USANA Health Sciences, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended March 30, 2019, compared with the quarter ended March 31, 2018. The filing covers Q1 2019, notwithstanding the request metadata’s “2018 Q1” label. USANA sells nutrition, food, personal-care and skincare products internationally through independent distributors and other customers; it reported approximately 586,000 active customers.
Financial performance
| Metric | Q1 2018 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $292.0 million | $273.0 million | Down 6.5% |
| Gross profit / margin | $242.6 million / 83.1% | $227.1 million / 83.2% | Margin up 0.1 percentage point |
| Operating earnings | $43.1 million | $35.0 million | Down 18.8% |
| Net earnings | $28.9 million | $24.2 million | Down 16.5% |
| Diluted EPS | $1.19 | $1.01 | Down 15.1% |
| Operating cash flow | $19.5 million | $5.5 million | Down $14.0 million |
Associate incentives were $122.5 million, or 44.9% of sales, versus 44.3% a year earlier. SG&A was $69.6 million, down $0.6 million. The effective tax rate was 33.4%, compared with 34.2%. Approximate operating and net margins, calculated from reported figures, were 12.8% and 8.9%, respectively, versus 14.8% and 9.9% in Q1 2018.
Cash, liquidity and debt
- At March 30, 2019, cash and cash equivalents were $225.0 million and held-to-maturity securities were $26.9 million, totaling $251.9 million. This compared with $277.9 million at December 29, 2018.
- Net working capital was $240.2 million, down from $243.6 million at year-end; adoption of the new lease standard reduced it by $6.8 million.
- Cash from investing activities was $32.5 million, mainly reflecting $36.7 million of investment-security maturities. Financing activities used $31.4 million, including $30.0 million for share repurchases. Cash, cash equivalents and restricted cash ended the quarter at $228.0 million.
- No line-of-credit debt was outstanding at quarter-end. The $75.0 million facility, due April 2021, had approximately $6.0 million of availability reserved for guarantees, reducing borrowing availability. Management said cash, investments, expected operating cash flow and the facility should cover ordinary-course needs for the foreseeable future.
- Adoption of lease accounting added operating lease right-of-use assets of $24.7 million and lease liabilities of $18.6 million at March 30, 2019.
Material changes and operating trends
- Sales fell $19.0 million. Management attributed the decline to limited first-quarter promotions, adverse Chinese media coverage during the government’s 100-day review of health-product and direct-selling industries, and $13.3 million of unfavorable currency effects. Excluding currency, sales declined approximately 2.0%.
- Greater China sales declined 8.7% reported and 3.4% excluding currency; Mainland China local-currency sales fell 3.9%. Americas and Europe sales declined 13.0% reported and 10.6% excluding currency. North Asia sales increased 22.9% reported and 28.9% excluding currency, supported by South Korea.
- Active customers increased 0.2% to 586,000 overall. Asia Pacific rose 2.9% to 459,000, while Americas and Europe fell 8.6% to 127,000.
- Despite lower sales, gross margin edged up to 83.2%, reflecting lower scrap reserves and conversion costs, price changes and favorable market mix; these benefits were partly offset by skincare costs, lower-sales fixed-cost deleverage and currency effects.
- USANA repurchased 283,600 shares for $30.0 million during the quarter, at an average $105.78 per share. The board later increased the total repurchase authorization to $150 million, including $40.2 million remaining under the prior authorization.
Outlook, risks and contingencies
Management said promotional activity was starting in Q2 2019 and expected results to begin improving in Q2 and accelerate in the second half of 2019. It also expected a more typical operating environment in China after the 100-day review concluded in April. These are expectations, not quantified financial guidance; the filing provides no clear numerical revenue or earnings forecast.
Key risks include continued regulatory uncertainty in China, restrictions on distributor meetings and the suspension of direct-selling license application reviews. BabyCare’s business model has not received formal government confirmation of compliance, and the filing says some pending provincial or municipal approvals may need to be resubmitted. The company also disclosed an ongoing voluntary internal investigation concerning BabyCare’s China operations, with duration and outcome unknown; possible government actions could include fines, penalties or other relief. Management did not believe ordinary-course legal matters would materially affect the company, but said some reasonably possible contingencies could not currently be estimated.
Other material exposures include foreign-exchange movements (90.8% of Q1 sales were outside the United States), adverse publicity, direct-selling and product regulation, customer and distributor retention, trade policy and tariffs, and restrictions or delays on remitting profits from China. Management cautioned that adverse operating conditions or unusual capital needs could require financing, which may not be available on favorable terms. Disclosure controls were assessed as effective as of March 30, 2019.
Most important facts for investors to verify
- Whether Q2 promotions and the expected second-half recovery translate into sustained sales and active-customer growth, particularly in China and the Americas and Europe.
- Developments after the 100-day review: government rules on distributor meetings, license application processing, BabyCare’s existing approvals and the outcome of the internal investigation.
- How operating cash flow develops after the quarter’s decline, and whether liquidity remains adequate given cash concentration in China and the share-repurchase program.
- The effects of currency movements, associate-incentive levels and sales mix on margins and earnings.
- Whether potential legal, regulatory or other contingencies become estimable or result in material charges or operating restrictions.