USANA Health Sciences, Inc. — Form 10-K Summary
Period clarification: The supplied filing is the annual report for the fiscal year ended December 28, 2019, not a 2018 Q4 filing. Fiscal 2019 and 2018 were each 52-week years.
Business context and reporting period
USANA develops and sells nutrition, personal care, and skincare products through direct selling in 24 markets. It reported 586,000 active customers at year-end, down from 616,000. China was its largest market, accounting for about 44% of net sales; international markets generated approximately 90.1% of sales.
Financial results and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net sales | $1,060.9 million | $1,189.2 million |
| Gross profit / margin | $873.4 million / 82.3% | $988.5 million / 83.1% |
| Operating income / margin | $146.2 million / 13.8% | $188.4 million / 15.8% |
| Net earnings / margin | $100.5 million / 9.5% | $126.2 million / 10.6% |
| Diluted EPS | $4.41 | $5.12 |
| Operating cash flow | $126.7 million | $152.1 million |
- Reported net sales fell 10.8%; management estimated unfavorable currency movements reduced sales by $34.5 million, and sales declined 7.9% excluding currency effects.
- Cash and cash equivalents were $234.8 million at year-end, versus $214.3 million; prior-year cash plus held-to-maturity securities was $277.9 million. Working capital was $193.2 million, down from $243.6 million.
- USANA had no debt outstanding at year-end. Its credit facility was $75 million, subject to covenants and availability reductions for bank guarantees; the filing reports $8.9 million of such reductions.
- Cash used for share repurchases was $150.0 million in 2019. Capital expenditures were $16.6 million. The board increased the repurchase authorization to $130 million in February 2020.
- The effective tax rate was 33.2%, compared with 34.1%. A $64.3 million valuation allowance was recorded against deferred tax assets, primarily tax-credit carryforwards.
Material changes versus the prior comparable period
- Greater China sales declined 18.1% as reported, or 14.7% excluding currency; China-market active customers declined 14.5%. China sales were $471.2 million versus $586.5 million.
- North Asia sales rose 25.4% as reported, led by South Korea; Americas and Europe sales fell 10.3% as reported and 9.3% excluding currency.
- Gross margin contracted 0.8 percentage points, attributed to market mix, currency, lower production levels, and lost fixed-cost leverage. SG&A declined $7.3 million in dollars but rose 2.1 percentage points as a share of sales.
- Associate incentives declined to 43.3% of sales from 44.2%. Net earnings fell 20.4%, while diluted EPS fell 13.9%; the lower share count partly offset the earnings decline.
- Fourth-quarter 2019 sales were $271.3 million versus $299.0 million in Q4 2018; net earnings were $30.8 million versus $32.3 million. Diluted EPS was $1.41 versus $1.32.
Outlook, management commentary, risks, and unusual items
- No specific numerical financial guidance is provided. Management’s 2020 priorities include customer acquisition, technology and mobile improvements, product launches, growth in China and other Asia-Pacific markets, and bringing food and some skincare production in-house.
- Management cited moderate improvement in China in the second half of 2019 and expressed optimism about growth there, while acknowledging the challenging operating environment and declining customer counts.
- The coronavirus outbreak and related restrictions disrupted China operations around the turn of 2020. Management expected disruption through at least the first quarter of 2020 and said the full-year financial impact could not then be reasonably estimated.
- BabyCare’s China business model has not received government confirmation of compliance. A 2019 Chinese government review of health-product and direct-selling businesses suspended applications for direct-selling licenses and authorizations; expansion approvals may be delayed or unavailable.
- USANA’s internal investigation of China operations, focused on FCPA compliance and expense-reimbursement practices, was substantially complete, but the company continued cooperating with the SEC and Department of Justice. The outcome and any potential governmental action, penalties, or litigation were uncertain. The filing says 2018 included $1.4 million of incremental investigation expense; 2019 amounts were minimal.
- Other principal risks include direct-selling regulation and compensation-plan changes, customer and Associate attrition, foreign-exchange exposure, product and manufacturing regulation, supply disruptions, cybersecurity and privacy requirements, and dependence on China. The founder-controlled shareholder held 45.56% of outstanding shares.
- The financial-statement auditor issued an unqualified opinion, and management and the auditor concluded internal control over financial reporting was effective as of December 28, 2019.
Important facts for investors to verify
- Whether customer trends and sales stabilize in China, and how the coronavirus disruption affected subsequent results.
- The status of the China operations investigation, SEC/DOJ cooperation, and any resulting proceedings or costs.
- Availability of China direct-selling licenses, regulatory compliance, and the impact of any restrictions on growth.
- Cash conversion and working-capital trends, the effect of continued repurchases, and compliance with credit-facility covenants.
- Whether planned in-house manufacturing and customer-acquisition initiatives improve margins and customer growth as expected; the filing provides no numerical guidance.