USANA Health Sciences, Inc. — Form 10-Q
Reporting period: Quarter and six months ended June 27, 2020. The request metadata labels this “2019 Q2,” but the filing is for 2020 Q2. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. Unaudited.
Business context
USANA develops and manufactures nutrition, food, personal-care and skincare products, distributed internationally through independent Associates and Preferred Customers using a direct-selling model. It reported approximately 599,000 active Customers at quarter-end, up 7.9% year over year. Asia Pacific represented 80.8% of quarterly sales; Greater China remained the largest regional market.
Financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $259.0 | $256.0 | $525.6 | $529.0 |
| Gross profit | $211.3 | $209.5 | $431.9 | $436.6 |
| Gross margin | 81.6% | 81.8% | 82.2% | 82.5% |
| Operating earnings | $39.6 | $31.2 | $78.6 | $66.2 |
| Net earnings | $28.0 | $21.4 | $54.5 | $45.6 |
| Diluted EPS | $1.32 | $0.91 | $2.56 | $1.93 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $63.4 | $20.7 |
Q2 sales rose 1.2% reported and 4.3% excluding currency effects; the stronger U.S. dollar reduced sales by approximately $8.1 million. Six-month sales fell 0.6% reported but increased 2.1% excluding currency effects. Q2 net earnings grew 30.9%; diluted EPS rose 45.1%, reflecting higher earnings and a lower diluted share count. Six-month diluted EPS increased 32.6%.
Q2 operating expenses were $171.7 million versus $178.4 million a year earlier. Associate incentives were 42.8% of sales versus 43.6%; SG&A declined $6.0 million. The Q2 effective tax rate was 30.0%, versus 34.2%, due primarily to discrete items and increased U.S. earnings supporting foreign tax credit utilization. For the six-month period, the effective tax rate was 31.1%, versus 33.8%.
Financial position and liquidity
- Cash and cash equivalents were $227.4 million at June 27, 2020, compared with $234.8 million at December 28, 2019. Including restricted cash, period-end cash was $230.2 million.
- Total assets were $512.2 million, current liabilities $139.7 million, and stockholders’ equity $349.1 million. The filing does not present a conventional current ratio.
- No line-of-credit debt was outstanding at quarter-end. The $75 million facility had $8.9 million of availability reserved for guarantees; the facility was scheduled to reduce to $100 million on September 30, 2020 and mature in April 2021. Covenant requirements include rolling four-quarter adjusted EBITDA of at least $100 million and funded debt to adjusted EBITDA no greater than 2.0 to 1.0.
- Operating cash flow was $63.4 million for six months. Investing activities used $9.8 million, including $10.8 million of property and equipment purchases; financing activities used $58.9 million, chiefly due to $57.0 million of share repurchases.
- The company drew $60.0 million on its credit line during the quarter to provide additional liquidity and repaid it by quarter-end. Management said it believes cash, operating cash flow and available credit are sufficient for foreseeable ordinary-course needs, while noting uncertainty and potential need for financing in adverse conditions.
Material changes and management commentary
- Growth varied by market. Q2 Greater China sales declined 3.8% reported, while Southeast Asia Pacific rose 10.2% and North Asia 14.5%. Customer growth was particularly strong in the Philippines, Malaysia and South Korea. Hong Kong sales declined materially.
- Gross margin contracted 20 basis points in Q2 and 30 basis points for the six-month period. Management cited production costs, promotions, unfavorable foreign exchange and pandemic-related freight costs, partly offset by lower scrap costs.
- Lower travel, employee-related and event expenses—including cancelled or virtual Associate events—contributed to reduced SG&A. Management also cited temporary government stimulus benefits for Q2.
- The company repurchased 785,000 shares for $57.0 million during the first half; no shares were repurchased in Q2. Remaining authorized repurchase capacity was $73.0 million. The board was to consider resuming repurchases after quarter-end.
- There was no quantitative earnings or sales guidance in the supplied filing text. Management said COVID-19 had not materially affected reported first-half results or caused meaningful supply-chain disruption to date, but its future effects remained uncertain. It planned to align spending with sales and defer non-essential capital investment.
Risks, contingencies and unusual items
- COVID-19 could affect customer activity, in-person selling, operations, supply chains and future results; restrictions could be reinstated or tightened. The company’s manufacturing facilities remained operational, while will-call centers were generally closed and curbside delivery or subsidized shipping was offered.
- Key ongoing exposures include reliance on direct selling and Associates; regulatory and anti-pyramiding requirements, particularly in China; China operating and currency-remittance restrictions; foreign-exchange volatility; supply-chain and raw-material risks; and compliance with credit covenants.
- The SEC notified USANA on June 24, 2020 that it had closed its investigation into BabyCare’s China operations and would take no enforcement action. The DOJ notified the company on June 26 that it had closed its investigation. The company cited cooperation and remediation. Other ordinary-course legal matters remained; management did not believe they would materially adversely affect the company, but certain contingencies could not be estimated.
- Currency translation reduced first-half comprehensive income by $5.2 million, net of tax. The company reported no derivatives outstanding under hedge accounting at quarter-end.
Important facts for investors to verify
- Confirm the reporting-period discrepancy: the supplied filing covers Q2 2020, not Q2 2019.
- Monitor whether customer growth translates into durable sales growth, especially given Greater China and Hong Kong trends and the dependence on independent Associates.
- Track COVID-19 effects on customer activity, freight and production costs, events, supply chains and second-half performance; management provided no numerical guidance.
- Verify credit-facility availability, covenant compliance and renewal or replacement plans ahead of its April 2021 maturity and scheduled facility amendment.
- Assess the sustainability of earnings growth given lower operating expenses, a reduced tax rate and share-count reductions, as well as the effect of repurchases on cash and liquidity.
- Monitor China regulatory, remittance and foreign-exchange risks, and any developments in the remaining legal contingencies.