USANA Health Sciences, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended October 1, 2011, not 2010 Q3 as indicated in the request metadata. Comparisons below are with the quarter ended October 2, 2010; nine-month comparisons are with the corresponding 2010 period. Dollar amounts are in millions unless stated otherwise.
Business context and reporting period
USANA develops and manufactures nutrition and personal-care products sold internationally through independent Associates in a network-marketing model. At October 1, 2011, it reported approximately 214,000 active Associates and 66,000 active Preferred Customers. The company reports one operating segment, with North America and Asia Pacific presented as geographic regions.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $143.5 | $135.0 | $436.0 | $380.1 |
| Gross profit | $118.3 | $109.8 | $358.9 | $309.2 |
| Gross margin | 82.4% | 81.4% | 82.3% | 81.3% |
| Operating earnings | $18.8 | $18.5 | $57.2 | $50.1 |
| Net earnings | $12.4 | $12.8 | $37.6 | $33.3 |
| Diluted EPS | $0.81 | $0.79 | $2.39 | $2.11 |
| Operating cash flow | Not separately provided | Not separately provided | $53.5 | $46.2 |
Q3 net margin was approximately 8.6%, versus 9.5% a year earlier; nine-month net margin was approximately 8.6%, versus 8.8%. These percentages are calculated from reported net earnings and sales.
At October 1, 2011, cash and cash equivalents were $36.3 million, current assets $90.0 million, current liabilities $59.3 million, and working capital approximately $30.7 million. Total assets were $229.3 million and stockholders’ equity $159.1 million. No credit-facility borrowings were outstanding. The amended Bank of America facility provides up to $60 million through April 2016; the company said it was compliant with its covenants. Nine-month capital expenditures were $8.6 million.
Material changes versus the prior comparable period
- Q3 sales rose 6.3% to $143.5 million, but the filing attributes approximately $5.1 million of the increase to favorable currency movements; sales growth excluding currency was 2.5%. Asia Pacific sales increased 12.6%, while North America sales declined 1.6%.
- Q3 net earnings fell 3.6% to $12.4 million. Higher Associate incentives and selling, general and administrative expenses offset improved gross margin. Diluted EPS nevertheless increased 2.5%, reflecting fewer diluted shares after repurchases.
- For the first nine months, sales increased 14.7% and net earnings increased 13.0%. The company attributed much of the sales growth to Asia Pacific, including Greater China and BabyCare; favorable currency contributed approximately $15.0 million to reported sales growth.
- Active Associates declined 8.5% year over year to 214,000, and active Preferred Customers declined 10.8% to 66,000. Management said higher average spending per Associate partly offset customer-count declines.
- During the first nine months, the company repurchased and retired 1.1 million shares for $32.7 million, at an average $29.86 per share. The board authorized an additional $30 million of repurchases in Q3; $29.0 million remained authorized at quarter-end.
Outlook, management commentary, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management expects cash balances, operating cash flow and available credit to meet ordinary-course operating and capital needs for the foreseeable future, while cautioning that adverse conditions or unusual capital needs could require additional financing.
- Management’s priorities include integrating and expanding BabyCare in China, rebuilding Associate momentum in North America and other markets, and international expansion. Thailand was planned to open near year-end 2011, with France and Belgium planned for Q1 2012. These are forward-looking plans, not reported outcomes.
- Management cited economic weakness, competition, changes to commission qualifications and uncertainty related to China integration as challenges. Hong Kong Associate counts fell 22.1% year over year in Q3; management linked the decline partly to purchasing timing and uncertainty around integration plans.
- Key risks include retaining Associates, executing the BabyCare integration and obtaining additional Chinese provincial direct-selling licenses, compensation-plan changes, regulatory and litigation matters, foreign-exchange movements, product and supply risks, and compliance with credit covenants.
- The company revised prior-period presentation for deferred taxes and currency translation effects on acquired intangible assets and goodwill. It said the revisions did not affect operating earnings, net earnings or EPS. It also reported cancellations of certain executives’ equity awards following their departures; recaptured compensation reduced nine-month equity-compensation expense by $1.23 million.
- Management said disclosure controls were effective as of October 1, 2011, with no material change in internal control over financial reporting during the quarter. It reported no material change in market-risk disclosures from its prior annual report.
Important facts for investors to verify
- Whether sales growth persists after separating currency effects, acquisition contributions and changes in Associate spending from underlying customer and volume trends.
- Whether declining active Associate and Preferred Customer counts stabilize, particularly in North America and Hong Kong.
- Progress on BabyCare integration, China product launches and provincial licensing, and the actual timing and performance of planned new-market openings.
- Whether higher Associate incentives and operating expenses continue to pressure earnings despite improved gross margins.
- Use of the remaining repurchase authorization, liquidity and covenant headroom under the $60 million credit facility, and any need for additional financing.