USANA Health Sciences, Inc. — Form 10-Q
Reporting period: Quarter and six months ended July 2, 2011; comparisons are with the quarter and six months ended July 3, 2010. Amounts below are in U.S. dollars. Financial statement amounts have been converted from thousands to millions where shown. The filing describes interim results as unaudited and cautions they may not indicate full-year results.
Business context and results
USANA develops and manufactures nutritional and personal-care products sold internationally through independent distributors and a direct-selling network. It reports one operating segment. At quarter-end, it had approximately 222,000 active Associates and 68,000 active Preferred Customers. Associates represented 90% of product sales during the first half.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $148.9m | $126.0m | $292.5m | $245.1m |
| Gross profit | $122.7m | $103.3m | $240.6m | $199.3m |
| Gross margin | 82.4% | 82.0% | 82.3% | 81.3% |
| Operating earnings | $21.2m | $17.1m | $38.4m | $31.6m |
| Net earnings | $13.9m | $10.8m | $25.2m | $20.4m |
| Diluted EPS | $0.88 | $0.69 | $1.58 | $1.31 |
Financial position and cash flow
- Cash and cash equivalents were $24.9m at July 2, 2011, versus $24.2m at January 1, 2011. Current assets were $79.3m and current liabilities $54.5m; reported net working capital was $24.8m.
- Six-month operating cash flow was $31.4m, compared with $25.3m in the prior-year period. Capital spending was $5.8m, and investing cash outflow was $5.8m.
- Financing cash outflow was $25.3m, primarily reflecting $25.3m of share repurchases. The company repurchased and retired 827,000 shares during the first half at an average $30.64 per share.
- No debt was outstanding on the credit line at quarter-end. The amended facility increased borrowing capacity from $40m to $60m and extends through May 2016. The company reported compliance with its covenants, including a minimum rolling four-quarter adjusted EBITDA of $60m and a maximum funded-debt-to-adjusted-EBITDA ratio of 2.0 to 1.0.
Material changes versus the prior period
- Quarterly sales rose 18.2%; first-half sales rose 19.3%. Asia Pacific drove growth, while North American sales declined 3.0% in the quarter and 1.9% for the first half. Management attributed North American weakness to lower customer and Associate counts amid difficult economic conditions.
- Asia Pacific quarterly sales increased 38.7%; Greater China sales rose 55.9%. BabyCare contributed $5.6m of quarterly sales and $11.3m for the first half. Excluding BabyCare, first-half Asia Pacific local-currency sales increased 25.4%.
- Management estimated favorable exchange-rate movements added $5.8m to quarterly sales and $10.0m to first-half sales. Gross margin benefited from currency effects, partly offset by higher freight costs.
- Quarterly Associate incentives were 45.5% of sales versus 45.3%; first-half incentives were 45.3% versus 45.4%. First-half SG&A rose to 23.8% of sales from 23.1%, with BabyCare costs a primary factor. Quarterly SG&A was 22.7% versus 23.1%.
- First-half diluted EPS increased 20.6%. Share repurchases reduced outstanding shares, while the weighted-average diluted share count was higher year over year for both reported periods.
Outlook, commentary and risks
- No quantified full-year earnings or revenue guidance is provided. Management said cash, operating cash flow and available credit should cover ordinary operating and capital needs for the foreseeable future, but additional financing could be needed in adverse conditions or for expansion.
- Management planned to expand into Thailand by year-end 2011 and anticipated introducing four key nutritional products through BabyCare in China in the fourth quarter. It described China growth as likely to be more gradual and organic after revising its strategy following Associate feedback.
- Management estimated strategic changes announced in Hong Kong prompted approximately $4m of additional second-quarter sales as Associates purchased in anticipation. The filing also notes that the 2010 Hong Kong comparison included $2.8m from a convention held in Q2; the 2011 convention occurred in Q1.
- During Q2, certain executives left the company. Cancellation of their unvested awards reduced equity-based compensation expense by $1.23m for the quarter and first half, with a related tax impact of $0.424m.
- Key risks include dependence on attracting and retaining Associates, network-marketing and compensation-plan risks, BabyCare integration and Chinese licensing/product registration, competition, economic conditions, currency movements, regulation, supply and shipping disruptions, and litigation or product-liability matters. Management reported disclosure controls were effective at period-end and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales growth in Greater China, including Hong Kong and BabyCare, is sustainable after the estimated Hong Kong purchase pull-forward and convention timing effects.
- Whether North American Associate and Preferred Customer declines stabilize, and whether reported customer-count growth translates into durable sales.
- How exchange rates, freight costs, BabyCare operating expenses and Associate incentive rates affect future margins and earnings.
- Whether BabyCare integration, Chinese licensing and product-registration milestones, and the Thailand launch proceed as planned.
- Continued compliance with the credit-facility covenants and the effect of further repurchases on cash, share count and capital needs.