USANA HEALTH SCIENCES, INC. (USNA, NASDAQ)
Annual report, fiscal year 2016






2016 was another exceptional year for USANA. We surpassed the $1 billion mark in net sales, generating our 14th consecutive year of record sales, and we reported the highest EPS in the history of the Company. We also ended the year with a record number of Associates and Preferred Customers. Customer growth remains our highest priority as we strive to improve the health and nutrition of individuals and families around the world. Our results for the year were driven by the significant contributions made by each of our employees and Associates from around the world, as well as the continued implementation of our growth initiatives.

Our introduction and launch of InCelligence™ was perhaps our most significant accomplishment in 2016. InCelligence™ is our proprietary, patent-pending, technology that is designed to support the body’s natural ability to nourish, protect and renew its cells. The science behind InCelligence™ reflects a significant shift in nutritional supplementation and Dr. Wentz, with our team of exceptional scientists, has positioned USANA as a leader in this technology. We also introduced our new core product, CellSentials™ (which fully incorporates the InCelligence™ technology), at our 2016 international convention in August. This product, and others, were received by our customers with tremendous excitement. The InCelligence™ platform represents the future of our various product lines and is intended to keep USANA at the forefront of nutritional supplementation.

During the year we also continued to invest in our China infrastructure and information technology systems. Our most significant accomplishment in this regard was the completion of, and transition to, our new China production facility in the fourth quarter. This accomplishment was the result of a significant undertaking by our U.S. and China operations teams, and extensive cooperation with the Chinese government.
Adding 350,000 square feet of production capacity to USANA's manufacturing operations, this facility is now fully operational and will provide the production capacity we need in China for the foreseeable future.

Looking ahead to 2017 – USANA’s 25th anniversary year will be another significant milestone for the Company. We will continue to advance our personalization strategy by leveraging InCelligence™ – launching it in additional markets around the world and incorporating this proprietary technology into new products, with launches and offerings strategically implemented throughout the year.

We will also continue to focus on customer growth in 2017. In this regard, we plan to enhance our Preferred Customer program through a number of strategies that we will begin rolling out as the year progresses. These strategies include a new customer invitation program as well as a rewards and loyalty program. We believe this enhanced Preferred Customer initiative offers a growth opportunity that we have not fully realized in the past.

In 2017, we will continue to invest in our information technology systems and infrastructure, improving the experience of doing business with USANA around the world. Our team is confident in the strength of USANA's business globally and the growth strategies we have in place. We look forward to delivering another year of record results in 2017 and thank you, our valued stakeholders, for your continued support and belief in USANA's mission.

SINCERELY,

KEVIN G. GUEST
Chief Executive Officer
MYRON W. WENTZ, PhD
Founder & Chairman of the Board



# UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

# FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission file number: 001-35024

USANA HEALTH SCIENCES, INC.
(Exact name of registrant as specified in its charter)

Utah

(State or other jurisdiction of incorporation or organization)

87-0500306

(I.R.S. Employer Identification No.)

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

(801) 954-7100

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

(Title of each class) (Name of each exchange on which registered)
Common Stock, Par Value $0.001 Per Share New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. []

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [X]

Non-accelerated filer [ ]

Accelerated filer [ ]

Smaller reporting company []

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

The aggregate market value of common stock held by non-affiliates of the registrant as of July 2, 2016 was approximately $586,741,969, based on a closing market price of $55.98 per share.

There were 24,499,297 shares of the registrant's common stock outstanding as of February 24, 2017.

Documents incorporated by reference. The registrant incorporates information required by Part III (Items 10, 11, 12, 13, and 14) of this report by reference to the registrant's definitive proxy statement to be filed pursuant to Regulation 14A for its 2017 Annual Shareholders Meeting.

On October 25, 2016, the registrant declared a two-for-one stock split of its common stock that was distributed in the form of a stock dividend on November 22, 2016 to shareholders of record as of November 14, 2016. Outstanding common stock data in this report have been adjusted to reflect the stock split.



## USANA HEALTH SCIENCES, INC.
FORM 10-K
For the Fiscal Year Ended December 31, 2016
INDEX

## Part I

Item 1 Business ..... 4
General ..... 4
Current Focus and Recent Developments ..... 5
Products ..... 7
Geographic Presence ..... 8
Research and Development ..... 9
Manufacturing and Quality Assurance ..... 10
Distribution and Marketing ..... 12
Operating Strengths ..... 14
Growth Strategy ..... 16
Competition ..... 18
Product Returns ..... 19
Major Customers ..... 19
Compliance by Associates ..... 19
Information Technology ..... 20
Regulatory Matters ..... 20
Intellectual Property ..... 23
Seasonality ..... 24
Backlog ..... 24
Working Capital Practices ..... 24
Environment ..... 24
Employees ..... 24
Additional Available Information ..... 24
Item 1A Risk Factors ..... 25
Item 1B Unresolved Staff Comments ..... 39
Item 2 Properties ..... 39
Item 3 Legal Proceedings ..... 40
Item 4 Mine Safety Disclosures ..... 40
Part II
Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ..... 41
Item 6 Selected Financial Data ..... 43
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 44
Item 7A Quantitative and Qualitative Disclosures About Market Risk ..... 57
Item 8 Financial Statements and Supplementary Data ..... 58
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..... 59
Item 9A Controls and Procedures ..... 59
Item 9B Other Information ..... 64
Part III
Item 10 Directors, Executive Officers and Corporate Governance ..... 64



Item 11 Executive Compensation 64
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 64
Item 13 Certain Relationships and Related Transactions, and Director Independence 64
Item 14 Principal Accounting Fees and Services 64
Part IV
Item 15 Exhibits, Financial Statement Schedules 65
Signatures 69



The statements contained in this report on Form 10-K that are not purely historical are considered to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements include, but are not limited to: any projections of net sales, earnings, or other financial items; any statements of the strategies, plans and objectives of management for future operations; any statements concerning proposed new products or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect” or “anticipate” and any other similar words. These statements represent our expectations, beliefs, anticipations, commitments, intentions, and strategies regarding the future and include, but are not limited to, the risks and uncertainties outlined in Item 1A Risk Factors and Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations. Readers are cautioned that actual results could differ materially from the anticipated results or other expectations that are expressed in forward-looking statements within this report. The forward-looking statements included in this report speak only as of the date hereof, and we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.

In this Annual Report on Form 10-K, unless otherwise expressly indicated, references to “dollars” and “$” are to United States dollars.

## PART I

## Item 1. Business

## General

USANA Health Sciences, Inc., a Utah corporation, was founded in 1992 by Myron W. Wentz, Ph.D. We develop and manufacture high-quality, science-based nutritional and personal care products with a primary focus on promoting long-term health and reducing the risk of chronic degenerative disease. In so doing, we are committed to continuous product innovation and sound scientific research. We have operations in 20 markets worldwide, where we distribute and sell our products by way of direct selling. We have chosen the direct selling distribution method as we believe it is the most conducive to meeting our vision as a company, which is improving the overall health and nutrition of individuals and families around the world. Our net sales in fiscal year 2016 were $1.006 billion, of which 87.0% were in markets outside of the United States. As a U.S.-based multi-national company with an expanding international presence, our operating results are sensitive to currency fluctuations, as well as economic and political conditions in markets throughout the world. Additionally, we are subject to the various laws and regulations in the United States, China, and the other markets in which we operate with respect to the products that we sell and to our method of distribution.

Our customer base comprises two types of customers: “Associates” and “Preferred Customers.” Associates share in our company vision by acting as independent distributors of our products in addition to purchasing our products for their personal use. Preferred Customers purchase our products strictly for personal use and are not permitted to resell or to distribute the products. As of December 31, 2016, we had 471,000 active Associates and 93,000 active Preferred Customers worldwide.



## Current Focus and Recent Developments

We have implemented the following strategies and initiatives to increase the number of Associates and Preferred Customers who use our products throughout the world and, thereby, further our company vision:

• Personalization: Over the last few years, we have focused heavily on personalizing and improving our customers’ experience with USANA. Personalization will continue to be one of our key strategies in 2017 as we continue to further personalize each of our product lines.

In August 2016, we introduced one of the greatest product innovations in our history with the launch of our Incelligence \( ^{™} \)  product platform. Incelligence \( ^{™} \)  is USANA’s proprietary, patent-pending, technology that is designed to support the body’s natural ability to nourish, protect and renew itself. As part of our Incelligence \( ^{™} \)  platform, we also launched our new flagship multivitamin, CellSentials \( ^{™} \) .

In August 2015, we introduced our new “MySmart \( ^{TM} \) Foods” line of products, which continues our philosophy and strategy of personalization. MySmart \( ^{TM} \) Foods are science-based, healthy nutrition shakes, bars, boosters and flavor optimizers. We made MySmart \( ^{TM} \) Foods available to our Associates for a limited time at our 2015 International Convention only, as a pre-launch opportunity to purchase and try the products. Following that, we officially launched MySmart \( ^{TM} \) Foods during the first half of 2016. While MySmart \( ^{TM} \) Foods offer optimal nutrition and personalization, the launch and reception of these products have not met our expectations. Accordingly, our team is in the process of evaluating and enhancing the MySmart \( ^{TM} \) Foods product line so that we can fully deliver on our vision of these personalized healthy foods.

• Market-Specific Strategies: We have implemented market-specific strategies to facilitate growth and strengthen our business around the world.

During the fourth quarter of 2016, we began to again offer short-term incentives and promotions in each of our markets around the world, with an emphasis on China, to generate excitement and customer growth. Prior to the fourth quarter, we did not offer any significant short-term incentives during 2016 as we focused on (i) our Incelligence \( ^{™} \)  and MySmart \( ^{™} \) Foods product launches, and (ii) the completion of, and transition to, our new manufacturing facility in China. Market-specific incentives have been an important part of our business in the past and in 2017, we will continue to offer short-term incentives to drive customer growth around the world, but will follow a measured approach to ensure that we continue to manage our Associate incentives expense.

In 2016, we continued our strategy to increase our brand-recognition to make it easier for our Associates to introduce USANA to customers. In this regard, we continued our relationship with Dr. Mehmet Oz as a Trusted Partner and Sponsor of The Dr. Oz Show. While this partnership is focused on our North America region, it is intended to increase awareness and recognition of the USANA brand in our other regions as well. Under this partnership, USANA products are regularly featured on The Dr. Oz Show and viewers of the show are able to purchase USANA products via a direct link on The Dr. Oz Show website.

Additionally, in 2016 we continued to expand our international brand ambassador and athlete sponsorship program. Under this program, USANA is designated as the exclusive supplement provider for over 1,000 elite athletes around the world. These athletes compete at the highest levels and represent the USANA brand.

• Product Innovation, Information Technology and Infrastructure: In 2016, we continued our investments in product innovation, information technology and infrastructure to further our Company vision, continue to improve our customers’ experience with us, and to prepare to



become a larger company. These investments led to our successful execution of a number of strategies in 2016, including our Incelligence \( ^{™} \)  and MySmart \( ^{TM} \)  Foods product launches, as well as the successful completion of our manufacturing facility in China. In 2017, we will continue to invest in these areas to drive our initiatives and these investments will be reflected as both additional SG&A expense and capital expenditures.

• International Development and Expansion: Given the significant opportunity that exists in China, we plan to continue focusing significant time and resources on growing this market. Additionally, we continue to believe that significant growth opportunities exist in new international markets and our management team will continue to evaluate markets for USANA's business. Fiscal 2016 was the first full-year of operations for USANA in Indonesia and we continue to believe that this market offers a promising long-term growth opportunity for us.

• Preferred Customer Growth Initiatives: We plan to execute certain initiatives to generate growth in the number of Preferred Customers using our products. We will begin rolling out these initiatives in 2017 through the launch of a new Preferred Customer Invitation Program. Going forward, we also plan to offer new Preferred Customer rewards programs and loyalty programs.



## Products

The following table summarizes our product lines.

<table><tr><td>Product Line/Category</td><td>Description</td><td>Percent of Product Sales by Fiscal Year</td><td>Product examples</td></tr><tr><td>USANA®
Nutritionals</td><td></td><td></td><td></td></tr><tr><td>Essentials</td><td>Includes core vitamin and mineral supplements that provide a foundation of advanced total body nutrition for every age group beginning with children 13 months of age.</td><td>2014—24% 2015—22% 2016—20%</td><td>USANA® CellSentials Essentials HealthPak 100™</td></tr><tr><td>Optimizers</td><td>Consists of targeted supplements designed to meet individual health and nutritional needs. These products support needs such as cardiovascular health, skeletal/structural health, and digestive health and are intended to be used in conjunction with the Essentials.</td><td>2014—55% 2015—59% 2016—63%</td><td>Proflavanol CoQuinone® 30 BiOmega-3™</td></tr><tr><td>Foods</td><td>Includes low-glycemic meal replacement shakes, snack bars, and other related products that provide optimal macronutrition (complex carbohydrates, complete proteins, and beneficial fats) in great tasting and convenient formats. These products can be used along with Essentials and Optimizers to provide a complete and healthy diet and sustained energy throughout the day.</td><td>2014—13% 2015—11% 2016—10%</td><td>MySmartFoods Nutrimeal Fibergy RESET™ weight-management program</td></tr><tr><td>Sense—beautiful science®</td><td>Includes premium, science-based, personal care products that support healthy skin and hair by providing advanced topical nourishment, moisturization, and protection. These products are designed to complement inner nutrition for the skin provided by the USANA Nutritionals and are manufactured with our patented, self-preserving technology, which uses a unique blend of botanicals, antioxidants, and active ingredients to keep products fresh, without adding traditional chemical preservatives.</td><td>2014—7% 2015—7% 2016—6%</td><td>Daytime Protective Emulsion Night Renewal Perfecting Essence</td></tr><tr><td>All Other</td><td>Includes materials and online tools that are designed to assist our Associates in building their businesses and in marketing our products.</td><td>2014—1% 2015—1% 2016—1%</td><td>Associate Starter Kit Product Brochures</td></tr></table>



In addition to the products described above, we offer products designed specifically for prenatal, infant, and young-child age groups in China. As we continue to focus on personalization and innovation, we will look for innovative product opportunities such as our Incelligence \( ^{™} \)  and MySmart \( ^{™} \)  Foods products, which were launched in 2016.

The approximate percentage of total product sales represented by our top-selling products for the last three fiscal years is as follows:

<table><tr><td rowspan="2"></td><td colspan="3">Year Ended</td></tr><tr><td>2014</td><td>2015</td><td>2016</td></tr><tr><td>Key Product</td><td></td><td></td><td></td></tr><tr><td>USANA \( ^{\circledR} \)  Essentials/CellSentials</td><td>16%</td><td>14%</td><td>14%</td></tr><tr><td>Proflavanol \( ^{\circledR} \)</td><td>13%</td><td>13%</td><td>13%</td></tr><tr><td>BiOmega-3 \( ^{™} \)</td><td>10%</td><td>12%</td><td>13%</td></tr></table>

Other top-selling products include our HealthPak 100 \( ^{™} \)  and CoQuinone \( ^{®} $  30.

## Geographic Presence

Our products are distributed and sold in 20 markets. We have organized our markets into two geographic regions: (i) Asia Pacific, which includes three sub-regions, and (ii) Americas and Europe, as noted below.

## Asia Pacific

Asia Pacific is organized into three sub-regions: Greater China, Southeast Asia Pacific, and North Asia. Markets included in each of these sub-regions are as follows:

• Greater China—Hong Kong, Taiwan, and China(1)

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

• North Asia—Japan and South Korea

Asia Pacific has driven our growth the last several years. Our most recent market expansions in this region include our entry into Indonesia in late 2015. Since our acquisition of BabyCare in 2010, our strategy in Asia Pacific has been centered on generating growth in China. Consequently, our growth in Asia Pacific over the last few years has been led by China, and we believe that China will continue to drive our growth in this region going forward. We also expect our business to grow in most of our other markets in this region.

## Americas and Europe

Americas and Europe is our most mature region and has grown modestly on a constant currency basis over the last several years due to sales and customer growth in Canada and Mexico. We have not, however, generated sales and customer growth in the United States over the last several years. We continue to implement growth strategies in the United States and remain optimistic about our potential to generate growth in this market.



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. In 2016, net sales outside of the United States represented approximately 87.0% of consolidated net sales.

## Net Sales by Region

The following table shows net sales by geographic region for our last three fiscal years. We report net sales in a geographic region if a product shipment originates in that geographic region. Additional financial information relating to our geographic regions can be found in Note K to the Consolidated Financial Statements included in this report.

<table><tr><td rowspan="2"></td><td rowspan="2">2014</td><td colspan="2">2015</td><td colspan="2">2016</td></tr><tr><td colspan="4">(in thousands)</td></tr><tr><td>Asia Pacific</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Greater China</td><td>$326,134</td><td>41.3%</td><td>$441,284</td><td>48.0%</td><td>$502,299</td></tr><tr><td>Southeast Asia Pacific</td><td>177,940</td><td>22.5%</td><td>183,828</td><td>20.0%</td><td>206,124</td></tr><tr><td>North Asia</td><td>32,667</td><td>4.1%</td><td>39,751</td><td>4.4%</td><td>46,023</td></tr><tr><td>Asia Pacific Total</td><td>536,741</td><td>67.9%</td><td>664,863</td><td>72.4%</td><td>754,446</td></tr><tr><td>Americas and Europe</td><td>253,730</td><td>32.1%</td><td>253,636</td><td>27.6%</td><td>251,637</td></tr><tr><td></td><td>$790,471</td><td>100.0%</td><td>$918,499</td><td>100.0%</td><td>$1,006,083</td></tr></table>

## Research and Development

Our research and development efforts are focused on developing and launching high-quality, science-based products that promote long-term health and reduce the risk of chronic degenerative disease. Our research and development activities include developing products that are new to USANA and new to the industry, updating existing USANA brand formulas to keep them current with the latest science, and adapting existing formulas to meet ever-changing regulations in new and existing international markets. The R&D team is also involved in protecting our proprietary position with both exclusive ingredients, and patent protection. We filed three new U.S. patent applications on our Incelligence \( ^{™} \)  platform and CellSentials \( ^{™} \)  formulation in 2016. Additional research support for this technology is underway. In addition, we have an ongoing clinical study in place to verify the efficacy of our existing products and our new formulations. Our scientific staff includes experts on human nutrition, cellular biology, biochemistry, genetics, the microbiome, natural product chemistry, and clinical research. These experts continually review the latest published research on nutrition, attend scientific conferences, and work with a number of third-party research institutions and researchers to identify possible new products and opportunities and also to reformulate our existing products.

Our in-house research team is working closely with scientists at a number of universities and top research institutes, including the University of Washington, the University of Texas, the University of Colorado Health Sciences Center in Denver, Utah State University, the University of Utah, the Linus Pauling Institute at Oregon State University, The Foods for Health Institute at The University of California, Davis, McGill University in Montreal, Canada, and The Orthopedic Specialty Hospital (“TOSH”) in Salt Lake City, Utah, to maintain our leadership in clinical research in nutrition, oxidative stress, glycemic stress, chronic inflammation and health implications of the microbiome.

We follow pharmaceutical standards established by the U.S. Pharmacopeia and other pharmacopeias in the development and formulation of our products. Our ingredients are selected to meet a number of criteria, including, but not limited to: safety, potency, purity, stability, bio-availability, and efficacy. We control the quality of our products beginning at the formulation stage, and we



maintain our quality control through controlled sourcing of raw ingredients, manufacturing, packaging, and labeling. In fiscal years 2014, 2015, and 2016, we expended $5.1 million, $6.4 million, and $8.8 million, respectively, on product research and development activities. Going forward, we expect to increase our spending and resources for research and development in connection with our personalization and product innovation strategies.

## Manufacturing and Quality Assurance

We conduct nearly all of the manufacturing, production and quality control operations for our nutritional and personal care products in-house. We have established and maintain a manufacturing and quality control facility in Salt Lake City, Utah. BabyCare manufactures and produces nearly all of its products in-house and maintains manufacturing and quality control facilities in Beijing, China and Tianjin, China. Additional information about our manufacturing, production and quality control operations is set out below.

## Tablet Manufacturing

Our tablet production process uses automatic and semi-automatic equipment and includes the following activities: auditing and qualifying suppliers of raw materials, acquiring raw materials, analyzing raw material quality, weighing or otherwise measuring raw materials, mixing raw materials into batches, forming mixtures into tablets, coating and sorting the tablets, analyzing tablet quality, packaging finished products, and analyzing finished product quality. We conduct sample testing of raw materials, in-process materials, and finished products for purity, potency, and composition to determine whether our products conform to our internal specifications, and we maintain complete documentation for each of these tests. We employ a qualified staff of professionals to develop, implement and maintain a quality system designed to assure that our products are manufactured to our internal and applicable regulatory agency specifications.

Our Salt Lake City manufacturing facility is registered with the U.S. Food and Drug Administration (“FDA”), Health Canada Natural Health Products Directorate, the Australian Therapeutic Goods Administration (“TGA”), and other governmental agencies, as required. This facility is audited regularly by various organizations and government agencies to assess, among other things, compliance with current Good Manufacturing Practices (“GMPs”) and with labeling claims. Additionally, our Salt Lake City manufacturing facility is also certified, through inspection and audits, with the Islamic Foods and Nutrition Counsel of America in compliance with Halal, NSF International in compliance with product testing and GMPs, and the TGA in compliance with the current Therapeutic Goods Act in Australia.

The manufacture of nutritional or dietary supplements and related products in the United States requires compliance with dietary supplement GMPs, which are based on the food-model GMPs and pharmaceutical GMPs, with additional requirements that are specific to dietary supplements. We are audited by the FDA, specifically for dietary supplements, and have been found in full compliance with GMPs for dietary supplements.

Our Beijing, China manufacturing facility is registered with the China Food and Drug Administration (“CFDA”), and other governmental agencies, as required. This facility is audited regularly by various organizations and government agencies to assess, among other things, compliance with GMP’s, and with labeling claims.

## Personal Care Manufacturing

The production process for personal care products includes identifying and evaluating suppliers of raw materials, acquiring raw materials, analyzing raw material quality, weighing or otherwise measuring the raw materials, mixing raw materials into batches, analyzing liquid batch quality, packaging finished



products, and analyzing finished product quality. We conduct sample testing of raw materials, in-process materials, and finished products for purity, potency, and composition to determine whether our products conform to our internal specifications, and we maintain complete documentation for each of these tests.

At our Salt Lake City facility, we have standard technology for producing batches of personal care items, and we have semi-automatic packaging equipment for packaging end products. We employ qualified staff to develop, implement, and maintain a quality system. Although the FDA has not promulgated GMPs for personal care items, it has issued guidelines for manufacturing personal care products. We voluntarily maintain compliance with the guidance established by the FDA and the Personal Care Products Council.

## Third-Party Suppliers and Manufacturers

We contract with third-party suppliers and manufacturers for the production of some of our products, which account for approximately 33% of our product sales. These third-party suppliers and manufacturers produce and, in most cases, package these products according to formulations that have been developed by or in conjunction with our in-house product development team. These products include most of our gelatin-capsulated supplements, Rev3 Energy \( ^{™} \)  Drink, Probiotic, our powdered drink mixes, nutrition bars, and certain of our personal care products. In particular, we have entered into a strategic relationship with a third-party manufacturer of our nutrition bars. Under this relationship we have extended credit to this supplier in the form of a secured loan to allow the supplier to acquire the necessary equipment to manufacture our bars. This relationship improves our supply chain stability and creates a mutually beneficial relationship between both parties. Products manufactured by third-party suppliers at their locations must also pass through quality control and assurance procedures to ensure they are manufactured in conformance with our specifications. We require products manufactured at these facilities to be shipped to USANA, where a quality inspection and release also takes place.

## Quality Control/Assurance

We have microbiology and analytical chemistry labs in which we conduct quality control processes. In our microbiology laboratory, scientists test for biological contamination of raw materials and finished goods. In our analytical chemistry laboratory, scientists test for chemical contamination and accurate levels of active ingredients in both raw materials and finished products. Both laboratories conduct stability tests on finished products to determine the shelf life of our products. Our Salt Lake City laboratory staff also performs chemical assays on vitamin and mineral constituents, using U.S. Pharmacopoeia methods and other internally validated methods. In addition to our quality control and clinical laboratories, our headquarters and China facilities also house a laboratory designated for research and development.

## Raw Materials

Most of the raw ingredients that are used in the manufacture of our products are available from a number of suppliers. We have not generally experienced difficulty in obtaining necessary quantities of raw ingredients. When supplies of certain raw materials have tightened, we have been able to find alternative sources of raw materials, and believe we will be able to do so in the future, if the need arises. Our raw material suppliers must demonstrate stringent process and quality control before we use their products in our manufacturing process.



## Distribution and Marketing

## General

We distribute our products internationally through a network marketing system, which is a form of person-to-person direct selling. Under this system, distributors purchase products at wholesale prices from the manufacturer for resale to consumers and for personal consumption. The concept of network marketing is based on the strength of personal recommendations that frequently come from friends, neighbors, relatives, and close acquaintances. We believe that network marketing is an effective way to distribute our products because it allows person-to-person product education and testimonials, as well as higher levels of customer service, all of which are not as readily available through other distribution channels.

## Structure of Network Marketing Program

Associates. A person who wishes to sell USANA products must join our independent sales force as an Associate. A person becomes an Associate by completing an application under the sponsorship of an existing Associate. The new Associate then becomes part of the sponsoring Associate’s sales organization. New Associates sign a written contract and agree to adhere to the USANA policies and procedures. Under the policies and procedures, Associates may not, among other things: (i) use deceptive or unlawful practices to sell USANA products; (ii) make deceptive or unlawful claims or representations concerning our products or Compensation Plan; or (iii) sell competitive products to other USANA Associates or solicit USANA Associates to participate in other network marketing opportunities. New Associates are required to purchase a starter kit that includes a detailed manual describing our business and products, as well as our policies and procedures. We sell these kits at a nominal cost averaging $30 in each of our markets. No other investment is required to become an Associate.

Once a person becomes an Associate, she or he may purchase products directly from us at wholesale prices for personal use and resale to customers. Our Associates are also entitled to build sales organizations by attracting and enrolling new Associates and establishing a network of product users. Associates are not required to recruit or sponsor new Associates and we do not compensate Associates for sponsoring or recruiting Associates. The sponsoring of new Associates results in the creation of multiple levels within our network marketing structure. Sponsored Associates are referred to as part of the sales organization of the sponsoring Associate. New Associates may also sponsor new Associates, creating additional levels in their network, but also forming a part of the same sales organization as the original sponsoring Associate. As outlined below, Associates who are interested in earning additional income must successfully sell USANA products and establish a business network in order to qualify for commissions, including bonuses. Subject to payment of a minimal annual account renewal fee, Associates may continue to distribute or consume our products as long as they adhere to our policies and procedures.

Individuals who reside in China and who are interested in being part of USANA’s organization in China may do so by joining BabyCare. While the process for joining BabyCare is similar to the process for joining USANA, individuals who join BabyCare must initially join as a China Preferred Customer, or CPC. CPCs are similar to Preferred Customers in our other markets, but CPC’s also have the right in China to sponsor other CPCs and receive rebates on future product purchases based on the volume of product purchased by CPCs they have sponsored. A CPC may become a direct seller, or Associate, in China by electing to do so, signing an Associate agreement, and agreeing to adhere to BabyCare’s policies and procedures in China. Much like our operations in other markets, an Associate in China may build a sales organization and receive compensation for product sales. Associates in China are compensated under a compensation plan created and implemented by BabyCare specifically for China.



Preferred Customers. We also sell directly to customers who purchase products only for personal use. This program is our “Preferred Customer” program. Preferred Customers may not resell or distribute our products. We believe this program gives us access to a market that would otherwise be missed, by targeting customers who enjoy USANA products, but who prefer not to maintain a distribution relationship with us. Although our policies prohibit Preferred Customers from engaging in retail sales of products, they may enroll as Associates at any time, if they desire. Preferred Customers are not eligible to earn commissions or to participate in our Compensation Plan. As noted above, our China operations utilize a China Preferred Customer program, which is based on USANA's Preferred Customer program in our other markets with modifications that we have made specifically for our China market.

## Associate Training and Motivation

Initial training of Associates about the products, the Compensation Plan, network marketing, and USANA is provided primarily by an Associate's sponsor and others in their sales organization. We develop and sell training materials and sales tools to assist Associates in building their businesses, as well as provide reprints from other commercial publications that feature USANA and may be used as sales tools. We also sponsor and conduct regional, national, and international Associate events, as well as intensive leadership training seminars. Attendance at these sessions is voluntary, and we undertake no generalized effort to provide individualized training to Associates, although experience shows that the most effective and successful Associates participate in training activities. Although we provide leadership training and sales tools, we ultimately rely on our Associates to sell our products, attract new Associates and Preferred Customers to purchase our products, and to educate and train new Associates regarding our products and Compensation Plan.

## Associate Compensation

As outlined below, our Compensation Plan provides several opportunities for Associates to earn compensation, provided they are willing to consistently work at building, training, and retaining their sales organizations to sell USANA products to consumers. The purpose behind each form of compensation under our Compensation Plan is to reward Associates for generating product sales either directly or indirectly through their sales organization and network of product consumers.

Associates can earn compensation in four ways:

• Commissions. The primary way an Associate is compensated is through earning commissions. Associates earn commissions through generating sales volume points, which are a measure of the product sales of their sales organization. Each of our products has an assigned sales volume point value comprised of a certain percent of the product price in U.S. dollars. To be eligible to earn commissions, an Associate must sell a certain amount of product each month (“Qualifying Sales”). Qualifying Sales may include products that the Associates either use personally or that they resell to consumers. Associates do not earn commissions on these Qualifying Sales. Associates may earn commissions on their sale of products above the Qualifying Sales as well as the sale of products by Associates in their organization and to Preferred Customers. Additionally, Associates do not earn commissions for simply recruiting and enrolling others in their organization. Commissions are paid only on the sale of products. We pay Associate commissions on a weekly basis. As noted elsewhere in this report, our China operations maintain their own compensation plan, which has been implemented by BabyCare specifically for China.

• Bonuses. We offer Associates several bonus opportunities, including our leadership bonus, elite bonus, and lifetime matching bonus. These bonus opportunities are based on a



pay-for-performance philosophy and, therefore, are paid out when the Associate achieves certain performance measures.

• Retail Mark-Ups. As discussed previously, in markets where retail mark-ups are permitted, our Associates purchase products from us at the Preferred Price and may resell them to consumers at higher retail prices. In this case, the Associate retains the retail mark-up as another form of compensation.

• Contests and Promotions. We periodically sponsor contests and promotions designed to incentivize Associates to generate sales, grow their sales organization, and increase the number of product users. These promotions are also based on a pay-for-performance philosophy and, therefore, are only paid upon the achievement of the promotion objectives.

We endeavor to integrate our Compensation Plan seamlessly across all markets where legally permissible, allowing Associates to receive commissions for global—not merely local—product sales. This seamless sales organization structure is designed to allow Associates to build a global network by establishing or expanding their sales organization in any of the markets where we operate. We believe our Compensation Plan significantly enhances our ability to expand internationally, and we intend to continue to integrate new markets, where permitted, into our Compensation Plan.

## Operating Strengths

Our principal objective is to improve the overall health and nutrition of individuals and families around the world. We do this through (i) developing and manufacturing high-quality, science-based nutritional and personal care products that promote long-term health, (ii) personalizing our products to our customer's needs and desires; and (iii) providing a rewarding opportunity through network marketing for our Associates who distribute our products. Our strategy is to capitalize on our operating strengths, which include: a strong research and development program; in-house manufacturing capability; science-based products; an attractive Associate Compensation Plan; a scalable business model; and an experienced management team.

Emphasis on Research and Development. We have a technical team of experienced scientists, including several holding Ph.D. degrees, quality engineers, and regulatory specialists who contribute to our research and development activities. In our research and development laboratories, our scientists and researchers:

• Investigate activities of natural extracts and formulated products in laboratory and clinical settings;

• Identify and research combinations of nutrients that may be candidates for new products;

• Develop new nutritional ingredients for use in supplements;

• Study the metabolic activities of existing and newly identified nutritional ingredients;

• Enhance existing USANA brand products, as new discoveries in nutrition and skin care are made;

• Formulate products to meet diverse regulatory requirements across all of our markets; and

• Investigate processes for improving the production of our formulated products.

Our scientists and researchers also conduct double-blind, placebo-controlled, clinical studies, which are intended to further evaluate the efficacy of our products. In addition, we work with outside research organizations to further support various aspects of our research and development efforts. Our in-house research team is working closely with scientists at a number of universities and top research institutes, including those listed under the caption “Research and Development” above, to maintain our



leadership in clinical research in nutrition, oxidative stress, glycemic stress, chronic inflammation and health implications of the micro-biome. We have also funded clinical research programs at Boston University, the University of Colorado, the University of Utah, the University of Sydney in Australia, TOSH, and Utah State University. Our R&D team also works closely with the Medical staff at Sanoviv Medical Institute in Rosarito, Mexico to obtain additional perspectives on the use of supplements in a clinical setting and to get feedback on formulas in development. Additionally, our Scientific Advisory Council, comprised of health care professionals and nutritional science experts worldwide, provides us with valuable insights into product applications and efficacy. It is through our internal research and development efforts, as well as our relationships with outside research organizations and health care providers, that we can provide what we believe to be some of the highest quality health products in the industry.

In-house Manufacturing. We manufacture products that account for approximately 67% of our product sales. We believe that our ability to manufacture our own products in-house is a significant competitive advantage for the following reasons:

• We can better control the quality of raw materials and finished products;

• We can more reliably monitor the manufacturing process to better guarantee potency and bioavailability and to reduce the risk of product contamination;

• We can better control production schedules to increase the likelihood of maintaining an uninterrupted supply of products for our customers;

• We are able to produce most of our own prototypes in the research phase of product development; and

• We are better able to manage the underlying costs associated with manufacturing our products.

Science-based Products. As a result of our emphasis on research and development and our in-house manufacturing capabilities, we have developed a line of high-quality health products that we believe provides health benefits to our customers. Our products have been developed based on a combination of published research, in-house laboratory and third-party clinical studies, and sponsored research.

Attractive Associate Compensation Plan and Support. We are committed to increasing our product sales by providing a highly competitive compensation plan to attract and retain Associates who constitute our sales force. We motivate our Associates by paying incentives on a weekly basis. Additionally, our Compensation Plan is, where permissible, a global-seamless plan, meaning that Associates can be compensated each week for their business success in any market in which they have a sales organization where we conduct business. As noted elsewhere in this report, our China operations maintain their own compensation plan, which is structured differently than USANAs plan in other markets.

To support our Associates, 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 business development and to provide a forum for interaction with some of our Associate leaders and with members of the USANA management team. We also provide low-cost sales tools and resources, which we believe are an integral part of building and maintaining a successful home-based business for our Associates. For example, we offer a computer-based, interactive presentation tool, called Health and Freedom Solution, which is designed to help our Associates easily explain and share the USANA opportunity, including the benefits of our products and our Compensation Plan.



In addition to company-sponsored meetings, sales tools and resources, we maintain a website exclusively for our Associates, where they can access the latest USANA news, obtain training materials, manage their personal information, enroll new customers, shop for products, and register for company-sponsored events. Additionally, through this website, Associates can access other online services to which they may subscribe. For example, we offer an online business management service, which includes a tool that helps Associates track and manage their business activity, a personal webpage to which prospects or retail customers can be directed, and e-cards for advertising.

We also believe that recognition is an important factor in supporting and retaining our Associates. We understand that being a successful USANA Associate requires hard work and dedication, and we celebrate key achievements and rank advancements of our Associates. We believe that our recognition programs greatly contribute to our ability to retain our Associates.

Business Model. We believe that our business model provides, among others, the following advantages:

• No requirement for a company-employed sales force to sell our products, with a relatively low incremental cost to add a new Associate;

• Commissions paid to our Associates are tied to sales performance;

• Accounts receivable are minimal because payment is required at the time an Associate or Preferred Customer purchases product;

• A stream of recurring revenue from our monthly product subscription program known as “Auto Order,” which we utilize in all of our markets (for the year ended December 31, 2016, this program represented 51% of our product sales volume); and

• We can typically expand into new international markets with moderate investment because we generally maintain only warehouse facilities, customer support, and minimal administrative facilities in those international markets. Larger markets, including China however, require more significant local investment.

Experienced Management Team. Our management team includes individuals with expertise in various scientific and managerial disciplines, including nutrition, product research and development, international development, marketing, customer network development, information technology, manufacturing, finance, legal, regulatory, and operations. This team is responsible for supporting growth, research and development, international expansion, strengthening our financial condition, and improving our internal controls.

## Growth Strategy

We seek to grow our business by pursuing the following strategies:

Attract and Retain Customers. Our customers, and Associates in particular, are central to the growth and success of our business. Accordingly, our primary growth strategy focuses on increasing our overall customer counts throughout the world. We will execute this strategy by applying both world-wide and region-specific initiatives, which include the initiatives set out below. Our management team maintains a close working relationship with our Associate leaders by interacting with them on a regular basis through in-person meetings and phone calls. Further, in addition to our Annual International Convention and our Asia Pacific Convention, we hold several regional events in key growth areas to provide support and training to Associates. We continue to invest in these events and in the marketing of our business to help Associates improve the productivity of their businesses. We are also executing our Preferred Customer growth initiatives described under the “Current Focus and Recent Developments” section above.

Personalization. Our personalization initiative has been a key marketing and operating strategy for us over the last few years and will continue to be a key strategy going forward. This initiative focuses on personalizing and improving our overall business, as well as our customers' experience with USANA. We have already applied personalization to many aspects of our business and have several additional enhancements planned going forward, all of which is further discussed under “Current Focus and Recent Developments” above.



New Product Introductions. Our research and development team continually reviews the latest scientific findings related to nutrition, conducts or manages research and clinical trials, reviews new technologies, and attends scientific conferences. If, in the process, we see potential for a new product or ingredient that provides a measurable and important health benefit, and if we believe this benefit can be realized by a significant number of our customers, we will generally pursue development of that product. Our research and development focus has and will continue to be centered on personalization and innovation. To the extent reasonably possible, we intend to personalize our product offering and product delivery systems to our customers' individual needs. At our 2016 International Convention, we introduced one of the greatest product innovations in our history with the launch of our Incelligence \( ^{™} \)  product platform. Incelligence \( ^{™} \)  is our proprietary, patent-pending, technology that is designed to support the body's natural ability to nourish, protect and renew itself. As part of our Incelligence \( ^{™} \)  platform, we also launched our new flagship multivitamin, CellSentials \( ^{™} \) . Incelligence \( ^{™} \)  is a key part of our growth strategy and has already been launched in nine markets around the world with an additional six market launches planned going forward and will eventually be offered in China upon regulatory approval.

Successfully Grow each of our Regions through Market Specific Strategies and Incentives. In light of the strength of our Asia Pacific region and our growing Associate base in Asia, we believe that Greater China continues to be the most significant and imminent growth opportunity for us. Our strategy in this region is focused on generating customer growth in each market, with an emphasis on China. Our wholly-owned subsidiary, BabyCare, is our operating entity in China. BabyCare has been granted licenses to engage in direct selling in the following twelve municipalities/provinces: Beijing, Jiangsu, Shaanxi, Tianjin, Liaoning Province, Shandong Province, Shanxi Province, Sichuan Province, Guangdong Province, Dalian City, Qingdao City, and Shenzhen City. The eight licenses granted to BabyCare in 2016 require BabyCare to complete certain conditions and reporting requirements, which BabyCare is in the process of completing. BabyCare is also working to obtain similar licenses in other provinces. In 2016, we successfully completed and transitioned our manufacturing operations to our new manufacturing facility in Beijing. We have also spent the last few years registering USANA products for sale by BabyCare in China, educating our customers on our product offering and business model in China, and improving our information systems, technology and infrastructure in China. We will continue to execute these strategies going forward.

We are also confident in our growth potential in our Southeast Asia Pacific region. While the Philippines, Australia and New Zealand have been key growth markets for us in this region, we generated constant currency sales and customer growth in nearly every market in this region in 2016. We have implemented strategies for each market in this region, which are intended to continue our customer growth trend in 2017. 2016 was the first full operational year for USANA in Indonesia, our newest market in this region. Indonesia is USANAs  $ 20^{th} \)  market and we believe it offers a promising growth opportunity for us.

Our Americas and Europe region is also very important to our business and a significant part of our growth strategy. We achieved double-digit constant currency sales growth in Mexico and Canada in 2016, and expect growth in these markets to continue in 2017. Although our sales and customer counts have declined in the United States over the last several years, we remain focused on growth in this market. Our objective for this region remains centered on increasing the overall number of customers who consistently use USANA products. To achieve our objective, we will continue to execute our personalization and brand-awareness strategies and also utilize market-specific promotions and incentives.

Brand Awareness: To facilitate customer growth, we plan to continue to promote global awareness of the USANA brand through various strategies, including professional athlete sponsorships and credible associations with individuals and organizations. Examples of this include our sponsorship of the U.S. Ski Team and our partnership with the Women’s Tennis Association. We continue to serve as the



official health supplement supplier for these teams and organizations and are also increasing our sponsorship of individual athletes who rely on our products and brand. We seek to leverage these relationships to build brand credibility and increase product consumption and loyalty. In addition to our athlete sponsorships, we seek to advertise and collaborate with credible, nationally recognized organizations and individuals to enhance our global brand. We will also continue our relationship with Dr. Mehmet Oz as a Trusted Partner and Sponsor of The Dr. Oz Show, as discussed further under “Current Focus and Recent Developments” above. While branding efforts such as this have a global reach, the primary objective of this initiative is to grow sales and customers in the Americas and Europe.

Enter New Markets. We believe that significant growth opportunities continue to exist in markets where we currently conduct business and in new international markets. We commenced operations in Indonesia during the fourth quarter of 2015. This market, as well as future markets, are selected following an assessment of several factors, including market size, anticipated demand for USANA products, receptiveness to network marketing, and the market entry process, which includes consideration of possible regulatory restrictions on our products or our network marketing system. We have also begun to register certain products with regulatory and government agencies in other countries in preparation for further international expansion. Wherever possible, we expect to seamlessly integrate the Compensation Plan in each market to allow Associates to receive commissions for global—not merely local—product sales. This seamless sales structure is designed to allow an Associate to build a global network by creating a sales organization across national borders. We believe our seamless Compensation Plan significantly enhances our ability to expand internationally, and we intend, where permitted, to integrate future markets into this Compensation Plan. While we deem new market expansion as a key growth strategy, given the significant opportunity that currently exists in China, we plan to focus the majority of our time and resources on growing that market.

Pursue Strategic Acquisitions. We believe that attractive acquisition opportunities may arise in the future. We intend to pursue strategic acquisition opportunities that would grow our customer base, expand our product lines, enhance our manufacturing and technical expertise, allow vertical integration, or otherwise complement our business or further our strategic goals.

## Competition

We compete with manufacturers, distributors, and retailers of nutritional products for consumers, and we compete with network marketing companies for distributors. On both fronts, some of our competitors are significantly larger than we are, have a longer operating history, higher visibility and name recognition, and have greater financial resources than we do. We compete with these entities by emphasizing the underlying science, value, and superior quality of our products, the simplicity in our product offerings, and the convenience and financial benefits afforded by our network marketing system and global seamless Compensation Plan.

Our business is driven primarily by our distributors, whom we refer to as Associates. Our ability to compete with other network marketing companies depends, in significant part, on our success in attracting and retaining Associates. There can be no assurance that our programs for attracting and retaining Associates will be successful. The pool of individuals interested in network marketing is limited in each market and is reduced to the extent other network marketing companies successfully attract these individuals into their businesses. Although we believe that we offer an attractive opportunity for our Associates, there can be no assurance that other network marketing companies will not be able to recruit our existing Associates or deplete the pool of potential Associates in a given market.

We believe that the leading network marketing company in the world, based on total sales, is Amway Corporation and its affiliates, and that Avon Products, Inc. is the leading direct seller of beauty



and related products worldwide. Leading competitors in the nutritional network marketing and nutritional product industry include Herbalife Ltd., Inc.; Nu Skin Enterprises, Inc.; and NBTY, Inc. Based on information that is publicly available, 2016 net sales of the aforementioned companies ranged from $2.2 billion to $5.6 billion. There are other manufacturers of competing product lines that have or may launch direct selling enterprises that compete with us in certain product lines and in the recruiting of Associates. There can be no assurance that we will be able to successfully meet the challenges posed by increased competition.

## Product Returns

Product returns have not been a material factor in our business, totaling approximately 0.8%, 0.6%, and 0.7% in 2014, 2015, and 2016, respectively. Customer satisfaction has always been and will continue to be a hallmark of our business. We believe that we have always offered a generous product return policy. Our standard return policy allows Associates and Preferred Customers to receive a 100% refund on the sales price of any unused and resalable products that are returned up to one year from the date of purchase. This standard policy differs slightly in a few of our international markets due to the regulatory environment in those markets. To avoid manipulation of our Compensation Plan, return of product where the purchase amount exceeds $100 and was not damaged at the time of receipt by the Associate may result in cancellation of an Associate’s distributorship.

## Major Customers

Sales are made to independent Associates and Preferred Customers. No single customer accounted for 10% or more of net sales. Notwithstanding the foregoing, the nature of our business model results in a significant amount of sales to several different Associate leaders and their sales organizations. Although no single Associate accounted for 10% or more of our net sales, the loss of a key Associate leader or that Associate’s sales organization could adversely affect our net sales and our overall operating results.

## Compliance by Associates

We continually monitor and review our Associates’ compliance with our policies and procedures as well as the laws and regulations applicable to our business around the world. Part of this review entails an assessment of our Associates’ sales activities to ensure that Associates are actually selling products to consumers. Our policies and procedures require Associates to present our products and the USANA opportunity ethically and honestly. Associates are not permitted to make claims about our products or Compensation Plan that are not consistent with our policies and procedures and applicable laws and regulations. The majority of our Associates must use marketing and promotional materials provided by USANA. Associates who have achieved a certain leadership level are permitted, however, to produce their own marketing and promotional materials, but only if such materials are approved by USANA prior to use.

From time to time, we have Associates who fail to adhere to our policies and procedures. We systematically review reports of alleged Associate misbehavior. Infractions of the policies and procedures are reported to our compliance group, who determine what disciplinary action is warranted in each case. More serious infractions are reported to our Compliance Committee, which includes USANA executives. If we determine that an Associate has violated any of our policies and procedures, we may take a number of disciplinary actions, such as warnings, fines or probation. We may also withdraw or deny awards, suspend privileges, withhold commissions until specific conditions are satisfied, or take other appropriate actions in our discretion, including termination of the Associate’s purchase and distribution rights.



We believe that Associate compliance is critical to the integrity of our business and, therefore, we are aggressive in ensuring that our Associates comply with our policies and procedures. As explained above, when an Associate fails to comply with our policies and procedures, we may terminate their purchase and distribution rights. From time to time, we become involved in litigation with Associates whose purchase and distribution rights have been terminated. We consider such litigation to be routine and incidental to our business and will continue to be aggressive in ensuring that our Associates comply with our policies and procedures.

## Information Technology

We believe that the ability to efficiently manage distribution, compensation, manufacturing, inventory, and communication functions through the use of secure, sophisticated, and dependable information processing systems is critical to our success. We continually evaluate changes in the information technology environment to ensure that we are capitalizing on new technologies, keeping pace with regulatory standards, and ensuring that our systems and data are secure. Over the next few years we intend to increase our investment in technology systems and infrastructure as we prepare to become a much larger company.

Our information technology resources are maintained primarily by our in-house staff to optimally support our customer base and core business processes. Our IT staff manages an array of systems and processes which support our global operations 24 hours a day and 365 days a year. Three of our most critical applications include:

• A web-based application that provides online services to Associates, such as training sessions and presentations, online shopping, enrollment, a real-time reporting engine, Company and product information, web-hosting, email, and other tools to help Associates effectively manage their business and sales organizations.

• A web-based order-entry system that handles order entry, customer information, compensation, Associate business structure, returns, invoices, and other transactional-based processes.

• A fully integrated world-wide Enterprise Resource Planning (“ERP”) system that handles accounting, human resources, inventory management, production processes, quality assurance, and reporting requirements in a multinational environment.

Our web applications are supported by a clustered environment providing high availability. All production systems are fully backed-up and stored off-site to mitigate the risk of significant interruption of our business in the event of a disaster at the locations of our primary servers.

## Regulatory Matters

General. In the United States and the other countries where we operate, our business is subject to extensive governmental laws and regulations. These laws and regulations exist at various levels in the United States and other countries and pertain to our products, network marketing program, and other aspects of our business as described in more detail below.

Product Regulation. Numerous governmental agencies in the United States and other countries regulate the manufacturing, packaging, labeling, advertising, promoting, importing, distributing, and the selling of nutrition, health, beauty, and weight-management products. In the United States, advertisement of our products is regulated by the Federal Trade Commission (“FTC”) under the FTC Act and, where such advertising is considered to be product labeling by the FDA, under the Food, Drug, and Cosmetic Act (“FDCA”) and the regulations thereunder. USANA products in the United States are also subject to regulation by, among others, the Consumer Product Safety Commission, the U.S. Department of Agriculture, and the Environmental Protection Agency.



Our largest selling product group includes products that are regulated as dietary supplements under the FDCA. Dietary supplements are also regulated in the United States under the Dietary Supplement Health and Education Act of 1994 (“DSHEA”), which we believe is generally favorable to the dietary supplement industry. Some of our powdered drink, food bar, and other nutrition products are regulated as foods under the Nutrition Labeling and Education Act of 1990 (“NLEA”). The NLEA establishes requirements for ingredient and nutritional labeling including product labeling claims. The manufacture of nutritional or dietary supplements and related products in the United States requires compliance with dietary supplement GMPs, which are based on the food-model GMPs and Pharmaceutical GMP’s, with additional requirements that are specific to dietary supplements. We are audited annually by the US FDA, specifically for dietary supplements and have been found in full compliance with GMPs for dietary supplements. The Dietary Supplement & Nonprescription Drug Consumer Protection Act requires manufacturers of dietary supplement and over-the-counter products to notify the FDA when they receive reports of serious adverse events occurring within the United States. We have an internal adverse event reporting system that has been in place for several years, and we believe that we are in compliance with this law.

In general, our personal care products, which are regulated as cosmetic products by the FDA, are not subject to pre-market approval by that agency. Cosmetics, however, are subject to regulation by the FDA under the FDCA adulteration and misbranding provisions. Cosmetics also are subject to specific labeling regulations, including warning statements, if the safety of a cosmetic is not adequately substantiated or if the product may be hazardous, as well as ingredient statements and other packaging requirements under the Fair Packaging and Labeling Act. Cosmetics that meet the definition of a drug, such as sunscreens, are regulated as drugs. Over-the-counter (“OTC”) drug products, including cosmetics, may be marketed if they conform to the requirements of the OTC monograph that is applicable to that drug. Drug products not conforming to monograph requirements require an approved New Drug Application (“NDA”) before marketing may begin. Under these provisions, if the agency were to find that a product or ingredient of one of our OTC drug products is not generally recognized as safe and effective or is not included in a final monograph that is applicable to one of our OTC drug products, we would be required to reformulate or cease marketing that product until it is the subject of an approved NDA or until the time, if ever, that the monograph is amended to include such product.

Advertising of our products in the United States is subject to regulation by the FTC under the FTC Act. Under the FTC’s Substantiation Doctrine, an advertiser is required to have a “reasonable basis” for all objective product claims before the claims are made. Failure to adequately substantiate claims may be considered either deceptive or unfair practices. Pursuant to this FTC requirement, we are required to have adequate substantiation for all material advertising claims that we make for our products in the United States. In recent years, the FTC has initiated numerous investigations of and actions against companies that sell dietary supplement, weight-management, and cosmetic products. The FTC has issued guidance to assist companies in understanding and complying with its substantiation requirement. We believe that we have adequate substantiation for all material advertising claims that we make for our products in the United States, and we believe that we have organized the documentation to support our advertising and promotional practices in compliance with these guidelines. However, no assurance can be given that the FTC would reach the same conclusion if it were to review or question our substantiation for our advertising claims in the United States.

The FTC may enforce compliance with the law in a variety of ways, both administratively and judicially, using compulsory process, cease and desist orders, and injunctions. FTC enforcement can result in orders requiring, among other things, limits on advertising, corrective advertising, consumer redress, divestiture of assets, rescission of contracts, and such other relief as the agency deems necessary to protect the public. Violation of these orders could result in substantial financial or other penalties. Although, to our knowledge, we have not been the subject of any action by the FTC, no



assurance can be given that the FTC will not question our advertising or other operations in the United States in the future. Any action in the future by the FTC could materially and adversely affect our ability to successfully market our products in the United States.

The manufacturing, labeling, and advertising of our products are also regulated by various governmental agencies outside the United States in each country where they are distributed. For example, in Australia, product registration, labeling and manufacturing is regulated by the TGA and, in Japan, the Ministry of Health, Labor and Welfare. In China, the China Food and Drug Administration (“CFDA”) regulates product registration, labeling and manufacturing. In markets outside the United States, prior to commencing operations or marketing products, we may be required to obtain approvals, licenses, or certifications from a country’s Food Administration, Ministry of Health or comparable agency. Approvals or licensing may be conditioned on reformulation of USANA products for the market or may be unavailable with respect to certain products or product ingredients. We must also comply with local product labeling and packaging regulations that vary from country to country. For example, China extensively regulates the registration, labeling and marketing of our products. In China, our nutritional products are typically classified as “health functional foods” and our personal care products are typically classified as “non-special use cosmetics”. The registration process for health functional foods is complex and generally requires extensive analysis and approval by the CFDA. As a result, it may take several years to register a product as a health functional food in China. While all products currently sold by BabyCare in China have been registered with the CFDA, we continue to work through the registration process for other health functional food products, which we also hope to begin selling through BabyCare in the future.

We cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can we determine what effect additional governmental regulations or administrative orders, when and if promulgated, would have on our business. Future changes could include requirements for the reformulation of certain products to meet new standards, the recall or discontinuation of certain products that cannot be reformulated, additional record keeping, expanded documentation of the properties of certain products, expanded or different labeling, and additional scientific substantiation. Any or all of these requirements could have a material adverse effect on our business, financial condition, and operating results.

Network Marketing Regulation. Various laws and regulations in the United States and other countries regulate network marketing, or direct selling. These laws and regulations exist at many levels of government in many different forms, including statutes, rules, regulations, judicial decisions, and administrative orders. Generally, the regulations are directed at: (i) ensuring that product sales ultimately are made to consumers and that advancement within a sales organization is based on product sales rather than on investments in the organization or on other criteria that are not related to sales; and (ii) preventing the use of deceptive or fraudulent practices that have sometimes been inappropriately associated with legitimate direct selling and network marketing activities. Network marketing regulations are inherently fact-based and often do not include “bright line” rules. Additionally, we are subject to the risk that the regulations, or a regulator’s interpretation and enforcement of the regulations, could change.

Network marketing companies, and the industry in general, continue to experience significant media and public scrutiny in many countries. Several companies similar to ours have been scrutinized and penalized in several markets where we operate, including the United States, Canada, China, Japan, and South Korea. This scrutiny, along with the uncertainty of the laws and regulations pertaining to network marketing in many countries, can affect how a regulator or member of the public perceives our Company. For instance, there has been significant media and short-seller attention regarding the viability and legality of network marketing in the United States and China over the past few years. This attention has led to intense public scrutiny of the industry, as well as volatility in our stock price and



the stock prices of companies similar to our company. We cannot predict the impact that this scrutiny may have on our business or the industry in general.

The Chinese government has adopted 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. These regulations are also subject to discretionary interpretation and enforcement by various municipal and provincial level officials in China. For a description of the various risks associated with our business see the “Risk Factors” section of this report.

Transfer Pricing Regulation. In the United States and many other countries, we are subject to transfer pricing and other tax regulations that are designed to ensure that appropriate levels of income are reported by our U.S. or international entities and are taxed accordingly. We have adopted transfer prices, which are supported by formal transfer pricing studies for the sale of products to our subsidiaries in accordance with applicable transfer pricing laws. In addition, we have entered into agreements with our subsidiaries for services and other contractual obligations, such as the payment of Associate incentives that are also supported by the same formal transfer pricing studies. If the U.S. Internal Revenue Service or the taxing authorities of any other jurisdiction were to successfully challenge these agreements or require changes in our standard transfer pricing practices for products, we could become subject to higher taxes and our earnings could be adversely affected. The tax treaties between the United States and most countries provide competent authority for relief to avoid any double taxation. We believe that we operate in compliance with all applicable transfer pricing regulations. There can be no assurance, however, that we will continue to be found to be operating in compliance with transfer pricing regulations or that those laws will not be modified, which may require that we change our operating procedures.

## Intellectual Property

Trademarks. We have developed and use registered trademarks in our business, particularly relating to our corporate and product names. We own 25 trademarks that are registered with the U.S. Patent and Trademark Office. Federal registration of a trademark enables the registered owner of the mark to bar the unauthorized use of the registered mark in connection with a similar product in the same channels of trade by any third-party anywhere in the United States, regardless of whether the registered owner has ever used the trademark in the area where the unauthorized use occurs. We have filed applications and own trademark registrations, and we intend to register additional trademarks in countries outside the United States where USANA products are or may be sold in the future. Protection of registered trademarks in some jurisdictions may not be as extensive as the protection in the United States.

We also claim ownership and protection of certain product names, unregistered trademarks, and service marks under common law. Common law trademark rights do not provide the same level of protection that is afforded by the registration of a trademark. In addition, common law trademark rights are limited to the geographic area in which the trademark is actually used. We believe these trademarks, whether registered or claimed under common law, constitute valuable assets, adding to recognition of USANA and the effective marketing of USANA products. Trademark registration once obtained is essentially perpetual, subject to the payment of a renewal fee. We therefore believe that these proprietary rights have been and will continue to be important in enabling us to compete.

Trade Secrets. We own certain intellectual property, including trade secrets that we seek to protect, in part, through confidentiality agreements with employees and other parties. Even where these agreements exist, there can be no assurance that these agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known to



or independently developed by competitors. Our proprietary product formulations are generally considered trade secrets, but are not otherwise protected under intellectual property laws.

Patents. We have three U.S. patents. Two of our patents relate to the method of extracting an antioxidant from olives and the byproducts of olive oil production. These patents were issued in 2002 and will continue in force until December 20, 2019. Our third patent relates to a method of self-preserving our Sense \( ^{™} \)  line of personal care products. This patent was issued in May 2007 and will continue in force until August 5, 2024.

We intend to protect our legal rights concerning intellectual property by all appropriate legal action. Consequently, we may become involved from time to time in litigation to determine the enforceability, scope, and validity of any of the foregoing proprietary rights. Any patent litigation could result in substantial cost and divert the efforts of management and technical personnel.

## Seasonality

Although we are not significantly affected by seasonality, we do experience variations in the activity of our Associates in many of our markets in the first and fourth quarters around major cultural events such as Chinese New Year and Christmas.

## Backlog

Our products are typically shipped within 72 hours after receipt of an order. As of February 24, 2017 we had no significant backlog of orders.

## Working Capital Practices

We maintain sufficient amounts of inventory in stock in order to provide a high level of service to our Associates and Preferred Customers. Substantial inventories are required to meet the needs of our dual role as manufacturer and distributor. We also watch seasonal commodity markets and may buy ahead of normal demand to hedge against cost increases and supply risks.

## Environment

We are not aware of any instance in which we have contravened federal, state, or local laws relating to protection of the environment or in which we otherwise may be subject to liability for environmental conditions that could materially affect operations.

## Employees

As of February 24, 2017 we had approximately 1,788 employees worldwide, as measured by full-time equivalency. Our employees are not currently represented by a collective bargaining agreement, and we have not experienced work stoppages as a result of labor disputes. We believe that we have a good relationship with our employees.

## Additional Available Information

We maintain executive offices and principal facilities at 3838 West Parkway Boulevard, Salt Lake City, Utah 84120. Our telephone number is (801) 954-7100. We maintain a World Wide Web site at www.usanahealthsciences.com. The information on our web site should not be considered part of this report on Form 10-K.

We make available, free of charge at our corporate web site, copies of our annual reports on United States Securities and Exchange Commission (“SEC”) Form 10-K, quarterly reports on SEC Form 10-Q, current reports on SEC Form 8-K, proxy statements, and all amendments to these reports, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act. This information may also be obtained from the SEC’s on-line database, which is located at www.sec.gov.



## Item 1A. Risk Factors

## Forward-Looking Statements and Certain Risks

We encounter substantial risks in our business, any one of which may adversely affect our business, results of operations or financial condition. The fact that some of these risk factors may be the same or similar to those that we have filed with the Securities and Exchange Commission in past reports means only that the risks are present in multiple periods. We believe that many of the risks that are described here are part of doing business in the industry in which we operate and will likely be present in all periods. The fact that certain risks are endemic to the industry does not lessen their significance. These risk factors should be read together with the other items in this report, including Item 1, "Business," and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Among others, risks and uncertainties that may affect our business, financial condition, performance, development, and results of operations include the following:

We are a network marketing company and are dependent upon an independent sales force of “Associates” to sell our products. If we are unable to attract and retain Associates, our business may be harmed. We rely on non-employee, independent Associates to market and sell our products and to generate our sales. Our ability to maintain and increase sales in the future will depend in large part upon our success in increasing the number of new Associates, retaining and motivating our existing Associates, and in improving the productivity of our Associates. Associates typically market and sell our products on a part-time basis and likely will engage in other business activities, some of which may compete with us. We rely primarily upon our Associates to attract, train and motivate new Associates. Our ability to continue to attract and retain Associates can be affected by a number of factors, some of which are beyond our control, including:

• General business and economic conditions;

• Adverse publicity or negative misinformation about our industry, us or our products;

• Negative public perceptions about network marketing programs;

• High-visibility investigations or legal proceedings against network marketing companies by federal or state authorities or private citizens;

• Public perceptions about the value and efficacy of nutritional or dietary supplement, products generally;

• Other competing network marketing organizations entering into the marketplace that may recruit our existing Associates or reduce the potential pool of new Associates; and

• Changes to the Compensation Plan required by law or implemented for business reasons that make attracting and retaining Associates more difficult.

We can provide no assurance that the number of Associates will increase or remain constant or that their productivity will increase. Our Associates may terminate their services at any time, and, like most direct selling companies, we experience a high turnover among new Associates from year to year. While our total number of active Associates has continued to increase during recent years, a few of our markets, including the United States, have experienced a decline in the number of active Associates. If our strategies and initiatives do not drive growth in our Associate numbers, particularly in the United States, China and other markets, our operating results could be harmed. We cannot accurately predict any fluctuation in the number and productivity of Associates because we primarily rely upon existing Associates to train new Associates and to motivate new and existing Associates. Our operating results in other markets could also be adversely affected if we do not generate sufficient interest in our business to successfully retain existing Associates and attract new Associates.

The loss of a significant USANA Associate or Associate sales organization could adversely affect our business. We rely on the successful efforts of our Associates that become leaders within our



Compensation Plan. Our Compensation Plan is designed to permit Associates to sponsor new Associates, thereby creating sales organizations. As a result, Associates develop business and personal relationships with other Associates. The loss of a key Associate or group of Associates, large turnover or decreases in the size of the key Associate force, seasonal or other decreases in product purchases, sales volume reduction, the costs associated with training new Associates, and other related expenses may adversely affect our business, financial condition, or results of operations.

The violation of marketing or advertising laws by Associates in connection with the sale of our products or the improper promotion of our Compensation Plan could adversely affect our business. All Associates sign a written contract and agree to adhere to our policies and procedures. Although these policies and procedures prohibit Associates from making false, misleading and other improper claims regarding products or income potential from the distribution of the products, Associates may, from time to time, without our knowledge and in violation of our policies, create promotional materials or otherwise provide information that does not accurately describe our marketing program. They also may make statements regarding potential earnings, product claims, or other matters in violation of our policies or applicable laws and regulations concerning these matters. These violations may result in legal action against us by regulatory agencies, state attorneys general, or private parties. Legal actions against our Associates or others who are associated with us could lead to increased regulatory scrutiny of our business, including our network marketing system. We take what we believe to be commercially reasonable steps to monitor the activities of our Associates to guard against misrepresentation and other illegal or unethical conduct by Associates and to assure that the terms of our policies and procedures and Compensation Plan are observed. There can be no assurance, however, that our efforts in this regard will be sufficient to accomplish this objective, particularly in times/regions where we may experience rapid growth. Adverse publicity resulting from such activities could also make it more difficult for us to attract and retain Associates and may have an adverse effect on our business, financial condition, and results of operations.

We may have or could incur obligations relating to the activities of our Associates. Our Associates are subject to taxation, and, in some instances, legislation or governmental agencies impose an obligation on us to collect taxes, such as sales taxes or value added taxes, and to maintain appropriate records of such transactions. In addition, we are subject to the risk in some jurisdictions of being responsible for social security and similar taxes with respect to our Associates. In the event that local laws and regulations or the interpretation of local laws and regulations change to require us to treat our independent Associates as employees, or if our Associates are deemed by local regulatory authorities in one or more of the jurisdictions in which we operate to be our employees rather than independent contractors, under existing laws and interpretations, we may be held responsible for a variety of obligations that are imposed upon employers relating to their employees, including social security and related taxes in those jurisdictions, plus any related assessments and penalties, which could harm our financial condition and operating results.

Network marketing is subject to intense government scrutiny, and regulation and changes in the law, or the interpretation and enforcement of the law, might adversely affect our business. Various laws and regulations in the United States and other countries regulate network marketing, or direct selling. These laws and regulations exist at many levels of government in many different forms, including statutes, rules, regulations, judicial decisions, and administrative orders. Network marketing regulations are inherently fact-based and often do not include “bright line” rules. Additionally, we are subject to the risk that the regulations, or a regulator’s interpretation and enforcement of the regulations, could change. From time to time, we have received requests to supply information regarding our network marketing plan to regulatory agencies. We have also modified our network marketing plan in the past to comply with the interpretation of the regulations by authorities. Where required by law, we obtain regulatory approval of our network marketing plan, or, where approval is not required or available, the favorable opinion of local counsel as to regulatory compliance. Further, we may simply be prohibited



from distributing products through a network-marketing channel in some countries, or we may be forced to alter our Compensation Plan.

We are subject to the risk that, in one or more countries, our network marketing plan, or the conduct of certain of our Associates, could be found not to be in compliance with applicable laws and regulations. For instance, the FTC has recently issued guidance to U.S. direct selling companies in several different ways. The FTC has broad enforcement authority and while it issues guidance on how it interprets the applicable law, that guidance is not ultimately binding on the FTC. As a result, the FTC could decide to investigate or bring an enforcement action regarding practices that we interpret to be in line with applicable law and/or FTC guidance. In this regard, the FTC has challenged the distributor compensation plans used by certain direct sellers over the last several years. In each instance, the FTC obtained a consent decree requiring those companies to (i) discontinue using all, or certain parts of, their distributor compensation plan, and (ii) implement a compensation plan that had been approved by the FTC. While we strive to ensure that our overall business, and Associate Compensation Plan, is regulatory compliant, we cannot be certain that the FTC, or a regulator in another country, will not continue to modify guidance, laws or regulations or interpret the same in a way that would render our current practices inconsistent with the same.

Additionally, we cannot predict the nature of any future law, regulation, or guidance, nor can we predict what effect additional governmental regulations, judicial decisions, or administrative orders, when and if promulgated, would have on our business. Failure by us, or our Associates, to comply with these laws, regulations, or guidance, could have a material adverse effect on our business in a particular market or in general. Finally, the continuation of regulatory challenges, investigations and litigation against other network marketing companies could harm our business and industry if the laws and regulations are interpreted in a way that results in additional restrictions on network marketing companies in general.

Our products and manufacturing activities are subject to extensive government regulation, which could limit or prevent the sale of our products in some markets. The manufacture, packaging, labeling, advertising, promotion, distribution, and sale of our products are subject to regulation by numerous national and local governmental agencies in the United States and other countries, including the FDA and the FTC. For example, failure to comply with FDA regulatory requirements may result in, among other things, injunctions, product withdrawals, recalls, product seizures, fines, and criminal prosecutions. Any action of this type by the FDA could materially adversely affect our ability to successfully market our products.

The manufacture of nutritional or dietary supplements and related products in the United States requires compliance with dietary supplement GMPs, which are based on the food-model GMPs, with additional requirements that are specific to dietary supplements. We believe our manufacturing processes comply with these GMPs for dietary supplements. Nevertheless, any FDA action determining that our processes were non-compliant with dietary supplement GMPs, could materially adversely affect our ability to manufacture and market our products. Additionally, the Dietary Supplement & Nonprescription Drug Consumer Protection Act requires manufacturers of dietary supplement and over-the-counter products to notify the FDA when they receive reports of serious adverse events occurring within the United States. Potential FDA responses to any such report could include injunctions, product withdrawals, recalls, product seizures, fines, or criminal prosecutions. We have an internal adverse event reporting system that has been in place for several years and believe that we are in compliance with this new law. Nevertheless, any action by the FDA in response to a serious adverse event report that may be filed by us could materially and adversely affect our ability to successfully market our products.

In markets outside the United States, prior to commencing operations or marketing our products, we may be required to obtain approvals, licenses, or certifications from a country’s ministry of health or a comparable agency. For example, our manufacturing facility has been registered with the FDA and



Health Canada and is certified by Australia’s TGA. Approvals or licensing may be conditioned on reformulation of products or may be unavailable with respect to certain products or product ingredients. China also extensively regulates the registration, labeling and marketing of our products. Consequently, the registration process for our products in China is complex and generally requires extensive analysis and approval by the CFDA. As a result, it may take several years to register a product in China. We must also comply with product labeling and packaging regulations that vary from country to country. These activities are also subject to regulation by various agencies of the countries in which our products are sold.

We cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can we determine what effect additional governmental regulations or administrative orders, when and if promulgated, could have on our business. These potential effects could include, however, requirements for the reformulation of certain products to meet new standards, the recall or discontinuance of certain products, additional record keeping and reporting requirements, expanded documentation of the properties of certain products, expanded or different labeling, or additional scientific substantiation. Any or all of these requirements could have a material adverse effect on our business, financial condition, or results of operations.

Our manufacturing activity is subject to certain risks. We manufacture approximately 67% of the products sold to our customers. As a result, we are dependent upon the uninterrupted and efficient operation of our manufacturing facilities. Those operations are subject to power failures, the breakdown, failure, or substandard performance of equipment, the improper installation or operation of equipment, natural or other disasters, and the need to comply with the requirements or directives of government agencies, including the FDA and CFDA. There can be no assurance that the occurrence of these or any other operational problems at our facilities would not have a material adverse effect on our business, financial condition, or results of operations. We are subject to a variety of environmental laws relating to the storage, discharge, handling, emission, generation, manufacture, use and disposal of chemicals, solid and hazardous waste, and other toxic and hazardous materials. Our manufacturing operations presently do not result in the generation of material amounts of hazardous or toxic substances. Nevertheless, complying with new or more stringent laws or regulations, or more vigorous enforcement of current or future policies of regulatory agencies, could require substantial expenditures by us that could have a material adverse effect on our business, financial condition, or results of operations. Environmental laws and regulations require us to maintain and comply with a number of permits, authorizations, and approvals and to maintain and update training programs and safety data regarding materials used in our processes. Violations of those requirements could result in financial penalties and other enforcement actions and could require us to halt one or more portions of our operations until a violation is cured. The combined costs of curing incidents of non-compliance, resolving enforcement actions that might be initiated by government authorities, or of satisfying new legal requirements could have a material adverse effect on our business, financial condition, or results of operations.

We may incur liability with respect to our products. As a manufacturer and a distributor of products for human consumption and topical application, we could become exposed to product liability claims and litigation. Additionally, the manufacture and sale of these products involves the risk of injury to consumers due to tampering by unauthorized third parties or product contamination. To date, we have not been a party to any product liability litigation, although, like any dietary supplement company, we have received reports from individuals who have asserted that they suffered adverse consequences as a result of using our products. The number of reports we have received to date is nominal. These matters historically have been settled to our satisfaction and have not resulted in material payments. We are aware of no instance in which any of our products are or have been defective in any way that could give rise to material losses or expenditures related to product liability claims. Although we maintain



product liability insurance, which we believe to be adequate for our needs, there can be no assurance that we will not be subject to such claims in the future or that our insurance coverage will be adequate.

Our Greater China region accounts for a significant part of our business and expected growth. Any decline in sales or customers in this region would harm our business, financial condition and results of operations. Our Greater China region consists of China, Hong Kong and Taiwan and is currently our largest and most rapidly growing region. Our international growth strategy has been centered on growing BabyCare’s business in China for the last several years. As a result of this strategy, China has been our fastest growing market and is now our largest individual market. If we are not successful in continuing to grow BabyCare’s sales and customer base in China, our consolidated growth as a company will be negatively affected and our business, financial condition and results of operations may be harmed. BabyCare must comply with significant operational, financial, and other regulatory requirements to engage in direct selling in China. Although we believe that, in light of our successful Asian Associate base, we will be successful in growing BabyCare’s business in China, it is difficult to assess the extent to which BabyCare’s Chinese business model and Associate compensation plan will be successful in that market or deemed to be compliant with applicable laws and regulations by the Chinese government. Although we are required to conduct our operations in China through BabyCare, we believe that our long-term success in China will depend on our ability to successfully integrate, to the extent possible, our operations with BabyCare’s operations. In light of the factors listed above, and the other risks to our business, there can be no assurance that we will be successful in growing sales and customers in China through BabyCare.

Our operations in China are subject to significant government regulation and scrutiny, 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 business in China is that of BabyCare, a direct selling company that we indirectly acquired several years ago to facilitate our expansion into China. BabyCare has been granted licenses from the Chinese government to conduct direct selling operations in twelve provinces in China and has applied for licenses in additional municipalities and provinces. BabyCare’s business model has been designed specifically for China based on a number of factors, including: (i) BabyCare’s communications with the Chinese government, (ii) BabyCare’s interpretation of the direct selling regulations, as well as their 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. Notwithstanding the foregoing, BabyCare has not received 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.

The direct selling laws and regulations in China 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. We cannot be certain that BabyCare’s business model or the activities of its employees or Associates will be deemed by Chinese regulatory authorities to be compliant with current or future laws and regulations.

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 the media. These inquiries or complaints may result in the Chinese government investigating the particular complaint or BabyCare’s business in general. There have been instances where inquiries or complaints about BabyCare’s business have resulted in warnings from the Chinese government and/or the payment of fines by BabyCare. Going forward, 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 its direct selling licenses, all of which could have an adverse effect on our business and operations. As such, 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 lead to fines or penalties against BabyCare, USANA or our Associates in China.

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 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 is required to obtain various licenses and approvals from municipalities and provinces within China to operate its direct selling business model. Currently, BabyCare holds twelve such licenses, the eight most recent of which are subject to BabyCare's satisfaction of certain conditions and reporting requirements. BabyCare will be required to obtain licenses from municipalities and provinces within China where it does not hold a license. If BabyCare is unable to obtain additional direct selling licenses as quickly as we would like, it would have a negative impact our ability to expand and grow our business. The process for obtaining the necessary government approvals to conduct direct selling continues to evolve, is time-consuming and expensive. The complexity of the approval process, as well as the government's continued cautious approach for direct selling in China, makes it difficult to predict the timeline for obtaining additional approvals. The Chinese government regularly investigates direct selling companies and may decide to increase its scrutiny of the industry or modify the applicable regulations and process. If the current processes for obtaining approvals are delayed for any reason or are changed or are interpreted differently than currently understood, 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.

If BabyCare’s operations in China are successful, we may experience rapid growth in China, and there can be no assurances that we will be able to successfully manage rapid expansion of BabyCare’s direct selling activities under license in China or the related manufacturing and retail operations required to support this expansion. If we are unable to effectively manage BabyCare’s growth and expansion, including expansion of branches, warehouses, and manufacturing operations, BabyCare’s government relations may be compromised and our operations in China may be harmed.

Risks associated with operating in international markets could restrict our ability to expand globally and harm our business and prospects, and we could be adversely affected by our failure to comply with the laws applicable to our foreign activities, including the U.S. Foreign Corrupt Practices Act and other similar worldwide anti-bribery laws. Our international operations are presently conducted in various foreign countries, and we expect that the number of countries in which we operate could expand over the next few years. Economic conditions, including those resulting from wars, civil unrest, acts of terrorism and other conflicts or volatility in the global markets, may adversely affect our customers, their demand for our products and their ability to pay for our products. In addition, there are numerous risks inherent in conducting our business internationally, including, but not limited to, potential instability in international markets, changes in regulatory requirements applicable to international operations, currency fluctuations in foreign countries, political, economic and social conditions in foreign countries and complex U.S. and foreign laws and treaties, including tax laws, the U.S. Foreign Corrupt Practices Act (FCPA), and the Bribery Act of 2010 (U.K. Anti-Bribery Act). These risks could restrict our ability to sell products, obtain international customers, or to operate our international business profitably, which would have a negative impact on our overall business and results of operations.



The FCPA prohibits U.S.-based companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business. We are also subject to the U.K. Anti-Bribery Act, which prohibits both domestic and international bribery as well as bribery across both public and private sectors. We pursue opportunities in certain parts of the world that experience government corruption and, in certain circumstances, compliance with anti-bribery laws may conflict with local customs and practices. Our policies mandate compliance with all applicable anti-bribery laws. Further, we require our partners, subcontractors, agents and others who work for us or on our behalf to comply with the FCPA and other anti-bribery laws. Although we have policies and procedures and a compliance program designed to ensure that we, our employees, associates, distributors, agents and others who work with us in foreign countries comply with the FCPA and other anti-bribery laws, there is no assurance that such policies or procedures will protect us against liability under the FCPA or other laws for actions taken by our agents, employees and intermediaries. If we are found to be liable for violations of these acts (either due to our own acts or our inadvertence or due to the acts or inadvertence of others), we could incur severe criminal or civil penalties or other sanctions, which could have a material adverse effect on our reputation, business, results of operations or cash flows. In addition, detecting, investigating and resolving actual or alleged violations of these acts is expensive and could consume significant time and attention of our senior management. For a discussion of the risks associated with the internal investigation, see – An internal investigation of our China operations is being conducted.

We believe that our ability to achieve future growth is dependent in part on our ability to continue our international expansion efforts. There can be no assurance, however, that we will be able to grow in our existing international markets, enter new international markets on a timely basis, or that new markets will be profitable. We must overcome significant regulatory and legal barriers before we can begin marketing in any international market. Also, before marketing commences in a new country or market, it is difficult to assess the extent to which our products and sales techniques will be accepted or successful in any given country. In addition to significant regulatory barriers, we may also encounter problems conducting operations in new markets with different cultures and legal systems from those encountered elsewhere. We may be required to reformulate certain of our products before commencing sales in a given country. Once we have entered a market, we must adhere to the regulatory and legal requirements of that market. No assurance can be given that we will be able to successfully reformulate our products in any of our current or potential international markets to meet local regulatory requirements or to attract local customers. Our failure to do so could have a material adverse effect on our business, financial condition, or results of operations. There can be no assurance that we will be able to obtain and retain necessary permits and approvals in new markets or that we will have sufficient capital to finance our expansion efforts in a timely manner.

In many market areas, other network marketing companies already have significant market penetration, the effect of which could be to desensitize the local Associate population to a new opportunity, such as USANA, or to make it more difficult for us to attract qualified Associates. Even if we are able to commence operations in new markets, there may not be a sufficient population of persons who are interested in our network marketing system. We believe our future success will depend in part on our ability to seamlessly integrate our Compensation Plan across all markets where legally permissible. There can be no assurance, however, that we will be able to utilize our Compensation Plan seamlessly in all existing or future markets. For example, in August 2010, we indirectly acquired BabyCare, a nutritional supplement company that is now licensed by the government of China to engage in direct selling in twelve municipalities/provinces the eight most recent of which are subject to BabyCare’s satisfaction of certain conditions and reporting requirements. In accordance with Chinese law, we utilize a compensation plan that has been designed specifically for China and implemented by BabyCare separately from our Compensation Plan in our other markets.

An internal investigation of our China operations is being conducted. We are voluntarily conducting an internal investigation of our China operations, BabyCare Ltd. The investigation focuses on



compliance with the FCPA and certain conduct and policies at BabyCare, including BabyCare’s expense reimbursement policies. The Audit Committee of the Board of Directors has assumed direct responsibility for reviewing these matters and has hired experienced counsel to conduct the investigation. While we do not believe that the subject amounts are quantitatively material or will materially affect our financial statements, we cannot currently predict the outcome of the investigation on our business, results of operations or financial condition. We have voluntarily contacted the Securities and Exchange Commission (SEC) and the United States Department of Justice (DOJ) to advise both agencies that an internal investigation is underway and we intend to provide additional information to both agencies as the investigation progresses. Because the internal investigation is in its early stage, we cannot predict the duration, scope, or result of the investigation.

We could be exposed to a variety of negative consequences as a result of these matters. 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. Several civil lawsuits have been initiated as a result of these matters and we cannot predict whether they may result in judgments against us and potentially any responsible current and former directors and officers. We expect to continue to incur costs in conducting our 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 us or any of our current or former officers or directors.

Fluctuation in the value of currency exchange rates with the U.S. dollar affects our operations and our net sales and earnings. Over the past several years, a majority of our net sales have been generated outside the United States. Such sales for the year ended December 31, 2016 represented 87.0% of our total net sales. We will likely continue to expand our operations into new markets, exposing us to expanding risks of changes in social, political, and economic conditions, including changes in the laws and policies that govern investment or exchange in these markets. Because a significant portion of our sales are generated outside the United States, exchange rate fluctuations will have a significant effect on our sales and earnings. Further, if exchange rates fluctuate dramatically, it may become uneconomical for us to establish or to continue activities in certain countries. For instance, changes in currency exchange rates may affect the relative prices at which we and our competitors sell similar products in the same market. As our business expands outside the United States, an increasing share of our net sales and operating costs will be transacted in currencies other than the U.S. dollar. Accounting practices require that our non-U.S. financial results be converted to U.S. dollars for reporting purposes. Consequently, our reported net earnings may be significantly affected by fluctuations in currency exchange rates, with earnings generally increasing with a weaker U.S. dollar and decreasing with a strengthening U.S. dollar. Product purchases by our subsidiaries are transacted in U.S. dollars. As our operations expand in countries where transactions may be made in currencies other than the U.S. dollar, our operating results will be increasingly subject to the risks of exchange rate fluctuations and we may not be able to accurately estimate the impact that these changes might have on our future business, product pricing, results of operations, or financial condition. In addition, the value of the U.S. dollar in relation to other currencies may also adversely affect our sales to customers outside the United States. Currently our strategy for reducing our exposure to currency fluctuation includes the timely and efficient repatriation of earnings from international markets where such earnings are not considered to be indefinitely reinvested, and settlement of intercompany transactions. We also from time to time enter into currency exchange contracts to offset foreign currency exposure in various international markets. We do not use derivative instruments for speculative purposes. There can be no assurance that we will be successful in protecting our operating results or cash flows from potentially adverse effects of currency exchange fluctuations. Any such adverse effects could also adversely affect our business, financial condition, or results of operations.



Difficult economic conditions may adversely affect our business. Over the past few years, economic conditions in many of the markets where we sell our products have resulted in challenges to our business. This is particularly true in our Americas and Europe region, where, although we have seen a recent improvement, we continue to experience difficulty generating meaningful growth. We cannot predict whether world or market-specific economies will improve or deteriorate in the future. If difficult economic conditions continue or worsen, we could experience declines in net sales, profitability and cash flow due to lower demand for our products or other factors caused by economic challenges faced by our customers, potential customers or suppliers. Additionally, these conditions may result in a material adverse effect on our liquidity and capital resources or otherwise negatively impact our operations or overall financial condition.

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 network marketing, 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 network marketing companies.

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. More recently, in November 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.

Additionally, there has been significant media and short-seller attention regarding the viability and legality of network marketing in the United States and internationally over the past few years. This attention has led to intense public scrutiny of the industry, as 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.

Our Associate Compensation Plan, or changes we make to it, may be viewed negatively by some Associates, could fail to achieve our desired objectives, and could have a negative impact on our business. Our line of business is highly competitive and sensitive to the introduction of new competitors, new products and/or new distributor compensation plans. Network marketing companies commonly attempt to attract new distributors by offering generous distributor compensation plans. From time to time, we modify components of our Compensation Plan in an effort to (i) keep it competitive and attractive to existing and potential Associates, (ii) cause or address a change in Associate behavior, (iii) incent Associates to grow our business, (iv) conform to legal and regulatory requirements, and (v) address other business needs. In light of the size and diversity of our Associate force and the complexity of our Compensation Plan, it is difficult to predict how any changes to the plan will be viewed by Associates and whether such changes will achieve their desired results. In 2013, we made several changes to our product pricing structure and Associate Compensation Plan to improve our business, including to increase Associate loyalty and satisfaction and to attract new Associates. There can be no assurance that the foregoing changes, or any future changes, to our Associate Compensation Plan will allow us to successfully attract new Associates or retain existing Associates, nor can we assure that any changes we make to our Compensation Plan will achieve our desired results.



Additionally, the payment of Associate incentives under our Compensation Plan is our most significant expense. These incentives include commissions, bonuses, and certain awards and prizes. Adjusting or enhancing our Compensation Plan directly affects the incentives we pay as a percentage of net sales. We may periodically adjust our Compensation Plan to prevent Associate incentives from having a significant adverse effect on our earnings. There can be no assurance that changes to the Compensation Plan or product pricing will be successful in achieving target levels of Associate incentives as a percentage of net sales. Furthermore, such changes may make it difficult to attract and retain qualified and motivated Associates or cause us to lose some of our longer-standing Associates.

Legal action by former Associates or third parties against us could harm our business. We continually monitor and review our Associates' compliance with our policies and procedures as well as the laws and regulations applicable to our business. From time to time, some Associates fail to adhere to our policies and procedures. If this happens, we may take disciplinary action against the particular Associate. This disciplinary action is based on the facts and circumstances of the particular case and may include anything from warnings for minor violations to termination of an Associate's purchase and distribution rights for more serious violations. From time to time, we become involved in litigation with an Associate whose purchase and distribution rights have been terminated. We consider this type of litigation to be routine and incidental to our business. While neither the existence nor the outcome of this type of litigation is typically material to our business, in the past we have been involved in litigation of this nature that resulted in a large cash award against the Company. Our competitors have also been involved in this type of litigation, and in some cases class actions, where the result has been a large cash award against the competitor or a large cash settlement by the competitor. These types of challenges, awards or settlements could provide incentives for similar actions by other former Associates against us in the future. Any such challenge involving us or others in our industry could harm our business by resulting in fines or damages against us, creating adverse publicity about us or our industry, or hurting our ability to attract and retain customers. We believe that Associate compliance is critical to the integrity of our business, and, therefore, we will continue to be aggressive in ensuring that our Associates comply with our policies and procedures. As such, there can be no assurance that this type of litigation will not occur again in the future or result in an award or settlement that has a materially adverse effect on our business.

The inability to obtain adequate supplies of raw materials for products at favorable prices, or at all, or the inability to obtain certain products from third-party suppliers, could have a material adverse effect on our business, financial condition, or results of operations. We acquire all of our raw materials for the manufacture of our products from third-party suppliers. Materials used in manufacturing our products are purchased through purchase order, often invoking pre-negotiated annual supply agreements. We have very few long-term agreements for the supply of these materials. We also contract with third-party manufacturers and suppliers for the production of some of our products, including most of our gelatin-capsuled supplements, Probiotic, Rev3 Energy \( ^{™} \)  Drink, our powdered drink mixes and nutrition bars, and certain of our personal care products. These third-party suppliers and manufacturers produce and, in most cases, package these products according to formulations that have been developed by, or in conjunction with, our in-house product development team. There is a risk that any of our suppliers or manufacturers could discontinue manufacturing our products or selling their products to us. Although we believe that we could establish alternate sources for most of our products, any delay in locating and establishing relationships with other sources could result in product shortages or back orders for products, with a resulting loss of net sales. In certain situations, we may be required to alter our products or to substitute different products from another source. We have, in the past, discontinued or temporarily stopped sales of certain products that were manufactured by third parties while those products were on back order. There can be no assurance that suppliers will provide the raw materials or manufactured products that are needed by us in the quantities that we request or at the prices that we are willing to pay. Because we do not control the actual production of certain raw materials and products, we are also subject to delays caused by any interruption in the production of these materials,



based on conditions not within our control, including weather, crop conditions, transportation interruptions, strikes by supplier employees, and natural disasters or other catastrophic events.

Shortages of raw materials may temporarily adversely affect our margins or our profitability related to the sale of those products. In the past, we have experienced temporary shortages of the raw materials used in certain of our nutritional products. Although we had identified multiple sources to supply such raw material ingredients, quantities of the materials we purchased during these shortages were at higher prices, which had a negative impact on our gross margins for those products. While we periodically experience price increases due to unexpected raw material shortages and other unanticipated events, we have been able to manage this by increasing the price at which we sell our products, therefore, this has historically not resulted in a material effect on our overall cost of goods sold. However, there is no assurance that our raw materials will not be significantly adversely affected in the future, causing our profitability to be reduced.

Disruptions to shipping channels that we use to distribute our products to international warehouses may adversely affect our margins and profitability in those markets. In the past, we have felt the impact of disruptions to the shipping channels used to distribute our products. These disruptions have included increased port congestion, a lack of capacity on the railroads, and a shortage of manpower. Most recently, we experienced the impact of the West Coast port congestion that started late in 2014 due to worker strikes. In response to this congestion, we increased lead-times for shipments to our international markets, which caused an increase in our inventory levels. We also pursued alternative routes of transportation, which increased our shipping costs. Although the west coast ports are now fully functioning, we cannot assure you that we will not experience port congestion in the future. Congestion to ports can affect previously negotiated contracts with shipping companies, resulting in unexpected increases in shipping costs and reduction in our net sales.

Nutritional supplement products may be supported by only limited availability of conclusive clinical studies. Our products include nutritional supplements that are made from vitamins, minerals, herbs, and other substances for which there is a long history of human consumption. Some of our products contain innovative ingredients or combinations of ingredients. Although we believe that all of our products are safe when taken as directed, there is little long-term experience with human consumption of certain of these product ingredients or combinations of ingredients in concentrated form. We conduct research and test the formulation and production of our products, but we have performed or sponsored only limited clinical studies. Furthermore, because we are highly dependent on consumers' perception of the efficacy, safety, and quality of our products, as well as similar products distributed by other companies, we could be adversely affected in the event that those products prove or are asserted to be ineffective or harmful to consumers or in the event of adverse publicity associated with any illness or other adverse effects resulting from consumers' use or misuse of our products or similar products of our competitors.

Our business is subject to the risks associated with intense competition from larger, wealthier, and more established competitors. We face intense competition in the business of distributing and marketing nutritional supplements, vitamins and minerals, personal care products, and other nutritional products, as described in greater detail in “Business—Competition.” Numerous manufacturers, distributors, and retailers compete actively for consumers and, in the case of other network marketing companies, for Associates. There can be no assurance that we will be able to compete in this intensely competitive environment. In addition, nutrition and personal care products can be purchased in a wide variety of channels of distribution, including retail stores. Also, entry is not particularly capital intensive or otherwise subject to high barriers to entry; as a result, new competitors can enter fairly easily and compete with us for customers and our Associates. Our product offerings in each product category are also relatively small, compared to the wide variety of products offered by many of our competitors.



We are also subject to significant competition from other network marketing organizations for the time, attention, and commitment of new and existing Associates. Our ability to remain competitive depends, in significant part, on our success in recruiting and retaining Associates. There can be no assurance that our programs for recruiting and retaining Associates will be successful. The pool of individuals who may be interested in network marketing is limited in each market, and it is reduced to the extent other network marketing companies successfully recruit these individuals into their businesses. Although we believe we offer an attractive opportunity for Associates, there can be no assurance that other network marketing companies will not be able to recruit our existing Associates or deplete the pool of potential Associates in a given market. This risk is compounded by the relative ease with which our Associates can exit our network marketing program.

Taxation and transfer pricing considerations affect our operations. In many countries, including the United States, we are subject to transfer pricing and other tax regulations that are designed to ensure that appropriate levels of income are reported by our U.S. and foreign entities and are taxed appropriately. Although we believe that we are in compliance with all material regulations and restrictions in this regard, we are subject to the risk that taxing authorities could audit our transfer pricing and related practices and assert that additional taxes are owed. We are also subject to the risk that taxing authorities in any of our markets could change the laws in a manner that may increase our effective tax rate and/or duties on our products. Under tax treaties, we are eligible to receive foreign tax credits in the United States for foreign taxes paid abroad. In the event any audits or assessments are concluded adversely to us, we may or may not be able to offset the consolidated effect of foreign income tax assessments through the use of U.S. foreign tax credits. Currently, we are utilizing all foreign tax credits in the year in which they arise. Because the laws and regulations governing U.S. foreign tax credits are complex and subject to periodic legislative amendment, we cannot be sure that we would in fact be able to take advantage of any foreign tax credits in the future. As a result, adverse outcomes in these matters could have a material impact on our financial condition or operating results.

Our business is subject to particular intellectual property risks. Most of our products are not protected by patents. The labeling regulations governing our nutritional supplements require that the ingredients of such products be precisely and accurately indicated on product containers. Accordingly, patent protection for nutritional supplements often is impractical given the large number of manufacturers who produce nutritional supplements having many active ingredients in common. Additionally, the nutritional supplement industry is characterized by rapid change and frequent reformulations of products, as the body of scientific research and literature refines current understanding of the application and efficacy of certain substances and the interactions among various substances. In this respect, we maintain an active research and development program that is devoted to developing better, purer, and more effective formulations of our products. We protect our investment in research, as well as the techniques we use to improve the purity and effectiveness of our products, by relying on trade secret laws. We have also entered into confidentiality agreements with certain of our employees involved in research and development activities. Additionally, we endeavor to seek, to the fullest extent permitted by applicable law, trademark and trade dress protection for our products, which protection has been sought in the United States, Canada, and in many of the other countries in which we are either presently operating or plan to commence operations in the future. Notwithstanding our efforts, there can be no assurance that our efforts to protect our trade secrets and trademarks will be successful. Nor can there be any assurance that third-parties will not assert claims against us for infringement of their intellectual proprietary rights. If an infringement claim is asserted, we may be required to obtain a license of such rights, pay royalties on a retrospective or prospective basis, or terminate our manufacturing and marketing of our infringing products. Litigation with respect to such matters could result in substantial costs and diversion of management and other resources and could have a material adverse effect on our business, financial condition, or operating results.



A failure of our information technology systems would harm our business. The global nature of our business and our seamless global compensation plan requires the development and implementation of robust and efficiently functioning information technology systems. Such systems are vulnerable to a variety of potential risks, including damage or interruption resulting from natural disasters and telecommunication failures and human error or intentional acts of sabotage, vandalism, break-ins and similar acts. Although we have adopted and implemented a business continuity and disaster recovery plan, which includes routine back-up, off-site archiving and storage, and certain redundancies, the occurrence of any of these events could result in costly interruptions or failures adversely affecting our business and the results of our operations.

Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer. In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our customers and employees, in our data centers and on our networks. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties, disrupt our operations, and damage our reputation, which could adversely affect our business, revenues and competitive position.

We may incur liability under our “Athlete Guarantee” program, if and to the extent participating athletes make a successful claim against USANA for testing positive for certain banned substances while taking USANA nutritional supplements. USANA believes that its nutritional supplement products are free from substances that have been banned by world-class training and competitive athletic programs. We retain independent testing agencies to conduct periodic checks for banned substances. We further believe that, while our products promote good health, they are not otherwise considered to be “performance enhancing” as that term has been used in defining substances that are banned from use in international competition by the World Anti-Doping Agency (“WADA”). For many years, USANA has been a sponsor of Olympic athletes and professional competitors around the world. These athletes have been tested on many occasions and have never tested positive for banned substances as a result of taking USANA nutritional products. To back up our claim that athletes who use USANA products as part of their training regimen will not be consuming banned substances, we have offered to enter into agreements with select athletes, some of whom have high-profiles and are highly compensated, which state that, during the term of the agreement, should the athlete test positive for a banned substance included in the WADA, and should such positive result be the result of taking USANA nutritional products, we will compensate that athlete at an amount equal to two times their current annual earnings up to $1.0 million dollars, based on the athlete’s personal level of competition, endorsement, and other income, as well as other factors. To mitigate potential exposure under these agreements, we:

• Designate lots identified as dedicated to the Athlete Guarantee program and retain additional samples;

• Store designated lot samples externally with a third-party; and

• Establish a chain of custody that requires signatures on behalf of USANA and the third-party to transfer possession of the product lots and that restricts access by USANA employees after the transfer.

All applicants to this Athlete Guarantee program are subject to screening and acceptance by the Company in its sole discretion. Contracts are tailored to fit the athlete’s individual circumstances and



the amount of our exposure is limited based on the level of sponsorship of the participating athlete. Although we believe that the pool of current and potential participants in the program is small, there is no guarantee that an athlete who is accepted in the program will not successfully make a claim against us. We currently have no insurance to protect us from potential claims under this program.

The loss of key management personnel could adversely affect our business. Our executive officers are primarily responsible for our day-to-day operations, and we believe our success depends in part on our ability to retain our executive officers, to compensate our executive officers at attractive levels, and to continue to attract additional qualified individuals to our management team. In November 2016, we transitioned from a co-chief executive officer leadership structure so that we now operate with a chief executive officer. We depend upon the services of our Chief Executive Officer, Kevin Guest, our President and Chief Operating Officer, Jim Brown and our Chief Financial Officer, Paul Jones, as well as other key members of our executive team. We cannot guarantee continued service by our key executive officers. We do not maintain key man life insurance on any of our executive officers, nor do we have an employment agreement with any of our executive officers. The loss or limitation of the services of any of our executive officers or the inability to attract additional qualified management personnel could have a material adverse effect on our business, financial condition, or results of operations.

Failure to maintain effective internal controls in accordance with the Sarbanes-Oxley Act of 2002 could negatively impact our business. We are required by federal securities laws to document and test our internal control procedures in order to satisfy the requirements of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of internal control over financial reporting. Effective internal controls are necessary for us to provide reliable financial reports and to effectively prevent fraud. The SEC, as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring public companies to include a report by management on the effectiveness of our internal control over financial reporting in the companies' Annual Reports on Form 10-K. In addition, our independent registered public accounting firm must report on the effectiveness of the internal control over financial reporting. Although we review internal control over financial reporting in order to ensure compliance with the Section 404 requirements, if we fail to maintain effective internal control over financial reporting, we could be required to take costly and time-consuming corrective measures, to remedy any number of deficiencies, significant deficiencies or material weaknesses, be required to restate the affected historical financial statements, be subjected to investigations and/or sanctions by federal and state securities regulators, and be subjected to civil lawsuits by security holders. Any of the foregoing could also cause investors to lose confidence in our reported financial information and in our company and would likely result in a decline in the market price of our stock and in our ability to raise additional financing if needed in the future.

We identified a material weakness in our internal control over financial reporting and our business and stock price may be adversely affected if we do not adequately address this material weakness or if we have other material weaknesses or significant deficiencies in our internal control over financial reporting. As described in our Management’s Annual Report on Internal Control Over Financial Reporting at Item 9A of this Annual Report on Form 10-K, we identified a material weakness in our internal control over financial reporting as of our fiscal year ended December 31, 2016. The existence of this or one or more material weaknesses or significant deficiencies could result in errors in our financial statements, and substantial costs and resources may be required to rectify any internal control deficiencies. If we do not complete the evaluation, remediation and testing of our internal controls on a timely basis in the future, we will be unable to conclude that our internal controls are effective and our independent registered public accounting firm will be unable to express an unqualified opinion on the effectiveness of our internal controls. If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, the market price of our stock could decline and we could be



subject to sanctions or investigations by the SEC, NYSE or other regulatory authorities, and our business and financial condition could be materially adversely affected.

The beneficial ownership of a significant percentage of our common stock gives our founder and parties related to or affiliated with him effective control, and limits the influence of other shareholders on important policy and management issues. Gull Global, Ltd., an entity that is solely owned and controlled by our founder Dr. Wentz, owned 51.45% of our outstanding common stock at December 31, 2016. By virtue of this stock ownership, Dr. Wentz is able to exert significant influence over the election of the members of our Board of Directors and our business affairs. This concentration of ownership could also have the effect of delaying, deterring, or preventing a change in control that might otherwise be beneficial to shareholders. In addition, Dr. Wentz currently serves as Chairman of our Board of Directors. There can be no assurance that conflicts of interest will not arise with respect to these relationships or that conflicts will be resolved in a manner favorable to other shareholders of the Company.

Sales by our shareholders of a substantial number of shares of our common stock in the public market could adversely affect the market price of our common stock. A large number of outstanding shares of our common stock are held by several of our principal shareholders. If any of these principal shareholders were to decide to sell large amounts of stock over a short period of time such sales could cause the market price of our common stock to decline.

Our stock price has been volatile and subject to various market conditions. There can be no assurance that an active market in our stock will be sustained. The trading price of our common stock has been subject to wide fluctuations. We have a relatively small public float compared to the number of our shares outstanding. Accordingly, we cannot predict the extent to which investors' interest in our common stock will provide an active and liquid trading market. Due to our limited public float, we are vulnerable to investors taking a "short position" in our common stock, which is likely to have a depressing effect on the price of our common stock and add increased volatility to our trading market. The price of our common stock also may fluctuate in the future in response to quarter-to-quarter variations in operating results, material announcements by us or our competitors, governmental regulatory action, conditions in the nutritional supplement industry, negative publicity, or other events or factors, many of which are beyond our control. In addition, the stock market has historically experienced significant price and volume fluctuations, which have particularly affected the market prices of many dietary and nutritional supplement companies and which have, in certain cases, not had a strong correlation to the operating performance of these companies. Our operating results in future quarters may be below the expectations of securities analysts and investors. If that were to occur, the price of our common stock, and accordingly, the value of a shareholder's investment in our company, would likely decline, perhaps substantially.

## Item 1B. Unresolved Staff Comments

None.

## Item 2. Properties

## Corporate Headquarters

Our world-wide corporate headquarters is a 354,000 square foot company-owned facility located in Salt Lake City, Utah. This facility includes space for manufacturing and quality control, distribution, administrative functions, and research and development.



## China Manufacturing

We own a 350,000 square foot state-of-the-art facility in Beijing, China similar in potential capacity and nature to our corporate headquarters. Additionally, we own a 31,000 square foot manufacturing facility in Tianjin, China, which is currently used to manufacture our Sense products that are sold in China.

## Other Office and Distribution Warehouse Facilities

We own a 45,000 square foot office/warehouse building in Sydney, Australia. In each of the remainder of our markets, we lease regional offices and distribution warehouses. Additionally, we lease retail centers for our operations in China and a packaging facility in Singapore, which fulfills orders for our MyHealthPak \( ^{™} \)  in our Asia Pacific markets.

We believe that the facilities referenced above are in good condition and are adequately utilized. Further, we believe that our current and planned manufacturing facilities provide for the productive capacity to meet our foreseeable needs.

## Item 3. 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 legal proceedings may be found in Note I to the Consolidated Financial Statements included in Item 15 Part IV of this Annual Report on Form 10-K, which is incorporated herein by reference.

On February 7, 2017, we disclosed on Form 8-K that we are conducting a voluntary internal investigation regarding our BabyCare operations in China. In connection with this investigation, we expect to continue to incur costs in conducting our 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 us or any of our current or former officers or directors. We have voluntarily contacted the SEC and the DOJ to advise both agencies that an internal investigation is underway and we intend to provide additional information to both agencies as the investigation progresses. Because the internal investigation is in its early stage, we cannot predict the duration, scope, or result of the investigation. On February 13, 2017, a putative shareholder class action complaint was filed in the United States District Court for the District of Utah, with the plaintiff, April Rumbaugh, alleging that the Company failed to disclose that (i) the Company’s BabyCare subsidiary had engaged in improper reimbursement practices in China, (ii) these practices constituted violations of the FCPA, (iii) as such, the Company’s China revenues were in part the product of unlawful conduct and unlikely to be sustainable, and (iv) the foregoing conduct, when it became known, was likely to subject the Company to significant regulatory scrutiny. The lawsuit names as defendants the Company; our former Co-Chief Executive Officer, David A. Wentz; and our Chief Financial Officer, Paul A. Jones. On behalf of herself and a putative class of purchasers of USANA stock between March 14, 2014 and February 7, 2017, the plaintiff asserts claims for violation of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. The plaintiff seeks, among other things, an award of damages, interest, reasonable attorneys’ fees, expert fees, and other costs. We believe that the action is without merit, and intend to vigorously defend against all claims asserted.

## Item 4. Mine Safety Disclosures

None.



## PART II

## Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Common stock data has been adjusted to reflect the two-for-one split of common stock in the form of a stock dividend, which was distributed on November 22, 2016.

## Market Information

Our common stock trades on the New York Stock Exchange (“NYSE”) under the symbol “USNA.” The following table contains the reported high and low sales prices for our common stock as reported on the NYSE for the periods indicated:

<table><tr><td>2015</td><td>High</td><td>Low</td></tr><tr><td>First Quarter</td><td>$57.50</td><td>$48.02</td></tr><tr><td>Second Quarter</td><td>$72.53</td><td>$56.42</td></tr><tr><td>Third Quarter</td><td>$88.44</td><td>$61.27</td></tr><tr><td>Fourth Quarter</td><td>$70.29</td><td>$51.68</td></tr><tr><td>2016</td><td>High</td><td>Low</td></tr><tr><td>First Quarter</td><td>$68.16</td><td>$46.00</td></tr><tr><td>Second Quarter</td><td>$64.88</td><td>$54.03</td></tr><tr><td>Third Quarter</td><td>$71.48</td><td>$54.26</td></tr><tr><td>Fourth Quarter</td><td>$75.00</td><td>$58.80</td></tr></table>

The market price of our common shares is subject to fluctuations in response to variations in our quarterly operating results, general trends in the market for our products and product candidates, economic and currency exchange issues in the markets where we operate, as well as other factors, many of which are not within our control. In addition, broad market fluctuations, as well as general economic, business and political conditions may adversely affect the market for our common shares, regardless of our actual or projected performance.

On February 24, 2017, the high and low sales prices of our common stock as reported by NYSE were $59.15 and $58.50, respectively.

## Shareholders

As of February 24, 2017, we had approximately 288 holders of record of our common stock.

## Dividends

We have never declared or paid cash dividends on our common stock. Future cash dividends, if any, will be determined by our Board of Directors and will be based on earnings, available capital, our financial condition, and other factors that the Board of Directors deems to be relevant.

## Share Repurchases

There were no share repurchases made during the quarter ended December 31, 2016. At December 31, 2016, the remaining approved repurchase amount under the plan was $35.4 million. There currently is no expiration date on the remaining approved repurchase amount and no requirement for future share repurchases.



## Stock Performance Graph

The following graph and table compares the performance of our common stock to the S&P 500 Index and to a market-weighted index of four companies selected in good faith from our industry (the “Peer Group”) over the last five years. The data shown assumes an investment on December 31, 2011, of $100 and reinvestment of all dividends into additional shares of the same class of equity, if applicable to the stock or index.

Each of the companies included in the Peer Group markets or manufactures products similar to USANA's products or markets its products through a similar marketing channel. The Peer Group includes the following companies: Avon Products, Inc., NuSkin Enterprises, Inc., Herbalife Ltd., and Nature's Sunshine.

Cumulative Shareholder Return
Dec. 2011 - Dec. 2016



<table><tr><td></td><td>USNA</td><td>S&amp;P 500</td><td>Peer Group</td></tr><tr><td>Dec 11</td><td>$100</td><td>$100</td><td>$100</td></tr><tr><td>Dec 12</td><td>$108</td><td>$113</td><td>$ 97</td></tr><tr><td>Dec 13</td><td>$249</td><td>$147</td><td>$184</td></tr><tr><td>Dec 14</td><td>$338</td><td>$164</td><td>$170</td></tr><tr><td>Dec 15</td><td>$421</td><td>$163</td><td>$142</td></tr><tr><td>Dec 16</td><td>$403</td><td>$178</td><td>$107</td></tr></table>



## Item 6. Selected Financial Data

The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related notes thereto that are included in this report.

<table><tr><td rowspan="3"></td><td colspan="6">Fiscal Year(1)</td></tr><tr><td>2012</td><td>2013</td><td>2014</td><td>2015</td><td>2016</td><td></td></tr><tr><td colspan="6">(in thousands, except per share data)</td></tr><tr><td>Consolidated Statements of Earnings Data:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Net sales</td><td>$648,726</td><td>$718,175</td><td>$790,471</td><td>$918,499</td><td>$1,006,083</td><td></td></tr><tr><td>Income taxes</td><td>31,993</td><td>37,557</td><td>39,017</td><td>47,917</td><td>38,511</td><td></td></tr><tr><td>Net earnings</td><td>$66,433</td><td>$79,024</td><td>$76,636</td><td>$94,672</td><td>$100,041</td><td></td></tr><tr><td>Earnings per common share:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>$2.28</td><td>$2.89</td><td>$2.90</td><td>$3.72</td><td>$4.14</td><td></td></tr><tr><td>Diluted</td><td>$2.23</td><td>$2.78</td><td>$2.80</td><td>$3.59</td><td>$3.99</td><td></td></tr><tr><td>Weighted-average common shares outstanding:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>29,094</td><td>27,391</td><td>26,443</td><td>25,460</td><td>24,185</td><td></td></tr><tr><td>Diluted</td><td>29,847</td><td>28,408</td><td>27,377</td><td>26,355</td><td>25,047</td><td></td></tr><tr><td>Percentage of Net Sales Data:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Gross profit</td><td>82.1%</td><td>82.3%</td><td>82.2%</td><td>82.6%</td><td>82.1%</td><td></td></tr><tr><td>Associate incentives</td><td>43.2%</td><td>42.9%</td><td>44.2%</td><td>44.4%</td><td>45.0%</td><td></td></tr><tr><td>Selling, general and administrative</td><td>23.8%</td><td>23.1%</td><td>23.3%</td><td>22.8%</td><td>23.3%</td><td></td></tr><tr><td>Effective tax rate</td><td>32.5%</td><td>32.2%</td><td>33.7%</td><td>33.6%</td><td>27.8%</td><td></td></tr><tr><td>Dividends per share</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td></td></tr><tr><td>Consolidated Balance Sheet Data:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Cash and cash equivalents</td><td>$70,839</td><td>$137,343</td><td>$111,126</td><td>$143,210</td><td>$175,774</td><td></td></tr><tr><td>Working capital</td><td>61,701</td><td>133,174</td><td>82,222</td><td>112,852</td><td>139,370</td><td></td></tr><tr><td>Total assets</td><td>267,355</td><td>368,470</td><td>350,584</td><td>423,237</td><td>470,642</td><td></td></tr><tr><td>Other long-term liabilities</td><td>938</td><td>1,211</td><td>1,114</td><td>1,151</td><td>1,365</td><td></td></tr><tr><td>Stockholders&#x27; equity</td><td>185,572</td><td>260,522</td><td>230,164</td><td>280,852</td><td>325,287</td><td></td></tr><tr><td>Other Data:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Total Active Customers</td><td>311,000</td><td>343,000</td><td>430,000</td><td>510,000</td><td>564,000</td><td></td></tr></table>

(1) The Company operates on a 52-53 week year, ending on the Saturday that is closest to December 31. All years presented were 52-week years with the exception of 2014, which was a 53-week year.



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

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

• Overview

• Customers

• Presentation

• Results of Operations

• Quarterly Financial Information

• Liquidity and Capital Resources

• Contractual Obligations and Commercial Contingencies

• Inflation

• Critical Accounting Estimates

This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and notes thereto appearing elsewhere in this report.

## Overview

We develop and manufacture high-quality, science-based nutritional and personal care products that are distributed internationally through a network marketing system, which is a form of direct selling. We have chosen this distribution method as we believe it is more conducive to meeting our vision as a company, which is improving the overall health and nutrition of individuals and families around the world. Our customer base includes two types of customers: “Associates” and “Preferred Customers.” Associates share in our company vision by acting as independent distributors of our products in addition to purchasing our products for their personal use. Preferred Customers purchase our products strictly for their personal use and are not permitted to resell or to distribute the products. As of December 31, 2016, we had approximately 471,000 active Associates and approximately 93,000 active Preferred Customers worldwide.

## Customers

Because we sell our products exclusively to a customer base of independent Associates and Preferred Customers, in order to increase net sales, we must either increase the number of, or the productivity of, our Associates and Preferred Customers. Increasing the productivity of our Associates and Preferred Customers has not been our primary focus. Rather, we seek to increase the number of Associates and Preferred Customers who use our products. We believe this focus is more consistent with our vision of improving the overall health and nutrition of individuals and families around the world. Sales to Associates account for the majority of our product sales, representing 92% of product sales during 2016. The remainder of our sales comes from Preferred Customers. Increases or decreases in product sales are typically the result of variations in the volume of product sold relating to fluctuations in the number of active Associates and Preferred Customers purchasing our products. The number of active Associates and Preferred Customers is, therefore, used by management as a key non-financial measure.

The tables below summarize the number of active customers and year-over-year percentage growth by geographic region as of the dates indicated (quarterly). These numbers have been rounded to the nearest thousand as of the dates indicated. For purposes of this report, we only count as active



customers those Associates and Preferred Customers who have purchased from us at any time during the most recent three-month period as of the date indicated.

<table><tr><td rowspan="2"></td><td colspan="8">Active Associates by Region</td></tr><tr><td colspan="2">April 2, 2016</td><td colspan="2">July 2, 2016</td><td colspan="2">October 1, 2016</td><td colspan="2">December 31, 2016</td></tr><tr><td>Asia Pacific:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Greater China</td><td>245,000</td><td>21.9%</td><td>267,000</td><td>23.6%</td><td>263,000</td><td>20.6%</td><td>276,000</td><td>17.9%</td></tr><tr><td>Southeast Asia Pacific</td><td>88,000</td><td>14.3%</td><td>88,000</td><td>11.4%</td><td>91,000</td><td>7.1%</td><td>91,000</td><td>5.8%</td></tr><tr><td>North Asia</td><td>15,000</td><td>25.0%</td><td>15,000</td><td>15.4%</td><td>15,000</td><td>15.4%</td><td>17,000</td><td>30.8%</td></tr><tr><td>Asia Pacific Total</td><td>348,000</td><td>20.0%</td><td>370,000</td><td>20.1%</td><td>369,000</td><td>16.8%</td><td>384,000</td><td>15.3%</td></tr><tr><td>Americas and Europe</td><td>89,000</td><td>3.5%</td><td>90,000</td><td>1.1%</td><td>87,000</td><td>(2.2)%</td><td>87,000</td><td>(1.1)%</td></tr><tr><td></td><td>437,000</td><td>16.2%</td><td>460,000</td><td>15.9%</td><td>456,000</td><td>12.6%</td><td>471,000</td><td>11.9%</td></tr></table>

<table><tr><td rowspan="2"></td><td colspan="6">Active Preferred Customers by Region</td></tr><tr><td colspan="2">April 2, 2016</td><td colspan="2">July 2, 2016</td><td colspan="2">December 31, 2016</td></tr><tr><td>Asia Pacific:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Greater China</td><td>5,000</td><td>25.0%</td><td>5,000</td><td>25.0%</td><td>5,000</td><td>25%</td></tr><tr><td>Southeast Asia Pacific</td><td>13,000</td><td>8.3%</td><td>14,000</td><td>16.7%</td><td>15,000</td><td>15.4%</td></tr><tr><td>North Asia</td><td>10,000</td><td>42.9%</td><td>10,000</td><td>11.1%</td><td>10,000</td><td>11.1%</td></tr><tr><td>Asia Pacific Total</td><td>28,000</td><td>21.7%</td><td>29,000</td><td>16.0%</td><td>30,000</td><td>15.4%</td></tr><tr><td>Americas and Europe</td><td>66,000</td><td>4.8%</td><td>68,000</td><td>3.0%</td><td>64,000</td><td>1.6%</td></tr><tr><td></td><td>94,000</td><td>9.3%</td><td>97,000</td><td>6.6%</td><td>94,000</td><td>5.6%</td></tr></table>

## Presentation

Product sales along with the shipping and handling fees billed to our customers are recorded as revenue net of applicable sales discounts when the product is delivered, title has transferred, and the risk of loss passes to the customer. Payments received for undelivered products are recorded as deferred revenue and are included in other current liabilities. Also reflected in net sales is a provision for product returns and allowances, which is estimated based on our historical experience. Additionally, the Company collects a nominal annual renewal fee from Associates that is deferred on receipt and is recognized as revenue on a straight-line basis over a twelve-month period.

Cost of sales primarily consists of expenses related to raw materials, labor, quality assurance, and overhead costs that are all directly associated with the production and distribution of our products and sales materials, as well as duties and taxes that are associated with the import and export of our products. As our international sales increase as a percentage of net sales, cost of sales are increasingly affected by additional duties, freight, and other factors, such as changes in currency exchange rates.

Associate incentives expense includes all forms of commissions, and other incentives paid to our Associates. Incentives paid to Associates include bonuses earned, rewards from contests and promotions, and base commissions, which makes up the majority of our Associate incentives expense. Bonuses are paid out to Associates based on certain business-related criteria, total base commission earnings, and leadership level. Contests and promotions are offered as an incentive and reward to our Associates and are typically paid out only after an Associate achieves specific criteria. Base commissions are paid out on the sale of products. Associates earn their commissions based on sales volume points that are generated in their sales organization. Sales volume points are assigned to each commissionable product and comprise a certain percent of the product price. Items such as our starter kits and sales tools have no sales volume point value, and commissions are not paid on the sale of



these items. Although insignificant to our financial statements, an Associate may earn commissions on sales volume points that are generated from personal purchases that are not considered to be part of their “Qualifying Sales.” To be eligible to earn commissions, an Associate must reach a certain level of Qualifying Sales each month, which may include product that they use personally or that they resell to consumers. Associates do not earn commissions on their Qualifying Sales. Commissions paid to Associates on personal purchases are considered a sales discount and are reported as a reduction to our net sales.

Selling, general and administrative expenses include wages and benefits, depreciation and amortization, rents and utilities, Associate event costs, advertising, professional fees, marketing, and research and development expenses. Wages and benefits represent the largest component of selling, general and administrative expenses. Significant depreciation and amortization expense is incurred as a result of investments in physical facilities, computer and telecommunications equipment, and systems to support our international operations.

Sales to customers outside the United States are transacted in the respective local currencies and are translated to U.S. dollars at weighted-average currency exchange rates for each monthly accounting period to which they relate. Most of our raw material purchases from suppliers and our product purchases from third-party manufacturers are transacted in U.S. dollars. Consequently, our net sales and earnings are affected by changes in currency exchange rates. In general, our operating results are affected positively by a weakening U.S. dollar and negatively by a strengthening U.S. dollar. In our net sales discussions that follow, we approximate the impact of currency fluctuations on net sales by translating current year net sales at the average exchange rates in effect during the comparable prior year periods.

## Results of Operations

The following table summarizes our consolidated operating results as a percent of net sales, respectively, for the years indicated:

<table><tr><td></td><td>2014</td><td>2015</td><td>2016</td></tr><tr><td>Consolidated Statements of Earnings Data:</td><td></td><td></td><td></td></tr><tr><td>Net sales</td><td>100.0%</td><td>100.0%</td><td>100.0%</td></tr><tr><td>Cost of sales</td><td>17.8%</td><td>17.4%</td><td>17.9%</td></tr><tr><td>Gross profit</td><td>82.2%</td><td>82.6%</td><td>82.1%</td></tr><tr><td>Operating expenses:</td><td></td><td></td><td></td></tr><tr><td>Associate incentives</td><td>44.2%</td><td>44.4%</td><td>45.0%</td></tr><tr><td>Selling, general and administrative</td><td>23.3%</td><td>22.8%</td><td>23.3%</td></tr><tr><td>Total operating expenses</td><td>67.5%</td><td>67.2%</td><td>68.3%</td></tr><tr><td>Earnings from operations</td><td>14.7%</td><td>15.4%</td><td>13.8%</td></tr><tr><td>Other income (expense), net</td><td>(0.1)%</td><td>0.1%</td><td>0.0%</td></tr><tr><td>Earnings before income taxes</td><td>14.6%</td><td>15.5%</td><td>13.8%</td></tr><tr><td>Income taxes</td><td>4.9%</td><td>5.2%</td><td>3.9%</td></tr><tr><td>Net earnings</td><td>9.7%</td><td>10.3%</td><td>9.9%</td></tr></table>

## Non-GAAP Financial Measures

Constant currency net sales, earnings, EPS and other currency-related financial information (collectively, “Financial Results”) are non-GAAP financial measures that remove the impact of fluctuations in foreign-currency exchange rates and help facilitate period-to-period comparisons of the Company’s Financial Results and thus provide investors an additional perspective on trends and



underlying business results. Constant currency Financial Results are calculated by translating the current period’s Financial Results at the same average exchange rates in effect during the applicable prior-year period and then comparing this amount to the prior-year period’s Financial Results.

## Summary of 2016 Financial Results

Net sales in 2016 increased 9.5%, or $87.6 million, to $1.006 billion, compared with 2015. This increase was driven by higher product sales volume resulting primarily from strong Associate growth in our Asia Pacific region throughout the year. Unfavorable changes in currency exchange rates reduced net sales for the year by an estimated $41.6 million.

Net earnings increased 5.7% to $100.0 million in 2016, when compared with 2015. This increase was driven primarily by higher net sales and a lower effective tax rate largely due to the early adoption of ASU 2016-09 “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. Lower gross margins, higher operating expenses, and the negative impact of changes in currency largely offset this increase.

## Fiscal Year 2016 compared to Fiscal Year 2015

## Net Sales

The following table summarizes the changes in our net sales by geographic region for the fiscal years ended January 2, 2016, and December 31, 2016:

<table><tr><td rowspan="2"></td><td colspan="3">Net Sales by Region (in thousands) Year Ended</td><td rowspan="2">Change from prior year</td><td rowspan="2">Percent change</td><td rowspan="2">Currency impact on sales</td><td rowspan="2">Percent change excluding currency impact</td></tr><tr><td>2015</td><td>2016</td><td></td></tr><tr><td>Asia Pacific</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Greater China</td><td>$441,284</td><td>48.0%</td><td>$502,299</td><td>49.9%</td><td>$61,015</td><td>13.8%</td><td>(25,594)</td><td>19.6%</td></tr><tr><td>Southeast Asia Pacific</td><td>183,828</td><td>20.0%</td><td>206,124</td><td>20.5%</td><td>22,296</td><td>12.1%</td><td>(5,583)</td><td>15.2%</td></tr><tr><td>North Asia</td><td>39,751</td><td>4.4%</td><td>46,023</td><td>4.6%</td><td>6,272</td><td>15.8%</td><td>(627)</td><td>17.4%</td></tr><tr><td>Asia Pacific Total</td><td>664,863</td><td>72.4%</td><td>754,446</td><td>75.0%</td><td>89,583</td><td>13.5%</td><td>(31,804)</td><td>18.3%</td></tr><tr><td>Americas and Europe</td><td>253,636</td><td>27.6%</td><td>251,637</td><td>25.0%</td><td>(1,999)</td><td>(0.8)%</td><td>(9,824)</td><td>3.1%</td></tr><tr><td></td><td>$918,499</td><td>100.0%</td><td>$1,006,083</td><td>100.0%</td><td>$87,584</td><td>9.5%</td><td>(41,628)</td><td>14.1%</td></tr></table>

Asia Pacific: The increase in net sales in Greater China continues to be driven by growth in Mainland China, where net sales increased 24.4% on a constant currency basis and the number of active Associates increased 20.1%. This increase was partially offset by a continued year-over-year decline in Hong Kong sales and Associates.

The increase in constant currency net sales in Southeast Asia Pacific was driven by double-digit constant currency sales growth in nearly every market led by Australia, Malaysia and New Zealand. Our newest market, Indonesia which commenced operations in the fourth quarter of 2015 contributed $5.0 million in sales for the year.

The increase in constant currency net sales in North Asia continues to be driven by growth in South Korea, where constant currency net sales increased just over 19.1% resulting from a 33.3% increases in the number of active Associates.

Americas and Europe: The increase in constant currency net sales in this region continues to be driven primarily by growth in Mexico and Canada, where constant currency net sales increased 22.6% and 13.3%, respectively. This growth is reflective in the number of active Associates and Preferred Customers purchasing our products. Net Sales in the United States decreased $9.6 million or 6.9%, due to a decline in the number of active customers in this market.



## Gross Profit

The 50 basis point relative decrease in gross profit from 2015 to 2016 can be attributed to an unfavorable shift in currency exchange rates, and production inefficiencies associated with moving to our new manufacturing facility in China. This reduction was partially offset by a favorable shift in sales mix by market and by modest product price adjustments that occurred during the first quarter of 2016.

## Associate Incentives

The 60 basis point relative increase in Associate incentives from 2015 to 2016 can be primarily attributed to higher payout on Associate bonus programs and incentive trip costs.

## Selling, General and Administrative Expenses

In absolute terms, our selling general and administrative expense increased $25.2 million from 2015 to 2016. This increase can be attributed to costs associated with supporting our 2016 strategic initiatives, including (i) higher wages and benefits expense to support our growing customer base and to further improve our customers' experience around the world, (ii) investment in information technology systems and infrastructure, and (iii) increased research and development investment to drive future product and technology innovation.

## Income Taxes

Our effective income tax rate was 27.8% in 2016, compared with 33.6% in 2015. The primary reason for the year-over-year effective tax rate improvement was the early adoption of ASU 2016-09 “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”, which requires excess tax benefits or tax deficiencies resulting from exercise or settlement of share-based payment transactions to be recognized as an income tax benefit or expense in the income statement prospectively.

## Diluted Earnings Per Share

Diluted earnings per share in 2016 increased 11.1% from 2015 to 2016. This increase was mostly due to a lower effective tax rate, primarily resulting from the adoption of ASU 2016-09 that contributed $0.30 to the year, and a lower number of shares outstanding resulting from activity under our share buyback program.

## Summary of 2015 Financial Results

Net sales in 2015 increased 16.2%, or $128.0 million, to $918.5 million, compared with 2014. This increase was driven by higher product sales volume resulting primarily from strong Associate growth in our Asia Pacific region throughout the year. In 2015 our business started with strong momentum, which was reflected by constant currency sales and customer growth in most of our markets. During 2015, we also utilized market-specific promotions and incentives to generate growth across our regions. Unfavorable changes in currency exchange rates reduced net sales in 2015 by an estimated $53.6 million. Additionally, on a comparative basis, 2014 was a 53-week year and included one additional week of sales, which contributed approximately $16.0 million to net sales for that year.

Net earnings increased 23.5% to $94.7 million in 2015, when compared with 2014. This increase was driven primarily by higher net sales, improved gross margins and lower relative selling, general and administrative expense.



## Fiscal Year 2015 compared to Fiscal Year 2014

The tables below summarize the number of active customers and year-over-year percentage growth by geographic region as of the dates indicated. These numbers have been rounded to the nearest thousand as of the dates indicated. For purposes of this report, we only count as active customers those Associates and Preferred Customers who have purchased from us at any time during the most recent three-month period as of the date indicated.

<table><tr><td rowspan="2"></td><td colspan="7">Active Associates by Region</td></tr><tr><td>April 4, 2015</td><td colspan="2">July 4, 2015</td><td colspan="2">October 3, 2015</td><td colspan="2">January 2, 2016</td></tr><tr><td>Asia Pacific:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Greater China</td><td>201,000</td><td>82.7%</td><td>216,000</td><td>72.8%</td><td>218,000</td><td>69.0%</td><td>234,000</td></tr><tr><td>Southeast Asia Pacific</td><td>77,000</td><td>20.3%</td><td>79,000</td><td>17.9%</td><td>85,000</td><td>21.4%</td><td>86,000</td></tr><tr><td>North Asia</td><td>12,000</td><td>33.3%</td><td>13,000</td><td>44.4%</td><td>13,000</td><td>30.0%</td><td>13,000</td></tr><tr><td>Asia Pacific Total</td><td>290,000</td><td>58.5%</td><td>308,000</td><td>53.2%</td><td>316,000</td><td>51.2%</td><td>333,000</td></tr><tr><td>Americas and Europe</td><td>86,000</td><td>4.9%</td><td>89,000</td><td>8.5%</td><td>89,000</td><td>8.5%</td><td>88,000</td></tr><tr><td></td><td>376,000</td><td>41.9%</td><td>397,000</td><td>40.3%</td><td>405,000</td><td>39.2%</td><td>421,000</td></tr><tr><td></td><td></td><td></td><td colspan="5">Active Preferred Customers by Region</td></tr><tr><td></td><td>April 4, 2015</td><td colspan="2">July 4, 2015</td><td colspan="2">October 3, 2015</td><td colspan="2">January 2, 2016</td></tr><tr><td>Asia Pacific:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Greater China</td><td>4,000</td><td>33.3%</td><td>4,000</td><td>33.3%</td><td>4,000</td><td>33,3%</td><td>4,000</td></tr><tr><td>Southeast Asia Pacific</td><td>12,000</td><td>20.0%</td><td>12,000</td><td>9.1%</td><td>13,000</td><td>18.2%</td><td>13,000</td></tr><tr><td>North Asia</td><td>7,000</td><td>75.0%</td><td>9,000</td><td>80.0%</td><td>9,000</td><td>50.0%</td><td>9,000</td></tr><tr><td>Asia Pacific Total</td><td>23,000</td><td>35.3%</td><td>25,000</td><td>31.6%</td><td>26,000</td><td>30.0%</td><td>26,000</td></tr><tr><td>Americas and Europe</td><td>63,000</td><td>3.3%</td><td>66,000</td><td>10.0%</td><td>63,000</td><td>10.5%</td><td>63,000</td></tr><tr><td></td><td>86,000</td><td>10.3%</td><td>91,000</td><td>15.2%</td><td>89,000</td><td>15.6%</td><td>89,000</td></tr></table>

## Net Sales

The following table summarizes the changes in our net sales by geographic region for the fiscal years ended January 3, 2015, and January 2, 2016:

<table><tr><td rowspan="2"></td><td colspan="3">Net Sales by Region (in thousands)</td><td rowspan="2">Change from prior year</td><td rowspan="2">Percent change</td><td rowspan="2">Currency impact on sales</td><td rowspan="2">Percent change excluding currency impact</td></tr><tr><td>2014</td><td>2015</td><td></td></tr><tr><td>Asia Pacific</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Greater China</td><td>$326,134</td><td>41.3%</td><td>$41,284</td><td>48.0%</td><td>$115,150</td><td>35.3%</td><td>$ (8,769)</td></tr><tr><td>Southeast Asia Pacific</td><td>177,940</td><td>22.5%</td><td>183,828</td><td>20.0%</td><td>5,888</td><td>3.3%</td><td>(21,491)</td></tr><tr><td>North Asia</td><td>32,667</td><td>4.1%</td><td>39,751</td><td>4.4%</td><td>7,084</td><td>21.7%</td><td>(3,318)</td></tr><tr><td>Asia Pacific Total</td><td>536,741</td><td>67.9%</td><td>664,863</td><td>72.4%</td><td>128,122</td><td>23.9%</td><td>(33,578)</td></tr><tr><td>Americas and Europe</td><td>253,730</td><td>32.1%</td><td>253,636</td><td>27.6%</td><td>(94)</td><td>(0.0)%</td><td>(20,053)</td></tr><tr><td></td><td>$790,471</td><td>100.0%</td><td>$918,499</td><td>100.0%</td><td>$128,028</td><td>16.2%</td><td>(53,631)</td></tr></table>



Asia Pacific: The increase in Greater China was driven by growth in Mainland China, where net sales increased nearly 75% on a constant currency basis, resulting from strong growth in the number of active Associates throughout 2015. Net sales and Associate growth in Mainland China during 2015 benefited from: (i) momentum created from a short-term incentive that we offered during the first quarter of the year, (ii) a more favorable operating environment for the Company during the first quarter of 2015 when compared with the previous year, and (iii) higher-than-anticipated incremental sales of approximately $17.0 million that occurred following the announcement of our 2015 price adjustments. Net sales growth in Greater China was partially offset in 2015 by a year-over-year decline in Hong Kong sales and Associates, which stabilized during 2015.

The increase in constant currency net sales in Southeast Asia Pacific was driven by double-digit constant currency sales growth from nearly every market, which is reflective of growth in the number of active Associates and Preferred Customers purchasing our products.

The increase in constant currency net sales in North Asia was driven by growth in South Korea, where constant currency net sales increased just over 39% resulting from double-digit increases in the number of active Associates and Preferred Customers during the year.

Americas and Europe: The increase in constant currency net sales in this region was driven primarily by growth in Canada and Mexico, where constant currency net sales increased 17.5% and 19.4%, respectively. This growth was reflective of growth in the number of active Associates and Preferred Customers purchasing our products.

## Gross Profit

The 40 basis point relative increase in gross profit from 2014 to 2015 was attributed to a favorable shift in sales mix by market and by modest product price adjustments that occurred during 2015. These improvements were partially offset by the negative impact from the strengthening of the U.S. dollar.

## Associate Incentives

The 20 basis point relative increase in Associate incentives was attributed to higher relative payout under one of our Associate bonus programs. The increase in Associate incentives expense was partially offset by our annual price adjustment.

## Selling, General and Administrative Expenses

In absolute terms, our selling, general and administrative expense increased by $24.5 million. This increase was primarily driven by costs associated with supporting higher sales and customer base as well as our investment in brand-recognition initiatives during 2015.

## Income Taxes

Our effective income tax rate was 33.6% in 2015, compared with 33.7% in 2014. This change was primarily due to slightly lower 2015 state tax expense compared to 2014 state tax expense as a percentage of income.

## Diluted Earnings Per Share

Diluted earnings per share in 2015 increased 28.2% to $3.59, from $2.80 in the prior year. This increase was due to higher net earnings and a lower number of diluted shares outstanding resulting from share repurchases under our share buyback program during 2015.



## Quarterly Financial Information (Unaudited)

The following tables set forth unaudited quarterly operating results for each of the last eight fiscal quarters, as well as percentages of net sales for certain data for the periods indicated. This information is consistent with the Consolidated Financial Statements herein and includes normally recurring adjustments that management considers to be necessary for a fair presentation of the data. Quarterly results are not necessarily indicative of future results of operations. This information should be read in conjunction with the audited Consolidated Financial Statements and notes thereto that are included elsewhere in this report.

<table><tr><td rowspan="2"></td><td colspan="9">Quarter Ended</td></tr><tr><td>Apr 4, 2015</td><td>Jul. 4, 2015</td><td>Oct. 3, 2015</td><td>Jan. 2, 2016</td><td>Apr 2, 2016</td><td>Jul. 2, 2016</td><td>Oct. 1, 2016</td><td>Dec. 31, 2016</td><td></td></tr><tr><td>Consolidated Statements of Earnings Data:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Net sales</td><td>$219,378</td><td>$233,244</td><td>$233,292</td><td>$232,585</td><td>$240,449</td><td>$258,514</td><td>$254,219</td><td>$252,901</td><td></td></tr><tr><td>Cost of sales</td><td>38,364</td><td>40,089</td><td>41,048</td><td>40,181</td><td>42,920</td><td>45,970</td><td>44,979</td><td>46,321</td><td></td></tr><tr><td>Gross profit</td><td>181,014</td><td>193,155</td><td>192,244</td><td>192,404</td><td>197,529</td><td>212,544</td><td>209,240</td><td>206,580</td><td></td></tr><tr><td>Operating expenses:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Associate incentives</td><td>101,353</td><td>101,877</td><td>101,521</td><td>103,409</td><td>107,394</td><td>115,331</td><td>112,816</td><td>117,536</td><td></td></tr><tr><td>Selling, general and administrative</td><td>49,875</td><td>52,505</td><td>52,757</td><td>53,858</td><td>56,631</td><td>59,764</td><td>60,591</td><td>57,208</td><td></td></tr><tr><td>Total operating expenses</td><td>151,228</td><td>154,382</td><td>154,278</td><td>157,267</td><td>164,025</td><td>175,095</td><td>173,407</td><td>174,744</td><td></td></tr><tr><td>Earnings from operations</td><td>29,786</td><td>38,773</td><td>37,966</td><td>35,137</td><td>33,504</td><td>37,449</td><td>35,833</td><td>31,836</td><td></td></tr><tr><td>Other income (expense), net</td><td>168</td><td>(86)</td><td>441</td><td>404</td><td>(496)</td><td>219</td><td>268</td><td>(61)</td><td></td></tr><tr><td>Earnings from operations before income taxes</td><td>29,954</td><td>38,687</td><td>38,407</td><td>35,541</td><td>33,008</td><td>37,668</td><td>36,101</td><td>31,775</td><td></td></tr><tr><td>Income taxes</td><td>10,274</td><td>13,271</td><td>12,798</td><td>11,574</td><td>10,709</td><td>11,906</td><td>6,003</td><td>9,893</td><td></td></tr><tr><td>Net earnings</td><td>$ 19,680</td><td>$ 25,416</td><td>$ 25,609</td><td>$ 23,967</td><td>$ 22,299</td><td>$ 25,762</td><td>$ 30,098</td><td>$ 21,882</td><td></td></tr><tr><td>Earnings per common share*:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>$ 0.78</td><td>$ 1.00</td><td>$ 1.00</td><td>$ 0.95</td><td>$ 0.92</td><td>$ 1.08</td><td>$ 1.24</td><td>$ 0.90</td><td></td></tr><tr><td>Diluted</td><td>$ 0.75</td><td>$ 0.96</td><td>$ 0.96</td><td>$ 0.92</td><td>$ 0.89</td><td>$ 1.03</td><td>$ 1.20</td><td>$ 0.87</td><td></td></tr><tr><td>Weighted-average shares outstanding:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>25,295</td><td>25,480</td><td>25,704</td><td>25,361</td><td>24,204</td><td>23,955</td><td>24,178</td><td>24,404</td><td></td></tr><tr><td>Diluted</td><td>26,170</td><td>26,450</td><td>26,634</td><td>26,165</td><td>25,183</td><td>24,917</td><td>25,050</td><td>25,037</td><td></td></tr><tr><td>Consolidated Statements of Earnings as a percentage of Net Sales:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Net sales</td><td>100.0%</td><td>100.0%</td><td>100.0%</td><td>100.0%</td><td></td><td>100.0%</td><td>100.0%</td><td>100.0%</td><td></td></tr><tr><td>Cost of sales</td><td>17.5</td><td>17.2</td><td>17.6</td><td>17.3</td><td>17.8</td><td>17.8</td><td>17.7</td><td>18.3</td><td></td></tr><tr><td>Gross profit</td><td>82.5</td><td>82.8</td><td>82.4</td><td>82.7</td><td>82.2</td><td>82.2</td><td>82.3</td><td>81.7</td><td></td></tr><tr><td>Operating expenses:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Associate incentives</td><td>46.2</td><td>43.7</td><td>43.5</td><td>44.4</td><td>44.6</td><td>44.6</td><td>44.4</td><td>46.5</td><td></td></tr><tr><td>Selling, general and administrative</td><td>22.7</td><td>22.5</td><td>22.6</td><td>23.2</td><td>23.6</td><td>23.1</td><td>23.8</td><td>22.6</td><td></td></tr><tr><td>Total operating expenses</td><td>68.9</td><td>66.2</td><td>66.1</td><td>67.6</td><td>68.2</td><td>67.7</td><td>68.2</td><td>69.1</td><td></td></tr><tr><td>Earnings from operations</td><td>13.6</td><td>16.6</td><td>16.3</td><td>15.1</td><td>14.0</td><td>14.5</td><td>14.1</td><td>12.6</td><td></td></tr><tr><td>Other income (expense), net</td><td>0.1</td><td>0.0</td><td>0.2</td><td>0.2</td><td>(0.2)</td><td>0.1</td><td>0.1</td><td>0.0</td><td></td></tr><tr><td>Earnings from operations before income taxes</td><td>13.7</td><td>16.6</td><td>16.5</td><td>15.3</td><td>13.8</td><td>14.6</td><td>14.2</td><td>12.6</td><td></td></tr><tr><td>Income taxes</td><td>4.7</td><td>5.7</td><td>5.5</td><td>5.0</td><td>4.5</td><td>4.6</td><td>2.4</td><td>3.9</td><td></td></tr><tr><td>Net earnings</td><td>9.0%</td><td>10.9%</td><td>11.0%</td><td>10.3%</td><td>9.3%</td><td>10.0%</td><td>11.8%</td><td>8.7%</td><td></td></tr></table>

* Earnings per common share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share amounts does not necessarily equal the total for the year.



We may experience variations in the results of operations from quarter to quarter as a result of factors that include, but are not limited to the following:

• The number of Associates and Preferred Customers who join our business, purchase and sell our products, and stay with our business;

• The opening of new markets;

• The timing of Company-sponsored events, contests, and promotions;

• Fluctuations in currency exchange rates;

• New product introductions;

• The timing of holidays, which may reduce the amount of time that our Associates spend selling products or introducing USANA to potential Associates or Preferred Customers;

• The negative impact of changes in or interpretations of regulations that may limit or restrict our network marketing model or the sale of certain products in some countries;

• The adverse effect of a failure by us or an Associate (or allegations of such failure) to comply with applicable governmental regulations;

• The integration and operation of new information technology systems;

• The inability to introduce new products or the introduction of new products by competitors;

• Entry into one or more of our markets by competitors;

• Availability of raw materials;

• General conditions in the nutritional supplement, personal care, and healthy food industries or the network marketing industry; and

• Consumer perceptions of our products and business.

Because our products are consumed by consumers or applied to their bodies, we are highly dependent upon consumers' perception of the safety, quality, and efficacy of our products and nutritional supplements in general. As a result, substantial negative publicity, whether founded or unfounded, concerning one or more of our products or of other products that are similar to our products could adversely affect our business, financial condition, or results of operations.

As a result of these and other factors, quarterly revenues, expenses, and results of operations could vary significantly in the future, and period-to-period comparisons should not be relied upon as indications of future performance. There can be no assurance that we will be able to increase revenues in future periods or be able to sustain the level of revenue or rate of revenue growth on a quarterly or annual basis that we have sustained in the past. Due to the foregoing factors, future results of operations could be below the expectations of public market analysts and investors. If that occurs, the market price of our common stock would likely decline.

## Liquidity and Capital Resources

We have historically met our working capital and capital expenditure requirements by using both net cash flow from operations and by drawing from our line of credit. Our principal source of liquidity is our operating cash flow. Although we are required to maintain cash deposits with banks in certain of our markets, there are currently no material restrictions on our ability to transfer and remit funds among our international markets. 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. Notwithstanding the foregoing, if we were to repatriate the $19.6 million of cumulative earnings that have been indefinitely reinvested in certain of our markets at December 31, 2016, there would be a tax liability to the Company of approximately $3.1 million.

We have historically generated positive cash flow due to our strong operating margins. Net cash flow from operating activities totaled $137.0 million in 2016, compared with $111.5 million in 2015. Items positively affecting cash flow from operations on a year-over-year basis include: (i) less cash used on inventories (ii) higher net earnings and (iii) an increase in other liabilities, which was driven primarily by accrued commissions. These items were partially offset by (i) an increase in cash used in prepaid expenses and other assets related to taxes and our investment in information technology systems and (ii) decrease in accounts payable due to the timing of vendor invoices and payments.

We generated strong cash flow from operating activities in 2016. Cash and cash equivalents increased to $175.8 million at December 31, 2016, from $143.2 million at January 2, 2016. This increase was primarily due to less cash used in inventories in the current year and higher net earnings. Of the $175.8 million cash and cash equivalents held at December 31, 2016, $20.1 million was held in the United States and $155.7 million was held by international subsidiaries. Of the $143.2 million held at January 2, 2016, $16.2 million was held in the United States and $127.0 million was held by international subsidiaries. Net working capital increased to $139.4 million at December 31, 2016, from $112.9 million at January 2, 2016.

We have extended non-revolving credit to the supplier of our nutrition bars to allow this supplier to modify its facility and acquire the necessary equipment to manufacture our bars. Notes receivable from this supplier as of December 31, 2016, were $6.9 million and are included as non-current other assets on the balance sheet.

## Line of credit

Information with respect to line of credit may be found in Note H to the Consolidated Financial Statements included in item 8 Part IV of this annual Report on Form 10-K, which is incorporated herein by reference.

## Share repurchase

We have a share repurchase plan that has been ongoing since the fourth quarter of 2000. The objective of this plan is to return value to our shareholders and offset dilution from our equity incentive plans. Our Board of Directors has periodically approved additional dollar amounts for share repurchases under that plan. Share repurchases are made from time-to-time, in the open market, through block trades or otherwise, and are based on market conditions, the level of our cash balances, general business opportunities, and other factors. In 2016, we repurchased and retired 1.1 million shares of common stock for $64.6 million, at a weighted average market price of $58.41 per share. At December 31, 2016, the remaining approved repurchase amount under the plan was $35.4 million. There currently is no expiration date on the remaining approved repurchase amount and no requirement for future share repurchases.

## Summary

We believe that current cash balances, future cash provided by operations, and amounts available under our line of credit will be sufficient to cover our operating and capital needs in the ordinary course of business for the foreseeable future. If we experience an adverse operating environment or unanticipated and unusual capital expenditure requirements, additional financing may be required. No



assurance can be given, however, that additional financing, if required, would be available at all or on favorable terms. We might also require or seek additional financing for the purpose of expanding into new markets, growing our existing markets, or for other reasons. Such financing may include the use of additional debt or the sale of additional equity securities. Any financing which involves the sale of equity securities or instruments that are convertible into equity securities could result in immediate and possibly significant dilution to our existing shareholders.

## Contractual Obligations and Commercial Contingencies

The following table summarizes our contractual obligations and commitments as of December 31, 2016 and the effect such obligations and commitments are expected to have on our liquidity and cash flow in future periods:

Payments Due By Period (in thousands)

<table><tr><td>Contractual Obligations</td><td>Total</td><td>Less than 1 year</td><td>1 - 3 years</td><td>3 - 5 years</td><td>More than 5 years</td></tr><tr><td>Operating Leases</td><td>$19,988</td><td>$10,391</td><td>$ 8,789</td><td>$ 776</td><td>$32</td></tr><tr><td>Other Commitments</td><td>32,103</td><td>25,706</td><td>6,093</td><td>304</td><td>—</td></tr><tr><td>Line of Credit</td><td>753</td><td>141</td><td>283</td><td>282</td><td>47</td></tr><tr><td>Total Contractual Obligations</td><td>$52,844</td><td>$36,238</td><td>$15,165</td><td>$1,362</td><td>$79</td></tr></table>

“Operating Leases” generally provide that property taxes, insurance, and maintenance expenses are the responsibility of the Company. Such expenses are not included in the operating lease amounts that are outlined in the table above.

“Other Commitments” generally include consulting- and IT-related services, investments in brand awareness through corporate and athlete sponsorships as discussed under “Growth Strategy” within Item 1 of this report, facility maintenance, and services related to the events that we hold for our Associates both locally and internationally. Additionally, throughout the year we will enter into various short-term contracts, mostly for services related to events that we hold for our Associates.

The “Line of Credit” has a maturity date of April 2021. Although we currently have no balance outstanding on this line of credit, fees on the unused portion of this line are due periodically and are reflected in the table above. If we utilize this line of credit prior to its maturity, we will be required to pay it in full at maturity.

## Inflation

We do not believe that inflation has had a material impact on our historical operations or profitability.

## Critical Accounting Estimates

Our Consolidated Financial Statements included in this report have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). Our significant accounting policies are described in Note A to the Consolidated Financial Statements included herein. The preparation of financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying footnotes. Those estimates and assumptions are derived and are continually evaluated based on our historical experiences, current facts and circumstances, and on changes in the business environment. Actual results, however, may sometimes differ materially from estimates under different conditions. Critical accounting estimates are defined as both those that are



material to the portrayal of our financial condition and results of operations and those that require management’s most subjective judgments. We believe that our most critical accounting estimates are described in this section.

## Revenue Recognition.

• Revenue is recognized at the estimated point of delivery of the merchandise, at which point the risks and rewards of ownership have passed to the customer. Revenue is recognized when the following four criteria are met: persuasive evidence of a sale arrangement exists, delivery of the product has occurred, the price is fixed or determinable, and payment is reasonably assured. It is not practical for us to track the actual delivery date of each shipment as we ship a high volume of orders through several carriers. Therefore, we use estimates to determine which shipments are delivered and, therefore, recognized as revenue at the end of a period. Our estimates on delivery date largely relate to orders fulfilled in North America and Australia and are based on average shipping transit times, which are calculated using the following factors: (i) the type of shipping carrier (as carriers have different in-transit times); (ii) the delivery destination; and (iii) actual transit time experience, which shows that delivery date is typically one to five business days from the date of shipment. We review and update our estimates on a quarterly basis based on our actual transit time experience. However, actual shipping times may differ from our estimates. The estimated total of shipments that are not delivered at the end of a period is not material nor would a change in the average shipping transit times (1 to 2 days) have a material impact on our consolidated financial statements. Additionally, we require cash or credit card payment prior to shipping and do not extend credit to customers.

• Payments received for undelivered products are recorded as deferred revenue and are included in other current liabilities. Deferred revenue is recognized at the estimated point of delivery of the merchandise. On the occasion that will-call orders are not picked up by customers, we periodically assess the likelihood that customers will exercise their contractual right to pick up orders and recognize revenue when the likelihood is estimated to be remote.

• A provision for product returns and allowances is established and is based on our historical experience.

• Amounts billed to customers for shipping and handling fees are classified as revenue.

• Sales discounts earned under USANA’s initial order reward program are considered part of a multiple element revenue arrangement and accordingly are deferred when the first order is placed and recognized as customers place their subsequent two Auto Orders.

• Any compensation paid to an Associate on their personal orders are captured and reported as a reduction to net sales in the form of a sales discount. Management estimates, based on the structure of USANA's Compensation Plan, that an Associate who places an order with sales volume points in a personal sales position will eventually be paid commission on that purchase. Such reduction of revenue for Associates outside of the United States is converted to U.S. Dollars at the average currency exchange rate for the applicable period.

• We collect an annual renewal fee from our Associates that is deferred when it is collected and is recognized as income on a straight-line basis over the subsequent twelve-month period.

Inventory Valuation. Inventories are stated at the lower of cost or market. Cost is determined using a standard costing system which approximates the first-in, first-out method. The components of inventory cost include raw materials, labor, and overhead. Market value is determined using various assumptions with regard to excess or slow-moving inventories, non-conforming inventories, expiration dates, current and future product demand, production planning, and market conditions. A change in any of these variables could affect the valuation of our inventories.



Impairment of Long-Lived Assets, Goodwill, and Indefinite-Lived Intangible Assets. Long-lived assets, including property and equipment and definite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances exist that indicate the carrying amount of the assets may not be recoverable. Events or changes in circumstances that would indicate the need for impairment testing include, among other factors: operating losses; unused capacity; market value declines; technological developments resulting in obsolescence; changes in demand for products manufactured; changes in competition and competitive practices; uncertainties associated with the world economies; and changes in governmental regulations or actions. When indicators of impairment exist, an estimate of undiscounted net cash flows is used in measuring whether the carrying amount of the asset or related asset group is recoverable. Measurement of the amount of impairment, if any, is based upon the difference between the asset group's carrying value and estimated fair value. Fair value is determined through various valuation techniques, including market and income approaches as considered necessary.

Goodwill represents the excess of purchase price paid over the fair market value of identifiable net assets of companies acquired. Goodwill is not amortized, but rather it is tested at the reporting unit level at least annually for impairment (or more frequently if triggering events or changes in circumstances indicate impairment). Initially, qualitative factors are considered to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Some of these qualitative factors may include macroeconomic conditions, industry and market considerations, a change in financial performance, entity-specific events, a sustained decrease in share price, and consideration of the difference between the fair value and carrying amount of a reporting unit as determined in the most recent quantitative assessment. If, through this qualitative assessment, the conclusion is made that it is more likely than not that a reporting unit's fair value is less than its carrying amount, a two-step quantitative impairment analysis is performed to estimate the fair value of goodwill. The first step involves estimating the fair values of a reporting unit using widely-accepted valuation methodologies including the income and market approaches, which requires the use of estimates and assumptions. These estimates and assumptions include revenue growth rates, discounts rates, and determination of appropriate market comparables. If the fair value of the reporting unit is less than its carrying amount, the second step of the impairment test is performed to measure the amount of the impairment loss. In the second step, the implied fair value of the goodwill is estimated as the fair value of the reporting unit as determined in step one, less fair values of all other net tangible and intangible assets of the reporting unit determined in a manner similar to a purchase price allocation. If the carrying amount of the goodwill exceeds its implied fair value, an impairment loss is recognized in an amount equal to that excess, not to exceed the carrying amount of the goodwill.

Indefinite-lived intangible assets are not amortized; however, they are tested at least annually for impairment or more frequently if events or changes in circumstances exist that may indicate impairment. Initially, qualitative factors are considered to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If, through this qualitative assessment, the conclusion is made that it is more likely than not that an indefinite-lived intangible asset's fair value is less than its carrying amount, a quantitative impairment analysis is performed by comparing the indefinite-lived intangible asset's book value to its estimated fair value. The fair value for indefinite-lived intangible assets is determined through various valuation techniques, including market and income approaches as considered necessary. The amount of any impairment is measured as the difference between the carrying amount and the fair value of the impaired asset. During 2014, 2015, and 2016, no impairment of indefinite-lived intangible assets was recorded.

Determining the fair value of our long-lived assets, goodwill, and indefinite-lived intangible assets as part of these impairment analyses requires significant judgment in estimates and assumptions used under the income and market approaches. A change in any of the estimates or assumptions used could result in impairment.



Accounting for Income Taxes. Income taxes are calculated in each of the jurisdictions in which we operate. This process involves estimating our current tax exposure, together with assessing temporary differences for items treated differently for tax and financial reporting. Tax benefits are recognized from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Deferred income tax assets are reviewed for recoverability, and valuation allowances are provided, when necessary, to reduce deferred income tax assets to the amounts that are more likely than not to be realized based on our estimate of future taxable income. Should our expectations of taxable income change in future periods, it may be necessary to establish a valuation allowance, which could affect our results of operations in the period such a determination is made.

Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our financial position, results of operations, or cash flows. Additional information regarding income taxes is available in Note D to the Consolidated Financial Statements herein.

On an interim basis, an estimate is made of what our effective tax rate will be for the full fiscal year, and a quarterly income tax provision in accordance with this anticipated effective rate is recorded. As the fiscal year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction during the year. This estimation process periodically results in changes to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision equals the expected annual rate.

Equity-Based Compensation. We record compensation expense in the financial statements for equity-based awards based on the grant date fair value. We use the Black-Scholes option pricing model to estimate the fair value of our equity awards, which involves the use of assumptions such as expected volatility, expected term, dividend rate, and risk-free rate. Equity-based compensation expense is recognized on a straight-line basis over the requisite service period, which is generally the vesting period. For more information regarding the assumptions and estimates used in calculating this equity-based compensation expense, see Note J to the Consolidated Financial Statements herein.

## Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Our earnings, cash flows, and financial position are affected by fluctuations in currency exchange rates, interest rates, and other uncertainties that are inherent in doing business and selling product in more than one currency. In addition, our operations are exposed to risks that are associated with changes in social, political, and economic conditions in our international operations. This includes changes in the laws and policies that govern investment in international countries where we have operations, as well as, to a lesser extent, changes in U.S. laws and regulations relating to international trade and investment.

Foreign Currency Risks. Net sales outside the United States represented 81.8%, 84.8%, and 87.0% of our net sales in 2014, 2015, and 2016, respectively. Because a significant portion of our sales are generated outside the United States, currency exchange rate fluctuations may have a significant effect on our sales and earnings. The local currency of each international subsidiary is considered the functional currency, with all revenue and expenses being translated at weighted-average currency exchange rates for the applicable periods. In general, our reported sales and gross profit are affected positively by a weakening of the U.S. dollar and negatively by a strengthening of the U.S. dollar because we manufacture the majority of our products in the United States and sell them to our



international subsidiaries in their respective functional currencies. Currency fluctuations, however, have the opposite effect on our Associate incentives and selling, general and administrative expenses. We are unable to reasonably estimate the effect that currency fluctuations may have on our future business, results of operations, or financial condition. This is due to the uncertainty in, and the varying degrees and type of exposure that we face from, fluctuation of various currencies.

Currently our strategy for reducing our exposure to currency fluctuation includes the timely and efficient repatriation of earnings from international markets where such earnings are not considered to be indefinitely reinvested, and settlement of intercompany transactions. Additionally, we may enter into short-term foreign currency credit arrangements in our international markets, primarily as a way to reduce our exposure to negative effects of changes in foreign currency exchange rates. We also from time to time enter into currency exchange contracts to offset foreign currency exposure in various international markets. We do not use derivative financial instruments for trading or speculative purposes. There can be no assurance that our practices will be successful in eliminating all or substantially all of the risks that may be encountered in connection with our currency transactions.

Following are the average exchange rates of currency units to one U.S. dollar for each of the international markets in which we operated as of December 31, 2016 for the quarterly periods indicated:

<table><tr><td rowspan="2"></td><td colspan="4">2015</td><td colspan="4">2016</td></tr><tr><td>First</td><td>Second</td><td>Third</td><td>Fourth</td><td>First</td><td>Second</td><td>Third</td><td>Fourth</td></tr><tr><td>Canadian Dollar . . .</td><td>1.24</td><td>1.23</td><td>1.31</td><td>1.34</td><td>1.37</td><td>1.29</td><td>1.30</td><td>1.34</td></tr><tr><td>Australian Dollar . . .</td><td>1.28</td><td>1.29</td><td>1.39</td><td>1.39</td><td>1.38</td><td>1.34</td><td>1.32</td><td>1.34</td></tr><tr><td>New Zealand</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Dollar . . . . . . .</td><td>1.33</td><td>1.38</td><td>1.54</td><td>1.50</td><td>1.50</td><td>1.45</td><td>1.38</td><td>1.41</td></tr><tr><td>Hong Kong Dollar</td><td>7.76</td><td>7.75</td><td>7.75</td><td>7.75</td><td>7.77</td><td>7.76</td><td>7.76</td><td>7.76</td></tr><tr><td>Japanese Yen . . . . .</td><td>119.2</td><td>121.7</td><td>121.9</td><td>121.5</td><td>114.8</td><td>107.7</td><td>102.2</td><td>109.8</td></tr><tr><td>New Taiwan Dollar</td><td>31.51</td><td>30.83</td><td>32.13</td><td>32.66</td><td>33.03</td><td>32.42</td><td>31.67</td><td>31.80</td></tr><tr><td>Korean Won . . . . . .</td><td>1,104.2</td><td>1,100.2</td><td>1,173.7</td><td>1,158.5</td><td>1,198.7</td><td>1,164.3</td><td>1,118.2</td><td>1,161.1</td></tr><tr><td>Singapore Dollar . . .</td><td>1.36</td><td>1.34</td><td>1.40</td><td>1.41</td><td>1.40</td><td>1.36</td><td>1.35</td><td>1.41</td></tr><tr><td>Mexican Peso . . . . .</td><td>14.97</td><td>15.36</td><td>16.51</td><td>16.79</td><td>18.01</td><td>18.15</td><td>18.76</td><td>19.89</td></tr><tr><td>Chinese Yuan . . . . .</td><td>6.24</td><td>6.20</td><td>6.32</td><td>6.40</td><td>6.54</td><td>6.54</td><td>6.67</td><td>6.84</td></tr><tr><td>Malaysian Ringitt . .</td><td>3.63</td><td>3.66</td><td>4.09</td><td>4.28</td><td>4.17</td><td>4.01</td><td>4.05</td><td>4.34</td></tr><tr><td>Philippine Peso . . . .</td><td>44.44</td><td>44.71</td><td>46.22</td><td>46.95</td><td>47.17</td><td>46.58</td><td>47.02</td><td>49.18</td></tr><tr><td>Thailand Baht . . . . .</td><td>32.62</td><td>33.36</td><td>35.40</td><td>35.83</td><td>35.58</td><td>35.28</td><td>34.80</td><td>35.44</td></tr><tr><td>Euro . . . . . . . . . . . . . . . . . . . .</td><td>0.89</td><td>0.90</td><td>0.90</td><td>0.92</td><td>0.90</td><td>0.89</td><td>0.90</td><td>0.93</td></tr><tr><td>Colombian Peso . . . . . . . . . . . . . . . . . . . .</td><td>2,483.7</td><td>2,504.0</td><td>2,970.6</td><td>3,072.5</td><td>3,240.8</td><td>2,990.1</td><td>2,940.9</td><td>3,020.8</td></tr><tr><td>Indonesia Rupiah . . . . . . . . . . . . . . . . . . . .</td><td>*</td><td>*</td><td>*</td><td>1,3743.19</td><td>13,461.4</td><td>13,323.3</td><td>13,130.3</td><td>13,276.69</td></tr></table>

* USANA operations had not commenced during the period indicated.

Interest Rate Risks. As of December 31, 2016, we had no outstanding debt and therefore, we had no direct exposure to interest rate risk. It may become necessary to borrow in the future in order to meet our financing needs. In the event that it becomes necessary to borrow, there can be no assurance that we will be able to borrow, or at favorable rates.

## Item 8. Financial Statements and Supplementary Data

The Financial Statements and Supplementary Data required by this Item are set forth at the pages indicated at Item 15 below.



## Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.

## Item 9A. Controls and Procedures

## Evaluation of 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 specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief 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, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.

As further described in “Management’s Report on Internal Control Over Financial Reporting:” below, as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) and management identified a material weakness in our internal control over financial reporting. Based upon the existence of this material weakness, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were not effective to provide reasonable assurance as of December 31, 2016.

The material weakness was detected in connection with an ongoing investigation being conducted by the Audit Committee of the Company’s Board of Directors into certain conduct and policies at BabyCare, including BabyCare’s compliance with the Foreign Corrupt Practices Act (FCPA). In particular, the Audit Committee, with the assistance of independent outside counsel and other advisors, is in the process of determining whether the conduct of certain employees and senior management at BabyCare violated the FCPA. While we do not currently believe that the amounts being investigated are quantitatively material or materially affected our financial statements, we cannot currently predict the outcome of the investigation on our business, results of operations or financial condition.

Notwithstanding the identified material weakness, management, including our Chief Executive Officer and Chief Financial Officer, believes the consolidated financial statements included in this annual report on Form 10-K fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.

## Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, (as defined in Rule 13a-15(f) under the Exchange Act). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:

• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;



• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

• Provide reasonable assurance regarding the prevention or timely detection of any unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper override of a control. Because of its inherent limitations, internal control over financial reporting may not prevent or detect all errors or fraud or ensure that all material information will be made known to management in a timely manner. However, these inherent limitations are known features of the financial reporting process, and it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Our management, including our Chief Executive Officer and our Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016. In making this assessment, management used the criteria that have been set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on its assessment, using those criteria, management concluded that, as of December 31, 2016, the Company’s internal control over financial reporting was not effective due to the material weakness described below. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

A member of BabyCare’s senior management overrode the system of internal control in China and did not demonstrate integrity and ethical values by his actions and behavior to support the effective functioning of internal control. Additionally, the training the Company provided to BabyCare personnel and management did not adequately train them regarding their responsibilities for compliance with relevant laws and regulations, including FCPA and anti-corruption matters, and the impact on financial reporting. Accordingly, as a result of these deficiencies, BabyCare did not operate effective controls over the authorization and review of cash disbursements and supporting documentation to ensure valid expenditures in compliance with relevant laws and regulations.

The control deficiencies resulted in no material misstatements to the consolidated financial statements. However, these control deficiencies create a reasonable possibility that a material misstatement to the consolidated financial statements will not be prevented or detected on a timely basis, and therefore we concluded that the control deficiencies represent a material weakness in the Company’s internal control over financial reporting and our internal control over financial reporting was not effective as of December 31, 2016. Our independent registered public accounting firm, KPMG LLP, who audited the consolidated financial statements included in this annual report, has expressed an adverse report on the operating effectiveness of the Company’s internal control over financial reporting. KPMG LLP’s report appears on page 50 of this annual report on Form 10-K.



## Remediation Efforts to Address Material Weakness

Management has and will continue to implement a number of actions that are intended to remediate the material weakness and strengthen our internal control and compliance environment, including the following:

• Termination of certain BabyCare employees and senior management whose conduct may have violated the FCPA;

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

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

The material weakness will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed during 2017.

## Changes in Control over Financial Reporting

Other than with respect to the material weaknesses identified during the fourth quarter and described above, there were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2016 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



## Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
USANA Health Sciences, Inc.:

We have audited USANA Health Science, Inc.'s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). USANA Health Science, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness related to failure to demonstrate integrity and ethical values in the actions and behavior of a member of senior management in China, ineffective training of China personnel regarding compliance with relevant laws and regulations impacting financial reporting and their responsibilities, and ineffective controls over the review and approval of cash disbursements and supporting documentation in China has been identified and included in management’s assessment. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of USANA Health Sciences, Inc. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2016 consolidated financial statements, and this report does not affect our report dated March 1, 2017, which expressed an unqualified opinion on those consolidated financial statements.



In our opinion, because of the effect of the aforementioned material weakness on the achievement of the objectives of the control criteria, USANA Health Sciences, Inc. has not maintained effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We do not express an opinion or any other form of assurance on management’s statements referring to corrective actions taken after December 31, 2016, relative to the aforementioned material weakness in internal control over financial reporting.

/s/ KPMG LLP

Salt Lake City, Utah

March 1, 2017



## Item 9B. Other Information

None.

## PART III

## Item 10. Directors, Executive Officers and Corporate Governance

The information for this Item is incorporated by reference to the definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act.

## Item 11. Executive Compensation

The information for this Item is incorporated by reference to the definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act.

## Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information for this Item is incorporated by reference to the definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act.

## Item 13. Certain Relationships and Related Transactions, and Director Independence

The information for this Item is incorporated by reference to the definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act.

## Item 14. Principal Accounting Fees and Services

The information for this Item is incorporated by reference to the definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act.



## PART IV

## Item 15. Exhibits, Financial Statement Schedules

(a) The following documents are filed as part of this Form:

1. Financial Statements
Reports of Independent Registered Public Accounting Firms ..... F-1
Consolidated Balance Sheets ..... F-2
Consolidated Statements of Comprehensive Income ..... F-3
Consolidated Statements of Stockholders' Equity ..... F-4
Consolidated Statements of Cash Flows ..... F-5
Notes to the Consolidated Financial Statements ..... F-6

2. Financial Statement Schedules.
For the years ended January 3, 2015, January 2, 2016, and December 31, 2016 Schedule II—Valuation and Qualifying Accounts

3. Exhibits.



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

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

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

10.1 USANA Health Sciences, Inc. 2006 Equity Incentive Award Plan (incorporated by reference to the Company’s Current Report on Form 8-K, filed April 25, 2006, Exhibit 10.1, File No. 0-21116). \( ^{*} $ 

10.2 Form of Stock Option Agreement for award of non-statutory stock options to employees under the USANA Health Sciences, Inc. 2006 Equity Incentive Award Plan (incorporated by reference to the Company’s Current Report on Form 8-K, filed April 26, 2006, Exhibit 10.1, File No. 0-21116). \( ^{*} $ 

10.3 Form of Stock Option Agreement for award of non-statutory stock options to directors who are not employees under the USANA Health Sciences, Inc. 2006 Equity Incentive Award Plan (incorporated by reference to the Company’s Current Report on Form 8-K, filed April 26, 2006, Exhibit 10.2, File No. 0-21116). \( ^{*} $ 

10.4 Form of Incentive Stock Option Agreement for award of incentive stock options to employees under the USANA Health Sciences, Inc. 2006 Equity Incentive Award Plan (incorporated by reference to the Company’s Current Report on Form 8-K, filed April 26, 2006, Exhibit 10.3, File No. 0-21116). \( ^{*} $ 

10.5 Form of Stock-Settled Stock Appreciation Rights Award Agreement for award of stock-settled stock appreciation rights to employees under the USANA Health Sciences, Inc. 2006 Equity Incentive Award Plan (incorporated by reference to the Company’s Current Report on Form 8-K, filed April 26, 2006, Exhibit 10.4, File No. 0-21116). \( ^{*} $ 

10.6 Form of Stock-Settled Stock Appreciation Rights Award Agreement for award of stock-settled stock appreciation rights to directors who are not employees under the USANA Health Sciences, Inc. 2006 Equity Incentive Award Plan (incorporated by reference to the Company’s Current Report on Form 8-K, filed April 26, 2006, Exhibit 10.5, File No. 0-21116). \( ^{*} $ 

10.7 Form of Deferred Stock Unit Award Agreement for grants of deferred stock units to directors who are not employees under the USANA Health Sciences, Inc. 2006 Equity Incentive Award Plan (incorporated by reference to the Company’s Current Report on Form 8-K, filed April 26, 2006, Exhibit 10.6, File No. 0-21116). \( ^{*} $ 

10.8 Form of Indemnification Agreement between the Company and its directors (incorporated by reference to the Company’s Current Report on Form 8-K, filed May 24, 2006, Exhibit 10.1, File No. 0-21116). \( ^{*} $ 

10.9 Form of Indemnification Agreement between the Company and certain of its officers (Incorporated by reference to the Company’s Current Report on Form 8-K, filed May 24, 2006, Exhibit 10.2, File No. 0-21116). \( ^{*} \)



10.10 Share Purchase Agreement, dated as of August 16, 2010, among USANA Health Sciences, Inc., Petlane, Inc., Yaolan Ltd., and BabyCare Holdings Ltd. (Incorporated by Reference to the Company’ Current Report on Form 8-K, filed August 16, 2010, Exhibit 10.1, File No. 0-21116).

10.11 Amended and Restated Credit Agreement, dated as of April 27, 2011 (Incorporated by reference to the Company’s Current Report on Form 8-K, filed April 28, 2011, Exhibit 10.17, File No. 0-21116).

10.12 Form of Executive Confidentiality, Non-Disclosure and Non-Solicitation Agreement (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended October 1, 2011, filed November 9, 2011, Exhibit 10.18, File No. 0-21116). \( ^{*} $ 

10.13 Separation and Release of Claims Agreement dated as of December 21, 2012 by and between USANA Health Sciences, Inc. and Roy Truett (incorporated by reference to the Company’s Current Report on Form 8-K, filed December 26, 2012, Exhibit 10.1, File No. 0-21116). \( ^{*} $ 

10.14 Amendment to Confidentiality, Non-Disclosure and Non-Solicitation Agreement dated as of December 21, 2012 by and between USANA Health Sciences, Inc. and Roy Truett (incorporated by reference to the Company’s Current Report on Form 8-K, filed December 26, 2012, Exhibit 10.2, File No. 0-21116). \( ^{*} $ 

10.15 Amendment to Amended and Restated Credit Agreement, dated as of July 18, 2013 (Incorporated by reference to the Company’s Current Report on Form 8-K, filed July 23, 2013, Exhibit 10.1, File No. 0-21116).

10.16 USANA Health Sciences, Inc. 2015 Equity Incentive Award Plan (incorporated by reference to the Company’s Current Report on Form 8-K, filed July 31, 2015, Exhibit 10.1, File No. 001-35024).*

10.17 Form of Stock-Settled Stock Appreciation Rights Award Agreement for employees under the USANA Health Sciences, Inc. 2015 Equity Incentive Award Plan (incorporated by reference to the Company’s Current Report on Form 8-K, filed July 31, 2015, Exhibit 10.2, File No. 001-35024).*

10.18 Form of Stock-Settled Stock Appreciation Rights Award Agreement for non-employee directors under the USANA Health Sciences, Inc. 2015 Equity Incentive Award Plan (incorporated by reference to the Company’s Current Report on Form 8-K, filed July 31, 2015, Exhibit 10.3, File No. 001-35024).*

10.19 Form of Restricted Stock Unit Award Agreement for employees under the USANA Health Sciences, Inc. 2015 Equity Incentive Award Plan (incorporated by reference to the Company’s Current Report on Form 8-K, filed July 31, 2015, Exhibit 10.4, File No. 001-35024).*

10.20 Form of Restricted Stock Unit Award Agreement for non-employee directors under the USANA Health Sciences, Inc. 2015 Equity Incentive Award Plan (incorporated by reference to the Company’s Current Report on Form 8-K, filed July 31, 2015, Exhibit 10.5, File No. 001-35024).*

10.21 Form of Deferred Stock Unit Award Agreement for grants of deferred stock units to non-employee director under the USANA Health Sciences, Inc. 2015 Equity Incentive Award Plan (incorporated by reference to the Company’s Current Report on Form 8-K, filed July 31, 2015, Exhibit 10.6, File No. 001-35024).*



10.22 Second Amendment to the Amended and Restated Credit Agreement and Amendment to loan documents, dated as of February 19, 2016 (incorporated by reference to the Company’s Current Report on Form 8-K, filed February 23, 2016, Exhibit 10.1, File No. 001-35024).

10.23 Transition Agreement dated as of December 19, 2016 by and between USANA Health Sciences, Inc. and Doug Braun.

11.1 Computation of Net Income per Share (included in Notes to Consolidated Financial Statements)

Code of Ethics of USANA Health Sciences, Inc. (posted on the Company’s Internet website at www.usanahealthsciences.com).

21 Subsidiaries of the Registrant, as of February 24, 2017 (filed herewith).

23.1 Consent of Independent Registered Public Accounting Firm (KPMG LLP) (filed herewith).

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

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

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

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

101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema Document

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF XBRL Taxonomy Extension Definition Linkbase Document

101.LAB XBRL Taxonomy Extension Label Linkbase Document

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 \( ^{*} \)  Denotes a management contract or compensatory plan or arrangement.



## SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

USANA Health Sciences, Inc.

By: /s/ KEVIN G. GUEST
Kevin G. Guest
Chief Executive Officer

Date: March 1, 2017

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

<table><tr><td>Signature</td><td>Title</td><td>Date</td></tr><tr><td>/s/ MYRON W. WENTZ
Myron W. Wentz, PhD</td><td>Chairman</td><td>March 1, 2017</td></tr><tr><td>/s/ KEVIN G. GUEST
Kevin G. Guest</td><td>Chief Executive Officer (Principal Executive Officer)</td><td>March 1, 2017</td></tr><tr><td>/s/ GILBERT A. FULLER
Gilbert A. Fuller</td><td>Director</td><td>March 1, 2017</td></tr><tr><td>/s/ ROBERT ANCIAUX
Robert Anciaux</td><td>Director</td><td>March 1, 2017</td></tr><tr><td>/s/ D. RICHARD WILLIAMS
D. Richard Williams</td><td>Director</td><td>March 1, 2017</td></tr><tr><td>/s/ FREDERIC J. WINSSINGER
Frederic J. Winssinger</td><td>Director</td><td>March 1, 2017</td></tr><tr><td>/s/ FENG PENG
Feng Peng</td><td>Director</td><td>March 1, 2017</td></tr><tr><td>/s/ PAUL A. JONES
Paul A. Jones</td><td>Chief Financial Officer (Principal Financial and Accounting Officer)</td><td>March 1, 2017</td></tr></table>



# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
USANA Health Sciences, Inc.:

We have audited the accompanying consolidated balance sheets of USANA Health Sciences, Inc. and subsidiaries as of December 31, 2016 and January 2, 2016, and the related consolidated statements of comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2016. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule II. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of USANA Health Sciences, Inc. and subsidiaries as of December 31, 2016 and January 2, 2016, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note A to the consolidated financial statements, the Company has changed its method of accounting for equity-based compensation due to the adoption of the amendments to the FASB Accounting Standards Codification resulting from Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting, effective January 3, 2016.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), USANA Health Sciences, Inc.'s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 1, 2017 expressed an adverse opinion on the effectiveness of the Company's internal control over financial reporting.

/s/ KPMG LLP

Salt Lake City, Utah
March 1, 2017



## USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)

<table><tr><td></td><td>As of January 2, 2016</td><td>As of December 31, 2016</td></tr><tr><td>ASSETS</td><td></td><td></td></tr><tr><td>Current assets</td><td></td><td></td></tr><tr><td>Cash and cash equivalents</td><td>$143,210</td><td>$175,774</td></tr><tr><td>Inventories</td><td>66,119</td><td>64,810</td></tr><tr><td>Prepaid expenses and other current assets</td><td>34,935</td><td>37,277</td></tr><tr><td>Total current assets</td><td>244,264</td><td>277,861</td></tr><tr><td>Property and equipment, net</td><td>87,982</td><td>101,267</td></tr><tr><td>Goodwill</td><td>17,432</td><td>16,715</td></tr><tr><td>Intangible assets, net</td><td>38,269</td><td>34,349</td></tr><tr><td>Deferred tax assets</td><td>9,844</td><td>18,292</td></tr><tr><td>Other assets</td><td>25,446</td><td>22,158</td></tr><tr><td></td><td>$423,237</td><td>$470,642</td></tr><tr><td>LIABILITIES AND STOCKHOLDERS&#x27; EQUITY</td><td></td><td></td></tr><tr><td>Current liabilities</td><td></td><td></td></tr><tr><td>Accounts payable</td><td>$ 10,043</td><td>$ 9,040</td></tr><tr><td>Other current liabilities</td><td>121,369</td><td>129,451</td></tr><tr><td>Total current liabilities</td><td>131,412</td><td>138,491</td></tr><tr><td>Deferred tax liabilities</td><td>9,822</td><td>5,499</td></tr><tr><td>Other long-term liabilities</td><td>1,151</td><td>1,365</td></tr><tr><td>Stockholders&#x27; equity</td><td></td><td></td></tr><tr><td>Common stock, $0.001 par value; Authorized—50,000 shares, issued and outstanding 24,976 as of January 2, 2016 and 24,485 as of December 31, 2016</td><td>25</td><td>24</td></tr><tr><td>Additional paid-in capital</td><td>69,728</td><td>71,505</td></tr><tr><td>Retained earnings</td><td>214,875</td><td>265,405</td></tr><tr><td>Accumulated other comprehensive income (loss)</td><td>(3,776)</td><td>(11,647)</td></tr><tr><td>Total stockholders&#x27; equity</td><td>280,852</td><td>325,287</td></tr><tr><td></td><td>$423,237</td><td>$470,642</td></tr></table>

The accompanying notes are an integral part of these statements.



## USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except per share data)

<table><tr><td rowspan="2"></td><td colspan="3">Fiscal Year</td></tr><tr><td>2014</td><td>2015</td><td>2016</td></tr><tr><td>Net sales</td><td>$790,471</td><td>$918,499</td><td>$1,006,083</td></tr><tr><td>Cost of sales</td><td>140,794</td><td>159,682</td><td>180,190</td></tr><tr><td>Gross profit</td><td>649,677</td><td>758,817</td><td>825,893</td></tr><tr><td>Operating expenses:</td><td></td><td></td><td></td></tr><tr><td>Associate incentives</td><td>349,044</td><td>408,160</td><td>453,077</td></tr><tr><td>Selling, general and administrative</td><td>184,531</td><td>208,995</td><td>234,194</td></tr><tr><td>Total operating expenses</td><td>533,575</td><td>617,155</td><td>687,271</td></tr><tr><td>Earnings from operations</td><td>116,102</td><td>141,662</td><td>138,622</td></tr><tr><td>Other income (expense):</td><td></td><td></td><td></td></tr><tr><td>Interest income</td><td>500</td><td>1,116</td><td>1,480</td></tr><tr><td>Interest expense</td><td>(129)</td><td>(15)</td><td>(444)</td></tr><tr><td>Other, net</td><td>(820)</td><td>(174)</td><td>(1,106)</td></tr><tr><td>Other income (expense), net</td><td>(449)</td><td>927</td><td>(70)</td></tr><tr><td>Earnings before income taxes</td><td>115,653</td><td>142,589</td><td>138,552</td></tr><tr><td>Income taxes</td><td>39,017</td><td>47,917</td><td>38,511</td></tr><tr><td>Net earnings</td><td>$ 76,636</td><td>$ 94,672</td><td>$ 100,041</td></tr><tr><td>Earnings per common share</td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>$ 2.90</td><td>$ 3.72</td><td>$ 4.14</td></tr><tr><td>Diluted</td><td>$ 2.80</td><td>$ 3.59</td><td>$ 3.99</td></tr><tr><td>Weighted average common shares outstanding</td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>26,443</td><td>25,460</td><td>24,185</td></tr><tr><td>Diluted</td><td>27,377</td><td>26,355</td><td>25,047</td></tr><tr><td>Comprehensive income:</td><td></td><td></td><td></td></tr><tr><td>Net earnings</td><td>$ 76,636</td><td>$ 94,672</td><td>$ 100,041</td></tr><tr><td>Other comprehensive income (loss), net of tax:</td><td></td><td></td><td></td></tr><tr><td>Foreign currency translation adjustment</td><td>(4,492)</td><td>(9,283)</td><td>(11,777)</td></tr><tr><td>Tax benefit (expense) related to foreign currency translation adjustment</td><td>830</td><td>3,375</td><td>3,906</td></tr><tr><td>Other comprehensive income (loss), net of tax</td><td>(3,662)</td><td>(5,908)</td><td>(7,871)</td></tr><tr><td>Comprehensive income</td><td>$ 72,974</td><td>$ 88,764</td><td>$ 92,170</td></tr></table>

The accompanying notes are an integral part of these statements.



## USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended January 3, 2015; January 2, 2016; and December 31, 2016
(in thousands)

<table><tr><td rowspan="2"></td><td colspan="2">Common Stock</td><td rowspan="2">Additional Paid-in Capital</td><td rowspan="2">Retained Earnings</td><td rowspan="2">Accumulated Other Comprehensive Income (Loss)</td><td rowspan="2">Total</td></tr><tr><td>Shares</td><td>Value</td></tr><tr><td>Balance at December 28, 2013</td><td>27,772</td><td>$28</td><td>$ 54,677</td><td>$ 200,023</td><td>$ 5,794</td><td>$ 260,522</td></tr><tr><td>Net earnings</td><td></td><td></td><td></td><td>76,636</td><td></td><td>76,636</td></tr><tr><td>Other comprehensive income (loss), net of tax</td><td></td><td></td><td></td><td></td><td>(3,662)</td><td>(3,662)</td></tr><tr><td>Equity-based compensation expense</td><td></td><td></td><td>9,805</td><td></td><td></td><td>9,805</td></tr><tr><td>Common stock repurchased and retired</td><td>(3,854)</td><td>(4)</td><td>(28,562)</td><td>(110,253)</td><td></td><td>(138,819)</td></tr><tr><td>Common stock issued under equity award plans</td><td>1,348</td><td>1</td><td>10,969</td><td></td><td></td><td>10,970</td></tr><tr><td>Tax benefit from equity award activity</td><td></td><td></td><td>14,712</td><td></td><td></td><td>14,712</td></tr><tr><td>Balance at January 3, 2015</td><td>25,266</td><td>25</td><td>61,601</td><td>166,406</td><td>2,132</td><td>230,164</td></tr><tr><td>Net earnings</td><td></td><td></td><td></td><td>94,672</td><td></td><td>94,672</td></tr><tr><td>Other comprehensive income (loss), net of tax</td><td></td><td></td><td></td><td></td><td>(5,908)</td><td>(5,908)</td></tr><tr><td>Equity-based compensation expense</td><td></td><td></td><td>11,081</td><td></td><td></td><td>11,081</td></tr><tr><td>Common stock repurchased and retired</td><td>(914)</td><td>—</td><td>(14,978)</td><td>(46,203)</td><td></td><td>(61,181)</td></tr><tr><td>Common stock issued under equity award plans</td><td>624</td><td>—</td><td></td><td></td><td></td><td>—</td></tr><tr><td>Tax benefit from equity award activity</td><td></td><td></td><td>12,024</td><td></td><td></td><td>12,024</td></tr><tr><td>Balance at January 2, 2016</td><td>24,976</td><td>25</td><td>69,728</td><td>214,875</td><td>(3,776)</td><td>280,852</td></tr><tr><td>Cumulative-effect of accounting change</td><td></td><td></td><td>934</td><td>(601)</td><td></td><td>333</td></tr><tr><td>Balance at January 2, 2016, as adjusted</td><td>24,976</td><td>25</td><td>70,662</td><td>214,274</td><td>(3,776)</td><td>281,185</td></tr><tr><td>Net earnings</td><td></td><td></td><td></td><td>100,041</td><td></td><td>100,041</td></tr><tr><td>Other comprehensive income (loss), net of tax</td><td></td><td></td><td></td><td></td><td>(7,871)</td><td>(7,871)</td></tr><tr><td>Equity-based compensation expense</td><td></td><td></td><td>16,542</td><td></td><td></td><td>16,542</td></tr><tr><td>Common stock repurchased and retired</td><td>(1,106)</td><td>(1)</td><td>(15,699)</td><td>(48,910)</td><td></td><td>(64,610)</td></tr><tr><td>Common stock issued under equity award plans</td><td>615</td><td>—</td><td></td><td></td><td></td><td>—</td></tr><tr><td>Balance at December 31, 2016</td><td>24,485</td><td>$24</td><td>$ 71,505</td><td>$ 265,405</td><td>$(11,647)</td><td>$ 325,287</td></tr></table>

The accompanying notes are an integral part of these statements.



## USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

<table><tr><td rowspan="2"></td><td colspan="3">Year Ended</td></tr><tr><td>2014</td><td>2015</td><td>2016</td></tr><tr><td>Cash flows from operating activities</td><td></td><td></td><td></td></tr><tr><td>Net earnings</td><td>$ 76,636</td><td>$ 94,672</td><td>$100,041</td></tr><tr><td>Adjustments to reconcile net earnings to net cash provided by (used in) operating activities</td><td></td><td></td><td></td></tr><tr><td>Depreciation and amortization</td><td>8,810</td><td>9,978</td><td>13,482</td></tr><tr><td>(Gain) loss on sale of property and equipment</td><td>46</td><td>3</td><td>116</td></tr><tr><td>Equity-based compensation expense</td><td>9,805</td><td>11,081</td><td>16,542</td></tr><tr><td>Excess tax benefits from equity-based payment arrangements</td><td>(14,834)</td><td>(12,024)</td><td>—</td></tr><tr><td>Deferred income taxes</td><td>(1,039)</td><td>(2,572)</td><td>(3,700)</td></tr><tr><td>Changes in operating assets and liabilities:</td><td></td><td></td><td></td></tr><tr><td>Inventories</td><td>1,102</td><td>(23,071)</td><td>(1,034)</td></tr><tr><td>Prepaid expenses and other assets</td><td>(3,789)</td><td>(2,047)</td><td>(9,610)</td></tr><tr><td>Income tax payable related to tax benefit from equity award activity</td><td>14,712</td><td>12,024</td><td>—</td></tr><tr><td>Accounts payable</td><td>(1,337)</td><td>2,481</td><td>(1,341)</td></tr><tr><td>Other liabilities</td><td>15,073</td><td>20,941</td><td>22,534</td></tr><tr><td>Net cash provided by (used in) operating activities</td><td>105,185</td><td>111,466</td><td>137,030</td></tr><tr><td>Cash flows from investing activities</td><td></td><td></td><td></td></tr><tr><td>Additions to notes receivable</td><td>(4,495)</td><td>(1,580)</td><td>(7)</td></tr><tr><td>Receipts on notes receivable</td><td>—</td><td>—</td><td>811</td></tr><tr><td>Purchases of investment securities held-to-maturity</td><td>(3,871)</td><td>—</td><td>—</td></tr><tr><td>Maturities of investment securities</td><td>12,511</td><td>—</td><td>—</td></tr><tr><td>Proceeds from sale of property and equipment</td><td>10</td><td>185</td><td>11</td></tr><tr><td>Purchases of property and equipment</td><td>(20,421)</td><td>(23,729)</td><td>(32,698)</td></tr><tr><td>Net cash provided by (used in) investing activities</td><td>(16,266)</td><td>(25,124)</td><td>(31,883)</td></tr><tr><td>Cash flows from financing activities</td><td></td><td></td><td></td></tr><tr><td>Proceeds from equity awards exercised</td><td>10,970</td><td>—</td><td>—</td></tr><tr><td>Excess tax benefits from equity-based payment arrangements</td><td>14,834</td><td>12,024</td><td>—</td></tr><tr><td>Repurchase of common stock</td><td>(138,819)</td><td>(61,181)</td><td>(64,610)</td></tr><tr><td>Borrowings on line of credit</td><td>30,000</td><td>—</td><td>73,700</td></tr><tr><td>Payments on line of credit</td><td>(30,000)</td><td>—</td><td>(73,700)</td></tr><tr><td>Deferred debt issuance costs</td><td>—</td><td>—</td><td>(250)</td></tr><tr><td>Net cash provided by (used in) financing activities</td><td>(113,015)</td><td>(49,157)</td><td>(64,860)</td></tr><tr><td>Effect of exchange rate changes on cash and cash equivalents</td><td>(2,121)</td><td>(5,101)</td><td>(7,723)</td></tr><tr><td>Net increase (decrease) in cash and cash equivalents</td><td>(26,217)</td><td>32,084</td><td>32,564</td></tr><tr><td>Cash and cash equivalents, beginning of period</td><td>137,343</td><td>111,126</td><td>143,210</td></tr><tr><td>Cash and cash equivalents, end of period</td><td>$ 111,126</td><td>$143,210</td><td>$175,774</td></tr><tr><td>Supplemental disclosures of cash flow information</td><td></td><td></td><td></td></tr><tr><td>Cash paid during the period for:</td><td></td><td></td><td></td></tr><tr><td>Interest</td><td>$ 136</td><td>$ 15</td><td>$ 323</td></tr><tr><td>Income taxes</td><td>26,955</td><td>35,782</td><td>52,579</td></tr><tr><td>Non-cash investing activities:</td><td></td><td></td><td></td></tr><tr><td>Credits on notes receivable</td><td>720</td><td>966</td><td>1,288</td></tr><tr><td>Accrued purchases of property and equipment</td><td>1,805</td><td>6,863</td><td>2,216</td></tr></table>

The accompanying notes are an integral part of these statements.



# USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)

## NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

## The Company

USANA Health Sciences, Inc. develops and manufactures high-quality nutritional and personal care products that are sold internationally through a global network marketing system, which is a form of direct selling. The Consolidated Financial Statements include the accounts and operations of USANA Health Sciences, Inc. and its wholly-owned subsidiaries (collectively, the “Company” or “USANA”) in two geographic regions: Asia Pacific, and Americas and Europe. Asia Pacific is further divided into three sub-regions: Greater China, Southeast Asia Pacific, and North Asia. Greater China includes Hong Kong, Taiwan and China; Southeast Asia Pacific includes Australia, New Zealand, Singapore, Malaysia, the Philippines, Thailand, and Indonesia; North Asia includes Japan, and South Korea. Americas and Europe includes the United States, Canada, Mexico, Colombia, the United Kingdom, France, Belgium, and the Netherlands.

## Principles of consolidation and basis of presentation

The accompanying Consolidated Financial Statements include the accounts and operations of USANA Health Sciences, Inc. and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America (“US GAAP”).

## Use of estimates

The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates for the Company relate to revenue recognition, inventory obsolescence, goodwill and other intangible assets, equity-based compensation, income taxes, and contingent liabilities. Actual results could differ from those estimates. These estimates may be adjusted as more current information becomes available, and any adjustment could be significant.

## Fiscal year

The Company operates on a 52-53 week year, ending on the Saturday closest to December 31. Fiscal year 2014 was a 53-week year. Fiscal years 2015 and 2016, were 52-week years. Fiscal year 2014 covered the period December 29, 2013 to January 3, 2015 (hereinafter 2014). Fiscal year 2015 covered the period January 4, 2015 to January 2, 2016 (hereinafter 2015). Fiscal year 2016 covered the period January 3, 2016 to December 31, 2016 (hereinafter 2016).

## Fair value measurements

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



# USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)

## NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 January 2, 2016 and December 31, 2016, the following financial assets and liabilities were measured at fair value on a recurring basis using the type of inputs shown:

<table><tr><td rowspan="3"></td><td rowspan="3">January 2, 2016</td><td colspan="3">Fair Value Measurements Using</td></tr><tr><td colspan="3">Inputs</td></tr><tr><td>Level 1</td><td>Level 2</td><td>Level 3</td></tr><tr><td>Money market funds included in cash equivalents</td><td>$14,460</td><td>$14,460</td><td>$—</td><td>$—</td></tr><tr><td>Foreign currency contracts included in prepaid expenses and other current assets</td><td>33</td><td>—</td><td>33</td><td>—</td></tr><tr><td></td><td>$14,493</td><td>$14,460</td><td>$33</td><td>$—</td></tr><tr><td></td><td></td><td></td><td colspan="2">Fair Value Measurements Using</td></tr><tr><td></td><td>December 31, 2016</td><td colspan="3">Inputs</td></tr><tr><td></td><td></td><td>Level 1</td><td>Level 2</td><td>Level 3</td></tr><tr><td>Money market funds included in cash equivalents</td><td>$27,917</td><td>$27,917</td><td>$—</td><td>$—</td></tr><tr><td>Foreign currency contracts included in prepaid expenses and other current assets</td><td>4</td><td>—</td><td>4</td><td>—</td></tr><tr><td></td><td>$27,921</td><td>$27,917</td><td>$4</td><td>$—</td></tr></table>

There were no transfers of financial assets or liabilities between Level 1 and Level 2 inputs for the years ended 2015 and 2016.

The majority of the Company’s non-financial assets, which include goodwill, intangible assets, and property and equipment, are not required to be carried at fair value on a recurring basis. However, if certain triggering events occur (or tested at least annually for goodwill and indefinite-lived intangibles) such that a non-financial asset is required to be evaluated for impairment, an impairment charge is recorded to reduce the carrying value to the fair value, if the carrying value exceeds the fair value. For the years ended 2014, 2015, and 2016, there were no non-financial assets measured at fair value on a non-recurring basis.



# USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)

## NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

## Fair value of financial instruments

At January 2, 2016 and December 31, 2016, the Company’s financial instruments include cash equivalents, accounts receivable, restricted cash, notes receivable, and accounts payable. The recorded values of cash equivalents, accounts receivable, restricted cash, and accounts payable approximate their fair values, based on their short-term nature. The carrying value of the notes receivable approximate fair value because the variable interest rates in the notes reflect current market rates.

## Translation of foreign currencies

The functional currency of the Company’s foreign subsidiaries is the local currency of their country of domicile. Assets and liabilities of the foreign subsidiaries are translated into U.S. dollar amounts at month-end exchange rates. Revenue and expense accounts are translated at the weighted-average rates for the monthly accounting period to which they relate. Equity accounts are translated at historical rates. Foreign currency translation adjustments are accumulated as a component of other comprehensive income. Gains and losses from foreign currency transactions are included in the “Other, net” component of Other income (expense) in the Company’s consolidated statements of comprehensive income.

## Cash and cash equivalents

The Company considers all highly liquid investments with an original maturity of three months or less from the date of purchase to be cash equivalents. Cash equivalents as of January 2, 2016 and December 31, 2016 consisted primarily of money market fund investments and amounts receivable from credit card processors.

Amounts receivable from credit card processors are considered cash equivalents because they are both short-term and highly liquid in nature and are typically converted to cash within three days of the sales transaction. Amounts receivable from credit card processors as of January 2, 2016 and December 31, 2016 totaled $12,516 and $11,659, respectively.

## Restricted Cash

The Company is required to maintain cash deposits with banks in certain subsidiary locations for various operating purposes. The most significant of these cash deposits relates to a deposit held at a bank in China, the balance of which was $3,080 as of January 2, 2016, and $2,880 as of December 31, 2016. This deposit is required for the application of direct sales licenses by the Ministry of Commerce and the State Administration for Industry & Commerce of the People’s Republic of China, and will continue to be restricted during the periods while the Company holds these licenses. Restricted cash is included in the “Other assets” line item in the Company’s consolidated balance sheets.

## Inventories

Inventories are stated at the lower of cost or market. Cost is determined using a standard costing system which approximates the first-in, first-out method. The components of inventory cost include raw materials, labor, and overhead. Market value is determined using various assumptions with regard to excess or slow-moving inventories, non-conforming inventories, expiration dates, current and future



# USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)

## NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

product demand, production planning, and market conditions. A change in any of these variables could result in an adjustment to inventory.

## Accounts Receivable

Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and our customers' financial condition, the amount of receivables in dispute, and the current receivables aging and current payment patterns. The Company reviews its allowance for doubtful accounts regularly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Accounts Receivable is included in the “Prepaid expenses and other current assets” line item in the Company’s consolidated balance sheets.

## Income taxes

The Company accounts for income taxes using the asset and liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of the differences between the financial statement assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax expense or benefit is the result of changes in deferred tax assets and liabilities. The Company evaluates the probability of realizing the future benefits of its deferred tax assets and provides a valuation allowance for the portion of any deferred tax assets where the likelihood of realizing an income tax benefit in the future does not meet the “more-likely-than-not” criteria for recognition. The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The Company recognizes interest and penalties related to unrecognized tax benefits in income taxes. Deferred taxes are not provided on the portion of undistributed earnings of subsidiaries outside of the United States when these earnings are considered indefinitely reinvested.

## Property and equipment

Property and equipment are recorded at cost. Maintenance, repairs, and renewals, which neither materially add to the value of the property nor appreciably prolong its life, are charged to expense as incurred. Depreciation is provided in amounts sufficient to relate the cost of depreciable assets to operations over the estimated useful lives of the related assets. The straight-line method of depreciation and amortization is followed for financial statement purposes. Leasehold improvements are amortized over the shorter of the life of the respective lease or the useful life of the improvements. Property and equipment are reviewed for impairment whenever events or changes in circumstances exist that indicate



# USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)

## NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

the carrying amount of an asset may not be recoverable. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period.

## Notes receivable

Notes receivable consists primarily of a secured loan to a third-party supplier of the Company’s nutrition bars and are included in the “Other assets” line item in the Company’s consolidated balance sheets. The Company has extended non-revolving credit to this supplier to allow them to acquire equipment that is necessary to manufacture the USANA nutrition bars. This relationship provides improved supply chain stability for USANA and creates a mutually beneficial relationship between the parties. Notes receivable are valued at their unpaid principal balance plus any accrued but unpaid interest, which approximates fair value. Interest accrues at an annual interest rate of LIBOR plus 400 basis points. The note has a maturity date of February 1, 2024 and will be repaid by a combination of cash payments and credits for the manufacture of USANA’s nutrition bars. Manufacturing credits and cash payments applied during 2015 and 2016 were $966 and $1,860, respectively. There is no prepayment penalty. Notes receivable from this supplier as of January 2, 2016, and December 31, 2016, were $8,339, and $6,867, respectively.

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

## Goodwill

Goodwill represents the excess of the purchase price over the fair market value of identifiable net assets of acquired companies. Goodwill is not amortized, but rather is tested at the reporting unit level at least annually for impairment or more frequently if triggering events or changes in circumstances indicate impairment. Initially, qualitative factors are considered to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Some of these qualitative factors may include macroeconomic conditions, industry and market considerations, a change in financial performance, entity-specific events, a sustained decrease in share price, and consideration of the difference between the fair value and carrying amount of a reporting unit as determined in the most recent quantitative assessment. If, through this qualitative assessment, the conclusion is made that it is more likely than not that a reporting unit’s fair value is less than its carrying amount, a two-step quantitative impairment analysis is performed. The first step involves estimating the fair value of a reporting unit using widely-accepted valuation methodologies including the income and market approaches, which requires the use of estimates and assumptions. These estimates and assumptions include revenue growth rates, discounts rates, and determination of appropriate market comparables. If the fair value of the reporting unit is less than its carrying amount, the second step of the impairment test is performed to measure the amount of the impairment loss. In the second step, the implied fair



# USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)

## NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

value of the goodwill is estimated as the fair value of the reporting unit as determined in step one, less fair values of all other net tangible and intangible assets of the reporting unit determined in a manner similar to a purchase price allocation. If the carrying amount of the goodwill exceeds its implied fair value, an impairment loss is recognized in an amount equal to that excess, not to exceed the carrying amount of the goodwill. During 2014, 2015, and 2016, no impairment of goodwill was recorded.

## Intangible assets

Intangible assets represent long-lived and indefinite-lived intangible assets acquired in connection with the purchase of the Company’s China subsidiary in 2010. Long-lived intangible assets are amortized over their related useful lives, using a straight-line or accelerated method consistent with the underlying expected future cash flows related to the specific intangible asset. Long-lived intangible assets are reviewed for impairment whenever events or changes in circumstances exist that indicate the carrying amount of an asset may not be recoverable. When indicators of impairment exist, an estimate of undiscounted net cash flows is used in measuring whether the carrying amount of the asset or related asset group is recoverable. Measurement of the amount of impairment, if any, is based upon the difference between the asset or asset group’s carrying value and estimated fair value. Fair value is determined through various valuation techniques, including market and income approaches as considered necessary.

Indefinite-lived intangible assets are not amortized; however, they are tested at least annually for impairment or more frequently if events or changes in circumstances exist that may indicate impairment. Initially, qualitative factors are considered to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If, through this qualitative assessment, the conclusion is made that it is more likely than not that an indefinite-lived intangible asset’s fair value is less than its carrying amount, a quantitative impairment analysis is performed by comparing the indefinite-lived intangible asset’s book value to its estimated fair value. The fair value for indefinite-lived intangible assets is determined through various valuation techniques, including market and income approaches as considered necessary. The amount of any impairment is measured as the difference between the carrying amount and the fair value of the impaired asset. During 2014, 2015, and 2016, no impairment of indefinite-lived intangible assets was recorded.

## Self insurance

The Company is self-insured, up to certain limits, for employee group health claims. The Company has purchased stop-loss insurance on both an individual and an aggregate basis, which will reimburse the Company for individual claims in excess of $125 and aggregate claims that are greater than 100% of projected claims. A liability is accrued for all unpaid claims. Total expense under this self-insurance program was $7,019, $7,287 and $9,015 in 2014, 2015 and 2016, respectively.

## Common stock and additional paid-in capital

The Company records cash that it receives upon the exercise of equity awards by crediting common stock and additional paid-in capital. The Company received $10,970 in cash proceeds from the exercise of equity awards in 2014. There were no cash proceeds from the exercise of equity awards in



# USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)

## NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

2015 and 2016. The Company also realizes an income tax benefit from the exercise of certain equity awards.

Upon exercise, the related deferred tax assets are reversed and the difference between the deferred tax assets and the realized tax benefit creates a tax windfall or shortfall that increases or decreases income tax expense. The total tax benefit recorded in income tax expense was $9,140, in 2016. Prior to 2016, tax benefits from exercises of equity awards were recorded in additional paid-in capital and were $14,712 and $12,024, in 2014 and 2015, respectively. See Recent Accounting Pronouncements for discussion of this change in accounting principle

The Company has a stock repurchase plan in place that has been authorized by the Board of Directors. As of December 31, 2016, $35,390 was available to repurchase shares under this plan. During the years ended 2014, 2015, and 2016, the Company repurchased and retired 3,854 shares, 914 shares, and 1,106 shares for an aggregate price of $138,819, $61,181, and $64,610, respectively. The excess of the repurchase price over par value is allocated between additional paid-in capital and retained earnings on a pro-rata basis. There currently is no expiration date on the remaining approved repurchase amount and no requirement for future share repurchases.

## Revenue recognition and deferred revenue

Revenue is recognized at the estimated point of delivery of the merchandise, at which point the risks and rewards of ownership have passed to the customer. Revenue is realizable when the following four criteria are met: persuasive evidence of a sale arrangement exists, delivery of the product has occurred, the price is fixed or determinable, and payment is reasonably assured.

The Company receives payment, primarily via credit card, for the sale of products at the time customers place orders. Sales and related fees such as shipping and handling, net of applicable sales discounts, are recorded as revenue when the product is delivered and when title and the risk of ownership passes to the customer. Payments received for undelivered products are recorded as deferred revenue and are included in other current liabilities. Deferred revenue is recognized at the estimated point of delivery of the merchandise. On the occasion that will-call orders are not picked up by customers, we periodically assess the likelihood that customers will exercise their contractual right to pick up orders and recognize revenue when the likelihood is estimated to be remote. Certain incentives offered on the sale of our products, including sales discounts, are classified as a reduction of revenue. Sales discounts earned under USANA's initial order reward program are considered part of a multiple element revenue arrangement and accordingly are deferred when the first order is placed and recognized as customers place their subsequent two Auto Orders. A provision for product returns and allowances is recorded and is based on historical experience. Additionally, the Company collects an annual account renewal fee from Associates that is deferred upon receipt and is recognized as revenue on a straight-line basis over the subsequent twelve-month period.

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, are presented on a net basis in the consolidated statements of comprehensive income (excluded from net sales).



# USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)

## NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

## Product return policy

All first-time product orders, regardless of condition, that are returned within the first 30 days following purchase are refunded at 100% of the sales price. After the first order, all other returned product that is unused and resalable is refunded up to one year from the date of purchase at 100% of the sales price. This standard policy differs slightly in a few of our international markets due to the regulatory environment in those markets. According to the terms of the Associate agreement, return of product where the purchase amount exceeds one hundred dollars and was not damaged at the time of receipt by the Associate may result in cancellation of the Associate’s distributorship. Depending upon the conditions under which product was returned, customers may either receive a refund based on their original form of payment, or credit on account for a product exchange. Product returns totaled approximately 0.8%, 0.6%, and 0.7% of net sales in 2014, 2015, and 2016, respectively.

## Shipping and handling costs

The Company’s shipping and handling costs are included in cost of sales for all periods presented.

## Associate incentives

Associate incentives expenses include all forms of commissions, and other incentives paid to our Associates, less commissions paid to Associates on personal purchases, which are considered a sales discount and are reported as a reduction to net sales.

## Selling, general and administrative

Selling, general and administrative expenses include wages and benefits, depreciation and amortization, rents and utilities, Associate event costs, advertising and professional fees, marketing, and research and development expenses.

## Equity-based compensation

The Company records compensation expense in the financial statements for equity-based awards based on the grant date fair value. Equity-based compensation expense is recognized under the straight-line method over the period that service is provided, which is generally the vesting term. Further information regarding equity awards can be found in Note J—Equity-Based Compensation.

## Advertising

Advertising costs are charged to expense as incurred and are presented as part of selling, general and administrative expense. Advertising expense totaled $4,942, $13,766, and $12,266 in 2014, 2015, and 2016, respectively.

## Research and development

Research and development costs are charged to expense as incurred and are presented as part of selling, general and administrative expense. Research and development expense totaled $5,128, $6,420, and $8,842 in 2014, 2015, and 2016, respectively.



# USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)

## NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

## Earnings per share and stock split

Basic earnings per common share (EPS) are based on the weighted-average number of common shares that were outstanding during each period. Diluted earnings per common share include the effect of potentially dilutive common shares calculated using the treasury stock method, which include in-the-money, equity-based awards that have been granted but have not been issued. Weighted average shares outstanding for all years presented reflect a two-for-one stock split effective November 22, 2016.

## Recent Accounting Pronouncements

## Adopted accounting pronouncements

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”. The ASU requires entities with a classified balance sheet to present all deferred tax assets and liabilities as noncurrent. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2016. Early adoption is permitted at the beginning of an interim or annual period and requires either a prospective or retrospective approach to adoption. The Company elected to early adopt ASU 2015-17 during the quarter ended April 2, 2016. As a result of the adoption, current deferred tax assets and current deferred tax liabilities were reclassified to noncurrent deferred taxes. The adoption of ASU 2015-17 was on a prospective basis and therefore had no impact on prior periods.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 was issued as part of the FASB’s simplification initiative aimed at reducing costs and complexity while maintaining or improving the usefulness of financial information. This update involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, forfeitures, statutory tax withholding requirements, and classification in the statement of cash flows. This ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period, and the entity must adopt all of the amendments in the same period. The Company elected to early adopt ASU 2016-09 during the quarter ended April 2, 2016. Following is a summary of the changes resulting from adopting this ASU:

Forfeitures—Estimating forfeitures as part of the compensation cost accrual is no longer required. An entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The Company has elected to account for forfeitures when they occur. The cumulative-effect of this change in election resulted in a decrease to retained earnings and an increase to additional paid-in capital of $934 as of the beginning of 2016. The tax effect of this adjustment increased the beginning balances for deferred tax assets and retained earnings by $333.

Income Tax Accounting—Prior to adopting this ASU, all excess tax benefits resulting from exercise or settlement of share-based payment transactions were recognized in Additional paid-in capital (“APIC”) and accumulated in an APIC pool. Any tax deficiencies were either offset against the APIC



# USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)

## NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

pool, or were recognized in the income statement if no APIC pool was available. Under the new amendments, the APIC pool has been eliminated and all excess tax benefits and tax deficiencies are recognized as an income tax benefit or expense in the income statement prospectively. Accordingly, prior periods have not been adjusted. The calculation of diluted earnings per share under the treasury stock method no longer includes the estimated excess tax benefits and tax deficiencies that were recorded in APIC. Additionally, the tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur. An entity should also recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period.

Statement of Cash Flow Presentation—Historically, excess tax benefits on the statement of cash flows have been presented as a cash inflow from financing activities and a cash outflow from operating activities. The ASU simplifies the presentation of excess tax benefits on the statements of cash flow requiring that excess tax benefits be classified along with other income tax cash flows as an operating activity. As part of the transition, entities may elect the cash flow presentation changes using either a prospective or retrospective application. The Company has elected to present the changes on a prospective basis, and as such, the excess tax benefits from equity-based payment arrangements in the Condensed Consolidated Statements of Cash Flows have not been adjusted for prior periods to conform with the current presentation. The excess tax benefits from equity-based payment arrangements during 2016 totaled $9,140 and are reflected in net earnings of the operating activities section of the Consolidated Statements of Cash Flows.

The net impact of the early adoption of this standard increased net earnings by approximately $8,600 and diluted earnings per share by $0.30 for 2016.

## Issued accounting pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standard Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 includes a five-step process by which entities will recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which an entity expects to be entitled in exchange for those goods or services. The standard also will require enhanced disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB announced a decision to defer the effective date of this ASU. ASU 2014-09 is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted for annual and interim reporting periods beginning after December 15, 2016. The amendments may be applied retrospectively to each prior period (full retrospective) or retrospectively with the cumulative effect recognized as of the date of initial application (modified retrospective). The Company plans to adopt ASU 2014-09 in the first quarter of 2018 and apply the modified retrospective approach.

The company continues to evaluate the impact of this ASU on the specific areas that apply to the Company and their potential impact to our processes, accounting, financial reporting, disclosures and controls. At this point, the Company has determined that the overall impact of adopting this ASU will not be material. This ASU will primarily involve updating revenue related internal control documentation and expanding revenue disclosures in our periodic filings. In addition to the documentation updates, the Company is considering a change in the methodology for deferring revenue



# USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)

## NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

on undelivered orders, which would not change the total amount of revenue recognized, but would accelerate the timing of when revenue is recognized. None of these changes are expected to have a material impact on the Company’s financial statements.

In April 2015, the FASB issued ASU No. 2015-05, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement”. This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The ASU is effective for annual and interim reporting periods beginning after December 15, 2016. Early adoption is permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company does not expect the adoption of ASU 2015-05 will have a material impact on its consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”. For entities that do not measure inventory using the last-in, first-out or retail inventory method, ASU 2015-11 changes the measurement principle for inventory from the lower of cost or market to lower of cost or net realizable value, where net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The ASU is effective for annual and interim reporting periods beginning after December 15, 2016. The Company does not expect the adoption of ASU 2015-11 will have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” ASU 2016-02 is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Additionally, the ASU will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. The update requires lessees to apply a modified retrospective approach for recognition and disclosure, beginning with the earliest period presented. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact ASU 2016-02 will have on its consolidated financial statements. The Company believes that adoption of this standard will likely have a material impact on its consolidated balance sheets for the recognition of certain operating leases as right-of-use assets and lease obligations. Additional information on the Company’s operating lease obligations can be found in Note I—Commitments and Contingencies.

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”. The ASU requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The ASU is effective for annual and interim period in fiscal years beginning after December 15, 2017. The Company does not expect the adoption of ASU 2016-18 will have a material impact on its cash flows.



# USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)

## NOTE B—INVENTORIES

Inventories consist of the following:

<table><tr><td></td><td>January 2, 2016</td><td>December 31, 2016</td></tr><tr><td>Raw materials</td><td>$22,529</td><td>$26,186</td></tr><tr><td>Work in progress</td><td>8,701</td><td>9,455</td></tr><tr><td>Finished goods</td><td>34,889</td><td>29,169</td></tr><tr><td></td><td>$66,119</td><td>$64,810</td></tr></table>

## NOTE C—PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following:

<table><tr><td></td><td>January 2, 2016</td><td>December 31, 2016</td></tr><tr><td>Prepaid insurance</td><td>$ 1,727</td><td>$ 1,475</td></tr><tr><td>Other prepaid expenses</td><td>3,862</td><td>7,755</td></tr><tr><td>Federal income taxes receivable</td><td>7,080</td><td>12,787</td></tr><tr><td>Miscellaneous receivables, net</td><td>4,704</td><td>4,257</td></tr><tr><td>Deferred commissions</td><td>3,305</td><td>5,399</td></tr><tr><td>Deferred tax assets</td><td>9,674</td><td>—</td></tr><tr><td>Other current assets</td><td>4,583</td><td>5,604</td></tr><tr><td></td><td>$34,935</td><td>$37,277</td></tr></table>

## NOTE D—INCOME TAXES

Income tax expense (benefit) included in income from net earnings consists of the following:

<table><tr><td rowspan="2"></td><td colspan="3">Year ended</td></tr><tr><td>2014</td><td>2015</td><td>2016</td></tr><tr><td>Current</td><td></td><td></td><td></td></tr><tr><td>Federal</td><td>$22,362</td><td>$17,492</td><td>$(4,361)</td></tr><tr><td>State</td><td>1,056</td><td>464</td><td>756</td></tr><tr><td>Foreign</td><td>16,265</td><td>32,198</td><td>45,568</td></tr><tr><td>Total Current</td><td>39,683</td><td>50,154</td><td>41,963</td></tr><tr><td>Deferred</td><td></td><td></td><td></td></tr><tr><td>Federal</td><td>(1,096)</td><td>(5,220)</td><td>(6,813)</td></tr><tr><td>State</td><td>(43)</td><td>(155)</td><td>(67)</td></tr><tr><td>Foreign</td><td>473</td><td>3,138</td><td>3,428</td></tr><tr><td>Total Deferred</td><td>(666)</td><td>(2,237)</td><td>(3,452)</td></tr><tr><td></td><td>$39,017</td><td>$47,917</td><td>$38,511</td></tr></table>



## USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)

## NOTE D—INCOME TAXES (Continued)

The income tax provision, as reconciled to the tax computed at the federal statutory rate of 35% for 2014, 2015, and 2016, is as follows:

<table><tr><td rowspan="2"></td><td colspan="3">Year ended</td></tr><tr><td>2014</td><td>2015</td><td>2016</td></tr><tr><td>Federal income taxes at statutory rate</td><td>$40,479</td><td>$49,906</td><td>$48,493</td></tr><tr><td>State income taxes, net of federal tax benefit</td><td>653</td><td>670</td><td>689</td></tr><tr><td>Excess tax benefits on equity awards</td><td>—</td><td>—</td><td>(9,140)</td></tr><tr><td>Qualified production activities deduction</td><td>(887)</td><td>(952)</td><td>(856)</td></tr><tr><td>Foreign rate differential</td><td>(603)</td><td>(461)</td><td>(337)</td></tr><tr><td>U.S. research credit</td><td>(293)</td><td>(425)</td><td>(339)</td></tr><tr><td>All other, net</td><td>(332)</td><td>(821)</td><td>1</td></tr><tr><td></td><td>$39,017</td><td>$47,917</td><td>$38,511</td></tr></table>

The significant categories of deferred taxes are as follows:

<table><tr><td></td><td>January 2, 2016</td><td>December 31, 2016</td></tr><tr><td>Deferred tax assets</td><td></td><td></td></tr><tr><td>Inventory</td><td>$ 3,341</td><td>$ 3,315</td></tr><tr><td>Accruals not currently deductible</td><td>5,892</td><td>5,233</td></tr><tr><td>Equity-based compensation expense</td><td>4,476</td><td>7,198</td></tr><tr><td>Intangible assets</td><td>9,283</td><td>8,591</td></tr><tr><td>Accumulated other comprehensive income</td><td>988</td><td>3,943</td></tr><tr><td>Tax credit carry forwards</td><td>—</td><td>3,698</td></tr><tr><td>Net operating losses</td><td>110</td><td>424</td></tr><tr><td>Other</td><td>3,428</td><td>4,365</td></tr><tr><td>Gross deferred tax assets</td><td>27,518</td><td>36,767</td></tr><tr><td>Valuation allowance</td><td>(607)</td><td>(640)</td></tr><tr><td>Net deferred tax assets</td><td>26,911</td><td>36,127</td></tr><tr><td>Deferred tax liabilities</td><td></td><td></td></tr><tr><td>Depreciation/amortization</td><td>(6,137)</td><td>(7,016)</td></tr><tr><td>Prepaid expenses</td><td>(1,566)</td><td>(2,222)</td></tr><tr><td>Intangible assets</td><td>(9,283)</td><td>(8,591)</td></tr><tr><td>Other</td><td>(4,663)</td><td>(5,505)</td></tr><tr><td>Gross deferred tax liabilities</td><td>(21,649)</td><td>(23,334)</td></tr><tr><td>Net deferred taxes</td><td>$ 5,262</td><td>$ 12,793</td></tr></table>



# USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)

## NOTE D—INCOME TAXES (Continued)

The Components of deferred taxes, net on a jurisdiction basis are as follows:

<table><tr><td></td><td>January 2, 2016</td><td>December 31, 2016</td></tr><tr><td>Net current deferred tax assets</td><td>$ 9,674</td><td>$ —</td></tr><tr><td>Net noncurrent deferred tax assets</td><td>9,844</td><td>18,292</td></tr><tr><td>Net current deferred tax liabilities</td><td>(4,434)</td><td>—</td></tr><tr><td>Net noncurrent deferred tax liabilities</td><td>(9,822)</td><td>(5,499)</td></tr><tr><td>Net deferred taxes</td><td>$ 5,262</td><td>$12,793</td></tr></table>

At December 31, 2016, the Company had foreign operating loss carry forwards of approximately $1,444. If these operating losses are not used, a portion of them will begin to expire in 2017. A valuation allowance of $424 has been placed on these foreign operating loss carry forwards. The valuation allowance is determined using a more likely than not realization criteria and is based upon all available positive and negative evidence, including future reversals of temporary differences. A future increase or decrease in the current valuation allowance is not expected to impact the income tax provision due to the Company’s ability to fully utilize foreign tax credits associated with taxable income in these jurisdictions.

Also at December 31, 2016, the Company reported U.S. foreign tax credit carry forwards of $3,351. These foreign tax credits can carry forward for 10 years and will not expire until 2026. The Company also reported $339 of U.S. research credit carry forwards. These research credit carry forwards can be carried forward for 20 years and will not expire until 2036. Because these carry-forward credits are expected to be utilized before expiration, no valuation allowance has been provided.

The Company has not recognized a deferred tax liability for the undistributed earnings of certain of its foreign operations that arose during 2016 and in prior years as the Company considers these earnings to be indefinitely reinvested. As of December 31, 2016, the undistributed earnings of these subsidiaries was $19,597. The repatriation of these earnings would result in a tax liability to the Company of approximately $3,083.

The Company recognizes the impact of a tax position in the financial statements if that position is more likely than not of being sustained on audit, based on the technical merits of the position. As of January 2, 2016 and December 31, 2016, the Company had no significant unrecognized tax benefits.

From time to time, the Company is subject to federal, state, and foreign tax authority income tax examinations. The Company remains subject to income tax examinations for each of its open tax years, which extend back to 2013 under most circumstances. Certain taxing jurisdictions may provide for additional open years depending upon their statutes or if an audit is on-going.



## USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)

## NOTE E—PROPERTY AND EQUIPMENT

Cost of property and equipment and their estimated useful lives is as follows:

<table><tr><td></td><td>Years</td><td>January 2, 2016</td><td>December 31, 2016</td></tr><tr><td>Buildings</td><td>39.5</td><td>$ 38,242</td><td>$ 70,719</td></tr><tr><td>Laboratory and production equipment</td><td>5 - 7</td><td>27,027</td><td>29,697</td></tr><tr><td>Sound and video library</td><td>5</td><td>600</td><td>600</td></tr><tr><td>Computer equipment and software</td><td>3 - 5</td><td>34,497</td><td>41,801</td></tr><tr><td>Furniture and fixtures</td><td>3 - 5</td><td>5,214</td><td>6,164</td></tr><tr><td>Automobiles</td><td>3 - 5</td><td>385</td><td>369</td></tr><tr><td>Leasehold improvements</td><td>3 - 5</td><td>11,591</td><td>11,701</td></tr><tr><td>Land improvements</td><td>15</td><td>2,052</td><td>2,626</td></tr><tr><td></td><td></td><td>119,608</td><td>163,677</td></tr><tr><td>Less accumulated depreciation and amortization</td><td></td><td>71,030</td><td>75,792</td></tr><tr><td></td><td></td><td>48,578</td><td>87,885</td></tr><tr><td>Land</td><td></td><td>6,361</td><td>6,286</td></tr><tr><td>Deposits and projects in process</td><td></td><td>33,043</td><td>7,096</td></tr><tr><td></td><td></td><td>$ 87,982</td><td>$101,267</td></tr></table>

Depreciation of property and equipment was $8,414, $9,034, and $11,878, for the years ended 2014, 2015, and 2016, respectively.

## NOTE F—INTANGIBLE ASSETS

The Company performed its annual goodwill impairment test during the third quarter of 2016. The Company performed a qualitative assessment of each reporting unit and determined that it was not more-likely-than-not that the fair value of any reporting unit was less than its carrying amount. As a result, the two-step goodwill impairment test was not required and no impairments of goodwill were recognized in 2016.

The Company also performed its annual indefinite-lived intangible asset impairment test during the third quarter of 2016. The Company performed a qualitative assessment of the indefinite-lived intangible assets and determined that it was not more-likely-than-not that the fair value of any indefinite-lived intangible asset was less than the carrying amount. As a result, the quantitative impairment test was not required and no impairments of indefinite-lived intangible assets were recognized in 2016.



# USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)

## NOTE F—INTANGIBLE ASSETS (Continued)

The changes in the carrying amount of goodwill are as follows:

<table><tr><td></td><td>January 2, 2016</td><td>December 31, 2016</td></tr><tr><td>Balance at beginning of year:</td><td></td><td></td></tr><tr><td>Gross goodwill</td><td>$17,941</td><td>$17,432</td></tr><tr><td>Accumulated impairment losses</td><td>—</td><td>—</td></tr><tr><td>Net goodwill as of beginning of year</td><td>17,941</td><td>17,432</td></tr><tr><td>Goodwill acquired during the year</td><td>—</td><td>—</td></tr><tr><td>Impairment loss</td><td>—</td><td>—</td></tr><tr><td>Currency translation adjustment</td><td>(509)</td><td>(717)</td></tr><tr><td>Balance as of end of year</td><td></td><td></td></tr><tr><td>Gross goodwill</td><td>17,432</td><td>16,715</td></tr><tr><td>Accumulated impairment losses</td><td>—</td><td>—</td></tr><tr><td>Net goodwill as of end of year</td><td>$17,432</td><td>$16,715</td></tr></table>

Intangible assets consist of the following:

<table><tr><td rowspan="2"></td><td colspan="4">As of January 2, 2016</td><td rowspan="2">Weighted- amortization period (years)</td></tr><tr><td>Gross amount</td><td>Accumulated amortization</td><td>Net carrying amount</td><td></td></tr><tr><td>Amortized intangible assets</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Trade name and trademarks</td><td>$ 4,086</td><td>(2,205)</td><td>$ 1,881</td><td>10</td><td></td></tr><tr><td>Product formulas</td><td>9,010</td><td>(489)</td><td>8,521</td><td>8</td><td></td></tr><tr><td>Indefinite-lived intangible assets</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Direct sales license</td><td>27,867</td><td></td><td>27,867</td><td></td><td></td></tr><tr><td></td><td>$40,963</td><td></td><td>$38,269</td><td></td><td></td></tr></table>



## USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)

## NOTE F—INTANGIBLE ASSETS (Continued)

<table><tr><td rowspan="2"></td><td colspan="4">As of December 31, 2016</td></tr><tr><td>Gross amount</td><td>Accumulated amortization</td><td>Net carrying amount</td><td>Weighted-amortization period (years)</td></tr><tr><td>Amortized intangible assets</td><td></td><td></td><td></td><td></td></tr><tr><td>Trade name and trademarks</td><td>$ 3,820</td><td>$(2,440)</td><td>$ 1,380</td><td>10</td></tr><tr><td>Product formulas</td><td>8,424</td><td>(1,512)</td><td>6,912</td><td>8</td></tr><tr><td>Indefinite-lived intangible assets</td><td></td><td></td><td></td><td></td></tr><tr><td>Direct sales license</td><td>26,057</td><td></td><td>26,057</td><td></td></tr><tr><td></td><td>$38,301</td><td></td><td>$34,349</td><td></td></tr><tr><td>Estimated Amortization Expense:</td><td></td><td></td><td></td><td></td></tr><tr><td>2017</td><td>$ 1,435</td><td></td><td></td><td></td></tr><tr><td>2018</td><td>1,435</td><td></td><td></td><td></td></tr><tr><td>2019</td><td>1,435</td><td></td><td></td><td></td></tr><tr><td>2020</td><td>1,288</td><td></td><td></td><td></td></tr><tr><td>2021</td><td>1,053</td><td></td><td></td><td></td></tr><tr><td>Thereafter</td><td>1,646</td><td></td><td></td><td></td></tr><tr><td></td><td>$ 8,292</td><td></td><td></td><td></td></tr></table>

Aggregate amortization of intangible assets was $431, $900, and $1,500, for the years ended 2014, 2015, and 2016, respectively.

## NOTE G—OTHER CURRENT LIABILITIES

Other current liabilities consist of the following:

<table><tr><td></td><td>January 2, 2016</td><td>December 31, 2016</td></tr><tr><td>Associate incentives</td><td>$ 38,852</td><td>$ 52,594</td></tr><tr><td>Accrued employee compensation</td><td>24,489</td><td>23,135</td></tr><tr><td>Income taxes</td><td>5,561</td><td>5,676</td></tr><tr><td>Sales taxes</td><td>10,109</td><td>11,774</td></tr><tr><td>Deferred tax liabilities</td><td>4,434</td><td>—</td></tr><tr><td>Associate promotions</td><td>2,712</td><td>2,916</td></tr><tr><td>Deferred revenue</td><td>17,637</td><td>21,464</td></tr><tr><td>Provision for returns and allowances</td><td>521</td><td>696</td></tr><tr><td>Accrued purchases of property and equipment</td><td>6,863</td><td>2,216</td></tr><tr><td>All other</td><td>10,191</td><td>8,980</td></tr><tr><td></td><td>$121,369</td><td>$129,451</td></tr></table>



# USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)

## NOTE H—LINE OF CREDIT

The Company has a $75,000 line of credit with Bank of America. Interest is computed at the bank’s Prime Rate or LIBOR, adjusted by features specified in the Credit Agreement. The collateral for this line of credit is the pledge of the capital stock of certain subsidiaries of the Company, set forth in a separate pledge agreement with the bank. On February 19, 2016, the Company entered into an Amended and Restated Credit Agreement with Bank of America, which extends the term of the Credit Agreement to April 27, 2021 and increases the Company’s consolidated rolling four-quarter adjusted EBITDA covenant from $60,000 to equal to or greater than $100,000 and a ratio of consolidated funded debt to adjusted EBITDA of 2.0 to 1.0 at the end of each quarter. The adjusted EBITDA under this agreement is modified for certain non-cash expenses. Part of the credit agreement is that any existing bank guarantees are considered a reduction of the overall availability of credit and part of the covenant calculation. This resulted in a $4,153, and $5,241 reduction in the available borrowing limit as of January 2, 2016 and December 31, 2016, respectively, due to existing normal course of business guarantees in certain markets.

There was no outstanding balance on this line of credit at January 2, 2016 or at December 31, 2016. 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 I—COMMITMENTS AND CONTINGENCIES

## 1. Operating leases

With the exception of the Company’s Salt Lake City headquarters, Australia facility, Beijing, China facility and Tianjin, China facility, facilities are generally leased. Each of the facility lease agreements is a non-cancelable operating lease generally structured with renewal options and expire prior to or during 2020. The Company utilizes equipment under non-cancelable operating leases, expiring through 2019. The minimum commitments under operating leases at December 31, 2016 are as follows:

<table><tr><td>Year ending</td><td></td></tr><tr><td>2017</td><td>$10,391</td></tr><tr><td>2018</td><td>5,999</td></tr><tr><td>2019</td><td>2,790</td></tr><tr><td>2020</td><td>544</td></tr><tr><td>2021</td><td>232</td></tr><tr><td>Thereafter</td><td>32</td></tr><tr><td></td><td>$19,988</td></tr></table>

These leases generally provide that property taxes, insurance, and maintenance expenses are the responsibility of the Company. Such expenses are not included in the operating lease amounts outlined in the table above or in the rent expense amounts that follow. The total rent expense was approximately $11,129, $10,503, and $10,153 for the years ended 2014, 2015, and 2016, respectively.

The Company has other unconditional purchase obligations relating to capital projects and advertising agreements of $5,877 that will be paid in the next year.



# USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)

## NOTE I—COMMITMENTS AND CONTINGENCIES (Continued)

## 2. 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 has not accrued for any contingency at December 31, 2016 as the Company does not consider any contingency to be probable nor estimable. The Company faces contingencies that are reasonably possible to occur; however, they cannot currently be estimated. While complete assurance cannot be given to the outcome of these proceedings, management does not currently believe that any of these matters, individually or in the aggregate, will have a material adverse effect on the Company's financial condition, liquidity or results of operations.

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

On February 7, 2017, the Company disclosed on Form 8-K that it is conducting a voluntary internal investigation regarding its BabyCare operations in China. In connection with this investigation, the Company expects to continue to incur costs in conducting the on-going review and investigation, in responding to requests for information in connection with any government investigations and in defending any potential civil or governmental proceedings that are instituted against it or any of its current or former officers or directors. The Company has voluntarily contacted the Securities and Exchange Commission 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 in its early stage, the Company cannot predict the duration, scope, or result of the investigation. One or more governmental actions could be instituted in respect of the matters that are the subject of the internal investigation, and such actions, if brought, may result in judgments, settlements, fines, penalties, injunctions, cease and desist orders, criminal penalties, or other relief.

On February 13, 2017, a putative shareholder class action complaint was filed in the United States District Court for the District of Utah, with the plaintiff, April Rumbaugh, alleging that the Company failed to disclose that (i) the Company’s BabyCare subsidiary had engaged in improper reimbursement



# USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)

## NOTE I—COMMITMENTS AND CONTINGENCIES (Continued)

practices in China, (ii) these practices constituted violations of the FCPA, (iii) as such, the Company’s China revenues were in part the product of unlawful conduct and unlikely to be sustainable, and (iv) the foregoing conduct, when it became known, was likely to subject the Company to significant regulatory scrutiny. The lawsuit names as defendants the Company; our former Co-Chief Executive Officer, David A. Wentz; and our Chief Financial Officer, Paul A. Jones. On behalf of herself and a putative class of purchasers of USANA stock between March 14, 2014 and February 7, 2017, the plaintiff asserts claims for violation of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. The plaintiff seeks, among other things, an award of damages, interest, reasonable attorneys’ fees, expert fees, and other costs. The Company believes that the action is without merit, and intend to vigorously defend against all claims asserted.

## 3. Employee Benefit Plan

The Company sponsors an employee benefit plan under Section 401(k) of the Internal Revenue Code. This plan covers employees who are at least 18 years of age and have met a one-month service requirement. The Company makes a matching contribution equal to 100 percent of the first one percent of a participant's compensation that is contributed by the participant, and 50 percent of that deferral that exceeds one percent of the participant's compensation, not to exceed six percent of the participant's compensation, subject to the limits of ERISA. In addition, the Company may make a discretionary contribution based on earnings. The Company's matching contributions cliff vest at two years of service. Contributions made by the Company to the plan in the United States were $1,324, $1,458, and $1,594 for the years ended 2014, 2015, and 2016, respectively.

## NOTE J—EQUITY-BASED COMPENSATION

On October 25, 2016, the Company declared a two-for-one stock split of its common stock that was distributed in the form of a stock dividend on November 22, 2016 to shareholders of record as of November 14, 2016. All existing equity award agreements provide that the number of shares of common stock and the respective exercise price covered by each outstanding option agreement be proportionately adjusted for a stock split or similar event. Equity award data in the following has been adjusted to reflect the stock split.

Equity-based compensation expense was $9,805, $11,081, and $16,542 for fiscal years 2014, 2015, and 2016, respectively. The related tax benefit for these periods was $3,308, $3,766, and $5,540, respectively.



# USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)

## NOTE J—EQUITY-BASED COMPENSATION (Continued)

The following table shows the remaining unrecognized compensation expense on a pre-tax basis for all types of unvested equity awards outstanding as of December 31, 2016. This table does not include an estimate for future grants that may be issued.

<table><tr><td>2017</td><td>$15,765</td></tr><tr><td>2018</td><td>13,306</td></tr><tr><td>2019</td><td>9,778</td></tr><tr><td>2020</td><td>3,642</td></tr><tr><td>2021+</td><td>1,978</td></tr><tr><td></td><td>$44,469</td></tr></table>

The cost above is expected to be recognized over a weighted-average period of 3.3 years.

The Company’s 2015 Equity Incentive Award Plan (the “2015 Plan”), which was approved by the shareholders at the Annual Shareholders’ Meeting held on May 8, 2015, allows for the grant of various equity awards including stock-settled stock appreciation rights, stock options, deferred stock units, and other types of equity-based awards to the Company’s officers, key employees, and non-employee directors. Prior to the approval of the 2015 plan, the Company maintained a 2006 Equity Incentive Award Plan (the “2006” Plan”), which expired in April of 2016. The 2015 Plan replaced the 2006 Plan for all future grants, and no new awards have been granted under the 2006 Plan.

At the inception of the 2015 Plan, 13,839 awards had been granted under the 2006 Plan, of which 13,595 were stock-settled stock appreciation rights, 15 were stock options, and 229 were deferred stock units. Also, at the inception of the 2015 Plan, 2,551 awards had been forfeited. Under the 2015 Plan, 10,000 shares have been authorized. As of December 31, 2016, 2,773 awards had been granted under the 2015 Plan, of which 2,752 were stock-settled stock appreciation rights, and 21 were deferred stock units. Also, as of December 31, 2016, a total of 612 awards had been forfeited and added back to the number of shares available for issuance under the 2015 Plan.

The Company’s Compensation Committee utilizes two types of vesting methods when granting awards to officers and key employees under the 2015 Plan based upon the nature of the grant. Awards granted to officers and key employees upon hire or promotion to such a position generally vest 20% each year on the anniversary of the grant date and expire five and one-half years from the date of grant. Awards granted as a supplement to existing equity awards held by officers and key employees will generally vest 50% each year beginning on the first grant date anniversary following the final vesting of previous grants. The expiration of these supplemental awards is generally within 12 months following the last vest date of such award. Awards of stock options and stock-settled stock appreciation rights to be granted to non-employee directors generally vest 25% each quarter, commencing on the first vest date anniversary following the final vesting of the previous award. The expiration of these awards is generally within 12 months following the last vest date of the previous award. Awards of deferred stock units are full-value shares at the date of grant, vesting over the periods of service, and do not have expiration dates. Beginning in 2015, certain new grants of stock-settled stock appreciation rights became subject to a mandatory post-vesting holding requirement of 10% of the shares derived upon exercise for the sooner of five years following the exercise or at such time the grantee no longer



# USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)

## NOTE J—EQUITY-BASED COMPENSATION (Continued)

qualifies as a participant under the Plan. As a result of this requirement, the Company has included an illiquidity discount in the fair value calculation of these awards.

The Company uses the Black-Scholes option pricing model to estimate the fair value of its equity awards. The weighted-average fair value, net of illiquidity discount, of stock-settled stock appreciation rights that was $9.46, $23.50, and $22.99, granted in 2014, 2015, and 2016, respectively.

Following is a table that includes the weighted-average assumptions that the Company used to calculate fair value of equity awards that were granted during the periods indicated. Deferred stock units are full-value shares at the date of grant and have been excluded from the table below.

<table><tr><td rowspan="2"></td><td colspan="3">Year ended</td></tr><tr><td>2014</td><td>2015</td><td>2016</td></tr><tr><td>Expected volatility(1)</td><td>40.2%</td><td>44.0%</td><td>47.5%</td></tr><tr><td>Risk-free interest rate(2)</td><td>1.2%</td><td>1.3%</td><td>1.1%</td></tr><tr><td>Expected life(3)</td><td>3.6 yrs.</td><td>3.8 yrs.</td><td>3.7 yrs.</td></tr><tr><td>Expected dividend yield(4)</td><td>0.0%</td><td>0.0%</td><td>0.0%</td></tr><tr><td>Weighted-average exercise price(5)</td><td>$60.61</td><td>$67.71</td><td>$63.16</td></tr></table>

(1) The Company utilizes historical volatility of the trading price of its common stock.

(2) Risk-free interest rate is based on the U.S. Treasury yield curve with respect to the expected life of the award.

(3) Depending upon the terms of the award, one of two methods will be used to calculate expected life:

(i) a weighted-average that includes historical settlement data of the Company’s equity awards and a

hypothetical holding period, or (ii) the simplified method.

(4) The Company historically has not paid and currently has no plan to pay dividends.

(5) Exercise price is the closing price of the Company’s common stock on the date of grant.

A summary of the Company’s stock option and stock-settled stock appreciation right activity is as follows:

<table><tr><td></td><td>Shares</td><td>Weighted-average exercise price</td><td>Weighted-average remaining contractual term</td><td>Aggregate intrinsic value*</td></tr><tr><td>Outstanding at January 2, 2016</td><td>4,351</td><td>$47.34</td><td>3.3</td><td>$83,475</td></tr><tr><td>Granted</td><td>742</td><td>63.16</td><td></td><td></td></tr><tr><td>Exercised</td><td>(971)</td><td>25.68</td><td></td><td></td></tr><tr><td>Forfeited</td><td>(731)</td><td>58.05</td><td></td><td></td></tr><tr><td>Expired</td><td>—</td><td>—</td><td></td><td></td></tr><tr><td>Outstanding at December 31, 2016</td><td>3,391</td><td>$54.69</td><td>3.1</td><td>$36,169</td></tr><tr><td>Exercisable at December 31, 2016</td><td>335</td><td>$37.69</td><td>1.6</td><td>$ 8,112</td></tr></table>



# USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)

## NOTE J—EQUITY-BASED COMPENSATION (Continued)

The total intrinsic value of stock options and stock-settled stock appreciation rights exercised was $51,795 in 2014, $41,548 in 2015, and $38,198 in 2016. The Company currently has no deferred stock units that are nonvested.

The total fair value of equity awards that vested was $7,568, $7,184, and $11,481, for the years ended 2014, 2015, and 2016 respectively. This total fair value includes equity-based awards issued in the form of stock-settled stock appreciation rights.

## NOTE K—SEGMENT INFORMATION

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

<table><tr><td rowspan="2"></td><td colspan="3">Year Ended</td></tr><tr><td>2014</td><td>2015</td><td>2016</td></tr><tr><td>USANA® Nutritionals</td><td>79%</td><td>81%</td><td>83%</td></tr><tr><td>USANA Foods</td><td>13%</td><td>11%</td><td>10%</td></tr><tr><td>Sense—beautiful science®</td><td>7%</td><td>7%</td><td>6%</td></tr></table>

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

• Asia Pacific—

• Greater China—Hong Kong, Taiwan and China(1)

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

• North Asia—Japan and South Korea

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



# USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)

## NOTE K—SEGMENT INFORMATION (Continued)

Selected Financial Information

Financial information, presented by geographic region is listed below:

<table><tr><td rowspan="2"></td><td colspan="3">Year Ended</td></tr><tr><td>2014</td><td>2015</td><td>2016</td></tr><tr><td>Net Sales to External Customers</td><td></td><td></td><td></td></tr><tr><td>Asia Pacific</td><td></td><td></td><td></td></tr><tr><td>Greater China</td><td>$326,134</td><td>$441,284</td><td>$ 502,299</td></tr><tr><td>Southeast Asia Pacific</td><td>177,940</td><td>183,828</td><td>206,124</td></tr><tr><td>North Asia</td><td>32,667</td><td>39,751</td><td>46,023</td></tr><tr><td>Asia Pacific Total</td><td>536,741</td><td>664,863</td><td>754,446</td></tr><tr><td>Americas and Europe</td><td>253,730</td><td>253,636</td><td>251,637</td></tr><tr><td>Consolidated Total</td><td>$790,471</td><td>$918,499</td><td>$1,006,083</td></tr><tr><td></td><td></td><td>January 2, 2016</td><td>December 31, 2016</td></tr><tr><td>Long-lived Assets</td><td></td><td></td><td></td></tr><tr><td>Asia Pacific</td><td></td><td></td><td></td></tr><tr><td>Greater China</td><td>$ 94,792</td><td>$ 94,537</td><td></td></tr><tr><td>Southeast Asia Pacific</td><td>13,463</td><td>13,204</td><td></td></tr><tr><td>North Asia</td><td>1,938</td><td>1,884</td><td></td></tr><tr><td>Asia Pacific Total</td><td>110,193</td><td>109,625</td><td></td></tr><tr><td>Americas and Europe</td><td>58,936</td><td>64,864</td><td></td></tr><tr><td>Consolidated Total</td><td>$169,129</td><td>$174,489</td><td></td></tr><tr><td>Total Assets</td><td></td><td></td><td></td></tr><tr><td>Asia Pacific</td><td></td><td></td><td></td></tr><tr><td>Greater China</td><td>$231,018</td><td>$255,214</td><td></td></tr><tr><td>Southeast Asia Pacific</td><td>40,038</td><td>45,896</td><td></td></tr><tr><td>North Asia</td><td>6,695</td><td>9,646</td><td></td></tr><tr><td>Asia Pacific Total</td><td>277,751</td><td>310,756</td><td></td></tr><tr><td>Americas and Europe</td><td>145,486</td><td>159,886</td><td></td></tr><tr><td>Consolidated Total</td><td>$423,237</td><td>$470,642</td><td></td></tr></table>



# USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)

## NOTE K—SEGMENT INFORMATION (Continued)

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

<table><tr><td rowspan="2"></td><td colspan="3">Year Ended</td></tr><tr><td>2014</td><td>2015</td><td>2016</td></tr><tr><td>Net sales:</td><td></td><td></td><td></td></tr><tr><td>China</td><td>$216,842</td><td>$371,737</td><td>$437,386</td></tr><tr><td>United States</td><td>$140,457</td><td>$140,057</td><td>$130,427</td></tr><tr><td>Long-lived Assets:</td><td></td><td></td><td></td></tr><tr><td>China</td><td></td><td>$92,835</td><td>$91,909</td></tr><tr><td>United States</td><td></td><td>$57,797</td><td>$63,654</td></tr></table>

## NOTE L—QUARTERLY FINANCIAL RESULTS (Unaudited)

The following table summarizes quarterly financial information for fiscal years 2015 and 2016.

<table><tr><td>2015</td><td>First</td><td>Second</td><td>Third</td><td>Fourth</td></tr><tr><td>Net sales</td><td>$219,378</td><td>$233,244</td><td>$233,292</td><td>$232,585</td></tr><tr><td>Gross profit</td><td>$181,014</td><td>$193,155</td><td>$192,244</td><td>$192,404</td></tr><tr><td>Net earnings</td><td>$ 19,680</td><td>$ 25,416</td><td>$ 25,609</td><td>$ 23,967</td></tr><tr><td>Earnings per share:</td><td></td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>$ 0.78</td><td>$ 1.00</td><td>$ 1.00</td><td>$ 0.95</td></tr><tr><td>Diluted</td><td>$ 0.75</td><td>$ 0.96</td><td>$ 0.96</td><td>$ 0.92</td></tr><tr><td>2016</td><td>First</td><td>Second</td><td>Third</td><td>Fourth</td></tr><tr><td>Net sales</td><td>$240,449</td><td>$258,514</td><td>$254,219</td><td>$252,901</td></tr><tr><td>Gross profit</td><td>$197,529</td><td>$212,544</td><td>$209,240</td><td>$206,580</td></tr><tr><td>Net earnings</td><td>$ 22,299</td><td>$ 25,762</td><td>$ 30,098</td><td>$ 21,882</td></tr><tr><td>Earnings per share:</td><td></td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>$ 0.92</td><td>$ 1.08</td><td>$ 1.24</td><td>$ 0.90</td></tr><tr><td>Diluted</td><td>$ 0.89</td><td>$ 1.03</td><td>$ 1.20</td><td>$ 0.87</td></tr></table>

## NOTE M—EARNINGS PER SHARE

Basic earnings per share are based on the weighted-average number of shares outstanding for each period. Shares that have been repurchased and retired during the periods specified below have been included in the calculation of the number of weighted-average shares that are outstanding for the calculation of basic earnings per share based on the time they were outstanding in any period. Diluted earnings per common share are based on shares that are outstanding (computed under basic EPS) and on potentially dilutive shares. Shares that are included in the diluted earnings per share calculations under the treasury stock method include equity awards that are in-the-money but have not yet been exercised.



# USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)

## NOTE M—EARNINGS PER SHARE (Continued)

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

<table><tr><td rowspan="2"></td><td colspan="4">Year Ended</td></tr><tr><td>2014</td><td>2015</td><td>2016</td><td></td></tr><tr><td>Net earnings available to common shareholders</td><td>$76,636</td><td>$94,672</td><td>$100,041</td><td></td></tr><tr><td>Weighted average common shares outstanding—basic</td><td>26,443</td><td>25,460</td><td>24,185</td><td></td></tr><tr><td>Dilutive effect of in-the-money equity awards</td><td>934</td><td>895</td><td>862</td><td></td></tr><tr><td>Weighted average common shares outstanding—diluted</td><td>27,377</td><td>26,355</td><td>25,047</td><td></td></tr><tr><td>Earnings per common share from net earnings—basic</td><td>$2.90</td><td>$3.72</td><td>$4.14</td><td></td></tr><tr><td>Earnings per common share from net earnings—diluted</td><td>$2.80</td><td>$3.59</td><td>$3.99</td><td></td></tr></table>

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

<table><tr><td colspan="3">Year Ended</td></tr><tr><td>2014</td><td>2015</td><td>2016</td></tr><tr><td>574</td><td>786</td><td>2,242</td></tr></table>

## NOTE N—RELATED-PARTY TRANSACTIONS

The Company’s Founder and Chairman of the Board, Myron W. Wentz, PhD is the sole beneficial owner of the largest shareholder of the Company, Gull Global, Ltd. As of December 31, 2016, Gull Global, Ltd. owned 51.45% of the Company’s issued and outstanding shares. Dr. Wentz devotes much of his personal time, expertise, and resources to a number of business and professional activities outside of USANA. The most significant of these is the Sanoviv Medical Institute, which is a unique, fully integrated health and wellness center located near Rosarito, Mexico that Dr. Wentz founded in 1998. Dr. Wentz’s private entity, Sanoviv S.A. de C.V. (“Sanoviv”), contracts with Medicis, S.C. (“Medicis”), an entity that is owned and operated independently of Dr. Wentz, to conduct the operations of the Sanoviv Medical Institute. Sanoviv leases the medical building to Medicis and Medicis carries out all of the operations of the medical institute, which include employing all of the medical and healthcare professionals who provide services at the medical institute. The Medicis medical and healthcare professionals possess expertise in the fields of human health, digestive health, nutritional medicine, lifestyle medicine and other medical fields that are important to USANA.

Medicis performs research and development of novel product formulations for future development and production by USANA, and they also perform research and development of improvements in existing USANA product formulations. In addition to providing contract research services, Medicis provides physicians and other medical staff to speak at USANA Associate events. Finally, Medicis performs health assessments and physical examinations for the Company’s Executives. In consideration for these services, USANA paid Medicis $239, $383, and $322 in 2014, 2015, and 2016, respectively. The Company’s agreements with Medicis were approved by the Audit Committee in advance of the



# USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)

## NOTE N—RELATED-PARTY TRANSACTIONS (Continued)

Company’s entry into the agreements. USANA’s collaboration with Medicis is terminable at will by USANA at any time, without any continuing commitment by USANA.

The Company has had a long-standing relationship with Drive Marketing, a promotional product distributor located in Sandy, Utah. Drive Marketing provides the Company with customized products for Associate recognition. The Company paid Drive Marketing $566, $420, and $523 in 2014, 2015 and 2016, respectively. During 2016, Drive Marketing hired Nathan Guest as a sales representative for its various network marketing accounts, including the Company's account. Nathan Guest is the son of Kevin Guest, the Company's CEO. Drive Marketing is one of many promotional product distributors utilized by the Company. The Company's relationship with Drive Marketing is terminable at will by the Company at any time without any continuing commitment.



## USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

<table><tr><td>Description</td><td>Balance at beginning of period</td><td>Charged to costs and expenses</td><td>Charged to other accounts</td><td>Deductions</td><td>Balance at end of period</td></tr><tr><td>January 3, 2015</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Allowance for sales returns</td><td>591</td><td>194</td><td>—</td><td>67</td><td>718</td></tr><tr><td>Allowance for doubtful accounts</td><td>1,880</td><td>26</td><td>—</td><td>118</td><td>1,788</td></tr><tr><td>Valuation allowance—deferred tax assets</td><td>530</td><td>—</td><td>—</td><td>4</td><td>526</td></tr><tr><td>January 2, 2016</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Allowance for sales returns</td><td>718</td><td>49</td><td>—</td><td>246</td><td>521</td></tr><tr><td>Allowance for doubtful accounts</td><td>1,788</td><td>162</td><td>—</td><td>14</td><td>1,936</td></tr><tr><td>Valuation allowance—deferred tax assets</td><td>526</td><td>81</td><td>—</td><td>—</td><td>607</td></tr><tr><td>December 31, 2016</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Allowance for sales returns</td><td>521</td><td>213</td><td>—</td><td>38</td><td>696</td></tr><tr><td>Allowance for doubtful accounts</td><td>1,936</td><td>220</td><td>—</td><td>1,413</td><td>743</td></tr><tr><td>Valuation allowance—deferred tax assets</td><td>607</td><td>33</td><td>—</td><td>—</td><td>640</td></tr></table>



MYRON W. WENTZ, PhD
Chairman

ROBERT ANCIAUX
Managing Director S.E.I. s.a.
Director

GILBERT A. FULLER
Independent Director

FENG PENG
CFO of Ossen Innovation Co., Ltd
Independent Director

FREDERIC J. WINSSINGER
Managing Partner of RW Partner LLC
Independent Director

D. RICHARD WILLIAMS
Non-Executive Chairman of Primerica,
Board of Directors of Crawford & Company
Independent Director

## EXECUTIVE OFFICERS

KEVIN G. GUEST
Chief Executive Officer

PAUL A. JONES
Chief Financial Officer &
Chief Leadership
Development Officer

JIM BROWN
President &
Chief Operations Officer

JAMES H. BRAMBLE
Chief Legal Officer &
Corporate Secretary

DANIEL A. MACUGA
Chief Communications Officer

ROB SINNOTT
Chief Scientific Officer

WALTER NOOT
Chief Information Officer

DAVID MULHAM
Chief Field Development Officer
INDEPENDENT
PUBLIC ACCOUNTANT

KPMG LLP
Salt Lake City, Utah

ANNUAL MEETING

Please refer to the Proxy Statement for information regarding the Annual Meeting.

## MARKET INFORMATION

Our common stock trades on the New York Stock Exchange (the "NYSE") under the symbol "USNA." The following table contains the reported high and low sale prices for our common stock as reported on the NYSE for the period indicated:

<table><tr><td></td><td colspan="2">2015</td><td colspan="2">2016</td></tr><tr><td></td><td>HIGH</td><td>LOW</td><td>HIGH</td><td>LOW</td></tr><tr><td>1 \( ^{\text{ST}} \)  QUARTER</td><td>57.50</td><td>48.02</td><td>68.16</td><td>46.00</td></tr><tr><td>2 \( ^{\text{ND}} \)  QUARTER</td><td>72.53</td><td>56.42</td><td>64.88</td><td>54.03</td></tr><tr><td>3 \( ^{\text{RD}} \)  QUARTER</td><td>88.44</td><td>61.27</td><td>71.48</td><td>54.26</td></tr><tr><td>4 \( ^{\text{TH}} \)  QUARTER</td><td>70.29</td><td>51.68</td><td>75.00</td><td>58.80</td></tr></table>

## SHAREHOLDERS

The approximate number of record and beneficial holders of the Company's common stock was 288 and 11,107 respectively, as of March 1, 2017.

## TRANSFER AGENT & REGISTRAR

AMERICAN STOCK TRANSFER AND TRUST COMPANY
6201 15th Avenue
Brooklyn, NY 11219
(800) 937-5449 or (718) 921-8124
www.amstock.com




3838 West Parkway Blvd.
Salt Lake City, UT 84120

T: (801) 954.7100
F: (801) 956.9486

USANAHEALTHSCIENCES.COM

NYSE: USNA
investor.relations@us.usana.com