USANA Health Sciences, Inc. — Form 10-Q Summary
Period discrepancy: The request identifies “2015 Q3,” but the supplied filing is for the quarter ended October 1, 2016, with comparisons to the quarter ended October 3, 2015. Financial figures below are in U.S. dollars; monetary amounts are rounded to millions unless stated otherwise.
Business context and reporting period
USANA develops and manufactures nutrition and personal-care products sold internationally through independent network-marketing Associates. It reported approximately 456,000 active Associates and 94,000 active Preferred Customers at quarter-end. Sales are concentrated in Asia Pacific, particularly Greater China; 86.6% of nine-month sales were outside the United States.
Financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $254.2m | $233.3m | $753.2m | $685.9m |
| Gross profit | $209.2m | $192.2m | $619.3m | $566.4m |
| Operating earnings | $35.8m | $38.0m | $106.8m | $106.5m |
| Net earnings | $30.1m | $25.6m | $78.2m | $70.7m |
| Diluted EPS | $2.40 | $1.92 | $6.24 | $5.35 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $81.7m | $74.5m |
- Q3 sales rose 9.0%; growth excluding currency effects was 11.4%. Nine-month sales rose 9.8%, or 14.5% excluding currency effects.
- Gross margin was 82.3% in Q3 versus 82.4%; nine-month gross margin was 82.2% versus 82.6%. Operating margin was approximately 14.1% versus 16.3% in Q3 and 14.2% versus 15.5% year to date. Net margin was approximately 11.8% versus 11.0% in Q3 and 10.4% versus 10.3% year to date.
- Q3 operating earnings declined despite higher sales, as operating expenses rose. Net earnings increased mainly because the effective tax rate fell to 16.6% from 33.3%. Nine-month effective tax rate was 26.8% versus 34.0%.
- Early adoption of share-based compensation accounting standard ASU 2016-09 increased Q3 and nine-month net earnings by approximately $6.5m and $7.3m, respectively, and benefited diluted EPS by $0.50 and $0.52. Thus, reported earnings and EPS growth included a significant tax-accounting benefit.
- At October 1, cash and cash equivalents were $134.5m, current assets $248.1m, and current liabilities $128.4m; working capital was $119.7m. Total assets were $443.6m and stockholders’ equity $307.7m.
- Nine-month operating cash flow was $81.7m; capital expenditures were $26.0m. Cash decreased $8.7m over the period, including $64.6m of share repurchases. The company held $121.5m of cash at international subsidiaries and $13.0m in the U.S.
- Borrowings under the credit line were $1.2m at quarter-end. The facility was extended to April 2021, with borrowing capacity temporarily increased to $125m through October 31, 2016 and reverting to $75m thereafter. The company reported covenant compliance.
Material changes and management commentary
- Asia Pacific sales increased 13.2% in Q3; Greater China rose 10.8% reported and 16.2% excluding currency effects. Americas and Europe sales declined 2.0%; U.S. sales fell 8.0%, partly offset by growth in Mexico. For the first nine months, Asia Pacific sales rose 13.9%, while Americas and Europe declined 0.5% reported but grew 3.7% excluding currency effects.
- Active Associates increased 12.6% year over year, led by Greater China; Preferred Customers increased 5.6%. Management attributed sales growth principally to customer growth and reported a $5.7m adverse currency impact on Q3 sales.
- Q3 associate incentives increased to 44.4% of sales from 43.5%, mainly due to higher commission payouts and bonus programs. SG&A increased $7.8m in Q3 and $21.8m year to date, reflecting staffing, technology, China investment, and research and development.
- Management’s focus includes expanding China, upgrading information technology, product innovation, market-specific incentives, and brand-building. A new China manufacturing facility was expected to be fully operational by year-end 2016; required permits and product registrations had been obtained. The company had launched its Incelligence platform and CellSentials product in nine markets, with additional launches planned.
- On October 25, 2016, the board approved a two-for-one stock split, distributable November 22 to shareholders of record November 14. The split is subsequent to the reporting date.
Outlook, risks, and contingencies
Management said cash, operating cash flow, and available credit were expected to meet ordinary-course operating and capital needs for the foreseeable future, while noting that adverse conditions or unusual capital needs could require financing and that financing might not be available on favorable terms. The filing does not provide a quantified earnings or revenue forecast. Key risks include reliance on the network-marketing channel and Associate retention, China expansion, currency fluctuations, regulation, competition, suppliers and raw-material availability, product liability, technology dependence, and debt-covenant compliance.
The company reported no contingency accrual because no matter was considered both probable and estimable. A shareholder derivative suit concerning 2014 equity awards remained on appeal; oral arguments were scheduled for January 2017. Management considered the claims without merit and did not expect a material adverse effect. No material change in market-risk disclosures was reported.
Important facts for investors to verify
- Confirm the intended period: the supplied filing is Q3 2016, not Q3 2015.
- Assess earnings growth excluding the ASU 2016-09 tax benefit and the effect of share repurchases on EPS.
- Monitor U.S. customer and sales trends, Greater China growth, and the impact of foreign-exchange movements.
- Track execution, timing, and costs of the China facility and other strategic investments.
- Review ongoing litigation developments, credit-facility terms and covenant headroom, and the availability of international cash.