USANA HEALTH SCIENCES, INC.

FORM 10-Q

For the Quarterly Period Ended ~~June~~March 30, ~~2018~~2019

INDEX

		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	~~7-17~~7-18
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~18-27~~19-26
Item 3	Quantitative and Qualitative Disclosures About Market Risk	2726
Item 4	Controls and Procedures	2726


PART II. OTHER INFORMATION

Item 1	Legal Proceedings	2827
Item 1A	Risk Factors	2827
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3	Defaults Upon Senior Securities	30
Item 4	Mine Safety Disclosures	30
Item 5	Other Information	30
Item 6	Exhibits	3031

Signatures		32

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
	December 30,			June 30,			December 29,			March 30,
	2017			2018			2018			2019

ASSETS
Current assets
Cash and cash equivalents	$	247,131		$	256,326		$	214,326		$	225,041
Securities held-to-maturity, net	—			42,433
Securities held-to-maturity							63,539			26,854
Inventories	62,918			74,123			81,948			86,465
Prepaid expenses and other current assets	30,110			31,777			32,522			31,819
Total current assets	340,159			404,659			392,335			370,179

Property and equipment, net	102,847			96,845			92,025			91,994

Goodwill	17,417			17,224			16,815			17,073
Intangible assets, net	35,154			33,811			31,811			32,227
Deferred tax assets	2,859			3,609			3,348			3,249
Other assets	20,833			19,136			18,129			36,861
	$	519,269		$	575,284		$	554,463		$	551,583

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	11,787		$	12,379		$	9,947		$	11,700
Other current liabilities	129,396			124,371			138,739			118,292
Total current liabilities	141,183			136,750			148,686			129,992

Deferred tax liabilities	13,730			8,125			13,367			17,507
Other long-term liabilities	1,146			1,128			1,264			12,867

Stockholders’ equity
Common stock, $0.001 par value; Authorized — 50,000 shares, issued and outstanding 24,024 as of December 30, 2017 and 24,220 as of June 30, 2018	24			24
Common stock, $0.001 par value; Authorized — 50,000 shares, issued and outstanding 23,567 as of December 29, 2018 and 23,335 as of March 30, 2019							24			23
Additional paid-in capital	76,542			83,542			72,008			69,100
Retained earnings	288,070			349,579			329,501			329,001
Accumulated other comprehensive income (loss)	(1,426		)	(3,864		)	(10,387		)	(6,907		)
Total stockholders’ equity	363,210			429,281			391,146			391,217
	$	519,269		$	575,284		$	554,463		$	551,583

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						Six Months Ended
	July 1,			June 30,			July 1,			June 30,			Quarter Ended
	2017			2018			2017			2018			March 31,			March 30,
													2018			2019
Net sales	$	257,063		$	301,460		$	512,386		$	593,458		$	291,998		$	272,990
Cost of sales	43,902			49,991			86,556			99,366			49,375			45,901

Gross profit	213,161			251,469			425,830			494,092			242,623			227,089

Operating expenses:
Associate incentives	118,404			132,790			234,185			262,152			129,362			122,530
Selling, general and administrative	62,389			67,537			126,390			137,669			70,132			69,555

Total operating expenses	180,793			200,327			360,575			399,821			199,494			192,085

Earnings from operations	32,368			51,142			65,255			94,271			43,129			35,004

Other income (expense):
Interest income	590			1,031			1,073			1,871			840			1,484
Interest expense	(11		)	(9		)	(21		)	(19		)	(10		)	(12		)
Other, net	(119		)	(634		)	(110		)	(602		)	32			(182		)

Other income (expense), net	460			388			942			1,250			862			1,290

Earnings before income taxes	32,828			51,530			66,197			95,521			43,991			36,294
				��
Income taxes	9,569			17,623			21,580			32,668			15,045			12,122

Net earnings	$	23,259		$	33,907		$	44,617		$	62,853		$	28,946		$	24,172

Earnings per common share
Basic	$	0.95		$	1.40		$	1.82		$	2.60		$	1.20		$	1.03
Diluted	$	0.93		$	1.36		$	1.78		$	2.56		$	1.19		$	1.01

Weighted average common shares outstanding
Basic	24,574			24,193			24,537			24,134			24,074			23,484
Diluted	25,018			24,841			24,997			24,557			24,273			23,927

Comprehensive income:

Net earnings	$	23,259		$	33,907		$	44,617		$	62,853		$	28,946		$	24,172

Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment	3,915			(11,520		)	7,212			(3,706		)	7,814			4,774
Tax benefit (expense) related to foreign currency translation adjustment	(1,769		)	1,808			(1,976		)	1,268			(540		)	(1,294		)

Other comprehensive income (loss), net of tax	2,146			(9,712		)	5,236			(2,438		)	7,274			3,480

Comprehensive income	$	25,405		$	24,195		$	49,853		$	60,415		$	36,220		$	27,652

The accompanying notes are an integral part of these statements.

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

~~Six Months Ended June 30, 2018~~

(in thousands)

(unaudited)

Accumulated

Additional

Other

Common Stock

Paid-in

Retained

Comprehensive

Shares

Value

Capital

Earnings

Income (Loss)

Total

Balance at December 30, 2017

24,024

$
24

$
76,542

$
288,070

$
(1,426
)
$
363,210

Cumulative effect of accounting change

994

994

Balance after cumulative effect of accounting change

24,024

24

76,542

289,064

(1,426
)
364,204

Net earnings

62,853

62,853

Other comprehensive income (loss), net of tax

(2,438
)
(2,438
)
Equity-based compensation expense

7,058

7,058

Common stock repurchased and retired

(39
)
—

(605
)
(2,338
)

(2,943
)
Common stock issued under equity award plans

235

—

—

Tax withholding for net-share settled equity awards

(360
)

(360
)
Disgorgement of short-swing stock profits

907

907

Balance at June 30, 2018

24,220

$
24

$
83,542

$
349,579

$
(3,864
)
$
429,281

For the three months ended March 31, 2018

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

Balance at December 30, 2017	24,024		$	24	$	76,542		$	288,070		$	(1,426	)	$	363,210
Cumulative effect of accounting change								994						994

Balance after cumulative effect of accounting change	24,024		24		76,542			289,064			(1,426		)	364,204
Net earnings								28,946						28,946
Other comprehensive income (loss), net of tax											7,274			7,274
Equity-based compensation expense					3,805									3,805
Common stock repurchased and retired	(39	)	—		(605		)	(2,338		)				(2,943		)
Common stock issued under equity award plans	114		—											—
Tax withholding for net-share settled equity awards					(308		)							(308		)

Balance at March 31, 2018	24,099		$	24	$	79,434		$	315,672		$	5,848		$	400,978

For the three months ended March 30, 2019

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

Balance at December 29, 2018	23,567		$	24		$	72,008		$	329,501		$	(10,387	)	$	391,146
Net earnings									24,172						24,172
Other comprehensive income (loss), net of tax												3,480			3,480
Equity-based compensation expense						3,832									3,832
Common stock repurchased and retired	(284	)	(1		)	(5,327		)	(24,672		)				(30,000		)
Common stock issued under equity award plans	52		—												—
Tax withholding for net-share settled equity awards						(1,413		)							(1,413		)

Balance at March 30, 2019	23,335		$	23		$	69,100		$	329,001		$	(6,907	)	$	391,217

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)

	Six Months Ended
	July 1,			June 30,			Three Months Ended
	2017			2018			March 31,			March 30,
							2018			2019
Cash flows from operating activities
Net earnings	$	44,617		$	62,853		$	28,946		$	24,172
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities
Depreciation and amortization	7,666			8,685			4,531			3,866
Right-of-use asset amortization							—			2,023
(Gain) loss on sale of property and equipment	(6		)	1,777			1,782			23
Equity-based compensation expense	8,002			7,058			3,805			3,832
Deferred income taxes	(2,043		)	(5,293		)	3,102			3,048
Impairment on notes receivable	—			(658		)
Changes in operating assets and liabilities:
Inventories	(1,603		)	(13,443		)	(4,469		)	(3,630		)
Prepaid expenses and other assets	4,771			(5,448		)	(3,379		)	1,480
Accounts payable	(1,187		)	546			649			1,750
Other liabilities	(4,613		)	1,116			(15,449		)	(31,043		)

Net cash provided by (used in) operating activities	55,604			57,193			19,518			5,521

Cash flows from investing activities
Receipts on notes receivable	259			4,760			301			55
Proceeds from the settlement of net investment hedges	—			739
Purchases of investment securities held-to-maturity	—			(42,433		)
Payments for net investment hedge							—			(1,660		)
Maturities of investment securities							—			36,685
Proceeds from sale of property and equipment	11			381			35			6
Purchases of property and equipment	(6,969		)	(6,636		)	(2,948		)	(2,577		)

Net cash provided by (used in) investing activities	(6,699		)	(43,189		)	(2,612		)	32,509

Cash flows from financing activities
Repurchase of common stock	—			(2,943		)	(2,943		)	(30,000		)
Proceeds from disgorgement of short-swing stock profits	—			907
Borrowings on line of credit	3,500			—			—			5,000
Payments on line of credit	(3,500		)	—			—			(5,000		)
Payments related to tax withholding for net-share settled equity awards	—			(360		)	(308		)	(1,413		)

Net cash provided by (used in) financing activities	—			(2,396		)	(3,251		)	(31,413		)

Effect of exchange rate changes on cash, cash equivalents and restricted cash	4,764			(2,687		)	5,519			4,170

Net increase (decrease) in cash, cash equivalents and restricted cash	53,669			8,921			19,174			10,787

Cash, cash equivalents, and restricted cash, at beginning of period	178,952			250,535			250,535			217,234

Cash, cash equivalents, and restricted cash at end of period	$	232,621		$	259,456		$	269,709		$	228,021

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

Cash and equivalents	$	229,365		$	256,326		$	266,197		$	225,041
Restricted cash included in prepaid expenses and other current assets	306			108			330			—
Restricted cash included in other assets	2,950			3,022			3,182			2,980

Total cash, cash equivalents, and restricted cash	$	232,621		$	259,456		$	269,709		$	228,021

Supplemental disclosures of cash flow information

Cash paid during the period for:
Interest	$	6		$	4		$	2		$	5
Income taxes	20,929			46,532			19,495			10,163
Cash received during the period for:
Income tax refund	4,700			2,066			49			5,095
Non-cash operating activities:
Right-of-use assets obtained in exchange for lease obligations							—			20,286
Non-cash investing activities:
Credits on notes receivable	191			—
Accrued purchases of property and equipment	25			151			159			251

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/skincare products that are sold internationally through a global network marketing system, which is a form of direct selling. The Condensed Consolidated Financial Statements (the “Financial Statements”) include the accounts and operations of USANA Health Sciences, Inc., a Utah corporation and its wholly-owned subsidiaries (collectively, the “Company” or “USANA”) in two geographic regions: Asia Pacific, and Americas and Europe. Asia Pacific is further divided into three sub-regions: Greater China, Southeast Asia Pacific, and North Asia. Greater China includes Hong Kong, Taiwan and China; Southeast Asia Pacific includes Australia, New Zealand, Singapore, Malaysia, the Philippines, Thailand, and Indonesia; North Asia includes Japan, and South Korea. Americas and Europe includes the United States, Canada, Mexico, Colombia, the United Kingdom, France, Germany, Spain, Italy, Romania, Belgium, and the Netherlands. All intercompany accounts and transactions have been eliminated in consolidation.

The condensed consolidated balance sheet as of December ~~30, 2017,~~29, 2018, derived from audited consolidated financial statements, and the unaudited interim consolidated financial information of the Company have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures that are normally included in financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. In the opinion of the Company’s management, the accompanying interim condensed consolidated financial information contains all adjustments, consisting only of normal recurring adjustments that are necessary to state fairly the Company’s financial position as of ~~June~~March 30, ~~2018~~2019 and results of operations for the ~~six~~three months ended ~~July 1, 2017~~March 31, 2018 and ~~June~~March 30, ~~2018.~~2019.

The interim ~~condensed consolidated financial statements~~Financial Statements should be read in conjunction with the audited consolidated financial statements and notes thereto that are included in the Company’s Annual Report on Form 10-K for the year ended December ~~30, 2017.~~29, 2018. The results of operations for the ~~six~~three months ended ~~June~~March 30, ~~2018,~~2019, are not necessarily indicative of the results that may be expected for the fiscal year ending December ~~29, 2018.~~28, 2019.

Recent Accounting Pronouncements

Adopted accounting pronouncements

In ~~May 2014,~~February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” Also referred to as ASC 606, this update replaces existing revenue recognition guidance with a single comprehensive revenue model for entities to use in accounting for revenue arising from contracts with customers. ASC 606 includes a five-step process by which entities recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which an entity expects to be entitled in exchange for those goods or services. This standard also requires enhanced disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

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

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

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

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

~~(unaudited)~~

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

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

~~Issued accounting pronouncements~~

~~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~~requires 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~~In July 2018, the FASB issued ASU ~~is effective for fiscal years~~No. 2018-11, “Leases (Topic 842)”—Targeted Improvements, which allows an additional transition method to adopt the new lease standard at the adoption date, as compared to the beginning ~~after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted.~~ of the earliest period presented, and recognize a cumulative-effect adjustment to the beginning balance of retained earnings in the period of adoption.

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

The Company ~~is currently~~adopted Topic 842 in the ~~process~~first quarter of ~~evaluating~~2019, using the ~~impact~~transition method per ASU 2018-11. Accordingly, all periods prior to December 30, 2018 were presented in accordance with the previous Topic 840, Leases, and no retrospective adjustments were made to the comparative periods presented. As a result of the ~~ASU~~adoption on December 30, 2018, the Company, recorded operating lease right-of-use (“ROU”) assets of $19,671 and operating lease liabilities of $20,010 (of which, $7,120 was current and $12,890 was non-current) on the Company’s ~~outstanding~~balance sheet for facility and equipment lease agreements. Additionally, the Company has prepaid land use rights related to production facilities in China of $6,853 that were reclassified to ROU assets. The Company utilized the incremental borrowing rate for the remaining lease term and remaining minimum rental payments for the calculation of the lease liability at the adoption date. Consistent with the treatment under Topic 840, the Company has excluded the portion of fixed rental payments attributable to executory costs such as taxes, insurance and maintenance in the determination of the future minimum rental payments for purposes of calculation of the lease liability at the adoption date. The Company does not have significant finance leases.

As part of the adoption of Topic 842, the Company made the following practical expedient elections:

· The Company elected the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and ~~expects that~~initial direct costs for all leases

· The Company did not elect the hindsight practical expedient, for all leases.

· The Company did not elect the land easement practical expedient.

The adoption ~~will have an~~of Topic 842 had a material impact onto the Company’s consolidated balance sheets, but did not materially impact the Company’s consolidated statements of comprehensive income. The most significant changes to the consolidated balance sheets ~~related~~relate to ~~recording right-of-use~~the recognition of new ROU assets and ~~corresponding~~lease liabilities for operating leases. The adoption of Topic 842 also had no material impact on operating, investing, or financing cash flows in the consolidated statement of cash flows. However, Topic 842 has affected the Company’s disclosures about noncash activities relating to the initial recognition of ROU assets and lease liabilities. Additionally, the Company’s lease-related disclosures have increased as of and for the period ended March 30, 2019. See Note B - Operating Leases for additional information regarding the Company’s lease policies under the new standard.

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 better aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To satisfy that objective, the amendments expand and refine hedge accounting for both non-financial and financial risk components, and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company adopted ASU 2017-12 during the quarter ended March 30, 2019 and the adoption of the standard did not have an 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 A — ORGANIZATION, CONSOLIDATION, AND BASIS OF PRESENTATION

Issued accounting pronouncements not yet adopted

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the disclosure requirements for fair value measurements. The modifications removed the following disclosure requirements: (i) the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) the policy for timing of transfers between levels; and (iii) the valuation processes for Level 3 fair value measurements. This ASU added the following disclosure requirements: (i) the changes in unrealized gains and losses for the period included in other comprehensive income (“OCI”) for recurring Level 3 fair value measurements held at the end of the reporting period; and (ii) the range and weighted average of significant observable inputs used to develop Level 3 fair value measurements. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. The Company does not expect the adoption of ASU ~~2017-12~~2018-13 will have a material impact on its consolidated financial ~~statements~~statements.

In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The capitalized implementation costs of a hosting arrangement that is a service contract will be expensed over the term of the hosting arrangement. For public business entities, the amendments in this ASU are effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted, including adoption in any interim period. The amendments can be applied either retrospectively or prospectively to all implementation costs incurred after the adoption date. The Company does not expect the adoption of ASU 2018-15 will have a material impact on its consolidated financial statements.

NOTE B — OPERATING LEASES.

With the exception of the Company’s headquarters in Salt Lake City, Utah and its facilities in New South Wales, Australia, and in Beijing and Tianjin, China, the Company generally leases its facilities. Each of the facility lease agreements is a non-cancelable operating lease generally structured with renewal options and expire prior to or during 2026. In connection with the production facilities in Beijing and Tianjin, China, the Company has prepaid land use rights that are considered under the guidance for lease accounting. The Company utilizes equipment under non-cancelable operating leases, expiring through 2022.

At contract inception, the Company determines whether an arrangement is or contains a lease and whether the lease should be classified as an operating or a financing lease. A contract is or contains a lease if the contract conveys the right to control the use of the identified asset for a period of time in exchange for consideration. Control is determined based on the right to obtain all of the economic benefits from use of the identified asset and the right to direct the use of the identified asset. ROU assets for operating leases represent the right to use an underlying asset for the lease term, and operating lease liabilities represent the obligation to make lease payments.

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

NOTE B — ~~REVENUE RECOGNITION~~OPERATING LEASES — CONTINUED

~~Revenue is~~Lease liabilities are recognized ~~when, or as, control of a promised product or service transfers to a customer, in an amount that reflects~~based on the consideration to which the Company expects to be entitled in exchange for transferring those products or services. Revenue excludes taxes that have been assessed by governmental authorities and that are directly imposed on revenue-producing transactions between the Company and its customers, including sales, use, value-added, and some excise taxes. Revenue recognition is evaluated through the following five-step process:

~~1) identification~~present value of the ~~contract with a customer;~~

~~2) identification~~future minimum lease payments over the lease term at the commencement date for leases exceeding 12 months. Minimum lease payments include only the fixed lease component of the ~~performance obligations in~~agreement, as well as any variable rate payments that depend on an index, initially measured using the ~~contract;~~

~~3) determination of~~index at the ~~transaction price;~~

~~4) allocation of~~lease commencement date. Non-lease components are accounted for separately from the ~~transaction price to the performance obligations in the contract; and~~

~~5) recognition of revenue when or as a performance obligation is satisfied.~~

~~Product Revenue~~

~~A majority~~fixed lease component for all leases. Most of the Company’s ~~sales are for products sold at~~leases do not provide an implicit rate that can readily be determined. Therefore, the applied discount rate is based on the Company’s incremental borrowing rate, which is determined using its credit rating and other information available as of the commencement date and is the rate of interest it would have to pay on a ~~point in time and shipped~~collateralized basis to ~~customers, for which control is transferred as goods are delivered~~borrow an amount equal to the ~~third party carrier for shipment.~~ lease payments under similar terms. Lease terms may include options to renew when it is reasonably certain that the Company will exercise that option. The ~~Company receives payment, primarily via credit card, for the sale of products~~ROU asset is measured at the ~~time customers place orders and payment is required prior to shipment.~~initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received.

The Company’s product sales contracts include terms that could cause variability in the transaction price for items such as discounts, credits, or sales returns. Accordingly, the transaction price for product sales includes estimates of variable consideration to the extent itOperating lease expense is ~~probable that a significant reversal of revenue~~ recognized ~~will not occur. At the time of sale, the Company estimates a refund liability for the variable consideration based on historical experience.~~

Initial product orders with a new customer may include multiple performance obligations related to sales discounts earned under the Company’s initial order reward program. Under this program, the customer receives an option to apply the discounts earned on the initial order to two subsequent Auto Orders, which conveys a material right to the customer. As such, the initial order transaction price is allocated to each separate performance obligation based on its relative standalone selling price and recognized as revenue as each performance obligation is satisfied.

Associate incentives represent consideration paid to a customer and include all forms of commissions, and other incentives paid to our Associates. With the exception of commissions paid to Associates on personal purchases, which are considered a sales discount and are reported as a reduction to net sales, the incentives are paid for distinct services related to the Company’s product sales and are recorded as an expense when revenue for the goods is recognized.

Shipping and handling activities are performed after the customer obtains control of the goods transferred. The Company accounts for these activities as fulfillment costs. Therefore, the Company recognizes the costs of these activities when revenue for the goods is recognized. Shipping and handling costs are included in cost of sales for all periods presented.

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

~~Other Revenue~~

Other types of revenue include fees for access to online customer service applications and annual account renewal fees for Associates, for which control is transferred over time as services are delivered and are recognized as revenue on a straight-line basis over the lease term and is included in cost of sales and selling, general and administrative expense in the Company’s consolidated statements of comprehensive income. Leases with an initial term of 12 months or less are not recorded on the ~~respective contracts.~~balance sheet, and the expense for these short-term leases is recognized on a straight-line basis over the lease term.

The Company monitors for events or changes in circumstances that require a reassessment of its leases. When a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying amount of the ROU asset unless doing so would reduce the ROU asset to an amount less than zero, in which case the remaining adjustment would be recorded in the consolidated statements of comprehensive income.

The following table summarizes the classification of lease assets and lease liabilities in the Company’s consolidated balance sheet:

Leases	Classification	March 30, 2019
Assets
ROU operating lease assets, net	Other assets	$	24,746

Total ROU assets		$	24,746

Liabilities
Current:
Operating lease liabilities	Other current liabilities	$	6,764

Non-current:
Operating lease liabilities	Other long-term liabilities	$	11,805

Total lease liabilities		$	18,569

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

NOTE B — ~~REVENUE RECOGNITION -~~OPERATING LEASES — CONTINUED

~~Revenue Disaggregation~~

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

~~Contract Balances~~

Contract liabilities, which are recorded within Other current liabilities in the condensed consolidated balance sheets, primarily relate to deferred revenue for product sales for customer payments received in advance of shipment, for outstanding material rights under the initial order program, and for services where control is transferred over time as services are delivered.

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

Six Months Ended

June 30,

2018

Contract liabilities at beginning of period

$
14,417

Increase due to deferral of revenue

14,357

Decreases due to recognition of revenue

(13,059
)

Contract liabilities at end of period

$
15,715

	March 30, 2019

Lease cost
Operating lease cost	$	2,166

Total lease cost	$	2,166

Other information

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows from operating leases	$	2,188

ROU assets obtained in exchange for new operating lease liabilities	$	615

Weighted-average remaining lease term—operating leases	4.04 yrs.

Weighted-average discount rate—operating leases	3.78		%

The following table presents the maturity of the Company’s lease liabilities as of March 30, 2019.

Year ending
Remainder of 2019	$	5,752
2020	6,065
2021	3,703
2022	1,692
2023	1,584
Thereafter	2,610

	$	21,406

Less: imputed interest	$	(2,837	)

Present value	$	18,569

The future minimum commitments under operating leases at December 29, 2018 having a non-cancelable term in excess of one year as determined prior to the adoption of Topic 842 are as follows:

Year ending
2019	$	9,155
2020	6,146
2021	3,825
2022	1,962
2023	1,464
Thereafter	2,514
	$	25,066

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

NOTE C — FAIR VALUE MEASURES

The Company measures at fair value certain of its financial and non-financial assets and liabilities by using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are:

· Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.

· Level 2 inputs are from other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

· Level 3 inputs are unobservable and are used to measure fair value in situations where there is little, if any, market activity for the asset or liability at the measurement date.

As of the dates indicated, the following financial assets and liabilities were measured at fair value on a recurring basis using the type of inputs shown:

				Fair Value Measurements Using										Fair Value Measurements Using
				Inputs										Inputs
	December 30, 2017			Level 1		Level 2			Level 3		December 29, 2018			Level 1		Level 2			Level 3

Money market funds included in cash equivalents	$	106,090		$	106,090	$	—		$	—	$	129,449		$	129,449	$	—		$	—
Foreign currency contracts included in other current liabilities	(139		)	—		(139		)	—		(309		)	—		(309		)	—

	$	105,951		$	106,090	$	(139	)	$	—	$	129,140		$	129,449	$	(309	)	$	—


			Fair Value Measurements Using								Fair Value Measurements Using
			Inputs								Inputs
	June 30, 2018		Level 1		Level 2		Level 3		March 30, 2019		Level 1		Level 2		Level 3

Money market funds included in cash equivalents	$	157,262	$	157,262	$	—	$	—	$	141,120	$	141,120	$	—	$	—
Net investment hedge included in prepaid expenses and other current assets									674		—		674		—
Foreign currency contracts included in prepaid expenses and other current assets	310		—		310		—		208		—		208		—

	$	157,572	$	157,262	$	310	$	—	$	142,002	$	141,120	$	882	$	—

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, and ROU assets are not required to be carried at fair value on a recurring basis. However, if certain triggering events occur (or tested at least annually for goodwill and indefinite-lived intangibles) such that a non-financial asset is required to be evaluated for impairment, an impairment charge is recorded to reduce the carrying value to the fair value, if the carrying value exceeds the fair value. At December 29, 2018 and March 30, ~~2017 and June 30, 2018,~~2019, there were no non-financial assets measured at fair value on a non-recurring basis.

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

NOTE C — FAIR VALUE MEASURES - CONTINUED

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

Securities held-to-maturity consist of corporate ~~bonds and U.S. treasuries.~~bonds. The fair value of corporate bonds ~~and U.S. treasuries~~ are priced using quoted market prices for similar instruments or non-binding market prices that are corroborated by observable market data, which is considered to be a Level 2 input. The carrying values of these corporate bonds ~~and U.S. treasuries~~ approximate their fair values due to their short-term maturities.

NOTE D — INVESTMENTS

The carrying amount, gross unrealized holding gains, gross unrealized holding losses, and fair value of securities held-to-maturity by major security type and class of security were as follows:

As of June 30, 2018

Amortized Cost

Unrecognized
Holding Gains

Unrecognized
Holding Losses

Estimated Fair
Value

Corporate bonds

27,502

—

—

27,502

U.S. treasuries

14,931

—

—

14,931

Total securities held-to-maturity

$
42,433

$
—

$
—

$
42,433

	As of December 29, 2018
	Amortized Cost		Unrecognized Holding Gains		Unrecognized Holding Losses			Estimated Fair Value

Corporate bonds	$	57,554	$	1	$	(46	)	$	57,509
Commercial Paper	5,985		—		—			5,985

Total HTM Securities	$	63,539	$	1	$	(46	)	$	63,494

	As of March 30, 2019
	Amortized Cost		Unrecognized Holding Gains		Unrecognized Holding Losses			Estimated Fair Value

Corporate bonds	$	26,854	$	5	$	(3	)	$	26,856

Total securities held-to-maturity	$	26,854	$	5	$	(3	)	$	26,856

All held-to-maturity securities as of ~~June~~March 30, ~~2018~~2019 mature within one year.

NOTE E — ~~OTHER ASSETS~~INVENTORIES

~~Other assets~~Inventories consist ~~primarily~~ of ~~land use rights related~~the following:

	December 29,		March 30,
	2018		2019
Raw materials	$	19,502	$	22,336
Work in progress	14,485		11,755
Finished goods	47,961		52,374

	$	81,948	$	86,465

NOTE F — REVENUE CONTRACT LIABILITIES

Revenue is recognized when, or as, control of a promised product or service transfers to a ~~production facility~~customer, in ~~China. At December 30, 2017, other assets also included a secured loan~~an amount that reflects the consideration to which the ~~former supplier~~Company expects to be entitled in exchange for transferring those products or services. A majority of the Company’s ~~nutrition bars.~~sales are for products sold at a point in time and shipped to customers, for which control is transferred as goods are delivered to the third party carrier for shipment. The Company ~~extended non-revolving~~receives payment, primarily via credit to this former supplier to allow them to acquire equipment that was necessary to manufacture the USANA nutrition bars, which was secured by the equipment. This relationship was intended to provide improved supply chain stability for USANA and create a mutually beneficial relationship between the parties. Interest accrued at an annual interest rate of LIBOR plus 400 basis points. The note had a maturity date of February 1, 2024 and was to be repaid by a combination of cash payments and creditscard, for the ~~manufacture~~sale of ~~USANA’s nutrition bars.~~products at the time customers place orders and payment is required prior to shipment. Contract liabilities, which are recorded within Other current liabilities in the consolidated balance sheets, primarily relate to deferred revenue for product sales for customer payments received in advance of shipment, for outstanding material rights under the initial order program, and for services where control is transferred over time as services are delivered.

~~A loan~~Disaggregation of revenue by geographical region and major product line is ~~considered impaired when, based on current information and events; it is probable that the Company will be unable to collect the scheduled payments~~included in ~~accordance with the contractual terms of the loan. Factors considered~~Segment Information in determining impairment include payment status, collateral value and the probability of collecting payments when due. During the first half of 2017, the Company experienced challenges with the former supplier of nutrition bars and subsequently determined to no longer use this supplier. The Company evaluated the recoverability of the note receivable from this supplier and recorded impairments totaling $2,734 during the year ended December 30, 2017. The total contractual unpaid principal balance, including accrued unpaid interest on the note receivable from this supplier as of December 30, 2017 was $6,734. During April 2018, the Company reached a settlement with the supplier to terminate the relationship and received $4,800 in cash as payment in full under the terms of the settlement.Note K.

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

NOTE F — ~~INVENTORIES~~REVENUE CONTRACT LIABILITIES

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

December 30,

June 30,

2017

2018

Raw materials

$
20,737

$
21,037

Work in progress

8,461

10,049

Finished goods

33,720

43,037

$
62,918

$
74,123

	December 29,			March 30,
	2018			2019
Contract liabilities at beginning of period	$	14,417		$	15,055
Increase due to deferral of revenue at period end	15,055			14,191
Decrease due to beginning contract liabilities recognized as revenue	(14,417		)	(14,291		)

Contract liabilities at end of period	$	15,055		$	14,955

NOTE G — LINE OF CREDIT

The Company has a $75,000 line of credit with Bank of ~~America.~~America (‘Bank”). Interest is computed at the ~~bank’s~~Bank’s Prime Rate or a LIBOR plus rate, 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, pursuant to a separate pledge agreement with the ~~bank.~~Bank. On February 19, 2016, the Company entered into an Amended and Restated Credit Agreement with the 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 to $100,000 or greater and its ratio of consolidated funded debt to adjusted EBITDA of equal to or less than 2.0 to 1.0 at the end of each quarter.

The adjusted EBITDA under the ~~line of credit agreement~~Credit Agreement is modified for certain non-cash expenses. Any existing bank guarantees are considered a reduction of the overall availability of credit and part of the covenant calculation under the ~~credit agreement.~~Credit Agreement. This resulted in a ~~$4,273~~$6,619 and ~~$6,917~~$6,001 reduction in the available borrowing limit as of December 29, 2018 and March 30, ~~2017 and June 30, 2018,~~2019, respectively, due to existing normal course of business guarantees in certain markets.

There was no outstanding debt on this line of credit at December ~~30, 2017~~29, 2018 or at ~~June~~March 30, ~~2018.~~2019. 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 H — CONTINGENCIES

The Company is involved in various lawsuits, claims, and other legal matters from time to time that arise in the ordinary course of conducting business, including matters involving our products, intellectual property, supplier relationships, distributors, competitor relationships, employees and other matters. The Company records a liability when a particular contingency is probable and estimable. The Company faces contingencies that are reasonably possible to occur; however, they cannot currently be estimated. While complete assurance cannot be given to the outcome of these proceedings, management does not currently believe that any of these matters, individually or in the aggregate, will have a material adverse effect on the Company’s financial condition, liquidity or results of operations.

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

NOTE H — CONTINGENCIES - CONTINUED

On February 7, 2017, the Company disclosed in a Current Report on Form 8-K filed with the SEC that it is conducting a voluntary internal investigation regarding its BabyCare operations in China. In connection with this investigation, the Company expects to continue to incur costs in conducting the on-going review and investigation, in responding to requests for information in connection with any government investigations and in defending any potential civil or governmental proceedings that are instituted against it or any of its current or former officers or directors. The Company has voluntarily contacted the SEC and the United States Department of Justice to advise both agencies that an internal investigation is underway and intends to provide additional information to both agencies as the investigation progresses. Because the internal investigation is ongoing, the Company cannot predict the duration, scope, or result of the investigation. One or more governmental actions could be instituted in respect of the matters that are the subject of the internal investigation, and such actions, if brought, may result in judgments, settlements, fines, penalties, injunctions, cease and desist orders, criminal penalties, or other relief.

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

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

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

~~(unaudited)~~

~~NOTE H~~ — ~~CONTINGENCIES - CONTINUED~~

On February 13, 2017, a purported shareholder class action lawsuit (Rumbaugh v. USANA Health Sciences Inc., et al., Case No. 2:17-cv-00106) was filed in the United States District Court for the District of Utah by April Rumbaugh, a purported shareholder of USANA, alleging that the Company failed to disclose that (i) the Company’s BabyCare subsidiary had engaged in improper reimbursement practices in China, (ii) these practices constituted violations of the Foreign Corrupt Practices Act or FCPA, (iii) as such, the Company’s China revenues were in part the product of unlawful conduct and unlikely to be sustainable, and (iv) the foregoing conduct, when it became known, was likely to subject the Company to significant regulatory scrutiny. On behalf of herself and a putative class of purchasers of USANA stock between March 14, 2014 and February 7, 2017, the plaintiff asserted claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated thereunder. The plaintiff sought, among other things, an award of damages, interest, reasonable attorneys’ fees, expert fees, and other costs. The lawsuit named as defendants the Company; its former Co-Chief Executive Officer, David A. Wentz; and our Chief Leadership Development Officer, Paul A. Jones. On June 2, 2017, the court appointed Chi Wah On (another purported shareholder of USANA) as lead plaintiff. On August 4, 2017, lead plaintiff filed a consolidated amended complaint seeking similar relief. This new complaint asserted additional allegations and added the Company’s Chief Executive Officer, Kevin G. Guest, and Chief Financial Officer, G. Douglas Hekking, as defendants. On September 18, 2017, the Company filed a motion to dismiss the amended complaint, and briefing was completed on November 8, 2017. The motion to dismiss was argued on April 25, 2018 and a decision is pending. The Company believes that the action is without merit, and intends to vigorously defend against all claims asserted.

NOTE I — DERIVATIVE FINANCIAL INSTRUMENTS

The Company’s risk management strategy includes the select use of derivative instruments to reduce the effects of volatility in foreign currency exchange exposure on operating results and cash flows. In accordance with the Company’s risk management policies, the Company does not hold or issue derivative instruments for trading or speculative purposes.

The Company recognizes all derivative instruments as either assets or liabilities in the balance sheet at their respective fair values. When the Company becomes a party to a derivative instrument and intends to apply hedge accounting, the Company formally documents the hedge relationship and the risk management objective for undertaking the hedge, the nature of risk being hedged, and the hedged transaction, which includes designating the instrument for financial reporting purposes as a fair value hedge, a cash flow hedge, or a net investment hedge. The Company also documents how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method used to measure ~~ineffectiveness~~ineffectiveness.

The Company periodically uses derivative hedging instruments to hedge its net investment in its non U.S. subsidiaries designed to hedge a portion of the foreign currency exposure that arises on translation of the foreign subsidiaries into U.S. dollars. Initially, the Company records derivative assets on a gross basis in our consolidated balance sheets. Subsequently the fair value of derivatives is measured for each reporting period. The effective portion of gains and losses attributable to these net investment hedges is recorded to foreign currency translation adjustment (“FCTA”) within accumulated other comprehensive income (loss) (“AOCI”) to offset the change in the carrying value of the net investment being hedged, and will subsequently be reclassified to net earnings in the period in which the hedged investment is either sold or substantially liquidated.

As of December ~~30, 2017,~~29, 2018, there were no derivatives outstanding for which the Company has applied hedge accounting. During the ~~second~~first quarter of ~~2018,~~2019, the Company entered into ~~and settled~~ a ~~forward contract~~European option designated as a net investment hedge with a notional value of ~~$105,000 and realized~~$110,000. As of March 30, 2019, the Company had recorded an unrealized a ~~net gain~~loss of ~~$739,~~$986, which is ~~reflected in the~~recorded to FCTA within AOCI. The Company assessed hedge effectiveness under the forward rate method, determining the ~~hedged~~hedging instrument iswas highly ~~effective and recorded no ineffectiveness. As of June 30, 2018, there were no derivatives outstanding for which the Company has applied hedge accounting.~~

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

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

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

~~(unaudited)~~effective.

NOTE J— COMMON STOCK AND EARNINGS PER SHARE

Basic earnings per share (“EPS”) 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~~EPS 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~~EPS calculations under the treasury stock method include equity awards that are in-the-money but have not yet been exercised.

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

NOTE J— COMMON STOCK AND EARNINGS PER SHARE - CONTINUED

The following is a reconciliation of the numerator and denominator used to calculate basic ~~earnings per share~~EPS and diluted earnings per share for the periods indicated:

	Quarter Ended				Six Months Ended				Quarter Ended
	July 1,		June 30,		July 1,		June 30,		March 31,		March 30,
	2017		2018		2017		2018		2018		2019

Net earnings available to common shareholders	$	23,259	$	33,907	$	44,617	$	62,853	$	28,946	$	24,172

Weighted average common shares outstanding - basic	24,574		24,193		24,537		24,134		24,074		23,484

Dilutive effect of in-the-money equity awards	444		648		460		423		199		443

Weighted average common shares outstanding - diluted	25,018		24,841		24,997		24,557		24,273		23,927

Earnings per common share from net earnings - basic	$	0.95	$	1.40	$	1.82	$	2.60	$	1.20	$	1.03

Earnings per common share from net earnings - diluted	$	0.93	$	1.36	$	1.78	$	2.56	$	1.19	$	1.01

Equity awards consisting of stock-settled stock appreciation rights and restricted stock awards, for the following shares were not included in the computation of diluted EPS due to the fact that their effect would be anti-dilutive:

Quarter Ended

Six Months Ended

July 1,

June 30,

July 1,

June 30,

2017

2018

2017

2018

2,059

—

2,119

901

		Quarter Ended
		March 31,		March 30,
		2018		2019
		1,802		105

~~There were no share repurchases during the six months ended July 1, 2017.~~ During the ~~six months~~quarters ended ~~June~~March 31, 2018 and March 30, ~~2018,~~2019, the Company repurchased and retired 39 shares and 284 shares for $2,943 and $30,000, respectively, under the Company’s share repurchase plan. The excess of the repurchase price over par value is allocated between additional paid-in capital and retained earnings on a pro-rata basis. The purchase of shares under this plan reduces the number of shares outstanding in the above calculations.

As of ~~June~~March 30, ~~2018,~~2019, the remaining ~~approved~~authorized repurchase amount under the stock repurchase plan was ~~$47,057.~~$40,216. There ~~currently~~ is no expiration date on the remaining approved repurchase amount and no requirement for future share repurchases.

On April 30, 2019, the Company’s Board of Directors authorized an increase in the repurchase amount under its share repurchase plan to a total of $150,000. The authorization includes the $40,216 that was remaining under the prior authorization at March 30, 2019.

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

NOTE K — SEGMENT INFORMATION

USANA operates as a direct selling company that develops, manufactures, and distributes high-quality nutritional and personal care/skincare products that are sold through a global network marketing system of independent distributors (“Associates”). ~~As such, management~~The Company aggregates its operating segments into one reportable segment as management believes that the Company’s segments exhibit similar long-term financial performance and have similar economic characteristics. Performance for a region or market is evaluated based on sales. No single Associate accounted for 10% or more of net sales for the periods presented. The table below summarizes the approximate percentage of total product revenue that has been contributed by the Company’s nutritional, foods, and personal care/skincare products for the periods indicated.

	Quarter Ended				Six Months Ended				Quarter Ended
	July 1,		June 30,		July 1,		June 30,		March 31,		March 30,
	2017		2018		2017		2018		2018		2019

USANA® Nutritionals	84	%	82	%	85	%	82	%	83	%	84	%
USANA Foods	9	%	9	%	8	%	9	%	8	%	8	%
Personal care/Skincare
Sensé — beautiful science®	6	%	4	%	6	%	4	%	4	%	1	%
Celavive®(1)	N/A		4	%	N/A		4	%	4	%	6	%

(1) WeThe Company launched Celavive® in every market except China in the first quarter of 2018 and ~~anticipate launching~~launched in China late in the third quarter of 2018.

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

· Asia Pacific —

· Greater China — Hong Kong, Taiwan and China. Our business in China is conducted by BabyCare Holding, Ltd. (“BabyCare”), our wholly-owned ~~subsidiary.~~

subsidiary;

· Southeast Asia Pacific — Australia, New Zealand, Singapore, Malaysia, the Philippines, Thailand, and Indonesia

· North Asia — Japan and South ~~Korea~~

Korea;

· Americas and Europe — United States, Canada, Mexico, Colombia, the United Kingdom, France, Germany(2), Spain(2), Italy(2), Romania(2), Belgium, and the ~~Netherlands.~~Netherlands

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

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

NOTE K — SEGMENT INFORMATION - CONTINUED

Selected Financial Information

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

	Quarter Ended				Six Months Ended
	July 1,		June 30,		July 1,		June 30,		Quarter Ended
	2017		2018		2017		2018		March 31,		March 30,
									2018		2019
Net Sales to External Customers

Asia Pacific
Greater China	$	136,702	$	167,841	$	268,440	$	325,649	$	157,808	$	144,153
Southeast Asia Pacific	48,665		54,771		99,071		110,999		56,228		54,515
North Asia	13,948		18,986		26,904		37,070		18,084		22,228
Asia Pacific Total	199,315		241,598		394,415		473,718		232,120		220,896

Americas and Europe	57,748		59,862		117,971		119,740		59,878		52,094

Consolidated Total	$	257,063	$	301,460	$	512,386	$	593,458	$	291,998	$	272,990

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

	Quarter Ended				Six Months Ended				Three Months Ended
	July 1,		June 30,		July 1,		June 30,		March 31,		March 30,
	2017		2018		2017		2018		2018		2019

Net sales:
China	$	120,831	$	151,110	$	236,288	$	291,702	$	140,592	$	127,372
United States	$	28,870	$	30,250	$	59,036	N/A

	As of				As of
	December 30,		June 30,		December 29,		March 30,
	2017		2018		2018		2019
Long-lived assets:
China	$	96,248	$	93,281	$	89,509	$	95,386
United States	$	59,589	$	52,551	$	49,195	$	49,875

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our Unaudited Condensed Consolidated Financial Statements and Notes thereto that are contained in this report, with a narrative from the perspective of management. The following discussion and analysis of ~~USANA’s~~our financial condition and results of operations is presented in ~~six~~five 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 included in our Annual Report on Form 10-K for the year ended December ~~30, 2017,~~29, 2018, and our other filings, including Current Reports on Form 8-K, that have been filed with the SEC through the date of this report.

Overview

We develop and manufacture high-quality, science-based nutritional, personal care and skincare products that ~~are distributed~~we distribute 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~~to improve the overall health and nutrition of individuals and families around the world. Our customer base comprises two types of customers: “Associates” and “Preferred ~~Customers”~~Customers,” referred to together collectively in this report as “active Customers.” Our Associates also sell products to retail customers and 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 ~~June~~March 30, ~~2018,~~2019, we had approximately ~~597,000~~586,000 active Customers worldwide. For purposes of this report, we only count as active Customers those Associates and Preferred Customers who have purchased products 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~~Pacific:

· Greater China — Hong Kong, Taiwan, and China. Our business in China is conducted by BabyCare, our wholly-owned ~~subsidiary.~~subsidiary;

· Southeast Asia Pacific — Australia, New Zealand, Singapore, Malaysia, the Philippines, Thailand, and Indonesia

· North Asia — Japan and South ~~Korea~~Korea;

· Americas and Europe — United States, Canada, Mexico, Colombia, the United Kingdom, France, Germany(1), Spain(1), Italy(1), Romania(1), Belgium, and the Netherlands

~~Our primary product lines consist~~(1) We commenced operations in Germany, Spain, Italy, and Romania near the end of ~~(i) USANA~~â ~~Nutritionals, (ii) USANA Foods, (ii) Sensé — beautiful science~~â ~~(Sensé), our historical line~~the second quarter of ~~personal care products, and (iv) Celavive~~â~~, our new innovative skincare system with our InCelligence Technology~~TM~~. The USANA Nutritionals product line is further categorized into two separate classifications: Essentials and Optimizers.~~ 2018.

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:

~~(1)~~ ~~We commenced operations in Germany, Spain, Italy, and Romania near the end of the second quarter of 2018.~~

	Six Months Ended				Three Months Ended
	July 1, 2017		June 30, 2018		March 31, 2018		March 30, 2019

Product Line
USANA® Nutritionals
Essentials/CellSentials	20	%	17	%	18	%	19	%
Optimizers	65	%	65	%	65	%	65	%
USANA Foods	8	%	9	%	8	%	8	%
Personal care/Skincare
Sensé — beautiful science®	6	%	4	%	4	%	1	%
Celavive®(1)	N/A		4	%	4	%	6	%
All Other	1	%	1	%	1	%	1	%

Key Product
USANA® Essentials/CellSentials	13	%	11	%	12	%	12	%
Proflavanol®	12	%	11	%	11	%	11	%
BiOmega-3™	14	%	14	%	14	%	15	%

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

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

~~We believe that~~ownership are key to our ~~high-quality products~~ability to attract and ~~our Associate Compensation Plan are the key components to attracting and retaining~~retain Associates. We periodically make changes to our Compensation Plan in an effort to ensure that our plan is among the most competitive in the industry, to encourage behavior that we believe leads to a successful business for our Associates, and to ensure that our plan provides us with leverage to grow sales and earnings. Additionally, the initiatives we are executing under our customer experience, and our social media and sharing strategies are designed to promote active Customer growth.

To further support our Associates in building their businesses, we sponsor meetings and events throughout the year, which offer information about our products and our network marketing system. These meetings are designed to assist Associates in their business development and to provide a forum for interaction with our Associate leaders and members of our management team. We also provide low cost sales tools, including online sales, business management, and training tools, which we believe are an integral part of building and maintaining a successful home-based business for our Associates. Although we provide training and sales tools, we ultimately rely on our Associates to sell our products, attract new active Customers to purchase our products, and educate and train new Associates.

Because we have operations in multiple markets, with sales and expenses being generated and incurred in multiple currencies, our reported U.S. dollar sales and earnings can be significantly affected by fluctuations in currency exchange rates. In general, our operating results are affected positively by a weakening of the U.S. dollar and negatively by a strengthening of the U.S. dollar. During the ~~six~~three months ended ~~June~~March 30, ~~2018,~~2019, net sales outside of the United States represented ~~90.1%~~90.8% 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, we ~~must~~ increase our sales by increasing the number of our active Customers, ~~and/or increase~~ the amount they spend on average, ~~to increase net sales.~~or both. Our primary focus continues to be increasing the number of active Customers. We believe this focus is consistent with our vision of improving the overall health and nutrition of individuals and families around the world. Sales to Associates account for ~~the majority of our product sales, representing~~ approximately ~~57%~~59% of product sales during the ~~six~~three months ended ~~June~~March 30, ~~2018;~~2019; the remainder of our sales are to Preferred Customers. Increases or decreases in product sales are typically the result of variations in the volume of product sold relating to fluctuations in the number of active Customers purchasing our products. The number of active Associates and Preferred Customers is, therefore, used by management as a key non-financial indicator to evaluate our operational performance.

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

Active Associates by Region

As of

As of

Change from

Percent

July 1, 2017

June 30, 2018

Prior Year

Change

Asia Pacific:

Greater China

105,000

37.5
%
111,000

38.0
%
6,000

5.7
%
Southeast Asia Pacific

83,000

29.7
%
85,000

29.1
%
2,000

2.4
%
North Asia

20,000

7.1
%
26,000

8.9
%
6,000

30.0
%
Asia Pacific Total

208,000

74.3
%
222,000

76.0
%
14,000

6.7
%

Americas and Europe

72,000

25.7
%
70,000

24.0
%
(2,000
)
(2.8
)%

280,000

100.0
%
292,000

100.0
%
12,000

4.3
%

Active Preferred Customers by Region

As of

As of

Change from

Percent

July 1, 2017

June 30, 2018

Prior Year

Change

Asia Pacific:

Greater China

189,000

65.9
%
206,000

67.5
%
17,000

9.0
%
Southeast Asia Pacific

15,000

5.2
%
20,000

6.6
%
5,000

33.3
%
North Asia

10,000

3.5
%
11,000

3.6
%
1,000

10.0
%
Asia Pacific Total

214,000

74.6
%
237,000

77.7
%
23,000

10.7
%

Americas and Europe

73,000

25.4
%
68,000

22.3
%
(5,000
)
(6.8
)%

287,000

100.0
%
305,000

100.0
%
18,000

6.3
%

~~Current Focus and Recent Developments~~

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

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

· We continued our international expansion efforts during the second quarter of 2018 with the commencement of operations in four new European markets: Germany, Spain, Italy, and Romania. Each of these markets will be supported by our European regional headquarters in Paris, France, which presents an efficient opportunity for USANA to expand its consumer base throughout Europe.

· We completed the initial development of our new WeChat platform in China during the second quarter of 2018 and plan to roll out in the third quarter of 2018. WeChat is a Chinese multi-purpose messaging and social media app that is widely thought of as China’s “app for everything” because of its wide range of functionality. This new platform is expected to make it easier for customers in China to do business as they will be able to use the app to introduce USANA to new customers, complete sales of products and enroll new Customers. This new platform demonstrates our commitment to making business convenient for our independent Associates.

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

	Total Active Customers by Region
	As of			As of			Change from		Percent
	March 31, 2018			March 30, 2019			Prior Year		Change

Asia Pacific:
Greater China	302,000	51.6	%	304,000	51.9	%	2,000		0.7	%
Southeast Asia Pacific	109,000	18.6	%	111,000	18.9	%	2,000		1.8	%
North Asia	35,000	6.0	%	44,000	7.5	%	9,000		25.7	%
Asia Pacific Total	446,000	76.2	%	459,000	78.3	%	13,000		2.9	%

Americas and Europe	139,000	23.8	%	127,000	21.7	%	(12,000	)	(8.6	)%

	585,000	100.0	%	586,000	100.0	%	1,000		0.2	%

Non-GAAP Financial Measures

~~Regulation G, Conditions for Use~~We believe that presentation of non-GAAP ~~Financial Measures,~~financial information is meaningful and ~~other SEC regulations define~~useful in understanding the activities and ~~prescribe the conditions for use~~business metrics of ~~certain~~our operations. We believe that these non-GAAP financial ~~information. Constant~~measures reflect an additional way of viewing aspects of our business that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business. We provide non-GAAP financial information for informational purposes only. Readers should consider the information in addition but not instead of or superior to, our consolidated financial statements prepared in accordance with GAAP. This non-GAAP financial information may be determined or calculated differently by other companies, limiting the usefulness of those measures for comparative purposes.

We use constant currency net sales, local currency net sales, earnings, diluted EPS and other currency-related financial information ~~(collectively, “Financial Results”)~~terms used to discuss our financial results in this report that are non-GAAP financial measures ~~that~~to remove the impact of fluctuations in foreign-currency exchange rates and to help facilitate period-to-period comparisons of our ~~Financial Results~~results of operations and thus provide investors an additional perspective on trends and underlying business results. ~~Constant~~Changes in our reported revenue and profits include the impacts of changes in foreign currency exchange rates. As additional information to the reader, we provide constant currency assessments in this MD&A to remove or quantify the impact of the fluctuation in foreign exchange rates and utilize constant currency results in our analysis of performance. Our constant currency Financial Results are calculated by translating the current period’s Financial Results at the same average exchange rates in effect during the applicable prior-year period and then comparing this amount ~~for the current period~~ to the prior-year period’s Financial Results. A reconciliation of these non-GAAP financial measures accompanies any reference to them in the presentation in the accompanying financial statements and notes thereto. Management believes that the non-GAAP financial measures assist management and investors in evaluating, and comparing from period to period, results from ongoing operations in a more meaningful and consistent manner while also highlighting more meaningful trends in the results of operations. These measures are used in addition to and in conjunction with results presented in accordance with GAAP. 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 ~~second~~first quarter of ~~2018 increased 17.3%~~2019 decreased 6.5% to ~~$301.5~~$273.0 million, ~~an increase~~a decrease of ~~$44.4~~$19.0 million, compared with the ~~second~~first quarter of ~~2017.~~2018. This ~~increase~~decrease resulted from (i) a lack of promotional activity around the world during the quarter; (ii) negative media in China regarding the health products and direct sales industries, which was ~~driven by several factors, including: (i) our new Celavive~~® ~~line, which contributed approximately $7.0~~associated with the Chinese government’s 100-day review of these industries during the quarter; and (iii) a negative impact of $13.3 million ~~in incremental sales, (ii) favorable~~related to unfavorable changes in currency exchange ~~rates that benefited net sales for~~rates.

Although our 2019 operating plan contains escalating promotional activity throughout 2019, it contained very little activity during the first quarter. This was the case because we align our annual operating plan and promotional calendar to offer additional promotions and incentives at strategic times throughout the year to drive momentum. While we believed the plan as a whole was well developed, the lack of promotional activity during the first quarter had a more significant impact on our worldwide momentum than we anticipated. Promotional activity in our various markets is commencing in the second quarter of 2019 and the intent of this activity is to generate sales and customer growth around the world. While we believe that we will begin to see positive results from this activity during the second quarter of 2019, we believe our results will accelerate during the second half of 2019.

Our results for the first quarter were also negatively affected by ~~$12.5 million,~~media coverage in China associated with the Chinese government’s 100-day review of the health products and ~~(iii) growth~~direct selling industries that occurred during the quarter. This volume of negative media coverage regarding our industry was unanticipated and slowed the productivity of our Associates, generated skepticism amongst customers and potential customers, all of which adversely affected our sales in ~~active Customers, which increased 5.3% year-over-year~~China for the quarter. The Chinese government’s 100-day review of these industries concluded in April 2019, and we expect to ~~597,000.~~see a more typical operating environment in China going forward. While we believe that we will begin to see progress in China during the second quarter of 2019, we believe that our results in China will further accelerate during the second half of the year.

Net earnings for the ~~second~~first quarter of ~~2018 increased 45.8% to $33.9~~2019 were $24.2 million, ~~an increase~~a decrease of ~~$10.6 million,~~16.5%, compared with $28.9 million during the ~~second quarter of 2017.~~prior-year period. The ~~increase~~decrease in net earnings was ~~mostly~~ the result of ~~higher~~lower net sales, ~~benefitted by lower~~and higher relative operating expenses.

Quarters Ended ~~July 1, 2017~~March 31, 2018 and ~~June~~March 30, ~~2018~~2019

Net Sales

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

															Percent
	Net Sales by Region														change																		Percent
	(in thousands)												Currency		excluding		Net Sales by Region																change
	Quarter Ended								Change from		Percent		impact on		currency		(in thousands)													Currency			excluding
	July 1, 2017				June 30, 2018				prior year		change		sales		impact		Quarter Ended								Change from			Percent		impact on			currency
																	March 31, 2018				March 30, 2019				prior year			change		sales			impact
Asia Pacific
Greater China	$	136,702	53.2	%	$	167,841	55.6	%	$	31,139	22.8	%	$	10,573	15.0	%	$	157,808	54.0	%	$	144,153	52.8	%	$	(13,655	)	(8.7	)%	$	(8,252	)	(3.4	)%
Southeast Asia Pacific	48,665		18.9	%	54,771		18.2	%	6,106		12.5	%	614		11.3	%	56,228		19.3	%	54,515		20.0	%	(1,713		)	(3.0	)%	(2,566		)	1.5	%
North Asia	13,948		5.4	%	18,986		6.3	%	5,038		36.1	%	812		30.3	%	18,084		6.2	%	22,228		8.1	%	4,144			22.9	%	(1,074		)	28.9	%
Asia Pacific Total	199,315		77.5	%	241,598		80.1	%	42,283		21.2	%	11,999		15.2	%	232,120		79.5	%	220,896		80.9	%	(11,224		)	(4.8	)%	(11,892		)	0.3	%

Americas and Europe	57,748		22.5	%	59,862		19.9	%	2,114		3.7	%	472		2.8	%	59,878		20.5	%	52,094		19.1	%	(7,784		)	(13.0	)%	(1,412		)	(10.6	)%

	$	257,063	100.0	%	$	301,460	100.0	%	$	44,397	17.3	%	$	12,471	12.4	%	$	291,998	100.0	%	$	272,990	100.0	%	$	(19,008	)	(6.5	)%	$	(13,304	)	(2.0	)%

Asia Pacific: The ~~increase~~decrease in constant currency net sales in Greater China ~~continues to be~~was driven largely by ~~growth~~a sales decline in Mainland China, where local currency net sales ~~increased 16.5%~~decreased 3.9%. The ~~increase~~decrease in constant currency net sales in Southeast Asia Pacific was

driven by ~~double digit~~ local currency ~~growth~~declines in several markets, including ~~Malaysia~~Australia and ~~Singapore. The increase~~Singapore, which declined 7.0% and 13.0%, respectively. These decreases were partially offset by local currency increases in ~~constant currency net sales in North Asia continues to be driven by growth~~the Philippines and Thailand, which increased 20.6% and 25.8%, respectively. Growth in South Korea, where local currency net sales increased ~~31.3%,~~30.3% and the number of active Customers increased ~~20.7%.~~27.3% continues to drive the increase in constant currency net sales in North Asia.

Americas and Europe: The ~~increase~~decrease in constant currency net sales in this region was driven by ~~increases~~decreases in several markets. Sales decreased 12.2% in the U.S., ~~where~~9.2% in Canada, and 17.9% in Mexico during the quarter. During fiscal year 2019, we will introduce several new, trial initiatives in the United States, which are intended to improve our customer experience and simplify our incentive offering to our sales ~~increased 4.8%~~force. We believe that these incentives will help generate sales and ~~Canada, where local currency net sales increased 5.9%. While constant currency sales in this region increased year-over-year, the number of active Customers declined 4.8%. Sustainable~~ customer growth ~~remains our top priority for~~in the United States and potentially other markets in this region.

Gross Profit

Gross profit increased 5010 basis points to ~~83.4%~~83.2% of net sales for the ~~second~~first quarter of ~~2018,~~2019, from ~~82.9%~~83.1% in the prior year. This increase can be attributed to ~~favorable~~(i) lower scrap reserves, (ii) lower conversion costs resulting from higher production levels, (iii) price changes, ~~in currency exchange rates in markets outside of China,~~and (iv) favorable changes in sales mix by ~~market,~~market. These increases were partially offset by (i) costs associated with our Celavive® skincare line, which carries a higher relative cost than our previous skincare line, (ii) leverage ~~from higher sales~~lost on fixed period costs associated with lower sales, and ~~lower relative freight costs, as well as annual price adjustments.~~(iii) an unfavorable change in currency exchange rates. With the exception of China, where products are manufactured in-market, changes in currency exchange rates affect the valuation of ~~U.S. manufactured~~U.S.-manufactured inventory that is transferred to our other international subsidiaries. ~~These increases were partially offset by higher reserves for inventory obsolescence and costs associated with Celavive~~®~~, which carries a higher relative cost than our previous skincare line.~~

Associate Incentives

Associate incentives ~~were 44.0%~~increased 60 basis points to 44.9% of net sales for the ~~second~~first quarter of ~~2018,~~2019, compared with ~~46.1%~~44.3% in the prior year. ~~This decrease~~The relative increase can be ~~primarily~~ attributed to a typical pattern of modestly higher commissions and bonuses in periods of softer sales ~~from Celavive~~®, which has a lower incentive payout as compared to our other product categories. Additionally, Associate incentive expense was elevated during the second quarter of 2017 due to a short-term incentive promotion we offered in China. We did not offer a similar promotion during the second quarter of 2018, which helped contribute to the favorable, relative year-over-year comparison.performance.

Selling, General and Administrative Expenses

In absolute terms, our selling, general and administrative expense ~~increased $5.1~~decreased $0.6 million during the ~~second~~first quarter of ~~2018~~2019 when compared with the same period of the prior year. This ~~increase can be attributed~~decrease is due to ~~(i) higher employee related costs~~the lower spend in the quarter on information technology systems and ~~(ii) higher costs to support the launch of Celavive~~®~~. This absolute increase was~~infrastructure, partially offset by ~~expense related to China and our internal investigation in the prior-year quarter, which was nominal during the second quarter of 2018.~~increased advertising expense.

Income Taxes

Income taxes were ~~34.2%~~33.4% of earnings in the ~~second~~first quarter of ~~2018~~2019 compared with ~~29.1%~~34.2% of earnings in the prior year. ~~The higher effective tax rate for the second quarter compared with the same period~~This small improvement is due primarily to recognition of ~~the prior-year is primarily due to higher excess~~ tax benefits from equity award exercises ~~recognized during~~that occurred in the ~~prior year quarter. Our effective tax rate, on a year-over-year basis, is not (and will not be) comparable during 2018 because~~first quarter of ~~the impact of U.S. tax reform.~~2019.

Diluted Earnings Per Share

Diluted ~~earnings per share increased 46.2%~~EPS decreased 15.1% in the ~~second~~first quarter of ~~2018~~2019 when compared with the prior-year quarter. This ~~increase~~decrease was due to ~~higher~~lower net ~~earnings.~~

~~Six Months Ended July 1, 2017 and June 30, 2018~~

~~Net Sales~~

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

Percent

Net Sales by Region

change

(in thousands)

Change

Currency

excluding

Six Months Ended

from prior

Percent

impact on

currency

July 1, 2017

June 30, 2018

year

change

sales

impact

Asia Pacific

Greater China

$
268,440

52.4
%
$
325,649

54.9
%
$
57,209

21.3
%
$
21,702

13.2
%
Southeast Asia Pacific

99,071

19.3
%
110,999

18.7
%
11,928

12.0
%
2,858

9.2
%
North Asia

26,904

5.3
%
37,070

6.2
%
10,166

37.8
%
2,021

30.3
%
Asia Pacific Total

394,415

77.0
%
473,718

79.8
%
79,303

20.1
%
26,581

13.4
%

Americas and Europe

117,971

23.0
%
119,740

20.2
%
1,769

1.5
%
2,279

(0.4
)%

$
512,386

100.0
%
$
593,458

100.0
%
$
81,072

15.8
%
$
28,860

10.2
%

~~Asia Pacific:~~ The increase in constant currency net sales in Greater China continues to be driven by growth in Mainland China, where local currency net sales increased 14.5%. The increase in net sales in Southeast Asia Pacific was driven by double digit local currency net sales growth in several markets, including Malaysia, Singapore, and Australia. The increase in constant currency net sales in North Asia continues to be driven by growth in South Korea, where constant local currency net sales increased 31.6%.

~~Americas and Europe~~~~: The modest decrease in constant currency net sales in this region was driven by a 4.8% decrease in active Customers~~earnings offset, in part, by ~~incremental sales of Celavive~~®.

~~Gross Profit~~

Gross profit increased 20 basis points to 83.3% of net sales for the six months of 2018, from 83.1% in the prior year. This increase can be attributed to favorable changes in currency exchange rates in markets outside of China, leverage from higher sales on fixed costs, and lower relative freight costs, as well as annual price adjustments. With the exception of China, where products are manufactured in-market, changes in currency exchange rates affect the valuation of U.S. manufactured inventory that is transferred to international subsidiaries. These increases were partially offset by higher reserves for inventory obsolescence and costs associated with our new Celavive® ~~skincare line, which carries a higher relative cost than other products.~~

~~Associate Incentives~~

Associate incentives were 44.2% of net sales for the first six months of 2018, compared with 45.7% in the prior year. This decrease can be primarily attributed to a higher level of contests, incentive promotions and reward trips during the first six months of 2017 and sales from our new Celavive® ~~line, which have a lower incentive payout.~~

~~Selling, General and Administrative Expenses~~

In absolute terms, our selling, general and administrative expense increased $11.3 million during the first six months of 2018 when compared with the same period of the prior year. This increase can be attributed to (i) higher employee related costs and (ii) higher costs to support the launch of Celavive®. This absolute increase was partially offset by the incremental expense related to China and our internal investigation in the first six months of 2017, which was nominal during the current-year period.

~~Income Taxes~~

Income taxes were 34.2% of earnings in the first six months of 2018 compared with 32.6% of earnings in the prior year. Our effective tax rate, on a year-over-year basis, is not (and will not be) comparable during 2018 because of the impact of U.S. tax reform.

~~Diluted Earnings Per Share~~

~~Diluted earnings per share increased 43.8% in the first six months of 2018 when compared with the same period of the prior year. This increase was due to higher net earnings and~~ a lower diluted share count.

Liquidity and Capital Resources

We have historically met our working capital and capital expenditure requirements by using both net cash flow from operations and drawing periodically ~~drawing~~ on our line of credit. Our principal source of liquidity is our operating cash flow. Although we are required to maintain cash deposits with banks in certain of our markets, there are currently no material restrictions on our ability to transfer and remit funds among our international markets. In ~~Mainland~~ China, however, our compliance with Chinese accounting and tax regulations promulgated by the State Administration of Foreign Exchange (“SAFE”) results in transfer and remittance of our profits and dividends from ~~Mainland~~ China to the United States on a delayed basis. If SAFE or other Chinese regulators introduce new regulations, or change existing regulations which allow foreign investors to remit profits and dividends earned in China to other countries, our ability to remit profits or pay dividends from ~~Mainland~~ China may be limited in the future. We had previously anticipated $7.5 million of cumulative earnings to be indefinitely reinvested in certain of our markets. Based on changing business dynamics, we no longer have earnings designated as indefinitely reinvested.

We have ~~historically~~typically generated positive cash flow due to our strong operating margins. Net cash flow from operating activities totaled ~~$57.2~~$5.5 million in the first three months of 2019. Items increasing cash flows from operations in the ~~six~~first three months of 2019 include: (i) net earnings, and (ii) adjustments of non-cash items. These increases were partially offset by cash paid to reduce accrued employee compensation costs and accrued Associate incentives.

Net cash flow from operating activities totaled $19.5 million in the first three months of 2018. Items increasing cash flows from operations in the first ~~six~~three months of 2018 include: (i) net earnings, and (ii) depreciation related to investment in information technology systems. These increases were partially offset by (i) ~~cash used on inventories primarily attributed to our new Celavive~~® ~~line, and (ii) tax payments.~~

Net cash flow from operating activities totaled $55.6 million in the first six months of 2017. Items increasing cash flows from operations in the first six months of 2017 include: (i) net earnings, and (ii) depreciation related to investment in information technology systems. These increases were reduced by (i) payment of accrued employee compensation, ~~costs,~~ (ii) ~~payment of accrued commissions,~~tax payments, and (iii) ~~deferred revenue.~~cash used on inventories.

Cash and cash equivalents and securities held-to-maturity ~~increased to $298.8 million~~ at ~~June~~March 30, ~~2018, from $247.1 million at December 30, 2017. Of the $298.8~~2019, totaled $251.9 million of ~~cash and cash equivalents and securities held-to-maturity held at June 30, 2018, $118.7~~which, $17.7 million was held as cash and cash equivalents and ~~$42.4~~$26.9 million as securities held-to-maturity in the United States. Of the remaining ~~$137.7~~$207.3 million held by our international subsidiaries, ~~$95.6~~$175.9 million was concentrated in China. Cash and cash equivalents ~~held~~and securities held-to-maturity at December ~~30, 2017,~~29, 2018, totaled ~~$247.1~~$277.9 million of which, ~~$52.2~~$23.3 million was held as cash and cash equivalents and $63.5 million as securities held-to-maturity in the United ~~States and $142.7~~States. Of the remaining $191.1 million held by our international subsidiaries, $157.3 million was held in China. Net working capital ~~increased~~decreased to ~~$267.9~~$240.2 million at ~~June~~March 30, ~~2018,~~2019, from ~~$199.0~~$243.6 million at December ~~30, 2017.~~29, 2018. Net working capital was reduced by $6.8 million due to the adoption of the new lease standard under Topic 842.

~~During the six months ended June 30, 2018, an intercompany dividend of $104.7 million was remitted to the United States by our China business.~~

Line of Credit

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

Share Repurchase

During the ~~six~~three months ended ~~June~~March 30, ~~2018,~~2019, we repurchased ~~39,000~~283,600 shares of our common stock for ~~$2.9~~$30.0 million under our share repurchase plan, at an average market price of ~~$74.77.~~$105.78 per share. At ~~June~~March 30, ~~2018,~~2019, the remaining ~~approved~~authorized repurchase amount under the plan was ~~$47.1~~$40.2 million. There ~~currently~~ is no expiration date on the ~~remaining approved~~ repurchase ~~amount~~plan and no requirement for future share repurchases.

On April 30, 2019, our Board of Directors authorized an increase in the repurchase amount under the share repurchase plan to a total of $150 million, including the $40.2 million that was remaining under the prior authorization at March 30, 2019.

Off-Balance Sheet Arrangements

None.

Summary

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

Cautionary Note Regarding Forward-Looking Statements and Certain Risks

~~The statements contained in this~~This report ~~that are not purely historical are considered to be~~contains, “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange ~~Act. These~~Act of 1934, as amended (the “Exchange Act”). All statements ~~represent our expectations, hopes, beliefs, anticipations, commitments, intentions,~~other than statements of historical fact are “forward-looking statements” for

purposes of federal and state securities laws, including any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the ~~future. They may~~foregoing. Forward-looking statements can be identified by ~~the use of~~ words ~~or phrases~~ such ~~as “believes,~~as: “anticipate,” ~~“expects,~~“intend,” ~~“anticipates,~~“plan,” “goal,” “seek,” “believe,” “project,” “estimate,” “expect,” “strategy,” “future,” “likely,” “may,” “should,” ~~“plans,” “estimates,”~~“will” and ~~“potential,” among others.~~similar references to future periods. Forward-looking statements ~~include, but~~ are ~~not limited~~neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to ~~statements contained~~the future, they are subject to inherent uncertainties, risks and changes in ~~Management’s Discussion~~circumstances that are difficult to predict and ~~Analysis~~many of ~~Financial Condition~~which are outside of our control. Our actual results and ~~Results of Operations regarding our~~ financial ~~performance, revenue, and expense levels~~condition may differ materially from those indicated in the ~~future and~~forward-looking statements.

Although we believe that the ~~sufficiency~~expectations reflected in any of our ~~existing assets to fund our future operations and capital spending needs. Readers~~forward-looking statements are ~~cautioned that~~reasonable, actual results could differ materially from ~~the anticipated~~those projected or assumed in any of our forward-looking statements. Our future financial condition and results ~~or other expectations that are expressed in these~~of operations, as well as any forward-looking statements, ~~for~~are subject to change and to inherent risks and uncertainties, such as those disclosed or incorporated by reference in our filings with the ~~reasons that are detailed in~~SEC including 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. The10-K. Any forward-looking ~~statements contained~~statement made by us in this report ~~are made~~is based only on information currently available to us and speaks only as of the date ~~of this report, and we assume~~hereof. We undertake no obligation to publicly update ~~them~~any forward-looking statement, whether written or ~~to update the reasons why our actual results could differ from those that we have projected. Among others, risks and uncertainties~~oral, that may ~~affect our business, financial condition, performance, development, and results~~be made from time to time, whether as a result of ~~operations include:~~new information, future developments, the occurrence of unanticipated events or otherwise.

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

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

· The operation and expansion of our business in China through BabyCare;

· Unanticipated effects of changes to our Compensation Plan;

· Uncertainties relating to the interpretation and enforcement of applicable laws and regulations, particularly in China, governing direct selling and anti-pyramiding, including for example, changes, if any resulting from the 100-day review concluded in April 2019;

· Our inability to obtain or maintain the necessary licenses for our direct selling business in China and elsewhere;

· Adverse changes in the Chinese economy;

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

· General economic conditions, both domestically and internationally;

· The impact of changes in trade policies and tariffs;

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

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

· Reliance on our key management personnel;

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

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

· An increase in ~~the amount~~Associate incentives as a percentage of ~~Associate incentives;~~net revenues;

· Our reliance on the use of information technology;

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

·The effects of competition from new ~~and~~as well as from established network and direct selling organizations in our key markets;

· The adverse effect of the loss of a high-level sponsoring Associate, together with a group of leading Associates, in that person’s downline;

· The loss of product market share or Associates to competitors;

· Potential adverse effects of customs, duties, taxation, and transfer pricing regulations, including regulations governing distinctions between and our responsibilities to employees and independent contractors;

· The fluctuation in the value of foreign currencies against the U.S. dollar;

· Our reliance on outside suppliers for raw materials and certain manufactured items;

· Shortages of raw materials that we use in certain of our products;

· Significant price increases of our key raw materials;

· Product liability claims and other risks that may arise with our manufacturing activity;

· Intellectual property risks;

· Liability claims that may arise in connection 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 December ~~30, 2017.~~29, 2018.

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 Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial and Accounting 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 our disclosure controls and procedures were effective as of ~~June~~March 30, ~~2018.~~2019.

Changes in Internal Control Over Financial Reporting

~~There~~Beginning December 30, 2018, we implemented ASU 2016-02, “Leases (Topic 842).” In connection with its adoption, we implemented changes to our processes and internal control activities related to leases to ensure compliance with the new accounting and disclosure rules.

Except for the preceding changes, there were no changes in our internal control over financial reporting during the fiscal quarter ended ~~June~~March 30, ~~2018~~2019 that ~~have~~ materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are a party to litigation and other proceedings that arise in the ordinary course of conducting business, including matters involving our products, intellectual property, supplier relationships, distributors, competitor relationships, employees and other matters.

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

Item 1A. Risk Factors

The risks and uncertainties described below are not the only ones facing us. Other events that we do not currently anticipate or that we currently deem immaterial also may affect our results of operations, cash flows and financial condition. Our business, results of operations, and financial condition ~~also~~ are subject to various risks. These risks are described elsewhere in this Quarterly Report on Form 10-Q and our other filings with the SEC, including the 2018 Form 10-K filed with the SEC on February 26, 2019. Except as provided below, the risk factors identified in our ~~2017~~2018 Form 10-K have not changed in any material respect. The information presented below supplements and ~~risk factors identified~~should be read in conjunction with the detailed discussion of risks associated with our business in our ~~other~~recent SEC filings, ~~with~~including our Annual Report on Form 10-K for the ~~SEC. In addition, we have identified below specific additional risks applicable to our business.~~2018 fiscal year.

~~Trade Policies. Potential~~Our operations in China are subject to significant government regulation, as well as a variety of legal, political, and economic risks. If the government modifies the direct selling regulations, or interprets and enforces the regulations in a manner that is adverse to our business in China, our consolidated business and results of operations may be materially harmed.

Our operations in China are conducted by BabyCare, a direct selling company that we indirectly acquired several years ago to facilitate our expansion into China. BabyCare operates in China pursuant to direct selling laws and regulations that are uncertain and evolving. These regulations contain a number of financial and operational restrictions for direct selling companies, most notably on pyramid selling and multi-level compensation. The laws and regulations are also subject to discretionary interpretation and enforcement by various state, provincial and municipal level officials in China. Regulators in China may change how they interpret and enforce the direct selling regulations, both current interpretations and enforcement thereof or future iterations. Regulators in China may also modify the current regulations. As a result, there can be no assurance that the Chinese government’s current or future interpretation and application of existing and new regulations will not negatively impact our business in China, result in regulatory investigations or lead to fines or penalties against us or our Associates.

The Chinese central government also exercises significant control over the Chinese economy, including through controlling capital, controlling foreign exchange and foreign exchange rates, controlling tax regulations, providing preferential treatment to certain industry segments or companies and issuing required licenses to conduct business. In addition, we could face additional risks resulting from changes in ~~international trade relations between~~China’s data privacy and security requirements. Accordingly, any adverse change in the ~~United States and~~Chinese governmental, economic or other ~~countries, most significantly China,~~policies could have a material adverse effect on ~~our~~BabyCare’s business in China and ~~financial statements.~~ ~~As of the date of this report, approximately 90% of~~ our consolidated ~~net sales occur outside~~results of the United States. In particular, over 50% of our net sales occur in our Greater China Region and over 50% of our total active Customers reside in this region. There is currently significant uncertainty about the future relationship between the United States and various other countries, most significantly China, with respect tooperations.

Certain trade policies, ~~treaties, government regulations and tariffs. The current U.S. presidential administration has called for substantial changes to U.S. foreign~~tariffs, other trade policy with respect to China and other countries, including the possibility of imposing greater restrictions on international trade and significant increases in tariffs on goods imported into the United States. Recently, the United States has increased tariffs on certain goods imported into the United States from China, following which the Chinese government increased tariffs on certain goods imported into China fromactions implemented by the United States in response to which the United States announced plans to impose additional tariffs. Based on the structure of our international business, including our operating structure in China, we do not currently expect these changes in foreign trade policy to have a material impact on our business or financial statements.

~~Notwithstanding the foregoing, there is a risk of further escalation and retaliatory actions between the United States and~~2018 against other countries, including China, relating to the import and export of certain products, and negotiations with respect thereto, may have a negative effect on our business, financial condition, and results of operations in China and other markets. China, and certain of our other markets, have imposed, or threatened to ~~foreign trade policy. For instance,~~impose, tariffs on U.S. imports or to take other actions in retaliation to actions taken by the ~~current administration, certain members of Congress~~United States. These developments may have a material adverse effect on the economy, financial markets, and ~~federal officials have stated that~~currency exchange rates in China and the United States, ~~may seek~~which represent our two largest markets. Additionally, any actions taken by the Chinese government, or the government in our other markets, to implement ~~more protective~~further trade ~~measures, not just with respect to China but with respect to other countries as well. In this regard, the current administration has called for substantial~~policy changes, ~~to the North American Free Trade Agreement (“NAFTA”), which might adversely affect our markets in Mexico and Canada. While it is currently unclear how the~~financial restrictions, or increased regulatory scrutiny on U.S. Administration or foreign governments will act with respect to tariffs, international trade agreements and policies, a trade war or further governmental action related to tariffs or international trade policies has the potential to adverselycompanies could negatively impact our business, financial condition, and results of operations.

~~Data Privacy and Security. We store, process, and use data, some of which contain personal information and are subject to complex and evolving~~While BabyCare utilizes a business model that has been developed specifically for China’s laws and regulations, ~~regarding privacy, data protection and other matters, which are~~BabyCare’s model has not been formally approved by the Chinese government.

~~subject to change.~~ ~~Some~~

BabyCare’s business model has been designed specifically for China’s laws and regulations based on, among other things: (i) BabyCare’s communications with the Chinese government, (ii) BabyCare’s interpretation of the ~~data we store, process,~~direct selling laws and ~~use, contains personal information, subjecting us~~

regulations, as well as its understanding of how the government interprets and enforces the regulations, and (iii) BabyCare’s understanding of how other multinational direct selling companies operate in China. Many of the components of BabyCare’s business model are unique to China and are not part of our business model in our markets outside of China. For example, BabyCare sells products in China through a variety of methods, including: (a) online through its website; (b) at physical branch retail locations in China; (c) through direct sellers in provinces and municipalities where BabyCare has received a direct sales license; and (d) through independent distributors who are considered independent business owners under Chinese law. BabyCare has not received formal confirmation from the Chinese government that its business model and operations in China comply with applicable laws and regulations, including those pertaining to direct selling. We cannot be certain that BabyCare’s business model or the activities of its employees, direct sellers or independent distributors will be deemed by Chinese regulatory authorities to be compliant with current or future laws and regulations. If BabyCare’s model is deemed to be in violation of applicable regulations, as they are now or may in the ~~United States and other countries with respect to privacy, rights of publicity, data protection, content, protection of minors, and consumer protection. These laws can~~future be ~~particularly restrictive. Both in the United States and abroad, these laws and regulations are evolving and remain~~interpreted or enforced, BabyCare could be subject to ~~change. In addition,~~fines, penalties, suspension of its business in China or, ultimately, have its direct selling license revoked by the application and interpretation of these laws and regulations are often uncertain and could result in investigations, claims, changes to our business practices, increased cost of operations and declines in Customer growth, retention or engagement, anyChinese government, all of which could ~~materially adversely affect~~have a material adverse impact on our business ~~results of operations and financial condition.~~

Several proposals are pending before federal, state and foreign legislative and regulatory bodies that could significantly affect our business. A number of states have enacted laws or are considering the enactment of laws governing the release of credit card or other personal information received from consumers. For example, California recently enacted legislation, the California Consumer Privacy Act, or CCPA, that will, among other things, require covered companies to provide new disclosures to California consumers, and afford such consumers new abilities to opt-out of certain sales of personal information, when it goes into effect on January 1, 2020.Additionally, the EU General Data Protection Regulation (“GDPR”), which came into effect on May 25, 2018, establishes new requirements applicable to the processing of personal data (i.e., data which identifies an individual or from which an individual is identifiable), affords new data protection rights to individuals, and imposes penalties for serious data breaches. Individuals also have a right to compensation under GDPR for financial or non-financial losses. GDPR has imposed additional responsibility and liability in relation to our processing of personal data in the EU. GDPR has also required us to change our various policies and procedures in the EU and, if we are not compliant, could materially adversely affect our business, results of operations and financial condition. Similarly, Canada’s Personal Information and Protection of Electronic Documents Act provides Canadian residents with privacy protections in regard to transactions with businesses and organizations in the private sector and sets out ground rules for how private sector organizations may collect, use, and disclose personal information in the course of commercial activities. Another example is China’s new cybersecurity law. Foreign governments also may attempt to apply such laws extraterritorially or through treaties or other arrangements with U.S. governmental entities.

We cannot assure you that the privacy policies and other statements regarding our practices will be found sufficient to protect us from liability or adverse publicity relating to the privacy and security of personal information. Whether and how existing local and international privacy and consumer protection laws in various jurisdictions apply to the internet and other online technologies is still uncertain and may take years to resolve. Privacy laws and regulations, if drafted or interpreted broadly, could be deemed to apply to the technology we use and could restrict our information collection methods or decrease the amount and utility of the information that we would be permitted to collect. The costs of compliance with, and the other burdens imposed by, these and other laws or regulatory actions may prevent us from selling our products, or increase the costs of doing so, and may affect our ability to invest in or develop products. In addition, a determination by a court or government agency that any of our practices, or those of our distributors, do not meet these standards could result in liability, result in adverse publicity, and adversely affect our business.China.

~~Cybersecurity~~BabyCare’s operations in China, and ~~Data Breaches. Failures~~direct selling companies in ~~material damage~~general, are subject to significant government oversight, scrutiny and monitoring.

Chinese regulators regularly monitor and make inquiries about the business activities of direct sellers in China and have done so with BabyCare. These inquiries can arise in a variety of ways, including from complaints from customers, competitors or ~~interruptions~~the media. For example, following various media reports in ~~our~~2017, certain departments of the Chinese government, including the former State Administration of Industry and Commerce (now SAMR) and MPS, carried out a three-month review of the direct selling industry to investigate alleged violations of the direct selling regulations and anti-pyramiding regulations. Additionally, following media coverage of certain health product companies and direct selling companies in January of 2019, several departments of the Chinese government, including SAMR, MPS, and MOFCOM, carried out a 100-day review of health product and direct selling companies in China. The 100-day review required applicable companies such as BabyCare to conduct a self-assessment of the regulatory compliance of their business (including product regulatory compliance and direct selling regulatory compliance) and to provide information ~~technology systems, software~~to the government regarding the same. The 100-day review also entailed a review of a company’s regulatory compliance by various departments of the Chinese government. During this review period, the Chinese government, among other things, (i) instructed direct selling companies to not hold large distributor meetings, and (ii) suspended its application review process for direct sales licenses and authorizations. Although the 100-day review ended on or ~~websites,~~about April 18, 2019, as of the date of this report the Chinese government has not formally reversed its instruction to direct selling companies regarding holding large distributor meetings, nor started accepting applications for direct sales licenses. These factors, and others, have contributed to the uncertain regulatory and operating environment in China for BabyCare.

The Chinese government has investigated and imposed significant fines on companies and their distributors believed to have violated direct selling and anti-pyramiding regulations. In some cases, it has even shut such companies down. There have been instances where inquiries or complaints about BabyCare’s business have resulted in warnings from the Chinese government as well as the payment of fines by BabyCare. We expect that BabyCare will continue to face the risk of government inquiries, complaints or investigations, and any determination that BabyCare’s business or the activities of its Associates are not in compliance with applicable regulations could result in additional fines, disruption of business, or the suspension or termination of BabyCare’s licenses, including ~~as a result~~its direct selling licenses, all of ~~cyber-attacks, and difficulties in updating our existing software or developing or implementing new software~~which could have a material adverse effect on our business and operations. There can be no assurance that the Chinese government’s interpretation and enforcement of applicable laws and regulations will not negatively impact BabyCare’s business, result in regulatory investigations or ~~results~~lead to fines or penalties against BabyCare, USANA or our Associates in China.

Additionally, the direct selling regulations in China prevent persons who are not Chinese nationals from engaging in direct selling in China. Although we have implemented internal policies that are designed to promote our Associates’ compliance with these regulations, we cannot guarantee that any of ~~operations.~~ our Associates living outside of China or any of BabyCare’s Associates in China have not engaged or will not engage in activities that violate our policies in this market or that violate Chinese law or other applicable laws and regulations and, therefore, might result in regulatory action and adverse publicity, which would harm our business in China.

BabyCare must apply for and receive government approval to expand its business in China and its ability to expand could be negatively impacted if it is unable to obtain such required approvals.~~We depend heavily upon our information technology systems~~

BabyCare has obtained direct selling licenses in certain provinces and municipalities and it must obtain various licenses and approvals from additional municipalities and provinces within China if it is to operate its direct selling business model in

China. While direct selling licenses are centrally issued, the licenses are generally valid only in the ~~conduct~~jurisdictions within which related approvals have been obtained. Those approvals are generally awarded on local and provincial bases, and the approval process requires involvement with multiple ministries at each level. As of ~~our business. For example,~~the date of this report, BabyCare has been granted licenses to engage in direct selling in the municipalities and provinces of Beijing, Jiangsu, Shaanxi, and Tianjin. In 2016, BabyCare received preliminary approval from the Chinese government to expand its direct selling business into the following eight additional provinces and municipalities: Liaoning Province, Shandong Province, Shanxi Province, Sichuan Province, Guangdong Province, Dalian City, Qingdao City, and Shenzhen City. Issuance of final direct selling approvals for these municipalities and provinces was contingent upon BabyCare satisfying certain conditions and reporting requirements. Although BabyCare has been working to satisfy these conditions and reporting requirements, we ~~own, license~~now believe that BabyCare will not be receive the final direct selling approvals for one or ~~otherwise contract~~more of these eight additional provinces and municipalities under the current applications due to (i) delays by BabyCare in satisfying the conditions, (ii) the reorganization of several departments of the Chinese government in 2018, (iii) the Chinese government’s 100-day review of the direct sales industry, which occurred from early January 2019 through mid-April 2019, and/or (iv) the related suspension of the Chinese government’s application review process for ~~sophisticated technology~~direct sales licenses and ~~systems~~approvals in connection with 100-day review. Consequently, if a previously submitted application is not approved, BabyCare will need to reapply for these approvals at some point. Although the 100-day review has ended, the Chinese government has not started accepting applications for direct sales licenses and approvals, nor indicated if, or when, it will do ~~business with our Associates~~so. Due to these factors, and ~~Preferred Customers, including~~the discretion maintained by the Chinese government, there is no guarantee that BabyCare will be successful in reapplying for order entry and fulfillment, compensation tracking, processing and payment, and product returns. Those systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches and natural and manmade disasters. In particular, from time to time we and third parties who serve us experience cyber-attacks, attempted breaches of our or their information technology systems and networks or similar events, which could result in a loss of sensitive business or customer information, systems interruption or the disruption of our operations. The techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently and may be difficult to detect for long periods of time, and accordingly we may be unable to anticipate and prevent all data security incidents. Like many businesses, our systems are under frequent attack from third parties. We are required to expend capital and other resources to protect against such cyber-attacks and potential security breaches or to alleviate problems caused by such potential breaches or attacks. Despite the constant monitoring of our technology systems and hiring of specialized third parties to identify and address any vulnerabilities through implementation of multi-tiered network security measures, computer programmers and hackers, or even internal users, may be able to penetrate, create systems disruptions or cause shutdowns of our network securitythese approvals or that ~~of third-party companies with which we have contracted. As~~the Chinese government will ultimately grant BabyCare a ~~result, we could experience significant disruptions~~direct sales license in these or other jurisdictions, either of our operations and incur significant expenses addressing problems created by these breaches. Such unauthorized access could disrupt our business and could result in a loss of revenue or assets and any compromise of customer information could subject us to customer or government litigation and harm our reputation, which could adversely affect ~~our business and growth. While we maintain cyber liability insurance that provides liability and insurance coverages,~~

~~subject to limitations and conditions of the policies, our insurance may not be sufficient to protect against all losses or costs related to any future breaches of our systems.~~BabyCare’s business.

~~Damage~~Going forward, BabyCare will be required to obtain licenses from municipalities and provinces within China where it does not hold a license. As noted above, although the 100-day review has now ended, the Chinese government has not started accepting applications for direct sales licenses and approvals, nor indicated if, or ~~interruption~~when, it will do so. If BabyCare is unable to ~~our information systems may require~~obtain additional direct selling licenses as quickly as we would like, or at all, it would have a significant investment to fix or replace them, and we may suffer interruptions in our operations in the interim. In addition, costs and potential problems and interruptions associated with the implementation of new or upgraded systems and technology or with maintenance or adequate support of existing systems could also disrupt or reduce the efficiency of our operations. Any material interruptions or failures in our systems, including those that may result from our failure to adequately develop, implement and maintain a robust disaster recovery plan and backup systems could severely affectnegative impact our ability to ~~conduct normal~~expand and grow our business in China. If and when the Chinese government again begins to accept direct selling applications and to issue direct sales licenses and authorizations, the process for obtaining the necessary government approvals will likely remain unpredictable, time-consuming and expensive. If the current processes for obtaining approvals are suspended or otherwise delayed for an extended period of time, or indefinitely, these events could have a negative impact on BabyCare’s growth prospects in China. Ultimately, there can be no assurance that BabyCare will be successful in maintaining its current direct-selling licenses or obtaining additional direct-selling licenses or the required approvals to expand into additional locations in China that are important to its business.

Our business is subject to the effects of adverse publicity and negative public perception.

Our ability to attract and retain Associates and to sustain and enhance sales through our Associates can be affected by adverse publicity or negative public perception regarding our industry, our competition, or our business generally. Our business prospects, financial condition and results of operations could be adversely affected if our public image or reputation were to be tarnished by negative publicity including dissemination via print, broadcast or social media, or other forms of Internet-based communications. This negative public perception may include publicity regarding the legality of direct selling, the quality or efficacy of nutritional supplement products or ingredients in general or our products or ingredients specifically, and regulatory investigations, regardless of whether those investigations involve us or our Associates or the business practices or products of our competitors or other direct selling companies.

During the first several months of 2019, the Chinse government conducted a 100-day review of the health products and direct selling industries in China. This review was accompanied by significant and persistent negative media coverage in China regarding these industries. This negative media coverage slowed the productivity of our Associates in China, generated skepticism amongst customers and potential customers and, ultimately, adversely affected our sales in China for the first quarter of 2019. Continued negative media regarding our industry in China could adversely affect our operating results and result in further regulatory scrutiny and investigations in China.

In April 2017, we were the target of an anonymous short-seller blog that contained distortions of fact and misleading information about BabyCare’s business in China.

In 2007, we were the victim of false statements made to the press and regulatory agencies, causing us to incur significant expense in defending and dispelling the allegations during 2007 and 2008. In 2012, we were again the target of false and misleading statements concerning our business practices, particularly in China and Hong Kong. This adverse publicity also had an adverse impact on the market price of our stock and caused insecurity among our Associates.

There has been significant media and short-seller attention regarding the viability and legality of direct selling in the United States, China, and internationally recently and over the past few years. This attention has led to intense public scrutiny of the industry, as ~~a result, may~~well as volatility in our stock price and the stock price of companies similar to ours. There can be no assurance that we will not be subject to adverse publicity or negative public perception in the future or that such adverse publicity will not have a material adverse effect on our business, financial condition, or results of operations.

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

~~None.~~(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Our share repurchase plan has been ongoing since the fourth quarter of 2000, with the Board of Directors periodically approving additional dollar amounts for share repurchases under the plan. At March 30, 2019, the authorized amount available for repurchases under the plan was $40.2 million. On May 1, 2019, our Board of Directors increased the authorized repurchase amount under the plan to $150 million, including the $40.2 million remaining from the prior authorization.

Repurchases are made from time to time at management’s discretion in accordance with applicable federal securities laws. Repurchases may occur through open market purchases, pursuant to a Rule 10b5-1 trading plan, or in other transactions as permitted by the rules of the SEC. There is no requirement for future share repurchases, and there is no expiration date of the repurchase plan.

The following table summarizes information relating to purchases made by or on behalf of the Company of shares of the Company’s common stock during the quarter ended March 30, 2019.

Issuer Purchases of Equity Securities

(amounts in thousands, except per share data)

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs

Fiscal January
(Dec 30, 2018 through Feb. 2, 2019)	0	$	0.00	0	$	70,216

Fiscal February
(Feb. 3, 2019 through Mar. 2, 2019)	284	$	105.78	284	$	40,216

Fiscal March
(Mar. 3, 2019 through Mar. 30, 2019)	0	$	0.00	0	$	40,216

	284			284

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

Item 4. MINE SAFETY DISCLOSURES

None.

Item 5. OTHER INFORMATION

None.

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, Exhibit 3.1, File No. 0-21116).~~

3.2		Second Amended and Restated Bylaws, effective as of March 14, 2019 (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed ~~April 25, 2006,~~with the Securities and Exchange Commission on March 15, 2019 Exhibit ~~3.2,~~3.1, File No. ~~0- 21116).~~01-35024)

~~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)~~

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

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.

Date: ~~August 8, 2018~~May 7, 2019

	USANA HEALTH SCIENCES, INC.


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

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

3838 West Parkway Blvd., Salt Lake City, Utah		~~3838 West Parkway Blvd., Salt Lake City, Utah~~ 84120
(Address of principal executive offices)		(~~Address of principal executive offices,~~ Zip Code)

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

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock		USNA		New York Stock Exchange

	As of June 30, 2018
	Amortized Cost		Unrecognized Holding Gains		Unrecognized Holding Losses		Estimated Fair Value

Corporate bonds	27,502		—		—		27,502
U.S. treasuries	14,931		—		—		14,931

Total securities held-to-maturity	$	42,433	$	—	$	—	$	42,433

	Active Associates by Region
	As of			As of			Change from		Percent
	July 1, 2017			June 30, 2018			Prior Year		Change

Asia Pacific:
Greater China	105,000	37.5	%	111,000	38.0	%	6,000		5.7	%
Southeast Asia Pacific	83,000	29.7	%	85,000	29.1	%	2,000		2.4	%
North Asia	20,000	7.1	%	26,000	8.9	%	6,000		30.0	%
Asia Pacific Total	208,000	74.3	%	222,000	76.0	%	14,000		6.7	%

Americas and Europe	72,000	25.7	%	70,000	24.0	%	(2,000	)	(2.8	)%

	280,000	100.0	%	292,000	100.0	%	12,000		4.3	%