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 April 2, 2016

 

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: 001-35024

 

 

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.

 

Large accelerated filer x	Accelerated filer o
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 May 6, 2016 was 11,971,998.

 

 

Table of Contents

 

USANA HEALTH SCIENCES, INC.

 

FORM 10-Q

 

For the Quarterly Period Ended April 2, 2016

 

INDEX

 

			Page
	PART I. FINANCIAL INFORMATION
Item 1	Financial Statements (unaudited)		3
	Condensed Consolidated Balance Sheets		3
	Condensed Consolidated Statements of Comprehensive Income		4
	Condensed Consolidated Statements of Stockholders’ Equity		5
	Condensed Consolidated Statements of Cash Flows		6
	Notes to Condensed Consolidated Financial Statements		7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3	Quantitative and Qualitative Disclosures About Market Risk		24
Item 4	Controls and Procedures		24
	PART II. OTHER INFORMATION
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		25
Item 6	Exhibits		26
Signatures			28

 

2

Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(in thousands, except par value)

(unaudited)

 

		As of			As of
		January 2,			April 2,
		2016			2016
ASSETS
Current assets
Cash and cash equivalents		$	143,210		$	150,501
Inventories		66,119			67,554
Prepaid expenses and other current assets		34,935			25,349
Total current assets		244,264			243,404
Property and equipment, net		87,982			94,606
Goodwill		17,432			17,460
Intangible assets, net		38,269			37,984
Deferred tax assets		9,844			13,812
Other assets		25,446			24,461
		$	423,237		$	431,727
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	10,043		$	7,992
Other current liabilities		121,369			104,758
Total current liabilities		131,412			112,750
Line of credit - long term		—			66,000
Deferred tax liabilities		9,822			6,874
Other long-term liabilities		1,151			1,189
Stockholders’ equity
Common stock, $0.001 par value; Authorized — 50,000 shares, issued and outstanding 12,488 as of January 2, 2016 and 11,956 as of April 2, 2016		13			12
Additional paid-in capital		69,740			59,584
Retained earnings		214,875			187,663
Accumulated other comprehensive income		(3,776		)	(2,345		)
Total stockholders’ equity		280,852			244,914
		$	423,237		$	431,727

 

The accompanying notes are an integral part of these statements.

 

3

Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(in thousands, except per share data)

(unaudited)

 

		Quarter Ended
		April 4,			April 2,
		2015			2016
Net sales		$	219,378		$	240,449
Cost of sales		38,364			42,920
Gross profit		181,014			197,529
Operating expenses:
Associate incentives		101,353			107,394
Selling, general and administrative		49,875			56,631
Total operating expenses		151,228			164,025
Earnings from operations		29,786			33,504
Other income (expense):
Interest income		154			438
Interest expense		—			(202		)
Other, net		14			(732		)
Other income (expense), net		168			(496		)
Earnings before income taxes		29,954			33,008
Income taxes		10,274			10,709
Net earnings		$	19,680		$	22,299
Earnings per common share
Basic		$	1.56		$	1.84
Diluted		$	1.50		$	1.77
Weighted average common shares outstanding
Basic		12,648			12,102
Diluted		13,085			12,591
Comprehensive income:
Net earnings		$	19,680		$	22,299
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment		563			2,131
Tax benefit (expense) related to foreign currency translation adjustment		(220		)	(700		)
Other comprehensive income (loss), net of tax		343			1,431
Comprehensive income		$	20,023		$	23,730

 

The accompanying notes are an integral part of these statements.

 

4

Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

 

Three Months Ended April 2, 2016

 

(in thousands)

(unaudited)

 

													Accumulated
							Additional						Other
		Common Stock					Paid-in			Retained			Comprehensive
		Shares		Value			Capital			Earnings			Income (Loss)			Total
Balance at January 2, 2016		12,488		$	13		$	69,740		$	214,875		$	(3,776	)	$	280,852
Cumulative-effect of accounting change							934			(601		)				333
Balance at January 2, 2016, as adjusted		12,488		$	13		$	70,674		$	214,274		$	(3,776	)	$	281,185
Net earnings										22,299						22,299
Other comprehensive income (loss), net of tax													1,431			1,431
Equity-based compensation expense							4,609									4,609
Common stock repurchased and retired		(553	)	(1		)	(15,699		)	(48,910		)				(64,610		)
Common stock issued under equity award plans		21														—
Balance at April 2, 2016		11,956		$	12		$	59,584		$	187,663		$	(2,345	)	$	244,914

 

The accompanying notes are an integral part of these statements.

 

5

Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in thousands)

(unaudited)

 

		Three Months Ended
		April 4,			April 2,
		2015			2016
Cash flows from operating activities
Net earnings		$	19,680		$	22,299
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities
Depreciation and amortization		2,337			3,520
(Gain) loss on sale of property and equipment		25			39
Equity-based compensation expense		2,210			4,609
Excess tax benefits from equity-based payment arrangements		(910		)	—
Deferred income taxes		(577		)	(1,932		)
Changes in operating assets and liabilities:
Inventories		(5,753		)	(392		)
Prepaid expenses and other assets		890			1,033
Income tax payable related to tax benefit from equity award activity		910			—
Accounts payable		789			(2,081		)
Other liabilities		3,960			(13,624		)
Net cash provided by (used in) operating activities		23,561			13,471
Cash flows from investing activities
Additions to notes receivable		(1,547		)	(3		)
Receipts on notes receivable		—			49
Purchases of property and equipment		(5,842		)	(8,971		)
Net cash provided by (used in) investing activities		(7,389		)	(8,925		)
Cash flows from financing activities
Excess tax benefits from equity-based payment arrangements		910			—
Repurchase of common stock		—			(64,610		)
Borrowings on line of credit		—			71,000
Payments on line of credit		—			(5,000		)
Deferred debt issuance costs		—			(250		)
Net cash provided by (used in) financing activities		910			1,140
Effect of exchange rate changes on cash and cash equivalents		361			1,605
Net increase (decrease) in cash and cash equivalents		17,443			7,291
Cash and cash equivalents, beginning of period		111,126			143,210
Cash and cash equivalents, end of period		$	128,569		$	150,501
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest		$	—		$	147
Income taxes		2,996			8,587
Non-cash investing activities:
Credits on notes receivable		55			505
Accrued purchases of property and equipment		910			2,655

 

The accompanying notes are an integral part of these statements.

 

6

Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

 

NOTE A — 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 global 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: Asia Pacific, and Americas and Europe.  Asia Pacific is further divided into three sub-regions: Greater China, Southeast Asia Pacific, and North Asia. Greater China includes Hong Kong, Taiwan and China; Southeast Asia Pacific includes Australia, New Zealand, Singapore, Malaysia, the Philippines, Thailand, and Indonesia; North Asia includes Japan, and South Korea.  Americas and Europe includes the United States, Canada, Mexico, Colombia, the United Kingdom, France, Belgium, and the Netherlands.  All intercompany accounts and transactions have been eliminated in this consolidation.

 

The condensed consolidated balance sheet as of January 2, 2016, derived from audited consolidated 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 (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of any contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.  In the opinion of management, the accompanying interim consolidated financial information contains all adjustments, consisting only of normal recurring adjustments that are necessary to state fairly the Company’s financial position as of April 2, 2016 and results of operations for the three months ended April 4, 2015 and April 2, 2016.

 

The interim condensed consolidated 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, 2016.  The results of operations for the three months ended April 2, 2016, may not be indicative of the results that may be expected for the fiscal year 2016 ending December 31, 2016.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standard Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 includes a five-step process by which entities will recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which an entity expects to be entitled in exchange for those goods or services.  The standard also will require enhanced disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB announced a decision to defer the effective date of this ASU. ASU 2014-09 is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted for annual and interim reporting periods beginning after December 15, 2016.  The Company is currently evaluating the impact ASU 2014-09 will have on its consolidated financial statements.

 

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.”  The ASU addresses concerns about the current accounting for consolidation of certain legal entities.  The ASU also provides guidance for identifying the primary beneficiary that varies depending on whether there is a single decision maker or shared power depending on whether the related parties are under common control with the reporting entity.  ASU 2015-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2015, and requires either a retrospective or a modified retrospective approach to adoption.  The Company adopted ASU 2015-02 effective for the quarter ended April 2, 2016, however, there was no material impact to the Company’s consolidated financial statements.

 

7

Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

 

NOTE A — ORGANIZATION, CONSOLIDATION, AND BASIS OF PRESENTATION - CONTINUED

 

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.”  The ASU requires entities with a classified balance sheet to present all deferred tax assets and liabilities as noncurrent.  The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2016.  Early adoption is permitted at the beginning of an interim or annual period and requires either a prospective or retrospective approach to adoption.  The Company elected to early adopt ASU 2015-17 during the quarter ended April 2, 2016.  As a result of the adoption, current deferred tax assets and current deferred tax liabilities were reclassified to noncurrent deferred taxes.  The adoption was on a prospective basis and therefore had no impact on prior periods.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).”  ASU 2016-02 is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  Additionally, the ASU will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements.  The update requires lessees to apply a modified retrospective approach for recognition and disclosure, beginning with the earliest period presented.  The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted.  The Company is currently evaluating the impact ASU 2016-02 will have on its consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.”  ASU 2016-09 was issued as part of the FASB’s simplification initiative aimed at reducing costs and complexity while maintaining or improving the usefulness of financial information.  This update involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, forfeitures, statutory tax withholding requirements, and classification in the statement of cash flows.  This ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any interim or annual period.  If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period, and the entity must adopt all of the amendments in the same period.  The Company elected to early adopt ASU 2016-09 during the quarter ended April 2, 2016.  Following is a summary of the changes resulting from adopting this ASU:

 

·                  Forfeitures — Estimating forfeitures as part of the compensation cost accrual is no longer required.  An entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur.  The Company has elected to account for forfeitures when they occur.  The cumulative-effect of this change in election resulted in a decrease to retained earnings and an increase to additional paid-in capital of $934 as of the beginning of 2016. The tax effect of this adjustment increased the beginning balances for deferred tax assets and retained earnings by $333.

 

·                  Income Tax Accounting — Prior to adopting this ASU, all excess tax benefits resulting from exercise or settlement of share-based payment transactions were recognized in Additional paid-in capital (“APIC”) and accumulated in an APIC pool.  Any tax deficiencies were either offset against the APIC pool, or were recognized in the income statement if no APIC pool was available.  Under the new amendments, the APIC pool has been eliminated and all excess tax benefits and tax deficiencies are recognized as an income tax benefit or expense in the income statement prospectively.  Accordingly, prior periods have not been adjusted.  Additionally, the tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur.  An entity should also recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period.

 

8

Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

 

NOTE A — ORGANIZATION, CONSOLIDATION, AND BASIS OF PRESENTATION - CONTINUED

 

·                  Statement of Cash Flow Presentation — Historically, excess tax benefits on the statement of cash flows have been presented as a cash inflow from financing activities and a cash outflow from operating activities.  The ASU simplifies the presentation of excess tax benefits on the statements of cash flow requiring that excess tax benefits be classified along with other income tax cash flows as an operating activity.  As part of the transition, entities may elect the cash flow presentation changes using either a prospective or retrospective application.  The Company has elected to present the changes on a prospective basis, and as such, the excess tax benefits from equity-based payment arrangements in the Condensed Consolidated Statements of Cash Flows have not been adjusted for prior periods to conform with the current presentation.  The excess tax benefits from equity-based payment arrangements during the quarter ended April 2, 2016 totaled $574 and are reflected in net earnings of the operating activities section of the Condensed Consolidated Statements of Cash Flows.

 

NOTE B — FAIR VALUE MEASURES

 

The Company measures at fair value certain of its financial and non-financial assets and liabilities by using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are:

 

·                  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.

 

As of the dates indicated, the following financial assets and liabilities were measured at fair value on a recurring basis using the type of inputs shown:

 

					Fair Value Measurements Using
					Inputs
		January 2, 2016			Level 1			Level 2			Level 3
Money market funds included in cash equivalents		$	14,460		$	14,460		$	—		$	—
Foreign currency contracts included in Prepaid expenses and other current assets		33			—			33			—
		$	14,493		$	14,460		$	33		$	—

 

					Fair Value Measurements Using
					Inputs
		April 2, 2016			Level 1			Level 2			Level 3
Money market funds included in cash equivalents		$	61,406		$	61,406		$	—		$	—
Foreign currency contracts included in other current liabilities		(1,132		)	—			(1,132		)	—
		$	60,274		$	61,406		$	(1,132	)	$	—

 

9

Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

 

NOTE B — FAIR VALUE MEASURES - CONTINUED

 

There were no transfers of financial assets or liabilities between Level 1 and Level 2 inputs for the periods indicated.

 

The majority of the Company’s non-financial assets, which include goodwill, intangible assets, and property and equipment, are not required to be carried at fair value on a recurring basis. However, if certain triggering events occur (or tested at least annually for goodwill and indefinite-lived intangibles) such that a non-financial asset is required to be evaluated for impairment, an impairment charge is recorded to reduce the carrying value to the fair value, if the carrying value exceeds the fair value. At January 2, 2016 and April 2, 2016, there were no non-financial assets measured at fair value on a non-recurring basis.

 

The Company’s financial instruments include cash equivalents, accounts receivable, restricted cash, notes receivable, and accounts payable. The recorded values of cash equivalents, accounts receivable, restricted cash, and accounts payable approximate their fair values, based on their short-term nature. The carrying value of the notes receivable approximate fair value because the variable interest rates in the notes reflect current market rates.

 

NOTE C — INVENTORIES

 

Inventories consist of the following:

 

		January 2,			April 2,
		2016			2016
Raw materials		$	22,529		$	23,168
Work in progress		8,701			9,172
Finished goods		34,889			35,214
		$	66,119		$	67,554

 

NOTE D — OTHER ASSETS

 

Other assets consists primarily of a secured loan to a third-party supplier of the Company’s nutrition bars and land use rights related to a production facility under development in China.

 

The Company has extended non-revolving credit to its supplier of nutrition bars to allow them to acquire equipment that is necessary to manufacture the USANA nutrition bars.  This relationship provides improved supply chain stability for USANA and creates a mutually beneficial relationship between the parties.  Notes receivable are valued at their unpaid principal balance plus any accrued but unpaid interest, which approximates fair value.  Interest accrues at an annual interest rate of LIBOR plus 400 basis points. The note has a maturity date of February 1, 2024 and will be repaid by a combination of cash payments and credits for the manufacture of USANA’s nutrition bars.  There is no prepayment penalty.  Notes receivable from this supplier as of January 2, 2016, and April 2, 2016 were $8,339 and $7,939, respectively.

 

This third-party supplier is considered to be a variable interest entity; however, the Company is not the primary beneficiary due to the inability to direct the activities that most significantly affect the third-party supplier’s economic performance. Additionally, the Company does not absorb a majority of the third-party supplier’s expected losses or returns. Consequentially, the financial information of the third-party supplier is not consolidated. The maximum exposure to loss as a result of the Company’s involvement with the third-party supplier is limited to the carrying value of the note receivable due from the third-party supplier.

 

The Company is building a state-of-the-art manufacturing and production facility in China, which is expected to become operational in the first half of 2016.  As part of this project, land use rights totaling $7,053, and $7,071 as of January 2, 2016 and April 2, 2016, respectively, have been purchased and are being amortized over 50 years.

 

10

Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

 

NOTE  E — FOREIGN CURRENCY CONTRACTS

 

Derivative financial instruments are recognized as either assets or liabilities in the consolidated balance sheet at their respective fair values. As a matter of policy, the Company uses derivatives for risk management purposes. The Company does not use derivatives for speculative purposes. The Company uses foreign currency contracts to hedge the effects of fluctuations in exchange rates on intercompany transactions. Substantially all of these instruments have terms of 90 days or less. The Company does not designate any of its derivatives as qualifying hedges for accounting purposes. Changes in the fair value of derivative instruments are recognized currently through earnings.

 

The notional amount of the foreign currency contracts as of January 2, 2016 and April 2, 2016 was $7,488 and $68,196, respectively.  The fair values of derivative instruments in the condensed consolidated balance sheets are as follows:

 

				Asset /(Liability) Fair Value
		Balance Sheet		January 2,			April 2,
		Classification		2016			2016
Foreign currency contracts		Prepaid expenses and other current assets		$	33		$	—
		Other current liabilities		—			(1,132		)
				$	33		$	(1,132	)

 

The net gain (loss) recognized in the condensed consolidated statements of comprehensive income on derivative instruments not designated as hedges are as follows for the periods indicated: periods indicated:

 

				Quarter Ended
		Income Statement		April 4,			April 2,
		Classification		2015			2016
Foreign currency contracts		Other, net		$	64		$	(1,348	)

 

NOTE F — LINE OF CREDIT

 

On February 19, 2016, the Company entered into an Amended and Restated Credit Agreement (“Credit Agreement”), with Bank of America, which extends the term of the Credit Agreement to April 27, 2021.  The Credit Agreement also increases the amount the Company may borrow under the credit facility from $75,000 to up to $125,000, through October 31, 2016.  On November 1, 2016, the amount the Company may borrow will revert to $75,000 for the remainder of the agreement.  The only other modification to the Credit Agreement was an increase to the Company’s consolidated rolling four-quarter adjusted EBITDA covenant from $60,000 to equal to or greater than $100,000.

 

Interest is computed based on 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, set forth in a separate pledge agreement with the bank. Part of the credit agreement is that any existing bank guarantees are considered a reduction of the overall availability of credit and part of the covenant calculation. This resulted in a $4,153, and $4,130 reduction in the available borrowing limit as of January 2, 2016 and April 2, 2016, respectively, due to existing normal course of business guarantees in certain markets.

 

11

Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

 

NOTE F — LINE OF CREDIT - CONTINUED

 

There was no outstanding debt on this line of credit at January 2, 2016.  At April 2, 2016, there was an outstanding balance of $66,000.  The Company will be required to pay any balance on this line of credit in full at the time of maturity in April 2021 unless the line of credit is replaced or terms are renegotiated.  Subsequent to the quarter ended April 2, 2016, the Company considered its liquidity needs and made a decision to repay the current outstanding balance on the line of credit within the next twelve months.

 

NOTE G — CONTINGENCIES

 

The Company is involved in various lawsuits, claims and other legal matters from time to time that arise in the ordinary course of conducting business, including matters involving our products, intellectual property, supplier relationships, distributors, competitor relationships, employees and other matters. The Company records a liability when a particular contingency is probable and estimable. The Company has not accrued for any contingency at April 2, 2016 as the Company does not consider any contingency to be probable nor estimable. The Company faces contingencies that are reasonably possible to occur; however, they cannot currently be estimated. While complete assurance cannot be given to the outcome of these proceedings, management does not currently believe that any of these matters, individually or in the aggregate, will have a material adverse effect on the Company’s financial condition, liquidity or results of operations.

 

In August 2014, a purported shareholder derivative lawsuit was filed in the Third Judicial District Court of Salt Lake County, State of Utah (James Robert Rawcliffe v. Robert Anciaux, et al.,) against certain of the Company’s directors and officers. The derivative complaint, which also names USANA as a nominal defendant but is asserted on USANA’s behalf, contains claims of breach of fiduciary duty, waste of corporate assets and unjust enrichment against the defendant directors and officers in connection with certain equity awards granted by the Compensation Committee of the Company’s Board of Directors in February 2014. In October 2014, the Company filed a motion to dismiss the complaint and, in March 2015, the court granted that motion and dismissed the complaint without prejudice. In May 2015, the plaintiffs filed an appeal with the Utah Supreme Court. The Supreme Court remanded the Company’s case to the Utah Court of Appeals, which recently issued a briefing schedule for the parties.  In March, 2016, the plaintiffs filed their opening brief.  The Company will respond in May 2016. The Company believes that the claims in the complaint are without merit and will continue to vigorously defend this suit. The Company continues to believe, based on information currently available, that the final outcome of this suit will not have a material adverse effect on the Company’s business, results of operations or consolidated financial position.

 

12

Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED 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 based on the time they were outstanding in any period. 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.

 

The following is a reconciliation of the numerator and denominator used to calculate basic earnings per share and diluted earnings per share for the periods indicated:

 

		Quarter Ended
		April 4,			April 2,
		2015			2016
Net earnings available to common shareholders		$	19,680		$	22,299
Weighted average common shares outstanding - basic		12,648			12,102
Dilutive effect of in-the-money equity awards		437			489
Weighted average common shares outstanding - diluted		13,085			12,591
Earnings per common share from net earnings - basic		$	1.56		$	1.84
Earnings per common share from net earnings - diluted		$	1.50		$	1.77

 

Equity awards for the following shares were not included in the computation of diluted EPS due to the fact that

their effect would be anti-dilutive:

 

		Quarter Ended
		April 4,			April 2,
		2015			2016
		125			1,095

 

During the three months ended April 2, 2016, the Company repurchased and retired 553 shares, for $64,610, under the Company’s share repurchase plan.  The excess of the repurchase price over par value is allocated between additional paid-in capital and retained earnings on a pro-rata basis.  The purchase of shares under this plan reduces the number of shares outstanding in the above calculations.

 

As of April 2, 2016, the remaining approved repurchase amount under the stock repurchase plan was $35,390.  There currently is no expiration date on the remaining approved repurchase amount and no requirement for future share repurchases.

 

13

Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

 

NOTE I — SEGMENT INFORMATION

 

USANA operates 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 aggregates its operating segments into one reportable segment as management believes that the Company’s segments exhibit similar long-term financial performance and have similar economic characteristics.  Performance for a region or market is evaluated based on sales.  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
		April 4,		April 2,
		2015		2016
USANA® Nutritionals		81	%	82	%
USANA Foods		11	%	10	%
Sensé — beautiful science®		7	%	7	%

 

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

 

·                  Asia Pacific —

 

·                  Greater China — Hong Kong, Taiwan and China(1)

 

·                  Southeast Asia Pacific — Australia, New Zealand, Singapore, Malaysia, the Philippines, Thailand, and Indonesia(2)

 

·                  North Asia — Japan and South Korea

 

·                 Americas and Europe — United States, Canada, Mexico, Colombia, the United Kingdom, France, Belgium, and the Netherlands.

 

(1)    The Company’s business in China is that of BabyCare, its wholly-owned subsidiary.

(2)    The Company commenced operations in Indonesia in the fourth quarter of 2015.

 

14

Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

 

NOTE I — SEGMENT INFORMATION - CONTINUED

 

Selected Financial Information

 

Financial information by geographic region is presented for the periods indicated below:

 

		Quarter Ended
		April 4,			April 2,
		2015			2016
Net Sales to External Customers
Asia Pacific
Greater China		$	101,286		$	116,998
Southeast Asia Pacific		45,339			48,861
North Asia		9,229			10,560
Asia Pacific Total		155,854			176,419
Americas and Europe		63,524			64,030
Consolidated Total		$	219,378		$	240,449

 

The following table provides further information on markets representing ten percent or more of consolidated net sales and long-lived assets, respectively:

 

		Quarter Ended
		April 4,			April 2,
		2015			2016
Net sales:
China		$	83,810		$	100,499
United States		$	36,302		$	34,865

 

		As of
		January 2,			April 2,
		2016			2016
Long-lived Assets:
China		$	92,835		$	95,602
United States		$	57,797		$	59,433

 

15

Table of Contents

 

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 is presented in six

 

sections:

 

·                  Overview

 

·                  Customers

 

·                  Current Focus and Recent Developments

 

·                  Results of Operations

 

·                  Liquidity and Capital Resources

 

·                  Forward-Looking Statements and Certain Risks

 

This discussion and analysis should be read in conjunction with the Unaudited Condensed 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, 2016, 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.

 

Overview

 

We develop and manufacture high-quality, science-based nutritional and personal care products that are distributed internationally through a network marketing system, which is a form of direct selling.  We have chosen this distribution method as we believe it is more conducive to meeting our vision as a company, which is improving the overall health and nutrition of individuals and families around the world.  Our customer base comprises two types of customers: “Associates” and “Preferred Customers.”  Associates share in our company vision by acting as independent distributors of our products in addition to purchasing 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 April 2, 2016, we had approximately 437,000 active Associates and approximately 94,000 active Preferred Customers worldwide.  For purposes of this report, we only count as active customers those Associates and Preferred Customers who have purchased from us at any time during the most recent three-month period.

 

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

 

·                  Asia Pacific

 

·                  Greater China — Hong Kong, Taiwan, and China(1)

 

·                  Southeast Asia Pacific — Australia, New Zealand, Singapore, Malaysia, the Philippines, Thailand, and Indonesia(2)

 

·                  North Asia — Japan and South Korea

 

·                  Americas and Europe — United States, Canada, Mexico, Colombia, the United Kingdom, France, Belgium, and the Netherlands

 

(1)         Our business in China is that of BabyCare, our wholly-owned subsidiary.

(2)         We commenced operations in Indonesia in the fourth quarter of 2015.

 

Our primary product lines consist of USANAâ Nutritionals, USANA Foods, and Sensé — beautiful scienceâ (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 as indicated:

 

16

Table of Contents

 

		Three months ended
		April 4, 2015		April 2, 2016
Product Line
USANA® Nutritionals
Essentials		23	%	20	%
Optimizers		58	%	62	%
USANA Foods		11	%	10	%
Sensé — beautiful science®		7	%	7	%
All Other		1	%	1	%
Key Product
USANA® Essentials		15	%	13	%
Proflavanol®		13	%	13	%
BiOmega-3™		12	%	13	%

 

We believe that our ability to attract and retain Associates and Preferred Customers to sell and consume our products is positively influenced by a number of factors, some of which include: the general public’s heightened awareness and understanding of the connection between diet and long-term health, and the growing desire for a secondary source of income and small business ownership.

 

We believe that our high-quality products and our financially rewarding Associate Compensation Plan are the key components to attracting and retaining Associates.  We periodically make changes to our Compensation Plan in an effort to ensure that our plan is among the most rewarding in the industry, to encourage behavior that we believe leads to a successful business for our Associates, and to ensure that our plan provides us with leverage to grow sales and earnings.

 

To further 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 our Associate leaders and members of our management team.  We also provide low cost sales tools, including online sales, business management, and training tools, which we believe are an integral part of building and maintaining a successful home-based business for our Associates.  Although we provide training and sales tools, we ultimately rely on our Associates to sell our products, attract new customers to purchase our products, and educate and train new Associates.

 

Because we have operations in multiple markets, with sales and expenses being generated and incurred in multiple currencies, our reported U.S. dollar sales and earnings can be significantly affected by fluctuations in currency exchange rates.  In general, our operating results are affected positively by a weakening of the U.S. dollar and negatively by a strengthening of the U.S. dollar.  During the three months ended April 2, 2016, net sales outside of the United States represented 85.5% of consolidated net sales.  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.

 

17

Table of Contents

 

Customers

 

Because we sell our products exclusively to a customer base of independent Associates and Preferred Customers, to increase net sales we must either increase the number or the productivity of our Associates and Preferred Customers.  Increasing the productivity of our Associates and Preferred Customers has not been our primary focus.  Rather, we seek to increase the number of Associates and Preferred Customers who use our products.  We believe this focus is more consistent with our vision of improving the overall health and nutrition of individuals and families around the world.  Sales to Associates account for the majority of our product sales, representing approximately 92% of product sales during the three months ended April 2, 2016; the remainder of our sales are to Preferred Customers.  Increases or decreases in product sales are typically the result of variations in the volume of product sold relating to fluctuations in the number of active Associates and Preferred Customers purchasing our products.  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
		April 4, 2015				April 2, 2016				Prior Year		Change
Asia Pacific:
Greater China		201,000		53.4	%	245,000		56.1	%	44,000		21.9	%
Southeast Asia Pacific		77,000		20.5	%	88,000		20.1	%	11,000		14.3	%
North Asia		12,000		3.2	%	15,000		3.4	%	3,000		25.0	%
Asia Pacific Total		290,000		77.1	%	348,000		79.6	%	58,000		20.0	%
Americas and Europe		86,000		22.9	%	89,000		20.4	%	3,000		3.5	%
		376,000		100.0	%	437,000		100.0	%	61,000		16.2	%

 

		Active Preferred Customers by Region
		As of				As of				Change from		Percent
		April 4, 2015				April 2, 2016				Prior Year		Change
Asia Pacific:
Greater China		4,000		4.6	%	5,000		5.3	%	1,000		25.0	%
Southeast Asia Pacific		12,000		14.0	%	13,000		13.8	%	1,000		8.3	%
North Asia		7,000		8.1	%	10,000		10.7	%	3,000		42.9	%
Asia Pacific Total		23,000		26.7	%	28,000		29.8	%	5,000		21.7	%
Americas and Europe		63,000		73.3	%	66,000		70.2	%	3,000		4.8	%
		86,000		100.0	%	94,000		100.0	%	8,000		9.3	%

 

Current Focus and Recent Developments

 

Our primary objective is to increase the number of Associates and Preferred Customers (referred to together as “customers”) who use our products throughout the world.  We have several strategies in place to support this objective, including:

 

18