usna-20200627x10q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 27, 2020

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ____________

Commission file number: 001-35024

______________________

USANA HEALTH SCIENCES, INC.

(Exact name of registrant as specified in its charter)


Utah	87-0500306
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification No.)

______________________

3838 West Parkway Blvd., Salt Lake City, Utah 84120

(Address of principal executive offices) (Zip Code)

______________________

(801) 954-7100

(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
Common Stock	USNA	New York Stock Exchange

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. Yes x No ¨

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). Yes x No ¨

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.



Large accelerated filer x	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 ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of July 31, 2020, 21,020,007 shares of common stock, $.001 par value, of the registrant were outstanding.
‎

Cautionary Note Regarding Forward-Looking Statements and Certain Risks

This report 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”). 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, future 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.

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 Securities and Exchange Commission (“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 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;

Volatile fluctuation in the value of foreign currencies against the U.S. dollar;

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.

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 subsidiaries.

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(unaudited)



	As of		As of
	June 27,		December 28,
	2020		2019
ASSETS
Current assets
Cash and cash equivalents	$	227,368	$	234,830
Inventories		69,279		68,905
Prepaid expenses and other current assets		28,302		25,544
Total current assets		324,949		329,279
Property and equipment, net		98,435		95,233
Goodwill		16,521		16,636
Intangible assets, net		29,008		29,840
Deferred tax assets		3,741		3,090
Other assets		39,497		42,856
	$	512,151	$	516,934
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	10,942	$	12,525
Other current liabilities		128,775		123,573
Total current liabilities		139,717		136,098
Deferred tax liabilities		6,584		10,282
Other long-term liabilities		16,774		18,842
Stockholders' equity
Common stock, $0.001 par value; Authorized -- 50,000 shares,
issued and outstanding 21,017 as of June 27, 2020
and 21,655 as of December 28, 2019		21		22
Additional paid-in capital		55,526		59,445
Retained earnings		312,659		306,146
Accumulated other comprehensive income (loss)		(19,130)		(13,901)
Total stockholders' equity		349,076		351,712
	$	512,151	$	516,934

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
	June 27,		June 29,		June 27,		June 29,
	2020		2019		2020		2019
Net sales	$	258,991	$	256,016	$	525,610	$	529,006
Cost of sales		47,674		46,494		93,733		92,395
Gross profit		211,317		209,522		431,877		436,611
Operating expenses:
Associate incentives		110,852		111,511		226,921		234,041
Selling, general and administrative		60,879		66,854		126,358		136,409
Total operating expenses		171,731		178,365		353,279		370,450
Earnings from operations		39,586		31,157		78,598		66,161
Other income (expense):
Interest income		435		1,301		1,419		2,785
Interest expense		(217)		(10)		(238)		(22)
Other, net		175		64		(637)		(118)
Other income (expense), net		393		1,355		544		2,645
Earnings before income taxes		39,979		32,512		79,142		68,806
Income taxes		12,002		11,134		24,613		23,256
Net earnings	$	27,977	$	21,378	$	54,529	$	45,550

Earnings per common share
Basic	$	1.33	$	0.92	$	2.56	$	1.95
Diluted	$	1.32	$	0.91	$	2.56	$	1.93

Weighted average common shares outstanding
Basic		21,034		23,245		21,265		23,364
Diluted		21,129		23,370		21,340		23,648

Comprehensive income:
Net earnings	$	27,977	$	21,378	$	54,529	$	45,550
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment		1,861		(5,592)		(4,376)		(818)
Tax benefit (expense) related to foreign currency
translation adjustment		(1,892)		242		(853)		(1,052)
Other comprehensive income (loss), net of tax		(31)		(5,350)		(5,229)		(1,870)
Comprehensive income	$	27,946	$	16,028	$	49,300	$	43,680

The accompanying notes are an integral part of these statements.

‎

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)


For six months ended June 29, 2019
								Accumulated
				Additional				Other
	Common Stock			Paid-in		Retained		Comprehensive
	Shares	Value		Capital		Earnings		Income (Loss)		Total
Balance at December 29, 2018	23,567	$	24	$	72,008	$	329,501	$	(10,387)	$	391,146
Net earnings							45,550				45,550
Other comprehensive income (loss), net of tax									(1,870)		(1,870)
Equity-based compensation expense					8,601						8,601
Common stock repurchased and retired	(651)		(1)		(10,115)		(47,507)				(57,623)
Common stock issued under equity award plans	64		—								—
Tax withholding for net-share settled equity awards					(1,648)						(1,648)
Balance at June 29, 2019	22,980	$	23	$	68,846	$	327,544	$	(12,257)	$	384,156

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	21,655	$	22	$	59,445	$	306,146	$	(13,901)	$	351,712
Net earnings							54,529				54,529
Other comprehensive income (loss), net of tax									(5,229)		(5,229)
Equity-based compensation expense					6,991						6,991
Common stock repurchased and retired	(785)		(1)		(9,012)		(48,016)				(57,029)
Common stock issued under equity award plans	147		—								—
Tax withholding for net-share settled equity awards					(1,898)						(1,898)
Balance at June 27, 2020	21,017	$	21	$	55,526	$	312,659	$	(19,130)	$	349,076

The accompanying notes are an integral part of these statements.

‎

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)


For the three months ended June 29, 2019
								Accumulated
				Additional				Other
	Common Stock			Paid-in		Retained		Comprehensive
	Shares	Value		Capital		Earnings		Income (Loss)		Total
Balance at March 30, 2019	23,335	$	23	$	69,100	$	329,001	$	(6,907)	$	391,217
Net earnings							21,378				21,378
Other comprehensive income (loss), net of tax									(5,350)		(5,350)
Equity-based compensation expense					4,769						4,769
Common stock repurchased and retired	(367)		—		(4,788)		(22,835)				(27,623)
Common stock issued under equity award plans	12		—								—
Tax withholding for net-share settled equity awards					(235)						(235)
Balance at June 29, 2019	22,980	$	23	$	68,846	$	327,544	$	(12,257)	$	384,156

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	20,995	$	21	$	52,004	$	284,682	$	(19,099)	$	317,608
Net earnings							27,977				27,977
Other comprehensive income (loss), net of tax									(31)		(31)
Equity-based compensation expense					3,597						3,597
Common stock issued under equity award plans	22		—								—
Tax withholding for net-share settled equity awards					(75)						(75)
Balance at June 27, 2020	21,017	$	21	$	55,526	$	312,659	$	(19,130)	$	349,076

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
	June 27,		June 29,
	2020		2019
Cash flows from operating activities
Net earnings	$	54,529	$	45,550
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities
Depreciation and amortization		7,044		7,654
Right-of-use asset amortization		4,355		3,977
(Gain) loss on sale of property and equipment		116		26
Equity-based compensation expense		6,991		8,601
Deferred income taxes		(5,326)		(10,722)
Changes in operating assets and liabilities:
Inventories		(1,950)		(6,026)
Prepaid expenses and other assets		(4,890)		3,334
Accounts payable		(1,120)		1,379
Other liabilities		3,675		(33,094)
Net cash provided by (used in) operating activities		63,424		20,679
Cash flows from investing activities
Receipts on notes receivable		179		92
Proceeds from the settlement of net investment hedges		1,935		1,936
Payments for net investment hedge		(1,089)		(1,660)
Maturities of investment securities held-to-maturity		—		60,540
Proceeds from sale of property and equipment		—		6
Purchases of property and equipment		(10,821)		(7,130)
Net cash provided by (used in) investing activities		(9,796)		53,784
Cash flows from financing activities
Repurchase of common stock		(57,029)		(57,623)
Borrowings on line of credit		60,000		5,000
Payments on line of credit		(60,000)		(5,000)
Payments related to tax withholding for net-share settled equity awards		(1,898)		(1,648)
Net cash provided by (used in) financing activities		(58,927)		(59,271)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash		(2,195)		1,839
Net increase (decrease) in cash, cash equivalents, and restricted cash		(7,494)		17,031
Cash, cash equivalents, and restricted cash at beginning of period		237,688		217,234
Cash, cash equivalents, and restricted cash at end of period	$	230,194	$	234,265
Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets
Cash and cash equivalents	$	227,368	$	231,353
Restricted cash included in other assets		2,826		2,912
Total cash, cash equivalents, and restricted cash	$	230,194	$	234,265
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	199	$	7
Income taxes		30,866		35,149
Cash received during the period for:
Income tax refund		42		5,169
Non-cash investing and financing activities:
Right-of-use assets obtained in exchange for lease obligations		1,151		22,926
Accrued purchases of property and equipment		613		659

The accompanying notes are an integral part of these statements.

NOTE A – ORGANIZATION, CONSOLIDATION, AND BASIS OF PRESENTATION – CONTINUED

Recent Accounting Pronouncements

Adopted accounting pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the disclosure requirements for fair value measurements. The modifications removed the following disclosure requirements: (i) the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) the policy for timing of transfers between levels; and (iii) the valuation processes for Level 3 fair value measurements. This ASU added the following disclosure requirements: (i) the changes in unrealized gains and losses for the period included in other comprehensive income (“OCI”) for recurring Level 3 fair value measurements held at the end of the reporting period; and (ii) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company adopted ASU 2018-13 during the first quarter of 2020 and the adoption of the standard did not have an impact on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The capitalized implementation costs of a hosting arrangement that is a service contract will be expensed over the term of the hosting arrangement. For public business entities, the amendments in this ASU are effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted, including adoption in any interim period. The amendments can be applied either retrospectively or prospectively to all implementation costs incurred after the adoption date. The Company adopted ASU 2018-15 during the first quarter of 2020 and the adoption of the standard did not have an impact on its condensed consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 is intended to provide temporary optional expedients and exceptions to the Generally Accepted Accounting Principles (“GAAP”) guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. This ASU is effective upon issuance through December 31, 2022 on a prospective basis. The Company will evaluate transactions or contract modifications occurring as a result of reference rate reform and determine whether to apply the optional guidance on an ongoing basis. The Company does not expect the adoption of ASU 2020-04 will have a material impact on its consolidated financial statements.

Recently issued accounting pronouncements not yet adopted

In December 2019, the FASB issued 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. An entity that elects early adoption must adopt all the amendments in the same period. 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 does not expect the adoption of ASU 2019-12 will have a material impact on its consolidated financial statements.

No other new accounting pronouncement issued or effective during the three and six months ended June 27, 2020 had, or is expected to have, a material impact on the Company’s condensed consolidated financial statements.

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
	June 27,		Inputs
	2020		Level 1		Level 2		Level 3
Money market funds included in cash equivalents	$	149,307	$	149,307	$	—	$	—
Foreign currency contracts included in other current liabilities		(888)		—		(888)		—
	$	148,419	$	149,307	$	(888)	$	—

			Fair Value Measurements Using
	December 28,		Inputs
	2019		Level 1		Level 2		Level 3
Money market funds included in cash equivalents	$	180,032	$	180,032	$	—	$	—
Foreign currency contracts included in other current liabilities		(764)		—		(764)		—
	$	179,268	$	180,032	$	(764)	$	—

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. At June 27, 2020 and December 28, 2019, there were no non-financial assets measured at fair value on a non-recurring basis.

The Company’s financial instruments include cash equivalents, accounts receivable, restricted cash, and accounts payable. The recorded values of cash equivalents, accounts receivable, restricted cash, and accounts payable approximate their fair values, based on their short-term nature.

NOTE C – INVENTORIES

Inventories consist of the following:



	June 27,		December 28,
	2020		2019
Raw materials	$	18,619	$	15,879
Work in progress		8,420		12,111
Finished goods		42,240		40,915
	$	69,279	$	68,905

‎

NOTE D – 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
	June 27,		June 29,		June 27,		June 29,
	2020		2019		2020		2019
Other Revenue	$	978	$	784	$	1,977	$	1,657

Disaggregation of revenue by geographic region and major product line is included in Segment Information in Note I.

The following table provides information about contract liabilities from contracts with customers, including significant changes in the contract liabilities balances during the period:



	June 27,		December 28,
	2020		2019
Contract liabilities at beginning of period	$	13,852	$	15,055
Increase due to deferral of revenue at period end		15,972		13,852
Decrease due to beginning contract liabilities recognized as revenue		(13,372)		(15,055)
Contract liabilities at end of period	$	16,452	$	13,852

NOTE E – LINE OF CREDIT

The Company has a $75,000 line of credit (“Credit Agreement”) with Bank of America (“Bank”). Interest is computed at the Bank’s Prime Rate or a LIBOR-plus “Eurodollar” rate, adjusted by features specified in the Credit Agreement. The collateral for this line of credit is the pledge of the capital stock of certain subsidiaries of the Company, pursuant to a separate pledge agreement with the Bank. On February 19, 2016, the Company entered into an Amended and Restated Credit Agreement with the Bank, which extended the term of the Credit Agreement to April 27, 2021 and increased the Company’s consolidated rolling four-quarter adjusted EBITDA covenant to $100,000 or greater and its ratio of consolidated funded debt to adjusted EBITDA of equal to or less than 2.0 to 1.0 at the end of each quarter.

On July 15, 2019, the Company entered into a Third Amendment to the Amended and Restated Credit Agreement (the “Third Amendment”). The Third Amendment established a procedure for the Company to request an increase in the line of credit by an amount not to exceed $125,000 (up to $200,000 in the aggregate). The Company may make a maximum of three such requests in increments of at least $25,000 to the Bank. The Bank, at its election, will notify the Company whether or not it agrees to increase the line of credit and, if so, whether by an amount equal to or less than the amount requested by the Company. The line of credit will be automatically reduced to $100,000, as of September 30, 2020.

NOTE E – LINE OF CREDIT - CONTINUED

The adjusted EBITDA under the Credit Agreement is modified for certain non-cash expenses. Any existing bank guarantees are considered a reduction of the overall availability of credit and part of the covenant calculation under the Credit Agreement. This provision resulted in a reduction of $8,856 and $8,924 in the available borrowing limit as of June 27, 2020 and December 28, 2019, respectively, due to existing normal course of business guarantees in certain markets.

There was no outstanding debt on this line of credit at June 27, 2020. The Company will be required to pay any balance on this line of credit in full at the time of maturity in April 2021, unless the Credit Agreement is replaced or its terms are renegotiated.

NOTE F – 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.

On February 7, 2017, the Company disclosed in a Current Report on Form 8-K filed with the SEC that it was conducting a voluntary internal investigation regarding its BabyCare operations in China. In 2017, the Company voluntarily contacted the SEC and the United States Department of Justice (“DOJ”) to advise both agencies that an internal investigation was underway. The Company provided information to both agencies throughout the internal investigation. On June 24, 2020, the SEC informed the Company that it had closed its investigation and declined any enforcement action. The SEC stated that it had reached this conclusion based on a number of factors, including, but not limited to, the Company’s (i) prompt, voluntary self-disclosure of the matters underlying the investigation, (ii) thorough internal investigation, (iii) full cooperation with the SEC, and (iv) remediation of the matters underlying the investigation. On June 26, 2020, the DOJ informed the Company by letter that it had closed its investigation into this matter, noting the Company’s cooperation during the investigation.

NOTE G – 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 second quarter ended June 27, 2020 and June 29, 2019, the Company settled a European option designated as a net investment hedge with a notional amount of $90,000 and $110,000, respectively. For the three and six months ended June 27, 2020 and June 29, 2019, the Company realized a net gain of $846 and $276, respectively, which is recorded to FCTA within AOCI.

As of June 27, 2020, there were no derivatives outstanding for which the Company has applied hedge accounting.

NOTE H – COMMON STOCK AND EARNINGS PER SHARE

Basic earnings per share (“EPS”) are 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 are 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
	June 27,		June 29,		June 27,		June 29,
	2020		2019		2020		2019
Net earnings available to common shareholders	$	27,977	$	21,378	$	54,529	$	45,550
Weighted average common shares outstanding - basic		21,034		23,245		21,265		23,364
Dilutive effect of in-the-money equity awards		95		125		75		284
Weighted average common shares outstanding - diluted		21,129		23,370		21,340		23,648
Earnings per common share from net earnings - basic	$	1.33	$	0.92	$	2.56	$	1.95
Earnings per common share from net earnings - diluted	$	1.32	$	0.91	$	2.56	$	1.93

Equity awards for the following shares were not included in the computation of diluted EPS due to the fact that their effect would be anti-dilutive:



Quarter Ended				Six Months Ended
June 27,		June 29,		June 27,		June 29,
2020		2019		2020		2019
	284		392		550		248

There were no shares repurchased during the quarter ended June 27, 2020. During the quarter ended June 29, 2019, the Company repurchased and retired 367 shares for $27,623 under its share repurchase plan.

During the six months ended June 27, 2020 and June 29, 2019, the Company repurchased and retired 785 shares and 651 shares for $57,029 and $57,623, respectively, under the its share repurchase plan. The excess of the repurchase price over par value is allocated between additional paid-in capital and retained earnings on a pro-rata basis. The purchase of shares under this plan reduces the number of shares outstanding in the above calculations.

As of June 27, 2020, the remaining authorized repurchase amount under the stock repurchase plan was $72,971. There is no expiration date on the remaining approved repurchase amount and no requirement for future share repurchases.

NOTE I – 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 one 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
	June 27,	June 29,	June 27,	June 29,
	2020	2019	2020	2019
USANA^® Nutritionals	79%	83%	82%	84%
USANA Foods	12%	9%	10%	8%
Personal care and Skincare	8%	7%	7%	7%
All Other	1%	1%	1%	1%

Selected Financial Information

Financial information by geographic region is presented for the periods indicated below:



	Quarter Ended				Six Months Ended
	June 27,		June 29,		June 27,		June 29,
	2020		2019		2020		2019
Net Sales to External Customers
Asia Pacific
Greater China	$	124,001	$	128,946	$	255,433	$	273,099
Southeast Asia Pacific		59,459		53,960		116,381		108,475
North Asia		25,852		22,575		53,103		44,803
Asia Pacific Total		209,312		205,481		424,917		426,377
Americas and Europe		49,679		50,535		100,693		102,629
Consolidated Total	$	258,991	$	256,016	$	525,610	$	529,006

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
	June 27,		June 29,		June 27,		June 29,
	2020		2019		2020		2019
Net sales:
China	$	110,525	$	112,775	$	226,003	$	240,147

					As of
					June 27,		December 28,
					2020		2019
Long-lived assets:
China					$	87,845	$	90,886
United States					$	60,912	$	54,809

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
	June 27,	June 29,
	2020	2019
Product Line
USANA^® Nutritionals
Optimizers	63%	65%
Essentials/CellSentials*	19%	19%
USANA Foods	10%	8%
Personal care and Skincare	7%	7%
All Other	1%	1%
Key Product
USANA^® Essentials/CellSentials	12%	12%
Proflavanol^®	11%	11%
Probiotic	10%	10%

*Represents a product line consisting of multiple products, as opposed to the actual Essentials / CellSentials product.

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 June 27, 2020, net sales outside of the United States represented 90.4% 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.

Trends Affecting Our Business – COVID-19

On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic. COVID-19, which is believed to have originated in Wuhan City, China, has spread and significantly impacted various countries around the world, including the United States and the other markets in which USANA sells products and has operations. Various policies and initiatives have been implemented, and continue to be utilized, around the world to reduce the spread of COVID-19, including work-from-home requirements or requests, shelter-in-place requirements, social distancing requirements, travel restrictions or bans in and to certain countries, the closure of retail stores, restaurants and other business establishments and the cancellation of major sporting and entertainment events. During the second quarter of 2020, many local, state and national governments began a phased reopening of their economies, which included a partial reopening of restaurants and retail establishments as well as increased travel. These reopenings have been carried out under new guidelines and enhanced safety measures, including continued social distancing and face mask requirements or requests. However, certain countries and states have paused or reversed plans to reopen their economies as COVID-19 continues to spread in various locations, including the United States, at an increased rate. Local, state and national governments also continue to emphasize the importance of overall health, wellness and nutrition during this pandemic and have allowed, and requested, that manufacturers of nutritional supplements and health food products, such as USANA, remain open to meet the needs of the general public. Consequently, as of the date of this report, we can report that (i) our manufacturing facilities in the U.S. and China continue to remain fully operational, (ii) we continue to sell and distribute products in each of our markets throughout the world, and (iii) we have not experienced any meaningful disruption to our world-wide supply chain, though it is possible that disruptions could occur if the COVID-19 pandemic continues to impact markets around the world for a prolonged period of time.

The health and safety of our employees and customers around the world remains our top priority. We are also 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. For instance, we are continuing to utilize a work-from-home plan for all non-manufacturing and non-distribution employees. Although our manufacturing and distribution employees continue to work on site, they are following additional health and safety guidelines. On top of our already high standards for safety and sanitation in manufacturing, we continue to utilize body temperature monitoring, social distancing, and mandatory use of face masks for employees and visitors at our facilities. We are also utilizing flexible shift schedules, time and attendance policies, and sick-leave policies to promote health, wellness and safety. In nearly all of our markets, we have also temporarily closed product will-call centers and are instead offering curbside delivery and subsidized shipping to customers. Finally, our risk management team continues to monitor the rapidly evolving COVID-19 situation and recommend additional risk mitigation actions where necessary.

Our Associate sales force has also modified their business operations as a result of COVID-19. While many of our Associates have transitioned over the last several years to doing business online through social media, person-to-person and face-to-face selling remains an important part of our business and of direct selling in general. Consequently, as a result of the social distancing and stay-at-home orders put in place across all of our markets, our Associates have also been required to modify their business practices to conduct the entirety of their business virtually. We continue to do what we can to assist our Associates in their efforts, including providing increased sales, technology and systems support in each of our markets.

While the overall impact of the COVID-19 pandemic on our consolidated results of operations for the three and six months ended June 27, 2020 was not material, there continues to be uncertainty surrounding COVID-19 and its potential impact on our business, industry and the citizens and economies in our various international markets. Although we have successfully modified our business operations in each of our markets to date, future efforts to reduce the spread of COVID-19 could still affect our momentum and operating results in the second half of the year. 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, however, remains the same and entails our efforts to safeguard against disruptions to our business, particularly 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.

While we expect to continue to fund our business with cash flow from operations and believe that we have sufficient liquidity to satisfy our cash needs, we cannot assure you that this will be the case due to the uncertainty surrounding the COVID-19 pandemic. Consequently, the impact from the COVID-19 pandemic on our business, financial condition or longer-term financial or operational results remains uncertain. However, we 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. For instance, we are taking action to align spending with sales performance and defer non-essential capital investments amid the COVID-19 pandemic. Based on the actions we have taken and our assumptions regarding the impact of COVID-19, we believe that our current financial resources and cash flows from operations are sufficient to fund our liquidity requirements.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. The CARES Act provides a substantial stimulus and assistance package intended to address the impact of the COVID-19 pandemic, including tax relief and government loans, grants and investments. The CARES Act did not have a material impact on our consolidated financial statements for the three and six months ended June 27, 2020. We continue to monitor any effects that may result from the CARES Act.

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 59% of product sales during the six months ended June 27, 2020; 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, social media, and social sharing strategies are designed to promote active Customer growth.

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. As noted above in this report, during the first six months we chose to either cancel several of these types of meetings and other Associate events, or change them to virtual events, as a result of the COVID-19 pandemic. Additionally, upcoming Associate meetings and events of this nature have either been cancelled or changed to virtual events.

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
	June 27, 2020		June 29, 2019		Prior Year	Change
Asia Pacific:
Greater China	278,000	46.4%	278,000	50.1%	—	0.0%
Southeast Asia Pacific	129,000	21.5%	108,000	19.4%	21,000	19.4%
North Asia	56,000	9.4%	47,000	8.5%	9,000	19.1%
Asia Pacific Total	463,000	77.3%	433,000	78.0%	30,000	6.9%
Americas and Europe	136,000	22.7%	122,000	22.0%	14,000	11.5%
	599,000	100.0%	555,000	100.0%	44,000	7.9%

Non-GAAP Financial Measures

We believe that presentation of certain non-GAAP financial information is meaningful and useful 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 to discuss our financial results in a way we believe 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 thus providing 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 2020 increased 1.2% to $259.0 million, an increase of $3.0 million, compared with the prior-year quarter. This increase was due primarily to (i) promotions offered during the quarter and (ii) growth in active Customers during the quarter, due to double-digit customer growth in three-of-our-four regions. The increase was offset by the unfavorable impact of a strengthening U.S. dollar, which impacted net sales negatively by $8.1 million during the quarter.

Net earnings for the second quarter of 2020 were $28.0 million, an increase of 30.9% compared with $21.4 million during the prior-year period. The increase in net earnings was mainly the result of lower relative operating expenses and a reduced income tax rate.

‎

Quarters Ended June 27, 2020 and June 29, 2019

Net Sales

The following table summarizes the changes in our net sales by geographic region for the fiscal quarters ended as of the dates indicated:


	Net Sales by Region
	(in thousands)
	Quarter Ended
	June 27, 2020			June 29, 2019			Change ‎from ‎prior year		Percent ‎change	Currency ‎impact ‎on sales		Percent ‎change ‎excluding ‎currency ‎impact
Asia Pacific
Greater China	$	124,001	47.9%	$	128,946	50.3%	$	(4,945)	(3.8%)	$	(3,874)	(0.8%)
Southeast Asia Pacific		59,459	22.9%		53,960	21.1%		5,499	10.2%		(1,096)	12.2%
North Asia		25,852	10.0%		22,575	8.8%		3,277	14.5%		(1,127)	19.5%
Asia Pacific Total		209,312	80.8%		205,481	80.2%		3,831	1.9%		(6,097)	4.8%
Americas and Europe		49,679	19.2%		50,535	19.8%		(856)	(1.7%)		(1,999)	2.3%
	$	258,991	100.0%	$	256,016	100.0%	$	2,975	1.2%	$	(8,096)	4.3%

Asia Pacific: The decrease in constant currency net sales in Greater China was largely the result of a sales decline in Hong Kong, where local currency net sales decreased 29.4% due to an 11.1% decrease in active Customers. The increase in constant currency net sales in Southeast Asia Pacific was driven primarily by the Philippines and Malaysia, which had local currency net sales growth of 42.0% and 16.9% due to a 44.4% and 10.7% increase in active Customers, respectively. This was partially offset by a 10.4% local currency sales decline in Australia due to a 9.5% decrease 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 20.1% due to a 20.0% increase in active Customers.

Americas and Europe: The increase in constant currency net sales in Americas and Europe was the result of modest local currency sales growth in nearly all markets within this region. Canada and Mexico led the region in sales growth, which can be primarily attributed to an increase in active Customers of 4.9% and 13.6%, respectively.

Gross Profit

Gross profit decreased 20 basis points to 81.6% of net sales, down from 81.8% in the prior-year quarter. This decrease can primarily be attributed to (i) higher relative freight costs due to will-call closures and subsidized shipping as a result of COVID-19, (ii) higher production costs, (iii) product promotions offered during the quarter, and (iv) unfavorable changes in currency exchange rates. These decreases were partially offset by lower scrap costs.

Associate Incentives

Associate incentives decreased 80 basis points to 42.8% of net sales for the second quarter of 2020, compared with 43.6% in the prior-year quarter. The relative decrease can be attributed to product based promotions offered during the quarter as well as changes in market sales mix.

Selling, General and Administrative Expenses

In absolute terms, our selling, general and administrative expenses decreased $6.0 million. The decrease can primarily be attributed to the impact of COVID-19, which has resulted in (i) lower travel costs, (ii) benefits from temporary government stimulus programs, and (iii) decreased event costs.

Income Taxes

Income taxes decreased to 30.0% of pre-tax earnings in the second quarter of 2020, down from 34.2% of pre-tax earnings in the prior-year quarter. The lower effective tax rate is due primarily to certain discrete events as well as increased earnings in the U.S., which allowed for greater foreign tax credit utilization.

Diluted Earnings per Share

Diluted EPS increased 45.1% in the second quarter of 2020 compared with the prior-year quarter. This increase can be attributed to higher net earnings and a lower diluted share count.

Six Months Ended June 27, 2020 and June 29, 2019

Net Sales

The following table summarizes the changes in our net sales by geographic region for the six months ended as of the dates indicated:


	Net Sales by Region
	(in thousands)
	Six Months Ended
	June 27, 2020			June 29, 2019			Change ‎from ‎prior year		Percent ‎change	Currency ‎impact ‎on sales		Percent ‎change ‎excluding ‎currency ‎impact
Asia Pacific
Greater China	$	255,433	48.6%	$	273,099	51.6%	$	(17,666)	(6.5%)	$	(7,583)	(3.7%)
Southeast Asia Pacific		116,381	22.1%		108,475	20.5%		7,906	7.3%		(2,222)	9.3%
North Asia		53,103	10.1%		44,803	8.5%		8,300	18.5%		(2,664)	24.5%
Asia Pacific Total		424,917	80.8%		426,377	80.6%		(1,460)	(0.3%)		(12,469)	2.6%
Americas and Europe		100,693	19.2%		102,629	19.4%		(1,936)	(1.9%)		(2,270)	0.3%
	$	525,610	100.0%	$	529,006	100.0%	$	(3,396)	(0.6%)	$	(14,739)	2.1%

Asia Pacific: The decrease in constant currency net sales in Greater China was largely the result of a sales decline in both Mainland China and Hong Kong, where local currency net sales decreased 2.5% and 26.0% respectively. The increase in constant currency net sales in Southeast Asia Pacific was driven primarily by the Philippines and Malaysia and which had local currency net sales growth of 19.8% and 27.7% respectively due to an increase in active Customers of 44.4% and 10.7%. This was partially offset by a 9.3% local currency sales decline in Australia due to a 9.5% decrease 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 25.5% due to a 20.0% increase in active Customers.

Americas and Europe: Constant currency net sales in this region increased 0.3%, driven by modest growth in Canada, the U.S., and Europe, which was partially offset by a decline in local currency sales in Mexico.

Gross Profit

Gross profit decreased 30 basis points to 82.2% of net sales for the first six months of 2020, from 82.5% in the prior-year. This decrease can primarily be attributed to (i) higher production costs, (ii) product promotions offered during the first six months of 2020, (iii) higher relative freight costs due to will-call closures and subsidized shipping as a result of COVID-19, and (iv) unfavorable changes in currency exchange rates.

Associate Incentives

Associate incentives decreased 100 basis points to 43.2% of net sales for the first six months of 2020, compared with 44.2% in the prior-year. The relative decrease can be attributed to product based promotions offered during the first six months of 2020, changes in market sales mix and annual price adjustments.

Selling, General and Administrative Expenses

In absolute terms, our selling, general and administrative expenses decreased $10.1 million for the first six months of 2020, compared to the prior-year. The decrease can mainly be attributed to (i) lower variable expenses tied to Associate events that were cancelled or postponed due to COVID-19, (ii) lower employee related costs, and (iii) lower travel related expenses.

Income Taxes

Income taxes decreased to 31.1% of pre-tax earnings for the first six months of 2020 compared to 33.8% of pre-tax earnings in the prior-year period. The lower effective tax rate is due primarily to certain discrete events as well as increased earnings in the U.S., which allowed for greater foreign tax credit utilization.

Diluted Earnings per Share

Diluted EPS increased 32.6% in the first six months of 2020 compared with the same period of the prior year. 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 both 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. Consequently, we are actively monitoring spending and taking action, when necessary, to align spending with sales performance. During the quarter we drew $60.0 million on our line of credit to ensure availability of additional liquidity, however, that amount was paid back by the end of the quarter. Subsequent to June 27, 2020, our board of directors will once again consider utilizing our share repurchase authorization to return value to shareholders.

Cash and Cash Equivalents

Cash and cash equivalents decreased to $227.4 million at June 27, 2020, from $234.8 million at December 28, 2019. This decrease is due primarily to (i) cash used to repurchase and retire shares of our common stock totaling $57.0 million and (ii) purchases of plant, property and equipment to support in-house manufacturing of our food product line. The decrease was partially offset by cash flow provided by operations of $63.4 million.

The following table below presents concentrations of cash and cash equivalents by market for the periods indicated:


	Cash and cash equivalents
	(in Millions)
		As of		As of
		June 27,		December 28,
		2020		2019
United States	$	108.4	$	85.3
China		75.1		114.9
All other markets		43.9		34.6
Total Cash and cash equivalents	$	227.4	$	234.8

Cash Flows Provided by Operations

We have historically generated positive cash flow due to our strong operating margins. Net cash flow provided by operating activities totaled $63.4 million in the first six months of 2020, which was up $42.7 million from $20.7 million in the first six months of 2019. The increase in cash flows from operating activities was mainly driven by (i) lower payments and higher accruals in the current year related to employee compensation costs, (ii) higher accruals for Associate incentives, and (iii) higher net earnings.

Line of Credit

Information with respect to our line of credit may be found in Note E to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this report.


		Page
Cautionary Note Regarding Forward-Looking Statements and Certain Risks		1
PART I. FINANCIAL INFORMATION
Item 1	Financial Statements (unaudited)	2
	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of Comprehensive Income	3
	Condensed Consolidated Statements of Stockholders’ Equity	4
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7 - 13
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14 - 21
Item 3	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4	Controls and Procedures	21
PART II. OTHER INFORMATION
Item 1	Legal Proceedings	22
Item 1A	Risk Factors	22
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3	Defaults Upon Senior Securities	22
Item 4	Mine Safety Disclosures	22
Item 5	Other Information	22
Item 6	Exhibits	22
Signatures		23


Exhibit Number	Description
31.1	*Certification of Principal Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
31.2	*Certification of Principal Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
32.1	*Certification of Principal Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
32.2	*Certification of Principal Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

	USANA HEALTH SCIENCES, INC.

	/s/ G. Douglas Hekking
	G. Douglas Hekking
	Chief Financial Officer (Principal Financial Officer)