UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

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 November 6, 2009 was 15,305,093.

 

 

 

USANA HEALTH SCIENCES, INC.

 

FORM 10-Q

 

For the Quarterly Period Ended October 3, 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 — Nine Months Ended		5
		Consolidated Statements of Stockholders’ Equity and Comprehensive Income		6
		Consolidated Statements of Cash Flows		7
		Notes to Consolidated Financial Statements		8-17
Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations		17-27
Item 3		Quantitative and Qualitative Disclosures About Market Risk		27-29
Item 4		Controls and Procedures		29
		PART II. OTHER INFORMATION
Item 1		Legal Proceedings		30
Item 2		Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 6		Exhibits		31-32
Signatures				33

 

 

2

 

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,			October 3,
		2009 (1)			2009
					(unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	13,281		$	13,265
Inventories		23,879			25,615
Prepaid expenses and other current assets		12,657			8,932
Deferred income taxes		2,857			2,533
Total current assets		52,674			50,345
Property and equipment, net		56,762			57,289
Assets held for sale		607			—
Goodwill		5,690			5,690
Other assets		6,839			8,150
		$	122,572		$	121,474
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	6,879		$	5,628
Other current liabilities		47,655			34,259
Total current liabilities		54,534			39,887
Line of credit		34,990			17,000
Other long-term liabilities		1,212			1,743
Stockholders’ equity
Common stock, $0.001 par value; Authorized — 50,000 shares, issued and outstanding 15,350 as of January 3, 2009 and 15,326 as of October 3, 2009		15			15
Additional paid-in capital		8,089			14,813
Retained earnings		24,107			46,683
Accumulated other comprehensive income (loss)		(375		)	1,333
Total stockholders’ equity		31,836			62,844
		$	122,572		$	121,474

(1) Derived from audited financial statements.

 

The accompanying notes are an integral part of these statements.

 

3

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF EARNINGS

 

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

 

(unaudited)

 

		Quarter Ended
		September 27,			October 3,
		2008			2009
		(as restated)
Net sales		$	107,176		$	110,764
Cost of sales		22,228			22,637
Gross profit		84,948			88,127
Operating expenses:
Associate incentives		44,573			50,799
Selling, general and administrative		27,621			25,414
Total operating expenses		72,194			76,213
Earnings from operations		12,754			11,914
Other income (expense):
Interest income		5			15
Interest expense		(84		)	(105		)
Other, net		(410		)	200
Other income (expense), net		(489		)	110
Earnings before income taxes		12,265			12,024
Income taxes		4,185			4,112
Net earnings		8,080			7,912
Earnings per common share
Basic		$	0.50		$	0.52
Diluted		$	0.50		$	0.51
Weighted average common shares outstanding
Basic		16,031			15,345
Diluted		16,133			15,547

 

The accompanying notes are an integral part of these statements.

 

4

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF EARNINGS

 

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

 

(unaudited)

 

		Nine Months Ended
		September 27,			October 3,
		2008			2009
		(as restated)
Net sales		$	317,954		$	320,156
Cost of sales		65,614			66,236
Gross profit		252,340			253,920
Operating expenses:
Associate incentives		131,540			143,010
Selling, general and administrative		80,410			75,463
Total operating expenses		211,950			218,473
Earnings from operations		40,390			35,447
Other income (expense):
Interest income		188			45
Interest expense		(446		)	(540		)
Other, net		(367		)	640
Other income (expense), net		(625		)	145
Earnings before income taxes		39,765			35,592
Income taxes		14,310			12,243
Net earnings		25,455			23,349
Earnings per common share
Basic		$	1.57		$	1.52
Diluted		$	1.56		$	1.51
Weighted average common shares outstanding
Basic		16,262			15,349
Diluted		16,351			15,421

 

The accompanying notes are an integral part of these statements.

 

5

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

 

Nine Months Ended September 27, 2008 and October 3, 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 Nine Months Ended September 27, 2008
Balance at December 29, 2007 (as restated)		16,198		$	16		$	5,636		$	26,308		$	989		$	32,949
Comprehensive income
Net earnings										25,455						25,455
Foreign currency translation adjustment, net of tax expense of $ 582													(581		)	(581		)
Comprehensive income																24,874
Common stock repurchased and retired		(809	)				(5,134		)	(22,931		)				(28,065		)
Equity-based compensation expense							4,934									4,934
Common stock issued under equity award plans, including tax benefit of $2,095		258					2,637									2,637
Balance at September 27, 2008 (as restated)		15,647		$	16		$	8,073		$	28,832		$	408		$	37,329
For the Nine Months Ended October 3, 2009
Balance at January 3, 2009		15,350		15			8,089			24,107			(375		)	31,836
Comprehensive income
Net earnings										23,349						23,349
Foreign currency translation adjustment, net of tax benefit of $1,427													1,708			1,708
Comprehensive income																25,057
Common stock repurchased and retired		(33	)				(249		)	(773		)				(1,022		)
Equity-based compensation expense							6,916									6,916
Common stock issued under equity award plans, including tax expense of $19		9					57									57
Balance at October 3, 2009		15,326		$	15		$	14,813		$	46,683		$	1,333		$	62,844

 

The accompanying notes are an integral part of these statements.

 

6

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. dollars in thousands)

(unaudited)

 

		Nine Months Ended
		September 27,			October 3,
		2008			2009
		(as restated)
Cash flows from operating activities
Net earnings		$	25,455		$	23,349
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization		4,894			5,312
Gain on sale of property and equipment		(81		)	(155		)
Equity-based compensation expense		4,934			6,916
Excess tax benefit from equity-based payment arrangements		(2,225		)	(11		)
Deferred income taxes		(1,603		)	(2,179		)
Provision for inventory valuation		700			780
Changes in operating assets and liabilities:
Inventories		(3,746		)	(1,364		)
Prepaid expenses and other assets		152			3,776
Accounts payable		3,015			(1,311		)
Other liabilities		6,625			(14,585		)
Total adjustments		12,665			(2,821		)
Net cash provided by operating activities		38,120			20,528
Cash flows from investing activities
Receipts on notes receivable		$	561		$	169
Increase in notes receivable		4			(143		)
Proceeds from sale of property and equipment		136			837
Purchases of property and equipment		(15,081		)	(2,871		)
Net cash used in investing activities		(14,380		)	(2,008		)
Cash flows from financing activities
Proceeds from equity awards exercised		$	542		$	76
Excess tax benefits from equity-based payment arrangements		2,225			11
Repurchase of common stock		(28,065		)	(1,022		)
Borrowings on line of credit		46,555			55,710
Payments on line of credit		(43,905		)	(73,700		)
Net cash used in financing activities		(22,648		)	(18,925		)
Effect of exchange rate changes on cash and cash equivalents		(258		)	389
Net increase (decrease) in cash and cash equivalents		834			(16		)
Cash and cash equivalents, beginning of period		12,865			13,281
Cash and cash equivalents, end of period		$	13,699		$	13,265
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest, net of amount capitalized		$	315		$	503
Income taxes		16,222			17,874

 

The accompanying notes are an integral part of these statements.

 

7

 

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 condensed balance sheet as of January 3, 2009, derived from audited financial statements, and the unaudited interim consolidated financial information of USANA Health Sciences, Inc. and its subsidiaries (collectively, the “Company” or “USANA”) have 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 October 3, 2009, and results of operations for the quarters and nine months ended September 27, 2008 and October 3, 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 nine months ended October 3, 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 June 2009, the FASB issued new codification standards which establish 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.    The codification supersedes all non-SEC accounting and reporting standards which existed prior to the codification.  All other non-grandfathered, non-SEC accounting literature not included in the codification is non-authoritative.  The new codification standards are effective for interim and annual financial periods ending after September 15, 2009.  As such, the Company adopted the codification standards during the quarter ended October 3, 2009.  The adoption had no impact on the Company’s consolidated financial statements.  All prior references to previous GAAP in the Company’s consolidated financial statements were updated with new references under the Codification.

 

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 ended 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

 

8

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

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

(unaudited)

 

disclosures for the quarter and nine months ended September 27, 2008 have been restated in this report to reflect the correction of the errors discussed above.  The earnings impact of this restatement on the third quarter of 2008 was an increase to income taxes of $59, a decrease in basic earnings per share of $0.01, and no impact on diluted earnings per share.  The earnings impact of this restatement on the nine months ended September 27, 2008 was an increase in selling, general and administrative expense of $289, an increase to income taxes of $90, 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 September 27, 2008 was an increase in other current liabilities of $6,068, a decrease in additional paid-in capital of $1,539, and a decrease in retained earnings of $4,529.

 

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 (including direct sales from the United States to the United Kingdom and the Netherlands), Canada, Mexico, Australia, New Zealand, Singapore, Malaysia, the Philippines, Hong Kong, Taiwan, Japan, and South Korea.

 

NOTE B — INVENTORIES

 

Inventories consist of the following:

 

		January 3,			October 3,
		2009			2009
Raw materials		$	7,063		$	6,378
Work in progress		5,412			4,821
Finished goods		11,404			14,416
		$	23,879		$	25,615

 

NOTE C — PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following:

 

		January 3,			October 3,
		2009			2009
Prepaid insurance		$	1,393		$	349
Other prepaid expenses		1,458			1,576
Federal income taxes receivable		3,759			1,189
Miscellaneous receivables, net		3,182			2,572
Deferred commissions		2,174			2,471
Other current assets		691			775
		$	12,657		$	8,932

 

9

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

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

(unaudited)

 

NOTE D — PROPERTY AND EQUIPMENT

 

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

 

				January 3,			October 3,
		Years		2009			2009
Buildings		40		$	35,714		$	37,017
Laboratory and production equipment		5-7		14,414			15,201
Sound and video library		5		600			600
Computer equipment and software		3-5		24,626			27,352
Furniture and fixtures		3-5		4,474			4,554
Automobiles		3-5		201			256
Leasehold improvements		3-5		3,871			4,428
Land improvements		15		1,979			2,018
				85,879			91,426
Less accumulated depreciation and amortization				36,796			41,882
				49,083			49,544
Land				6,224			7,149
Deposits and projects in process				1,455			596
				$	56,762		$	57,289

 

NOTE E — OTHER CURRENT LIABILITIES

 

Other current liabilities consist of the following:

 

				January 3,			October 3,
				2009			2009
Associate incentives				$	6,498		$	7,901
Accrued employee compensation				11,212			8,537
Income taxes				6,243			207
Sales taxes				3,923			3,553
Associate promotions				607			797
Deferred revenue				6,588			7,006
Provision for returns and allowances				1,101			1,077
Arbitration award				7,020			—
All other				4,463			5,181
				$	47,655		$	34,259

 

NOTE F — LONG TERM DEBT AND LINE OF CREDIT

 

The Company has a $40,000 line of credit.  At October 3, 2009, there was an outstanding balance of $17,000 associated with the line of credit, with a weighted-average interest rate of 1.25%.  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.

 

10

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

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

(unaudited)

 

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						Nine Months Ended
		September 27,			October 3,			September 27,			October 3,
		2008			2009			2008			2009
Cost of sales		$	205		$	189		$	536		$	532
Selling, general and administrative		1,871			2,109			4,398			6,384
		2,076			2,298			4,934			6,916
Related tax benefit		748			845			1,796			2,492
Net equity-based compensation expense		$	1,328		$	1,453		$	3,138		$	4,424

 

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 October 3, 2009.  This table does not include an estimate for future grants that may be issued.

 

Remainder of 2009		$	1,998
2010		8,154
2011		6,737
2012		5,367
2013		2,656
2014		64
		$	24,976

 

The cost above is expected to be recognized over a weighted-average period of 2.1 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						Nine Months Ended
		September 27,			October 3,			September 27,			October 3,
		2008			2009			2008			2009
Expected volatility		37.3		%	55.8		%	37.3		%	41.0		%
Risk-free interest rate		3.2		%	2.1		%	3.2		%	1.8		%
Expected life		4.0 yrs.			4.1 yrs.			4.0 yrs.			4.0 yrs.
Expected dividend yield		—			—			—			—
Weighted-average grant price		$	26.06		$	27.99		$	26.06		$	26.43

 

11