UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM
(Mark One)
For the quarterly period ended
or
For the transition period from ___________ to ____________
Commission file number:
______________________
USANA HEALTH SCIENCES, INC.
(Exact name of registrant as specified in its charter)
| | | |
| (State or other jurisdiction | (I.R.S. Employer | |
| of incorporation or organization) | Identification No.) | |
______________________
(Address of principal executive offices) (Zip Code)
______________________
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| | | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | Accelerated filer ☐ |
| Non-accelerated filer ☐ | Smaller reporting company |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of August 6, 2021, there were outstanding
FORM 10-Q
For the Quarterly Period Ended July 3, 2021
TABLE OF CONTENTS
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| Cautionary Note Regarding Forward-Looking Statements and Certain Risks |
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Cautionary Note Regarding Forward-Looking Statements and Certain Risks
This report, including “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2, contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We may also make forward-looking statements in other reports filed with the Securities and Exchange Commission (“SEC”), in materials delivered to shareholders and in press releases. In addition, our representatives may from time to time make oral forward-looking statements. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new products; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements can be identified by words such as: “anticipate,” “intend,” “plan,” “seek,” “believe,” “project,” “estimate,” “expect,” “strategy,” “future,” “likely,” “may,” “should,” “will” and similar references to future periods. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely unduly on forward-looking statements.
Although we believe that the expectations reflected in our forward-looking statements are reasonable, actual results could differ materially from those we project or assume in our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, such as those disclosed or incorporated by reference in our filings with the SEC. Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments, the occurrence of unanticipated events or otherwise. Important factors that could cause our actual results, performance and achievements to differ materially from estimates or projections contained in our forward-looking statements in this report include, among others, the following:
| ● |
Our dependence upon the direct selling business model to distribute our products and the activities of our independent Associates; |
| ● |
Extensive regulation of our business model and uncertainties relating to the interpretation and enforcement of applicable laws and regulations governing direct selling and anti-pyramiding, particularly in the United States and China; |
| ● |
The operation and expansion of our business in China through our subsidiary, BabyCare Holdings, Ltd. (“BabyCare”), including risks related to (i) operating in China in general, (ii) engaging in direct selling in China, (iii) BabyCare’s business model in China, and (iv) changes in the Chinese economy, marketplace or consumer environment; |
| ● |
Unanticipated effects of changes to our Compensation Plan; |
| ● |
Challenges associated with our planned expansion into new international markets, delays in commencement of sales or product offerings in such markets, delays in compliance with local marketing or other regulatory requirements, or changes in target markets; |
| ● |
Uncertainty related to the magnitude, scope and duration of the impact of the novel strain coronavirus COVID-19 pandemic (“COVID-19” or the “COVID-19 pandemic”) to our business, operations and financial results, including, for example, additional regulatory measures or voluntary actions that may be put in place to limit the spread of COVID-19 in the markets where we operate, such as restrictions on business operations, shelter at home, or social distancing requirements; |
| ● |
Political events, natural disasters, pandemics, epidemics or other health crises including, and in addition to, COVID-19 or other events that may negatively affect economic conditions, consumer spending or consumer behavior; |
| ● |
Changes to trade policies and tariffs, the impact of customs, duties, taxation, and transfer pricing regulations, as well as regulations governing distinctions between and our responsibilities to employees and independent contractors; |
|
| ● | Deterioration in foreign relations, as well as international disputes, or tensions, between the United States and other countries, including China; |
| ● |
Volatile fluctuation in the value of foreign currencies against the U.S. dollar; |
| ● |
Noncompliance by us or our Associates with any data privacy laws or any security breach by us or a third party involving the misappropriation, loss, destruction or other unauthorized use or disclosure of confidential information; |
| ● |
Shortages of raw materials, disruptions in the business of our contract manufacturers, significant price increases of key raw materials, and other disruptions to our supply chain; and |
| ● |
Our continued compliance with debt covenants in our Credit Facility. |
Important information as to these factors can be found in this document, including, among other sections, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the headings of “Overview,” and “Financial Condition and Liquidity.” Discussion of these factors is incorporated by reference from Part I, Item 1A, “Risk Factors,” of this document, and should be considered an integral part of Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” For additional information concerning factors that may cause actual results to vary materially from those stated in the forward-looking statements, see our reports on Form 10-K, 10-Q and 8-K filed with the SEC from time to time.
Unless otherwise indicated or otherwise required by the context, the terms “we,” “our,” “it,” “its,” “Company,” and “USANA” refer to USANA Health Sciences, Inc. and its wholly-owned subsidiaries. USANA Health Sciences, Inc. and its subsidiaries’ names, abbreviations thereof, logos, and product and service designators are all either the registered or unregistered trademarks or tradenames of USANA Health Sciences, Inc. and its subsidiaries. Names, abbreviations of names, logos, and products and service designators of other companies are either the registered or unregistered trademarks or tradenames of their respective owners. References to internet websites in this Form 10-Q are provided for convenience only. Information available through these websites is not incorporated by reference into this Form 10-Q.
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
(unaudited)
| As of | As of | |||||||
| July 3, | January 2, | |||||||
| 2021 | 2021 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Deferred tax assets | ||||||||
| Other assets | ||||||||
| $ | $ | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Deferred tax liabilities | ||||||||
| Other long-term liabilities | ||||||||
| Stockholders' equity | ||||||||
| Common stock, par value; Authorized -- shares, issued and outstanding as of July 3, 2021 and as of January 2, 2021 | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive income (loss) | ( | ) | ( | ) | ||||
| Total stockholders' equity | ||||||||
| $ | $ | |||||||
The accompanying notes are an integral part of these statements.
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
| Quarter Ended | Six Months Ended | |||||||||||||||
| July 3, | June 27, | July 3, | June 27, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Cost of sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Associate incentives | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Earnings from operations | ||||||||||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other, net | ( | ) | ( | ) | ( | ) | ||||||||||
| Other income (expense), net | ||||||||||||||||
| Earnings before income taxes | ||||||||||||||||
| Income taxes | ||||||||||||||||
| Net earnings | $ | $ | $ | $ | ||||||||||||
| Earnings per common share | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
| Weighted average common shares outstanding | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
| Comprehensive income: | ||||||||||||||||
| Net earnings | $ | $ | $ | $ | ||||||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||
| Foreign currency translation adjustment | ( | ) | ||||||||||||||
| Tax benefit (expense) related to foreign currency translation adjustment | ( | ) | ( | ) | ||||||||||||
| Other comprehensive income (loss), net of tax | ( | ) | ( | ) | ||||||||||||
| Comprehensive income | $ | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of these statements.
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
| For six months ended June 27, 2020 | ||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||
| Common Stock | Paid-in | Retained | Comprehensive | |||||||||||||||||||||
| Shares | Value | Capital | Earnings | Income (Loss) | Total | |||||||||||||||||||
| Balance at December 28, 2019 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net earnings | ||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | ( | ) | ( | ) | ||||||||||||||||||||
| Equity-based compensation expense | ||||||||||||||||||||||||
| Common stock repurchased and retired | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Common stock issued under equity award plans | ||||||||||||||||||||||||
| Tax withholding for net-share settled equity awards | ( | ) | ( | ) | ||||||||||||||||||||
| Balance at June 27, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| For six months ended July 3, 2021 | ||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||
| Common Stock | Paid-in | Retained | Comprehensive | |||||||||||||||||||||
| Shares | Value | Capital | Earnings | Income (Loss) | Total | |||||||||||||||||||
| Balance at January 2, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net earnings | ||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | ||||||||||||||||||||||||
| Equity-based compensation expense | ||||||||||||||||||||||||
| Common stock repurchased and retired | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Common stock issued under equity award plans | ||||||||||||||||||||||||
| Tax withholding for net-share settled equity awards | ( | ) | ( | ) | ||||||||||||||||||||
| Balance at July 3, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
The accompanying notes are an integral part of these statements.
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
| For the three months ended June 27, 2020 | ||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||
| Common Stock | Paid-in | Retained | Comprehensive | |||||||||||||||||||||
| Shares | Value | Capital | Earnings | Income (Loss) | Total | |||||||||||||||||||
| Balance at March 28, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net earnings | ||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | ( | ) | ( | ) | ||||||||||||||||||||
| Equity-based compensation expense | ||||||||||||||||||||||||
| Common stock issued under equity award plans | ||||||||||||||||||||||||
| Tax withholding for net-share settled equity awards | ( | ) | ( | ) | ||||||||||||||||||||
| Balance at June 27, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| For the three months ended July 3, 2021 | ||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||
| Common Stock | Paid-in | Retained | Comprehensive | |||||||||||||||||||||
| Shares | Value | Capital | Earnings | Income (Loss) | Total | |||||||||||||||||||
| Balance at April 3, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net earnings | ||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | ||||||||||||||||||||||||
| Equity-based compensation expense | ||||||||||||||||||||||||
| Common stock repurchased and retired | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Common stock issued under equity award plans | ||||||||||||||||||||||||
| Tax withholding for net-share settled equity awards | ( | ) | ( | ) | ||||||||||||||||||||
| Balance at July 3, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
The accompanying notes are an integral part of these statements.
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Six Months Ended | ||||||||
| July 3, | June 27, | |||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities | ||||||||
| Net earnings | $ | $ | ||||||
| Adjustments to reconcile net earnings to net cash provided by (used in) operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Right-of-use asset amortization | ||||||||
| (Gain) loss on sale of property and equipment | ||||||||
| Equity-based compensation expense | ||||||||
| Deferred income taxes | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and other assets | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ( | ) | ||||
| Other liabilities | ( | ) | ||||||
| Net cash provided by (used in) operating activities | ||||||||
| Cash flows from investing activities | ||||||||
| Receipts on notes receivable | ||||||||
| Proceeds from the settlement of net investment hedges | ||||||||
| Payments for net investment hedge | ( | ) | ( | ) | ||||
| Proceeds from sale of property and equipment | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Net cash provided by (used in) investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities | ||||||||
| Repurchase of common stock | ( | ) | ( | ) | ||||
| Borrowings on line of credit | ||||||||
| Payments on line of credit | ( | ) | ||||||
| Payments related to tax withholding for net-share settled equity awards | ( | ) | ( | ) | ||||
| Net cash provided by (used in) financing activities | ( | ) | ( | ) | ||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | ( | ) | ||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | ( | ) | ( | ) | ||||
| Cash, cash equivalents, and restricted cash at beginning of period | ||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | $ | ||||||
| Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash included in prepaid expenses and other current assets | ||||||||
| Restricted cash included in other assets | ||||||||
| Total cash, cash equivalents, and restricted cash | $ | $ | ||||||
| Supplemental disclosures of cash flow information | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | ||||||||
| Cash received during the period for: | ||||||||
| Income tax refund | ||||||||
| Non-cash investing and financing activities: | ||||||||
| Right-of-use assets obtained in exchange for lease obligations | ||||||||
| Accrued purchases of property and equipment | ||||||||
The accompanying notes are an integral part of these statements.
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
NOTE A – ORGANIZATION, CONSOLIDATION, AND BASIS OF PRESENTATION
USANA Health Sciences, Inc. develops and manufactures high quality, science-based nutritional and personal care products that are sold internationally through a network marketing system, which is a form of direct selling. The Condensed Consolidated Financial Statements (the “Financial Statements”) include the accounts and operations of the Company, which are grouped and presented in two geographic regions: (1) Asia Pacific, and (2) Americas and Europe. Asia Pacific is further divided into three sub-regions: (i) Greater China, (ii) Southeast Asia Pacific, and (iii) North Asia.
(1) Asia Pacific -
(i) Greater China - Hong Kong, Taiwan, and China. The Company’s business in China is conducted by BabyCare Holdings, Ltd., the Company’s wholly-owned subsidiary.
(ii) Southeast Asia Pacific – Australia, New Zealand, Singapore, Malaysia, the Philippines, Thailand, and Indonesia.
(iii) North Asia – Japan and South Korea.
(2) Americas and Europe – United States, Canada, Mexico, Colombia, the United Kingdom, France, Germany, Spain, Italy, Romania, Belgium, and the Netherlands.
The condensed consolidated balance sheet as of January 2, 2021, derived from audited consolidated financial statements, and the unaudited interim condensed consolidated financial information of the Company have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the SEC. Accordingly, certain information and disclosures that are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. In the opinion of the Company’s management, the accompanying interim condensed consolidated financial information contains all adjustments, consisting only of normal recurring adjustments that are necessary to state fairly the Company’s financial position as of July 3, 2021 and results of operations and cash flows for the three and six months ended July 3, 2021 and June 27, 2020.
The interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto that are included in the Company’s Annual Report on Form 10-K for the year ended January 2, 2021. The results of operations for the three and six months ended July 3, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending January 1, 2022.
The COVID-19 pandemic has negatively impacted economies, businesses, sales practices, supply chains, and consumer behavior around the world. While the overall impact of the pandemic on our business and results of operations was not material for the three and six months ended July 3, 2021, and for fiscal 2020, the pandemic disrupted and negatively affected our business. While the Company did not incur significant disruptions to its operations during the three and six months ended July 3, 2021, from COVID-19, it is unable at this time to predict the impact that COVID-19 will have on its business, financial position and operating results in future periods due to numerous uncertainties and is closely monitoring the impact of the pandemic on all aspects of its business.
Recent Accounting Pronouncements
Adopted accounting pronouncements
In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” ASU 2019-12 is intended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifying certain aspects of the current guidance to promote consistency among reporting entities. The amendments in this ASU are effective for annual periods beginning after December 15, 2020 and interim periods within those annual periods, with early adoption permitted. Most amendments within this ASU are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company adopted ASU 2019-12 during the first quarter ended April 3, 2021 and the adoption of the standard did not have an impact on its condensed consolidated financial statements.
In January 2021, the FASB issued ASU No. 2021-01 “Reference Rate Reform (Topic 848): Scope,” which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. Specifically, certain provisions in Topic 848, if elected by an entity, apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. Amendments in this ASU to the expedients and exceptions in Topic 848 capture the incremental consequences of the scope clarification and tailor the existing guidance to derivative instruments affected by the discounting transition. The amendments in this ASU do not apply to contract modifications made after December 31, 2022, new hedging relationships entered into after December 31, 2022, and existing hedging relationships evaluated for effectiveness in periods after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship (including periods after December 31, 2022). The amendments in this ASU are effective immediately for all entities. An entity may elect to apply the amendments in this ASU on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final ASU, up to the date that financial statements are available to be issued. The Company, on January 7, 2021, adopted ASU 2021-01 on a prospective basis and the adoption of this ASU did not have an impact on its condensed consolidated financial statements.
No other new accounting pronouncement issued or effective during the three and six months ended July 3, 2021, had, or is expected to have, a material impact on the Company’s condensed consolidated financial statements.
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE B – FAIR VALUE MEASURES
The Company measures at fair value certain of its financial and non-financial assets and liabilities by using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are:
| ● | Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date. |
| ● | Level 2 inputs are from other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. |
| ● | Level 3 inputs are unobservable and are used to measure fair value in situations where there is little, if any, market activity for the asset or liability at the measurement date. |
As of the dates indicated, the following financial assets and liabilities were measured at fair value on a recurring basis using the type of inputs shown:
| Fair Value Measurements Using | ||||||||||||||||
| July 3, | Inputs | |||||||||||||||
| 2021 | Level 1 | Level 2 | Level 3 | |||||||||||||
| Money market funds included in cash equivalents | $ | $ | $ | $ | ||||||||||||
| Foreign currency contracts included in other current liabilities | ( | ) | ( | ) | ||||||||||||
| $ | $ | $ | ( | ) | $ | |||||||||||
| Fair Value Measurements Using | ||||||||||||||||
| January 2, | Inputs | |||||||||||||||
| 2021 | Level 1 | Level 2 | Level 3 | |||||||||||||
| Money market funds included in cash equivalents | $ | $ | $ | $ | ||||||||||||
| Foreign currency contracts included in other current liabilities | ( | ) | ( | ) | ||||||||||||
| $ | $ | $ | ( | ) | $ | |||||||||||
There were no transfers of financial assets or liabilities between levels of the fair value hierarchy for the periods indicated.
The majority of the Company’s non-financial assets, which include long-lived assets, are not required to be carried at fair value on a recurring basis. However, if an impairment charge is required, a non-financial asset would be written down to fair value. As of July 3, 2021 and January 2, 2021, there were
The Company’s financial instruments include cash equivalents, accounts receivable, restricted cash, notes receivable, equity securities, accounts payable, and foreign currency contracts. The recorded values of cash equivalents, accounts receivable, restricted cash, and accounts payable approximate their fair values, based on their short-term nature.
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE C – INVENTORIES
Inventories consist of the following:
| July 3, | January 2, | |||||||
| 2021 | 2021 | |||||||
| Raw materials | $ | $ | ||||||
| Work in progress | ||||||||
| Finished goods | ||||||||
| $ | $ | |||||||
NOTE D – INVESTMENT IN EQUITY SECURITIES
As of July 3, 2021 and January 2, 2021, the carrying amount of equity securities without readily determinable fair values was $
During the three and six months ended July 3, 2021, and the fiscal year ended January 2, 2021,
NOTE E – REVENUE AND CONTRACT LIABILITIES
Revenue is recognized when, or as, control of a promised product or service transfers to a customer, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring those products or services. A majority of the Company’s sales are for products sold at a point in time and shipped to customers, for which control is transferred as goods are delivered to the third party carrier for shipment. The Company receives payment, primarily via credit card, for the sale of products at the time customers place orders and payment is required prior to shipment. Contract liabilities, which are recorded within the “Other current liabilities” line item in the condensed consolidated balance sheets, primarily relate to deferred revenue for product sales for customer payments received in advance of shipment, for outstanding material rights under the initial order program, and for services where control is transferred over time as services are delivered.
Other revenue includes fees, which are paid by the customer at the beginning of the service period, for access to online customer service applications and annual account renewal fees for Associates, for which control is transferred over time as services are delivered and are recognized as revenue on a straight-line basis over the term of the respective contracts.
The following table presents Other Revenue for the periods indicated:
| Quarter Ended | Six Months Ended | |||||||||||||||
| July 3, | June 27, | July 3, | June 27, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Other Revenue | $ | $ | $ | $ | ||||||||||||
Disaggregation of revenue by geographic region and major product line is included in Segment Information in Note J.
The following table provides information about contract liabilities from contracts with customers, including significant changes in the contract liabilities balances during the period:
| July 3, | January 2, | |||||||
| 2021 | 2021 | |||||||
| Contract liabilities at beginning of period | $ | $ | ||||||
| Increase due to deferral of revenue at period end | ||||||||
| Decrease due to beginning contract liabilities recognized as revenue | ( | ) | ( | ) | ||||
| Contract liabilities at end of period | $ | $ | ||||||
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE F – LINE OF CREDIT
On August 25, 2020, the Company as borrower, and certain of its material subsidiaries as guarantors, entered into the Second Amended and Restated Credit Agreement (the "Credit Agreement") with Bank of America, N.A. ("Bank of America") as Administrative Agent, Swingline Lender and Letter of Credit Issuer, and the other lenders party thereto. On April 21, 2021, the Company entered into the First Amendment to the Second Amended and Restated Credit Agreement, which, among other things amended the definition of "LIBOR Replacement Date," "LIBOR Successor Rate," and "Eurodollar Rate."
The Credit Agreement provides for a revolving credit limit for loans to the Company up to $
There was
Interest on revolving borrowings under the Credit Facility are computed at Bank of America’s prime rate or the Eurodollar rate, adjusted by features specified in the Credit Agreement. The Credit Agreement covenants require the Company’s rolling four-quarter consolidated EBITDA of $
The Company will be required to pay any balance on this Credit Facility in full at the time of maturity in August 2025.
NOTE G – CONTINGENCIES
The Company is involved in various lawsuits, claims, and other legal matters from time to time that arise in the ordinary course of conducting business, including matters involving its products, intellectual property, supplier relationships, distributors, competitor relationships, employees and other matters. The Company records a liability when a particular contingency is probable and estimable. The Company faces contingencies that are reasonably possible to occur; however, they cannot currently be estimated. While complete assurance cannot be given as to the outcome of these proceedings, management does not currently believe that any of these matters, individually or in the aggregate, will have a material adverse effect on the Company’s financial condition, liquidity or results of operations. It is reasonably possible that a change in the contingencies could result in a change in the amount recorded by the Company in the future.
NOTE H – DERIVATIVE FINANCIAL INSTRUMENTS
The Company’s risk management strategy includes the select use of derivative instruments to reduce the effects of volatility in foreign currency exchange exposure on operating results and cash flows. In accordance with the Company’s risk management policies, the Company does not hold or issue derivative instruments for trading or speculative purposes. The Company recognizes all derivative instruments as either assets or liabilities in the balance sheet at their respective fair values. When the Company becomes a party to a derivative instrument and intends to apply hedge accounting, the Company formally documents the hedge relationship and the risk management objective for undertaking the hedge, the nature of risk being hedged, and the hedged transaction, which includes designating the instrument for financial reporting purposes as a fair value hedge, a cash flow hedge, or a net investment hedge. The Company also documents how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method used to measure ineffectiveness.
The Company periodically uses derivative instruments to hedge the foreign currency exposure of its net investment in foreign subsidiaries into U.S. dollars. Initially, the Company records derivative assets on a gross basis in its condensed consolidated balance sheets. Subsequently the fair value of derivatives is measured for each reporting period. The effective portion of gains and losses attributable to these net investment hedges is recorded to foreign currency translation adjustment (“FCTA”) within accumulated other comprehensive income (loss) (“AOCI”) to offset the change in the carrying value of the net investment being hedged, and will subsequently be reclassified to net earnings in the period in which the investment in the subsidiary is either sold or substantially liquidated.
During the three and six months ended July 3, 2021 and June 27, 2020, the Company settled European options designated as net investment hedges with notional amounts of $
As of July 3, 2021, there were
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE I – COMMON STOCK AND EARNINGS PER SHARE
Basic earnings per share (“EPS”) is based on the weighted-average number of shares outstanding for each period. Shares that have been repurchased and retired during the periods specified below have been included in the calculation of the number of weighted-average shares that are outstanding for the calculation of basic EPS based on the time they were outstanding in any period. Diluted EPS is based on shares that are outstanding (computed under basic EPS) and on potentially dilutive shares. Shares that are included in the diluted EPS calculations under the treasury stock method include equity awards that are in-the-money but have not yet been exercised.
The following is a reconciliation of the numerator and denominator used to calculate basic EPS and diluted EPS for the periods indicated:
| Quarter Ended | Six Months Ended | |||||||||||||||
| July 3, | June 27, | July 3, | June 27, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net earnings available to common shareholders | $ | $ | $ | $ | ||||||||||||
| Weighted average common shares outstanding - basic | ||||||||||||||||
| Dilutive effect of in-the-money equity awards | ||||||||||||||||
| Weighted average common shares outstanding - diluted | ||||||||||||||||
| Earnings per common share from net earnings - basic | $ | $ | $ | $ | ||||||||||||
| Earnings per common share from net earnings - diluted | $ | $ | $ | $ | ||||||||||||
Equity awards for the following shares were not included in the computation of diluted EPS because their effect would be anti-dilutive:
| Quarter Ended | Six Months Ended | |||||||||||||||
| July 3, | June 27, | July 3, | June 27, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
During the three months ended July 3, 2021, the Company repurchased and retired
During the six months ended July 3, 2021 and June 27, 2020, the Company repurchased and retired
As of July 3, 2021, the remaining authorized repurchase amount under the stock repurchase plan was $
Subsequent to July 3, 2021, and through August 6, 2021, the Company repurchased and retired
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE J – SEGMENT INFORMATION
USANA operates as a direct selling company that develops, manufactures, and distributes high-quality nutritional and personal care products that are sold through a network marketing system of independent distributors (“Associates”). The Company aggregates its operating segments into reportable segment, as management believes that the Company’s segments exhibit similar long-term financial performance and have similar economic characteristics. Performance for a region or market is evaluated based on sales. No single Associate accounted for 10% or more of net sales for the periods presented. The table below summarizes the approximate percentage of total product revenue that has been contributed by the Company’s nutritionals, foods, and personal care and skincare products for the periods indicated.
| Quarter Ended | Six Months Ended | |||||||||||||||
| July 3, | June 27, | July 3, | June 27, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| USANA® Nutritionals | % | % | % | % | ||||||||||||
| USANA Foods(1) | % | % | % | % | ||||||||||||
| Personal care and Skincare | % | % | % | % | ||||||||||||
| All Other | % | % | % | % | ||||||||||||
(1) Includes the Company's new Active Nutrition line, which launched in five markets late in the first quarter of 2021 and will roll out to additional markets throughout the year.
Selected Financial Information
Financial information by geographic region is presented for the periods indicated below:
| Quarter Ended | Six Months Ended | |||||||||||||||
| July 3, | June 27, | July 3, | June 27, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net Sales to External Customers | ||||||||||||||||
| Asia Pacific | ||||||||||||||||
| Greater China | $ | $ | $ | $ | ||||||||||||
| Southeast Asia Pacific | ||||||||||||||||
| North Asia | ||||||||||||||||
| Asia Pacific Total | ||||||||||||||||
| Americas and Europe | ||||||||||||||||
| Consolidated Total | $ | $ | $ | $ | ||||||||||||
The following table provides further information on markets representing 10% or more of consolidated net sales and long-lived assets, respectively:
| Quarter Ended | Six Months Ended | |||||||||||||||
| July 3, | June 27, | July 3, | June 27, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net sales: | ||||||||||||||||
| China | $ | $ | $ | $ | ||||||||||||
| South Korea | $ | $ | $ | $ | ||||||||||||
| As of | ||||||||
| July 3, | January 2, | |||||||
| 2021 | 2021 | |||||||
| Long-lived assets: | ||||||||
| China | $ | | $ | | ||||
| United States | $ | | $ | | ||||
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide an understanding of USANA’s financial condition, results of operations and cash flows by reviewing certain key indicators and measures of performance.
The MD&A is presented in six sections as follows:
| ● |
Overview |
| ● |
Impact of the COVID-19 Pandemic |
| ● |
Customers |
| ● |
Non-GAAP Financial Measures |
| ● |
Results of Operations |
| ● |
Liquidity and Capital Resources |
This MD&A should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and Notes thereto that are contained in this quarterly report, as well as Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended January 2, 2021 ("2020 Form 10-K") filed with the SEC on March 2, 2021, and our other filings, including the Current Reports on Form 8-K, that have been filed with the SEC through the date of this report. Forward-looking statements in Part I, Item 2 may involve risks and uncertainties that could cause results to differ materially from those projected (refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements and Certain Risks” on page 1 and the risk factors provided in Part II, Item 1A for discussion of these risks and uncertainties).
Overview
We develop and manufacture high quality, science-based nutritional and personal care and skincare products that are distributed internationally through direct selling. We use this distribution method because we believe it is more conducive to meeting our vision as a company, which is to improve the overall health and nutrition of individuals and families around the world. Our customer base is primarily comprised of two types of customers: “Associates” and “Preferred Customers,” referred to together as “active Customers.” Our Associates also sell our products to retail customers. Associates share in our company vision by acting as independent distributors of our products in addition to purchasing our products for their personal use. Preferred Customers purchase our products strictly for personal use and are not permitted to resell or to distribute the products. We only count as active Customers those Associates and Preferred Customers who have purchased from us at any time during the most recent three-month period. As of July 3, 2021, we had approximately 652,000 active Customers worldwide.
We have ongoing operations in the following markets, which are grouped and presented in two geographic regions: (1) Asia Pacific, and (2) Americas and Europe. Asia Pacific is further divided into three sub-regions: (i) Greater China, (ii) Southeast Asia Pacific, and (iii) North Asia. The countries included in these regions and sub-regions are described below:
(1) Asia Pacific -
(i) Greater China - Hong Kong, Taiwan, and China. Our business in China is conducted by BabyCare Holdings, Ltd., our wholly-owned subsidiary.
(ii) Southeast Asia Pacific – Australia, New Zealand, Singapore, Malaysia, the Philippines, Thailand and Indonesia.
(iii) North Asia – Japan and South Korea.
(2) Americas and Europe – United States, Canada, Mexico, Colombia, the United Kingdom, France, Germany, Spain, Italy, Romania, Belgium, and the Netherlands.
The following table summarizes the approximate percentage of total product revenue that has been contributed by our major product lines and our top-selling products for the current and prior-year periods as indicated:
| Six Months Ended |
||||||||
| July 3, |
June 27, |
|||||||
| 2021 |
2020 |
|||||||
| Product Line |
||||||||
| USANA® Nutritionals |
||||||||
| Optimizers |
69% |
63% |
||||||
| Essentials/CellSentials(1) |
18% |
19% |
||||||
| USANA Foods(2) |
7% |
10% |
||||||
| Personal care and Skincare |
5% |
7% |
||||||
| All Other |
1% |
1% |
||||||
| Key Product |
||||||||
| USANA® Essentials/CellSentials |
12% |
12% |
||||||
| Proflavanol® |
11% |
11% |
||||||
| Probiotic |
9% |
10% |
||||||
(1) Represents a product line consisting of multiple products, as opposed to the actual USANA® Essentials / CellSentials product.
(2) Includes our new Active Nutrition line.
Our new Active Nutrition line promotes healthy weight management, digestive health, energy and hydration through a holistic approach. We launched the Active Nutrition line in five markets including the United States late in the first quarter of 2021. We will roll this line out to additional markets throughout the year.
Because we have operations in multiple markets, with sales and expenses being generated and incurred in multiple currencies, our reported U.S. dollar sales and earnings can be significantly affected by fluctuations in currency exchange rates. In general, our operating results are affected positively by a weakening of the U.S. dollar and negatively by a strengthening of the U.S. dollar. During the six months ended July 3, 2021, net sales outside of the United States represented 91.6% of consolidated net sales. In our net sales discussions that follow, we approximate the impact of currency fluctuations on net sales by translating current year sales at the average exchange rates in effect during the comparable periods of the prior year.
Impact of the COVID-19 Pandemic
The COVID-19 pandemic, including the spread of new variants of the virus, has negatively impacted economies, businesses, sales practices, supply chains, and consumer behavior around the world. While the overall impact of the pandemic on our business and results of operations has not been material, the pandemic has disrupted and negatively affected our business. Government-imposed restrictions, health and safety mandated best practices, and public hesitance regarding in-person gatherings have reduced our ability and the ability of our Associates to hold sales meetings, required our Associates to share and sell our products in a predominantly virtual environment, resulted in cancellations of key Company events and trips, required us to utilize a work-from-home strategy for all non-manufacturing and non-distribution employees, and required us to temporarily close our walk-in and fulfillment locations in some markets where we have such properties. The pandemic has also affected our ability to timely obtain some ingredients and packaging as well as ship products to some markets. While we have not experienced a meaningful supply chain interruption, our supply chain and logistics have incurred some disruption and we could experience more significant disruptions or closures in the future. These factors and others related to the COVID-19 pandemic, including the spread of new variants of the virus, will likely continue to negatively affect our business throughout 2021 in a number of ways, including those described below.
● Our Workforce. The health and safety of our employees around the world remains our top priority. We remain committed to being socially responsible as a corporate leader in each of our markets and doing our part to reduce the spread of COVID-19. As such, we are continuing to utilize a modified operating model in each of our markets as necessary to follow applicable guidelines from government and health officials. Although a significant portion of our non-manufacturing and non-distribution employees continued with remote working arrangements, we began efforts during the second quarter to bring these employees back to our offices, in markets where health and safety best practices have allowed us to safely do so. In connection with this effort, we are permitting our employees to utilize a hybrid work schedule, which allows them to split their time working at the office and remotely. Employees working on site are required to follow applicable health and safety guidelines. We are also continuing to utilize flexible shift schedules, time and attendance policies, and sick-leave policies to promote health, wellness and safety. Where necessary in our international markets, we have temporarily closed product will-call centers and continue to offer curbside delivery and subsidized shipping to customers. We will continue to monitor the situation surrounding the pandemic and implement additional risk mitigation actions where necessary.
● Our Operations. All of our production facilities remain operational under enhanced safety measures and as of the date of this report, we have not experienced meaningful disruptions to our supply chain, shipping, or logistics. Although we have successfully modified our operations in each of our markets to date, future efforts to reduce the spread of COVID-19, including the spread of new variants of the virus, may negatively affect our business. The extent of any disruption to our business in each of our markets going forward is difficult to estimate and will depend on many factors, many of which are outside of our control. Our operating plan continues to entail efforts to safeguard against disruptions through maintaining and operating (i) raw material procurement; (ii) manufacturing; (iii) distribution; (iv) selling; (v) operating cash flows and liquidity; (vi) Associate engagement and activity; and (vii) employee support and engagement.
● Our Sales and Salesforce. Demand for our high quality nutritional products has remained high during the pandemic. We continue to utilize a virtual strategy to hold meetings and events with our salesforce and will evaluate this strategy as the year and situation with the pandemic progresses. Our salesforce will also continue to utilize a virtual sales and operating strategy. Notwithstanding the foregoing, person-to-person and face-to-face selling and events remain an important part of our business and we plan to begin incorporating the same into our strategy as it becomes safe and appropriate for us and our sales force to do so.
● Our Liquidity. Our liquidity position is strong. We expect to continue to fund our business with cash flow from operations and believe that we have sufficient liquidity to satisfy our day-to-day cash needs. Notwithstanding the foregoing, we will continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate at full strength during these uncertain times. Additionally, as long as uncertainty remains surrounding the duration and impact of the COVID-19 pandemic, the potential impact from the pandemic on our business, financial condition or longer-term financial or operational results will remain uncertain. We will continue to align spending with sales performance and defer non-priority capital investments amid the COVID-19 pandemic.
Customers
Because we sell our products to a customer base of independent Associates and Preferred Customers, we increase our sales by increasing the number of our active Customers, the amount they spend on average, or both. Our primary focus continues to be increasing the number of active Customers. We believe this focus is consistent with our vision of improving the overall health and nutrition of individuals and families around the world. Sales to Associates account for approximately 55% of product sales during the six months ended July 3, 2021. The remainder of our sales are to Preferred Customers. Increases or decreases in product sales are typically the result of variations in the volume of product sold relating to fluctuations in the number of active Customers purchasing our products. The number of active Associates and Preferred Customers is, therefore, used by management as a key non-financial indicator to evaluate our operational performance.
We believe that our ability to attract and retain active Customers is positively influenced by a number of factors, including our high quality product offerings and the general public’s heightened awareness and understanding of the connection between diet and long-term health. Additionally, we believe that our Associate compensation plan and the general public’s growing desire for a secondary source of income and small business ownership are key to our ability to attract and retain Associates. We periodically make changes to our Compensation Plan in an effort to ensure that it is among the most competitive plans in the industry, to encourage behavior that we believe leads to a successful business for our Associates, and to ensure that our plan provides us with leverage to grow sales and earnings. Additionally, the initiatives we are executing under our customer experience and technology enhancements strategy are designed to promote active Customer growth. While these initiatives are designed to promote both Associate and Preferred Customer growth, Preferred Customer growth has outpaced Associate growth during the six months ended July 3, 2021. Consequently, Preferred Customers comprise a larger portion of total active Customers.
To further support our Associates in building their businesses, we traditionally sponsor meetings and events throughout the year, which offer information about our products and our network marketing system. We also provide low cost sales tools, including online sales, business management, and training tools, which are intended to support our Associates in building and maintaining a successful home-based business. Although we provide training and sales tools, we ultimately rely on our Associates to sell our products, attract new active Customers to purchase our products, and educate and train new Associates. We sponsor meetings designed to assist Associates in their business development and to provide a forum for interaction with our Associate leaders and members of our management team.
The table below summarizes the changes in our active Customer base by geographic region, rounded to the nearest thousand as of the dates indicated:
| Total Active Customers by Region |
|||||||||||
| As of |
As of |
Change from |
Percent |
||||||||
| July 3, 2021 |
June 27, 2020 |
Prior Year |
Change |
||||||||
| Asia Pacific: |
|||||||||||
| Greater China |
303,000 |
46.5% |
278,000 |
46.4% |
25,000 |
9.0% |
|||||
| Southeast Asia Pacific |
144,000 |
22.1% |
129,000 |
21.5% |
15,000 |
11.6% |
|||||
| North Asia |
66,000 |
10.1% |
56,000 |
9.4% |
10,000 |
17.9% |
|||||
| Asia Pacific Total |
513,000 |
78.7% |
463,000 |
77.3% |
50,000 |
10.8% |
|||||
| Americas and Europe |
139,000 |
21.3% |
136,000 |
22.7% |
3,000 |
2.2% |
|||||
| 652,000 |
100.0% |
599,000 |
100.0% |
53,000 |
8.8% |
||||||
Non-GAAP Financial Measures
We report our financial results in accordance with accounting principles generally accepted in the United States (GAAP). However, to supplement the financial results prepared in accordance with GAAP, we use non-GAAP financial measures described below. Our management believes these non-GAAP financial measures that exclude the impact of specific items (described below) may be useful to investors in their assessment of our ongoing operating performance and provide additional meaningful comparisons between current results and results in prior operating periods and in understanding the activities and business metrics of our operations. We believe that these non-GAAP financial measures reflect an additional way of viewing aspects of our business that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business. We provide non-GAAP financial information for informational purposes only. Readers should consider the information in addition but not instead of or superior to, our consolidated financial statements prepared in accordance with GAAP. This non-GAAP financial information may be determined or calculated differently by other companies, limiting the usefulness of those measures for comparative purposes.
In this report, we use “constant currency” net sales, “local currency” net sales, and other currency-related financial information terms that are non-GAAP financial measures. We believe the use of these terms is helpful in understanding the impact of fluctuations in foreign-currency exchange rates and facilitating period-to-period comparisons of our results of operations and provides investors an additional perspective on trends and underlying business results. Changes in our reported revenue and profits in this report include the impacts of changes in foreign currency exchange rates. As additional information to the reader, we provide constant currency assessments in the tables and the narrative information in this MD&A to remove or quantify the impact of the fluctuation in foreign exchange rates and utilize constant currency results in our analysis of performance. Our constant currency financial results are calculated by translating the current period’s financial results at the same average exchange rates in effect during the applicable prior-year period and then comparing this amount to the prior-year period’s financial results. The GAAP reconciliations of these non-GAAP measures are contained in the tables within Results of Operations.
Results of Operations
Summary of Financial Results
Net sales for the second quarter of 2021 increased 30.1% to $336.8 million, an increase of $77.8 million, compared with the prior-year quarter. This increase was due, in great part, to a successful, short-term incentive program that we offered globally during the quarter. This incentive program contributed to double-digit active Customer growth in our Southeast Asia Pacific and North Asia regions, with an 8.8% overall increase in total active Customers during the quarter. Additionally, favorable changes in currency exchange rates benefited net sales for the second quarter by $25.2 million.
Net earnings for the second quarter of 2021 were $38.2 million, an increase of 36.7% compared with $28.0 million during the prior-year period. The increase in net earnings was mainly the result of increased sales and lower relative operating expenses.
Quarters Ended July 3, 2021 and June 27, 2020
Net Sales
The following table summarizes the changes in net sales by geographic region for the fiscal quarters ended as of the dates indicated:
| Net Sales by Region |
||||||||||||||||||||||||||||||||
| (in thousands) |
||||||||||||||||||||||||||||||||
| Quarter Ended |
||||||||||||||||||||||||||||||||
| July 3, 2021 |
June 27, 2020 |
Change |
Percent |
Currency |
Percent |
|||||||||||||||||||||||||||
| Asia Pacific |
||||||||||||||||||||||||||||||||
| Greater China |
$ | 165,416 | 49.1 | % | $ | 124,001 | 47.9 | % | $ | 41,415 | 33.4 | % | $ | 13,459 | 22.5 | % | ||||||||||||||||
| Southeast Asia Pacific |
76,101 | 22.6 | % | 59,459 | 22.9 | % | 16,642 | 28.0 | % | 5,225 | 19.2 | % | ||||||||||||||||||||
| North Asia |
37,438 | 11.1 | % | 25,852 | 10.0 | % | 11,586 | 44.8 | % | 2,906 | 33.6 | % | ||||||||||||||||||||
| Asia Pacific Total |
278,955 | 82.8 | % | 209,312 | 80.8 | % | 69,643 | 33.3 | % | 21,590 | 23.0 | % | ||||||||||||||||||||
| Americas and Europe |
57,882 | 17.2 | % | 49,679 | 19.2 | % | 8,203 | 16.5 | % | 3,610 | 9.2 | % | ||||||||||||||||||||
| $ | 336,837 | 100.0 | % | $ | 258,991 | 100.0 | % | $ | 77,846 | 30.1 | % | $ | 25,200 | 20.3 | % | |||||||||||||||||
Asia Pacific: The growth in this region was driven by a successful worldwide incentive program designed to further incent product sales to new customers. The increase in constant currency net sales in Southeast Asia Pacific was driven primarily by Malaysia, Australia, and the Philippines, which had local currency net sales growth of 51.2%, 14.8%, and 7.0% due to a 38.7%, 5.3%, and 1.9% increase in active Customers, respectively. The increase in constant currency net sales in Greater China was primarily driven by China, which generated local currency net sales growth of 24.5%, due to a 9.8% increase in active Customers. The increase in constant currency net sales in North Asia was driven by South Korea which had local currency net sales growth of 33.6% due to a 16.7% increase in active Customers.
Americas and Europe: The growth in this region was aided by the worldwide incentive program described above. The increase in constant currency net sales in Americas and Europe was driven by local currency net sales growth in Canada and the United States, which generated local currency net sales growth of 10.1% and 9.0%, respectively. Additionally, Europe increased constant currency net sales by 28.9% during the current year quarter due to an 11.1% increase in active Customers.
Gross Profit
Gross profit increased 150 basis points to 83.1% of net sales, up from 81.6% in the prior-year quarter. This increase can be attributed to (i) favorable changes in currency exchange rates, (ii) leverage gained on fixed period costs associated with higher sales, and (iii) lower conversion costs as a result of higher production levels, mostly in China. These improvements were partially offset by higher freight costs.
Associate Incentives
Associate incentives increased 290 basis points to 45.7% of net sales, up from 42.8% in the prior-year quarter. The relative increase can be attributed to (i) the short-term incentive program offered during the quarter, (ii) increased spend on miscellaneous associate incentives, and (iii) changes in market sales mix.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 200 basis points relative to net sales, and increased $11.4 million in absolute terms. The relative improvement can be attributed to leverage gained on higher net sales. The increased expense in absolute terms is due to (i) higher employee related costs, and (ii) an increase in variable expenses associated with higher sales. Additionally, there was a modest increase in event and travel-related expenses.
Income Taxes
Income taxes decreased modestly to 29.6% of pre-tax earnings, down from 30.0% of pre-tax earnings in the prior-year quarter. The lower effective tax rate is due primarily to increased earnings in the United States, which allowed for greater foreign tax credit utilization.
Diluted Earnings per Share
Diluted EPS increased 41.7% to $1.87 as compared to $1.32 reported in the prior-year quarter. This increase can be attributed to higher net earnings and a lower diluted share count.
Six Months Ended July 3, 2021 and June 27, 2020
Net Sales
The following table summarizes the changes in net sales by geographic region for the six months ended as of the dates indicated:
| Net Sales by Region |
||||||||||||||||||||||||||||||||
| (in thousands) |
||||||||||||||||||||||||||||||||
| Six Months Ended |
||||||||||||||||||||||||||||||||
| July 3, 2021 |
June 27, 2020 |
Change |
Percent |
Currency |
Percent |
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| Asia Pacific |
||||||||||||||||||||||||||||||||
| Greater China |
$ | 314,394 | 48.7 | % | $ | 255,433 | 48.6 | % | $ | 58,961 | 23.1 | % | $ | 23,197 | 14.0 | % | ||||||||||||||||
| Southeast Asia Pacific |
148,249 | 23.0 | % | 116,381 | 22.1 | % | 31,868 | 27.4 | % | 9,332 | 19.4 | % | ||||||||||||||||||||
| North Asia |
67,603 | 10.5 | % | 53,103 | 10.1 | % | 14,500 | 27.3 | % | 4,759 | 18.3 | % | ||||||||||||||||||||
| Asia Pacific Total |
530,246 | 82.2 | % | 424,917 | 80.8 | % | 105,329 | 24.8 | % | 37,288 | 16.0 | % | ||||||||||||||||||||
| Americas and Europe |
114,567 | 17.8 | % | 100,693 | 19.2 | % | 13,874 | 13.8 | % | 4,517 | 9.3 | % | ||||||||||||||||||||
| $ | 644,813 | 100.0 | % | $ | 525,610 | 100.0 | % | $ | 119,203 | 22.7 | % | $ | 41,805 | 14.7 | % | |||||||||||||||||
Asia Pacific: The growth in this region was driven by a worldwide incentive program described above in this report. The increase in constant currency net sales in Southeast Asia Pacific was driven primarily by Malaysia, the Philippines, and Singapore, which had local currency net sales growth of 48.8%, 16.5%, and 15.9%. The increase in constant currency net sales in Greater China was primarily driven by China, which generated local currency net sales growth of 16.2%. The increase in constant currency net sales in North Asia was driven by South Korea which had local currency net sales growth of 17.8%.
Americas and Europe: The growth in this region was aided by the worldwide incentive program described above. The increase in constant currency net sales in Americas and Europe was driven by net sales growth in the United States, Mexico, and Canada, which had local currency sales growth of 7.8%, 16.6%, and 5.1%, respectively. Additionally, Europe increased constant currency net sales by 31.6%.
Gross Profit
Gross profit was 82.2% for the first six months of 2021 and 2020. While there was no change in gross profit as a percent of net sales, there was significant fluctuation related to certain activities in the first six months of 2021, which include favorable changes in currency exchange rates, offset by unfavorable changes in market sales mix.
Associate Incentives
Associate incentives increased 150 basis points to 44.7% of net sales for the first six months of 2021, compared with 43.2% in the prior-year period. The relative increase can be attributed to (i) the short-term incentive program offered during the current year period, (ii) changes in market sales mix, and (iii) increased spend on miscellaneous associate incentives.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 170 basis points relative to net sales, and increased $17.5 million in absolute terms for the first six months of 2021. The relative improvement can be attributed to leverage gained on higher net sales. The increased expense in absolute terms is due to (i) higher employee related costs, and (ii) an increase in variable expenses associated with higher sales. Additionally, there was a modest increase in event and travel-related expenses.
Income Taxes
Income taxes decreased to 30.2% of pre-tax earnings for the first six months of 2021, down from 31.1% of pre-tax earnings in the prior-year period. The lower effective tax rate is due primarily to increased earnings in the United States, which allowed for greater foreign tax credit utilization.
Diluted Earnings per Share
Diluted EPS increased 29.3% in the first six months of 2021 to $3.31 as compared to $2.56 reported in the prior-year period. This increase can be attributed to higher net earnings and a lower diluted share count.
Liquidity and Capital Resources
We have historically met our working capital and capital expenditure requirements by using net cash flow from operations and by drawing on our line of credit. Our principal source of liquidity is our operating cash flow. Although we are required to maintain cash deposits with banks in certain of our markets, there are currently no material restrictions on our ability to transfer and remit funds among our international markets. In China, however, our compliance with Chinese accounting and tax regulations promulgated by the State Administration of Foreign Exchange (“SAFE”) results in transfer and remittance of our profits and dividends from China to the United States on a delayed basis. If SAFE or other Chinese regulators introduce new regulations, or change existing regulations which allow foreign investors to remit profits and dividends earned in China to other countries, our ability to remit profits or pay dividends from China to the United States may be limited in the future.
We believe we have sufficient liquidity to satisfy our cash needs and expect to continue to fund our business with cash flow from operations. We continue, however, to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times. Additionally, we continually evaluate opportunities, to repurchase shares of our common stock and will, from time to time, consider the acquisition of, or investment in complementary businesses, products, services and technologies, which has the potential to affect our liquidity.
Cash and Cash Equivalents
Cash and cash equivalents decreased to $265.4 million at July 3, 2021, from $311.9 million at January 2, 2021. Cash flow provided by operating activities generated $58.8 million during the six months ended July 3, 2021. The decrease in cash and cash equivalents was primarily due to cash used to repurchase and retire shares of our common stock totaling $99.2 million.
The table below presents concentrations of cash and cash equivalents by market for the periods indicated:
| Cash and cash equivalents |
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| (in Millions) |
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| As of |
As of |
|||||||
| July 3, 2021 |
January 2, 2021 |
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| United States |
$ | 118.2 | $ | 119.7 | ||||
| China |
89.5 | 133.8 | ||||||
| All other markets |
57.7 | 58.4 | ||||||
| Total Cash and cash equivalents |
$ | 265.4 | $ | 311.9 | ||||
Cash Flows Provided by Operations
As discussed above, our principal source of liquidity comes from our net cash flows from operations, which results from a strong operating margin. Net cash flows provided by operating activities was $58.8 million for the first six months of 2021. Net earnings combined with adjustments of non-cash items contributed positively to our net cash flows provided by operating activities, partially offset by cash used to (i) payout the annual employee bonus, and (ii) a reduction in trade payables.
Net cash flows provided by operating activities was $63.4 million for the six months of 2020. Net earnings combined with adjustments of non-cash items contributed positively to our net cash flows provided by operating activities, partially offset by cash used to (i) payout the annual employee bonus, and (ii) a reduction in trade payables.
Line of Credit
Information with respect to our line of credit may be found in Note F to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this report.
Share Repurchase
Information with respect to share repurchases may be found in Note I to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this report.
Off-Balance Sheet Arrangements
None.
Summary
We believe our current cash balances, future cash provided by operations, and amounts available under our line of credit will be sufficient to cover our operating and capital needs in the ordinary course of business for the foreseeable future. If we experience an adverse operating environment or unanticipated and unusual capital expenditure requirements, additional financing may be required. No assurance can be given, however, that additional financing, if required, would be available to us at all or on favorable terms. We might also require or seek additional financing for the purpose of expanding into new markets, growing our existing markets, mergers and acquisitions, or for other reasons. Such financing may include the use of additional debt or the sale of additional equity securities. Any financing which involves the sale of equity securities or instruments that are convertible into equity securities could result in immediate and possibly significant dilution to our existing shareholders.
Critical Accounting Policies
There were no changes during the quarter to our critical accounting policies as disclosed in our 2020 Form 10-K. Our significant accounting policies are disclosed in Note A to our Consolidated Financial Statements filed with our 2020 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have no material changes to the disclosures on this matter made in our 2020 Form 10-K. For a discussion of our exposure to market risk, refer to our market risk disclosures set forth in the section entitled "Quantitative and Qualitative Disclosures About Market Risk" in the 2020 Form 10-K.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information that is required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods that are specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding any required disclosure. In designing and evaluating these disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
As of the end of the period covered by this report, our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial and Accounting Officer) evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a- 15(e) under the Exchange Act). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of July 3, 2021.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the fiscal quarter ended July 3, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are a party to litigation and other proceedings that arise in the ordinary course of conducting business, including matters involving our products, intellectual property, supplier relationships, distributors, competitor relationships, employees and other matters.
Information with respect to our legal proceedings may be found in Note G to the Condensed Consolidated Financial Statements included in Item 1 Part I of this report.
Our business, results of operations, and financial condition are subject to various risks. These risks are described elsewhere in this Quarterly Report on Form 10-Q and our other filings with the SEC, including the 2020 Form 10-K. The risk factors identified in our 2020 Form 10-K have not changed in any material respect.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Our share repurchase plan has been ongoing since the fourth quarter of 2000, with the Board of Directors periodically approving additional dollar amounts for share repurchases under the plan. At July 3, 2021, the authorized amount available for repurchases under the plan was $50.8 million.
Repurchases are made from time to time at management’s discretion in accordance with applicable federal securities laws. Repurchases may occur through open market purchases, pursuant to a Rule 10b5-1 trading plan, or in other transactions as permitted by the rules of the SEC. There is no requirement for future share repurchases, and there is no expiration date of the repurchase plan.
The following table summarizes information relating to purchases of our common stock made by or on behalf of the Company during the quarter ended July 3, 2021.
| Issuer Purchases of Equity Securities |
||||||||
| (amounts in thousands, except per share data) |
||||||||
| Period |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
||||
| Fiscal April |
||||||||
| (Apr. 4, 2021 through May 8, 2021) |
190 |
$96.67 |
190 |
$62,179 |
||||
| Fiscal May |
||||||||
| (May 9, 2021 through Jun. 5, 2021) |
114 |
$99.24 |
114 |
$50,845 |
||||
| Fiscal June |
||||||||
| (Jun. 6, 2021 through Jul. 3, 2021) |
0 |
$0.00 |
0 |
$50,845 |
||||
| 304 |
304 |
|||||||
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. MINE SAFETY DISCLOSURES
Not Applicable.
None.
Exhibits marked with an asterisk (*) are filed herewith.
| Exhibit Number |
Description |
| 10.18 | First Amendment to the Second Amended and Restated Credit Agreement dated as of April 21, 2021 (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended April 3, 2021, filed May 11, 2021, Exhibit 10.18, File No. 001-35024).* |
| 31.1 |
|
| 31.2 |
|
| 32.1 |
|
| 32.2 |
|
| 101.INS |
Inline XBRL Instance Document |
| 101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | Cover Page Interactive Data file (formatted as Inline XBRL and contained in Exhibit 101) |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 11, 2021
| USANA HEALTH SCIENCES, INC. |
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| /s/ G. Douglas Hekking |
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G. Douglas Hekking |
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Chief Financial Officer (Principal Financial Officer) |