UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2007
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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
(Registrants 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 x 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):
Large accelerated filer o |
Accelerated filer x |
Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
The number of shares outstanding of the registrants common stock as of August 3, 2007 was 16,264,889.
USANA HEALTH SCIENCES, INC.
For the Quarterly Period Ended June 30, 2007
INDEX
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Consolidated Statements of Stockholders Equity and Comprehensive Income |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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2
EXPLANATORY NOTE
Rule 10-01(d) of Regulation S-X requires that interim financial statements included in quarterly reports on Form 10-Q be reviewed by an independent public accountant using professional standards and procedures for conducting such reviews, as established by generally accepted auditing standards, as may be modified or supplemented by the Securities and Exchange Commission (SEC). The Company previously announced that its independent registered public accountant, Grant Thornton LLP, resigned July 10, 2007. The timing of the resignation prevented the Company from engaging a new independent registered public accountant to review the financial statements included in this report before filing. Consequently, the accompanying consolidated financial statements as of June 30, 2007 and for the quarter ended June 30, 2007 have not been reviewed by an independent public accountant in accordance with Statement of Auditing Standards No. 100, Interim Financial Information (SAS 100).
Furthermore, Section 302 of the Sarbanes-Oxley Act of 2002 (Section 302) requires our chief executive officer and our chief financial officer to certify concerning the Companys disclosure controls and procedures, internal controls over financial reporting in accordance with rules of the SEC, and disclosures concerning their evaluation of those controls to the Companys auditors and Audit Committee. Additionally, Section 906 of the Sarbanes-Oxley Act (Section 906) requires our chief executive officer and chief financial officer to certify that this Quarterly Report on Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the Exchange Act) and that the information contained in the report fairly presents, in all material respects, our financial condition and results of operations. Those certifications are omitted from this filing only because the financial statements accompanying this report have not been reviewed by an independent public accountant under SAS 100. The Company believes that this report otherwise meets all of the qualifications of the Exchange Act and the rules and regulations thereunder governing the preparation and filing of periodic reports as referenced in the certifications. Before our officers can make such certifications, our new independent public accounting firm must complete its review of the consolidated financial statements appearing elsewhere in this report under SAS 100, as required by SEC rules. Once our Audit Committee has engaged a new independent registered public accountant as our auditor and that firm completes its review under SAS 100, we will file an amendment to this report pursuant to which our chief executive officer and chief financial officer will make the certifications required under Section 302 and Section 906.
3
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
(in thousands)
|
|
December 30, |
|
June 30, |
|
||
|
|
2006 |
|
2007 |
|
||
|
|
|
|
(unaudited) |
|
||
ASSETS |
|
|
|
|
|
||
Current assets |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
27,029 |
|
$ |
9,876 |
|
Inventories |
|
22,483 |
|
20,810 |
|
||
Prepaid expenses and other current assets |
|
8,908 |
|
7,328 |
|
||
Current assets held for sale |
|
|
|
3,260 |
|
||
Deferred income taxes |
|
2,195 |
|
2,659 |
|
||
|
|
|
|
|
|
||
Total current assets |
|
60,615 |
|
43,933 |
|
||
|
|
|
|
|
|
||
Property and equipment, net |
|
30,323 |
|
42,293 |
|
||
|
|
|
|
|
|
||
Goodwill |
|
5,690 |
|
5,690 |
|
||
|
|
|
|
|
|
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Other assets |
|
3,374 |
|
4,052 |
|
||
|
|
|
|
|
|
||
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$ |
100,002 |
|
$ |
95,968 |
|
|
|
|
|
|
|
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LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
||
Current liabilities |
|
|
|
|
|
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Accounts payable |
|
$ |
10,241 |
|
$ |
9,337 |
|
Other current liabilities |
|
29,564 |
|
35,165 |
|
||
Line of credit |
|
|
|
34,515 |
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||
|
|
|
|
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Total current liabilities |
|
39,805 |
|
79,017 |
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||
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Stockholders equity |
|
|
|
|
|
||
Common stock, $0.001 par value; authorized 50,000 shares, issued and outstanding 17,859 as of December 30, 2006 and 16,265 as of June 30, 2007 |
|
18 |
|
16 |
|
||
Additional paid-in capital |
|
15,573 |
|
3,114 |
|
||
Retained earnings |
|
44,251 |
|
13,213 |
|
||
Accumulated other comprehensive income |
|
355 |
|
608 |
|
||
|
|
|
|
|
|
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Total stockholders equity |
|
60,197 |
|
16,951 |
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||
|
|
|
|
|
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$ |
100,002 |
|
$ |
95,968 |
|
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)
|
|
Quarter Ended |
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July 1, |
|
June 30, |
|
||
|
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2006 |
|
2007 |
|
||
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|
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Net sales |
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$ |
89,694 |
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$ |
107,542 |
|
|
|
|
|
|
|
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Cost of sales |
|
19,319 |
|
22,443 |
|
||
|
|
|
|
|
|
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Gross profit |
|
70,375 |
|
85,099 |
|
||
|
|
|
|
|
|
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Operating expenses: |
|
|
|
|
|
||
Associate incentives |
|
36,025 |
|
43,280 |
|
||
Selling, general and administrative |
|
17,910 |
|
22,531 |
|
||
Research and development |
|
756 |
|
902 |
|
||
|
|
|
|
|
|
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Total operating expenses |
|
54,691 |
|
66,713 |
|
||
|
|
|
|
|
|
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Earnings from operations |
|
15,684 |
|
18,386 |
|
||
|
|
|
|
|
|
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Other income (expense): |
|
|
|
|
|
||
Interest income |
|
169 |
|
87 |
|
||
Interest expense |
|
(10 |
) |
(403 |
) |
||
Other, net |
|
177 |
|
303 |
|
||
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|
|
|
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|
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Other income (expense), net |
|
336 |
|
(13 |
) |
||
|
|
|
|
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Earnings from continuing operations before income taxes |
|
16,020 |
|
18,373 |
|
||
|
|
|
|
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|
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Income taxes |
|
5,462 |
|
6,966 |
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|
|
|
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Income from continuing operations |
|
10,558 |
|
11,407 |
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||
|
|
|
|
|
|
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Loss from discontinued operations, net of tax benefit |
|
(214 |
) |
(93 |
) |
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Net earnings |
|
$ |
10,344 |
|
$ |
11,314 |
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Earnings per common share |
|
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Basic |
|
|
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|
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Continuing operations |
|
$ |
0.58 |
|
$ |
0.68 |
|
Discontinued operations |
|
(0.01 |
) |
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|
||
|
|
|
|
|
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Net earnings |
|
$ |
0.57 |
|
$ |
0.68 |
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Diluted |
|
|
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Continuing operations |
|
$ |
0.56 |
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$ |
0.66 |
|
Discontinued operations |
|
(0.01 |
) |
|
|
||
|
|
|
|
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Net earnings |
|
$ |
0.55 |
|
$ |
0.66 |
|
|
|
|
|
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|
||
Weighted average common shares outstanding |
|
|
|
|
|
||
Basic |
|
18,149 |
|
16,709 |
|
||
Diluted |
|
18,777 |
|
17,163 |
|
The accompanying notes are an integral part of these statements.
5
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(unaudited)
|
|
Six Months Ended |
|
||||
|
|
July 1, |
|
June 30, |
|
||
|
|
2006 |
|
2007 |
|
||
|
|
|
|
|
|
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Net sales |
|
$ |
175,078 |
|
$ |
208,220 |
|
|
|
|
|
|
|
||
Cost of sales |
|
37,697 |
|
43,029 |
|
||
|
|
|
|
|
|
||
Gross profit |
|
137,381 |
|
165,191 |
|
||
|
|
|
|
|
|
||
Operating expenses: |
|
|
|
|
|
||
Associate incentives |
|
70,031 |
|
82,829 |
|
||
Selling, general and administrative |
|
35,400 |
|
44,032 |
|
||
Research and development |
|
1,429 |
|
1,832 |
|
||
|
|
|
|
|
|
||
Total operating expenses |
|
106,860 |
|
128,693 |
|
||
|
|
|
|
|
|
||
Earnings from operations |
|
30,521 |
|
36,498 |
|
||
|
|
|
|
|
|
||
Other income (expense): |
|
|
|
|
|
||
Interest income |
|
311 |
|
394 |
|
||
Interest expense |
|
(10 |
) |
(408 |
) |
||
Other, net |
|
330 |
|
472 |
|
||
|
|
|
|
|
|
||
Other income, net |
|
631 |
|
458 |
|
||
|
|
|
|
|
|
||
Earnings from continuing operations before income taxes |
|
31,152 |
|
36,956 |
|
||
|
|
|
|
|
|
||
Income taxes |
|
10,835 |
|
13,749 |
|
||
|
|
|
|
|
|
||
Income from continuing operations |
|
20,317 |
|
23,207 |
|
||
|
|
|
|
|
|
||
Loss from discontinued operations, net of tax benefit |
|
(413 |
) |
(207 |
) |
||
|
|
|
|
|
|
||
Net earnings |
|
$ |
19,904 |
|
$ |
23,000 |
|
|
|
|
|
|
|
||
Earnings per common share |
|
|
|
|
|
||
Basic |
|
|
|
|
|
||
Continuing operations |
|
$ |
1.11 |
|
$ |
1.34 |
|
Discontinued operations |
|
(0.02 |
) |
(0.01 |
) |
||
|
|
|
|
|
|
||
Net earnings |
|
$ |
1.09 |
|
$ |
1.33 |
|
|
|
|
|
|
|
||
Diluted |
|
|
|
|
|
||
Continuing operations |
|
$ |
1.07 |
|
$ |
1.30 |
|
Discontinued operations |
|
(0.02 |
) |
(0.01 |
) |
||
|
|
|
|
|
|
||
Net earnings |
|
$ |
1.05 |
|
$ |
1.29 |
|
|
|
|
|
|
|
||
Weighted average common shares outstanding |
|
|
|
|
|
||
Basic |
|
18,304 |
|
17,302 |
|
||
Diluted |
|
19,002 |
|
17,813 |
|
The accompanying notes are an integral part of these statements.
6
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
Six Months Ended July 1, 2006 and June 30, 2007
(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 1, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
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|
|||||
Balance at December 31, 2005 |
|
18,343 |
|
$ |
18 |
|
$ |
9,161 |
|
$ |
35,720 |
|
$ |
839 |
|
$ |
45,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net earnings |
|
|
|
|
|
|
|
19,904 |
|
|
|
19,904 |
|
|||||
Foreign currency translation adjustment, net |
|
|
|
|
|
|
|
|
|
(49 |
) |
(49 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
19,855 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Common stock retired |
|
(801 |
) |
|
|
(5,733 |
) |
(24,413 |
) |
|
|
(30,146 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Equity-based compensation expense |
|
|
|
|
|
2,152 |
|
|
|
|
|
2,152 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Common stock issued under equity-based award plan, including tax benefit of $1,033 |
|
181 |
|
|
|
1,840 |
|
|
|
|
|
1,840 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Balance at July 1, 2006 |
|
17,723 |
|
$ |
18 |
|
$ |
7,420 |
|
$ |
31,211 |
|
$ |
790 |
|
$ |
39,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
For the Six Months Ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Balance at December 30, 2006 |
|
17,859 |
|
$ |
18 |
|
$ |
15,573 |
|
$ |
44,251 |
|
$ |
355 |
|
$ |
60,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net earnings |
|
|
|
|
|
|
|
23,000 |
|
|
|
23,000 |
|
|||||
Foreign currency translation adjustment, net |
|
|
|
|
|
|
|
|
|
253 |
|
253 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
23,253 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Common stock retired |
|
(1,712 |
) |
(2 |
) |
(18,958 |
) |
(54,038 |
) |
|
|
(72,998 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Common stock awarded to Associates |
|
1 |
|
|
|
47 |
|
|
|
|
|
47 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Equity-based compensation expense |
|
|
|
|
|
3,220 |
|
|
|
|
|
3,220 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Common stock issued under equity-based award plan, including tax benefit of $1,031 |
|
117 |
|
|
|
3,232 |
|
|
|
|
|
3,232 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Balance at June 30, 2007 |
|
16,265 |
|
$ |
16 |
|
$ |
3,114 |
|
$ |
13,213 |
|
$ |
608 |
|
$ |
16,951 |
|
The accompanying notes are an integral part of these statements.
7
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
Six Months Ended |
|
||||
|
|
July 1, |
|
June 30, |
|
||
|
|
2006 |
|
2007 |
|
||
|
|
|
|
|
|
||
Increase (decrease) in cash and cash equivalents |
|
|
|
|
|
||
Cash flows from operating activities |
|
|
|
|
|
||
Net earnings |
|
$ |
19,904 |
|
$ |
23,000 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities |
|
|
|
|
|
||
Depreciation and amortization |
|
2,924 |
|
2,457 |
|
||
Loss on disposition of property and equipment |
|
8 |
|
73 |
|
||
Write-down of assets held for sale |
|
|
|
25 |
|
||
Equity-based compensation expense |
|
2,152 |
|
3,220 |
|
||
Excess tax benefit from equity-based payment arrangements |
|
(832 |
) |
(844 |
) |
||
Common stock awarded to Associates |
|
|
|
47 |
|
||
Deferred income taxes |
|
(721 |
) |
(998 |
) |
||
Provision for inventory valuation |
|
1,690 |
|
691 |
|
||
Changes in operating assets and liabilities: |
|
|
|
|
|
||
Inventories |
|
340 |
|
26 |
|
||
Prepaid expenses and other assets |
|
(411 |
) |
106 |
|
||
Accounts payable |
|
1,379 |
|
(1,371 |
) |
||
Other current liabilities |
|
3,805 |
|
6,167 |
|
||
|
|
|
|
|
|
||
Total adjustments |
|
10,334 |
|
9,599 |
|
||
|
|
|
|
|
|
||
Net cash provided by operating activities |
|
30,238 |
|
32,599 |
|
||
|
|
|
|
|
|
||
Cash flows from investing activities |
|
|
|
|
|
||
Receipts on notes receivable |
|
|
|
60 |
|
||
Increases in notes receivable |
|
|
|
(65 |
) |
||
Proceeds from the sale of property and equipment |
|
|
|
23 |
|
||
Purchases of property and equipment |
|
(3,104 |
) |
(14,271 |
) |
||
|
|
|
|
|
|
||
Net cash used in investing activities |
|
(3,104 |
) |
(14,253 |
) |
||
|
|
|
|
|
|
||
Cash flows from financing activities |
|
|
|
|
|
||
Proceeds from equity awards exercised |
|
807 |
|
2,201 |
|
||
Excess tax benefit from equity-based payment arrangements |
|
832 |
|
844 |
|
||
Retirement of common stock |
|
(30,146 |
) |
(72,998 |
) |
||
Increase in line of credit |
|
|
|
34,515 |
|
||
|
|
|
|
|
|
||
Net cash used in financing activities |
|
(28,507 |
) |
(35,438 |
) |
||
|
|
|
|
|
|
||
Effect of exchange rate changes on cash and cash equivalents |
|
(33 |
) |
(61 |
) |
||
|
|
|
|
|
|
||
Net decrease in cash and cash equivalents |
|
(1,406 |
) |
(17,153 |
) |
||
|
|
|
|
|
|
||
Cash and cash equivalents, beginning of period |
|
10,579 |
|
27,029 |
|
||
|
|
|
|
|
|
||
Cash and cash equivalents, end of period |
|
$ |
9,173 |
|
$ |
9,876 |
|
|
|
|
|
|
|
||
Supplemental disclosures of cash flow information |
|
|
|
|
|
||
Cash paid during the period for: |
|
|
|
|
|
||
Interest |
|
$ |
8 |
|
$ |
201 |
|
Income taxes |
|
10,491 |
|
11,343 |
|
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 its subsidiaries (collectively, 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 Companys financial position as of June 30, 2007, and results of operations for the quarters and six months ended July 1, 2006 and June 30, 2007. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto that are included in the Companys Annual Report on Form 10-K for the year ended December 30, 2006. The results of operations for the quarter ended June 30, 2007 may not be indicative of the results that may be expected for the fiscal year ending December 29, 2007.
Reclassification
Minor reclassifications relating to net sales and Associate incentives expense have been made to the Companys financial statements in order to comply with EITF 01-09. Under these guidelines, certain incentives that are offered to our Associates are classified as sales discounts, resulting in a reduction of revenue, with a corresponding reduction to Associate incentives. Net sales and Associate incentives expense numbers reflected throughout this document, for periods prior to December 31, 2006, have been adjusted for comparability purposes. The impact of this reclassification reduced previously reported net sales for the quarter ended July 1, 2006 by 1.6%. This minor reclassification had no effect on our earnings from operations, net earnings, or earnings per share.
Recently Issued Accounting Standards
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, with earlier application encouraged. Any amounts recognized upon adoption as a cumulative effect adjustment will be recorded to the opening balance of retained earnings in the year of adoption. The Company has not yet determined the impact of adopting SFAS No. 157 on its Consolidated Financial Statements.
On February 15, 2007, the FASB issued SFAS Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115. SFAS No. 159 permits an entity to choose to measure eligible items at fair value at specified election dates. An entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. SFAS No. 159 is effective for fiscal years that begin after November 15, 2007. The Company has not yet determined the impact of adopting SFAS No. 159 on its Consolidated Financial Statements.
On June 27, 2007, the FASB ratified the EITF consensus on EITF 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities, which calls for nonrefundable advance payments for goods or services to be used in future research and development activities to be deferred and capitalized until such time as the related goods are delivered or related services are performed, at which point the amounts are to be recognized as an expense. EITF 07-3 is effective for fiscal periods beginning after December 15, 2007. The Company has evaluated its research and development contracts in regard to this new pronouncement and has determined that the effect of this consensus will not have a material impact on its financial statements.
9
NOTE A EQUITY-BASED COMPENSATION
Equity-based compensation expense relating to awards vested under the current and previous plans utilized by the Company, and the related tax benefit recognized in earnings for the quarters and six months ended July 1, 2006, and June 30, 2007, are as follows:
|
Quarter Ended |
|
Six Months Ended |
|
|||||||||
|
|
July 1, |
|
June 30, |
|
July 1, |
|
June 30, |
|
||||
|
|
2006 |
|
2007 |
|
2006 |
|
2007 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Cost of sales |
|
$ |
143 |
|
$ |
172 |
|
$ |
270 |
|
$ |
315 |
|
Selling, general and administrative |
|
930 |
|
1,303 |
|
1,637 |
|
2,612 |
|
||||
Research and development |
|
132 |
|
154 |
|
245 |
|
293 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
|
|
1,205 |
|
1,629 |
|
2,152 |
|
3,220 |
|
||||
Related tax benefit |
|
386 |
|
529 |
|
648 |
|
1,105 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net equity-based compensation expense |
|
$ |
819 |
|
$ |
1,100 |
|
$ |
1,504 |
|
$ |
2,115 |
|
The following table shows the remaining unrecognized compensation expense on a pre-tax basis that is related to all types of equity awards that are outstanding as of June 30, 2007. This table does not include an estimate for future grants that may be issued.
Remainder of 2007 |
|
$ |
3,177 |
|
2008 |
|
5,844 |
|
|
2009 |
|
3,853 |
|
|
2010 |
|
3,393 |
|
|
2011 |
|
1,959 |
|
|
Thereafter |
|
418 |
|
|
|
|
$ |
18,644 |
|
The weighted-average period over which the expense above will be recognized is 2.3 years.
During the quarter and six months ended June 30, 2007, the Company granted equity awards under the Companys 2006 Equity Incentive Award Plan (the 2006 Plan), which was approved by the shareholders in April 2006. The 2006 Plan allows for the grant of various equity awards, including stock-settled stock appreciation rights, stock options, deferred stock units, and other types of equity-based awards to the Companys officers, key employees, and non-employee directors. The 2006 Plan authorized 5,000 shares of common stock for issuance; as of June 30, 2007, 4,202 of these shares were available for future issuance.
The Companys Compensation Committee has determined that awards to be granted to officers and key employees under the 2006 Plan will generally vest 20% each year on the anniversary of the grant date and will generally expire five to five and one-half years from the date of grant. Awards of stock options and stock-settled stock appreciation rights to be granted to non-employee directors will generally vest 25% each quarter, commencing on the last day of the fiscal quarter in which the awards are granted, and will generally expire five years to five and one-half years from the date of grant. Awards of deferred stock units are full-value shares at the date of grant, vesting over the periods of service, and do not have expiration dates. The exercise price of all awards granted under the 2006 Plan during 2006 was established by averaging the closing price of the Companys common stock over the five trading days preceding the date of grant. The exercise price of all awards granted under the 2006 Plan subsequent to December 30, 2006 is the closing price of the Companys common stock on the date of grant.
10
Prior to the approval of the 2006 Plan, the Company maintained the 2002 Stock Option Plan (the 2002 Plan), which was limited to the granting of incentive and non-qualified stock options. 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 exercise price of all awards granted under the 2002 Plan was established by averaging the closing price of the Companys common stock over the five trading days preceding the date of grant. The 2006 Plan replaced the 2002 Plan for all grants that were awarded subsequent to the approval of the 2006 Plan.
During 2006 and the first six months of 2007, the Company continued 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. Expected volatility is calculated by averaging the historical volatility of the Company and a peer group index. The risk-free interest rate is based on the U.S. Treasury yield curve on the date of grant with respect to the expected life of the award. Due to the plain vanilla characteristics of the Companys equity awards, the simplified method, as permitted by the guidance in Staff Accounting Bulletin No. 107, has been used to determine expected life.
Weighted-average assumptions used to calculate the fair value of awards that have been granted during the quarters ended as of the dates indicated are included in the table below. Deferred stock units are full-value shares at the date of grant and have been excluded.
|
Quarter Ended |
|
Six Months Ended |
|
|||||||||
|
|
July 1, |
|
June 30, |
|
July 1, |
|
June 30, |
|
||||
|
|
2006 |
|
2007 |
|
2006 |
|
2007 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Expected volatility |
|
57.04 |
% |
41.87 |
% |
57.04 |
% |
41.88 |
% |
||||
Risk-free interest rate |
|
4.98 |
% |
4.58 |
% |
4.79 |
% |
4.59 |
% |
||||
Expected life |
|
4.1 yrs. |
|
4.2 yrs. |
|
4.1 yrs. |
|
4.2 yrs. |
|
||||
Expected dividend yield |
|
|
|
|
|
|
|
|
|
||||
Grant price |
|
$ |
37.54 |
|
$ |
40.51 |
|
$ |
38.14 |
|
$ |
42.10 |
|
A summary of the Companys stock option and stock-settled stock appreciation right activity for the six months ended June 30, 2007 is as follows:
|
Shares |
|
Weighted- |
|
Weighted-average |
|
Aggregate |
|
|||
Outstanding at December 30, 2006 |
|
1,720 |
|
$ |
27.15 |
|
5.8 |
|
$ |
42,172 |
|
Granted |
|
449 |
|
$ |
42.10 |
|
|
|
|
|
|
Exercised |
|
(116 |
) |
$ |
18.93 |
|
|
|
|
|
|
Canceled or expired |
|
(70 |
) |
$ |
40.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Outstanding at June 30, 2007 |
|
1,983 |
|
$ |
30.54 |
|
5.4 |
|
$ |
28,733 |
|
|
|
|
|
|
|
|
|
|
|
||
Exercisable at June 30, 2007 |
|
645 |
|
$ |
29.22 |
|
6.5 |
|
$ |
10,038 |
|
* Aggregate intrinsic value is defined as the difference between the current market value at period end and the exercise price of awards that were in-the-money and is estimated using the closing price of the Companys common stock on the last trading day of the period.
11
The weighted-average fair value of stock options and stock-settled stock appreciation rights that were granted during the six month periods ending July 1, 2006, and June 30, 2007 was $18.76 and $16.79, respectively. The total intrinsic value of awards that were exercised during the six month periods ending July 1, 2006 and June 30, 2007, was $6,348 and $4,745, respectively.
A summary of the Companys deferred stock unit activity for the six months ended June 30, 2007 is as follows:
|
Shares |
|
Weighted- |
|
||
Nonvested at December 30, 2006 |
|
1 |
|
$ |
37.60 |
|
Granted |
|
3 |
|
$ |
40.59 |
|
Vested |
|
(2 |
) |
$ |
39.04 |
|
Canceled or expired |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2007 |
|
2 |
|
$ |
40.59 |
|
The total fair value of awards that vested during the six month periods ending July 1, 2006 and June 30, 2007, was $2,561 and $4,397, respectively. This total fair value included equity awards that were issued in the form of stock options, stock-settled stock appreciation rights, and deferred stock units.
NOTE B ASSETS HELD FOR SALE
Consistent with our long-term objectives of focusing on our direct selling business, on June 5, 2007, the Company adopted a plan to discontinue the operations of its third-party contract manufacturing business at its Draper, Utah facility. Accordingly, we have a signed Letter of Intent to sell certain assets, accounts receivable, and inventory associated with our third-party contract manufacturing segment. The buyer has agreed to purchase the assets for $3,260 to be adjusted for changes in inventory levels and accounts receivable as of the closing date of the sale. The agreed upon sales price has been determined to exceed the carrying amount of current assets held for sale, and as a result an impairment loss of $25 has been incurred and the assets have been adjusted to fair value in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. It is anticipated that the sale of this business will be effective during the third quarter of 2007. We will retain assets that are associated with manufacturing and packaging our Sensé skin and beauty care products and will continue to manufacture these products at our Draper, Utah facility.
The following table shows revenues and pre-tax loss from discontinued operations for the three months ended July 1, 2006 and June 30, 2007, respectively.
|
July 1, |
|
June 30, |
|
|||
|
|
2006 |
|
2007 |
|
||
|
|
|
|
|
|
||
Revenues |
|
$ |
2,788 |
|
$ |
1,865 |
|
Pre-tax loss from operations |
|
(324 |
) |
(150 |
) |
||
12
The following table shows revenues and pre-tax loss from discontinued operations for the six months ended July 1, 2006 and June 30, 2007, respectively.
|
July 1, |
|
June 30, |
|
|||
|
|
2006 |
|
2007 |
|
||
|
|
|
|
|
|
||
Revenues |
|
$ |
5,633 |
|
$ |
3,754 |
|
Pre-tax income (loss) from operations |
|
(634 |
) |
(330 |
) |
||
The following table shows the carrying amount of the assets of the third-party contract manufacturing business as of June 30, 2007, including the write-down impairment adjustment to fair value.
|
June 30, |
|
||
|
|
2007 |
|
|
|
|
|
|
|
Inventory |
|
$ |
1,492 |
|
Accounts receivable |
|
1,087 |
|
|
Property, plant and equipment, net of $594 of accumulated depreciation |
|
706 |
|
|
Current assets held for sale |
|
$ |
3,285 |
|
Less write-down of assets held for sale |
|
(25 |
) |
|
Total current assets held for sale |
|
$ |
3,260 |
|
Inventories consist of the following:
|
December 30, |
|
June 30, |
|
|||
|
|
2006 |
|
2007 |
|
||
|
|
|
|
|
|
||
Raw materials |
|
$ |
8,073 |
|
$ |
5,192 |
|
Work in progress |
|
4,227 |
|
5,342 |
|
||
Finished goods |
|
10,183 |
|
10,276 |
|
||
|
|
|
|
|
|
||
|
|
$ |
22,483 |
|
$ |
20,810 |
|
Prepaid expenses and other current assets consist of the following:
|
December 30, |
|
June 30, |
|
|||
|
|
2006 |
|
2007 |
|
||
|
|
|
|
|
|
||
Prepaid expenses |
|
$ |
2,150 |
|
$ |
1,821 |
|
Miscellaneous receivables, net |
|
5,082 |
|
3,112 |
|
||
Other current assets |
|
1,676 |
|
2,395 |
|
||
|
|
|
|
|
|
||
|
|
$ |
8,908 |
|
$ |
7,328 |
|
13
|
|
|
December 30, |
|
June 30, |
|
|||
|
|
Years |
|
2006 |
|
2007 |
|
||
|
|
|
|
|
|
|
|
||
Buildings |
|
40 |
|
$ |
10,682 |
|
$ |
14,184 |
|
Laboratory and production equipment |
|
5-7 |
|
10,863 |
|
9,966 |
|
||
Sound and video library |
|
5 |
|
600 |
|
600 |
|
||
Computer equipment and software |
|
3-5 |
|
23,365 |
|
23,516 |
|
||
Furniture and fixtures |
|
3-5 |
|
2,719 |
|
2,802 |
|
||
Automobiles |
|
3-5 |
|
242 |
|
187 |
|
||
Leasehold improvements |
|
3-5 |
|
2,834 |
|
3,081 |
|
||
Land improvements |
|
15 |
|
931 |
|
1,011 |
|
||
|
|
|
|
|
|
|
|
||
|
|
|
|
52,236 |
|
55,347 |
|
||
|
|
|
|
|
|
|
|
||
Less accumulated depreciation and amortization |
|
|
|
33,330 |
|
34,401 |
|
||
|
|
|
|
|
|
|
|
||
|
|
|
|
18,906 |
|
20,946 |
|
||
|
|
|
|
|
|
|
|
||
Land |
|
|
|
2,070 |
|
2,074 |
|
||
|
|
|
|
|
|
|
|
||
Deposits and projects in process |
|
|
|
9,347 |
|
19,273 |
|
||
|
|
|
|
|
|
|
|
||
|
|
|
|
$ |
30,323 |
|
$ |
42,293 |
|
NOTE F GOODWILL
Goodwill represents the excess of the purchase price paid for acquired entities over the fair market value of the net assets acquired. As of June 30, 2007, goodwill totaled $5,690, comprising $4,267 that was associated with the July 1, 2003 acquisition of Wasatch Product Development, Inc. (WPD) and $1,423 that was associated with the February 1, 2004 acquisition of FMG Productions (FMG). No events have occurred subsequent to either acquisition that resulted in an impairment of the original goodwill amounts that were initially recorded from these 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 July 2007, an independent third party conducted the annual impairment analysis of goodwill related to the Companys acquisition of WPD in July 2003. The impairment analysis incorporated the anticipated sale of certain assets relating to the third-party contract manufacturing segment during the third quarter of 2007. The fair market value of the remaining net assets retained to manufacture and package our Sensé skin and beauty care products 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 can be no assurance that, under the assumptions used, these projections will materialize. Based upon the results of this independent appraisal, the fair market value of the net assets tested has been determined to be in excess of the carrying amount, and, therefore, no impairment loss for goodwill has been recognized. As previously reported, the goodwill associated with WPD relates to the premium that was paid for acquiring the ability to produce our Sensé products in-house, along with benefits in the form of reduced cost of sales and enhanced quality control for the Sensé product line. As such, there is no impairment relating to the planned future sale of the third-party contract manufacturing assets of WPD.
14
NOTE G OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
|
December 30, |
|
June 30, |
|
|||
|
|
2006 |
|
2007 |
|
||
|
|
|
|
|
|
||
Associate incentives |
|
$ |
5,793 |
|
$ |
5,626 |
|
Accrued employee compensation |
|
7,022 |
|
7,053 |
|
||
Income taxes |
|
3,095 |
|
3,920 |
|
||
Sales taxes |
|
4,031 |
|
4,227 |
|
||
Associate promotions |
|
711 |
|
1,514 |
|
||
Deferred revenue |
|
3,092 |
|
4,468 |
|
||
Provision for returns and allowances |
|
947 |
|
971 |
|
||
All other |
|
4,873 |
|
7,386 |
|
||
|
|
|
|
|
|
||
|
|
$ |
29,564 |
|
$ |
35,165 |
|
NOTE H LONG TERM DEBT AND LINE OF CREDIT
In June 2004, the Company entered into an agreement with a financial institution to provide a $10,000, two-year, revolving line of credit. The term of this agreement extended through May 30, 2006, however an amendment to this agreement was entered into on May 17, 2006. The amendment increased the Companys line of credit to $25,000, extended its termination to May 30, 2011, and modified certain restrictive covenants in the agreement. On April 24, 2007, a subsequent amendment was entered into to increase the Companys line of credit to $40,000 and to modify certain restrictive covenants in the agreement.
At June 30, 2007, there was an outstanding balance of $34,515 that was associated with the above line of credit, with a weighted-average interest rate of 6.4%. The Company, therefore, had $5,485 available under the line of credit as of that date. The interest rate under this line of credit is computed at the banks Prime Rate or LIBOR, adjusted by features specified in the agreement. The Company may choose to borrow at the banks publicly announced Prime Rate, including a margin adjustment per annum, as specified in the agreement, or, at the option of the Company, loans within the approved commitment may be available in minimum amounts of $100 or more for specific periods, ranging from one to six months at LIBOR, including a margin adjustment as specified in the agreement. The collateral for this revolving line of credit is the pledge of the capital stock of certain subsidiaries of the Company. The credit agreement contains restrictive covenants that are based on EBITDA and a specified debt coverage ratio. As of June 30, 2007, the Company was in compliance with these covenants.
NOTE I COMMITMENTS AND CONTINGENCIES
Litigation
In the normal course of business, the Company is party to various legal claims, actions, and complaints. During 2007, four class action complaints were filed against the Company and certain of its executive officers, alleging that the defendants violated federal securities laws by making certain alleged false and misleading statements. The Company believes that these claims are without merit and plans to vigorously defend against these claims. The potential loss or range of loss that could arise from these complaints is not estimable at this time.
15
NOTE J COMMON STOCK AND EARNINGS PER SHARE
Basic earnings per share are based on the weighted-average number of shares outstanding for each period. Shares that have been repurchased and retired during the specified periods have been included in the calculation of weighted-average shares that are outstanding for the basic earnings per share calculation. Diluted earnings per share are based on shares outstanding (computed under basic EPS) and potentially dilutive shares. Shares included in the diluted earnings per share calculations include equity awards that are in the money but that have not yet been exercised.
|
For the Quarter Ended |
|
|||||
|
|
July 1, |
|
June 30, |
|
||
|
|
2006 |
|
2007 |
|
||
Earnings from continuing operations available to common shareholders |
|
$ |
10,558 |
|
$ |
11,407 |
|
Loss from discontinued operations available to common shareholders |
|
(214 |
) |
(93 |
) |
||
|
|
|
|
|
|
||
Net earnings available to common shareholders |
|
$ |
10,344 |
|
$ |
11,314 |
|
|
|
|
|
|
|
||
Basic EPS |
|
|
|
|
|
||
|
|
|
|
|
|
||
Shares |
|
|
|
|
|
||
Common shares outstanding entire period |
|
18,343 |
|
17,859 |
|
||
Weighted average common shares: |
|
|
|
|
|
||
Issued during period |
|
173 |
|
116 |
|
||
Canceled during period |
|
(367 |
) |
(1,266 |
) |
||
|
|
|
|
|
|
||
Weighted average common shares outstanding during period |
|
18,149 |
|
16,709 |
|
||
Earnings per common share from continuing operations - basic |
|
$ |
0.58 |
|
$ |
0.68 |
|
Loss per common share from discontinued operations - basic |
|
(0.01 |
) |
|
|
||
|
|
|
|
|
|
||
Earnings per common share from net earnings - basic |
|
$ |
0.57 |
|
$ |
0.68 |
|
|
|
|
|
|
|
||
Diluted EPS |
|
|
|
|
|
||
|
|
|
|
|
|
||
Shares |
|
|
|
|
|
||
Weighted average shares outstanding during period - basic |
|
18,149 |
|
16,709 |
|
||
Dilutive effect of equity awards |
|
628 |
|
454 |
|
||
|
|
|
|
|
|
||
Weighted average shares outstanding during period - diluted |
|
18,777 |
|
17,163 |
|
||
Earnings per common share from continuing operations - diluted |
|
$ |
0.56 |
|
$ |
0.66 |
|
Loss per common share from discontinued operations - diluted |
|
(0.01 |
) |
|
|
||
|
|
|
|
|
|
||
Earnings per common share from net earnings - diluted |
|
$ |
0.55 |
|
$ |
0.66 |
|
Equity awards for 571 and 58 shares of stock were not included in the computation of EPS for the quarters ended July 1, 2006 and June 30, 2007, respectively, due to their exercise prices being greater than the average market price of the shares during those periods.
16
|
For the Six Months Ended |
|
|||||
|
|
July 1, |
|
June 30, |
|
||
|
|
2006 |
|
2007 |
|
||
Earnings from continuing operations available to common shareholders |
|
$ |
20,317 |
|
$ |
23,207 |
|
Loss from discontinued operations available to common shareholders |
|
(413 |
) |
(207 |
) |
||
|
|
|
|
|
|
||
Net earnings available to common shareholders |
|
$ |
19,904 |
|
$ |
23,000 |
|
|
|
|
|
|
|
||
Basic EPS |
|
|
|
|
|
||
|
|
|
|
|
|
||
Shares |
|
|
|
|
|
||
Common shares outstanding entire period |
|
18,343 |
|
17,859 |
|
||
Weighted average common shares: |
|
|
|
|
|
||
Issued during period |
|
144 |
|
84 |
|
||
Canceled during period |
|
(183 |
) |
(641 |
) |
||
|
|
|
|
|
|
||
Weighted average common shares outstanding during period |
|
18,304 |
|
17,302 |
|
||
Earnings per common share from continuing operations - basic |
|
$ |
1.11 |
|
$ |
1.34 |
|
Loss per common share from discontinued operations - basic |
|
(0.02 |
) |
(0.01 |
) |
||
|
|
|
|
|
|
||
Earnings per common share from net earnings - basic |
|
$ |
1.09 |
|
$ |
1.33 |
|
|
|
|
|
|
|
||
Diluted EPS |
|
|
|
|
|
||
|
|
|
|
|
|
||
Shares |
|
|
|
|
|
||
Weighted average shares outstanding during period - basic |
|
18,304 |
|
17,302 |
|
||
Dilutive effect of equity awards |
|
698 |
|
511 |
|
||
|
|
|
|
|
|
||
Weighted average shares outstanding during period - diluted |
|
19,002 |
|
17,813 |
|
||
Earnings per common share from continuing operations - diluted |
|
$ |
1.07 |
|
$ |
1.30 |
|
Loss per common share from discontinued operations - diluted |
|
(0.02 |
) |
(0.01 |
) |
||
|
|
|
|
|
|
||
Earnings per common share from net earnings - diluted |
|
$ |
1.05 |
|
$ |
1.29 |
|
Equity awards for 319 and 42 shares of stock were not included in the computation of EPS for the six months ended July 1, 2006 and June 30, 2007, respectively, due to their exercise prices being greater than the average market price of the shares during those periods.
During the six months ended July 1, 2006, and June 30, 2007, the Company expended $30,146 and $72,998 to purchase 801 and 1,712 shares, respectively, under the Companys share repurchase plan. The purchase of shares under this plan reduces the number of shares issued and outstanding in the above calculations.
NOTE K SEGMENT INFORMATION
As of June 30, 2007, the Companys segments were based on two operating geographic regions. Management considers the geographic segments of the Company to be the only reportable operating segments. 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 the net sales and the amount of operating income or loss in these segments.
17
Segment profit or loss 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 Companys determination of segment profit or loss. The profitability of each reported region is representative of what is controllable within that region by local management and is not necessarily indicative of the actual profit or loss that is generated by a fully burdened region. Nevertheless, the presentation of this data is consistent with how management evaluates each region and the respective markets within that region.
Prior to the second quarter of 2007, the Companys operations were reported as two business segments: Direct Selling and Contract Manufacturing. Direct Selling continues to constitute our principal line of business: developing, manufacturing, and distributing nutritional and personal care products through a network marketing system. Due to the planned sale of assets related to the third-party contract manufacturing business, however, the Company now recognizes only one reportable segment that is distinguished by geographic regions. The Company will retain the remaining assets that are associated with manufacturing and packaging its Sensé skin and beauty care products and will continue to manufacture these products at its current facility in Draper, Utah. Reported third-party contract manufacturing assets have been presented as held for sale, and the results of these operations have been classified as discontinued in the financial statements. Accordingly, the segment financial information below has been updated to exclude these contract manufacturing assets and these discontinued operations, the detail of which is presented in Note B Assets Held for Sale.
Selected financial information is reported for two geographic regions: North America and Asia Pacific. North America includes the United States, Canada, and Mexico. All other entities outside of North America are located within the Asia Pacific region, which includes Australia/New Zealand, Hong Kong, Japan, Taiwan, South Korea, Singapore, and Malaysia.
Segment Financial Information
Financial information, summarized by geographic region for the quarters ended July 1, 2006 and June 30, 2007, is listed below:
|
Net Sales from |
|
Inter-segment |
|
Earnings |
|
||||
Quarter ended July 1, 2006: |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|||
North America |
|
$ |
61,294 |
|
$ |
16,651 |
|
$ |
8,297 |
|
Asia Pacific |
|
28,400 |
|
1,402 |
|
8,330 |
|
|||
|
|
|
|
|
|
|
|
|||
Reportable Segments Total |
|
89,694 |
|
18,053 |
|
16,627 |
|
|||
|
|
|
|
|
|
|
|
|||
Unallocated and Other * |
|
|
|
(18,053 |
) |
(607 |
) |
|||
|
|
|
|
|
|
|
|
|||
Consolidated Total |
|
$ |
89,694 |
|
$ |
|
|
$ |
16,020 |
|
18
|
Net Sales from |
|
Inter-segment |
|
Earnings |
|
||||
Quarter ended June 30, 2007: |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|||
North America |
|
$ |
68,156 |
|
$ |
20,563 |
|
$ |
8,632 |
|
Asia Pacific |
|
39,386 |
|
2,691 |
|
9,361 |
|
|||
|
|
|
|
|
|
|
|
|||
Reportable Segments Total |
|
107,542 |
|
23,254 |
|
17,993 |
|
|||
|
|
|
|
|
|
|
|
|||
Unallocated and Other * |
|
|
|
(23,254 |
) |
380 |
|
|||
|
|
|
|
|
|
|
|
|||
Consolidated Total |
|
$ |
107,542 |
|
$ |
|
|
$ |
18,373 |
|
Financial information, summarized by geographic region for the six months ended July 1, 2006 and June 30, 2007, is listed below:
|
|
Net Sales from |
|
Inter-segment |
|
Earnings |
|
Long-lived |
|
Total |
|
|||||
Six months ended July 1, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
North America |
|
$ |
120,516 |
|
$ |
32,666 |
|
$ |
17,015 |
|
$ |
28,044 |
|
$ |
52,387 |
|
Asia Pacific |
|
54,562 |
|
2,643 |
|
14,100 |
|
4,032 |
|
15,475 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Reportable Segments Total |
|
175,078 |
|
35,309 |
|
31,115 |
|
32,076 |
|
67,862 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Unallocated and Other * |
|
|
|
(35,309 |
) |
37 |
|
3 |
|
2,428 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Consolidated Total |
|
$ |
175,078 |
|
$ |
|
|
$ |
31,152 |
|
$ |
32,079 |
|
$ |
70,290 |
|
|
|
Net Sales from |
|
Inter-segment |
|
Earnings |
|
Long-lived |
|
Total |
|
|||||
Six months ended June 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
North America |
|
$ |
132,709 |
|
$ |
39,121 |
|
$ |
18,925 |
|
$ |
41,294 |
|
$ |
64,827 |
|
Asia Pacific |
|
75,511 |
|
4,581 |
|
17,663 |
|
11,363 |
|
26,890 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Reportable Segments Total |
|
208,220 |
|
43,702 |
|
36,588 |
|
52,657 |
|
91,717 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Unallocated and Other * |
|
|
|
(43,702 |
) |
368 |
|
(622 |
) |
991 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Consolidated Total |
|
$ |
208,220 |
|
$ |
|
|
$ |
36,956 |
|
$ |
52,035 |
|
$ |
92,708 |
|
* Unallocated and Other includes certain corporate items and eliminations that are not allocated to the operating segments.
19
The following table provides further net sales information on markets that represent five percent or more of net sales:
|
Quarter Ended |
|
Six Months Ended |
|
|||||||||
|
|
July 1, |
|
June 30, |
|
July 1, |
|
June 30, |
|
||||
|
|
2006 |
|
2007 |
|
2006 |
|
2007 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net sales: |
|
|
|
|
|
|
|
|
|
||||
United States |
|
$ |
39,250 |
|
$ |
43,433 |
|
$ |
77,718 |
|
$ |
85,493 |
|
Canada |
|
17,721 |
|
18,965 |
|
34,422 |
|
36,106 |
|
||||
Australia/New Zealand |
|
12,104 |
|
14,630 |
|
23,204 |
|
27,656 |
|
||||
Hong Kong |
|
** |
|
6,220 |
|
** |
|
11,853 |
|
||||
Taiwan |
|
4,978 |
|
5,411 |
|
9,917 |
|
11,663 |
|
||||
Mexico |
|
** |
|
5,758 |
|
** |
|
11,110 |
|
||||
** Market represented less than five percent of net sales.
Due to the centralized structure of our manufacturing operations and our corporate headquarters in the United States, a significant concentration of assets exist in this market. Long-lived assets in the United States as of July 1, 2006 and June 30, 2007 totaled $18,090 and $39,023, respectively. As a result of the purchase of a facility in Australia during first quarter 2007, long-lived assets in the Australia/New Zealand market totaling $7,009 comprised greater than 5% of the Companys long-lived assets as of June 30, 2007. Outside of these two markets, there is no significant concentration of long-lived assets.
NOTE L INCOME TAXES
The Company files income tax returns in the U.S. federal jurisdiction and in various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state, local, or non-U.S. income tax examinations by tax authorities for years before 2002. One notable exception is in Canada where the applicable federal statute of limitations is open back to 1998.
The Company adopted the provisions of FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109, on December 30, 2006. The implementation of FIN 48 did not result in a material change to the liability for unrecognized tax benefits. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Balance at December 30, 2006 |
|
$ |
1,523 |
|
|
|
|
|
|
Additions based on tax positions related to the current year |
|
72 |
|
|
|
|
|
|
|
Additions for tax positions of prior years |
|
61 |
|
|
|
|
|
|
|
Settlements/lapse of statute |
|
(9 |
) |
|
|
|
|
|
|
Balance at June 30, 2007 |
|
$ |
1,647 |
|
The Company anticipates that it is reasonably possible that unrecognized tax benefits, including interest and penalties, of up to $439 could be recognized within the next twelve months due to the lapse of applicable statute of limitations. Recognition of these uncertain tax positions or any uncertain tax position included in the June 30, 2007 balance will result in an adjustment to the Companys effective tax rate. The Company has determined that all material, temporary differences can be fully recognized for FIN 48 purposes.
20
The Company recognizes interest accrued related to unrecognized tax benefits in income taxes. In the first six months of 2007, the Company recognized $64 in interest and penalties, compared to $36 in the first six months of 2006. The Company has accrued $160 and $384 for the payment of interest and penalties at the end of the first six months of 2006 and 2007, respectively.
NOTE M SUBSEQUENT EVENTS
On July 10, 2007, Grant Thornton LLP (GT) informed us that it was resigning as the Companys independent public accountants prior to completing its review of the financial statements for the three and six-month periods ended June 30, 2007. In connection with GTs review of the Companys unaudited financial statements that were included in the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, the Audit Committee and GT disagreed as to the scope of the procedures to be performed by the auditors, disagreeing to the extent to which the Audit Committee should engage new, independent consultants to respond to what the Company and its Audit Committee deemed to be unfounded and unwarranted accusations leveled against the Company by convicted felon Barry Minkow. In response to the Minkow allegations, the Companys Audit Committee commenced an internal investigation (the Internal Investigation) by the Companys general counsel of the matters raised by Minkow. Also in response to the Minkow allegations, and in connection with its review of the Companys First Quarter 10-Q, GT made numerous requests to the Company for additional information and documents (the Additional Information), including requests for independent legal reviews (the Independent Reports) with respect to Minkows allegations that: (1) the Companys associate compensation plan violates anti-pyramid investment rules, (2) the Companys compensation plan fails to comply with Federal Trade Commission rules regarding disclosure of earnings and income to sales associates and prospective associates, and (3) the Company violated securities laws relating to insider trading and its stock buyback policy.
Initially, the Companys Audit Committee wanted to complete the Internal Investigation before considering whether or not to engage independent consultants to provide Independent Reports. GT informed the Company that this approach could potentially delay the filing of the First Quarter 10-Q. This position led to further discussions between the Chairman of the Audit Committee and GT, and the matter was resolved to the satisfaction of GT, the Company, and the Audit Committee when the Company furnished to GT all Additional Information requested by GT, and engaged select independent legal advisers to produce the Independent Reports.
After the Internal Investigation and the Independent Reports were completed, GT completed its review of the Companys First Q