The following discussion and analysis of USANA’s financial condition and results of operations are presented in 10 sections:
? Overview ? Impact of the COVID-19 Pandemic ? Customers ? Presentation ? Non-GAAP Financial Measures ? Results of Operations ? Liquidity and Capital Resources ? Contractual Obligations and Commercial Contingencies ? Inflation ? Critical Accounting Policies and Estimates
This discussion and analysis from a management perspective should be read in conjunction with the consolidated financial statements and accompanying notes appearing elsewhere in this report.
Overview We develop and manufacture high quality, science-based nutritional and personal care and skincare products that are distributed internationally through direct selling. We use this distribution method because we believe it is more conducive to meeting our vision as a company, which is to improve the overall health and nutrition of individuals and families around the world. Our customer base is primarily comprised of two types of customers: "Associates" and "Preferred Customers" referred to together as "active Customers." Our Associates also sell our products to retail customers. Associates share in our company vision by acting as independent distributors of our products in addition to purchasing our products for their personal use. Preferred Customers purchase our products strictly for personal use and are not permitted to resell or to distribute the products. We only count as active Customers those Associates and Preferred Customers who have purchased from us at any time during the most recent three-month period. As ofJanuary 1, 2022 , we had approximately 560,000 active Customers worldwide. 31
--------------------------------------------------------------------------------
Impact of the COVID-19 pandemic
The COVID-19 pandemic, including the spread of new variants of the virus, has
negatively impacted our business in various markets around the world and
continues to create an unpredictable operating environment for us in many of our
markets. Government-imposed restrictions, health and safety mandated best
practices, and public hesitance regarding in-person gatherings have reduced our
ability, and the ability of our Associates to hold sales meetings, required our
Associates to share and sell our products in a predominantly virtual
environment, resulted in cancellations of key Company events and trips, required
us to utilize a work-from-home strategy for all non-manufacturing and
non-distribution employees, and required us to temporarily close our walk-in and
fulfillment locations in some markets where we have such properties. The
pandemic has also affected the availability and cost of various of our raw
materials, packaging material, and shipping resources to transport our product
to our various markets around the world. Our supply chain and logistics have
incurred some disruption and we could experience more significant disruptions
or closures in the future. These factors and others related to the COVID-19
pandemic will likely continue to negatively affect our business throughout 2022
in a number of ways, including those described below.
? Our Workforce. The health and safety of our employees around the world remains
our top priority. We remain committed to being socially responsible as a
corporate leader in each of our markets and doing our part to reduce the spread
of COVID-19. As such, we are continuing to utilize a modified operating model in
each of our markets as necessary to follow applicable guidelines from government
and health officials. Although a significant portion of our non-manufacturing
and non-distribution employees continued with remote working arrangements, we
began efforts during the second quarter of 2021 to bring these employees back to
our offices, in markets where health and safety best practices have allowed us
to safely do so. In connection with this effort, we are permitting most of our
employees to utilize a hybrid work schedule, which allows them to split their
time working at the office and remotely. Employees working on site are required
to follow applicable health and safety guidelines. We are also continuing to
utilize flexible shift schedules, time and attendance policies, and sick-leave
policies to promote health, wellness and safety. Where necessary in our
international markets, we have temporarily closed product will-call centers and
continue to offer curbside delivery and subsidized shipping to customers. We
will continue to monitor the situation surrounding the pandemic and implement
additional risk mitigation actions where necessary.
? Our Operations. All of our production facilities remain operational under
enhanced safety measures and as of the date of this Annual Report, however we
have experienced meaningful disruptions in several of our markets due to the
escalation of the COVID-19 pandemic. These disruptions have affected our
customers and salesforce and, in some cases our ability to operate and ship
products. In some markets, we have had to postpone or cancel certain planned
business events and activities. In other markets, we have delayed the
introduction of new product offerings until 2022. Although we have successfully
modified our operations in each of our markets to date, future efforts to reduce
the spread of COVID-19, including the spread of new variants of the virus, may
negatively affect our business. The extent of any disruption to our business in
each of our markets going forward is difficult to estimate and will depend on
many factors, many of which are outside of our control. Our operating plan
continues to entail efforts to safeguard against disruptions through maintaining
and operating (i) raw material procurement, (ii) manufacturing, (iii)
distribution, (iv) selling, (v) operating cash flows and liquidity, (vi)
Associate engagement and activity, and (vii) employee support and engagement.
? Our Sales and Salesforce. Demand for our high quality nutritional products
remained high during the pandemic. We will continue to utilize a primarily
virtual strategy to hold meetings and events with our salesforce; however, in
markets where health and safety best practices have allowed us to safely do so,
we have held in-person meetings. We will evaluate this strategy as situation
with the pandemic progresses. Notwithstanding the foregoing, person-to-person
and face-to-face selling and events remain an important part of our business,
and we plan to begin incorporating the same into our strategy as it becomes safe
and appropriate for us and our sales force to do so.
? Our Liquidity. Our liquidity position is strong. We expect to continue to
fund our business with cash flow from operations and believe that we have
sufficient liquidity to satisfy our cash needs. Notwithstanding the foregoing,
we will continue to evaluate and take action, as necessary, to preserve adequate
liquidity and ensure that our business can continue to operate at full strength
during these uncertain times. Additionally, as long as uncertainty remains
surrounding the duration and impact of the COVID-19 pandemic, the potential
impact from the pandemic on our business, financial condition or longer-term
financial or operational results will remain uncertain. We will continue to
align spending with sales performance and defer non-essential capital
investments amid the COVID-19 pandemic.
32
--------------------------------------------------------------------------------
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 accounted for approximately 55% of product sales during 2021 with the remainder of our sales being 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 table below summarizes the evolution of our active clientele by geographical area, rounded to the nearest thousand, on the dates indicated.
Total Active Customers by Region
As of As of Change from Percent
January 1, 2022 January 2, 2021 Prior Year Change
Asia Pacific:
Greater China 255,000 45.5 % 252,000 42.1 % 3,000 1.2 %
Southeast Asia Pacific 115,000 20.5 % 142,000 23.7 % (27,000 ) (19.0 %)
North Asia 58,000 10.4 % 60,000 9.9 % (2,000 ) (3.3 %)
Asia Pacific Total 428,000 76.4 % 454,000 75.7 % (26,000 ) (5.7 %)
Americas and Europe 132,000 23.6 % 145,000 24.3 % (13,000 ) (9.0 %)
560,000 100.0 % 599,000 100.0 % (39,000 ) (6.5 %)
Presentation
Product sales along with the shipping and handling fees billed to our
customers are recorded as revenue net of applicable sales discounts when, or as
control of, the promised product is transferred to the customer, which is at the
time of delivery to the third party carrier for shipment. Payments received for
unshipped products are recorded as deferred revenue and are included in the
"Other current liabilities" line item in the consolidated balance sheet. Also
reflected in net sales is a provision for a refund liability for sales returns,
which is estimated based on our historical experience. Additionally, other types
of revenue include 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.
Cost of sales primarily consists of expenses related to raw materials, labor,
quality assurance, and overhead costs that are all directly associated with the
production and distribution of our products and sales materials, as well as
duties and taxes that are associated with the import and export of our products.
As international sales increase as a percentage of net sales, cost of sales are
increasingly affected by additional duties, freight, and other factors, such as
changes in currency exchange rates.
Associate incentives expense includes all forms of commissions, and other
incentives paid to our Associates. Incentives paid to Associates include bonuses
earned, rewards from contests and promotions, and base commissions, which makes
up the majority of our Associate incentives expense. We pay bonuses to
Associates based on certain business-related criteria, total base commission
earnings, and leadership level. Contests and promotions are offered as an
incentive and reward to our Associates and are typically paid out only after an
Associate achieves specific criteria. Base commissions are paid out on the sale
of products. Associates earn their commissions based on sales volume points that
are generated in their sales organization. Sales volume points are assigned to
each commissionable product and comprise a certain percent of the product price.
Items such as our starter kits and sales tools have no sales volume point value,
and commissions are not paid on the sale of these items. Although insignificant
to our financial statements, an Associate may earn commissions on sales volume
points that are generated from personal purchases that are not considered part
of their "Qualifying Sales." To be eligible to earn commissions, an Associate
must reach a certain level of Qualifying Sales each month, which may include
product that they use personally or that they resell to consumers. Associates do
not earn commissions on their Qualifying Sales. Commissions paid to Associates
on personal purchases are considered a sales discount and are reported as a
reduction to our net sales.
Selling, general and administrative expenses include wages and benefits,
depreciation and amortization, lease costs and utilities, Associate event costs,
advertising, professional fees, marketing, and research and development
expenses. Wages and benefits represent the largest component of selling, general
and administrative expenses. Significant depreciation and amortization expense
is incurred as a result of investments in physical facilities, computer and
information technology infrastructure to support our international operations.
33
————————————————– ——————————
Contents
Sales to customers outsidethe United States are transacted in the respective local currencies and translated toU.S. dollars at weighted-average currency exchange rates for each monthly accounting period to which they relate. With the exception ofChina , our raw material purchases from suppliers and product purchases from third-party manufacturers are transacted inU.S. dollars. Consequently, our net sales and earnings are affected by changes in currency exchange rates. In general, our operating results are affected positively by a weakeningU.S. dollar and negatively by a strengtheningU.S. dollar. In our net sales discussions that follow, we approximate the impact of currency fluctuations on net sales by translating current year net sales at the average exchange rates in effect during the comparable prior-year periods. 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. Management believes these 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. This non-GAAP financial information may be determined or calculated differently by other companies, limiting the usefulness of those measures for comparative purposes. We provide such 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, accompanying this report. In analyzing business trends and performance, management uses "constant currency" net sales, "local currency" net sales, and other currency-related financial information terms 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 results of operations and 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.
Operating results
The following table summarizes our consolidated results of operations as a percentage of net sales, respectively, for the years indicated:
2021 2020
Consolidated Statements of Earnings Data:
Net sales 100.0 % 100.0 %
Cost of sales 18.4 18.4
Gross profit 81.6 81.6
Operating expenses:
Associate incentives 43.8 43.0
Selling, general and administrative 23.5 23.0
Total operating expenses 67.3 66.0
Earnings from operations 14.3 15.6
Other income (expense), net 0.1 0.1
Earnings before income taxes 14.4 15.7
Income taxes 4.6 4.7
Net earnings 9.8 % 11.0 %
34
————————————————– ——————————
Table of Contents
Summary of 2021 financial results
Our discussion and analysis is focused on our 2021 and 2020 financial results, including comparisons of our year-over-year performance between these years. Discussion and analysis of our 2019 fiscal year specifically, as well as the year-over-year comparison of our 2020 financial performance to 2019, are located in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedJanuary 2, 2021 , filed with theSEC onMarch 2, 2021 , which is available on our investor relations website at https://ir.usana.com or theSEC's website at www.sec.gov. That information is incorporated by reference into this report. Net sales in 2021 increased 4.6%, or$51.8 million , to$1.186 billion , compared with 2020. Fiscal 2020 was a 53-week year and included, comparatively, one additional week of sales. We estimate that this extra week contributed approximately$18.0 million to net sales for the year. Additionally, favorable changes in currency exchange rates increased net sales for the year by an estimated$53.6 million .
Net profit decreased by 6.5% for
higher relative operating expenses and a higher income tax rate.
Financial year 2021 compared to financial year 2020
Net Sales
The following table summarizes the evolution of our net sales by geographic region for the years ended
Net Sales by Region
(in thousands)
Twelve Months Ended
Percent
change
Currency excluding
Change from Percent impact on currency
January 1, 2022 January 2, 2021 prior year change sales impact
Asia Pacific
Greater China $ 563,469 47.5 % $ 530,505 46.7 % $ 32,964 6.2 % $ 34,781 (0.3 %)
Southeast Asia Pacific 269,803 22.7 % 269,555 23.8 % 248 0.1 % 8,381 (3.0 %)
North Asia 129,920 11.0 % 114,964 10.1 % 14,956 13.0 % 3,917 9.6 %
Asia Pacific Total 963,192 81.2 % 915,024 80.6 % 48,168 5.3 % 47,079 0.1 %
Americas and Europe 223,272 18.8 % 219,620 19.4 % 3,652 1.7 % 6,555 (1.3 %)
$ 1,186,464 100.0 % $ 1,134,644 100.0 % $ 51,820 4.6 % $ 53,634 (0.2 %)
Asia Pacific : Performance across markets varied significantly in this region,
with the key underlying factor relating to the relative severity of COVID-19
lockdowns and disruptions. This region was led by Malaysia and South Korea which
had local currency net sales growth of 29.1% and 10.4%, respectively. The growth
in this region was partially offset by a 22.6% local currency sales decline in
the Philippines .
35
————————————————– ——————————
Contents
Americas andEurope : The increase in constant currency net sales inAmericas andEurope region was driven by local currency net sales growth inthe United States where local currency net sales increased 2.8%. This growth was partially offset by declines in all other markets in this region. Gross Profit Gross profit remained flat at 81.6% of net sales; however, 2021 was positively impacted by favorable changes in currency exchange rates, and lower scrap charges. The current period was also negatively impacted by an unfavorable shift in market mix, and increased freight expense. Associate Incentives Associate incentives increased 80 basis point points to 43.8% of net sales in 2021, compared with 43.0% in the prior year. This relative increase can be attributed to changes in market sales mix, costs related to trial incentive programs being tested and evaluated in certain markets, and increased spend on miscellaneous associate incentives.
Selling, general and administrative expenses
Selling, general and administrative expenses increased 50 basis points relative to net sales and$17.9 million in absolute terms. The increase in expense can be attributed to increased employee related costs, an increase in variable expenses associated with higher sales, higher advertising expense, and increased event costs in certain markets. Income Taxes Income taxes increased to 31.7% of pre-tax earnings in 2021, up from 29.9% of pre-tax earnings in 2020. The effective tax rate increase is largely due to a decrease inU.S. domestic earnings and an increase related to unreserved tax settlements. Diluted Earnings Per Share Diluted EPS decreased to$5.73 in 2021 from$5.86 in 2020. This decrease can be attributed to lower net earnings resulting from higher operating expenses. The decrease in diluted EPS was offset, in part, by a lower diluted share count. 36
————————————————– ——————————
Contents
Cash and capital resources
We have historically met our working capital and capital expenditure requirements by using both net cash flow from operations and by drawing on our line of credit. Our principal source of liquidity is our operating cash flow. There are currently no material restrictions on our ability to transfer and remit funds among our international markets. InChina , however, our compliance with Chinese accounting and tax regulations promulgated by theState Administration of Foreign Exchange ("SAFE") results in transfer and remittance of our profits and dividends fromChina tothe United States on a delayed basis. If SAFE or other Chinese regulators introduce new regulations, or change existing regulations, which allow foreign investors to remit profits and dividends earned inChina to other countries, our ability to remit profits or pay dividends fromChina tothe United States may be limited in the future. We believe we have sufficient liquidity to satisfy our cash needs and expect to continue to fund our business with cash flow from operations. We continue, however, to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times. Additionally, we continually evaluate opportunities to repurchase shares of our common stock and will, from time to time, consider the acquisition of, or investment in complementary businesses, products, services and technologies, which might affect our liquidity. Cash and Cash Equivalents Cash and cash equivalents decreased to$239.8 million atJanuary 1, 2022 , from$311.9 million atJanuary 2, 2021 . Cash flow provided by operating activities generated$121.2 million during the full year endedJanuary 1, 2022 . The decrease in cash and cash equivalents was primarily due to cash used to repurchase and retire shares of our common stock totaling$177.8 million , as well as,$12.8 million of cash used for investments in property and equipment.
The following table presents the concentrations of cash and cash equivalents by market for the periods indicated:
Cash and cash equivalents
(in Millions)
As of As of
January 1, 2022 January 2, 2021
China $ 139.9 $ 133.8
United States 51.9 119.7
All other markets 48.0 58.4
Total Cash and cash equivalents $ 239.8 $ 311.9
Cash flow generated by operations
As discussed above, our principal source of liquidity comes from our net cash flow from operations, which results from a strong operating margin. Net cash flow provided by operating activities totaled$121.2 million in 2021, a decrease of$39.2 million from$160.4 million in 2020. Net earnings combined with adjustments of non-cash items contributed positively to our net cash flow provided by operating activities, partially offset by purchases of inventories, the payout of the annual employee bonus, and a reduction in trade payables. 37
————————————————– ——————————
Table of Contents Line of Credit Information with respect to our line of credit may be found in Note I to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report, which is incorporated by reference. Share Repurchase Information with respect to our share repurchases may be found in Note M to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report, which is incorporated by reference.
Off-balance sheet arrangements
None. Summary We believe that current cash balances, future cash provided by operations, and amounts available under our line of credit will be sufficient to cover our operating and capital needs in the ordinary course of business for the foreseeable future. If we experience an adverse operating environment or unanticipated and unusual capital expenditure requirements, additional financing may be required. No assurance can be given, however, that additional financing, if required, would be available 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.
Contractual obligations and commercial contingencies
The following table summarizes our contractual obligations and commitments as ofJanuary 1, 2022 and the effect such obligations and commitments are expected to have on our liquidity and cash flow in future periods: Payments Due By Period (in thousands) Less than 1 Contractual Obligations Total year 1 - 3 years 3 - 5 years More than 5 years Operating Leases$ 18,041 $ 7,481 $ 9,276 $ 1,253 $ 31 Other Commitments$ 32,820 21,679 9,059 2,082 -
Total contractual obligations
31
"Operating Leases" generally provide that property taxes, insurance, and
maintenance expenses are our responsibility. Such expenses are not included in
the operating lease amounts in the table above. Information with respect to our
Operating Leases may be found in Note F to the Consolidated Financial Statements
included in Part II, Item 8 of this Annual Report, which is incorporated by
reference.
"Other Commitments" generally include consulting- and IT-related services,
investments in brand awareness through corporate and athlete sponsorships,
facility maintenance, and services related to the events that we hold for our
Associates both locally and internationally. Additionally, throughout the year
we will enter into various short-term contracts, mostly for services related to
events that we hold for our Associates. Information with respect to our
Unconditional Purchase Obligations may be found in Note J to the Consolidated
Financial Statements included in Part II, Item 8 of this Annual Report, which is
incorporated by reference.
Inflation
We do not believe that inflation has had a material impact on our historical
operations or profitability. However, we have begun to experience increased
costs due to inflationary pressures that are also expected to negatively impact
fiscal year 2022.
38
————————————————– ——————————
Contents
Significant Accounting Policies and Estimates
Our Consolidated Financial Statements included in this report have been prepared in accordance with accounting principles generally accepted inthe United States of America ("US GAAP"). Our significant accounting policies are described in Consolidated Financial Statements included herein. The preparation of financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Those estimates and assumptions are derived and are continually evaluated based on our historical experiences, current facts and circumstances, and on changes in the business environment. Actual results, however, may sometimes differ materially from estimates under different conditions. Critical accounting estimates are defined as both those that are material to the portrayal of our financial condition and results of operations and those that require management's most subjective judgments. We believe that our most critical accounting policies and estimates are described in this section. Revenue Recognition. 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 we expect to be entitled in exchange for transferring those products or services. Revenue recognition is evaluated through the following five-step process: 1) identification of the contract with a customer; 2) identification of the performance obligations in the contract; 3) determination of the transaction price;
4) allocation of the transaction price to the performance obligations in the
Contract; and
5) revenue recognition when a performance obligation is satisfied.
A majority of our sales are for products sold at a point in time and shipped to customers, for which control is transferred to the customer as goods are delivered to the third-party carrier for shipment. We receive payment, primarily via credit card, for the sale of products at the time customers place orders and payment is required prior to shipment. Our product sales contracts include terms that could cause variability in the transaction price for items such as discounts, credits, or sales returns. Accordingly, the transaction price for product sales includes estimates of variable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur. At the time of sale, we estimate a refund liability for the variable consideration based on historical experience. Initial product orders with a new customer may include multiple performance obligations related to sales discounts earned under our initial order reward program. Under this program, the customer receives an option to apply the discounts earned on the initial order to two subsequentAuto Orders , which conveys a material right to the customer. As such, the initial order transaction price is allocated to each separate performance obligation based on its relative standalone selling price and recognized as revenue as each performance obligation is satisfied. Associate incentives represent consideration paid and include all forms of commissions, and other incentives paid to our Associates. With the exception of commissions paid to Associates on personal purchases, which are considered a sales discount and are reported as a reduction to net sales, the incentives are paid for distinct services related to our product sales and are recorded as an expense when revenue for the goods is recognized. Shipping and handling activities are performed upon delivery to the third-party carrier for shipment. We account for these activities as fulfillment costs. Therefore, we recognize the costs of these activities when revenue for the goods is recognized. Shipping and handling costs are included in cost of sales for all periods presented. Contract liabilities 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 the performance obligations are satisfied over time as services are delivered. Contract liabilities are recorded as deferred revenue within the "Other current liabilities" line item in the consolidated balance sheet. Deferred revenue is recognized when or as the related performance obligation is satisfied. On the occasion that will-call orders are not picked up by customers, we periodically assess the likelihood that customers will exercise their contractual right to pick up orders and recognize revenue when the likelihood that customers will pick up orders is remote. Inventory Valuation. Inventories are stated at the lower of cost or net realizable value. Cost is determined using a standard costing system, which approximates the first-in, first-out method. The components of inventory cost include raw materials, labor, and overhead. Net realizable value is determined using various assumptions with regard to excess or slow-moving inventories, non-conforming inventories, expiration dates, current and future product demand, production planning, and market conditions. The forecasted future product demand for excess or slow-moving inventories is based on judgment and available information. A change in any valuation assumptions could result in an adjustment to inventory. However, the reported carrying value of inventory is not highly sensitive to reasonable changes in individual assumptions.
© Edgar Online, source
