Table of Contents

 

 

 

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 3, 2010

 

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 (§232.405 of this chapter) 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 August 2, 2010 was 15,323,969.

 

 

 



Table of Contents

 

USANA HEALTH SCIENCES, INC.

 

FORM 10-Q

 

For the Quarterly Period Ended July 3, 2010

 

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

8–16

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16–25

Item 3

Quantitative and Qualitative Disclosures About Market Risk

26–27

Item 4

Controls and Procedures

27

 

 

 

PART II.   OTHER INFORMATION

 

 

 

 

Item 1

Legal Proceedings

27

Item 6

Exhibits

28–29

 

 

 

Signatures

 

30

 

2



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

(in thousands)

 

 

 

As of

 

As of

 

 

 

January 2,

 

July 3,

 

 

 

2010 (1)

 

2010

 

 

 

 

 

(unaudited)

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

13,658

 

$

28,427

 

Inventories

 

25,761

 

30,789

 

Prepaid expenses and other current assets

 

10,391

 

9,391

 

Deferred income taxes

 

2,116

 

2,519

 

Total current assets

 

51,926

 

71,126

 

 

 

 

 

 

 

Property and equipment, net

 

57,241

 

56,035

 

 

 

 

 

 

 

Goodwill

 

5,690

 

5,690

 

Other assets

 

8,581

 

10,821

 

 

 

$

123,438

 

$

143,672

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

5,810

 

$

7,121

 

Other current liabilities

 

34,668

 

36,523

 

Total current liabilities

 

40,478

 

43,644

 

 

 

 

 

 

 

Line of credit

 

7,000

 

 

 

 

 

 

 

 

Other long-term liabilities

 

1,587

 

1,470

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock, $0.001 par value; Authorized — 50,000 shares, issued and outstanding 15,309 as of January 2, 2010 and 15,319 as of July 3, 2010

 

15

 

15

 

Additional paid-in capital

 

16,425

 

20,662

 

Retained earnings

 

56,410

 

76,821

 

Accumulated other comprehensive income

 

1,523

 

1,060

 

Total stockholders’ equity

 

74,373

 

98,558

 

 

 

$

123,438

 

$

143,672

 

 


(1) Derived from audited financial statements.

 

The accompanying notes are an integral part of these statements.

 

3



Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF EARNINGS

 

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

 

(unaudited)

 

 

 

Quarter Ended

 

 

 

July 4,

 

July 3,

 

 

 

2009

 

2010

 

 

 

 

 

 

 

Net sales

 

$

112,093

 

$

126,011

 

 

 

 

 

 

 

Cost of sales

 

23,753

 

22,735

 

 

 

 

 

 

 

Gross profit

 

88,340

 

103,276

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Associate incentives

 

50,321

 

57,065

 

Selling, general and administrative

 

24,719

 

29,149

 

 

 

 

 

 

 

Total operating expenses

 

75,040

 

86,214

 

 

 

 

 

 

 

Earnings from operations

 

13,300

 

17,062

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

12

 

16

 

Interest expense

 

(146

)

(5

)

Other, net

 

259

 

(598

)

 

 

 

 

 

 

Other income (expense), net

 

125

 

(587

)

 

 

 

 

 

 

Earnings before income taxes

 

13,425

 

16,475

 

 

 

 

 

 

 

Income taxes

 

4,634

 

5,705

 

 

 

 

 

 

 

Net earnings

 

8,791

 

10,770

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

Basic

 

$

0.57

 

$

0.70

 

 

 

 

 

 

 

Diluted

 

$

0.57

 

$

0.69

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

15,350

 

15,318

 

Diluted

 

15,385

 

15,697

 

 

The accompanying notes are an integral part of these statements.

 

4



Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF EARNINGS

 

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

 

(unaudited)

 

 

 

Six Months Ended

 

 

 

July 4,

 

July 3,

 

 

 

2009

 

2010

 

 

 

 

 

 

 

Net sales

 

$

209,392

 

$

245,098

 

 

 

 

 

 

 

Cost of sales

 

43,599

 

45,755

 

 

 

 

 

 

 

Gross profit

 

165,793

 

199,343

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Associate incentives

 

92,211

 

111,183

 

Selling, general and administrative

 

50,049

 

56,607

 

 

 

 

 

 

 

Total operating expenses

 

142,260

 

167,790

 

 

 

 

 

 

 

Earnings from operations

 

23,533

 

31,553

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

30

 

34

 

Interest expense

 

(435

)

(26

)

Other, net

 

440

 

(256

)

 

 

 

 

 

 

Other income (expense), net

 

35

 

(248

)

 

 

 

 

 

 

Earnings before income taxes

 

23,568

 

31,305

 

 

 

 

 

 

 

Income taxes

 

8,131

 

10,894

 

 

 

 

 

 

 

Net earnings

 

15,437

 

20,411

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

Basic

 

$

1.01

 

$

1.33

 

 

 

 

 

 

 

Diluted

 

$

1.00

 

$

1.31

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

15,350

 

15,315

 

Diluted

 

15,384

 

15,609

 

 

The accompanying notes are an integral part of these statements.

 

5



Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

 

Six Months Ended July 4, 2009 and July 3, 2010

 

(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 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended July 3, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 2, 2010

 

15,309

 

15

 

16,425

 

56,410

 

1,523

 

74,373

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

20,411

 

 

 

20,411

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment, net of tax benefit of $317

 

 

 

 

 

 

 

 

 

(463

)

(463

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

19,948

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity-based compensation expense

 

 

 

 

 

4,140

 

 

 

 

 

4,140

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued under equity award plans, including tax benefit of $38

 

10

 

 

 

97

 

 

 

 

 

97

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at July 3, 2010

 

15,319

 

$

15

 

$

20,662

 

$

76,821

 

$

1,060

 

$

98,558

 

 

The accompanying notes are an integral part of these statements.

 

6



Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in thousands)

 

(unaudited)

 

 

 

Six Months Ended

 

 

 

July 4,

 

July 3,

 

 

 

2009

 

2010

 

Cash flows from operating activities

 

 

 

 

 

Net earnings

 

$

15,437

 

$

20,411

 

Adjustments to reconcile net earnings to net cash provided by operating activities

 

 

 

 

 

Depreciation and amortization

 

3,569

 

3,623

 

Loss on sale of property and equipment

 

20

 

7

 

Equity-based compensation expense

 

4,618

 

4,140

 

Excess tax benefit from equity-based payment arrangements

 

 

(61

)

Deferred income taxes

 

(1,508

)

(2,240

)

Provision for inventory valuation

 

334

 

601

 

Changes in operating assets and liabilities:

 

 

 

 

 

Inventories

 

(600

)

(5,781

)

Prepaid expenses and other assets

 

2,359

 

996

 

Accounts payable

 

(2,200

)

1,312

 

Other liabilities

 

(15,565

)

2,319

 

 

 

 

 

 

 

Total adjustments

 

(8,973

)

4,916

 

 

 

 

 

 

 

Net cash provided by operating activities

 

6,464

 

25,327

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Receipts on notes receivable

 

$

108

 

$

 

Increase in notes receivable

 

(1

)

 

Proceeds from sale of property and equipment

 

1

 

4

 

Purchases of property and equipment

 

(1,893

)

(3,666

)

 

 

 

 

 

 

Net cash used in investing activities

 

(1,785

)

(3,662

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from equity awards exercised

 

$

 

$

59

 

Excess tax benefits from equity-based payment arrangements

 

 

61

 

Borrowings on line of credit

 

49,340

 

 

Payments on line of credit

 

(56,160

)

(7,000

)

 

 

 

 

 

 

Net cash used in financing activities

 

(6,820

)

(6,880

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

30

 

(16

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(2,111

)

14,769

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

13,281

 

13,658

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

11,170

 

$

28,427

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

411

 

$

32

 

Income taxes

 

12,492

 

12,513

 

 

The accompanying notes are an integral part of these statements.

 

7



Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

 

Basis of Presentation

 

The condensed balance sheet as of January 2, 2010, 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 July 3, 2010 and results of operations for the quarters and six months ended July 4, 2009 and July 3, 2010.  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 2, 2010.  The results of operations for the quarter and six months ended July 3, 2010, may not be indicative of the results that may be expected for the fiscal year 2010 ending January 1, 2011.

 

Recent Accounting Pronouncements

 

In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force (ASU 2009-13).  ASU 2009-13 addresses the accounting for sales arrangements that include multiple products or services by revising the criteria for when deliverables may be accounted for separately rather than as a combined unit.  Specifically, this guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is necessary to separately account for each product or service.  This hierarchy provides more options for establishing selling price than existing guidance.  ASU 2009-13 is required to be applied prospectively to new or materially modified revenue arrangements in fiscal periods beginning on or after June 15, 2010.  The Company adopted ASU 2009-13 during the second quarter ended July 3, 2010, and its application had no impact on the Company’s consolidated financial statements.

 

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 2,

 

July 3,

 

 

 

2010

 

2010

 

 

 

 

 

 

 

Raw materials

 

$

6,785

 

$

7,419

 

Work in progress

 

5,003

 

5,603

 

Finished goods

 

13,973

 

17,767

 

 

 

 

 

 

 

 

 

$

25,761

 

$

30,789

 

 

8



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(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 2,

 

July 3,

 

 

 

2010

 

2010

 

 

 

 

 

 

 

Prepaid insurance

 

$

1,165

 

$

602

 

Other prepaid expenses

 

2,263

 

2,305

 

Federal income taxes receivable

 

505

 

462

 

Miscellaneous receivables, net

 

2,775

 

2,595

 

Deferred commissions

 

2,738

 

2,741

 

Other current assets

 

945

 

686

 

 

 

 

 

 

 

 

 

$

10,391

 

$

9,391

 

 

NOTE D — PROPERTY AND EQUIPMENT

 

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

 

 

 

 

 

January 2,

 

July 3,

 

 

 

Years

 

2010

 

2010

 

 

 

 

 

 

 

 

 

Buildings

 

40

 

$

37,346

 

$

37,013

 

Laboratory and production equipment

 

5-7

 

16,242

 

16,641

 

Sound and video library

 

5

 

600

 

600

 

Computer equipment and software

 

3-5

 

27,419

 

27,544

 

Furniture and fixtures

 

3-5

 

4,561

 

4,601

 

Automobiles

 

3-5

 

256

 

259

 

Leasehold improvements

 

3-5

 

4,478

 

4,447

 

Land improvements

 

15

 

2,025

 

2,014

 

 

 

 

 

 

 

 

 

 

 

 

 

92,927

 

93,119

 

 

 

 

 

 

 

 

 

Less accumulated depreciation and amortization

 

 

 

43,714

 

46,489

 

 

 

 

 

 

 

 

 

 

 

 

 

49,213

 

46,630

 

 

 

 

 

 

 

 

 

Land

 

 

 

7,352

 

7,027

 

 

 

 

 

 

 

 

 

Deposits and projects in process

 

 

 

676

 

2,378

 

 

 

 

 

 

 

 

 

 

 

 

 

$

57,241

 

$

56,035

 

 

9



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE E — OTHER CURRENT LIABILITIES

 

Other current liabilities consist of the following:

 

 

 

January 2,

 

July 3,

 

 

 

2010

 

2010

 

 

 

 

 

 

 

Associate incentives

 

$

8,008

 

$

8,804

 

Accrued employee compensation

 

8,508

 

7,382

 

Income taxes

 

284

 

834

 

Sales taxes

 

3,683

 

3,208

 

Associate promotions

 

1,026

 

1,883

 

Deferred revenue

 

7,387

 

7,565

 

Provision for returns and allowances

 

1,115

 

1,092

 

All other

 

4,657

 

5,755

 

 

 

 

 

 

 

 

 

$

34,668

 

$

36,523

 

 

NOTE F — LONG TERM DEBT AND LINE OF CREDIT

 

The Company has a $40,000 line of credit.  At the year ended 2009, there was an outstanding balance of $7,000 associated with the line of credit, with a weighted-average interest rate of 1.23%.  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 adjusted EBITDA and a debt coverage ratio.

 

At July 3, 2010, there was no outstanding debt on this line of credit.  The Company will be required to pay any balance on this line of credit in full at the time of maturity in May 2011 unless the line of credit is replaced or terms are renegotiated.

 

NOTE G — EQUITY-BASED COMPENSATION

 

Equity-based compensation expense for the quarters ended July 4, 2009, and July 3, 2010, was $2,104 and $2,184, respectively.  The related tax benefit for these periods was $758 and $787, respectively.  Expense for the six months ended July 4, 2009, and July 3, 2010, was $4,618 and $4,140, respectively.  The related tax benefit for these periods was $1,647 and $1,514, respectively.

 

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 3, 2010.  This table does not include an estimate for future grants that may be issued.

 

Remainder of 2010

 

$

4,968

 

2011

 

8,572

 

2012

 

7,357

 

2013

 

4,696

 

2014

 

2,143

 

2015

 

596

 

 

 

$

28,332

 

 

The cost above is expected to be recognized over a weighted-average period of 2.5 years.

 

10



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE G — EQUITY-BASED COMPENSATION — CONTINUED

 

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

 

 

 

July 4,

 

July 3,

 

July 4,

 

July 3,

 

 

 

2009

 

2010

 

2009

 

2010

 

 

 

 

 

 

 

 

 

 

 

Expected volatility

 

37.3

%

54.8

%

37.3

%

54.9

%

Risk-free interest rate

 

1.6

%

2.0

%

1.7

%

2.0

%

Expected life

 

4.0 yrs.

 

4.2 yrs.

 

4.0 yrs.

 

4.2 yrs.

 

Expected dividend yield

 

 

 

 

 

Weighted-average grant price

 

$

24.99

 

$

35.47

 

$

26.04

 

$

34.46

 

 

A summary of the Company’s stock option and stock-settled stock appreciation right activity for the six months ended July 3, 2010 is as follows:

 

 

 

Shares

 

Weighted-
average grant
price

 

Weighted-average
remaining
contractual term

 

Aggregate
intrinsic
value*

 

Outstanding at January 2, 2010

 

4,267

 

$

30.26

 

3.8

 

$

17,173

 

Granted

 

652

 

34.46

 

 

 

 

 

Exercised

 

(17

)

18.49

 

 

 

 

 

Canceled or expired

 

(71

)

34.16

 

 

 

 

 

Outstanding at July 3, 2010

 

4,831

 

$

30.81

 

3.5

 

$

33,641

 

Exercisable at July 3, 2010

 

1,840

 

$

32.86

 

3.1

 

$

9,969

 

 


*                 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 six-month periods ended July 4, 2009, and July 3, 2010 was $8.16 and $15.50, respectively.

 

11



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE H — 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 under the treasury stock method include equity awards that are in-the-money but have not yet been exercised.

 

 

 

For the Quarter Ended

 

 

 

July 4,

 

July 3,

 

 

 

2009

 

2010

 

 

 

 

 

 

 

Net earnings available to common shareholders

 

$

8,791

 

$

10,770

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Common shares outstanding - entire period

 

 

 

 

 

Weighted-average common shares:

 

15,350

 

15,309

 

Issued during period

 

 

9

 

Canceled during period

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding during period

 

15,350

 

15,318

 

 

 

 

 

 

 

Earnings per common share from net earnings - basic

 

$

0.57

 

$

0.70

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Weighted-average shares outstanding during period - basic

 

15,350

 

15,318

 

Dilutive effect of equity awards

 

35

 

379

 

 

 

 

 

 

 

Weighted-average shares outstanding during period - diluted

 

15,385

 

15,697

 

 

 

 

 

 

 

Earnings per common share from net earnings - diluted

 

$

0.57

 

$

0.69

 

 

Equity awards for 1,584 and 1,256 shares of stock were not included in the computation of diluted EPS for the quarters ended July 4, 2009, and July 3, 2010, respectively, due to the fact that their exercise prices were greater than the average market price of the shares.

 

12



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE H — COMMON STOCK AND EARNINGS PER SHARE — CONTINUED

 

 

 

For the Six Months Ended

 

 

 

July 4,

 

July 3,

 

 

 

2009

 

2010

 

 

 

 

 

 

 

Net earnings available to common shareholders

 

$

15,437

 

$

20,411

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Common shares outstanding - entire period

 

 

 

 

 

Weighted-average common shares:

 

15,350

 

15,309

 

Issued during period

 

 

6

 

Canceled during period

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding during period

 

15,350

 

15,315

 

 

 

 

 

 

 

Earnings per common share from net earnings - basic

 

$

1.01

 

$

1.33

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Weighted-average shares outstanding during period - basic

 

15,350

 

15,315

 

Dilutive effect of equity awards

 

34

 

294

 

 

 

 

 

 

 

Weighted-average shares outstanding during period - diluted

 

15,384

 

15,609

 

 

 

 

 

 

 

Earnings per common share from net earnings - diluted

 

$

1.00

 

$

1.31

 

 

Equity awards for 2,935 and 1,833 shares of stock were not included in the computation of diluted EPS for the six-month periods ended July 4, 2009, and July 3, 2010, respectively, due to the fact that their exercise prices were greater than the average market price of the shares.

 

NOTE I — COMPREHENSIVE INCOME

 

Total comprehensive income consisted of the following:

 

 

 

Quarter Ended

 

Six Months Ended

 

 

 

July 4,

 

July 3,

 

July 4,

 

July 3,

 

 

 

2009

 

2010

 

2009

 

2010

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

8,791

 

$

10,770

 

$

15,437

 

$

20,411

 

Foreign currency translation adjustment

 

1,157

 

(762

)

911

 

(463

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

9,948

 

$

10,008

 

$

16,348

 

$

19,948

 

 

13



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE J — 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.  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

 

Six Months Ended

 

 

 

July 4,

 

July 3,

 

July 4,

 

July 3,

 

Product Line

 

2009

 

2010

 

2009

 

2010

 

USANA® Nutritionals

 

77

%

76

%

76

%

76

%

USANA Foods

 

11

%

13

%

12

%

13

%

Sensé – beautiful science®

 

9

%

8

%

9

%

8

%

 

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

 

14



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE J — 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

 

Six Months Ended

 

 

 

July 4,

 

July 3,

 

July 4,

 

July 3,

 

 

 

2009

 

2010

 

2009

 

2010

 

Net Sales to External Customers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

 

 

 

 

 

 

 

 

United States

 

$

39,908

 

$

37,992

 

$

76,397

 

$

75,598

 

Canada

 

16,454

 

18,373

 

31,390

 

35,933

 

Mexico

 

6,379

 

5,748

 

10,849

 

11,102

 

North America Total

 

62,741

 

62,113

 

118,636

 

122,633

 

 

 

 

 

 

 

 

 

 

 

Asia Pacific

 

 

 

 

 

 

 

 

 

Southeast Asia Pacific

 

24,518

 

23,968

 

44,456

 

48,501

 

East Asia

 

19,649

 

34,437

 

36,604

 

62,700

 

North Asia

 

5,185

 

5,493

 

9,696

 

11,264

 

Asia Pacific Total

 

49,352

 

63,898

 

90,756

 

122,465

 

 

 

 

 

 

 

 

 

 

 

Consolidated Total

 

$

112,093

 

$

126,011

 

$

209,392

 

$

245,098

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

 

 

 

 

 

 

 

 

United States

 

$

77,356

 

$

90,951

 

$

77,356

 

$

90,951

 

Canada

 

2,112

 

2,992

 

2,112

 

2,992

 

Mexico

 

3,522

 

3,905

 

3,522

 

3,905

 

North America Total

 

82,990

 

97,848

 

82,990

 

97,848

 

 

 

 

 

 

 

 

 

 

 

Asia Pacific

 

 

 

 

 

 

 

 

 

Southeast Asia Pacific

 

24,308

 

24,119

 

24,308

 

24,119

 

East Asia

 

8,448

 

15,846

 

8,448

 

15,846

 

North Asia

 

4,208

 

5,859

 

4,208

 

5,859

 

Asia Pacific Total

 

36,964

 

45,824

 

36,964

 

45,824

 

 

 

 

 

 

 

 

 

 

 

Consolidated Total

 

$

119,954

 

$

143,672

 

$

119,954

 

$

143,672

 

 

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

 

 

 

Quarter Ended

 

Six Months Ended

 

 

 

July 4,

 

July 3,

 

July 4,

 

July 3,

 

 

 

2009

 

2010

 

2009

 

2010

 

Net Sales:

 

 

 

 

 

 

 

 

 

United States

 

$

39,908

 

$

37,992

 

$

76,397

 

$

75,598

 

Hong Kong

 

14,392

 

28,858

 

26,293

 

50,867

 

Canada

 

16,454

 

18,373

 

31,390

 

35,933

 

 

15



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE J — 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 July 4, 2009, and July 3, 2010, long-lived assets in the United States totaled $47,749 and $45,903, respectively.  Additionally, long-lived assets in the Australia market as of July 4, 2009, and July 3, 2010 totaled $12,721 and $13,131, respectively.  There is no significant concentration of long-lived assets in any other market.

 

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 2, 2010, 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 2010 will end on January 1, 2011, and fiscal year 2009 ended on January 2, 2010.

 

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 July 3, 2010, we had approximately 210,000 active Associates and approximately 66,000 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

 

·                  East Asia — Hong Kong and Taiwan

 

·                  North Asia — Japan and South Korea

 

16



Table of Contents

 

Our primary product lines consist of USANA® Nutritionals, USANA Foods, and Sensé — beautiful science® (Sensé), which is our line of personal care products.  The USANA Nutritionals product line is further categorized into two separate classifications: Essentials and 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:

 

 

 

Six Months Ended

 

 

 

July 4,

 

July 3,

 

Product Line

 

2009

 

2010

 

USANA® Nutritionals

 

 

 

 

 

Essentials

 

33

%

30

%

Optimizers

 

43

%

46

%

USANA Foods

 

12

%

13

%

Sensé – beautiful science®

 

9

%

8

%

All Other

 

3

%

3

%

 

 

 

Six Months Ended

 

 

 

July 4,

 

July 3,

 

Key Product

 

2009

 

2010

 

 

 

 

 

 

 

USANA® Essentials

 

19

%

18

%

HealthPak 100 ™

 

12

%

10

%

Proflavanol®

 

11

%

11

%

 

As a developer and manufacturer of nutritional and personal care products, we utilize a direct selling model for the distribution of our products.  The success and growth of our business is primarily based on our ability to attract new Associates and retain existing Associates to sell and consume our products.  Additionally, it is important to attract and retain Preferred Customers as consumers of our products.  We believe that our ability to attract and retain Associates and Preferred Customers to sell and consume our products is influenced by a number of factors.  Some of these factors include: the growing desire for a secondary source of income and small business ownership, the general public’s heightened awareness and understanding of the connection between diet and long-term health, and the aging of the worldwide population, as older people generally tend to consume more nutritional supplements.

 

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 and the continued success and growth of our business.  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 our 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.  For example, we offer our Associates an on-line training system, called eApprentice, which was designed to make training in USANA’s network marketing system readily available, simple to use and easy to understand.  We believe that this system will assist new Associates by providing detailed training about the industry and a deeper understanding of USANA’s products and compensation plan.

 

In addition to Company-sponsored meetings and sales tools, we maintain a website exclusively for our Associates where they can stay 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 information tool.

 

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

 

17



Table of Contents

 

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.

 

Increases or decreases in product sales are typically the result of variations in product sales volumes relating to fluctuations in the number of active Associates and Preferred Customers purchasing our products.  Notably, sales to Associates account for the majority of our product sales, representing 89% of product sales during the six months ended July 3, 2010.  In general, the volume of recurring monthly product purchases by an Associate or a Preferred Customer, in their local currencies, remain 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.

 

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

 

 

 

July 4, 2009

 

July 3, 2010

 

Prior Year

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America:

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

65,000

 

32.5

%

57,000

 

27.1

%

(8,000

)

(12.3

)%

Canada

 

26,000

 

13.0

%

26,000

 

12.4

%

 

0.0

%

Mexico

 

15,000

 

7.5

%

12,000

 

5.7

%

(3,000

)

(20.0

)%

North America Total

 

106,000

 

53.0

%

95,000

 

45.2

%

(11,000

)

(10.4

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asia Pacific:

 

 

 

 

 

 

 

 

 

 

 

 

 

Southeast Asia Pacific

 

46,000

 

23.0

%

44,000

 

21.0

%

(2,000

)

(4.3

)%

East Asia

 

40,000

 

20.0

%

63,000

 

30.0

%

23,000

 

57.5

%

North Asia

 

8,000

 

4.0

%

8,000

 

3.8

%

 

0.0

%

Asia Pacific Total

 

94,000

 

47.0

%

115,000

 

54.8

%

21,000

 

22.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

200,000

 

100.0

%

210,000

 

100.0

%

10,000

 

5.0

%

 

Active Preferred Customers By Region

 

 

 

As of

 

As of

 

Change from

 

Percent

 

 

 

July 4, 2009

 

July 3, 2010

 

Prior Year

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America:

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

42,000

 

60.9

%

39,000

 

59.1

%

(3,000

)

(7.1

)%

Canada

 

15,000

 

21.7

%

15,000

 

22.7

%

 

0.0

%

Mexico

 

3,000

 

4.3

%

3,000

 

4.6

%

 

0.0

%

North America Total

 

60,000

 

86.9

%

57,000

 

86.4

%

(3,000

)

(5.0

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asia Pacific:

 

 

 

 

 

 

 

 

 

 

 

 

 

Southeast Asia Pacific

 

7,000

 

10.1

%

6,000

 

9.1

%

(1,000

)

(14.3

)%

East Asia

 

1,000

 

1.5

%

2,000

 

3.0

%

1,000

 

100.0

%

North Asia

 

1,000

 

1.5

%

1,000

 

1.5

%

 

0.0

%

Asia Pacific Total

 

9,000

 

13.1

%

9,000

 

13.6

%

 

0.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

69,000

 

100.0

%

66,000

 

100.0

%

(3,000

)

(4.3

)%

 

18



Table of Contents

 

Total Active Customers By Region

 

 

 

As of

 

As of

 

Change from

 

Percent

 

 

 

July 4, 2009

 

July 3, 2010

 

Prior Year

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America:

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

107,000

 

39.8

%

96,000

 

34.8

%

(11,000

)

(10.3

)%

Canada

 

41,000

 

15.2

%

41,000

 

14.8

%

 

0.0

%

Mexico

 

18,000

 

6.7

%

15,000

 

5.4

%

(3,000

)

(16.7

)%

North America Total

 

166,000

 

61.7

%

152,000

 

55.0

%

(14,000

)

(8.4

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asia Pacific:

 

 

 

 

 

 

 

 

 

 

 

 

 

Southeast Asia Pacific

 

53,000

 

19.7

%

50,000

 

18.1

%

(3,000

)

(5.7

)%

East Asia

 

41,000

 

15.2

%

65,000

 

23.6

%

24,000

 

58.5

%

North Asia

 

9,000

 

3.4

%

9,000

 

3.3

%

 

0.0

%

Asia Pacific Total

 

103,000

 

38.3

%

124,000

 

45.0

%

21,000