USANA Health Sciences, Inc. — Form 10-Q Summary
Period discrepancy: The request metadata says 2017 Q3, but the supplied filing is for the quarter ended September 29, 2018, with comparisons to 2017. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and reporting period
USANA develops and manufactures nutritional, food, personal-care and skincare products sold internationally through independent direct-selling Associates. It reported approximately 615,000 active Customers at September 29, 2018, up 9.2% year over year. Asia Pacific generated 80.7% of quarterly sales; Greater China was the largest regional contributor. The interim statements are unaudited.
Financial performance
| Metric | Q3 2018 | Q3 2017 | First nine months 2018 | First nine months 2017 |
|---|---|---|---|---|
| Net sales | $296.8 | $261.8 | $890.2 | $774.2 |
| Gross profit | $244.9 | $214.6 | $739.0 | $640.5 |
| Gross margin | 82.5% | 82.0% | 83.0% | 82.7% |
| Operating earnings | $45.5 | $31.4 | $139.8 | $96.6 |
| Net earnings | $31.0 | $23.8 | $93.9 | $68.4 |
| Diluted EPS | $1.24 | $0.97 | $3.80 | $2.75 |
| Operating margin | 15.3% | 12.0% | 15.7% | 12.5% |
| Net margin | 10.5% | 9.1% | 10.5% | 8.8% |
Quarterly sales increased 13.4% and net earnings increased 30.6% year over year. The company attributed sales growth to a larger active Customer base and approximately $9.5 million in incremental Celavive sales; unfavorable currency movements reduced quarterly sales by about $6.2 million. For the first nine months, sales rose 15.0% and diluted EPS rose 38.2%.
Quarterly associate incentives were 43.9% of sales, down from 44.3%; nine-month incentives were 44.1%, down from 45.2%. The quarterly effective tax rate was 33.3% versus 25.8%; the nine-month rate was 33.9% versus 30.4%. Management cautioned that 2018 tax rates are not comparable with 2017, partly because of U.S. tax reform and prior-period equity-award tax benefits.
Cash flow, liquidity and debt
- Operating cash flow for the first nine months was $111.7 million, compared with $68.6 million in 2017. Higher earnings supported cash generation, partly offset by inventory investment, particularly for Celavive, and tax payments.
- Cash, cash equivalents and held-to-maturity securities totaled $321.4 million at September 29, 2018, versus $247.1 million in cash and cash equivalents at December 30, 2017. Net working capital was $281.9 million, up from $199.0 million.
- Investing cash outflow was $84.6 million, principally reflecting $81.7 million of purchases of short-term securities. Financing cash outflow was $25.1 million, including $25.6 million of share repurchases.
- No line-of-credit borrowings were outstanding. The $75 million facility matures in April 2021; bank guarantees reduced availability by $6.6 million at quarter-end. No material long-term debt balance is reported in the supplied filing.
- Management said existing cash, investments, operating cash flow and available credit should cover ordinary operating and capital needs for the foreseeable future. It noted that adverse conditions or unusual capital needs could require financing, which might not be available on favorable terms.
Material changes, outlook and notable matters
- Asia Pacific sales rose 20.2% in Q3, led by Greater China; Americas and Europe sales fell 8.5%, including declines in the United States and Mexico. In the first nine months, Asia Pacific sales rose 20.1%, while Americas and Europe declined 2.0%.
- Quarterly gross margin improved 50 basis points. Management cited sales mix, fixed-cost leverage, lower relative freight costs and price adjustments, partly offset by inventory-obsolescence reserves and Celavive’s higher relative product cost. Lower relative associate incentives also supported operating results.
- Celavive launched in most markets in Q1 and in China late in Q3. Management’s stated objective was to grow personal-care and skincare to an estimated 10% of net sales run rate by fiscal year-end 2018; this is an operating goal, not full-year financial guidance. No specific consolidated revenue or earnings guidance is provided in the supplied text.
- The company completed and rolled out a WeChat platform for China customers and continued deploying social-selling tools. Germany, Spain, Italy and Romania began operations near the end of Q2.
- A voluntary internal investigation concerning BabyCare operations in China remained ongoing. The company said it could not predict its duration, scope or outcome and could incur further investigation and defense costs; potential government actions could include penalties or other relief. A related shareholder securities class action was dismissed with prejudice on October 16, 2018, after quarter-end.
- The board increased the share-repurchase authorization to $150 million on October 23, 2018. Through November 2, the company repurchased 235,000 shares for $26.7 million. China-related transfers and remittances may be delayed under local rules. Foreign-exchange movements, customer and Associate retention, regulation, China operations, competition, supply risks and litigation remain material risks.
- ASC 606 was adopted in 2018 with no material financial-statement impact. The company planned to adopt the lease standard in Q1 2019 and expected the main effect to be recognition of facility lease right-of-use assets and liabilities.
Most important facts for investors to verify
- Confirm the intended reporting period: this filing covers Q3 2018, not Q3 2017.
- Track Greater China growth and the ongoing BabyCare investigation, including any subsequent regulatory developments.
- Assess whether active Customer growth and Celavive sales support the stated skincare objective, and monitor continued weakness in the Americas and Europe.
- Review inventory growth, operating cash conversion, and the composition and geographic availability of cash and short-term investments.
- Verify actual post-quarter repurchases and remaining authorization, as well as compliance with credit-facility covenants and any changes in liquidity.
- Monitor currency effects, tax-rate changes, and the eventual balance-sheet impact of lease accounting adoption.