USANA Health Sciences, Inc. - 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for USANA Health Sciences, Inc., covering the period ended July 4, 2009. USANA is a direct-selling company that develops, manufactures, and distributes nutritional and personal care products globally through a network of independent distributors ("Associates") and "Preferred Customers." As of the reporting date, the company had approximately 200,000 active Associates and 69,000 active Preferred Customers.
Key Financial Metrics
| Metric | Quarter Ended July 4, 2009 | Six Months Ended July 4, 2009 |
|---|---|---|
| Net Sales | $112.1 million | $209.4 million |
| Gross Profit | $88.3 million (78.8% margin) | $165.8 million (79.2% margin) |
| Net Earnings | $8.8 million | $15.4 million |
| Diluted EPS | $0.57 | $1.00 |
| Cash and Equivalents | $11.2 million | $11.2 million (Ending Balance) |
| Operating Cash Flow (6mo) | $6.5 million | |
| Line of Credit Outstanding | $28.2 million | $28.2 million |
| Total Debt | $28.2 million | $28.2 million |
Material Changes vs. Prior Period
- Revenue: Quarterly net sales increased 2.6% to $112.1 million compared to $109.2 million in the prior year quarter. However, sales for the six-month period decreased 0.7% to $209.4 million from $210.8 million.
- Profitability: Net earnings decreased 12.8% for the quarter and 11.2% for the six-month period compared to the prior year.
- Currency Impact: A significant strengthening of the U.S. dollar negatively impacted reported sales and earnings. Excluding currency effects, sales in the Asia Pacific region grew 25.2% for the quarter and 22.3% for the six months.
- Customer Base: Active Associates increased 18.3% year-over-year, while active Preferred Customers decreased 10.4%.
- Expenses: Associate incentives as a percentage of net sales increased to 44.9% (quarter) and 44.0% (six months) due to compensation plan enhancements. Selling, general, and administrative (SG&A) expenses decreased in absolute terms due to lower legal fees and event costs.
- Cash Flow: Operating cash flow for the six months dropped significantly to $6.5 million from $25.2 million in the prior year. This was primarily due to unusual cash payments of $7.0 million for an arbitration award and $7.4 million in tax payments resulting from an IRS audit settlement.
Guidance, Outlook, and Risks
Outlook: Management expects currency exchange rates to continue to have a significant negative effect on net sales and operating cash flows for the remainder of 2009 due to the strong U.S. dollar. The company plans to continue investing in Associate events and marketing to drive growth.
Risks and Contingencies:
- Legal Proceedings: A purported class action lawsuit was filed in April 2009 in Nevada alleging violations of state pyramid laws and deceptive business practices. The company intends to vigorously defend the action but notes potential material adverse impacts.
- Debt Covenants: The company maintains a $40 million line of credit with Bank of America, maturing in May 2011. It must maintain a rolling four-quarter EBITDA of at least $50 million and a debt-to-EBITDA ratio of 2.5 to 1.0. The company was in compliance as of July 4, 2009.
- Restatement: Historical financial statements for 2006 and 2007 were restated to correct errors related to income taxes and stock option treatment following an IRS audit and settlement.
Investor Verification Checklist
- Verify the impact of the $7.0 million arbitration award and $7.4 million tax payment on future liquidity and working capital.
- Monitor the status of the Nevada class action lawsuit regarding pyramid law allegations.
- Assess the sustainability of the 18.3% growth in active Associates versus the 10.4% decline in Preferred Customers.
- Review the company's ability to maintain debt covenants given the negative impact of currency fluctuations on EBITDA.
- Confirm the effectiveness of the company's hedging strategies, noting that no currency exchange contracts were in place as of July 4, 2009.