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 July 2, 2005

 

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 July 29, 2005 was 18,833,182.

 

 



 

USANA HEALTH SCIENCES, INC.

 

FORM 10-Q

 

For the Quarterly Period Ended July 2, 2005

 

INDEX

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1

Financial Statements

 

 

Consolidated Balance Sheets

 

 

Consolidated Statements of Earnings – Quarter Ended

 

 

Consolidated Statements of Earnings – Six 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

Unregistered Sales of Equity Securities and Use of Proceeds.

 

Item 4

Submission of Matters to a Vote of Security Holders.

 

Item 6

Exhibits.

 

 

 

 

Signatures

 

 

 

2



 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

(in thousands)

 

 

 

January 1,

 

July 2,

 

 

 

2005

 

2005

 

 

 

 

 

(unaudited)

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

15,067

 

$

20,428

 

Inventories, net

 

17,722

 

22,044

 

Prepaid expenses and other current assets

 

5,808

 

5,180

 

Deferred income taxes

 

2,226

 

2,431

 

 

 

 

 

 

 

Total current assets

 

40,823

 

50,083

 

 

 

 

 

 

 

Property and equipment, net

 

23,194

 

23,233

 

 

 

 

 

 

 

Goodwill

 

5,690

 

5,690

 

 

 

 

 

 

 

Other assets

 

1,957

 

2,812

 

 

 

 

 

 

 

 

 

$

71,664

 

$

81,818

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

5,106

 

$

4,814

 

Other current liabilities

 

17,644

 

20,706

 

 

 

 

 

 

 

Total current liabilities

 

22,750

 

25,520

 

 

 

 

 

 

 

Long-term liabilities

 

1,071

 

1,495

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock, $0.001 par value; authorized 50,000 shares, issued and outstanding 18,953 as of January 1, 2005 and 18,816 as of July 2, 2005

 

19

 

19

 

Additional paid-in capital

 

11,853

 

12,135

 

Retained earnings

 

34,496

 

41,914

 

Accumulated other comprehensive income

 

1,475

 

735

 

 

 

 

 

 

 

Total stockholders’ equity

 

47,843

 

54,803

 

 

 

 

 

 

 

 

 

$

71,664

 

$

81,818

 

 

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)

 

(unaudited)

 

 

 

Quarter Ended

 

 

 

July 3,

 

July 2,

 

 

 

2004

 

2005

 

 

 

 

 

 

 

Net sales

 

$

67,246

 

$

82,015

 

 

 

 

 

 

 

Cost of sales

 

16,195

 

19,499

 

 

 

 

 

 

 

Gross profit

 

51,051

 

62,516

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Associate incentives

 

25,556

 

31,911

 

Selling, general and administrative

 

13,656

 

15,168

 

Research and development

 

607

 

689

 

 

 

 

 

 

 

Total operating expenses

 

39,819

 

47,768

 

 

 

 

 

 

 

Earnings from operations

 

11,232

 

14,748

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

36

 

93

 

Interest expense

 

 

(3

)

Other, net

 

(37

)

(157

)

 

 

 

 

 

 

Other income (expense), net

 

(1

)

(67

)

 

 

 

 

 

 

Earnings before income taxes

 

11,231

 

14,681

 

 

 

 

 

 

 

Income taxes

 

3,818

 

5,138

 

 

 

 

 

 

 

Net earnings

 

$

7,413

 

$

9,543

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

Basic

 

$

0.39

 

$

0.50

 

Diluted

 

$

0.36

 

$

0.48

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

Basic

 

19,199

 

18,948

 

Diluted

 

20,523

 

19,821

 

 

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)

 

(unaudited)

 

 

 

Six Months Ended

 

 

 

July 3,

 

July 2,

 

 

 

2004

 

2005

 

 

 

 

 

 

 

Net sales

 

$

129,021

 

$

158,593

 

 

 

 

 

 

 

Cost of sales

 

31,253

 

37,509

 

 

 

 

 

 

 

Gross profit

 

97,768

 

121,084

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Associate incentives

 

49,168

 

61,461

 

Selling, general and administrative

 

26,918

 

30,017

 

Research and development

 

1,185

 

1,288

 

 

 

 

 

 

 

Total operating expenses

 

77,271

 

92,766

 

 

 

 

 

 

 

Earnings from operations

 

20,497

 

28,318

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

86

 

197

 

Interest expense

 

 

(3

)

Other, net

 

62

 

(96

)

 

 

 

 

 

 

Other income (expense), net

 

148

 

98

 

 

 

 

 

 

 

Earnings before income taxes

 

20,645

 

28,416

 

 

 

 

 

 

 

Income taxes

 

7,019

 

9,945

 

 

 

 

 

 

 

Net earnings

 

$

13,626

 

$

18,471

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

Basic

 

$

0.71

 

$

0.97

 

Diluted

 

$

0.66

 

$

0.93

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

Basic

 

19,288

 

19,008

 

Diluted

 

20,688

 

19,896

 

 

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

 

Six Months Ended July 3, 2004 and July 2, 2005

 

(in thousands)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

Common Stock

 

Paid-in

 

Retained

 

Comprehensive

 

 

 

 

 

Shares

 

Value

 

Capital

 

Earnings

 

Income (Loss)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended July 3, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 3, 2004

 

19,470

 

$

19

 

$

14,187

 

$

28,935

 

$

1,230

 

$

44,371

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

13,626

 

 

13,626

 

Foreign currency translation adjustment, net

 

 

 

 

 

(88

)

(88

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

13,538

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock retired

 

(524

)

 

(4,505

)

(10,392

)

 

(14,897

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued under stock option plan, including tax benefit of $1,372

 

224

 

 

1,865

 

 

 

1,865

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at July 3, 2004

 

19,170

 

$

19

 

$

11,547

 

$

32,169

 

$

1,142

 

$

44,877

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended July 2, 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2005

 

18,953

 

$

19

 

$

11,853

 

$

34,496

 

$

1,475

 

$

47,843

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

18,471

 

 

18,471

 

Foreign currency translation adjustment, net

 

 

 

 

 

(740

)

(740

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

17,731

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock retired

 

(353

)

 

(3,948

)

(11,053

)

 

(15,001

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued under stock option plan, including tax benefit of $2,679

 

216

 

 

4,230

 

 

 

4,230

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at July 2, 2005

 

18,816

 

$

19

 

$

12,135

 

$

41,914

 

$

735

 

$

54,803

 

 

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)

 

 

 

Six Months Ended

 

 

 

July 3,

 

July 2,

 

 

 

2004

 

2005

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net earnings

 

$

13,626

 

$

18,471

 

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

 

 

 

 

 

Depreciation and amortization

 

2,255

 

2,824

 

(Gain) loss on sale of property and equipment

 

(2

)

5

 

Deferred income taxes

 

174

 

56

 

Allowance for inventory valuation

 

553

 

43

 

Changes in operating assets and liabilities:

 

 

 

 

 

Inventories

 

(34

)

(4,545

)

Prepaid expenses and other assets

 

(246

)

(734

)

Accounts payable

 

(1,144

)

(261

)

Other current liabilities

 

1,688

 

6,105

 

 

 

 

 

 

 

Total adjustments

 

3,244

 

3,493

 

 

 

 

 

 

 

Net cash provided by operating activities

 

16,870

 

21,964

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Acquisition, net of cash acquired

 

(2,140

)

 

Purchases of property and equipment

 

(5,349

)

(2,688

)

Proceeds from the sale of property and equipment

 

21

 

4

 

 

 

 

 

 

 

Net cash used in investing activities

 

(7,468

)

(2,684

)

 

The accompanying notes are an integral part of these statements.

 

7



 

 

 

Six Months Ended

 

 

 

July 3,

 

July 2,

 

 

 

2004

 

2005

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from stock options exercised

 

493

 

1,551

 

Redemption of common stock

 

(14,897

)

(15,001

)

 

 

 

 

 

 

Net cash used in financing activities

 

(14,404

)

(13,450

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(165

)

(469

)

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(5,167

)

5,361

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

18,965

 

15,067

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

13,798

 

$

20,428

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

 

$

3

 

Income taxes

 

5,727

 

5,944

 

 

Non-cash activities

 

In February 2004, the Company acquired FMG Productions (FMG), LLC for $2,140 in cash, which included $80 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 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 July 2, 2005, and results of operations for the quarters and six months ended July 3, 2004 and July 2, 2005.  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 1, 2005.  The results of operations for the quarter and six months ended July 2, 2005 may not be indicative of the results that may be expected for the fiscal year ending December 31, 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 six months ended July 3, 2004 and July 2, 2005.  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

 

Six Months Ended

 

 

 

 

 

July 3,

 

July 2,

 

July 3,

 

July 2,

 

 

 

 

 

2004

 

2005

 

2004

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

As reported

 

$

7,413

 

$

9,543

 

$

13,626

 

$

18,471

 

 

 

 

 

 

 

 

 

 

 

 

 

Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects

 

 

 

$

(440

)

$

(466

)

$

(664

)

$

(914

)

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

Pro forma

 

$

6,973

 

$

9,077

 

$

12,962

 

$

17,557

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - basic

 

As reported

 

$

0.39

 

$

0.50

 

$

0.71

 

$

0.97

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma

 

$

0.36

 

$

0.48

 

$

0.67

 

$

0.92

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - diluted

 

As reported

 

$

0.36

 

$

0.48

 

$

0.66

 

$

0.93

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma

 

$

0.34

 

$

0.46

 

$

0.63

 

$

0.88

 

 

9



 

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

 

 

 

Quarter Ended

 

Six Months Ended

 

 

 

July 3,

 

July 2,

 

July 3,

 

July 2,

 

 

 

2004

 

2005

 

2004

 

2005

 

 

 

 

 

 

 

 

 

 

 

Expected volatility

 

 

*

72%

 

76%

 

72%

 

Risk free interest rate

 

 

*

3.87%

 

4.02%

 

3.87%

 

Expected life

 

 

*

5.25 yrs.

 

10 yrs.

 

5.25 yrs.

 

Expected dividend yield

 

 

*

0%

 

0%

 

0%

 

Weighted average fair value of options granted**

 

 

*

$

42.64

 

$

29.72

 

$

42.64

 

 


*                 No grants were issued during the quarter ended July 3, 2004.

**          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 under the Black-Scholes option pricing model 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 1,

 

July 2,

 

 

 

2005

 

2005

 

 

 

 

 

 

 

Raw materials

 

$

8,846

 

$

11,747

 

Work in progress

 

3,123

 

3,671

 

Finished goods

 

7,897

 

8,436

 

 

 

 

 

 

 

 

 

19,866

 

23,854

 

 

 

 

 

 

 

Less allowance for inventory valuation

 

2,144

 

1,810

 

 

 

 

 

 

 

 

 

$

17,722

 

$

22,044

 

 

10



 

NOTE C – PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following:

 

 

 

January 1,

 

July 2,

 

 

 

2005

 

2005

 

 

 

 

 

 

 

Prepaid expenses

 

$

1,599

 

$

1,553

 

Miscellaneous receivables, net

 

3,734

 

3,129

 

Other current assets

 

475

 

498

 

 

 

 

 

 

 

 

 

$

5,808

 

$

5,180

 

 

NOTE D – PROPERTY AND EQUIPMENT

 

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

 

 

 

 

 

January 1,

 

July 2,

 

 

 

Years

 

2005

 

2005

 

 

 

 

 

 

 

 

 

Building

 

40

 

$

9,400

 

$

9,400

 

Laboratory and production equipment

 

5-7

 

8,706

 

9,187

 

Sound and video library

 

5

 

600

 

600

 

Computer equipment and software

 

3-5

 

22,580

 

23,440

 

Furniture and fixtures

 

3-5

 

2,530

 

2,588

 

Automobiles

 

3-5

 

206

 

204

 

Leasehold improvements

 

3-5

 

2,568

 

2,522

 

Land improvements

 

15

 

931

 

931

 

 

 

 

 

 

 

 

 

 

 

 

 

47,521

 

48,872

 

 

 

 

 

 

 

 

 

Less accumulated depreciation and amortization

 

 

 

26,459

 

28,402

 

 

 

 

 

 

 

 

 

 

 

 

 

21,062

 

20,470

 

 

 

 

 

 

 

 

 

Land

 

 

 

1,899

 

1,899

 

 

 

 

 

 

 

 

 

Deposits and projects in process

 

 

 

233

 

864

 

 

 

 

 

 

 

 

 

 

 

 

 

$

23,194

 

$

23,233

 

 

NOTE E – GOODWILL

 

Goodwill represents the excess of the purchase price paid of acquired entities over the fair market value of the net assets acquired.  As of July 2, 2005, goodwill totaled $5,690, comprised of $4,267 associated with the July 1, 2003 acquisition of Wasatch Product Development, Inc. (WPD) and $1,423 in connection with the February 1, 2004 acquisition of FMG.  No events have occurred subsequent to either acquisition that have resulted in an impairment of the original goodwill amounts initially recorded from the transactions.  In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill must be tested at least annually and if the carrying amount of goodwill exceeds its fair value, an impairment loss must be recognized in an amount equal to that excess.

 

During June 2005, an independent third party conducted the annual impairment test of goodwill related to the acquisition of WPD.  The fair market value of the net assets of WPD was estimated using widely accepted valuation methods, including both a market approach and an income approach.  In determining the fair market value as part of the impairment test, certain assumptions were used to project future results that management believes are reasonable, given current facts and circumstances; however, there

 

11



 

can be no assurance that, under the assumptions used, these projections will materialize.  Based upon the results of the independent appraisal, the fair market value of the net assets of WPD has been determined to be in excess of the carrying amount of the net assets, and, therefore, no impairment loss for goodwill has been recognized.

 

There were no changes in the carrying amount of goodwill for the acquired subsidiaries for the six months ended July 2, 2005:

 

 

 

 

 

 

 

Consolidated

 

 

 

WPD

 

FMG

 

Total

 

 

 

 

 

 

 

 

 

Balance at January 1, 2005

 

$

4,267

 

$

1,423

 

$

5,690

 

 

 

 

 

 

 

 

 

Goodwill acquired

 

 

 

 

 

 

 

 

 

 

 

 

Impairment adjustments

 

 

 

 

 

 

 

 

 

 

 

 

Balance at July 2, 2005

 

$

4,267

 

$

1,423

 

$

5,690

 

 

NOTE F – OTHER CURRENT LIABILITIES

 

Other current liabilities consist of the following:

 

 

 

January 1,

 

July 2,

 

 

 

2005

 

2005

 

 

 

 

 

 

 

Associate incentives

 

$

2,379

 

$

3,115

 

Accrued employee compensation

 

4,696

 

3,968

 

Income taxes

 

1,901

 

3,789

 

Sales taxes

 

1,986

 

1,923

 

Associate promotions

 

429

 

1,619

 

Deferred revenue

 

1,825

 

1,814

 

Provision for returns and allowances

 

1,284

 

1,292

 

Accrued loss on foreign currency forwards

 

425

 

 

All other

 

2,719

 

3,186

 

 

 

 

 

 

 

 

 

$

17,644

 

$

20,706

 

 

12



 

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.

 

 

 

For the Quarter Ended

 

 

 

July 3,

 

July 2,

 

 

 

2004

 

2005

 

Earnings available to common shareholders

 

$

7,413

 

$

9,543

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Common shares outstanding entire period

 

19,470

 

18,953

 

Weighted average common shares:

 

 

 

 

 

Issued during period

 

180

 

211

 

Canceled during period

 

(451

)

(216

)

Weighted average common shares outstanding during period

 

19,199

 

18,948

 

Earnings per common share - basic

 

$

0.39

 

$

0.50

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Weighted average shares outstanding during period - basic

 

19,199

 

18,948

 

Dilutive effect of stock options

 

1,324

 

873

 

Weighted average shares outstanding during period - diluted

 

20,523

 

19,821

 

Earnings per common share - diluted

 

$

0.36

 

$

0.48

 

 

Options to purchase 390 shares of stock were not included in the computation of EPS for the quarter ended July 3, 2004 due to their exercise price being greater than the average market price of the shares.

 

13



 

 

 

For the Six Months Ended

 

 

 

July 3,

 

July 2,

 

 

 

2004

 

2005

 

Earnings available to common shareholders

 

$

13,626

 

$

18,471

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Common shares outstanding entire period

 

19,470

 

18,953

 

Weighted average common shares:

 

 

 

 

 

Issued during period

 

104

 

163

 

Canceled during period

 

(286

)

(108

)

Weighted average common shares outstanding during period

 

19,288

 

19,008

 

Earnings per common share - basic

 

$

0.71

 

$

0.97

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Weighted average shares outstanding during period - basic

 

19,288

 

19,008

 

Dilutive effect of stock options

 

1,400

 

888

 

Weighted average shares outstanding during period - diluted

 

20,688

 

19,896

 

Earnings per common share - diluted

 

$

0.66

 

$

0.93

 

 

Options to purchase 290 shares of stock were not included in the computation of EPS for the six months ended July 3, 2004 due to their exercise price being greater than the average market price of the shares.

 

During the six months ended July 2, 2005 and July 3, 2004 the Company expended $15,001 and $14,897 to purchase 353 and 524 shares, respectively, under the Company’s share repurchase 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 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 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.

 

14



 

NOTE H – SEGMENT INFORMATION - CONTINUED

 

Historically, selected financial information for the Direct Selling segment has been reported for seven operating geographic regions including North America, Australia-New Zealand, Hong Kong, Japan, Taiwan, South Korea, and Singapore.  To simplify the presentation of selected financial information, these formerly segregated regions have been aggregated into two geographic regions: North America and Pacific Rim.  North America includes the United States, Canada, and Mexico.  All other entities outside of North America are located within the Pacific Rim region, which includes Australia-New Zealand, Hong Kong, Japan, Taiwan, South Korea, and Singapore.

 

Contract Manufacturing

 

Operations for the Contract Manufacturing segment are located in Draper, Utah.  Operating activities for this segment include the manufacture of premium personal care products, and primarily exist for the production of the Company’s Sensé™ line of skin and personal care.  In addition to the production of the Sensé product line, contract manufacturing services are provided to a limited number of customers in the personal care marketplace, which helps offset operating expenses associated with this segment.  In both the second quarters of 2004 and 2005, we had one external customer that accounted for more than ten percent of segment sales.  Financial data for the Contract Manufacturing segment has been modified to include a reasonable markup on the intersegment sale of the Sensé product line consistent with what we believe is typical of the industry.

 

Financial information summarized by operating segment and geographic region for the quarters ended July 3, 2004 and July 2, 2005 is listed below:

 

 

 

Revenues

 

 

 

Earnings

 

 

 

from External

 

Intersegment

 

before Income

 

 

 

Customers

 

Revenues

 

Taxes

 

Quarter ended July 3, 2004:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Selling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

42,415

 

$

11,598

 

$

11,389

 

Pacific Rim

 

21,711

 

912

 

281

 

 

 

 

 

 

 

 

 

Segment Total

 

64,126

 

12,510

 

11,670

 

 

 

 

 

 

 

 

 

Contract Manufacturing

 

3,120

 

256

 

254

 

 

 

 

 

 

 

 

 

Reportable Segments Total

 

67,246

 

12,766

 

11,924

 

 

 

 

 

 

 

 

 

Unallocated and Other *

 

 

(12,766

)

(693

)

 

 

 

 

 

 

 

 

Consolidated Total

 

$

67,246

 

$

 

$

11,231

 

 


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

 

15



 

 

 

Revenues

 

 

 

Earnings

 

 

 

from External

 

Intersegment

 

before Income

 

 

 

Customers

 

Revenues

 

Taxes

 

Quarter ended July 2, 2005:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Selling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

52,264

 

$

15,316

 

$

15,284

 

Pacific Rim

 

27,548

 

1,382

 

(424

)

 

 

 

 

 

 

 

 

Segment Total

 

79,812

 

16,698

 

14,860

 

 

 

 

 

 

 

 

 

Contract Manufacturing

 

2,203

 

2,395

 

221

 

 

 

 

 

 

 

 

 

Reportable Segments Total

 

82,015

 

19,093

 

15,081

 

 

 

 

 

 

 

 

 

Unallocated and Other *

 

 

(19,093

)

(400

)

 

 

 

 

 

 

 

 

Consolidated Total

 

$

82,015

 

$

 

$

14,681

 

 

Financial information summarized by operating segment and geographic region for the six months ended July 3, 2004 and July 2, 2005 is listed below:

 

 

 

Revenues

 

 

 

Earnings

 

 

 

 

 

 

 

from External

 

Intersegment

 

before Income

 

Long-lived

 

 

 

 

 

Customers

 

Revenues

 

Taxes

 

Assets

 

Total Assets

 

Six months ended July 3, 2004:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Selling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

82,701

 

$

20,921

 

$

22,018

 

$

37,733

 

$

55,049

 

Pacific Rim

 

41,666

 

1,584

 

(1,686

)

2,902

 

17,294

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Total

 

124,367

 

22,505

 

20,332

 

40,635

 

72,343

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract Manufacturing

 

4,654

 

907

 

103

 

5,923

 

9,510

 

 

 

 

 

 

 

 

 

 

 

 

 

Reportable Segments Total

 

129,021

 

23,412

 

20,435

 

46,558

 

81,853

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated and Other *

 

 

(23,412

)

210

 

(14,308

)

(16,904

)

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Total

 

$

129,021

 

$

 

$

20,645

 

$

32,250

 

$

64,949

 

 


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

 

16



 

 

 

Revenues

 

 

 

Earnings

 

 

 

 

 

 

 

from External

 

Intersegment

 

before Income

 

Long-lived

 

 

 

 

 

Customers

 

Revenues

 

Taxes

 

Assets

 

Total Assets

 

Six months ended July 2, 2005:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Selling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

101,522

 

$

33,251

 

$

31,613

 

$

37,550

 

$

68,688

 

Pacific Rim

 

52,939

 

2,659

 

(820

)

2,909

 

18,778

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Total

 

154,461

 

35,910

 

30,793

 

40,459

 

87,466

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract Manufacturing

 

4,132

 

5,160

 

764

 

6,361

 

12,720

 

 

 

 

 

 

 

 

 

 

 

 

 

Reportable Segments Total

 

158,593

 

41,070

 

31,557

 

46,820

 

100,186

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated and Other *

 

 

(41,070

)

(3,141

)

(15,085

)

(18,368

)

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Total

 

$

158,593

 

$

 

$

28,416

 

$

31,735

 

$

81,818

 

 


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

 

17



 

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 that we refer to as “Associates.”  As of July 2, 2005, we had 125,000 active Associates worldwide.  We also sell products directly to “Preferred Customers” who purchase products for personal use and are not permitted to resell or distribute the products.  As of July 2, 2005, we had 66,000 active Preferred Customers worldwide.  The majority of sales in the Direct Selling segment come from Associates.  During the second quarter of 2005 sales to Associates accounted for approximately 86% of net sales for the Direct Selling segment.  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 ended on January 1, 2005, and fiscal year 2005 will end on December 31, 2005.

 

As discussed more fully in Note H – Segment Information, beginning on page 14 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 primarily consists of manufacturing and packaging the Company’s Sensé™ product line of skin and personal care products, but also includes the manufacture of premium personal care products, produced for a limited number of third-party customers, under their independent brand names.

 

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.  Additionally, we offer combination packs, which generally contain a variety of products from each product line.

 

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.  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 available in a convenient pillow pack format, HealthPak 100Ô.

 

The 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 convenience foods and other related products.  NutrimealÔ, Fibergyâ, and SoyaMaxÔ powdered drink mixes, and nutrition and fiber bars, are included in this product category.

 

18



 

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.  This line is formulated with our patent-pending, self-preserving technology, which 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.  Products in this line include Perfecting Essence, Gentle Daily Cleanser, Hydrating Toner, Daytime Protective Emulsion SPF 15, Eye Nourisher, Night Renewal, Serum Intensive, 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 these principal product lines, we have developed and sell to Associates materials and online tools designed to assist them in building their businesses and selling products.  These resource materials or sales tools include product brochures and business forms designed internally 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 sold to Associates.  We also write and develop our own materials for CDs and DVDs, which are produced by our wholly-owned subsidiary, FMG Productions.  New Associates are required to purchase a starter kit containing USANA training materials that assist the Associates in starting and growing their businesses.  Associates do not earn commissions on the sale of sales tools 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 six months ended as of the dates indicated:

 

 

 

Sales By Product Line *

 

 

 

Six Months Ended

 

 

 

July 3,

 

July 2,

 

Product Line

 

2004

 

2005

 

USANAâ Nutritionals

 

 

 

 

 

Essentials **

 

38

%

37

%

Optimizers

 

34

%

35

%

Macro Optimizers

 

10

%

9

%

Sensé – beautiful scienceâ

 

13

%

15

%

All Other

 

5

%

4

%

 


*   Combination Pack sales have been allocated to their respective product lines based on the weighted average price of the product components that compose 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 six months ended as of the dates indicated.

 

 

 

Six Months Ended

 

 

 

July 3,

 

July 2,

 

Key Product

 

2004

 

2005

 

USANAâ Essentials

 

25

%

22

%

HealthPak 100 ™

 

11

%

12

%

Proflavanolâ

 

10

%

10

%

 

19



 

Results of Operations

 

Quarters Ended July 3, 2004 and July 2, 2005

 

Net Sales.  Net sales increased 22.0% to $82.0 million for the quarter ended July 2, 2005, an increase of $14.8 million from $67.2 million for the comparable quarter in 2004.  The change consisted of a $15.7 million increase in the Direct Selling segment, and a $0.9 million decrease in the Contract Manufacturing segment.

 

The following table summarizes the changes in net sales by segment and geographic region for the fiscal quarters ended July 3, 2004, and July 2, 2005.

 

 

 

Sales By Segment and Region

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

Quarter Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change from

 

Percent

 

Segment / Region

 

July 3, 2004

 

July 2, 2005

 

Prior Year

 

Change

 

Direct Selling

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

27,821

 

41.4%

 

$

33,067

 

40.3%

 

$

5,246

 

18.9%

 

Canada

 

12,378

 

18.4%

 

15,287

 

18.6%

 

2,909

 

23.5%

 

Mexico

 

2,216

 

3.3%

 

3,910

 

4.8%

 

1,694

 

76.4%

 

North America Total

 

42,415

 

63.1%

 

52,264

 

63.7%

 

9,849

 

23.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pacific Rim

 

 

 

 

 

 

 

 

 

 

 

 

 

Australia-New Zealand

 

8,471

 

12.6%

 

11,241

 

13.7%

 

2,770

 

32.7%

 

Hong Kong

 

2,750

 

4.1%

 

3,377

 

4.1%

 

627

 

22.8%

 

Japan

 

2,176

 

3.2%

 

2,620

 

3.2%

 

444

 

20.4%

 

Taiwan

 

3,898

 

5.8%

 

5,381

 

6.6%

 

1,483

 

38.0%

 

South Korea

 

1,804

 

2.7%

 

1,323

 

1.6%

 

(481

)

(26.7)%

 

Singapore

 

2,612

 

3.9%

 

3,606

 

4.4%

 

994

 

38.1%

 

Pacific Rim Total

 

21,711

 

32.3%

 

27,548

 

33.6%

 

5,837

 

26.9%

 

Segment Total

 

64,126

 

95.4%