NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The Company

 

USANA Health Sciences, Inc. develops and manufactures high-quality nutritional and personal care products that are sold internationally through a global network marketing system, which is a form of direct selling. The Consolidated Financial Statements include the accounts and operations of USANA Health Sciences, Inc. and its wholly-owned subsidiaries (collectively, the “Company” or “USANA”) in two geographic regions: Asia Pacific, and Americas and Europe.  Asia Pacific is further divided into three sub-regions: Greater China, Southeast Asia Pacific, and North Asia. Greater China includes Hong Kong, Taiwan and China; Southeast Asia Pacific includes Australia, New Zealand, Singapore, Malaysia, the Philippines, Thailand, and Indonesia; North Asia includes Japan, and South Korea.  Americas and Europe includes the United States, Canada, Mexico, Colombia, the United Kingdom, France, Belgium, and the Netherlands. 

 

Principles of consolidation and basis of presentation

 

The accompanying Consolidated Financial Statements include the accounts and operations of USANA Health Sciences, Inc. and its wholly-owned subsidiaries.  All inter-company accounts and transactions have been eliminated in consolidation.  The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America (“US GAAP”). 

  

Use of estimates

 

The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Significant estimates for the Company relate to revenue recognition, inventory obsolescence, goodwill and other intangible assets, equity-based compensation, and income taxes.  Actual results could differ from those estimates.  These estimates may be adjusted as more current information becomes available, and any adjustment could be significant.

 

Fiscal year

 

The Company operates on a 52-53 week year, ending on the Saturday closest to December 31.  Fiscal years 2013 and 2015, were 52-week years.  Fiscal year 2014 was a 53-week year.  Fiscal year 2013 covered the period December 30, 2012 to December 28, 2013 (hereinafter 2013).  Fiscal year 2014 covered the period December 29, 2013 to January 3, 2015 (hereinafter 2014).  Fiscal year 2015 covered the period January 4, 2015 to January 2, 2016 (hereinafter 2015).

 

Fair value measurements

 

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:

 

 

 

 

As of January 3, 2015 and January 2, 2016, the following financial assets and liabilities were measured at fair value on a recurring basis using the type of inputs shown:

 

 

 

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There were no transfers of financial assets or liabilities between Level 1 and Level 2 inputs for the years ended 2014 and 2015.

 

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. For the years ended 2013, 2014, and 2015, there were no non-financial assets measured at fair value on a non-recurring basis.

 

Fair value of financial instruments

 

At January 3, 2015 and January 2, 2016, the Company’s financial instruments include cash equivalents, accounts receivable, restricted cash, notes receivable, and accounts payable. The recorded values of cash equivalents, accounts receivable, restricted cash, and accounts payable approximate their fair values, based on their short-term nature. The carrying value of the notes receivable approximate fair value because the variable interest rates in the notes reflect current market rates.

 

Translation of foreign currencies

 

The functional currency of the Company’s foreign subsidiaries is the local currency of their country of domicile.  Assets and liabilities of the foreign subsidiaries are translated into U.S. dollar amounts at month-end exchange rates.  Revenue and expense accounts are translated at the weighted-average rates for the monthly accounting period to which they relate.  Equity accounts are translated at historical rates.  Foreign currency translation adjustments are accumulated as a component of other comprehensive income.  Gains and losses from foreign currency transactions are included in the “Other, net” component of Other income (expense) in the Company’s consolidated statements of comprehensive income.

 

Cash and cash equivalents

 

The Company considers all highly liquid investments with an original maturity of three months or less from the date of purchase to be cash equivalents.  Cash equivalents as of January 3, 2015 and January 2, 2016 consisted primarily of money market fund investments, and amounts receivable from credit card processors.

 

Amounts receivable from credit card processors are considered cash equivalents because they are both short-term and highly liquid in nature and are typically converted to cash within three days of the sales transaction. Amounts receivable from credit card processors as of January 3, 2015 and January 2, 2016 totaled $6,209 and $12,516, respectively.

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Restricted Cash

 

The Company is required to maintain cash deposits with banks in certain subsidiary locations for various operating purposes.  The most significant of these cash deposits relates to a deposit held at a bank in China, the balance of which was $3,222 as of January 3, 2015, and $3,080 as of January 2, 2016.  This deposit is required for the application of direct sales licenses by the Ministry of Commerce and the State Administration for Industry & Commerce of the People’s Republic of China, and will continue to be restricted during the periods while the Company holds these licenses.  Restricted cash is included in the “Other assets” line item in the Company’s consolidated balance sheets.

 

Inventories

 

Inventories are stated at the lower of cost or market.  Cost is determined using a standard costing system which approximates the first-in, first-out method.  The components of inventory cost include raw materials, labor, and overhead.  Market value is determined using various assumptions with regard to excess or slow-moving inventories, non-conforming inventories, expiration dates, current and future product demand, production planning, and market conditions.  A change in any of these variables could result in an adjustment to inventory.

 

Accounts Receivable

 

Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and our customers’ financial condition, the amount of receivables in dispute, and the current receivables aging and current payment patterns. The Company reviews its allowance for doubtful accounts regularly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.  Accounts Receivable is included in “Prepaid expenses and other current assets” line item in the Company’s consolidated balance sheets.

 

Income taxes

 

The Company accounts for income taxes using the asset and liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of the differences between the financial statement assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  Deferred tax expense or benefit is the result of changes in deferred tax assets and liabilities.  The Company evaluates the probability of realizing the future benefits of its deferred tax assets and provides a valuation allowance for the portion of any deferred tax assets where the likelihood of realizing an income tax benefit in the future does not meet the “more-likely-than-not” criteria for recognition.  The Company recognizes tax benefits from uncertain tax

positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.  The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.  The Company recognizes interest and penalties related to unrecognized tax benefits in income taxes.  Deferred taxes are not provided on the portion of undistributed earnings of subsidiaries outside of the United States when these earnings are considered indefinitely reinvested. 

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Property and equipment

 

Property and equipment are recorded at cost.  Maintenance, repairs, and renewals, which neither materially add to the value of the property nor appreciably prolong its life, are charged to expense as incurred.  Depreciation is provided in amounts sufficient to relate the cost of depreciable assets to operations over the estimated useful lives of the related assets.  The straight-line method of depreciation and amortization is followed for financial statement purposes.  Leasehold improvements are amortized over the shorter of the life of the respective lease or the useful life of the improvements.  Property and equipment are reviewed for impairment whenever events or changes in circumstances exist that indicate the carrying amount of an asset may not be recoverable.  When property and equipment are retired or  otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. 

 

Notes receivable

 

Notes receivable consists primarily of a secured loan to a third-party supplier of the Company’s nutrition bars and are included in the “Other assets” line item in the Company’s consolidated balance sheets.  The Company has extended non-revolving credit to this supplier to allow them to acquire equipment that is necessary to manufacture the USANA nutrition bars.  This relationship provides improved supply chain stability for USANA and creates a mutually beneficial relationship between the parties.  Notes receivable are valued at their unpaid principal balance plus any accrued but unpaid interest, which approximates fair value.  Interest accrues at an annual interest rate of LIBOR plus 400 basis points. The note has a maturity date of February 1, 2024 and will be repaid by a combination of cash payments and credits for the manufacture of USANA’s nutrition bars.  Manufacturing credits applied during 2014 and 2015 were $720 and $966, respectively.  There is no prepayment penalty.  Notes receivable from this supplier as of January 3, 2015, and January 2, 2016, were $8,519, and $8,339, respectively.    

 

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

 

Goodwill

 

Goodwill represents the excess of the purchase price over the fair market value of identifiable net assets of acquired companies.  Goodwill is not amortized, but rather is tested at the reporting unit level at least annually for impairment or more frequently if triggering events or changes in circumstances indicate impairment.  Initially, qualitative factors are considered to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  Some of these qualitative factors may include macroeconomic conditions, industry and market considerations, a change in financial performance, entity-specific events, a sustained decrease in share price, and consideration of the difference between the fair value and carrying amount of a reporting unit as determined in the most recent quantitative assessment.  If, through this qualitative assessment, the conclusion is made that it is more likely than not that a reporting unit’s fair value is less than its carrying amount, a two-step quantitative impairment analysis is performed.  The first step involves estimating the fair value of a reporting unit using widely-accepted valuation methodologies including the income and market approaches, which requires the use of estimates and assumptions.  These estimates and assumptions include revenue growth rates, discounts rates, and determination of appropriate market comparables.  If the fair value of the reporting unit is less than its carrying amount, the second step of the impairment test is performed to measure the amount of the impairment loss.  In the second step, the implied fair value of the goodwill is estimated as the fair value of the reporting unit as determined in step one, less fair values of all other net tangible and intangible assets of the reporting unit determined in a manner similar to a purchase price allocation.  If the carrying amount of the goodwill exceeds its implied fair value, an impairment loss is recognized in an amount equal to that excess, not to exceed the carrying amount of the goodwill.   During 2013, 2014, and 2015, no impairment of goodwill was recorded.

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Intangible assets

 

Intangible assets represent long-lived and indefinite-lived intangible assets acquired in connection with the purchase of the Company’s China subsidiary in 2010.  Long-lived intangible assets are amortized over their related useful lives, using a straight-line or accelerated method consistent with the underlying expected future cash flows related to the specific intangible asset.  Long-lived intangible assets are reviewed for impairment whenever events or changes in circumstances exist that indicate the carrying amount of an asset may not be recoverable.  When indicators of impairment exist, an estimate of undiscounted net cash flows is used in measuring whether the carrying amount of the asset or related asset group is recoverable.  Measurement of the amount of impairment, if any, is based upon the difference between the asset group’s carrying value and estimated fair value. Fair value is determined through various valuation techniques, including market and income approaches as considered necessary.

 

Indefinite-lived intangible assets are not amortized; however, they are tested at least annually for impairment or more frequently if events or changes in circumstances exist that may indicate impairment.  Initially, qualitative factors are considered to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount.  If, through this qualitative assessment, the conclusion is made that it is more likely than not that an indefinite-lived intangible asset’s fair value is less than its carrying amount, a quantitative impairment analysis is performed by comparing the indefinite-lived intangible asset’s book value to its estimated fair value. The fair value for indefinite-lived intangible assets is determined through various valuation techniques, including market and income approaches as considered necessary.  The amount of any impairment is measured as the difference between the carrying amount and the fair value of the impaired asset.  During 2013, 2014, and 2015, no impairment of indefinite-lived intangible assets was recorded.

 

Self insurance

 

The Company is self-insured, up to certain limits, for employee group health claims.  The Company has purchased stop-loss insurance on both an individual and an aggregate basis, which will reimburse the Company for individual claims in excess of $125 and aggregate claims that are greater than 100% of projected claims.  A liability is accrued for all unpaid claims.  Total expense under this self insurance program was $5,281,  $7,019 and $7,287 in 2013, 2014 and 2015, respectively.

 

Common stock and additional paid-in capital

 

The Company records cash that it receives upon the exercise of equity awards by crediting common stock and additional paid-in capital.  The Company received $454, and $10,970 in cash proceeds from the exercise of equity awards in 2013 and 2014, respectively.  There were no cash proceeds from the exercise of equity awards in 2015.  The Company also realizes an income tax benefit from the exercise of certain equity awards. 

 

Upon exercise, the related deferred tax assets are reversed and the difference between the deferred tax assets and the realized tax benefit creates a tax windfall or shortfall that increases or decreases the additional paid-in capital pool (“APIC Pool”).  If the APIC Pool is reduced to zero, additional shortfalls are treated as a current tax expense.  The total tax benefit recorded in additional paid-in capital was $7,075,  $14,712, and $12,024, in 2013, 2014, and 2015, respectively.  

 

The Company has a stock repurchase plan in place that has been authorized by the Board of Directors.  As of January 2, 2016, $100,000 was available to repurchase shares under this plan.  The Company expended $18,085,  $138,819, and $61,181 to repurchase and retire shares during 2013, 2014, and 2015, respectively.  The excess of the repurchase price over par value is allocated between additional paid-in capital and retained earnings on a pro-rata basis.  There currently is no expiration date on the remaining approved repurchase amount and no requirement for future share repurchases.

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Revenue recognition and deferred revenue

 

Revenue is recognized at the estimated point of delivery of the merchandise, at which point the risks and rewards of ownership have passed to the customer.  Revenue is realizable when the following four criteria are met: persuasive evidence of a sale arrangement exists, delivery of the product has occurred, the price is fixed or determinable, and payment is reasonably assured.

 

The Company receives payment, primarily via credit card, for the sale of products at the time customers place orders.  Sales and related fees such as shipping and handling, net of applicable sales discounts, are recorded as revenue when the product is delivered and when title and the risk of ownership passes to the customer.  Payments received for undelivered products are recorded as deferred revenue and are included in other current liabilities.    Deferred revenue is recognized at the estimated point of delivery of the merchandise.  On the occasion that will-call orders are not picked up by customers, we periodically assess the likelihood that customers will exercise their contractual right to pick up orders and recognize revenue when the likelihood is estimated to be remote.  Certain incentives offered on the sale of our products, including sales discounts, are classified as a reduction of revenue.  Sales discounts earned under USANA’s initial order reward program are considered part of a multiple element revenue arrangement and accordingly are deferred when the first order is placed and recognized as customers place their subsequent two Auto Orders.  A provision for product returns and allowances is recorded and is based on historical experience.  Additionally, the Company collects an annual account renewal fee from Associates that is deferred upon receipt and is recognized as income on a straight-line basis over the subsequent twelve-month period.

 

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, are presented on a net basis in the consolidated statements of comprehensive income (excluded from net sales). 

Product return policy

 

All first-time product orders that are returned within the first 30 days following purchase are refunded at 100% of the sales price.  After the first order, all other returned product that is unused and resalable is refunded up to one year from the date of purchase at 100% of the sales price.  This standard policy differs slightly in a few of our international markets due to the regulatory environment in those markets.    According to the terms of the Associate agreement, return of product where the purchase amount exceeds one hundred dollars and was not damaged at the time of receipt by the Associate may result in cancellation of the Associate's distributorship. Depending upon the conditions under which product was returned, customers may either receive a refund based on their original form of payment, or credit on account for a product exchange.  Product returns totaled approximately 0.9% of net sales in 2013, 0.8% of net sales in 2014, and 0.6% of net sales in 2015.   

 

Shipping and handling costs

 

The Company’s shipping and handling costs are included in cost of sales for all periods presented.

 

Associate incentives

 

Associate incentives expenses include all forms of commissions, and other incentives paid to our Associates, less commissions paid to Associates on personal purchases, which are considered a sales discount and are reported as a reduction to net sales.

 

Selling, general and administrative

 

Selling, general and administrative expenses include wages and benefits, depreciation and amortization, rents and utilities, Associate event costs, advertising and professional fees, marketing, and research and development expenses.

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Equity-based compensation

 

The Company records compensation expense in the financial statements for equity-based awards based on the grant date fair value and an estimate of forfeitures derived from historical experience.  Equity-based compensation expense is recognized under the straight-line method over the period that service is provided, which is generally the vesting term.  Further information regarding equity awards can be found in Note J – Equity-Based Compensation.

 

Advertising

 

Advertising costs are charged to expense as incurred and are presented as part of selling, general and administrative expense.  Advertising expense totaled $3,650 in 2013, $4,942 in 2014 and $13,766 in 2015.

 

Research and development

 

Research and development costs are charged to expense as incurred and are presented as part of selling, general

and administrative expense.  Research and development expense totaled $5,083 in 2013, $5,128 in 2014 and $6,420 in 2015.

 

Earnings per share

 

Basic earnings per common share (EPS) are based on the weighted-average number of common shares that were outstanding during each period.  Diluted earnings per common share include the effect of potentially dilutive common shares calculated using the treasury stock method, which include in-the-money, equity-based awards that have been granted but have not been issued.

 

Recent Accounting Pronouncements

 

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

 

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis”.  This standard modifies existing consolidation guidance for reporting companies that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2015, and requires either a retrospective or a modified retrospective approach to adoption.  The Company is currently evaluating the impact ASU 2015-02 will have on its consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-05, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement”.  This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The ASU is effective for annual and interim reporting periods beginning after December 15, 2016.  Early adoption is permitted. The standard permits the use of either the retrospective or cumulative effect transition method.  The Company is currently evaluating the impact ASU 2015-05 will have on its consolidated financial statements.

 

 

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In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”.  For entities that do not measure inventory using the last-in, first-out or retail inventory method, ASU 2015-11 changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value, where net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The ASU is effective for annual and interim reporting periods beginning after December 15, 2016.  The Company is currently evaluating the impact ASU 2015-11 will have on its consolidated financial statements.

 

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”.  The ASU requires entities with a classified balance sheet to present all deferred tax assets and liabilities as noncurrent.  The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2016.  Early adoption is permitted at the beginning of an interim or annual period and requires either a prospective or retrospective approach to adoption.  The Company is currently evaluating the impact ASU 2015-17 will have on its consolidated financial statements.