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 October 2, 2004

 

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

 

(I.R.S. Employer

of incorporation or organization)

 

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 ý  No o

 

The number of shares outstanding of the registrant’s common stock as of November 5, 2004 was 19,092,228.

 

 



 

USANA HEALTH SCIENCES, INC.

 

FORM 10-Q

 

For the Quarterly Period Ended October 2, 2004

 

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 and Comprehensive Income

 

 

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 2

Changes in Securities and Use of Proceeds

 

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)

 

 

 

 

January 3,

 

October 2,

 

 

 

2004

 

2004

 

 

 

 

 

(Unaudited)

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

18,965

 

$

21,445

 

Inventories, net

 

14,069

 

16,195

 

Prepaid expenses and other current assets

 

3,294

 

3,353

 

Deferred income taxes

 

1,921

 

2,316

 

 

 

 

 

 

 

Total current assets

 

38,249

 

43,309

 

 

 

 

 

 

 

Property and equipment, net

 

20,195

 

23,689

 

 

 

 

 

 

 

Goodwill

 

4,267

 

5,690

 

 

 

 

 

 

 

Other assets

 

2,416

 

2,597

 

 

 

$

65,127

 

$

75,285

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

5,215

 

$

8,029

 

Other current liabilities

 

14,704

 

18,618

 

 

 

 

 

 

 

Total current liabilities

 

19,919

 

26,647

 

 

 

 

 

 

 

Deferred income taxes

 

837

 

911

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock, $0.001 par value; authorized 50,000 shares, issued and outstanding 19,470 as of January 3, 2004 and 19,062 as of October 2, 2004

 

19

 

19

 

 

 

Additional paid-in capital

 

14,187

 

11,141

 

Retained earnings

 

28,935

 

35,193

 

Accumulated other comprehensive income

 

1,230

 

1,374

 

 

 

 

 

 

 

Total stockholders’ equity

 

44,371

 

47,727

 

 

 

$

65,127

 

$

75,285

 

 

 

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 27,
2003

October 2,
2004

 

 

 

 

 

 

 

 

Net sales

 

$

52,506

 

$

68,673

 

 

 

 

 

 

 

Cost of sales

 

11,364

 

16,732

 

 

 

 

 

 

 

Gross profit

 

41,142

 

51,941

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Associate incentives

 

20,332

 

26,210

 

Selling, general and administrative

 

11,926

 

13,141

 

Research and development

 

379

 

450

 

 

 

 

 

 

 

Total operating expenses

 

32,637

 

39,801

 

 

 

 

 

 

 

Earnings from operations

 

8,505

 

12,140

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

42

 

56

 

Other, net

 

483

 

(569

)

 

 

 

 

 

 

Total other income (expense)

 

525

 

(513

)

 

 

 

 

 

 

Earnings before income taxes

 

9,030

 

11,627

 

 

 

 

 

 

 

Income taxes

 

2,974

 

3,631

 

 

 

 

 

 

 

Net earnings

 

$

6,056

 

$

7,996

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

Basic

 

$

0.32

 

$

0.42

 

Diluted

 

$

0.28

 

$

0.39

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

Basic

 

19,057

 

19,052

 

Diluted

 

21,383

 

20,296

 

 

 

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 27,

 

October 2,

 

 

 

2003

 

2004

 

 

 

 

 

 

 

Net sales

 

$

140,527

 

$

197,694

 

 

 

 

 

 

 

Cost of sales

 

31,001

 

47,985

 

 

 

 

 

 

 

Gross profit

 

109,526

 

149,709

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Associate incentives

 

55,091

 

75,378

 

Selling, general and administrative

 

32,072

 

40,059

 

Research and development

 

1,086

 

1,635

 

 

 

 

 

 

 

Total operating expenses

 

88,249

 

117,072

 

 

 

 

 

 

 

Earnings from operations

 

21,277

 

32,637

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

83

 

142

 

Interest expense

 

(48

)

 

Other, net

 

296

 

(507

)

 

 

 

 

 

 

Total other income (expense)

 

331

 

(365

)

 

 

 

 

 

 

Earnings before income taxes

 

21,608

 

32,272

 

 

 

 

 

 

 

Income taxes

 

7,628

 

10,650

 

 

 

 

 

 

 

Net earnings

 

$

13,980

 

$

21,622

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

Basic

 

$

0.74

 

$

1.13

 

Diluted

 

$

0.66

 

$

1.05

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

Basic

 

18,923

 

19,209

 

Diluted

 

21,294

 

20,557

 

 

The accompanying notes are an integral part of these statements.

 

 

5



 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

 

Nine Months Ended September 27, 2003 and October 2, 2004

 

(in thousands)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

 

 

 

 

 

 

 

Additional Paid-in Capital

 

 

 

 

 

 

 

 

Common Stock

 

 

Retained Earnings

 

 

 

 

 

 

Shares

 

Value

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended October 2, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 3, 2004

 

19,470

 

$

19

 

$

14,187

 

$

28,935

 

$

1,230

 

$

44,371

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

21,622

 

 

21,622

 

Foreign currency translation adjustment

 

 

 

 

 

144

 

144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

21,766

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock retired

 

(760

)

 

(6,287

)

(15,364

)

 

(21,651

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued under stock option plan, including tax benefit of $2,287

 

352

 

 

3,241

 

 

 

3,241

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at October 2, 2004

 

19,062

 

$

19

 

$

11,141

 

$

35,193

 

$

1,374

 

$

47,727

 

 

 

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 27,
2003

 

October 2,
2004

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net earnings

 

$

13,980

 

$

21,622

 

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

 

 

 

 

 

Depreciation and amortization

 

2,839

 

3,430

 

Gain on sale of property and equipment

 

(30

)

(1

)

Deferred income taxes

 

159

 

(341

)

Allowance for inventory valuation

 

1,068

 

1,173

 

Changes in operating assets and liabilities:

 

 

 

 

 

Inventories

 

(3,280

)

(3,741

)

Prepaid expenses and other assets

 

(1,396

)

253

 

Accounts payable

 

1,591

 

2,809

 

Other current liabilities

 

10,738

 

6,187

 

 

 

 

 

 

 

Total adjustments

 

11,689

 

9,769

 

 

 

 

 

 

 

Net cash provided by operating activities

 

25,669

 

31,391

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Acquisitions, net of cash acquired

 

(5,341

)

(2,140

)

Purchases of property and equipment

 

(2,948

)

(6,174

)

Proceeds from the sale of property and equipment

 

47

 

29

 

 

 

 

 

 

 

Net cash used in investing activities

 

(8,242

)

(8,285

)

 

 

(Continued)

 

 

The accompanying notes are an integral part of these statements.

 

7



 

 

 

 

Nine Months Ended

 

 

 

September 27,
2003

 

October 2,
2004

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Principal payments of long-term debt

 

(6,000

)

 

Proceeds from stock options exercised

 

2,623

 

954

 

Retirement of common stock

 

(8,237

)

(21,651

)

Decrease in line of credit

 

(2,913

)

 

Payments on capital lease obligations

 

(91

)

 

 

 

 

 

 

 

Net cash used in financing activities

 

(14,618

)

(20,697

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

840

 

71

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

3,649

 

2,480

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

6,686

 

18,965

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

10,335

 

$

21,445

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

65

 

$

 

Income taxes

 

1,644

 

6,280

 

 

 

 

 

 

 

Non-cash activities

 

 

 

 

 

In July 2003, the Company acquired Wasatch Product Development, Inc. for $5,016 in cash. In conjunction with the acquisition, certain liabilities were assumed, including $200 in income tax liabilities of the selling shareholders and $125 for professional fees directly associated with the acquisition.

 

 

 

 

 

 

In February 2004, the Company acquired FMG Productions, LLC for $2,060 in cash. In conjunction with the acquisition, liabilities totaling $80 were assumed for professional fees directly associated with the acquisition.

 

 

The accompanying notes are an integral part of these statements.

 

8



 

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 Rule 10-01 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 October 2, 2004, and results of operations for the quarters and nine months ended September 27, 2003 and October 2, 2004.  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 January 3, 2004.  The results of operations for the quarter and nine months ended October 2, 2004 may not be indicative of the results that may be expected for the fiscal year ending January 1, 2005.

 

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 month periods ended September 27, 2003 and October 2, 2004.  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 using the intrinsic value method under APB Opinion No. 25, under which no compensation expense 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 27,
2003

 

October 2,
 2004

 

September 27,
2003

 

October 2,
 2004

 

 

 

 

 

 

 

 

 

Net earnings

 

As reported

 

$

6,056

 

$

7,996

 

$

13,980

 

$

21,622

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma

 

$

5,860

 

$

7,516

 

$

13,556

 

$

20,438

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - basic

 

As reported

 

$

0.32

 

$

0.42

 

$

0.74

 

$

1.13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma

 

$

0.31

 

$

0.39

 

$

0.72

 

$

1.06

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - diluted

 

As reported

 

$

0.28

 

$

0.39

 

$

0.66

 

$

1.05

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma

 

$

0.27

 

$

0.37

 

$

0.64

 

$

0.99

 

 

 

9



 

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

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

September 27, 2003

 

October 2,
2004

 

September 27, 2003

 

October 2,
2004

 

 

 

 

 

 

 

Expected volatility

 

77

%

75

%

77

%

75

%

Risk free interest rate

 

3.60

%

3.57

%

3.67

%

3.93

%

Expected life

 

10.0 yrs.

 

5.6 yrs.

 

10.0 yrs.

 

9.1 yrs.

 

Expected dividend yield

 

0

%

0

%

0

%

0

%

Weighted average fair value of options granted*

 

$

28.77

 

$

27.69

 

$

25.04

 

$

29.30

 

 

*

All options during the periods indicated have been granted at the market value on the date of grant, which is established by averaging the closing price of the Company’s common stock over the five trading days preceding the date of grant.


           Option pricing models require the input of highly subjective assumptions including the expected stock price volatility.  Additionally, 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 — INVENTORIES

 

Inventories consist of the following:

 

 

 

January 3,
2004

 

October 2,
2004

 

 

 

 

 

Raw materials

 

$

5,498

 

$

8,432

 

Work in progress

 

2,497

 

2,654

 

Finished goods

 

7,563

 

6,697

 

 

 

15,558

 

17,783

 

 

 

 

 

 

 

Less allowance for inventory valuation

 

1,489

 

1,588

 

 

 

$

14,069

 

$

16,195

 

 

 

NOTE C — PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following:

 

 

 

January 3,
2004

 

October 2,
2004

 

 

 

 

 

Prepaid expenses

 

$

1,376

 

$

697

 

Miscellaneous receivables, net

 

1,449

 

1,905

 

Other current assets

 

469

 

751

 

 

 

$

3,294

 

$

3,353

 

 

 

10



 

NOTE D — PROPERTY AND EQUIPMENT

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

 

 

 

 

 

January 3,
2004

 

October 2,
2004

 

 

 

Years

 

 

 

 

 

 

 

 

 

 

 

Buildings

 

40

 

$

8,120

 

$

9,381

 

Laboratory and production equipment

 

5-7

 

6,879

 

8,063

 

Sound and video library

 

5

 

 

600

 

Computer equipment and software

 

3-5

 

18,702

 

22,177

 

Furniture and fixtures

 

3-5

 

2,227

 

2,492

 

Automobiles

 

3-5

 

180

 

201

 

Leasehold improvements

 

3-5

 

1,626

 

2,374

 

Land improvements

 

15

 

931

 

931

 

 

 

 

 

 

 

 

 

 

 

 

 

38,665

 

46,219

 

 

 

 

 

 

 

 

 

Less accumulated depreciation and amortization

 

 

 

21,740

 

24,906

 

 

 

 

 

 

 

 

 

 

 

 

 

16,925

 

21,313

 

 

 

 

 

 

 

 

 

Land

 

 

 

1,773

 

1,899

 

 

 

 

 

 

 

 

 

Deposits and projects in process

 

 

 

1,497

 

477

 

 

 

 

 

 

 

 

 

 

 

 

 

$

20,195

 

$

23,689

 

 

 

NOTE E — OTHER CURRENT LIABILITIES

 

Other current liabilities consist of the following:

 

 

 

January 3,
2004

 

October 2,
2004

 

 

 

 

 

 

 

 

 

 

 

Associate incentives

 

$

2,692

 

$

2,477

 

Accrued employee compensation

 

4,186

 

3,729

 

Income taxes

 

1,255

 

4,041

 

Sales taxes

 

1,667

 

2,032

 

Associate promotions

 

29

 

346

 

Deferred revenue

 

1,404

 

2,020

 

Provision for returns and allowances

 

998

 

1,125

 

Accrued loss on foreign currency forwards

 

337

 

412

 

All other

 

2,136

 

2,436

 

 

 

 

 

 

 

 

 

$

14,704

 

$

18,618

 

 

 

11



 

NOTE F — COMMON STOCK AND EARNINGS PER SHARE

 

Basic earnings per share are based on the weighted average number of common shares outstanding for each period.  Weighted average shares retired have been included as a reduction in the calculation of weighted average common 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 using the treasury stock method.  Shares included in diluted earnings per share calculations include stock options granted that are in the money but have not yet been exercised.

 

 

 

For the Quarter Ended

 

 

 

September 27,
2003

 

October 2,
2004

 

 

 

 

 

Earnings available to common shareholders

 

$

6,056

 

$

7,996

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

Shares

 

 

 

 

 

Common shares outstanding entire period

 

18,273

 

19,470

 

Weighted average common shares:

 

 

 

 

 

Issued during period

 

1,104

 

273

 

Canceled during period

 

(320

)

(691

)

 

 

 

 

 

 

Weighted average common shares outstanding during period

 

19,057

 

19,052

 

 

 

 

 

 

 

Earnings per common share - basic

 

$

0.32

 

$

0.42

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

Shares

 

 

 

 

 

Weighted average shares outstanding during period - basic

 

19,057

 

19,052

 

Dilutive effect of stock options

 

2,326

 

1,244

 

Weighted average shares outstanding during period - diluted

 

21,383

 

20,296

 

 

 

 

 

 

 

Earnings per common share - diluted

 

$

0.28

 

$

0.39

 

 

 

Options to purchase 190 shares of stock were not included in the computation of EPS for the quarter ended October 2, 2004 due to their exercise price being greater than the average market price of the shares.  For the quarter ended September 27, 2003, all options were included in the computation of EPS.

 

               

 

 

For the Nine Months Ended

 

 

 

September 27,
2003

 

October 2,
2004

 

 

 

 

 

Earnings available to common shareholders

 

$

13,980

 

$

21,622

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

Shares

 

 

 

 

 

Common shares outstanding entire period

 

18,273

 

19,470

 

Weighted average common shares:

 

 

 

 

 

Issued during period

 

773

 

160

 

Canceled during period

 

(123

)

(421

)

 

 

 

 

 

 

Weighted average common shares outstanding during period

 

18,923

 

19,209

 

 

 

 

 

 

 

Earnings per common share - basic

 

$

0.74

 

$

1.13

 

 

 

12



 

 

 

 

For the Nine Months Ended

 

 

 

September 27,
2003

 

October 2,
2004

 

 

 

 

 

Diluted EPS

 

 

 

 

 

Shares

 

 

 

 

 

Weighted average shares outstanding during period - basic

 

18,923

 

19,209

 

Dilutive effect of stock options

 

2,371

 

1,348

 

Weighted average shares outstanding during period - diluted

 

21,294

 

20,557

 

Earnings per common share - diluted

 

$

0.66

 

$

1.05

 

 

Options to purchase 193 shares of stock were not included in the computation of EPS for the nine months ended October 2, 2004 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.

 

During the nine months ended October 2, 2004, the Company expended $21,651 to purchase 760 shares under the Company’s Share Repurchase Plan.  The purchase of shares under this plan reduces the number of shares issued and outstanding.

 

NOTE G — SEGMENT INFORMATION

 

The Company’s operations are distinguished by 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, 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 and personal care 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 seven operating geographic regions including North America, Australia-New Zealand, Hong Kong, Japan, Taiwan, South Korea, and Singapore.

 

Contract Manufacturing

 

Operating activities for the Contract Manufacturing segment include the manufacture of premium personal care products, produced under the brand name of its customers, including manufacturing and packaging for the Company’s Sensé product line of skin and personal care products.  These operations are located in Draper, Utah and sales are made to a limited number of customers.

 

Sales made by the Contract Manufacturing segment to one customer accounted for 82%, or approximately $2,316, of segment revenues for the quarter ended October 2, 2004.  No other individual customer accounted for 10% or more of segment net revenues.

 

13



 

 

Financial information summarized by operating segment and geographic region for the quarters ended September 27, 2003 and October 2, 2004 is listed below:

 

 

 

Net Sales
from External Customers

 

Intersegment
Sales

 

Earnings
before Income Taxes

 

Quarter ended September 27, 2003:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Selling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America (1)

 

$

34,214

 

$

13,313

 

$

13,360

 

Australia - New Zealand

 

8,023

 

762

 

(989

)

Hong Kong

 

2,285

 

 

349

 

Japan (2)

 

1,750

 

 

(515

)

Taiwan

 

3,507

 

 

77

 

South Korea

 

2,071

 

 

(430

)

 

 

 

 

 

 

 

 

Segment Total

 

51,850

 

14,075

 

11,852

 

 

 

 

 

 

 

 

 

Contract Manufacturing

 

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

 

 

 

 

 

Net Sales
from External Customers

 

Intersegment
Sales

 

Earnings
before Income Taxes

 

Quarter ended October 2, 2004:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Selling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America (1)

 

$

43,648

 

$

11,416

 

$

11,440

 

Australia - New Zealand

 

9,056

 

911

 

642

 

Hong Kong

 

2,837

 

 

(173

)

Japan (2)

 

2,356

 

 

(233

)

Taiwan

 

3,903

 

 

6

 

South Korea

 

1,366

 

 

(276

)

Singapore

 

2,678

 

 

192

 

 

 

 

 

 

 

 

 

Segment Total

 

65,844

 

12,327

 

11,598

 

 

 

 

 

 

 

 

 

Contract Manufacturing

 

2,829

 

522

 

4

 

 

 

 

 

 

 

 

 

Reportable Segments Total

 

68,673

 

12,849

 

11,602

 

 

 

 

 

 

 

 

 

Unallocated and Other (3)

 

 

(12,849

)

25

 

 

 

 

 

 

 

 

 

Consolidated Total

 

$

68,673

 

$

 

$

11,627

 

 

 

14



 

Financial information summarized by operating segment and geographic region for the nine months ended September 27, 2003 and October 2, 2004 is listed below:

 

 

 

Net Sales
from External
Customers

 

Intersegment
Sales

 

Earnings
before Income
Taxes

 

Long-lived
Assets

 

Total
Assets

 

Nine months ended September 27, 2003:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Selling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America (1)

 

$

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 (2)

 

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

 

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

 

 

 

 

Net Sales
from External
Customers

 

Intersegment
Sales

 

Earnings
before Income
Taxes

 

Long-lived
Assets

 

Total
Assets

 

Nine months ended October 2, 2004:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Selling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America (1)

 

$

126,349

 

$

32,337

 

$

33,458

 

$

37,426

 

$

65,600

 

Australia - New Zealand

 

25,803

 

2,495

 

348

 

207

 

4,173

 

Hong Kong

 

8,044

 

 

312

 

201

 

2,293

 

Japan (2)

 

6,748

 

 

(1,298

)

970

 

2,376

 

Taiwan

 

11,530

 

 

(556

)

314

 

2,523

 

South Korea

 

4,440

 

 

(986

)

789

 

1,881

 

Singapore

 

7,297

 

 

652

 

288

 

2,307

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Total

 

190,211

 

34,832

 

31,930

 

40,195

 

81,153

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract Manufacturing

 

7,483

 

1,202

 

(120

)

5,988

 

10,891

 

 

 

 

 

 

 

 

 

 

 

 

 

Reportable Segments Total

 

197,694

 

36,034

 

31,810

 

46,183

 

92,044

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated and Other (3)

 

 

(36,034

)

462

 

(14,207

)

(16,759

)

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Total

 

$

197,694

 

$

 

$

32,272

 

$

31,976

 

$

75,285

 


(1)

 

Includes results from the FMG subsidiary acquired in February 2004 and operations in Mexico initiated in
March 2004.

 

 

 

(2)

 

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

 

 

 

(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 and personal care 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 whom we refer to as “Associates.”  As of October 2, 2004, we had approximately 111,000 active Associates in the United States, Canada, Australia, New Zealand, Hong Kong, Japan, Taiwan, South Korea, Singapore, Mexico, 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 October 2, 2004, we had approximately 60,000 active Preferred Customers worldwide.  Sales to Preferred Customers accounted for approximately 14% of net sales for the Direct Selling segment during the third quarter of 2004.  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.

 

The fiscal year end of USANA is the Saturday closest to December 31 of each year.  Fiscal year 2004 will end on January 1, 2005 and is a 52-week year.  Fiscal year 2003 ended on January 3, 2004 and was a 53-week year.

 

As discussed more fully in Note G — Segment Information, 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 and personal care products through a network marketing system.  The Contract Manufacturing segment includes the manufacture of premium personal care products, produced under the brand name of its customers, including manufacturing and packaging for our Sensé product line of skin and personal care products.

 

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.

 

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 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.  The USANAâ Essentials product 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, Visionexâ, and OptOmegaâ.

 

The Macro Optimizers include healthy, low-glycemic convenience foods and other related products, including powdered drink mixes and nutrition bars.  NutrimealÔ, Fibergyâ, and SoyaMaxÔ drink mixes, and Nutrition and Fibergy Bars 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.  At our Annual International Convention held in September 2004, we announced the re-launch of the Sensé product line, now formulated with our patent-pending, self-preserving technology.  This new technology uses a unique blend of botanicals, antioxidants, and active ingredients to keep products fresh, without adding parabens, the most common preservative used in cosmetics and skin care products.  The Sensé product line will include all of the same products but will now be formulated with the new patent-pending technology.  These products specifically 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, Energizing Shower Gel, and Intensive Hand Therapy.

 

All Other

 

In addition to our 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 FMG (our wholly owned subsidiary) and 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

 

 

 

 

 

 

September 27,
2003

 

October 2, 2004

 

Product Line

 

 

 

USANA® Nutritionals

 

 

 

 

 

Essentials **

 

39

%

39

%

Optimizers

 

34

%

34

%

Macro Optimizers

 

8

%

10

%

Sensé — beautiful science®

 

14

%

13

%

All Other

 

5

%

4

%


*   Product sales previously categorized as Combination Packs have been allocated to their respective product lines based on the weighted average price of the product components that comprise each pack.

 

** The Essentials category under the USANAâ Nutritionals product line includes USANAâ Essentials, 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 October 2, 2004.

 

USANAâ Essentials

 

24

%

HealthPak 100Ô

 

11

%

Proflavanolâ

 

10

%

 

 

 

17



 

Results of Operations

 

West Coast Shipping Port Congestion.  The financial press is reporting congestion at West Coast ports caused by increasing cargo volumes, a lack of capacity on the railroads, and a shortage of manpower.  We have particularly felt the effects in our container shipments to Australia.  The near-term solution has required additional use of airfreight to meet demand.  Between now and February 2005, when congestion is expected to be relieved, we anticipate an additional two weeks of ocean transit time, thus potentially adding to required inventories associated with products in transit or additional cost for airfreight depending on evaluation of cost tradeoffs.  Although we have rate agreements in place for international shipment, the steamship lines will begin adding $200 per 20 foot container and $400 per 40 foot container effective November 15, 2004.  This additional fee applies to both imports and exports via Los Angeles/Long Beach ports.  Our freight forwarders will continue to exercise flexibility in the selection of ports and carriers to provide the best service.

 

Quarters Ended September 27, 2003 and October 2, 2004

 

Net Sales.  Net sales increased 30.8% to $68.7 million for the quarter ended October 2, 2004, an increase of $16.2 million from $52.5 million for the comparable quarter in 2003.  The increase was comprised of $14.0 million and $2.2 million contributed by our Direct Selling and Contract Manufacturing segments, respectively.

 

The following table summarizes the growth (decline) in net sales by segment and geographic region for the quarters ended September 27, 2003 and October 2, 2004.

 

 

 

Net Sales By Segment and Region
(in thousands)
Quarter Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change from

Prior Year

 

Percent

Change

 

Segment / Region

 

September 27, 2003

 

October 2, 2004

 

 

 

Direct Selling

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

23,444

 

44.7

%

$

28,827

 

42.0

%

$

5,383

 

23.0

%

Canada

 

10,770

 

20.5

%

12,553

 

18.3

%

1,783

 

16.6

%

Australia-New Zealand

 

8,023

 

15.3

%

9,056

 

13.2

%

1,033

 

12.9

%

Hong Kong

 

2,285

 

4.4

%

2,837

 

4.1

%

552

 

24.2

%

Japan

 

1,750

 

3.3

%

2,356

 

3.4

%

606

 

34.6

%

Taiwan

 

3,507

 

6.7

%

3,903

 

5.7

%

396

 

11.3

%

South Korea

 

2,071

 

3.9

%

1,366

 

2.0

%

(705

)

(34.0%

)

Singapore

 

 

0.0

%

2,678

 

3.9

%

2,678

 

N/A

 

Mexico

 

 

0.0

%

2,268

 

3.3

%

2,268

 

N/A

 

Segment Total

 

51,850

 

98.8

%

65,844

 

95.9

%

13,994

 

27.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract Manufacturing

 

656

 

1.2

%

2,829

 

4.1

%

2,173

 

331.3

%