The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
NOTE A – ORGANIZATION, CONSOLIDATION, AND BASIS OF PRESENTATION
The COVID-19 pandemic has negatively impacted economies, businesses, sales practices, supply chains, and consumer behavior around the world. The ongoing COVID-19 pandemic has created an unpredictable operating environment for us in many of our markets around the world and caused meaningful disruptions in both sales and operations for the three and six months ended July 2, 2022, and for fiscal 2021. At this time, the Company is unable to predict the impact that COVID-19 will have on its business, financial position, and operating results in future periods due to numerous uncertainties and is closely monitoring the impact of the pandemic on all aspects of its business. Additionally, we have begun to experience inflationary pressures across several areas of our business which has created a challenging operating environment.
USANA Health Sciences, Inc. develops and manufactures high quality, science-based nutritional and personal care products that are sold internationally through a direct selling channel. The Condensed Consolidated Financial Statements (the “Financial Statements”) include the accounts and operations of the Company, which are grouped and presented in two geographic regions: (1) Asia Pacific, and (2) Americas and Europe. Asia Pacific is further divided into three sub-regions: (i) Greater China, (ii) Southeast Asia Pacific, and (iii) North Asia.
(1) Asia Pacific -
(i) Greater China - Hong Kong, Taiwan, and China. The Company’s business in China is conducted by BabyCare Holdings, Ltd., the Company’s wholly-owned subsidiary.
(ii) Southeast Asia Pacific – Australia, New Zealand, Singapore, Malaysia, the Philippines, Thailand, and Indonesia.
(iii) North Asia – Japan and South Korea.
(2) Americas and Europe – United States, Canada, Mexico, Colombia, the United Kingdom, France, Germany, Spain, Italy, Romania, Belgium, and the Netherlands.
The condensed consolidated balance sheet as of January 1, 2022, derived from audited consolidated financial statements, and the unaudited interim condensed consolidated financial information of the Company have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the SEC. Accordingly, certain information and disclosures that are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. In the opinion of the Company’s management, the accompanying interim condensed consolidated financial information contains all adjustments, consisting only of normal recurring adjustments that are necessary to state fairly the Company’s financial position as of July 2, 2022, and results of operations and cash flows for the three and six months ended July 2, 2022 and July 3, 2021.
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 January 1, 2022. The results of operations for the three and six months ended July 2, 2022, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2022.
Recent Accounting Pronouncements
Issued Accounting Pronouncements Not Yet Adopted
In October 2021, the Financial Accounting Standards Board ("FASB") issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. ASU 2021-08 requires an acquirer to recognize and measure contract assets and contract liabilities (deferred revenue) acquired in a business combination in accordance with Revenue from Contracts with Customers (Topic 606). Under this approach, the acquirer applies the revenue model as if it had originated the contracts. This is a departure from the current requirement to measure contract assets and contract liabilities at fair value at the acquisition date. ASU 2021-08 is effective for annual periods beginning after December 15, 2022 and interim periods within those annual periods. ASU 2021-08 should be applied prospectively to business combinations occurring on or after the date of adoption. Evaluation of this new standard is dependent on multiple circumstances including the timing and complexity of completed business combinations. As a result, the Company intends to adopt the provisions of ASU 2021-08 in the first quarter of 2023.
No other new accounting pronouncement issued or effective during the three and six months ended July 2, 2022, had, or is expected to have, a material impact on the Company's condensed consolidated financial statements.
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE B – BUSINESS COMBINATIONS
During the second quarter, the Company acquired assets in business combinations for an aggregate purchase consideration of $6,532 in cash and $886 in contingent consideration. The preliminary purchase price allocations were $964 to tangible assets, $6,065 to intangible assets, and $389 to goodwill. The primary reasons for the business combinations are to augment and expand the Company's core competencies. The amount of revenue and earnings related to the business combinations since the acquisition date is immaterial.
The contingent consideration liability is based on the achievement of certain milestones over a three-year period. Under the terms of the purchase agreement, the contingent consideration consists of three earn-out periods capped at $500 per earn-out period. The maximum earn-out is $1,500 per the asset purchase agreement. As of the acquisition date, the contingent consideration had a fair value of $886. The estimated fair value of the contingent consideration liability as of the date of acquisition was determined using an option pricing method based upon available information and certain assumptions known and contains key inputs that are unobservable in the market, which represents a Level 3 measurement within the fair value hierarchy. Contingent consideration is included in Fair Value Measures in Note C.
Pro forma results of operations have not been presented because the effects of the acquisitions were not material to the Company’s condensed consolidated financial statements.
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE 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 July 2, 2022, and January 1, 2022, 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 | |
| | July 2, | | | Inputs | |
| | 2022 | | | Level 1 | | | Level 2 | | | Level 3 | |
Money market funds included in cash equivalents | | $ | 160,287 | | | $ | 160,287 | | | $ | — | | | $ | — | |
Foreign currency contracts included in prepaid expenses and other current assets | | | 1,435 | | | | — | | | | 1,435 | | | | — | |
Contingent consideration included in other current liabilities of ($338) and other long-term liabilities of ($548) | | | (886 | ) | | | — | | | | — | | | | (886 | ) |
| | $ | 160,836 | | | $ | 160,287 | | | $ | 1,435 | | | $ | (886 | ) |
| | | | | | Fair Value Measurements Using | |
| | January 1, | | | Inputs | |
| | 2022 | | | Level 1 | | | Level 2 | | | Level 3 | |
Money market funds included in cash equivalents | | $ | 163,619 | | | $ | 163,619 | | | $ | — | | | $ | — | |
Foreign currency contracts included in other current liabilities | | | (461 | ) | | | — | | | | (461 | ) | | | — | |
| | $ | 163,158 | | | $ | 163,619 | | | $ | (461 | ) | | $ | — | |
There were no transfers of financial assets or liabilities between levels of the fair value hierarchy for the periods indicated.
The majority of the Company’s non-financial assets, which include long-lived assets, are not required to be carried at fair value on a recurring basis. However, if an impairment charge is required, a non-financial asset would be written down to fair value. As of July 2, 2022 and January 1, 2022, there were no non-financial assets measured at fair value on a non-recurring basis.
The Company’s financial instruments include cash equivalents, restricted cash, other liabilities, and foreign currency contracts. The recorded values of cash equivalents and restricted cash approximate their fair values, based on their short-term nature.
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE D – INVENTORIES
Inventories consist of the following:
| | July 2, | | | January 1, | |
| | 2022 | | | 2022 | |
Raw materials | | $ | 24,629 | | | $ | 30,280 | |
Work in progress | | | 7,990 | | | | 9,586 | |
Finished goods | | | 51,545 | | | | 58,452 | |
| | $ | 84,164 | | | $ | 98,318 | |
NOTE E – INVESTMENT IN EQUITY SECURITIES
As of July 2, 2022 and January 1, 2022, the carrying amount of equity securities without readily determinable fair values was $20,000 and is included in the “Other assets” line item on the Company’s condensed consolidated balance sheets.
During the three and six months ended July 2, 2022, and the fiscal year ended January 1, 2022, no observable price changes occurred, and no impairment of securities was recorded.
NOTE F – REVENUE AND CONTRACT LIABILITIES
Revenue is recognized when, or as, control of a promised product or service transfers to a customer, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring those products or services. A majority of the Company’s sales are for products sold at a point in time and shipped to customers, for which control is transferred as goods are delivered to the third-party carrier for shipment. The Company receives payment, primarily via credit card, for the sale of products at the time customers place orders and payment is required prior to shipment. Contract liabilities, which are recorded within the “Other current liabilities” line item in the condensed consolidated balance sheets, primarily relate to deferred revenue for product sales for customer payments received in advance of shipment, for outstanding material rights under the initial order program, and for services where control is transferred over time as services are delivered.
Other revenue includes fees, which are paid by the customer at the beginning of the service period, for access to online customer service applications and annual account renewal fees for Associates, for which control is transferred over time as services are delivered and are recognized as revenue on a straight-line basis over the term of the respective contracts.
The following table presents Other Revenue for the periods indicated:
| | Quarter Ended | | | Six Months Ended | |
| | July 2, | | | July 3, | | | July 2, | | | July 3, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
Other Revenue | | $ | 895 | | | $ | 965 | | | $ | 1,794 | | | $ | 1,937 | |
Disaggregation of revenue by geographic region and major product line is included in Segment Information in Note K.
The following table provides information about contract liabilities from contracts with customers, including significant changes in the contract liabilities balances during the period:
| | July 2, | | | January 1, | |
| | 2022 | | | 2022 | |
Contract liabilities at beginning of period | | $ | 19,635 | | | $ | 15,952 | |
Increase due to deferral of revenue at end of period | | | 16,141 | | | | 19,635 | |
Decrease due to beginning contract liabilities recognized as revenue | | | (17,147 | ) | | | (15,952 | ) |
Contract liabilities at end of period | | $ | 18,629 | | | $ | 19,635 | |
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE G – LINE OF CREDIT
On August 25, 2020, the Company as borrower, and certain of its material subsidiaries as guarantors, entered into the Second Amended and Restated Credit Agreement (the “Credit Agreement”) with Bank of America, N.A. (“Bank of America”) as Administrative Agent, Swingline Lender and Letter of Credit Issuer, and the other lenders party thereto. On April 21, 2021, the Company entered into the First Amendment to the Second Amended and Restated Credit Agreement, which, among other things amended the definition of “LIBOR Replacement Date,” “LIBOR Successor Rate,” and “Eurodollar Rate.”
The Credit Agreement provides for a revolving credit limit for loans to the Company up to $75,000 (the “Credit Facility”). In addition, at the option of the Company, and subject to certain conditions, the Company may request to increase the aggregate commitment under the Credit Facility to up to an additional $200,000.
There was no outstanding debt on the Credit Facility at July 2, 2022. The obligations of the Company under the Credit Agreement are secured by the pledge of the capital stock of certain subsidiaries of the Company, pursuant to a Security and Pledge Agreement.
Interest on revolving borrowings under the Credit Facility are computed at Bank of America’s prime rate or the Eurodollar rate, adjusted by features specified in the Credit Agreement. The Credit Agreement covenants require the Company’s rolling four-quarter consolidated EBITDA of $100,000 or greater and its ratio of consolidated funded debt to consolidated EBITDA of equal to or less than 2.0 to 1.0 at the end of each quarter. The Credit Agreement does not include any restrictions on the payment of cash dividends or share repurchases by the Company. Consolidated EBITDA and consolidated funded debt are non-GAAP terms.
The Company will be required to pay any balance on this Credit Facility in full at the time of maturity in August 2025.
NOTE H – CONTINGENCIES
The Company is involved in various lawsuits, claims, and other legal matters from time to time that arise in the ordinary course of conducting business, including matters involving its products, intellectual property, supplier relationships, distributors, competitor relationships, employees and other matters. The Company records a liability when a particular contingency is probable and estimable. The Company faces contingencies that are reasonably possible to occur; however, they cannot currently be estimated. While complete assurance cannot be given as to the outcome of these proceedings, management does not currently believe that any of these matters, individually or in the aggregate, will have a material adverse effect on the Company’s financial condition, liquidity or results of operations. It is reasonably possible that a change in the contingencies could result in a change in the amount recorded by the Company in the future.
NOTE I – DERIVATIVE FINANCIAL INSTRUMENTS
The Company’s risk management strategy includes the select use of derivative instruments to reduce the effects of volatility in foreign currency exchange exposure on operating results and cash flows. In accordance with the Company’s risk management policies, the Company does not hold or issue derivative instruments for trading or speculative purposes. The Company recognizes all derivative instruments as either assets or liabilities in the balance sheet at their respective fair values. When the Company becomes a party to a derivative instrument and intends to apply hedge accounting, the Company formally documents the hedge relationship and the risk management objective for undertaking the hedge, the nature of risk being hedged, and the hedged transaction, which includes designating the instrument for financial reporting purposes as a fair value hedge, a cash flow hedge, or a net investment hedge. The Company also documents how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method used to measure ineffectiveness.
The Company periodically uses derivative instruments to hedge the foreign currency exposure of its net investment in foreign subsidiaries into U.S. dollars. Initially, the Company records derivative assets on a gross basis in its condensed consolidated balance sheets. Subsequently the fair value of derivatives is measured for each reporting period. The effective portion of gains and losses attributable to these net investment hedges is recorded to foreign currency translation adjustment (“FCTA”) within accumulated other comprehensive income (loss) (“AOCI”) to offset the change in the carrying value of the net investment being hedged and will subsequently be reclassified to net earnings in the period in which the investment in the subsidiary is either sold or substantially liquidated.
During the three and six months ended July 2, 2022, the Company settled a forward contract with a notional amount of $98,930. During the three and six months ended July 3, 2021, the Company settled a European option with a notional amount of $98,684. Both the forward contract and the European option were designated as net investment hedges. For the three and six months ended July 2, 2022 and July 3, 2021, the Company realized a gain of $4,555 and a loss of $1,555, respectively, recorded to FCTA within AOCI. The Company assessed hedge effectiveness under the forward rate method, determining the hedging instruments were highly effective.
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE J – COMMON STOCK AND EARNINGS PER SHARE
Basic earnings per share (“EPS”) is 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 is 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 |
|
|
Six Months Ended |
|
|
|
July 2, |
|
|
July 3, |
|
|
July 2, |
|
|
July 3, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Net earnings available to common shareholders |
|
$ |
19,157 |
|
|
$ |
38,234 |
|
|
$ |
41,626 |
|
|
$ |
68,855 |
|
Weighted average common shares outstanding - basic |
|
|
19,215 |
|
|
|
20,247 |
|
|
|
19,283 |
|
|
|
20,570 |
|
Dilutive effect of in-the-money equity awards |
|
|
29 |
|
|
|
199 |
|
|
|
79 |
|
|
|
201 |
|
Weighted average common shares outstanding - diluted |
|
|
19,244 |
|
|
|
20,446 |
|
|
|
19,362 |
|
|
|
20,771 |
|
Earnings per common share from net earnings - basic |
|
$ |
1.00 |
|
|
$ |
1.89 |
|
|
$ |
2.16 |
|
|
$ |
3.35 |
|
Earnings per common share from net earnings - diluted |
|
$ |
1.00 |
|
|
$ |
1.87 |
|
|
$ |
2.15 |
|
|
$ |
3.31 |
|
Equity awards for the following shares were not included in the computation of diluted EPS due to the fact that their effect would be anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Six Months Ended |
|
|
|
July 2, |
|
|
July 3, |
|
|
July 2, |
|
|
July 3, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
|
374 |
|
|
|
59 |
|
|
|
272 |
|
|
|
58 |
|
There were no shares repurchased during the three months ended July 2, 2022. During the three months ended July 3, 2021, the Company repurchased and retired 304 shares for $29,701 under the Company's share repurchase plan.
During the six months ended July 2, 2022 and July 3, 2021, the Company repurchased and retired 288 shares and 1,025 shares for $25,382 and $99,155, respectively, under the Company’s share repurchase plan. The excess of the repurchase price over par value is allocated between additional paid-in capital and retained earnings on a pro-rata basis. The purchase of shares under this plan reduces the number of shares outstanding in the above calculations.
As of July 2, 2022, the remaining authorized repurchase amount under the stock repurchase plan was $82,839. There is no expiration date on the remaining approved repurchase amount and no requirement for future share repurchases.
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(unaudited)
NOTE K – SEGMENT INFORMATION
USANA operates as a direct selling company that develops, manufactures, and distributes high-quality nutritional and personal care products that are sold through a network marketing system of independent distributors (“Associates”). The Company aggregates its operating segments into one 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 |
|
|
Six Months Ended |
|
|
|
July 2, |
|
|
July 3, |
|
|
July 2, |
|
|
July 3, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
USANA® Nutritionals |
|
|
85 |
% |
|
|
86 |
% |
|
|
86 |
% |
|
|
87 |
% |
USANA Foods(1) |
|
|
8 |
% |
|
|
8 |
% |
|
|
7 |
% |
|
|
7 |
% |
Personal care and Skincare |
|
|
6 |
% |
|
|
5 |
% |
|
|
6 |
% |
|
|
5 |
% |
All Other |
|
|
1 |
% |
|
|
1 |
% |
|
|
1 |
% |
|
|
1 |
% |
(1) Includes the Company’s new Active Nutrition line, which launched in five markets in 2021 and all but two of the remaining markets through the second quarter of 2022.
Selected Financial Information
Financial information, presented by geographic region is listed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Six Months Ended |
|
|
|
July 2, |
|
|
July 3, |
|
|
July 2, |
|
|
July 3, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Net Sales to External Customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia Pacific |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater China |
|
$ |
140,775 |
|
|
$ |
165,416 |
|
|
$ |
274,514 |
|
|
$ |
314,394 |
|
Southeast Asia Pacific |
|
|
47,830 |
|
|
|
76,101 |
|
|
|
102,572 |
|
|
|
148,249 |
|
North Asia |
|
|
28,803 |
|
|
|
37,438 |
|
|
|
58,742 |
|
|
|
67,603 |
|
Asia Pacific Total |
|
|
217,408 |
|
|
|
278,955 |
|
|
|
435,828 |
|
|
|
530,246 |
|
Americas and Europe |
|
|
47,066 |
|
|
|
57,882 |
|
|
|
101,513 |
|
|
|
114,567 |
|
Consolidated Total |
|
$ |
264,474 |
|
|
$ |
336,837 |
|
|
$ |
537,341 |
|
|
$ |
644,813 |
|
The following table provides further information on markets representing ten percent or more of consolidated net sales and long-lived assets, respectively:
|
|
Quarter Ended |
|
|
Six Months Ended |
|
|
|
July 2, |
|
|
July 3, |
|
|
July 2, |
|
|
July 3, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China |
|
$ |
128,389 |
|
|
$ |
150,878 |
|
|
$ |
248,643 |
|
|
$ |
285,181 |
|
South Korea |
|
$ |
28,153 |
|
|
$ |
36,337 |
|
|
$ |
57,340 |
|
|
$ |
65,357 |
|
| | As of | |
| | July 2, | | | January 1, | |
| | 2022 | | | 2022 | |
Long-lived assets: | | | | | | | | |
China | | $ | 87,351 | | | $ | 91,530 | |
United States | | $ | 92,227 | | | $ | 85,350 | |