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 SECon March 1, 2022, and our other filings, including the Current Reports on Form 8-K, that have been filed with the SECthrough 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 Statesrepresented 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. 14
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. 15
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 Pacificmarkets. 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
Net earnings for the second quarter of 2022 were
$19.2 million, a decrease of 49.9% compared with $38.2 millionduring 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. 16
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 PacificGreater China $ 140,77553.2 % $ 165,41649.1 % $ (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 %) $ 264,474100.0 % $ 336,837100.0 % $ (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 Chinawas 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 Pacificis 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 Asiawas 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. Americasand 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, Canadaand 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 millionin 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
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 PacificGreater China $ 274,51451.1 % $ 314,39448.7 % $ (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 %) $ 537,341100.0 % $ 644,813100.0 % $ (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 Chinawas most notable in China, where local currency net sales decreased 12.7%. The decrease in constant currency net sales in Southeast Asia Pacificwas 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 Asiawas most notable in South Korea, which had a local currency net sales decline of 3.4%. Americasand 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 , Canadaand 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 millionin 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
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 Chinato the United Stateson 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 Chinato other countries, our ability to remit profits or pay dividends from Chinato the United Statesmay 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 millionas of July 2, 2022, from $239.8 millionas of January 1, 2022. Cash flow provided by operating activities generated $34.3 millionpartially offset by cash used in financing activities of $29.9 million, and cash used in investing activities of $6.5 millionto 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 millionfor 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 millionfor 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. 19
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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