Business context and reporting period
USANA develops and sells nutrition and personal-care products through an international direct-selling network. The filing covers the quarter and six months ended July 1, 2017, compared with periods ended July 2, 2016. The request metadata says “2016 Q2,” but the filing itself is for 2017 Q2.
USANA reported approximately 567,000 active customers at quarter-end. About 88.5% of first-half sales were outside the United States; China is a key market.
Financial performance
Amounts below are in millions of dollars unless otherwise noted.
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $257.1 | $258.5 | $512.4 | $499.0 |
| Gross profit / margin | $213.2 / 82.9% | $212.5 / 82.2% | $425.8 / 83.1% | $410.1 / 82.2% |
| Operating earnings / margin | $32.4 / 12.6% | $37.4 / 14.5% | $65.3 / 12.7% | $71.0 / 14.2% |
| Net earnings | $23.3 | $25.8 | $44.6 | $48.1 |
| Diluted EPS | $0.93 | $1.03 | $1.78 | $1.92 |
| Operating cash flow | Not separately reported | Not separately reported | $55.6 | $48.0 |
Q2 net margin was approximately 9.1%, versus 10.0% a year earlier; first-half net margin was 8.7%, versus 9.6%. First-half capital expenditures were $7.0 million.
Balance sheet and liquidity
- Cash and cash equivalents were $229.4 million at July 1, 2017, up from $175.8 million at December 31, 2016. Of the quarter-end cash, $219.0 million was held by international subsidiaries and $10.4 million in the United States.
- Working capital was $194.8 million, compared with $139.4 million at year-end; the current ratio was approximately 2.44x.
- No borrowings were outstanding on the $75 million credit facility. Existing guarantees reduced availability by $4.75 million. The facility matures in April 2021 and is subject to financial covenants.
- USANA said cash, operating cash flow, and available credit should cover ordinary operating and capital needs for the foreseeable future. Repatriating $19.6 million of indefinitely reinvested earnings would generate an estimated $3.1 million tax liability. An $80.5 million intercompany dividend was paid to the U.S. after quarter-end.
Material changes and management commentary
- Q2 sales declined 0.6%; unfavorable currency movements reduced sales by $7.4 million. On a constant-currency basis, sales increased 2.3%. First-half sales rose 2.7% reported and 5.4% excluding currency effects.
- Regional results diverged: Q2 Asia Pacific sales increased 2.6% reported (5.9% constant currency), while Americas and Europe fell 10.2% (8.6% constant currency). China and South Korea grew; U.S. and Canadian sales declined, alongside lower active-customer counts.
- Q2 earnings fell as investigation costs and higher Associate incentives outweighed improved gross margin and a lower effective tax rate. First-half SG&A rose $10.0 million, attributed to China investigation costs and technology/infrastructure investment. First-half Associate incentives increased to 45.7% of sales from 44.6%.
- Management’s stated focus includes growing active customers, expanding in China, improving technology and the Preferred Customer program, and investing in product innovation and market-specific promotions. The filing provides no numerical earnings or sales guidance.
- No repurchases occurred in the first half. After quarter-end, the board increased the repurchase authorization to $100 million; USANA repurchased 189,000 shares for $10.8 million through August 4.
Risks, contingencies, and unusual items
- China investigation and controls: USANA was conducting a voluntary internal investigation into BabyCare operations and had contacted the SEC and Department of Justice. The company could not predict the investigation’s duration, scope, or outcome; potential government actions could involve penalties or other relief. A material weakness in internal control remained, and disclosure controls were deemed ineffective as of July 1, 2017. Management expected remediation during 2017, subject to testing.
- Litigation and regulatory exposure: A putative shareholder securities class action alleged undisclosed improper China reimbursement practices and related issues. USANA disputed the claims. The filing also describes a pending shareholder derivative case and periodic Chinese regulatory inquiries; a first-quarter fine was described as not quantitatively material.
- Supplier note: After challenges with its nutrition-bar supplier, USANA decided to stop using that supplier. A $6.9 million secured note would now be repaid in cash. Management recorded no impairment but said recoverability would continue to be assessed.
- Foreign exchange, customer and Associate retention, China operations and regulation, network-marketing dependence, supplier risks, and compliance with credit covenants remain material business risks.
Investor facts to verify
- Progress, findings, costs, and any government or civil proceedings arising from the BabyCare investigation; also verify remediation of the material weakness and effectiveness of controls.
- China growth and customer trends versus declines in the United States, Canada, and parts of Southeast Asia; assess the effect of the U.S. Associate-to-Preferred-Customer conversion on reported customer comparisons.
- Whether gross-margin improvements persist and whether higher incentives and investigation/technology costs continue to pressure operating margins and earnings.
- Collection of the supplier note, covenant headroom and credit availability, and the location and accessibility of international cash.
- Execution and funding of post-quarter share repurchases and the effect of currency movements on reported results.