USANA Health Sciences, Inc. — Form 10-Q Summary
Period discrepancy: The request identifies 2018 Q3, but the supplied filing is for the quarter ended September 28, 2019, with comparisons to the quarter ended September 29, 2018. This summary reflects the supplied 2019 filing.
Business context and reporting period
USANA develops and manufactures nutrition, personal care, and skincare products sold internationally through a direct-selling network. The unaudited filing covers the third quarter and first nine months of 2019. About 90.1% of nine-month sales were outside the United States. Active customers totaled approximately 558,000 at quarter-end, down 9.3% year over year.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $260.6 million | $296.8 million | $789.6 million | $890.2 million |
| Gross margin | 81.7% | 82.5% | 82.2% | 83.0% |
| Operating earnings | $35.5 million | $45.5 million | $101.6 million | $139.8 million |
| Net earnings | $24.2 million | $31.0 million | $69.8 million | $93.9 million |
| Diluted EPS | $1.09 | $1.24 | $3.01 | $3.80 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $71.0 million | $111.7 million |
At September 28, 2019, cash and cash equivalents were $182.7 million, current assets were $283.0 million, and current liabilities were $129.6 million. Net working capital was $153.3 million. No line-of-credit debt was outstanding; the company had a $75 million facility, subject to covenants and availability reductions for guarantees. Total lease liabilities were $19.7 million.
Changes versus the prior comparable period
- Q3 sales fell 12.2%; management attributed the decline mainly to a challenging China consumer environment and a stronger U.S. dollar, which reduced sales by about $6.0 million. Constant-currency sales declined 10.2%.
- China sales declined 20.2% in Q3, from $144.6 million to $115.4 million; Greater China overall declined 18.6%. South Korea was a growth area, with local-currency sales up 26.4% in Q3.
- Q3 net earnings fell 22.0%. Gross margin declined 80 basis points. Associate incentives decreased as a percentage of sales, while SG&A increased as a percentage of sales because of lower revenue, despite lower absolute SG&A expense.
- Nine-month sales declined 11.3% and net earnings declined 25.7%. Nine-month operating cash flow decreased by $40.7 million year over year.
- The company repurchased $150 million of stock in the first nine months, retiring 2.009 million shares. Remaining authorized repurchases were $30 million at quarter-end.
Outlook, risks, and unusual items
- Management said quarterly promotions and sales incentives contributed an estimated $16 million of sales and helped produce sequential growth in sales and active customers. No numerical earnings or revenue guidance is provided in the supplied filing.
- Management believed cash, future operating cash flow, and available credit would cover ordinary-course needs for the foreseeable future, while noting additional financing might be needed under adverse conditions or for expansion.
- The company’s internal investigation of its BabyCare China operations was substantially complete, but it continued cooperating with the SEC and Department of Justice. The duration, scope, and outcome remained uncertain; potential government actions could result in penalties or other relief.
- Management cited China market conditions, customer and Associate retention, direct-selling regulation, foreign exchange, tariffs, competition, and the investigation as important risks. China-to-U.S. profit remittances may be delayed under local requirements.
- Adoption of the new lease standard added operating lease assets and liabilities to the balance sheet; the filing says it did not materially affect earnings or cash flows. The annual goodwill and indefinite-lived intangible impairment assessments identified no impairment.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is Q3 2019, not Q3 2018.
- Track China sales and customer trends, along with the progress and possible outcome of the BabyCare investigation.
- Assess whether operating cash flow and liquidity remain adequate after substantial repurchases, and review credit-facility covenant compliance and availability.
- Verify whether sales promotions support durable customer growth and margins, rather than only near-term sales.
- Review foreign-exchange effects and the timing of cash remittances from China.