Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide an understanding of USANA's financial condition, results of operations and cash flows by reviewing certain key indicators and measures of performance.
The MD&A is presented in 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 endedJanuary 1, 2022 ( "2021 Form 10-K" ), filed with theSEC onMarch 1, 2022 , and our other filings, including the Current Reports on Form 8-K, that have been filed with theSEC 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 ofApril 2, 2022 , we had approximately 552,000 active Customers worldwide. We have operations in multiple markets, with sales and expenses being generated and incurred in multiple currencies, our reportedU.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 theU.S. dollar and negatively by a strengthening of theU.S. dollar. During the three months endedApril 2, 2022 , net sales outside ofthe United States represented 89.6% of consolidated net sales. In our net sales discussions that follow, we approximate the impact of currency fluctuations on net sales by translating current year sales at the average exchange rates in effect during the comparable periods of the prior year. 12
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Table of Contents Products
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:
Three Months Ended April 2, April 3, 2022 2021 Product Line USANA® Nutritionals Optimizers 70% 70% Essentials/CellSentials(1) 17% 17% USANA Foods(2) 7% 7% Personal care and Skincare 5% 5% All Other 1% 1% Key Product USANA® Essentials/CellSentials 11% 12% Proflavanol® 10% 11% Probiotic 13% 9%
(1) Represents a product line consisting of multiple products, as opposed to the actual USANA® Essentials / CellSentials product.
(2) Includes the Active Nutrition line, which launched in five markets late in the first quarter of 2021 and will roll out to additional markets in future periods.
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 utilize a work-from-home strategy for all non-manufacturing and non-distribution employees, and required us to temporarily close our walk-in and fulfillment locations in some markets where we have such properties. The pandemic has also affected 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 52% of product sales during the three months endedApril 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. 13
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Table of Contents
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 April 2, 2022 April 3, 2021 Prior Year ChangeAsia Pacific : Greater China 255,000 46.2 % 276,000 44.7 % (21,000 ) (7.6 %) Southeast Asia Pacific 110,000 19.9 % 137,000 22.2 % (27,000 ) (19.7 %) North Asia 57,000 10.3 % 59,000 9.6 % (2,000 ) (3.4 %) Asia Pacific Total 422,000 76.4 % 472,000 76.5 % (50,000 ) (10.6 %) Americas and Europe 130,000 23.6 % 145,000 23.5 % (15,000 ) (10.3 %) 552,000 100.0 % 617,000 100.0 % (65,000 ) (10.5 %) Non-GAAP Financial Measures We report our financial results in accordance with accounting principles generally accepted inthe 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 first quarter of 2022 decreased 11.4% to$272.9 million , a decrease of$35.1 million , compared with the prior-year quarter. This decrease resulted primarily from a 10.5% decline in active Customers compared to the prior-year quarter, and unfavorable changes in currency exchange rates, which negatively impacted net sales by$2.8 million . Net earnings for the first quarter of 2022 were$22.5 million , a decrease of 26.6% compared with$30.6 million during the prior-year quarter. The decrease in net earnings was primarily the result of decreased sales and higher relative operating expenses. 14
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Quarters Ended
Net Sales
The following table summarizes the changes in net sales by geographic region for the fiscal quarters ended as of the dates indicated:
Net Sales by Region (in thousands) Quarter Ended Percent change Change Currency excluding from Percent impact currency April 2, 2022 April 3, 2021 prior year change on sales impactAsia Pacific Greater China$ 133,739 49.0 %$ 148,978 48.4 %$ (15,239 ) (10.2% )$ 2,530 (11.9% ) Southeast Asia Pacific 54,742 20.0 % 72,148 23.4 % (17,406 ) (24.1% ) (2,596 ) (20.5% ) North Asia 29,939 11.0 % 30,165 9.8 % (226 ) (0.7% ) (2,446 ) 7.4 % Asia Pacific Total 218,420 80.0 % 251,291 81.6 % (32,871 ) (13.1% ) (2,512 ) (12.1% ) Americas and Europe 54,447 20.0 % 56,685 18.4 % (2,238 ) (3.9% ) (293 ) (3.4% )$ 272,867 100.0 %$ 307,976 100.0 %$ (35,109 ) (11.4% )$ (2,805 ) (10.5% )Asia Pacific : The decline in this region is largely the result of a challenging operating environment in several of ourAsia Pacific markets due to the COVID-19 pandemic. The decrease in constant currency net sales inGreater China was primarily the result of a sales decline inChina , where local currency net sales decreased 12.4%, due to a 7.9% decrease in active Customers. The decrease in constant currency net sales inSoutheast Asia Pacific is largely the result of sales declines inthe Philippines , andMalaysia , which had local currency net sales decline of 29.8%, and 27.0%, due to a 28.6% and 17.1% decrease in active Customers, respectively. The increase in constant currency net sales inNorth Asia was primarily the result of sales growth inKorea , where local currency net sales increased 8.6%, due to an increase in average spend per customer.Americas andEurope : The decrease in constant currency sales in this region was primarily the result of a sales decline inMexico , where local currency net sales decreased 27.8%, due to competitive pressures, which led to a 20.7% decrease in active Customers. The decrease was partially offset by a 4.9% net sales increase inthe United States . Gross Profit Gross profit decreased 10 basis points to 81.2% of net sales, down from 81.3% in the prior-year quarter. The decrease in gross profit margin can be attributed to inventory valuation adjustments, unfavorable changes in currency exchange rates, and increased product costs. 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 increased 10 basis points to 43.8% of net sales, up from 43.7% in the prior-year quarter. The relative increase can primarily be attributed to a market specific incentive promotion and increased spend on miscellaneous associate incentives.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 210 basis points relative to net sales and decreased$2.8 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 current year sales and operating performance. Income Taxes
Income taxes increased to 32.5% of pre-tax earnings, up from 30.9% of pre-tax earnings in the prior-year quarter. The effective tax rate increase is due primarily to a change in distribution of pre-tax income by market.
Diluted Earnings per Share
Diluted EPS decreased 20.7% to
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Liquidity and Capital Resources
We have historically met our working capital and capital expenditure requirements by using net cash flow from operations and by drawing on our line of credit. Our principal source of liquidity is our operating cash flow. Although we are required to maintain cash deposits with banks in certain of our markets, there are currently no material restrictions on our ability to transfer and remit funds among our international markets. InChina , however, our compliance with Chinese accounting and tax regulations promulgated by theState Administration of Foreign Exchange ("SAFE") results in transfer and remittance of our profits and dividends fromChina tothe 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 inChina to other countries, our ability to remit profits or pay dividends fromChina tothe 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$237.8 million as ofApril 2, 2022 , from$239.8 million as ofJanuary 1, 2022 . Cash flow provided by operating activities generated$19.7 million partially offset by cash used in financing activities of$19.6 million during the three months endedApril 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 April 2, 2022 January 1, 2022 China $ 176.4 $ 139.9 United States 17.0 51.9 All other markets 44.4 48.0 Total Cash and cash equivalents $ 237.8 $ 239.8
Cash Flows Provided 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$19.7 million for the first three 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$19.7 million for the three 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 F to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this report. 16
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Table of Contents Share Repurchase
Information with respect to share repurchases may be found in Note I to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this report.
Off-Balance Sheet Arrangements
None. Summary We believe our current cash balances, future cash provided by operations, and amounts available under our line of credit will be sufficient to cover our operating and capital needs in the ordinary course of business for the foreseeable future. If we experience an adverse operating environment or unanticipated and unusual capital expenditure requirements, additional financing may be required. No assurance can be given, however, that additional financing, if required, would be available to us at all or on favorable terms. We might also require or seek additional financing for the purpose of expanding into new markets, growing our existing markets, mergers and acquisitions, or for other reasons. Such financing may include the use of additional debt or the sale of additional equity securities. Any financing which involves the sale of equity securities or instruments that are convertible into equity securities could result in immediate and possibly significant dilution to our existing shareholders. Critical Accounting Policies There were no changes during the quarter to our critical accounting policies as disclosed in our 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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