USANA Health Sciences, Inc. — Form 10-Q Summary
Reporting-period note: The request identifies 2015 Q2, but the supplied filing is for the quarter ended July 2, 2016, with comparisons to the quarter ended July 4, 2015. Financial statement amounts below are in millions of dollars unless noted.
Business context and reporting period
USANA develops and manufactures nutrition and personal-care products sold internationally through independent distributors and preferred customers. For the six months ended July 2, 2016, 86.6% of sales were outside the United States. The company reported approximately 460,000 active Associates and 97,000 active Preferred Customers at period end; it operates as one reportable segment, with geographic sales disclosed.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $258.5 | $233.2 | $499.0 | $452.6 |
| Gross profit / margin | $212.5 / 82.2% | $193.2 / 82.8% | $410.1 / 82.2% | $374.2 / 82.7% |
| Operating earnings / margin | $37.4 / 14.5% | $38.8 / 16.6% | $71.0 / 14.2% | $68.6 / 15.2% |
| Net earnings / net margin | $25.8 / 10.0% | $25.4 / 10.9% | $48.1 / 9.6% | $45.1 / 10.0% |
| Diluted EPS | $2.07 | $1.92 | $3.84 | $3.43 |
For the first six months, operating cash flow was $48.0 million, capital expenditures were $13.7 million, and cash declined by $30.8 million to $112.4 million. The decline primarily reflected $64.6 million of share repurchases, partly offset by operating cash flow. Net working capital was $93.9 million, down from $112.9 million at January 2, 2016. Current assets were $221.9 million and current liabilities $128.0 million.
No line-of-credit debt was outstanding at July 2, 2016. The facility provides borrowing capacity of up to $125 million through October 31, 2016, then reverts to $75 million; availability was reduced by $4.2 million for bank guarantees. The credit agreement runs to April 2021. The company reported compliance with its covenants, including adjusted EBITDA of at least $100 million and a funded-debt-to-adjusted-EBITDA ratio limit of 2.0:1.
Material changes versus the prior comparable period
- Q2 sales rose 10.8%; excluding a $12.4 million unfavorable currency impact, growth was 16.2%. First-half sales rose 10.2%, or 16.1% excluding a $26.7 million unfavorable currency impact.
- Asia Pacific drove growth: Q2 regional sales increased 15.1%, while Americas and Europe sales declined 0.4%. Greater China sales rose 17.4% reported and 23.3% excluding currency impact. U.S. sales declined 5.8% in Q2, attributed to fewer active customers.
- Q2 net earnings increased 1.4%, but operating earnings declined 3.4%. Higher sales and a lower effective tax rate were substantially offset by lower gross margin and higher operating expenses. Diluted EPS rose 7.8%, helped by fewer shares outstanding after buybacks.
- Q2 associate incentives increased to 44.6% of sales from 43.7%; first-half incentives declined to 44.6% from 44.9%. Q2 SG&A increased $7.2 million; first-half SG&A increased $14.0 million, reflecting wages, technology and infrastructure spending, and China investment.
- The company repurchased 553,082 shares for $64.6 million during the six months, at an average price of $116.82 per share. $35.4 million remained authorized for future repurchases, with no obligation to use it.
Outlook, management commentary, risks and unusual items
- Management said cash, operating cash flow and available credit should fund ordinary operating and capital needs for the foreseeable future; it cautioned that adverse conditions or unusual spending could require additional financing.
- The China manufacturing facility was expected to become operational in the fourth quarter of 2016, although permit approvals were taking longer than expected. Of the anticipated $40 million investment, $32.0 million had been incurred through Q2, including $5.7 million in the first half.
- Management described continued China expansion, customer growth, product innovation and technology investment as priorities. MySmart Foods was being introduced in additional markets, and a larger product launch was anticipated at the 2016 international convention. The filing gives no specific full-year revenue or earnings guidance.
- Foreign exchange is a significant exposure: management said a stronger U.S. dollar generally reduces reported sales and earnings. Other stated risks include attracting and retaining Associates, dependence on network marketing, regulation, competition, suppliers and raw materials, and China expansion.
- Early adoption of ASU 2016-09 increased net earnings by approximately $0.5 million for Q2 and $0.8 million for the first half; diluted EPS benefited by $0.02 for each period. Lower effective tax rates also reflected a federal research credit unavailable in the prior-year periods.
- The company reported no accrued legal contingencies because none were considered probable and estimable. A shareholder derivative lawsuit concerning 2014 equity awards was on appeal; management considered the claims without merit and did not expect a material adverse effect. Management stated disclosure controls were effective and there were no material changes in internal controls.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied 10-Q covers Q2 2016, not Q2 2015.
- Track whether active-customer growth, especially in Greater China, continues and whether the U.S. customer decline persists.
- Assess currency effects and whether sales growth translates into improved margins, given lower gross and operating margins.
- Verify the China facility’s permit progress, opening date and remaining investment requirements.
- Review cash deployment, future repurchases, credit-facility availability and covenant compliance.
- Monitor the derivative lawsuit and other legal or regulatory matters, for which outcomes or potential exposure were not quantified.