USANA Health Sciences, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended January 2, 2016 (52 weeks). The filing is an annual report for fiscal 2015, not a standalone 2014 fourth-quarter filing; fiscal 2014 had 53 weeks. Figures are in U.S. dollars unless stated otherwise.
Business context
USANA develops and manufactures nutritional and personal-care products sold through direct selling in 20 markets. It reported 421,000 active Associates and 89,000 Preferred Customers at year-end. Sales to customers outside the United States represented 84.8% of revenue; Associates generated 92% of product sales.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $918.5 million | $790.5 million |
| Gross profit / margin | $758.8 million / 82.6% | $649.7 million / 82.2% |
| Operating earnings / margin | $141.7 million / 15.4% | $116.1 million / 14.7% |
| Net earnings / net margin | $94.7 million / 10.3% | $76.6 million / 9.7% |
| Diluted EPS | $7.18 | $5.60 |
| Cash from operating activities | $111.5 million | $105.2 million |
Revenue increased 16.2% and net earnings rose 23.5%. The company attributed growth primarily to higher sales volume and Associate growth in Asia Pacific, alongside improved gross margin and lower SG&A as a percentage of sales. A stronger U.S. dollar reduced FY2015 reported sales by an estimated $53.6 million; excluding currency effects, sales grew 23.0%. The extra week in FY2014 contributed an estimated $16.0 million to that year’s sales.
Asia Pacific revenue rose to $664.9 million, or 72.4% of sales, led by Greater China, which generated $441.3 million. Americas and Europe revenue was approximately flat at $253.6 million. Associate incentives were 44.4% of sales, up from 44.2%; SG&A was 22.8%, down from 23.3%. The effective tax rate was 33.6%, compared with 33.7%.
At January 2, 2016, cash and cash equivalents were $143.2 million, working capital was $112.9 million, total assets were $423.2 million, and stockholders’ equity was $280.9 million. The company had no outstanding credit-line borrowings at year-end. Inventory increased to $66.1 million from $45.2 million, partly to support the China facility transition and a new-market launch. Cash used in investing activities was $25.1 million, including $23.7 million of property and equipment purchases. Cash used in financing activities was $49.2 million, including $61.2 million of share repurchases.
Material changes and unusual items
- Greater China sales increased 35.3% as reported; Mainland China growth was strong, while Hong Kong sales and Associate counts continued to decline, though the decline stabilized during 2015.
- The FY2015 increase in gross margin reflected market mix and price adjustments, partly offset by currency effects. Associate incentives rose slightly as a share of revenue, partly due to a bonus program.
- Product returns were 0.6% of sales, down from 0.8% in FY2014. The company removed the 10% restocking fee in 2015 for eligible returns.
- During the year, USANA began amortizing acquired China product formulas over an estimated eight-year remaining life after determining that they no longer had an indefinite life. No impairment was recorded.
- USANA repurchased 457,000 shares for $61.2 million in 2015; $100 million remained authorized at year-end. It paid no cash dividends.
Outlook, risks and contingencies
Management planned a first-half 2016 launch of MySmart Foods and further product, technology and IT investments. It expected those strategic investments to reduce operating earnings by approximately 100–140 basis points and anticipated 2016 capital expenditures of $35–$40 million. The China manufacturing facility was expected to become operational in the first half of 2016; estimated total investment was approximately $40 million, of which $25.5 million had been incurred by year-end.
On February 19, 2016, after year-end, the company amended its credit agreement: the facility term was extended to April 2021, borrowing capacity rose temporarily to as much as $125 million through October 31, 2016 (then reverting to $75 million), and the adjusted EBITDA covenant increased from $60 million to $100 million. USANA had drawn $63 million by February 26, 2016. Management stated existing cash, operating cash flow and available credit should cover ordinary operating and capital needs.
Principal risks include dependence on independent Associates and key sales leaders; China’s evolving direct-selling rules, licensing and product-registration requirements; Greater China’s concentration in growth; currency volatility; product and advertising regulation; competition; supplier and shipping disruptions; and possible reputational or legal effects of Associate conduct. A shareholder derivative suit over 2014 equity awards remained on appeal; management considered the claims without merit and did not expect a material adverse effect. The filing reported no contingency accrual because none was considered both probable and estimable, while noting some reasonably possible matters could not then be estimated.
Important facts for investors to verify
- Whether China’s growth, additional direct-selling licenses and product registrations support the company’s outlook, and whether Hong Kong declines continue.
- The effect of currency movements and the comparison with FY2014’s extra week on reported growth.
- Execution, total cost and expected operating impact of the Beijing facility and planned 2016 investments.
- Post-year-end borrowing, credit-agreement covenant compliance and the company’s use of cash for repurchases versus investment.
- Associate growth and retention, incentive costs, regulatory developments, and the outcome of the derivative litigation.