USANA Health Sciences, Inc. — Form 10-Q Summary
Reporting period: Quarter ended October 2, 2021, with comparisons to the quarter ended September 26, 2020. The supplied filing is for 2021 Q3, although the request metadata says 2020 Q3. Financial amounts below are in U.S. dollars; millions are used unless stated otherwise.
Business context
USANA develops and manufactures nutritional, food, personal-care and skincare products, primarily distributed internationally through independent direct-selling Associates. It reported approximately 576,000 active Customers, down 11.4% from 650,000 a year earlier. About 91.2% of year-to-date sales were outside the United States.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $274.4 | $298.5 | $919.2 | $824.1 |
| Gross profit | $223.6 | $242.2 | $753.8 | $674.0 |
| Earnings from operations | $40.8 | $45.4 | $138.7 | $124.0 |
| Net earnings | $27.3 | $30.5 | $96.2 | $85.0 |
| Diluted EPS | $1.36 | $1.44 | $4.68 | $4.00 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $96.3 | $112.5 |
- Margins: Q3 gross margin was 81.5%, up from 81.1%; operating margin was approximately 14.9%, versus 15.2%; net margin was approximately 10.0%, versus 10.2%. For the nine months, gross margin was 82.0%, up from 81.8%.
- Cash and liquidity: Cash and cash equivalents were $248.7 at October 2, 2021, versus $311.9 at January 2, 2021. Current assets were $368.4 and current liabilities $158.0. Cash, cash equivalents and restricted cash totaled $251.9 at period-end.
- Debt: No borrowings were outstanding under the $75.0 revolving credit facility. The agreement includes quarterly covenants requiring rolling four-quarter consolidated EBITDA of at least $100.0 million and funded debt to EBITDA of no more than 2.0 to 1.0.
- Capital allocation: The company repurchased 1.548 million shares for $148.9 during the first nine months, including 523,000 shares for $49.8 in Q3. $137.2 remained authorized for repurchases at quarter-end.
Material changes versus comparable periods
- Q3 sales fell 8.1%; excluding favorable currency effects of $9.9 million, sales declined 11.4%. Management attributed the decline primarily to the timing of a short-term incentive program: it ran in Q2 in 2021 but Q3 in 2020.
- Q3 net earnings declined 10.5% and diluted EPS declined 5.6%. Lower sales and higher relative operating expenses contributed; the lower diluted share count partly offset the EPS decline.
- Year-to-date sales rose 11.5% reported and 5.3% excluding currency; net earnings increased 13.1% and diluted EPS rose 17.0%.
- Year-to-date operating cash flow declined to $96.3 from $112.5. The filing cites inventory purchases, annual employee bonus payments and reduced trade payables as offsets to earnings and noncash adjustments.
- Active Customers declined by 74,000 year over year. Asia Pacific was down 11.8%, Greater China down 13.4%, and Americas and Europe down 10.1%.
Outlook, commentary and risks
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management said it expects to fund operations from operating cash flow and believes current cash, future operating cash flow and available credit are sufficient for ordinary operating and capital needs.
- Management described Q3 sales and Customer activity as softer than anticipated, citing COVID-19 disruptions, challenging market conditions and the prior-year incentive-program comparison. It expected pandemic-related effects to continue affecting the business during 2021, while noting the uncertainty of their future magnitude and duration.
- COVID-19-related risks include restrictions on events and in-person selling, market disruptions, supply-chain and shipping constraints, and increased raw-material and transportation costs. All production facilities remained operational under enhanced safety measures at the report date.
- Other identified risks include direct-selling regulation, particularly in China; foreign-exchange volatility; geopolitical and trade tensions; data-security and privacy matters; supply-chain disruptions; and compliance with credit-facility covenants. Chinese regulatory requirements can delay remittance of profits to the United States.
- Ordinary-course legal matters were disclosed; management did not believe they would have a material adverse effect, though outcomes and potential changes in recorded amounts remain uncertain. No goodwill or indefinite-lived intangible impairment was recorded after annual qualitative assessments.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended period: this filing covers Q3 2021, not Q3 2020.
- Assess whether Customer-count declines and weaker Q3 sales persist beyond the incentive-program timing effect, particularly in China, Southeast Asia Pacific and the Philippines.
- Monitor COVID-19, freight and supply-chain effects, and whether inventory levels and costs affect margins and cash conversion.
- Review the scale and pace of share repurchases relative to operating cash flow, cash balances and covenant requirements.
- Track foreign-exchange movements, Chinese profit-remittance constraints and compliance with the credit facility’s EBITDA covenant.