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 September 29, 2018

 

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 every Interactive Data File required to be submitted 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 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

 

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 November 2, 2018 was 23,976,585

 

 

 


Table of Contents

 

USANA HEALTH SCIENCES, INC.

 

FORM 10-Q

 

For the Quarterly Period Ended September 29, 2018

 

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

8-18

Item 2

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

20-28

Item 3

Quantitative and Qualitative Disclosures About Market Risk

29

Item 4

Controls and Procedures

29

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1

Legal Proceedings

29

Item 1A

Risk Factors

29

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 3

Defaults Upon Senior Securities

30

Item 4

Mine Safety Disclosures

30

Item 5

Other Information

30

Item 6

Exhibits

30

 

 

 

Signatures

 

31

 

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 30,

 

September 29,

 

 

 

2017

 

2018

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

247,131

 

$

239,751

 

Securities held-to-maturity, net

 

 

81,673

 

Inventories

 

62,918

 

81,110

 

Prepaid expenses and other current assets

 

30,110

 

32,228

 

Total current assets

 

340,159

 

434,762

 

 

 

 

 

 

 

Property and equipment, net

 

102,847

 

93,555

 

 

 

 

 

 

 

Goodwill

 

17,417

 

16,829

 

Intangible assets, net

 

35,154

 

32,217

 

Deferred tax assets

 

2,859

 

3,771

 

Other assets

 

20,833

 

18,247

 

 

 

$

519,269

 

$

599,381

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

11,787

 

$

14,467

 

Other current liabilities

 

129,396

 

138,419

 

Total current liabilities

 

141,183

 

152,886

 

 

 

 

 

 

 

Deferred tax liabilities

 

13,730

 

9,848

 

Other long-term liabilities

 

1,146

 

1,058

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock, $0.001 par value; Authorized — 50,000 shares, issued and outstanding 24,024 as of December 30, 2017 and 24,201 as of September 29, 2018

 

24

 

24

 

Additional paid-in capital

 

76,542

 

83,216

 

Retained earnings

 

288,070

 

362,250

 

Accumulated other comprehensive income (loss)

 

(1,426

)

(9,901

)

Total stockholders’ equity

 

363,210

 

435,589

 

 

 

$

519,269

 

$

599,381

 

 

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

 

Nine Months Ended

 

 

 

September 30,

 

September 29,

 

September 30,

 

September 29,

 

 

 

2017

 

2018

 

2017

 

2018

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

           261,765

 

$

           296,767

 

$

           774,151

 

$

           890,225

 

Cost of sales

 

47,135

 

51,877

 

133,691

 

151,243

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

214,630

 

244,890

 

640,460

 

738,982

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Associate incentives

 

116,010

 

130,264

 

350,195

 

392,416

 

Selling, general and administrative

 

67,263

 

69,112

 

193,653

 

206,781

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

183,273

 

199,376

 

543,848

 

599,197

 

 

 

 

 

 

 

 

 

 

 

Earnings from operations

 

31,357

 

45,514

 

96,612

 

139,785

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

571

 

1,269

 

1,644

 

3,140

 

Interest expense

 

(10

)

(8

)

(31

)

(27

)

Other, net

 

129

 

(249

)

19

 

(851

)

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

690

 

1,012

 

1,632

 

2,262

 

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes

 

32,047

 

46,526

 

98,244

 

142,047

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

8,278

 

15,486

 

29,858

 

48,154

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

             23,769

 

$

             31,040

 

$

             68,386

 

$

             93,893

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

 

 

 

 

Basic

 

$

                0.98

 

$

                1.28

 

$

                2.80

 

$

                3.88

 

Diluted

 

$

                0.97

 

$

                1.24

 

$

                2.75

 

$

                3.80

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

24,283

 

24,269

 

24,462

 

24,179

 

Diluted

 

24,588

 

25,001

 

24,871

 

24,705

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

             23,769

 

$

             31,040

 

$

             68,386

 

$

             93,893

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

2,941

 

(6,381

)

10,153

 

(10,087

)

Tax benefit (expense) related to foreign currency translation adjustment

 

(625

)

344

 

(2,601

)

1,612

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

2,316

 

(6,037

)

7,552

 

(8,475

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

             26,085

 

$

             25,003

 

$

             75,938

 

$

             85,418

 

 

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

(in thousands)

(unaudited)

 

For the nine months ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

68,386

 

 

 

68,386

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

7,552

 

7,552

 

Equity-based compensation expense

 

 

 

 

 

11,711

 

 

 

 

 

11,711

 

Common stock repurchased and retired

 

(865

)

(1

)

(10,129

)

(39,870

)

 

 

(50,000

)

Common stock issued under equity award plans

 

326

 

1

 

 

 

 

 

 

 

1

 

Tax withholding for net-share settled equity awards

 

 

 

 

 

(125

)

 

 

 

 

(125

)

Balance at September 30, 2017

 

23,946

 

$

           24

 

$

     72,962

 

$

   293,921

 

$

(4,095

)

$

   362,812

 

 

For the nine months ended September 29, 2018

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

Common Stock

 

Paid-in

 

Retained

 

Comprehensive

 

 

 

 

 

Shares

 

Value

 

Capital

 

Earnings

 

Income (Loss)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 30, 2017

 

24,024

 

$

           24

 

$

     76,542

 

$

   288,070

 

$

(1,426

)

$

   363,210

 

Cumulative effect of accounting change

 

 

 

 

 

 

 

994

 

 

 

994

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance after cumulative effect of accounting change

 

24,024

 

24

 

76,542

 

289,064

 

(1,426

)

364,204

 

Net earnings

 

 

 

 

 

 

 

93,893

 

 

 

93,893

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

(8,475

)

(8,475

)

Equity-based compensation expense

 

 

 

 

 

11,026

 

 

 

 

 

11,026

 

Common stock repurchased and retired

 

(217

)

 

(4,883

)

(20,707

)

 

 

(25,590

)

Common stock issued under equity award plans

 

394

 

 

 

 

 

 

 

 

 

Tax withholding for net-share settled equity awards

 

 

 

 

 

(376

)

 

 

 

 

(376

)

Disgorgement of short-swing stock profits

 

 

 

 

 

907

 

 

 

 

 

907

 

Balance at September 29, 2018

 

24,201

 

$

           24

 

$

     83,216

 

$

   362,250

 

$

(9,901

)

$

   435,589

 

 

5


Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

 

For the three months ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

Common Stock

 

Paid-in

 

Retained

 

Comprehensive

 

 

 

 

 

Shares

 

Value

 

Capital

 

Earnings

 

Income (Loss)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at July 1, 2017

 

24,624

 

$

           24

 

$

     79,507

 

$

   310,022

 

$

(6,411

)

$

   383,142

 

Net earnings

 

 

 

 

 

 

 

23,769

 

 

 

23,769

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

2,316

 

2,316

 

Equity-based compensation expense

 

 

 

 

 

3,709

 

 

 

 

 

3,709

 

Common stock repurchased and retired

 

(865

)

(1

)

(10,129

)

(39,870

)

 

 

(50,000

)

Common stock issued under equity award plans

 

187

 

1

 

 

 

 

 

 

 

1

 

Tax withholding for net-share settled equity awards

 

 

 

 

 

(125

)

 

 

 

 

(125

)

Balance at September 30, 2017

 

23,946

 

$

           24

 

$

     72,962

 

$

   293,921

 

$

(4,095

)

$

   362,812

 

 

For the three months ended September 29, 2018

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

Common Stock

 

Paid-in

 

Retained

 

Comprehensive

 

 

 

 

 

Shares

 

Value

 

Capital

 

Earnings

 

Income (Loss)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2018

 

24,220

 

$

           24

 

$

     83,542

 

$

   349,579

 

$

(3,864

)

$

   429,281

 

Net earnings

 

 

 

 

 

 

 

31,040

 

 

 

31,040

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

(6,037

)

(6,037

)

Equity-based compensation expense

 

 

 

 

 

3,968

 

 

 

 

 

3,968

 

Common stock repurchased and retired

 

(178

)

 

(4,278

)

(18,369

)

 

 

(22,647

)

Common stock issued under equity award plans

 

159

 

 

 

 

 

 

 

 

 

Tax withholding for net-share settled equity awards

 

 

 

 

 

(16

)

 

 

 

 

(16

)

Balance at September 29, 2018

 

24,201

 

$

           24

 

$

     83,216

 

$

   362,250

 

$

(9,901

)

$

   435,589

 

 

The accompanying notes are an integral part of these statements.

 

6


Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

September 29,

 

 

 

2017

 

2018

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net earnings

 

$

             68,386

 

$

             93,893

 

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

 

 

 

 

 

Depreciation and amortization

 

11,797

 

12,734

 

(Gain) loss on sale of property and equipment

 

8

 

1,804

 

Equity-based compensation expense

 

11,711

 

11,026

 

Deferred income taxes

 

(12,801

)

(3,524

)

Impairment on notes receivable

 

 

(658

)

Changes in operating assets and liabilities:

 

 

 

 

 

Inventories

 

4,556

 

(21,938

)

Prepaid expenses and other assets

 

6,343

 

(2,396

)

Accounts payable

 

550

 

2,855

 

Other liabilities

 

(21,909

)

17,897

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

68,641

 

111,693

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Receipts on notes receivable

 

259

 

4,801

 

Proceeds from the settlement of net investment hedges

 

 

739

 

Purchases of investment securities held-to-maturity

 

 

(81,673

)

Proceeds from sale of property and equipment

 

16

 

381

 

Purchases of property and equipment

 

(9,168

)

(8,862

)

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

(8,893

)

(84,614

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Repurchase of common stock

 

(50,000

)

(25,590

)

Proceeds from disgorgement of short-swing stock profits

 

 

907

 

Borrowings on line of credit

 

3,500

 

 

Payments on line of credit

 

(3,500

)

 

Payments related to tax withholding for net-share settled equity awards

 

(125

)

(376

)

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

(50,125

)

(25,059

)

 

 

 

 

 

 

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

6,481

 

(9,784

)

 

 

 

 

 

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

16,104

 

(7,764

)

 

 

 

 

 

 

Cash, cash equivalents, and restricted cash, at beginning of period

 

178,952

 

250,535

 

 

 

 

 

 

 

Cash, cash equivalents, and restricted cash at end of period

 

$

           195,056

 

$

           242,771

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents

 

$

           191,745

 

$

           239,751

 

Restricted cash included in prepaid expenses and other current assets

 

305

 

108

 

Restricted cash included in other assets

 

3,006

 

2,912

 

Total cash, cash equivalents, and restricted cash

 

$

           195,056

 

$

           242,771

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

                     9

 

$

                     5

 

Income taxes

 

40,532

 

59,244

 

Cash received during the period for:

 

 

 

 

 

Income tax refund

 

4,700

 

2,451

 

Non-cash investing activities:

 

 

 

 

 

Credits on notes receivable

 

412

 

 

Accrued purchases of property and equipment

 

202

 

50

 

 

The accompanying notes are an integral part of these statements.

 

7


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/skincare 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., a Utah corporation 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, Germany, Spain, Italy, Romania, Belgium, and the Netherlands.  All intercompany accounts and transactions have been eliminated in consolidation.

 

The condensed consolidated balance sheet as of December 30, 2017, derived from audited consolidated financial statements, and the unaudited interim consolidated financial information of the Company have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”).  Accordingly, 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 September 29, 2018 and results of operations for the quarters and nine months ended September 30, 2017 and September 29, 2018.

 

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 30, 2017.  The results of operations for the nine months ended September 29, 2018, are not necessarily indicative of the results that may be expected for the fiscal year ending December 29, 2018.

 

Recent Accounting Pronouncements

 

Adopted accounting pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).”  Also referred to as ASC 606, this update replaces existing revenue recognition guidance with a single comprehensive revenue model for entities to use in accounting for revenue arising from contracts with customers.  ASC 606 includes a five-step process by which entities 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.  This standard also requires 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.

 

The Company adopted ASC 606 effective at the beginning of fiscal 2018 and applied the modified retrospective approach.  Accordingly, the Company recognized the cumulative effect of initially applying ASC 606 as an adjustment to the fiscal 2018 opening balance of retained earnings.  The comparative information has not been restated and continues to be presented according to accounting standards in effect for those periods.  The adoption of ASC 606 did not have a material impact on the Company’s consolidated financial statements.  As a result of the adoption of ASC 606, the Company updated its accounting policies related to revenue recognition.  See Note B Revenue Recognition for additional information regarding the Company’s revenue recognition policies under the new standard.

 

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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 A ORGANIZATION, CONSOLIDATION, AND BASIS OF PRESENTATION - CONTINUED

 

Under ASC 606, the Company made a change in the timing for recognizing revenue on orders that have shipped but have not been delivered at period end.  Under the new standard, revenue is recognized when the customer obtains control of the goods and considering the indicators used to determine when control has passed to the customer, the Company has concluded that control transfers upon shipment.  Therefore, revenue and related expense items including cost of goods sold and Associate incentives on orders that have shipped but have not been delivered at period end are no longer deferred.  Subsequent to the period of adoption, there has been no material impact on net income and related per-share amounts.

 

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule is effective on November 5, 2018. The Company is in the process of evaluating the impact of the final rule on its consolidated financial statements.

 

Issued accounting pronouncements not yet adopted

 

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.  In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842)” — Targeted Improvements, which allows an additional transition method to adopt the new lease standard at the adoption date, as compared to the beginning of the earliest period presented, and recognize a cumulative-effect adjustment to the beginning balance of retained earnings in the period of adoption.  The Company will adopt ASU 2016-02 in the first quarter of 2019, specifically, using the alternative transition method.  The Company is currently in the process of accumulating and evaluating all the necessary information required to properly account for its lease portfolio under the new standard.  The Company is also in the process of implementing changes to its systems and processes in conjunction with its review of lease agreements to support the ongoing accounting and disclosure requirements. Although the Company is in the process of evaluating the impact of adoption of the ASU on its consolidated financial statements, the Company currently believes the most significant change will be related to the recognition of right-of-use assets and lease liabilities on the Company’s balance sheet for facility lease agreements.

 

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.”  ASU 2017-12 better aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To satisfy that objective, the amendments expand and refine hedge accounting for both non-financial and financial risk components, and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements.  For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.  Early adoption is permitted.  The Company does not expect the adoption of ASU 2017-12 will have a material impact on its consolidated financial statements.

 

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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 A ORGANIZATION, CONSOLIDATION, AND BASIS OF PRESENTATION - CONTINUED

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.”  ASU 2018-13 modifies the disclosure requirements for fair value measurements. The modifications removed the following disclosure requirements: (i) the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) the policy for timing of transfers between levels; and (iii) the valuation processes for Level 3 fair value measurements. This ASU added the following disclosure requirements: (i) the changes in unrealized gains and losses for the period included in other comprehensive income (“OCI”) for recurring Level 3 fair value measurements held at the end of the reporting period; and (ii) the range and weighted average of significant observable inputs used to develop Level 3 fair value measurements. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date.  Early adoption is permitted. The Company does not expect the adoption of ASU 2018-13 will have a material impact on its consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.”  ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The capitalized implementation costs of a hosting arrangement that is a service contract will be expensed over the term of the hosting arrangement. For public business entities, the amendments in this ASU are effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted, including adoption in any interim period. The amendments can be applied either retrospectively or prospectively to all implementation costs incurred after the adoption date.  The Company does not expect the adoption of ASU 2018-15 will have a material impact on its consolidated financial statements.

 

NOTE B — REVENUE RECOGNITION

 

Revenue is recognized when, or as, control of a promised product or service transfers to a customer, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring those products or services.  Revenue excludes taxes that have been assessed by governmental authorities and that are directly imposed on revenue-producing transactions between the Company and its customers, including sales, use, value-added, and some excise taxes. Revenue recognition is evaluated through the following five-step process:

 

1) identification of the contract with a customer;

2) identification of the performance obligations in the contract;

3) determination of the transaction price;

4) allocation of the transaction price to the performance obligations in the contract; and

5) recognition of revenue when or as a performance obligation is satisfied.

 

Product Revenue

 

A majority of the Company’s sales are for products sold at a point in time and shipped to customers, for which control is transferred as goods are delivered to the third party carrier for shipment.  The Company receives payment, primarily via credit card, for the sale of products at the time customers place orders and payment is required prior to shipment.

 

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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 B — REVENUE RECOGNITION - CONTINUED

 

The Company’s product sales contracts include terms that could cause variability in the transaction price for items such as discounts, credits, or sales returns.  Accordingly, the transaction price for product sales includes estimates of variable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur. At the time of sale, the Company estimates a refund liability for the variable consideration based on historical experience.

 

Initial product orders with a new customer may include multiple performance obligations related to sales discounts earned under the Company’s initial order reward program.  Under this program, the customer receives an option to apply the discounts earned on the initial order to two subsequent Auto Orders, which conveys a material right to the customer.  As such, the initial order transaction price is allocated to each separate performance obligation based on its relative standalone selling price and recognized as revenue as each performance obligation is satisfied.

 

Associate incentives represent consideration paid to a customer and include all forms of commissions, and other incentives paid to our Associates.  With the exception of commissions paid to Associates on personal purchases, which are considered a sales discount and are reported as a reduction to net sales, the incentives are paid for distinct services related to the Company’s product sales and are recorded as an expense when revenue for the goods is recognized.

 

Shipping and handling activities are performed after the customer obtains control of the goods transferred.  The Company accounts for these activities as fulfillment costs.  Therefore, the Company recognizes the costs of these activities when revenue for the goods is recognized.  Shipping and handling costs are included in cost of sales for all periods presented.

 

With respect to will-call orders, the Company periodically assesses the likelihood that customers will exercise their contractual right to pick up orders and revenue is recognized when the likelihood is estimated to be remote.

 

Other Revenue

 

Other types of revenue include fees for access to online customer service applications and annual account renewal fees for Associates, for which control is transferred over time as services are delivered and are recognized as revenue on a straight-line basis over the term of the respective contracts.

 

Revenue Disaggregation

 

Disaggregation of revenue by geographical region and major product line is included in Segment Information in Note L.

 

Contract Balances

 

Contract liabilities, which are recorded within Other current liabilities in the condensed consolidated balance sheets, primarily relate to deferred revenue for product sales for customer payments received in advance of shipment, for outstanding material rights under the initial order program, and for services where control is transferred over time as services are delivered.

 

The following table provides information about contract liabilities from contracts with customers, including significant changes in the contract liabilities balances during the period.

 

 

 

Nine Months Ended

 

 

 

September 29,

 

 

 

2018

 

 

 

 

 

Contract liabilities at beginning of period

 

$

14,417

 

Increase due to deferral of revenue

 

17,601

 

Decreases due to recognition of revenue

 

(14,141

)

 

 

 

 

Contract liabilities at end of period

 

$

17,877

 

 

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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 C — 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 30, 2017

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

Money market funds included in cash equivalents

 

$

106,090

 

$

106,090

 

$

 

$

 

Foreign currency contracts included in other current liabilities

 

(139

)

 

(139

)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

105,951

 

$

106,090

 

$

(139

)

$

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

 

 

Inputs

 

 

 

September 29,  2018

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

Money market funds included in cash equivalents

 

$

128,418

 

$

128,418

 

$

 

$

 

Foreign currency contracts included in other current liabilities

 

(93

)

 

(93

)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

128,325

 

$

128,418

 

$

(93

)

$

 

 

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 30, 2017 and September 29, 2018, there were no non-financial assets measured at fair value on a non-recurring basis.

 

The Company’s financial instruments include cash equivalents, securities held-to-maturity, 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. Historically, the carrying value of the notes receivable approximated fair value because the variable interest rates in the notes reflected current market rates. During the year ended December 30, 2017, an impairment was recorded on a note receivable (discussed in Note G) based on the estimated recoverable amount using Level 3 inputs, which approximates fair value.

 

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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 C — FAIR VALUE MEASURES - CONTINUED

 

Securities held-to-maturity consist of corporate bonds, commercial paper, and U.S. treasuries. The fair value of corporate bonds, commercial paper, and U.S. treasuries are priced using quoted market prices for similar instruments or non-binding market prices that are corroborated by observable market data, which is considered to be a Level 2 input. The carrying values of these corporate bonds, commercial paper, and U.S. treasuries approximate their fair values due to their short-term maturities.

 

NOTE D — INVESTMENTS

 

The carrying amount, gross unrealized holding gains, gross unrealized holding losses, and fair value of securities held-to-maturity by major security type and class of security were as follows:

 

 

 

As of September 29, 2018

 

 

 

Amortized Cost

 

Unrecognized
Holding Gains

 

Unrecognized
Holding Losses

 

Estimated Fair
Value

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

60,743

 

5

 

(24

)

60,724

 

U.S. treasuries

 

14,981

 

 

(1

)

14,980

 

Commercial paper

 

5,949

 

 

 

5,949

 

 

 

 

 

 

 

 

 

 

 

Total securities held-to-maturity

 

$

81,673

 

$

5

 

$

(25

)

$

81,653

 

 

All held-to-maturity securities as of September 29, 2018 mature within one year.

 

NOTE E — INVENTORIES

 

Inventories consist of the following:

 

 

 

December 30,

 

September 29,

 

 

 

2017

 

2018

 

 

 

 

 

 

 

Raw materials

 

$

20,737

 

$

22,066

 

Work in progress

 

8,461

 

14,318

 

Finished goods

 

33,720

 

44,726

 

 

 

 

 

 

 

 

 

$

62,918

 

$

81,110

 

 

NOTE F — INTANGIBLE ASSETS

 

The Company performed its annual goodwill impairment test during the third quarter of 2018.  The Company performed a qualitative assessment of each reporting unit and determined that it was not more-likely-than-not that the fair value of any reporting unit was less than its carrying amount.  As a result, no impairments of goodwill were recognized.

 

The Company also performed its annual indefinite-lived intangible asset impairment test during the third quarter of 2018. The Company performed a qualitative assessment of the indefinite-lived intangible asset and determined that is was not more-likely-than-not that the fair value of the indefinite-lived intangible asset was less than the carrying amount. As a result, no impairment of the indefinite-lived intangible asset was recognized.

 

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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 — OTHER ASSETS

 

Other assets consist primarily of land use rights related to a production facility in China.  At December 30, 2017, other assets also included a secured loan to the former supplier of the Company’s nutrition bars.  The Company extended non-revolving credit to this former supplier to allow them to acquire equipment that was necessary to manufacture the USANA nutrition bars, which was secured by the equipment. This relationship was intended to provide improved supply chain stability for USANA and create a mutually beneficial relationship between the parties. Interest accrued at an annual interest rate of LIBOR plus 400 basis points. The note had a maturity date of February 1, 2024 and was to be repaid by a combination of cash payments and credits for the manufacture of USANA’s nutrition bars.

 

A loan is considered impaired when, based on current information and events; it is probable that the Company will be unable to collect the scheduled payments in accordance with the contractual terms of the loan. Factors considered in determining impairment include payment status, collateral value and the probability of collecting payments when due. During the first half of 2017, the Company experienced challenges with the former supplier of nutrition bars and subsequently determined to no longer use this supplier. The Company evaluated the recoverability of the note receivable from this supplier and recorded impairments totaling $2,734 during the year ended December 30, 2017.  The total contractual unpaid principal balance, including accrued unpaid interest on the note receivable from this supplier as of December 30, 2017 was $6,734.  During April 2018, the Company reached a settlement with the supplier to terminate the relationship and received $4,800 in cash as payment in full under the terms of the settlement.

 

NOTE H — 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, pursuant to 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 to $100,000 or greater and its ratio of consolidated funded debt to adjusted EBITDA of 1.0 at the end of each quarter.

 

The adjusted EBITDA under the Credit Agreement is modified for certain non-cash expenses.  Any existing bank guarantees are considered a reduction of the overall availability of credit and part of the covenant calculation under the credit agreement.  This resulted in a $4,273 and $6,602 reduction in the available borrowing limit as of December 30, 2017 and September 29, 2018, respectively, due to existing normal course of business guarantees in certain markets.

 

There was no outstanding debt on this line of credit at December 30, 2017 or at September 29, 2018.  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.

 

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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 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.

 

On February 7, 2017, the Company disclosed in a Current Report on Form 8-K filed with the SEC 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 SEC 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 ongoing, 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 purported shareholder class action lawsuit (Rumbaugh v. USANA Health Sciences Inc., et al., Case No. 2:17-cv-00106) was filed in the United States District Court for the District of Utah by April Rumbaugh, a purported shareholder of USANA, 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 Foreign Corrupt Practices Act or 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. On behalf of herself and a putative class of purchasers of USANA stock between March 14, 2014 and February 7, 2017, the plaintiff asserted claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated thereunder. The plaintiff sought, among other things, an award of damages, interest, reasonable attorneys’ fees, expert fees, and other costs. The lawsuit named as defendants the Company; its former Co-Chief Executive Officer, David A. Wentz; and our Chief Leadership Development Officer, Paul A. Jones. On June 2, 2017, the court appointed Chi Wah On (another purported shareholder of USANA) as lead plaintiff. On August 4, 2017, lead plaintiff filed a consolidated amended complaint seeking similar relief. This new complaint asserted additional allegations and added the Company’s Chief Executive Officer, Kevin G. Guest, and Chief Financial Officer, G. Douglas Hekking, as defendants. On September 18, 2017, the Company filed a motion to dismiss the amended complaint, and briefing was completed on November 8, 2017.  The motion to dismiss was argued on April 25, 2018.  Subsequent to September 29, 2018, on October 16, 2018, the United States District Court for the District of Utah dismissed the action with prejudice.

 

NOTE J DERIVATIVE FINANCIAL INSTRUMENTS

 

The Company’s risk management strategy includes the select use of derivative instruments to reduce the effects of volatility in foreign currency exchange exposure on operating results and cash flows.  In accordance with the Company’s risk management policies, the Company does not hold or issue derivative instruments for trading or speculative purposes.

 

The Company recognizes all derivative instruments as either assets or liabilities in the balance sheet at their respective fair values.  When the Company becomes a party to a derivative instrument and intends to apply hedge accounting, the Company formally documents the hedge relationship and the risk management objective for undertaking the hedge, the nature of risk being hedged, and the hedged transaction, which includes designating the instrument for financial reporting purposes as a fair value hedge, a cash flow hedge, or a net investment hedge.  The Company also documents how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method used to measure ineffectiveness.

 

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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 J DERIVATIVE FINANCIAL INSTRUMENTS - CONTINUED

 

The Company periodically uses derivative hedging instruments to hedge its net investment in its non U.S. subsidiaries designed to hedge a portion of the foreign currency exposure that arises on translation of the foreign subsidiaries into U.S. dollars. The effective portion of gains and losses attributable to these net investment hedges is recorded to foreign currency translation adjustment (“FCTA”) within accumulated other comprehensive income (loss) (“AOCI”) to offset the change in the carrying value of the net investment being hedged, and will subsequently be reclassified to net earnings in the period in which the hedged investment is either sold or substantially liquidated.

 

As of December 30, 2017, there were no derivatives outstanding for which the Company has applied hedge accounting.  During the second quarter of 2018, the Company entered into and settled a forward contract designated as a net investment hedge with a notional value of $105,000 and realized a net gain of $739, which is reflected in the FCTA within AOCI.  The Company assessed hedge effectiveness determining the hedged instrument was highly effective and recorded no ineffectiveness.  As of September 29, 2018, there were no derivatives outstanding for which the Company has applied hedge accounting.

 

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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 K 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

 

Nine Months Ended

 

 

 

September 30,

 

September 29,

 

September 30,

 

September 29,

 

 

 

2017

 

2018

 

2017

 

2018

 

 

 

 

 

 

 

 

 

 

 

Net earnings available to common shareholders

 

$

23,769

 

$

31,040

 

$

68,386

 

$

93,893

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

24,283

 

24,269

 

24,462

 

24,179

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of in-the-money equity awards

 

305

 

732

 

409

 

526

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - diluted

 

24,588

 

25,001

 

24,871

 

24,705

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share from net earnings - basic

 

$

0.98

 

$

1.28

 

$

2.80

 

$

3.88

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share from net earnings - diluted

 

$

0.97

 

$

1.24

 

$

2.75

 

$

3.80

 

 

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

 

Nine Months Ended

 

 

 

September 30,

 

September 29,

 

September 30,

 

September 29,

 

 

 

2017

 

2018

 

2017

 

2018

 

 

 

2,035

 

 

2,091

 

601

 

 

During the quarter ended September 30, 2017 and September 29, 2018, the Company repurchased and retired 865 shares and 178 shares for $50,000 and $22,647, respectively, under the Company’s share repurchase plan.

 

During the nine months ended September 30, 2017 and September 29, 2018, the Company repurchased and retired 865 shares and 217 shares for $50,000 and $25,590, respectively 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 September 29, 2018, the remaining approved repurchase amount under the stock repurchase plan was $24,410.  There currently is no expiration date on the remaining approved repurchase amount and no requirement for future share repurchases.

 

On October 23, 2018, the Company’s Board of Directors authorized an increase in the amount available under its share repurchase plan to a total of $150,000.  The authorization is inclusive of the $24,410 that was remaining under the prior authorization at September 29, 2018.  Subsequent to September 29, 2018, and through November 2, 2018, the Company repurchased and retired 235 shares of common stock for $26,677, at an average market price of $113.57 per share.

 

17


Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

 

NOTE L — SEGMENT INFORMATION

 

USANA operates as a direct selling company that develops, manufactures, and distributes high-quality nutritional and personal care/skincare 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, foods, and personal care/skincare products for the periods indicated.

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 29,

 

September 30,

 

September 29,

 

 

 

2017

 

2018

 

2017

 

2018

 

 

 

 

 

 

 

 

 

 

 

USANA® Nutritionals

 

83

%

83

%

84

%

82

%

USANA Foods

 

9

%

9

%

9

%

9

%

Personal care/Skincare

 

 

 

 

 

 

 

 

 

Sensé — beautiful science®

 

6

%

2

%

6

%

4

%

Celavive®(1)

 

N/A

 

5

%

N/A

 

4

%

 


(1) We launched Celavive® in every market except China in the first quarter of 2018 and recently launched in China late in the third quarter of 2018.

 

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.  Our business in China is conducted by BabyCare Holding, Ltd.  (“BabyCare”), our wholly-owned subsidiary.

 

·                  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, Germany(2), Spain(2), Italy(2), Romania(2), Belgium, and the Netherlands.

 

(2) We commenced operations in Germany, Spain, Italy, and Romania near the end of the second quarter of 2018.

 

18


Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

 

NOTE L — SEGMENT INFORMATION - CONTINUED

 

Selected Financial Information

 

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

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 29,

 

September 30,

 

September 29,

 

 

 

2017

 

2018

 

2017

 

2018

 

 

 

 

 

 

 

 

 

 

 

Net Sales to External Customers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asia Pacific

 

 

 

 

 

 

 

 

 

Greater China

 

$

131,273

 

$

160,932

 

$

399,713

 

$

486,581

 

Southeast Asia Pacific

 

52,310

 

58,770

 

151,381

 

169,769

 

North Asia

 

15,708

 

19,899

 

42,612

 

56,969

 

Asia Pacific Total

 

199,291

 

239,601

 

593,706

 

713,319

 

 

 

 

 

 

 

 

 

 

 

Americas and Europe

 

62,474

 

57,166

 

180,445

 

176,906

 

 

 

 

 

 

 

 

 

 

 

Consolidated Total

 

$

261,765

 

$

296,767

 

$

774,151

 

$

890,225

 

 

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

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 29,

 

September 30,

 

September 29,

 

 

 

2017

 

2018

 

2017

 

2018

 

 

 

 

 

 

 

 

 

 

 

Net sales:

 

 

 

 

 

 

 

 

 

China

 

$

116,174

 

$

144,625

 

$

352,462

 

$

436,327

 

United States

 

$

34,183

 

$

29,790

 

$

93,219

 

$

88,734

 

 

 

 

As of

 

 

 

December 30, 

 

September 29, 

 

 

 

2017

 

2018

 

Long-lived assets:

 

 

 

 

 

China

 

$

96,248

 

$

89,236

 

United States

 

$

59,589

 

$

51,218

 

 

19


Table of Contents

 

Item 2.         MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our 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 included in our Annual Report on Form 10-K for the year ended December 30, 2017, and our other filings, including Current Reports on Form 8-K, that have been filed with the SEC through the date of this report.

 

Overview

 

We develop and manufacture high-quality, science-based nutritional, personal care and skincare 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 collectively 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 September 29, 2018, we had approximately 615,000 active Customers worldwide.  For purposes of this report, we only count as active Customers those Associates and Preferred Customers who have purchased products 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.  Our business in China is conducted by BabyCare, our wholly-owned subsidiary.

 

·                  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, Germany(1), Spain(1), Italy(1), Romania(1), Belgium, and the Netherlands

 

Our primary product lines consist of (i) USANAâ Nutritionals, (ii) USANA Foods, (ii) Sensé — beautiful scienceâ (Sensé), our historical line of personal care products, and (iv) Celaviveâ, our new innovative skincare system with our InCelligence TechnologyTM.  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:

 


(1)         We commenced operations in Germany, Spain, Italy, and Romania near the end of the second quarter of 2018.

 

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Table of Contents

 

 

 

Nine Months Ended

 

 

 

September 30, 2017

 

September 29, 2018

 

 

 

 

 

 

 

Product Line

 

 

 

 

 

USANA® Nutritionals

 

 

 

 

 

Essentials/CellSentials

 

19

%

17

%

Optimizers

 

65

%

65

%

USANA Foods

 

9

%

9

%

Personal care/Skincare

 

 

 

 

 

Sensé — beautiful science®

 

6

%

4

%

Celavive®(1)

 

N/A

 

4

%

All Other

 

1

%

1

%

 

 

 

 

 

 

Key Product

 

 

 

 

 

USANA® Essentials/CellSentials

 

13

%

11

%

Proflavanol®

 

12

%

11

%

BiOmega-3

 

14

%

14

%

 


(1)         We launched Celavive® in every market except China in the first quarter of 2018 and recently launched in China late in the third quarter of 2018.

 

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 a growing desire for a secondary source of income and small business ownership.

 

We believe that our high-quality products and our 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 competitive 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 nine months ended September 29, 2018, net sales outside of the United States represented 90.0% 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.

 

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Table of Contents

 

Customers

 

Because we sell our products exclusively to a customer base of independent Associates and Preferred Customers, we must increase the number of active Customers and/or increase the amount they spend, on average, to increase net sales.  Our primary focus continues to be increasing the number of active Customers.  We believe this focus is consistent with our vision of improving the overall health and nutrition of individuals and families around the world.  Sales to Associates account for approximately 57% of product sales during the nine months ended September 29, 2018; 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 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.

 

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.

 

 

 

Total Active Customers by Region

 

 

 

 

 

 

 

As of

 

As of

 

Change from

 

Percent

 

 

 

September 30, 2017

 

September 29, 2018

 

Prior Year

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asia Pacific:

 

 

 

 

 

 

 

 

 

 

 

 

 

Greater China

 

285,000

 

50.6

%

330,000

 

53.7

%

45,000

 

15.8

%

Southeast Asia Pacific

 

106,000

 

18.8

%

115,000

 

18.7

%

9,000

 

8.5

%

North Asia

 

34,000

 

6.1

%

39,000

 

6.3

%

5,000

 

14.7

%

Asia Pacific Total

 

425,000

 

75.5

%

484,000

 

78.7

%

59,000

 

13.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas and Europe

 

138,000

 

24.5

%

131,000

 

21.3

%

(7,000

)

(5.1

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

563,000

 

100.0

%

615,000

 

100.0

%

52,000

 

9.2

%

 

Current Focus and Recent Developments

 

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

 

·                  We successfully launched our Celavive® skincare line in every market.  Our 2018 objective is to promote Celavive® to our existing Customers and to also use it to acquire a new customer demographic for USANA.  With the anticipated growth from Celavive®, our goal is to grow our personal care and skincare line to an estimated run rate of 10% of net sales by the end of fiscal 2018.

 

·                  We completed the development of our new WeChat platform in China during the second quarter of 2018 and made it available to our China Customers during the third quarter of 2018.  WeChat is a Chinese multi-purpose messaging and social media app that is widely thought of as China’s “app for everything” because of its wide range of functionality.  This platform is part of our Customer experience initiative and is intended to make it easier for Customers in China to do business as they will be able to use the app to introduce USANA to new customers, complete sales of products and enroll new customers.

 

·                  We continue to develop and deploy information technology tools across the enterprise, including a new social sharing platform. This platform, which we began rolling out during the first quarter of 2018, allows our Associates to more fully utilize social media to promote USANA products and interact directly with Customers and potential customers.  In particular, we are utilizing our social selling platform in connection with the launch of Celavive® around the world.

 

During the quarter, we held our International Convention in Salt Lake City, where a number of our Associates gathered to celebrate their success, engage with management and receive additional training.

 

22


Table of Contents

 

Non-GAAP Financial Measures

 

Regulation S-K Item 10(e), “Use of non-GAAP Financial Measures in Commission Filings,” and other SEC regulations define and prescribe the conditions for use of certain non-GAAP financial information. Constant and local 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 our 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 for the current period to the prior-year period’s Financial Results. A reconciliation of these non-GAAP financial measures accompanies any reference to them in the presentation in the accompanying financial statements and notes thereto. Management believes that the non-GAAP financial measures assist management and investors in evaluating, and comparing from period to period, results from ongoing operations in a meaningful and consistent manner while also highlighting meaningful trends in the results of operations. These measures are used in addition to and in conjunction with results presented in accordance with GAAP.  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 third quarter of 2018 increased 13.4% to $296.8 million, an increase of $35.0 million, compared with the third quarter of 2017.  This increase was driven by several factors, including: (i) growth in active Customers, which increased 9.2% year-over-year to 615,000, and (ii) our new Celavive® line, which contributed approximately $9.5 million in incremental sales.  This increase was partially offset by unfavorable changes in currency exchange rates that reduced net sales for the third quarter by $6.2 million.

 

Net earnings for the third quarter of 2018 increased 30.6% to $31.0 million, an increase of $7.3 million, compared with the third quarter of 2017.  The increase in net earnings was primarily the result of higher net sales, and lower relative operating expenses.

 

23


Table of Contents

 

Quarters Ended September 30, 2017 and September 29, 2018

 

Net Sales

 

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

 

 

 

Net Sales by Region

 

 

 

 

 

 

 

Percent

 

 

 

(in thousands)

 

 

 

 

 

 

 

change

 

 

 

Quarter Ended

 

 

 

 

 

Currency

 

excluding

 

 

 

September 30,
2017

 

September 29,
2018

 

Change from
prior year

 

Percent
change

 

impact on
sales

 

currency
impact

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asia Pacific

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Greater China

 

$

131,273

 

50.1

%

$

160,932

 

54.2

%

$

29,659

 

22.6

%

$

(3,221

)

25.0

%

Southeast Asia Pacific

 

52,310

 

20.0

%

58,770

 

19.8

%

6,460

 

12.3

%

(1,942

)

16.1

%

North Asia

 

15,708

 

6.0

%

19,899

 

6.7

%

4,191

 

26.7

%

182

 

25.5

%

Asia Pacific Total

 

199,291

 

76.1

%

239,601

 

80.7

%

40,310

 

20.2

%

(4,981

)

22.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas and Europe

 

62,474

 

23.9

%

57,166

 

19.3

%

(5,308

)

(8.5

)%

(1,236

)

(6.5

)%

 

 

$

261,765

 

100.0

%

$

296,767

 

100.0

%

$

35,002

 

13.4

%

$

(6,217

)

15.7

%

 

Asia Pacific:  The increase in constant currency net sales in Greater China continues to be driven by growth in Mainland China, where local currency net sales increased 27.0%.  The increase in constant currency net sales in Southeast Asia Pacific was driven by double digit local currency growth in several markets, including Malaysia, Philippines, Australia, and New Zealand.  The increase in constant currency net sales in North Asia continues to be driven by growth in South Korea, where local currency net sales increased 25.6%, and the number of active Customers increased 15.6%.

 

Americas and Europe:  The decrease in constant currency net sales in this region was driven by decreases in the U.S. and Mexico, where sales decreased 12.9% and 11.9%, respectively.  Net sales in the U.S. were down compared with the prior year period due to higher sales related to the introduction of our Celavive® product line at our 2017 International Convention.  Sustainable customer growth remains our top priority for each of our reporting regions.

 

Gross Profit

 

Gross profit increased 50 basis points to 82.5% of net sales for the third quarter of 2018, from 82.0% in the prior year.  This increase can be attributed to changes in sales mix by market, leverage from higher sales on fixed costs, and lower relative freight costs, as well as annual price adjustments.  These increases were partially offset by higher reserves for inventory obsolescence and costs associated with Celavive®, which carries a higher relative cost than our previous skincare line.

 

Associate Incentives

 

Associate incentives were 43.9% of net sales for the third quarter of 2018, compared with 44.3% in the prior year.  This decrease can be primarily attributed to sales from Celavive®, which has a lower incentive payout as compared to our other product categories.

 

Selling, General and Administrative Expenses

 

In absolute terms, our selling, general and administrative expense increased $1.8 million during the third quarter of 2018

 

24


Table of Contents

 

when compared with the same period of the prior year.  This increase can be attributed to higher employee related costs in the current year period.  This absolute increase was partially offset by a reduction in expense related to China and our internal investigation and an impairment charge related to our note receivable from a former third-party supplier in the prior-year period.

 

Income Taxes

 

Income taxes were 33.3% of earnings in the third quarter of 2018 compared with 25.8% of earnings in the prior year.  The higher effective tax rate for the third quarter compared with the same period of the prior-year is primarily due to higher excess tax benefits from equity award exercises recognized during the prior year quarter.  Our effective tax rate, on a year-over-year basis, is not (and will not be) comparable during 2018 because of the impact of U.S. tax reform.

 

Diluted Earnings Per Share

 

Diluted earnings per share increased 27.8% in the third quarter of 2018 when compared with the prior-year quarter.  This increase was due to higher net earnings offset, in part, by a higher diluted share count.

 

Nine Months Ended September 30, 2017 and September 29, 2018

 

Net Sales

 

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

 

 

 

Net Sales by Region

 

 

 

 

 

 

 

Percent

 

 

 

(in thousands)

 

 

 

 

 

 

 

change

 

 

 

Nine Months Ended

 

Change

 

 

 

Currency

 

excluding

 

 

 

September 30,
2017

 

September 29,
2018

 

from prior
year

 

Percent
change

 

impact on
sales

 

currency
impact

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asia Pacific

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Greater China

 

$

399,713

 

51.6

%

$

486,581

 

54.7

%

$

86,868

 

21.7

%

$

18,481

 

17.1

%

Southeast Asia Pacific

 

151,381

 

19.6

%

169,769

 

19.0

%

18,388

 

12.1

%

916

 

11.5

%

North Asia

 

42,612

 

5.5

%

56,969

 

6.4

%

14,357

 

33.7

%

2,203

 

28.5

%

Asia Pacific Total

 

593,706

 

76.7

%

713,319

 

80.1

%

119,613

 

20.1

%

21,600

 

16.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas and Europe

 

180,445

 

23.3

%

176,906

 

19.9

%

(3,539

)

(2.0

)%

1,043

 

(2.5

)%

 

 

$

774,151

 

100.0

%

$

890,225

 

100.0

%

$

116,074

 

15.0

%

$

22,643

 

12.1

%

 

Asia Pacific:  The increase in constant currency net sales in Greater China continues to be driven by growth in Mainland China, where local currency net sales increased 18.6%.  The increase in net sales in Southeast Asia Pacific was driven by double digit local currency net sales growth in several markets, including Malaysia, New Zealand, Australia, and Indonesia.  The increase in constant currency net sales in North Asia continues to be driven by growth in South Korea, where local currency net sales increased 29.4%.

 

Americas and Europe:  The decrease in constant currency net sales in this region was driven by local currency decreases in the U.S. and Mexico, which decreased a 4.8% and 7.9%, respectively.  Sustainable customer growth remains our top priority for this region as well as each of our other reporting regions.

 

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Gross Profit

 

Gross profit increased 30 basis points to 83.0% of net sales for the nine months of 2018, from 82.7% in the prior year.  This increase can be attributed to favorable changes in currency exchange rates in markets outside of China, leverage from higher sales on fixed costs, and lower relative freight costs, as well as 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.  Improvement in gross profit margin were partially offset by higher reserves for inventory obsolescence and costs associated with our new Celavive® skincare line, which carries a higher relative cost than other products.

 

Associate Incentives

 

Associate incentives were 44.1% of net sales for the first nine months of 2018, compared with 45.2% in the prior year.  This decrease can be primarily attributed to a higher level of contests, incentive promotions and reward trips during the first nine months of 2017 and sales from our new Celavive® line, which have a lower incentive payout.

 

Selling, General and Administrative Expenses

 

In absolute terms, our selling, general and administrative expense increased $13.1 million during the first nine months of 2018 when compared with the same period of the prior year.  This increase can be attributed to higher employee related costs in the current year period.  This absolute increase was partially offset by the incremental expense related to China and our internal investigation and an impairment charge related to our note receivable from a former third-party supplier in the first nine months of 2017.

 

Income Taxes

 

Income taxes were 33.9% of earnings in the first nine months of 2018 compared with 30.4% of earnings in the prior year.  The higher effective tax rate for the first nine months compared with the same period of the prior-year is primarily due to the recognition of excess tax benefits from equity award exercises recognized during the prior period.  Our effective tax rate, on a year-over-year basis, is not (and will not be) comparable during 2018 because of the impact of U.S. tax reform.

 

Diluted Earnings Per Share

 

Diluted earnings per share increased 38.2% in the first nine months of 2018 when compared with the same period of the prior year.  This increase can be attributed to strong growth in net sales and improved operating margins offset, in part, by a higher effective tax rate.

 

Liquidity and Capital Resources

 

We have historically met our working capital and capital expenditure requirements by using both net cash flow from operations and periodically drawing on 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.  In Mainland China, however, our compliance with Chinese accounting and tax regulations promulgated by the State Administration of Foreign Exchange (“SAFE”) results in transfer and remittance of our profits and dividends from Mainland China to the United States on a delayed basis. If SAFE or other Chinese regulators introduce new regulations, or change existing regulations which allow foreign investors to remit profits and dividends earned in China to other countries, our ability to remit profits or pay dividends from Mainland China may be limited in the future.

 

We have historically generated positive cash flow due to our strong operating margins.  Net cash flow from operating activities totaled $111.7 million in the first nine months of 2018.  Items increasing cash flows from operations in the first nine months of 2018 include: (i) net earnings, and (ii) non-cash items.  These increases were partially offset by (i) cash used on inventories primarily attributed to our new Celavive® line, and (ii) tax payments.

 

Net cash flow from operating activities totaled $68.6 million in the first nine months of 2017.  Items increasing cash flows from operations in the first nine months of 2017 include: (i) net earnings, and (ii) non-cash items.  These increases were reduced by (i) payment of accrued employee compensation costs, (ii) payment of accrued commissions, and (iii) deferred revenue.

 

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Cash and cash equivalents and securities held-to-maturity increased to $321.4 million at September 29, 2018, from $247.1 million at December 30, 2017.  Of the $321.4 million of cash and cash equivalents and securities held-to-maturity held at September 29, 2018, $63.2 million was held as cash and cash equivalents and $81.7 million as securities held-to-maturity in the United States.  Of the remaining $176.5 million held by our international subsidiaries, $132.3 million was concentrated in China.  Cash and cash equivalents held at December 30, 2017, totaled $247.1 million of which, $52.2 million was held in the United States.  Of the remaining $194.9 million held by our international subsidiaries, $142.3 million was held in China.  Net working capital increased to $281.9 million at September 29, 2018, from $199.0 million at December 30, 2017.

 

Line of Credit

 

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

 

Share Repurchase

 

During the nine months ended September 29, 2018, we repurchased 217,000 shares of our common stock for $25.6 million under our share repurchase plan, at an average market price of $117.88.  At September 29, 2018, the remaining approved repurchase amount under the plan was $24.4 million. There currently is no expiration date on the remaining approved repurchase amount and no requirement for future share repurchases.

 

On October 23, 2018, our Board of Directors authorized an increase in the amount available under the share repurchase plan to a total of $150.0 million.  The authorization is inclusive of the $24.4 million that was remaining under the prior authorization at September 29, 2018.  Subsequent to September 29, 2018, and through November 2, 2018, we repurchased and retired 235,000 shares of common stock for $26.7 million, at an average market price of $113.57 per share.

 

Off-Balance Sheet Arrangements

 

None.

 

Summary

 

We believe that current cash balances, investments, 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.

 

Cautionary Note Regarding 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 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

 

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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 and Preferred Customers;

 

·                 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;

 

·                 The impact of changes in trade policies and tariffs;

 

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

 

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

 

·                 Reliance on key management personnel;

 

·                 Extensive government regulation of our 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;

 

·                 Disruption in operations or liability resulting from cybersecurity, data breaches or failure to comply with data privacy and/or data security laws and regulations;

 

·                 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 our 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.

 

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Item 3.         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There have been no material changes from the information presented for the year ended December 30, 2017.

 

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 (Principal Executive Officer) and Chief Financial Officer (Principal Financial and Accounting 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 our disclosure controls and procedures were effective as of September 29, 2018.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting during the fiscal quarter ended September 29, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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 I to the Condensed Consolidated Financial Statements included in Item 1 Part I of this Report on Form 10-Q.

 

Item 1A. Risk Factors

 

Our business, results of operations, and financial condition are subject to various risks. These risks are described elsewhere in this Quarterly Report on Form 10-Q and our other filings with the SEC, including the 2017 Form 10-K and the additional risk factors disclosed in our Form 10-Q for the quarter-ended June 30, 2018.  The risk factors identified in our 2017 Form 10-K and Form 10-Q for the quarter-ended June 30, 2018 have not changed in any material respect.

 

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Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Purchases of Equity Securities

(amounts in thousands, except per share data)

 

Period

 

Total
Number of
Shares
Purchased

 

Average
Price Paid
per Share

 

Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs

 

Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans or
Programs *

 

 

 

 

 

 

 

 

 

 

 

Fiscal July

 

 

 

 

 

 

 

 

 

(Jul. 1, 2018 through Aug. 4, 2018)

 

0

 

$

0.00

 

0

 

$

47,057

 

 

 

 

 

 

 

 

 

 

 

Fiscal August

 

 

 

 

 

 

 

 

 

(Aug 5, 2018 through Sep. 1, 2018)

 

0

 

$

0.00

 

0

 

$

47,057

 

 

 

 

 

 

 

 

 

 

 

Fiscal September

 

 

 

 

 

 

 

 

 

(Sep. 2, 2018 through Sep. 29, 2018)

 

178

 

$

127.43

 

0

 

$

24,410

 

 

 

178

 

 

 

0

 

 

 

 


* Our share repurchase plan has been ongoing since the fourth quarter of 2000, with the Board of Directors periodically approving additional dollar amounts for share repurchases under the plan.  Our share repurchases may occur through open market purchases or pursuant to a Rule 10b5-1 trading plan.  There is no requirement for future share repurchases, and there currently is no expiration date on the approved repurchase amount.

 

Item 3.   DEFAULTS UPON SENIOR SECURITIES

 

None.

 

Item 4.   MINE SAFETY DISCLOSURES

 

None.

 

Item 5.   OTHER INFORMATION

 

None.

 

Item 6.   EXHIBITS

 

Exhibit

 

 

Number

 

Description

 

 

 

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

 

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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.

 

Date: November 7, 2018

 

 

USANA HEALTH SCIENCES, INC.

 

 

 

 

 

/s/ G. Douglas Hekking

 

G. Douglas Hekking

 

Chief Financial Officer
(Principal Financial Officer)

 

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