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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 October 2, 2010

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                        to                       

 

Commission file number: 0-21116

 


 

USANA HEALTH SCIENCES, INC.

(Exact name of registrant as specified in its charter)

 

Utah

 

87-0500306

(State or other jurisdiction

 

(I.R.S. Employer

of incorporation or organization)

 

Identification No.)

 


 

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

(Address of principal executive offices, Zip Code)

 


 

(801) 954-7100

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

The number of shares outstanding of the registrant’s common stock as of November 5, 2010 was 15,968,838.

 

 

 



Table of Contents

 

USANA HEALTH SCIENCES, INC.

 

FORM 10-Q

 

For the Quarterly Period Ended October 2, 2010

 

INDEX

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1

Financial Statements (unaudited)

 

 

Consolidated Balance Sheets

3

 

Consolidated Statements of Earnings — Quarter Ended

4

 

Consolidated Statements of Earnings — Nine Months Ended

5

 

Consolidated Statements of Stockholders’ Equity and Comprehensive Income

6

 

Consolidated Statements of Cash Flows

7

 

Notes to Consolidated Financial Statements

8–19

Item 2

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

19–30

Item 3

Quantitative and Qualitative Disclosures About Market Risk

30–31

Item 4

Controls and Procedures

31

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1

Legal Proceedings

32

Item 1A

Risk Factors

32–36

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

36

Item 6

Exhibits

37-38

 

 

 

Signatures

 

39

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

(in thousands)

 

 

 

As of

 

As of

 

 

 

January 2,

 

October 2,

 

 

 

2010 (1)

 

2010

 

 

 

 

 

(unaudited)

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

13,658

 

$

22,928

 

Inventories

 

25,761

 

32,605

 

Prepaid expenses and other current assets

 

10,391

 

15,155

 

Deferred income taxes

 

2,116

 

2,622

 

Total current assets

 

51,926

 

73,310

 

 

 

 

 

 

 

Property and equipment, net

 

57,241

 

58,327

 

 

 

 

 

 

 

Goodwill

 

5,690

 

16,930

 

Intangible assets, net

 

 

40,872

 

Other assets

 

8,581

 

12,086

 

 

 

$

123,438

 

$

201,525

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

5,810

 

$

8,485

 

Line of credit - short term

 

 

19,000

 

Other current liabilities

 

34,668

 

43,017

 

Total current liabilities

 

40,478

 

70,502

 

 

 

 

 

 

 

Line of credit - long term

 

7,000

 

 

 

 

 

 

 

 

Other long-term liabilities

 

1,587

 

1,076

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock, $0.001 par value; Authorized — 50,000 shares, issued and outstanding 15,309 as of January 2, 2010 and 15,760 as of October 2, 2010

 

15

 

16

 

Additional paid-in capital

 

16,425

 

43,705

 

Retained earnings

 

56,410

 

83,272

 

Accumulated other comprehensive income

 

1,523

 

2,954

 

Total stockholders’ equity

 

74,373

 

129,947

 

 

 

$

123,438

 

$

201,525

 

 


(1) Derived from audited financial statements.

 

The accompanying notes are an integral part of these statements.

 

3



Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF EARNINGS

 

(U.S. dollars in thousands, except per share data)

 

(unaudited)

 

 

 

Quarter Ended

 

 

 

October 3,

 

October 2,

 

 

 

2009

 

2010

 

 

 

 

 

 

 

Net sales

 

$

110,764

 

$

135,006

 

 

 

 

 

 

 

Cost of sales

 

22,637

 

25,157

 

 

 

 

 

 

 

Gross profit

 

88,127

 

109,849

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Associate incentives

 

50,799

 

60,560

 

Selling, general and administrative

 

25,414

 

30,751

 

 

 

 

 

 

 

Total operating expenses

 

76,213

 

91,311

 

 

 

 

 

 

 

Earnings from operations

 

11,914

 

18,538

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

15

 

36

 

Interest expense

 

(105

)

(42

)

Other, net

 

200

 

557

 

 

 

 

 

 

 

Other income, net

 

110

 

551

 

 

 

 

 

 

 

Earnings before income taxes

 

12,024

 

19,089

 

 

 

 

 

 

 

Income taxes

 

4,112

 

6,240

 

 

 

 

 

 

 

Net earnings

 

7,912

 

12,849

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

Basic

 

$

0.52

 

$

0.83

 

 

 

 

 

 

 

Diluted

 

$

0.51

 

$

0.79

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

15,345

 

15,562

 

Diluted

 

15,547

 

16,247

 

 

The accompanying notes are an integral part of these statements.

 

4



Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF EARNINGS

 

(U.S. dollars in thousands, except per share data)

 

(unaudited)

 

 

 

Nine Months Ended

 

 

 

October 3,

 

October 2,

 

 

 

2009

 

2010

 

 

 

 

 

 

 

Net sales

 

$

320,156

 

$

380,104

 

 

 

 

 

 

 

Cost of sales

 

66,236

 

70,912

 

 

 

 

 

 

 

Gross profit

 

253,920

 

309,192

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Associate incentives

 

143,010

 

171,743

 

Selling, general and administrative

 

75,463

 

87,358

 

 

 

 

 

 

 

Total operating expenses

 

218,473

 

259,101

 

 

 

 

 

 

 

Earnings from operations

 

35,447

 

50,091

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

45

 

70

 

Interest expense

 

(540

)

(68

)

Other, net

 

640

 

301

 

 

 

 

 

 

 

Other income, net

 

145

 

303

 

 

 

 

 

 

 

Earnings before income taxes

 

35,592

 

50,394

 

 

 

 

 

 

 

Income taxes

 

12,243

 

17,134

 

 

 

 

 

 

 

Net earnings

 

23,349

 

33,260

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

Basic

 

$

1.52

 

$

2.16

 

 

 

 

 

 

 

Diluted

 

$

1.51

 

$

2.11

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

15,349

 

15,397

 

Diluted

 

15,421

 

15,763

 

 

The accompanying notes are an integral part of these statements.

 

5



Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

 

Nine Months Ended October 3, 2009 and October 2, 2010

 

(in thousands)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

Common Stock

 

Paid-in

 

Retained

 

Comprehensive

 

 

 

 

 

Shares

 

Value

 

Capital

 

Earnings

 

Income (Loss)

 

Total

 

For the Nine Months Ended October 3, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 3, 2009

 

15,350

 

15

 

8,089

 

24,107

 

(375

)

31,836

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

23,349

 

 

 

23,349

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment, net of tax benefit of $1,427

 

 

 

 

 

 

 

 

 

1,708

 

1,708

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

25,057

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock repurchased and retired

 

(33

)

 

 

(249

)

(773

)

 

 

(1,022

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity-based compensation expense

 

 

 

 

 

6,916

 

 

 

 

 

6,916

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued under equity award plans, including tax expense of $19

 

9

 

 

 

57

 

 

 

 

 

57

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at October 3, 2009

 

15,326

 

$

15

 

$

14,813

 

$

46,683

 

$

1,333

 

$

62,844

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended October 2, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 2, 2010

 

15,309

 

15

 

16,425

 

56,410

 

1,523

 

74,373

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

33,260

 

 

 

33,260

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment, net of tax benefit of $614

 

 

 

 

 

 

 

 

 

1,431

 

1,431

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

34,691

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock repurchased and retired

 

(199

)

 

 

(2,232

)

(6,398

)

 

 

(8,630

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued in connection with acquisition

 

400

 

1

 

17,715

 

 

 

 

 

17,716

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity-based compensation expense

 

 

 

 

 

7,107

 

 

 

 

 

7,107

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued under equity award plans, including tax benefit of $50

 

250

 

 

 

4,690

 

 

 

 

 

4,690

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at October 2, 2010

 

15,760

 

$

16

 

$

43,705

 

$

83,272

 

$

2,954

 

$

129,947

 

 

The accompanying notes are an integral part of these statements.

 

6



Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Nine Months Ended

 

 

 

October 3,

 

October 2,

 

 

 

2009

 

2010

 

Cash flows from operating activities

 

 

 

 

 

Net earnings

 

$

23,349

 

$

33,260

 

Adjustments to reconcile net earnings to net cash provided by operating activities

 

 

 

 

 

Depreciation and amortization

 

5,312

 

5,641

 

Loss (gain) on sale of property and equipment

 

(155

)

87

 

Equity-based compensation expense

 

6,916

 

7,107

 

Excess tax benefit from equity-based payment arrangements

 

(11

)

(792

)

Deferred income taxes

 

(2,179

)

(1,221

)

Provision for inventory valuation

 

780

 

989

 

Changes in operating assets and liabilities:

 

 

 

 

 

Inventories

 

(1,364

)

(5,040

)

Prepaid expenses and other assets

 

3,776

 

30

 

Accounts payable

 

(1,311

)

41

 

Other liabilities

 

(14,585

)

6,137

 

 

 

 

 

 

 

Total adjustments

 

(2,821

)

12,979

 

 

 

 

 

 

 

Net cash provided by operating activities

 

20,528

 

46,239

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Acquisition, net of cash acquired

 

$

 

$

(42,694

)

Receipts on notes receivable

 

169

 

 

Increase in notes receivable

 

(143

)

 

Proceeds from sale of property and equipment

 

837

 

32

 

Purchases of property and equipment

 

(2,871

)

(3,676

)

 

 

 

 

 

 

Net cash used in investing activities

 

(2,008

)

(46,338

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from equity awards exercised

 

$

76

 

$

4,640

 

Excess tax benefits from equity-based payment arrangements

 

11

 

792

 

Repurchase of common stock

 

(1,022

)

(8,630

)

Borrowings on line of credit

 

55,710

 

23,350

 

Payments on line of credit

 

(73,700

)

(11,350

)

 

 

 

 

 

 

Net cash (used in) provided by financing activities

 

(18,925

)

8,802

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

389

 

567

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(16

)

9,270

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

13,281

 

13,658

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

13,265

 

$

22,928

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

503

 

$

62

 

Income taxes

 

17,874

 

18,582

 

 

 

 

 

 

 

Non-cash financing activities

 

 

 

 

 

Common stock issued in connection with acquisitions

 

 

17,716

 

 

The accompanying notes are an integral part of these statements.

 

7



Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

 

Basis of Presentation

 

The condensed balance sheet as of January 2, 2010, derived from audited financial statements, and the unaudited interim consolidated financial information of USANA Health Sciences, Inc. and its subsidiaries (collectively, the “Company” or “USANA”) have been prepared in accordance with Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission.  Certain information and footnote disclosures that are normally included in financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.  In the opinion of management, the accompanying interim consolidated financial information contains all adjustments, consisting of normal recurring adjustments that are necessary to present fairly the Company’s financial position as of October 2, 2010 and results of operations for the quarters and nine months ended October 3, 2009 and October 2, 2010.  These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto that are included in the Company’s Annual Report on Form 10-K for the year ended January 2, 2010.  The results of operations for the quarter and nine months ended October 2, 2010, may not be indicative of the results that may be expected for the fiscal year 2010 ending January 1, 2011.

 

NOTE A — ORGANIZATION

 

USANA develops and manufactures high-quality nutritional and personal care products that are sold internationally through a network marketing system, which is a form of direct selling.  The Company’s products are sold throughout the United States (including direct sales from the United States to the United Kingdom and the Netherlands), Canada, Mexico, Australia, New Zealand, Singapore, Malaysia, the Philippines, Hong Kong, Taiwan, Japan, South Korea, and as of August 2010, the People’s Republic of China (“China” or “PRC”).

 

NOTE B — ACQUISITION

 

On August 16, 2010, the Company indirectly acquired 100% of BabyCare Ltd. (“BabyCare”), a limited liability company incorporated under the laws of the PRC, for the purchase price of $62,716, which consisted of $45,000 cash paid and $17,716 common stock issued (400,000 shares of USANA common stock at $44.29).

 

BabyCare is a direct selling company in China that is principally engaged in developing, manufacturing and selling nutritional products for the entire family, with an emphasis on infant nutrition, through both a distributor sales force and a chain of retail centers.  This acquisition was accomplished in the following simultaneous transactions. The Company acquired Pet Lane, Inc., a Delaware corporation (“Pet Lane”), which is the record owner of BabyCare in China. Simultaneously, the Company entered into and closed a share purchase agreement (the “Purchase Agreement”) by and among the Company and the following parties: Pet Lane; Yaolan Ltd., an exempted company organized under the laws of the Cayman Islands (“Yaolan”); and BabyCare Holdings, Ltd., an exempted company organized under the laws of the Cayman Islands (“BabyCare Holdings”). Pursuant to the Purchase Agreement, the Company, through its acquisition entity Pet Lane, acquired all of the issued and outstanding shares of BabyCare Holdings (the “Shares”) from Yaolan. BabyCare Holdings is the beneficial owner of BabyCare. As a result of its acquisition of Pet Lane and BabyCare Holdings, the Company, indirectly, has acquired both record and beneficial ownership of BabyCare.

 

8



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE B — ACQUISITION — CONTINUED

 

The acquisition was accounted for as a business combination and as such, the results of operations for BabyCare have been included in the consolidated financial statements since the effective date of acquisition.  This acquisition contributed $3,358 in net sales and net earnings of $130 for the quarter ended October 2, 2010.  Unaudited supplemental pro forma information had the acquisition occurred at the beginning of each period is as follows:

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

October 3,

 

October 2,

 

October 3,

 

October 2,

 

 

 

2009

 

2010

 

2009

 

2010

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

114,474

 

$

136,592

 

$

330,824

 

$

389,726

 

Net earnings

 

6,570

 

12,338

 

19,600

 

30,782

 

 

The assets acquired and liabilities assumed were recorded at estimated fair values as of the date of the acquisition.  The purchase price allocation for BabyCare is as follows:

 

 

 

August 16,

 

 

 

2010

 

 

 

 

 

Assets Acquired and Liabilities Assumed

 

 

 

Cash and cash equivalents

 

$

3,006

 

Inventories

 

1,702

 

Prepaid expenses and other current assets

 

4,663

 

Property and equipment

 

1,517

 

Goodwill

 

10,540

 

Intangible assets

 

41,000

 

Other assets

 

3,375

 

Accounts payable

 

(2,552

)

Other current liabilities

 

(535

)

 

 

 

 

 

 

$

62,716

 

 

Goodwill of $10,540 has been recognized for the excess of consideration transferred over the acquisition-date fair value of net assets acquired.  In accordance with accounting standards governing the subsequent measurement of goodwill, goodwill will not be amortized, but will be tested at least annually for impairment. The fair value of intangible assets acquired in the amount of $41,000 was derived using various methodologies applied within the income approach.  For further information on intangible assets, see Note G to these consolidated financial statements.  For tax purposes, $52,323 of goodwill and other intangible assets will be deducted over a period of 15 years in computing the Company’s United States tax obligation.  The anticipated benefits associated with the acquired goodwill and other intangibles include facilitating our expansion and growth in China.  The most significant intangible asset is a direct selling license held by BabyCare from the Chinese government to engage in direct selling activities in the Municipality of Beijing.  This direct selling license allows BabyCare to engage non-employee distributors to sell their products away from fixed retail locations.

 

The costs related to the acquisition of BabyCare totaled $1,895 which included; advisory, legal, accounting, valuation, and other professional fees.  These costs were expensed as incurred in the periods in which services were received and recognized in the consolidated statements of earnings in Selling, General and Administrative expenses.

 

9



Table of Contents

 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE C — FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Company reports term deposits in accordance with established authoritative guidance, which requires a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

 

The three levels are defined as follows:

 

·                  Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.

 

·                  Level 2 inputs are from other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

 

·                  Level 3 inputs are unobservable and are used to measure fair value in situations where there is little, if any, market activity for the asset or liability at the measurement date.

 

The fair values of term deposits placed with banks are determined based on the pervasive interest rates in the market, which are also the interest rates as stated in the contracts with the banks. The Company classifies the valuation techniques that use the pervasive interest rates input as Level 2.  The carrying values of these term deposits approximate their fair values due to their short-term maturities.  As of October 2, 2010, the fair value of term deposits in the consolidated balance sheet totaled $3,588, consisting of $598 classified in cash and cash equivalents, and $2,990 in prepaid expenses and other current assets.

 

NOTE D — INVENTORIES

 

Inventories consist of the following:

 

 

 

January 2,

 

October 2,

 

 

 

2010

 

2010

 

 

 

 

 

 

 

Raw materials

 

$

6,785

 

$

8,551

 

Work in progress

 

5,003

 

5,027

 

Finished goods

 

13,973

 

19,027

 

 

 

 

 

 

 

 

 

$

25,761

 

$

32,605

 

 

10



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE E — PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following:

 

 

 

January 2,

 

October 2,

 

 

 

2010

 

2010

 

 

 

 

 

 

 

Prepaid insurance

 

$

1,165

 

$

331

 

Other prepaid expenses

 

2,263

 

2,117

 

Federal income taxes receivable

 

505

 

1,736

 

Miscellaneous receivables, net

 

2,775

 

3,492

 

Deferred commissions

 

2,738

 

3,122

 

Other current assets

 

945

 

4,357

 

 

 

 

 

 

 

 

 

$

10,391

 

$

15,155

 

 

NOTE F — PROPERTY AND EQUIPMENT

 

Cost of property and equipment and their estimated useful lives is as follows:

 

 

 

 

 

January 2,

 

October 2,

 

 

 

Years

 

2010

 

2010

 

 

 

 

 

 

 

 

 

Buildings

 

40

 

$

37,346

 

$

38,226

 

Laboratory and production equipment

 

5-7

 

16,242

 

17,610

 

Sound and video library

 

5

 

600

 

600

 

Computer equipment and software

 

3-5

 

27,419

 

29,057

 

Furniture and fixtures

 

3-5

 

4,561

 

4,820

 

Automobiles

 

3-5

 

256

 

289

 

Leasehold improvements

 

3-5

 

4,478

 

5,171

 

Land improvements

 

15

 

2,025

 

2,041

 

 

 

 

 

 

 

 

 

 

 

 

 

92,927

 

97,814

 

 

 

 

 

 

 

 

 

Less accumulated depreciation and amortization

 

 

 

43,714

 

47,916

 

 

 

 

 

 

 

 

 

 

 

 

 

49,213

 

49,898

 

 

 

 

 

 

 

 

 

Land

 

 

 

7,352

 

7,811

 

 

 

 

 

 

 

 

 

Deposits and projects in process

 

 

 

676

 

618

 

 

 

 

 

 

 

 

 

 

 

 

 

$

57,241

 

$

58,327

 

 

11



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE G — INTANGIBLE ASSETS

 

Intangible assests consist of the following:

 

 

 

As of October 2, 2010

 

Weighted-average

 

 

 

Gross Carrying

 

Accumulated

 

Net Carrying

 

amortization

 

 

 

Amount

 

Amortization

 

Amount

 

period (years)

 

 

 

 

 

 

 

 

 

 

 

Amortized intangible assets

 

 

 

 

 

 

 

 

 

Trade Name & Trademarks

 

$

3,900

 

$

(49

)

$

3,851

 

10

 

Customer Relationships

 

1,900

 

(79

)

1,821

 

3

 

 

 

5,800

 

(128

)

5,672

 

 

 

 

 

 

 

 

 

 

 

 

 

Unamortized intangible assets

 

 

 

 

 

 

 

 

 

Product Formulas

 

8,600

 

 

 

8,600

 

 

 

Direct Sales License

 

26,600

 

 

 

26,600

 

 

 

 

 

35,200

 

 

 

35,200

 

 

 

 

 

$

41,000

 

 

 

$

40,872

 

 

 

 

 

 

 

 

 

 

 

 

 

The Aggregate Amortization Expense:

 

 

 

 

 

 

 

 

 

For quarter ended October 2, 2010

 

$

128

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Amortization Expense:

 

 

 

 

 

 

 

 

 

Remainder of 2010

 

$

266

 

 

 

 

 

 

 

2011

 

1,023

 

 

 

 

 

 

 

2012

 

1,023

 

 

 

 

 

 

 

2013

 

780

 

 

 

 

 

 

 

2014

 

390

 

 

 

 

 

 

 

Thereafter

 

2,190

 

 

 

 

 

 

 

 

 

$

5,672

 

 

 

 

 

 

 

 

NOTE H — LINE OF CREDIT

 

The Company has a $40,000 line of credit.  At October 2, 2010, there was an outstanding balance of $19,000 associated with the line of credit, with a weighted-average interest rate of 1.26%.  The interest rate 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, as set forth in a separate pledge agreement with the bank.  The Credit Agreement contains restrictive covenants based on adjusted EBITDA and a debt coverage ratio.  The Company will be required to pay the balance on this line of credit in full at the time of maturity in May 2011 unless the line of credit is replaced or terms are renegotiated.

 

12



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE I — OTHER CURRENT LIABILITIES

 

Other current liabilities consist of the following:

 

 

 

January 2,

 

October 2,

 

 

 

2010

 

2010

 

 

 

 

 

 

 

Associate incentives

 

$

8,008

 

$

9,777

 

Accrued employee compensation

 

8,508

 

11,637

 

Income taxes

 

284

 

1,716

 

Sales taxes

 

3,683

 

4,178

 

Associate promotions

 

1,026

 

1,200

 

Deferred revenue

 

7,387

 

8,536

 

Provision for returns and allowances

 

1,115

 

1,014

 

All other

 

4,657

 

4,959

 

 

 

 

 

 

 

 

 

$

34,668

 

$

43,017

 

 

NOTE J — EQUITY-BASED COMPENSATION

 

Equity-based compensation expense for the quarters ended October 3, 2009, and October 2, 2010, was $2,298 and $2,967, respectively.  The related tax benefit for these periods was $845 and $1,180, respectively.  Expense for the nine months ended October 3, 2009, and October 2, 2010, was $6,916 and $7,107, respectively.  The related tax benefit for these periods was $2,492 and $2,693, respectively.

 

The following table shows the remaining unrecognized compensation expense on a pre-tax basis for all types of equity awards that were outstanding as of October 2, 2010.  This table does not include an estimate for future grants that may be issued.

 

Remainder of 2010

 

$

3,286

 

2011

 

12,545

 

2012

 

10,455

 

2013

 

6,409

 

2014

 

3,904

 

2015

 

1,651

 

 

 

$

38,250

 

 

The cost above is expected to be recognized over a weighted-average period of 2.4 years.

 

The following table includes weighted-average assumptions that the Company has used to calculate the fair value of equity awards that were granted during the periods indicated.  Deferred stock units are full-value shares at the date of grant and have been excluded from the table below:

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

October 3,

 

October 2,

 

October 3,

 

October 2,

 

 

 

2009

 

2010

 

2009

 

2010

 

 

 

 

 

 

 

 

 

 

 

Expected volatility

 

55.8

%

54.8

%

41.0

%

54.9

%

Risk-free interest rate

 

2.1

%

1.4

%

1.8

%

1.7

%

Expected life

 

4.1 yrs.

 

4.2 yrs.

 

4.0 yrs.

 

4.2 yrs.

 

Expected dividend yield

 

 

 

 

 

Weighted-average grant price

 

$

27.99

 

$

43.73

 

$

26.43

 

$

38.23

 

 

13



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE J — EQUITY-BASED COMPENSATION — CONTINUED

 

A summary of the Company’s stock option and stock-settled stock appreciation right activity for the nine months ended October 2, 2010 is as follows:

 

 

 

Shares

 

Weighted-
average grant
price

 

Weighted-average
remaining
contractual term

 

Aggregate
intrinsic
value*

 

Outstanding at January 2, 2010

 

4,267

 

$

30.26

 

3.8

 

$

17,173

 

Granted

 

1,098

 

38.23

 

 

 

 

 

Exercised

 

(430

)

28.21

 

 

 

 

 

Canceled or expired

 

(89

)

32.98

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at October 2, 2010

 

4,846

 

$

32.20

 

3.5

 

$

41,142

 

 

 

 

 

 

 

 

 

 

 

Exercisable at October 2, 2010

 

1,821

 

$

32.38

 

3.0

 

$

14,671

 

 


*                 Aggregate intrinsic value is defined as the difference between the current market value at the reporting date (the closing price of the Company’s common stock on the last trading day of the period) and the exercise price of awards that were in-the-money.

 

The weighted-average fair value of stock-settled stock appreciation rights that were granted during the nine-month periods ended October 3, 2009, and October 2, 2010 was $9.07 and $17.07, respectively.  The total intrinsic value of awards that were exercised during the nine-month periods ended October 3, 2009, and October 2, 2010 was $194 and $6,057, respectively.

 

A summary of the Company’s deferred stock unit activity for the nine months ended October 2, 2010 is as follows:

 

 

 

Shares

 

Weighted-
average Fair
Value

 

Nonvested at January 2, 2010

 

 

$

 

Granted

 

100

 

$

44.29

 

Vested

 

 

$

 

Canceled or expired

 

 

$

 

 

 

 

 

 

 

Nonvested at October 2, 2010

 

100

 

$

44.29

 

 

14



Table of Contents

 

NOTES TO 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.  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.

 

 

 

For the Quarter Ended

 

 

 

October 3,

 

October 2,

 

 

 

2009

 

2010

 

 

 

 

 

 

 

Net earnings available to common shareholders

 

$

7,912

 

$

12,849

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Common shares outstanding - entire period

 

 

 

 

 

Weighted-average common shares:

 

15,350

 

15,309

 

Issued during period

 

4

 

320

 

Canceled during period

 

(9

)

(67

)

 

 

 

 

 

 

Weighted-average common shares outstanding during period

 

15,345

 

15,562

 

 

 

 

 

 

 

Earnings per common share from net earnings - basic

 

$

0.52

 

$

0.83

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Weighted-average shares outstanding during period - basic

 

15,345

 

15,562

 

Dilutive effect of equity awards

 

202

 

685

 

 

 

 

 

 

 

Weighted-average shares outstanding during period - diluted

 

15,547

 

16,247

 

 

 

 

 

 

 

Earnings per common share from net earnings - diluted

 

$

0.51

 

$

0.79

 

 

Equity awards for 1,295 and 434 shares of stock were not included in the computation of diluted EPS for the quarters ended October 3, 2009, and October 2, 2010, respectively, due to the fact that their exercise prices were greater than the average market price of the shares.

 

15



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE K — COMMON STOCK AND EARNINGS PER SHARE — CONTINUED

 

 

 

For the Nine Months Ended

 

 

 

October 3,

 

October 2,

 

 

 

2009

 

2010

 

 

 

 

 

 

 

Net earnings available to common shareholders

 

$

23,349

 

$

33,260

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Common shares outstanding - entire period

 

 

 

 

 

Weighted-average common shares:

 

15,350

 

15,309

 

Issued during period

 

2

 

110

 

Canceled during period

 

(3

)

(22

)

 

 

 

 

 

 

Weighted-average common shares outstanding during period

 

15,349

 

15,397

 

 

 

 

 

 

 

Earnings per common share from net earnings - basic

 

$

1.52

 

$

2.16

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Weighted-average shares outstanding during period - basic

 

15,349

 

15,397

 

Dilutive effect of equity awards

 

72

 

366

 

 

 

 

 

 

 

Weighted-average shares outstanding during period - diluted

 

15,421

 

15,763

 

 

 

 

 

 

 

Earnings per common share from net earnings - diluted

 

$

1.51

 

$

2.11

 

 

Equity awards for 1,571 and 1,627 shares of stock were not included in the computation of diluted EPS for the nine-month periods ended October 3, 2009, and October 2, 2010, respectively, due to the fact that their exercise prices were greater than the average market price of the shares.

 

NOTE L — COMPREHENSIVE INCOME

 

Total comprehensive income consisted of the following:

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

October 3,

 

October 2,

 

October 3,

 

October 2,

 

 

 

2009

 

2010

 

2009

 

2010

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

7,912

 

$

12,849

 

$

23,349

 

$

33,260

 

Foreign currency translation adjustment

 

797

 

1,894

 

1,708

 

1,431

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

8,709

 

$

14,743

 

$

25,057

 

$

34,691

 

 

16



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE M — SEGMENT INFORMATION

 

USANA operates in a single operating segment as a direct selling company that develops, manufactures, and distributes high-quality nutritional and personal care products that are sold through a global network marketing system of independent distributors (“Associates”).  As such, management has determined that the Company operates in one reportable business segment.  Performance for a region or market is primarily evaluated based on sales.  The Company does not use profitability reports on a regional or market basis for making business decisions.  No single Associate accounted for 10% or more of net sales for the periods presented.  The table below summarizes the approximate percentage of total product revenue that has been contributed by the Company’s nutritional and personal care products for the periods indicated.

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

October 3,

 

October 2,

 

October 3,

 

October 2,

 

 

 

2009

 

2010

 

2009

 

2010

 

Product Line

 

 

 

 

 

 

 

 

 

USANAâ Nutritionals

 

76

%

78

%

76

%

77

%

USANA Foods

 

12

%

12

%

12

%

12

%

Sensé — beautiful scienceâ

 

9

%

7

%

9

%

8

%

 

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

 

·                  North America

 

·                  United States

 

·                  Canada

 

·                  Mexico

 

·                  Asia Pacific

 

·                  Southeast Asia Pacific — Australia, New Zealand, Singapore, Malaysia, and the Philippines

 

·                  Greater China(1) — Hong Kong, Taiwan, and China(2)

 

·                  North Asia — Japan and South Korea

 


(1)         Formerly referred to as East Asia.

(2)         Our business in China is that of BabyCare, which was indirectly acquired on August 16, 2010.

 

17



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE M — SEGMENT INFORMATION — CONTINUED

 

Selected Financial Information

 

Selected financial information, presented by geographic region, is listed below for the periods ended as of the dates indicated:

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

October 3,

 

October 2,

 

October 3,

 

October 2,

 

 

 

2009

 

2010

 

2009

 

2010

 

Net Sales to External Customers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

 

 

 

 

 

 

 

 

United States

 

$

38,098

 

$

38,228

 

$

114,495

 

$

113,826

 

Canada

 

16,661

 

16,419

 

48,051

 

52,352

 

Mexico

 

5,535

 

5,314

 

16,384

 

16,416

 

North America Total

 

60,294

 

59,961

 

178,930

 

182,594

 

 

 

 

 

 

 

 

 

 

 

Asia Pacific

 

 

 

 

 

 

 

 

 

Southeast Asia Pacific

 

25,227

 

25,730

 

69,683

 

74,231

 

Greater China

 

20,262

 

43,456

 

56,866

 

106,156

 

North Asia

 

4,981

 

5,859

 

14,677

 

17,123

 

Asia Pacific Total

 

50,470

 

75,045

 

141,226

 

197,510