USANA HEALTH SCIENCES INC quarterly report, Q1 FY2013

Full document

USANA Health Sciences, Inc. — Form 10-Q Summary

Reporting period: The supplied filing is for the quarter ended March 30, 2013, with comparisons to the quarter ended March 31, 2012. This differs from the request metadata identifying 2012 Q1. Unless otherwise stated, financial amounts below are in millions of U.S. dollars.

Business context

USANA develops and manufactures nutritional and personal-care products sold internationally through independent associates using a direct-selling network. In Q1 2013, it reported approximately 229,000 active Associates and 67,000 active Preferred Customers. Associates accounted for 91% of product sales. The company operates in one reportable business segment, with sales across North America/Europe and Asia Pacific.

Financial results and liquidity

  • Net sales: $169.1 million, up 9.7% from $154.1 million. Management attributed growth to higher active Associate counts and sales volume per Associate; currency contributed approximately $0.9 million.
  • Gross profit and margin: $138.8 million; gross margin was 82.1%, compared with 82.3%.
  • Operating earnings and margin: $26.6 million and 15.7%, versus $20.9 million and 13.5%.
  • Net earnings and margin: $17.8 million, up 29.3%, with a 10.5% net margin versus $13.8 million and 8.9% a year earlier. Diluted EPS rose to $1.28 from $0.90.
  • Operating costs: Associate incentives were $69.9 million, or 41.3% of sales, down from 44.1%. SG&A rose to $42.4 million from $38.0 million, increasing to 25.1% of sales from 24.7%.
  • Cash flow: Operating cash flow was $20.3 million, down from $22.6 million. Investing activities used $2.0 million; financing activities used $17.9 million, including $18.1 million for share repurchases. Cash increased $0.2 million during the quarter to $71.0 million.
  • Balance sheet and liquidity: Current assets were $133.7 million and current liabilities $70.0 million; working capital was $63.6 million. The company reported no outstanding borrowings on its $60 million credit facility, which expires in April 2016, and said it complied with its covenants. Total liabilities were $81.0 million; no long-term debt balance is reported in the balance sheet presented.
  • Other balance-sheet changes: Inventory increased to $43.0 million from $36.5 million. Stockholders’ equity was $187.6 million at quarter-end.

Material changes and operating developments

  • Sales grew across most markets: North America/Europe increased 9.4%, Southeast Asia Pacific 9.5%, and Greater China 11.2%; North Asia was nearly flat.
  • Greater China growth included a $7.8 million increase in mainland China, partly offset by a $2.2 million decrease in Hong Kong. Hong Kong comparisons were affected by prior-year sales ahead of price increases and convention-related sales in 2013.
  • Active Associates increased 4.6% year over year to 229,000. Active Preferred Customers remained about 67,000, while Greater China Preferred Customers fell 57.1% to approximately 3,000.
  • Management linked the higher earnings to sales growth, lower relative Associate incentives under the Lifetime Matching Bonus, and a lower effective tax rate. Lower gross margin and higher relative SG&A partly offset those benefits.
  • The company repurchased and retired 414,000 shares for $18.1 million, at an average $43.64 per share; $13.6 million remained authorized for repurchases at quarter-end.

Outlook, risks, and unusual items

  • Management expected fiscal 2013 effective tax rate of 33.0%–33.5%. It expected unit sales to increase but said the 2013 pricing initiative could have a neutral-to-negative effect on full-year net sales and a negative effect on gross profit.
  • Planned 2013 capital expenditures were up to $25 million, higher than usual, primarily for China and international development. Management believed cash, operating cash flow, and the credit facility would cover ordinary operating and capital needs, while noting additional financing might be needed under adverse conditions or unusual capital requirements.
  • USANA announced Colombia as its next market, planned to open in Q3 2013, and reported receiving three additional direct-selling licenses in Mainland China.
  • Risks highlighted include retaining Associates and dependence on network marketing, China expansion and integration, regulation, foreign-exchange movements, competition, supply and raw-material risks, product liability, and litigation or regulatory outcomes. The filing reported no material change in market-risk disclosures from the prior annual report.
  • Management attributed the lower tax rate partly to a research credit relating to fiscal 2012, Hong Kong tax-rate changes, and a larger manufacturing deduction. No specific material litigation contingency amount is provided in the supplied text.
  • Management concluded disclosure controls were effective as of March 30, 2013, and reported no material quarter-over-quarter change in internal control over financial reporting.

Important facts for investors to verify

  • Confirm the intended reporting period: the filing itself covers Q1 2013, not Q1 2012.
  • Assess whether Associate growth and sales volume can offset pricing-related pressure on revenue and gross margin.
  • Investigate the sharp decline in Greater China Preferred Customers and the Hong Kong sales decrease, including the sustainability of mainland China growth.
  • Monitor inventory growth, operating cash flow, and planned capital spending of up to $25 million.
  • Review share repurchases, remaining authorization, and covenant headroom; the filing states covenant compliance but does not provide the actual covenant ratios.
  • Consider foreign-exchange exposure: approximately 76% of quarterly sales were outside the United States.