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 October 3, 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)

 

Utah

 

87-0500306

(State or other jurisdiction

 

(I.R.S. Employer

of incorporation or organization)

 

Identification No.)

 


 

3838 West Parkway Blvd., Salt Lake City, Utah 84120

(Address of principal executive offices, Zip Code)

 


 

(801) 954-7100

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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.

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company 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 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



 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

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

(unaudited)

 

NOTE G — EQUITY-BASED COMPENSATION — CONTINUED

 

A summary of the Company’s stock option and stock-settled stock appreciation right activity for the nine months ended October 3, 2009 is as follows:

 

 

 

 

 

Weighted-

 

Weighted-average 

 

Aggregate

 

 

 

 

 

average grant

 

remaining

 

intrinsic

 

 

 

Shares

 

price

 

contractual term

 

value*

 

Outstanding at January 3, 2009

 

4,244

 

$

30.28

 

4.7

 

$

21,382

 

Granted

 

125

 

26.43

 

 

 

 

 

Exercised

 

(24

)

24.87

 

 

 

 

 

Canceled or expired

 

(55

)

29.18

 

 

 

 

 

Outstanding at October 3, 2009

 

4,290

 

$

30.21

 

4.0

 

$

24,916

 

Exercisable at October 3, 2009

 

1,585

 

$

32.38

 

3.8

 

$

6,897

 

 


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

 

The weighted-average fair value of stock-settled stock appreciation rights that were granted during the nine month periods ended September 27, 2008, and October 3, 2009 was $8.73 and $9.07, respectively.  The total intrinsic value of awards that were exercised during the nine month periods ended September 27, 2008, and October 3, 2009 was $8,571 and $194.

 

The total fair value of awards that vested during the nine-month periods ended September 27, 2008, and October 3, 2009 was $5,942 and $10,087, respectively.  This total fair value includes equity awards that were issued in the form of stock options, stock-settled stock appreciation rights, and deferred stock units.

 

NOTE H — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

The Company designates certain derivatives, such as certain currency option and forward contracts, as freestanding derivatives for which hedge accounting does not apply.  The changes in the fair market value of the derivatives are included in “Other, net” in the Company’s consolidated statements of earnings.  The fair value of any option or forward contract is based on period-end quoted market prices.  The Company does not use derivative financial instruments for trading or speculative purposes.  The use of currency exchange contracts includes the purchase of put and call options, which give the Company the right, but not the obligation, to sell or buy international currency at a specified exchange rate (“strike price”).  In addition, the Company has used forward contracts to supplement its use of options.  The Company’s objective in using currency exchange contracts has been to reduce the impact of currency fluctuations on cash that it repatriates.  The Company has also considered the costs and benefits of managing currency impacts on net sales and certain balance sheet items.  The Company did not enter into any currency exchange contracts during the quarter and nine months ended October 3, 2009.  Historically, the exercise of currency contracts has not had a material impact on the Company’s consolidated statements of earnings.

 

12



 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

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

(unaudited)

 

NOTE I — 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 periods specified below have been included in the calculation of the number of weighted-average shares that are outstanding for the calculation of basic earnings per share.  Diluted earnings per common share are based on shares that are outstanding (computed under basic EPS) and on potentially dilutive shares.  Shares that are included in the diluted earnings per share calculations include equity awards that are in-the-money but have not yet been exercised.

 

 

 

For the Quarter Ended

 

 

 

September 27,

 

October 3,

 

 

 

2008

 

2009

 

 

 

(as restated)

 

 

 

 

 

 

 

 

 

Net earnings available to common shareholders

 

$

8,080

 

$

7,912

 

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Common shares outstanding - entire period

 

 

 

 

 

Weighted-average common shares:

 

16,198

 

15,350

 

Issued during period

 

223

 

4

 

Canceled during period

 

(390

)

(9

)

Weighted-average common shares outstanding during period

 

16,031

 

15,345

 

Earnings per common share from net earnings - basic

 

$

0.50

 

$

0.52

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Weighted-average shares outstanding during period - basic

 

16,031

 

15,345

 

Dilutive effect of equity awards

 

102

 

202

 

Weighted-average shares outstanding during period - diluted

 

16,133

 

15,547

 

Earnings per common share from net earnings - diluted

 

$

0.50

 

$

0.51

 

 

Equity awards for 1,232 and 1,295 shares of stock were not included in the computation of diluted EPS for the quarters ended September 27, 2008, and October 3, 2009, respectively, due to the fact that their exercise prices were greater than the average market price of the shares.

 

13



 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

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

(unaudited)

 

NOTE I — COMMON STOCK AND EARNINGS PER SHARE — CONTINUED

 

 

 

For the Nine Months Ended

 

 

 

September 27,

 

October 3,

 

 

 

2008

 

2009

 

 

 

(as restated)

 

 

 

 

 

 

 

 

 

Net earnings available to common shareholders

 

$

25,455

 

$

23,349

 

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Common shares outstanding - entire period

 

 

 

 

 

Weighted-average common shares:

 

16,198

 

15,350

 

Issued during period

 

194

 

2

 

Canceled during period

 

(130

)

(3

)

Weighted-average common shares outstanding during period

 

16,262

 

15,349

 

Earnings per common share from net earnings - basic

 

$

1.57

 

$

1.52

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Weighted-average shares outstanding during period - basic

 

16,262

 

15,349

 

Dilutive effect of equity awards

 

89

 

72

 

Weighted-average shares outstanding during period - diluted

 

16,351

 

15,421

 

Earnings per common share from net earnings - diluted

 

$

1.56

 

$

1.51

 

 

Equity awards for 1,344 and 1,571 shares of stock were not included in the computation of diluted EPS for the nine months ended September 27, 2008, and October 3, 2009, respectively, due to the fact that their exercise prices were greater than the average market price of the shares.

 

During the nine months ended September 27, 2008, and October 3, 2009, the Company expended $28,065 and $1,022 to purchase 809 and 33 shares, respectively, under the Company’s share repurchase plan.  The purchase of shares under this plan reduces the number of shares issued and outstanding in the above calculations.

 

NOTE J — COMPREHENSIVE INCOME

 

Total comprehensive income consisted of the following:

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

September 27,

 

October 3,

 

September 27,

 

October 3,

 

 

 

2008

 

2009

 

2008

 

2009

 

 

 

(as restated)

 

 

 

(as restated)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

8,080

 

$

7,912

 

$

25,455

 

$

23,349

 

Foreign currency translation adjustment

 

(1,425

)

797

 

(581

)

1,708

 

Comprehensive income

 

$

6,655

 

$

8,709

 

$

24,874

 

$

25,057

 

 

14



 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

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

(unaudited)

 

NOTE K — SEGMENT INFORMATION

 

USANA operates in a single operating segment as a direct selling company that develops, manufactures, and distributes high-quality nutritional and personal care products that are sold through a global network marketing system of independent distributors (“Associates”).  As such, management has determined that the Company operates in one reportable business segment as defined in ASC 280, “Disclosures about Segments of an Enterprise and Related Information.”  Performance for a region or market is primarily evaluated based on sales.  The Company does not use profitability reports on a regional or market basis for making business decisions.  No single Associate accounted for 10% or more of net sales for the periods presented.  The table below summarizes the approximate percentage of total product revenue that has been contributed by the Company’s nutritional and personal care products for the periods indicated.

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

September 27,

 

October 3,

 

September 27,

 

October 3,

 

Product Line

 

2008

 

2009

 

2008

 

2009

 

USANA® Nutritionals

 

87

%

88

%

87

%

88

%

Sensé — beautiful science®

 

9

%

9

%

10

%

9

%

 

Selected financial information for the Company is presented for two geographic regions: North America and Asia Pacific, with three sub-regions under Asia Pacific.  Individual markets are categorized into these regions as follows:

 

·                  North America

 

·                  United States

 

·                  Canada

 

·                  Mexico

 

·                  Asia Pacific

 

·                  Southeast Asia/Pacific — Australia, New Zealand, Singapore, Malaysia, and the Philippines*

 

·                  East Asia — Hong Kong and Taiwan

 

·                  North Asia — Japan and South Korea

 


* Operations in the Philippines commenced in January 2009.

 

15



 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

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

(unaudited)

 

NOTE K — SEGMENT INFORMATION — CONTINUED

 

Selected Financial Information

 

Selected financial information, presented by geographic region, is listed below for the periods ended as of the dates indicated:

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

September 27,

 

October 3,

 

September 27,

 

October 3,

 

 

 

2008

 

2009

 

2008

 

2009

 

Net Sales to External Customers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

 

 

 

 

 

 

 

 

United States

 

$

40,169

 

$

38,098

 

$

118,844

 

$

114,495

 

Canada

 

18,216

 

16,661

 

56,326

 

48,051

 

Mexico

 

6,208

 

5,535

 

17,619

 

16,384

 

North America Total

 

64,593

 

60,294

 

192,789

 

178,930

 

 

 

 

 

 

 

 

 

 

 

Asia Pacific

 

 

 

 

 

 

 

 

 

Southeast Asia/Pacific

 

23,265

 

25,227

 

68,980

 

69,683

 

East Asia

 

15,206

 

20,262

 

43,878

 

56,866

 

North Asia

 

4,112

 

4,981

 

12,307

 

14,677

 

Asia Pacific Total

 

42,583

 

50,470

 

125,165

 

141,226

 

Consolidated Total

 

$

107,176

 

$

110,764

 

$

317,954

 

$

320,156

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

 

 

 

 

 

 

 

 

United States

 

$

79,979

 

$

76,371

 

$

79,979

 

$

76,371

 

Canada

 

3,109

 

2,373

 

3,109

 

2,373

 

Mexico

 

4,250

 

3,506

 

4,250

 

3,506

 

North America Total

 

87,338

 

82,250

 

87,338

 

82,250

 

 

 

 

 

 

 

 

 

 

 

Asia Pacific

 

 

 

 

 

 

 

 

 

Southeast Asia/Pacific

 

21,393

 

26,029

 

21,393

 

26,029

 

East Asia

 

8,178

 

8,667

 

8,178

 

8,667

 

North Asia

 

4,233

 

4,528

 

4,233

 

4,528

 

Asia Pacific Total

 

33,804

 

39,224

 

33,804

 

39,224

 

Consolidated Total

 

$

121,142

 

$

121,474

 

$

121,142

 

$

121,474

 

 

The following table provides further information on markets representing ten percent or more of consolidated net sales:

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

September 27,

 

October 3,

 

September 27,

 

October 3,

 

 

 

2008

 

2009

 

2008

 

2009

 

Net Sales:

 

 

 

 

 

 

 

 

 

United States

 

$

40,169

 

$

38,098

 

$

118,844

 

$

114,495

 

Canada

 

18,216

 

16,661

 

56,326

 

48,051

 

Hong Kong

 

9,563

 

14,756

 

26,957

 

41,049

 

 

16



 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

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

(unaudited)

 

NOTE K — SEGMENT INFORMATION — CONTINUED

 

Due to the centralized structure of the Company’s manufacturing operations and its corporate headquarters in the United States, a significant concentration of assets exists in this market.  As of September 27, 2008, and October 3, 2009, long-lived assets in the United States totaled $50,230 and $46,657, respectively.  Additionally, long-lived assets in the Australia market as of September 27, 2008, and October 3, 2009 totaled $12,898 and $13,673, respectively.  There is no significant concentration of long-lived assets in any other market.

 

NOTE L — SUBSEQUENT EVENTS

 

The Company evaluated subsequent events through the date the accompanying financial statements were issued, which was November 10, 2009.

 

Item 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of USANA’s financial condition and results of operations should be read in conjunction with the Unaudited Consolidated Financial Statements and Notes thereto that are contained in this quarterly report, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations that are included in our Annual Report on Form 10-K for the year ended January 3, 2009, and our other filings, including Current Reports on Form 8-K, that have been filed with the Securities and Exchange Commission (“SEC”) through the date of this report.

 

Our fiscal year end is the Saturday closest to December 31st of each year.  Fiscal year 2009 will end on January 2, 2010 and is a 52-week year.  Fiscal year 2008 ended on January 3, 2009 and was a 53-week year.

 

Overview

 

We develop and manufacture high-quality nutritional and personal care products that are distributed internationally through a network marketing system, which is a form of direct selling.  Our customer base comprises two types of customers; “Associates” and “Preferred Customers.”  Associates are independent distributors of our products who also purchase our products for their personal use.  Preferred Customers purchase our products strictly for their personal use and are not permitted to resell or to distribute the products.  As of October 3, 2009, we had approximately 199,000 active Associates and approximately 68,000 active Preferred Customers worldwide.  For purposes of this report, we only count as active customers those Associates and Preferred Customers who have purchased product from USANA at any time during the most recent three-month period, either for personal use or for resale.

 

We have ongoing operations in the following markets, which are grouped and presented as follows:

 

·                  North America

 

·                  United States

 

·                  Canada

 

·                  Mexico

 

·                  Asia Pacific

 

·                  Southeast Asia/Pacific — Australia, New Zealand, Singapore, Malaysia, and the Philippines*

 

17



 

·                  East Asia — Hong Kong and Taiwan

 

·                  North Asia — Japan and South Korea

 


* Operations in the Philippines commenced in January 2009.

 

Because we have operations in multiple markets, with sales and expenses being generated and incurred in multiple currencies, our reported U.S. dollar sales and earnings can be significantly affected by fluctuations in currency exchange rates.  In general, our reported sales and earnings are affected positively by a weakening of the U.S. dollar and negatively by a strengthening of the U.S. dollar.  In our net sales discussions that follow, we approximate the impact of currency fluctuations on net sales by translating current year sales at the average exchange rates in effect during the comparable periods of the prior year.

 

Our primary product lines consist of USANAâ Nutritionals and Sensé — beautiful scienceâ (Sensé), which is our line of personal care products.  The USANA Nutritionals product line is further categorized into three separate classifications: Essentials, Optimizers, and USANA Foods (formerly Macro Optimizers).  The following tables summarize the approximate percentage of total product revenue that has been contributed by our major product lines and our top-selling products for the current and prior-year periods indicated:

 

 

 

Nine Months Ended

 

 

 

September 27,

 

October 3,

 

Product Line

 

2008

 

2009

 

USANA® Nutritionals

 

 

 

 

 

Essentials

 

34

%

33

%

Optimizers

 

40

%

43

%

USANA Foods

 

13

%

12

%

Sensé — beautiful science®

 

10

%

9

%

All Other *

 

3

%

3

%

 


* Includes items such as services, sales tools, and logo merchandise.

 

 

 

Nine Months Ended

 

 

 

September 27,

 

October 3,

 

Key Product

 

2008

 

2009

 

USANA® Essentials

 

20

%

19

%

HealthPak 100 ™

 

12

%

12

%

Proflavanol®

 

10

%

11

%

 

As a manufacturer of nutritional and personal care products utilizing direct selling for the distribution of our products, we compete within two industries: direct selling and nutrition.  We believe that the most significant factors affecting us are the aging of the worldwide population, the general public’s heightened awareness and understanding of the connection between diet and health, and the growing desire for an alternative source of income, all of which affect our ability to attract and retain Associates and Preferred Customers to sell and consume our products.

 

Changes in product sales are typically the result of variations in product sales volumes relating to changes in the number of active Associates and Preferred Customers purchasing our products.  Notably, Associate sales account for the majority of our product sales, representing 89% of product sales during the nine months ended October 3, 2009.  Although to a lesser extent, changes in product sales may also periodically be affected by minor product price adjustments.  In general, however, the volume of average monthly product purchases by our active Associates and Preferred Customers, in their local currencies, remains relatively constant over time.  Accordingly, sales growth in local currencies is driven primarily by an increased number of active Associates and Preferred Customers.  The number of active Associates and Preferred Customers is, therefore, used by management as a key non-financial measure.

 

18



 

We believe that our high-quality products and our financially rewarding Associate compensation plan (“Compensation Plan”) are the key components to attracting and retaining Associates.  To support our Associates in building their businesses, we sponsor meetings and events throughout the year, which offer information about our products and our network marketing system.  These meetings are designed to assist Associates in their business development and to provide a forum for interaction with some of  our Associate leaders and members of the USANA management team.  We also provide low cost sales tools, which we believe are an integral part of building and maintaining a successful home-based business for our Associates.

 

In addition to Company-sponsored meetings and sales tools, we maintain a website exclusively for our Associates where they can keep up-to-date on the latest USANA news, obtain training materials, manage their personal information, enroll new customers, shop, and register for Company-sponsored events.  Additionally, through this website, Associates can access other online services to which they may subscribe.  For example, we offer an online business management service, which includes a tool that helps Associates track and manage their business activity, a personal webpage to which their prospects or retail customers can be directed, e-cards for advertising, and a tax management tool.

 

The tables below summarize the changes in our active customer base by geographic region.  These numbers have been rounded to the nearest thousand as of the dates indicated.

 

 

 

Active Associates By Region

 

 

 

 

 

 

 

As of

 

As of

 

Change from

 

Percent

 

 

 

September 27, 2008

 

October 3, 2009

 

Prior Year

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America:

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

61,000

 

33.2

%

61,000

 

30.7

%

 

0.0

%

Canada

 

28,000

 

15.2

%

26,000

 

13.1

%

(2,000

)

(7.1

)%

Mexico

 

14,000

 

7.6

%

15,000

 

7.5

%

1,000

 

7.1

%

North America Total

 

103,000

 

56.0

%

102,000

 

51.3

%

(1,000

)

(1.0

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asia Pacific:

 

 

 

 

 

 

 

 

 

 

 

 

 

Southeast Asia/Pacific

 

42,000

 

22.8

%

49,000

 

24.6

%

7,000

 

16.7

%

East Asia

 

32,000

 

17.4

%

40,000

 

20.1

%

8,000

 

25.0

%

North Asia

 

7,000

 

3.8

%

8,000

 

4.0

%

1,000

 

14.3

%

Asia Pacific Total

 

81,000

 

44.0

%

97,000

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