USANA Health Sciences, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022 (52 weeks), compared with fiscal 2021, ended January 1, 2022. This is an annual filing, not a standalone 2021 Q4 report. USANA sells nutrition, personal care and skincare products through direct selling in 24 markets; China is its largest market.
Financial performance and position
| Metric | FY2022 | FY2021 | Change / context |
|---|---|---|---|
| Net sales | $998.6 million | $1,186.5 million | Down 15.8%; adverse currency impact estimated at $49.7 million. Excluding currency, sales declined 11.6%. |
| Gross profit / margin | $804.7 million / 80.6% | $968.6 million / 81.6% | Margin down 1.0 percentage point. |
| Operating earnings / margin | $107.6 million / 10.8% | $170.2 million / 14.3% | Lower sales and reduced operating leverage. |
| Net earnings / net margin | $69.4 million / 6.9% | $116.5 million / 9.8% | Net earnings down 40.5%. |
| Diluted EPS | $3.59 | $5.73 | Down from lower earnings, partly offset by fewer diluted shares. |
| Operating cash flow | $103.9 million | $121.2 million | Down $17.3 million. |
Associate incentives were 43.5% of sales versus 43.8% in FY2021. SG&A was $262.3 million, down $16.8 million in absolute terms but up 2.8 percentage points as a share of sales due to lower revenue. The effective tax rate rose to 36.2% from 31.7%, primarily due to the geographic mix of pretax income.
Liquidity and debt: Cash and cash equivalents were $288.4 million, up from $239.8 million; current assets were $384.4 million and current liabilities $143.8 million. Inventory fell to $67.1 million from $98.3 million. USANA reported no outstanding debt at year-end under its $75 million revolving facility; the facility matures in August 2025 and has financial covenants. Cash flow from operations was partly offset by $25.4 million of share repurchases and $10.4 million of property and equipment purchases. Cash held in China was $129.8 million; China profit remittances may be delayed by regulatory requirements.
Material changes and operating developments
- Active Customers fell 12.5% to approximately 490,000. Declines were reported in every region: Asia Pacific down 10.3% and Americas and Europe down 19.7%.
- Asia Pacific sales fell 16.7% reported and 11.9% excluding currency effects; Americas and Europe sales fell 11.9% reported and 10.5% excluding currency effects. China sales were $453.1 million, down from $506.1 million.
- Management attributed the downturn to COVID-related disruption and lockdowns, weaker-than-expected promotions, inflation and economic challenges, and unfavorable foreign exchange.
- USANA acquired Rise Bar and Oola in 2022. Combined consideration included $6.5 million cash and $0.9 million contingent consideration; acquired businesses’ post-acquisition revenue and earnings were described as immaterial.
- Foreign-currency translation reduced other comprehensive income by $13.2 million after tax. The company repurchased $25.4 million of stock, versus $177.8 million in FY2021.
Outlook, risks and unusual items
No quantified FY2023 revenue or earnings guidance is provided in the filing. Management’s 2023 priorities include growing active Customers, advancing digital commerce and the new U.S., Canada and Mexico Affiliate program, targeted local promotions, product development, expanding in-house food production, China customer initiatives, and international expansion. Management said the pandemic could continue to negatively affect the business through 2023 and planned to announce and launch a new market in late 2023.
- China and regulation: China generated approximately 45.4% of net sales. BabyCare’s business model has not been approved by the Chinese government; direct-selling license applications have remained suspended since 2019. BabyCare held licenses in Beijing, Jiangsu, Shaanxi and Tianjin. Regulatory action could result in fines, operating restrictions or license loss.
- Other risks: Direct-selling regulation and Associate conduct, customer attrition, currency movements, inflation and supply-chain costs, product and manufacturing regulation, data privacy and cybersecurity, and U.S.–China geopolitical tensions could materially affect results.
- Legal and compliance matters: The company is involved in ordinary-course legal matters; management did not expect them, individually or together, to materially harm results, but some reasonably possible contingencies could not be estimated. USANA disclosed that it received an FTC penalty-offense warning letter that did not accuse it of unlawful conduct, and that it had concluded a voluntary investigation concerning China operations.
- Other items: The effective tax rate was affected by market mix. Deferred tax assets included a valuation allowance of $118.1 million, up $18.2 million. Inventory valuation was identified by KPMG as a critical audit matter because demand forecasts for excess or slow-moving inventory require judgment. No inventory impairment amount is separately stated here.
- Leadership and ownership: Jim Brown was scheduled to become CEO on July 1, 2023, with Kevin Guest transitioning to Executive Chairman. Founder Myron Wentz’s entity owned 41.6% of shares at year-end, giving it significant influence.
KPMG issued an unqualified opinion on the consolidated financial statements and concluded internal control over financial reporting was effective. The filing reports no outstanding debt at year-end and no material off-balance-sheet arrangements.
Investor verification priorities
- Confirm the trajectory of active Customers, sales and margins, especially in China and Southeast Asia Pacific, and whether planned initiatives are improving retention and acquisition.
- Assess FY2023 effects of COVID-related disruption, inflation, supply-chain costs and foreign exchange; the filing gives no numerical earnings or sales guidance.
- Review the China business model, license coverage, remittance constraints and any material regulatory developments.
- Check credit-facility covenant headroom and the availability and location of cash, given the facility’s $100 million minimum rolling-four-quarter EBITDA covenant and China remittance requirements.
- Track acquisition integration and performance of Rise Bar and Oola, including contingent consideration and any additional acquisition spending.
- Review inventory demand assumptions, tax-credit valuation allowances and developments in legal, tax, data-privacy and compliance matters.