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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 1, 2011

 

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 x  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 October 31, 2011 was 14,959,597.

 

 

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USANA HEALTH SCIENCES, INC.

 

FORM 10-Q

 

For the Quarterly Period Ended October 1, 2011

 

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	8–20
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21–31
Item 3	Quantitative and Qualitative Disclosures About Market Risk		31
Item 4	Controls and Procedures		31
PART II.     OTHER INFORMATION
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		32
Item 6	Exhibits		33–34
Signatures			35

 

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PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

(in thousands)

 

(unaudited)

 

		As of			As of
		January 1,			October 1,
		2011			2011
ASSETS
Current assets
Cash and cash equivalents		$	24,222		$	36,317
Inventories		34,078			36,199
Prepaid expenses and other current assets		23,377			17,461
Total current assets		81,677			89,977
Property and equipment, net		57,568			59,756
Goodwill		17,267			17,596
Intangible assets, net		41,915			42,370
Deferred tax assets		12,383			13,486
Other assets		5,826			6,108
		$	216,636		$	229,293
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	6,445		$	9,096
Other current liabilities		52,584			50,193
Total current liabilities		59,029			59,289
Deferred tax liabilities		9,793			9,896
Other long-term liabilities		1,012			969
Stockholders’ equity
Common stock, $0.001 par value; Authorized — 50,000 shares, issued and outstanding 15,985 as of January 1, 2011 and 14,954 as of October 1, 2011		16			15
Additional paid-in capital		51,222			46,834
Retained earnings		90,207			106,170
Accumulated other comprehensive income		5,357			6,120
Total stockholders’ equity		146,802			159,139
		$	216,636		$	229,293

 

The accompanying notes are an integral part of these statements.

 

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF EARNINGS

 

(in thousands, except per share data)

 

(unaudited)

 

		Quarter Ended
		October 2,			October 1,
		2010			2011
Net sales		$	135,006		$	143,501
Cost of sales		25,157			25,202
Gross profit		109,849			118,299
Operating expenses:
Associate incentives		60,560			66,158
Selling, general and administrative		30,751			33,365
Total operating expenses		91,311			99,523
Earnings from operations		18,538			18,776
Other income (expense):
Interest income		36			42
Interest expense		(42		)	(1		)
Other, net		557			92
Other income, net		551			133
Earnings before income taxes		19,089			18,909
Income taxes		6,240			6,524
Net earnings		$	12,849		$	12,385
Earnings per common share
Basic		$	0.83		$	0.82
Diluted		$	0.79		$	0.81
Weighted average common shares outstanding
Basic		15,562			15,043
Diluted		16,247			15,205

 

The accompanying notes are an integral part of these statements.

 

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF EARNINGS

 

(in thousands, except per share data)

 

(unaudited)

 

		Nine Months Ended
		October 2,			October 1,
		2010			2011
Net sales		$	380,104		$	435,992
Cost of sales		70,912			77,072
Gross profit		309,192			358,920
Operating expenses:
Associate incentives		171,743			198,725
Selling, general and administrative		87,358			103,038
Total operating expenses		259,101			301,763
Earnings from operations		50,091			57,157
Other income (expense):
Interest income		70			146
Interest expense		(68		)	(9		)
Other, net		301			97
Other income, net		303			234
Earnings before income taxes		50,394			57,391
Income taxes		17,134			19,800
Net earnings		$	33,260		$	37,591
Earnings per common share
Basic		$	2.16		$	2.43
Diluted		$	2.11		$	2.39
Weighted average common shares outstanding
Basic		15,397			15,495
Diluted		15,763			15,712

 

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 2, 2010 and October 1, 2011

 

(in thousands)

 

(unaudited)

 

													Accumulated
							Additional						Other
		Common Stock					Paid-in			Retained			Comprehensive
		Shares		Value			Capital			Earnings			Income			Total
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		—		—			—			—			2,305			2,305
Comprehensive income																35,565
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		$	3,828		$	130,821
For the Nine Months Ended October 1, 2011
Balance at January 1, 2011		15,985		$	16		$	51,222		$	90,207		$	5,357		$	146,802
Comprehensive income
Net earnings		—		—			—			37,591			—			37,591
Foreign currency translation adjustment, net of tax benefit of $491		—		—			—			—			763			763
Comprehensive income																38,354
Equity-based compensation expense		—		—			7,739			—			—			7,739
Common stock repurchased and retired		(1,095	)	(1		)	(11,072		)	(21,628		)	—			(32,701		)
Common stock issued under equity award plans, including tax expense of $309		64		—			(270		)	—			—			(270		)
Tax impact of canceled vested equity awards		—		—			(785		)	—			—			(785		)
Balance at October 1, 2011		14,954		$	15		$	46,834		$	106,170		$	6,120		$	159,139

 

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 2,			October 1,
		2010			2011
Cash flows from operating activities
Net earnings		$	33,260		$	37,591
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization		5,641			6,361
Loss on sale of property and equipment		87			44
Equity-based compensation expense		7,107			7,739
Excess tax benefits from equity-based payment arrangements		(792		)	(48		)
Deferred income taxes		(1,221		)	(1,473		)
Inventory valuation		989			888
Changes in operating assets and liabilities:
Inventories		(5,040		)	(3,552		)
Prepaid expenses and other assets		30			6,063
Accounts payable		41			2,614
Other liabilities		6,137			(2,759		)
Total adjustments		12,979			15,877
Net cash provided by operating activities		46,239			53,468
Cash flows from investing activities
Acquisitions, net of cash acquired		$	(42,694	)	$	—
Proceeds from sale of property and equipment		32			1
Purchases of property and equipment		(3,676		)	(8,558		)
Net cash used in investing activities		(46,338		)	(8,557		)
Cash flows from financing activities
Proceeds from equity awards exercised		$	4,640		$	39
Excess tax benefits from equity-based payment arrangements		792			48
Repurchase of common stock		(8,630		)	(32,701		)
Borrowings on line of credit		23,350			—
Payments on line of credit		(11,350		)	—
Net cash used in financing activities		8,802			(32,614		)
Effect of exchange rate changes on cash and cash equivalents		567			(202		)
Net increase in cash and cash equivalents		9,270			12,095
Cash and cash equivalents, beginning of period		13,658			24,222
Cash and cash equivalents, end of period		$	22,928		$	36,317
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest		$	62		$	10
Income taxes		18,582			19,281
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)

 

Organization, Consolidation, and Basis of Presentation

 

USANA Health Sciences, Inc. 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 Consolidated Financial Statements include the accounts and operations of USANA Health Sciences, Inc. and its wholly-owned subsidiaries (collectively, the “Company” or “USANA”) in two geographic regions: North America and Asia Pacific, which is further divided into three sub-regions; Southeast Asia/Pacific, Greater China, and North Asia.  North America includes the United States, Canada, Mexico, and direct sales from the United States to the United Kingdom and the Netherlands.  Southeast Asia/Pacific includes Australia, New Zealand, Singapore, Malaysia, and the Philippines; Greater China includes Hong Kong, Taiwan and China; and North Asia includes Japan and South Korea.  All significant inter-company accounts and transactions have been eliminated in this consolidation.

 

The condensed balance sheet as of January 1, 2011, derived from audited financial statements, and the unaudited interim consolidated financial information of the Company 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 1, 2011 and results of operations for the quarters and nine months ended October 2, 2010 and October 1, 2011.  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 1, 2011.  The results of operations for the quarter and nine months ended October 1, 2011, may not be indicative of the results that may be expected for the fiscal year 2011 ending December 31, 2011.

 

Revisions

 

Revisions relating to deferred taxes and intangible assets have been made to the Company’s financial statements to reflect adjustments made to correct the presentation of deferred taxes on a gross rather than net basis, and to record the impact of currency translation on intangible assets acquired as part of the 2010 purchase of BabyCare Holdings Ltd.  These adjustments revise amounts reported for periods prior to January 2, 2011 in the financial statements and related notes, for deferred taxes, goodwill, intangible assets and accumulated other comprehensive income in the Consolidated Balance Sheet, and the foreign currency translation adjustment component of comprehensive income in the Consolidated Statement of Stockholders’ Equity and Comprehensive Income.  While the overall net deferred tax amount has not changed, certain deferred tax line items in the Consolidated Balance Sheet have been modified to reflect a gross presentation.  Additionally, goodwill and intangible assets have been increased, along with a corresponding increase in accumulated other comprehensive income, to capture the changes on these assets related to foreign currency translation. These revisions had no effect on our earnings from operations, net earnings, or earnings per share.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

Revisions — continued

 

The following tables illustrate the effects of the revision on the Company’s consolidated financial statements for only those line items that were affected:

 

Consolidated Balance Sheet Items

(in thousands)

 

		As of January 1, 2011
		As Previously Reported			Adjustment			As Revised
Prepaid expenses and other current assets, including current deferred tax assets		$	21,972		$	1,405		$	23,377
Total current assets		80,272			1,405			81,677
Goodwill		16,930			337			17,267
Intangible assets, net		40,616			1,299			41,915
Other assets, including long-term deferred tax assets		8,416			9,793			18,209
Total assets		203,802			12,834			216,636
Other current liabilities		51,179			1,405			52,584
Total current liabilities		57,624			1,405			59,029
Long-term deferred tax liabilities		—			9,793			9,793
Accumulated other comprehensive income *		3,721			1,636			5,357
Total stockholders’ equity *		145,166			1,636			146,802
Total liabilities and stockholders’ equity		203,802			12,834			216,636

 

* Change also reflected in the beginning balance within the Consolidated Statement of Stockholders’ Equity and Comprehensive Income.

 

Consolidated Statement of Stockholders’ Equity and Comprehensive Income Items

(in thousands)

 

		For the nine months ended October 2, 2010
		As Previously Reported			Adjustment			As Revised
Accumulated other comprehensive income (loss), foreign currency translation adjustment		$	1,431		$	874		$	2,305
Accumulated other comprehensive income (loss), total comprehensive income		34,691			874			35,565
Accumulated other comprehensive income (loss), balance at October 2, 2010		2,954			874			3,828
Total stockholders’ equity at October 2, 2010		129,947			874			130,821

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

Recent accounting pronouncements

 

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04).  ASU 2011-04 updates existing guidance in Topic 820 to establish common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS).  ASU 2011-04 is effective prospectively for fiscal years, and interim periods, beginning after December 15, 2011.  Early adoption is not permitted.  The Company does not expect adoption of this standard to have a material impact on its consolidated financial statements.

 

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (ASU 2011-05).  The objective of ASU 2011-05 is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income.  To increase the prominence of items reported in other comprehensive income and to facilitate the convergence of U.S. GAAP and IFRS, ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity.  Under the amendments in this update, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  Regardless of which option is chosen, items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements.  These amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  Also, the amendments do not change the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense or benefit related to the total of other comprehensive income items.  ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  Early adoption is permitted.  The Company does not expect adoption of this standard to have a material impact on its consolidated financial statements.

 

In September 2011, the FASB issued Accounting Standards Update No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment (ASU 2011-08).  ASU 2011-08 simplifies how entities test goodwill for impairment.  The amendments in this update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test.  An entity also has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test.  An entity may resume performing the qualitative assessment in any subsequent period.  Additionally, an entity no longer is permitted to carry forward its detailed calculation of a reporting unit’s fair value from a prior year as previously permitted by Topic 350.

 

ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued.  The Company has early adopted this standard, which did not have a material impact on its consolidated financial statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE A — 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 1, 2011, the fair value of term deposits in the consolidated balance sheet totaled $313, classified in cash and cash equivalents.

 

NOTE B — INVENTORIES

 

Inventories consist of the following:

 

		January 1,			October 1,
		2011			2011
Raw materials		$	9,372		$	10,155
Work in progress		5,791			6,844
Finished goods		18,915			19,200
		$	34,078		$	36,199

 

NOTE C — PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following:

 

		January 1,			October 1,
		2011			2011
Prepaid insurance		$	1,175		$	342
Other prepaid expenses		2,583			2,249
Federal income taxes receivable		3,108			1,985
Miscellaneous receivables, net		3,735			2,944
Deferred commissions		4,867			3,864
Term deposits		3,034			—
Deferred tax assets		3,116			4,194
Other current assets		1,759			1,883
		$	23,377		$	17,461

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(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 1,			October 1,
		Years		2011			2011
Buildings		40		$	38,732		$	39,343
Laboratory and production equipment		5-7		17,723			18,778
Sound and video library		5		600			600
Computer equipment and software		3-5		27,788			29,790
Furniture and fixtures		3-5		4,953			5,024
Automobiles		3-5		290			293
Leasehold improvements		3-5		5,404			5,344
Land improvements		15		2,051			2,040
				97,541			101,212
Less accumulated depreciation and amortization				48,298			52,794
				49,243			48,418
Land				8,107			7,780
Deposits and projects in process				218			3,558
				$	57,568		$	59,756

 

NOTE E — INTANGIBLE ASSETS

 

Goodwill and intangible assets that have indefinite useful lives are tested annually for impairment, or more frequently if impairment indicators are present.  Such indicators of impairment include, but are not limited to, changes in business climate, and operating or cash flow losses related to such assets.  Goodwill and indefinite lived intangible assets are not amortized.  Definite lived intangibles are amortized over their related useful lives.  No events have occurred subsequent to any of our acquisitions that have resulted in an impairment of the original goodwill or intangible asset amounts that were initially recorded from the transactions.

 

Goodwill is as follows:

 

								Currency
		January 1,			Goodwill			translation			Impairment			October 1,
		2011			acquired			adjustments			adjustments			2011
North America		$	6,390		$	—		$	—		$	—		$	6,390
Asia Pacific		10,877			—			329			—			11,206
		$	17,267		$	—		$	329		$	—		$	17,596

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE E — INTANGIBLE ASSETS — CONTINUED

 

Intangible assets are as follows:

 

		As of October 1, 2011									Weighted-average
		Gross carrying			Accumulated			Net carrying			amortization
		amount			amortization			amount			period (years)
Amortized intangible assets
Trade Name and Trademarks		$	4,147		$	(467	)	$	3,680		10
Customer Relationships		2,020			(758		)	1,262			3
		6,167			(1,225		)	4,942
Unamortized intangible assets
Product Formulas		9,145						9,145
Direct Sales License		28,283						28,283
		37,428						37,428
		$	43,595					$	42,370
Aggregate Amortization Expense:
For the nine months ended October 1, 2011		$	816
Estimated Amortization Expense:
Remainder of 2011		272
2012		1,088
2013		836
2014		415
2015		415
Thereafter		1,916
		$	4,942

 

NOTE F — OTHER CURRENT LIABILITIES

 

Other current liabilities consist of the following:

 

		January 1,			October 1,
		2011			2011
Associate incentives		$	11,379		$	11,914
Accrued employee compensation		14,395			11,703
Income Taxes		1,571			2,880
Sales taxes		4,671			4,090
Deferred tax liabilities		1,405			1,501
Associate promotions		1,491			1,046
Deferred revenue		11,772			10,162
Provision for returns and allowances		929			963
All other		4,971			5,934
		$	52,584		$	50,193

 

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