UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

Commission file number: 0-21116

 

 

USANA HEALTH SCIENCES, INC.

(Exact name of registrant as specified in its charter)

 

 

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

The number of shares outstanding of the registrant’s common stock as of May 5, 2006 was 18,337,698.

 

 

USANA HEALTH SCIENCES, INC.

 

FORM 10-Q

 

For the Quarterly Period Ended April 1, 2006

 

INDEX

 

PART I. FINANCIAL INFORMATION
Item 1		Financial Statements
		Consolidated Balance Sheets
		Consolidated Statements of Earnings
		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 1A		Risk Factors
Item 6		Exhibits
Signatures

 

2

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

(in thousands)

 

		December 31,			April 1,
		2005			2006
					(unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	10,579		$	25,505
Inventories, net		22,223			21,295
Prepaid expenses and other current assets		6,024			6,432
Deferred income taxes		3,004			3,166
Total current assets		41,830			56,398
Property and equipment, net		23,302			23,489
Goodwill		5,690			5,690
Other assets		2,886			2,771
		$	73,708		$	88,348
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	4,955		$	5,652
Other current liabilities		21,601			24,624
Total current liabilities		26,556			30,276
Long-term liabilities		1,414			832
Stockholders’ equity
Common stock, $0.001 par value; authorized 50,000 shares, issued and outstanding 18,343 as of December 31, 2005 and 18,511 as of April 1, 2006		18			19
Additional paid-in capital		9,161			11,228
Retained earnings		35,720			45,280
Accumulated other comprehensive income		839			713
Total stockholders’ equity		45,738			57,240
		$	73,708		$	88,348

 

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
		April 2,			April 1,
		2005			2006
Net sales		$	76,578		$	89,651
Cost of sales		18,010			21,338
Gross profit		58,568			68,313
Operating expenses:
Associate incentives		29,550			35,428
Selling, general and administrative		14,849			17,626
Research and development		599			732
Total operating expenses		44,998			53,786
Earnings from operations		13,570			14,527
Other income:
Interest income		104			142
Other, net		61			153
Other income, net		165			295
Earnings before income taxes		13,735			14,822
Income taxes		4,807			5,262
Net earnings		$	8,928		$	9,560
Earnings per common share
Basic		$	0.47		$	0.52
Diluted		$	0.45		$	0.50
Weighted average common shares outstanding
Basic		19,068			18,460
Diluted		19,971			19,228

 

The accompanying notes are an integral part of these statements.

 

4

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

 

Quarters Ended April 2, 2005 and April 1, 2006

 

(in thousands)

 

(unaudited)

 

													Accumulated
							Additional						Other
		Common Stock					Paid-in			Retained			Comprehensive
		Shares		Value			Capital			Earnings			Income (Loss)			Total
For the Quarter Ended April 2, 2005
Balance at January 1, 2005		18,953		$	19		$	11,853		$	34,496		$	1,475		$	47,843
Comprehensive income
Net earnings		—		—			—			8,928			—			8,928
Foreign currency translation adjustment, net		—		—			—			—			(633		)	(633		)
Comprehensive income																8,295
Common stock issued under stock option plan, including tax benefit of $2,585		210		—			4,122			—			—			4,122
Balance at April 2, 2005		19,163		$	19		$	15,975		$	43,424		$	842		$	60,260
For the Quarter Ended April 1, 2006
Balance at December 31, 2005		18,343		$	18		$	9,161		$	35,720		$	839		$	45,738
Comprehensive income
Net earnings		—		—			—			9,560			—			9,560
Foreign currency translation adjustment, net		—		—			—			—			(126		)	(126		)
Comprehensive income																9,434
Equity-based compensation expense		—		—			947			—			—			947
Common stock issued under stock option plan, including tax benefit of $381		168		1			1,120			—			—			1,121
Balance at April 1, 2006		18,511		$	19		$	11,228		$	45,280		$	713		$	57,240

 

The accompanying notes are an integral part of these statements.

 

5

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in thousands)

 

(unaudited)

 

		Quarter Ended
		April 2,			April 1,
		2005			2006
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net earnings		$	8,928		$	9,560
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization		1,348			1,464
Excess tax benefit from equity-based payment arrangements		—			(212		)
Equity-based compensation expense		—			947
Deferred income taxes		234			(603		)
Allowance for inventory valuation		644			796
Changes in operating assets and liabilities:
Inventories		(5,497		)	44
Prepaid expenses and other assets		(1,860		)	(617		)
Accounts payable		42			700
Other current liabilities		3,698			3,298
Total adjustments		(1,391		)	5,817
Net cash provided by operating activities		7,537			15,377

 

The accompanying notes are an integral part of these statements.

 

6

 

		Quarter Ended
		April 2,			April 1,
		2005			2006
Cash flows from investing activities
Purchases of property and equipment		(1,596		)	(1,487		)
Net cash used in investing activities		(1,596		)	(1,487		)
Cash flows from financing activities
Proceeds from equity awards exercised		1,537			739
Excess tax benefit from equity-based payment arrangements		—			212
Net cash provided by financing activities		1,537			951
Effect of exchange rate changes on cash and cash equivalents		(512		)	85
Net increase in cash and cash equivalents		6,966			14,926
Cash and cash equivalents, beginning of period		15,067			10,579
Cash and cash equivalents, end of period		$	22,033		$	25,505
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest		$	—		$	—
Income taxes		704			1,018

 

The accompanying notes are an integral part of these statements.

 

7

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

 

Basis of Presentation

 

The unaudited interim consolidated financial information of USANA Health Sciences, Inc. and Subsidiaries (the “Company” or “USANA”) has been prepared in accordance with Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying interim consolidated financial information contains all adjustments, consisting of normal recurring adjustments, necessary to present fairly the Company’s financial position as of April 1, 2006, and results of operations for the quarters ended April 1, 2006 and April 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 December 31, 2005. The results of operations for the quarter ended April 1, 2006 may not be indicative of the results that may be expected for the fiscal year ending December 30, 2006.

 

NOTE A – EQUITY-BASED COMPENSATION

 

Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment,” using the modified version of prospective application. Under this method, compensation expense includes the estimated fair value of equity awards vested during the reported period. Expense for equity awards vested is determined based on grant date fair value previously calculated for pro forma disclosures under SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—An Amendment of FASB Statement No. 123.”  For the quarter ended April 1, 2006, equity-based compensation expense of $127, $707, and $113 was included in cost of sales, selling, general and administrative, and research and development, respectively, for a total reduction in earnings from operations and earnings before income taxes of $947. The impact of equity-based compensation expense on net earnings and earnings per share for the quarter, ended April 1, 2006, can be found in the pro forma table in this footnote. Taking into account recent grants of equity awards since the date of the Company’s Annual Meeting of Shareholders, we now anticipate that equity-based compensation expense will reduce 2006 basic and diluted earnings per share by approximately $0.18. The following table shows remaining unrecognized compensation expense on a pre-tax basis related to nonvested equity awards outstanding as of May 5, 2006, which includes grants issued since April 1, 2006, but which does not include an estimate for future grants to be issued.

 

Remainder of 2006		$	3,905
2007		$	5,123
2008		$	4,676
2009		$	2,798
2010		$	2,161
Thereafter		$	397
		$	19,060

 

The weighted-average period over which the expense above will be recognized is 2.5 years.

 

Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits resulting from equity-based compensation as cash flows from operating activities in the condensed consolidated statements of cash flows. SFAS No. 123(R) requires cash flows resulting from tax deductions in excess of the grant-date fair value of equity awards to be included in cash flows from financing activities. The excess tax benefits of $212 related to equity-based compensation included in cash flows from financing activities in the first quarter of 2006 would have been included in cash flows from operating activities if the Company had not adopted SFAS No. 123(R).

 

8

 

As permitted by SFAS No. 148, prior to the adoption of SFAS No. 123(R) the Company accounted for equity award expense under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” under which no compensation was recognized in the Company’s financial statements for the quarter, ended April 2, 2005. In connection with the modified prospective method, disclosures made for periods prior to the adoption of SFAS No. 123(R) do not reflect restated amounts.

 

The following table presents equity-based compensation expense included in our financial statements for the quarter ended April 1, 2006, and also illustrates the pro forma 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 equity-based compensation for the quarter ended April 2, 2005:

 

 

				Quarter Ended
				April 2, 2005			April 1, 2006
Net earnings		As reported		$	8,928		$	9,560
Add: Compensation cost included in reported net income				—			685
Deduct: Total compensation expense under the fair value method for all awards				(449		)	(685		)
Net earnings		Pro forma		$	8,479		$	9,560
Earnings per share - basic		As reported		$	0.47		$	0.52
		Pro forma		$	0.44		$	0.52
Earnings per share - diluted		As reported		$	0.45		$	0.50
		Pro forma		$	0.42		$	0.50

 

The Company continues to use the Black-Scholes option pricing model to estimate fair value of equity awards, which requires the input of highly subjective assumptions, including the expected stock price volatility. Prior to the implementation of SFAS No. 123(R), expected volatility represented the historical share prices of the Company’s common stock over the expected life of the award and the risk-free interest rate was based on the U.S. Treasury yield curve on the date of grant with respect to the expected life of the award. Expected life was based on the contractual term of the award.

 

Preceding the adoption of SFAS No. 123(R), the Company engaged a third-party valuation expert to analyze assumptions used by the Company and to determine changes necessary for a more accurate reflection of the estimated fair value of equity awards granted by the Company. Based on this analysis the Company decided that, effective January 1, 2006, expected volatility will be calculated by averaging the historical volatility of the Company and a peer group index. The risk-free interest rate will continue to be based on the U.S. Treasury yield curve on the date of grant with respect to the expected life of the award. Also, effective January 1, 2006, due to the “plain vanilla” characteristics of the Company’s stock options, the simplified method, as permitted by the guidance provided in Staff Accounting Bulletin No. 107, will be used to determine expected life. We estimate that the equity-based compensation expense included in earnings before income taxes for the first quarter 2006 was decreased by approximately $30 due to the change in assumptions used to estimate fair value of awards granted during the first quarter of 2006.

 

9

 

Weighted-average assumptions used to calculate the fair value of awards granted during the quarters ended as of the dates indicated, as well as the weighted-average fair value of awards granted are as follows:

 

		Quarter Ended
		April 2,		April 1,
		2005		2006
Expected volatility		*		57.04		%
Risk free interest rate		*		4.46		%
Expected life		*		4.125		yrs.
Expected dividend yield		*		—
Weighted average fair value of awards granted**		*		$	19.15

 

*      No grants were issued during the quarter ended April 2, 2005.

**   All awards 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.

 

The Company’s 2006 Equity Incentive Award Plan (2006 Plan), which was approved by the shareholders at the Annual Shareholders’ Meeting held on April 19, 2006, allows for the grant of stock options, restricted stock, and other types of equity-based awards to the Company’s directors, officers, and key employees. Prior to the approval of the 2006 Plan, the Company maintained the 2002 Stock Option Plan (2002 Plan), which was limited to the granting of incentive and non-qualified stock options. The 2006 Plan replaces the 2002 Plan for all future grants, and no new awards will be granted under the 2002 Plan. The 2006 Plan authorized 5,000 shares of common stock for issuance, of which all of such shares were available for future issuance as of April 1, 2006. Options granted under the 2002 Plan generally vest 20% each year on the anniversary of the grant date and expire five to ten years from the date of grant. The Company’s Compensation Committee has initially determined that awards to be granted under the 2006 Plan will generally vest 20% each year on the anniversary of the grant date and expire five to 5.25 years from the date of grant.

 

A summary of the Company’s equity award activity for the period ended April 1, 2006 is as follows:

 

		Shares		Weighted- average exercise price			Weighted-average remaining contractual term		Aggregate intrinsic value*
Outstanding at December 31, 2005		1,773		$	17.43		6.97		$	37,121
Granted		175		$	39.14		—		$	—
Exercised		(168	)	$	4.41		—		$	—
Canceled or expired		—		$	—		—		$	—
Outstanding at April 1, 2006		1,780		$	20.78		6.63		$	37,281
Exercisable at April 1, 2006		570		$	25.74		7.94		$	9,120

 

*      Aggregate intrinsic value is defined as the difference between the current market value and the exercise price and is estimated using the closing price of the Company’s common stock on the last trading day of the periods ended as of the dates indicated.

 

10

 

Total intrinsic value of awards exercised during the quarters, ended April 2, 2005 and April 1, 2006, was $7,093 and $5,917, respectively. The total fair value of awards vested during the quarters ended April 2, 2005 and April 1, 2006, was $723 and $947, respectively.

 

A summary of the Company’s nonvested equity award activity for the period ended April 1, 2006 is as follows:

 

		Shares		Weighted- average fair value
Nonvested at December 31, 2005		1,133		$	11.84
Granted		175		$	19.15
Vested		(98	)	$	20.28
Canceled or expired		—		$	—
Nonvested at April 1, 2006		1,210		$	12.21

 

NOTE B – INVENTORIES

 

Inventories consist of the following:

 

		December 31,			April 1,
		2005			2006
Raw materials		$	11,878		$	11,893
Work in progress		3,533			3,234
Finished goods		9,482			9,392
		24,893			24,519
Less allowance for inventory valuation		2,670			3,224
		$	22,223		$	21,295

 

NOTE C – PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following:

 

		December 31,			April 1,
		2005			2006
Prepaid expenses		$	2,038		$	1,599
Miscellaneous receivables, net		3,537			3,881
Other current assets		449			952
		$	6,024		$	6,432

 

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NOTE D – PROPERTY AND EQUIPMENT

 

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

 

				December 31,			April 1,
		Years		2005			2006
Building		40		$	10,377		$	10,345
Laboratory and production equipment		5-7		9,706			9,959
Sound and video library		5		600			600
Computer equipment and software		3-5		23,083			23,249
Furniture and fixtures		3-5		2,654			2,654
Automobiles		3-5		248			248
Leasehold improvements		3-5		2,709			2,750
Land improvements		15		931			931
				50,308			50,736
Less accumulated depreciation and amortization				29,605			30,684
				20,703			20,052
Land				2,064			2,064
Deposits and projects in process				535			1,373
				$	23,302		$	23,489

 

NOTE E – OTHER CURRENT LIABILITIES

 

Other current liabilities consist of the following:

 

		December 31,			April 1,
		2005			2006
Associate incentives		$	3,528		$	3,877
Accrued employee compensation		6,257			2,829
Income taxes		2,429			6,681
Sales taxes		2,354			2,060
Associate promotions		616			960
Deferred revenue		1,903			2,904
Provision for returns and allowances		943			846
All other		3,571			4,467
		$	21,601		$	24,624

 

NOTE F – 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 that have been redeemed have been included in the calculation of weighted average shares that are 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 the diluted earnings per share calculations include stock options granted that are in the money but have not yet been exercised.

 

12

 

		For the Quarter Ended
		April 2,			April 1,
		2005			2006
Earnings available to common shareholders		$	8,928		$	9,560
Basic EPS
Shares
Common shares outstanding entire period		18,953			18,343
Weighted average common shares:
Issued during period		115			117
Canceled during period		—			—
Weighted average common shares outstanding during period		19,068			18,460
Earnings per common share - basic		$	0.47		$	0.52
Diluted EPS
Shares
Weighted average shares outstanding during period - basic		19,068			18,460
Dilutive effect of stock options		903			768
Weighted average shares outstanding during period - diluted		19,971			19,228
Earnings per common share - diluted		$	0.45		$	0.50

 

Options to purchase 66 shares of stock were not included in the computation of diluted EPS for the quarter ended April 1, 2006 due to the exercise price being greater than the average market price of the shares.

 

NOTE G – SEGMENT INFORMATION

 

The Company’s operations are distinguished by regions served and the method of distribution employed. Two reportable business segments are recognized by the Company: 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 profitability is based on profit or loss from operations before income taxes. All intercompany transactions, intercompany profit, currency gains and losses, interest income and expense, and income taxes are excluded in the Company’s determination of segment profit or loss.

 

Direct Selling

 

The Company’s Direct Selling segment develops, manufactures, and distributes nutritional and personal care products, and is the primary segment in which the Company operates. Products are distributed through a network marketing system using independent distributors that are 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.

 

Selected financial information for the Direct Selling segment is reported for 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.

 

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