UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2019June 27, 2020
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 x 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 x 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 x | 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 x
TheIndicate the number of shares outstanding of each of the registrant’sissuer’s classes of common stock, as of November 1, 2019 was 21,643,055the latest practicable date: As of July 31, 2020, 21,020,007shares of common stock, $.001 par value, of the registrant were outstanding.
USANA HEALTH SCIENCES, INC.
FORM 10-Q
For the Quarterly Period Ended September 28, 2019June 27, 2020
INDEXTABLE OF CONTENTS
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Cautionary Note Regarding Forward-Looking Statements and Certain Risks | 1 | |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Cautionary Note Regarding Forward-Looking Statements and Certain Risks
This report 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”). 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 services or developments;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,” “goal,” “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.
Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projectedwe project or assumedassume in any of 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 SEC including our most recent Annual Report on Form 10-K.Securities and Exchange Commission (“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 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 or industry results to differ materially from estimates or projections contained in our forward-looking statements in this report include, among others, the following:
Our ability to attract and maintain a sufficient number of Associates and Preferred Customers;
Our dependence upon athe direct selling systembusiness 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 BabyCare;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;
Uncertainties relating to the interpretation and enforcement of applicable laws and regulations, particularly in the United States and China, governing direct selling and anti-pyramiding;
Our inability to obtain or maintain the necessary licenses for our direct selling business in China and elsewhere;
Adverse changes in the Chinese economy, marketplace in general, or consumer environment;
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;
General economic conditions, both domesticallyUncertainty related to the magnitude, scope and internationally;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;
The impact of changes in trade policies and tariffs;
Potential politicalPolitical 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;conditions, consumer spending or consumer behavior;
Potential effects of adverse publicity regarding USANA, nutritional supplements, orChanges to trade policies and tariffs, the direct selling industry;
Reliance on our key management personnel;
Extensive government regulation of our products, manufacturing, and direct selling business model;
Potential inability to sustain or manage growth, including the failure to continue to develop new products;
An increase in Associate incentives as a percentage of net revenues;
Our reliance on the use of information technology;
Disruption in operations or increased liability resulting from cybersecurity incidents, data breaches, or failure to comply with data privacy or data security laws and regulations;
The effects of competition from new as well as from established network and direct selling organizations in our key markets;
The adverse effect of the loss of a high-level sponsoring Associate, together with a group of leading Associates, in that person’s downline;
The loss of product market share or Associates to competitors;
Potential adverse effectsimpact of customs, duties, taxation, and transfer pricing regulations, includingas well as regulations governing distinctions between and our responsibilities to employees and independent contractors;
TheVolatile fluctuation in the value of foreign currencies against the U.S. dollar;
Our reliance on outside suppliers for raw materials and certain manufactured items;
Shortages of raw materials, that we usedisruptions in certainthe business of our products;contract manufacturers, significant price increases of key raw materials, and other disruptions to our supply chain, and;
Significant price increases of our key raw materials;
Product liability claims and other risks that may arise with our manufacturing activity;
Intellectual property risks;
Liability claims that may arise in connection with our “Athlete Guarantee” program;
ContinuedOur continued compliance with debt covenants;covenants in our credit facility.
Disruptions to shipping channels that are used to distribute our products to international warehouses;
The introduction of new lawsUnless otherwise indicated or changesotherwise required by the context, the terms “we,” “our,” “it,” “its,” “Company,” and “USANA” refer to existing laws, both domesticallyUSANA Health Sciences, Inc. and internationally; and
The outcome of the internal investigation into our China operations, as well as other regulatory and litigation matters.its subsidiaries.
PART I. FINANCIAL INFORMATION
Item 1. Financial StatementsFINANCIAL STATEMENTS
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
(unaudited)
As of | As of | As of | As of | |||||||||
December 29, | September 28, | June 27, | December 28, | |||||||||
2018 | 2019 | 2020 | 2019 | |||||||||
ASSETS | ||||||||||||
Current assets | ||||||||||||
Cash and cash equivalents | $ | 214,326 | $ | 182,748 | $ | 227,368 | $ | 234,830 | ||||
Securities held-to-maturity | 63,539 | — | ||||||||||
Inventories | 81,948 | 76,141 | 69,279 | 68,905 | ||||||||
Prepaid expenses and other current assets | 32,522 | 24,089 | 28,302 | 25,544 | ||||||||
Total current assets | 392,335 | 282,978 | 324,949 | 329,279 | ||||||||
Property and equipment, net | 92,025 | 91,515 | 98,435 | 95,233 | ||||||||
Goodwill | 16,815 | 16,456 | 16,521 | 16,636 | ||||||||
Intangible assets, net | 31,811 | 29,667 | 29,008 | 29,840 | ||||||||
Deferred tax assets | 3,348 | 5,267 | 3,741 | 3,090 | ||||||||
Other assets | 18,129 | 37,158 | 39,497 | 42,856 | ||||||||
$ | 554,463 | $ | 463,041 | $ | 512,151 | $ | 516,934 | |||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||
Current liabilities | ||||||||||||
Accounts payable | $ | 9,947 | $ | 8,605 | $ | 10,942 | $ | 12,525 | ||||
Other current liabilities | 138,739 | 121,041 | 128,775 | 123,573 | ||||||||
Total current liabilities | 148,686 | 129,646 | 139,717 | 136,098 | ||||||||
Deferred tax liabilities | 13,367 | 5,433 | 6,584 | 10,282 | ||||||||
Other long-term liabilities | 1,264 | 13,676 | 16,774 | 18,842 | ||||||||
Stockholders' equity | ||||||||||||
Common stock, $0.001 par value; Authorized -- 50,000 shares, | ||||||||||||
issued and outstanding 23,567 as of December 29, 2018 | ||||||||||||
and 21,631 as of September 28, 2019 | 24 | 22 | ||||||||||
issued and outstanding 21,017 as of June 27, 2020 | ||||||||||||
and 21,655 as of December 28, 2019 | 21 | 22 | ||||||||||
Additional paid-in capital | 72,008 | 56,893 | 55,526 | 59,445 | ||||||||
Retained earnings | 329,501 | 275,392 | 312,659 | 306,146 | ||||||||
Accumulated other comprehensive income (loss) | (10,387) | (18,021) | (19,130) | (13,901) | ||||||||
Total stockholders' equity | 391,146 | 314,286 | 349,076 | 351,712 | ||||||||
$ | 554,463 | $ | 463,041 | $ | 512,151 | $ | 516,934 | |||||
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 | Six Months Ended | |||||||||||||||||||||
September 29, | September 28, | September 29, | September 28, | June 27, | June 29, | June 27, | June 29, | |||||||||||||||||
2018 | 2019 | 2018 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||
Net sales | $ | 296,767 | $ | 260,598 | $ | 890,225 | $ | 789,604 | $ | 258,991 | $ | 256,016 | $ | 525,610 | $ | 529,006 | ||||||||
Cost of sales | 51,877 | 47,819 | 151,243 | 140,214 | 47,674 | 46,494 | 93,733 | 92,395 | ||||||||||||||||
Gross profit | 244,890 | 212,779 | 738,982 | 649,390 | 211,317 | 209,522 | 431,877 | 436,611 | ||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Associate incentives | 130,264 | 111,059 | 392,416 | 345,100 | 110,852 | 111,511 | 226,921 | 234,041 | ||||||||||||||||
Selling, general and administrative | 69,112 | 66,262 | 206,781 | 202,671 | 60,879 | 66,854 | 126,358 | 136,409 | ||||||||||||||||
Total operating expenses | 199,376 | 177,321 | 599,197 | 547,771 | 171,731 | 178,365 | 353,279 | 370,450 | ||||||||||||||||
Earnings from operations | 45,514 | 35,458 | 139,785 | 101,619 | 39,586 | 31,157 | 78,598 | 66,161 | ||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||
Interest income | 1,269 | 966 | 3,140 | 3,751 | 435 | 1,301 | 1,419 | 2,785 | ||||||||||||||||
Interest expense | (8) | (22) | (27) | (44) | (217) | (10) | (238) | (22) | ||||||||||||||||
Other, net | (249) | (514) | (851) | (632) | 175 | 64 | (637) | (118) | ||||||||||||||||
Other income (expense), net | 1,012 | 430 | 2,262 | 3,075 | 393 | 1,355 | 544 | 2,645 | ||||||||||||||||
Earnings before income taxes | 46,526 | 35,888 | 142,047 | 104,694 | 39,979 | 32,512 | 79,142 | 68,806 | ||||||||||||||||
Income taxes | 15,486 | 11,666 | 48,154 | 34,922 | 12,002 | 11,134 | 24,613 | 23,256 | ||||||||||||||||
Net earnings | $ | 31,040 | $ | 24,222 | $ | 93,893 | $ | 69,772 | $ | 27,977 | $ | 21,378 | $ | 54,529 | $ | 45,550 | ||||||||
Earnings per common share | ||||||||||||||||||||||||
Basic | $ | 1.28 | $ | 1.09 | $ | 3.88 | $ | 3.04 | $ | 1.33 | $ | 0.92 | $ | 2.56 | $ | 1.95 | ||||||||
Diluted | $ | 1.24 | $ | 1.09 | $ | 3.80 | $ | 3.01 | $ | 1.32 | $ | 0.91 | $ | 2.56 | $ | 1.93 | ||||||||
Weighted average common shares outstanding | ||||||||||||||||||||||||
Basic | 24,269 | 22,180 | 24,179 | 22,969 | 21,034 | 23,245 | 21,265 | 23,364 | ||||||||||||||||
Diluted | 25,001 | 22,223 | 24,705 | 23,173 | 21,129 | 23,370 | 21,340 | 23,648 | ||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||
Net earnings | $ | 31,040 | $ | 24,222 | $ | 93,893 | $ | 69,772 | $ | 27,977 | $ | 21,378 | $ | 54,529 | $ | 45,550 | ||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||
Foreign currency translation adjustment | (6,381) | (6,186) | (10,087) | (7,004) | 1,861 | (5,592) | (4,376) | (818) | ||||||||||||||||
Tax benefit (expense) related to foreign currency | ||||||||||||||||||||||||
translation adjustment | 344 | 422 | 1,612 | (630) | (1,892) | 242 | (853) | (1,052) | ||||||||||||||||
Other comprehensive income (loss), net of tax | (6,037) | (5,764) | (8,475) | (7,634) | (31) | (5,350) | (5,229) | (1,870) | ||||||||||||||||
Comprehensive income | $ | 25,003 | $ | 18,458 | $ | 85,418 | $ | 62,138 | $ | 27,946 | $ | 16,028 | $ | 49,300 | $ | 43,680 | ||||||||
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 nine months ended September 29, 2018 | ||||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||||||||||||
Common Stock | Paid-in | Retained | Comprehensive | |||||||||||||||||||||||||||||||
Shares | Value | Capital | Earnings | Income (Loss) | Total | |||||||||||||||||||||||||||||
Balance at December 30, 2017 | 24,024 | $ | 24 | $ | 76,542 | $ | 288,070 | $ | (1,426) | $ | 363,210 | |||||||||||||||||||||||
Cumulative effect of accounting change | 994 | 994 | ||||||||||||||||||||||||||||||||
Balance after cumulative effect of accounting change | 24,024 | 24 | 76,542 | 289,064 | (1,426) | 364,204 | ||||||||||||||||||||||||||||
Net earnings | 93,893 | 93,893 | ||||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of tax | (8,475) | (8,475) | ||||||||||||||||||||||||||||||||
Equity-based compensation expense | 11,026 | 11,026 | ||||||||||||||||||||||||||||||||
Common stock repurchased and retired | (217) | — | (4,883) | (20,707) | (25,590) | |||||||||||||||||||||||||||||
Common stock issued under equity award plans | 394 | — | — | |||||||||||||||||||||||||||||||
Tax withholding for net-share settled equity awards | (376) | (376) | ||||||||||||||||||||||||||||||||
Disgorgement of short-swing stock profits | 907 | 907 | ||||||||||||||||||||||||||||||||
Balance at September 29, 2018 | 24,201 | $ | 24 | $ | 83,216 | $ | 362,250 | $ | (9,901) | $ | 435,589 | |||||||||||||||||||||||
For the nine months ended September 28, 2019 | ||||||||||||||||||||||||||||||||||
For six months ended June 29, 2019 | ||||||||||||||||||||||||||||||||||
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 | 23,567 | $ | 24 | $ | 72,008 | $ | 329,501 | $ | (10,387) | $ | 391,146 | ||||||||||||
Net earnings | 69,772 | 69,772 | 45,550 | 45,550 | ||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of tax | (7,634) | (7,634) | (1,870) | (1,870) | ||||||||||||||||||||||||||||||
Equity-based compensation expense | 12,684 | 12,684 | 8,601 | 8,601 | ||||||||||||||||||||||||||||||
Common stock repurchased and retired | (2,009) | (2) | (26,117) | (123,881) | (150,000) | (651) | (1) | (10,115) | (47,507) | (57,623) | ||||||||||||||||||||||||
Common stock issued under equity award plans | 73 | — | — | 64 | — | — | ||||||||||||||||||||||||||||
Tax withholding for net-share settled equity awards | (1,682) | (1,682) | (1,648) | (1,648) | ||||||||||||||||||||||||||||||
Balance at September 28, 2019 | 21,631 | $ | 22 | $ | 56,893 | $ | 275,392 | $ | (18,021) | $ | 314,286 | |||||||||||||||||||||||
Balance at June 29, 2019 | 22,980 | $ | 23 | $ | 68,846 | $ | 327,544 | $ | (12,257) | $ | 384,156 | |||||||||||||||||||||||
For six months ended June 27, 2020 | ||||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||||||||||||
Common Stock | Paid-in | Retained | Comprehensive | |||||||||||||||||||||||||||||||
Shares | Value | Capital | Earnings | Income (Loss) | Total | |||||||||||||||||||||||||||||
Balance at December 28, 2019 | 21,655 | $ | 22 | $ | 59,445 | $ | 306,146 | $ | (13,901) | $ | 351,712 | |||||||||||||||||||||||
Net earnings | 54,529 | 54,529 | ||||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of tax | (5,229) | (5,229) | ||||||||||||||||||||||||||||||||
Equity-based compensation expense | 6,991 | 6,991 | ||||||||||||||||||||||||||||||||
Common stock repurchased and retired | (785) | (1) | (9,012) | (48,016) | (57,029) | |||||||||||||||||||||||||||||
Common stock issued under equity award plans | 147 | — | — | |||||||||||||||||||||||||||||||
Tax withholding for net-share settled equity awards | (1,898) | (1,898) | ||||||||||||||||||||||||||||||||
Balance at June 27, 2020 | 21,017 | $ | 21 | $ | 55,526 | $ | 312,659 | $ | (19,130) | $ | 349,076 | |||||||||||||||||||||||
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 29, 2018 | ||||||||||||||||||||||||||||||||||
For the three months ended June 29, 2019 | ||||||||||||||||||||||||||||||||||
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 June 30, 2018 | 24,220 | $ | 24 | $ | 83,542 | $ | 349,579 | $ | (3,864) | $ | 429,281 | |||||||||||||||||||||||
Balance at March 30, 2019 | 23,335 | $ | 23 | $ | 69,100 | $ | 329,001 | $ | (6,907) | $ | 391,217 | |||||||||||||||||||||||
Net earnings | 31,040 | 31,040 | 21,378 | 21,378 | ||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of tax | (6,037) | (6,037) | (5,350) | (5,350) | ||||||||||||||||||||||||||||||
Equity-based compensation expense | 3,968 | 3,968 | 4,769 | 4,769 | ||||||||||||||||||||||||||||||
Common stock repurchased and retired | (178) | — | (4,278) | (18,369) | (22,647) | (367) | — | (4,788) | (22,835) | (27,623) | ||||||||||||||||||||||||
Common stock issued under equity award plans | 159 | — | — | 12 | — | — | ||||||||||||||||||||||||||||
Tax withholding for net-share settled equity awards | (16) | (16) | (235) | (235) | ||||||||||||||||||||||||||||||
Balance at September 29, 2018 | 24,201 | $ | 24 | $ | 83,216 | $ | 362,250 | $ | (9,901) | $ | 435,589 | |||||||||||||||||||||||
Balance at June 29, 2019 | 22,980 | $ | 23 | $ | 68,846 | $ | 327,544 | $ | (12,257) | $ | 384,156 | |||||||||||||||||||||||
For the three months ended September 28, 2019 | ||||||||||||||||||||||||||||||||||
For the three months ended June 27, 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 June 29, 2019 | 22,980 | $ | 23 | $ | 68,846 | $ | 327,544 | $ | (12,257) | $ | 384,156 | |||||||||||||||||||||||
Balance at March 28, 2020 | 20,995 | $ | 21 | $ | 52,004 | $ | 284,682 | $ | (19,099) | $ | 317,608 | |||||||||||||||||||||||
Net earnings | 24,222 | 24,222 | 27,977 | 27,977 | ||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of tax | (5,764) | (5,764) | (31) | (31) | ||||||||||||||||||||||||||||||
Equity-based compensation expense | 4,083 | 4,083 | 3,597 | 3,597 | ||||||||||||||||||||||||||||||
Common stock repurchased and retired | (1,358) | (1) | (16,002) | (76,374) | (92,377) | |||||||||||||||||||||||||||||
Common stock issued under equity award plans | 9 | — | — | 22 | — | — | ||||||||||||||||||||||||||||
Tax withholding for net-share settled equity awards | (34) | (34) | (75) | (75) | ||||||||||||||||||||||||||||||
Balance at September 28, 2019 | 21,631 | $ | 22 | $ | 56,893 | $ | 275,392 | $ | (18,021) | $ | 314,286 | |||||||||||||||||||||||
Balance at June 27, 2020 | 21,017 | $ | 21 | $ | 55,526 | $ | 312,659 | $ | (19,130) | $ | 349,076 | |||||||||||||||||||||||
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 | Six Months Ended | |||||||||||
September 29, | September 28, | June 27, | June 29, | |||||||||
2018 | 2019 | 2020 | 2019 | |||||||||
Cash flows from operating activities | ||||||||||||
Net earnings | $ | 93,893 | $ | 69,772 | $ | 54,529 | $ | 45,550 | ||||
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities | ||||||||||||
Depreciation and amortization | 12,734 | 11,187 | 7,044 | 7,654 | ||||||||
Right-of-use asset amortization | — | 6,095 | 4,355 | 3,977 | ||||||||
(Gain) loss on sale of property and equipment | 1,804 | 37 | 116 | 26 | ||||||||
Equity-based compensation expense | 11,026 | 12,684 | 6,991 | 8,601 | ||||||||
Deferred income taxes | (3,524) | (10,634) | (5,326) | (10,722) | ||||||||
(Gain) loss on impairment on note receivable | (658) | — | ||||||||||
Changes in operating assets and liabilities: | ||||||||||||
Inventories | (21,938) | 3,861 | (1,950) | (6,026) | ||||||||
Prepaid expenses and other assets | (2,396) | 8,071 | (4,890) | 3,334 | ||||||||
Accounts payable | 2,855 | (1,248) | (1,120) | 1,379 | ||||||||
Other liabilities | 17,897 | (28,832) | 3,675 | (33,094) | ||||||||
Net cash provided by (used in) operating activities | 111,693 | 70,993 | 63,424 | 20,679 | ||||||||
Cash flows from investing activities | ||||||||||||
Receipts on notes receivable | 4,801 | 145 | 179 | 92 | ||||||||
Proceeds from the settlement of net investment hedges | 739 | 1,936 | 1,935 | 1,936 | ||||||||
Payments for net investment hedge | — | (1,660) | (1,089) | (1,660) | ||||||||
Purchases of investment securities held-to-maturity | (81,673) | — | ||||||||||
Maturities of investment securities held-to-maturity | — | 63,539 | — | 60,540 | ||||||||
Proceeds from sale of property and equipment | 381 | 11 | — | 6 | ||||||||
Purchases of property and equipment | (8,862) | (11,372) | (10,821) | (7,130) | ||||||||
Net cash provided by (used in) investing activities | (84,614) | 52,599 | (9,796) | 53,784 | ||||||||
Cash flows from financing activities | ||||||||||||
Repurchase of common stock | (25,590) | (150,000) | (57,029) | (57,623) | ||||||||
Proceeds from disgorgement of short-swing stock profits | 907 | — | ||||||||||
Borrowings on line of credit | — | 5,000 | 60,000 | 5,000 | ||||||||
Payments on line of credit | — | (5,000) | (60,000) | (5,000) | ||||||||
Payments related to tax withholding for net-share settled equity awards | (376) | (1,682) | (1,898) | (1,648) | ||||||||
Deferred debt issuance costs | — | (65) | ||||||||||
Net cash provided by (used in) financing activities | (25,059) | (151,747) | (58,927) | (59,271) | ||||||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (9,784) | (3,523) | ||||||||||
Net increase (decrease) in cash, cash equivalents and restricted cash | (7,764) | (31,678) | ||||||||||
Cash, cash equivalents, and restricted cash, at beginning of period | 250,535 | 217,234 | ||||||||||
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (2,195) | 1,839 | ||||||||||
Net increase (decrease) in cash, cash equivalents, and restricted cash | (7,494) | 17,031 | ||||||||||
Cash, cash equivalents, and restricted cash at beginning of period | 237,688 | 217,234 | ||||||||||
Cash, cash equivalents, and restricted cash at end of period | $ | 242,771 | $ | 185,556 | $ | 230,194 | $ | 234,265 | ||||
Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets | ||||||||||||
Cash and equivalents | $ | 239,751 | $ | 182,748 | ||||||||
Restricted cash included in prepaid expenses and other current assets | 108 | — | ||||||||||
Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets | Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets | |||||||||||
Cash and cash equivalents | $ | 227,368 | $ | 231,353 | ||||||||
Restricted cash included in other assets | 2,912 | 2,808 | 2,826 | 2,912 | ||||||||
Total cash, cash equivalents, and restricted cash | $ | 242,771 | $ | 185,556 | $ | 230,194 | $ | 234,265 | ||||
Supplemental disclosures of cash flow information | ||||||||||||
Cash paid during the period for: | ||||||||||||
Interest | $ | 5 | $ | 10 | $ | 199 | $ | 7 | ||||
Income taxes | 59,244 | 45,666 | 30,866 | 35,149 | ||||||||
Cash received during the period for: | ||||||||||||
Income tax refund | 2,451 | 5,432 | 42 | 5,169 | ||||||||
Non-cash operating activities: | ||||||||||||
Non-cash investing and financing activities: | ||||||||||||
Right-of-use assets obtained in exchange for lease obligations | — | 25,872 | 1,151 | 22,926 | ||||||||
Non-cash investing activities: | ||||||||||||
Accrued purchases of property and equipment | 50 | 223 | 613 | 659 | ||||||||
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, science-based nutritional and personal care and skincare products that are sold internationally through a global network marketing system, which is a form of direct selling. The Condensed Consolidated Financial Statements (the “Financial Statements”) include the accounts and operations of USANA Health Sciences, Inc., a Utah corporation and its wholly-owned subsidiaries (collectively, the “Company” or “USANA”) in 2 geographic regions: (1) Asia Pacific, and (2) Americas and Europe. Asia Pacific is further divided into 3 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 includes- Hong Kong, Taiwan, and China; China. The Company’s business in China is conducted by BabyCare Holdings, Ltd., the Company’s wholly-owned subsidiary.
(ii)Southeast Asia Pacific includes– Australia, New Zealand, Singapore, Malaysia, the Philippines, Thailand and Indonesia; Indonesia.
(iii)North Asia includes– Japan and South Korea.
(2)Americas and Europe includes the– United States, Canada, Mexico, Colombia, the United Kingdom, France, Germany, Spain, Italy, Romania, Belgium,, and the Netherlands. All intercompany accounts and transactions have been eliminated in consolidation.
The condensed consolidated balance sheet as of December 29, 2018,28, 2019, 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 Securities and Exchange Commission (“SEC”).SEC. Accordingly, certain information and footnote disclosures that are normally included in financial statements that have been 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 28, 2019June 27, 2020 and results of operations for Septemberthe three and six months ended June 27, 2020 and June 29, 2018 and September 28, 2019.
The interim Financial 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 29, 2018.28, 2019. The results of operations for the three and ninesix months ended September 28, 2019,June 27, 2020, are not necessarily indicative of the results that may be expected for the fiscal year ending December 28, 2019.
Recent Accounting Pronouncements
Adopted accounting pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842).” ASU 2016-02 is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Additionally, the ASU requires disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. The update requires lessees to apply a modified retrospective approach for recognition and disclosure, beginning with the earliest period presented. In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842)”—Targeted Improvements, which allows an additional transition method to adopt the new lease standard at the adoption date, as compared to the beginning of the earliest period presented, and recognize a cumulative-effect adjustment to the beginning balance of retained earnings in the period of adoption.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE A – ORGANIZATION, CONSOLIDATION, AND BASIS OF PRESENTATIONJanuary 2, 2021.
The Company adopted Topic 842considered 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 the first quartera potential impairment of 2019, using the transition method per ASU 2018-11. Accordingly, all periods prior to December 30, 2018 were presented in accordance with the previous Topic 840, Leases,goodwill, indefinite-lived intangible assets, and no retrospective adjustments were made to the comparative periods presented. As a result of the adoptionlong-lived assets. Based on December 30, 2018,this assessment, the Company recorded operating lease right-of-use (“ROU”) assets of $19,671 and operating lease liabilities of $20,010 (ofconcluded that a triggering event has not occurred which $7,120 was current and $12,890 was non-current) on thewould require further impairment testing to be performed. The Company’s balance sheet for facility and equipment lease agreements. Additionally, the Company has prepaid land use rights related to production facilities in China of $6,853 thatoperations were reclassified to ROU assets. The Company utilized the incremental borrowing ratenot materially affected by COVID-19 for the remaining lease termthree and remaining minimum rental payments forsix months ended June 27, 2020. While the calculation of the lease liability at the adoption date. Consistent with the treatment under Topic 840, the Company has excluded the portion of fixed rental payments attributable to executory costs such as taxes, insurance and maintenance in the determination of the future minimum rental payments for purposes of calculation of the lease liability at the adoption date. The Company does not have significant finance leases.
As part of the adoption of Topic 842, the Company made the following practical expedient elections:
The Company elected the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs for all leases
The Company did not electincur significant disruptions to its operations during the hindsight practical expedient, for all leases.
The Company did not electthree and six months ended June 27, 2020 from COVID-19, it is unable at this time to predict the land easement practical expedient.
The adoption of Topic 842 had a material 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 Company’s consolidated balance sheets, but did not materially impact the Company’s consolidated statements of comprehensive income. The most significant changes to the consolidated balance sheets relate to the recognition of new ROU assets and lease liabilities for operating leases. The adoption of Topic 842 also had no material impact on operating, investing, or financing cash flows in the consolidated statement of cash flows. However, Topic 842 has affected the Company’s disclosures about noncash activities relating to the initial recognition of ROU assets and lease liabilities. Additionally, the Company’s lease-related disclosures have increased as a result of adoption. See Note B - Operating Leases for additional information regarding the Company’s lease policies under the new standard.
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 better aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To satisfy that objective, the amendments expand and refine hedge accounting for both non-financial and financial risk components, and align the recognition and presentation of the effectspandemic on all aspects of the hedging instrument and the hedged item in the financial statements. For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company adopted ASU 2017-12 during the quarter ended March 30, 2019 and the adoption of the standard did not have an impact on its consolidated financial statements.business.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE A – ORGANIZATION, CONSOLIDATION, AND BASIS OF PRESENTATION – CONTINUED
IssuedRecent Accounting Pronouncements
Adopted accounting pronouncements not yet adopted
In August 2018, the FASBFinancial Accounting Standards Board (“FASB”) issued ASUAccounting Standards Update (“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 UpdateASU 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. Early adoption is permitted. The Company does not expectadopted ASU 2018-13 during the first quarter of 2020 and the adoption of ASU 2018-13 willthe standard did not have a materialan 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 Generally Accepted Accounting Principles (“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 does not expect the adoption of ASU 2018-152020-04 will have a material impact on its 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 of ASU 2019-12 will have a material impact on its consolidated financial statements.
No other new accounting pronouncement issued or effective during the three and six months ended June 27, 2020 had, or is expected to have, a material impacton the Company’s condensed consolidated financial statements.
NOTE B – OPERATING LEASES
With the exception of the Company’s headquarters in Salt Lake City, Utah, and its facilities in New South Wales, Australia, and in Beijing, and Tianjin, China, the Company generally leases its facilities. Each of the facility lease agreements is a non-cancelable operating lease generally structured with renewal options and expires prior to or during 2026. In connection with the production facilities in Beijing and Tianjin, China, the Company has prepaid land use rights that are considered when applying the lease definition under the guidance for lease accounting. The Company utilizes equipment under non-cancelable operating leases, expiring through 2022.
At contract inception, the Company determines whether an arrangement is or contains a lease and whether the lease should be classified as an operating or a financing lease. A contract is or contains a lease if the contract conveys the right to control the use of the identified asset for a period of time in exchange for consideration. Control is determined based on the right to obtain all of the economic benefits from use of the identified asset and the right to direct the use of the identified asset. ROU assets for operating leases represent the right to use an underlying asset for the lease term, and operating lease liabilities represent the obligation to make lease payments.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE B – OPERATING LEASES – CONTINUED
Lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date for leases exceeding 12 months. Minimum lease payments include only the fixed lease component of the agreement, as well as any variable rate payments that depend on an index, initially measured using the index at the lease commencement date. Non-lease components are accounted for separately from the fixed lease component for all leases. Most of the Company’s leases do not provide an implicit rate that can readily be determined. Therefore, the applied discount rate is based on the Company’s incremental borrowing rate, which is determined using its credit rating and other information available as of the commencement date and is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. Lease terms may include options to renew when it is reasonably certain that the Company will exercise that option. The ROU asset is measured at the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received.
Operating lease expense is recognized on a straight-line basis over the lease term and is included in cost of sales and selling, general and administrative expense in the Company’s consolidated statements of comprehensive income. Leases with an initial term of 12 months or less are not recorded on the balance sheet, and the expense for these short-term leases is recognized on a straight-line basis over the lease term.
The Company monitors for events or changes in circumstances that require a reassessment of its leases. When a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying amount of the ROU asset unless doing so would reduce the ROU asset to an amount less than zero, in which case the remaining adjustment would be recorded in the consolidated statements of comprehensive income.
The following table summarizes the classification of lease assets and lease liabilities in the Company’s consolidated balance sheet:
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE B – OPERATING LEASES – CONTINUED
The following table presents supplemental lease information:
Quarter Ended | Nine Months Ended | |||||
September 28, | September 28, | |||||
2019 | 2019 | |||||
Lease cost | ||||||
Operating lease cost | $ | 2,153 | $ | 6,647 | ||
Total lease cost | $ | 2,153 | $ | 6,647 | ||
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The following table presents the maturity of the Company’s lease liabilities as of September 28, 2019.
Year ending | |||||
Remainder of 2019 | $ | 2,145 | |||
2020 | 7,659 | ||||
2021 | 5,115 | ||||
2022 | 2,241 | ||||
2023 | 1,650 | ||||
Thereafter | 2,609 | ||||
$ | 21,419 | ||||
Less: imputed interest | $ | (1,687) | |||
Present value | $ | 19,732 |
The future minimum commitments under operating leases at December 29, 2018 having a non-cancelable term in excess of one year as determined prior to the adoption of Topic 842 are as follows:
Year ending | ||
2019 | $ | 9,155 |
2020 | 6,146 | |
2021 | 3,825 | |
2022 | 1,962 | |
2023 | 1,464 | |
Thereafter | 2,514 | |
$ | 25,066 |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE C – 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 | |||||||||||||||||||||||
December 29, | Inputs | June 27, | Inputs | |||||||||||||||||||||
2018 | Level 1 | Level 2 | Level 3 | 2020 | Level 1 | Level 2 | Level 3 | |||||||||||||||||
Money market funds included in cash equivalents | $ | 129,449 | $ | 129,449 | $ | — | $ | — | $ | 149,307 | $ | 149,307 | $ | — | $ | — | ||||||||
Foreign currency contracts included in other current liabilities | (309) | — | (309) | — | (888) | — | (888) | — | ||||||||||||||||
$ | 129,140 | $ | 129,449 | $ | (309) | $ | — | $ | 148,419 | $ | 149,307 | $ | (888) | $ | — | |||||||||
Fair Value Measurements Using | Fair Value Measurements Using | |||||||||||||||||||||||
September 28, | Inputs | December 28, | Inputs | |||||||||||||||||||||
2019 | Level 1 | Level 2 | Level 3 | 2019 | Level 1 | Level 2 | Level 3 | |||||||||||||||||
Money market funds included in cash equivalents | $ | 129,116 | $ | 129,116 | $ | — | $ | — | $ | 180,032 | $ | 180,032 | $ | — | $ | — | ||||||||
Foreign currency contracts included in prepaid expenses and other current assets | 611 | — | 611 | — | ||||||||||||||||||||
Foreign currency contracts included in other current liabilities | (764) | — | (764) | — | ||||||||||||||||||||
$ | 129,727 | $ | 129,116 | $ | 611 | $ | — | $ | 179,268 | $ | 180,032 | $ | (764) | $ | — | |||||||||
There were 0 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 goodwill, intangible assets, property and equipment, and ROUlong-lived assets, are not required to be carried at fair value on a recurring basis. However, if certain triggering events occur (or tested at least annually for goodwill and indefinite-lived intangibles) such that a non-financial asset is required to be evaluated for impairment, an impairment charge is recordedrequired, a non-financial asset would be written down to reduce the carrying value to the fair value, if the carrying value exceeds the fair value. At December 29, 2018June 27, 2020 and SeptemberDecember 28, 2019, there were 0 non-financial assets measured at fair value on a non-recurring basis.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE C – FAIR VALUE MEASURES - CONTINUED
The Company’s financial instruments include cash equivalents, securities held-to-maturity (“HTM”), accounts receivable, restricted cash, notes receivable, 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.
Securities held-to-maturity consist of corporate bonds and commercial paper. The fair value of corporate bonds and commercial paper are priced using quoted market prices for similar instruments or non-binding market prices that are corroborated by observable market data, which is considered to be a Level 2 input. The carrying values of these corporate bonds and commercial paper approximate their fair values due to their short-term maturities.
NOTE D – INVESTMENTS
The carrying amount, gross unrealized holding gains, gross unrealized holding losses, and fair value of securities held-to-maturity by major security type and class of security were as follows:
As of December 29, 2018 | ||||||||||||
Amortized Cost | Unrecognized | Unrecognized | Estimated | |||||||||
Corporate bonds | $ | 57,554 | $ | 1 | $ | (46) | $ | 57,509 | ||||
Commercial Paper | 5,985 | — | — | 5,985 | ||||||||
Total HTM Securities | $ | 63,539 | $ | 1 | $ | (46) | $ | 63,494 | ||||
As of September 28, 2019, all HTM securities had matured and there was 0 balance.
NOTE EC – INVENTORIES
Inventories consist of the following:
December 29, | September 28, | June 27, | December 28, | |||||||||
2018 | 2019 | 2020 | 2019 | |||||||||
Raw materials | $ | 19,502 | $ | 22,332 | $ | 18,619 | $ | 15,879 | ||||
Work in progress | 14,485 | 13,956 | 8,420 | 12,111 | ||||||||
Finished goods | 47,961 | 39,853 | 42,240 | 40,915 | ||||||||
$ | 81,948 | $ | 76,141 | $ | 69,279 | $ | 68,905 | |||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE F – INTANGIBLE ASSETS
The Company performed its annual goodwill impairment test during the third quarter of 2019. 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.
The Company also performed its annual indefinite-lived intangible asset impairment test during the third quarter of 2019. The Company performed a qualitative assessment of the indefinite-lived intangible asset and determined that is 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 asset was recognized.
NOTE GD – 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 Otherthe “Other current liabilitiesliabilities” 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 | Six Months Ended | ||||||||||
June 27, | June 29, | June 27, | June 29, | ||||||||
2020 | 2019 | 2020 | 2019 | ||||||||
Other Revenue | $ | 978 | $ | 784 | $ | 1,977 | $ | 1,657 | |||
Disaggregation of revenue by geographicalgeographic region and major product line is included in Segment Information in Note L.I.
The following table provides information about contract liabilities from contracts with customers, including significant changes in the contract liabilities balances during the period.period:
December 29, | September 28, | June 27, | December 28, | |||||||||
2018 | 2019 | 2020 | 2019 | |||||||||
Contract liabilities at beginning of period | $ | 14,417 | $ | 15,055 | $ | 13,852 | $ | 15,055 | ||||
Increase due to deferral of revenue at period end | 15,055 | 14,023 | 15,972 | 13,852 | ||||||||
Decrease due to beginning contract liabilities recognized as revenue | (14,417) | (14,801) | (13,372) | (15,055) | ||||||||
Contract liabilities at end of period | $ | 15,055 | $ | 14,277 | $ | 16,452 | $ | 13,852 | ||||
NOTE HE – LINE OF CREDIT
The Company has a $75,000 line of credit (“Credit Agreement”) with Bank of America (“Bank”). Interest is computed at the Bank’s Prime Rate or a LIBOR-plus “Eurodollar” rate, adjusted by features specified in the Credit Agreement. The collateral for this line of credit is the pledge of the capital stock of certain subsidiaries of the Company, pursuant to a separate pledge agreement with the Bank. On February 19, 2016, the Company entered into an Amended and Restated Credit Agreement with the Bank, which extended the term of the Credit Agreement to April 27, 2021 and increased the Company’s consolidated rolling four-quarter adjusted EBITDA covenant to $100,000 or greater and its ratio of consolidated funded debt to adjusted EBITDA of equal to or less than 2.0 to 1.0 at the end of each quarter.
On July 15, 2019, the Company entered into a Third Amendment (the “Third Amendment”) to the Amended and Restated Credit Agreement.Agreement (the “Third Amendment”). The Third Amendment established a procedure for the Company to request an increase in the line of credit by an amount not to exceed $125,000 (up to $200,000 in the aggregate). The Company may make a maximum of 3 such requests in increments of at least $25,000 to the Bank. The Bank, at its election, will notify the Company whether or not it agrees to increase the line of credit and, if so, whether by an amount equal to or less than the amount requested by the Company. The line of credit will be automatically reduced to $100,000, as of September 30, 2020.
The adjusted EBITDA under the Credit Agreement is modified for certain non-cash expenses. Any existing bank guarantees are considered a reduction of the overall availability of credit and part of the covenant calculation under the Credit Agreement. This resulted in a $6,619 and $9,255 reduction in the available borrowing limit as of December 29, 2018 and September 28, 2019, respectively, due to existing normal course of business guarantees in certain markets.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE HE – LINE OF CREDIT –- CONTINUED
The adjusted EBITDA under the Credit Agreement is modified for certain non-cash expenses. Any existing bank guarantees are considered a reduction of the overall availability of credit and part of the covenant calculation under the Credit Agreement. This provision resulted in a reduction of $8,856 and $8,924 in the available borrowing limit as of June 27, 2020 and December 28, 2019, respectively, due to existing normal course of business guarantees in certain markets.
There was 0 outstanding debt on this line of credit at December 29, 2018 or at September 28, 2019.June 27, 2020. The Company will be required to pay any balance on this line of credit in full at the time of maturity in April 2021, unless the line of creditCredit Agreement is replaced or its terms are renegotiated.
NOTE IF – 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.
On February 7, 2017, the Company disclosed in a Current Report on Form 8-K filed with the SEC that it iswas conducting a voluntary internal investigation regarding its BabyCare operations in China. In connection with this investigation, the Company expects to continue to incur costs in conducting the on-going review and investigation, in responding to requests for information in connection with any government investigations and in defending any potential civil or governmental proceedings that may be instituted against it or any of its current or former officers or directors. In 2017, the Company voluntarily contacted the SEC and the United States Department of Justice (“DOJ”) to advise both agencies that an internal investigation was underway andunderway. The Company provided information to both agencies throughout the internal investigation. On June 24, 2020, the SEC informed the Company that it had closed its investigation and declined any enforcement action. The SEC stated that it had reached this conclusion based on a number of factors, including, but not limited to, the Company’s (i) prompt, voluntary self-disclosure of the matters underlying the investigation, (ii) thorough internal investigation, is substantially complete, however the Company continues to cooperate(iii) full cooperation with the SEC, and the United States Department of Justice. The Company cannot predict the duration, scope, or result of the investigation. One or more governmental actions could be instituted in respect(iv) remediation of the matters underlying the investigation. On June 26, 2020, the DOJ informed the Company by letter that areit had closed its investigation into this matter, noting the subject ofCompany’s cooperation during the internal investigation, and such actions, if brought, may result in judgments, settlements, fines, penalties, injunctions, cease and desist orders, criminal penalties, or other relief. investigation.
NOTE JG – 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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE J – DERIVATIVE FINANCIAL INSTRUMENTS - CONTINUED
The Company periodically uses derivative hedging instruments to hedge the foreign currency exposure of its net investment in its non U.S. subsidiaries designed to hedge a portion of the foreign currency exposure that arises on translation of the accounts of the 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 hedged investment in the subsidiary is either sold or substantially liquidated.
As of December 29, 2018, there were 0 derivatives outstanding for which the Company has applied hedge accounting. During the second quarter ofended June 27, 2020 and June 29, 2019, the Company settled a European option designated as a net investment hedge with a notional amount of $90,000 and $110,000, respectively. For the three and six months ended June 27, 2020 and June 29, 2019, the Company realized a net gain of $846 and $276, respectively, which is recorded to FCTA within AOCI. The Company assessed hedge effectiveness under the forward rate method, determining the hedging instrument was highly effective.
As of September 28, 2019,June 27, 2020, there were 0 derivatives outstanding for which the Company has applied hedge accounting.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE KH – COMMON STOCK AND EARNINGS PER SHARE
Basic earnings per share (“EPS”) are 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 are 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 | Six Months Ended | |||||||||||||||||||||
September 29, | September 28, | September 29, | September 28, | June 27, | June 29, | June 27, | June 29, | |||||||||||||||||
2018 | 2019 | 2018 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||
Net earnings available to common shareholders | $ | 31,040 | $ | 24,222 | $ | 93,893 | $ | 69,772 | $ | 27,977 | $ | 21,378 | $ | 54,529 | $ | 45,550 | ||||||||
Weighted average common shares outstanding - basic | 24,269 | 22,180 | 24,179 | 22,969 | 21,034 | 23,245 | 21,265 | 23,364 | ||||||||||||||||
Dilutive effect of in-the-money equity awards | 732 | 43 | 526 | 204 | 95 | 125 | 75 | 284 | ||||||||||||||||
Weighted average common shares outstanding - diluted | 25,001 | 22,223 | 24,705 | 23,173 | 21,129 | 23,370 | 21,340 | 23,648 | ||||||||||||||||
Earnings per common share from net earnings - basic | $ | 1.28 | $ | 1.09 | $ | 3.88 | $ | 3.04 | $ | 1.33 | $ | 0.92 | $ | 2.56 | $ | 1.95 | ||||||||
Earnings per common share from net earnings - diluted | $ | 1.24 | $ | 1.09 | $ | 3.80 | $ | 3.01 | $ | 1.32 | $ | 0.91 | $ | 2.56 | $ | 1.93 | ||||||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE K – COMMON STOCK AND EARNINGS PER SHARE - CONTINUED
Equity awards consisting of stock-settled stock appreciation rights and restricted stock 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 29, | September 28, | September 29, | September 28, | |||||||||
2018 | 2019 | 2018 | 2019 | |||||||||
— | 1,317 | 601 | 605 | |||||||||
Quarter Ended | Six Months Ended | |||||||||||
June 27, | June 29, | June 27, | June 29, | |||||||||
2020 | 2019 | 2020 | 2019 | |||||||||
284 | 392 | 550 | 248 | |||||||||
There were 0 shares repurchased during the quarter ended June 27, 2020. During the quarter ended September 29, 2018 and September 28,June 29, 2019, the Company repurchased and retired 178 shares and 1,358367 shares for $22,647 and $92,377, respectively,$27,623 under the Company’sits share repurchase plan.
During the ninesix months ended SeptemberJune 27, 2020 and June 29, 2018 and September 28, 2019, the Company repurchased and retired 217785 shares and 2,009651 shares for $25,590$57,029 and $150,000$57,623, respectively, under the Company’sits 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 28, 2019,June 27, 2020, the remaining authorized repurchase amount under the stock repurchase plan was $30,000.$72,971. There is no expiration date on the remaining approved repurchase amount and no requirement for future share repurchases.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE LI – SEGMENT INFORMATION
USANA operates as a direct selling company that develops, manufactures, and distributes high-quality nutritional and personal care and skincare products that are sold through a global network marketing system of independent distributors (“Associates”). The Company aggregates its operating segments into 1 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 | Six Months Ended | |||||||||||||
September 29, | September 28, | September 29, | September 28, | June 27, | June 29, | June 27, | June 29, | |||||||||
2018 | 2019 | 2018 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||
USANA® Nutritionals | 83% | 81% | 82% | 83% | 79% | 83% | 82% | 84% | ||||||||
USANA Foods | 9% | 9% | 9% | 8% | 12% | 9% | 10% | 8% | ||||||||
Personal care and Skincare | 7% | 9% | 8% | 8% | 8% | 7% | 7% | 7% | ||||||||
All Other | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 1% | ||||||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE L – SEGMENT INFORMATION – CONTINUED
Selected financial information for the Company is presented for 2 geographic regions: Asia Pacific (with 3 sub-regions), and Americas and Europe. Individual markets are categorized into these regions as follows:
Asia Pacific –
Greater China – Hong Kong, Taiwan and China. The Company’s business in China is conducted by BabyCare Holding, Ltd. (“BabyCare”), a wholly-owned subsidiary;
Southeast Asia Pacific – Australia, New Zealand, Singapore, Malaysia, the Philippines, Thailand, and Indonesia;
North Asia – Japan and South Korea
Americas and Europe – United States, Canada, Mexico, Colombia, the United Kingdom, France, Germany(1), Spain(1), Italy(1), Romania(1), Belgium, and the Netherlands
(1)The Company commenced operations in Germany, Spain, Italy, and Romania near the end of the second quarter of 2018.
Selected Financial Information
Financial information by geographic region is presented for the periods indicated below:
Quarter Ended | Nine Months Ended | Quarter Ended | Six Months Ended | |||||||||||||||||||||
September 29, | September 28, | September 29, | September 28, | June 27, | June 29, | June 27, | June 29, | |||||||||||||||||
2018 | 2019 | 2018 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||
Net Sales to External Customers | ||||||||||||||||||||||||
Asia Pacific | ||||||||||||||||||||||||
Greater China | $ | 160,932 | $ | 130,947 | $ | 486,581 | $ | 404,046 | $ | 124,001 | $ | 128,946 | $ | 255,433 | $ | 273,099 | ||||||||
Southeast Asia Pacific | 58,770 | 54,327 | 169,769 | 162,802 | 59,459 | 53,960 | 116,381 | 108,475 | ||||||||||||||||
North Asia | 19,899 | 23,299 | 56,969 | 68,102 | 25,852 | 22,575 | 53,103 | 44,803 | ||||||||||||||||
Asia Pacific Total | 239,601 | 208,573 | 713,319 | 634,950 | 209,312 | 205,481 | 424,917 | 426,377 | ||||||||||||||||
Americas and Europe | 57,166 | 52,025 | 176,906 | 154,654 | 49,679 | 50,535 | 100,693 | 102,629 | ||||||||||||||||
Consolidated Total | $ | 296,767 | $ | 260,598 | $ | 890,225 | $ | 789,604 | $ | 258,991 | $ | 256,016 | $ | 525,610 | $ | 529,006 | ||||||||
The following table provides further information on markets representing ten percent10% or more of consolidated net sales and long-lived assets, respectively:
Quarter Ended | Nine Months Ended | Quarter Ended | Six Months Ended | |||||||||||||||||||||
September 29, | September 28, | September 29, | September 28, | June 27, | June 29, | June 27, | June 29, | |||||||||||||||||
2018 | 2019 | 2018 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||
Net sales: | ||||||||||||||||||||||||
China | $ | 144,625 | $ | 115,424 | $ | 436,327 | $ | 355,571 | $ | 110,525 | $ | 112,775 | $ | 226,003 | $ | 240,147 | ||||||||
As of | As of | |||||||||||||||||||||||
December 29, | September 28, | June 27, | December 28, | |||||||||||||||||||||
2018 | 2019 | 2020 | 2019 | |||||||||||||||||||||
Long-lived assets: | ||||||||||||||||||||||||
China | $ | 89,509 | $ | 88,850 | $ | 87,845 | $ | 90,886 | ||||||||||||||||
United States | $ | 49,195 | $ | 52,448 | $ | 60,912 | $ | 54,809 | ||||||||||||||||
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 a readeran understanding of our Unaudited Condensed Consolidated Financial Statements and Notes thereto that are contained in this report, with a narrative from the perspective of management regarding theUSANA’s financial condition, results of operations and cash flows by reviewing certain key indicators and measures of USANA Health Sciences, Inc. and subsidiaries (“USANA”, the “performance from year to year.
Company”, “we”, “us”, or “our”).
The following discussion and analysis of our financial condition and results of operationsMD&A is presented in four sections:six sections as follows:
Overview
Trends Affecting Our Business – COVID-19
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 orof our Annual Report on Form 10-K for the year ended December 29, 2018,28, 2019, 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.
Overview
We develop and manufacture high-quality, science-based nutritional and personal care and skincare products that we distributeare 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 customerbase comprisesis primarily comprised of two types of customers: “Associates” and “Preferred Customers,” referred to together collectively in this report as “active Customers.” Our Associates also sell our products to retail customers andcustomers. 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 their personal use and are not permitted to resell or to distribute the products. As of September 28, 2019, we had approximately 558,000 active Customers worldwide. For purposes of this report, weWe only count as “active” thoseactive Customers of both typesthose Associates and Preferred Customers who have purchased products from us at any time during the most recent three-month period. As of June 27, 2020, we had approximately 599,000 active Customers worldwide.
We have ongoing operations in the following markets, which are grouped and presented in two geographic regions as follows:
(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;subsidiary.
(ii)Southeast Asia Pacific – Australia, New Zealand, Singapore, Malaysia, the Philippines, Thailand and Indonesia;Indonesia.
(iii)North Asia – Japan and South KoreaKorea.
(2)Americas and Europe – United States, Canada, Mexico, Colombia, the United Kingdom, France, Germany,(1), Spain,(1), Italy,(1), Romania,(1), Belgium, and the NetherlandsNetherlands.
(1) We commenced operations in Germany, Spain, Italy, and Romania near the end of the second quarter of 2018.
The following tables summarizetable 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 | Six Months Ended | |||||||
September 29, | September 28, | June 27, | June 29, | |||||
2018 | 2019 | 2020 | 2019 | |||||
Product Line | ||||||||
USANA® Nutritionals | ||||||||
Optimizers | 63% | 65% | ||||||
Essentials/CellSentials* | 17% | 19% | 19% | 19% | ||||
Optimizers | 65% | 64% | ||||||
USANA Foods | 9% | 8% | 10% | 8% | ||||
Personal care and Skincare | 8% | 8% | 7% | 7% | ||||
All Other | 1% | 1% | 1% | 1% | ||||
Key Product | ||||||||
USANA® Essentials/CellSentials | 11% | 12% | 12% | 12% | ||||
Proflavanol® | 11% | 11% | 11% | 11% | ||||
BiOmega-3™ | 14% | 13% | ||||||
Probiotic | 10% | 10% | ||||||
*Represents a product line consisting of multiple products, as opposed to the actual Essentials / CellSentials product.
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 six months ended June 27, 2020, net sales outside of the United States represented 90.4% 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 – COVID-19
On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic. COVID-19, which is believed to have originated in Wuhan City, China, has spread and significantly impacted various countries around the world, including the United States and the other markets in which USANA sells products and has operations. Various policies and initiatives have been implemented, and continue 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 bans 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 second quarter of 2020, many local, state and national governments began a phased reopening of their economies, which included a partial reopening of restaurants and retail establishments as well as increased travel. These reopenings have been carried out under new guidelines and enhanced safety measures, including continued social distancing and face mask requirements or requests. However, certain countries and states have paused or reversed plans 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) we have not experienced any meaningful disruption to our world-wide supply chain, though it is possible that disruptions could occur if the COVID-19 pandemic continues to impact markets around the world for a prolonged period of time.
The health and safety of our employees and customers around the world remains our top priority. We are also 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 continuing 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 additional 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 utilizing flexible shift schedules, time and attendance policies, and sick-leave policies to promote health, wellness and safety. In nearly all of our markets, we have also temporarily closed product will-call centers and are instead offering curbside delivery and subsidized shipping to customers. Finally, our risk management team continues to monitor the rapidly evolving COVID-19 situation and recommend additional risk mitigation actions where necessary.
Our Associate sales force has also modified their business operations as a result of COVID-19. While many of our Associates have transitioned over the last several years to doing business online through social media, person-to-person and face-to-face selling remains an important part of our business and of direct selling in general. Consequently, as a result of the social distancing and stay-at-home orders put in place across all of our markets, our Associates have also been required to modify their business practices to conduct the entirety 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 impact of the COVID-19 pandemic on our consolidated results of operations for the three and six months ended June 27, 2020 was not material, there continues to be uncertainty surrounding COVID-19 and its potential impact on our business, industry and the citizens and economies in our various international markets. 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 still affect our momentum and operating results in the second half of the year. 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 our 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 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, 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. For instance, we are taking action 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 six months ended June 27, 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 59% of product sales during the six months ended June 27, 2020; the remainder of our sales are to Preferred Customers. Increases or decreases in product sales are typically the result of variations in the volume of product sold relating to fluctuations in the number of active Customers purchasing our products. The number of active Associates and Preferred Customers is, therefore, used by management as a key non-financial indicator to evaluate our operational performance.
We believe that our ability to attract and retain active Customers is positively influenced by a number of factors, including our high-quality product offerings and the general public’s heightened awareness and understanding of the connection between diet and long-term health. Additionally, we believe that our Associate compensation plan and the general public’s growing desire for a secondary source of income and small business ownership are key to our ability to attract and retain Associates. We periodically make changes to our Compensation Plan in an effort to ensure that it is among the most competitive plans in the industry, to encourage behavior that we believe leads to a successful business for our Associates, and to ensure that our plan provides us with leverage to grow sales and earnings. Additionally, the initiatives we are executing under our customer experience, social media, and social sharing strategies are designed to promote active Customer growth.
To further support our Associates in building their businesses, we traditionally sponsor meetings and events throughout the year, which offer information about our products and our network marketing system. These meetings are 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. 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.
Because 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 six months we have operations in multiple markets, with saleschose to either cancel several of these types of meetings 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 byother Associate events, or change them to virtual events, as a weakeningresult of the U.S. dollarCOVID-19 pandemic. Additionally, upcoming Associate meetings and negatively by a strengtheningevents of the U.S. dollar. During the nine months ended September 28, 2019, net sales outside of the United States represented 90.1% 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.this nature have either been cancelled or changed to virtual events.
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 61% of product sales during the nine months ended September 28, 2019; 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.
The tablestable below summarizesummarizes the changes in our active Customer base by geographic region, rounded to the nearest thousand as of the dates indicated.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 29, 2018 | September 28, 2019 | Prior Year | Change | June 27, 2020 | June 29, 2019 | Prior Year | Change | |||||||||||||||
Asia Pacific: | ||||||||||||||||||||||
Greater China | 330,000 | 53.7% | 273,000 | 48.9% | (57,000) | (17.3%) | 278,000 | 46.4% | 278,000 | 50.1% | — | 0.0% | ||||||||||
Southeast Asia Pacific | 115,000 | 18.7% | 112,000 | 20.1% | (3,000) | (2.6%) | 129,000 | 21.5% | 108,000 | 19.4% | 21,000 | 19.4% | ||||||||||
North Asia | 39,000 | 6.3% | 50,000 | 9.0% | 11,000 | 28.2% | 56,000 | 9.4% | 47,000 | 8.5% | 9,000 | 19.1% | ||||||||||
Asia Pacific Total | 484,000 | 78.7% | 435,000 | 78.0% | (49,000) | (10.1%) | 463,000 | 77.3% | 433,000 | 78.0% | 30,000 | 6.9% | ||||||||||
Americas and Europe | 131,000 | 21.3% | 123,000 | 22.0% | (8,000) | (6.1%) | 136,000 | 22.7% | 122,000 | 22.0% | 14,000 | 11.5% | ||||||||||
615,000 | 100.0% | 558,000 | 100.0% | (57,000) | (9.3%) | 599,000 | 100.0% | 555,000 | 100.0% | 44,000 | 7.9% | |||||||||||
Non-GAAP Financial Measures
We believe that presentation of certain non-GAAP financial information is meaningful and useful 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 we believe 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 providing 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 and in the Notes to the Condensed Consolidated Financial Statements.within Results of Operations.
Results of Operations
Summary of Financial Results
Net sales for the thirdsecond quarter of 2019 decreased 12.2%2020 increased 1.2% to $260.6$259.0 million, a decreasean increase of $36.2$3.0 million, compared with the third quarter of 2018.prior-year quarter. This decreaseincrease was due in great part,primarily to (i) promotions offered during the continuing challenging consumer environment in China, which negatively impacted our ability to sell products and acquire new customers in this market,quarter and (ii)growth in active Customers during the quarter, due to double-digit customer growth in three-of-our-four regions. The increase was offset by the unfavorable impact of a strengthening U.S. dollar, which impacted net sales negatively by $6.0$8.1 million during the quarter.
We saw positive results around the world from product promotions and sales incentives that were offered during the quarter. We estimate that these promotions and incentives contributed approximately $16 million in sales to the quarter. Although net sales were down on a year-over-year basis, the foregoing efforts helped us generate modest growth in both net sales and active Customers on a sequential quarter basis.
Net earnings for the thirdsecond quarter of 20192020 were $24.2$28.0 million, a decreasean increase of 22.0%30.9% compared with $31.0$21.4 million during the prior-year period. The decreaseincrease in net earnings was mainly the result of lower net salesrelative ope,rating expenses and a reduced income tax rate.
and higher relative operating expenses.
Quarters Ended SeptemberJune 27, 2020 and June 29, 2018 and September 28, 2019
Net Sales
The following table summarizes the changes in our 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 29, 2018 | September 28, 2019 | Change | Percent | Currency | Percent | June 27, 2020 | June 29, 2019 | Change | Percent | Currency | Percent | |||||||||||||||||||||||||||
Asia Pacific | ||||||||||||||||||||||||||||||||||||||
Greater China | $ | 160,932 | 54.2% | $ | 130,947 | 50.3% | $ | (29,985) | (18.6%) | $ | (3,647) | (16.4%) | $ | 124,001 | 47.9% | $ | 128,946 | 50.3% | $ | (4,945) | (3.8%) | $ | (3,874) | (0.8%) | ||||||||||||||
Southeast Asia Pacific | 58,770 | 19.8% | 54,327 | 20.8% | (4,443) | (7.6%) | (428) | (6.8%) | 59,459 | 22.9% | 53,960 | 21.1% | 5,499 | 10.2% | (1,096) | 12.2% | ||||||||||||||||||||||
North Asia | 19,899 | 6.7% | 23,299 | 8.9% | 3,400 | 17.1% | (1,435) | 24.3% | 25,852 | 10.0% | 22,575 | 8.8% | 3,277 | 14.5% | (1,127) | 19.5% | ||||||||||||||||||||||
Asia Pacific Total | 239,601 | 80.7% | 208,573 | 80.0% | (31,028) | (12.9%) | (5,510) | (10.7%) | 209,312 | 80.8% | 205,481 | 80.2% | 3,831 | 1.9% | (6,097) | 4.8% | ||||||||||||||||||||||
Americas and Europe | 57,166 | 19.3% | 52,025 | 20.0% | (5,141) | (9.0%) | (450) | (8.2%) | 49,679 | 19.2% | 50,535 | 19.8% | (856) | (1.7%) | (1,999) | 2.3% | ||||||||||||||||||||||
$ | 296,767 | 100.0% | $ | 260,598 | 100.0% | $ | (36,169) | (12.2%) | $ | (5,960) | (10.2%) | $ | 258,991 | 100.0% | $ | 256,016 | 100.0% | $ | 2,975 | 1.2% | $ | (8,096) | 4.3% | |||||||||||||||
Asia Pacific: The decrease in constant currency net sales in Greater China was largely the result of a sales decline in Mainland China,Hong Kong, where local currency net sales decreased 17.8%.29.4% due to an 11.1% decrease in active Customers. The decreaseincrease in constant currency net sales in Southeast Asia Pacific resulted fromwas driven primarily by the Philippines and Malaysia, which had local currency net sales growth of 42.0% and 16.9% due to a 44.4% and 10.7% increase in active Customers, respectively. This was partially offset by a 10.4% local currency sales declinesdecline in several markets, including Australia New Zealand, and Singapore. Growthdue to a 9.5% decrease in active Customers. The increase in constant currency net sales in North Asia was driven by our performance in South Korea wherewhich had local currency net sales increased 26.4% and the numbergrowth of 20.1% due to a 20.0% increase in active Customers increased 29.7%.Customers.
Americas and Europe: Net sales in this region declined 8.2%The increase in constant currency duringnet sales in Americas and Europe was the current-year quarter, as a result of a 6.1% decreasemodest local currency sales growth in nearly all markets within this region. Canada and Mexico led the region in sales growth, which can be primarily attributed to an increase in active Customers. We are continuing to promote the various initiatives we launched in this region, on a trial basis, to address the sales decline. We also introduced additional promotions at our annual Global Convention held in the US, which are intended to generate customer growth. These initiatives have been introduced incrementallyCustomers of 4.9% and we expect that it will take time for our customers to fully adopt these initiatives.13.6%, respectively.
Gross Profit
Gross profit decreased 8020 basis points to 81.7%81.6% of net sales, for the third quarter of 2019,down from 82.5%81.8% in the prior yearprior-year quarter. This decrease can primarily be attributed to (i) higher relative freight costs due to will-call closures and subsidized shipping as a result of COVID-19, (ii) higher production costs, (iii) product promotions offered during the quarter, (ii) anand (iv) unfavorable changechanges in currency exchange rates, (iii) leverage lost on fixed period costs associated with lower sales, and (iv) lower sales in China, which has better overall gross margins compared to other markets.rates. These decreases were partially offset by lower scrap costs and the impact of annual price adjustments.costs.
Associate Incentives
Associate incentives decreased 80 basis points to 42.8% of net sales for the second quarter of 2020, compared with 43.6% in the prior-year quarter. The relative decrease can be attributed to product based promotions offered during the quarter as well as changes in market sales mix.
Selling, General and Administrative Expenses
In absolute terms, our selling, general and administrative expenses decreased $6.0 million. The decrease can primarily be attributed to the impact of COVID-19, which has resulted in (i) lower travel costs, (ii) benefits from temporary government stimulus programs, and (iii) decreased event costs.
Income Taxes
Income taxes decreased to 30.0% of pre-tax earnings in the second quarter of 2020, down from 34.2% of pre-tax earnings in the prior-year quarter. The lower effective tax rate is due primarily to certain discrete events as well as increased earnings in the U.S., which allowed for greater foreign tax credit utilization.
Associate Incentives
Associate incentives decreased 130 basis points to 42.6% of net sales for the third quarter of 2019, compared with 43.9% in the prior year. The relative decrease can be attributed to changes in market sales mix, product based promotions offered during the quarter, and annual price adjustments.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were up 210 basis points, to 25.4% of net sales, but down $2.9 million in absolute terms. The relative increase was primarily due to leverage lost on lower net sales compared to the prior-year quarter. The decrease in absolute terms is primarily attributed to lower employee related costs and a decrease in variable expenses.
Income Taxes
Income taxes were 32.5% of earnings in the third quarter of 2019 compared to 33.3% of earnings in the prior-year quarter. The lower effective tax rate for 2019 compared with 2018 is due to favorable movements in our excess foreign tax credit position and prior-year tax return true-up adjustments.
Diluted Earnings Perper Share
Diluted EPS decreased 12.1%increased 45.1% in the thirdsecond quarter of 2019 when2020 compared with the prior-year quarter. This decrease was dueincrease can be attributed to lowerhigher net earnings resulting from lower net sales. This decrease in diluted EPS was offset, in part, byand a lower diluted share count.
NineSix Months Ended SeptemberJune 27, 2020 and June 29, 2018 and September 28, 2019
Net Sales
The following table summarizes the changes in our net sales by geographic region for the fiscal periodssix months ended as of the dates indicated:
Net Sales by Region | Net Sales by Region | |||||||||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||
Nine Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||
September 29, 2018 | September 28, 2019 | Change | Percent | Currency | Percent | June 27, 2020 | June 29, 2019 | Change | Percent | Currency | Percent | |||||||||||||||||||||||||||
Asia Pacific | ||||||||||||||||||||||||||||||||||||||
Greater China | $ | 486,581 | 54.7% | $ | 404,046 | 51.2% | $ | (82,535) | (17.0%) | $ | (20,069) | (12.8%) | $ | 255,433 | 48.6% | $ | 273,099 | 51.6% | $ | (17,666) | (6.5%) | $ | (7,583) | (3.7%) | ||||||||||||||
Southeast Asia Pacific | 169,769 | 19.0% | 162,802 | 20.6% | (6,967) | (4.1%) | (4,812) | (1.3%) | 116,381 | 22.1% | 108,475 | 20.5% | 7,906 | 7.3% | (2,222) | 9.3% | ||||||||||||||||||||||
North Asia | 56,969 | 6.4% | 68,102 | 8.6% | 11,133 | 19.5% | (4,240) | 27.0% | 53,103 | 10.1% | 44,803 | 8.5% | 8,300 | 18.5% | (2,664) | 24.5% | ||||||||||||||||||||||
Asia Pacific Total | 713,319 | 80.1% | 634,950 | 80.4% | (78,369) | (11.0%) | (29,121) | (6.9%) | 424,917 | 80.8% | 426,377 | 80.6% | (1,460) | (0.3%) | (12,469) | 2.6% | ||||||||||||||||||||||
Americas and Europe | 176,906 | 19.9% | 154,654 | 19.6% | (22,252) | (12.6%) | (2,522) | (11.2%) | 100,693 | 19.2% | 102,629 | 19.4% | (1,936) | (1.9%) | (2,270) | 0.3% | ||||||||||||||||||||||
$ | 890,225 | 100.0% | $ | 789,604 | 100.0% | $ | (100,621) | (11.3%) | $ | (31,643) | (7.7%) | $ | 525,610 | 100.0% | $ | 529,006 | 100.0% | $ | (3,396) | (0.6%) | $ | (14,739) | 2.1% | |||||||||||||||
Asia Pacific: The decrease in constant currency net sales in Greater China was largely the result of a sales decline in both Mainland China and Hong Kong, where local currency net sales decreased 14.2%.2.5% and 26.0% respectively. The decreaseincrease in constant currency net sales in Southeast Asia Pacific resulted fromwas driven primarily by the Philippines and Malaysia and which had local currency net sales growth of 19.8% and 27.7% respectively due to an increase in active Customers of 44.4% and 10.7%. This was partially offset by a 9.3% local currency sales declinesdecline in several markets, including Australia Singapore, and New Zealand.due to a 9.5% decrease in active Customers. The decreasesincrease in this region were partially offset by localconstant currency net sales increases in Malaysia, Thailand, and the Philippines. Growth in North Asia was driven by our performance in South Korea wherewhich had local currency net sales increased 28.9% and the numbergrowth of 25.5% due to a 20.0% increase in active Customers increased 29.7%.Customers.
Americas and Europe: NetConstant currency net sales in this region declined 11.2%increased 0.3%, driven by modest growth in constant currency duringCanada, the first nine months of 2019. A 6.1% decrease in active CustomersU.S., and Europe, which was the primary driver of thepartially offset by a decline in net sales. During 2019, we have introduced a variety of new initiatives on a trial basislocal currency sales in the U.S. These initiatives, which are designed to generate customer growth, have been introduced incrementally and we expect that it will take time for our customers to fully adopt these initiatives. We have now introduced similar trial initiatives in various other markets in this region.Mexico.
Gross Profit
Gross profit decreased 8030 basis points to 82.2% of net sales for the first ninesix months of 2019,2020, from 83.0%82.5% in the prior year.prior-year. This decrease can primarily be attributed to (i) unfavorable changes in sales mix by market,higher production costs, (ii) an unfavorable change in currency exchange rates,product promotions offered during the first six months of 2020, (iii) leverage lost on fixed period higher relative freight costs due to will-call closures and (iv) higher conversion costssubsidized shipping as a result of lower production levels. These decreases were partially offset by lower scrap costsCOVID-19, and the impact of annual price adjustments.(iv) unfavorable changes in currency exchange rates.
Associate Incentives
Associate incentives decreased 40100 basis points to 43.7%43.2% of net sales for the first ninesix months of 2019,2020, compared with 44.1%44.2% in the prior year.prior-year. The relative decrease can be attributed to product based promotions offered during the first six months of 2020, changes in market sales mix.mix and annual price adjustments.
Selling, General and Administrative Expenses
Selling,In absolute terms, our selling, general and administrative expenses were up 250 basis points,decreased $10.1 million for the first six months of 2020, compared to 25.7% of net sales, but down $4.1 million in absolute terms.the prior-year. The decrease in absolute terms is primarilycan mainly be attributed to (i) lower variable expenses tied to Associate events that were cancelled or postponed due to COVID-19, (ii) lower employee related costs, and a decrease in variable(iii) lower travel related expenses.
Income Taxes
Income taxes were 33.4% of earnings in the first nine months of 2019 compared to 33.9%of earnings in the prior year. The lower effective tax rate for 2019 compared with 2018 is due to favorable movements in our excess foreign tax credit position and prior-year tax return true-up adjustments.
Income Taxes
Income taxes decreased to 31.1% of pre-tax earnings for the first six months of 2020 compared to 33.8% of pre-tax earnings in the prior-year period. The lower effective tax rate is due primarily to certain discrete events as well as increased earnings in the U.S., which allowed for greater foreign tax credit utilization.
Diluted Earnings Perper Share
Diluted EPS decreased 20.8%increased 32.6% in the first ninesix months of 2019 when2020 compared with the same period of the prior year. This decrease was dueincrease can be attributed to lowerhigher net earnings resulting from lower net sales. This decrease in diluted EPS was offset, in part, byand 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 periodically 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 typicallysufficient 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. Consequently, we are actively monitoring spending and taking action, when necessary, to align spending with sales performance. During the quarter we drew $60.0 million on our line of credit to ensure availability of additional liquidity, however, that amount was paid back by the end of the quarter. Subsequent to June 27, 2020, our board of directors will once again consider utilizing our share repurchase authorization to return value to shareholders.
Cash and Cash Equivalents
Cash and cash equivalents decreased to $227.4 million at June 27, 2020, from $234.8 million at December 28, 2019. This decrease is due primarily to (i) cash used to repurchase and retire shares of our common stock totaling $57.0 million and (ii) purchases of plant, property and equipment to support in-house manufacturing of our food product line. The decrease was partially offset by cash flow provided by operations of $63.4 million.
The following table below presents concentrations of cash and cash equivalents by market for the periods indicated:
Cash and cash equivalents | |||||
(in Millions) | |||||
As of | As of | ||||
June 27, | December 28, | ||||
2020 | 2019 | ||||
United States | $ | 108.4 | $ | 85.3 | |
China | 75.1 | 114.9 | |||
All other markets | 43.9 | 34.6 | |||
Total Cash and cash equivalents | $ | 227.4 | $ | 234.8 | |
Cash Flows Provided by Operations
We have historically generated positive cash flow due to our strong operating margins. Net cash flow fromprovided by operating activities totaled $71.0$63.4 million in the first ninesix months of 2019. Items increasing cash flows2020, which was up $42.7 million from operations in the first nine months of 2019 include: (i) net earnings, and (ii) adjustments of non-cash items. These increases were partially offset by cash paid to reduce accrued employee compensation costs and accrued Associate incentives.
Net cash flow from operating activities totaled $111.7$20.7 million in the first the ninesix months of 2018. Items increasing2019. The increase in cash flows from operationsoperating activities was mainly driven by (i) lower payments and higher accruals in the first nine months of 2018 include: (i)current year related to employee compensation costs, (ii) higher accruals for Associate incentives, and (iii) higher net earnings, and (ii) adjustments of non-cash items. These increases were partially offset by (i) cash used on inventories primarily attributed to our new Celavive® line, and (ii) tax payments.
Cash and cash equivalents at September 28, 2019, totaled $182.7 million of which, $63.8 million was held as cash and cash equivalents in the United States. Of the remaining $118.9 million held by our international subsidiaries, $85.1 million was concentrated in China. Cash and cash equivalents and securities held-to-maturity at December 29, 2018, totaled $277.9 million of which, $23.3 million was held as cash and cash equivalents and $63.5 million as securities held-to-maturity in the United States. Of the remaining $191.0 million held by our international subsidiaries, $157.3 million was held in China. Net working capital decreased to $153.3 million at September 28, 2019, from $243.6 million at December 29, 2018. The decrease in net working capital can primarily be attributed to the $150 million invested in our share repurchase program during the first nine months of 2019. Additionally, net working capital was reduced by $7.2 million due to the adoption of the new lease standard under Topic 842. (See, Note B to the Condensed Consolidated Financial Statements included in Item 1, Part I of this report.)earnings.
Line of Credit
Information with respect to our line of credit may be found in Note E 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 H 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 K to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this report and Part II, Item 2 of this report, under the heading “Purchases of Equity Securities by the Issuer and Affiliated Purchasers”.
Off-Balance Sheet Arrangements
None.
Summary
We believe our current cash balances, and investments, 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, 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 Form 10-K for the year ended December 29, 201828, 2019 (the “2018“2019 Form 10-K”). Our significant accounting policies are disclosed in Note A to our Consolidated Financial Statements filed with our 20182019 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
ThereWe have been no material changes fromto the information presenteddisclosures on this matter made in our Annual Report on Form 10-K for the year ended December 29, 2018.28, 2019.
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 28, 2019.June 27, 2020.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the fiscal quarter ended September 28, 2019June 27, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal ProceedingsLEGAL PROCEEDINGS
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 IF to the Condensed Consolidated Financial Statements included in Item 1 Part I of this report on Form 10-Q.
Item 1A. Risk FactorsRISK FACTORS
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 20182019 Form 10-K filed with the SEC on February 26, 2019.25, 2020. The risk factors identified in our 20182019 Form 10-K and our Form 10-Q for the quarter-ended SeptemberMarch 28, 2019,2020, have not changed in any material respect.
Item 2. Unregistered Sales of Equity Securities and Use of ProceedsUNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Purchases of Equity Securities by the Issuer and Affiliated PurchasersNone.
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 September 28, 2019, the authorized amount available for repurchases under the plan was $30 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 September 28, 2019.
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 July | ||||||||
(Jun. 30, 2019 through Aug. 3, 2019) | 726 | $67.97 | 726 | $73,051 | ||||
Fiscal August | ||||||||
(Aug. 4, 2019 through Aug. 31, 2019) | 632 | $68.12 | 632 | $30,000 | ||||
Fiscal September | ||||||||
(Sep. 1, 2019 through Sep. 28, 2019) | 0 | $0.00 | 0 | $30,000 | ||||
1,358 | 1,358 | |||||||
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. MINE SAFETY DISCLOSURES
None.
Item 5. OTHER INFORMATION
None.
Item 6. Exhibits
Exhibits marked with an asterisk (*) are filed herewith.
Exhibit Number | Description |
| |
31.1 | |
31.2 | |
32.1 | |
32.2 | |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
SIGNATURES
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 5, 2019August 4, 2020
USANA HEALTH SCIENCES, INC. | |
| |
/s/ G. Douglas Hekking | |
| G. Douglas Hekking |
| Chief Financial Officer (Principal Financial Officer) |