USANA HEALTH SCIENCES, INC.

FORM 10-Q

For the Quarterly Period Ended ~~October~~July 1, ~~2016~~2017

~~INDE~~INDEXX

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			As of			As of
	January 2,			October 1,			December 31,			July 1,
	2016			2016			2016			2017

ASSETS
Current assets
Cash and cash equivalents	$	143,210		$	134,543		$	175,774		$	229,365
Inventories	66,119			74,146			64,810			68,688
Prepaid expenses and other current assets	34,935			39,423			37,277			32,109
Total current assets	244,264			248,112			277,861			330,162

Property and equipment, net	87,982			103,916			101,267			102,534

Goodwill	17,432			17,138			16,715			16,966
Intangible assets, net	38,269			36,130			34,349			34,449
Deferred tax assets	9,844			15,404			18,292			18,081
Other assets	25,446			22,908			22,158			22,588
	$	423,237		$	443,608		$	470,642		$	524,780

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	10,043		$	10,586		$	9,040		$	7,444
Line of credit - short term	—			1,200
Other current liabilities	121,369			116,648			129,451			127,930
Total current liabilities	131,412			128,434			138,491			135,374

Deferred tax liabilities	9,822			5,971			5,499			4,965
Other long-term liabilities	1,151			1,494			1,365			1,299

Stockholders’ equity
Common stock, $0.001 par value; Authorized — 50,000 shares, issued and outstanding 12,488 as of January 2, 2016 and 12,176 as of October 1, 2016	13			12
Common stock, $0.001 par value; Authorized — 50,000 shares, issued and outstanding 24,485 as of December 31, 2016 and 24,624 as of July 1, 2017							24			24
Additional paid-in capital	69,740			68,938			71,505			79,507
Retained earnings	214,875			243,523			265,405			310,022
Accumulated other comprehensive income (loss)	(3,776		)	(4,764		)	(11,647		)	(6,411		)
Total stockholders’ equity	280,852			307,709			325,287			383,142
	$	423,237		$	443,608		$	470,642		$	524,780

The accompanying notes are an integral part of these statements.

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands, except per share data)

(unaudited)

	Quarter Ended						Nine Months Ended						Quarter Ended						Six Months Ended
	October 3,			October 1,			October 3,			October 1,			July 2,			July 1,			July 2,			July 1,
	2015			2016			2015			2016			2016			2017			2016			2017

Net sales	$	233,292		$	254,219		$	685,914		$	753,182		$	258,514		$	257,063		$	498,963		$	512,386
Cost of sales	41,048			44,979			119,501			133,869			45,970			43,902			88,890			86,556

Gross profit	192,244			209,240			566,413			619,313			212,544			213,161			410,073			425,830

Operating expenses:
Associate incentives	101,521			112,816			304,751			335,541			115,331			118,404			222,725			234,185
Selling, general and administrative	52,757			60,591			155,137			176,986			59,764			62,389			116,395			126,390

Total operating expenses	154,278			173,407			459,888			512,527			175,095			180,793			339,120			360,575

Earnings from operations	37,966			35,833			106,525			106,786			37,449			32,368			70,953			65,255

Other income (expense):
Interest income	367			338			753			1,099			323			590			761			1,073
Interest expense	(4		)	(46		)	(11		)	(424		)	(176		)	(11		)	(378		)	(21		)
Other, net	78			(24		)	(219		)	(684		)	72			(119		)	(660		)	(110		)

Other income (expense), net	441			268			523			(9		)	219			460			(277		)	942

Earnings before income taxes	38,407			36,101			107,048			106,777			37,668			32,828			70,676			66,197

Income taxes	12,798			6,003			36,343			28,618			11,906			9,569			22,615			21,580

Net earnings	$	25,609		$	30,098		$	70,705		$	78,159		$	25,762		$	23,259		$	48,061		$	44,617

Earnings per common share
Basic	$	1.99		$	2.49		$	5.55		$	6.48		$	1.08		$	0.95		$	2.00		$	1.82
Diluted	$	1.92		$	2.40		$	5.35		$	6.24		$	1.03		$	0.93		$	1.92		$	1.78

Weighted average common shares outstanding
Basic	12,852			12,089			12,747			12,056			23,955			24,574			24,080			24,537
Diluted	13,317			12,525			13,209			12,525			24,917			25,018			25,050			24,997

Comprehensive income:

Net earnings	$	25,609		$	30,098		$	70,705		$	78,159		$	25,762		$	23,259		$	48,061		$	44,617

Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment	(4,990		)	(341		)	(6,374		)	(2,643		)	(4,433		)	3,915			(2,302		)	7,212
Tax benefit (expense) related to foreign currency translation adjustment	1,831			(515		)	2,355			1,655			2,870			(1,769		)	2,170			(1,976		)

Other comprehensive income (loss), net of tax	(3,159		)	(856		)	(4,019		)	(988		)	(1,563		)	2,146			(132		)	5,236

Comprehensive income	$	22,450		$	29,242		$	66,686		$	77,171		$	24,199		$	25,405		$	47,929		$	49,853

The accompanying notes are an integral part of these statements.

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

~~Nine~~Six Months Ended ~~October~~July 1, ~~2016~~2017

(in thousands)

(unaudited)

Accumulated

Additional

Other

Common Stock

Paid-in

Retained

Comprehensive

Shares

Value

Capital

Earnings

Income (Loss)

Total

Balance at January 2, 2016

12,488

$
13

$
69,740

$
214,875

$
(3,776
)
$
280,852

Cumulative-effect of accounting change

934

(601
)

333

Balance at January 2, 2016, as adjusted

12,488

$
13

$
70,674

$
214,274

$
(3,776
)
$
281,185

Net earnings

78,159

78,159

Other comprehensive income (loss), net of tax

(988
)
(988
)
Equity-based compensation expense

13,963

13,963

Common stock repurchased and retired

(553
)
(1
)
(15,699
)
(48,910
)

(64,610
)
Common stock issued under equity award plans

241

—

—

Balance at October 1, 2016

12,176

$
12

$
68,938

$
243,523

$
(4,764
)
$
307,709

								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						44,617					44,617
Other comprehensive income (loss), net of tax								5,236			5,236
Equity-based compensation expense				8,002							8,002
Common stock issued under equity award plans	139	—									—

Balance at July 1, 2017	24,624	$	24	$	79,507	$	310,022	$	(6,411	)	$	383,142

The accompanying notes are an integral part of these statements.

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended						Six Months Ended
	October 3,			October 1,			July 2,			July 1,
	2015			2016			2016			2017

Cash flows from operating activities
Net earnings	$	70,705		$	78,159		$	48,061		$	44,617
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities
Depreciation and amortization	7,284			9,930			6,754			7,666
(Gain) loss on sale of property and equipment	1			55			40			(6		)
Equity-based compensation expense	6,952			13,963			9,421			8,002
Excess tax benefits from equity-based payment arrangements	(9,739		)	—
Deferred income taxes	(1,993		)	(2,249		)	(1,883		)	(2,043		)
Changes in operating assets and liabilities:
Inventories	(18,432		)	(7,922		)	(4,789		)	(1,603		)
Prepaid expenses and other assets	(565		)	(12,179		)	(11,647		)	4,780
Income tax payable related to tax benefit from equity award activity	9,587			—
Accounts payable	1,868			597			80			(1,187		)
Other liabilities	8,849			1,386			1,940			(4,613		)

Net cash provided by (used in) operating activities	74,517			81,740			47,977			55,613

Cash flows from investing activities
Additions to notes receivable	(1,579		)	(4		)	(4		)	—
Receipts on notes receivable	—			605			443			259
Proceeds from sale of property and equipment	182			3			1			11
Purchases of property and equipment	(16,468		)	(26,047		)	(13,663		)	(6,969		)

Net cash provided by (used in) investing activities	(17,865		)	(25,443		)	(13,223		)	(6,699		)

Cash flows from financing activities
Excess tax benefits from equity-based payment arrangements	9,739			—
Repurchase of common stock	—			(64,610		)	(64,610		)	—
Borrowings on line of credit	—			73,700			72,500			3,500
Payments on line of credit	—			(72,500		)	(72,500		)	(3,500		)
Deferred debt issuance costs	—			(250		)	(250		)	—

Net cash provided by (used in) financing activities	9,739			(63,660		)	(64,860		)	—

Effect of exchange rate changes on cash and cash equivalents	(3,322		)	(1,304		)	(706		)	4,677

Net increase (decrease) in cash and cash equivalents	63,069			(8,667		)	(30,812		)	53,591

Cash and cash equivalents, beginning of period	111,126			143,210			143,210			175,774

Cash and cash equivalents, end of period	$	174,195		$	134,543		$	112,398		$	229,365

Supplemental disclosures of cash flow information

Cash paid during the period for:
Interest	$	11		$	317		$	317		$	6
Income taxes	18,918			41,114			28,143			20,929
Cash received during the period for:
Income tax refund							—			4,700
Non-cash investing activities:
Credits on notes receivable	466			1,142			852			191
Accrued purchases of property and equipment	1,906			1,763			2,333			25

The accompanying notes are an integral part of these statements.

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

USANA Health Sciences, Inc. develops and manufactures high-quality nutritional and personal care 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. 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, Belgium, and the Netherlands. All intercompany accounts and transactions have been eliminated in consolidation.

The condensed consolidated balance sheet as of ~~January 2,~~December 31, 2016, derived from audited consolidated financial statements, and the unaudited interim consolidated financial information of the Company have been prepared in accordance with Article 10 of Regulation S-X promulgated by the Securities and Exchange ~~Commission. Certain~~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 ~~October~~July 1, ~~2016~~2017 and results of operations for the quarters and ~~nine~~six months ended ~~October 3, 2015~~July 2, 2016 and ~~October~~July 1, ~~2016.~~2017.

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 ~~January 2,~~December 31, 2016. The results of operations for the ~~nine~~six months ended ~~October~~July 1, ~~2016, may~~2017, are not benecessarily indicative of the results that may be expected for the fiscal year ~~2016~~ ending December ~~31, 2016.~~

On October 25, 2016, the Company declared a two-for-one stock split of its common stock that will be distributed in the form of a stock dividend on November 22, 2016 to shareholders of record as of November 14, 2016. This stock dividend will double the number of shares outstanding but will not affect the number of authorized shares of the Company or the par value of the common stock. All existing stock option agreements provide that the number of shares of common stock and the respective exercise price covered by each outstanding option agreement be proportionately adjusted for a stock split or similar event.30, 2017.

Recent Accounting Pronouncements

In May 2014, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued an Accounting Standard Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 includes a five-step process by which entities will 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. The standard also will require 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. In July 2015, the FASB announced a decision to defer the effective date of this ASU. ASU 2014-09 is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted for annual and interim reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact ASU 2014-09 will have on its consolidated financial statements. The amendments may be applied retrospectively to each prior period (full retrospective) or retrospectively with the cumulative effect recognized as of the date of initial application (modified retrospective). The Company plans to adopt ASU 2014-09 in the first quarter of 2018 and apply the modified retrospective approach.

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

The Company continues to evaluate the impact of this ASU on the specific areas that apply to the Company and their potential impact to its processes, accounting, financial reporting, disclosures, and controls. At this point, the Company has determined that the overall impact of adopting this ASU will not be material. This ASU will primarily involve updating revenue related internal control documentation and expanding revenue disclosures in our periodic filings. In addition to the documentation updates, the Company is considering a change in the methodology for deferring revenue on undelivered orders, which would not change the total amount of revenue recognized, but would accelerate the timing of when revenue is recognized. None of these changes are expected to have a material impact on the Company’s consolidated financial statements.

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. The Company is currently in the process of evaluating the impact of the ASU on the Company’s outstanding leases and expects that adoption will have an impact on the consolidated balance sheets related to recording right-of-use assets and corresponding lease liabilities. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact ASU 2016-02 will have on its consolidated financial statements.

In ~~March~~November 2016, the FASB issued ASU No. ~~2016-09, “Compensation-Stock Compensation~~2016-18, “Statement of Cash Flows (Topic ~~718)~~230): ~~Improvements to Employee Share-Based Payment Accounting.”~~Restricted Cash”. The ASU ~~2016-09 was issued~~requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as ~~part of~~restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the ~~FASB’s simplification initiative aimed at reducing costs~~beginning-of-period and complexity while maintaining or improving the usefulness of financial information. This update involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, forfeitures, statutory tax withholding requirements, and classification inend-of-period total amounts shown on the statement of cash flows. ~~This~~The ASU is effective for annual and interim periods in fiscal years beginning after December 15, ~~2016,~~2017. The Company does not expect the adoption of ASU 2016-18 will have a material impact on its statement of cash flows.

In January 2017 the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment.” ASU 2017-04 simplifies the accounting for goodwill impairment by eliminating the Step 2 requirement to calculate the implied fair value of goodwill. Instead, under ASU 2017-04, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of each reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those ~~annual periods. Early~~fiscal years, with early adoption ~~is permitted for any interim or annual period. If an entity early adopts~~permitted. The Company does not expect the ~~amendments in an interim period, any adjustments~~adoption of ASU 2017-04 will have a material impact on its consolidated financial statements.

In May 2017 the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting.” ASU 2017-09 provides clarification on when modification accounting should be ~~reflected as~~used for changes to the terms or conditions of a share-based payment award. ASU 2017-09 does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions, or award classification and would not be required if the changes are considered non-substantive. The ASU is effective for all annual and interim periods in fiscal years beginning ~~of the fiscal year that includes that interim period, and the entity must adopt all of the amendments in the same period.~~after December 15, 2017. The Company ~~elected to early adopt ASU 2016-09 during~~does not expect the ~~quarter ended April 2, 2016.~~

~~The impact of the early~~ adoption of this standard increased net earnings by approximately $6,491 and $7,316 for the quarter and nine months ended October 1, 2016, respectively. Diluted earnings per share, benefited the quarter and nine months ended October 1, 2016, by $0.50 and $0.52, respectively.ASU 2017-09 will have a material impact on its consolidated financial statements.

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

NOTE B — 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

January 2, 2016

Level 1

Level 2

Level 3

Money market funds included in cash equivalents

$
14,460

$
14,460

$
—

$
—

Foreign currency contracts included in prepaid expenses and other current assets

33

—

33

—

$
14,493

$
14,460

$
33

$
—

Fair Value Measurements Using

Inputs

October 1, 2016

Level 1

Level 2

Level 3

Money market funds included in cash equivalents

$
44,541

$
44,541

$
—

$
—

Foreign currency contracts included in prepaid expenses and other current assets

179

—

179

—

$
44,720

$
44,541

$
179

$
—

~~USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~(in thousands, except per share data)~~

~~(unaudited)~~

			Fair Value Measurements Using
			Inputs
	December 31, 2016		Level 1		Level 2		Level 3

Money market funds included in cash equivalents	$	27,917	$	27,917	$	—	$	—
Foreign currency contracts included in prepaid expenses and other current assets	4		—		4		—

	$	27,921	$	27,917	$	4	$	—

~~NOTE B — FAIR VALUE MEASURES - CONTINUED~~

			Fair Value Measurements Using
			Inputs
	July 1, 2017		Level 1		Level 2		Level 3

Money market funds included in cash equivalents	$	78,170	$	78,170	$	—	$	—
Foreign currency contracts included in prepaid expenses and other current assets	58		—		58		—

	$	78,228	$	78,170	$	58	$	—

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 ~~January 2,~~December 31, 2016 and ~~October~~July 1, ~~2016,~~2017, there were no non-financial assets measured at fair value on a non-recurring basis.

The Company’s financial instruments include cash equivalents, 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. The carrying value of the notes receivable approximate fair value because the variable interest rates in the notes reflect current market rates.

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

NOTE C — INVENTORIES

Inventories consist of the following:

					December 31,		July 1,
	January 2,		October 1,		2016		2017
	2016		2016
Raw materials	$	22,529	$	27,388	$	26,186	$	25,954
Work in progress	8,701		9,482		9,455		9,382
Finished goods	34,889		37,276		29,169		33,352

	$	66,119	$	74,146	$	64,810	$	68,688

NOTE D — ~~INTANGIBLE~~ ~~ASSETS~~

The Company performed its annual goodwill impairment test during the third quarter of 2016. 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 each reporting unit was less than its carrying amount. As a result, the two-step goodwill impairment test was not required and no impairments of goodwill were recognized.

The Company performed its annual indefinite-lived intangible asset impairment test during the third quarter of 2016. 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, the quantitative impairment test was not required and no impairment was recognized.

~~NOTE E~~ — OTHER ASSETS

Other assets ~~consists~~consist primarily of a secured loan to a third-party supplier of the Company’s nutrition bars and land use rights related to a production facility ~~under development~~ in China.

The Company has extended non-revolving credit to its supplier of nutrition bars to allow ~~them~~it to acquire equipment that is necessary to manufacture the USANA nutrition ~~bars.~~bars, which is secured by the equipment. This relationship ~~provides~~provided improved supply chain stability for USANA and ~~creates~~created a mutually beneficial relationship between the parties. Notes receivable are valued at their unpaid principal balance plus any accrued but unpaid interest, which approximates fair value. Interest accrues at an annual interest rate of LIBOR plus 400 basis points. The note has a maturity date of February 1, 2024 and ~~will~~was to be repaid by a combination of cash payments and credits for the manufacture of USANA’s nutrition bars. There is no prepayment penalty. ~~Notes~~The note receivable from this supplier as of ~~January 2,~~December 31, 2016, and ~~October~~July 1, ~~2016 were $8,339~~2017 was $6,867 and ~~$7,099,~~$6,868, respectively.

During the second quarter of 2017, the Company experienced challenges with the third-party supplier of the Company’s nutrition bars. Due to these challenges, the Company has determined to no longer use the existing supplier of the nutritional bars. The Company has evaluated the recoverability of the note receivable from this supplier, which will now be repaid through cash payments. Through this analysis and examination of financial data of the third-party supplier, the Company believes that the third-party supplier has the wherewithal to repay the note receivable by the maturity date as of July 1, 2017. Accordingly, no impairment was recorded during second quarter of 2017. The Company will continue to evaluate the recoverability of the note receivable in future periods.

This third-party supplier is considered to be a variable interest entity; however, the Company is not the primary beneficiary due to the inability to direct the activities that most significantly affect the third-party supplier’s economic performance. Additionally, the Company does not absorb a majority of the third-party supplier’s expected losses or returns. Consequentially, the financial information of the third-party supplier is not consolidated. The maximum exposure to loss as a result of the Company’s involvement with the third-party supplier is limited to the carrying value of the note receivable due from the third-party supplier.

The Company is building a state-of-the-art manufacturing and production facility in China, which is expected to become fully operational by the end of 2016. As part of this project, land use rights totaling $7,053, and $6,865 as of January 2, 2016 and October 1, 2016, respectively, have been purchased and are being amortized over 50 years.

~~USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~(in thousands, except per share data)~~

~~(unaudited)~~

NOTE FE — LINE OF CREDIT

~~On February 19, 2016, the~~The Company ~~entered into an Amended and Restated Credit Agreement (“Credit Agreement”),~~has a $75,000 line of credit with Bank of America, which extends the term of the Credit Agreement to April 27, 2021. The Credit Agreement also increases the amount the Company may borrow under the credit facility from $75,000 to up to $125,000, through October 31, 2016. On November 1, 2016, the amount the Company may borrow will revert to $75,000 for the remainder of the agreement. The only other modification to the Credit Agreement was an increase to the Company’s consolidated rolling four-quarter adjusted EBITDA covenant from $60,000 to equal to or greater than $100,000.

America. Interest is computed ~~based on~~at the bank’s Prime Rate or LIBOR, adjusted by features specified in the Credit Agreement. The collateral for this line of credit is the pledge of the capital stock of certain subsidiaries of the Company, set forth in a separate pledge agreement with the bank. On February 19, 2016, the Company entered into an Amended and Restated Credit Agreement with Bank of America, which extends the term of the Credit Agreement to April 27, 2021 and increases the Company’s consolidated rolling four-quarter adjusted EBITDA covenant from $60,000 to equal to or greater than $100,000 and a ratio of consolidated funded debt to adjusted EBITDA of 2.0 to 1.0 at the end of each quarter.

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

NOTE E — LINE OF CREDIT - CONTINUED

The adjusted EBITDA under this agreement is modified for certain non-cash expenses. Part of the credit agreement is that any existing bank guarantees are considered a reduction of the overall availability of credit and part of the covenant calculation. This resulted in a ~~$4,153,~~$5,241, and ~~$5,078~~$4,750 reduction in the available borrowing limit as of ~~January 2,~~December 31, 2016 and ~~October~~July 1, ~~2016,~~2017, respectively, due to existing normal course of business guarantees in certain markets.

~~At October~~There was no outstanding debt on this line of credit at December 31, 2016 or at July 1, ~~2016 there was an outstanding balance of $1,200.~~2017. The Company will be required to pay any balance on this line of credit in full at the time of maturity in April 2021 unless the line of credit is replaced or terms are renegotiated.

NOTE GF — 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~~its products, intellectual property, supplier relationships, distributors, competitor relationships, employees and other matters. The Company records a liability when a particular contingency is probable and ~~estimable. The Company has not accrued for any contingency at October 1, 2016 as the Company does not consider any contingency to be probable nor~~ 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.

In August 2014, a purported shareholder derivative lawsuit was filed in the Third Judicial District Court of Salt Lake County, State of Utah (James Robert Rawcliffe v. Robert Anciaux, et al.,) against certain of the Company’s directors and officers. The derivative complaint, which also names USANA as a nominal defendant but is asserted on USANA’s behalf, contains claims of breach of fiduciary duty, waste of corporate assets and unjust enrichment against the defendant directors and officers in connection with certain equity awards granted by the Compensation Committee of the Company’s Board of Directors in February 2014. In October 2014, the Company filed a motion to dismiss the complaint and, in March 2015, the court granted that motion and dismissed the complaint without prejudice. In May 2015, the plaintiffs filed an appeal with the Utah Supreme Court. The Supreme Court remanded the ~~Company’s~~ case to the Utah Court of Appeals. ~~The plaintiff and~~In December 2016, the ~~Company have each filed their appellate brief with~~Court of Appeals certified the ~~court and oral~~case to the Utah Supreme Court, confirming the Company’s belief that this case addresses a new issue under Utah law. Oral arguments ~~have been scheduled to take place in January~~before the Supreme Court occurred May 10, 2017. The Company believes that the claims in the complaint are without merit and will continue to vigorously defend this suit. The Company continues to believe, based on information currently available, that the final outcome of this suit will not have a material adverse effect on the Company’s business, results of operations or consolidated financial position.

On February 7, 2017, the Company disclosed on Form 8-K 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.

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

NOTE HF — CONTINGENCIES - CONTINUED

On February 13, 2017, a putative shareholder class action complaint was filed in the United States District Court for the District of Utah, with the plaintiff, Chi Wah, 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 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. The lawsuit names as defendants the Company; its former Co-Chief Executive Officer, David A. Wentz; and its Chief Leadership Development Officer, Paul A. Jones (formerly the Chief Financial Officer). On behalf of the plaintiff, and a putative class of purchasers of USANA stock between March 14, 2014 and February 7, 2017, the plaintiff asserts claims for violation of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. The plaintiff seeks, among other things, an award of damages, interest, reasonable attorneys’ fees, expert fees, and other costs. The Company believes that the action is without merit, and intends to vigorously defend against all claims asserted.

Chinese regulators regularly make inquiries about the business activities of direct sellers in China and have done so with the Company’s operating subsidiary in China, BabyCare, Ltd. There have been instances where inquiries or complaints about BabyCare’s business have resulted in the payment of fines by BabyCare. For instance, during the first quarter of 2017, an inquiry from a provincial-level regulator was received and promptly resolved by BabyCare. A fine was issued in a BabyCare Associate’s name and paid by BabyCare in connection with resolving this matter. The fine was not quantitatively material.

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

NOTE G — 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				Quarter Ended				Six Months Ended
	October 3,		October 1,		October 3,		October 1,		July 2,		July 1,		July 2,		July 1,
	2015		2016		2015		2016		2016		2017		2016		2017

Net earnings available to common shareholders	$	25,609	$	30,098	$	70,705	$	78,159	$	25,762	$	23,259	$	48,061	$	44,617

Weighted average common shares outstanding - basic	12,852		12,089		12,747		12,056		23,955		24,574		24,080		24,537

Dilutive effect of in-the-money equity awards	465		436		462		469		962		444		970		460

Weighted average common shares outstanding - diluted	13,317		12,525		13,209		12,525		24,917		25,018		25,050		24,997

Earnings per common share from net earnings - basic	$	1.99	$	2.49	$	5.55	$	6.48	$	1.08	$	0.95	$	2.00	$	1.82

Earnings per common share from net earnings - diluted	$	1.92	$	2.40	$	5.35	$	6.24	$	1.03	$	0.93	$	1.92	$	1.78

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

October 3,

October 1,

October 3,

October 1,

2015

2016

2015

2016

361

1,154

196

1,118

Quarter Ended		Six Months Ended
July 2,	July 1,	July 2,	July 1,
2016	2017	2016	2017
2,210	2,059	2,200	2,119

During the ~~nine~~six months ended ~~October 1,~~July 2, 2016, the Company repurchased and retired ~~553~~1,106 shares, for $64,610, under the Company’s share repurchase plan. There were no share repurchases made during the six months ended July 1, 2017. 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 ~~October~~July 1, ~~2016,~~2017, the remaining approved repurchase amount under the stock repurchase plan was $35,390. There currently is no expiration date on the remaining approved repurchase amount and no requirement for future share repurchases.

On July 25, 2017, the Company’s Board of Directors authorized an increase in the amount available under its share repurchase plan to a total of $100,000. Subsequent to July 1, 2017, and through August 4, 2017, the Company repurchased and retired 189 shares of common stock for a total investment of $10,762, at an average market price of $56.83 per share.

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

NOTE IH — SEGMENT INFORMATION

USANA operates as a direct selling company that develops, manufactures, and distributes high-quality nutritional and personal care products that are sold through a 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 and personal care products for the periods indicated.

	Quarter Ended				Nine Months Ended				Quarter Ended				Six Months Ended
	October 3,		October 1,		October 3,		October 1,		July 2,		July 1,		July 2,		July 1,
	2015		2016		2015		2016		2016		2017		2016		2017

USANA® Nutritionals	80	%	85	%	81	%	83	%	82	%	84	%	82	%	85	%
USANA Foods	12	%	8	%	12	%	10	%	11	%	9	%	10	%	8	%
Sensé – beautiful science®	7	%	6	%	6	%	6	%
Sensé — beautiful science®									6	%	6	%	7	%	6	%

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(1)

· Southeast Asia Pacific –— Australia, New Zealand, Singapore, Malaysia, the Philippines, Thailand, and ~~Indonesia(2)~~

Indonesia

· North Asia –— Japan and South Korea

· Americas and Europe –— United States, Canada, Mexico, Colombia, the United Kingdom, France, Belgium, and the Netherlands.

(1) The Company’s business in China is that of BabyCare, its wholly-owned subsidiary.

~~(2) The Company commenced operations in Indonesia in the fourth quarter of 2015.~~

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

NOTE IH — SEGMENT INFORMATION - CONTINUED

Selected Financial Information

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

	Quarter Ended				Nine Months Ended				Quarter Ended				Six Months Ended
	October 3,		October 1,		October 3,		October 1,		July 2,		July 1,		July 2,		July 1,
	2015		2016		2015		2016		2016		2017		2016		2017

Net Sales to External Customers

Asia Pacific
Greater China	$	112,323	$	124,470	$	325,942	$	373,308	$	131,840	$	136,702	$	248,838	$	268,440
Southeast Asia Pacific	45,936		54,351		137,308		154,335		51,123		48,665		99,984		99,071
North Asia	9,920		11,555		29,495		33,376		11,261		13,948		21,821		26,904
Asia Pacific Total	168,179		190,376		492,745		561,019		194,224		199,315		370,643		394,415

Americas and Europe	65,113		63,843		193,169		192,163		64,290		57,748		128,320		117,971

Consolidated Total	$	233,292	$	254,219	$	685,914	$	753,182	$	258,514	$	257,063	$	498,963	$	512,386

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

									Quarter Ended				Quarter Ended
	Quarter Ended				Nine Months Ended				July 2,		July 1,		July 2,		July 1,
	October 3,		October 1,		October 3,		October 1,		2016		2017		2016		2017
	2015		2016		2015		2016
Net sales:
China	$	95,147	$	108,355	$	273,433	$	324,689	$	115,835	$	120,831	$	216,334	$	236,288
United States	$	37,325	$	34,352	$	107,112	$	101,245	$	32,191	$	28,870	$	66,893	$	59,036

	As of				As of
	January 2,		October 1,		December 31,		July 1,
	2016		2016		2016		2017
Long-lived Assets:
Long-lived assets:
China	$	92,835	$	95,455	$	91,909	$	93,289
United States	$	57,797	$	64,415	$	63,654	$	63,747

Item 2. 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 six

sections:

· Overview

· Customers

· Current Focus and Recent Developments

· Results of Operations

· Liquidity and Capital Resources

· Forward-Looking Statements and Certain Risks

This discussion and analysis should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and Notes thereto that are contained in this quarterly report, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations that are included in our Annual Report on Form 10-K for the year ended ~~January 2,~~December 31, 2016, and our other filings, including Current Reports on Form 8-K, that have been filed with the Securities and Exchange Commission (“SEC”) through the date of this report.

Overview

We develop and manufacture high-quality, science-based nutritional and personal care products that are distributed internationally through a network marketing system, which is a form of direct selling. We have chosen this distribution method as we believe it is more conducive to meeting our vision as a company, which is improving the overall health and nutrition of individuals and families around the world. Our customer base comprises two types of customers: “Associates” and “Preferred Customers” referred to together as “active Customers.” Associates share in our company vision by acting as independent distributors of our products in addition to purchasing our products for their personal use. Preferred Customers purchase our products strictly for their personal use and are not permitted to resell or to distribute the products. As of ~~October~~July 1, ~~2016,~~2017, we had approximately ~~456,000~~567,000 active ~~Associates and approximately 94,000 active Preferred~~ Customers worldwide. For purposes of this report, we only count as active ~~customers~~Customers those Associates and Preferred Customers who have purchased from us at any time during the most recent three-month period.

We have ongoing operations in the following markets, which are grouped and presented as follows:

· Asia Pacific

· Greater China –— Hong Kong, Taiwan, and China(1)

· Southeast Asia Pacific –— Australia, New Zealand, Singapore, Malaysia, the Philippines, Thailand, and ~~Indonesia(2)~~

Indonesia

· North Asia –— Japan and South Korea

· Americas and Europe –— United States, Canada, Mexico, Colombia, the United Kingdom, France, Belgium, and the Netherlands

(1) Our business in China is that of BabyCare, our wholly-owned subsidiary.

~~(2)~~ ~~We commenced operations in Indonesia in the fourth quarter of 2015.~~

Our primary product lines consist of USANAâ Nutritionals, USANA Foods, and Sensé — beautiful scienceâ (Sensé), which is our line of personal care products. The USANA Nutritionals product line is further categorized into two separate classifications: Essentials and Optimizers. The following tables summarize the approximate percentage of total product revenue that has been contributed by our major product lines and our top-selling products for the current and prior-year periods as indicated:

	Nine Months Ended				Six Months Ended
	October 3, 2015		October 1, 2016		July 2, 2016		July 1, 2017

Product Line
USANA® Nutritionals
Essentials	22	%	20	%	20	%	20	%
Optimizers	59	%	63	%	62	%	65	%
USANA Foods	12	%	10	%	10	%	8	%
Sensé – beautiful science®	6	%	6	%
Sensé — beautiful science®					7	%	6	%
All Other	1	%	1	%	1	%	1	%

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

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 the growing desire for a secondary source of income and small business ownership.

We believe that our high-quality products and our financially rewarding 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 rewarding 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 ~~customers~~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~~six months ended ~~October~~July 1, ~~2016,~~2017, net sales outside of the United States represented ~~86.6%~~88.5% 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.

Customers

Because we sell our products exclusively to a customer base of independent Associates and Preferred Customers, to increase net sales we must increase either ~~increase~~ the number or the productivity of our ~~Associates and Preferred~~active Customers. Increasing the productivity of our ~~Associates and Preferred~~active Customers has not been our primary focus. Rather, we seek to increase the number of ~~Associates and Preferred~~active Customers who use and sell our products. We believe this focus is more consistent with our vision of improving the overall health and nutrition of individuals and families around the world. Sales to Associates account for the majority of our product sales, representing approximately ~~92%~~91% of product sales during the ~~nine~~six months ended ~~October~~July 1, ~~2016;~~2017; 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 ~~Associates and Preferred~~

Customers purchasing our products. The number of active Associates and Preferred Customers is, therefore, used by management as a key non-financial ~~measure.~~indicator to evaluate our operational performance.

During the first quarter of 2017, we initiated our Preferred Customer Invitation Plan in the United States and pursuant to this invitation 16,000 active Associates in the United States became Preferred Customers. We are continuing to evaluate whether to offer the same invitation to Associates in our other markets around the world.

The tables below summarize the changes in our active ~~customer~~Customer base by geographic region. These numbers have been rounded to the nearest thousand as of the dates indicated.

	Active Associates by Region										Active Associates by Region
	As of			As of			Change from		Percent		As of			As of			Change from		Percent
	October 3, 2015			October 1, 2016			Prior Year		Change		July 2, 2016			July 1, 2017			Prior Year		Change

Asia Pacific:
Greater China	218,000	53.8	%	263,000	57.7	%	45,000		20.6	%	267,000	58.0	%	289,000	62.3	%	22,000		8.2	%
Southeast Asia Pacific	85,000	21.0	%	91,000	20.0	%	6,000		7.1	%	88,000	19.1	%	83,000	17.9	%	(5,000	)	(5.7	%)
North Asia	13,000	3.2	%	15,000	3.3	%	2,000		15.4	%	15,000	3.3	%	20,000	4.3	%	5,000		33.3	%
Asia Pacific Total	316,000	78.0	%	369,000	81.0	%	53,000		16.8	%	370,000	80.4	%	392,000	84.5	%	22,000		5.9	%

Americas and Europe(1)	89,000	22.0	%	87,000	19.0	%	(2,000	)	(2.2	)%	90,000	19.6	%	72,000	15.5	%	(18,000	)	(20.0	%)

	405,000	100.0	%	456,000	100.0	%	51,000		12.6	%	460,000	100.0	%	464,000	100.0	%	4,000		0.9	%

	Active Preferred Customers by Region									Active Preferred Customers by Region
	As of			As of			Change from	Percent		As of			As of			Change from	Percent
	October 3, 2015			October 1, 2016			Prior Year	Change		July 2, 2016			July 1, 2017			Prior Year	Change

Asia Pacific:
Greater China	4,000	4.5	%	5,000	5.3	%	1,000	25.0	%	5,000	5.2	%	5,000	4.9	%	—	0.0	%
Southeast Asia Pacific	13,000	14.6	%	15,000	16.0	%	2,000	15.4	%	14,000	14.4	%	15,000	14.5	%	1,000	7.1	%
North Asia	9,000	10.1	%	10,000	10.6	%	1,000	11.1	%	10,000	10.3	%	10,000	9.7	%	—	0.0	%
Asia Pacific Total	26,000	29.2	%	30,000	31.9	%	4,000	15.4	%	29,000	29.9	%	30,000	29.1	%	1,000	3.4	%

Americas and Europe(1)	63,000	70.8	%	64,000	68.1	%	1,000	1.6	%	68,000	70.1	%	73,000	70.9	%	5,000	7.4	%

	89,000	100.0	%	94,000	100.0	%	5,000	5.6	%	97,000	100.0	%	103,000	100.0	%	6,000	6.2	%

(1) Pursuant to the Preferred Customer Invitation Plan in the United States, 16,000 active Associates became Preferred Customers during the first quarter of 2017.

Current Focus and Recent Developments

Our primary objective is to increase the number of ~~Associates and Preferred~~active Customers ~~(referred to together as “customers”)~~ who use our products throughout the world. We have several strategies in place to support this objective, including:

· Expansion in China, where we plan to continue devoting significant time and resources on growing this market. Our efforts in this regard include transitioning to our new manufacturing and production facility in Beijing, which we anticipate will be fully operational by the end of 2016;

· Enhancing our information technology systems and infrastructure to support our growing customer base and to further improve our customers’ experience of doing business with us around the world as well as to prepare for future growth and expansion; and

· Future product and technology innovation that supports our desire to personalize our customer’s overall experience with USANA that would encompass our product offering, Associate Compensation Plan, and online business environment;

· Expansion in China, where we plan to continue devoting significant time and resources on growing this market;

· Enhancing our information technology systems and infrastructure to support our growing active Customer base and to further improve our active Customers’ experience of doing business with us around the world as well as to prepare for future growth and expansion;

·Development and offering of market-specific incentives and promotions for our Associates to incent sales and ~~customer~~active Customer growth around the world;

· Enhancing our Preferred Customer Program through our Preferred Customer Invitation Plan and additional strategies; and

· Increasing our brand recognition, which includes our relationship as a Trusted Partner and Sponsor of The Dr. Oz Show, our partnership with the Women’s Tennis Association, and our sponsorship of the U.S. Ski ~~Team, and our partnership with the Women’s Tennis Association;~~Team; to make it easier for our Associates to talk about USANA with potential customers.

~~At our 2016 International Convention, we introduced one~~Non-GAAP Financial Measures

Constant currency net sales, earnings, EPS and other currency-related financial information (collectively, “Financial Results”) are non-GAAP financial measures that remove the impact of fluctuations in foreign-currency exchange rates and help facilitate period-to-period comparisons of the greatest product innovations in our history with the launch of our Incelligence™ product platform. Incelligence™ is USANA’s proprietary, patent-pending, technology that is designed to support your body’s natural ability to nourish, protectCompany’s Financial Results and renew itself. As part of our Incelligence™ platform, we also launched our new flagship multivitamin, CellSentials™. Incelligence™ is a key part of our growth strategy and has already been launched in nine markets around the world withthus provide investors an additional ~~six market launches planned~~perspective on trends and underlying business results. Constant currency Financial Results are calculated by translating the current period’s Financial Results at the same average exchange rates in effect during the ~~remainder of 2016~~applicable prior-year period and ~~into 2017.~~then comparing this amount for the current period to the prior-year period’s Financial Results. Investors should rely primarily on our GAAP results, and use non-GAAP financial measures only supplementally, in making investment decisions.

Results of Operations

Summary of Financial Results

Net sales for the ~~third~~second quarter of ~~2016 increased 9.0%~~2017 decreased 0.6% to ~~$254.2~~$257.1 million, ~~an increase~~a decrease of ~~$20.9~~$1.5 million, compared with the ~~third~~second quarter of ~~2015.~~2016. This ~~increase~~decrease was primarily driven by higher product sales volume due in great part to strong customer growth. The increase in net sales was driven by 12.6% growth in the number of active Associates and 5.6% growth in the number of Preferred Customers. Associate and customer growth during the quarter was the result of continued momentum in our world-wide business. This increase in net sales during the third quarter of 2016 was partially offset by unfavorable changes in currency exchange rates that reduced net sales for the quarter by $7.4 million, with $5.7 ~~million.~~million attributable to mainland China.

Net earnings for the ~~third~~second quarter of ~~2016 increased 17.5%~~2017 decreased 9.7% to ~~$30.1~~$23.3 million, ~~an increase~~a decrease of ~~$4.5~~$2.5 million, compared with the ~~third~~second quarter of ~~2015.~~2016. The ~~increase~~decrease in net earnings was driven ~~primarily~~in part by the Company’s internal investigation in China, higher Associate incentives, partially offset by improved gross margins and a ~~significantly~~ lower effective tax ~~rate, as well as higher net sales, which were largely offset by higher operating expenses during the quarter.~~rate.

Quarters Ended ~~October 3, 2015~~July 2, 2016 and ~~October~~July 1, ~~2016~~2017

Net Sales

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

	Net Sales by Region																Percent change		Net Sales by Region																Percent change
	(in thousands)													Currency			excluding		(in thousands)													Currency			excluding
	Quarter Ended								Change from			Percent		impact on			currency		Quarter Ended								Change from			Percent		impact on			currency
	October 3, 2015				October 1, 2016				prior year			change		sales			impact		July 2, 2016				July 1, 2017				prior year			change		sales			impact
Asia Pacific
Greater China	$	112,323	48.1	%	$	124,470	49.0	%	$	12,147		10.8	%	$	(6,099	)	16.2	%	$	131,840	51.0	%	$	136,702	53.2	%	$	4,862		3.7	%	$	(5,187	)	7.6	%
Southeast Asia Pacific	45,936		19.7	%	54,351		21.4	%	8,415			18.3	%	988			16.2	%	51,123		19.8	%	48,665		18.9	%	(2,458		)	(4.8	%)	(1,602		)	(1.7	%)
North Asia	9,920		4.3	%	11,555		4.5	%	1,635			16.5	%	626			10.2	%	11,261		4.3	%	13,948		5.4	%	2,687			23.9	%	349			20.8	%
Asia Pacific Total	168,179		72.1	%	190,376		74.9	%	22,197			13.2	%	(4,485		)	15.9	%	194,224		75.1	%	199,315		77.5	%	5,091			2.6	%	(6,440		)	5.9	%

Americas and Europe	65,113		27.9	%	63,843		25.1	%	(1,270		)	(2.0	)%	(1,246		)	(0.0	)%	64,290		24.9	%	57,748		22.5	%	(6,542		)	(10.2	%)	(981		)	(8.6	%)

	$	233,292	100.0	%	$	254,219	100.0	%	$	20,927		9.0	%	$	(5,731	)	11.4	%	$	258,514	100.0	%	$	257,063	100.0	%	$	(1,451	)	(0.6	%)	$	(7,421	)	2.3	%

Asia Pacific: The increase in net sales in Greater China continues to be driven by growth in Mainland China, where ~~local~~constant currency net sales and active Customers increased ~~20.4% and~~9.3%. A promotion offered in Mainland China during the ~~number~~second quarter of ~~active Associates increased 22.2%. The increase~~2017 contributed to growth in ~~local currency~~ net sales and active Customers. Net sales decreased in Southeast Asia Pacific ~~was driven by Associate growth~~as a result of negative impact of currency and softer sales in ~~several markets, led by Australia and Malaysia.~~the Philippines, which declined 10.0% on a year-over-year basis. The increase in ~~local~~constant currency net sales in North Asia continues to be driven by growth in South Korea, where ~~local~~constant currency net sales increased ~~10.9%. The~~23.0%, and the number of active ~~Associates in South Korea~~Customers increased ~~16.7%~~20.8%.

Americas and Europe: NetNet sales in this region ~~was again driven~~were affected by ~~growth in Mexico, where local currency net~~a sales ~~increased 22.4%. The number~~decrease of ~~active Associates and Preferred Customers in Mexico increased 16.7% and 12.5%, respectively. Net Sales~~10.3% in the United States, ~~decreased $3.0 million or 8.0%,~~and a 7.3% constant currency decrease in Canada. These decreases are primarily due to ~~a decline~~declines in the number of active ~~customers~~Customers of 8.6% in ~~this market.~~the United States, and 8.2% in Canada.

Gross Profit

Gross profit ~~decreased 10~~increased 70 basis points to ~~82.3%~~82.9% of net sales for the ~~third~~second quarter of ~~2016,~~2017, from ~~82.4%~~82.2% in the prior year. This ~~reduction~~increase can be attributed to ~~an unfavorable shift~~favorable changes in currency exchange ~~rates.~~rates in markets outside of China as well as the 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.

Associate Incentives

Associate incentives were ~~44.4%~~46.1% of net sales for the ~~third~~second quarter of ~~2016,~~2017, compared with ~~43.5%~~44.6% in the ~~third quarter of 2015.~~prior year. This increase can be primarily attributed to ~~higher payout on base commissions and Associate bonus programs. Associate incentives expense has been fairly consistent over~~a promotion we ran in Mainland China during the ~~last several quarters and is roughly in-line with our expectations for the remainder~~second quarter of ~~the year.~~2017.

Selling, General and Administrative Expenses

In absolute terms, our selling, general and administrative expense increased ~~$7.8~~$2.6 million during the ~~third~~second quarter of ~~2016~~2017 when compared with the same period of the prior year. This increase can be attributed to ~~costs associated with supporting~~incremental expense related to the our ~~2016 strategic initiatives, including (i) higher wages~~internal investigation in China and ~~benefits expense to support our growing customer base and to further improve our customers’ experience around the world, (ii)~~continued investment in information technology systems and infrastructure, ~~and (iii) increased research and development investment to drive future product and technology innovation.~~partially offset by lower employee benefit related costs.

Income Taxes

Income taxes were ~~16.6%~~29.1% of earnings in the ~~third~~second quarter of ~~2016~~2017 compared with ~~33.3%~~31.6% of earnings in the ~~third quarter of 2015.~~prior year. The ~~primary reason for the year-over-year~~lower effective tax rate ~~improvement~~for the second quarter was primarily due to ~~the early adoption of ASU 2016-09 “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”, which requires~~higher excess tax benefits ~~or tax deficiencies resulting~~ from ~~exercise or settlement of share-based payment transactions~~equity award exercises recognized during the current quarter compared to ~~be recognized as an income tax benefit or expense in~~ the ~~income statement prospectively.~~prior-year quarter.

Diluted Earnings Per Share

Diluted earnings per share ~~increased 25.0%~~decreased 9.7% in the ~~third~~second quarter of ~~2016~~2017 when compared with the ~~prior year~~prior-year quarter. This ~~increase~~decrease was mostly due to higher operating expenses and changes in currency exchange rates. These decreases were partially offset by a lower effective tax rate, ~~primarily resulting from the adoption of ASU 2016-09 that contributed $0.50 to the quarter,~~ and ~~a lower number of shares outstanding resulting from activity under our share buyback program.~~improved gross margins.

~~Nine~~Six Months Ended ~~October 3, 2015~~July 2, 2016 and ~~October~~July 1, ~~2016~~2017

Net Sales

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

																																			Percent
	Net Sales by Region																Percent change		Net Sales by Region																change
	(in thousands)								Change					Currency			excluding		(in thousands)								Change					Currency			excluding
	Nine Months Ended								from prior			Percent		impact on			currency		Six Months Ended								from prior			Percent		impact on			currency
	October 3, 2015				October 1, 2016				year			change		sales			impact		July 2, 2016				July 1, 2017				year			change		sales			impact

Asia Pacific
Greater China	$	325,942	47.5	%	$	373,308	49.6	%	$	47,366		14.5	%	$	(18,066	)	20.1	%	$	248,838	49.9	%	$	268,440	52.4	%	$	19,602		7.9	%	$	(10,763	)	12.2	%
Southeast Asia Pacific	137,308		20.0	%	154,335		20.5	%	17,027			12.4	%	(5,512		)	16.4	%	99,984		20.0	%	99,071		19.3	%	(913		)	(0.9	)%	(2,257		)	1.3	%
North Asia	29,495		4.3	%	33,376		4.4	%	3,881			13.2	%	(690		)	15.5	%	21,821		4.4	%	26,904		5.3	%	5,083			23.3	%	841			19.4	%
Asia Pacific Total	492,745		71.8	%	561,019		74.5	%	68,274			13.9	%	(24,268		)	18.8	%	370,643		74.3	%	394,415		77.0	%	23,772			6.4	%	(12,179		)	9.7	%

Americas and Europe	193,169		28.2	%	192,163		25.5	%	(1,006		)	(0.5	)%	(8,159		)	3.7	%	128,320		25.7	%	117,971		23.0	%	(10,349		)	(8.1	)%	(1,485		)	(6.9	)%

	$	685,914	100.0	%	$	753,182	100.0	%	$	67,268		9.8	%	$	(32,427	)	14.5	%	$	498,963	100.0	%	$	512,386	100.0	%	$	13,423		2.7	%	$	(13,664	)	5.4	%

Asia Pacific: The increase in net sales in Greater China continues to be driven by growth in Mainland China, where ~~local~~constant currency net sales increased ~~25.1% and the number of active Associates increased 22.2%~~14.8%. The ~~increase~~decrease in ~~local currency~~ net sales in Southeast Asia Pacific was driven by ~~double-digit~~lower constant currency sales ~~growth~~ in many of our markets led by Thailand, Malaysia, Australia, and New Zealand. This increase was the result of growth in the average number of active Associates and Preferred Customers purchasing our products during the first nine months of the year.Philippines, which declined 4.4%. The increase in ~~local~~constant currency net sales in North Asia continues to be driven by growth in South Korea, where ~~local~~constant currency net sales increased ~~17.1%~~21.6%.

Americas and Europe: ~~The increase in local currency net~~Net sales in this region ~~was driven~~were affected by ~~growth in Mexico and Canada, where local currency net~~a sales ~~increased 21.6% and 13.3%, respectively. Net Sales~~decrease of 11.7% in the United States, ~~declined 5.5%~~and a 3.8% constant currency decrease in Canada. These decreases are primarily due to ~~a decline~~declines in the number of active ~~customers~~Customers in ~~this market.~~these markets.

Gross Profit

Gross profit ~~decreased~~increased 90 basis points to ~~82.2%~~83.1% of net sales for the ~~first nine~~six months of ~~2016,~~2017, from ~~82.6%~~82.2% in the ~~comparable~~ prior ~~year period.~~year. This ~~reduction~~increase can ~~primarily~~ be attributed to ~~an unfavorable shift~~favorable changes in currency exchange ~~rates. This reduction was partially offset by a favorable shift~~rates in ~~sales mix by market and to a lesser extent by modest~~markets outside of China as well as the annual price adjustments, and lower relative freight costs. 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 ~~we implemented during the first half of the year.~~is transferred to international subsidiaries.

Associate Incentives

Associate incentives were ~~44.5%~~45.7% of net sales for the ~~first nine~~six months of ~~2016,~~2017, compared with ~~44.4%~~44.6% in the ~~comparable~~ prior ~~year period. This~~year. The increase in relative Associate incentives expense can ~~primarily~~ be attributed to ~~increased spending on~~a higher level of contests, ~~and~~ promotions and ~~by modest price adjustments that we implemented~~reward trips during the first ~~half~~six months of ~~the year.~~2017.

Selling, General and Administrative Expenses

In absolute terms, our selling, general and administrative expense increased ~~$21.8~~$10.0 million during the first ~~nine~~six months of ~~2016~~2017 when compared with the same period of the prior year. This increase can be attributed to ~~costs associated with supporting~~ our ~~2016 strategic initiatives, including (i) higher wages and benefits expense to support our growing customer base and to further improve our customers’ experience around the world, (ii) investment~~continued investments in information technology ~~systems~~ and infrastructure, ~~(iii) continued investment~~as well as our internal investigation in ~~Mainland China, and (iv) increased research and development investment to drive future product and technology innovation.~~China.

Income Taxes

Income taxes were ~~26.8% of earnings for the first nine months of 2016 compared with 34.0%~~32.6% of earnings in the first ~~nine~~six months of ~~2015.~~2017 compared with 32.0% of earnings in the prior year. The ~~primary reason for the year-over-year~~higher effective tax rate ~~improvement~~for the first six months was primarily due to higher non-deductible expenses recognized during the ~~early adoption of ASU 2016-09 “Compensation-Stock Compensation (Topic 718): Improvements~~current six months compared to Employee Share-Based Payment Accounting”, which requires excess tax benefits or tax deficiencies resulting from exercise or settlement of share-based payment transactions to be recognized as an income tax benefit or expense in the ~~income statement prospectively.~~prior year.

Diluted Earnings Per Share

Diluted earnings per share ~~increased 16.6%~~decreased 7.3% in the ~~first nine~~six months of ~~2016~~2017 when compared with the same period of the prior ~~year period.~~year. This ~~increase~~decrease was mostly due to higher operating expenses, changes in currency exchange rates and a ~~lower~~higher effective tax rate, ~~primarily resulting from the adoption of ASU 2016-09 that contributed $0.52 year-to-date, and due to a lower number of shares outstanding resulting from activity under our share buyback program.~~which was partially offset by improved gross margins.

Liquidity and Capital Resources

We have historically met our working capital and capital expenditure requirements by using both net cash flow from operations and by drawing from 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. Notwithstanding the foregoing, if we were to repatriate the ~~$18.2~~$19.6 million of cumulative earnings that have been indefinitely reinvested in certain of our markets at ~~October~~July 1, ~~2016,~~2017, there would be a tax liability to the Company of approximately $3.1 million.

We have historically generated positive cash flow due to our strong operating margins. Net cash flow from operating activities totaled ~~$81.7~~$55.6 million in the first ~~nine~~six months of ~~2016. Items increasing~~2017. Changes in current assets and liabilities were the primary factor to increased cash flows from ~~operations in~~operating activities for the first ~~nine~~six months of 2016 are higher net earnings, which were increased by $7.3 million from the adoption of ASU 2016-09, and adjusted for higher equity based compensation expense, and depreciation and amortization, reduced by employee compensation costs, and taxes payable.

Net cash flow from operating activities totaled $74.5 million in the first nine months of 2015. Items increasing cash flows from operations in the first nine months of 2015 were higher net earnings, accrued incentives and deferred revenue, and taxes payable, reduced by inventory and employee compensation costs.2017.

Cash and cash equivalents ~~decreased~~increased to ~~$134.5~~$229.4 million at ~~October~~July 1, ~~2016,~~2017, from ~~$143.2~~$175.8 million at ~~January 2,~~December 31, 2016. Of the ~~$134.5~~$229.4 million held at ~~October~~July 1, ~~2016, $13.0~~2017, $10.4 million was held in the United States and ~~$121.5~~$219.0 million was held by international subsidiaries. Of the ~~$143.2~~$175.8 million in cash and cash equivalents held at ~~January 2,~~December 31, 2016, ~~$16.2~~$20.1 million was held in the United States and ~~$127.0~~$155.7 million was held by international subsidiaries. Net working capital increased to ~~$119.7~~$194.8 million at ~~October~~July 1, ~~2016,~~2017, from ~~$112.9~~$139.4 million at ~~January 2,~~December 31, 2016.

~~Our new state-of-the-art manufacturing and production facility in China is expected~~Subsequent to ~~become fully operational by the end~~July 1, 2017, an intercompany dividend of ~~2016. During the third quarter of 2016, we obtained the necessary permits and product registrations to begin production in the new facility.~~

~~Beginning in 2013, we extended non-revolving credit~~$80.5 million was paid to the ~~supplier~~United States by one of our nutrition bars to allow this supplier to modify its facility and acquire the necessary equipment to manufacture our bars. Notes receivable from this supplier as of January 2, 2016 and October 1, 2016, were $8.3 million and $7.1 million, respectively, and are included as non-current other assets on the balance sheet.international subsidiaries.

Line of credit

~~We have a long-standing relationship~~Information with Bank of America. We currently maintain a $75.0 million credit facility pursuant to an Amended and Restated Credit Agreement (“Credit Agreement”) with the bank. On February 19, 2016 we entered into a Second Amendment (“Amendment”)respect to our ~~Credit Agreement, which among other things, extends~~line of credit may be found in Note E to the ~~term~~Condensed Consolidated Financial Statements included in Item 1 of the Credit Agreement to April 27, 2021. The Amendment also increases the amount we may borrow under the Credit Agreement from $75.0 million to up to $125.0 million through October 31, 2016. On November 1, 2016 the amount we may borrow under the Credit Agreement will revert to $75.0 million for the termPart I of the agreement. The Amendment also increases our consolidated rolling four-quarter adjusted earnings before interest, taxes, depreciation and amortization (“adjusted EBITDA”) covenant from $60.0 million to equal to or greater than $100.0 million.

Bank guarantees are considered a reduction of the overall availability of credit. As of October 1, 2016, such normal course of business bank guarantees reduced our available borrowing limit by $5.1 million. During the first nine months, we utilized our credit facility, and as of October 1, 2016, we had a balance of $1.2 million outstanding.

~~The Credit Agreement for~~ this credit facility contains restrictive covenants, which require us to maintain a consolidated rolling four-quarter adjusted earnings before interest, taxes, depreciation and amortization (“adjusted EBITDA”) equal to or greater than $100.0 million (increased by the Amendment from $60.0 million), and a ratio of consolidated funded debt to adjusted EBITDA of 2.0 to 1.0 at the end of each quarter. The adjusted EBITDA under this agreement is modified for certain non-cash expenses. As of October 1, 2016, we were in compliance with these covenants. Management is not aware of any issues currently impacting Bank of America’s ability to honor their commitment to extend credit under this facility.Report on Form 10-Q.

Share repurchase

We have a share repurchase plan that has been ongoing since the fourth quarter of 2000. The objective of this plan is to return value to our shareholders. Our Board of Directors has periodically approved additional dollar amounts formade no share repurchases ~~under that plan. Share repurchases are made from time-to-time, in~~during the ~~open market, through block trades or otherwise, and are based on market conditions, the level of our cash balances, general business opportunities, and other factors. During the nine~~six months ended ~~October~~July 1, 2016, we repurchased 553,082 shares of common stock for a total investment of $64.6 million, at an average market price of $116.82 per share pursuant to a preset trading plan meeting the requirements of a Rule 10b5-1 under the Securities Exchange Act of 1934 as amended. As of October2017. At July 1, ~~2016,~~2017, the remaining approved repurchase amount under the plan was $35.4 million. There currently is ~~currently~~ no expiration date on the remaining approved repurchase amount and no requirement for future share repurchases.

On July 25, 2017, our Board of Directors authorized an increase in the amount available under the share repurchase plan to a total of $100.0 million. Subsequent to July 1, 2017, and through August 4, 2017, our repurchased and retired 189 shares of common stock for a total investment of $10.8 million, at an average market price of $56.83 per share.

Summary

We believe that current cash balances, future cash provided by operations, and amounts available under our line of credit will be sufficient to cover our operating and capital needs in the ordinary course of business for the foreseeable future. If we experience an adverse operating environment or unanticipated and unusual capital expenditure requirements, additional financing may be required. No assurance can be given, however, that additional financing, if required, would be available at all or on favorable terms. We might also require or seek additional financing for the purpose of expanding into new markets, growing our existing markets, or for other reasons. Such financing may include the use of additional debt or the sale of additional equity securities. Any financing which involves the sale of equity securities or instruments that are convertible into equity securities could result in immediate and possibly significant dilution to our existing shareholders.

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 Securities Exchange Act of 1934 (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 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;

· 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;

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

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

· Reliance on key management personnel;

· Extensive government regulation of the Company’s 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;

· 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 Company 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.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes from the information presented for the year ended ~~January 2,~~December 31, 2016.

Item 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information that is required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods that are specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding any required disclosure. In designing and evaluating these disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

As of the end of the period covered by this report, our ~~Principal~~Chief Executive Officer and ~~Principal~~Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a- 15(e) under the Exchange Act). Based on this evaluation, the ~~Principal~~Chief Executive Officer and ~~Principal~~Chief Financial Officer concluded that, due to a material weakness in

internal control over financial reporting described in Part II, Item 9A of our Form 10-K for the fiscal year ended December 31, 2016 (the “2016 Form 10-K”), our disclosure controls and procedures were not effective to provide reasonable assurance as of ~~October~~July 1, ~~2016.~~2017.

Changes in Internal Control Over Financial Reporting

~~There~~Other than with respect to the remediation efforts addressed below, there were no changes in our internal control over financial reporting ~~that occurred~~ during the fiscal quarter ended ~~October~~July 1, ~~2016,~~2017 that ~~have~~ materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Remediation Efforts to Address Material Weakness

As previously disclosed in Part II, Item 9A of the 2016 Form 10-K, we are implementing a plan to remediate the material weakness described therein and strengthen our internal control and compliance environment. The remediation plan includes the following:

· Termination of certain BabyCare employees and senior management whose conduct may have violated the Foreign Corrupt Practices Act (“FCPA”);

· Enhancement of our global anticorruption and ethics program, with additional training and education on such program at BabyCare, with the objective of promoting company-wide ethics and preventing and detecting violations of applicable anti-corruption laws, including FCPA; and

· Revision and communication of BabyCare accounting controls, policies and procedures relating to signing authority, supporting documentation requirements, and reimbursable expenses to provide additional details with the submission of supporting documentation to provide further transparency.

During the first six months of 2017, we (i) terminated certain BabyCare employees and senior management whose conduct may have violated the FCPA; and (ii) began the process of revising and enhancing BabyCare’s accounting controls, policies and procedures in the areas referenced above. Additionally, we have made enhancements to our global anticorruption and ethics program; we will make more enhancements in the coming quarter. We plan to also continue enhancing BabyCare’s controls, policies and procedures during the third quarter of 2017. The material weakness will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed during 2017.

PART II. OTHER INFORMATION

Item ~~5. Other Information~~1. Legal Proceedings

~~On October 25, 2016, the Company’s Board of Directors approved~~We are a ~~two-for-one split of common stock~~party to litigation and other proceedings that arise in the ~~form~~ordinary course of ~~a stock dividend. The stock dividend will~~conducting business, including matters involving our products, intellectual property, supplier relationships, distributors, competitor relationships, employees and other matters.

Information with respect to our legal proceedings may be ~~distributed on November 22, 2016~~found in Note F to ~~shareholders of record as of November 14, 2016. The dividend distribution will double~~ the number of shares outstanding; however, it will not affect the number of authorized shares of the Company or the par value of the common stock. The announcement regarding the two-for-one stock split wasCondensed Consolidated Financial Statements included in ~~a Current~~Item 1 Part I of this Report on Form ~~8-K, filed by~~10-Q.

Item 1A. Risk Factors

The Company’s business, results of operations, and financial condition are subject to various risks. These risks are described elsewhere in this Quarterly Report on Form 10-Q and in the ~~Company~~Company’s other filings with the SEC, including the Company’s Annual Report on ~~October 25,~~Form 10-K for the year ended December 31, 2016. The risk factors identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 have not changed in any material respect.

Item 6. EXHIBITS

Exhibit
Number		Description

3.1		Amended and Restated Articles of Incorporation (incorporated by reference to Current Report on Form 8-K, filed April 25, ~~2006)~~2006, Exhibit 3.1, File No. 0-21116).

3.2		Bylaws (incorporated by reference to Current Report on Form 8-K, filed April 25, ~~2006)~~2006, Exhibit 3.2, File No. 0- 21116).

4.1		Specimen Stock Certificate for Common Stock (incorporated by reference to Registration Statement on Form 10, File No. 0-21116, effective April 16, 1993)

~~10.1~~		USANA Health Sciences, Inc. 2006 Equity Incentive Award Plan (incorporated by reference to Current Report on Form 8-K, filed April 25, 2006)*

~~10.2~~		Form of Stock Option Agreement for award of non-statutory stock options to employees under the USANA Health Sciences, Inc. 2006 Equity Incentive Award Plan (incorporated by reference to Current Report on Form 8-K, filed April 26, 2006)*

~~10.3~~		Form of Stock Option Agreement for award of non-statutory stock options to directors who are not employees under the USANA Health Sciences, Inc. 2006 Equity Incentive Award Plan (incorporated by reference to Current Report on Form 8-K, filed April 26, 2006)*

~~10.4~~		Form of Incentive Stock Option Agreement for award of incentive stock options to employees under the USANA Health Sciences, Inc. 2006 Equity Incentive Award Plan (incorporated by reference to Current Report on Form 8-K, filed April 26, 2006)*

~~10.5~~		Form of Stock-Settled Stock Appreciation Rights Award Agreement for award of stock-settled stock appreciation rights to employees under the USANA Health Sciences, Inc. 2006 Equity Incentive Award Plan (incorporated by reference to Current Report on Form 8-K, filed April 26, 2006)*

~~10.6~~		Form of Stock-Settled Stock Appreciation Rights Award Agreement for award of stock-settled stock appreciation rights to directors who are not employees under the USANA Health Sciences, Inc. 2006 Equity Incentive Award Plan (incorporated by reference to Current Report on Form 8-K, filed April 26, 2006)*

~~10.7~~		Form of Deferred Stock Unit Award Agreement for grants of deferred stock units to directors who are not employees under the USANA Health Sciences, Inc. 2006 Equity Incentive Award Plan (incorporated by reference to Current Report on Form 8-K, filed April 26, 2006)*

~~10.8~~		Form of Indemnification Agreement between the Company and its directors (incorporated by reference to Current Report on Form 8-K, filed May 24, 2006)*

~~10.9~~		Form of Indemnification Agreement between the Company and certain of its officers (Incorporated by reference to Report on Form 8-K, filed May 24, 2006)*

~~10.10~~		Share Purchase Agreement, dated as of August 16, 2010, among USANA Health Sciences, Inc., Petlane, Inc., Yaolan Ltd., and BabyCare Holdings Ltd. (Incorporated by Reference to Report on Form 8-K, filed August 16, 2010)

~~10.11~~		~~Amended and Restated Credit Agreement, dated as of April 27, 2011 (Incorporated by reference to Report on Form 8-K, filed April 28, 2011)~~

~~10.12~~		Form of Executive Confidentiality, Non-Disclosure and Non-Solicitation Agreement (incorporated by reference to Quarterly Report on Form 10-Q for the period ended October 1, 2011, filed November 9, 2011)*

~~10.13~~		Separation and Release of Claims Agreement dated as of December 21, 2012 by and between USANA Health Sciences, Inc. and Roy Truett (incorporated by reference to Report on Form 8-K/A, filed December 26, 2012)*

~~10.14~~		Amendment to Confidentiality, Non-Disclosure and Non-Solicitation Agreement dated as of December 21, 2012 by and between USANA Health Sciences, Inc. and Roy Truett (incorporated by reference to Report on Form 8-K/A, filed December 26, 2012)*

~~10.15~~		~~Amendment to Amended and Restated Credit Agreement, dated as of July 18, 2013 (Incorporated by reference to Report on Form 8-K, filed July 23, 2013)~~

~~10.16~~		~~USANA Health Sciences, Inc. 2015 Equity Incentive Award Plan (incorporated by reference to Report on Form 8-K, filed July 31, 2015)~~

~~10.17~~		Form of Stock-Settled Stock Appreciation Rights Award Agreement for employees under the USANA Health Sciences, Inc. 2015 Equity Incentive Award Plan (incorporated by reference to Report on Form 8-K, filed July 31, 2015)*

~~10.18~~		Form of Stock-Settled Stock Appreciation Rights Award Agreement for non-employee directors under the USANA Health Sciences, Inc. 2015 Equity Incentive Award Plan (incorporated by reference to Report on Form 8-K, filed July 31, 2015)*

~~10.19~~		Form of Restricted Stock Unit Award Agreement for employees under the USANA Health Sciences, Inc. 2015 Equity Incentive Award Plan (incorporated by reference to Report on Form 8-K, filed July 31, 2015)*

~~10.20~~		Form of Restricted Stock Unit Award Agreement for non-employee directors under the USANA Health Sciences, Inc. 2015 Equity Incentive Award Plan (incorporated by reference to Report on Form 8-K, filed July 31, 2015)

~~10.21~~		Form of Deferred Stock Unit Award Agreement for grants of deferred stock units to non-employee director under the USANA Health Sciences, Inc. 2015 Equity Incentive Award Plan (incorporated by reference to Report on Form 8-K, filed July 31, 2015)

~~10.22~~		~~Second Amendment to the Amended and Restated Credit Agreement and Amendment to loan documents (incorporated by reference to Report on Form 8-K, filed February 23, 2016)~~

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

* Denotes a management contract or compensatory plan or arrangement.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

USANA HEALTH SCIENCES, INC.

Date: ~~November~~August 9, ~~2016~~2017	/s/ ~~Paul A. Jones~~G. Douglas Hekking
	~~Paul A. Jones~~G. Douglas Hekking
	~~Principal~~Chief Financial ~~and Accounting~~ Officer

Utah		87-0500306
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)

Large accelerated filer x		Accelerated filer o

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)		Emerging growth company o

		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	~~7-14~~7-15
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~15-25~~16-25
Item 3	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4	Controls and Procedures	25

PART II. OTHER INFORMATION

Item 51	~~Other Information~~Legal Proceedings	2526
Item 1A	Risk Factors	26
Item 6	Exhibits	2627
		28
Signatures		28

			Fair Value Measurements Using
			Inputs
	January 2, 2016		Level 1		Level 2		Level 3

Money market funds included in cash equivalents	$	14,460	$	14,460	$	—	$	—
Foreign currency contracts included in prepaid expenses and other current assets	33		—		33		—

	$	14,493	$	14,460	$	33	$	—

			Fair Value Measurements Using
			Inputs
	October 1, 2016		Level 1		Level 2		Level 3

Money market funds included in cash equivalents	$	44,541	$	44,541	$	—	$	—
Foreign currency contracts included in prepaid expenses and other current assets	179		—		179		—

	$	44,720	$	44,541	$	179	$	—