USANA Health Sciences, Inc. — Form 10-Q Summary
Period clarification: The request metadata says 2019 Q1, but this filing covers the quarter ended March 28, 2020. Comparatives are for the quarter ended March 30, 2019. Amounts below are in U.S. dollars.
Business context and reporting period
USANA develops and manufactures nutrition, food, personal care, and skincare products sold internationally through independent direct-selling Associates. It reported approximately 573,000 active Customers at quarter-end, down 2.2% from 586,000 a year earlier. Asia Pacific contributed 80.9% of quarterly sales; sales outside the United States were 90.5% of consolidated sales.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $266.6 million | $273.0 million | Down 2.3%; essentially flat excluding currency |
| Gross profit / margin | $220.6 million / 82.7% | $227.1 million / 83.2% | Margin down 0.5 percentage points |
| Operating earnings | $39.0 million | $35.0 million | Up 11.4% |
| Net earnings | $26.6 million | $24.2 million | Up 9.8% |
| Diluted EPS | $1.23 | $1.01 | Up 21.8% |
| Operating cash flow | $30.8 million | $5.5 million | Up $25.3 million |
| Cash and cash equivalents, quarter-end | $194.1 million | $234.8 million at prior year-end | Down $40.7 million since year-end |
Associate incentives were 43.5% of sales versus 44.9%; selling, general and administrative expense was $65.5 million versus $69.6 million. The effective tax rate was 32.2%, compared with 33.4%. The lower diluted share count, reflecting repurchases, contributed to EPS growth.
Current assets were $286.8 million and current liabilities were $124.5 million at March 28, 2020. No line-of-credit borrowings were outstanding at quarter-end; the company subsequently drew $60.0 million under its $75.0 million facility. The facility matures in April 2021 and has financial covenants. Cash and cash equivalents included $143.5 million held in China, where profit remittances may be delayed by regulatory requirements.
Material changes versus the prior comparable period
- Reported sales fell 2.3%, principally because currency movements reduced sales by approximately $6.6 million. Excluding currency, sales were approximately flat.
- Greater China sales decreased 8.8% reported and 6.3% excluding currency; Mainland China active Customers fell 10.0%. North Asia sales rose 22.6% reported and 29.5% excluding currency, while Southeast Asia Pacific rose 4.4% and 6.5%, respectively, on those bases.
- Gross margin declined 0.5 percentage points, attributed to more favorable inventory pricing in the prior-year quarter and higher current-quarter manufacturing costs. Lower relative operating expenses more than offset the margin decline, lifting net earnings.
- Operating cash flow improved from $5.5 million to $30.8 million, mainly because the first quarter of 2019 had larger payments for employee compensation, Associate incentives, and inventory.
- The company repurchased and retired 785,000 shares for $57.0 million, versus 284,000 shares for $30.0 million in Q1 2019. Quarter-end cash was lower than year-end cash, primarily due to repurchases.
Outlook, risks, contingencies, and unusual items
- Management said COVID-19 had not materially affected Q1 results overall, but began negatively affecting sales momentum late in the quarter. It expected adverse effects in Q2 and throughout the remainder of 2020; the magnitude and duration were uncertain. Manufacturing facilities were operating, and the company reported no meaningful supply-chain disruption as of the filing.
- In response to uncertainty, USANA drew $60.0 million after quarter-end, temporarily suspended share repurchases, planned to align spending with sales, and intended to defer non-essential capital investments. Management believed existing resources and operating cash flow were sufficient for liquidity needs, but gave no quantified earnings or sales guidance.
- The company’s internal investigation into its China operations was substantially complete, but it continued cooperating with the SEC and Department of Justice. The company could not predict the investigation’s duration, scope, or outcome, or whether governmental proceedings would follow.
- Ordinary-course litigation and other contingencies were disclosed; management did not expect them, individually or collectively, to materially adversely affect financial condition, liquidity, or results, while noting some reasonably possible matters could not currently be estimated.
- Other cited risks include direct-selling regulation, China operations and regulation, Associate activity, foreign exchange, supply-chain disruption, and compliance with credit-facility covenants. Management reported no COVID-related impairment triggering event at quarter-end.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is Q1 2020, not Q1 2019.
- Track COVID-19 effects on sales, active Customers, Associate engagement, manufacturing, and supply-chain continuity, particularly in subsequent quarters.
- Verify the terms, covenant compliance, and outstanding balance of the credit facility after the $60.0 million post-quarter draw.
- Monitor cash availability and transferability, especially the concentration of cash in China and any constraints on remittances.
- Follow developments and potential costs or outcomes of the China investigation and related government inquiries.
- Assess whether sales and earnings trends persist after adjusting for currency, share repurchases, and the unusually low prior-year operating cash flow.