USANA Health Sciences, Inc. — Form 10-Q Summary
Period: Quarter ended March 29, 2014, compared with the quarter ended March 30, 2013. The request metadata says 2013 Q1, but the filing is for 2014 Q1. Unless stated otherwise, financial amounts below are in millions; the filing reports them in thousands.
Business context
USANA develops and manufactures nutritional and personal-care products sold internationally through independent Associates using a direct-selling model. At quarter-end it reported approximately 265,000 active Associates and 78,000 active Preferred Customers. About 79.4% of sales were outside the United States, and Associates accounted for approximately 90% of product sales.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2014 | Change / context |
|---|---|---|---|
| Net sales | $169.1 | $182.4 | Up 7.9% |
| Gross profit / margin | $138.8 / 82.1% | $148.6 / 81.5% | Gross profit rose; margin fell 0.6 percentage points |
| Operating earnings / margin | $26.6 / 15.7% | $25.1 / 13.8% | Earnings declined |
| Net earnings / margin | $17.8 / 10.5% | $16.5 / 9.1% | Down 7.0% |
| Diluted EPS | $1.28 | $1.15 | Down 10.2% |
| Operating cash flow | $20.3 | $2.5 | Lower year over year |
Foreign-currency movements reduced year-over-year sales by approximately $5.0 million. Associate incentives rose to 43.2% of sales from 41.3%; SG&A declined to 24.4% of sales from 25.1%. The effective tax rate increased to 34.5% from 33.0%.
At March 29, cash and cash equivalents were $142.7 million, held-to-maturity securities were $4.4 million, current assets were $226.4 million, and current liabilities were $79.9 million. Net working capital was $146.4 million. The company had no outstanding borrowings under its $75 million credit facility; $3.9 million of availability was reserved for bank guarantees. It reported compliance with the facility’s covenants and no material debt balance.
Cash increased by $5.4 million during the quarter. Operating cash flow was affected by land-use-right purchases for the China facility, lower accrued compensation and commissions, and payment timing for accounts payable. Investing cash flow was $1.8 million and financing cash flow was $1.9 million, including equity-award tax benefits; no shares were repurchased during the quarter.
Material changes and management commentary
- Sales growth reflected higher active-customer counts across most markets, partly offset by price discounts and currency impacts. Active Associates increased 15.7% year over year and Preferred Customers increased 16.4%; management said customer counts, unit volume, Auto Order participation, and Associates earning commissions each grew at double-digit rates.
- Asia Pacific sales rose 13.0%, including Greater China growth of 12.5%; Americas and Europe sales were approximately flat. U.S. sales declined 6.5%, while mainland China sales increased 188.7% year over year. Hong Kong sales declined substantially.
- Management attributed lower earnings and margins principally to lower gross margin, higher Associate incentives following 2013 compensation-plan changes, and a higher tax rate. Price reductions and customer-order rewards introduced in 2013 supported customer growth but tempered revenue growth relative to that growth.
- Management expects the challenging regulatory and media environment in China to affect the business for the next few quarters. Greater China sales also declined 1.1% sequentially, reflecting Chinese New Year seasonality and the environment.
Outlook, commitments, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management stated that cash, expected operating cash flow, and available credit should fund ordinary operating and capital needs for the foreseeable future, while noting that adverse conditions or unexpected capital needs could require financing.
- The China manufacturing facility was expected to become operational in the latter half of 2015. Estimated total investment was approximately $40 million, including approximately $31 million expected in 2014; $6.2 million was incurred in Q1 2014. The filing does not provide a clear remaining committed expenditure schedule.
- Currency exposure is significant because of international operations; the filing says there were no material changes to the market-risk disclosures from the 2013 annual report. Repatriation of $10.2 million of indefinitely reinvested foreign earnings would trigger tax liability.
- The SEC was conducting a formal investigation concerning possible issues related to certain directors’ stock trading in late 2012, including the Chairman. Management, based on counsel’s advice, considered an adverse outcome against the company remote and not expected to materially affect its financial position or results. Management also said ordinary-course legal matters were not expected to have a material adverse effect.
- On April 28, 2014, the board increased the share-repurchase authorization to $200 million. Through May 5, the company repurchased and retired approximately 58,000 shares for $4.0 million at an average $69.51 per share.
- Management identified risks including retaining Associates, changes to the compensation plan, Chinese regulatory and publicity conditions, foreign exchange, product and network-marketing regulation, suppliers and raw materials, competition, and litigation or regulatory outcomes.
Key facts for investors to verify
- Whether active-customer growth translates into sales and earnings despite price discounts and increased Associate incentives.
- China market trends, regulatory developments, and the assumptions behind the facility’s $40 million investment and 2015 operating timeline.
- The causes and sustainability of low Q1 operating cash flow, including changes in accrued liabilities and working-capital timing.
- Foreign-exchange effects, the effective tax rate, and the cost of repatriating foreign earnings.
- Developments in the SEC investigation, credit-facility covenant compliance, and subsequent share repurchases.