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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended July 4, 2009

 

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)

 

 

 

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 x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes o No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” 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 x

 

The number of shares outstanding of the registrant’s common stock as of August 5, 2009 was 15,535,210.

 

 

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USANA HEALTH SCIENCES, INC.

 

FORM 10-Q

 

For the Quarterly Period Ended July 4, 2009

 

INDEX

 

		Page
PART I. FINANCIAL INFORMATION
Item 1	Financial Statements (unaudited)
	Consolidated Balance Sheets	3
	Consolidated Statements of Earnings — Quarter Ended	4
	Consolidated Statements of Earnings — Six Months Ended	5
	Consolidated Statements of Stockholders’ Equity and Comprehensive Income	6
	Consolidated Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	8-18
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18-27
Item 3	Quantitative and Qualitative Disclosures About Market Risk	27-28
Item 4	Controls and Procedures	29
PART II. OTHER INFORMATION
Item 1	Legal Proceedings	30
Item 4	Submission of Matters to a Vote of Security Holders	30
Item 6	Exhibits	31-32
Signatures		33

 

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PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(U.S. dollars in thousands)

 

		As of			As of
		January 3,			July 4,
		2009 (1)			2009
					(unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	13,281		$	11,170
Inventories		23,879			24,656
Prepaid expenses and other current assets		12,657			10,206
Deferred income taxes		2,857			2,698
Total current assets		52,674			48,730
Property and equipment, net		56,762			56,994
Assets held for sale		607			607
Goodwill		5,690			5,690
Other assets		6,839			7,933
		$	122,572		$	119,954
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	6,879		$	4,697
Other current liabilities		47,655			32,400
Total current liabilities		54,534			37,097
Line of credit		34,990			28,170
Other long-term liabilities		1,212			1,885
Stockholders’ equity
Common stock, $0.001 par value;
Authorized — 50,000 shares, issued and outstanding 15,350 as of January 3, 2009 and 15,350 as of July 4, 2009		15			15
Additional paid-in capital		8,089			12,707
Retained earnings		24,107			39,544
Accumulated other comprehensive income (loss)		(375		)	536
Total stockholders’ equity		31,836			52,802
		$	122,572		$	119,954

 

(1) Derived from audited financial statements.

 

The accompanying notes are an integral part of these statements.

 

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF EARNINGS

 

(U.S. dollars in thousands, except per share data)

 

(unaudited)

 

		Quarter Ended
		June 28,			July 4,
		2008			2009
		(as restated)
Net sales		$	109,208		$	112,093
Cost of sales		21,884			23,753
Gross profit		87,324			88,340
Operating expenses:
Associate incentives		45,603			50,321
Selling, general and administrative		25,753			24,719
Total operating expenses		71,356			75,040
Earnings from operations		15,968			13,300
Other income (expense):
Interest income		85			12
Interest expense		(123		)	(146		)
Other, net		(27		)	259
Other income (expense), net		(65		)	125
Earnings before income taxes		15,903			13,425
Income taxes		5,821			4,634
Net earnings		10,082			8,791
Earnings per common share
Basic		$	0.62		$	0.57
Diluted		$	0.61		$	0.57
Weighted average common shares outstanding
Basic		16,393			15,350
Diluted		16,460			15,385

 

The accompanying notes are an integral part of these statements.

 

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF EARNINGS

 

(U.S. dollars in thousands, except per share data)

 

(unaudited)

 

		Six Months Ended
		June 28,			July 4,
		2008			2009
		(as restated)
Net sales		$	210,778		$	209,392
Cost of sales		43,386			43,599
Gross profit		167,392			165,793
Operating expenses:
Associate incentives		86,967			92,211
Selling, general and administrative		52,789			50,049
Total operating expenses		139,756			142,260
Earnings from operations		27,636			23,533
Other income (expense):
Interest income		183			30
Interest expense		(362		)	(435		)
Other, net		43			440
Other income (expense), net		(136		)	35
Earnings before income taxes		27,500			23,568
Income taxes		10,125			8,131
Net earnings		17,375			15,437
Earnings per common share
Basic		$	1.06		$	1.01
Diluted		$	1.06		$	1.00
Weighted average common shares outstanding
Basic		16,378			15,350
Diluted		16,460			15,384

 

The accompanying notes are an integral part of these statements.

 

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

 

Six Months Ended June 28, 2008 and July 4, 2009

 

(U.S. dollars in thousands)

 

(unaudited)

 

													Accumulated
							Additional						Other
		Common Stock					Paid-in			Retained			Comprehensive
		Shares		Value			Capital			Earnings			Income (Loss)			Total
For the Six Months Ended June 28, 2008
Balance at December 29, 2007 (as restated)		16,198		$	16		$	5,636		$	26,308		$	989		$	32,949
Comprehensive income
Net earnings										17,375						17,375
Foreign currency translation adjustment, net of tax benefit of $ 438													844			844
Comprehensive income																18,219
Equity-based compensation expense							2,858									2,858
Common stock issued under equity award plans, including tax benefit of $1,028		215					1,376									1,376
Balance at June 28, 2008 (as restated)		16,413		$	16		$	9,870		$	43,683		$	1,833		$	55,402
For the Six Months Ended July 4, 2009
Balance at January 3, 2009		15,350		15			8,089			24,107			(375		)	31,836
Comprehensive income
Net earnings										15,437						15,437
Foreign currency translation adjustment, net of tax benefit of $613													911			911
Comprehensive income																16,348
Equity-based compensation expense							4,618									4,618
Balance at July 4, 2009		15,350		$	15		$	12,707		$	39,544		$	536		$	52,802

 

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

(U.S. dollars in thousands)

(unaudited)

 

		Six Months Ended
		June 28,			July 4,
		2008			2009
		(as restated)
Cash flows from operating activities
Net earnings		$	17,375		$	15,437
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization		3,171			3,569
(Gain) loss on sale of property and equipment		(78		)	20
Equity-based compensation expense		2,858			4,618
Excess tax benefit from equity-based payment arrangements		(1,028		)	—
Deferred income taxes		(1,791		)	(1,508		)
Provision for inventory valuation		400			334
Changes in operating assets and liabilities:
Inventories		(2,563		)	(600		)
Prepaid expenses and other assets		2,291			2,359
Accounts payable		1,705			(2,200		)
Other liabilities		2,855			(15,565		)
Total adjustments		7,820			(8,973		)
Net cash provided by operating activities		25,195			6,464
Cash flows from investing activities
Receipts on notes receivable		$	57		$	108
Increase in notes receivable		(16		)	(1		)
Proceeds from sale of property and equipment		119			1
Purchases of property and equipment		(11,582		)	(1,893		)
Net cash used in investing activities		(11,422		)	(1,785		)
Cash flows from financing activities
Proceeds from equity awards exercised		$	348		$	—
Excess tax benefits from equity-based payment arrangements		1,028			—
Borrowings on line of credit		2,655			49,340
Payments on line of credit		(20,820		)	(56,160		)
Net cash used in financing activities		(16,789		)	(6,820		)
Effect of exchange rate changes on cash and cash equivalents		133			30
Net decrease in cash and cash equivalents		(2,883		)	(2,111		)
Cash and cash equivalents, beginning of period		12,865			13,281
Cash and cash equivalents, end of period		$	9,982		$	11,170
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest, net of amount capitalized		$	371		$	411
Income taxes		9,948			12,492

 

The accompanying notes are an integral part of these statements.

 

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars 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 that are normally included in financial statements that have been 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 that are necessary to present fairly the Company’s financial position as of July 4, 2009, and results of operations for the quarters and six months ended June 28, 2008 and July 4, 2009.  These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto that are included in the Company’s Annual Report on Form 10-K for the year ended January 3, 2009.  The results of operations for the quarter and six months ended July 4, 2009 may not be indicative of the results that may be expected for the fiscal year 2009 ending January 2, 2010.

 

Recently Adopted Accounting Pronouncements

 

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events,” which establishes general accounting standards and disclosure for events that occur after the balance sheet date but before the financial statements are issued or are available to be issued.  It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date.  SFAS 165 is effective for interim and annual financial periods ending after June 15, 2009 and requires prospective application.  The Company adopted SFAS 165 during the second quarter ended July 4, 2009, and its application had no impact on the Company’s consolidated financial statements.  The Company evaluated subsequent events through the date the accompanying financial statements were issued, which was August 11, 2009.

 

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162.”  SFAS 168 replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” and establishes the “FASB Accounting Standards Codification™” (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles (GAAP).  Rules and interpretive releases of the Securities and Exchange Commission (SEC) are also sources of authoritative GAAP for SEC registrants.  SFAS 168 is effective for interim and annual financial periods ending after September 15, 2009.  On this effective date, the Codification will supersede all then-existing non-SEC accounting and reporting standards.  All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative.  Once the Codification is in effect, all of its content will carry the same level of authority, effectively superseding SFAS 162.  The Company will adopt SFAS 168 during its interim period ending October 3, 2009 and does not anticipate that the adoption of this standard will have a material impact on its consolidated financial statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(U.S. dollars in thousands, except per share data)

(unaudited)

 

Restatement of consolidated financial statements

 

In its Annual Report on Form 10-K filed with the SEC on March 6, 2009, the Company restated its historical consolidated financial statements for the fiscal years ending December 29, 2007 and December 30, 2006 to correct two errors related to income taxes payable during the reported periods, as explained below.

 

During 2008, the Internal Revenue Service (“IRS”) commenced an audit of the Company’s tax returns for tax years 2003 through 2007. In January 2009, the IRS communicated its intent to disallow deductions claimed by the Company under Section 162(m) of the Internal Revenue Code (“IRC”). In February 2009, the Company settled the Section 162(m) matter with the IRS. Under the settlement, the cumulative tax impact to the Company is the loss of $11.8 million in tax deductions resulting in estimated taxes due of $4.4 million, plus $0.8 million in interest. The $4.4 million in taxes due resulted in an increase to current liabilities and corresponding reduction in stockholders’ equity in the affected periods. The $0.8 million in interest resulted in an increase to current liabilities with a corresponding increase to income tax expense in the affected periods.

 

The IRS also disallowed the treatment of certain stock options granted by the Company as Incentive Stock Options. The Company’s February 2009 settlement with the IRS also settled this matter. The settlement resulted in a cumulative increase of $1.3 million to compensation expense recorded in selling, general and administrative expense for the affected periods.

 

The Company concluded that the cumulative effect of the balance sheet adjustments due to these two errors was material to its fiscal year 2007, as well as its 2007 and 2008 quarterly, balance sheets.  The consolidated financial statements and related disclosures for the quarter and six months ended June 28, 2008 have been restated in this report to reflect the errors discussed above.  The earnings impact of this restatement on the second quarter of 2008 was an increase to income taxes of $66 and a decrease in diluted earnings per share of $0.01.  The earnings impact of this restatement on the six months ended June 28, 2008 was an increase in selling, general and administrative expense of $289, an increase to income taxes of $31, and a decrease in both basic and diluted earnings per share of $0.02.  The impact of this restatement on the balance sheet as of June 28, 2008 was an increase in other current liabilities of $6,009, a decrease in additional paid-in capital of $1,889, and a decrease in retained earnings of $4,120.

 

Refer to Note A of the 2008 Form 10-K for the effects of the restatement on the Company’s consolidated financial statements as of and for the fiscal years ended December 29, 2007 and January 3, 2009.

 

NOTE A — ORGANIZATION

 

USANA develops and manufactures high-quality nutritional and personal care products that are sold internationally through a network marketing system, which is a form of direct selling.  The Company’s products are sold throughout the United States, Canada, Mexico, Australia, New Zealand, Singapore, Malaysia, the Philippines, Hong Kong, Taiwan, Japan, South Korea, the United Kingdom, and the Netherlands.

 

NOTE B — INVENTORIES

 

Inventories consist of the following:

 

		January 3,			July 4,
		2009			2009
Raw materials		$	7,063		$	6,469
Work in progress		5,412			5,764
Finished goods		11,404			12,423
		$	23,879		$	24,656

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(U.S. dollars in thousands, except per share data)

(unaudited)

 

NOTE C — PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following:

 

		January 3,			July 4,
		2009			2009
Prepaid insurance		$	1,393		$	694
Other prepaid expenses		1,458			2,283
Federal income taxes receivable		3,759			1,601
Miscellaneous receivables, net		3,182			2,382
Deferred commissions		2,174			2,458
Other current assets		691			788
		$	12,657		$	10,206

 

NOTE D — PROPERTY AND EQUIPMENT

 

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

 

				January 3,			July 4,
		Years		2009			2009
Buildings		40		$	35,714		$	36,582
Laboratory and production equipment		5-7		14,414			14,680
Sound and video library		5		600			600
Computer equipment and software		3-5		24,626			26,261
Furniture and fixtures		3-5		4,474			4,481
Automobiles		3-5		201			255
Leasehold improvements		3-5		3,871			4,404
Land improvements		15		1,979			2,005
				85,879			89,268
Less accumulated depreciation and amortization				36,796			40,203
				49,083			49,065
Land				6,224			6,757
Deposits and projects in process				1,455			1,172
				$	56,762		$	56,994

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(U.S. dollars in thousands, except per share data)

(unaudited)

 

NOTE E — OTHER CURRENT LIABILITIES

 

Other current liabilities consist of the following:

 

		January 3,			July 4,
		2009			2009
Associate incentives		$	6,498		$	7,839
Accrued employee compensation		11,212			6,122
Income taxes		6,243			594
Sales taxes		3,923			3,398
Associate promotions		607			1,326
Deferred revenue		6,588			6,778
Provision for returns and allowances		1,101			989
Arbitration award		7,020			—
All other		4,463			5,354
		$	47,655		$	32,400

 

NOTE F — LONG TERM DEBT AND LINE OF CREDIT

 

The Company has a $40,000 line of credit.  At July 4, 2009, there was an outstanding balance of $28,170 associated with the line of credit, with a weighted-average interest rate of 1.33%.  The interest rate is computed at the bank’s Prime Rate or LIBOR, adjusted by features specified in the Credit Agreement.  The collateral for this line of credit is the pledge of the capital stock of certain subsidiaries of the Company, as set forth in a separate pledge agreement with the bank.  The Credit Agreement contains restrictive covenants based on a minimum EBITDA requirement and a debt coverage ratio.  The Company will be required to pay the balance on this line of credit in full at the time of maturity in May 2011.

 

NOTE G — EQUITY-BASED COMPENSATION

 

Equity-based compensation expense relating to equity awards under the current and previous plans of the Company, together with the related tax benefit recognized in earnings for the periods ended as of the dates indicated is as follows:

 

		Quarter Ended						Six Months Ended
		June 28,			July 4,			June 28,			July 4,
		2008			2009			2008			2009
Cost of sales		$	150		$	153		$	331		$	343
Selling, general and administrative		1,220			1,951			2,527			4,275
		1,370			2,104			2,858			4,618
Related tax benefit		479			758			1,048			1,647
Net equity-based compensation expense		$	891		$	1,346		$	1,810		$	2,971

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(U.S. dollars in thousands, except per share data)

(unaudited)

 

NOTE G — EQUITY-BASED COMPENSATION — CONTINUED

 

The following table shows the remaining unrecognized compensation expense on a pre-tax basis for all types of equity awards that were outstanding as of July 4, 2009.  This table does not include an estimate for future grants that may be issued.

 

Remainder of 2009		$	4,342
2010		8,230
2011		6,813
2012		5,410
2013		2,642
2014		27
		$	27,464

 

The cost above is expected to be recognized over a weighted-average period of 2.2 years.

 

The following table includes weighted-average assumptions that the Company has used to calculate the fair value of equity awards that were granted during the periods indicated.  Deferred stock units are full-value shares at the date of grant and have been excluded from the table below:

 

		Quarter Ended					Six Months Ended
		June 28,		July 4,			June 28,		July 4,
		2008		2009			2008		2009
Expected volatility		*		37.3		%	*		37.3		%
Risk-free interest rate		*		1.6		%	*		1.7		%
Expected life		*		4.0 yrs.			*		4.0 yrs.
Expected dividend yield		*		—			*		—
Weighted-average grant price		*		$	24.99		*		$	26.04

 

* There were no equity awards granted during the quarter and six months ended June 28, 2008 that required calculation of fair value.

 

A summary of the Company’s stock option and stock-settled stock appreciation right activity for the six months ended July 4, 2009 is as follows:

 

		Shares		Weighted- average grant price			Weighted-average remaining contractual term		Aggregate intrinsic  value*
Outstanding at January 3, 2009		4,244		$	30.28		4.7		$	21,382
Granted		100		26.04
Exercised		—		—
Canceled or expired		(5	)	35.43
Outstanding at July 4, 2009		4,339		$	30.17		4.2		$	4,470
Exercisable at July 4, 2009		1,159		$	34.59		4.0		$	1,007

 

*   Aggregate intrinsic value is defined as the difference between the current market value at the reporting date and the exercise price of awards that were in-the-money.  It is estimated using the closing price of the Company’s common stock on the last trading day of the period reported.

 

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