USANA Health Sciences, Inc. — Form 10-Q Summary
Period: The filing covers the quarter ended September 27, 2014, and the nine months then ended. The request metadata says 2013 Q3, but the supplied filing is for 2014 Q3.
Business context and results
USANA develops and manufactures nutrition and personal-care products sold internationally through independent network-marketing Associates. At quarter-end it reported approximately 291,000 active Associates and 77,000 active Preferred Customers. Asia Pacific generated 67.8% of quarterly sales; Greater China was the largest regional component.
| Metric | Q3 2014 | Q3 2013 | First 9 months 2014 | First 9 months 2013 |
|---|---|---|---|---|
| Net sales | $191.9m | $173.7m | $562.6m | $531.9m |
| Gross profit | $157.4m | $142.2m | $459.3m | $438.3m |
| Gross margin | 82.0% | 81.9% | 81.6% | 82.4% |
| Operating earnings | $29.3m | $24.7m | $83.5m | $87.7m |
| Net earnings | $19.5m | $16.8m | $55.3m | $58.7m |
| Diluted EPS | $1.47 | $1.16 | $3.96 | $4.16 |
| Operating cash flow | Not separately stated | Not separately stated | $67.4m | $64.6m |
Changes and management commentary
- Quarterly sales rose 10.5% year over year, while net earnings rose 16.4%. Management attributed sales growth mainly to Associate growth in Asia Pacific; Greater China quarterly sales rose 29.2%, while Americas and Europe fell 6.9%, including a 12.5% decline in U.S. sales.
- Quarterly diluted EPS increased 26.7%, helped by higher earnings and fewer diluted shares following repurchases. Management said EPS growth would have been 17.2% without the Hong Kong deferred-revenue item.
- For the nine-month period, sales increased 5.8%, but net earnings declined 5.8% and diluted EPS declined 4.8%. Gross margin fell 0.8 percentage points, and associate incentives increased from 42.1% to 43.1% of sales. Management cited price discounts, currency effects and higher relative freight costs as margin pressures.
- Associate incentives were 43.0% of quarterly sales versus 44.0% a year earlier; the comparison benefited from a $4.5m one-time payout in Q3 2013. SG&A was flat as a percentage of sales year over year in both the quarter and nine-month period.
- Active Associates increased 18.8% year over year, concentrated in Asia Pacific. Management said customer growth exceeded sales growth in Q3 partly because of price discounts introduced in 2013; it expected the growth rates to become more closely aligned after the anniversary of those changes and planned market-specific promotions.
Liquidity, capital, debt and outlook
- At September 27, cash and cash equivalents were $87.7m, down from $137.3m at year-end 2013. Current assets were $162.5m and current liabilities $105.5m; reported net working capital was $57.0m. Cash decline primarily reflected share repurchases and capital spending.
- Nine-month operating cash flow was $67.4m; investing cash outflow was $7.8m and financing cash outflow was $108.7m. Capital expenditures were $13.3m. The company repurchased 1.755m shares for $125.7m during the nine months.
- The company had $10.0m outstanding on its $75.0m Bank of America credit facility, classified as current because it intended to repay it within 12 months. The facility matures in April 2016; the company said it was in compliance with its covenants. Management believed cash, operating cash flow and available credit would fund ordinary operating and capital needs.
- USANA was constructing a China production facility expected to be operational in the second half of 2015. Estimated total investment was approximately $40m, with approximately $24m expected in 2014; $12.9m had been incurred in the first nine months of 2014.
- No specific full-year earnings or sales guidance is provided in the supplied filing text. Management cautioned that interim results may not indicate full-year results. It identified foreign-exchange exposure, customer and Associate retention, regulation, competition, supplier reliance and growth execution among material risks.
Unusual items, contingencies and other disclosures
- USANA recognized $3.1m of Hong Kong deferred revenue after concluding that orders more than two years old were remote to be collected. The item increased quarterly net earnings by $1.4m.
- A $7.4m note receivable from a nutrition-bar supplier increased from $4.9m at year-end. Project delays prompted a recoverability test; no impairment was recorded, but future impairment could result if assumptions change.
- A shareholder derivative suit filed in August 2014 challenges certain February 2014 equity awards and names USANA as a nominal defendant. The company said it would defend the suit, filed a motion to dismiss, and did not expect a material adverse outcome.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the reporting-period discrepancy between the metadata and the filing, and assess the sustainability of growth across Greater China versus continued weakness in the United States and Hong Kong.
- Separate underlying performance from the $3.1m deferred-revenue recognition and its $1.4m net-earnings benefit.
- Track gross-margin and incentive-expense trends, including the effects of discounts, foreign exchange and freight costs.
- Review cash use and repurchase pace alongside the China facility’s remaining investment needs, credit-facility availability and covenant compliance.
- Monitor the supplier note receivable and project delays, the derivative lawsuit, and execution of the China facility plan.