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 29, 2018

o 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)

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 o

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 o

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 o
Non-accelerated filer o	Smaller reporting company o
	Emerging growth company o

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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares outstanding of the registrant’s common stock as of November 2, 2018 was 23,976,585

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(unaudited)

	As of			As of
	December 30,			September 29,
	2017			2018

ASSETS
Current assets
Cash and cash equivalents	$	247,131		$	239,751
Securities held-to-maturity, net	—			81,673
Inventories	62,918			81,110
Prepaid expenses and other current assets	30,110			32,228
Total current assets	340,159			434,762

Property and equipment, net	102,847			93,555

Goodwill	17,417			16,829
Intangible assets, net	35,154			32,217
Deferred tax assets	2,859			3,771
Other assets	20,833			18,247
	$	519,269		$	599,381

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	11,787		$	14,467
Other current liabilities	129,396			138,419
Total current liabilities	141,183			152,886

Deferred tax liabilities	13,730			9,848
Other long-term liabilities	1,146			1,058

Stockholders’ equity
Common stock, $0.001 par value; Authorized — 50,000 shares, issued and outstanding 24,024 as of December 30, 2017 and 24,201 as of September 29, 2018	24			24
Additional paid-in capital	76,542			83,216
Retained earnings	288,070			362,250
Accumulated other comprehensive income (loss)	(1,426		)	(9,901		)
Total stockholders’ equity	363,210			435,589
	$	519,269		$	599,381

The accompanying notes are an integral part of these statements.

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands, except per share data)

(unaudited)

	Quarter Ended						Nine Months Ended
	September 30,			September 29,			September 30,			September 29,
	2017			2018			2017			2018

Net sales	$	261,765		$	296,767		$	774,151		$	890,225
Cost of sales	47,135			51,877			133,691			151,243

Gross profit	214,630			244,890			640,460			738,982

Operating expenses:
Associate incentives	116,010			130,264			350,195			392,416
Selling, general and administrative	67,263			69,112			193,653			206,781

Total operating expenses	183,273			199,376			543,848			599,197

Earnings from operations	31,357			45,514			96,612			139,785

Other income (expense):
Interest income	571			1,269			1,644			3,140
Interest expense	(10		)	(8		)	(31		)	(27		)
Other, net	129			(249		)	19			(851		)

Other income (expense), net	690			1,012			1,632			2,262

Earnings before income taxes	32,047			46,526			98,244			142,047

Income taxes	8,278			15,486			29,858			48,154

Net earnings	$	23,769		$	31,040		$	68,386		$	93,893

Earnings per common share
Basic	$	0.98		$	1.28		$	2.80		$	3.88
Diluted	$	0.97		$	1.24		$	2.75		$	3.80

Weighted average common shares outstanding
Basic	24,283			24,269			24,462			24,179
Diluted	24,588			25,001			24,871			24,705

Comprehensive income:

Net earnings	$	23,769		$	31,040		$	68,386		$	93,893

Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment	2,941			(6,381		)	10,153			(10,087		)
Tax benefit (expense) related to foreign currency translation adjustment	(625		)	344			(2,601		)	1,612

Other comprehensive income (loss), net of tax	2,316			(6,037		)	7,552			(8,475		)

Comprehensive income	$	26,085		$	25,003		$	75,938		$	85,418

The accompanying notes are an integral part of these statements.

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

For the nine months ended September 30, 2017

												Accumulated
						Additional						Other
	Common Stock					Paid-in			Retained			Comprehensive
	Shares		Value			Capital			Earnings			Income (Loss)			Total

Balance at December 31, 2016	24,485		$	24		$	71,505		$	265,405		$	(11,647	)	325,287
Net earnings									68,386						68,386
Other comprehensive income (loss), net of tax												7,552			7,552
Equity-based compensation expense						11,711									11,711
Common stock repurchased and retired	(865	)	(1		)	(10,129		)	(39,870		)				(50,000		)
Common stock issued under equity award plans	326		1												1
Tax withholding for net-share settled equity awards						(125		)							(125		)
Balance at September 30, 2017	23,946		$	24		$	72,962		$	293,921		$	(4,095	)	$	362,812

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

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

For the three months ended September 30, 2017

												Accumulated
						Additional						Other
	Common Stock					Paid-in			Retained			Comprehensive
	Shares		Value			Capital			Earnings			Income (Loss)			Total

Balance at July 1, 2017	24,624		$	24		$	79,507		$	310,022		$	(6,411	)	$	383,142
Net earnings									23,769						23,769
Other comprehensive income (loss), net of tax												2,316			2,316
Equity-based compensation expense						3,709									3,709
Common stock repurchased and retired	(865	)	(1		)	(10,129		)	(39,870		)				(50,000		)
Common stock issued under equity award plans	187		1												1
Tax withholding for net-share settled equity awards						(125		)							(125		)
Balance at September 30, 2017	23,946		$	24		$	72,962		$	293,921		$	(4,095	)	$	362,812

For the three months ended September 29, 2018

											Accumulated
					Additional						Other
	Common Stock				Paid-in			Retained			Comprehensive
	Shares		Value		Capital			Earnings			Income (Loss)			Total

Balance at June 30, 2018	24,220		$	24	$	83,542		$	349,579		$	(3,864	)	$	429,281
Net earnings								31,040						31,040
Other comprehensive income (loss), net of tax											(6,037		)	(6,037		)
Equity-based compensation expense					3,968									3,968
Common stock repurchased and retired	(178	)	—		(4,278		)	(18,369		)				(22,647		)
Common stock issued under equity award plans	159		—											—
Tax withholding for net-share settled equity awards					(16		)							(16		)
Balance at September 29, 2018	24,201		$	24	$	83,216		$	362,250		$	(9,901	)	$	435,589

The accompanying notes are an integral part of these statements.

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended
	September 30,			September 29,
	2017			2018

Cash flows from operating activities
Net earnings	$	68,386		$	93,893
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities
Depreciation and amortization	11,797			12,734
(Gain) loss on sale of property and equipment	8			1,804
Equity-based compensation expense	11,711			11,026
Deferred income taxes	(12,801		)	(3,524		)
Impairment on notes receivable	—			(658		)
Changes in operating assets and liabilities:
Inventories	4,556			(21,938		)
Prepaid expenses and other assets	6,343			(2,396		)
Accounts payable	550			2,855
Other liabilities	(21,909		)	17,897

Net cash provided by (used in) operating activities	68,641			111,693

Cash flows from investing activities
Receipts on notes receivable	259			4,801
Proceeds from the settlement of net investment hedges	—			739
Purchases of investment securities held-to-maturity	—			(81,673		)
Proceeds from sale of property and equipment	16			381
Purchases of property and equipment	(9,168		)	(8,862		)

Net cash provided by (used in) investing activities	(8,893		)	(84,614		)

Cash flows from financing activities
Repurchase of common stock	(50,000		)	(25,590		)
Proceeds from disgorgement of short-swing stock profits	—			907
Borrowings on line of credit	3,500			—
Payments on line of credit	(3,500		)	—
Payments related to tax withholding for net-share settled equity awards	(125		)	(376		)

Net cash provided by (used in) financing activities	(50,125		)	(25,059		)

Effect of exchange rate changes on cash, cash equivalents and restricted cash	6,481			(9,784		)

Net increase (decrease) in cash, cash equivalents and restricted cash	16,104			(7,764		)

Cash, cash equivalents, and restricted cash, at beginning of period	178,952			250,535

Cash, cash equivalents, and restricted cash at end of period	$	195,056		$	242,771

Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets

Cash and equivalents	$	191,745		$	239,751
Restricted cash included in prepaid expenses and other current assets	305			108
Restricted cash included in other assets	3,006			2,912
Total cash, cash equivalents, and restricted cash	$	195,056		$	242,771

Supplemental disclosures of cash flow information

Cash paid during the period for:
Interest	$	9		$	5
Income taxes	40,532			59,244
Cash received during the period for:
Income tax refund	4,700			2,451
Non-cash investing activities:
Credits on notes receivable	412			—
Accrued purchases of property and equipment	202			50

The accompanying notes are an integral part of these statements.

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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 nutritional and personal care/skincare products that are sold internationally through a global network marketing system, which is a form of direct selling. The Condensed Consolidated 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 two geographic regions: Asia Pacific, and Americas and Europe. Asia Pacific is further divided into three sub-regions: Greater China, Southeast Asia Pacific, and North Asia. Greater China includes Hong Kong, Taiwan and China; Southeast Asia Pacific includes Australia, New Zealand, Singapore, Malaysia, the Philippines, Thailand, and Indonesia; North Asia includes Japan, and South Korea. 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 30, 2017, derived from audited consolidated financial statements, and the unaudited interim consolidated financial information of the Company have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission (“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 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 29, 2018 and results of operations for the quarters and nine months ended September 30, 2017 and September 29, 2018.

The interim condensed consolidated 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 30, 2017. The results of operations for the nine months ended September 29, 2018, are not necessarily indicative of the results that may be expected for the fiscal year ending December 29, 2018.

Recent Accounting Pronouncements

Adopted accounting pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” Also referred to as ASC 606, this update replaces existing revenue recognition guidance with a single comprehensive revenue model for entities to use in accounting for revenue arising from contracts with customers. ASC 606 includes a five-step process by which entities recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which an entity expects to be entitled in exchange for those goods or services. This standard also requires enhanced disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

The Company adopted ASC 606 effective at the beginning of fiscal 2018 and applied the modified retrospective approach. Accordingly, the Company recognized the cumulative effect of initially applying ASC 606 as an adjustment to the fiscal 2018 opening balance of retained earnings. The comparative information has not been restated and continues to be presented according to accounting standards in effect for those periods. The adoption of ASC 606 did not have a material impact on the Company’s consolidated financial statements. As a result of the adoption of ASC 606, the Company updated its accounting policies related to revenue recognition. See Note B — Revenue Recognition for additional information regarding the Company’s revenue recognition policies under the new standard.

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

NOTE A — ORGANIZATION, CONSOLIDATION, AND BASIS OF PRESENTATION - CONTINUED

Under ASC 606, the Company made a change in the timing for recognizing revenue on orders that have shipped but have not been delivered at period end. Under the new standard, revenue is recognized when the customer obtains control of the goods and considering the indicators used to determine when control has passed to the customer, the Company has concluded that control transfers upon shipment. Therefore, revenue and related expense items including cost of goods sold and Associate incentives on orders that have shipped but have not been delivered at period end are no longer deferred. Subsequent to the period of adoption, there has been no material impact on net income and related per-share amounts.

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule is effective on November 5, 2018. The Company is in the process of evaluating the impact of the final rule on its consolidated financial statements.

Issued accounting pronouncements not yet adopted

In February 2016, the FASB issued 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 will require 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. The Company will adopt ASU 2016-02 in the first quarter of 2019, specifically, using the alternative transition method. The Company is currently in the process of accumulating and evaluating all the necessary information required to properly account for its lease portfolio under the new standard. The Company is also in the process of implementing changes to its systems and processes in conjunction with its review of lease agreements to support the ongoing accounting and disclosure requirements. Although the Company is in the process of evaluating the impact of adoption of the ASU on its consolidated financial statements, the Company currently believes the most significant change will be related to the recognition of right-of-use assets and lease liabilities on the Company’s balance sheet for facility lease agreements.

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 effects 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. Early adoption is permitted. The Company does not expect the adoption of ASU 2017-12 will have a material impact on its consolidated financial statements.

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

NOTE A — ORGANIZATION, CONSOLIDATION, AND BASIS OF PRESENTATION - CONTINUED

In August 2018, the FASB issued 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 observable inputs used to develop Level 3 fair value measurements. The amendments in this Update 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 expect the adoption of ASU 2018-13 will have a material impact on its 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 does not expect the adoption of ASU 2018-15 will have a material impact on its consolidated financial statements.

NOTE B — 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 the Company expects to be entitled in exchange for transferring those products or services. Revenue excludes taxes that have been assessed by governmental authorities and that are directly imposed on revenue-producing transactions between the Company and its customers, including sales, use, value-added, and some excise taxes. 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.

Product Revenue

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.

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

NOTE B — REVENUE RECOGNITION - CONTINUED

The Company’s 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, the Company estimates 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 the Company’s 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 to a customer 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 the Company’s product sales and are recorded as an expense when revenue for the goods is recognized.

Shipping and handling activities are performed after the customer obtains control of the goods transferred. The Company accounts for these activities as fulfillment costs. Therefore, the Company recognizes 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.

With respect to will-call orders, the Company periodically assesses the likelihood that customers will exercise their contractual right to pick up orders and revenue is recognized when the likelihood is estimated to be remote.

Other Revenue

Other types of revenue include fees 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.

Revenue Disaggregation

Disaggregation of revenue by geographical region and major product line is included in Segment Information in Note L.

Contract Balances

Contract liabilities, which are recorded within Other current liabilities 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.

The following table provides information about contract liabilities from contracts with customers, including significant changes in the contract liabilities balances during the period.

	Nine Months Ended
	September 29,
	2018

Contract liabilities at beginning of period	$	14,417
Increase due to deferral of revenue	17,601
Decreases due to recognition of revenue	(14,141		)

Contract liabilities at end of period	$	17,877

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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 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
				Inputs
	December 30, 2017			Level 1		Level 2			Level 3

Money market funds included in cash equivalents	$	106,090		$	106,090	$	—		$	—
Foreign currency contracts included in other current liabilities	(139		)	—		(139		)	—

	$	105,951		$	106,090	$	(139	)	$	—

				Fair Value Measurements Using
				Inputs
	September 29, 2018			Level 1		Level 2			Level 3

Money market funds included in cash equivalents	$	128,418		$	128,418	$	—		$	—
Foreign currency contracts included in other current liabilities	(93		)	—		(93		)	—

	$	128,325		$	128,418	$	(93	)	$	—

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 goodwill, intangible assets, and property and equipment, 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 recorded to reduce the carrying value to the fair value, if the carrying value exceeds the fair value. At December 30, 2017 and September 29, 2018, there were no non-financial assets measured at fair value on a non-recurring basis.

The Company’s financial instruments include cash equivalents, securities held-to-maturity, 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. Historically, the carrying value of the notes receivable approximated fair value because the variable interest rates in the notes reflected current market rates. During the year ended December 30, 2017, an impairment was recorded on a note receivable (discussed in Note G) based on the estimated recoverable amount using Level 3 inputs, which approximates fair value.

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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 - CONTINUED

Securities held-to-maturity consist of corporate bonds, commercial paper, and U.S. treasuries. The fair value of corporate bonds, commercial paper, and U.S. treasuries 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, commercial paper, and U.S. treasuries 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 September 29, 2018
	Amortized Cost		Unrecognized Holding Gains		Unrecognized Holding Losses			Estimated Fair Value

Corporate bonds	60,743		5		(24		)	60,724
U.S. treasuries	14,981		—		(1		)	14,980
Commercial paper	5,949		—		—			5,949

Total securities held-to-maturity	$	81,673	$	5	$	(25	)	$	81,653

All held-to-maturity securities as of September 29, 2018 mature within one year.

NOTE E — INVENTORIES

Inventories consist of the following:

	December 30,		September 29,
	2017		2018

Raw materials	$	20,737	$	22,066
Work in progress	8,461		14,318
Finished goods	33,720		44,726

	$	62,918	$	81,110

NOTE F — INTANGIBLE ASSETS

The Company performed its annual goodwill impairment test during the third quarter of 2018. 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, no impairments of goodwill were recognized.

The Company also performed its annual indefinite-lived intangible asset impairment test during the third quarter of 2018. 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, no impairment of the indefinite-lived intangible asset was recognized.

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

NOTE I — 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 our 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 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.

On February 7, 2017, the Company disclosed in a Current Report on Form 8-K filed with the SEC that it is 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 are instituted against it or any of its current or former officers or directors. The Company has voluntarily contacted the SEC and the United States Department of Justice to advise both agencies that an internal investigation is underway and intends to provide additional information to both agencies as the investigation progresses. Because the internal investigation is ongoing, the Company cannot predict the duration, scope, or result of the investigation. One or more governmental actions could be instituted in respect of the matters that are the subject of 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.

On February 13, 2017, a purported shareholder class action lawsuit (Rumbaugh v. USANA Health Sciences Inc., et al., Case No. 2:17-cv-00106) was filed in the United States District Court for the District of Utah by April Rumbaugh, a purported shareholder of USANA, alleging that the Company failed to disclose that (i) the Company’s BabyCare subsidiary had engaged in improper reimbursement practices in China, (ii) these practices constituted violations of the Foreign Corrupt Practices Act or FCPA, (iii) as such, the Company’s China revenues were in part the product of unlawful conduct and unlikely to be sustainable, and (iv) the foregoing conduct, when it became known, was likely to subject the Company to significant regulatory scrutiny. On behalf of herself and a putative class of purchasers of USANA stock between March 14, 2014 and February 7, 2017, the plaintiff asserted claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated thereunder. The plaintiff sought, among other things, an award of damages, interest, reasonable attorneys’ fees, expert fees, and other costs. The lawsuit named as defendants the Company; its former Co-Chief Executive Officer, David A. Wentz; and our Chief Leadership Development Officer, Paul A. Jones. On June 2, 2017, the court appointed Chi Wah On (another purported shareholder of USANA) as lead plaintiff. On August 4, 2017, lead plaintiff filed a consolidated amended complaint seeking similar relief. This new complaint asserted additional allegations and added the Company’s Chief Executive Officer, Kevin G. Guest, and Chief Financial Officer, G. Douglas Hekking, as defendants. On September 18, 2017, the Company filed a motion to dismiss the amended complaint, and briefing was completed on November 8, 2017. The motion to dismiss was argued on April 25, 2018. Subsequent to September 29, 2018, on October 16, 2018, the United States District Court for the District of Utah dismissed the action with prejudice.

NOTE J — 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.

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

NOTE K — COMMON STOCK AND EARNINGS PER SHARE

Basic earnings per share 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 earnings per share based on the time they were outstanding in any period. Diluted earnings per common share are based on shares that are outstanding (computed under basic EPS) and on potentially dilutive shares. Shares that are included in the diluted earnings per share 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 earnings per share and diluted earnings per share for the periods indicated:

	Quarter Ended				Nine Months Ended
	September 30,		September 29,		September 30,		September 29,
	2017		2018		2017		2018

Net earnings available to common shareholders	$	23,769	$	31,040	$	68,386	$	93,893

Weighted average common shares outstanding - basic	24,283		24,269		24,462		24,179

Dilutive effect of in-the-money equity awards	305		732		409		526

Weighted average common shares outstanding - diluted	24,588		25,001		24,871		24,705

Earnings per common share from net earnings - basic	$	0.98	$	1.28	$	2.80	$	3.88

Earnings per common share from net earnings - diluted	$	0.97	$	1.24	$	2.75	$	3.80

Equity awards for the following shares were not included in the computation of diluted EPS due to the fact that their effect would be anti-dilutive:

Quarter Ended		Nine Months Ended
September 30,	September 29,	September 30,	September 29,
2017	2018	2017	2018
2,035	—	2,091	601

During the quarter ended September 30, 2017 and September 29, 2018, the Company repurchased and retired 865 shares and 178 shares for $50,000 and $22,647, respectively, under the Company’s share repurchase plan.

During the nine months ended September 30, 2017 and September 29, 2018, the Company repurchased and retired 865 shares and 217 shares for $50,000 and $25,590, 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 September 29, 2018, the remaining approved repurchase amount under the stock repurchase plan was $24,410. There currently is no expiration date on the remaining approved repurchase amount and no requirement for future share repurchases.

On October 23, 2018, the Company’s Board of Directors authorized an increase in the amount available under its share repurchase plan to a total of $150,000. The authorization is inclusive of the $24,410 that was remaining under the prior authorization at September 29, 2018. Subsequent to September 29, 2018, and through November 2, 2018, the Company repurchased and retired 235 shares of common stock for $26,677, at an average market price of $113.57 per share.

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

NOTE L — SEGMENT INFORMATION

USANA operates as a direct selling company that develops, manufactures, and distributes high-quality nutritional and personal care/skincare products that are sold through a global network marketing system of independent distributors (“Associates”). As such, management 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 nutritional, foods, and personal care/skincare products for the periods indicated.

	Quarter Ended				Nine Months Ended
	September 30,		September 29,		September 30,		September 29,
	2017		2018		2017		2018

USANA® Nutritionals	83	%	83	%	84	%	82	%
USANA Foods	9	%	9	%	9	%	9	%
Personal care/Skincare
Sensé — beautiful science®	6	%	2	%	6	%	4	%
Celavive®(1)	N/A		5	%	N/A		4	%

(1) We launched Celavive® in every market except China in the first quarter of 2018 and recently launched in China late in the third quarter of 2018.

Selected financial information for the Company is presented for two geographic regions: Asia Pacific, with three sub-regions under Asia Pacific, and Americas and Europe. Individual markets are categorized into these regions as follows:

· Asia Pacific —

· Greater China — Hong Kong, Taiwan and China. Our business in China is conducted by BabyCare Holding, Ltd. (“BabyCare”), our 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(2), Spain(2), Italy(2), Romania(2), Belgium, and the Netherlands.

(2) We commenced operations in Germany, Spain, Italy, and Romania near the end of the second quarter of 2018.

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

NOTE L — SEGMENT INFORMATION - CONTINUED

Selected Financial Information

Financial information by geographic region is presented for the periods indicated below:

	Quarter Ended				Nine Months Ended
	September 30,		September 29,		September 30,		September 29,
	2017		2018		2017		2018

Net Sales to External Customers

Asia Pacific
Greater China	$	131,273	$	160,932	$	399,713	$	486,581
Southeast Asia Pacific	52,310		58,770		151,381		169,769
North Asia	15,708		19,899		42,612		56,969
Asia Pacific Total	199,291		239,601		593,706		713,319

Americas and Europe	62,474		57,166		180,445		176,906

Consolidated Total	$	261,765	$	296,767	$	774,151	$	890,225

The following table provides further information on markets representing ten percent or more of consolidated net sales and long-lived assets, respectively:

	Quarter Ended				Nine Months Ended
	September 30,		September 29,		September 30,		September 29,
	2017		2018		2017		2018

Net sales:
China	$	116,174	$	144,625	$	352,462	$	436,327
United States	$	34,183	$	29,790	$	93,219	$	88,734

	As of
	December 30,		September 29,
	2017		2018
Long-lived assets:
China	$	96,248	$	89,236
United States	$	59,589	$	51,218

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	Nine Months Ended
	September 30, 2017		September 29, 2018

Product Line
USANA® Nutritionals
Essentials/CellSentials	19	%	17	%
Optimizers	65	%	65	%
USANA Foods	9	%	9	%
Personal care/Skincare
Sensé — beautiful science®	6	%	4	%
Celavive®(1)	N/A		4	%
All Other	1	%	1	%

Key Product
USANA® Essentials/CellSentials	13	%	11	%
Proflavanol®	12	%	11	%
BiOmega-3™	14	%	14	%

(1) We launched Celavive® in every market except China in the first quarter of 2018 and recently launched in China late in the third quarter of 2018.

We believe that our ability to attract and retain Associates and Preferred Customers to sell and consume our products is positively influenced by a number of factors, some of which include: the general public’s heightened awareness and understanding of the connection between diet and long-term health, and a growing desire for a secondary source of income and small business ownership.

We believe that our high-quality products and our Associate Compensation Plan are the key components to attracting and retaining Associates. We periodically make changes to our Compensation Plan in an effort to ensure that our plan is among the most competitive 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.

To further support our Associates in building their businesses, we 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 we believe are an integral part of building and maintaining a successful home-based business for our Associates. 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 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 nine months ended September 29, 2018, net sales outside of the United States represented 90.0% 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.

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Customers

Because we sell our products exclusively to a customer base of independent Associates and Preferred Customers, we must increase the number of active Customers and/or increase the amount they spend, on average, to increase net sales. 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 57% of product sales during the nine months ended September 29, 2018; 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 tables below summarize the changes in our active Customer base by geographic region. These numbers have been rounded to the nearest thousand as of the dates indicated.

	Total Active Customers by Region
	As of			As of			Change from		Percent
	September 30, 2017			September 29, 2018			Prior Year		Change

Asia Pacific:
Greater China	285,000	50.6	%	330,000	53.7	%	45,000		15.8	%
Southeast Asia Pacific	106,000	18.8	%	115,000	18.7	%	9,000		8.5	%
North Asia	34,000	6.1	%	39,000	6.3	%	5,000		14.7	%
Asia Pacific Total	425,000	75.5	%	484,000	78.7	%	59,000		13.9	%

Americas and Europe	138,000	24.5	%	131,000	21.3	%	(7,000	)	(5.1	)%

	563,000	100.0	%	615,000	100.0	%	52,000		9.2	%

Current Focus and Recent Developments

Our primary objective is to increase the number of active Customers who purchase and use our products throughout the world. We have several strategies in place to support this objective, including:

· We successfully launched our Celavive® skincare line in every market. Our 2018 objective is to promote Celavive® to our existing Customers and to also use it to acquire a new customer demographic for USANA. With the anticipated growth from Celavive®, our goal is to grow our personal care and skincare line to an estimated run rate of 10% of net sales by the end of fiscal 2018.

· We completed the development of our new WeChat platform in China during the second quarter of 2018 and made it available to our China Customers during the third quarter of 2018. WeChat is a Chinese multi-purpose messaging and social media app that is widely thought of as China’s “app for everything” because of its wide range of functionality. This platform is part of our Customer experience initiative and is intended to make it easier for Customers in China to do business as they will be able to use the app to introduce USANA to new customers, complete sales of products and enroll new customers.

· We continue to develop and deploy information technology tools across the enterprise, including a new social sharing platform. This platform, which we began rolling out during the first quarter of 2018, allows our Associates to more fully utilize social media to promote USANA products and interact directly with Customers and potential customers. In particular, we are utilizing our social selling platform in connection with the launch of Celavive® around the world.

During the quarter, we held our International Convention in Salt Lake City, where a number of our Associates gathered to celebrate their success, engage with management and receive additional training.

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Quarters Ended September 30, 2017 and September 29, 2018

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																Percent
	(in thousands)																change
	Quarter Ended													Currency			excluding
	September 30, 2017				September 29, 2018				Change from prior year			Percent change		impact on sales			currency impact

Asia Pacific
Greater China	$	131,273	50.1	%	$	160,932	54.2	%	$	29,659		22.6	%	$	(3,221	)	25.0	%
Southeast Asia Pacific	52,310		20.0	%	58,770		19.8	%	6,460			12.3	%	(1,942		)	16.1	%
North Asia	15,708		6.0	%	19,899		6.7	%	4,191			26.7	%	182			25.5	%
Asia Pacific Total	199,291		76.1	%	239,601		80.7	%	40,310			20.2	%	(4,981		)	22.7	%

Americas and Europe	62,474		23.9	%	57,166		19.3	%	(5,308		)	(8.5	)%	(1,236		)	(6.5	)%
	$	261,765	100.0	%	$	296,767	100.0	%	$	35,002		13.4	%	$	(6,217	)	15.7	%

Asia Pacific: The increase in constant currency net sales in Greater China continues to be driven by growth in Mainland China, where local currency net sales increased 27.0%. The increase in constant currency net sales in Southeast Asia Pacific was driven by double digit local currency growth in several markets, including Malaysia, Philippines, Australia, and New Zealand. The increase in constant currency net sales in North Asia continues to be driven by growth in South Korea, where local currency net sales increased 25.6%, and the number of active Customers increased 15.6%.

Americas and Europe: The decrease in constant currency net sales in this region was driven by decreases in the U.S. and Mexico, where sales decreased 12.9% and 11.9%, respectively. Net sales in the U.S. were down compared with the prior year period due to higher sales related to the introduction of our Celavive® product line at our 2017 International Convention. Sustainable customer growth remains our top priority for each of our reporting regions.

Gross Profit

Gross profit increased 50 basis points to 82.5% of net sales for the third quarter of 2018, from 82.0% in the prior year. This increase can be attributed to changes in sales mix by market, leverage from higher sales on fixed costs, and lower relative freight costs, as well as annual price adjustments. These increases were partially offset by higher reserves for inventory obsolescence and costs associated with Celavive®, which carries a higher relative cost than our previous skincare line.

Associate Incentives

Associate incentives were 43.9% of net sales for the third quarter of 2018, compared with 44.3% in the prior year. This decrease can be primarily attributed to sales from Celavive®, which has a lower incentive payout as compared to our other product categories.

Selling, General and Administrative Expenses

In absolute terms, our selling, general and administrative expense increased $1.8 million during the third quarter of 2018

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when compared with the same period of the prior year. This increase can be attributed to higher employee related costs in the current year period. This absolute increase was partially offset by a reduction in expense related to China and our internal investigation and an impairment charge related to our note receivable from a former third-party supplier in the prior-year period.

Income Taxes

Income taxes were 33.3% of earnings in the third quarter of 2018 compared with 25.8% of earnings in the prior year. The higher effective tax rate for the third quarter compared with the same period of the prior-year is primarily due to higher excess tax benefits from equity award exercises recognized during the prior year quarter. Our effective tax rate, on a year-over-year basis, is not (and will not be) comparable during 2018 because of the impact of U.S. tax reform.

Diluted Earnings Per Share

Diluted earnings per share increased 27.8% in the third quarter of 2018 when compared with the prior-year quarter. This increase was due to higher net earnings offset, in part, by a higher diluted share count.

Nine Months Ended September 30, 2017 and September 29, 2018

Net Sales

The following table summarizes the changes in our net sales by geographic region for the periods ended as of the dates indicated:

	Net Sales by Region															Percent
	(in thousands)															change
	Nine Months Ended								Change					Currency		excluding
	September 30, 2017				September 29, 2018				from prior year			Percent change		impact on sales		currency impact

Asia Pacific
Greater China	$	399,713	51.6	%	$	486,581	54.7	%	$	86,868		21.7	%	$	18,481	17.1	%
Southeast Asia Pacific	151,381		19.6	%	169,769		19.0	%	18,388			12.1	%	916		11.5	%
North Asia	42,612		5.5	%	56,969		6.4	%	14,357			33.7	%	2,203		28.5	%
Asia Pacific Total	593,706		76.7	%	713,319		80.1	%	119,613			20.1	%	21,600		16.5	%

Americas and Europe	180,445		23.3	%	176,906		19.9	%	(3,539		)	(2.0	)%	1,043		(2.5	)%
	$	774,151	100.0	%	$	890,225	100.0	%	$	116,074		15.0	%	$	22,643	12.1	%

Asia Pacific: The increase in constant currency net sales in Greater China continues to be driven by growth in Mainland China, where local currency net sales increased 18.6%. The increase in net sales in Southeast Asia Pacific was driven by double digit local currency net sales growth in several markets, including Malaysia, New Zealand, Australia, and Indonesia. The increase in constant currency net sales in North Asia continues to be driven by growth in South Korea, where local currency net sales increased 29.4%.

Americas and Europe: The decrease in constant currency net sales in this region was driven by local currency decreases in the U.S. and Mexico, which decreased a 4.8% and 7.9%, respectively. Sustainable customer growth remains our top priority for this region as well as each of our other reporting regions.

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Gross Profit

Gross profit increased 30 basis points to 83.0% of net sales for the nine months of 2018, from 82.7% in the prior year. This increase can be attributed to favorable changes in currency exchange rates in markets outside of China, leverage from higher sales on fixed costs, and lower relative freight costs, as well as annual price adjustments. With the exception of China, where products are manufactured in-market, changes in currency exchange rates affect the valuation of U.S. manufactured inventory that is transferred to international subsidiaries. Improvement in gross profit margin were partially offset by higher reserves for inventory obsolescence and costs associated with our new Celavive® skincare line, which carries a higher relative cost than other products.

Associate Incentives

Associate incentives were 44.1% of net sales for the first nine months of 2018, compared with 45.2% in the prior year. This decrease can be primarily attributed to a higher level of contests, incentive promotions and reward trips during the first nine months of 2017 and sales from our new Celavive® line, which have a lower incentive payout.

Selling, General and Administrative Expenses

In absolute terms, our selling, general and administrative expense increased $13.1 million during the first nine months of 2018 when compared with the same period of the prior year. This increase can be attributed to higher employee related costs in the current year period. This absolute increase was partially offset by the incremental expense related to China and our internal investigation and an impairment charge related to our note receivable from a former third-party supplier in the first nine months of 2017.

Income Taxes

Income taxes were 33.9% of earnings in the first nine months of 2018 compared with 30.4% of earnings in the prior year. The higher effective tax rate for the first nine months compared with the same period of the prior-year is primarily due to the recognition of excess tax benefits from equity award exercises recognized during the prior period. Our effective tax rate, on a year-over-year basis, is not (and will not be) comparable during 2018 because of the impact of U.S. tax reform.

Diluted Earnings Per Share

Diluted earnings per share increased 38.2% in the first nine months of 2018 when compared with the same period of the prior year. This increase can be attributed to strong growth in net sales and improved operating margins offset, in part, by a higher effective tax rate.

Liquidity and Capital Resources

We have historically met our working capital and capital expenditure requirements by using both net cash flow from operations and periodically 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 Mainland 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 Mainland 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 Mainland China may be limited in the future.

We have historically generated positive cash flow due to our strong operating margins. Net cash flow from operating activities totaled $111.7 million in the first nine months of 2018. Items increasing cash flows from operations in the first nine months of 2018 include: (i) net earnings, and (ii) 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.

Net cash flow from operating activities totaled $68.6 million in the first nine months of 2017. Items increasing cash flows from operations in the first nine months of 2017 include: (i) net earnings, and (ii) non-cash items. These increases were reduced by (i) payment of accrued employee compensation costs, (ii) payment of accrued commissions, and (iii) deferred revenue.

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Cash and cash equivalents and securities held-to-maturity increased to $321.4 million at September 29, 2018, from $247.1 million at December 30, 2017. Of the $321.4 million of cash and cash equivalents and securities held-to-maturity held at September 29, 2018, $63.2 million was held as cash and cash equivalents and $81.7 million as securities held-to-maturity in the United States. Of the remaining $176.5 million held by our international subsidiaries, $132.3 million was concentrated in China. Cash and cash equivalents held at December 30, 2017, totaled $247.1 million of which, $52.2 million was held in the United States. Of the remaining $194.9 million held by our international subsidiaries, $142.3 million was held in China. Net working capital increased to $281.9 million at September 29, 2018, from $199.0 million at December 30, 2017.

Line of Credit

Information with respect to our line of credit may be found in Note H to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Report on Form 10-Q.

Share Repurchase

During the nine months ended September 29, 2018, we repurchased 217,000 shares of our common stock for $25.6 million under our share repurchase plan, at an average market price of $117.88. At September 29, 2018, the remaining approved repurchase amount under the plan was $24.4 million. There currently is no expiration date on the remaining approved repurchase amount and no requirement for future share repurchases.

On October 23, 2018, our Board of Directors authorized an increase in the amount available under the share repurchase plan to a total of $150.0 million. The authorization is inclusive of the $24.4 million that was remaining under the prior authorization at September 29, 2018. Subsequent to September 29, 2018, and through November 2, 2018, we repurchased and retired 235,000 shares of common stock for $26.7 million, at an average market price of $113.57 per share.

Off-Balance Sheet Arrangements

None.

Summary

We believe that current cash balances, 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 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.

Cautionary Note Regarding Forward-Looking Statements and Certain Risks

The statements contained in this report that are not purely historical are considered to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Exchange Act. These statements represent our expectations, hopes, beliefs, anticipations, commitments, intentions, and strategies regarding the future. They may be identified by the use of words or phrases such as “believes,” “expects,” “anticipates,” “should,” “plans,” “estimates,” and “potential,” among others. Forward-looking statements include, but are not limited to, statements contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding our financial performance, revenue, and expense levels in the future and the sufficiency of our existing assets to fund our future operations and capital spending needs. Readers are cautioned that actual results could differ materially from the anticipated results or other expectations that are expressed in these forward-looking statements for the reasons that are detailed in our most recent Annual Report on Form 10-K. The fact that some of these risk factors may be the same or similar to those in our past SEC reports means only that the risks are present in multiple periods. We believe that many of the risks detailed here and in our other SEC filings are part of doing business in the industry in which we operate and will likely be present in all periods reported. The fact that certain risks are common in the industry does not lessen their significance. The

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forward-looking statements contained in this report are made as of the date of this report, and we assume no obligation to update them or to update the reasons why our actual results could differ from those that we have projected. Among others, risks and uncertainties that may affect our business, financial condition, performance, development, and results of operations include:

· Our ability to attract and maintain a sufficient number of Associates and Preferred Customers;

· Our dependence upon a network marketing system to distribute our products and the activities of our independent Associates;

· The expansion of our business in China through BabyCare;

· Unanticipated effects of changes to our Compensation Plan;

· Our planned expansion into international markets, including delays in commencement of sales or product offerings in any new market, delays in compliance with local marketing or other regulatory requirements, or changes in target markets;

· General economic conditions, both domestically and internationally;

· The impact of changes in trade policies and tariffs;

· Potential political events, natural disasters, or other events that may negatively affect economic conditions;

· Potential effects of adverse publicity regarding USANA, nutritional supplements, or the network marketing industry;

· Reliance on key management personnel;

· Extensive government regulation of our products, manufacturing, and network marketing system;

· Potential inability to sustain or manage growth, including the failure to continue to develop new products;

· An increase in the amount of Associate incentives;

· Our reliance on the use of information technology;

· Disruption in operations or liability resulting from cybersecurity, data breaches or failure to comply with data privacy and/or data security laws and regulations;

· The effects of competition from new and 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 effects of customs, duties, taxation, and transfer pricing regulations, including regulations governing distinctions between and our responsibilities to employees and independent contractors;

· The 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 use in certain of our products;

· 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 with our “Athlete Guarantee” program;

· Continued compliance with debt covenants;

· Disruptions to shipping channels that are used to distribute our products to international warehouses;

· The introduction of new laws or changes to existing laws, both domestically and internationally; and

· The outcome of the internal investigation into our China operations, as well as other regulatory and litigation matters.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

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
(Jul. 1, 2018 through Aug. 4, 2018)	0	$	0.00	0	$	47,057

Fiscal August
(Aug 5, 2018 through Sep. 1, 2018)	0	$	0.00	0	$	47,057

Fiscal September
(Sep. 2, 2018 through Sep. 29, 2018)	178	$	127.43	0	$	24,410
	178			0

* 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. Our share repurchases may occur through open market purchases or pursuant to a Rule 10b5-1 trading plan. There is no requirement for future share repurchases, and there currently is no expiration date on the approved repurchase amount.

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

Item 4. MINE SAFETY DISCLOSURES

None.

Item 5. OTHER INFORMATION

None.

Item 6. EXHIBITS

Exhibit
Number		Description

31.1		Certification of Principal Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

31.2		Certification of Principal Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

32.1		Certification of Principal Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 (filed herewith)

32.2		Certification of Principal Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 (filed herewith)

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

		Page

	PART I. FINANCIAL INFORMATION

Item 1	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Comprehensive Income	4
	Condensed Consolidated Statements of Stockholders’ Equity	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	8-18
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20-28
Item 3	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4	Controls and Procedures	29

	PART II. OTHER INFORMATION

Item 1	Legal Proceedings	29
Item 1A	Risk Factors	29
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3	Defaults Upon Senior Securities	30
Item 4	Mine Safety Disclosures	30
Item 5	Other Information	30
Item 6	Exhibits	30

Signatures		31

	USANA HEALTH SCIENCES, INC.


	/s/ G. Douglas Hekking
	G. Douglas Hekking
	Chief Financial Officer (Principal Financial Officer)