USANA Health Sciences, Inc. — Form 10-Q
Reporting period: Quarter ended March 31, 2012; comparable quarter ended April 2, 2011. The request metadata says 2011 Q1, but the filing itself covers 2012 Q1.
Business context and results
USANA develops and manufactures nutrition and personal-care products sold internationally through independent distributors and preferred customers. It reported approximately 219,000 active Associates and 67,000 active Preferred Customers at quarter-end. Associates generated 90% of product sales.
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $154.1 million | $143.6 million | +7.4% |
| Gross profit | $126.9 million | $117.9 million | +7.6% |
| Gross margin | 82.3% | 82.1% | +0.2 percentage points |
| Operating earnings | $20.9 million | $17.2 million | +21.1% |
| Net earnings | $13.8 million | $11.4 million | +21.2% |
| Diluted EPS | $0.90 | $0.70 | +28.6% |
| Operating cash flow | $22.6 million | $17.5 million | +$5.1 million |
Associate incentives were 44.1% of sales versus 45.1%; selling, general and administrative expenses were 24.7% versus 25.0%. Management attributed improved earnings chiefly to higher sales and lower relative incentive expense. Diluted EPS also benefited from fewer shares following 2011 repurchases.
Markets and material changes
- Asia Pacific sales rose 14.3% to $95.5 million, led by Southeast Asia/Pacific (+30.6%) and Greater China (+8.7%). North America sales fell 2.3% to $58.6 million; North Asia sales declined 2.1% to $6.6 million.
- Philippines sales increased 180.7%, alongside 162.5% growth in active Associates. Hong Kong sales benefited from an estimated $9.0 million temporary buying surge ahead of price changes; Taiwan also saw a temporary pre-price-change sales increase.
- Active Associates increased 2.8% year over year to 219,000, while Preferred Customers declined 4.3% to 67,000. North American active Associates fell 7.2%.
- France and Belgium began operations in the final week of the quarter; Thailand became fully operational near quarter-end. These markets were expected to begin contributing in Q2 2012.
Cash, liquidity, debt and outlook
- Cash and cash equivalents were $71.2 million at March 31, 2012, up from $50.4 million at year-end. Net working capital was $62.9 million, compared with $46.4 million.
- Operating cash flow was $22.6 million; capital expenditures were $2.2 million. The company ended the quarter with no balance drawn on its $60 million credit facility, which expires in April 2016.
- USANA was in compliance with facility covenants requiring rolling four-quarter adjusted EBITDA of at least $60 million and funded debt to adjusted EBITDA of no more than 2.0 to 1.0. The filing reports no material long-term debt balance.
- Management expects cash, operating cash generation and available credit to fund ordinary operating and capital needs for the foreseeable future. It expected new-market contributions in Q2 and initial results from its North America stabilization strategy as early as Q4 2012. No numerical earnings or revenue guidance was provided.
Management commentary, risks and unusual items
Management cited higher sales in Southeast Asia/Pacific and Greater China, partially offset by North American weakness. Gross margin benefited from sales mix, currency and price changes, but faced higher raw-material and product-personalization costs. The filing cautions that temporary pre-price-change demand and convention timing affected regional comparisons. Foreign-exchange movements can materially affect reported results; 76.4% of quarterly sales were outside the United States.
Key risks include retaining and recruiting Associates, dependence on network marketing, regulatory and market-entry challenges, currency fluctuations, raw-material costs and supply, competition, product liability, and possible changes in Associate compensation-plan behavior. A prior-period revision for currency translation of acquired BabyCare intangible assets affected comprehensive income and equity but not operating earnings, net earnings or EPS. Adoption of the comprehensive-income presentation standard had no material financial impact.
Important facts for investors to verify
- Whether North American customer and sales trends improve, particularly given the decline in active Associates.
- How much of Greater China and Southeast Asia/Pacific growth persists after temporary pre-price-change buying and event-related effects.
- Whether new-market launches in France, Belgium and Thailand generate meaningful sales without disproportionate start-up costs.
- Whether lower incentive expense and gross-margin gains are sustainable as product, raw-material and market costs evolve.
- Continued covenant compliance, cash generation, and the effect of foreign-currency movements on reported results.