Business context and reporting period
USANA Health Sciences, Inc. develops and sells nutrition and personal-care products through an international direct-selling network. This filing covers the quarter ended July 4, 2015, and the six months then ended; the request metadata’s “2014 Q2” does not match the filing period. Prior-year comparisons are for the corresponding 2014 periods. Financial amounts below are in U.S. dollars; figures are rounded to millions unless noted.
At quarter-end, USANA reported approximately 397,000 active Associates and 91,000 active Preferred Customers. Sales to Associates represented approximately 91.8% of first-half product sales.
Financial results and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $233.2 million | $188.3 million | $452.6 million | $370.7 million |
| Gross profit | $193.2 million | $153.4 million | $374.2 million | $302.0 million |
| Gross margin | 82.8% | 81.5% | 82.7% | 81.5% |
| Operating earnings | $38.8 million | $29.1 million | $68.6 million | $54.2 million |
| Net earnings | $25.4 million | $19.3 million | $45.1 million | $35.8 million |
| Diluted earnings per share | $1.92 | $1.36 | $3.43 | $2.50 |
- Second-quarter net sales rose 23.9%; net earnings rose 31.7%. First-half sales rose 22.1%; net earnings rose 25.8%.
- Foreign-exchange movements reduced reported sales by approximately $9.7 million in Q2 and $18.8 million in the first half. Sales growth excluding currency impact was 29.0% and 27.2%, respectively.
- First-half operating cash flow was $46.2 million, compared with $31.3 million in 2014. Capital expenditures were $9.8 million; investing cash outflow was $11.4 million.
- Cash and cash equivalents were $150.9 million at July 4, up from $111.1 million at January 3, 2015. Current assets were $244.8 million and current liabilities $112.9 million; reported net working capital was $132.0 million.
- No borrowings were outstanding on the $75 million Bank of America facility. Normal-course guarantees reduced availability by $4.3 million. The facility expires in April 2016; the company reported covenant compliance.
- Inventory increased to $54.0 million from $45.2 million at year-end. The filing attributes the increase to China demand, preparation for the new facility, and clearing inventory delayed by port congestion.
Material changes versus prior periods
- Greater China drove much of the growth: Q2 regional sales rose 35.4%, with China local-currency sales up 83.6%; first-half China local-currency sales rose 99.5%. China sales included approximately $17 million of incremental sales after announced price adjustments during the first half, including $5 million deferred from the previous quarter.
- Asia Pacific accounted for 72.3% of Q2 sales, versus 66.2% a year earlier. The United States declined 2.0% in Q2 and 2.8% for the first half; Hong Kong sales continued to decline year over year.
- Gross margin improved, attributed to favorable market mix and modest price adjustments, partly offset by the stronger U.S. dollar. Associate incentives increased to 43.7% of Q2 sales from 43.1%; first-half incentives were 44.9% versus 43.2%. SG&A declined as a share of sales to 22.5% for Q2 and 22.6% for the first half.
- Diluted weighted-average shares fell 7.1% in Q2 and 8.1% in the first half year over year, contributing to EPS growth. No shares were repurchased in the first half of 2015; the comparable 2014 cash-flow statement reported $46.1 million of repurchases.
Outlook, management commentary, risks and contingencies
- Management said available cash, operating cash flow, and the credit facility should cover ordinary operating and capital needs for the foreseeable future. No specific full-year revenue or earnings guidance is provided in the filing.
- Management expected Associate incentives to range from 44.0% to 44.5% of sales for the remainder of 2015.
- The China manufacturing facility was expected to become operational in early 2016. Estimated total investment was $40 million; $20.6 million had been incurred through Q2 2015, including $1.9 million in the first half.
- USANA planned to begin operations in Indonesia later in 2015, its anticipated 20th market. Management expected Hong Kong’s year-over-year sales decline to continue through the rest of 2015.
- Key risks include reliance on Associates and network marketing, China and BabyCare expansion, foreign-exchange volatility, regulation, competition, supplier and shipping disruptions, product liability, and maintaining debt-covenant compliance.
- A shareholder derivative action concerning 2014 equity awards was dismissed without prejudice in March 2015; plaintiffs appealed in May. Management considered an adverse outcome remote and stated it did not expect a material effect. No contingency liability was accrued; other reasonably possible matters could not then be estimated.
Important facts for investors to verify
- Whether China’s rapid growth and price-adjustment-related sales are sustainable, and how Hong Kong’s continuing decline affects Greater China.
- Whether active Associate growth translates into recurring customer demand, particularly given promotional activity and the increased incentive payout.
- The continuing effect of currency movements on reported revenue and earnings, given that 84.3% of first-half sales were outside the United States.
- Progress, remaining costs, and timing of the China facility; the filing reports a $40 million anticipated investment and an early-2016 operating target.
- Availability and renewal or replacement of the credit facility before its April 2016 expiration, and continued covenant compliance.
- Developments in the shareholder litigation and any other contingencies; the filing does not quantify the potential exposure of matters management said could not be estimated.