UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 2020April 3, 2021
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission file number: 001-35024
______________________
USANA HEALTH SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Utah | 87-0500306 | |
(State or other jurisdiction | (I.R.S. Employer | |
of incorporation or organization) | Identification No.) | |
______________________
3838 West Parkway Blvd., Salt Lake City, Utah 84120
(Address of principal executive offices) (Zip Code)
______________________
(801) 954-7100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock | USNA | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ | Accelerated filer ☐ |
Non-accelerated filer ☐ | Smaller reporting company ☐ |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the numberAs of sharesMay 7, 2021, there were outstanding of each20,236,693 shares of the issuer’s classes ofregistrant's common stock, as of the latest practicable date: As of October 30, 2020, 21,037,938 shares of common stock, $.001$0.001 par value, of the registrant were outstanding.value.
FORM 10-Q
For the Quarterly Period Ended September 26, 2020April 3, 2021
TABLE OF CONTENTS
Page | ||
Cautionary Note Regarding Forward-Looking Statements and Certain Risks | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||
Cautionary Note Regarding Forward-Looking Statements and Certain Risks
This report, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part I, Item 2, contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company may also make forward-looking statements in other reports filed with the Securities and Exchange Commission ("SEC"), in materials delivered to shareholders and in press releases. In addition, the Company's representatives may from time to time make oral forward-looking statements. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new products; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements can be identified by words such as: “anticipate,” “intend,” “plan,” “seek,” “believe,” “project,” “estimate,” “expect,” “strategy,” “future,” “likely,” “may,” “should,” “will” and similar references to future periods. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely unduly on forward-looking statements.
Although we believe that the expectations reflected in our forward-looking statements are reasonable, actual results could differ materially from those we project or assume in our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, such as those disclosed or incorporated by reference in our filings with the Securities and Exchange Commission (“SEC”).SEC. Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments, the occurrence of unanticipated events or otherwise. Important factors that could cause our actual results, performance and achievements to differ materially from estimates or projections contained in our forward-looking statements in this report include, among others, the following:
● | Our dependence upon the direct selling business model to distribute our products and the activities of our independent Associates; |
● | Extensive regulation of our business model and uncertainties relating to the interpretation and enforcement of applicable laws and regulations governing direct selling and anti-pyramiding, particularly in the United States and China; |
● | The operation and expansion of our business in China through our subsidiary, BabyCare Holdings, Ltd. (“BabyCare”), including risks related to (i) operating in China in general, (ii) engaging in direct selling in China, (iii) BabyCare’s business model in China, and (iv) changes in the Chinese economy, marketplace or consumer environment; |
● | Unanticipated effects of changes to our Compensation Plan; |
● | Challenges associated with our planned expansion into new international markets, delays in commencement of sales or product offerings in such markets, delays in compliance with local marketing or other regulatory requirements, or changes in target markets; |
● | Uncertainty related to the magnitude, scope and duration of the impact of the novel strain coronavirus COVID-19 pandemic (“COVID-19” or the “COVID-19 pandemic”) to our business, operations and financial results, including, for example, additional regulatory measures or voluntary actions that may be put in place to limit the spread of COVID-19 in the markets where we operate, such as restrictions on business operations, shelter at home, or social distancing requirements; |
● | Political events, natural disasters, pandemics, epidemics or other health crises including, and in addition to, COVID-19 or other events that may negatively affect economic conditions, consumer spending or consumer behavior; |
● | Changes to trade policies and tariffs, the impact of customs, duties, taxation, and transfer pricing regulations, as well as regulations governing distinctions between and our responsibilities to employees and independent contractors; | |
| ● | Deterioration in foreign relations, as well as international disputes, or tensions, between the United States and other countries, including China; |
● | Volatile fluctuation in the value of foreign currencies against the U.S. dollar; |
● | Noncompliance by us or our Associates with any data privacy laws or any security breach by us or a third party involving the misappropriation, loss, destruction or other unauthorized use or disclosure of confidential information; |
● | Shortages of raw materials, disruptions in the business of our contract manufacturers, significant price increases of key raw materials, and other disruptions to our supply chain; and |
● | Our continued compliance with debt covenants in our |
Important information as to these factors can be found in this document, including, among others, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the headings of “Overview,” and “Financial Condition and Liquidity.” Discussion of these factors is incorporated by reference from Part I, Item 1A, “Risk Factors,” of this document, and should be considered an integral part of Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” For additional information concerning factors that may cause actual results to vary materially from those stated in the forward-looking statements, see our reports on Form 10-K, 10-Q and 8-K filed with the SEC from time to time.
Unless otherwise indicated or otherwise required by the context, the terms “we,” “our,” “it,” “its,” “Company,” and “USANA” refer to USANA Health Sciences, Inc. and its wholly-owned subsidiaries. USANA Health Sciences, Inc. and its subsidiaries’ names, abbreviations thereof, logos, and product and service designators are all either the registered or unregistered trademarks or tradenames of USANA Health Sciences, Inc. and its subsidiaries. Names, abbreviations of names, logos, and products and service designators of other companies are either the registered or unregistered trademarks or tradenames of their respective owners. References to internet websites in this Form 10-Q are provided for convenience only. Information available through these websites is not incorporated by reference into this Form 10-Q.
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
(unaudited)
As of | As of | As of | As of | |||||||||||||
September 26, | December 28, | April 3, | January 2, | |||||||||||||
2020 | 2019 | 2021 | 2021 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and cash equivalents | $ | 278,418 | $ | 234,830 | $ | 256,964 | $ | 311,917 | ||||||||
Inventories | 78,167 | 68,905 | 87,646 | 90,224 | ||||||||||||
Prepaid expenses and other current assets | 29,447 | 25,544 | 28,570 | 23,145 | ||||||||||||
Total current assets | 386,032 | 329,279 | 373,180 | 425,286 | ||||||||||||
Property and equipment, net | 99,400 | 95,233 | 98,622 | 100,445 | ||||||||||||
Goodwill | 16,894 | 16,636 | 17,310 | 17,367 | ||||||||||||
Intangible assets, net | 29,748 | 29,840 | 30,345 | 30,796 | ||||||||||||
Deferred tax assets | 4,618 | 3,090 | 5,164 | 4,640 | ||||||||||||
Other assets | 40,840 | 42,856 | 59,891 | 62,353 | ||||||||||||
| $ | 577,532 | $ | 516,934 | $ | 584,512 | $ | 640,887 | |||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
Current liabilities | ||||||||||||||||
Accounts payable | $ | 14,173 | $ | 12,525 | $ | 11,952 | $ | 18,195 | ||||||||
Other current liabilities | 146,690 | 123,573 | 139,500 | 149,878 | ||||||||||||
Total current liabilities | 160,863 | 136,098 | 151,452 | 168,073 | ||||||||||||
Deferred tax liabilities | 8,248 | 10,282 | 13,975 | 12,009 | ||||||||||||
Other long-term liabilities | 19,304 | 18,842 | 16,308 | 19,155 | ||||||||||||
Stockholders' equity | ||||||||||||||||
Common stock, $0.001 par value; Authorized -- 50,000 shares, issued and outstanding 21,020 as of September 26, 2020 and 21,655 as of December 28, 2019 | 21 | 22 | ||||||||||||||
Common stock, $0.001 par value; Authorized -- 50,000 shares, issued and outstanding 20,422 as of April 3, 2021 and 21,038 as of January 2, 2021 | 20 | 21 | ||||||||||||||
Additional paid-in capital | 59,011 | 59,445 | 54,084 | 62,460 | ||||||||||||
Retained earnings | 343,165 | 306,146 | 353,213 | 382,794 | ||||||||||||
Accumulated other comprehensive income (loss) | (13,080 | ) | (13,901 | ) | (4,540 | ) | (3,625 | ) | ||||||||
Total stockholders' equity | 389,117 | 351,712 | 402,777 | 441,650 | ||||||||||||
| $ | 577,532 | $ | 516,934 | $ | 584,512 | $ | 640,887 | |||||||||
The accompanying notes are an integral part of these statements.
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
Quarter Ended | Nine Months Ended | Quarter Ended | ||||||||||||||||||||||
September 26, | September 28, | September 26, | September 28, | April 3, | March 28, | |||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | |||||||||||||||||||
Net sales | $ | 298,513 | $ | 260,598 | $ | 824,123 | $ | 789,604 | $ | 307,976 | $ | 266,619 | ||||||||||||
Cost of sales | 56,358 | 47,819 | 150,091 | 140,214 | 57,651 | 46,059 | ||||||||||||||||||
Gross profit | 242,155 | 212,779 | 674,032 | 649,390 | 250,325 | 220,560 | ||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Associate incentives | 131,144 | 111,059 | 358,065 | 345,100 | 134,495 | 116,069 | ||||||||||||||||||
Selling, general and administrative | 65,656 | 66,262 | 192,014 | 202,671 | 71,633 | 65,479 | ||||||||||||||||||
Total operating expenses | 196,800 | 177,321 | 550,079 | 547,771 | 206,128 | 181,548 | ||||||||||||||||||
Earnings from operations | 45,355 | 35,458 | 123,953 | 101,619 | 44,197 | 39,012 | ||||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||
Interest income | 460 | 966 | 1,879 | 3,751 | 760 | 984 | ||||||||||||||||||
Interest expense | (1,377 | ) | (22 | ) | (1,615 | ) | (44 | ) | (5 | ) | (21 | ) | ||||||||||||
Other, net | (163 | ) | (514 | ) | (800 | ) | (632 | ) | (616 | ) | (812 | ) | ||||||||||||
Other income (expense), net | (1,080 | ) | 430 | (536 | ) | 3,075 | 139 | 151 | ||||||||||||||||
Earnings before income taxes | 44,275 | 35,888 | 123,417 | 104,694 | 44,336 | 39,163 | ||||||||||||||||||
Income taxes | 13,769 | 11,666 | 38,382 | 34,922 | 13,715 | 12,611 | ||||||||||||||||||
Net earnings | $ | 30,506 | $ | 24,222 | $ | 85,035 | $ | 69,772 | $ | 30,621 | $ | 26,552 | ||||||||||||
Earnings per common share | ||||||||||||||||||||||||
Basic | $ | 1.45 | $ | 1.09 | $ | 4.01 | $ | 3.04 | $ | 1.47 | $ | 1.24 | ||||||||||||
Diluted | $ | 1.44 | $ | 1.09 | $ | 4.00 | $ | 3.01 | $ | 1.45 | $ | 1.23 | ||||||||||||
Weighted average common shares outstanding | ||||||||||||||||||||||||
Basic | 21,043 | 22,180 | 21,191 | 22,969 | 20,892 | 21,497 | ||||||||||||||||||
Diluted | 21,170 | 22,223 | 21,283 | 23,173 | 21,096 | 21,551 | ||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||
Net earnings | $ | 30,506 | $ | 24,222 | $ | 85,035 | $ | 69,772 | $ | 30,621 | $ | 26,552 | ||||||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||
Foreign currency translation adjustment | 6,381 | (6,186 | ) | 2,005 | (7,004 | ) | (2,531 | ) | (6,237 | ) | ||||||||||||||
Tax benefit (expense) related to foreign currency translation adjustment | (331 | ) | 422 | (1,184 | ) | (630 | ) | 1,616 | 1,039 | |||||||||||||||
Other comprehensive income (loss), net of tax | 6,050 | (5,764 | ) | 821 | (7,634 | ) | (915 | ) | (5,198 | ) | ||||||||||||||
Comprehensive income | $ | 36,556 | $ | 18,458 | $ | 85,856 | $ | 62,138 | $ | 29,706 | $ | 21,354 | ||||||||||||
The accompanying notes are an integral part of these statements.
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
For nine months ended September 28, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||
For the three months ended March 28, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||
Additional | Other | Additional | Other | |||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Paid-in | Retained | Comprehensive | Common Stock | Paid-in | Retained | Comprehensive | |||||||||||||||||||||||||||||||||||||||||
Shares | Value | Capital | Earnings | Income (Loss) | Total | Shares | Value | Capital | Earnings | Income (Loss) | Total | |||||||||||||||||||||||||||||||||||||
Balance at December 29, 2018 | 23,567 | $ | 24 | $ | 72,008 | $ | 329,501 | $ | (10,387 | ) | $ | 391,146 | ||||||||||||||||||||||||||||||||||||
Balance at December 28, 2019 | 21,655 | $ | 22 | $ | 59,445 | $ | 306,146 | $ | (13,901 | ) | $ | 351,712 | ||||||||||||||||||||||||||||||||||||
Net earnings | 69,772 | 69,772 | 26,552 | 26,552 | ||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of tax | (7,634 | ) | (7,634 | ) | (5,198 | ) | (5,198 | ) | ||||||||||||||||||||||||||||||||||||||||
Equity-based compensation expense | 12,684 | 12,684 | 3,394 | 3,394 | ||||||||||||||||||||||||||||||||||||||||||||
Common stock repurchased and retired | (2,009 | ) | (2 | ) | (26,117 | ) | (123,881 | ) | (150,000 | ) | (785 | ) | (1 | ) | (9,012 | ) | (48,016 | ) | (57,029 | ) | ||||||||||||||||||||||||||||
Common stock issued under equity award plans | 73 | — | — | 125 | 0 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Tax withholding for net-share settled equity awards | (1,682 | ) | (1,682 | ) | (1,823 | ) | (1,823 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance at September 28, 2019 | 21,631 | $ | 22 | $ | 56,893 | $ | 275,392 | $ | (18,021 | ) | $ | 314,286 | ||||||||||||||||||||||||||||||||||||
Balance at March 28, 2020 | 20,995 | $ | 21 | $ | 52,004 | $ | 284,682 | $ | (19,099 | ) | $ | 317,608 | ||||||||||||||||||||||||||||||||||||
For nine months ended September 26, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||
For the three months ended April 3, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||
Additional | Other | Additional | Other | |||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Paid-in | Retained | Comprehensive | Common Stock | Paid-in | Retained | Comprehensive | |||||||||||||||||||||||||||||||||||||||||
Shares | Value | Capital | Earnings | Income (Loss) | Total | Shares | Value | Capital | Earnings | Income (Loss) | Total | |||||||||||||||||||||||||||||||||||||
Balance at December 28, 2019 | 21,655 | $ | 22 | $ | 59,445 | $ | 306,146 | $ | (13,901 | ) | $ | 351,712 | ||||||||||||||||||||||||||||||||||||
Balance at January 2, 2021 | 21,038 | $ | 21 | $ | 62,460 | $ | 382,794 | $ | (3,625 | ) | $ | 441,650 | ||||||||||||||||||||||||||||||||||||
Net earnings | 85,035 | 85,035 | 30,621 | 30,621 | ||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of tax | 821 | 821 | (915 | ) | (915 | ) | ||||||||||||||||||||||||||||||||||||||||||
Equity-based compensation expense | 10,519 | 10,519 | 3,740 | 3,740 | ||||||||||||||||||||||||||||||||||||||||||||
Common stock repurchased and retired | (785 | ) | (1 | ) | (9,012 | ) | (48,016 | ) | (57,029 | ) | (721 | ) | (1 | ) | (9,251 | ) | (60,202 | ) | (69,454 | ) | ||||||||||||||||||||||||||||
Common stock issued under equity award plans | 150 | — | — | 105 | 0 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Tax withholding for net-share settled equity awards | (1,941 | ) | (1,941 | ) | (2,865 | ) | (2,865 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance at September 26, 2020 | 21,020 | $ | 21 | $ | 59,011 | $ | 343,165 | $ | (13,080 | ) | $ | 389,117 | ||||||||||||||||||||||||||||||||||||
Balance at April 3, 2021 | 20,422 | $ | 20 | $ | 54,084 | $ | 353,213 | $ | (4,540 | ) | $ | 402,777 | ||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these statements.
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
For the three months ended September 28, 2019 | ||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
Common Stock | Paid-in | Retained | Comprehensive | |||||||||||||||||||||
Shares | Value | Capital | Earnings | Income (Loss) | Total | |||||||||||||||||||
Balance at June 29, 2019 | 22,980 | $ | 23 | $ | 68,846 | $ | 327,544 | $ | (12,257 | ) | $ | 384,156 | ||||||||||||
Net earnings | 24,222 | 24,222 | ||||||||||||||||||||||
Other comprehensive income (loss), net of tax | (5,764 | ) | (5,764 | ) | ||||||||||||||||||||
Equity-based compensation expense | 4,083 | 4,083 | ||||||||||||||||||||||
Common stock repurchased and retired | (1,358 | ) | (1 | ) | (16,002 | ) | (76,374 | ) | (92,377 | ) | ||||||||||||||
Common stock issued under equity award plans | 9 | — | — | |||||||||||||||||||||
Tax withholding for net-share settled equity awards | (34 | ) | (34 | ) | ||||||||||||||||||||
Balance at September 28, 2019 | 21,631 | $ | 22 | $ | 56,893 | $ | 275,392 | $ | (18,021 | ) | $ | 314,286 | ||||||||||||
For the three months ended September 26, 2020 | ||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
Common Stock | Paid-in | Retained | Comprehensive | |||||||||||||||||||||
Shares | Value | Capital | Earnings | Income (Loss) | Total | |||||||||||||||||||
Balance at June 27, 2020 | 21,017 | $ | 21 | $ | 55,526 | $ | 312,659 | $ | (19,130 | ) | $ | 349,076 | ||||||||||||
Net earnings | 30,506 | 30,506 | ||||||||||||||||||||||
Other comprehensive income (loss), net of tax | 6,050 | 6,050 | ||||||||||||||||||||||
| Equity-based compensation expense | 3,528 | 3,528 | ||||||||||||||||||||||
Common stock issued under equity award plans | 3 | — | — | |||||||||||||||||||||
Tax withholding for net-share settled equity awards | (43 | ) | (43 | ) | ||||||||||||||||||||
Balance at September 26, 2020 | 21,020 | $ | 21 | $ | 59,011 | $ | 343,165 | $ | (13,080 | ) | $ | 389,117 | ||||||||||||
The accompanying notes are an integral part of these statements.
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended | Three Months Ended | |||||||||||||||
September 26, | September 28, | April 3, | March 28, | |||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
Cash flows from operating activities | ||||||||||||||||
Net earnings | $ | 85,035 | $ | 69,772 | $ | 30,621 | $ | 26,552 | ||||||||
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities | ||||||||||||||||
Depreciation and amortization | 10,513 | 11,187 | 3,231 | 3,494 | ||||||||||||
Right-of-use asset amortization | 6,479 | 6,095 | 2,259 | 2,255 | ||||||||||||
(Gain) loss on sale of property and equipment | 145 | 37 | 47 | 0 | ||||||||||||
Equity-based compensation expense | 10,519 | 12,684 | 3,740 | 3,394 | ||||||||||||
Deferred income taxes | (4,623 | ) | (10,634 | ) | 2,968 | 4,611 | ||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Inventories | (8,858 | ) | 3,861 | 1,393 | 5,153 | |||||||||||
Prepaid expenses and other assets | (7,259 | ) | 8,071 | (3,960 | ) | (4,262 | ) | |||||||||
Accounts payable | 2,179 | (1,248 | ) | (6,899 | ) | (174 | ) | |||||||||
Other liabilities | 18,356 | (28,832 | ) | (13,741 | ) | (10,237 | ) | |||||||||
Net cash provided by (used in) operating activities | 112,486 | 70,993 | 19,659 | 30,786 | ||||||||||||
Cash flows from investing activities | ||||||||||||||||
Receipts on notes receivable | 236 | 145 | 51 | 85 | ||||||||||||
Proceeds from the settlement of net investment hedges | 1,935 | 1,936 | ||||||||||||||
Payments for net investment hedge | (1,089 | ) | (1,660 | ) | (1,555 | ) | (1,089 | ) | ||||||||
Maturities of investment securities held-to-maturity | 0 | 63,539 | ||||||||||||||
Proceeds from sale of property and equipment | 0 | 11 | 13 | 0 | ||||||||||||
Purchases of property and equipment | (13,610 | ) | (11,372 | ) | (1,597 | ) | (7,266 | ) | ||||||||
Net cash provided by (used in) investing activities | (12,528 | ) | 52,599 | (3,088 | ) | (8,270 | ) | |||||||||
Cash flows from financing activities | ||||||||||||||||
Repurchase of common stock | (57,029 | ) | (150,000 | ) | (67,610 | ) | (57,029 | ) | ||||||||
Borrowings on line of credit | 60,000 | 5,000 | ||||||||||||||
Payments on line of credit | (60,000 | ) | (5,000 | ) | ||||||||||||
Payments related to tax withholding for net-share settled equity awards | (1,941 | ) | (1,682 | ) | (2,865 | ) | (1,823 | ) | ||||||||
Payments for debt issuance costs | 0 | (65 | ) | |||||||||||||
Net cash provided by (used in) financing activities | (58,970 | ) | (151,747 | ) | (70,475 | ) | (58,852 | ) | ||||||||
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 2,672 | (3,523 | ) | (1,962 | ) | (4,436 | ) | |||||||||
Net increase (decrease) in cash, cash equivalents, and restricted cash | 43,660 | (31,678 | ) | (55,866 | ) | (40,772 | ) | |||||||||
Cash, cash equivalents, and restricted cash at beginning of period | 237,688 | 217,234 | 315,937 | 237,688 | ||||||||||||
Cash, cash equivalents, and restricted cash at end of period | $ | 281,348 | $ | 185,556 | $ | 260,071 | $ | 196,916 | ||||||||
Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets | ||||||||||||||||
Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets | Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets | |||||||||||||||
Cash and cash equivalents | $ | 278,418 | $ | 182,748 | $ | 256,964 | $ | 194,098 | ||||||||
Restricted cash included in prepaid expenses and other current assets | 61 | 0 | ||||||||||||||
Restricted cash included in other assets | 2,930 | 2,808 | 3,046 | 2,818 | ||||||||||||
Total cash, cash equivalents, and restricted cash | $ | 281,348 | $ | 185,556 | $ | 260,071 | $ | 196,916 | ||||||||
Supplemental disclosures of cash flow information | ||||||||||||||||
Cash paid during the period for: | ||||||||||||||||
Interest | $ | 1,556 | $ | 10 | $ | 3 | $ | 2 | ||||||||
Income taxes | 43,789 | 45,666 | 13,523 | 9,694 | ||||||||||||
Cash received during the period for: | ||||||||||||||||
Income tax refund | 270 | 5,432 | ||||||||||||||
Non-cash investing and financing activities: | ||||||||||||||||
Right-of-use assets obtained in exchange for lease obligations | 3,775 | 25,872 | 829 | 1,914 | ||||||||||||
Accrued purchases of property and equipment | 414 | 223 | 239 | 608 | ||||||||||||
Unsettled trades for repurchase of common stock | 1,844 | 0 | ||||||||||||||
The accompanying notes are an integral part of these statements.
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
NOTE A – ORGANIZATION, CONSOLIDATION, AND BASIS OF PRESENTATION
USANA Health Sciences, Inc. develops and manufactures high-quality,high quality, science-based nutritional and personal care products that are sold internationally through a network marketing system, which is a form of direct selling. The Condensed Consolidated Financial Statements (the “Financial Statements”) include the accounts and operations of the Company, which are grouped and presented in two geographic regions: (1) Asia Pacific, and (2) Americas and Europe. Asia Pacific is further divided into three sub-regions: (i) Greater China, (ii) Southeast Asia Pacific, and (iii) North Asia. All intercompany accounts and transactions have been eliminated in consolidation. The countries included in these regions and sub-regions are as follows:
(1) Asia Pacific -
(i) Greater China - Hong Kong, Taiwan, and China. The Company’s business in China is conducted by BabyCare Holdings, Ltd., the Company’s wholly-owned subsidiary.
(ii) Southeast Asia Pacific – Australia, New Zealand, Singapore, Malaysia, the Philippines, Thailand, and Indonesia.
(iii) North Asia – Japan and South Korea.
(2) Americas and Europe – United States, Canada, Mexico, Colombia, the United Kingdom, France, Germany, Spain, Italy, Romania, Belgium, and the Netherlands.
The condensed consolidated balance sheet as of December 28, 2019,January 2,2021,derived from audited consolidated financial statements, and the unaudited interim condensed consolidated financial information of the Company have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the SEC. Accordingly, certain information and footnote disclosures that are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. In the opinion of the Company’s management, the accompanying interim condensed consolidated financial information contains all adjustments, consisting only of normal recurring adjustments that are necessary to state fairly the Company’s financial position as of September 26,2020April 3, 2021 and results of operations and cash flows for the three and ninemonths ended September 26,2020April 3, 2021 and September March 28, 202028,2019..
The interim Financial Statementsfinancial statements should be read in conjunction with the audited consolidated financial statements and notes thereto that are included in the Company’s Annual Report on Form 10-K for the year ended December 28, 2019.January 2, 2021. The results of operations for the three and ninemonths ended September 26,2020,April 3, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending January 2, 2021.1, 2022.
The Company considered the current and expected future economic and market conditions surrounding the global pandemic involving the novel strain of coronavirus known as COVID-19 to assess whether a triggering event had occurred that would result in a potential impairmentpandemic has negatively impacted economies, businesses, sales practices, supply chains, and consumer behavior around the world. While the overall impact of goodwill, indefinite-lived intangible assets,the pandemic on our business and long-lived assets. Based on this assessment, the Company concluded that a triggering event hasresults of operations was not occurred which would require further impairment testing to be performed. The Company’s operations were not materially affected by COVID-19material for the three and ninemonths ended SeptemberApril 3, 26,2021, and for fiscal 2020.2020, the pandemic disrupted and negatively affected our business. While the Company did not incur significant disruptions to its operations during the threefirst andquarter of nine months ended September 26,20202021 from COVID-19, it is unable at this time to predict the impact that COVID-19 will have on its business, financial position and operating results in future periods due to numerous uncertainties and is closely monitoring the impact of the pandemic on all aspects of its business. Further information regarding the Company’s annual goodwill impairment test and annual indefinite-lived intangible test can be found in Note D – Intangible Assets.
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE A – ORGANIZATION, CONSOLIDATION, AND BASIS OF PRESENTATION – CONTINUED
Recent Accounting Pronouncements
Adopted accounting pronouncements
In August 2018,December 2019, the Financial Accounting Standards Board (“FASB”("FASB") issued Accounting Standards Update (“ASU”("ASU")2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the disclosure requirements for fair value measurements. The modifications removed the following disclosure requirements: (i) the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) the policy for timing of transfers between levels; and (iii) the valuation processes for Level 3 fair value measurements. This ASU added the following disclosure requirements: (i) the changes in unrealized gains and losses for the period included in other comprehensive income (“OCI”) for recurring Level 3 fair value measurements held at the end of the reporting period; and (ii) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15,2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company adopted ASU 2018-13 during the first quarter of 2020 and the adoption of the standard did not have an impact on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The capitalized implementation costs of a hosting arrangement that is a service contract will be expensed over the term of the hosting arrangement. For public business entities, the amendments in this ASU are effective for annual and interim periods beginning after December 15,2019. Early adoption is permitted, including adoption in any interim period. The amendments can be applied either retrospectively or prospectively to all implementation costs incurred after the adoption date. The Company adopted ASU 2018-15 during the first quarter of 2020 and the adoption of the standard did not have an impact on its condensed consolidated financial statements.
In March 2020, the FASB issued ASU No.2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 is intended to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. This ASU is effective upon issuance through December 31, 2022 on a prospective basis. The Company will evaluate transactions or contract modifications occurring as a result of reference rate reform and determine whether to apply the optional guidance on an ongoing basis. The Company adopted ASU 2020-04 during the first quarter of 2020 and the adoption of the standard did not have an impact on its condensed consolidated financial statements.
Recently issued accounting pronouncements not yet adopted
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” ASU 2019-12 is intended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifying certain aspects of the current guidance to promote consistency among reporting entities. The amendments in this ASU are effective for annual periods beginning after December 15, 2020 and interim periods within those annual periods, with early adoption permitted. An entity that elects early adoption must adopt all the amendments in the same period. Most amendments within this ASU are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company does not expect the adoption ofadopted ASU 2019-12 willduring the first quarter ended April 3, 2021 and the adoption of the standard did not have a materialan impact on its condensed consolidated financial statements.
In January 2021, the FASB issued ASU No.2021-01 “Reference Rate Reform (Topic 848): Scope,” which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. Specifically, certain provisions in Topic 848, if elected by an entity, apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. Amendments in this ASU to the expedients and exceptions in Topic 848 capture the incremental consequences of the scope clarification and tailor the existing guidance to derivative instruments affected by the discounting transition. The amendments in this ASU do not apply to contract modifications made after December 31, 2022, new hedging relationships entered into after December 31, 2022, and existing hedging relationships evaluated for effectiveness in periods after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship (including periods after December 31, 2022). The amendments in this ASU are effective immediately for all entities. An entity may elect to apply the amendments in this ASU on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final ASU, up to the date that financial statements are available to be issued. The Company, on January 7, 2021, adopted ASU 2021-01 on a prospective basis and the adoption of this ASU did not have an impact on its condensed consolidated financial statements.
No other new accounting pronouncement issued or effective during the three and nine months ended September 26, 2020 quarter had, or is expected to have, a material impact on the Company’s condensed consolidated financial statements.
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE B – FAIR VALUE MEASURES
The Company measures at fair value certain of its financial and non-financial assets and liabilities by using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are:
● | Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date. |
● | Level 2 inputs are from other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. |
● | Level 3 inputs are unobservable and are used to measure fair value in situations where there is little, if any, market activity for the asset or liability at the measurement date. |
As of the dates indicated, the following financial assets and liabilities were measured at fair value on a recurring basis using the type of inputs shown:
Fair Value Measurements Using | Fair Value Measurements Using | |||||||||||||||||||||||||||||||
September 26, | Inputs | April 3, | Inputs | |||||||||||||||||||||||||||||
2020 | Level 1 | Level 2 | Level 3 | 2021 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
Money market funds included in cash equivalents | $ | 206,466 | $ | 206,466 | $ | 0 | $ | 0 | $ | 171,896 | $ | 171,896 | $ | 0 | $ | 0 | ||||||||||||||||
Foreign currency contracts included in other current liabilities | (1,424 | ) | 0 | (1,424 | ) | 0 | ||||||||||||||||||||||||||
| Net investment hedge included in prepaid expenses and other current assets | 1,365 | 0 | 1,365 | 0 | ||||||||||||||||||||||||||||
Foreign currency contracts included in prepaid expenses and other current assets | 223 | 0 | 223 | 0 | ||||||||||||||||||||||||||||
| $ | 205,042 | $ | 206,466 | $ | (1,424 | ) | $ | 0 | $ | 173,484 | $ | 171,896 | $ | 1,588 | $ | 0 | ||||||||||||||||
Fair Value Measurements Using | Fair Value Measurements Using | |||||||||||||||||||||||||||||||
December 28, | Inputs | January 2, | Inputs | |||||||||||||||||||||||||||||
2019 | Level 1 | Level 2 | Level 3 | 2021 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
Money market funds included in cash equivalents | $ | 180,032 | $ | 180,032 | $ | 0 | $ | 0 | $ | 224,092 | $ | 224,092 | $ | 0 | $ | 0 | ||||||||||||||||
Foreign currency contracts included in other current liabilities | (764 | ) | 0 | (764 | ) | 0 | (1,470 | ) | 0 | (1,470 | ) | 0 | ||||||||||||||||||||
| $ | 179,268 | $ | 180,032 | $ | (764 | ) | $ | 0 | $ | 222,622 | $ | 224,092 | $ | (1,470 | ) | $ | 0 | |||||||||||||||
There were no transfers of financial assets or liabilities between levels of the fair value hierarchy for the periods indicated.
The majority of the Company’s non-financial assets, which include long-lived assets, are not required to be carried at fair value on a recurring basis. However, if an impairment charge is required, a non-financial asset would be written down to fair value. AtAs of SeptemberApril 26,3, 20202021 and December 28, 2019,January 2, 2021, there were 0 non-financial assets measured at fair value on a non-recurring basis.
The Company’s financial instruments include cash equivalents, accounts receivable, restricted cash, and accounts payable. The recorded values of cash equivalents, accounts receivable, restricted cash, and accounts payable approximate their fair values, based on their short-term nature.
NOTE C – INVENTORIES
Inventories consist of the following:
September 26, | December 28, | |||||||
2020 | 2019 | |||||||
Raw materials | $ | 22,569 | $ | 15,879 | ||||
Work in progress | 8,496 | 12,111 | ||||||
Finished goods | 47,102 | 40,915 | ||||||
| $ | 78,167 | $ | 68,905 | |||||
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE DC – INTANGIBLE ASSETSINVENTORIES
The Company performed its annual goodwill impairment test duringInventories consist of the third quarter of 2020. The Company performed a qualitative assessment of each reporting unit and determined that it was not more-likely-than-not that the fair value of any reporting unit was less than its carrying amount. As a result, 0 impairments of goodwill were recognized.following:
April 3, | January 2, | |||||||
2021 | 2021 | |||||||
Raw materials | $ | 27,165 | $ | 28,328 | ||||
Work in progress | 10,181 | 9,956 | ||||||
Finished goods | 50,300 | 51,940 | ||||||
| $ | 87,646 | $ | 90,224 | |||||
NOTE D – INVESTMENT IN EQUITY SECURITIES
The Company also performed its annual indefinite-lived intangible asset impairment test duringAs of April 3, 2021 and January 2, 2021, the carrying amount of equity securities without readily determinable fair values was $20,000 and is included in the “Other assets” line item on the Company’s condensed consolidated balance sheets.
During the thirdthree quarter ofmonths ended 2020.April 3, 2021 The Company performed a qualitative assessment ofand the indefinite-lived intangible assetfiscal year ended January 2, 2021, 0 observable price changes occurred, and determined that it was not more-likely-than-not that the fair value of the indefinite-lived intangible asset was less than the carrying amount. As a result, 0 impairment of the indefinite-lived intangible assetsecurities was recognized.recorded.
NOTE E – REVENUE AND CONTRACT LIABILITIES
Revenue is recognized when, or as, control of a promised product or service transfers to a customer, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring those products or services. A majority of the Company’s sales are for products sold at a point in time and shipped to customers, for which control is transferred as goods are delivered to the third party carrier for shipment. The Company receives payment, primarily via credit card, for the sale of products at the time customers place orders and payment is required prior to shipment. Contract liabilities, which are recorded within the “Other current liabilities” line item in the condensed consolidated balance sheets, primarily relate to deferred revenue for product sales for customer payments received in advance of shipment, for outstanding material rights under the initial order program, and for services where control is transferred over time as services are delivered.
Other revenue includes fees, which are paid by the customer at the beginning of the service period, for access to online customer service applications and annual account renewal fees for Associates, for which control is transferred over time as services are delivered and are recognized as revenue on a straight-line basis over the term of the respective contracts.
The following table presents Other Revenue for the periods indicated:
Quarter Ended | Nine Months Ended | |||||||||||||||
September 26, | September 28, | September 26, | September 28, | |||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Other Revenue | $ | 817 | $ | 709 | $ | 2,794 | $ | 2,365 | ||||||||
Quarter Ended | ||||||||
April 3, | March 28, | |||||||
2021 | 2020 | |||||||
Other Revenue | $ | 972 | $ | 643 | ||||
Disaggregation of revenue by geographic region and major product line is included in Segment Information in Note J.
The following table provides information about contract liabilities from contracts with customers, including significant changes in the contract liabilities balances during the period:
September 26, | December 28, | April 3, | January 2, | |||||||||||||
2020 | 2019 | 2021 | 2021 | |||||||||||||
Contract liabilities at beginning of period | $ | 13,852 | $ | 15,055 | $ | 15,952 | $ | 13,852 | ||||||||
Increase due to deferral of revenue at period end | 19,363 | 13,852 | 16,017 | 15,952 | ||||||||||||
Decrease due to beginning contract liabilities recognized as revenue | (13,612 | ) | (15,055 | ) | (15,198 | ) | (13,852 | ) | ||||||||
Contract liabilities at end of period | $ | 19,603 | $ | 13,852 | $ | 16,771 | $ | 15,952 | ||||||||
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE F – LINE OF CREDIT
On August 25, 2020, the Company as borrower, and certain of its material subsidiaries as guarantors, entered into the Second Amended and Restated Credit Agreement (the “Second Amended and Restated“Credit Agreement”), dated as of August 25, 2020 with Bank of America, N.A. (“Bank of America”), as Administrative Agent, Swingline Lender and Letter of Credit Issuer, and the other lenders party thereto. The Second Amended and Restated Agreement provides for changes to the Company’s existing Credit Agreement originally entered into on June 16, 2004, the Amended and Restated Credit Agreement as of April 27, 2011 (the “First Amended and Restated Agreement”), and by the First Amendment to First Amended and Restated Agreement as of July 18, 2013, the Second Amendment to First Amended and Restated Agreement, as of February 19, 2016 and the Third Amendment to Amended and Restated Credit Agreement, dated as of July 15, 2019 (as amended and supplemented, the “Credit Agreement”), that was scheduled to expire in April 2021.
The Credit Agreement provides for a revolving credit limit for loans to the Company of up to $75,000 (the “Credit Facility”). In addition, at the option of the Company, and subject to certain conditions, the Company may request to increase the aggregate commitment under the Credit Facility byof up to an additional $200,000.
There was 0 outstanding debt on the Credit Facility at September 26, 2020. April 3, 2021. The obligations of the Company under the Credit Agreement are secured by the pledge of the capital stock of certain subsidiaries of the Company, pursuant to a Security and Pledge Agreement (the “Pledge Agreement”).Agreement.
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE F – LINE OF CREDIT - CONTINUED
Interest on revolving borrowings under the Credit Facility are computed at Bank of America’s prime rate or the Eurodollar rate, adjusted by features specified in the Credit Agreement. The Credit Agreement also requirescovenants require the Company’s rolling four-quarter adjustedconsolidated EBITDA covenant toof $100,000 or greater and its ratio of consolidated funded debt to adjustedconsolidated EBITDA of equal to or less than 2.0 to 1.0 at the end of each quarter. The Credit Agreement does not include any restrictions on the payment of cash dividends or share repurchases by the Company.
Under the terms Consolidated EBITDA and consolidated funded debt are non-GAAP terms. For purposes of the Second AmendmentCredit Agreement, adjusted EBITDA is defined as “consolidated EBITDA” and means, for any period, for the Company and its subsidiaries on a consolidated basis, an amount equal to First Amendedthe net income of the Company and Restatedits subsidiaries (excluding extraordinary gains but including extraordinary losses) for such period (“Net Income”) plus (a) the following to the extent deducted in calculating such Net Income: (i) the sum of (A) all interest, premium payments, debt discount, fees (including commitment fees and the amortization of upfront fees), charges and related expenses of the Company and its subsidiaries in connection with borrowed money (excluding capitalized interest) or in connection with the deferred purchase price of assets for such period, in each case to the extent treated as interest in accordance with U.S. GAAP and (B) the portion of rent expense of the Company and its subsidiaries for such period under capital leases that is treated as interest in accordance with U.S. GAAP, (ii) the provision for federal, state, local and foreign income taxes payable by the Company and its subsidiaries for such period, (iii) the amount of depreciation, depletion and amortization expense deducted in determining such Net Income and (iv) other expenses of the Company and its subsidiaries reducing such Net Income which do not represent a cash item in such period or any future period and minus (b) all non-cash items increasing Net Income for such period. For purposes of the Credit Agreement, “Consolidated Funded Debt” means, as of February 19, 2016 any date of determination, for the Company and its subsidiaries on a consolidated basis, the Third Amendment to Amended and Restated Credit Agreement, dated assum of July 15, 2019, any existing bank guarantees are considered a reduction(a) the outstanding principal amount of the overall availability of credit and part of the covenant calculation. This provision resulted in a reduction of $8,924 in the available borrowing limit as of December 28, 2019, due to existing normal course of business guarantees in certain markets. Under the terms of the Second Amended and Restated Agreement, there is no provision requiring bank guarantees to reduce the available credit limitall obligations, whether current or long-term, for borrowed money (including obligations under the Credit Facility,Agreement) and all obligations evidenced by bonds, debentures, notes, loan agreements or other similar instruments, plus (b) all purchase money indebtedness, plus (c) attributable indebtedness in respect of capital leases and synthetic lease obligations, plus (d) all indebtedness of the types referred to in clauses (a) through (c) above of any partnership or joint venture (other than a joint venture that is itself a corporation or limited liability company) in which the Company or a subsidiary is a general partner or joint venturer, unless such indebtedness is expressly made non-recourse to the Company or such subsidiary, minus (e) the aggregate amount of subordinated liabilities properly classified on such date as such, there was no reductionlong-term debt in the available borrowing limit as of September 26, 2020. accordance with U.S. GAAP.
The Company will be required to pay any balance on this Credit Facility in full at the time of maturity in August 2025.
Subsequent to April 3, 2021, on April 21, 2021, the Company entered into the First Amendment to the Second Amended and Restated Credit Agreement (the “2021 amendment”), which, among other things amended the definition of “LIBOR Replacement Date”, “LIBOR Successor Rate”, and “Eurodollar Rate.” The 2021 amendment also adjusted the minimum LIBOR rate from .50% to 0.00% and removes the one-week and two-month borrowing terms.
NOTE G – CONTINGENCIES
The Company is involved in various lawsuits, claims, and other legal matters from time to time that arise in the ordinary course of conducting business, including matters involving its products, intellectual property, supplier relationships, distributors, competitor relationships, employees and other matters. The Company records a liability when a particular contingency is probable and estimable. The Company faces contingencies that are reasonably possible to occur; however, they cannot currently be estimated. While complete assurance cannot be given as to the outcome of these proceedings, management does not currently believe that any of these matters, individually or in the aggregate, will have a material adverse effect on the Company’s financial condition, liquidity or results of operations. It is reasonably possible that a change in the contingencies could result in a change in the amount recorded by the Company in the future.
NOTE H – DERIVATIVE FINANCIAL INSTRUMENTS
The Company’s risk management strategy includes the select use of derivative instruments to reduce the effects of volatility in foreign currency exchange exposure on operating results and cash flows. In accordance with the Company’s risk management policies, the Company does not hold or issue derivative instruments for trading or speculative purposes. The Company recognizes all derivative instruments as either assets or liabilities in the balance sheet at their respective fair values. When the Company becomes a party to a derivative instrument and intends to apply hedge accounting, the Company formally documents the hedge relationship and the risk management objective for undertaking the hedge, the nature of risk being hedged, and the hedged transaction, which includes designating the instrument for financial reporting purposes as a fair value hedge, a cash flow hedge, or a net investment hedge. The Company also documents how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method used to measure ineffectiveness.
The Company periodically uses derivative instruments to hedge the foreign currency exposure of its net investment in foreign subsidiaries into U.S. dollars. Initially, the Company records derivative assets on a gross basis in its condensed consolidated balance sheets. Subsequently the fair value of derivatives is measured for each reporting period. The effective portion of gains and losses attributable to these net investment hedges is recorded to foreign currency translation adjustment (“FCTA”) within accumulated other comprehensive income (loss) (“AOCI”) to offset the change in the carrying value of the net investment being hedged, and will subsequently be reclassified to net earnings in the period in which the investment in the subsidiary is either sold or substantially liquidated.
During the ninethree months ended SeptemberApril 3, 2021 26,2020and SeptemberMarch 28, 2020, 28,2019,the Company settled aentered into European optionoptions designated as a net investment hedgehedges with a notional amountamounts of $98,684 and $90,000, and $110,000, respectively. NaN settlements occurred duringFor the three months ended September 26, 2020April 3, 2021 and SeptemberMarch 28, 2019. For the nine months ended September 26, 2020,and September 28, 2019, the Company realized a nethad an unrealized loss of $190 and an unrealized gain of $846 and $276,$850, respectively, which is recorded to FCTA within AOCI.other comprehensive income (loss).
As of September 26, 2020April 3, 2021, and December 28, 2019, there were 0 derivatives outstanding for which the Company has appliedassessed hedge accounting.effectiveness under the forward rate method, determining the hedging instrument was highly effective.
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE I – COMMON STOCK AND EARNINGS PER SHARE
Basic earnings per share (“EPS”) areis based on the weighted-average number of shares outstanding for each period. Shares that have been repurchased and retired during the periods specified below have been included in the calculation of the number of weighted-average shares that are outstanding for the calculation of basic EPS based on the time they were outstanding in any period. Diluted EPS areis based on shares that are outstanding (computed under basic EPS) and on potentially dilutive shares. Shares that are included in the diluted EPS calculations under the treasury stock method include equity awards that are in-the-money but have not yet been exercised.
The following is a reconciliation of the numerator and denominator used to calculate basic EPS and diluted EPS for the periods indicated:
Quarter Ended | Nine Months Ended | Quarter Ended | ||||||||||||||||||||||
September 26, | September 28, | September 26, | September 28, | April 3, | March 28, | |||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | |||||||||||||||||||
Net earnings available to common shareholders | $ | 30,506 | $ | 24,222 | $ | 85,035 | $ | 69,772 | $ | 30,621 | $ | 26,552 | ||||||||||||
Weighted average common shares outstanding - basic | 21,043 | 22,180 | 21,191 | 22,969 | 20,892 | 21,497 | ||||||||||||||||||
Dilutive effect of in-the-money equity awards | 127 | 43 | 92 | 204 | 204 | 54 | ||||||||||||||||||
Weighted average common shares outstanding - diluted | 21,170 | 22,223 | 21,283 | 23,173 | 21,096 | 21,551 | ||||||||||||||||||
Earnings per common share from net earnings - basic | $ | 1.45 | $ | 1.09 | $ | 4.01 | $ | 3.04 | $ | 1.47 | $ | 1.24 | ||||||||||||
Earnings per common share from net earnings - diluted | $ | 1.44 | $ | 1.09 | $ | 4.00 | $ | 3.01 | $ | 1.45 | $ | 1.23 | ||||||||||||
Equity awards for the following shares were not included in the computation of diluted EPS due to the fact that their effect would be anti-dilutive:
Quarter Ended | Nine Months Ended | |||||||||||||||
September 26, | September 28, | September 26, | September 28, | |||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
| 213 | 1,317 | 438 | 605 | |||||||||||||
Quarter Ended | ||||||||
April 3, | March 28, | |||||||
2021 | 2020 | |||||||
| 57 | 815 | |||||||
There were no shares repurchased during the quarter ended September 26, 2020. During the quarterthree months ended SeptemberApril 3, 2021 and March 28, 2019,2020, the Company repurchased and retired 1,358721 shares and 785 shares for $92,377 under its share repurchase plan.
During the nine months ended September 26, 2020 $69,454 and September 28,2019, the Company repurchased and retired 785 shares and 2,009 shares for $57,029 and $150,000, respectively, under itsthe Company’s share repurchase plan. The excess of the repurchase price over par value is allocated between additional paid-in capital and retained earnings on a pro-rata basis. The purchase of shares under this plan reduces the number of shares outstanding in the above calculations.
As of September 26, 2020,April 3, 2021, the remaining authorized repurchase amount under the stock repurchase plan was $72,971.$80,546. There is no expiration date on the remaining approved repurchase amount and no requirement for future share repurchases.
Subsequent to April 3, 2021, and through May 7, 2021, the Company repurchased and retired 190 shares of common stock for $18,367, at an average market price of $96.67 per share.
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE J – SEGMENT INFORMATION
USANA operates as a direct selling company that develops, manufactures, and distributes high-quality nutritional and personal care products that are sold through a network marketing system of independent distributors (“Associates”). The Company aggregates its operating segments into 1one reportable segment as management believes that the Company’s segments exhibit similar long-term financial performance and have similar economic characteristics. Performance for a region or market is evaluated based on sales. No single Associate accounted for 10% or more of net sales for the periods presented. The table below summarizes the approximate percentage of total product revenue that has been contributed by the Company’s nutritionals, foods, and personal care and skincare products for the periods indicated.
Quarter Ended | Nine Months Ended | Quarter Ended | ||||||||||||||||
September 26, | September 28, | September 26, | September 28, | April 3, | March 28, | |||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | |||||||||||||
USANA® Nutritionals | 85% | 81% | 83% | 83% | 87% | 86% | ||||||||||||
USANA Foods | 9% | 9% | 11% | 8% | 7% | 8% | ||||||||||||
Personal care and Skincare | 5% | 9% | 5% | 8% | 5% | 5% | ||||||||||||
All Other | 1% | 1% | 1% | 1% | 1% | 1% | ||||||||||||
(1)Includes the Company's new Active Nutrition line, which launched in five markets late in the first quarter of 2021 and will roll out to additional markets throughout the year.
Selected Financial Information
Financial information by geographic region is presented for the periods indicated below:
Quarter Ended | Nine Months Ended | Quarter Ended | ||||||||||||||||||||||
September 26, | September 28, | September 26, | September 28, | April 3, | March 28, | |||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | |||||||||||||||||||
Net Sales to External Customers | ||||||||||||||||||||||||
Asia Pacific | ||||||||||||||||||||||||
Greater China | $ | 136,013 | $ | 130,947 | $ | 391,446 | $ | 404,046 | $ | 148,978 | $ | 131,432 | ||||||||||||
Southeast Asia Pacific | 76,313 | 54,327 | 192,694 | 162,802 | 72,148 | 56,922 | ||||||||||||||||||
North Asia | 28,969 | 23,299 | 82,072 | 68,102 | 30,165 | 27,251 | ||||||||||||||||||
Asia Pacific Total | 241,295 | 208,573 | 666,212 | 634,950 | 251,291 | 215,605 | ||||||||||||||||||
Americas and Europe | 57,218 | 52,025 | 157,911 | 154,654 | 56,685 | 51,014 | ||||||||||||||||||
Consolidated Total | $ | 298,513 | $ | 260,598 | $ | 824,123 | $ | 789,604 | $ | 307,976 | $ | 266,619 | ||||||||||||
The following table provides further information on markets representing 10% or more of consolidated net sales and long-lived assets, respectively:
Quarter Ended | Nine Months Ended | Quarter Ended | ||||||||||||||||||||||
September 26, | September 28, | September 26, | September 28, | April 3, | March 28, | |||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | |||||||||||||||||||
Net sales: | ||||||||||||||||||||||||
China | $ | 120,523 | $ | 115,424 | $ | 346,526 | $ | 355,571 | $ | 134,303 | $ | 115,478 | ||||||||||||
Philippines | $ | 33,585 | $ | 15,935 | N/A | N/A | ||||||||||||||||||
| United States | $ | 27,560 | $ | 28,137 | N/A | N/A | ||||||||||||||||||
As of | As of | |||||||||||||||
September 26, | December 28, | April 3, | January 2, | |||||||||||||
2020 | 2019 | 2021 | 2021 | |||||||||||||
Long-lived assets: | ||||||||||||||||
China | $ | 89,208 | $ | 90,886 | $ | 90,293 | $ | 92,692 | ||||||||
United States | $ | 61,439 | $ | 54,809 | $ | 81,348 | $ | 82,167 | ||||||||
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following 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 from year to year.performance.
The MD&A is presented in six sections as follows:
● | Overview |
● |
|
● | 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 ended December 28, 2019,January 2, 2021 ("2020 Form 10-K") filed with the SEC on March 2, 2021, 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,high quality, science-based nutritional and personal care and skincare products that are distributed internationally through a network marketing system, which is a form of 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 September 26, 2020,April 3, 2021, we had approximately 650,000617,000 active Customers worldwide.
We have ongoing operations in the following markets, which are grouped and presented in two geographic regions: (1) Asia Pacific, and (2) Americas and Europe. Asia Pacific is further divided into three sub-regions: (i) Greater China, (ii) Southeast Asia Pacific, and (iii) North Asia. The countries included in these regions as follows:and sub-regions are described below:
(1) Asia Pacific -
(i) Greater China - Hong Kong, Taiwan, and China. Our business in China is conducted by BabyCare Holdings, Ltd., our wholly-owned subsidiary.
(ii) Southeast Asia Pacific – Australia, New Zealand, Singapore, Malaysia, the Philippines, Thailand and Indonesia.
(iii) North Asia – Japan and South Korea.
(2) Americas and Europe – United States, Canada, Mexico, Colombia, the United Kingdom, France, Germany, Spain, Italy, Romania, Belgium, and the Netherlands.
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:
Nine Months Ended | Three Months Ended | |||||||||||||||
September 26, | September 28, | April 3, | March 28, | |||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
Product Line | ||||||||||||||||
USANA® Nutritionals | ||||||||||||||||
Optimizers | 64% | 64% | 70% | 68% | ||||||||||||
Essentials/CellSentials* | 21% | 19% | ||||||||||||||
Essentials/CellSentials(1) | 17% | 18% | ||||||||||||||
USANA Foods | 9% | 8% | 7% | 8% | ||||||||||||
Personal care and Skincare | 5% | 8% | 5% | 5% | ||||||||||||
All Other | 1% | 1% | 1% | 1% | ||||||||||||
Key Product | ||||||||||||||||
USANA® Essentials/CellSentials | 14% | 12% | 12% | 12% | ||||||||||||
Proflavanol® | 9% | 11% | 11% | 11% | ||||||||||||
Probiotic | 9% | 10% | 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 the United States late in the first quarter of 2021. We will roll this line out to additional markets throughout the year.
Because we have operations in multiple markets, with sales and expenses being generated and incurred in multiple currencies, our reported U.S. dollar sales and earnings can be significantly affected by fluctuations in currency exchange rates. In general, our operating results are affected positively by a weakening of the U.S. dollar and negatively by a strengthening of the U.S. dollar. During the ninethree months ended September 26, 2020,April 3, 2021, net sales outside of the United States represented 90.6%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.
Trends Affecting Our Business –Impact of the COVID-19 Pandemic
On March 11, 2020, the World Health Organization designatedThe COVID-19 as a global pandemic. COVID-19, which is believed to have originated in Wuhan City, China,pandemic has spreadnegatively impacted economies, businesses, sales practices, supply chains, and significantly impacted various countriesconsumer behavior around the world, includingworld. While the United Statesoverall 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 other marketsability of our Associates to hold sales meetings, required our Associates to share and sell our products in which USANA sells productsa predominantly virtual environment, resulted in cancellations of key Company events and has operations. Various policiestrips, required us to utilize a work-from-home strategy for all non-manufacturing and initiatives have been implemented,non-distribution employees, and continuerequired us to be utilized, around the world to reduce the spread of COVID-19, including work-from-home requirements or requests, shelter-in-place requirements, social distancing requirements, travel restrictions or banstemporarily close our walk-in and fulfillment locations in and to certain countries, the closure of retail stores, restaurants and other business establishments and the cancellation of major sporting and entertainment events. During the third quarter of 2020, many governments in thesome markets where we do business operated their respective economies on a partial or fully operating basis under new guidelineshave such properties. The pandemic has also affected our ability to timely obtain some ingredients and enhanced safety measures, including social distancing and face mask requirements or requests. However, certain markets, or different areas within a market, paused or reversed planspackaging as well as ship products to reopen their economies as COVID-19 continues to spread in various locations, including the United States, at an increased rate. Local, state and national governments also continue to emphasize the importance of overall health, wellness and nutrition during this pandemic and have allowed, and requested, that manufacturers of nutritional supplements and health food products, such as USANA, remain open to meet the needs of the general public. Consequently, as of the date of this report, we can report that (i) our manufacturing facilities in the U.S. and China continue to remain fully operational, (ii) we continue to sell and distribute products in each of our markets throughout the world, and (iii)some markets. While we have not experienced anya meaningful disruption to our world-wide supply chain though it is possible thatinterruption, our supply chain and logistics have incurred some disruption and we could experience more significant disruptions could occur ifor closures in the future. These factors and others related to the COVID-19 pandemic continueswill likely continue to impact markets around the world fornegatively affect our business throughout 2021 in a prolonged periodnumber of time.ways, including those described below.
● Our Workforce. The health and safety of our employees and customers around the world remains our top priority. We are alsoremain committed to being socially responsible as a corporate leader in each of our markets and doing our part to reduce the spread of COVID-19. As such, we are continuing to utilize a modified operating model in each of our markets as necessary to follow applicable guidelines from government and health officials. For instance, we are continuingWe 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 additionalapplicable health and safety guidelines. On top of our already high standards for safety and sanitation in manufacturing, we continue to utilize body temperature monitoring, social distancing, and mandatory use of face masks for employees and visitors at our facilities. We are also utilizingcontinuing to utilize flexible shift schedules, time and attendance policies, and sick-leave policies to promote health, wellness and safety. In nearly all ofWhere necessary in our international markets, we hadhave temporarily closed product will-call centers and were offeringcontinue to offer curbside delivery and subsidized shipping to customers. Additionally, weWe will continue to utilize a virtual events strategy to hold meetings and events with our Associates. These virtual meetings and events have allowed us to reach larger audiences in a safe and effective environment. Finally, our risk management team continues to monitor the rapidly evolving COVID-19 situation surrounding the pandemic and recommendimplement additional risk mitigation actions where necessary.
● Our Associate sales force also continues to utilize a virtual sales and operating strategy as a result of COVID-19. While manyOperations. All of our Associates have transitioned over the last several years to doing business online through social media, person-to-personproduction facilities remain operational under enhanced safety measures and face-to-face selling remains an important part of our business and of direct selling in general. In person selling and promotion of our products, however, has been challenging for our Associates due to the various guidelines and restrictions in place across all of our markets. Consequently, our Associates continue to conduct most of their business virtually. We continue to do what we can to assist our Associates in their efforts, including providing increased sales, technology and systems support in each of our markets.
While the overall impactas of the COVID-19 pandemic ondate of this report, we have not experienced meaningful disruptions to our consolidated results of operations for the three and nine months ended September 26, 2020 was not material, there continues to be uncertainty surrounding COVID-19 and its potential impact on our business and industry and on the citizens and economies in our various international markets.supply chain, shipping, or logistics. Although we have successfully modified our business operations in each of our markets to date, future efforts to reduce the spread of COVID-19 could stillmay negatively affect our momentum and operating results.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 however, remains the same and entails ourcontinues to entail efforts to safeguard against disruptions to our business, particularly through maintaining and operating (i) raw material procurement; (ii) manufacturing; (iii) distribution; (iv) selling; (v) operating cash flows and liquidity; (vi) Associate engagement and activity; and (vii) employee support and engagement.
While● 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,needs. Notwithstanding the foregoing, we cannot assure you that this will be the case due to the uncertainty surrounding the COVID-19 pandemic. Consequently, the impact from the COVID-19 pandemic on our business, financial condition or longer-term financial or operational results remains uncertain. However, we continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate at full strength during these uncertain times. 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. Based on the actions we have taken and our assumptions regarding the impact of COVID-19, we believe that our current financial resources and cash flows from operations are sufficient to fund our liquidity requirements.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. The CARES Act provides a substantial stimulus and assistance package intended to address the impact of the COVID-19 pandemic, including tax relief and government loans, grants and investments. The CARES Act did not have a material impact on our consolidated financial statements for the three and nine months ended September 26, 2020. We continue to monitor any effects that may result from the CARES Act.
Customers
Because we sell our products to a customer base of independent Associates and Preferred Customers, we increase our sales by increasing the number of our active Customers, the amount they spend on average, or both. Our primary focus continues to be increasing the number of active Customers. We believe this focus is consistent with our vision of improving the overall health and nutrition of individuals and families around the world. Sales to Associates account for approximately 58%56% of product sales during the ninethree months ended September 26, 2020;April 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-qualityhigh quality product offerings and the general public’s heightened awareness and understanding of the connection between diet and long-term health. Additionally, we believe that our Associate compensation plan and the general public’s growing desire for a secondary source of income and small business ownership are key to our ability to attract and retain Associates. We periodically make changes to our Compensation Plan in an effort to ensure that it is among the most competitive plans in the industry, to encourage behavior that we believe leads to a successful business for our Associates, and to ensure that our plan provides us with leverage to grow sales and earnings. Additionally, the initiatives we are executing under our customer experience social media, and social sharing strategiestechnology 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 ninethree months ended September 26, 2020.April 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 ninethree 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.
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 | Total Active Customers by Region | |||||||||||||||||||||||||||||||||||||||||||||||
As of | As of | Change from | Percent | As of | As of | Change from | Percent | |||||||||||||||||||||||||||||||||||||||||
September 26, 2020 | September 28, 2019 | Prior Year | Change | April 3, 2021 | March 28, 2020 | Prior Year | Change | |||||||||||||||||||||||||||||||||||||||||
Asia Pacific: | ||||||||||||||||||||||||||||||||||||||||||||||||
Greater China | 284,000 | 43.7 | % | 273,000 | 48.9 | % | 11,000 | 4.0 | % | 276,000 | 44.7 | % | 277,000 | 48.3 | % | (1,000 | ) | (0.4 | %) | |||||||||||||||||||||||||||||
Southeast Asia Pacific | 158,000 | 24.3 | % | 112,000 | 20.1 | % | 46,000 | 41.1 | % | 137,000 | 22.2 | % | 115,000 | 20.1 | % | 22,000 | 19.1 | % | ||||||||||||||||||||||||||||||
North Asia | 60,000 | 9.2 | % | 50,000 | 9.0 | % | 10,000 | 20.0 | % | 59,000 | 9.6 | % | 57,000 | 10.0 | % | 2,000 | 3.5 | % | ||||||||||||||||||||||||||||||
Asia Pacific Total | 502,000 | 77.2 | % | 435,000 | 78.0 | % | 67,000 | 15.4 | % | 472,000 | 76.5 | % | 449,000 | 78.4 | % | 23,000 | 5.1 | % | ||||||||||||||||||||||||||||||
Americas and Europe | 148,000 | 22.8 | % | 123,000 | 22.0 | % | 25,000 | 20.3 | % | 145,000 | 23.5 | % | 124,000 | 21.6 | % | 21,000 | 16.9 | % | ||||||||||||||||||||||||||||||
| 650,000 | 100.0 | % | 558,000 | 100.0 | % | 92,000 | 16.5 | % | 617,000 | 100.0 | % | 573,000 | 100.0 | % | 44,000 | 7.7 | % | |||||||||||||||||||||||||||||||
Non-GAAP Financial Measures
We believe that presentation of certainreport 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 information ismeasures 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 usefulresults 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 to discuss our financial results in a way wemeasures. 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 thus providingprovides 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 thirdfirst quarter of 20202021 increased 14.5%15.5% to $298.5$308.0 million, an increase of $37.9$41.4 million, compared with the prior-year quarter. This increase, was due to (i)in part, driven by a successful, short-term incentive program that we offered globally7.7% increase in active Customer growth during the quarter, and (ii) a successful market specific incentive program that we offered during the quarter. These incentive programs contributed to double-digit growth in active Customers in both our Asia Pacific region as well as in the Americas and Europe region. Additionally, favorable changes in currency exchange rates alsothat benefited net sales for the third quarter by $2.5$16.6 million.
Net earnings for the thirdfirst quarter of 20202021 were $30.5$30.6 million, an increase of 25.9%15.3% compared with $24.2$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.
Quarters Ended September 26,April 3, 2021 and March 28, 2020 and September 28, 2019
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 | Net Sales by Region | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Quarter Ended | Quarter Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
September 26, 2020 | September 28, 2019 | Change | Percent | Currency | Percent | April 3, 2021 | March 28, 2020 | Change from prior year | Percent change | Currency impact on sales | Percent change excluding currency impact | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Asia Pacific | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Greater China | $ | 136,013 | 45.5 | % | $ | 130,947 | 50.3 | % | $ | 5,066 | 3.9 | % | $ | 1,510 | 2.7 | % | $ | 148,978 | 48.4 | % | $ | 131,432 | 49.3 | % | $ | 17,546 | 13.3 | % | $ | 9,738 | 5.9 | % | ||||||||||||||||||||||||||||||||
Southeast Asia Pacific | 76,313 | 25.6 | % | 54,327 | 20.8 | % | 21,986 | 40.5 | % | 2,032 | 36.7 | % | 72,148 | 23.4 | % | 56,922 | 21.4 | % | 15,226 | 26.7 | % | 4,107 | 19.5 | % | ||||||||||||||||||||||||||||||||||||||||
North Asia | 28,969 | 9.7 | % | 23,299 | 8.9 | % | 5,670 | 24.3 | % | 145 | 23.7 | % | 30,165 | 9.8 | % | 27,251 | 10.2 | % | 2,914 | 10.7 | % | 1,853 | 3.9 | % | ||||||||||||||||||||||||||||||||||||||||
Asia Pacific Total | 241,295 | 80.8 | % | 208,573 | 80.0 | % | 32,722 | 15.7 | % | 3,687 | 13.9 | % | 251,291 | 81.6 | % | 215,605 | 80.9 | % | 35,686 | 16.6 | % | 15,698 | 9.3 | % | ||||||||||||||||||||||||||||||||||||||||
Americas and Europe | 57,218 | 19.2 | % | 52,025 | 20.0 | % | 5,193 | 10.0 | % | (1,167 | ) | 12.2 | % | 56,685 | 18.4 | % | 51,014 | 19.1 | % | 5,671 | 11.1 | % | 907 | 9.3 | % | |||||||||||||||||||||||||||||||||||||||
| $ | 298,513 | 100.0 | % | $ | 260,598 | 100.0 | % | $ | 37,915 | 14.5 | % | $ | 2,520 | 13.6 | % | $ | 307,976 | 100.0 | % | $ | 266,619 | 100.0 | % | $ | 41,357 | 15.5 | % | $ | 16,605 | 9.3 | % | |||||||||||||||||||||||||||||||||
Asia Pacific: The growth in this region was driven bycontinues to benefit from the momentum generated from a successful world-wideworldwide incentive program designed to further incent product sales to new customers.offered during the third quarter of 2020. The increase in constant currency net sales in Southeast Asia Pacific was driven primarily by Malaysia, the Philippines, and Malaysia,Singapore, which had local currency net sales growth of 99.5%46.5%, 28.9%, and 16.3%12.5% due to a 91.9%32.3%, 25.6%, and 25.0%18.2% increase in active Customers, respectively. In addition to the world-wideworldwide incentive program conducted during the third quarter of 2020, the Philippines was also bolstered byintroduced a market specific incentive program and continues to benefit from that was also designed to further incent sales growth.program.
The increase in constant currency net sales in Greater China was largely the result of sales growth inprimarily driven by China, wherewhich generated local currency net sales increased 3.2%growth of 8.1%, due to customary promotions that performed better in the current year quarter, as well as a 4.8%modest 0.4% increase in active Customers. The increase in constant currency net sales in North Asia was driven by South Korea which had local currency net sales growth of 23.1%2.5% due to an 18.8%a 3.6% increase in active Customers.
Americas and Europe: The growth in this region was drivenaided by the world-wideworldwide incentive program described above in this report. above.The increase in constant currency net sales in Americas and Europe was driven by local currency net sales growth in CanadaMexico and Mexico,the United States, which increased 21.4% and 38.1%, due to increases in active Customers of 12.5% and 39.1%, respectively. Additionally, Europe had constantgenerated local currency net sales growth of 58.2%33.5% and 6.6%, due to ana 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 66.7%57.1%.
Gross Profit
Gross profit decreased 60140 basis points to 81.1%81.3% of net sales, down from 81.7%82.7% in the prior-year quarter. This decrease can primarily be attributed to (i) a market specific product promotion offered during the current year quarter, (ii) a change in market sales mix, and (ii)(iii) higher relative shipping costs.costs due to COVID-19 related disruptions to our supply chain and logistics. These decreases were partially offset by (i) lower gross marginsfavorable changes in the prior-year quarter resulting from product promotions, (ii) lower scrap costs, and (iii) lower conversion costs as a result of higher production levels, mostly in China.currency exchange rates.
Associate Incentives
Associate incentives increased 13020 basis points to 43.9%43.7% of net sales for the thirdfirst quarter of 2020,2021, compared with 42.6%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 short-termmarket specific promotion in the prior-year quarter, (ii) lower spend on incentive programbased promotions offered during the current quarter, which was offset, in part, byand (iii) changes in market sales mix.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 340 basis points1.40% relative to net sales, and $600 thousandincreased $6.2 million in absolute terms. The relative improvement can be attributed to (i) leverage gained on higher sales, (ii) decreased event costsnet sales. The increased expense in absolute terms is due to moving several large events to a virtual platform,(i) higher employee related costs, and (iii) lower overall travel costs. The absolute decrease(ii) an increase in expense can be attributed to the aforementioned decreased event and travel costs, which wasvariable expenses associated with higher sales. These increases were partially offset by higher employeelower travel related costs.costs in the current quarter due to travel related COVID-19 restrictions compared with the prior-year quarter.
Income Taxes
Income taxes decreased to 31.1%30.9% of pre-tax earnings in the thirdfirst quarter of 2020,2021, down from 32.5%32.2% of pre-tax earnings in the prior-year quarter. The lower effective tax rate is due primarily to increased earnings in the U.S.,United States, which allowed for greater foreign tax credit utilization.
Diluted Earnings per Share
Diluted EPS increased 32.1%17.9% in the thirdfirst quarter of 20202021 to $1.45 as compared withto $1.23 reported in the prior-year quarter.quarter of 2020. This increase can be attributed to higher net earnings, andas well as, a lower diluted share count.
Nine Months Ended September 26, 2020 and September 28, 2019
Net Sales
The following table summarizes the changes in net sales by geographic region for the nine months ended as of the dates indicated:
Net Sales by Region | ||||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Nine Months Ended | ||||||||||||||||||||||||||||||||
September 26, 2020 | September 28, 2019 | Change from prior year | Percent change | Currency impact on sales | Percent change excluding currency impact | |||||||||||||||||||||||||||
Asia Pacific | ||||||||||||||||||||||||||||||||
Greater China | $ | 391,446 | 47.5 | % | $ | 404,046 | 51.2 | % | $ | (12,600 | ) | (3.1 | %) | $ | (6,073 | ) | (1.6 | %) | ||||||||||||||
Southeast Asia Pacific | 192,694 | 23.4 | % | 162,802 | 20.6 | % | 29,892 | 18.4 | % | (190 | ) | 18.5 | % | |||||||||||||||||||
North Asia | 82,072 | 10.0 | % | 68,102 | 8.6 | % | 13,970 | 20.5 | % | (2,520 | ) | 24.2 | % | |||||||||||||||||||
Asia Pacific Total | 666,212 | 80.9 | % | 634,950 | 80.4 | % | 31,262 | 4.9 | % | (8,783 | ) | 6.3 | % | |||||||||||||||||||
Americas and Europe | 157,911 | 19.1 | % | 154,654 | 19.6 | % | 3,257 | 2.1 | % | (3,587 | ) | 4.4 | % | |||||||||||||||||||
| $ | 824,123 | 100.0 | % | $ | 789,604 | 100.0 | % | $ | 34,519 | 4.4 | % | $ | (12,370 | ) | 5.9 | % | ||||||||||||||||
Asia Pacific: The growth in this region was driven by a world-wide incentive program described above in this report. The increase in constant currency net sales in Southeast Asia Pacific was driven primarily by the Philippines and Malaysia which had local currency net sales growth of 46.0% and 23.2% respectively due to an increase in active Customers of 91.9% and 25.0%. This was partially offset by a 5.7% local currency sales decline in Australia. In addition to the world-wide incentive program, the Philippines was also bolstered by a market specific incentive program described above in this report.
The decrease in constant currency net sales in Greater China was largely the result of a sales decline in Hong Kong, where local currency net sales decreased 22.5%. The increase in constant currency net sales in North Asia was driven by South Korea which had local currency net sales growth of 24.7% due to an 18.8% increase in active Customers.
Americas and Europe: The growth in this region was driven by a world-wide incentive program described above in this report. The increase in constant currency net sales in Americas and Europe was driven primarily by local currency net sales growth in Canada and Mexico, which increased 7.6% and 10.1%, due to increases in active Customers of 12.5% and 39.1%, respectively. Europe had constant currency net sales growth of 23.7% due to an increase in active Customers of 66.7%.
Gross Profit
Gross profit decreased 40 basis points to 81.8% of net sales for the first nine months of 2020, from 82.2% in the prior-year. This decrease can primarily be attributed to (i) changes in market sales mix, (ii) higher relative shipping costs, and (iii) higher production costs.
Associate Incentives
Associate incentives decreased 30 basis points to 43.4% of net sales for the first nine months of 2020, compared with 43.7% in the prior-year. The relative decrease can be attributed to (i) changes in market sales mix, and (ii) lower spending on Associate related incentive trips due to travel restrictions related to COVID-19. These decreases were partially offset by higher costs related to incentive programs during the current year period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 240 basis points relative to net sales and $10.7 million in absolute terms. The relative improvement can be attributed to (i) leverage gained on higher sales, and (ii) overall reduced expenses. The absolute decrease in expense can primarily be attributed to the impact of COVID-19, which has resulted in (i) decreased event costs due to moving several large events to virtual, and (ii) lower travel costs. The decrease was partially offset by higher employee related costs.
Income Taxes
Income taxes decreased to 31.1% of pre-tax earnings for the first nine months of 2020 compared to 33.4% of pre-tax earnings in the prior-year period. The lower effective tax rate is due primarily to increased earnings in the U.S., which allowed for greater foreign tax credit utilization.
Diluted Earnings per Share
Diluted EPS increased 32.9% in the first nine months of 2020 compared with the same period of the prior year. This increase can be attributed to higher net earnings and a lower diluted share count.
Liquidity and Capital Resources
We have historically met our working capital and capital expenditure requirements by using both net cash flow from operations and by drawing on our line of credit. Our principal source of liquidity is our operating cash flow. Although we are required to maintain cash deposits with banks in certain of our markets, there are currently no material restrictions on our ability to transfer and remit funds among our international markets. In China, however, our compliance with Chinese accounting and tax regulations promulgated by the State Administration of Foreign Exchange (“SAFE”) results in transfer and remittance of our profits and dividends from China to the United States on a delayed basis. If SAFE or other Chinese regulators introduce new regulations, or change existing regulations which allow foreign investors to remit profits and dividends earned in China to other countries, our ability to remit profits or pay dividends from China to the United States may be limited in the future.
We believe we have sufficient liquidity to satisfy our cash needs and expect to continue to fund our business with cash flow from operations. We continue, however, to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times. 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 mighthas the potential to affect our liquidity.
Cash and Cash Equivalents
Cash and cash equivalents increaseddecreased to $278.4$257.0 million at September 26, 2020,April 3, 2021, from $234.8$311.9 million at December 28, 2019. This increase is due primarily to cashJanuary 2, 2021. Cash flow provided by operations of $112.5operating activities generated $19.7 million during the ninethree months ended September 26, 2020. This increaseApril 3, 2021. The decrease in cash and cash equivalents was partially offset by (i)primarily due to cash used to repurchase and retire shares of our common stock totaling $57.0$69.5 million, which is comprised of $67.6 million cash and (ii) purchasesan accrual for unsettled trades of plant, property and equipment$1.8 million, which was settled subsequent to support in-house manufacturing of our food product line totaling $13.6 million.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) | Cash and cash equivalents | |||||||||||||||
As of | As of | (in Millions) | ||||||||||||||
September 26, | December 28, | As of | As of | |||||||||||||
2020 | 2019 | April 3, 2021 | January 2, 2021 | |||||||||||||
United States | $ | 128.2 | $ | 85.3 | $ | 39.5 | $ | 119.7 | ||||||||
China | 98.1 | 114.9 | 168.9 | 133.8 | ||||||||||||
All other markets | 52.1 | 34.7 | 48.6 | 58.4 | ||||||||||||
Total Cash and cash equivalents | $ | 278.4 | $ | 234.8 | $ | 257.0 | $ | 311.9 | ||||||||
Cash Flows Provided by Operations
We have historically generated positiveAs discussed above, our principal source of liquidity comes from our net cash flow due to ourflows from operations, which results from having a strong operating margins.margin. Net cash flowflows provided by operating activities totaled $112.5was $19.7 million infor the first ninethree months of 2020, which was up $41.5 million from $71.0 million in the first nine months2021. Net earnings combined with adjustments of 2019. The increase innon-cash items contributed to our net cash flows fromprovided 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 mainly driven by (i) higher sales$30.8 million for the first three months of 2020. Net earnings combined with an improvedadjustments of non-cash items contributed to our net cash flows provided by operating margin and (ii) higher accruals in the current period. These increases wereactivities, partially offset by (i) cash used to build up inventory levels to offset any potential disruptions in(i) payout the supply chain2019 annual employee bonus, and (ii) an increase in prepaid expenses.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.
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 2020 Form 10-K for the year ended December 28, 2019 (the “2019 Form 10-K”).10-K. Our significant accounting policies are disclosed in Note A to our Consolidated Financial Statements filed with our 20192020 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have no material changes to the disclosures on this matter made in our Annual Report on2020 Form 10-K for10-K. For a discussion of our exposure to market risk, refer to our market risk disclosures set forth in the year ended December 28, 2019.section entitled "Quantitative and Qualitative Disclosures About Market Risk" in the 2020 Form 10-K.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information that is required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods that are specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding any required disclosure. In designing and evaluating these disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
As of the end of the period covered by this report, our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial and Accounting Officer) evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a- 15(e) under the Exchange Act). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 26, 2020.April 3, 2021.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the fiscal quarter ended September 26, 2020April 3, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are a party to litigation and other proceedings that arise in the ordinary course of conducting business, including matters involving our products, intellectual property, supplier relationships, distributors, competitor relationships, employees and other matters.
Information with respect to our legal proceedings may be found in Note G to the Condensed Consolidated Financial Statements included in Item 1 Part I of this report on Form 10-Q.
Our business, results of operations, and financial condition are subject to various risks. These risks are described elsewhere in this Quarterly Report on Form 10-Q and our other filings with the SEC, including the 20192020 Form 10-K filed with. Except as provided below, the SEC on February 25, 2020. The risk factors identified in our 20192020 Form 10-K and our Form 10-Q for the quarter-ended March 28, 2020, have not changed in any material respect.
The transition away from and discontinuation of LIBOR and other interest rate benchmarks may have a negative impact on the calculation of interest rates under our Credit Agreement.
Interest rates under our Credit Agreement are based partly on LIBOR, the London interbank offered rate, which is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. ICE Benchmark Administration, the administrator of LIBOR, will cease the publication of certain tenors of U.S. dollar LIBOR after December 31, 2021, and plans to cease the publication of all other tenors of U.S. dollar LIBOR after June 30, 2023. It is unclear if new methods of calculating LIBOR will be established such that it continues to exist after 2023. The U.S. Federal Reserve has begun publishing a Secured Overnight Funding Rate, which is currently intended to serve as an alternative reference rate to LIBOR. If the method for calculation of LIBOR changes, if LIBOR is no longer available, or if lenders have increased costs due to changes in LIBOR, we may suffer from potential increases in interest rates on our borrowings. After the period covered by this Report on Form 10-Q, we entered into the 2021 Amendment of our Credit Agreement, which, among other things, amended the definition of “LIBOR Replacement Date,” “LIBOR Successor Rate,” and “Eurodollar Rate” used by the Credit Agreement. We will continue to monitor and evaluate the potential impact of the transition and discontinuation of LIBOR, if any, on our financial condition and operating results. A copy of the 2021 Amendment is filed as Exhibit 10.18 to this Report on Form 10-Q.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Our share repurchase plan has been ongoing since the fourth quarter of 2000, with the Board of Directors periodically approving additional dollar amounts for share repurchases under the plan. At April 3, 2021, the authorized amount available for repurchases under the plan was $80.5 million.
Repurchases are made from time to time at management’s discretion in accordance with applicable federal securities laws. Repurchases may occur through open market purchases, pursuant to a Rule 10b5-1 trading plan, or in other transactions as permitted by the rules of the SEC. There is no requirement for future share repurchases, and there is no expiration date of the repurchase plan.
The following table summarizes information relating to purchases of our common stock made by or on behalf of the Company during the quarter ended April 3, 2021.
Issuer Purchases of Equity Securities | ||||||||
(amounts in thousands, except per share data) | ||||||||
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||
Fiscal January | ||||||||
(Jan. 3, 2021 through Feb. 6, 2021) | 0 | $0.00 | 0 | $150,000 | ||||
Fiscal February | ||||||||
(Feb. 7, 2021 through Mar. 6, 2021) | 378 | $94.57 | 378 | $114,289 | ||||
Fiscal March | ||||||||
(Mar. 7, 2021 through Apr. 3, 2021) | 343 | $98.26 | 343 | $80,546 | ||||
721 | 721 | |||||||
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. MINE SAFETY DISCLOSURES
None.Not Applicable.
None.
Exhibits marked with an asterisk (*) are filed herewith.
Exhibit Number | Description |
| First Amendment to the Second Amended and Restated Credit Agreement dated as of | |
31.1 | |
31.2 | |
32.1 | |
32.2 | |
101.INS | Inline XBRL Instance Document |
101.SCH | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | Cover Page Interactive Data file (formatted as Inline XBRL and contained in Exhibit 101) |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 3, 2020May 11, 2021
USANA HEALTH SCIENCES, INC. | |
| |
/s/ G. Douglas Hekking | |
| G. Douglas Hekking |
| Chief Financial Officer (Principal Financial Officer) |