USANA Health Sciences, Inc. — Form 10-Q Summary
Period: Quarter ended June 29, 2019, with six-month results also presented. The request metadata says “2018 Q2,” but the supplied filing is for 2019 Q2; 2018 figures below are the comparative period. Unless otherwise noted, amounts are USD millions.
Business context
USANA develops and manufactures nutrition, food, personal care, and skincare products sold internationally through independent distributors and Preferred Customers. It reported approximately 555,000 active Customers, down 7.0% from a year earlier. About 90.5% of first-half net sales were outside the United States. The company reports one operating segment, with geographic information provided for Asia Pacific and Americas and Europe.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $256.0 | $301.5 | $529.0 | $593.5 |
| Gross profit | $209.5 | $251.5 | $436.6 | $494.1 |
| Gross margin | 81.8% | 83.4% | 82.5% | 83.3% |
| Operating earnings | $31.2 | $51.1 | $66.2 | $94.3 |
| Net earnings | $21.4 | $33.9 | $45.6 | $62.9 |
| Diluted EPS | $0.91 | $1.36 | $1.93 | $2.56 |
| Operating cash flow | Not provided | Not provided | $20.7 | $57.2 |
Q2 sales fell 15.1% year over year (11.0% excluding currency impact); first-half sales fell 10.9% (6.5% excluding currency impact). Q2 net earnings declined 37.0%, and diluted EPS declined 33.1%. First-half diluted EPS declined 24.6%. Associate incentives were 43.6% of Q2 sales versus 44.0% a year earlier; SG&A was 26.1% versus 22.4% (calculated from reported amounts). First-half SG&A was 25.8% of sales versus 23.2%.
Regional trends and material changes
- Greater China Q2 sales were $128.9 million, down 23.2% reported and 18.3% excluding currency impact. Mainland China local-currency sales declined 20.2%; China active Customers fell substantially as consumer sentiment remained weak.
- Asia Pacific Q2 sales declined 14.9% reported and 10.1% excluding currency impact. North Asia grew 28.0% excluding currency impact, supported by South Korea; Southeast Asia Pacific grew 1.8% excluding currency impact.
- Americas and Europe Q2 sales declined 15.6% reported and 14.5% excluding currency impact, alongside an 11.6% decrease in active Customers.
- Management attributed lower gross margin to currency, reduced fixed-cost leverage, lower production conversion, and sales mix, partly offset by lower scrap costs and annual price adjustments. Lower sales also reduced operating leverage.
Liquidity, debt, and capital allocation
At June 29, 2019, cash and cash equivalents were $231.4 million and held-to-maturity securities were $3.0 million. Current assets were $348.8 million and current liabilities were $128.8 million; reported net working capital was $220.0 million. First-half operating cash flow was $20.7 million, compared with $57.2 million a year earlier. Investing cash flow was $53.8 million, driven largely by $60.5 million in security maturities; financing cash outflow was $59.3 million, primarily reflecting share repurchases.
No debt was outstanding at quarter-end under the $75 million credit facility; availability was reduced by $5.9 million for bank guarantees. The facility has a $100 million adjusted EBITDA covenant and a maximum funded-debt-to-adjusted-EBITDA ratio of 2.0 to 1.0. A July 15, 2019 amendment allowed the company to request increases, subject to bank approval, up to $200 million in aggregate; the facility is scheduled to reduce to $100 million on September 30, 2020.
USANA repurchased $57.6 million of shares in the first half, including $27.6 million in Q2. The remaining authorized repurchase amount at quarter-end was $122.4 million. It repurchased a further $49.3 million through August 2, 2019. The company stated that existing cash, investments, operating cash flow, and credit availability should meet ordinary-course needs for the foreseeable future.
Outlook, risks, and unusual items
Management said China’s consumer environment and promotional response remained weaker than expected and may take several more months to improve. It characterized recent conditions as short term and reiterated confidence in long-term growth potential. Its 2019 strategy included new products and planned second-half promotions; additional customer incentives were being tested in Americas and Europe. The filing provides no specific revenue or earnings guidance.
The company continued a voluntary internal investigation into its BabyCare China operations, first disclosed in 2017, and had informed the SEC and Department of Justice. It said it could not predict the investigation’s duration, scope, or outcome, and that government actions or related penalties and other relief were possible. Ordinary-course legal matters were also disclosed; management did not believe them likely to have a material adverse effect, while noting some contingencies could not be estimated.
Other notable items include adoption of the new lease standard, which added operating lease assets and liabilities to the balance sheet without material income-statement or cash-flow impact, and foreign-currency translation losses in other comprehensive income. Key risks include customer and distributor retention, China regulations and licenses, direct-selling regulation, currency movements, tariffs, competition, product and supply risks, cybersecurity, and debt-covenant compliance.
Important facts for investors to verify
- Confirm the reporting-period mismatch: the supplied filing is Q2 2019, not Q2 2018.
- Track China customer counts, local-currency sales, consumer sentiment, and the impact of promotional activity.
- Review the status and potential financial or regulatory consequences of the BabyCare investigation.
- Assess whether tested customer incentives can reverse declines in Americas and Europe without pressuring margins.
- Monitor operating cash generation, share repurchases, cash held in China, and compliance with credit-facility covenants.
- Evaluate continued foreign-exchange effects and the company’s ability to restore sales and operating leverage.