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 1, 2017

 

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)

 

Utah

 

87-0500306

(State or other jurisdiction

 

(I.R.S. Employer

of incorporation or organization)

 

Identification No.)

 


 

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

(Address of principal executive offices, Zip Code)

 


 

(801) 954-7100

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 5, 2017 was 24,523,449.

 

 

 



Table of Contents

 

USANA HEALTH SCIENCES, INC.

 

FORM 10-Q

 

For the Quarterly Period Ended April 1, 2017

 

INDEX

 

 

 

Page

 

 

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1

Financial Statements (unaudited)

 

 

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

7-15

Item 2

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

16-23

Item 3

Quantitative and Qualitative Disclosures About Market Risk

23

Item 4

Controls and Procedures

23

 

 

 

PART II. OTHER INFORMATION

Item 1

Legal Proceedings

24

Item 6

Exhibits

24

 

 

 

Signatures

26

 

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

 

 

 

December 31,

 

April 1,

 

 

 

2016

 

2017

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

175,774

 

$

176,320

 

Inventories

 

64,810

 

69,680

 

Prepaid expenses and other current assets

 

37,277

 

33,161

 

Total current assets

 

277,861

 

279,161

 

 

 

 

 

 

 

Property and equipment, net

 

101,267

 

102,035

 

 

 

 

 

 

 

Goodwill

 

16,715

 

16,801

 

Intangible assets, net

 

34,349

 

34,273

 

Deferred tax assets

 

18,292

 

17,321

 

Other assets

 

22,158

 

22,422

 

 

 

$

470,642

 

$

472,013

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

9,040

 

$

8,839

 

Other current liabilities

 

129,451

 

102,023

 

Total current liabilities

 

138,491

 

110,862

 

 

 

 

 

 

 

Deferred tax liabilities

 

5,499

 

5,952

 

Other long-term liabilities

 

1,365

 

1,266

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock, $0.001 par value; Authorized — 50,000 shares, issued and outstanding 24,485 as of December 31, 2016 and 24,523 as of April 1, 2017

 

24

 

24

 

Additional paid-in capital

 

71,505

 

75,703

 

Retained earnings

 

265,405

 

286,763

 

Accumulated other comprehensive income (loss)

 

(11,647

)

(8,557

)

Total stockholders’ equity

 

325,287

 

353,933

 

 

 

$

470,642

 

$

472,013

 

 

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 2,

 

April 1,

 

 

 

2016

 

2017

 

 

 

 

 

 

 

Net sales

 

$

240,449

 

$

255,323

 

Cost of sales

 

42,920

 

42,654

 

 

 

 

 

 

 

Gross profit

 

197,529

 

212,669

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Associate incentives

 

107,394

 

115,781

 

Selling, general and administrative

 

56,631

 

64,001

 

 

 

 

 

 

 

Total operating expenses

 

164,025

 

179,782

 

 

 

 

 

 

 

Earnings from operations

 

33,504

 

32,887

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

438

 

483

 

Interest expense

 

(202

)

(10

)

Other, net

 

(732

)

9

 

 

 

 

 

 

 

Other income (expense), net

 

(496

)

482

 

 

 

 

 

 

 

Earnings before income taxes

 

33,008

 

33,369

 

 

 

 

 

 

 

Income taxes

 

10,709

 

12,011

 

 

 

 

 

 

 

Net earnings

 

$

22,299

 

$

21,358

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

Basic

 

$

0.92

 

$

0.87

 

Diluted

 

$

0.89

 

$

0.86

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

Basic

 

24,204

 

24,499

 

Diluted

 

25,183

 

24,976

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

22,299

 

$

21,358

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

Foreign currency translation adjustment

 

2,131

 

3,297

 

Tax benefit (expense) related to foreign currency translation adjustment

 

(700

)

(207

)

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

1,431

 

3,090

 

 

 

 

 

 

 

Comprehensive income

 

$

23,730

 

$

24,448

 

 

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 1, 2017

 

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

Common Stock

 

Paid-in

 

Retained

 

Comprehensive

 

 

 

 

 

Shares

 

Value

 

Capital

 

Earnings

 

Income (Loss)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

 

24,485

 

$

24

 

$

71,505

 

$

265,405

 

$

(11,647

)

$

325,287

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

21,358

 

 

 

21,358

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

3,090

 

3,090

 

Equity-based compensation expense

 

 

 

 

 

4,198

 

 

 

 

 

4,198

 

Common stock issued under equity award plans

 

38

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at April 1, 2017

 

24,523

 

$

24

 

$

75,703

 

$

286,763

 

$

(8,557

)

$

353,933

 

 

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 2,

 

April 1,

 

 

 

2016

 

2017

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net earnings

 

$

22,299

 

$

21,358

 

Adjustments to reconcile net earnings to net cash provided by (used in) operating activities

 

 

 

 

 

Depreciation and amortization

 

3,520

 

3,466

 

(Gain) loss on sale of property and equipment

 

39

 

(10

)

Equity-based compensation expense

 

4,609

 

4,198

 

Deferred income taxes

 

(1,932

)

1,380

 

Changes in operating assets and liabilities:

 

 

 

 

 

Inventories

 

(392

)

(3,265

)

Prepaid expenses and other assets

 

1,033

 

3,756

 

Accounts payable

 

(2,081

)

263

 

Other liabilities

 

(13,624

)

(29,245

)

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

13,471

 

1,901

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Additions to notes receivable

 

(3

)

 

Receipts on notes receivable

 

49

 

107

 

Proceeds from sale of property and equipment

 

 

10

 

Purchases of property and equipment

 

(8,971

)

(3,381

)

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

(8,925

)

(3,264

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

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

 

1,140

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

1,605

 

1,909

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

7,291

 

546

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

143,210

 

175,774

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

150,501

 

$

176,320

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

147

 

$

2

 

Income taxes

 

8,587

 

10,087

 

Cash received during the period for:

 

 

 

 

 

Income tax refund

 

 

4,700

 

Non-cash investing activities:

 

 

 

 

 

Credits on notes receivable

 

505

 

191

 

Accrued purchases of property and equipment

 

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 (Continued)

 

(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 Condensed 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 consolidation.

 

The condensed consolidated balance sheet as of December 31, 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 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 condensed 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 1, 2017 and results of operations for the three months ended April 2, 2016 and April 1, 2017.

 

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 December 31, 2016.  The results of operations for the three months ended April 1, 2017, may not be indicative of the results that may be expected for the fiscal year 2017 ending December 30, 2017.

 

Recent Accounting Pronouncements

 

Adopted accounting pronouncements

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-05, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement”. This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses.  If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract.  The ASU is effective for annual and interim reporting periods beginning after December 15, 2016.  Early adoption is permitted.  The standard permits the use of either the retrospective or cumulative effect transition method.  The Company adopted ASU 2015-05 during the quarter ended April 1, 2017 and the adoption of the standard did not have an impact on its 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 July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”.  For entities that do not measure inventory using the last-in, first-out or retail inventory method, ASU 2015-11 changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value, where net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.  The ASU is effective for annual and interim reporting periods beginning after December 15, 2016.  The Company adopted ASU 2015-11 during the quarter ended April 1, 2017 and the adoption of the standard did not have a material impact on its consolidated financial statements.

 

Issued accounting pronouncements

 

In May 2014, the 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.  The amendments may be applied retrospectively to each prior period (full retrospective) or retrospectively with the cumulative effect recognized as of the date of initial application (modified retrospective).  The Company plans to adopt ASU 2014-09 in the first quarter of 2018 and apply the modified retrospective approach.

 

The Company continues to evaluate the impact of this ASU on the specific areas that apply to the Company and their potential impact to its processes, accounting, financial reporting, disclosures, and controls.  At this point, the Company has determined that the overall impact of adopting this ASU will not be material.  This ASU will primarily involve updating revenue related internal control documentation and expanding revenue disclosures in our periodic filings.  In addition to the documentation updates, the Company is considering a change in the methodology for deferring revenue on undelivered orders, which would not change the total amount of revenue recognized, but would accelerate the timing of when revenue is recognized. None of these changes are expected to have a material impact on the Company’s consolidated financial statements.

 

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 November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”. The ASU requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2017. The Company does not expect the adoption of ASU 2016-18 will have a material impact on its statement of cash flows.

 

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

 

In January 2017 the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment.”  ASU 2017-04 simplifies the accounting for goodwill impairment by eliminating the Step 2 requirement to calculate the implied fair value of goodwill.  Instead, the under ASU 2017-04, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of each reporting unit with its carrying amount.  An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.  An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.  The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted.  The Company does not expect the adoption of ASU 2017-04 will have a material impact on its consolidated financial statements.

 

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

 

 

 

December 31, 2016

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

Money market funds included in cash equivalents

 

$

27,917

 

$

27,917

 

$

 

$

 

Foreign currency contracts included in prepaid expenses and other current assets

 

4

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

27,921

 

$

27,917

 

$

4

 

$

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

 

 

Inputs

 

 

 

April 1, 2017

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

Money market funds included in cash equivalents

 

$

80,749

 

$

80,749

 

$

 

$

 

Foreign currency contracts included in other current liabilities

 

(320

)

 

(320

)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

80,429

 

$

80,749

 

$

(320

)

$

 

 

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 levels of the fair value hierarchy 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 December 31, 2016 and April 1, 2017, 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:

 

 

 

December 31,

 

April 1,

 

 

 

2016

 

2017

 

 

 

 

 

 

 

Raw materials

 

$

26,186

 

$

27,219

 

Work in progress

 

9,455

 

8,692

 

Finished goods

 

29,169

 

33,769

 

 

 

 

 

 

 

 

 

$

64,810

 

$

69,680

 

 

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 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 December 31, 2016, and April 1, 2017 were $6,867 and $6,772, 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.

 

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

(in thousands, except per share data)

(unaudited)

 

NOTE E — LINE OF CREDIT

 

The Company has a $75,000 line of credit with Bank of America.  Interest 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, set forth in a separate pledge agreement with the bank.  On February 19, 2016, the Company entered into an Amended and Restated Credit Agreement with Bank of America, which extends the term of the Credit Agreement to April 27, 2021 and increases the Company’s consolidated rolling four-quarter adjusted EBITDA covenant from $60,000 to equal to or greater than $100,000 and a ratio of consolidated funded debt to adjusted EBITDA of 2.0 to 1.0 at the end of each quarter.  The adjusted EBITDA under this agreement is modified for certain non-cash expenses.  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 $5,241, and $4,464 reduction in the available borrowing limit as of December 31, 2016 and April 1, 2017, respectively, due to existing normal course of business guarantees in certain markets.

 

There was no outstanding debt on this line of credit at December 31, 2016 or at April 1, 2017.  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.

 

NOTE F — 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 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 case to the Utah Court of Appeals.  In December 2016, the Court of Appeals certified the case to the Utah Supreme Court, confirming the Company’s belief that this case addresses a new issue under Utah law.  Oral arguments with the Supreme Court have been scheduled for May 10, 2017.  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.

 

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

(in thousands, except per share data)

(unaudited)

 

NOTE F — CONTINGENCIES - CONTINUED

 

On February 7, 2017, the Company disclosed on Form 8-K that it is conducting a voluntary internal investigation regarding its BabyCare operations in China.  In connection with this investigation, the Company expects to continue to incur costs in conducting the on-going review and investigation, in responding to requests for information in connection with any government investigations and in defending any potential civil or governmental proceedings that are instituted against it or any of its current or former officers or directors.  The Company has voluntarily contacted the Securities and Exchange Commission and the United States Department of Justice to advise both agencies that an internal investigation is underway and intends to provide additional information to both agencies as the investigation progresses.  Because the internal investigation is in its early stage, the Company cannot predict the duration, scope, or result of the investigation.  One or more governmental actions could be instituted in respect of the matters that are the subject of the internal investigation, and such actions, if brought, may result in judgments, settlements, fines, penalties, injunctions, cease and desist orders, criminal penalties, or other relief.

 

On February 13, 2017, a putative shareholder class action complaint was filed in the United States District Court for the District of Utah, with the plaintiff, Chi Wah, alleging that the Company failed to disclose that (i) the Company’s BabyCare subsidiary had engaged in improper reimbursement practices in China, (ii) these practices constituted violations of the FCPA, (iii) as such, the Company’s China revenues were in part the product of unlawful conduct and unlikely to be sustainable, and (iv) the foregoing conduct, when it became known, was likely to subject the Company to significant regulatory scrutiny.  The lawsuit names as defendants the Company; our former Co-Chief Executive Officer, David A. Wentz; and our Chief Leadership Development Officer, Paul A. Jones (formerly our Chief Financial Officer).  On behalf of the plaintiff, and a putative class of purchasers of USANA stock between March 14, 2014 and February 7, 2017, the plaintiff asserts claims for violation of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder.  The plaintiff seeks, among other things, an award of damages, interest, reasonable attorneys’ fees, expert fees, and other costs.  The Company believes that the action is without merit, and intends to vigorously defend against all claims asserted.

 

Chinese regulators regularly make inquiries about the business activities of direct sellers in China and have done so with the Company’s operating subsidiary in China, BabyCare, Ltd.  There have been instances where inquiries or complaints about BabyCare’s business have resulted in the payment of fines by BabyCare.  For instance, during the first quarter of 2017, an inquiry from a provincial-level regulator was received and promptly resolved by BabyCare.  A fine was issued in a BabyCare Associate’s name and paid by BabyCare in connection with resolving this matter.  The fine was not quantitatively material.

 

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

(in thousands, except per share data)

(unaudited)

 

NOTE G 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 2,

 

April 1,

 

 

 

2016

 

2017

 

 

 

 

 

 

 

Net earnings available to common shareholders

 

$

22,299

 

$

21,358

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

24,204

 

24,499

 

 

 

 

 

 

 

Dilutive effect of in-the-money equity awards

 

979

 

477

 

 

 

 

 

 

 

Weighted average common shares outstanding - diluted

 

25,183

 

24,976

 

 

 

 

 

 

 

Earnings per common share from net earnings - basic

 

$

0.92

 

$

0.87

 

 

 

 

 

 

 

Earnings per common share from net earnings - diluted

 

$

0.89

 

$

0.86

 

 

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 2,

 

April 1,

 

 

 

2016

 

2017

 

 

 

2,190

 

2,179

 

 

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.  There were no share repurchases made during the three months ended April 1, 2017.  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 1, 2017, 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.

 

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

(in thousands, except per share data)

(unaudited)

 

NOTE H — 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 2,

 

April 1,

 

 

 

2016

 

2017

 

 

 

 

 

 

 

USANA® Nutritionals

 

82

%

85

%

USANA Foods

 

10

%

8

%

Sensé — beautiful science®

 

7

%

6

%

 

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

·                  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.

 

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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 2,

 

April 1,

 

 

 

2016

 

2017

 

 

 

 

 

 

 

Net Sales to External Customers

 

 

 

 

 

 

 

 

 

 

 

Asia Pacific

 

 

 

 

 

Greater China

 

$

116,998

 

$

131,738

 

Southeast Asia Pacific

 

48,861

 

50,406

 

North Asia

 

10,560

 

12,956

 

Asia Pacific Total

 

176,419

 

195,100

 

 

 

 

 

 

 

Americas and Europe

 

64,030

 

60,223

 

 

 

 

 

 

 

Consolidated Total

 

$

240,449

 

$

255,323

 

 

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 2,

 

April 1,

 

 

 

2016

 

2017

 

 

 

 

 

 

 

Net sales:

 

 

 

 

 

China

 

$

100,499

 

$

115,457

 

United States

 

$

34,702

 

$

30,166

 

 

 

 

As of

 

 

 

December 31,

 

April 1,

 

 

 

2016

 

2017

 

Long-lived assets:

 

 

 

 

 

China

 

$

91,909

 

$

92,178

 

United States

 

$

63,654

 

$

63,952

 

 

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 December 31, 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” referred to together as “active 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 1, 2017, we had approximately 574,000 active 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

·                  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.

 

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:

 

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Table of Contents

 

 

 

Three Months Ended

 

 

 

April 2, 2016

 

April 1, 2017

 

 

 

 

 

 

 

Product Line

 

 

 

 

 

USANA® Nutritionals

 

 

 

 

 

Essentials

 

20

%

20

%

Optimizers

 

62

%

65

%

USANA Foods

 

10

%

8

%

Sensé — beautiful science®

 

7

%

6

%

All Other

 

1

%

1

%

 

 

 

 

 

 

Key Product

 

 

 

 

 

USANA® Essentials

 

13

%

13

%

Proflavanol®

 

13

%

15

%

BiOmega-3™

 

13

%

15

%

 

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 active 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 1, 2017, net sales outside of the United States represented 88.2% 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.

 

Customers

 

Because we sell our products exclusively to a customer base of independent Associates and Preferred Customers, to increase net sales we must increase either the number or the productivity of our active Customers.  Increasing the productivity of our active Customers has not been our primary focus.  Rather, we seek to increase the number of active Customers who use and sell 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 90% of product sales during the three months ended April 1, 2017; 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

 

17



Table of Contents

 

active Customers purchasing our products.  The number of active Associates and Preferred Customers is, therefore, used by management as a key non-financial indicator to evaluate our operational performance.

 

During the quarter, we continued to pursue our objective of enhancing our Preferred Customer program by initiating our Preferred Customer Invitation Plan in the United States.  Under this plan, we invited active Associates in the United States, who met certain criteria, to become Preferred Customers.  For many years, we have collected and analyzed a variety of data on our active Associates.  This data, along with our communications with Associates, suggest that we have a significant population of individuals who historically joined the Company as Associates but are interested only in purchasing our products for their personal consumption.  Our Preferred Customer Invitation Plan reflects our philosophy that treating individuals who desire only to be customers as customers is beneficial to both the customer and the Company.  Doing so will allow us to further personalize the Company to the customer and enhance our overall customer service to them.  To that effect, during the first quarter, 16,000 active Associates in the United States became Preferred Customers pursuant to our invitation plan.  During the remainder of 2017, we will offer the same invitation to Associates in our other markets around the world.

 

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 2, 2016

 

April 1, 2017

 

Prior Year

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asia Pacific:

 

 

 

 

 

 

 

 

 

 

 

 

 

Greater China

 

245,000

 

56.1

%

285,000

 

61.7

%

40,000

 

16.3

%

Southeast Asia Pacific

 

88,000

 

20.1

%

88,000

 

19.0

%

 

0.0

%

North Asia

 

15,000

 

3.4

%

19,000

 

4.1

%

4,000

 

26.7

%

Asia Pacific Total

 

348,000

 

79.6

%

392,000

 

84.8

%

44,000

 

12.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas and Europe (1)

 

89,000

 

20.4

%

70,000

 

15.2

%

(19,000

)

(21.3

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

437,000

 

100.0

%

462,000

 

100.0

%

25,000

 

5.7

%

 

 

 

Active Preferred Customers by Region

 

 

 

 

 

 

 

As of

 

As of

 

Change from

 

Percent

 

 

 

April 2, 2016

 

April 1, 2017

 

Prior Year

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asia Pacific:

 

 

 

 

 

 

 

 

 

 

 

 

 

Greater China

 

5,000

 

5.3

%

5,000

 

4.5

%

 

0.0

%

Southeast Asia Pacific

 

13,000

 

13.8

%

14,000

 

12.5

%

1,000

 

7.7

%

North Asia

 

10,000

 

10.7

%

11,000

 

9.8

%

1,000

 

10.0

%

Asia Pacific Total

 

28,000

 

29.8

%

30,000

 

26.8

%

2,000

 

7.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas and Europe (1)

 

66,000

 

70.2

%

82,000

 

73.2

%

16,000

 

24.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

94,000

 

100.0

%

112,000

 

100.0

%

18,000

 

19.1

%

 


(1)  Pursuant to the Preferred Customer Invitation Plan in the United States, 16,000 active Associates became Preferred Customers during the current quarter.

 

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Table of Contents

 

Current Focus and Recent Developments

 

Our primary objective is to increase the number of active Customers who use our products throughout the world.  We have several strategies in place to support this objective, including:

 

·                  Future product and technology innovation that supports our desire to personalize our customer’s overall experience with USANA that would encompass our product offering, Associate Compensation Plan, and online business environment;

 

·                  Expansion in China, where we plan to continue devoting significant time and resources on growing this market;

 

·                  Enhancing our information technology systems and infrastructure to support our growing active Customer base and to further improve our active Customers’ experience of doing business with us around the world as well as to prepare for future growth and expansion;

 

·                  Development and offering of market-specific incentives and promotions for our Associates to incent sales and active Customer growth around the world;

 

·                  Enhancing our Preferred Customer Program by initiating our Preferred Customer Invitations Plan in the United States and the rest of our markets around the world throughout 2017; and

 

·                  Increasing our brand recognition, which includes our relationship as a Trusted Partner and Sponsor of The Dr. Oz Show, our partnership with the Women’s Tennis Association, and our sponsorship of the U.S. Ski Team; to make it easier for our Associates to talk about USANA with potential customers.

 

At our 2016 International Convention, we introduced one of the greatest product innovations in our history with the launch of our Incelligence™ product platform.  Incelligence™ is USANA’s proprietary, patent-pending, technology that is designed to support your body’s natural ability to nourish, protect and renew itself.  As part of our Incelligence™ platform, we also launched our new flagship multivitamin, CellSentials™.  Incelligence™ is a key part of our growth strategy and has already been launched in 10 markets around the world with an additional six market launches planned during the remainder of 2017 and into 2018.  Incelligence™ will eventually be offered in China upon regulatory approval.

 

Non-GAAP Financial Measures

 

Constant currency net sales, earnings, EPS and other currency-related financial information (collectively, “Financial Results”) are non-GAAP financial measures that remove the impact of fluctuations in foreign-currency exchange rates and help facilitate period-to-period comparisons of the Company’s Financial Results and thus provide investors an additional perspective on trends and underlying business results.  Constant currency Financial Results are calculated by translating the current period’s Financial Results at the same average exchange rates in effect during the applicable prior-year period and then comparing this amount to the prior-year period’s Financial Results. Investors should rely primarily on our GAAP results, and use non-GAAP financial measures only supplementally, in making investment decisions.

 

Results of Operations

 

Summary of Financial Results

 

Net sales for the first quarter of 2017 increased 6.2% to $255.3 million, an increase of $14.9 million, compared with the first quarter of 2016.  This increase was driven by higher product sales volume resulting primarily from strong active Customer growth in our Asia Pacific region, and by annual product price adjustments.  This increase in net sales during the first quarter of 2017 was partially offset by unfavorable changes in currency exchange rates that reduced net sales for the quarter by $6.2 million.

 

Net earnings for the first quarter of 2017 decreased 4.2% to $21.4 million, a decrease of $0.9 million, compared with the first quarter of 2016.  The decrease in net earnings was driven in part by higher incremental expense related to China, the Company’s internal investigation in China, higher Associate incentives and a higher effective tax rate.

 

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Table of Contents

 

Quarters Ended April 2, 2016 and April 1, 2017

 

Net Sales

 

The following table summarizes the changes in our net sales by geographic region for the quarters ended as of the dates indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

Net Sales by Region

 

 

 

 

 

 

 

change

 

 

 

(in thousands)

 

 

 

 

 

Currency

 

excluding

 

 

 

Quarter Ended

 

Change from

 

Percent

 

impact on

 

currency

 

 

 

April 2, 2016

 

April 1, 2017

 

prior year

 

change

 

sales

 

impact

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asia Pacific

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Greater China

 

$

116,998

 

48.7

%

$

131,738

 

51.6

%

$

14,740

 

12.6

%

$

(5,576

)

17.4

%

Southeast Asia Pacific

 

48,861

 

20.3

%

50,406

 

19.7

%

1,545

 

3.2

%

(655

)

4.5

%

North Asia

 

10,560

 

4.4

%

12,956

 

5.1

%

2,396

 

22.7

%

492

 

18.0

%

Asia Pacific Total

 

176,419

 

73.4

%

195,100

 

76.4

%

18,681

 

10.6

%

(5,739

)

13.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas and Europe

 

64,030

 

26.6

%

60,223

 

23.6

%

(3,807

)

(5.9

)%

(504

)

(5.2

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

240,449

 

100.0

%

$

255,323

 

100.0

%

$

14,874

 

6.2

%

$

(6,243

)

8.8

%

 

 

Asia Pacific:  The increase in net sales in Greater China continues to be driven by growth in Mainland China, where constant currency net sales increased 21.0%, and the number of active Customers increased 18.2%.  The increase in constant currency net sales in Southeast Asia Pacific was driven by active Customer growth in several markets, led by Malaysia.  The increase in constant currency net sales in North Asia continues to be driven by growth in South Korea, where constant currency net sales increased 20.2%.  The number of active Customers in South Korea increased 21.7%.

 

Americas and Europe:  Net sales in this region were affected by a sales decrease of $4.5 million or 13.1% in the United States, primarily due to a decline in the number of active Customers in this market.  This was partially offset by growth in Mexico, where constant currency net sales increased 14.8% and the number of active Customers increased 11.1%.

 

Gross Profit

 

Gross profit increased 110 basis points to 83.3% of net sales for the first quarter of 2017, from 82.2% in the prior year.  This increase can be attributed to favorable changes in currency exchange rates in markets outside of China as well as the annual price adjustments.  With the exception of China, where products are manufactured in-market, changes in currency exchange rates affect the valuation of U.S. manufactured inventory that is transferred to international subsidiaries.  Comparatively, gross margins were negatively impacted by currency for the first quarter of 2016, resulting in a favorable year-over-year change for the first quarter of 2017.  Gross margins also benefited from production efficiencies during the first quarter of 2017 associated with increased production levels primarily related to our new China facility.

 

Associate Incentives

 

Associate incentives were 45.3% of net sales for the first quarter of 2017, compared with 44.7% in the prior year.  This increase can be primarily attributed to higher award trip incentives, and payout on Associate bonus programs.

 

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Selling, General and Administrative Expenses

 

In absolute terms, our selling, general and administrative expense increased $7.4 million during the first quarter of 2017 when compared with the same period of the prior year.  This increase can be attributed to the Company’s continued investments in information technology and infrastructure, higher incremental expense related to China, and the Company’s internal investigation in China.

 

Income Taxes

 

Income taxes were 36.0% of earnings in the first quarter of 2017 compared with 32.4% of earnings in the prior year.  The higher effective tax rate for the first quarter was primarily due to lower excess tax benefits from equity awards exercises and higher non-deductible expenses recognized during the current quarter compared to the prior year.

 

Diluted Earnings Per Share

 

Diluted earnings per share decreased 3.4% in the first quarter of 2017 when compared with the prior year quarter.  This decrease was mostly due to higher selling, general and administrative expense, associate incentives as well as a higher effective tax, partially offset by improved gross margins.

 

Liquidity and Capital Resources

 

We have historically met our working capital and capital expenditure requirements by using both net cash flow from operations and by drawing from our line of credit.  Our principal source of liquidity is our operating cash flow.  Although we are required to maintain cash deposits with banks in certain of our markets, there are currently no material restrictions on our ability to transfer and remit funds among our international markets.  Notwithstanding the foregoing, if we were to repatriate the $19.6 million of cumulative earnings that have been indefinitely reinvested in certain of our markets at April 1, 2017, there would be a tax liability to the Company of approximately $3.1 million.

 

We have historically generated positive cash flow due to our strong operating margins.  Net cash flow from operating activities totaled $1.9 million in the first three months of 2017.  Items increasing cash flows from operations in the first three months of 2017 are net earnings reduced by accrued employee compensation costs, accrued commissions and deferred revenue.

 

Net cash flow from operating activities totaled $13.5 million in the first three months of 2016.  Items increasing cash flows from operations in the first three months of 2016 were net earnings, accrued commissions and deferred revenue, and taxes payable, reduced by inventory and accrued employee compensation costs.

 

Cash and cash equivalents increased to $176.3 million at April 1, 2017, from $175.8 million at December 31, 2016.  Of the $176.3 million held at April 1, 2017, $12.9 million was held in the United States and $163.4 million was held by international subsidiaries.  Of the $175.8 million in cash and cash equivalents held at December 31, 2016, $20.1 million was held in the United States and $155.7 million was held by international subsidiaries.  Net working capital increased to $168.3 million at April 1, 2017, from $139.4 million at December 31, 2016.

 

Line of credit

 

Information with respect to our line of credit may be found in Note E to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Report on Form 10-Q.

Share repurchase

 

There were no share repurchases made during the three months ended April 1, 2017.  At April 1, 2017, the remaining approved repurchase amount under the plan was $35.4 million. There currently is no expiration date on the remaining approved repurchase amount and no requirement for future share repurchases.

 

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Summary

 

We believe that current cash balances, future cash provided by operations, and amounts available under our line of credit will be sufficient to cover our operating and capital needs in the ordinary course of business for the foreseeable future.  If we experience an adverse operating environment or unanticipated and unusual capital expenditure requirements, additional financing may be required.  No assurance can be given, however, that additional financing, if required, would be available at all or on favorable terms.  We might also require or seek additional financing for the purpose of expanding into new markets, growing our existing markets, or for other reasons.  Such financing may include the use of additional debt or the sale of additional equity securities.  Any financing which involves the sale of equity securities or instruments that are convertible into equity securities could result in immediate and possibly significant dilution to our existing shareholders.

 

Forward-Looking Statements and Certain Risks

 

The statements contained in this report that are not purely historical are considered to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”).  These statements represent our expectations, hopes, beliefs, anticipations, commitments, intentions, and strategies regarding the future.  They may be identified by the use of words or phrases such as “believes,” “expects,” “anticipates,” “should,” “plans,” “estimates,” and “potential,” among others.  Forward-looking statements include, but are not limited to, statements contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding our financial performance, revenue, and expense levels in the future and the sufficiency of our existing assets to fund our future operations and capital spending needs.  Readers are cautioned that actual results could differ materially from the anticipated results or other expectations that are expressed in these forward-looking statements for the reasons that are detailed in our most recent Annual Report on Form 10-K.  The fact that some of these risk factors may be the same or similar to those in our past SEC reports means only that the risks are present in multiple periods.  We believe that many of the risks detailed here and in our other SEC filings are part of doing business in the industry in which we operate and will likely be present in all periods reported.  The fact that certain risks are common in the industry does not lessen their significance.  The forward-looking statements contained in this report are made as of the date of this report, and we assume no obligation to update them or to update the reasons why our actual results could differ from those that we have projected.  Among others, risks and uncertainties that may affect our business, financial condition, performance, development, and results of operations include:

 

·                 Our ability to attract and maintain a sufficient number of Associates;

 

·                 Our dependence upon a network marketing system to distribute our products and the activities of our independent Associates;

 

·                 The expansion of our business in China through BabyCare;

 

·                  Unanticipated effects of changes to our Compensation Plan;

 

·                 Our planned expansion into international markets, including delays in commencement of sales or product offerings in any new market, delays in compliance with local marketing or other regulatory requirements, or changes in target markets;

 

·                 General economic conditions, both domestically and internationally;

 

·                  Potential political events, natural disasters, or other events that may negatively affect economic conditions;

 

·                 Potential effects of adverse publicity regarding the Company, nutritional supplements, or the network marketing industry;

 

·                 Reliance on key management personnel;

 

·                 Extensive government regulation of the Company’s products, manufacturing, and network marketing system;

 

·                 Potential inability to sustain or manage growth, including the failure to continue to develop new products;

 

·                 An increase in the amount of Associate incentives;

 

·                 Our reliance on the use of information technology;

 

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Table of Contents

 

·                 The effects of competition from new and established network and direct selling organizations in our key markets;

 

·                  The adverse effect of the loss of a high-level sponsoring Associate, together with a group of leading Associates, in that person’s downline;

 

·                  The loss of product market share or Associates to competitors;

 

·                  Potential adverse effects of customs, duties, taxation, and transfer pricing regulations, including regulations governing distinctions between and Company responsibilities to employees and independent contractors;

 

·                  The fluctuation in the value of foreign currencies against the U.S. dollar;

 

·                 Our reliance on outside suppliers for raw materials and certain manufactured items;

 

·                  Shortages of raw materials that we use in certain of our products;

 

·                  Significant price increases of our key raw materials;

 

·                  Product liability claims and other risks that may arise with our manufacturing activity;

 

·                  Intellectual property risks;

 

·                  Liability claims that may arise with our “Athlete Guarantee” program;

 

·                  Continued compliance with debt covenants;

 

·                  Disruptions to shipping channels that are used to distribute our products to international warehouses;

 

·                  The introduction of new laws or changes to existing laws, both domestically and internationally; and

 

·                  The outcome of the internal investigation into our China operations, as well as other regulatory and litigation matters.

 

Item 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There have been no material changes from the information presented for the year ended December 31, 2016.

 

Item 4.   CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information that is required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods that are specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding any required disclosure.  In designing and evaluating these disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

 

As of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a- 15(e) under the Exchange Act).  Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, due to a material weakness in internal control over financial reporting described in Part II, Item 9A of our Form 10-K for the fiscal year ended December 31, 2016 (the “2016 Form 10-K”), our disclosure controls and procedures were not effective to provide reasonable assurance as of April 1, 2017.

 

Changes in Internal Control Over Financial Reporting

 

Other than with respect to the remediation efforts addressed below, there were no changes in our internal control over financial reporting during the fiscal quarter ended April 1, 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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Table of Contents

 

Remediation Efforts to Address Material Weakness

 

As previously disclosed in Part II, Item 9A of the 2016 Form 10-K, we are implementing a plan to remediate the material weakness described therein and strengthen our internal control and compliance environment.  The remediation plan includes the following:

 

·                  Termination of certain BabyCare employees and senior management whose conduct may have violated the Foreign Corrupt Practices Act (“FCPA”);

 

·                  Enhancement of our global anticorruption and ethics program, with additional training and education on such program at BabyCare, with the objective of promoting company-wide ethics and preventing and detecting violations of applicable anti-corruption laws, including FCPA; and

 

·                  Revision and communication of BabyCare accounting controls, policies and procedures relating to signing authority, supporting documentation requirements, and reimbursable expenses to provide additional details with the submission of supporting documentation to provide further transparency.

 

During the first quarter of 2017, we (i) took action to terminate certain BabyCare employees and senior management whose conduct may have violated the FCPA; and (ii ) began the process of revising and enhancing BabyCare’s accounting controls, policies and procedures in the areas referenced above.  In the coming quarters, we will continue our remediation efforts in these areas, and plan to also enhance our global anticorruption and ethics program as referenced above.  The material weakness will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed during 2017.

 

PART II. OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

We are a party to litigation and other proceedings 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.

 

Information with respect to our legal proceedings may be found in Note F to the Condensed Consolidated Financial Statements included in Item 1 Part I of this Report on Form 10-Q.

 

Item 6.   EXHIBITS

 

Exhibit

 

 

Number

 

Description

 

 

 

3.1

 

Amended and Restated Articles of Incorporation (incorporated by reference to Current Report on Form 8-K, filed April 25, 2006, Exhibit 3.1, File No. 0-21116).

 

 

 

3.2

 

Bylaws (incorporated by reference to Current Report on Form 8-K, filed April 25, 2006 Exhibit 3.2, File No. 0- 21116).

 

 

 

4.1

 

Specimen Stock Certificate for Common Stock (incorporated by reference to Registration Statement on Form 10, File No. 0-21116, effective April 16, 1993)

 

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Table of Contents

 

31.1

 

Certification of Principal Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

 

 

 

31.2

 

Certification of Principal Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

 

 

 

32.1

 

Certification of Principal Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 (filed herewith)

 

 

 

32.2

 

Certification of Principal Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 (filed herewith)

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 


* Denotes a management contract or compensatory plan or arrangement.

 

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Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

USANA HEALTH SCIENCES, INC.

 

 

 

Date: May 10, 2017

/s/ G. Douglas Hekking

 

G. Douglas Hekking

 

Chief Financial Officer

 

26