USANA Health Sciences, Inc. — Form 10-Q Summary
Reporting period: Quarter ended June 30, 2018, with six-month results and comparisons to the corresponding 2017 periods. The request metadata identifies “2017 Q2,” but the filing itself reports 2018 Q2. Unless otherwise noted, amounts below are in millions of dollars.
Business context
USANA develops and sells nutrition, food, personal-care and skincare products through independent distributors and Preferred Customers. It reported approximately 597,000 active Customers. Asia Pacific generated 80.1% of second-quarter sales; Greater China alone accounted for $167.8 million. The company launched its Celavive skincare line in most markets and began operations in Germany, Spain, Italy and Romania late in the quarter.
Financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $301.5 | $257.1 | $593.5 | $512.4 |
| Gross profit | $251.5 | $213.2 | $494.1 | $425.8 |
| Gross margin | 83.4% | 82.9% | 83.3% | 83.1% |
| Operating earnings | $51.1 | $32.4 | $94.3 | $65.3 |
| Net earnings | $33.9 | $23.3 | $62.9 | $44.6 |
| Diluted EPS | $1.36 | $0.93 | $2.56 | $1.78 |
| Operating margin | 17.0% | 12.6% | 15.9% | 12.7% |
| Net margin | 11.2% | 9.1% | 10.6% | 8.7% |
Q2 sales rose 17.3%; management attributed about $12.5 million of the increase to favorable currency movements and about $7.0 million to Celavive. Constant-currency sales increased 12.4%. Q2 net earnings increased 45.8%. For the first half, sales grew 15.8% (10.2% excluding currency impact) and net earnings rose 40.9%.
Associate incentives were 44.0% of Q2 sales versus 46.1% a year earlier, and 44.2% for the first half versus 45.7%. Q2 income tax expense was $17.6 million, with a 34.2% effective rate, compared with 29.1% a year earlier; the filing says U.S. tax reform makes 2018 rates not comparable year over year.
Cash flow, liquidity and debt
- First-half operating cash flow was $57.2 million, compared with $55.6 million in 2017. Capital expenditures were $6.6 million. Inventory used $13.4 million of operating cash, primarily in connection with Celavive.
- Cash and cash equivalents were $256.3 million at June 30, 2018; held-to-maturity securities were $42.4 million, bringing cash and securities to $298.8 million. Net working capital was $267.9 million, up from $199.0 million at year-end 2017.
- No borrowings were outstanding under the $75 million credit line. Availability was reduced by $6.9 million for bank guarantees. The agreement includes an adjusted EBITDA minimum of $100 million and a funded-debt-to-adjusted-EBITDA covenant of 1.0.
- The company repurchased 39,000 shares for $2.9 million during the first half; $47.1 million remained authorized. Management said existing liquidity, operating cash flow and credit availability should cover foreseeable ordinary-course needs.
Changes, outlook and notable matters
- Growth was concentrated in Asia Pacific: Q2 regional sales rose 21.2%, versus 3.7% in Americas and Europe. Americas and Europe active Customers declined 4.8%, while total active Customers increased 5.3% year over year.
- Management targeted a personal-care and skincare sales run rate of approximately 10% of net sales by year-end 2018, anticipated a Celavive launch in China late in Q3, and planned a WeChat business platform rollout in China in Q3. These are objectives and plans, not guaranteed results.
- Management cited higher relative launch and employee costs, partly offset by lower incentive expense and nominal current-period China investigation costs compared with the prior-year period. Currency movements materially affected reported results.
- The company’s voluntary internal investigation into BabyCare’s China operations remained ongoing; its duration, scope and outcome were uncertain. A related shareholder securities class action was pending a court decision on the company’s motion to dismiss. Management said it intended to defend the claims; potential investigation and litigation costs or outcomes were not quantified.
- Other identified risks include China and other trade-policy changes, foreign-exchange exposure, customer and distributor retention, regulation, data privacy and cybersecurity, and supplier dependence. Management reported no material change in market-risk disclosures and stated disclosure controls were effective.
- ASC 606 was adopted in fiscal 2018 with no material financial-statement impact. The company was evaluating the effect of the upcoming lease-accounting standard and expected balance-sheet recognition of lease assets and liabilities.
Important facts for investors to verify
- Confirm the reporting-period discrepancy in the request metadata: this filing covers Q2 2018, not Q2 2017.
- Track China sales, customer trends and the status and potential consequences of the BabyCare investigation and shareholder litigation.
- Assess whether reported growth persists excluding favorable foreign-exchange effects, and whether new-market expansion and Celavive meet management’s stated objectives.
- Monitor inventory growth, cash conversion, tax-rate changes, and compliance with credit-agreement covenants.