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

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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		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

 

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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

 

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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

 

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