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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended October 2, 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)

 

 

 

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.

 

 

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 5, 2010 was 15,968,838.

 

 

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USANA HEALTH SCIENCES, INC.

 

FORM 10-Q

 

For the Quarterly Period Ended October 2, 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 — Nine Months Ended	5
	Consolidated Statements of Stockholders’ Equity and Comprehensive Income	6
	Consolidated Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	8–19
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19–30
Item 3	Quantitative and Qualitative Disclosures About Market Risk	30–31
Item 4	Controls and Procedures	31
	PART II. OTHER INFORMATION
Item 1	Legal Proceedings	32
Item 1A	Risk Factors	32–36
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 6	Exhibits	37-38
Signatures		39

 

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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,			October 2,
		2010 (1)			2010
					(unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	13,658		$	22,928
Inventories		25,761			32,605
Prepaid expenses and other current assets		10,391			15,155
Deferred income taxes		2,116			2,622
Total current assets		51,926			73,310
Property and equipment, net		57,241			58,327
Goodwill		5,690			16,930
Intangible assets, net		—			40,872
Other assets		8,581			12,086
		$	123,438		$	201,525
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	5,810		$	8,485
Line of credit - short term		—			19,000
Other current liabilities		34,668			43,017
Total current liabilities		40,478			70,502
Line of credit - long term		7,000			—
Other long-term liabilities		1,587			1,076
Stockholders’ equity
Common stock, $0.001 par value; Authorized — 50,000 shares, issued and outstanding 15,309 as of January 2, 2010 and 15,760 as of October 2, 2010		15			16
Additional paid-in capital		16,425			43,705
Retained earnings		56,410			83,272
Accumulated other comprehensive income		1,523			2,954
Total stockholders’ equity		74,373			129,947
		$	123,438		$	201,525

 

(1) Derived from audited financial statements.

 

The accompanying notes are an integral part of these statements.

 

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF EARNINGS

 

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

 

(unaudited)

 

		Quarter Ended
		October 3,			October 2,
		2009			2010
Net sales		$	110,764		$	135,006
Cost of sales		22,637			25,157
Gross profit		88,127			109,849
Operating expenses:
Associate incentives		50,799			60,560
Selling, general and administrative		25,414			30,751
Total operating expenses		76,213			91,311
Earnings from operations		11,914			18,538
Other income (expense):
Interest income		15			36
Interest expense		(105		)	(42		)
Other, net		200			557
Other income, net		110			551
Earnings before income taxes		12,024			19,089
Income taxes		4,112			6,240
Net earnings		7,912			12,849
Earnings per common share
Basic		$	0.52		$	0.83
Diluted		$	0.51		$	0.79
Weighted-average common shares outstanding
Basic		15,345			15,562
Diluted		15,547			16,247

 

The accompanying notes are an integral part of these statements.

 

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF EARNINGS

 

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

 

(unaudited)

 

		Nine Months Ended
		October 3,			October 2,
		2009			2010
Net sales		$	320,156		$	380,104
Cost of sales		66,236			70,912
Gross profit		253,920			309,192
Operating expenses:
Associate incentives		143,010			171,743
Selling, general and administrative		75,463			87,358
Total operating expenses		218,473			259,101
Earnings from operations		35,447			50,091
Other income (expense):
Interest income		45			70
Interest expense		(540		)	(68		)
Other, net		640			301
Other income, net		145			303
Earnings before income taxes		35,592			50,394
Income taxes		12,243			17,134
Net earnings		23,349			33,260
Earnings per common share
Basic		$	1.52		$	2.16
Diluted		$	1.51		$	2.11
Weighted-average common shares outstanding
Basic		15,349			15,397
Diluted		15,421			15,763

 

The accompanying notes are an integral part of these statements.

 

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

 

Nine Months Ended October 3, 2009 and October 2, 2010

 

(in thousands)

 

(unaudited)

 

													Accumulated
							Additional						Other
		Common Stock					Paid-in			Retained			Comprehensive
		Shares		Value			Capital			Earnings			Income (Loss)			Total
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
For the Nine Months Ended October 2, 2010
Balance at January 2, 2010		15,309		15			16,425			56,410			1,523			74,373
Comprehensive income
Net earnings										33,260						33,260
Foreign currency translation adjustment, net of tax benefit of $614													1,431			1,431
Comprehensive income																34,691
Common stock repurchased and retired		(199	)				(2,232		)	(6,398		)				(8,630		)
Common stock issued in connection with acquisition		400		1			17,715									17,716
Equity-based compensation expense							7,107									7,107
Common stock issued under equity award plans, including tax benefit of $50		250					4,690									4,690
Balance at October 2, 2010		15,760		$	16		$	43,705		$	83,272		$	2,954		$	129,947

 

The accompanying notes are an integral part of these statements.

 

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

		Nine Months Ended
		October 3,			October 2,
		2009			2010
Cash flows from operating activities
Net earnings		$	23,349		$	33,260
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization		5,312			5,641
Loss (gain) on sale of property and equipment		(155		)	87
Equity-based compensation expense		6,916			7,107
Excess tax benefit from equity-based payment arrangements		(11		)	(792		)
Deferred income taxes		(2,179		)	(1,221		)
Provision for inventory valuation		780			989
Changes in operating assets and liabilities:
Inventories		(1,364		)	(5,040		)
Prepaid expenses and other assets		3,776			30
Accounts payable		(1,311		)	41
Other liabilities		(14,585		)	6,137
Total adjustments		(2,821		)	12,979
Net cash provided by operating activities		20,528			46,239
Cash flows from investing activities
Acquisition, net of cash acquired		$	—		$	(42,694	)
Receipts on notes receivable		169			—
Increase in notes receivable		(143		)	—
Proceeds from sale of property and equipment		837			32
Purchases of property and equipment		(2,871		)	(3,676		)
Net cash used in investing activities		(2,008		)	(46,338		)
Cash flows from financing activities
Proceeds from equity awards exercised		$	76		$	4,640
Excess tax benefits from equity-based payment arrangements		11			792
Repurchase of common stock		(1,022		)	(8,630		)
Borrowings on line of credit		55,710			23,350
Payments on line of credit		(73,700		)	(11,350		)
Net cash (used in) provided by financing activities		(18,925		)	8,802
Effect of exchange rate changes on cash and cash equivalents		389			567
Net increase (decrease) in cash and cash equivalents		(16		)	9,270
Cash and cash equivalents, beginning of period		13,281			13,658
Cash and cash equivalents, end of period		$	13,265		$	22,928
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest		$	503		$	62
Income taxes		17,874			18,582
Non-cash financing activities
Common stock issued in connection with acquisitions		—			17,716

 

The accompanying notes are an integral part of these statements.

 

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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 October 2, 2010 and results of operations for the quarters and nine months ended October 3, 2009 and October 2, 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 nine months ended October 2, 2010, may not be indicative of the results that may be expected for the fiscal year 2010 ending January 1, 2011.

 

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, South Korea, and as of August 2010, the People’s Republic of China (“China” or “PRC”).

 

NOTE B — ACQUISITION

 

On August 16, 2010, the Company indirectly acquired 100% of BabyCare Ltd. (“BabyCare”), a limited liability company incorporated under the laws of the PRC, for the purchase price of $62,716, which consisted of $45,000 cash paid and $17,716 common stock issued (400,000 shares of USANA common stock at $44.29).

 

BabyCare is a direct selling company in China that is principally engaged in developing, manufacturing and selling nutritional products for the entire family, with an emphasis on infant nutrition, through both a distributor sales force and a chain of retail centers.  This acquisition was accomplished in the following simultaneous transactions. The Company acquired Pet Lane, Inc., a Delaware corporation (“Pet Lane”), which is the record owner of BabyCare in China. Simultaneously, the Company entered into and closed a share purchase agreement (the “Purchase Agreement”) by and among the Company and the following parties: Pet Lane; Yaolan Ltd., an exempted company organized under the laws of the Cayman Islands (“Yaolan”); and BabyCare Holdings, Ltd., an exempted company organized under the laws of the Cayman Islands (“BabyCare Holdings”). Pursuant to the Purchase Agreement, the Company, through its acquisition entity Pet Lane, acquired all of the issued and outstanding shares of BabyCare Holdings (the “Shares”) from Yaolan. BabyCare Holdings is the beneficial owner of BabyCare. As a result of its acquisition of Pet Lane and BabyCare Holdings, the Company, indirectly, has acquired both record and beneficial ownership of BabyCare.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE B — ACQUISITION — CONTINUED

 

The acquisition was accounted for as a business combination and as such, the results of operations for BabyCare have been included in the consolidated financial statements since the effective date of acquisition.  This acquisition contributed $3,358 in net sales and net earnings of $130 for the quarter ended October 2, 2010.  Unaudited supplemental pro forma information had the acquisition occurred at the beginning of each period is as follows:

 

		Quarter Ended						Nine Months Ended
		October 3,			October 2,			October 3,			October 2,
		2009			2010			2009			2010
Net sales		$	114,474		$	136,592		$	330,824		$	389,726
Net earnings		6,570			12,338			19,600			30,782

 

The assets acquired and liabilities assumed were recorded at estimated fair values as of the date of the acquisition.  The purchase price allocation for BabyCare is as follows:

 

		August 16,
		2010
Assets Acquired and Liabilities Assumed
Cash and cash equivalents		$	3,006
Inventories		1,702
Prepaid expenses and other current assets		4,663
Property and equipment		1,517
Goodwill		10,540
Intangible assets		41,000
Other assets		3,375
Accounts payable		(2,552		)
Other current liabilities		(535		)
		$	62,716

 

Goodwill of $10,540 has been recognized for the excess of consideration transferred over the acquisition-date fair value of net assets acquired.  In accordance with accounting standards governing the subsequent measurement of goodwill, goodwill will not be amortized, but will be tested at least annually for impairment. The fair value of intangible assets acquired in the amount of $41,000 was derived using various methodologies applied within the income approach.  For further information on intangible assets, see Note G to these consolidated financial statements.  For tax purposes, $52,323 of goodwill and other intangible assets will be deducted over a period of 15 years in computing the Company’s United States tax obligation.  The anticipated benefits associated with the acquired goodwill and other intangibles include facilitating our expansion and growth in China.  The most significant intangible asset is a direct selling license held by BabyCare from the Chinese government to engage in direct selling activities in the Municipality of Beijing.  This direct selling license allows BabyCare to engage non-employee distributors to sell their products away from fixed retail locations.

 

The costs related to the acquisition of BabyCare totaled $1,895 which included; advisory, legal, accounting, valuation, and other professional fees.  These costs were expensed as incurred in the periods in which services were received and recognized in the consolidated statements of earnings in Selling, General and Administrative expenses.

 

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE C — FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Company reports term deposits in accordance with established authoritative guidance, which requires a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

 

The three levels are defined as follows:

 

·                  Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.

 

·                  Level 2 inputs are from other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

 

·                  Level 3 inputs are unobservable and are used to measure fair value in situations where there is little, if any, market activity for the asset or liability at the measurement date.

 

The fair values of term deposits placed with banks are determined based on the pervasive interest rates in the market, which are also the interest rates as stated in the contracts with the banks. The Company classifies the valuation techniques that use the pervasive interest rates input as Level 2.  The carrying values of these term deposits approximate their fair values due to their short-term maturities.  As of October 2, 2010, the fair value of term deposits in the consolidated balance sheet totaled $3,588, consisting of $598 classified in cash and cash equivalents, and $2,990 in prepaid expenses and other current assets.

 

NOTE D — INVENTORIES

 

Inventories consist of the following:

 

		January 2,			October 2,
		2010			2010
Raw materials		$	6,785		$	8,551
Work in progress		5,003			5,027
Finished goods		13,973			19,027
		$	25,761		$	32,605

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE E — PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following:

 

		January 2,			October 2,
		2010			2010
Prepaid insurance		$	1,165		$	331
Other prepaid expenses		2,263			2,117
Federal income taxes receivable		505			1,736
Miscellaneous receivables, net		2,775			3,492
Deferred commissions		2,738			3,122
Other current assets		945			4,357
		$	10,391		$	15,155

 

NOTE F — PROPERTY AND EQUIPMENT

 

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

 

				January 2,			October 2,
		Years		2010			2010
Buildings		40		$	37,346		$	38,226
Laboratory and production equipment		5-7		16,242			17,610
Sound and video library		5		600			600
Computer equipment and software		3-5		27,419			29,057
Furniture and fixtures		3-5		4,561			4,820
Automobiles		3-5		256			289
Leasehold improvements		3-5		4,478			5,171
Land improvements		15		2,025			2,041
				92,927			97,814
Less accumulated depreciation and amortization				43,714			47,916
				49,213			49,898
Land				7,352			7,811
Deposits and projects in process				676			618
				$	57,241		$	58,327

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE G — INTANGIBLE ASSETS

 

Intangible assests consist of the following:

 

		As of October 2, 2010									Weighted-average
		Gross Carrying			Accumulated			Net Carrying			amortization
		Amount			Amortization			Amount			period (years)
Amortized intangible assets
Trade Name & Trademarks		$	3,900		$	(49	)	$	3,851		10
Customer Relationships		1,900			(79		)	1,821			3
		5,800			(128		)	5,672
Unamortized intangible assets
Product Formulas		8,600						8,600
Direct Sales License		26,600						26,600
		35,200						35,200
		$	41,000					$	40,872
The Aggregate Amortization Expense:
For quarter ended October 2, 2010		$	128
Estimated Amortization Expense:
Remainder of 2010		$	266
2011		1,023
2012		1,023
2013		780
2014		390
Thereafter		2,190
		$	5,672

 

NOTE H — LINE OF CREDIT

 

The Company has a $40,000 line of credit.  At October 2, 2010, there was an outstanding balance of $19,000 associated with the line of credit, with a weighted-average interest rate of 1.26%.  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.  The Company will be required to pay the 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.

 

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