UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

For the quarterly period ended September 27, 2003

 

 

 

OR

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

For the transition period from                 to                

 

Commission file number: 0-21116

 


 

USANA HEALTH SCIENCES, INC.

(Exact name of registrant as specified in its charter)

 

Utah

 

87-0500306

(State or other jurisdiction
of incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

3838 West Parkway Blvd., Salt Lake City, Utah 84120

(Address of principal executive offices, Zip Code)

 

(801) 954-7100

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý  No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o  No ý

 

The number of shares outstanding of the registrant’s common stock as of October 31, 2003 was 19,258,574.

 

On October 14, 2003, the registrant declared a two-for-one stock split of its common stock that was distributed in the form of a stock dividend on October 30, 2003 to shareholders of record as of October 24, 2003.  Outstanding common stock data in this report have been adjusted to reflect the stock split.

 

 



 

USANA HEALTH SCIENCES, INC.

 

FORM 10-Q

 

For the Quarterly Period Ended September 27, 2003

 

INDEX

 

PART I. FINANCIAL INFORMATION

 

 

Item 1

Financial Statements

 

 

Consolidated Balance Sheets

 

 

Consolidated Statements of Earnings – Quarter Ended

 

 

Consolidated Statements of Earnings – Nine Months Ended

 

 

Consolidated Statement of Stockholders’ Equity

 

 

Consolidated Statements of Cash Flows

 

 

Notes to Consolidated Financial Statements

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3

Quantitative and Qualitative Disclosures About Market Risk

Item 4

Controls and Procedures

 

 

PART II. OTHER INFORMATION

 

Item 5

Other Information.

Item 6

Exhibits and Reports on Form 8-K.

 

Signatures

 

2



 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

(in thousands, except per share data)

 

 

 

December 28,
2002

 

September 27,
2003

 

 

 

 

 

(Unaudited)

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

6,686

 

$

10,335

 

Inventories, net (Note C)

 

9,119

 

13,042

 

Prepaid expenses and other current assets (Note D)

 

1,545

 

2,126

 

Deferred income taxes

 

1,557

 

1,417

 

 

 

 

 

 

 

Total current assets

 

18,907

 

26,920

 

 

 

 

 

 

 

Property and equipment, net (Note E)

 

18,405

 

19,591

 

 

 

 

 

 

 

Goodwill (Note B)

 

 

4,260

 

 

 

 

 

 

 

Other assets

 

1,801

 

2,342

 

 

 

 

 

 

 

 

 

$

39,113

 

$

53,113

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Current maturities of long-term debt

 

$

3,428

 

$

 

Capital lease obligations, current

 

17

 

 

Accounts payable

 

2,666

 

5,045

 

Other current liabilities (Note F)

 

8,655

 

15,455

 

Line of credit

 

2,913

 

 

 

 

 

 

 

 

Total current liabilities

 

17,679

 

20,500

 

 

 

 

 

 

 

Long-term debt, less current maturities

 

2,572

 

 

 

 

 

 

 

 

Other long-term liabilities

 

769

 

685

 

 

 

 

 

 

 

Stockholders’ equity (Notes A and G)

 

 

 

 

 

Common stock, $0.001 par value; authorized 50,000 shares, issued and outstanding 18,273 as of December 28, 2002 and 19,047 as of September 27, 2003

 

18

 

19

 

Additional paid-in capital

 

3,666

 

8,951

 

Retained earnings

 

14,520

 

22,098

 

Accumulated other comprehensive income (loss)

 

(111

)

860

 

 

 

 

 

 

 

Total stockholders’ equity

 

18,093

 

31,928

 

 

 

 

 

 

 

 

 

$

39,113

 

$

53,113

 

 

The accompanying notes are an integral part of these statements.

 

3



 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF EARNINGS

 

(in thousands, except per share data)

 

 

 

Quarter Ended

 

 

 

(unaudited)

 

 

 

September 28,
2002

 

September 27,
2003

 

 

 

 

 

 

 

Net sales

 

$

34,787

 

$

52,506

 

 

 

 

 

 

 

Cost of sales

 

8,430

 

11,364

 

 

 

 

 

 

 

Gross profit

 

26,357

 

41,142

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Associate incentives

 

13,429

 

20,332

 

Selling, general and administrative

 

9,099

 

11,926

 

Research and development

 

260

 

379

 

 

 

 

 

 

 

Total operating expenses

 

22,788

 

32,637

 

 

 

 

 

 

 

Earnings from operations

 

3,569

 

8,505

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

24

 

42

 

Interest expense

 

(71

)

 

Other, net

 

(94

)

483

 

 

 

 

 

 

 

Total other income (expense)

 

(141

)

525

 

 

 

 

 

 

 

Earnings before income taxes

 

3,428

 

9,030

 

 

 

 

 

 

 

Income taxes

 

1,085

 

2,974

 

 

 

 

 

 

 

Net earnings

 

$

2,343

 

$

6,056

 

 

 

 

 

 

 

Earnings per common share (Notes A and G)

 

 

 

 

 

Basic

 

$

0.13

 

$

0.32

 

Diluted

 

$

0.11

 

$

0.28

 

 

 

 

 

 

 

Weighted average common and dilutive common equivalent shares outstanding (Notes A and G)

 

 

 

 

 

Basic

 

18,645

 

19,057

 

Diluted

 

21,216

 

21,383

 

 

The accompanying notes are an integral part of these statements.

 

4



 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF EARNINGS

 

(in thousands, except per share data)

 

 

 

Nine Months Ended

 

 

 

(unaudited)

 

 

 

September 28,
2002

 

September 27,
2003

 

 

 

 

 

 

 

Net sales

 

$

95,477

 

$

140,527

 

 

 

 

 

 

 

Cost of sales

 

24,500

 

31,001

 

 

 

 

 

 

 

Gross profit

 

70,977

 

109,526

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Associate incentives

 

36,364

 

55,091

 

Selling, general and administrative

 

25,714

 

32,072

 

Research and development

 

699

 

1,086

 

 

 

 

 

 

 

Total operating expenses

 

62,777

 

88,249

 

 

 

 

 

 

 

Earnings from operations

 

8,200

 

21,277

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

61

 

83

 

Interest expense

 

(263

)

(48

)

Other, net

 

(1

)

296

 

 

 

 

 

 

 

Total other income (expense)

 

(203

)

331

 

 

 

 

 

 

 

Earnings before income taxes

 

7,997

 

21,608

 

 

 

 

 

 

 

Income taxes

 

2,799

 

7,628

 

 

 

 

 

 

 

Net earnings

 

$

5,198

 

$

13,980

 

 

 

 

 

 

 

Earnings per common share (Notes A and G)

 

 

 

 

 

Basic

 

$

0.27

 

$

0.74

 

Diluted

 

$

0.25

 

$

0.66

 

 

 

 

 

 

 

Weighted average common and dilutive common equivalent shares outstanding (Notes A and G)

 

 

 

 

 

Basic

 

19,064

 

18,923

 

Diluted

 

20,613

 

21,294

 

 

The accompanying notes are an integral part of these statements.

 

5



 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

 

Nine Months Ended September 28, 2002 and September 27, 2003

 

(in thousands)

 

(unaudited)

 

 

 

Common Stock

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Total

 

Shares

 

Value

For the Nine Months Ended September 28, 2002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 29, 2001

 

19,328

 

$

19

 

$

2,350

 

$

12,752

 

$

(594

)

$

14,527

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

5,198

 

 

5,198

 

Foreign currency translation adjustment

 

 

 

 

 

308

 

308

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

5,506

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock retired

 

(1,054

)

(1

)

(328

)

(2,696

)

 

(3,025

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued under stock option plan, including tax benefit of $90

 

104

 

 

196

 

 

 

196

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 28, 2002

 

18,378

 

$

18

 

$

2,218

 

$

15,254

 

$

(286

)

$

17,204

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 27, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 28, 2002

 

18,273

 

$

18

 

$

3,666

 

$

14,520

 

$

(111

)

$

18,093

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

13,980

 

 

13,980

 

Foreign currency translation adjustment

 

 

 

 

 

971

 

971

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

14,951

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock retired

 

(472

)

 

(1,835

)

(6,402

)

 

(8,237

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued under stock option plan, including tax benefit of $4,498

 

1,246

 

1

 

7,120

 

 

 

7,121

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 27, 2003

 

19,047

 

$

19

 

$

8,951

 

$

22,098

 

$

860

 

$

31,928

 

 

The accompanying notes are an integral part of these statements.

 

6



 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in thousands)

 

(unaudited)

 

 

 

Nine Months Ended

 

 

 

September 28,
2002

 

September 27,
2003

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net earnings

 

$

5,198

 

$

13,980

 

Adjustments to reconcile net earnings to net cash provided by operating activities

 

 

 

 

 

Depreciation and amortization

 

3,116

 

2,839

 

(Gain) loss on sale of property and equipment

 

8

 

(30

)

Deferred income taxes

 

(850

)

159

 

Provision for inventory valuation

 

1,046

 

1,068

 

Changes in operating assets and liabilities:

 

 

 

 

 

Inventories

 

(212

)

(3,280

)

Prepaid expenses and other assets

 

(292

)

(1,396

)

Accounts payable

 

361

 

1,591

 

Other current liabilities

 

3,508

 

10,738

 

 

 

 

 

 

 

Total adjustments

 

6,685

 

11,689

 

 

 

 

 

 

 

Net cash provided by operating activities

 

11,883

 

25,669

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Acquisition, net of cash acquired

 

 

(5,341

)

Purchases of property and equipment

 

(1,341

)

(2,948

)

Proceeds from the sale of property and equipment

 

37

 

47

 

 

 

 

 

 

 

Net cash used in investing activities

 

(1,304

)

(8,242

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Net proceeds from the sale of common stock

 

106

 

2,623

 

Redemption of common stock

 

(3,025

)

(8,237

)

Principal payments of long-term debt

 

(1,500

)

(6,000

)

Decrease in line of credit

 

(2,965

)

(2,913

)

Payments on capital lease obligations

 

 

(91

)

 

 

 

 

 

 

Net cash used in financing activities

 

(7,384

)

(14,618

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

614

 

840

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

3,809

 

3,649

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

2,465

 

6,686

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

6,274

 

$

10,335

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

290

 

$

65

 

Income taxes

 

2,847

 

1,644

 

 

The accompanying notes are an integral part of these statements.

 

7



 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

 

Basis of Presentation

 

The unaudited interim consolidated financial information of USANA Health Sciences, Inc. and Subsidiaries (the “Company” or “USANA”) has been prepared in accordance with Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.  In the opinion of management, the accompanying interim consolidated financial information contains all adjustments, consisting of normal recurring adjustments, necessary to present fairly the Company’s financial position as of September 27, 2003, and results of operations for the quarters and nine months ended September 28, 2002 and September 27, 2003.  These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 28, 2002.  The results of operations for the quarter and nine months ended September 27, 2003 may not be indicative of the results that may be expected for the fiscal year ending January 3, 2004.

 

On October 14, 2003, the Company declared a two-for-one stock split of its common stock that was distributed in the form of a stock dividend on October 30, 2003 to shareholders of record as of October 24, 2003.  This stock dividend will double the number of shares outstanding but will not affect the number of authorized shares of the Company or the par value of the common stock.  All existing stock option agreements provide that the number of shares of common stock and the respective exercise price covered by each outstanding option agreement be proportionately adjusted for a stock split or similar event. Outstanding common stock data in this report have been adjusted to reflect the stock split.

 

NOTE A – STOCK-BASED COMPENSATION

 

The Company has applied the disclosure provisions of Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — An Amendment of FASB Statement No. 123,” for the quarters and nine months ended September 28, 2002 and September 27, 2003.  Issued in December 2002, SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  As permitted by SFAS No. 148, the Company continues to account for stock options under APB Opinion No. 25, under which no compensation has been recognized. The following table illustrates the effects on net earnings and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, as amended by SFAS No. 148, to stock-based compensation:

 

 

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

 

 

September 28,
2002

 

September 27,
2003

 

September 28,
2002

 

September 27,
2003

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

As reported

 

$

2,343

 

$

6,056

 

$

5,198

 

$

13,980

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma

 

$

2,149

 

$

5,860

 

$

4,586

 

$

13,556

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - basic

 

As reported

 

$

0.13

 

$

0.32

 

$

0.27

 

$

0.74

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma

 

$

0.12

 

$

0.31

 

$

0.24

 

$

0.72

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - diluted

 

As reported

 

$

0.11

 

$

0.28

 

$

0.25

 

$

0.66

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma

 

$

0.10

 

$

0.27

 

$

0.22

 

$

0.64

 

 

8



 

Weighted average Black-Scholes fair value assumptions for options granted during the periods indicated:

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

September 28,
2002

 

September 27,
2003

 

September 28,
2002

 

September 27,
2003

 

Expected volatility

 

77

%

77

%

71

%

77

%

Risk free interest rate

 

3.98

%

3.60

%

4.96

%

3.67

%

Expected life

 

10 yrs.

 

10 yrs.

 

10 yrs.

 

10 yrs.

 

Expected dividend yield

 

0

%

0

%

0

%

0

%

Weighted average fair value of options granted

 

$

6.40

 

$

28.77

 

$

1.81

 

$

25.04

 

 

Option pricing models require the input of highly subjective assumptions including the expected stock price volatility.  Also, the Company’s employee stock options have characteristics significantly different from those of traded options, including long vesting schedules and changes in the subjective input assumptions that can materially affect the fair value estimate.  Management believes the best assumptions available were used to value the options and that the resulting option values were reasonable as of the dates the options were granted.

 

NOTE B – ACQUISITIONS

 

Effective July 1, 2003, the Company acquired Wasatch Product Development, Inc. (WPD), a company specializing in the manufacture of skin and personal care products.  The aggregate investment was $5,341 including $5,016 in cash, $125 for professional fees directly associated with the acquisition, and $200 in income tax liabilities of the selling shareholders prior to the sale.  WPD will be operated as a subsidiary of USANA and will, to the extent possible, retain its existing business of contract manufacturing, as well as perform manufacturing and packaging of Sensé products for the Company.  The Company expects to realize future benefits from this acquisition, in the form of reduced cost of sales and enhanced quality control for its Sensé product line.

 

The acquisition was accounted for in accordance with SFAS No. 141, “Business Combinations” and as such, the results of operations for WPD have been included in the consolidated financial statements since the effective date of acquisition.  This acquisition contributed $656 in sales and operating income of $25 for the quarter ended September 27, 2003.  The Company obtained an independent appraisal of the fair values of identified intangible assets and based on the results of the analysis, has concluded that the fair value is effectively nil.  The assets acquired and liabilities assumed were recorded at estimated fair values as of the date of the acquisition as determined by the Company’s management and are summarized below:

 

 

 

At July 1,
2003

 

Assets acquired

 

 

 

Accounts receivable

 

$

335

 

Inventories

 

537

 

Property and equipment

 

978

 

Goodwill

 

4,260

 

 

 

 

 

Total assets acquired

 

6,110

 

 

 

 

 

Liabilities assumed

 

 

 

Accounts payable

 

707

 

Other liabilities

 

62

 

 

 

 

 

Total liabilities assumed

 

769

 

 

 

 

 

Net assets acquired

 

$

5,341

 

 

9



 

Goodwill has been recognized for the amount of the excess of the purchase price paid over the fair market value of the net assets acquired.  In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, Goodwill will not be amortized; however, it will be tested at least annually for impairment.

 

NOTE C – INVENTORIES

 

Inventories consist of the following:

 

 

 

December 28,
2002

 

September 27,
2003

 

Raw materials

 

$

2,488

 

$

5,096

 

Work in progress

 

2,018

 

1,965

 

Finished goods

 

6,336

 

7,392

 

 

 

10,842

 

14,453

 

 

 

 

 

 

 

Less allowance for inventory valuation

 

1,723

 

1,411

 

 

 

 

 

 

 

 

 

$

9,119

 

$

13,042

 

 

NOTE D – PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following:

 

 

 

December 28,
2002

 

September 27,
2003

 

Prepaid expenses

 

$

1,157

 

$

456

 

Receivables, net

 

150

 

1,112

 

All other

 

238

 

558

 

 

 

 

 

 

 

 

 

$

1,545

 

$

2,126

 

 

10



 

NOTE E – PROPERTY AND EQUIPMENT

 

Cost of property and equipment and their estimated useful lives is as follows:

 

 

 

Years

 

December 28,
2002

 

September 27,
2003

 

 

 

 

 

 

 

 

 

Building

 

40

 

$

8,110

 

$

8,120

 

Laboratory and production equipment

 

5-7

 

4,803

 

6,030

 

Computer equipment and software

 

3-5

 

16,606

 

18,828

 

Furniture and fixtures

 

3-5

 

2,139

 

2,269

 

Automobiles

 

3-5

 

351

 

174

 

Leasehold improvements

 

3-5

 

1,344

 

1,995

 

Land improvements

 

15

 

931

 

931

 

 

 

 

 

 

 

 

 

 

 

 

 

34,284

 

38,347

 

 

 

 

 

 

 

 

 

Less accumulated depreciation and amortization

 

 

 

18,618

 

21,604

 

 

 

 

 

 

 

 

 

 

 

 

 

15,666

 

16,743

 

 

 

 

 

 

 

 

 

Land

 

 

 

1,773

 

1,773

 

 

 

 

 

 

 

 

 

Deposits and projects in process

 

 

 

966

 

1,075

 

 

 

 

 

 

 

 

 

 

 

 

 

$

18,405

 

$

19,591

 

 

NOTE F – OTHER CURRENT LIABILITIES

 

Other current liabilities consist of the following:

 

 

 

December 28,
2002

 

September 27,
2003

 

Associate incentives

 

$

1,209

 

$

2,319

 

Accrued compensation

 

2,781

 

3,368

 

Income taxes

 

1,350

 

2,754

 

Sales taxes

 

732

 

1,390

 

Accrued associate promotions

 

32

 

1,598

 

Deferred revenue

 

973

 

1,166

 

Provision for returns and allowances

 

515

 

627

 

All other

 

1,063

 

2,233

 

 

 

$

8,655

 

$

15,455

 

 

Certain items within other current liabilities have been re-categorized for the year ended December 28, 2002 to conform with the current year’s presentation.

 

NOTE G – COMMON STOCK AND EARNINGS PER SHARE

 

Basic earnings per share are based on the weighted average number of shares outstanding for each period.  Weighted average shares redeemed have been included in the calculation of weighted average shares outstanding for basic earnings per share. Diluted earnings per common share are based on shares outstanding (computed under basic EPS) and potentially dilutive shares.  Shares included in dilutive earnings per share calculations include stock options granted that are in the money but have not yet been exercised.

 

11



 

 

 

 

For the Quarter Ended

 

 

 

 

 

September 28,
2002

 

September 27,
2003

 

 

 

Earnings available to common shareholders

 

$

2,343

 

$

6,056

 

 

 

 

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

Shares

 

 

 

 

 

 

 

Common shares outstanding entire period

 

19,328

 

18,273

 

 

 

Weighted average common shares:

 

 

 

 

 

 

 

Issued during period

 

72

 

1,104

 

 

 

Canceled during period

 

(755

)

(320

)

 

 

Weighted average common shares outstanding during period

 

18,645

 

19,057

 

 

 

Earnings per common share - basic

 

$

0.13

 

$

0.32

 

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

Shares

 

 

 

 

 

Weighted average shares outstanding during period - basic

 

18,645

 

19,057

 

Dilutive effect of stock options

 

2,571

 

2,326

 

Weighted average shares outstanding during period - diluted

 

21,216

 

21,383

 

Earnings per common share - diluted

 

$

0.11

 

$

0.28

 

 

Options to purchase 632 shares of stock were not included in the computation of EPS for the quarter ended September 28, 2002 due to their exercise price being greater than the average market price of the shares.  For the quarter ended September 27, 2003, all options to purchase shares of stock were included in the computation of EPS.

 

 

 

For the Nine Months Ended

 

 

 

September 28,
2002

 

September 27,
2003

 

Earnings available to common shareholders

 

$

5,198

 

$

13,980

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

Shares

 

 

 

 

 

Common shares outstanding entire period

 

19,328

 

18,273

 

Weighted average common shares:

 

 

 

 

 

Issued during period

 

27

 

773

 

Canceled during period

 

(291

)

(123

)

Weighted average common shares outstanding during period

 

19,064

 

18,923

 

Earnings per common share - basic

 

$

0.27

 

$

0.74

 

 

12



 

 

 

For the Nine Months Ended

 

 

 

September 28,
2002

 

September 27,
2003

 

Diluted EPS

 

 

 

 

 

Shares

 

 

 

 

 

Weighted average shares outstanding during period - basic

 

19,064

 

18,923

 

Dilutive effect of stock options

 

1,549

 

2,371

 

Weighted average shares outstanding during period - diluted

 

20,613

 

21,294

 

Earnings per common share - diluted

 

$

0.25

 

$

0.66

 

 

Options to purchase 2,634 shares of stock were not included in the computation of EPS for the nine months ended September 28, 2002 due to their exercise price being greater than the average market price of the shares.  For the nine months ended September 27, 2003, all options to purchase shares of stock were included in the computation of EPS.

 

As of the fiscal year ended 2002, 790 shares of 4,000 authorized were available in the Company’s share repurchase plan. Through the nine months ended September 27, 2003, the Company expended $8.2 million to purchase an additional 472 shares under this plan.  The purchase of shares under this plan reduces the number of shares issued and outstanding.

 

NOTE H – SEGMENT INFORMATION

 

The Company’s operations are distinguished by type of products produced, markets served, and method of distribution employed and are classified into two reportable business segments: Direct Selling and Contract Manufacturing.  These operating segments are evaluated regularly by management in determining the allocation of resources and in assessing the performance of the Company.  Management evaluates performance based on net sales and the amount of operating income or loss.

 

Segment profit or loss is based on profit or loss from operations before income taxes.  Interest income and expense, as well as income taxes, while significant, are not included in the Company’s determination of segment profit or loss in assessing the performance of a segment.

 

Direct Selling

 

The Direct Selling segment comprises the Company’s principal line of business: developing, manufacturing, and distributing nutritional, personal care, and weight management products.  Products are distributed through a network marketing system using independent distributors referred to as “Associates”.  Products are also sold directly to “Preferred Customers” who purchase products for personal use and are not permitted to resell or distribute the products.  Sales to Associates and Preferred Customers are reported for six operating geographic regions including North America, Australia-New Zealand, Hong Kong, Japan, Taiwan, and South Korea.

 

Contract Manufacturing

 

Operating activities for the Contract Manufacturing segment include the manufacture and sale of premium personal care products under the brand names of its customers. Operations are located in Draper, Utah and sales are made to a limited number of customers.  We expect that manufacturing and packaging activities for the Company’s Sensé products will begin during the fourth quarter of 2003.

 

Sales made by the Contract Manufacturing segment to one customer accounted for 59% of segment revenues for the quarter ended September 27, 2003.  No other individual customer accounted for 10% or more of segment net revenues.

 

13



 

Prior to the quarter ended September 27, 2003, the Company was only engaged in a single line of business, which was developing, manufacturing, and distributing nutritional, personal care, and weight management products through a network marketing system.  As such, only one business segment was reported, which was distinguished by geography.  Due to the Company’s recent acquisition (See Note B), the basis of segmentation has been modified to reflect the change in business activities to include the addition of Contract Manufacturing.  This change does not affect the presentation of historical segment information.

 

The following table summarizes financial information by operating segment and geographic region for the quarters ended September 28, 2002 and September 27, 2003:

 

 

 

Revenues from
External
Customers

 

Intersegment
Revenues

 

Earnings
before Income
Taxes

 

Quarter ended September 28, 2002:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Selling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

26,191

 

$

4,930

 

$

3,766

 

Australia - New Zealand

 

4,809

 

321

 

438

 

Hong Kong

 

2,268

 

 

245

 

Japan (1)

 

1,519

 

 

(466

)

 

 

 

 

 

 

 

 

Segment Total

 

34,787

 

5,251

 

3,983

 

 

 

 

 

 

 

 

 

Contract Manufacturing (2)

 

N/A

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

Reportable Segments Total

 

34,787

 

5,251

 

3,983

 

 

 

 

 

 

 

 

 

Unallocated and Other (3)

 

 

(5,251

)

(555

)

 

 

 

 

 

 

 

 

Consolidated Total

 

$

34,787

 

$

 

$

3,428

 

 

 

 

Revenues from
External
Customers

 

Intersegment
Revenues

 

Earnings
before Income
Taxes

 

Quarter ended September 27, 2003:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Selling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

34,214

 

$

13,313

 

$

13,360

 

Australia - New Zealand

 

8,023

 

762

 

(989

)

Hong Kong

 

2,285

 

 

349

 

Japan (1)

 

1,750

 

 

(515

)

Taiwan

 

3,507

 

 

77

 

South Korea

 

2,071

 

 

(430

)

 

 

 

 

 

 

 

 

Segment Total

 

51,850

 

14,075

 

11,852

 

 

 

 

 

 

 

 

 

Contract Manufacturing (2)

 

656

 

 

25

 

 

 

 

 

 

 

 

 

Reportable Segments Total

 

52,506

 

14,075

 

11,877

 

 

 

 

 

 

 

 

 

Unallocated and Other (3)

 

 

(14,075

)

(2,847

)

 

 

 

 

 

 

 

 

Consolidated Total

 

$

52,506

 

$

 

$

9,030

 

 

14



 

The following table summarizes financial information by operating segment and geographic region for the nine months ended September 28, 2002 and September 27, 2003:

 

 

 

Revenues from
External
Customers

 

Intersegment
Revenues

 

Earnings
before Income
Taxes

 

Long-lived
Assets

 

Total Assets

 

Nine months ended September 28, 2002:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Selling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

74,485

 

$

11,470

 

$

8,981

 

$

21,418

 

$

32,704

 

Australia - New Zealand

 

12,656

 

941

 

1,050

 

237

 

4,537

 

Hong Kong

 

4,753

 

 

228

 

249

 

1,442

 

Japan (1)

 

3,583

 

 

(1,907

)

1,326

 

2,608

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Total

 

95,477

 

12,411

 

8,352

 

23,230

 

41,291

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract Manufacturing (2)

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

Reportable Segments Total

 

95,477

 

12,411

 

8,352

 

23,230

 

41,291

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated and Other (3)

 

 

(12,411

)

(355

)

(3,740

)

(4,263

)

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Total

 

$

95,477

 

$

 

$

7,997

 

$

19,490

 

$

37,028

 

 

 

 

Revenues from
External
Customers

 

Intersegment
Revenues

 

Earnings
before Income
Taxes

 

Long-lived
Assets

 

Total Assets

 

Nine months ended September 27, 2003:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Selling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

97,068

 

$

26,588

 

$

25,513

 

$

29,079

 

$

42,417

 

Australia - New Zealand

 

20,430

 

1,675

 

521

 

291

 

6,412

 

Hong Kong

 

6,280

 

 

921

 

187

 

1,915

 

Japan (1)

 

4,433

 

 

(2,034

)

1,179

 

3,502

 

Taiwan

 

9,589

 

 

1,563

 

487

 

3,432

 

South Korea

 

2,071

 

 

(430

)

895

 

3,545

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Total

 

139,871

 

28,263

 

26,054

 

32,118

 

61,223

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract Manufacturing (2)

 

656

 

 

25

 

5,262

 

6,461

 

 

 

 

 

 

 

 

 

 

 

 

 

Reportable Segments Total

 

140,527

 

28,263

 

26,079

 

37,380

 

67,684

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated and Other (3)

 

 

(28,263

)

(4,471

)

(11,187

)

(14,571

)

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Total

 

$

140,527

 

$

 

$

21,608

 

$

26,193

 

$

53,113

 

 


(1)               Includes results from local operations in Japan.  Direct U.S. export sales to Japan are included in the North America geographic region.

 

(2)               Reportable business activities for the Contract Manufacturing segment commenced July 1, 2003.

 

(3)               “Unallocated and Other” includes certain corporate items and eliminations that are not allocated to the operating segments.

 

15



 

Item 2.           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of USANA’s financial condition and results of operations should be read in conjunction with the Unaudited Consolidated Financial Statements and Notes thereto contained in this quarterly report.

 

General

 

USANA Health Sciences, Inc. develops and manufactures high-quality nutritional, personal care and weight management products.  We market all of our products on the basis of high levels of bioavailability, safety, and quality.  We distribute our products through a network marketing system using independent distributors that we refer to as “Associates.”  As of September 27, 2003, we had approximately 87,000 active Associates in the United States, Canada, Australia, New Zealand, Hong Kong, Japan, Taiwan, South Korea, and the United Kingdom.  We also sell products directly to “Preferred Customers” who purchase product for personal use and are not permitted to resell or distribute the products.  As of September 27, 2003, we had approximately 49,000 active Preferred Customers worldwide.  Sales to Preferred Customers accounted for approximately 15% of net sales for the Direct Selling segment during the nine months ended September 27, 2003.  For purposes of this report, we only count as active customers those Associates and Preferred Customers who have purchased product from USANA at any time during the most recent three-month period.

 

As discussed more fully in Segment Information Note H, beginning on page 13 to the consolidated financial statements, we have two reportable segments: Direct Selling and Contract Manufacturing.  The Direct Selling segment constitutes our principal line of business: developing, manufacturing, and distributing nutritional, personal care, and weight management products through a network marketing system.  The Contract Manufacturing segment includes the manufacture and sale of premium personal care products, produced under the brand names of its customers, including sales to the Company for manufacturing and packaging its Sensé product line.

 

Our primary product lines within the Direct Selling segment consist of USANAâ Nutritionals and Sensé – beautiful scienceâ (Sensé).  The USANAâ Nutritionals product line is further categorized into three separate classifications: Essentials, Optimizers, and Macro Optimizers. Various individual items within these primary product lines are also grouped and sold as combination packs.

 

USANAâ Nutritionals.

 

The Essentials include core vitamin and mineral supplements that provide a foundation of advanced nutrition for every age group.  To help meet the “essential” nutrient needs of children and teens during the years of development, when good nutrition is most important, USANA offers: UsanimalsÔ, a great-tasting formulation of vitamins, minerals, and antioxidants, in an easy-to-take chewable tablet for children 13 months to 12 years old and Body RoxÔ, a nutritional supplement containing 31 essential vitamins, minerals, antioxidants, and cofactors for adolescents 12 to 18 years old, who need optimal nutrition to support the demands of growth and active teenage lifestyles.  USANAâ Essentials for adults is a combination of two products: Mega Antioxidant, a balanced, high-potency blend of 30 vitamins, antioxidants, and other important nutrients to support cellular metabolism and to counteract free-radical damage and Chelated Mineral, a complete spectrum of essential minerals, in balanced, highly bioavailable forms.  The USANAâ Essentials are also provided in a convenient pillow pack format, HealthPak 100Ô.

 

Optimizers are more targeted supplements designed to meet individual health and nutritional needs.  Products in this category include Proflavanolâ, Poly Câ, Procosaâ II, CoQuinoneâ 30, BiOmega-3Ô, E-PrimeÔ, Active CalciumÔ, PhytoEstrinÔ, Palmetto PlusÔ, Ginkgo-PSÔ, Garlic ECÔ, VisionexÔ, and OptOmegaâ.

 

The Macro Optimizers include healthy convenience foods and other related products, including powdered drink mixes and nutrition bars that were previously sold under the L·E·A·N LifelongÔ brand name.  NutrimealÔ and Fibergyâ drink mixes, SoyaMaxÔ, and Nutrition Bar and Fibergy Bar are included in this product category.

 

16



 

Sensé - beautiful scienceâ

 

The Sensé product line includes premium, science-based personal care products that support healthy skin and hair by providing advanced topical nourishment, moisturization and protection.  Products in this line include Perfecting Essence, Gentle Daily Cleanser, Hydrating Toner, Daytime Protective Emulsion SPF 15, Eye Nourisher, Night Renewal (Replenishing Crème), Serum Intensive (Skin Revival Complex), Rice Bran Polisher, Nutritious Crème Masque, Revitalizing Shampoo, Nourishing Conditioner, Firming Body Nourisher, and Energizing Shower Gel.

 

In addition to these principal product lines, we have developed and sell to Associates materials and online tools designed to assist them in building their business and selling products.  These resource materials or sales aids include product brochures and business forms designed by us and printed by outside publishers.  We periodically contract with authors and publishers to produce or provide books, tapes, and other items dealing with health topics and personal motivation, which are made available to Associates. We also write and develop our own materials for audio and videotapes, which are produced by third parties.  New Associates are required to purchase a starter kit containing USANA training materials that assist the Associates in starting and growing their business.  Associates do not earn commissions on the sale of sales aids or starter kits.

 

The following table summarizes the approximate percentage of total product revenue for the Direct Selling segment contributed by major product line for the nine months ended as of the dates indicated:

 

 

 

Sales By Product Line
Nine Months Ended

 

Product Line

 

September 28,
2002

 

September 27,
2003

 

 

 

 

 

 

 

USANAâ Nutritionals

 

 

 

 

 

Essentials *

 

33

%

33

%

Optimizers

 

33

%

29

%

Macro Optimizers

 

8

%

6

%

Sensé – beautiful scienceâ

 

13

%

12

%

Combination Packs

 

7

%

9

%

All Other

 

6

%

11

%

 


*                 The Essentials category under the USANAâ Nutritionals product line includes USANAâ Essentials (comprised of Mega Antioxidant and Chelated Mineral), HealthPak 100Ô, Body RoxÔ, and UsanimalsÔ

 

Key Products

 

The following highlights sales data for our top-selling products as a percentage of Direct Selling segment product sales for the nine months ended September 27, 2003.

 

USANAâ Essentials

 

22

%

HealthPak 100Ô

 

9

%

Proflavanolâ

 

9

%

 

The fiscal year end of USANA is the Saturday closest to December 31 of each year.  Fiscal year 2003 will end on January 3, 2004 and is a 53-week year.  Fiscal year 2002 ended on December 28, 2002 and was a 52-week year.  Fiscal year 2004 will be a 52-week year.

 

17



 

Results of Operations

 

Quarters Ended September 28, 2002 and September 27, 2003

 

Net Sales.  Net sales increased 50.9% to $52.5 million for the quarter ended September 27, 2003, an increase of $17.7 million from the $34.8 million reported for the comparable quarter in 2002.  The increase was comprised of $17.0 million associated with our Direct Selling segment and $0.7 million associated with our newly acquired Contract Manufacturing segment.

 

The following table summarizes the growth in net sales by segment and geographic region for the fiscal quarters ended September 28, 2002 and September 27, 2003. Direct Selling sales data for the United States region includes products shipped directly from the U.S. headquarters to customers in the United Kingdom and Japan.

 

 

 

Sales By Segment and Region
(in thousands)
Quarter Ended

 

Change from
Prior Year

 

Percent
Change

 

Segment / Region

 

September 28, 2002

 

September 27, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Selling

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

18,485

 

53.1

%

$

23,444

 

44.7

%

$

4,959

 

26.8

%

Canada

 

7,706

 

22.2

%

10,770

 

20.5

%

3,064

 

39.8

%

Australia-New Zealand

 

4,809

 

13.8

%

8,023

 

15.3

%

3,214

 

66.8

%

Hong Kong

 

2,268

 

6.5

%

2,285

 

4.4

%

17

 

0.7

%

Japan

 

1,519

 

4.4

%

1,750

 

3.3

%

231

 

15.2

%

Taiwan

 

 

0.0

%

3,507

 

6.7

%

3,507

 

N/A

 

South Korea

 

 

0.0

%

2,071

 

3.9

%

2,071

 

N/A

 

Segment Total

 

34,787

 

100.0

%

51,850

 

98.8

%

17,063

 

49.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract Manufacturing

 

 

0.0

%

656

 

1.2

%

656

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

34,787

 

100.0

%

$

52,506

 

100.0

%

$

17,719

 

50.9

%

 

The increase in net sales contributed by the Direct Selling segment can be primarily attributed to the following factors:

 

                  A 15.9% increase in the active Associate base and a 14.0% increase in the active Preferred Customer base for the third quarter of 2003 in markets that have been open longer than one year,

 

                  Sales of $3.5 million from our Taiwan market that commenced operations in the fourth quarter of 2002 and sales of $2.1 million from our South Korea market that commenced operations in the third quarter of 2003, and

 

                  Stronger foreign currencies, relative to the U. S. dollar, which positively affected the translation of sales in foreign currencies by $2.7 million.

 

Additionally, two other items contributed to the year-over-year third quarter increase in sales including a price increase on two key products, USANAâ Essentials and HealthPak 100Ô in North America and incremental product sales from our Annual International Convention held in the third quarter.

 

We expect net sales of approximately $57 million for the 14-week fourth quarter ended January 3, 2004.  A typical quarter for the Company consists of 13 weeks.

 

The following tables summarize the growth (decline) in active customers for the Direct Selling segment by geographic region as of the dates indicated:

 

18



 

Active Associates By Region

 

Region

 

As of
September 28, 2002

 

As of
September 27, 2003

 

Change from
Prior Year

 

Percent
Change

 

United States

 

28,000

 

44.4

%

33,000

 

37.9

%

5,000

 

17.9

%

Canada

 

16,000

 

25.4

%

19,000

 

21.8

%

3,000

 

18.8

%

Australia-New Zealand

 

11,000

 

17.5

%

14,000

 

16.1

%

3,000

 

27.3

%

Hong Kong

 

6,000

 

9.5

%

4,000

 

4.6

%

(2,000

)

(33.3

)%

Japan

 

2,000

 

3.2

%

3,000

 

3.4

%

1,000

 

50.0

%

Taiwan

 

 

0.0

%

9,000

 

10.3

%

9,000

 

N/A

 

South Korea

 

 

0.0

%

5,000

 

5.7

%

5,000

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

63,000

 

100.0

%

87,000

 

100.0

%

24,000

 

38.1

%

 

We believe that various factors contributed to the year-over-year third quarter increase in the active Associate base, including general enthusiasm created by international expansion, ongoing communication with Associate leaders in the field, improved infrastructure to enhance the Associate service level, and company-sponsored events and promotions held to motivate Associates.

 

Active Preferred Customers By Region

 

Region

 

As of
September 28, 2002

 

As of
September 27, 2003

 

Change from
Prior Year

 

Percent
Change

 

United States

 

26,000

 

60.5

%

30,000

 

61.2

%

4,000

 

15.4

%

Canada

 

12,000

 

27.9

%

14,000

 

28.6

%

2,000

 

16.7

%

Australia-New Zealand

 

4,000

 

9.3

%

4,000

 

8.2

%

 

0.0

%

Hong Kong

 

1,000

 

2.3

%

1,000

 

2.0

%

 

0.0

%

Japan

 

**

 

0.0

%

**

 

0.0

%

 

N/A

 

Taiwan

 

 

0.0

%

**

 

0.0

%

 

N/A

 

South Korea

 

 

0.0

%

**

 

0.0

%

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

43,000

 

100.0

%

49,000

 

100.0

%

6,000

 

14.0

%

 


**          Active Preferred Customer count is less than 500.

 

Total Active Customers By Region

 

Region

 

As of
September 28, 2002

 

As of
September 27, 2003

 

Change from
Prior Year

 

Percent
Change

 

United States

 

54,000

 

50.9

%

63,000

 

46.3

%

9,000

 

16.7

%

Canada

 

28,000

 

26.4

%

33,000

 

24.3

%

5,000

 

17.9

%

Australia-New Zealand

 

15,000

 

14.2

%

18,000

 

13.2

%