USANA Health Sciences, Inc. — Form 10-K Summary
Period clarification: The filing covers the fiscal year ended December 28, 2013, a 52-week year—not fiscal 2012 Q4. It also reports quarterly results, including Q4 2013.
Business context
USANA develops and sells nutritional and personal-care products through independent direct-selling Associates and Preferred Customers in 19 markets. International markets generated 78.1% of 2013 net sales. At year-end, the company reported 265,000 active Associates and 78,000 active Preferred Customers.
Financial results and liquidity
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Net sales | $718.2 million | $648.7 million | +10.7% |
| Gross profit | $590.7 million; 82.3% margin | $532.9 million; 82.1% margin | Margin +0.2 percentage points |
| Operating earnings | $116.7 million; 16.3% margin | $98.2 million; 15.1% margin | +18.9% |
| Net earnings | $79.0 million; 11.0% margin | $66.4 million; 10.2% margin | +19.0% |
| Diluted EPS | $5.56 | $4.45 | +24.9% |
| Operating cash flow | $98.9 million | $92.8 million | +$6.1 million |
Net cash used in investing activities was $21.6 million, including $8.1 million of property and equipment purchases, $8.6 million of held-to-maturity securities purchases, and $4.9 million advanced under a supplier note. Financing used $10.2 million, including $18.1 million of share repurchases. Cash and cash equivalents were $137.3 million, up from $70.8 million; working capital was $133.2 million, up from $61.7 million. The company had no outstanding debt and a $75 million revolving credit facility, reduced by $3.8 million of bank guarantees. It reported $260.5 million of stockholders’ equity.
Q4 2013 sales were $186.3 million versus $168.5 million in Q4 2012; net earnings were $20.3 million versus $18.4 million, and diluted EPS was $1.41 versus $1.27.
Material changes and management commentary
- Asia Pacific sales rose 12.9% to $456.5 million; Greater China rose 15.4% to $271.8 million. Americas and Europe increased 7.1% to $261.7 million. Hong Kong sales fell 26.8%, while Mainland China growth helped offset the decline.
- Active Associates increased 7.3% to 265,000 and Preferred Customers increased 21.9% to 78,000. Management attributed growth principally to increased active customer counts and 2013 initiatives.
- In 2013, USANA reduced prices in selected markets, simplified pricing and its compensation plan, increased certain Associate payouts, and restricted cross-border purchasing. Management said these measures supported customer growth but pressured results; the cross-border policy particularly affected Greater China.
- Associate incentives were 42.9% of sales, down from 43.2%; the 2013 plan changes included a one-time payout of approximately $4.5 million. SG&A fell to 23.1% of sales from 23.8%, while gross margin improved slightly.
- The company repurchased 414,000 shares for $18.1 million at an average $43.68 per share. It paid no dividends.
Outlook, risks and unusual items
- Management expects 2014 Associate incentives to be approximately 43.5% of net sales and anticipates a slight gross-margin improvement. It provided no clear numerical sales or earnings guidance in the supplied filing text.
- USANA planned approximately $40 million of investment in a new Beijing-area manufacturing facility, expected to become operational in the latter half of 2015; approximately $31 million was expected in 2014. Total 2014 capital expenditures were expected to be slightly above $40 million, including China branch renovations.
- Management expects growth initiatives to take several years to deliver their full potential and identifies Mainland China as a key growth opportunity. China direct-selling rules, license approvals and product registrations remain uncertain and subject to government interpretation.
- Key risks include dependence on independent Associates and customer retention, competition and adverse publicity, foreign-exchange exposure, product and advertising regulation, supply and manufacturing disruptions, and tax/transfer-pricing issues. International sales concentration increases sensitivity to currency movements.
- The SEC was conducting a formal investigation concerning possible trading in company stock in late 2012 by certain directors, including the Chairman. The company and individuals cooperated; management, based on counsel’s advice, considered an adverse outcome against the company remote. No contingency accrual was recorded because none was considered probable and estimable.
- Founder and Chairman Myron W. Wentz’s entity held 47.4% of outstanding shares at year-end. The filing notes potential governance and control implications. KPMG issued an unqualified opinion on the 2013 financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Confirm that the intended review period is FY 2013; the filing is not a 2012 Q4 report, though it includes Q4 2013 and comparative Q4 figures.
- Track whether active customer growth persists and whether the 2013 pricing, compensation-plan and cross-border purchasing changes improve retention and sales without eroding margins.
- Verify progress on China licenses, product registrations, facility construction, investment spending and the expected 2015 opening.
- Monitor cash conversion, inventory growth, planned capital expenditures, share repurchases and compliance with the credit facility’s covenants.
- Review developments in the SEC investigation, China regulatory environment, currency exposure, and any legal or product-related contingencies.