USANA Health Sciences, Inc. - 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report on Form 10-Q for the period ended October 3, 2009. USANA Health Sciences, Inc. develops and manufactures nutritional and personal care products sold internationally through a network marketing system. The company operates in two primary geographic regions: North America and Asia Pacific. As of the period end, the company had approximately 199,000 active Associates and 68,000 active Preferred Customers.
Key Financial Metrics
| Metric | Quarter Ended Oct 3, 2009 | Nine Months Ended Oct 3, 2009 |
|---|---|---|
| Net Sales | $110.8 million | $320.2 million |
| Gross Profit | $88.1 million (79.6% margin) | $253.9 million (79.3% margin) |
| Net Earnings | $7.9 million | $23.3 million |
| Diluted EPS | $0.51 | $1.51 |
| Cash and Equivalents | $13.3 million | $13.3 million |
| Operating Cash Flow (9mo) | $20.5 million | |
| Debt (Line of Credit) | $17.0 million outstanding | $17.0 million outstanding |
| Working Capital | $10.5 million | $10.5 million |
Material Changes vs. Prior Period
- Revenue: Net sales increased 3.3% for the quarter and 0.7% for the nine-month period compared to the prior year. Growth was driven by an 8.2% increase in active Associates, partially offset by a 6.8% decrease in Preferred Customers and significant negative currency impacts due to a strengthening U.S. dollar.
- Profitability: Net earnings decreased 2.1% for the quarter and 8.3% for the nine-month period. This decline was primarily due to higher Associate incentives (increasing to 45.9% of sales for the quarter) and currency headwinds.
- Expenses: Selling, general, and administrative (SG&A) expenses decreased significantly ($2.2 million for the quarter; $4.9 million for nine months) due to lower legal fees and promotional costs. However, Associate incentives rose due to compensation plan enhancements implemented in late 2008.
- Cash Flow: Operating cash flow for the nine months dropped to $20.5 million from $38.1 million in the prior year. This was largely due to non-routine payments of $7.0 million for an arbitration award and $7.4 million in tax payments resulting from an IRS audit settlement.
Outlook, Risks, and Unusual Items
- Restatement: The company restated prior period financial statements to correct errors related to income taxes and stock option deductions following an IRS audit. The settlement resulted in $4.4 million in taxes due and $1.3 million in additional compensation expense.
- Product Updates: The company re-launched flagship products (Essentials and HealthPak) with formula upgrades and price increases of approximately 6% and 3%, respectively. A new online training system, "eApprentice," was introduced.
- Market Expansion: Operations in the Philippines commenced in January 2009, contributing $1.9 million to quarterly sales.
- Risks: Key risks include the strengthening U.S. dollar negatively impacting international sales, dependence on the network marketing model, and the ability to attract and retain Associates. The company is currently in compliance with debt covenants regarding EBITDA and debt coverage ratios.
- Legal: A purported class action lawsuit (Chirco vs. USANA et. al) remains pending in Nevada state court.
Investor Verification Checklist
- Verify the impact of the strengthening U.S. dollar on future international revenue projections.
- Monitor the trend of active Associates vs. Preferred Customers to assess sales volume sustainability.
- Review the status of the pending Chirco class action lawsuit for potential liability exposure.
- Confirm continued compliance with the $40 million line of credit covenants (EBITDA and debt coverage).
- Assess the effectiveness of the new "eApprentice" training system in retaining new Associates.