USANA Health Sciences, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter ended September 28, 2013, and the nine months then ended, compared with corresponding 2012 periods. The request metadata says “2012 Q3,” but the filing itself is for 2013 Q3.
Business context
USANA develops and manufactures nutritional and personal-care products distributed internationally through independent network-marketing Associates. At quarter-end it reported approximately 245,000 active Associates and 71,000 active Preferred Customers. Associates accounted for 91% of product sales during the first nine months of 2013. The company began operations in Colombia in Q3.
Financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $173.7 million | $165.2 million | $531.9 million | $480.2 million |
| Gross profit | $142.2 million | $134.8 million | $438.3 million | $394.6 million |
| Operating earnings | $24.7 million | $24.1 million | $87.7 million | $70.1 million |
| Net earnings | $16.8 million | $17.5 million | $58.7 million | $48.0 million |
| Diluted EPS | $1.16 | $1.18 | $4.16 | $3.19 |
| Operating cash flow | Not presented by quarter | $64.6 million | $63.6 million |
- Q3 sales grew 5.2%; nine-month sales grew 10.8%. Q3 net earnings declined 4.2%, while nine-month earnings increased 22.4%.
- Gross margin was 81.9% in Q3 versus 81.6%; nine-month gross margin was 82.4% versus 82.2%. Q3 operating margin was approximately 14.2% versus 14.6%; nine-month operating margin was approximately 16.5% versus 14.6%.
- Q3 associate incentives were 44.0% of sales, up 1.4 percentage points year over year; SG&A was $41.1 million, up $0.8 million. The nine-month effective tax rate was 33.0%, versus 31.7%.
- At September 28, cash was $115.3 million, current assets $196.1 million, and current liabilities $82.5 million; working capital was $113.6 million. There was no outstanding line-of-credit debt. The $75 million credit facility had a $3.4 million availability reduction for bank guarantees; the company reported compliance with covenants.
- During the first nine months, investing activities used $9.6 million, including $6.3 million of property and equipment purchases and a $3.4 million increase in notes receivable. Financing activities used $10.1 million, including $18.1 million for repurchases of 414,000 shares.
Material changes and management commentary
- Q3 regional sales growth was strongest in Southeast Asia Pacific (+12.7%) and Americas and Europe (+6.1%); Greater China was nearly flat. Nine-month Greater China sales rose 15.6%.
- Management estimated that the worldwide cross-border purchasing policy reduced Q3 sales by $5.9 million, the new 10% Auto Order discount by $3.1 million, currency movements by $2.0 million, and price adjustments by about $1.5 million. Colombia contributed $1.4 million of Q3 sales.
- August compensation-plan changes included increased Associate payouts and a one-time payment of approximately $4.5 million, contributing to Q3 earnings pressure. Management said the changes and Auto Order incentives are intended to support longer-term customer and sales growth.
- Management expects the Auto Order discount to reduce sales by approximately 4% in the short term and Associate incentives to be about 43.5% of sales going forward. These are expectations, not guarantees.
- The company had planned up to $25 million in 2013 capital expenditures, but delays mean much of the additional investment is expected in 2014. Management believes cash, operating cash flow, and credit availability will cover ordinary operating and capital needs.
Risks, contingencies, and unusual items
- The SEC is conducting a formal investigation that appears to concern possible late-2012 trading in company stock by certain directors, including the Chairman. The company and certain directors and executives received subpoenas and are cooperating. Management, based on counsel’s advice, considered an adverse outcome against the company remote and did not expect a material financial impact.
- Other ordinary-course legal matters were disclosed; management did not believe they would have a material adverse effect. The Q3 annual impairment test found no impairment of goodwill or indefinite-lived intangible assets.
- Foreign-exchange movements, dependence on independent Associates and the network-marketing model, changes to the compensation plan, regulation, China expansion, and product/supply risks are among the stated uncertainties. Approximately 78% of nine-month sales were outside the United States.
- Management noted that $7.7 million of earnings considered indefinitely reinvested could incur tax if repatriated. It also cautioned that interim results may not indicate full-year performance.
Most important facts to verify
- Confirm the intended period: the supplied filing is for Q3 2013, not Q3 2012.
- Track whether the Auto Order discount and cross-border policy continue to pressure sales, particularly in Greater China, and whether customer counts and sales volumes respond to compensation-plan changes.
- Assess the effect of higher Associate incentives on margins and earnings against management’s approximately 43.5% expectation.
- Monitor the SEC investigation and any developments that could change the company’s assessment of materiality.
- Verify execution and timing of deferred capital spending, inventory growth, credit-facility covenant compliance, and the potential tax cost of repatriating indefinitely reinvested earnings.