# USANA HEALTH SCIENCES INC (USNA) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from USANA HEALTH SCIENCES INC's 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/896264/000089626425000092/usna-20241228.htm
Accession: 0000896264-25-000092
Filing date: 2025-03-12
Report date: 2024-12-28
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/USNA/
All MD&A years: /company/USNA/mda/
Previous year: /company/USNA/mda/fy2023/ (FY 2023)
Next year: /company/USNA/mda/fy2026/ (FY 2026)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of USANA’s financial condition and results of operations is presented in nine sections:

•Overview

•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 management's perspective should be read in conjunction with the Consolidated Financial Statements and notes thereto 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 primarily 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. In 2023, we launched our Affiliate program in the United States, Canada, and Mexico and are evaluating introducing the program in other markets. This program offers another sales and compensation opportunity to individuals who are interested in selling USANA products. Affiliates are discussed and reported in this report with Associates. Preferred Customers purchase our products strictly for personal use and are not permitted to resell or to distribute the products. We only count as active Customers those Associates and Preferred Customers who have purchased from us at any time during the most recent three-month period. As of December 28, 2024, we had approximately 454,000 direct selling active Customers worldwide. In addition, on December 23, 2024, we acquired a 78.85% controlling ownership interest in Hiya, a leading provider of high-quality children's health and wellness products through which we operate our direct-to-consumer business.

Customers

Because we primarily 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

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vision of improving the overall health and nutrition of individuals and families around the world. Sales to Associates account for approximately 52% of direct selling segment product sales during 2024, with the remainder 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 change in our direct selling active Customer base by geographic region, rounded to the nearest thousand, as of the dates indicated.

[[GREPCENT_TABLE]]
[["","Total Active Customers by Region","","Change from Prior Year","","Percent Change"],["","As of December 28, 2024","","As of December 30, 2023"],["Asia Pacific:"],["Greater China","246,000","","54.2","%","","255,000","","52.8","%","","(9,000)","","(3.5","%)"],["Southeast Asia Pacific","77,000","","16.9","%","","80,000","","16.6","%","","(3,000)","","(3.8","%)"],["North Asia","38,000","","8.4","%","","48,000","","9.9","%","","(10,000)","","(20.8","%)"],["Asia Pacific Total","361,000","","79.5","%","","383,000","","79.3","%","","(22,000)","","(5.7","%)"],["Americas and Europe","93,000","","20.5","%","","100,000","","20.7","%","","(7,000)","","(7.0","%)"],["","454,000","","100.0","%","","483,000","","100.0","%","","(29,000)","","(6.0","%)"]]
[[/GREPCENT_TABLE]]

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

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depreciation and amortization expense is incurred as a result of investments in physical facilities, computer and information technology infrastructure to support our international operations.

Sales to customers outside the United States are transacted in the respective local currencies and translated to U.S. dollars at weighted-average currency exchange rates for each monthly accounting period to which they relate. With the exception of China, our raw material purchases from suppliers and product purchases from third-party manufacturers are transacted in U.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 weakening U.S. dollar and negatively by a strengthening U.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 U.S. 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 U.S. 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.

Results of Operations

Summary of 2024 Financial Results

Our discussion and analysis is focused on our 2024 and 2023 financial results, including comparisons of our year-over-year performance between these years. Discussion and analysis of our 2022 fiscal year specifically, as well as the year-over-year comparison of our 2023 financial performance to 2022, 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 ended December 30, 2023, filed with the SEC on February 27, 2024, which is available on our investor relations website at https://ir.usana.com or the SEC’s website at www.sec.gov. That information is incorporated by reference into this report.

Net sales in 2024 decreased 7.2%, or $66.5 million, to $854.5 million, compared with 2023. The decrease in net sales was primarily the result of a decrease in average spend per Customer and a decrease in active Customers, due to a challenging economic environment in many of our key markets, which had varying degrees of impact on attracting new customers. We experienced a decline in active Customers of 6.0% compared to the prior year. Additionally, unfavorable changes in currency exchange rates decreased net sales for the year by an estimated $13.6 million.

Net earnings attributable to USANA decreased 34.1% to $42.0 million in 2024, when compared with 2023. The decrease in net earnings attributable to USANA was primarily the result of decreased sales, higher relative operating expenses, and a higher effective tax rate.

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Fiscal Year 2024 compared to Fiscal Year 2023

Net Sales

The following table summarizes the changes in our net sales by geographic region for the fiscal years ended December 28, 2024, and December 30, 2023:

[[GREPCENT_TABLE]]
[["","Net Sales by Region (in thousands)","","Change from prior year","","Percent change","","Currency impact on sales","","Percent change excluding currency impact"],["","Twelve Months Ended"],["","December 28, 2024","","December 30, 2023"],["Asia Pacific"],["Greater China","$","457,976","","","53.6","%","","$","475,099","","","51.6","%","","$","(17,123)","","","(3.6)","%","","$","(7,263)","","","(2.1)","%"],["Southeast Asia Pacific","146,795","","","17.2","%","","163,890","","","17.8","%","","(17,095)","","","(10.4)","%","","(1,593)","","","(9.5)","%"],["North Asia","78,214","","","9.1","%","","101,446","","","11.0","%","","(23,232)","","","(22.9)","%","","(3,461)","","","(19.5)","%"],["Asia Pacific Total","682,985","","","79.9","%","","740,435","","","80.4","%","","(57,450)","","","(7.8)","%","","(12,317)","","","(6.1)","%"],["Americas and Europe","171,518","","","20.1","%","","180,575","","","19.6","%","","(9,057)","","","(5.0)","%","","(1,247)","","","(4.3)","%"],["","$","854,503","","","100.0","%","","$","921,010","","","100.0","%","","$","(66,507)","","","(7.2)","%","","$","(13,564)","","","(5.7)","%"]]
[[/GREPCENT_TABLE]]

Asia Pacific: The decrease in constant currency net sales in Greater China was primarily the result of a sales decline in China and Taiwan where local currency net sales decreased 1.7% and 3.9%, respectively. There were local currency declines in most markets in the Southeast Asia Pacific sub-region, most notable in the Philippines, Malaysia, and Singapore, which had local currency net sales declines of 18.6%, 9.4%, and 14.0%, respectively. The decrease in constant currency net sales in North Asia was most notable in South Korea, which had a local currency net sales decline of 19.5%.

Americas and Europe: There were local currency sales declines in all markets in this region. The decrease in constant currency net sales is largely the result of sales declines in the United States and Canada, which had local currency net sales declines of 7.8%, and 6.0%, respectively.

Gross Profit

Gross profit increased 30 basis points to 81.1% of net sales, up from 80.8% in 2023. The increase in gross profit margin can be attributed to favorable changes in market and product sales mix, lower inventory scrap, the impact of modest price increases that occurred throughout the year, and lower material costs in China. These increases were partially offset by unfavorable changes in currency exchange rates.

Associate Incentives

Associate incentives decreased 20 basis points to 42.6% of net sales in 2024, compared with 42.8% in the prior year. The relative decrease can primarily be attributed to benefits from modest price increases that occurred throughout the year, was well as decreased spend on Associate incentive promotions. These improvements were partially offset by an unfavorable shift in market sales mix and higher spending on distributor trips and events.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 280 basis points relative to net sales and increased $6.3 million in absolute terms. The relative increase can be attributed to leverage lost on lower net sales. The increased expense in absolute terms can be primarily attributed to an increase in spending for legal and other professional services, which can be attributed to acquisition related costs of $8.2 million. This increase was partially offset by a decrease in spending for employee related costs.

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Income Taxes

Income taxes increased to 44.9% of pre-tax earnings in 2024, up from 37.7% of pre-tax earnings in 2023. The higher effective tax rate is primarily attributable to the distribution of pre-tax earnings between markets. This increase was offset, in part, by a change in U.S. tax law for foreign currency conversion of foreign branch operations.

Diluted Earnings Per Share Attributable to USANA

Diluted earnings per share attributable to USANA decreased to $2.19 in 2024 from $3.30 in 2023. This decrease can be attributed to lower net earnings.

Liquidity and Capital Resources

We have historically met our working capital and capital expenditure requirements by using net cash flow from operations and by drawing on our line of credit. Our principal source of liquidity is our operating cash flow. Although we are required to maintain cash deposits with banks in certain of our markets, there are currently no material restrictions on our ability to transfer and remit funds among our international markets. In China, however, our compliance with Chinese accounting and tax regulations promulgated by the State Administration of Foreign Exchange (“SAFE”) results in transfer and remittance of our profits and dividends from China to the United States on a delayed basis. If SAFE or other Chinese regulators introduce new regulations or change existing regulations which allow foreign investors to remit profits and dividends earned in China to other countries, our ability to remit profits or pay dividends from China to the United States may be limited in the future.

We believe our current liquidity, through cash flow from operations, is adequate to meet our cash requirements and sustain our operations. Maintaining a capital structure that emphasizes sufficient liquidity and adaptability in the prevailing economic climate is our top priority. We actively assess potential acquisition opportunities and investments in complementary ventures. While we continuously aim to preserve ample liquidity and ensure business continuity amid uncertainties, we also explore initiatives such as stock repurchases. These strategic decisions have the potential to impact our liquidity, enabling us to navigate these challenging times effectively.

Cash and Cash Equivalents

Cash and cash equivalents decreased to $181.8 million at December 28, 2024, from $330.4 million at December 30, 2023. Cash flow provided by operating and financing activities was $61.0 million and $9.6 million, respectively, offset by cash used in investing activities of $213.1 million. Additionally, unfavorable changes in currency exchange rates, have impacted cash and cash equivalents, and restricted cash by an estimated $6.2 million.

The following table below presents concentrations of cash and cash equivalents by market for the periods indicated:

[[GREPCENT_TABLE]]
[["","Cash and cash equivalents (in millions)"],["","As of December 28, 2024","","As of December 30, 2023"],["United States","$","40.1","","","$","169.9"],["China","101.2","","","111.0"],["All other markets","40.5","","","49.5"],["Total Cash and cash equivalents","$","181.8","","","$","330.4"]]
[[/GREPCENT_TABLE]]

Cash Flows Provided by Operations and Significant Uses of Cash

As discussed above, our principal source of liquidity comes from cash flows from operations. Net cash flow provided by operating activities totaled $61.0 million in 2024. Net earnings combined with adjustments of non-cash items contributed positively to our net cash flow provided by operating activities, partially offset by changes in working capital.

Other significant uses of cash included the Hiya Acquisition of $203.3 million, net of cash acquired, and an investment of $10.1 million to purchase property and equipment. Additionally, cash used to repurchase and retire shares totaled $9.4 million in 2024.

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Net cash flow provided by operating activities totaled $70.6 million in 2023. Net earnings combined with adjustments of non-cash items contributed positively to our net cash flow provided by operating activities, partially offset by $14.5 million in cash used to purchase property and equipment primarily related to our digital commerce initiatives and our India operations and cash used to repurchase and retire shares of $11.6 million.

Line of Credit

Information with respect to our line of credit 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.

Share Repurchase

Information with respect to our share repurchases may be found in Note N 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 our current cash balances, future cash provided by operations, and amounts available under our line of credit will be sufficient to cover our operating and capital needs in the ordinary course of business for the foreseeable future. If we experience an adverse operating environment or unanticipated and unusual capital expenditure requirements, additional financing may be required. No assurance can be given, however, that additional financing, if required, would be available to us at all or on favorable terms. We might also require or seek additional financing for the purpose of expanding into new markets, growing our existing markets, mergers and acquisitions, or for other reasons. Such financing may include the use of 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 of December 28, 2024, and the effect such obligations and commitments are expected to have on our liquidity and cash flow in future periods:

[[GREPCENT_TABLE]]
[["Payments Due By Period (in thousands)"],["Contractual Obligations","","Total","","Less than 1 year","","1 - 3 years","","3 - 5 years","","More than 5 years"],["Operating Leases","","$","17,824","","","$","6,742","","","$","6,982","","","$","4,074","","","$","26"],["Other Commitments","","31,363","","","20,493","","","9,675","","","1,166","","","29"],["Total Contractual Obligations","","$","49,187","","","$","27,235","","","$","16,657","","","$","5,240","","","$","55"]]
[[/GREPCENT_TABLE]]

“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 G 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, services related to the events that we hold for our Associates both locally and internationally, and local lines of credit. 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 K to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report, which is incorporated by reference.

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Inflation

Like many other global companies, we are facing significant inflationary pressures in the world economy. Inflationary pressures are growing as we renew pricing arrangements, notably for certain direct materials, wages, energy, and transportation costs. These inflationary pressures, including margin pressure from inflation as well as the cost of capital could continue to grow in 2025.

Critical Accounting Policies and Estimates

Our Consolidated Financial Statements included in this report have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Our significant accounting policies are described in the Consolidated Financial Statements included herein. The preparation of financial statements in accordance with U.S. 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)recognition of revenue when or as 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 subsequent Auto 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 becomes remote.

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Business Combinations. To record the value of assets acquired, liabilities assumed, and noncontrolling interest as a result of our acquisition of Hiya on December 23, 2024, we have performed a purchase price allocation utilizing the best information available to management. Assets acquired, liabilities assumed, and noncontrolling interests as part of a business acquisition are generally recorded at their fair value at the date of acquisition. The excess of purchase price over the fair value of assets acquired, liabilities assumed, and noncontrolling interest is recorded as goodwill. The acquisition method requires management to make assumptions and apply judgment, particularly for those assets acquired, liabilities assumed, and noncontrolling interest for which inputs are unobservable, such as trade name and customer relationship intangible assets. The fair value for the acquired trade name intangible asset was estimated utilizing an income approach, specifically the multi-period excess earnings method. The fair value for the acquired customer relationship intangible asset was estimated utilizing an income approach, specifically the with-and-without method. Both methods involve the use of significant estimates and assumptions including related to projected revenue growth rates, projected earnings before interest, taxes, depreciation and amortization (“EBITDA”) margins, and discount rates. Intangible assets estimated and recognized as a result of the Hiya Acquisition are based upon assumptions and inputs which have inherent estimation uncertainty. These estimates may be adjusted as more current information becomes available, and any adjustment could be material.