USANA HEALTH SCIENCES INC MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)

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 performance indicators and measures.

The management report is presented in seven sections as follows:


  ? Overview




  ? Products




  ? Impact of the COVID-19 Pandemic




  ? Customers




  ? Non-GAAP Financial Measures




  ? Results of Operations




  ? Liquidity and Capital Resources




This discussion and analysis from management's perspective 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 1,
2022 (  "2021 Form 10-K"  ), filed with the SEC on March 1, 2022, 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 2, 2022, we had approximately 559,000 active
Customers worldwide.



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 2, 2022, net sales outside of the United States represented
90.2% 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.





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  Table of Contents



Products


The following table summarizes the approximate percentage of total product revenue that was contributed by our major product lines and top-selling products for the current year and prior year periods, as shown:


                                     Six Months Ended
                                 July 2,         July 3,
                                   2022           2021
Product Line
USANA® Nutritionals
Optimizers                           69%             69%
Essentials/CellSentials(1)           17%             18%
USANA Foods(2)                       7%              7%
Personal care and Skincare           6%              5%
All Other                            1%              1%
Key Product
USANA® Essentials/CellSentials       11%             12%
Proflavanol®                         10%             11%
Probiotic                            10%             9%



(1) Represents a product line consisting of multiple products, as opposed to the actual USANA® Essentials / CellSentials product.

(2) Includes the company’s new Active Nutrition line, which launched in five markets in 2021 and in all but two remaining markets through the second quarter of 2022.

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.  The ongoing COVID-19 pandemic has created
an unpredictable operating environment for us in many of our markets around the
world and caused meaningful disruptions in both sales and operations.
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 modify our
workforce strategies, and required us, at times, to temporarily close our
walk-in and fulfillment locations in some markets where we have such properties.
The pandemic has also affected the availability and cost of various of our raw
materials, packaging materials and shipping resources to transport our products
to our various markets around the world. 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 2022 in a number of ways.



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 51% of product sales during the six months ended July 2, 2022.
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 update 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.



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.



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Contents

The table below summarizes the evolution of our active clientele by geographical area, rounded to the nearest thousand on the dates indicated:



                                  Total Active Customers by Region
                                  As of                       As of               Change from       Percent
                              July 2, 2022                July 3, 2021            Prior Year         Change
Asia Pacific:
Greater China              278,000          49.8 %     303,000          46.5 %         (25,000 )         (8.3 %)
Southeast Asia Pacific     103,000          18.4 %     144,000          22.1 %         (41,000 )        (28.5 %)
North Asia                  57,000          10.2 %      66,000          10.1 %          (9,000 )        (13.6 %)
Asia Pacific Total         438,000          78.4 %     513,000          78.7 %         (75,000 )        (14.6 %)
Americas and Europe        121,000          21.6 %     139,000          21.3 %         (18,000 )        (12.9 %)
                           559,000         100.0 %     652,000         100.0 %         (93,000 )        (14.3 %)




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 2022 decreased 21.5% to $264.5 million, a
decrease of $72.4 million, compared with the prior-year quarter. The decrease
was due, in great part, to a  lower number of active Customers during the
quarter as compared to the prior year period. This decline in active Customers
resulted, in part, from timing and performance differences in sales program
activity offered by the Company during the second quarter of 2022 compared to
the prior year period. During the second quarter of 2021, the Company benefited
from a successful worldwide sales program that contributed to double-digit-
active Customer growth during that period. During the second quarter of 2022, we
offered a similar sales program, however the duration and geographic scope of
the program is staggered throughout the year (beyond the second quarter), which
creates a challenging comparable year-over-year. Additionally, the current year
sales program has performed below expectations because of disruptions
attributable to COVID-19 related lockdowns, restrictions, and other challenges,
particularly in our Asia Pacific markets. These disruptions have contributed to
a 14.3% decline in active Customers compared to the prior-year quarter.

In addition, unfavorable changes in exchange rates had a negative impact on net sales of approximately $10.9 million.



Net earnings for the second quarter of 2022 were $19.2 million, a decrease of
49.9% compared with $38.2 million during the prior-year quarter. The decrease in
net earnings was primarily the result of decreased sales and higher relative
operating expenses. Additionally, inflationary pressures have persisted across
several areas of our business, but we remain steadfast in pursuing investments
to deliver on our business strategies.





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Contents

Quarters ended July 2, 2022 and July 3, 2021


Net Sales


The following table summarizes the evolution of net sales by geographic region for the fiscal quarters ended on the dates indicated:



                                        Net Sales by Region
                                          (in thousands)
                                           Quarter Ended
                                                                                                                Currency        Percent change
                                                                               Change from      Percent         impact on         excluding
                              July 2, 2022               July 3, 2021          prior year        change           sales        currency impact
Asia Pacific
Greater China            $ 140,775         53.2 %   $ 165,416         49.1 %   $   (24,641 )        (14.9 %)   $    (3,062 )              (13.0 %)
Southeast Asia Pacific      47,830         18.1 %      76,101         22.6 %       (28,271 )        (37.1 %)        (3,341 )              (32.8 %)
North Asia                  28,803         10.9 %      37,438         11.1 %        (8,635 )        (23.1 %)        (3,632 )              (13.4 %)
Asia Pacific Total         217,408         82.2 %     278,955         82.8 %       (61,547 )        (22.1 %)       (10,035 )              (18.5 %)
Americas and Europe         47,066         17.8 %      57,882         17.2 %       (10,816 )        (18.7 %)          (863 )              (17.2 %)
                         $ 264,474        100.0 %   $ 336,837        100.0 %   $   (72,363 )        (21.5 %)   $   (10,898 )              (18.2 %)




Asia Pacific: The decline in this region is largely the result of lower active
Customer counts in the region caused, in part, by (i) the challenging operating
environment due to COVID-19, and (ii) timing and performance differences in
sales program activity offered by the Company during the quarter compared to the
prior year period, which creates a challenging comparable year-over-year. The
decrease in constant currency net sales in Greater China was primarily the
result of a sales decline in China, where local currency net sales
decreased 13.1%, due to a 8.5% decrease in active Customers. The decrease in
constant currency net sales in Southeast Asia Pacific is largely the result of
sales declines in the Philippines, and Malaysia, which had local currency net
sales declines of 48.3%, and 28.2%, due to a 41.5%, and 20.9% decrease in active
Customers, respectively. The decrease in constant currency net sales in North
Asia was primarily the result of a sales decline in South Korea, where local
currency net sales decreased 12.9%, due to a 12.7% decrease in active Customers.


Americas and Europe: The decrease in this region is largely the result of lower
active Customer counts in the region due to timing and performance difference in
sales program activity offered by the Company during the quarter compared to the
prior year period, which creates a challenging year-over-year comparable. There
were local currency sales declines in all markets in this region, most notable
among these markets, Canada and the United States, which had local currency net
sales declines of 22.6%, and 9.5%, due to a 13.3%, and 8.8% decrease in active
Customers, respectively.



Gross Profit



Gross profit decreased 180 basis points to 81.3% of net sales, down from 83.1%
in the prior-year quarter. The decrease can be attributed to unfavorable changes
in currency exchange rates, an increase in inventory valuation adjustments, loss
of leverage on lower sales, and higher material costs. These decreases were
partially offset by favorable changes in market and product sales mix.



Associate Incentives



Associate incentives decreased 60 basis points to 45.1% of net sales, down from
45.7% in the prior-year quarter. The relative decrease can primarily be
attributed to the increased spend associated with the worldwide sales program
offered during the prior-year quarter, and decreased spend on miscellaneous
associate incentives.



Selling, general and administrative expenses



Selling, general and administrative expenses increased 360 basis points relative
to net sales and decreased $5.9 million in absolute terms. The relative increase
can be attributed to leverage lost on lower net sales. The decreased expense in
absolute terms can be primarily attributed to lower costs on variable expenses,
as well as lower employee related costs.



Income Taxes


Income taxes increased to 34.6% of pre-tax profit from 29.6% of pre-tax profit in the prior year quarter. The increase in the effective tax rate is primarily due to a shift in the mix of pre-tax profit towards markets with higher tax rates.

Diluted earnings per share

Diluted EPS decreased by 46.5% at $1.00 compared to $1.87 communicated during the quarter of the previous year. This decrease can be attributed to lower net earnings, partially offset by lower diluted share count.

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Contents

Semester completed July 2, 2022 and July 3, 2021


Net Sales


The following table summarizes the changes in net sales by geographic area for the six months ended on the dates indicated:



                                        Net Sales by Region
                                          (in thousands)
                                         Six Months Ended
                                                                                                                 Currency        Percent change
                                                                               Change from       Percent         impact on         excluding
                              July 2, 2022               July 3, 2021           prior year        change           sales        currency impact
Asia Pacific
Greater China            $ 274,514         51.1 %   $ 314,394         48.7 %   $    (39,880 )        (12.7 %)   $      (532 )              (12.5 %)
Southeast Asia Pacific     102,572         19.1 %     148,249         23.0 %        (45,677 )        (30.8 %)        (5,937 )              (26.8 %)
North Asia                  58,742         10.9 %      67,603         10.5 %         (8,861 )        (13.1 %)        (6,078 )               (4.1 %)
Asia Pacific Total         435,828         81.1 %     530,246         82.2 %        (94,418 )        (17.8 %)       (12,547 )              (15.4 %)
Americas and Europe        101,513         18.9 %     114,567         17.8 %        (13,054 )        (11.4 %)        (1,156 )              (10.4 %)
                         $ 537,341        100.0 %   $ 644,813        100.0 %   $   (107,472 )        (16.7 %)   $   (13,703 )              (14.5 %)




Asia Pacific: The decline in this region is largely the result of the
challenging operating environment as discussed above, as a result, there were
local currency sales declines in all markets in this region.  The decrease in
constant currency net sales in Greater China was most notable in China, where
local currency net sales decreased 12.7%. The decrease in constant currency net
sales in Southeast Asia Pacific was most notable among these markets, the
Philippines, and Malaysia, which had local currency net sales declines of 39.5%,
and 27.6%, respectively. The decrease in constant currency net sales in North
Asia was most notable in South Korea, which had a local currency net sales
decline of 3.4%.


Americas and Europe: The decline in this region is largely the result of the
challenging operating environment as discussed above, as a result, there were
local currency sales declines in all markets in this region, most notable among
these markets , Canada and Mexico, where local currency net sales decreased
14.2%, and 25.5%, respectively.



Gross Profit



Gross profit decreased 100 basis points to 81.2% of net sales, down from 82.2%
for the six months ended 2021. The decrease in gross profit margin can be
attributed to inventory valuation adjustments, unfavorable changes in currency
exchange rates, increased product costs, and loss of leverage on lower sales.
These decreases were partially offset by favorable changes in market and product
sales mix, and increased transportation costs related to the strategic buildup
of inventory in the prior-year quarter due to COVID-19 related disruptions to
our supply chain and logistics.



Associate Incentives


Associate incentives decreased by 30 basis points to 44.4% of net sales, compared to 44.7% for the six months ended 2021. The relative decrease can mainly be attributed to a decrease in promotional incentives, as described below above, and to a decrease in expenses for various incentives for associates.

Selling, general and administrative expenses



Selling, general and administrative expenses increased 290 basis points relative
to net sales and decreased $8.7 million in absolute terms. The relative increase
can be attributed to leverage lost on lower net sales. The decreased expense in
absolute terms can be primarily attributed to lower costs on variable expenses,
as well as lower employee related costs.



Income Taxes



Income taxes increased to 33.5% of pre-tax earnings, up from 30.2% of pre-tax
earnings for the six months ended 2021. The effective tax rate increase is due
primarily to a change in mix of pre-tax income to markets with higher tax rates.



Diluted Earnings per Share


Diluted EPS decreased by 35% for $2.15 compared to $3.31 reported for the six months ended 2021. This decline can be attributed to lower net profit, partially offset by lower diluted share count.

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Cash 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 $230.4 million as of July 2, 2022, from
$239.8 million as of January 1, 2022. Cash flow provided by operating activities
generated $34.3 million partially offset by cash used in financing activities of
$29.9 million, and cash used in investing activities of $6.5 million to acquire
assets in business combinations during the six months ended July 2, 2022.



The 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
                                  July 2, 2022         January 1, 2022
United States                             112.8                    51.9
China                             $        76.2       $           139.9
All other markets                          41.4                    48.0
Total Cash and cash equivalents   $       230.4       $           239.8




Cash flow generated by operations



As discussed above, our principal source of liquidity comes from our net cash
flow from operations, which results from a strong operating margin. Net cash
flow provided by operating activities was $34.3 million for the first six months
of 2022. Net earnings combined with adjustments of non-cash items contributed
positively to our net cash flow provided by operating activities, partially
offset by cash used to pay the 2021 annual employee bonus, and a reduction in
trade payables.



Net cash flow 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 pay the 2020 annual employee bonus,
reduce accruals related to inventories received at year-end, renew our annual
insurance policies, and renew contracts for certain IT-related services.



Line of Credit



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



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  Table of Contents



Share Repurchase


Information relating to share buybacks appears in note J of 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 2021 Form 10-K. Our significant accounting policies are
disclosed in Note A to our Consolidated Financial Statements filed with our 2021
Form 10-K.

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