UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the Quarterly Period Ended March 31, 2001
OR
For the transition period from to
Commission file number: 0-21116
USANA HEALTH SCIENCES, INC. (Exact name of registrant as specified in its charter)
3838 West Parkway Blvd., Salt Lake City, Utah 84120 (Address of principal executive offices, Zip Code)
(801) 954-7100 (Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No []
The number of shares outstanding of the registrant's common stock as of May 8, 2001 was 9,682,637.
USANA HEALTH SCIENCES, INC.FORM 10-QFor the Quarterly Period Ended March 31, 2001INDEX
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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except per share data)
The accompanying notes are an integral part of these statements.
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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (in thousands, except per share data)
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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Quarters Ended April 1, 2000 and March 31, 2001 (in thousands)(unaudited)
The accompanying notes are an integral part of this statement.
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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, except per share data) (unaudited)
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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data) (unaudited)
Basis of Presentation
The unaudited interim consolidated financial information of USANA Health Sciences, Inc. and Subsidiaries (the "Company" or "USANA") has been prepared in accordance with Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements 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, necessary to present fairly the Company's financial position as of March 31, 2001, and results of operations for the quarters March 31, 2001 and April 1, 2000. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 30, 2000. The results of operations for the quarter ended March 31, 2001 may not be indicative of the results that may be expected for the fiscal year ending December 29, 2001.
NOTE A—INVENTORIES
Inventories consist of the following:
NOTE B—OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
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NOTE C—PROPERTY AND EQUIPMENT
Cost of property and equipment and their estimated useful lives is as follows:
NOTE D—COMMON STOCK AND EARNINGS PER SHARE
Basic earnings per share are based on the weighted average number of shares outstanding for each period. Shares redeemed have been included in the calculation of weighted average shares outstanding for basic earnings per share. Diluted earnings per common share are based on shares outstanding (computed under basic EPS) and potentially dilutive shares. Potential shares included in dilutive earnings per share calculations include stock options granted but not exercised.
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Options to purchase 1,354 and 1,741 shares of stock were not included in the computation of EPS for the quarters ended April 1, 2000 and March 31, 2001, respectively, due to their exercise price being greater than the average market price of the shares.
NOTE E—SEGMENT INFORMATION
The Company has four operating segments. Since the beginning of the second quarter of 2000, the United Kingdom (hereinafter includes The Netherlands) market has been serviced from the United States and is considered a part of the domestic operating segment of the Company. Accordingly, all previously reported financial information for the United Kingdom has been included in the domestic segment for comparability purposes. Additionally, the Company began its direct export program into Japan during the third quarter of 2000. These results are also incorporated in the domestic segment. The Company's operating segments are based on operating geographic regions. Management considers the geographic segments of the Company to be the only reportable operating segments. These operating segments are evaluated regularly by management in determining the allocation of resources and in assessing the performance of the Company. Management evaluates performance based on sales revenue and the amount of operating income or loss.
Segment profit or loss is based on profit or loss from operations before income taxes. Interest income and expense as well as income taxes, while significant, are not included in the Company's determination of segment profit or loss in assessing the performance of a segment.
Financial information summarized by geographic segment for the quarters ended April 1, 2000 and March 31, 2001 is listed below:
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of USANA's financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained in this quarterly report.
General
USANA develops and manufactures high-quality nutritional, personal care and weight management products. USANA distributes its products through a network marketing system. USANA refers to its independent distributors as Associates. As of March 31, 2001, we had approximately 88,000 current Associates in the United States, Canada, Australia, New Zealand, Hong Kong, Japan and the United Kingdom. We also offer a Preferred Customer program specifically designed for customers who desire to purchase USANA's products for personal use and do not desire to resell or distribute products. As of March 31, 2001, we had approximately 80,000 Preferred Customers worldwide. Sales to Preferred Customers accounted for approximately 19% of net sales during the first quarter of 2001. USANA defines its Associates and Preferred Customers, within this document, as those who have purchased product from USANA at any time during the most recent 12-month period.
The financial results for any quarter ended within this report, as reported, are adjusted to reflect the Financial Accounting Standards Board guidelines on revenue recognition pursuant to Emerging Issues Task Force No 00-10 ("EITF 00-10"). Under EITF 00-10 guidelines, historical and future revenue relating to amounts billed to a customer for shipping and handling should be classified as revenue. The corresponding expenses are reported as cost of sales. Historically, USANA has reported freight income and expense as a net amount within selling, general and administrative expense.
USANA's three primary product lines consist of USANA® Nutritionals, LEAN Lifelong™ and Sensé™. The USANA Nutritionals product line accounted for approximately 66% of net sales for the quarter ended March 31, 2001. USANA's top selling products, USANA® Essentials and Proflavanol® represented approximately 29% and 12%, respectively, of net sales for the quarter ended March 31, 2001. The LEAN Lifelong product line accounted for approximately 11% of net sales for the quarter ended March 31, 2001. The LEAN Lifelong product line includes several completely reformulated food products previously sold under the LEAN or USANA brand names. Nutrimeal™ and Fibergy® drink mixes, Nutribar and Fibergy bar, a LEAN Formula for weight management and several other related products for healthy diets are included in the LEAN Lifelong product line. The Sensé product line consists of scientifically developed natural products designed to support healthy skin and hair by providing protection and nourishment on both the inside and outside of the dermal layers of the skin. The Sensé product line accounted for approximately 13% of net sales for the quarter ended March 31, 2001.
In addition to these three principal product lines, USANA develops and makes available to Associates a number of materials to assist them in building their business and selling the products. These resource materials or sales aids, which may be purchased from USANA, include product brochures and business forms designed by USANA and printed by outside publishers. Each major product line incorporates specifically designed sales aids. From time to time we contract with authors and publishers to provide books, tapes and other items dealing with health and personal motivation and make these available to Associates. USANA also writes and develops materials for audio and videotapes, which are produced by third parties. New Associates are required to purchase a starter kit, containing USANA training materials, that assists them in starting and growing their business. Affinity and identity are also furthered through the sale of logo merchandise such as clothing, caps, mugs, and other products. Associates do not earn commissions on sales aids, starter kits or logo merchandise.
The fiscal year end of USANA is the Saturday closest to December 31 of each year. Fiscal year 2001 will end on December 29, 2001. Fiscal year 2000 ended on December 30, 2000.
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Results of Operations
Quarters Ended March 31, 2001 and April 1, 2000
Net Sales. Net sales decreased 12.8% to $27.6 million for the quarter ended March 31, 2001, a decrease of $4.1 million from the $31.7 million reported for the comparable quarter in 2000. The decrease in net sales is the result of:
The value initiative was introduced in February 2000 and late March 2000 in the North American and Australia-New Zealand markets, respectively. The decrease in the Associate base was partially offset by strong enrollments of Preferred Customers. The Preferred Customer base increased 42.9% at March 31, 2001 compared to the levels at April 1, 2000. In September 2000, we began a direct export program for consumers in Japan. Sales to Japan under the direct export program totaled approximately $477,000 during the quarter ended March 31, 2001.
The following tables illustrate the change in sales and customers by market for the quarters ended April 1, 2000 and March 31, 2001 (sales and customer information for the United Kingdom and Japan are incorporated in the numbers for the United States):
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Gross Profit. Gross profit decreased to 71.1% of net sales for the quarter ended March 31, 2001 from 75.8% for the comparable quarter in 2000. The decrease in gross profit can be attributed to:
Associate Incentives. Associate incentives decreased to 38.0% of net sales for the quarter ended March 31, 2001 from 40.3% for the comparable quarter in 2000. The decrease in Associate incentives as a percentage of net sales can primarily be attributed to the value initiative. In addition to reducing prices by an average of 24%, the value initiative also incorporated a reduction in the ratio of sales volume points to the wholesale price on customer product purchases. Associate incentives are paid on the amount of sales volume points generated.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to 27.4% of net sales for the quarter ended March 31, 2001 from 26.3% for the comparable quarter in 2000. The increase in selling, general and administrative expenses as a percentage of net sales can be primarily attributed to lower sales in the first quarter of 2001 compared to the same period in 2000. USANA was able to reduce selling, general and administrative expenses in absolute terms during the first quarter of 2001 by $743,000. However, we expect that selling, general and administrative expenses will be pressured for the remainder of 2001 by costs associated with establishing operations in Japan, which is scheduled to open in late 2001.
Other Income (Expense). Foreign currency exchange losses (a component of Other, net) reached $376,000 for the quarter ended March 31, 2001 from $10,000 for the comparable quarter in 2000. The increase is due to the negative effect of weakening foreign currencies on intercompany loans with our foreign subsidiaries. Additional discussion on our foreign currency risk is included in Item 3, "QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK," on page 16.
Net Earnings. Net earnings decreased to 1.7% of net sales for the quarter ended March 31, 2001 from 4.3% for the comparable quarter in 2000. The decrease in net earnings can be attributed to:
Diluted earnings per share decreased $0.08 to $0.05 for the first quarter of 2001 from $0.13 for the comparable quarter in 2000.
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Liquidity and Capital Resources
USANA has historically financed growth with cash flows from operations. In the first quarter of 2001, USANA generated net cash flows from operations of $5.3 million compared to $1.1 million for the first quarter in 2000. Cash and cash equivalents decreased to $2.5 million at March 31, 2001 from $2.9 million at December 30, 2000.
On March 31, 2001, USANA had net working capital of $338,000 compared to net working capital of $2.3 million at December 30, 2000. The change in net working capital was primarily the result of investments in property and equipment.
USANA invested $2.7 million in property and equipment during the first quarter of 2001 compared to $780,000 in the first quarter of 2000. We are currently working on two significant projects that comprise the majority of the $2.7 million invested in property and equipment during the first quarter of 2001. The following table highlights, in millions, the estimated total, historical and future investment required for these projects:
USANA does not extend credit to its customers, but requires payment prior to shipping, which eliminates significant receivables.
During 1999, USANA entered into agreements with a financial institution to provide up to $25 million in secured credit facilities consisting of a $10 million 5-year term loan and a $15 million 3-year revolving line of credit. The credit facilities were amended in March 2001. The amended credit facilities reduced the revolving line of credit to $12.5 million and do not require USANA to make quarterly principal payments on the term loan until March 2002. The credit facilities contain restrictive covenants requiring USANA to maintain certain financial ratios. As of March 31, 2001, we were in compliance with these covenants. As of March 31, 2001, $8.0 million was outstanding on the 5-year term loan and $4.5 million was outstanding on the line of credit.
USANA believes that its current cash balances, the available line of credit and cash provided by operations will be sufficient to cover its needs in the ordinary course of business for the foreseeable future. If USANA experiences an adverse operating environment or unusual capital expenditure requirements, additional financing may be required. However, no assurance can be given that additional financing, if required, would be available on favorable terms. USANA may also require or seek additional financing, including through the sale of its equity securities to finance future expansion into new markets, finance capital acquisitions associated with the growth of USANA and for other reasons. Any financing which involves the sale of equity securities or instruments convertible into equity securities would result in immediate and possibly significant dilution to existing shareholders.
Forward-Looking Statements
The statements contained in this Report that are not purely historical are considered to be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act. 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 future operations and capital spending needs. Readers are
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cautioned that actual results could differ materially from the anticipated results or other expectations expressed in such forward-looking statements for the reasons detailed in our most recent Annual Report on Form 10-K, pages 25 through 30. The fact that some of the risk factors may be the same or similar to our past reports filed with the Securities and Exchange Commission means only that the risks are present in multiple periods. We believe that many of the risks detailed here and in the Company's SEC filings are part of doing business in the industry in which we operate and compete and will likely be present in all periods reported. The fact that certain risks are endemic to the industry does not lessen their significance. The forward-looking statements contained in this Report are made as of the date of this Report and we assume no obligation to update them or to update the reasons why actual results could differ from those projected in such forward-looking statements. Among others, risks and uncertainties that may affect our business, financial condition, performance, development and results of operations include:
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We conduct our business in several countries and intend to continue to expand our foreign operations. Net sales, earnings from operations and net earnings are affected by fluctuations in currency exchange rates, interest rates and other uncertainties inherent in doing business and selling product in more than one currency. In addition, USANA's operations are exposed to risks associated with changes in social, political and economic conditions inherent in foreign operations, including changes in the laws and policies that govern foreign investment in countries where it has operations as well as, to a lesser extent, changes in United States laws and regulations relating to foreign trade and investment.
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Foreign Currency Risks. USANA conducts business in several countries and intends to continue to expand its foreign operations. Sales outside the United States represented 46.4% and 41.9% of net sales for the quarters ended April 1, 2000 and March 31, 2001, respectively. Inventory purchases are transacted primarily in U.S. dollars from vendors located in the United States. The local currency of each international subsidiary is considered the functional currency with all revenue and expenses translated at weighted average exchange rates for reported periods. Consequently, USANA's reported sales and earnings are impacted positively by a weakening of the U.S. dollar and negatively by a strengthening of the U.S. dollar. Given the uncertainty of exchange rate fluctuations, we cannot estimate the effect of these fluctuations on our future business, product pricing, results of operations or financial condition. Changes in currency exchange rates affect the relative prices at which USANA sells its products.
USANA seeks to reduce its exposure to fluctuations in foreign exchange rates by creating offsetting positions through the use of foreign currency exchange contracts. We do not use such derivative financial instruments for trading or speculative purposes. We regularly monitor our foreign currency risks and periodically take measures to reduce the impact of foreign exchange fluctuations on our operating results. As of March 31, 2001 and during the quarter then ended, USANA had no hedging instruments in place to offset exposure to the Canadian Dollar, Australian Dollar, New Zealand Dollar, Hong Kong Dollar, Japanese Yen, British Pound or Euro, to which, in aggregate, USANA had significant exposure. In future periods, when USANA has foreign currency exchange contracts in place, we will present the required information in tabular form.
As a last recourse for hedging currency risk, USANA may elect to adjust prices in non-U.S. markets to reflect changes in foreign currency exchange rates. However, there can be no assurance that these practices will be successful in eliminating all or substantially all of the risks encountered in connection with our foreign currency transactions.
Interest Rate Risks. USANA currently carries $8.0 million in long-term debt at an effective interest rate of 6.98%. This long-term debt matures at the rate of $2.0 million in 2002, $3.4 million in 2003 and $2.6 million in 2004. We also have a revolving line of credit with $4.5 million outstanding at March 31, 2001 with a weighted average interest rate of 6.98%. The interest rate is computed at the bank's Prime Rate or LIBOR adjusted by features specified in our loan agreements, with fixed rate term options of up to six months. A hypothetical 100 basis point increase in interest rates on all of the above debt would result in an annual after tax increase of interest expense of approximately $78,000, which would not materially affect earnings.
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PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company filed no current reports on Form 8-K during the quarter ended March 31, 2001.
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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.
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