Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide an understanding of USANA's financial condition, results of operations and cash flows by reviewing certain key indicators and measures of performance.
The MD&A is presented in six sections as follows:
? Overview ? Impact of the COVID-19 Pandemic ? Customers ? Non-GAAP Financial Measures ? Results of Operations ? Liquidity and Capital Resources This MD&A should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and Notes thereto that are contained in this quarterly report, as well as Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year endedJanuary 2, 2021 ( "2020 Form 10-K" ) filed with theSEC onMarch 2, 2021 , 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 3, 2021 , we had approximately 617,000 active Customers worldwide.
We have ongoing operations in the following markets, which are grouped and
presented in two geographic regions: (1)
(1)Asia Pacific -
(i)
(ii)
(iii)North Asia -Japan andSouth Korea .
(2)
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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 3, March 28, 2021 2020 Product Line USANA® Nutritionals Optimizers 70% 68% Essentials/CellSentials(1) 17% 18% USANA Foods(2) 7% 8% Personal care and Skincare 5% 5% All Other 1% 1% Key Product USANA® Essentials/CellSentials 12% 12% Proflavanol® 11% 11% Probiotic 9% 11%
(1) Represents a product line consisting of multiple products, as opposed to the actual USANA® Essentials / CellSentials product.
(2) Includes our new Active Nutrition line.
Our new Active Nutrition line promotes healthy weight management, digestive
health, energy and hydration through a holistic approach. We launched the
Active Nutrition line in five markets including
Because 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 3, 2021 , net sales outside ofthe United States represented 91.2% 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.
Impact of the COVID-19 Pandemic
The COVID-19 pandemic has negatively impacted economies, businesses, sales practices, supply chains, and consumer behavior around the world. While the overall impact of the pandemic on our business and results of operations has not been material, the pandemic has disrupted and negatively affected our business. Government-imposed restrictions, health and safety mandated best practices, and public hesitance regarding in-person gatherings have reduced our ability and the ability of our Associates to hold sales meetings, required our Associates to share and sell our products in a predominantly virtual environment, resulted in cancellations of key Company events and trips, required us to utilize a work-from-home strategy for all non-manufacturing and non-distribution employees, and required us to temporarily close our walk-in and fulfillment locations in some markets where we have such properties. The pandemic has also affected our ability to timely obtain some ingredients and packaging as well as ship products to some markets. While we have not experienced a meaningful supply chain interruption, our supply chain and logistics have incurred some disruption and we could experience more significant disruptions or closures in the future. These factors and others related to the COVID-19 pandemic will likely continue to negatively affect our business throughout 2021 in a number of ways, including those described below. ? Our Workforce. The health and safety of our employees around the world remains our top priority. We remain committed to being socially responsible as a corporate leader in each of our markets and doing our part to reduce the spread of COVID-19. As such, we are continuing to utilize a modified operating model in each of our markets as necessary to follow applicable guidelines from government and health officials. We continue 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 applicable health and safety guidelines. We are also continuing to utilize flexible shift schedules, time and attendance policies, and sick-leave policies to promote health, wellness and safety. Where necessary in our international markets, we have temporarily closed product will-call centers and continue to offer curbside delivery and subsidized shipping to customers. We will continue to monitor the situation surrounding the pandemic and implement additional risk mitigation actions where necessary. 13
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? Our Operations. All of our production facilities remain operational under enhanced safety measures and as of the date of this report, we have not experienced meaningful disruptions to our supply chain, shipping, or logistics. Although we have successfully modified our operations in each of our markets to date, future efforts to reduce the spread of COVID-19 may negatively affect our business. The extent of any disruption to our business in each of our markets going forward is difficult to estimate and will depend on many factors, many of which are outside of our control. Our operating plan continues to entail efforts to safeguard against disruptions through maintaining and operating (i) raw material procurement; (ii) manufacturing; (iii) distribution; (iv) selling; (v) operating cash flows and liquidity; (vi) Associate engagement and activity; and (vii) employee support and engagement. ? Our Sales and Salesforce. Demand for our high quality nutritional products has remained high during the pandemic. We continue to utilize a virtual strategy to hold meetings and events with our salesforce and will evaluate this strategy as the year and situation with the pandemic progresses. Our salesforce will also continue to utilize a virtual sales and operating strategy. Notwithstanding the foregoing, person-to-person and face-to-face selling and events remain an important part of our business and we plan to begin incorporating the same into our strategy as it becomes safe and appropriate for us and our sales force to do so. ? Our Liquidity. Our liquidity position is strong. We expect to continue to fund our business with cash flow from operations and believe that we have sufficient liquidity to satisfy our cash needs. Notwithstanding the foregoing, we will continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate at full strength during these uncertain times. Additionally, as long as uncertainty remains surrounding the duration and impact of the COVID-19 pandemic, the potential impact from the pandemic on our business, financial condition or longer-term financial or operational results will remain uncertain. We will continue to align spending with sales performance and defer non-essential capital investments amid the COVID-19 pandemic. Customers Because we sell our products to a customer base of independent Associates and Preferred Customers, we increase our sales by increasing the number of our active Customers, the amount they spend on average, or both. Our primary focus continues to be increasing the number of active Customers. We believe this focus is consistent with our vision of improving the overall health and nutrition of individuals and families around the world. Sales to Associates account for approximately 56% of product sales during the three months endedApril 3, 2021 ; the remainder of our sales are to Preferred Customers. Increases or decreases in product sales are typically the result of variations in the volume of product sold relating to fluctuations in the number of active Customers purchasing our products. The number of active Associates and Preferred Customers is, therefore, used by management as a key non-financial indicator to evaluate our operational performance. We believe that our ability to attract and retain active Customers is positively influenced by a number of factors, including our high quality product offerings and the general public's heightened awareness and understanding of the connection between diet and long-term health. Additionally, we believe that our Associate compensation plan and the general public's growing desire for a secondary source of income and small business ownership are key to our ability to attract and retain Associates. We periodically make changes to our Compensation Plan in an effort to ensure that it is among the most competitive plans in the industry, to encourage behavior that we believe leads to a successful business for our Associates, and to ensure that our plan provides us with leverage to grow sales and earnings. Additionally, the initiatives we are executing under our customer experience and technology enhancements strategy are designed to promote active Customer growth. While these initiatives are designed to promote both Associate and Preferred Customer growth, Preferred Customer growth has outpaced Associate growth during the three months endedApril 3, 2021 . Consequently, Preferred Customers now comprise a larger portion of total active Customers. To further support our Associates in building their businesses, we traditionally sponsor meetings and events throughout the year, which offer information about our products and our network marketing system. We also provide low cost sales tools, including online sales, business management, and training tools, which are intended to support our Associates in building and maintaining a successful home-based business. Although we provide training and sales tools, we ultimately rely on our Associates to sell our products, attract new active Customers to purchase our products, and educate and train new Associates. We sponsor meetings designed to assist Associates in their business development and to provide a forum for interaction with our Associate leaders and members of our management team. As noted above in this report, during the first three months we chose either to cancel several of these types of meetings and other Associate events, or to 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 changed to virtual events or cancelled. 14
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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 3, 2021 March 28, 2020 Prior Year ChangeAsia Pacific : Greater China 276,000 44.7 % 277,000 48.3 % (1,000 ) (0.4 %) Southeast Asia Pacific 137,000 22.2 % 115,000 20.1 % 22,000 19.1 % North Asia 59,000 9.6 % 57,000 10.0 % 2,000 3.5 % Asia Pacific Total 472,000 76.5 % 449,000 78.4 % 23,000 5.1 % Americas and Europe 145,000 23.5 % 124,000 21.6 % 21,000 16.9 % 617,000 100.0 % 573,000 100.0 % 44,000 7.7 % 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. 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 2021 increased 15.5% to$308.0 million , an increase of$41.4 million , compared with the prior-year quarter. This increase, was in part, driven by a 7.7% increase in active Customer growth during the quarter, and favorable changes in currency exchange rates that benefited net sales by$16.6 million . Net earnings for the first quarter of 2021 were$30.6 million , an increase of 15.3% compared with$26.6 million during the prior-year period. The increase in net earnings was mainly the result of increased sales and lower relative operating expenses. 15
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Quarters Ended
Net Sales
The following table summarizes the changes in net sales by geographic region for the fiscal quarters ended as of the dates indicated:
Net Sales by Region (in thousands) Quarter Ended Percent change Currency excluding Change from Percent impact on currency April 3, 2021 March 28, 2020 prior year change sales impactAsia Pacific Greater China$ 148,978 48.4 %$ 131,432 49.3 %$ 17,546 13.3 %$ 9,738 5.9 % Southeast Asia Pacific 72,148 23.4 % 56,922 21.4 % 15,226 26.7 % 4,107 19.5 % North Asia 30,165 9.8 % 27,251 10.2 % 2,914 10.7 % 1,853 3.9 % Asia Pacific Total 251,291 81.6 % 215,605 80.9 % 35,686 16.6 % 15,698 9.3 % Americas and Europe 56,685 18.4 % 51,014 19.1 % 5,671 11.1 % 907 9.3 %$ 307,976 100.0 %$ 266,619 100.0 %$ 41,357 15.5 %$ 16,605 9.3 %Asia Pacific : The growth in this region continues to benefit from the momentum generated from a successful worldwide incentive program offered during the third quarter of 2020. The increase in constant currency net sales inSoutheast Asia Pacific was driven primarily byMalaysia ,the Philippines , andSingapore , which had local currency net sales growth of 46.5%, 28.9%, and 12.5% due to a 32.3%, 25.6%, and 18.2% increase in active Customers, respectively. In addition to the worldwide incentive program conducted during the third quarter of 2020,the Philippines also introduced a market specific incentive program and continues to benefit from that program. The increase in constant currency net sales inGreater China was primarily driven byChina , which generated local currency net sales growth of 8.1%, due to customary promotions that performed better in the current year quarter, as well as a modest 0.4% increase in active Customers. The increase in constant currency net sales inNorth Asia was driven bySouth Korea which had local currency net sales growth of 2.5% due to a 3.6% increase in active Customers.Americas andEurope : The growth in this region was aided by the worldwide incentive program described above. The increase in constant currency net sales inAmericas andEurope was driven by local currency net sales growth inMexico andthe United States , which generated local currency net sales growth of 33.5% and 6.6%, due to a 31.8% and 11.5% increase in active Customers, respectively. Additionally,Europe increased constant currency net sales by 34.7% during the current year quarter, which was driven by strong growth in active Customers of 57.1%. Gross Profit Gross profit decreased 140 basis points to 81.3% of net sales, down from 82.7% in the prior-year quarter. This decrease can be attributed to (i) a market specific product promotion offered during the current year quarter, (ii) a change in market sales mix, and (iii) higher relative shipping costs due to COVID-19 related disruptions to our supply chain and logistics. These decreases were partially offset by favorable changes in currency exchange rates. Associate Incentives Associate incentives increased 20 basis points to 43.7% of net sales for the first quarter of 2021, compared with 43.5% in the prior-year quarter. The relative increase in the current quarter can be attributed to increased spend on miscellaneous associate incentives. This increase was offset by (i) higher spend on a market specific promotion in the prior-year quarter, (ii) lower spend on incentive based promotions offered during the current quarter, and (iii) changes in market sales mix.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 1.40% relative to net sales, and increased$6.2 million in absolute terms. The relative improvement can be attributed to leverage gained on higher net sales. The increased expense in absolute terms is due to (i) higher employee related costs, and (ii) an increase in variable expenses associated with higher sales. These increases were partially offset by lower travel related costs in the current quarter due to travel related COVID-19 restrictions compared with the prior-year quarter. Income Taxes Income taxes decreased to 30.9% of pre-tax earnings in the first quarter of 2021, down from 32.2% of pre-tax earnings in the prior-year quarter. The lower effective tax rate is due primarily to increased earnings inthe United States , which allowed for greater foreign tax credit utilization. 16
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Diluted EPS increased 17.9% in the first quarter of 2021 to
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. 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$257.0 million atApril 3, 2021 , from$311.9 million atJanuary 2, 2021 . Cash flow provided by operating activities generated$19.7 million during the three months endedApril 3, 2021 . The decrease in cash and cash equivalents was primarily due to cash used to repurchase and retire shares of our common stock totaling$69.5 million , which is comprised of$67.6 million cash and an accrual for unsettled trades of$1.8 million , which was settled subsequent to quarter-end.
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 April 3, 2021 January 2, 2021 United States $ 39.5 $ 119.7 China 168.9 133.8 All other markets 48.6 58.4 Total Cash and cash equivalents $ 257.0 $ 311.9
Cash Flows Provided by Operations
As discussed above, our principal source of liquidity comes from our net cash flows from operations, which results from having a strong operating margin. Net cash flows provided by operating activities was$19.7 million for the first three months of 2021. Net earnings combined with adjustments of non-cash items contributed to our net cash flows provided by operating activities, partially offset by cash used to (i) payout the 2020 annual employee bonus, (ii) reduce accruals related to inventories received at year-end, (iii) renew our annual insurance policies, and (iv) renew contracts for certain IT-related services. Net cash flows provided by operating activities was$30.8 million for the first three months of 2020. Net earnings combined with adjustments of non-cash items contributed to our net cash flows provided by operating activities, partially offset by cash used to (i) payout the 2019 annual employee bonus, and (ii) payout accrued Associate incentives related to contest, promotions, and reward trips. 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. 17
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Information with respect to share repurchases may be found in Note I to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this report.
Off-Balance Sheet Arrangements
None. Summary We believe our current cash balances, future cash provided by operations, and amounts available under our line of credit will be sufficient to cover our operating and capital needs in the ordinary course of business for the foreseeable future. If we experience an adverse operating environment or unanticipated and unusual capital expenditure requirements, additional financing may be required. No assurance can be given, however, that additional financing, if required, would be available to us at all or on favorable terms. We might also require or seek additional financing for the purpose of expanding into new markets, growing our existing markets, mergers and acquisitions, or for other reasons. Such financing may include the use of additional debt or the sale of additional equity securities. Any financing which involves the sale of equity securities or instruments that are convertible into equity securities could result in immediate and possibly significant dilution to our existing shareholders. Critical Accounting Policies
There were no changes during the quarter to our critical accounting policies as disclosed in our 2020 Form 10-K. Our significant accounting policies are disclosed in Note A to our Consolidated Financial Statements filed with our 2020 Form 10-K.
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