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TABLE OF CONTENTS
Item 9B. Other Information
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark
One)
FORM 10-K
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 29, 2018
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission file number: 001-35024
USANA HEALTH SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Utah
(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
Common Stock, Par Value $0.001 per
share
Name of each exchange on which registered
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 o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No ý
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 ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files). Yes ý No o
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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting
company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý
The aggregate market value of common stock held by non-affiliates of the registrant as of June 30, 2018 was approximately
1,581,107,286 based on a closing market price of $115.30 per share.
There were 23,317,366 shares of the registrant's common stock outstanding as of February 22, 2019.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant incorporates by reference into Part III (Items 10, 11, 12, 13, and 14) of this report certain information contained in its
Definitive Proxy Statement to be filed with the Securities and Exchange Commission no later than 120 days after the end of the registrant's
fiscal year ended December 29, 2018, in connection with the registrant's 2019 Annual Meeting of Shareholders to be held May 1, 2019.
Table of Contents
USANA HEALTH SCIENCES, INC.
FORM 10-K
For the Fiscal Year Ended December 29, 2018
INDEX
Part I
Item 1
Business
General
Current Focus and Growth Strategy
Products
Geographic Presence
Research and Development
Manufacturing and Quality Assurance
Distribution and Marketing
Operating Strengths
Competition
Product Returns
Major Customers
Associate Compliance
Information Technology
Regulatory Matters
Intellectual Property
Seasonality
Backlog
Working Capital Practices
Environment Laws
Employees
Additional Available Information
Item 1A Risk Factors
Item 1B Unresolved Staff Comments
Item 2
Item 3
Item 4
Properties
Legal Proceedings
Mine Safety Disclosures
Item 5
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Part II
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 6
Item 7
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Item 8
Item 9
Item 9A Controls and Procedures
Item 9B Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
6
6
7
9
10
11
12
14
17
19
19
20
20
20
21
25
26
26
26
26
27
27
27
46
46
47
47
48
50
50
64
65
65
65
69
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Part III
Directors, Executive Officers and Corporate Governance
Item 10
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13 Certain Relationships and Related Transactions, and Director Independence
Item 14 Principal Accounting Fees and Services
Item 15
Signatures
Exhibits, Financial Statement Schedules
Part IV
3
69
69
69
69
69
69
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Cautionary Note Regarding Forward-Looking Statements
This report contains, "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities
Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. All statements other than statements of historical fact are "forward-looking statements" for purposes of federal and state
securities laws, including any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives
of management for future operations; any statements concerning proposed new services or developments; any statements regarding future
economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing.
Forward-looking statements can be identified by words such as: "anticipate," "intend," "plan," "goal," "seek," "believe," "project,"
"estimate," "expect," "strategy," "future," "likely," "may," "should," "will" and similar references to future periods.
Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ
materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of
operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, such as those disclosed
or incorporated by reference in our filings with the Securities and Exchange Commission ("SEC"). Important factors that could cause our
actual results, performance and achievements, or industry results to differ materially from estimates or projections contained in our
forward-looking statements include, among others, the following:
•
•
•
•
•
•
•
•
•
•
•
•
our relationship with, and our ability to influence the actions of, our Associates;
improper actions by our employees or Associates in violation of applicable law;
adverse publicity associated with our products or network marketing organization, including our ability to comfort the
marketplace and regulators regarding our compliance with applicable laws;
the potential outcome of and related regulatory or other action in connection with the results of our previously announced
internal investigation in China;
regulatory matters governing our products, including potential governmental or regulatory actions concerning the safety or
efficacy of our products and network marketing program, including the direct selling markets in which we operate;
legal challenges to our network marketing program in any of our primary markets;
risks associated with operating internationally and the effect of economic factors, including foreign exchange, inflation,
disruptions or conflicts with our third-party importers, pricing and currency devaluation risks;
uncertainties relating to interpretation and enforcement of legislation, particularly in China, governing direct selling and anti-
pyramiding;
our inability to obtain or maintain the necessary licenses for our direct selling business in China and elsewhere;
adverse changes in the Chinese economy;
any material disruption to our business caused by natural disasters, other catastrophic events, acts of war or terrorism, or
cyber-security incidents;
noncompliance by us or our Associates with any privacy laws or any security breach by us or a third party involving the
misappropriation, loss, or other unauthorized use or disclosure of confidential information; and
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•
our reliance upon, or the loss or departure of any Associate of, our senior management team which could negatively impact
our Associate relations and operating results.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our
current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated
events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to
inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our
actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should
not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ
materially from those indicated in the forward-looking statements include, among others, those that are discussed throughout Part II,
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and in Part I, Item 1A. Risk Factors of this
report.
•
•
•
•
•
Expected future operating results, such as sales, expenses, taxes, earnings, fluctuations in currency exchange rates, capital
expenditures, sources and uses of cash and other financial items
Current or future volatility in the world economic markets, including credit markets and future market conditions.
Our belief that we have sufficient liquidity to fund our business operations during the next fiscal year.
Expectations of the effect on our financial condition of contingent liabilities and governmental and regulatory investigations
and proceedings.
Our strategies for 2019, including expectations regarding plans to generate customer growth, executing our customer
experience initiative, product development, continued technology development, market position, financial results and
reserves.
Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of
the date hereof. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made
from time to time, whether as a result of new information, future developments, the occurrence of unanticipated events or otherwise.
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Item 1. Business
General
PART I
USANA Health Sciences, Inc. is one of the largest publicly held direct-selling nutrition, personal health and wellness companies in the
world. In 2018, we generated $1.189 billion in net sales from more than 616,000 active Customers worldwide. We were founded in 1992 by
Myron W. Wentz, Ph.D. and since that time we have developed and manufactured high-quality, science-based nutritional and personal care
products with a primary focus on promoting long-term health and wellness. In so doing, we are committed to continuous product innovation
and sound scientific research. We have operations in 24 markets worldwide, where we distribute and sell our products by way of direct
selling. Mainland China is our largest market and single largest source of revenue, representing approximately 50% of net sales and active
Customers. 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. 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 is primarily comprised of two types of customers: "Associates" and "Preferred Customers" referred to together as
"active Customers." Our Associates also sell our products to retail customers. Associates share in our company vision by acting as
independent distributors of our products in addition to purchasing our products for their personal use. Preferred Customers purchase our
products strictly for personal use and are not permitted to resell or to distribute the products. We only count as active Customers those
Associates and Preferred Customers who have purchased from us at any time during the most recent three-month period.
This portion of our Annual Report on Form 10-K provides detailed information about who we are, what we do and where we are
headed. Unless otherwise specified, current information reported in this Form 10-K is as of or for the fiscal year ended December 29, 2018.
We also discuss the development of our company and the geographic areas where we do business.
Throughout this Form 10-K, unless specified otherwise, references to "USANA," "we," "our," "us" and "the Company" refer to the
consolidated company. References to "dollars" and "$" are to United States dollars.
Trademarks Used In This Report
Trademarks or service marks owned by us or our affiliates, including our umbrella marks USANA®, USANA Health Sciences®,
USANA BabyCare®, and BabyCare®, when first used in this report, appear with an initial capital and are followed by the symbol ® or ™,
as applicable. In subsequent uses of the marks in the report, these symbols may be omitted.
WeChat® is a trademark of Tencent Holdings Limited
The Dr. Oz Show® is a trademark of Oz Media LLC
The Premier League® is a trademark of The Football Association Premier League Ltd.
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Current Focus and Growth Strategy
We have implemented or are implementing the following strategies and initiatives intended to increase the number of active
Customers who use our products throughout the world and, thereby, further our company vision:
•
•
•
•
Customer Experience and Technology Enhancements. To generate active Customer growth, we are striving to enhance the
overall experience a customer has when doing business with USANA, which we sometimes refer to as "customer
experience" or our "customer experience initiative." To improve our customer experience, we continue to improve the speed,
convenience, and ease with which customers do business with USANA. In 2019, this will include improving our mobile
technology platform, offering new payment options to meet the demands of active Customers across the globe, providing
quick and simple product education, capturing important feedback, and making it easier for our active Customers to share
their experience with friends and family.
Social Media and Sharing: Historically, the direct selling channel has been characterized by in-person promotion and
selling of products. While we believe that direct selling will continue to rely on person-to-person relationships, we believe
that the future of direct selling entails sharing, marketing and selling products through various social media platforms, which
is sometimes referred to as social sharing. Consequently, (i) we continue to increase our emphasis on training and educating
our Associates to market and sell our products through social sharing, and (ii) many of our customer experience initiatives
are also intended to enhance our social sharing platform. For example, over the last few years we have worked to implement
a WeChat platform for our active Customers in China. In 2019, we will continue to improve our WeChat technologies to
further promote social sharing and we will introduce a WeChat platform for our Chinese customers in markets outside of
China.
Product Innovation and Deployment. 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 that process, we see potential for a new product or ingredient that provides a measurable and important
health benefit, and we believe this benefit can be realized by a significant number of our customers, we will generally pursue
development of that product. For 2019, our science team has developed new products and formulated upgrades to certain
existing products within each of our current product categories that we plan to introduce throughout the year. These include
new food products, Celavive ® product line extensions, and upgrades to certain of our nutritional supplements. During the
year, we also plan to launch a new healthy living product line and focus extensively on the customer experience associated
with this line. This new line will offer products that are customer focused, demonstrable, and easily sharable through social
sharing. Finally, we have also begun implementing a plan to bring the manufacturing of our food products in-house, which
will provide us with several advantages and efficiencies over third-party manufacturing.
In the first quarter of 2018, we launched our Celavive skin and personal care line in every market except China. We then
launched this line in China late in the third quarter of 2018. Our 2019 objective is to further promote the Celavive line and to
introduce certain product line extensions during the year.
Existing Market Growth and International Expansion. After opening of our four new European markets in 2018, during
2019 we will focus on generating sales and active Customer growth in our existing markets. This strategy includes
enhancing our focus and development of submarkets, which entails targeting and addressing the needs of different customer
demographics within a single market.
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•
•
Notwithstanding our current focus, we continue to believe that growth opportunities exist in new international markets and
plan to expand our business to new markets in the future. We select new markets following an assessment of several factors,
including market size, anticipated demand for USANA products, receptiveness to direct selling, and the market entry
process, which includes consideration of possible regulatory restrictions on our products or our direct selling model.
Wherever possible, we endeavor to integrate our Associate Compensation Plan in each market to allow Associates to receive
compensation for global—not merely local—product sales. We believe our seamless Compensation Plan enhances our
ability to expand internationally, and we intend, where permitted, to integrate future markets into this Compensation Plan.
Successfully Grow each of our Regions through Market Specific Strategies and Incentives. While our objective is to
generate sales and active Customer growth in each of our markets around the world, in light of the strength of our Asia
Pacific region and our growing active Customer base in Asia, we continue to believe that our Asia Pacific region represents
our most significant and imminent growth opportunity. Over the last few years, we have generated solid growth in several
markets within this region, especially in mainland China. Although, mainland China is our largest market, we continue to
believe that it provides a significant growth opportunity for our business. Accordingly, we will continue to focus on growing
in China during 2019. To that end, we plan to execute a variety of market-specific strategies in 2019 in Asia Pacific, and
mainland China specifically, to generate growth, which include offering: (i) certain new product introductions described
above; (ii) targeted product promotions during the year; and (iii) other performance-based incentive offerings during the
year. For example, 2018 marked the first time that we have included product sales and promotions at our China National
Meeting. We plan to hold this meeting in Macau again during 2019 and expect to once again offer product for sale to
improve on the experience we provided in 2018. Additionally, we plan to continue to improve our information systems,
technology and infrastructure in China during 2019.
Our Americas and Europe region is also very important to our business and a significant part of our growth strategy.
Notwithstanding the foregoing, our sales and active Customer results in this region have declined over the last few years.
Our objective for this region remains centered on increasing the overall number of active Customers who consistently use
USANA products. To achieve our objective, we plan to execute a number of strategies in this region in 2019, which include
new product introductions and certain product promotions similar to those that will be offered in our Asia Pacific region.
Additionally, we plan to begin offering a variety of new initiatives in select markets in this region, particularly in the U.S.,
on a limited time or trial basis. These initiatives will include certain product enhancements and new compensation and
loyalty offerings for our sales force and customers.
Increase Brand Awareness. We continue to pursue strategies to increase our brand awareness around the world to
accomplish our Company vision. In this regard, in 2018 we renewed and extended our relationship with Dr. Mehmet Oz as a
Trusted Partner and Sponsor of The Dr. Oz Show. While this partnership has focused on our North America region
historically, it now focuses on China as well. Additionally, this partnership is intended to increase brand awareness and
recognition of the USANA brand in our other regions. 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. We also promote global awareness of the USANA brand through professional athlete sponsorships and credible
associations with individuals and organizations. Examples of this include our sponsorship of the U.S. Ski Team, Speed
Skating Canada, and US Speedskating, our partnership with the Women's Tennis Association, and our support of AFC
Bournemouth of The Premier League in England. We continue to serve as the official health supplement supplier for these
teams and
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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.
•
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.
Products
The following table summarizes information concerning our principal product lines.
Product Line/Category
USANA® Nutritionals
Includes core vitamin and mineral supplements that
Description
Essentials/CellSentials®
provide a foundation of advanced total body
nutrition for every age group beginning with
children 13 months of age.
Optimizers
Foods
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.
Includes low-glycemic meal replacement shakes,
snack bars, and other related products that provide
optimal macro-nutrition (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.
9
Percent of
Product Sales
by Fiscal Year
Product
examples
2016—20%
2017—19%
USANA
CellSentials
Essentials
2018—17%
HealthPak
100™
2016—63%
Proflavanol®
2017—64%
2018—65%
CoQuinone®
30
BiOmega-
3™
2016—10%
Nutrimeal
2017—9%
Fibergy
2018—9%
RESET™
weight-
management
program
USANA
MySmart®
Foods
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Product Line/Category
Sensé—beautiful science® Includes premium, science-based, personal care
Description
Percent of
Product Sales
by Fiscal Year
Product
examples
2016—6%
Daytime
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.
Includes new innovative skincare system
formulated with our USANA InCelligence
Technology®. Celavive offers a comprehensive
skin care regimen benefiting multiple skin care
types and ethnicities, upgraded science, and more
noticeable user benefits.
2017—6%
2018—3%
2018—5%
Celavive*
All Other
Includes materials and online tools that are
designed to assist our Associates in building their
businesses and in marketing our products.
2016—1%
2017—2%
2018—1%
Protective
Emulsion
Night
Renewal
Perfecting
Essence
Vitalizing
Serum
Protective
Day Cream
Replenishing
Night Cream
Protective
Day Cream
Perfecting
Toner
Associate
Starter Kit
Product
Brochures
Logo
Merchandise
(*)
Launched in 2018 after soft or pre-market launch in late 2017.
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 Celavive
product line.
The approximate percentage of total product sales represented by our top-selling products for the last three fiscal years is as follows:
Key Product
USANA Essentials/CellSentials
Proflavanol
BiOmega-3
Other top-selling products include our HealthPak 100 and CoQuinone 30.
Geographic Presence
Year Ended
2017
2018
2016
14%
13%
13%
13%
12%
14%
11%
11%
14%
Our products are distributed and sold in 24 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.
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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. Our business in China is conducted by BabyCare Holdings, Ltd.
("BabyCare"), our wholly-owned subsidiary
Southeast Asia Pacific—Australia, New Zealand, Singapore, Malaysia, the Philippines, Thailand and Indonesia
North Asia—Japan and South Korea
Asia Pacific has driven our growth the last several years. Since our acquisition of BabyCare in 2010, our strategy in Asia Pacific has
been centered on generating growth in mainland 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. Over the last few years, net sales in this region have decreased on a constant currency
basis due to active Customer declines in several markets within the region including the United States. We continue to implement growth
strategies in this region and remain optimistic about our potential to generate growth going forward. During 2018, we opened four new
European markets; Germany, Spain, Italy and Romania. These new markets commenced operations late in the second quarter of 2018 and
are supported by our European regional headquarters in Paris, France, which allows us to leverage existing infrastructure and efficiently
expand our consumer base throughout Europe.
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 2018, net sales
outside of the United States represented approximately 90.2% of consolidated net sales.
Research and Development
We focus our research and development ("R&D") efforts on developing and bringing to market high-quality, science-based products
that promote long-term health and wellness. 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 consumer preferences and regulations in global markets.
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, present at scientific
conferences, and collaborate with third-party researchers and institutions to identify possible new products and product upgrade
opportunities. The R&D team is also involved in protecting our proprietary position with exclusive ingredients, proprietary formulations,
product-specific scientific validation, and, in some cases, patent protection. Additional research to support our proprietary USANA
InCelligence Technology based on cell-signaling and microbiome supplementation continues, with new products being readied for launch in
2019.
Our in-house research team has built good working relationships with scientists at a number of universities and research institutes,
including the University of Washington, the University of Texas Medical Branch—Galveston, the University of Utah, The Foods for
Health Institute at The University
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of California, Davis, Peking University (China), Central Queensland University (Australia), University of Ghent (Belgium) and The
University of North Carolina at Pembroke. These relationships help us continue to advance our knowledge, expertise and leadership in
several areas of applied human nutrition.
When developing and manufacturing our products we follow the highest applicable industry quality standards, as established by the
U.S. Food and Drug Administration ("FDA"), U.S. Pharmacopeia ("USP"), other leading non-governmental agencies ("NGO"), and
government agencies. Our ingredients are selected to meet a number of criteria, including, but not limited to: safety, potency, purity,
stability, bioavailability, and efficacy. We control the quality of our products throughout all our internal processes, beginning at the
formulation stage. We maintain our quality control through controlled sourcing of raw ingredients, manufacturing, packaging, and labeling.
In fiscal years 2016, 2017, and 2018, we expended $8.8 million, $9.0 million, and $10.2 million, respectively, on product research and
development activities. Going forward, we expect to continue to increase our spending and resources for research and development to
advance our expertise and leadership in cellular nutrition, as well as overall health and wellness. USANA's attention to product quality is a
sustainable competitive advantage that we believe also provides a substantial barrier to entry for competitors who wish to enter our space.
Manufacturing and Quality Assurance
We conduct manufacturing, production and quality control operations for approximately 71% of our 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. This section of
this report gives you more information about our manufacturing, production and quality control operations.
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
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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 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
these and other 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 certified, through inspection and
audits, with the Islamic Foods and Nutrition Counsel of America in compliance with Halal, The Organized Kashrus Laboratories in
compliance with Kosher, 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 compliance with GMPs for
dietary supplements.
Our Beijing, China manufacturing facility has historically registered with the China Food and Drug Administration ("CFDA"), and
other governmental agencies, as required. Pursuant to a reorganization of certain departments of the Chinese government in 2018, CFDA
has now been consolidated into China's new State Administration of Market Regulation ("SAMR"). Our facility in Beijing is audited
regularly by various organizations and government agencies to assess, among other things, compliance with applicable GMPs, and with
labeling claims.
Personal Care Products 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
29% 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, and certain of our personal care products
including our new Celavive line for markets outside of China. 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.
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Quality Control and 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. Scientists also identify and
confirm all raw materials used in the manufacturing process through scientifically valid means. 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 USP 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 direct selling, which relies on person-to-person marketing and selling of products.
Direct selling is based on the strength of personal relationships and recommendations that frequently come from friends, neighbors,
relatives, and close acquaintances. We believe that direct selling is an effective way to distribute our products because it allows person-to-
person product education, as well as higher levels of customer service, all of which are not as readily available through other distribution
channels. As noted under the caption "Current Focus and Growth Strategy," above, we believe that the future of direct selling is "social
sharing" which entails sharing, marketing and selling products through various social media platforms. Consequently, we continue to
increase our emphasis on training and educating our Associates to market and sell our products through social sharing.
Structure of Direct Selling Program
Associates. A person who wishes to sell USANA products must join our independent sales force as an Associate. A person becomes
a USANA 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 must agree to adhere to the USANA policies and procedures. Under our
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 direct selling opportunities. Associates who violate our
policies are subject to discipline, which may include the termination of their purchase and distribution rights. 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 price averaging $30 in each of our markets and these kits are fully refundable under our return policy, which is
described elsewhere in this report. No other investment is required to become an Associate.
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Once a person becomes an Associate, she or he may purchase products directly from us at wholesale prices for their personal use and
for resale to customers. Our Associates are also entitled to build sales organizations by attracting, enrolling and selling product to new
active Customers. 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 direct sales structure.
Sponsored Associates are referred to as part of the sales organization of the sponsoring Associate. New Associates may also sponsor new
Associates and Preferred Customers, 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 income with USANA must successfully sell
USANA products and establish a network of product consumers 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.
Preferred Customers and Retail Customers. We also sell products directly to Preferred Customers and retail customers who
purchase the products only for their personal use. Preferred Customers enroll with USANA, generally through an introduction by an
Associate, and purchase product directly from the Company. Retail customers, however, generally purchase directly from Associates.
Neither Preferred Customers nor retail customers may resell or distribute our products, regardless of where they purchased them.
These various customer programs give us access to a customer market that would otherwise be missed, by targeting consumers who
enjoy USANA products, but who prefer not to maintain a distribution relationship with us. Although our policies prohibit customers from
engaging in retail sales of products, they may enroll as Associates at any time in the future, if they desire.
Associate Training and Motivation
Initial training of Associates about USANA, our products and Compensation Plan, and direct selling in general, is provided primarily
by an Associate's sponsor and others in the Associate's sales organization. We develop and sell training materials and sales tools to assist
Associates in building their businesses, and we provide reprints from commercial publications that feature USANA that 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 tend to be those who participate in such training activities.
Although we provide leadership training and sales tools, we ultimately rely on our Associates to sell our products, attract new active
Customers to purchase our products, and to educate and train new Associates regarding our products and Compensation Plan.
Associate Compensation
China Business. Because of unique business laws and regulations in China governing direct selling that differ materially from our
other markets, we operate our business in China through a Chinese subsidiary, BabyCare. The Chinese permit direct selling and have issued
regulations that contain a number of financial and operational restrictions. China prohibits pyramid promotion and selling and multi-level
compensation systems and has implemented a number of administrative and regulatory methods to control these activities. We have
adjusted our direct selling program in China to comply with these laws.
BabyCare sells products in China through a variety of methods, including: (a) online through its website; (b) at physical branch retail
locations; (c) through direct sellers in provinces and municipalities where BabyCare has received a direct sales license; and (d) through
independent distributors who are
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considered independent business owners under Chinese law. BabyCare's business model has been developed specifically for China's laws
and regulations based on, among other things: (i) BabyCare's communications with the Chinese government, (ii) BabyCare's interpretation
of the direct selling laws and regulations, as well as its understanding of how the government interprets and enforces the regulations, and
(iii) BabyCare's understanding of how other multinational direct selling companies operate in China.
Individuals who reside in China and who are interested in being part of USANA's organization in China may do so by enrolling with
BabyCare. While the process for enrolling with BabyCare is similar to the process for joining USANA, individuals must initially enroll with
BabyCare as a China Preferred Customer, or CPC. CPCs are similar to Preferred Customers in our other markets, but CPCs also have the
right in China to refer other CPCs and receive rebates on future product purchases based on the volume of product purchased by CPCs they
have referred. A CPC may become a direct seller or independent distributor (collectively referred to as Associates) in China by electing to
do so and agreeing to adhere to BabyCare's policies and procedures in China. Our direct sellers in China are permitted by our policies and
the terms of our direct selling licenses to sell away from fixed retail locations in the provinces and municipalities where BabyCare has been
granted a direct selling license and are compensated under BabyCare's compensation plan. Our independent distributors, who are
independent business owners under Chinese law, sell BabyCare products and provide various sales, marketing and other support services to
BabyCare and its customers in China. Our distributors in China do not participate in our global Compensation Plan for Associates; instead
they are compensated for their services under BabyCare's separate compensation plan established for China.
Operating in China involves certain risks and uncertainties to our business, as discussed further in Item 1A. Risk Factors. We
endeavor to mitigate these risks and uncertainties through various measures, including by seeking to understand and obey laws and
regulations, training our employees and sales force, engaging in dialogue with government officials to better understand their goals and
explain our plans, and cooperating in inquiries and other matters of interest to regulators. However, these efforts do not eliminate the
significant risks associated with operating in China.
Markets Outside China. This section describes our Compensation Plan generally, except for our China operations as discussed
above.
Our Compensation Plan provides several opportunities for Associates to earn compensation, provided they are willing to consistently
work at (i) sharing, marketing and selling USANA products to consumers, and (ii) building, training, and retaining their sales organizations.
The purpose behind each form of compensation under our Compensation Plan is to reward committed Associates for generating product
sales either directly or indirectly through their sales organization and network of product consumers.
Associates can earn compensation under the Compensation Plan in four ways:
•
•
Commissions. The primary way an Associate is compensated is through earning commissions. Associates earn commissions
by generating sales volume points, which are a unit of measure of the product sales of their sales organization. Each of our
products is assigned a sales volume point value comprised of a certain percentage 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. Associates do not earn
commissions for simply recruiting and enrolling others in their organization. Commissions are paid only on the sale of
products. In most markets, we pay Associates their commissions on a weekly basis.
Bonuses. We offer Associates several bonus opportunities, including our leadership bonus, elite bonus, and lifetime
matching bonus. These bonus opportunities are based on a
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•
•
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. This allows the Associate to
retain the retail mark-up as another form of compensation.
Contests and Promotions. We regularly sponsor contests and promotions designed to incentivize Associates to generate
sales, grow their active Customer base and ultimately increase the number of USANA product users. These promotions are
also based on a pay-for-performance philosophy and, therefore, are only paid upon the achievement of certain objectives.
We endeavor to integrate our Compensation Plan seamlessly across all markets (except China) 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 customers' needs and desires; and (iii) providing an opportunity through direct sales for our Associates
who desire to distribute our products and earn supplemental income. Our strategy is to capitalize on our operating strengths, which include:
a strong research and development program; significant in-house manufacturing capability; high quality science-based products; an
equitable 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 doctoral
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 collaborate with outside research organizations to further support various aspects of our
research and development efforts. Our in-house research team works closely with scientists at a number of universities and research
institutes, including those listed under the caption "Research and Development" above, to maintain our
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leadership in clinical research in nutrition, oxidative stress, glycemic stress, chronic inflammation and health implications of the
microbiome. We have also funded clinical research programs at Boston University, the University of Colorado, the University of Utah, the
University of Sydney in Australia, The Orthopedic Specialty Hospital (or "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. 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 three-fourths 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 Quality 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.
Equitable Associate Compensation Plan and Support. We are committed to increasing our product sales by providing a competitive
compensation plan that attracts and retains 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 product consumers and/or 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 USANA's plan in other markets.
To support our Associates, we sponsor meetings and events throughout the year, where we offer information about our products and
our direct selling 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.
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
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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
active Customer;
Commissions paid to our Associates are tied to sales performance;
Accounts receivable are minimal because payment is required at the time an active 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 29, 2018, this program represented 55% 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 direct selling, nutrition, product research and development, international development, marketing, sales, 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.
Competition
Our industry is very competitive and the barriers to entry are not significant. We compete with manufacturers, distributors, and
retailers of nutritional products in many channels, including direct sales, specialty retail stores, wholesale stores, and the internet generally.
We also compete with other public and privately owned direct sellers for distributor talent, including for example Amway, Herbalife, and
Nu Skin. On both fronts, some of our competitors are significantly larger than we are, have a longer operating history, higher visibility and
name recognition, and greater financial resources than we do. We compete with these entities by emphasizing the strengths of our business,
as described in the "Operating Strengths" section above, to our Associates, Preferred Customers and potential customers.
Product Returns
Product returns have not been a material factor in our business, totaling approximately 0.7% of net sales in 2016, 2017, and 2018,
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 applicable regulations in those markets. To avoid manipulation of our
Compensation Plan, return of product when
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the purchase amount exceeds $100 and the product 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 Associate or Preferred 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. See
"Risk Factors."
Associate Compliance
Our reputation depends upon the quality of our products and the integrity of our 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 they 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 us prior to their use.
In the ordinary course of our business, we encounter 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 Ethics and Education group,
who determine what, if any, disciplinary action is warranted in each case. More serious infractions are also reported to our Ethics
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, including 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
Because we believe that Associate compliance is critical to the integrity of our business, we are aggressive in ensuring that our
Associates comply with our policies and procedures. When an Associate fails to comply with our policies and procedures, we may
terminate the Associate's 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 we 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 sales, active Customer data, 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 last several years we
have meaningfully invested in technology systems and infrastructure to create a better overall customer experience for our customers and
we will continue to invest in this area going forward.
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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.
For information regarding technology-related risks, see the information in "Item 1A: Risk Factors" under the caption "We rely on
information technology to support our operations and reporting environments. A security failure of that technology could impact our ability
to operate our businesses effectively, adversely affect our reported financial results, impact our reputation and expose us to potential
liability or litigation."
Regulatory Matters
General. In every jurisdiction in which we operate, our business is subject to extensive governmental regulation. These regulations
exist at various national and local levels and pertain to our products, direct selling, and other aspects of our business. In this section, we
describe the regulations that are applicable to our business.
Product Regulation. Numerous governmental agencies regulate the formulation, manufacturing, holding, packaging, labeling,
advertising, promoting, importing, distributing, shipping, and selling of health supplements, cosmetics, and foods. In the United States,
these agencies include, for example, the Federal Trade Commission ("FTC") under the FTC Act, the FDA, under the Food, Drug, and
Cosmetic Act ("FDCA") and related regulations, the Consumer Product Safety Commission, the U.S. Department of Agriculture, the
Environmental Protection Agency, the United States Customs and Border Patrol, and the United States Postal Service.
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 GMPs,
with additional requirements that are specific to dietary supplements. We are audited annually by the FDA, specifically for dietary
supplements and have been found in 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
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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 adulteration and misbranding provisions of the FDCA.
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. In Australia, product registration, labeling and manufacturing is regulated by the
TGA. In Japan, the Ministry of Health, Labor and Welfare regulates these activities. In China, SAMR regulates these activities. Upon
entering a new market, prior to commencing operations or marketing products, we may be required to obtain approvals, licenses, or
certifications from that country's Food Administration, Ministry of Health or comparable agency. Approvals or licensing may be
conditioned on reformulation of USANA products for the particular market or approval or licensing otherwise may be unavailable with
respect to certain products or product ingredients in a given market.
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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 can be unpredictable. It generally requires extensive analysis and approval by the SAMR. As a
result, it can 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 SAMR, 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.
Direct Selling Regulation. Various laws and regulations in all of our markets regulate 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 activities. Direct selling regulations are inherently fact-based and often do not include "bright line" rules. In most of our markets,
these regulations are subject to discretionary interpretation by regulators and respective legal authority. Consequently, the regulations, or a
regulator's interpretation and enforcement of the regulations, could change at any time. If that were to occur, we may be required to change
our business model in the respective market in an effort to comply.
In the United States, the FTC has jurisdiction to regulate direct selling companies under the FTC Act. The FTC's interpretation of the
applicable direct selling laws and regulations has evolved over the last several years as represented in various consent orders between the
FTC and certain direct selling companies relating to a variety of consumer protection issues, including misleading earnings representations
by a company's independent distributors, as well as the fairness and legal validity of a company's business model and distributor
compensation plan. For instance, in July 2016, the FTC entered into a consent order with a direct selling company following an
enforcement action in which the FTC had alleged that, among other things, the direct selling company's distributors were making
misleading representations regarding income and that the company was utilizing an unfair and deceptive compensation plan. Additionally,
in September 2016, the FTC entered into a consent order with another direct selling company following an enforcement action in which the
FTC had alleged that the company's distributors were making misleading earnings representations and that the company was utilizing an
illegal business model. In each of these settlements, the FTC required the censured company to pay a significant fine, revise its U.S.
business model and compensation plan to comply with various restrictions on how it can compensate independent distributors and to make
changes to its marketing practices to avoid misleading income representations. FTC determinations such as these have created ambiguity as
to the proper interpretation of the law and regulations applicable to direct selling companies in the U.S. Although these settlements do not
represent judicial precedent or have the force of law or a new rule or regulation, FTC officials have indicated that the direct selling industry
should look to the principles underlying these consent orders for guidance in their own businesses.
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Additionally, in January 2018, the FTC issued its non-binding Business Guidance Concerning Multi-Level Marketing, which it
intended to reinforce many of the principles contained in the consent orders described above and to provide other operational guidance to
direct selling companies. We have analyzed the consent orders and the Business Guidance issued by the FTC and are in the process of both
(i) refining aspects of our U.S. business model based on the principles contained in these documents, and (ii) conducting additional analysis
to determine if further changes to our model may be necessary. We cannot assure you that the FTC, if it were to review our U.S. business,
would not require us to change one or more aspects of our operations in the U.S. in the future. Any action against us in the future by the
FTC could materially and adversely affect our operations in the U.S.
The Chinese government has adopted direct selling laws and regulations that contain a number of financial and operational restrictions
on direct selling companies, as well as prohibitions on pyramid selling and multi-level compensation. These regulations are also subject to
discretionary interpretation and enforcement by various municipal, provincial and state officials in China. Departments within the Chinese
government that regulate direct selling include, the Ministry of Commerce ("MOFCOM"), the Ministry of Public Security ("MPS") and
their local counterparts. BabyCare's business model has been developed specifically for China's laws and regulations based on, among other
things: (i) BabyCare's communications with the Chinese government, (ii) BabyCare's interpretation of the direct selling laws and
regulations, as well as its understanding of how the government interprets and enforces the regulations, and (iii) BabyCare's understanding
of how other multinational direct selling companies operate in China.
Notwithstanding the foregoing, the direct selling industry in China, as well as the regulatory environment for that industry, continues
to evolve and receive significant attention and scrutiny from the Chinese government and the media in China. For example, in January
2019, following unfavorable media coverage of certain health product companies and direct selling companies, several departments of the
Chinese government, including SAMR, MPS, and MOFCOM, initiated a 100-day review of health product and direct selling companies in
China. This 100-day review requires direct-selling companies such as BabyCare to conduct a self-assessment of the regulatory compliance
of their business (including product regulatory compliance and direct selling regulatory compliance) and to provide information to the
government regarding the same. The 100-day review will also entail a review of a company's regulatory compliance by various
departments of the Chinese government. During this review period, the Chinese government has, among other things, (i) instructed direct
selling companies to not hold large distributor meetings, and (ii) suspended its application review process for direct sales licenses and
authorizations.
Prior to 2019, including in 2017 following various media reports, certain departments of the Chinese government, including the
SAMR and MPS, carried out a three-month review of the direct selling industry to investigate alleged violations of the direct selling
regulations and anti-pyramiding regulations. The Chinese government has taken action historically against direct selling companies that it
believes have violated the government's direct selling regulations and anti-pyramiding laws. The government's action in this regard has
entailed investigating direct selling companies and their distributors, imposing significant fines and, in some cases, shutting down
companies. Historically, there have been instances when inquiries or complaints about BabyCare's business resulted in warnings from the
Chinese government, as well as the payment of fines by BabyCare or its distributors.
BabyCare has obtained direct selling licenses in certain provinces and municipalities, and it must obtain various licenses and approvals
from additional municipalities and provinces within China if it is to operate its direct selling business model in China. As of the date of this
report, BabyCare has been granted licenses to engage in direct selling in the municipalities and provinces of Beijing, Jiangsu, Shaanxi, and
Tianjin. In 2016, BabyCare received preliminary approval from the Chinese government to expand its direct selling business into the
following eight additional provinces and municipalities: Liaoning Province, Shandong Province, Shanxi Province, Sichuan Province,
Guangdong Province, Dalian
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City, Qingdao City, and Shenzhen City. Issuance of final direct selling approvals for these municipalities and provinces was contingent
upon BabyCare satisfying certain conditions and reporting requirements. Although BabyCare has been working to satisfy these conditions
and reporting requirements, we now believe that BabyCare will not be issued the final direct selling approvals for some or all of these eight
additional provinces and municipalities under the current applications due to (i) delays by BabyCare in completing the same, (ii) the
reorganization of several departments of the Chinese government in 2018, (iii) the Chinese government's 100-day review of the direct sales
industry, which commenced in January 2019, and/or (iv) the related suspension of the Chinese government's application review process for
direct sales licenses and approvals during the 100-day review. Consequently, we anticipate that BabyCare will need to reapply for these
approvals at some point following the 100-day review period. Due to the unpredictability created by these complications, and the discretion
maintained by the Chinese government, there is no guarantee that BabyCare will be successful in reapplying for these approvals or that the
Chinese government will ultimately grant BabyCare a direct sales license in these or in other jurisdictions, which could delay or adversely
affect BabyCare's growth and business.
Direct selling companies, and the industry in general, continue to experience significant media and public scrutiny in many countries.
Several companies similar to ours recently 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
direct selling in many countries, can affect how a regulator or member of the public, including investors, perceive us. For instance, there
has been significant media and short-seller attention given to the viability and legality of direct selling in the United States and China over
the past few years. This attention has led to intense public scrutiny of our industry, as well as volatility in our stock price and the stock
prices of other direct selling companies who operate in the same markets. We cannot predict the impact that this scrutiny may have on our
business or industry in the future.
We detail more of the various risks associated with our business in this report in Item 1A. "Risk Factors."
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 30 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
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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 operational
protections and confidentiality agreements with employees, consultants, vendors 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 two U.S. patents that 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.
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
intellectual property 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 22, 2019 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 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 Laws
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.
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Employees
As of February 22, 2019 we had approximately 1,911 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. Our website address is www.usanahealthsciences.com. The information on our website 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 reports under the Exchange Act, including our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and all amendments to these
reports, as soon as reasonably practicable after such reports or other material has been 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.
You may also obtain, free of charge on our website, a copy of our Corporate Governance Guidelines, our Code of Ethics for
Directors and Employees, and the Charters of our Audit Committee, Governance, Risk and Nominating Committee, and
Compensation Committee of our Board of Directors.
Item 1A. Risk Factors
We are subject to and encounter various substantial risks and events that adversely affect our business, results of operations, cash
flows, financial condition and the price of our common stock. You should consider the following risk factors, in addition to the information
presented elsewhere in this report, particularly under the heading "Cautionary Note Regarding Forward-Looking Statements," on page 1,
and in the sections Part I, Item 1. Business, Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations, as well as in the filings we make from time to time with the SEC, in evaluating us, our business and an investment in our
securities. The fact that some of these risk factors may be the same or similar to those that we have included in other reports that we have
filed with the Securities and Exchange Commission in past periods 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.
The risks discussed below are not the only risks that we face. Additional risks not currently known to us or that we currently deem
immaterial also may adversely affect our business.
As a direct selling company, we sell our products to a network of active Customers. If we are unable to attract and retain active
Customers, our business may be harmed.
Our consumer base includes (i) non-employee, independent Associates who personally consume and sell our products, (ii) Preferred
Customers who simply consume, but do not resell our products, and (iii) retail customers who typically purchase our products directly from
Associates. We rely largely on our Associates to market and sell our products and to generate active Customer growth. Our ability to
maintain and increase sales in the future will depend in large part upon our success in increasing the number of active Customers in each of
our markets around the world. Our success will also depend on our ability to retain and motivate our existing Associates and attract new
Associates. Associates
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typically market and sell our products on a part-time basis and often engage in other business activities, some of which may compete with
us. We rely primarily upon our Associates to (i) attract, train and motivate new Associates, and (ii) attract and sell to Preferred Customers
and retail customers. Our ability to continue to attract and retain active Customers can be affected by a number of factors, some of which
are beyond our control, including:
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General business and economic conditions;
Adverse publicity or negative misinformation about our industry, us or our products;
Negative public perceptions about direct selling in general;
High-visibility investigations or legal proceedings against direct selling 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 direct selling companies entering into the marketplace that may sell to our active Customers, or potential
active Customers; 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 we will be successful in increasing or retaining our number of active Customers 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 and Preferred Customers from year to year. Preferred Customers may stop buying from us at anytime and it is challenging
for organizations like ours to determine why a customer stops buying. While our total number of active Customers has continued to
increase during recent years, a few of our markets, including the United States, have experienced customer declines. If our strategies and
initiatives, including our customer experience and social selling initiatives, do not drive growth in our active Customer base, 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 Preferred Customers and attract new Associates and Preferred Customers.
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 with our Company. Our Compensation Plan is designed to
permit Associates to sponsor new Associates and Preferred Customers, thereby creating sales organizations. As a result, Associates develop
business and personal relationships with other Associates and Preferred Customers. 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.
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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 contractually 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, without our knowledge and in violation of our policies, create promotional materials or otherwise provide information that
does not accurately describe USANA, our products or the Associate Compensation Plan. 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 business
model. We take what we believe to be commercially reasonable steps to (i) regularly train our active Associate base, and (ii) monitor the
activities of our Associates to guard against misrepresentation and other illegal or unethical conduct by Associates and to assure compliance
with the terms of our policies and procedures and Compensation Plan. There can be no assurance, however, that our efforts in this regard
will be sufficient to accomplish this objective, particularly in times and 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 particular, the
laws in the United States regarding independent contractor status continue to evolve and, in some cases, have been applied unfavorably
against direct selling and other companies. 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.
Direct selling 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 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. Direct
selling 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 business to regulatory agencies. We have also been required to modify our Compensation Plan in the
past in certain jurisdictions in order to comply with the interpretation of the regulations by local authorities. Where required by law, we
obtain regulatory approval of our Compensation Plan, or, where approval is not required or available, the favorable opinion of local counsel
as to regulatory compliance. Further, we
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may simply be prohibited from distributing products through direct selling in some countries, or we may be forced to alter our
Compensation Plan.
In the United States, the FTC has entered into several highly publicized settlements with direct selling companies that required those
companies to modify their compensation plans and business models. Those settlements resulted from actions brought by the FTC involving
a variety of alleged violations of consumer protection laws, including misleading earnings representations by the companies' independent
distributors, as well as the legal validity of the companies' business model and distributor compensation plans. For instance, in July 2016,
the FTC entered into a consent order with a direct selling company following an enforcement action in which the FTC alleged that, among
other things, the direct selling company's distributors had made misleading income representations and that the company was utilizing an
unfair and deceptive compensation plan. In September 2016, the FTC entered into a consent order with another direct selling company
following an enforcement action in which the FTC alleged, among other things, that the company's distributors were making misleading
earnings representations and that the company was utilizing an illegal business model. The consent order in each of these cases required the
respective direct selling company to, among other things, pay a significant fine, revise its U.S. business model and compensation plan to
comply with various restrictions on how it can compensate independent distributors and change its marketing practices to avoid misleading
income representations.
FTC determinations such as these have created an ambiguity regarding the proper interpretation of the law and regulations applicable
to direct selling companies in the U.S. Although a consent order between the FTC and a specific company does not represent judicial
precedent, FTC officials have indicated that the direct selling industry should look to these consent orders, and the principles contained
therein, for guidance. In January 2018, the FTC issued non-binding guidance to the direct selling industry, suggesting it was intending to
reinforce the principles contained in these consent orders and provide other operational guidance. We have analyzed the consent orders and
the subsequent guidance issued by the FTC and we are in the process of both (i) refining aspects of our U.S. business model based on the
principles contained in the FTC materials, and (ii) conducting additional analysis to determine if further changes to our model may be
necessary. Although we strive to ensure that our overall business model and compensation plans are regulatory compliant in each of our
markets, we cannot assure you that a regulator, if it were to review our business, would agree with our assessment and would not require us
to change one or more aspects of our operations. Any action against us in the future by the FTC or another regulator could materially and
adversely affect our operations.
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 direct selling companies could
harm our business and industry if the laws and regulations are interpreted in a way that results in additional restrictions on direct selling
companies in general.
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 representing approximately 50% of our sales
and active Customer count. 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
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business, financial condition, results of operations and cash flows may be harmed. BabyCare must comply with significant operational,
financial, and other regulatory requirements to engage in direct selling in China. While we believe that we will be successful in growing
BabyCare's business in China, it is difficult to assess the extent to which BabyCare's business model and Associate compensation plan will
be successful or deemed to be compliant with applicable Chinese laws and regulations. Although we are required to conduct our operations
in China through BabyCare, we believe that our long-term success in China continues to 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, as well as a variety of legal, political, and economic
risks. If the government modifies the direct selling regulations, or interprets and enforces the regulations in a manner that is adverse to
our business in China, our consolidated business and results of operations may be materially harmed.
Our operations in China are conducted by BabyCare, a direct selling company that we indirectly acquired several years ago to facilitate
our expansion into China. BabyCare operates in China pursuant to direct selling laws and regulations that are uncertain and evolving. These
regulations contain a number of financial and operational restrictions for direct selling companies, most notably on pyramid selling and
multi-level compensation. The laws and regulations are also subject to discretionary interpretation and enforcement by various state,
provincial and municipal level officials in China. Regulators in China may change how they interpret and enforce the direct selling
regulations, both current interpretations and enforcement thereof or future iterations. Regulators in China may also modify the current
regulations. As a result, there can be no assurance that the Chinese government's current or future interpretation and application of existing
and new regulations will not negatively impact our business in China, result in regulatory investigations or lead to fines or penalties against
us or our Associates.
The Chinese central government also exercises significant control over the Chinese economy, including through controlling capital,
controlling foreign exchange and foreign exchange rates, controlling tax regulations, providing preferential treatment to certain industry
segments or companies and issuing required licenses to conduct business. In addition, we could face additional risks resulting from changes
in China's data privacy and security requirements. Accordingly, any adverse change in the Chinese governmental, economic or other
policies could have a material adverse effect on BabyCare's business in China and our consolidated results of operations.
Certain trade policies, tariffs, other trade actions implemented by the United States in 2018 against other countries, including China,
relating to the import and export of certain products, and negotiations with respect thereto, may have a negative effect on our business,
financial condition, and results of operations in China and other markets. China, and certain of our other markets, have imposed, or
threatened to impose, tariffs on U.S. imports or to take other actions in retaliation to actions taken by the United States. These
developments may have a material adverse effect on the economy, financial markets, and currency exchange rates in China and the United
States, which represent our two largest markets. Additionally, any actions taken by the Chinese government, or the government in our other
markets, to implement further trade policy changes, financial restrictions, or increased regulatory scrutiny on U.S. companies could
negatively impact our business, financial condition, and results of operations.
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While BabyCare utilizes a business model that has been developed specifically for China's laws and regulations, BabyCare's
model has not been formally approved by the Chinese government.
BabyCare's business model has been designed specifically for China's laws and regulations based on, among other things:
(i) BabyCare's communications with the Chinese government, (ii) BabyCare's interpretation of the direct selling laws and regulations, as
well as its understanding of how the government interprets and enforces the regulations, and (iii) BabyCare's understanding of how other
multinational direct selling companies operate in China. Many of the components of BabyCare's business model are unique to China and
are not part of our business model in our markets outside of China. For example, BabyCare sells products in China through a variety of
methods, including: (a) online through its website; (b) at physical branch retail locations in China; (c) through direct sellers in provinces
and municipalities where BabyCare has received a direct sales license; and (d) through independent distributors who are considered
independent business owners under Chinese law. BabyCare has not received formal confirmation from the Chinese government that its
business model and operations in China comply with applicable laws and regulations, including those pertaining to direct selling. We
cannot be certain that BabyCare's business model or the activities of its employees, direct sellers or independent distributors will be deemed
by Chinese regulatory authorities to be compliant with current or future laws and regulations. If BabyCare's model is deemed to be in
violation of applicable regulations, as they are now or may in the future be interpreted or enforced, BabyCare could be subject to fines,
penalties, suspension of its business in China or, ultimately, have its direct selling license revoked by the Chinese government, all of which
could have a material adverse impact on our business in China.
BabyCare's operations in China, and direct selling companies in general, are subject to significant government oversight, scrutiny
and monitoring.
Chinese regulators regularly monitor and make inquiries about the business activities of direct sellers in China and have done so with
BabyCare. These inquiries can arise in a variety of ways, including from complaints from customers, competitors or the media. For
example, following various media reports in 2017, certain departments of the Chinese government, including the former State
Administration of Industry and Commerce (now SAMR) and MPS, carried out a three-month review of the direct selling industry to
investigate alleged violations of the direct selling regulations and anti-pyramiding regulations. Additionally, following media coverage of
certain health product companies and direct selling companies in January of 2019, several departments of the Chinese government,
including SAMR, MPS, and MOFCOM, initiated a 100-day review of health product and direct selling companies in China. The 100-day
review requires applicable companies such as BabyCare to conduct a self-assessment of the regulatory compliance of their business
(including product regulatory compliance and direct selling regulatory compliance) and to provide information to the government regarding
the same. The 100-day review also entails a review of a company's regulatory compliance by various departments of the Chinese
government. During this review period, the Chinese government has, among other things, (i) instructed direct selling companies to not hold
large distributor meetings, and (ii) suspended its application review process for direct sales licenses and authorizations.
The Chinese government has investigated and imposed significant fines on companies and their distributors believed to have violated
direct selling and anti-pyramiding regulations. In some cases, it has even shut such companies down. There have been instances where
inquiries or complaints about BabyCare's business have resulted in warnings from the Chinese government as well as the payment of fines
by BabyCare. We expect that BabyCare will continue to face the risk of government inquiries, complaints or investigations, and any
determination that BabyCare's business or the activities of its Associates are not in compliance with applicable regulations could result in
additional fines, disruption of business, or the suspension or termination of BabyCare's licenses, including its direct selling licenses, all of
which could have a material adverse effect on our business and operations. There can be no
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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.
Additionally, the direct selling regulations in China prevent persons who are not Chinese nationals from engaging in direct selling in
China. Although we have implemented internal policies that are designed to promote our Associates' compliance with these regulations, we
cannot guarantee that any of our Associates living outside of China or any of BabyCare's Associates in China have not engaged or will not
engage in activities that violate our policies in this market or that violate Chinese law or other applicable laws and regulations and,
therefore, might result in regulatory action and adverse publicity, which would harm our business in China.
BabyCare must apply for and receive government approval to expand its business in China and its ability to expand could be
negatively impacted if it is unable to obtain such required approvals.
BabyCare has obtained direct selling licenses in certain provinces and municipalities and it must obtain various licenses and approvals
from additional municipalities and provinces within China if it is to operate its direct selling business model in China. While direct selling
licenses are centrally issued, the licenses are generally valid only in the jurisdictions within which related approvals have been obtained.
Those approvals are generally awarded on local and provincial bases, and the approval process requires involvement with multiple
ministries at each level. As of the date of this report, BabyCare has been granted licenses to engage in direct selling in the municipalities
and provinces of Beijing, Jiangsu, Shaanxi, and Tianjin. In 2016, BabyCare received preliminary approval from the Chinese government to
expand its direct selling business into the following eight additional provinces and municipalities: Liaoning Province, Shandong Province,
Shanxi Province, Sichuan Province, Guangdong Province, Dalian City, Qingdao City, and Shenzhen City. Issuance of final direct selling
approvals for these municipalities and provinces was contingent upon BabyCare satisfying certain conditions and reporting requirements.
Although BabyCare has been working to satisfy these conditions and reporting requirements, we now believe that BabyCare will not be
receive the final direct selling approvals for one or more of these eight additional provinces and municipalities under the current
applications due to (i) delays by BabyCare in satisfying the conditions, (ii) the reorganization of several departments of the Chinese
government in 2018, (iii) the Chinese government's 100-day review of the direct sales industry, which commenced in January 2019, and/or
(iv) the related suspension of the Chinese government's application review process for direct sales licenses and approvals during the 100-
day review. Consequently, if a previously submitted application is not approved, BabyCare will need to reapply for these approvals at some
point following the 100-day review period. Due to these complications, and the discretion maintained by the Chinese government, there is
no guarantee that BabyCare will be successful in reapplying for these approvals or that the Chinese government will ultimately grant
BabyCare a direct sales license in these or other jurisdictions, either of which could adversely affect BabyCare's business.
Going forward, BabyCare will be required to obtain licenses from municipalities and provinces within China where it does not hold a
license. As noted above, the Chinese government communicated in January 2019 that, as part of the 100-day review of the direct selling
industry, it had suspended its application review process for direct sales licenses and approvals. If BabyCare is unable to obtain additional
direct selling licenses as quickly as we would like, or at all, it would have a negative impact our ability to expand and grow our business in
China. If and when the Chinese government again begins to accept direct selling applications and to issue direct sales licenses and
authorizations, the process for obtaining the necessary government approvals will likely remain unpredictable, time-consuming and
expensive. Additionally, the Chinese government may, as part of the 100-day review of the direct selling industry, or in the future, continue
or increase its investigation and scrutiny of the direct selling industry or modify the applicable regulations and licensing process. If the
current
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processes for obtaining approvals are suspended or otherwise delayed for an extended period of time, or indefinitely, these events could
have a negative impact on BabyCare's growth prospects in China. Ultimately, there can be no assurance that BabyCare will be successful in
maintaining its current direct-selling licenses or obtaining additional direct-selling licenses or the required approvals to expand into
additional locations in China that are important to its business.
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 in the future. 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). In
recent years there have been an increasing number of investigations and other enforcement activities under these laws. 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. The U.K. Anti-Bribery Act 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 these 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 (see, "An internal
investigation of our China operations is being conducted," below).
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
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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 direct selling 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 business. 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.
An internal investigation of our China operations is being conducted.
We are voluntarily conducting an internal investigation of our China operations, BabyCare. 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 our Board of Directors has assumed direct responsibility for reviewing these matters and has hired experienced legal 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. Our
internal investigation is substantially complete; however, we continue to cooperate with the SEC and the United States Department of
Justice. 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. While one civil lawsuit was initiated as a result of these matters and dismissed by the court, there can be
no assurance that other lawsuits will not be initiated against us as a result of these matters. We cannot predict whether potential future
lawsuits will result in judgments against us and potentially any responsible current and former directors and officers. We expect to continue
to incur costs in connection with our ongoing cooperation with the government and, potentially, in defending any potential civil or
governmental proceedings that are instituted against us or any of our current or former officers or directors.
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
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our products. In addition, 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 in-house manufacturing activity is subject to certain risks.
We manufacture approximately 71% 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
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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.
Our reliance on third parties to manufacture and supply certain of our products and the failure by these third parties to supply
these products to us in accordance with our quality standards and specifications, as well as applicable laws and regulations, may harm
our financial condition and operating results.
We contract with third-party suppliers and manufacturers for the production of some of our products, which account for approximately
29% of our product sales. These third-party suppliers and manufacturers produce and, in most cases, package these products according to
formulations and specifications 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, including our new Celavive products. 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
cannot assure you that our outside contract manufacturers will continue to reliably supply products to us at the levels of quality, or the
quantities, we require, and in compliance with our specifications or applicable laws, including under the FDA's GMP regulations. We have
encountered situations in the past where we have had disagreements with contract manufacturers about the overall quality of products they
have produced for us, and specifically whether such products conform to our specifications. We have also suspended and terminated
relationships with contract manufacturers for quality issues and non-conforming products. While our business continuation plan
contemplates events such as these, identifying and obtaining acceptable replacement manufacturing sources, on a timely basis or at all, is
challenging. Additionally, transferring our third-party manufacturing business to another contract manufacturer can be expensive, time-
consuming, result in delays in our production or shipping, reduce our net sales, damage our relationship with customers and damage our
reputation in the marketplace. Any of these events, if they were to occur, could harm our business, results of operations and financial
condition.
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.
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 29, 2018, represented 90.2% 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
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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 is 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. With the exception of BabyCare's business in China,
product purchases by our subsidiaries around the world 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 enter into currency exchange contracts to offset foreign
currency exposure in various international markets. We do not use derivative instruments for speculative purposes. A foreign government
may impose, and some have imposed, foreign currency remittance restrictions. For example, several markets in which we conduct business
require that we file the necessary statutory financial statements for the relevant period as a prerequisite to repatriating cash in the form of a
dividend. Any government restrictions on transfers of cash out of the country and control of exchange rates may have a materially adverse
effect on our business, financial condition, liquidity and cash flows. 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 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 direct selling, the quality or efficacy of nutritional supplement products or
ingredients in general or our products or ingredients specifically, and regulatory investigations, regardless of whether
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those investigations involve us or our Associates or the business practices or products of our competitors or other direct selling 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. In 2012, we were again the target of false and misleading statements
concerning our business practices, particularly in China and Hong Kong. This adverse publicity also had an adverse impact on the market
price of our stock and caused insecurity among our Associates. Most recently, in April 2017, we were again the target of an anonymous
short-seller blog that contained distortions of fact and misleading information about BabyCare's business in China.
There has been significant media and short-seller attention regarding the viability and legality of direct selling in the United States,
China, and internationally recently and over the past few years. This attention has led to intense public scrutiny of the industry, as 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. Direct selling 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 the laws and regulations
applicable to our business. In the ordinary course of our business, Associates occasionally fail to adhere to our policies and procedures. If
this happens, we may take disciplinary action against the breaching 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 the Associate's
purchase and distribution rights for more serious violations. From time
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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 us.
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. We could also be subject to challenges by private parties in civil actions. We are aware of recent civil litigation against various
direct selling companies in the United States, which have already resulted in settlements and may result in additional significant settlements
in the future by these companies. There can be no assurance that we will not be challenged by private parties in litigation.
The inability to obtain adequate supplies of raw materials for products at favorable prices, or at all, 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. There is a risk that any of our suppliers could discontinue selling raw materials 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. There can be no assurance that suppliers will
provide the raw materials 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, 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.
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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. For example, 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 direct selling 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 direct selling 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 direct selling is limited in each market, and it is reduced to the extent other direct selling 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 direct selling 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 business.
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We could be subject to adverse changes in tax laws, regulations and interpretations or challenges to our tax positions.
We are subject to tax laws and regulations of the U.S. federal, state and local governments as well as various non-U.S. jurisdictions.
On December 22, 2017, H.R. 1, commonly known as the Tax Cuts and Jobs Act (the "Tax Act"), was enacted. The Tax Act contained
significant changes to corporate taxation, including the transition of U.S. international taxation from a worldwide tax system to a quasi-
territorial system, the reduction of the U.S. corporate tax rate from 35 percent to 21 percent, increased deductions for capital spending,
limitations on interest expense deductions, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign
earnings. This tax legislation made other changes that could have an unfavorable impact on our overall U.S. federal tax liability in light of
our current international operating structure. In particular, the tax legislation included a number of provisions that limit or eliminate various
tax deductions, including those related to foreign tax credits and other deferred tax assets that we will not be able to realize under the new
tax laws, each of which could affect our U.S. federal income tax position. As regulations are promulgated, we are continuing to evaluate the
overall impact of this tax legislation on our operations and U.S. federal income tax position. While we expect the Tax Act to be favorable to
us over the long run, it may be unfavorable to our short-term financial condition and results of operations.
In addition to the impact of the Tax Act on our federal taxes in the U.S., the Tax Act may impact our taxation in other jurisdictions,
including with respect to state income taxes. Additionally, other foreign governing bodies may enact changes in their tax laws in reaction to
the Tax Act that could result in changes in our global tax position and materially affect our financial position. There can be no assurance
that additional changes in tax laws or regulations, both within the U.S. and the other jurisdictions in which we operate, will not materially
and adversely affect our effective tax rate, tax payments, financial condition and results of operations. Similarly, changes in tax laws and
regulations that impact our customers and counterparties or the economy generally may also impact our financial condition and results of
operations.
We are also subject to examination by other tax authorities, including state revenue agencies and other foreign governments. While we
regularly assess the likelihood of favorable or unfavorable outcomes resulting from examinations by the IRS and other tax authorities to
determine the adequacy of our provision for income taxes, there can be no assurance that the actual outcome resulting from these
examinations will not materially adversely affect our financial condition and operating results. Additionally, the IRS and several foreign tax
authorities have increasingly focused attention on intercompany transfer pricing. Tax authorities could disagree with our intercompany
charges, cross-jurisdictional transfer pricing or other matters and assess additional taxes. If we do not prevail in any such disagreements,
our profitability may be affected. Tax laws and regulations are complex and subject to varying interpretations, and any significant failure to
comply with applicable tax laws and regulations in all relevant jurisdictions could give rise to substantial penalties and liabilities. Any
changes in enacted tax laws, rules or regulatory or judicial interpretations; any adverse outcome in connection with tax audits in any
jurisdiction; or any change in the pronouncements relating to accounting for income taxes could materially and adversely impact our
effective tax rate, tax payments, financial condition and results of operations.
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
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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.
We rely on information technology to support our operations and reporting environments. A security failure of that technology
could impact our ability to operate our businesses effectively, adversely affect our reported financial results, impact our reputation and
expose us to potential liability or litigation.
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 and payment card 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 a cyber incident, natural disaster, hardware or software corruption, failure or
error, telecommunications system failure, service provider or vendor error or failure, intentional or unintentional personnel actions,
employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could
be accessed, publicly disclosed, altered, damaged, held ransom, lost or stolen. In any such event, we could suffer significant loss or incur
significant liability, including: damage to our reputation; loss of customer confidence or goodwill; and significant expenditures of time and
money to address and remediate resulting damages (including notification and credit monitoring costs, as well as fines and penalties
imposed by regulators) to affected individuals or business partners, or to defend ourselves in resulting litigation or other legal proceedings,
by affected individuals, business partners or regulators. Furthermore, such data breach 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.
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Additionally, our international operations are such that we must understand and comply with different and potentially conflicting data
privacy laws, including those in effect in the various U.S. states, as well in many international jurisdictions while ensuring that data is
secure. For example, the State of California recently passed legislation granting residents certain new data privacy rights and imposing
various other regulations, which will go into effect in January 2020. In China, on June 1, 2017, a national Cybersecurity Law came into
effect to address cybersecurity and data privacy protection. There remains considerable uncertainty as to how the Cybersecurity Law will
be applied, and the regulatory environment continues to evolve rapidly with draft guidelines published frequently. It is expected that some
guidelines and national standards will be finalized in the coming months to further assist organizations in complying with the data
protection obligations imposed under this law. In January 2019, a new e-Commerce Law went into effect in China that targets the
protection of personal data in e-commerce transactions and environments. There are also numerous provincial and industry-specific
regulations that may impact our business and use and protection of personal data in China. Additionally, the General Data Protection
Regulation ("GDPR") was approved by the European Union in April 2016 and became effective in May 2018. GDPR superseded prior
European Union data protection laws and imposes more stringent requirements in how we collect and process personal data and provides
for significantly greater penalties for noncompliance. Several other countries have also passed various data privacy and security laws that
impose additional requirements and restrictions on us and our Associate sales force. We have incurred, and will continue to incur,
substantial costs in striving to comply with these various national and international data privacy laws and regulations. Compliance with
these laws and regulations may also require us to restrict our ability to provide services to our customers that they may find valuable or
otherwise require us to change our business practices in a manner that is ultimately averse to our business objectives. Finally, violations of
data privacy laws, and government investigations and enforcement actions regarding the same, can be costly and interrupt the regular
operation of our business, and could result in fines, reputational damage and civil lawsuits, any of which could adversely affect our
business, reputation and results of operations.
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.
We believe that our 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, we have 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
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•
Establish a chain of custody that requires signatures on behalf of us and the third-party to transfer possession of the product
lots and that restricts access by our employees after the transfer.
All applicants to this Athlete Guarantee program are subject to screening and acceptance by us in our 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. 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, Douglas Hekking, 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. For instance, as described in our Management's Annual Report on Internal Control Over Financial Reporting at Item 9A of
our Annual Report on Form 10-K, filed with the SEC on February 27, 2017, we identified a material weakness in our internal control over
financial reporting as of December 31, 2016. While the existence of this material weakness did not result in a restatement of previously
issued interim or annual consolidated financial statements, we incurred substantial costs and utilized meaningful resources to remediate the
material weakness during fiscal 2017. 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.
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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. Myron Wentz, owned approximately 42.12% of our
outstanding common stock at December 29, 2018. By virtue of this stock ownership, Dr. Wentz is able to exert significant influence and
control 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.
The market price of our common stock may be influenced by many factors, some of which are beyond our control.
There can be no assurance that an active market in our stock will be sustained. 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
There are no unresolved comments that were received from the SEC staff relating to our periodic or current reports under the
Securities Exchange Act of 1934.
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.
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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 skincare 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 J to the Consolidated Financial Statements included in Part II,
Item 8 of this Annual Report on Form 10-K, which is incorporated herein by reference.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock trades on the New York Stock Exchange ("NYSE") under the symbol "USNA." As of February 22, 2019, we had
approximately 261 holders of record of our common stock. 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
Issuer Purchases of Equity Securities
(amounts in thousands, except per share data)
Total
Number of
Shares
Purchased
Average Price
Paid per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans or
Programs
Period
Fiscal October
(Sep. 30, 2018 through Nov. 3, 2018)
235 $
113.57
235 $
123,323
Fiscal November
(Nov. 4, 2018 through Dec. 1, 2018)
354 $
118.26
354 $
81,493
Fiscal December
(Dec. 2, 2018 through Dec. 29, 2018)
94 $
683
119.67
94 $
683
70,216
Our share repurchase plan has been ongoing since the fourth quarter of 2000, with our Board of Directors periodically approving
additional dollar amounts for share repurchases under the plan. We began the fourth quarter of 2018 with $24.4 million remaining under
the plan. As announced in a publicly issued press release on October 23, 2018, the Board of Directors authorized an increase in the amount
available under the share repurchase plan to a total of $150 million. The authorization is inclusive of the $24.4 million that was remaining
under the prior authorization at the end of the third quarter of 2018. There is no requirement for future share repurchases, and there
currently is no expiration date on the approved repurchase amount.
At December 29, 2018, the remaining approved repurchase amount under the plan was $70.2 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, 2013, 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 our products or markets its products
through a similar marketing channel. The Peer Group includes the
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following companies: Avon Products, Inc., Nu Skin Enterprises, Inc., Herbalife Nutrition Ltd., and Nature's Sunshine Products, Inc.
Dec 13
Dec 14
Dec 15
Dec 16
Dec 17
Dec 18
USNA S&P 500 Peer Group
100
$ 100 $
96
$ 136 $
83
$ 169 $
58
$ 162 $
68
$ 196 $
53
$ 312 $
100 $
111 $
111 $
121 $
145 $
136 $
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Item 6. Selected Financial Data
The following selected consolidated financial data should be read in conjunction with Part II, Item 7. 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.
Fiscal Year(1)
Consolidated Statements of Earnings
2014
2015
2017
(in thousands, except per share data)
2016
2018
Data:
Net sales
Income taxes
Net earnings
Earnings per common share:
Basic
Diluted
Weighted-average common shares
outstanding:
Basic
Diluted
Percentage of Net Sales Data:
Gross profit
Associate incentives
Selling, general and administrative
Effective tax rate
Dividends per share
Consolidated Balance Sheet Data:
Cash and cash equivalents
Working capital
Total assets
Other long-term liabilities
Stockholders' equity
Other Data:
$ 790,471 $ 918,499 $ 1,006,083 $ 1,047,265 $ 1,189,248
65,286
$
47,917 $
38,511 $
72,105 $
39,017 $
$
76,636 $
94,672 $
100,041 $
62,535 $
126,224
$
$
2.90 $
2.80 $
3.72 $
3.59 $
4.14 $
3.99 $
2.57 $
2.53 $
5.24
5.12
26,443
27,377
25,460
26,355
24,185
25,047
24,349
24,708
24,105
24,642
82.2%
44.2%
23.3%
82.6%
44.4%
22.8%
82.1%
45.0%
23.3%
82.9%
44.9%
25.3%
83.1%
44.2%
23.1%
33.7%
33.6%
27.8%
53.6%
34.1%
—
—
—
—
—
$ 111,126 $ 143,210 $
82,222
350,584
1,114
112,852
423,237
1,151
$ 230,164 $ 280,852 $
175,774 $
139,370
470,642
1,365
325,287 $
247,131 $
198,976
519,269
1,146
363,210 $
214,326
243,649
554,463
1,264
391,146
Total Active Customers
430,000
510,000
564,000
565,000
616,000
(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 nine sections:
•
•
•
Overview
Customers
Presentation
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•
•
•
•
•
•
Results of Operations
Quarterly Financial Information
Liquidity and Capital Resources
Contractual Obligations and Commercial Contingencies
Inflation
Critical Accounting Policies and 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 direct selling system. 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" referred to together as "active Customers." Associates share in our company
vision by acting as independent distributors of our products in addition to purchasing our products for their personal use. Preferred
Customers purchase our products strictly for their personal use and are not permitted to resell or to distribute the products. As of
December 29, 2018, we had approximately 616,000 active Customers worldwide.
Customers
Because we sell our products exclusively to a customer base of independent Associates and Preferred Customers, we must increase the
number of active Customers and/or increase the amount they spend, on average, to increase net sales. Our primary focus continues to be
increasing the number of active Customers. We believe this focus is consistent with our vision of improving the overall health and nutrition
of individuals and families around the world. Sales to Associates account for approximately 57% of product sales during 2018; the
remainder of our sales are to Preferred Customers. Increases or decreases in product sales are typically the result of variations in the
volume of product sold relating to fluctuations in the number of active Customers purchasing our products. The number of active
Associates and Preferred Customers is, therefore, used by management as a key non-financial indicator to evaluate our operational
performance.
The table 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 those
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Customers who have purchased from us at any time during the most recent three-month period as of the date indicated.
Asia Pacific:
Greater China
Southeast Asia Pacific
North Asia
Asia Pacific Total
Americas and Europe
Asia Pacific:
Greater China
Southeast Asia Pacific
North Asia
Asia Pacific Total
Americas and Europe
Total Active Customers by Region
As of
As of
December 29, 2018
December 30, 2017
Change from
Prior Year
Percent
Change
288,000
107,000
32,000
427,000
51.0% 334,000
18.9% 114,000
5.7% 39,000
75.6% 487,000
54.2%
18.5%
6.4%
79.1%
46,000
7,000
7,000
60,000
16.0%
6.5%
21.9%
14.1%
138,000
565,000
24.4% 129,000
100.0% 616,000
20.9%
100.0%
(9,000)
51,000
(6.5)%
9.0%
Total Active Customers by Region
As of
As of
December 30, 2017
December 31, 2016
Change from
Prior Year
Percent
Change
281,000
105,000
27,000
413,000
49.8% 288,000
18.6% 107,000
4.8% 32,000
73.2% 427,000
51.0%
18.9%
5.7%
75.6%
7,000
2,000
5,000
14,000
2.5%
1.9%
18.5%
3.4%
151,000
564,000
26.8% 138,000
100.0% 565,000
24.4%
100.0%
(13,000)
1,000
(8.6)%
0.2%
Presentation
Product sales along with the shipping and handling fees billed to our customers are recorded as revenue net of applicable sales
discounts when, or as control of the promised product is transferred to the customer which is at the time of delivery to the third party carrier
for shipment. Payments received for unshipped products are recorded as deferred revenue and are included in other current liabilities. Also
reflected in net sales is a provision for a refund liability for sales returns, which is estimated based on our historical experience.
Additionally, we collect 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
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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 information technology infrastructure 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:
Consolidated Statements of Earnings Data:
Net sales
Cost of sales
Gross profit
Operating expenses:
Associate incentives
Selling, general and administrative
Total operating expenses
Earnings from operations
Other income (expense), net
Earnings before income taxes
Income taxes
Net earnings
53
2016
2017
2018
100.0% 100.0% 100.0%
17.1
17.9
82.9
82.1
16.9
83.1
45.0
23.3
68.3
13.8
0.0
13.8
3.9
9.9%
44.9
25.3
70.2
12.7
0.2
12.9
6.9
6.0% 10.6%
44.2
23.1
67.3
15.8
0.3
16.1
5.5
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Non-GAAP Financial Measures
Constant currency net sales, local currency net sales, earnings, diluted earnings per share ("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 our results of operations 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.
Net earnings and EPS results for a reporting period which exclude (i) the incremental impact of U.S. Tax Reform; and (ii) incremental
expense related to the Company's internal investigation in China are also non-GAAP financial measures that are intended to help facilitate
period-to-period comparisons of the Company's Financial Results.
•
•
EPS results excluding the impact of the U.S. Tax Reform are calculated by (i) calculating the total incremental expense
related to the U.S. Tax Reform; and (ii) dividing the expense by the total number of diluted shares outstanding for the
applicable reporting period.
EPS results excluding expense related to the internal investigation are calculated by (i) calculating the total incremental
expense related to the internal investigation after taxes; and (ii) dividing the expense by the total number of diluted shares
outstanding for the applicable reporting period.
The following is a reconciliation of net earnings (loss), presented and reported in accordance with GAAP, to net earnings adjusted for
the two items noted above:
Fiscal Year
Net earnings, as reported
Incremental expense related to internal investigation in China
Income tax adjustment for above item
One-time non-cash charge related to the U.S. Tax Reform
Net earnings, as adjusted
2018
$
2017
62,535 $ 126,224
1,444
11,604
(493)
(4,003)
—
30,136
$ 100,272 $ 127,175
The following is a reconciliation of diluted earnings (loss) per share, presented and reported in accordance with GAAP, to diluted
earnings per share adjusted for certain items:
Diluted earnings per share, as reported
Incremental expense related to internal investigation in China
Income tax adjustment for above item
One-time non-cash charge related to the U.S. Tax Reform
Diluted earnings per share, as adjusted
Fiscal Year
2017
2018
$
$
2.53 $
0.47
(0.16)
1.22
4.06 $
5.12
0.06
(0.02)
—
5.16
Summary of 2018 Financial Results
Net sales in 2018 increased 13.6%, or $142.0 million, to $1.189 billion, compared with 2017. This increase was driven by higher
product sales volume resulting primarily from strong active Customer growth in our Asia Pacific region throughout the year. Favorable
changes in currency exchange rates increased net sales for the year by an estimated $12.2 million.
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Net earnings increased 101.8% to $126.2 million in 2018, when compared with 2017. Excluding the impact of the U.S tax reform, and
after-tax costs related to our internal investigation, 2018 net earnings improved by 26.8%.
Fiscal Year 2018 compared to Fiscal Year 2017
Net Sales
The following table summarizes the changes in our net sales by geographic region for the fiscal years ended December 30, 2017, and
December 29, 2018:
Net Sales by Region
(in thousands)
Year Ended
2017
2018
Change
from prior
year
Percent
change
Currency
impact on
sales
Percent
change
excluding
currency
impact
$
Asia Pacific
Greater
China
Southeast
Asia
Pacific
North Asia
Asia
Pacific
Total
546,777
52.2% $
654,394
55.0% $ 107,617
19.7% $ 11,666
17.5%
205,289
58,376
19.6%
5.6%
225,469
76,720
19.0%
6.4%
20,180
18,344
9.8%
31.4%
(1,202)
1,821
10.4%
28.3%
810,442
77.4%
956,583
80.4% 146,141
18.0%
12,285
16.5%
Americas and
Europe
236,823
$ 1,047,265
232,665
22.6%
100.0% $ 1,189,248
19.6%
100.0% $ 141,983
(4,158)
(1.8)%
13.6% $ 12,170
(115)
(1.7)%
12.4%
Asia Pacific: The increase in net sales in Greater China continues to be driven by growth in mainland China, where local currency
net sales increased 19.0%. The increase in constant currency net sales in Southeast Asia Pacific was driven by local currency in all markets
led by Malaysia, Australia, Singapore, and New Zealand. The number of active Customers in this region increased 6.5%. The increase in
constant currency net sales in North Asia continues to be driven by growth in South Korea, where local currency net sales increased 29.0%
and the number of active Customers increased 19.4%.
Americas and Europe: Net Sales in this region were impacted by decreases in the U.S. and Mexico, where local currency sales
decreased by 3.9% and 8.5%, respectively. This decline was partially offset, by increased local currency sales in Canada and incremental
sales in Europe due to the launch of four new markets.
Gross Profit
The 20 basis point relative increase in gross profit in 2018 can be attributed to (i) favorable change in product mix by market,
(ii) leverage on fixed period costs with higher sales, (iii) modest annual price adjustments, and (iv) favorable currency exchange rates in
markets outside of China. With the exception of China, where products are manufactured in-market, changes in currency exchange rates
affect the valuation of U.S. manufactured inventory that is transferred to international subsidiaries. This improvement was partially offset
by (i) higher charges for inventory obsolescence and (ii) costs associated with Celavive, which carries a higher relative cost than our
previous skincare line.
Associate Incentives
Associate incentives decreased 70 basis point points to 44.2% of net sales in 2018, compared with 44.9% in the prior year. This
decrease can be attributed to (i) sales from Celavive, which has a lower incentive payout as compared to our other product categories, and
(ii) modest price adjustments. These decreases were partially offset by increased payout on Associate bonus programs.
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Selling, General and Administrative Expenses
In absolute terms, our selling general and administrative expense increased $10.0 million in 2018. This increase can be attributed to
(i) higher employee related costs, (ii) costs associated with continued investment in information technology and infrastructure, and
(iii) costs associated with supporting higher sales and customer base. These costs were partially offset by expenses in the prior year
attributed to (i) costs associated with China and our internal investigation into our China operations and (ii) an impairment charge
associated with a note receivable with a former third-party supplier.
Income Taxes
Income taxes were 34.1% of earnings in 2018 compared to 53.6% of earnings in 2017. The lower effective tax rate for the year ended
December 29, 2018 compared with 2017 is due the transition taxes associated with U.S. tax reform under the Tax Act incurred in 2017.
Under the Tax Act, the U.S. federal tax rate changed from 35% to 21%, which resulted in remeasurement of deferred income tax balances,
recognition of a valuation allowance on foreign tax credit carryforwards, and recognition of foreign withholding tax liabilities.
Diluted Earnings Per Share
Diluted earnings per share increased to $5.12 in 2018 from $2.53 in 2017. Lower net earnings in 2017 resulted from a one-time, non-
cash charge of $30.1 million, or $1.22 per diluted share, related to the Tax Act. Additionally, costs related to China and the Company's
internal investigation into our China operations in 2017 totaled $7.6 million after tax and negatively impacted earnings per diluted share by
$0.31. Excluding both the impact of the Tax Act and the expense related to China and the internal investigation, 2018 net earnings
improved by 26.8%, or $1.10 per diluted share. Weighted average diluted shares outstanding were 24.6 million for the full-year 2018,
compared with 24.7 million in the prior-year period.
Summary of 2017 Financial Results
Net sales in 2017 increased 4.1%, or $41.2 million, to $1.047 billion, compared with 2016. This increase was driven by higher product
sales volume resulting primarily from strong active Customer growth in our Asia Pacific region throughout the year. Unfavorable changes
in currency exchange rates reduced net sales for the year by an estimated $6.3 million.
Net earnings decreased 37.5% to $62.5 million in 2017, when compared with 2016. This decrease was driven primarily by a one-time,
non-cash charge of $30.1 million, related to U.S. tax reform enacted on December 22, 2017, and after-tax costs of $7.6 million related to
China and our internal investigation.
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Fiscal Year 2017 compared to Fiscal Year 2016
Net Sales
The following table summarizes the changes in our net sales by geographic region for the fiscal years ended December 31, 2016, and
December 30, 2017:
Net Sales by Region
(in thousands)
Year Ended
2016
2017
Change
from prior
year
Percent
change
Currency
impact on
sales
Percent
change
excluding
currency
impact
$
Asia Pacific
Greater
China
Southeast
Asia
Pacific
North Asia
Asia
Pacific
Total
502,299
49.9% $
546,777
52.2% $
44,478
8.9% $
(5,805)
10.0%
206,124
46,023
20.5%
4.6%
205,289
58,376
19.6%
5.6%
(835)
12,353
(0.4)%
26.8%
(2,881)
1,298
1.0%
24.0%
754,446
75.0%
810,442
77.4%
55,996
7.4%
(7,388)
8.4%
Americas and
Europe
251,637
$ 1,006,083
25.0%
236,823
100.0% $ 1,047,265
22.6%
100.0% $
(14,814)
41,182
(5.9)%
4.1% $
1,058
(6,330)
(6.3)%
4.7%
Asia Pacific: The increase in net sales in Greater China was driven by growth in mainland China, where local currency net sales
increased 12.2%. The decrease in net sales in Southeast Asia Pacific was driven by decreased sales in the Philippines, where local currency
net sales decreased 6.3% and the number of active Customers decreased 8.6%. This decrease was partially offset by growth in several other
markets led by Malaysia, and Australia. The increase in net sales in North Asia was driven by growth in South Korea, where local currency
net sales increased 26.5% and the number of active Customers increased 19.2%.
Americas and Europe: Net Sales in this region were affected by local currency sales declines in each market within the region,
including in the United States, where sales decreased $9.4 million or 7.2%, due to a decline of 9.1% in the number of active Customers.
Gross Profit
The 80 basis point relative increase in gross profit was attributed to a favorable shift in currency exchange rates, in markets outside of
China, and modest annual price adjustments. With the exception of China, where products are manufactured in-market, changes in currency
exchange rates affect the valuation of U.S. manufactured inventory that is transferred to international subsidiaries. Comparatively, gross
margins were negatively impacted by currency at the beginning of 2016, resulting in a favorable year-over-year change in 2017. This
increase was partially offset by an unfavorable shift in sales mix by market.
Associate Incentives
Associate incentives were essentially flat as a percentage of net sales from 2016 to 2017. While base commissions on product sales
decreased from the prior year, increased spending related to bonuses, contests, promotions, and reward trips offset this decrease.
Selling, General and Administrative Expenses
In absolute terms, our selling general and administrative expense increased $30.9 million in 2017. This increase was attributed to
(i) costs associated with China and our internal investigation into our China operations, (ii) costs associated with continued investment in
information technology and infrastructure, (iii) higher wages and benefits expense to support our growing customer base and to
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further improve our customers' experience with USANA around the world, and (iv) an impairment charge associated with our note
receivable to a former third-party supplier.
Income Taxes
Income taxes were 53.6% of earnings before income taxes in 2017 compared to 27.8% of earnings before income taxes in 2016. The
significant tax increase was due to the Tax Act enacted on December 22, 2017. We recognized an additional $30.1 million in tax expense
associated with U.S. tax reform. The 2017 tax rate before U.S. tax reform adjustments would have been 31.2%. The increase compared
with 2016 was primarily due to lower excess tax benefits from equity awards and certain non-deductible expenses recorded in 2017.
Diluted Earnings Per Share
Diluted earnings per share decreased to $2.53 in 2017 from $3.99 in 2016. This decrease was driven, in great part, by the impact of
U.S. tax reform enacted on December 22, 2017 and higher costs associated with China and our internal investigation into our China
operations. This decrease was partially offset by lower dilutive shares outstanding resulting from exercise activity in 2017 and a shift in
equity awards granted during 2017 from stock-settled stock appreciation rights to restricted stock units.
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
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conjunction with the audited Consolidated Financial Statements and notes thereto that are included elsewhere in this report.
Apr 1,
2017
Jul 1,
2017
Sep 30,
2017
Dec 30,
2017
Mar 31,
2018
Jun 30,
2018
Sep 29,
2018
Dec 29,
2018
(in thousands, except per share data)
Quarter Ended
Consolidated Statements of Operations Data:
Net sales
Cost of sales
Gross profit
Operating
expenses:
Associate
incentives
Selling, general
$255,323 $257,063 $261,765 $273,114 $291,998 $301,460 $296,767 $299,023
49,467
42,654
249,556
212,669
51,877
244,890
47,135
214,630
43,902
213,161
45,713
227,401
49,375
242,623
49,991
251,469
115,781
118,404
116,010
120,068
129,362
132,790
130,264
132,710
and
administrative 64,001
Total
62,389
67,263
71,441
70,132
67,537
69,112
68,278
operating
expenses
Earnings from
operations
Other income
(expense), net
Earnings from
operations
before income
taxes
Income taxes
Net earnings
179,782
180,793
183,273
191,509
199,494
200,327
199,376
200,988
32,887
32,368
31,357
35,892
43,129
51,142
45,514
48,568
482
460
690
504
862
388
1,012
895
33,369
12,011
32,828
9,569
32,047
8,278
36,396
42,247
43,991
15,045
51,530
17,623
46,526
15,486
49,463
17,132
(loss)
$ 21,358 $ 23,259 $ 23,769 $ (5,851) $ 28,946 $ 33,907 $ 31,040 $ 32,331
Earnings (Loss)
per common
share*:
Basic
Diluted
Weighted-average
shares
outstanding:
Basic
Diluted
$
$
0.87 $
0.86 $
0.95 $
0.93 $
0.98 $
0.97 $
(0.24) $
(0.24) $
1.20 $
1.19 $
1.40 $
1.36 $
1.28 $
1.24 $
1.35
1.32
24,499
24,976
24,574
25,018
24,283
24,588
24,010
24,010
24,074
24,273
24,193
24,841
24,269
25,001
23,884
24,455
*
Earnings (loss) per common share is computed independently for each of the quarters presented. Therefore, the sum
of the quarterly earnings (loss) per share amounts does not necessarily equal the total for the year.
Consolidated Statements of Operations as a percentage of Net Sales:
100.0%
16.7
83.3
100.0%
17.1
82.9
100.0%
18.0
82.0
100.0%
16.7
83.3
100.0%
16.9
83.1
100.0%
16.6
83.4
100.0%
17.5
82.5
100.0%
16.5
83.5
45.3
46.1
44.3
44.0
44.3
44.1
43.9
44.4
25.1
24.3
25.7
26.2
24.0
22.4
23.3
22.9
70.4
70.4
70.0
70.2
68.3
66.5
67.2
67.3
12.9
12.5
12.0
13.1
14.8
17.0
15.3
16.2
0.2
0.2
0.3
0.2
0.3
0.1
0.3
0.3
Net sales
Cost of sales
Gross profit
Operating
expenses:
Associate
incentives
Selling, general
and
administrative
Total
operating
expenses
Earnings from
operations
Other income
(expense), net
Earnings from
operations
before income
taxes
Income taxes
Net earnings
(loss)
13.1
4.7
12.7
3.7
12.3
3.2
13.3
15.5
15.1
5.2
17.1
5.9
15.6
5.2
16.5
5.7
8.4%
9.0%
9.1%
(2.2)%
9.9%
11.2%
10.4%
10.8%
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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 direct selling 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 direct selling 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 on our line of credit. Our principal source of liquidity is our operating cash flow. Although we are required to maintain cash
deposits with banks in certain of our markets, there are currently no material restrictions on our ability to transfer and remit funds among
our international markets. In China, however, our compliance with Chinese accounting and tax regulations promulgated by the State
Administration of Foreign Exchange ("SAFE") results in transfer and remittance of our profits and dividends from China to the United
States on a delayed basis. If
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SAFE or other Chinese regulators introduce new regulations, or change existing regulations which allow foreign investors to remit profits
and dividends earned in China to other countries, our ability to remit profits or pay dividends from China to the United States may be
limited in the future.
We have historically generated positive cash flow due to our strong operating margins. Net cash flow from operating activities totaled
$152.1 million in 2018. Items affecting cash flow from operations in 2018 include: (i) net earnings driven by a strong operating margin and
(ii) increase in other current liabilities driven primarily by employee related costs. These increases were partially offset by cash used on
inventories primarily attributed to our Celavive line.
Net cash flow from operating activities totaled $123.8 million in 2017. Items affecting cash flow from operations in 2017 include:
(i) net earnings reduced by a change in deferred income tax related to U.S. tax reform, (ii) continued increase in depreciation related to
investment in information technology systems, (iii) decrease in inventory levels in the current year, and (iv) receipt of an income tax refund.
These items were partially offset by an increase in other liabilities, which was driven primarily by income taxes payable.
Cash and cash equivalents and securities held-to-maturity increased to $277.9 million at December 29, 2018, from $247.1 million at
December 30, 2017. Of the $277.9 million cash and cash equivalents and securities held-to-maturity at December 29, 2018, $23.3 million
of cash and cash equivalents and $63.5 million of securities held-to-maturity was held in the United States. Of the remaining
$191.0 million held by our international subsidiaries, $156.1 million was held in China. Cash and cash equivalents held at December 30,
2017, totaled $247.1 million of which, $52.2 million was held in the United States. Of the remaining $194.9 million held by our
international subsidiaries, $142.3 million was held in China. Net working capital increased to $243.6 million at December 29, 2018, from
$199.0 million at December 30, 2017.
During 2017, we experienced challenges and disagreements with a former supplier and subsequently determined to no longer use this
supplier. We had extended a non-revolving credit to this former supplier to allow them to acquire equipment that was necessary to
manufacture the USANA nutrition bars. We evaluated the recoverability of this note receivable from this former supplier, considered
financial data of the supplier, and the estimated fair value of the collateralized equipment securing the note as of December 30, 2017.
Based on this analysis, we believed it was probable that the note receivable had been impaired. Accordingly, an impairment of $2.7 million
was recorded as determined by the difference between the note receivable balance and the estimated fair value of the collateralized
equipment as a practical expedient. During April 2018, we reached a settlement with the former supplier to terminate the relationship and
received $4.8 million in cash as payment in full under the terms of the settlement.
Line of Credit
Information with respect to our line of credit may be found below under the caption "Contractual Obligations and Commercial
Contingencies," and in Note I to the Consolidated Financial Statements included in Part II, Item 8 of this report.
Share Repurchase
Our Board of Directors has authorized 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 2018, we repurchased and retired 900,000 shares of common stock for $105.4 million, at a weighted
average market price of
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$117.09 per share. At December 29, 2018, the remaining approved repurchase amount under the plan was $70.2 million. Subsequent to the
year ended December 29, 2018, and through February 22, 2019, we repurchased and retired 283,600 shares for $30.0 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 29, 2018 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)
Contractual Obligations
Operating Leases
Other Commitments
Line of Credit
Total Contractual Obligations
Total
$ 25,066 $
43,602
605
$ 69,273 $
Less than 1 year
1 - 3 years
3 - 5 years
More than
5 years
9,155 $
26,080
140
35,375 $
9,971 $
17,149
279
27,399 $
3,426 $
276
186
3,888 $
2,514
97
—
2,611
"Operating Leases" generally provide that property taxes, insurance, and maintenance expenses are our responsibility. 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 "Current Focus and 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" is with a bank and has a maturity date of April 2021. Although we currently have no balance outstanding on the
Line of Credit, fees on the unused portion of this line are due periodically and are reflected in the table above. If we utilize the 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.
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Critical Accounting Policies and Estimates
Our Consolidated Financial Statements included in this report have been prepared in accordance with accounting principles generally
accepted in the United States of America ("US GAAP"). Our significant accounting policies are described in 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 policies and estimates are
described in this section.
Revenue Recognition. Revenue is recognized when, or as, control of a promised product or service transfers to a customer, in an
amount that reflects the consideration to which we expect to be entitled in exchange for transferring those products or services. Revenue
recognition is evaluated through the following five-step process:
1)
2)
3)
4)
5)
identification of the contract with a customer;
identification of the performance obligations in the contract;
determination of the transaction price;
allocation of the transaction price to the performance obligations in the contract; and
recognition of revenue when or as a performance obligation is satisfied.
A majority of our sales are for products sold at a point in time and shipped to customers, for which control is transferred to the
customer as goods are delivered to the third party carrier for shipment. We receive payment, primarily via credit card, for the sale of
products at the time customers place orders and payment is required prior to shipment. Our product sales contracts include terms that could
cause variability in the transaction price for items such as discounts, credits, or sales returns. Accordingly, the transaction price for product
sales includes estimates of variable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur.
At the time of sale, we estimate a refund liability for the variable consideration based on historical experience.
Initial product orders with a new customer may include multiple performance obligations related to sales discounts earned under our
initial order reward program. Under this program, the customer receives an option to apply the discounts earned on the initial order to two
subsequent Auto Orders, which conveys a material right to the customer. As such, the initial order transaction price is allocated to each
separate performance obligation based on its relative standalone selling price and recognized as revenue as each performance obligation is
satisfied.
Contract liabilities relate to deferred revenue for product sales for customer payments received in advance of shipment, for outstanding
material rights under the initial order program, and for services where the performance obligations are satisfied over time as services are
delivered. Contract liabilities are recorded as deferred revenue within "other current liabilities" in the consolidated balance sheets. Deferred
revenue is recognized when or as the related performance obligation is satisfied. On the occasion that will-call orders are not picked up by
customers, we periodically assess the likelihood that customers will exercise their contractual right to pick up orders and recognize revenue
when the likelihood is estimated to be remote.
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Inventory Valuation. Inventories are stated at the lower of cost or net realizable value. 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. Net
realizable 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.
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 87.0%, 88.4%, and 90.2% of our net sales in 2016, 2017,
and 2018, 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, 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 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.
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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 29, 2018 for the quarterly periods indicated:
Canadian
Dollar
Australian
Dollar
New Zealand
Dollar
Hong Kong
Dollar
Japanese
Yen
First
Second
Third
Fourth
First
Second
Third
Fourth
2017
2018
1.32
1.34
1.25
1.27
1.27
1.29
1.31
1.32
1.32
1.33
1.27
1.30
1.27
1.32
1.37
1.39
1.41
1.42
1.37
1.44
1.38
1.42
1.50
1.49
7.76
7.79
7.82
7.81
7.83
7.85
7.85
7.83
113.48
111.15
110.83
112.85
108.09
109.25
111.50
112.79
New Taiwan
Dollar
1.39
1.41
1.35
1.36
31.01
20.17
30.25
30.67
29.82
29.29
30.10
30.25
30.84
Korean Won 1,149.07 1,129.86 1,132.16 1,104.04 1,072.19 1,080.85 1,120.87 1,127.23
Singapore
Dollar
Mexican
Peso
Chinese
Yuan
Malaysian
Ringgit
Philippine
Peso
Thailand
Baht
50.85
53.57
50.76
51.55
52.54
17.81
18.99
18.94
18.71
19.46
50.00
49.83
18.53
53.10
1.37
6.66
6.81
4.26
4.10
3.92
6.35
19.87
4.15
1.32
1.34
6.61
3.95
6.38
6.86
4.33
6.89
4.45
6.92
1.38
4.17
35.08
0.94
34.28
0.91
33.35
0.85
32.86
0.85
31.54
0.81
31.97
0.84
32.95
0.86
32.83
0.88
2,919.71 2,926.26 2,968.83 2,987.75 2,854.97 2,845.49 2,964.72 3,171.58
13,344.01 13,309.67 13,328.00 13,533.02 13,591.88 13,967.13 14,618.46 14,760.87
Euro
Colombian
Peso
Indonesia
Rupiah
Interest Rate Risks. As of December 29, 2018, 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 Part IV, Item 15, below.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
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.
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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). Based on this
evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the disclosure controls and procedures were
effective to provide reasonable assurance as of December 29, 2018.
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). Our internal control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of our 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 our 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 our internal
control over financial reporting as of December 29, 2018. 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 29, 2018, our internal control over financial
reporting was effective.
The effectiveness of the Company's internal control over financial reporting, as of December 29, 2018, has been audited by
KPMG LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Control over Financial Reporting
There were no changes in our internal control over financial reporting during the fiscal quarter ended December 29, 2018 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
USANA Health Sciences, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited USANA Health Sciences, Inc. and subsidiaries' (the Company) internal control over financial reporting as of
December 29, 2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 29, 2018, based on criteria established in Internal Control—Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 29, 2018 and December 30, 2017, the related consolidated
statements of comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended
December 29, 2018, and the related notes and financial statement schedule II (collectively, the consolidated financial statements), and our
report dated February 26, 2019 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company'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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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 of internal control over financial reporting 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.
Definition and Limitations of Internal Control Over Financial Reporting
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
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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.
Salt Lake City, Utah
February 26, 2019
/s/ KPMG LLP
68
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Item 9B. Other Information
Not applicable.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
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 report:
1.
Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
F-1
F-2
F-3
F-4
F-5
F-6
2.
Financial Statement Schedules.
For the years ended December 31, 2016, December 30, 2017, and December 29, 2018
Schedule II—Valuation and Qualifying Accounts
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3.
Exhibits.
Exhibit
Number
Description
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 (filed herewith)
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).*
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Exhibit
Number
Description
10.10 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. 001-35024).*
10.11 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).*
10.12 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).*
10.13 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).*
10.14 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).*
10.15 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).*
10.16 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).*
10.17 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).
10.18 Transition Agreement dated as of December 19, 2016 by and between USANA Health
Sciences, Inc. and Doug Braun (incorporated by reference to the Company's Annual Report on
Form 10-K, filed March 1, 2017, Exhibit 10.23, File No. 001-35024).
14 Code of Ethics of USANA Health Sciences, Inc. (filed herewith)
21 Subsidiaries of the Registrant, as of February 22, 2019 (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).
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Exhibit
Number
Description
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.
72
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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.
SIGNATURES
USANA Health Sciences, Inc.
By:
/s/ KEVIN G. GUEST
Kevin G. Guest
Chief Executive Officer and Director
Date: February 26, 2019
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.
Signature
Title
Date
/s/ MYRON W. WENTZ
Myron W. Wentz, PhD
/s/ KEVIN G. GUEST
Kevin G. Guest
/s/ GILBERT A. FULLER
Gilbert A. Fuller
/s/ ROBERT ANCIAUX
Robert Anciaux
/s/ FREDERIC J. WINSSINGER
Frederic J. Winssinger
/s/ FENG PENG
Feng Peng
/s/ J. SCOTT NIXON
J. Scott Nixon
Chairman
February 26, 2019
Chief Executive Officer and Director
(Principal Executive Officer)
February 26, 2019
Director
Director
Director
Director
Director
73
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
Table of Contents
Signature
Title
Date
/s/ PEGGIE PELOSI
Peggie Pelosi
Director
February 26, 2019
/s/ G. DOUGLAS HEKKING
G. Douglas Hekking
Chief Financial Officer
(Principal Financial and Accounting
Officer)
February 26, 2019
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Table of Contents
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
USANA Health Sciences, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of USANA Health Sciences, Inc. and subsidiaries (the Company) as
of December 29, 2018 and December 30, 2017, the related consolidated statements of comprehensive income, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 29, 2018, and the related notes and financial statement schedule II
(collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of December 29, 2018 and December 30, 2017, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 29, 2018, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 29, 2018, based on criteria established in Internal
Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our
report dated February 26, 2019 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial
reporting.
Change in Accounting Principle
As discussed in Note A to the consolidated financial statements, the Company has changed its method of accounting for revenue from
contracts with customers in 2018 due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Update
(ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606).
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2013.
Salt Lake City, Utah
February 26, 2019
/s/ KPMG LLP
F-1
Table of Contents
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
ASSETS
Current assets
Cash and cash equivalents
Securities held-to-maturity
Inventories
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Goodwill
Intangible assets, net
Deferred tax assets
Other assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable
Other current liabilities
Total current liabilities
Deferred tax liabilities
Other long-term liabilities
Stockholders' equity
Common stock, $0.001 par value; Authorized—50,000 shares, issued and
outstanding 24,024 as of December 30, 2017 and 23,567 as of
December 29, 2018
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Total stockholders' equity
As of
December 30,
2017
As of
December 29,
2018
$
247,131 $
—
62,918
30,110
340,159
214,326
63,539
81,948
32,522
392,335
102,847
92,025
17,417
35,154
2,859
20,833
519,269 $
16,815
31,811
3,348
18,129
554,463
11,787 $
129,396
141,183
9,947
138,739
148,686
13,730
1,146
13,367
1,264
$
$
24
76,542
288,070
(1,426)
363,210
519,269 $
24
72,008
329,501
(10,387)
391,146
554,463
$
The accompanying notes are an integral part of these statements.
F-2
Table of Contents
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except per share data)
Net sales
Cost of sales
Gross profit
Operating expenses:
Associate incentives
Selling, general and administrative
Total operating expenses
Earnings from operations
Other income (expense):
Interest income
Interest expense
Other, net
Other income (expense), net
Earnings before income taxes
Income taxes
Net earnings
Earnings per common share
Basic
Diluted
Weighted average common shares outstanding
Basic
Diluted
Comprehensive income:
Net earnings
2016
Fiscal Year
2017
$ 1,006,083 $ 1,047,265 $ 1,189,248
200,710
988,538
179,404
867,861
180,190
825,893
2018
453,077
234,194
687,271
138,622
470,263
265,094
735,357
132,504
525,126
275,059
800,185
188,353
1,480
(444)
(1,106)
(70)
138,552
2,185
(46)
(3)
2,136
134,640
4,427
(36)
(1,234)
3,157
191,510
38,511
100,041 $
72,105
62,535 $
65,286
126,224
4.14 $
3.99 $
2.57 $
2.53 $
5.24
5.12
$
$
$
24,185
25,047
24,349
24,708
24,105
24,642
$
100,041 $
62,535 $
126,224
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment
Tax benefit (expense) related to foreign currency translation
adjustment
Other comprehensive income (loss), net of tax
Comprehensive income
(11,777)
14,995
(10,860)
3,906
(7,871)
92,170 $
(4,774)
10,221
72,756 $
1,899
(8,961)
117,263
$
The accompanying notes are an integral part of these statements.
F-3
Table of Contents
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2016; December 30, 2017; and December 29, 2018
(in thousands)
Common Stock
Shares
Value
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
24,976 $
25 $
69,728 $ 214,875 $
(3,776) $ 280,852
934
(601)
333
Balance at January 2, 2016
Cumulative effect of accounting
change
Balance after cumulative effect of
accounting change
24,976
25
70,662
214,274
(3,776)
281,185
Net earnings
Other comprehensive income
(loss), net of tax
Equity-based compensation
expense
Common stock repurchased and
16,542
retired
(1,106)
(1)
(15,699)
(48,910)
Common stock issued under equity
award plans
Balance at December 31, 2016
615
24,485
—
24
100,041
100,041
(7,871)
(7,871)
71,505
265,405
(11,647)
62,535
16,542
(64,610)
—
325,287
62,535
Net earnings
Other comprehensive income
(loss), net of tax
Equity-based compensation
expense
Common stock repurchased and
retired
Common stock issued under equity
award plans
Tax withholding for net-share
settled equity awards
Balance at December 30, 2017
Cumulative effect of accounting
change
Balance after cumulative effect of
Net earnings
Other comprehensive income
(loss), net of tax
Equity-based compensation
expense
Common stock repurchased and
retired
Common stock issued under equity
10,221
10,221
15,482
(865)
(1)
(10,129)
(39,870)
404
1
24,024
24
76,542
288,070
(1,426)
(316)
994
15,482
(50,000)
1
(316)
363,210
994
accounting change
24,024
24
76,542
289,064
(1,426)
364,204
126,224
126,224
(8,961)
(8,961)
14,955
(900)
(1)
(19,587)
(85,787)
award plans
443
1
Tax withholding for net-share
settled equity awards
Disgorgement of short-swing stock
profits
(809)
907
Balance at December 29, 2018
23,567 $
24 $
72,008 $ 329,501 $
The accompanying notes are an integral part of these statements.
F-4
14,955
(105,375)
1
(809)
907
(10,387) $ 391,146
Table of Contents
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities
Net earnings
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities
$ 100,041 $
62,535 $
126,224
2016
Year Ended
2017
2018
Depreciation and amortization
(Gain) loss on sale of property and equipment
Equity-based compensation expense
Deferred income taxes
(Gain) loss on impairment on note receivable
Changes in operating assets and liabilities:
Inventories
Prepaid expenses and other assets
Accounts payable
Other liabilities
Net cash provided by (used in) operating activities
Cash flows from investing activities
Additions to notes receivable
Receipts on notes receivable
Proceeds from the settlement of net investment hedges
Purchases of investment securities held-to-maturity
Maturities of investment securities
Proceeds from sale of property and equipment
Purchases of property and equipment
Net cash provided by (used in) investing activities
Cash flows from financing activities
Repurchase of common stock
Proceeds from disgorgement of short-swing stock profits
Borrowings on line of credit
Payments on line of credit
Payments related to tax withholding for net-share settled equity awards
Deferred debt issuance costs
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash, cash equivalents and restricted cash
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents, and restricted cash, at beginning of period
Cash, cash equivalents, and restricted cash at end of period
Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets
Cash and equivalents
Restricted cash included in prepaid expenses and other current assets
Restricted cash included in other assets
Total cash, cash equivalents, and restricted cash
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest
Income taxes
Cash received during the period for:
Income tax refund
Non-cash investing activities:
Credits on notes receivable
Accrued purchases of property and equipment
13,482
116
16,542
(3,700)
—
(1,034)
(9,749)
(1,341)
22,534
136,891
(7)
811
—
—
—
11
(32,698)
(31,883)
(64,610)
—
73,700
(73,700)
—
(250)
(64,860)
(7,929)
32,219
146,733
16,110
18
15,482
19,306
2,734
6,054
5,010
3,043
(6,518)
123,774
—
296
—
—
—
22
(13,220)
(12,902)
(50,000)
—
3,500
(3,500)
(316)
—
(50,316)
11,027
71,583
178,952
$ 178,952 $ 250,535 $
$ 175,774 $ 247,131 $
298
2,880
328
3,076
$ 178,952 $ 250,535 $
16,843
1,805
14,955
699
(658)
(23,101)
(1,626)
(1,720)
18,698
152,119
—
4,849
739
(86,396)
22,857
381
(11,433)
(69,003)
(105,375)
907
—
—
(809)
—
(105,277)
(11,140)
(33,301)
250,535
217,234
214,326
—
2,908
217,234
$
323 $
16 $
52,579
46,006
6
70,683
—
4,700
2,698
1,288
2,216
86
109
—
195
The accompanying notes are an integral part of these statements.
F-5
Table of Contents
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 direct selling system. 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.
•
Asia Pacific—
•
•
•
Greater China—Hong Kong, Taiwan, and China. Our business in China is conducted by BabyCare Holdings, Ltd.
("BabyCare"), our wholly-owned subsidiary.
Southeast Asia Pacific—Australia, New Zealand, Singapore, Malaysia, the Philippines, Thailand and Indonesia.
North Asia—Japan and South Korea
•
Americas and Europe—United States, Canada, Mexico, Colombia, the United Kingdom, France, Germany, Spain, Italy,
Romania, 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 and inventory valuation. 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 years 2016, 2017 and 2018, were
52-week years. Fiscal year 2016 covered the period January 3, 2016 to December 31, 2016 (hereinafter 2016). Fiscal year 2017 covered the
period January 1, 2017 to December 30, 2017 (hereinafter 2017). Fiscal year 2018 covered the period December 31, 2017 to December 29,
2018 (hereinafter 2018).
F-6
Table of Contents
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 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 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 December 30, 2017 and December 29, 2018, the following financial assets and liabilities were measured at fair value on a
recurring basis using the type of inputs shown:
Fair Value Measurements
Using
Money market funds included in cash equivalents
Foreign currency contracts included in other current liabilities
$
Level 1
Inputs
Level 2
December 30,
2017
106,090 $ 106,090 $ — $ —
(139) —
—
105,951 $ 106,090 $ (139) $ —
(139)
Level 3
$
Money market funds included in cash equivalents
Foreign currency contracts included in other current liabilities
$
Level 1
Inputs
Level 2
December 29,
2018
129,449 $ 129,449 $ — $ —
(309) —
—
129,140 $ 129,449 $ (309) $ —
(309)
Level 3
$
Fair Value Measurements
Using
There were no transfers of financial assets or liabilities between Level 1 and Level 2 inputs for the years ended 2017 and 2018.
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 2016, 2017, and 2018, there
were no non-financial assets measured at fair value on a non-recurring basis.
F-7
Table of Contents
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 December 30, 2017 and December 29, 2018, the Company's financial instruments include cash equivalents, securities held-to-
maturity, accounts receivable, restricted cash, notes receivable, and accounts payable. The recorded values of cash equivalents, accounts
receivable, restricted cash, and accounts payable approximate their fair values, based on their short-term nature. Historically, the carrying
value of the notes receivable approximated fair value because the variable interest rates in the notes reflected current market rates. During
2017, an impairment was recorded on a note receivable based on the estimated recoverable amount using Level 3 inputs, which
approximates fair value. This note receivable was settled during 2018.
Securities held-to-maturity consists of corporate bonds and commercial paper. The fair value of corporate bonds and commercial
paper are priced using quoted market prices for similar instruments or non-binding market prices that are corroborated by observable
market data, which is considered to be a Level 2 input. The carrying values of these corporate bonds and commercial paper approximate
their fair values due to their short-term maturities.
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 December 30, 2017 and December 29, 2018 consisted primarily of money market fund
investments and amounts receivable from credit card processors.
Amounts receivable from credit card processors and other forms of electronic payment 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 December 30, 2017 and December 29, 2018 totaled $11,517 and $11,860, 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 $3,076 as of December 30, 2017,
and $2,908 as of December 29, 2018. This deposit is required for the application of direct sales licenses by the Ministry
F-8
Table of Contents
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)
of Commerce and the SAMR 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 "Prepaid expenses and other current assets" and "Other assets" line item in the
Company's consolidated balance sheets.
Securities Held-to-Maturity
Investment securities as of December 29, 2018 consists of corporate bonds and commercial paper with initial terms of greater than
three months and are classified as held-to-maturity ("HTM"). HTM securities are those securities in which the Company has the ability and
intent to hold the security until maturity. HTM securities are recorded at amortized cost. Premiums and discounts on HTM securities are
amortized or accreted over the life of the related HTM security as an adjustment to yield using the effective-interest method. Such
amortization and accretion is included in the "Other net" line item in the Company's consolidated statements of comprehensive income.
Interest income is recognized when earned.
A decline in the market value of any HTM security below cost that is deemed to be other-than-temporary results in an impairment to
reduce the carrying amount to fair value. To determine whether an impairment is other-than-temporary, the Company considers all
available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable
forecasts when developing an estimate of cash flows expected to be collected. No other-than-temporary impairments were recorded by the
Company during the year ended December 29, 2018.
Inventories
Inventories are stated at the lower of cost or net realizable value. 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. Net realizable
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 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.
F-9
Table of Contents
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)
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 law 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.
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 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
At December 30, 2017, notes receivable consisted primarily of a secured loan to the former supplier of the Company's nutrition bars
and was included in the "Other assets" line item in the Company's consolidated balance sheets. The Company extended non-revolving
credit to this former supplier to allow them to acquire equipment that was necessary to manufacture the USANA nutrition bars, which was
secured by the equipment. This relationship was intended to provide improved supply chain stability for USANA and create a mutually
beneficial relationship between the parties. Interest accrued at an annual interest rate of LIBOR plus 400 basis points. The note had a
maturity date of February 1, 2024 and was to be repaid by a combination of cash payments and credits for the manufacture of USANA's
nutrition bars. There was no prepayment penalty. Manufacturing credits and cash payments applied were $420 and $0, in 2017 and 2018,
respectively.
F-10
Table of Contents
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)
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to
collect the scheduled payments in accordance with the contractual terms of the loan. Factors considered in determining impairment include
payment status, collateral value and the probability of collecting payments when due. During the first half of 2017, the Company
experienced challenges with the former supplier of nutrition bars and subsequently determined to no longer use this supplier. The Company
evaluated the recoverability of the note receivable from this supplier and recorded impairments totaling $2,734 during 2017. The total
contractual unpaid principal balance, including accrued unpaid interest on the note receivable from this supplier as of December 30, 2017
was $6,734. During 2018, the Company reached a settlement with the supplier to terminate the relationship and received $4,800 in cash as
payment in full under the terms of the settlement.
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 quantitative impairment analysis is performed. This analysis 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, an impairment loss
is recognized in an amount equal to the excess of the carrying amount over the fair value of the reporting unit, not to exceed the carrying
amount of the goodwill. During 2016, 2017, and 2018, no impairment of goodwill was recorded.
Intangible Assets
Intangible assets represent amortized and indefinite-lived intangible assets acquired in connection with the purchase of the Company's
China subsidiary in 2010. Amortized 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. Amortized 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 fair value. Fair value is determined through various valuation techniques, including
market and income approaches as considered necessary.
F-11
Table of Contents
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)
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 carrying amount to its 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 2016, 2017, and 2018, 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 $150 and aggregate
claims that are greater than $10,464. A liability is accrued for all unpaid claims. Total expense under this self-insurance program was
$9,015, $9,195 and $10,869 in 2016, 2017 and 2018, respectively.
Derivative Financial Instruments
The Company's risk management strategy includes the select use of derivative instruments to reduce the effects of volatility in foreign
currency exchange exposure on operating results and cash flows. In accordance with the Company's risk management policies, the
Company does not hold or issue derivative instruments for trading or speculative purposes.
The Company recognizes all derivative instruments as either assets or liabilities in the balance sheet at their respective fair values.
When the Company becomes a party to a derivative instrument and intends to apply hedge accounting, the Company formally documents
the hedge relationship and the risk management objective for undertaking the hedge, the nature of risk being hedged, and the hedged
transaction, which includes designating the instrument for financial reporting purposes as a fair value hedge, a cash flow hedge, or a net
investment hedge. The Company also documents how the hedging instrument's effectiveness in offsetting the hedged risk will be assessed
prospectively and retrospectively, and a description of the method used to measure ineffectiveness.
The Company periodically uses derivative hedging instruments to hedge its net investment in its non U.S. subsidiaries designed to
hedge a portion of the foreign currency exposure that arises on translation of the foreign subsidiaries into U.S. dollars. The effective
portion of gains and losses attributable to these net investment hedges is recorded to foreign currency translation adjustment ("FCTA")
within accumulated other comprehensive income (loss) ("AOCI") to offset the change in the carrying value of the net investment being
hedged, and will subsequently be reclassified to net earnings in the period in which the hedged investment is either sold or substantially
liquidated.
As of December 30, 2017, there were no derivatives outstanding for which the Company has applied hedge accounting. During the
second quarter of 2018, the Company entered into and settled a
F-12
Table of Contents
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)
forward contract designated as a net investment hedge with a notional value of $105,000 and realized a net gain of $739, which is reflected
in the FCTA within AOCI. The Company assessed hedge effectiveness determining the hedged instrument was highly effective and
recorded no ineffectiveness. As of December 29, 2018, there were no derivatives outstanding for which the Company has applied hedge
accounting.
Common Stock Share Repurchases
The Company has a stock repurchase plan in place that has been authorized by the Board of Directors. As of December 29, 2018,
$70,216 is available to repurchase shares under this plan. During the years ended 2016, 2017, and 2018, the Company repurchased and
retired 1,106 shares, 865 shares, and 900 shares for an aggregate price of $64,610, $50,000, and $105,375, 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
As further discussed below in Recent accounting policies, the Company adopted ASC 606 effective at the beginning of fiscal 2018.
Refer to Note A—Summary of Significant Accounting Policies of the Company's annual report on Form 10-K for the year ended
December 30, 2017 for policies in effect for revenue recognition prior to December 31, 2017, which were based on ASC 605.
Revenue is recognized when, or as, control of a promised product or service transfers to a customer, in an amount that reflects the
consideration to which the Company expects to be entitled in exchange for transferring those products or services. Revenue excludes taxes
that have been assessed by governmental authorities and that are directly imposed on revenue-producing transactions between the
Company and its customers, including sales, use, value-added, and some excise taxes. Revenue recognition is evaluated through the
following five-step process:
1)
2)
3)
4)
5)
identification of the contract with a customer;
identification of the performance obligations in the contract;
determination of the transaction price;
allocation of the transaction price to the performance obligations in the contract; and
recognition of revenue when or as a performance obligation is satisfied.
Product Revenue
A majority of the Company's sales are for products sold at a point in time and shipped to customers, for which control is transferred to
the customer as goods are delivered to the third party carrier for shipment. The Company receives payment, primarily via credit card, for
the sale of products at the time customers place orders and payment is required prior to shipment. The Company does not recognize assets
associated with costs to obtain or fulfill a contract with a customer.
F-13
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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 Company's product sales contracts include terms that could cause variability in the transaction price for items such as discounts,
credits, or sales returns. Accordingly, the transaction price for product sales includes estimates of variable consideration to the extent it is
probable that a significant reversal of revenue recognized will not occur. At the time of sale, the Company estimates a refund liability for
the variable consideration based on historical experience, which is recorded within Other current liabilities in the consolidated balance
sheet.
Initial product orders with a new customer may include multiple performance obligations related to sales discounts earned under the
Company's initial order reward program. Under this program, the customer receives an option to apply the discounts earned on the initial
order to two subsequent Auto Orders, which conveys a material right to the customer. As such, the initial order transaction price is allocated
to each separate performance obligation based on its relative standalone selling price and is recognized as revenue as each performance
obligation is satisfied.
Associate incentives represent consideration paid to a customer and include all forms of commissions, and other incentives paid to our
Associates. With the exception of commissions paid to Associates on personal purchases, which are considered a sales discount and are
reported as a reduction to net sales, the incentives are paid for distinct services related to the Company's product sales and are recorded as
an expense when revenue for the goods is recognized.
Shipping and handling activities are performed upon delivery to the third party carrier for shipment. The Company accounts for these
activities as fulfillment costs. Therefore, the Company recognizes the costs of these activities when revenue for the goods is recognized.
Shipping and handling costs are included in cost of sales for all periods presented.
With respect to will-call orders, the Company periodically assesses the likelihood that customers will exercise their contractual right to
pick up orders and revenue is recognized when the likelihood is estimated to be remote.
Other Revenue
Other types of revenue include fees, which are paid by the customer at the beginning of the service period, for access to online
customer service applications and annual account renewal fees for Associates, for which control is transferred over time as services are
delivered and are recognized as revenue on a straight-line basis over the term of the respective contracts.
Revenue Disaggregation
Disaggregation of revenue by geographical region and major product line is included in Segment Information in Note L—Segment
Information.
Contract Balances
When the timing of our provision of goods or services is different from the timing of the payments made by our customers, we
recognize either a contract asset (performance precedes contractual due date) or a contract liability (customer payment precedes
performance).
F-14
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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)
Contract liabilities relate to deferred revenue for product sales for customer payments received in advance of shipment, for outstanding
material rights under the initial order program, and for services where the performance obligations are satisfied over time as services are
delivered. Contract liabilities are recorded as deferred revenue within Other current liabilities in the consolidated balance sheets. The
Company typically does not have contract assets based on the payment terms included in the Company's contracts and the balance of
contract assets was $0 at December 29, 2018.
The following table provides information about contract liabilities from contracts with customers, including significant changes in the
contract liabilities balances during the period.
Contract liabilities at beginning of period
Increase due to deferral of revenue at period end
Decrease due to beginning contract liabilities recognized as revenue
Contract liabilities at end of period
As of
December 29,
2018
$
$
14,417
15,055
(14,417)
15,055
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 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 0.7% of net sales in 2016, 2017, and 2018.
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.
F-15
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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)
Equity-Based Compensation
The Company records compensation expense in the financial statements for equity-based awards based on the grant date fair value
which is the closing market value of the Company's common stock on the date of the grant. 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 K—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 $12,266, $11,503, and $10,345 in 2016, 2017, and 2018, 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 $8,842, $8,952, and $10,242 in 2016, 2017, and 2018, respectively.
Earnings Per Share
Basic earnings per common share (EPS) are based on the weighted-average number of common shares that were outstanding during
each period. Diluted EPS 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. When there is a loss, potential common shares
are not included in the computation of diluted EPS, because to do so would be anti-dilutive.
Recent Accounting Pronouncements
Adopted accounting pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09,
"Revenue from Contracts with Customers (Topic 606)." Also referred to as ASC 606, this update replaces existing revenue recognition
guidance with a single comprehensive revenue model for entities to use in accounting for revenue arising from contracts with customers.
ASC 606 includes a five-step process by which entities recognize revenue to depict the transfer of goods or services to customers in
amounts that reflect the consideration to which an entity expects to be entitled in exchange for those goods or services. This standard also
requires enhanced disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue
and cash flows arising from contracts with customers.
The Company adopted ASC 606 effective at the beginning of fiscal 2018 and applied the modified retrospective approach.
Accordingly, the Company recognized the cumulative effect of initially applying ASC 606 as an adjustment to the fiscal 2018 opening
balance of retained earnings. The comparative information has not been restated and continues to be presented according to accounting
standards in effect for those periods. The adoption of ASC 606 resulted in increased disclosures and a cumulative
F-16
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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)
effect adjustment, but otherwise did not have a material impact on the Company's consolidated financial statements. As a result of the
adoption of ASC 606, the Company updated its accounting policies related to revenue recognition.
Under ASC 606, the Company made a change in the timing for recognizing revenue on orders that have shipped but have not been
delivered at period end. Under the new standard, revenue is recognized when the customer obtains control of the goods and considering the
indicators used to determine when control has passed to the customer, the Company has concluded that control transfers upon delivery to
the third party carrier for shipment as the Company no longer has physical possession of the goods, nor from the customer's perspective
does the Company have control, as the Company does not have the ability to redirect shipments in transit to the customer. Therefore,
revenue and related expense items including cost of goods sold and Associate incentives on orders that have shipped but have not been
delivered at period end are no longer deferred. Subsequent to the period of adoption, there has been no material impact on net income and
related per-share amounts.
In 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 periods in fiscal years beginning after December 15, 2017. The
Company adopted ASU 2016-18 using a retrospective transition method during the quarter ended March 31, 2018. The reclassified
restricted cash balances from operating activities to changes in cash, cash equivalents and restricted cash on the consolidated statements of
cash flows were not material for all periods presented.
In May 2017 the FASB issued ASU No. 2017-09, "Compensation-Stock Compensation (Topic 718): Scope of Modification
Accounting." ASU 2017-09 provides clarification on when modification accounting should be used for changes to the terms or conditions
of a share-based payment award. ASU 2017-09 does not change the accounting for modifications but clarifies that modification accounting
guidance should only be applied if there is a change to the value, vesting conditions, or award classification and would not be required if the
changes are considered non-substantive. The ASU is effective for all annual and interim periods in fiscal years beginning after
December 15, 2017. The Company adopted ASU 2017-09 during the quarter ended March 31, 2018 and the adoption of the standard did
not have an impact on its consolidated financial statements.
Issued accounting pronouncements not yet adopted
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." ASU 2016-02 is intended to increase transparency and
comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information
about leasing arrangements. Additionally, the ASU will require disclosures to help investors and other financial statement users better
understand the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. The
update requires lessees to apply a modified retrospective approach for recognition and disclosure, beginning with the earliest period
presented. In July 2018, the
F-17
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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)
FASB issued ASU No. 2018-11, "Leases (Topic 842)"—Targeted Improvements, which allows an additional transition method to adopt the
new lease standard at the adoption date, as compared to the beginning of the earliest period presented, and recognize a cumulative-effect
adjustment to the beginning balance of retained earnings in the period of adoption. The Company will adopt ASU 2016-02 in the first
quarter of 2019, specifically, using the effective date method. The Company has evaluated the impact of this ASU on the specific areas that
apply to the Company and their potential impact to its processes, accounting, financial reporting, disclosures, and controls. The Company
has determined that the overall impact of adopting this ASU will result in the recognition of right-of-use assets and lease liabilities in the
range of $18,000 to $25,000 on the Company's balance sheet for facility lease agreements. Additionally, the Company has prepaid land use
rights related to production facilities in China of approximately $7,000 that will be reclassified to right-of-use assets upon adoption this
ASU. We do not expect a material impact as a cumulative-effect adjustment to the beginning balance of retained earnings.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for
Hedging Activities." ASU 2017-12 better aligns an entity's risk management activities and financial reporting for hedging relationships
through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge
results. To satisfy that objective, the amendments expand and refine hedge accounting for both non-financial and financial risk components,
and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. For
public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods
within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2017-12 will have a material
impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the
Disclosure Requirements for Fair Value Measurement." ASU 2018-13 modifies the disclosure requirements for fair value measurements.
The modifications removed the following disclosure requirements: (i) the amount of, and reasons for, transfers between Level 1 and
Level 2 of the fair value hierarchy; (ii) the policy for timing of transfers between levels; and (iii) the valuation processes for Level 3 fair
value measurements. This ASU added the following disclosure requirements: (i) the changes in unrealized gains and losses for the period
included in other comprehensive income ("OCI") for recurring Level 3 fair value measurements held at the end of the reporting period; and
(ii) the range and weighted average of significant observable inputs used to develop Level 3 fair value measurements. The amendments in
this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.
The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to
develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for
only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied
retrospectively to all periods presented upon their effective date. Early adoption is permitted. The Company does not expect the adoption of
ASU 2018-13 will have a material impact on its consolidated financial statements.
F-18
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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)
In August 2018, the FASB issued ASU 2018-15, "Intangibles—Goodwill and Other Internal-Use Software (Subtopic 350-40):
Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." ASU 2018-15
aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the
requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The capitalized implementation
costs of a hosting arrangement that is a service contract will be expensed over the term of the hosting arrangement. For public business
entities, the amendments in this ASU are effective for annual and interim periods beginning after December 15, 2019. Early adoption is
permitted, including adoption in any interim period. The amendments can be applied either retrospectively or prospectively to all
implementation costs incurred after the adoption date. The Company does not expect the adoption of ASU 2018-15 will have a material
impact on its consolidated financial statements.
No other new accounting pronouncement issued or effective during the fiscal year had, or is expected to have, a material impact on
our consolidated financial statements.
NOTE B—INVESTMENTS
The carrying amount, gross unrealized holding gains, gross unrealized holding losses, and fair value of securities held-to-maturity by
major security type and class of security were as follows:
Corporate bonds
Commercial paper
Total securities held-to-maturity
Amortized
Cost
$ 57,554 $
5,985
$ 63,539 $
As of December 29, 2018
Unrecognized
Holding Gains
Unrecognized
Holding Losses
Estimated
Fair Value
1 $
—
1 $
(46) $ 57,509
5,985
—
(46) $ 63,494
All held-to-maturity securities as of December 29, 2018 mature within one year.
NOTE C—INVENTORIES
Inventories consist of the following:
Raw materials
Work in progress
Finished goods
December 30,
2017
December 29,
2018
$
$
20,737 $
8,461
33,720
62,918 $
19,502
14,485
47,961
81,948
F-19
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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
NOTE D—PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
Prepaid insurance
Other prepaid expenses
Federal income taxes receivable
Miscellaneous receivables, net
Deferred commissions
Other current assets
December 30,
2017
December 29,
2018
$
$
1,081 $
7,236
8,677
4,780
3,009
5,327
30,110 $
1,577
7,713
6,402
7,629
2,039
7,162
32,522
NOTE E—INCOME TAXES
Consolidated earnings before income taxes consists of the following for 2016, 2017 and 2018:
U.S.
Foreign
Total earnings before income taxes
Year ended
2017
$
2016
(5,648) $ (25,167) $
1,475
190,035
159,807
$ 138,552 $ 134,640 $ 191,510
144,200
2018
Income tax expense (benefit) included in income from net earnings consists of the following:
2016
Year ended
2017
2018
Current
Federal
State
Foreign
Total Current
Deferred
Federal
State
Foreign
Total Deferred
F-20
$ (4,361) $
756
45,568
41,963
(171) $
(368)
—
337
64,342
64,679
52,167
51,628
(67)
(6,813) 23,609
132
(3,264)
(613)
24
1,196
607
$ 38,511 $ 72,105 $ 65,286
3,428
(3,452) 20,477
Table of Contents
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
NOTE E—INCOME TAXES (Continued)
The effective tax rate for 2016, 2017, and 2018 reconciled to the statutory U.S. Federal tax rate is as follows:
Statutory U.S. federal income tax rate
State income taxes, net of federal tax benefit
Excess tax benefits on equity awards
Permanent tax differences
Excess foreign tax credits
Net increase in valuation allowance
Foreign income tax rate differences
Foreign withholding taxes
U.S. tax reform
All other, net
Year ended
2017
2018
2016
35.0% 35.0% 21.0%
0.5
0.3
(0.2)
(6.6) (3.4) —
(0.4) 0.3
0.4
(14.7)
—
—
15.8
—
—
4.2
(0.2) (0.2)
—
8.1
—
—
(0.5) (0.3)
(1.0)
27.8% 53.6% 34.1%
9.3
13.1
The significant categories of deferred taxes are as follows:
December 30,
2017
December 29,
2018
$
Deferred tax assets
Inventory differences
Accruals not currently deductible
Equity-based compensation expense
Depreciation/amortization
Intangible assets
Foreign currency translation
Tax credit carry forwards
Net operating losses
Other
Gross deferred tax assets
Valuation allowance
Net deferred tax assets
Deferred tax liabilities
Depreciation/amortization
Foreign currency translation
Prepaid expenses
Intangible assets
Withholding tax on unremitted earnings
Other
Gross deferred tax liabilities
Net deferred taxes
$
F-21
1,988 $
4,245
5,056
—
8,792
—
10,690
795
3,860
35,426
(13,980)
21,446
(4,449)
(759)
(739)
(8,792)
(12,562)
(5,016)
(32,317)
(10,871) $
2,580
4,769
4,319
809
7,951
1,141
41,034
1,462
3,874
67,939
(44,199)
23,740
(4,983)
—
(1,828)
(7,951)
(14,608)
(4,389)
(33,759)
(10,019)
Table of Contents
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
NOTE E—INCOME TAXES (Continued)
The Components of deferred taxes, net on a jurisdiction basis are as follows:
Net noncurrent deferred tax assets
Net noncurrent deferred tax liabilities
Net deferred taxes
December 30,
2017
December 29,
2018
$
$
2,859 $
(13,730)
(10,871) $
3,348
(13,367)
(10,019)
As of December 29, 2018, the Company had foreign tax credit carryforwards of approximately $38,187. If unused, these
carryforwards will expire between 2026 and 2028. Because the U.S. tax rate is lower than most of the foreign tax rates where the Company
has operations, the Company expects to continue generating excess foreign tax credits in future years. Same as 2017, the company has
placed a full valuation allowance on its foreign tax credit carryforwards. Valuation allowances are determined using a more-likely-than-not
realization criteria and are based upon all available positive and negative evidence, including future reversals of existing taxable temporary
differences, projected future taxable income, tax planning strategies and recent financial operations. The U.S. jurisdiction has experienced
overall cumulative domestic losses over the previous three years, which is a significant piece of negative evidence for the future utilization
of foreign tax credit carryforwards. However, overall domestic losses do not expire and can be recaptured by recharacterizing U.S. source
taxable income as foreign source taxable income. Recharacterized foreign source taxable income would allow for utilization of foreign tax
credit carryforwards. The Company will continue to evaluate the positive and negative evidence related to this valuation allowance.
The Company recorded a $1,580 valuation allowance on mirrored deferred tax assets recorded in the U.S. to offset deferred tax
liabilities of foreign disregarded entities, which will generate additional U.S. foreign tax credits in the future. This valuation allowance is
necessary because the Company is limited in its ability to utilize future U.S. foreign tax credits due to the decrease in the U.S. corporate tax
rate.
The Company also has $1,022 of Utah research credit carryforwards, $979 of Philippines minimum income tax credit carryforwards,
and $846 of Federal research credit carryforwards as of December 29, 2018. If unused, the Utah research credit carryforwards expire
between 2027 and 2032, the Philippines' minimum income tax credit carryforwards expire between 2019 and 2021, and the Federal
research credits expire between 2036 and 2038. Utah research credits are limited to Utah tax due, which has declined because of overall
domestic losses. The Philippines' minimum income tax credit carryforwards can be used against Philippines regular tax. However, the
company doesn't believe it will report Philippines regular tax in the near future based on its transfer pricing guidance. Federal research
credit carryforwards can only be used in a year when U.S. taxes are owed after foreign tax credits have been fully utilized. Same as the
foreign tax credit carryforwards, the Company has placed a full valuation allowance on these credit carryforwards as well.
In addition, the Company has $4,296 of foreign operating loss carry forwards, $3,811 of which have an unlimited carryforward
period. The deferred tax asset associated with these losses is $1,385 and a valuation allowance of $1,278 has been applied against this
deferred tax asset. The 2018 deferred tax
F-22
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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
NOTE E—INCOME TAXES (Continued)
asset for state-tax-loss carryforwards was $77. If unused, some of the state-tax-loss carryforwards will expire between 2030 and 2035 and
others can be carried forward indefinitely.
The valuation allowance primarily represents amounts for tax credit carryforwards and foreign operating loss carryforwards.
However, valuation allowances on other foreign deferred tax assets were $307 for a combined valuation allowance of $44,199 as of
December 29, 2018. The 2018 valuation allowance represents a $30,219 net increase from 2017. If the Company determines that there is
sufficient evidence to remove the valuation allowances addressed above, the valuation allowance will be released and the provision for
income taxes will be reduced.
As of December 29, 2018, the Company has continued its position to return all foreign earnings to the U.S. parent company and has
recorded deferred tax liabilities of $14,608 for foreign withholding taxes associated with foreign retained earnings and cross-border
payments.
The Company recognizes the impact of a tax position in the financial statements if that position is more likely than not to be sustained
on audit, based on the technical merits of the position. As of December 30, 2017 and December 29, 2018, 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 2015 under most circumstances. Certain taxing
jurisdictions may provide for additional open years depending upon their statutes or if an audit is ongoing.
NOTE F—PROPERTY AND EQUIPMENT
Cost of property and equipment and their estimated useful lives is as follows:
Buildings
Laboratory and production equipment
Computer equipment and software
Furniture and fixtures
Automobiles
Leasehold improvements
Land improvements
Less accumulated depreciation and amortization
December 30,
2017
December 29,
2018
Years
39.5 $
5 - 7
3 - 5
3 - 5
3 - 5
3 - 5
15
73,344 $
31,063
50,124
6,453
562
12,740
3,069
177,355
86,202
91,153
71,326
31,969
51,410
6,524
682
13,102
3,074
178,087
95,561
82,526
7,052
2,447
92,025
Land
Deposits and projects in process
7,521
4,173
102,847 $
$
F-23
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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
NOTE F—PROPERTY AND EQUIPMENT (Continued)
Depreciation of property and equipment was $11,878, $14,480, and $15,222, for the years ended 2016, 2017, and 2018, respectively.
NOTE G—INTANGIBLE ASSETS
The Company performed its annual goodwill impairment test during the third quarter of 2018. The Company performed a qualitative
assessment of each reporting unit and determined that is was not more-likely-than-not that the fair value of any reporting unit was less than
its carrying amount. As a result, no impairments of goodwill were recognized in 2018.
The Company also performed its annual indefinite-lived intangible asset impairment test during the third quarter of 2018. The
Company performed a qualitative assessment of the indefinite-lived intangible assets and determined that is 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, no impairments of indefinite-lived
intangible assets were recognized in 2018.
The changes in the carrying amount of goodwill are as follows:
Balance at beginning of year:
Gross goodwill
Accumulated impairment losses
Net goodwill as of beginning of year
Goodwill acquired during the year
Impairment loss
Currency translation adjustment
Balance as of end of year
Gross goodwill
Accumulated impairment losses
Net goodwill as of end of year
F-24
December 30,
2017
December 29,
2018
$
16,715 $
—
16,715
17,417
—
17,417
—
—
702
—
—
(602)
17,417
—
17,417 $
16,815
—
16,815
$
Table of Contents
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
NOTE G—INTANGIBLE ASSETS (Continued)
Intangible assets consists of the following:
Amortized intangible assets
Trade name and trademarks
Product formulas
Indefinite-lived intangible assets
Direct sales license
As of December 30, 2017
Gross
carrying
amount
Accumulated
amortization
Net
carrying
amount
Weighted-average
amortization
period (years)
$
4,080 $
8,998
(3,010) $
(2,744)
1,070
6,254
10
8
27,830
$ 40,908
27,830
$ 35,154
Amortized intangible assets
Trade name and trademarks
Product formulas
Indefinite-lived intangible assets
Direct sales license
Estimated Amortization Expense:
2019
2020
2021
2022
2023
As of December 29, 2018
Gross
carrying
amount
Accumulated
amortization
Net
carrying
amount
Weighted-average
amortization
period (years)
$
3,858 $
8,506
(3,226) $
(3,637)
632
4,869
10
8
26,310
$ 38,674
26,310
$ 31,811
$
$
1,449
1,301
1,063
1,063
625
5,501
Aggregate amortization of intangible assets was $1,500, $1,480, and $1,505, for the years ended 2016, 2017, and 2018, respectively.
F-25
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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
NOTE H—OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
Associate incentives
Accrued employee compensation
Deferred revenue
Income taxes
Sales taxes
Associate promotions
All other
December 30,
2017
December 29,
2018
$
$
45,434 $
22,909
16,999
12,283
11,399
3,063
17,309
129,396 $
52,639
33,705
15,055
6,706
14,062
2,646
13,926
138,739
NOTE I—LINE OF CREDIT
The Company has a $75,000 line of credit with Bank of America. Interest on borrowed funds 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 $4,723, and $6,619 reduction in the
available borrowing limit as of December 30, 2017 and December 29, 2018, respectively, due to existing normal course of business
guarantees in certain markets.
There was no outstanding balance on this line of credit at December 30, 2017 or at December 29, 2018. 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 J—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
F-26
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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
NOTE J—COMMITMENTS AND CONTINGENCIES (Continued)
during 2026. The Company utilizes equipment under non-cancelable operating leases, expiring through 2023. The minimum commitments
under operating leases at December 29, 2018 are as follows:
Year ending
2019
2020
2021
2022
2023
Thereafter
$
9,155
6,146
3,825
1,962
1,464
2,514
$ 25,066
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 $10,153, $10,931, and $11,240 for the years ended 2016, 2017, and 2018, respectively.
The Company has other unconditional purchase obligations relating to advertising agreements and IT-related services of $10,687 that
will be paid in the next year.
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 faces contingencies that are reasonably possible to occur; however, they cannot currently be estimated. While complete assurance
cannot be given to the outcome of these proceedings, management does not currently believe that any of these matters, individually or in
the aggregate, will have a material adverse effect on the Company's financial condition, liquidity or results of operations
On February 7, 2017, the Company disclosed in a Current Report on Form 8-K filed with the SEC that it is conducting a voluntary
internal investigation regarding its BabyCare operations in China. In connection with this investigation, the Company expects to continue to
incur costs in conducting the on-going review and investigation, in responding to requests for information in connection with any
government investigations and in defending any potential civil or governmental proceedings that are instituted against it or any of its
current or former officers or directors. The Company has voluntarily contacted the SEC and the United States Department of Justice to
advise both agencies that an internal investigation is underway and intends to provide additional information to both agencies as the
investigation progresses. Because the internal investigation is ongoing, the Company cannot predict the duration, scope, or result of the
investigation. One or more governmental actions could be instituted in respect of the matters that are the subject of the internal
investigation, and such actions, if brought, may result in judgments, settlements, fines, penalties, injunctions, cease and desist orders,
criminal penalties, or other relief.
F-27
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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
NOTE J—COMMITMENTS AND CONTINGENCIES (Continued)
On February 13, 2017, a purported shareholder class action lawsuit (Rumbaugh v. USANA Health Sciences Inc., et al., Case No. 2:17-
cv-00106) was filed in the United States District Court for the District of Utah by April Rumbaugh, a purported shareholder of USANA,
alleging that the Company failed to disclose that (i) the Company's BabyCare subsidiary had engaged in improper reimbursement practices
in China, (ii) these practices constituted violations of the Foreign Corrupt Practices Act or FCPA, (iii) as such, the Company's China
revenues were in part the product of unlawful conduct and unlikely to be sustainable, and (iv) the foregoing conduct, when it became
known, was likely to subject the Company to significant regulatory scrutiny. On behalf of herself and a putative class of purchasers of
USANA stock between March 14, 2014 and February 7, 2017, the plaintiff asserted claims for violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 10b-5 promulgated thereunder. The plaintiff sought, among
other things, an award of damages, interest, reasonable attorneys' fees, expert fees, and other costs. The lawsuit named as defendants the
Company; its former Co-Chief Executive Officer, David A. Wentz; and our Chief Leadership Development Officer, Paul A. Jones. On
June 2, 2017, the court appointed Chi Wah On (another purported shareholder of USANA) as lead plaintiff. On August 4, 2017, lead
plaintiff filed a consolidated amended complaint seeking similar relief. This new complaint asserted additional allegations and added the
Company's Chief Executive Officer, Kevin G. Guest, and Chief Financial Officer, G. Douglas Hekking, as defendants. On September 18,
2017, the Company filed a motion to dismiss the amended complaint, and briefing was completed on November 8, 2017. The motion to
dismiss was argued on April 25, 2018. On October 16, 2018, the United States District Court for the District of Utah dismissed the action
with prejudice.
3.
Employee Benefit Plan
In the United States, 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 $1,594, $1,794, and $2,016 for the years ended 2016, 2017, and 2018, respectively.
The Company has employees in international countries that are covered by various defined contribution plans. These plans are
administered based upon the legal requirements in the countries in which they are established.
NOTE K—EQUITY-BASED COMPENSATION
Equity-based compensation expense was $16,542, $15,482, and $14,955 for fiscal years 2016, 2017, and 2018, respectively. The
related tax benefit for these periods was $5,540, $5,144, and $2,777, respectively.
F-28
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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
NOTE K—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 29, 2018. This table does not include an estimate for future grants that may be issued.
2019
2020
2021
2022
$ 12,186
6,566
4,768
277
$ 23,797
The cost above is expected to be recognized over a weighted-average period of 1.71 years.
The Company's 2015 Equity Incentive Award Plan (the "2015 Plan") allows for the grant of various equity awards including stock-
settled stock appreciation rights, stock options, restricted stock units, 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 29, 2018, 3,009 awards had been granted under
the 2015 Plan, of which 2,752 were stock-settled stock appreciation rights, and 257 were restricted stock awards. Also, as of December 29,
2018, a total of 889 awards had been forfeited and added back to the number of shares available for issuance under the 2015 Plan.
Stock-Settled Stock Appreciation Rights
The Company uses the Black-Scholes option pricing model to estimate the fair value of its stock-settled stock appreciation rights.
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 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 weighted-average fair value, of stock-settled stock appreciation rights granted in 2016 was $22.99.
There were no stock-settled stock appreciation rights granted in 2017 or 2018.
Stock-settled stock appreciation rights granted to officers and key employees upon hire or promotion to such a position, or annually for
existing participants, generally vest 25% each year on the anniversary of the grant date and expire four and one-half years from the date of
grant.
F-29
Table of Contents
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
NOTE K—EQUITY-BASED COMPENSATION (Continued)
Following is a table that includes the weighted-average assumptions that the Company used to calculate fair value of stock-settled
stock appreciation rights that were granted during the periods indicated.
Expected volatility(1)
Risk-free interest rate(2)
Expected life(3)
Expected dividend yield(4)
Weighted-average exercise price(5)
Year ended
2017
2016
47.5% N/A
1.1% N/A
N/A
0.0% N/A
N/A
63.16
3.7 yrs.
$
2018
N/A
N/A
N/A
N/A
N/A
(1)
(2)
(3)
(4)
(5)
The Company utilizes historical volatility of the trading price of its common stock.
Risk-free interest rate is based on the U.S. Treasury yield curve with respect to the expected life of the award.
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.
The Company historically has not paid and currently has no plan to pay dividends.
Exercise price is the closing price of the Company's common stock on the date of grant.
A summary of the Company's stock-settled stock appreciation right activity is as follows:
Outstanding at December 30, 2017
Granted
Exercised
Forfeited
Expired
Outstanding at December 29, 2018
Exercisable at December 29, 2018
Shares
2,290 $
—
(880)
(94)
—
1,316 $
329 $
Weighted-average
exercise price
Weighted-average
remaining
contractual term
Aggregate
intrinsic
value*
2.6 $ 26,703
1.8 $ 64,359
1.5 $ 15,578
62.49
—
56.81
64.97
—
66.07
67.60
*
Aggregate intrinsic value is defined as the difference between the current market value at the reporting date
(the closing price of the Company's common stock on the last trading day of the period) and the exercise price
of awards that were in-the-money. The closing price of the Company's common stock at December 30, 2017,
and December 29, 2018, was $74.05 and $114.96, respectively.
F-30
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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
NOTE K—EQUITY-BASED COMPENSATION (Continued)
The total intrinsic value of stock-settled stock appreciation rights exercised was $38,198, $25,424, and $46,224, for the years ended
2016, 2017 and 2018, respectively. The total fair value of stock-settled stock appreciation rights that vested was $11,481, $14,126, and
$17,614, for the years ended 2016, 2017, and 2018 respectively.
During the year ended December 30, 2017 and December 29, 2018, certain employees elected to receive a net amount of shares upon
the exercise of stock-settled stock appreciation rights in order to satisfy the Company's tax withholding obligation. This resulted in a
reduction to additional paid-in capital of $316 and $154 for the years ended 2017 and 2018, respectively.
Restricted Stock Awards
Restricted stock awards include stock-settled and cash-settled restricted stock units granted to the Company's officers and key
employees, and deferred stock units granted to non-employee directors. Restricted stock units are granted to officers and key employees
upon hire or promotion to such a position, or annually for existing participants, and generally vest 25% each year on the anniversary of the
grant date. Awards of deferred stock units 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. Upon vesting, holders of stock-settled restricted stock units and deferred
stock units are entitled to receive shares of the Company's common stock on a one-for-one basis. Holders of cash-settled restricted stock
units are entitled to receive cash payments equivalent to the number of awards held, valued at the closing market price on the vest date. The
fair value of restricted stock awards is determined based on the Company's closing stock price on the date of grant. Cash-settled restricted
stock units are accounted for as liability awards and fair value is remeasured to current fair value at each reporting date until the award is
settled at vesting. Restricted stock awards are full-value shares at the date of grant, vesting over the periods of service, and do not have
expiration dates.
A summary of the Company's stock-settled restricted stock unit activity is as follows:
Outstanding at December 30, 2017
Granted
Vested
Forfeited
Outstanding at December 29, 2018
Weighted-average
grant date
fair value
Shares
92 $
135
(25)
(6)
196 $
59.42
73.25
63.52
61.36
68.22
During the year ended December 29, 2018, certain employees elected to receive a net amount of shares upon the release of restricted
stock units in order to satisfy the Company's tax withholding obligation. This resulted in a $655 reduction to additional paid-in capital.
F-31
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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
NOTE K—EQUITY-BASED COMPENSATION (Continued)
A summary of the Company's cash-settled restricted stock unit activity is as follows:
Nonvested at December 30, 2017
Granted
Vested
Forfeited
Nonvested at December 29, 2018
The total fair value of liability awards outstanding at December 29, 2018 was $98.
A summary of the Company's deferred stock unit activity is as follows:
Nonvested at December 30, 2017
Granted
Vested
Forfeited
Nonvested at December 29, 2018
Weighted-average
grant date
fair value
Shares
— $
1
—
—
1 $
—
107.29
—
—
107.29
Weighted-average
grant date
fair value
Shares
3 $
—
(3)
—
— $
60.24
—
60.24
—
—
The number of deferred stock units vested and unreleased totaled 24 as of December 30, 2017 and December 29, 2018, respectively.
The total fair value of deferred stock units that vested was $962, $638, and $290, for the years ended 2016, 2017, and 2018
respectively. The total fair value of restricted stock units that vested in 2018 was $2,395. There were no restricted stock units that vested
during 2016 and 2017.
NOTE L—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 direct selling 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
F-32
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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
NOTE L—SEGMENT INFORMATION (Continued)
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.
USANA Nutritionals
USANA Foods
Personal care/Skincare
Sensé—beautiful science
Celavive(1)
2016
Year Ended
2017
2018
83%
10%
83%
9%
82%
9%
6%
6%
N/A
N/A
3%
5%
Selected financial information for the Company is presented for two geographic regions: Asia Pacific, with three sub-regions under
Asia Pacific, and Americas and Europe. Individual markets are categorized into these regions as follows:
•
Asia Pacific—
•
•
•
Greater China—Hong Kong, Taiwan, and China. Our business in China is conducted by BabyCare Holdings, Ltd.
our wholly-owned subsidiary.
Southeast Asia Pacific—Australia, New Zealand, Singapore, Malaysia, the Philippines, Thailand and Indonesia.
We commenced operations in Indonesia in the fourth quarter of 2015.
North Asia—Japan and South Korea
•
Americas and Europe—United States, Canada, Mexico, Colombia, the United Kingdom, France, Germany(2), Spain(2),
Italy(2), Romania(2), Belgium, and the Netherlands.
(1)
The Company launched Celavive in every market except China in the first quarter of 2018 and launched in China late in the third
quarter of 2018.
(2) We commenced operations in Germany, Spain, Italy, and Romania near the end of the second quarter of 2018.
F-33
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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
NOTE L—SEGMENT INFORMATION (Continued)
Selected Financial Information
Financial information, presented by geographic region is listed below:
Net Sales to External Customers
Asia Pacific
Greater China
Southeast Asia Pacific
North Asia
Asia Pacific Total
Americas and Europe
Consolidated Total
Long-lived Assets
Asia Pacific
Greater China
Southeast Asia Pacific
North Asia
Asia Pacific Total
Americas and Europe
Consolidated Total
Total Assets
Asia Pacific
Greater China
Southeast Asia Pacific
North Asia
Asia Pacific Total
Americas and Europe
Consolidated Total
2016
Year Ended
2017
2018
$
502,299 $
206,124
46,023
754,446
546,777 $
205,289
58,376
810,442
654,394
225,469
76,720
956,583
251,637
232,665
$ 1,006,083 $ 1,047,265 $ 1,189,248
236,823
December 30,
2017
December 29,
2018
$
$
$
98,641 $
14,603
1,908
115,152
92,062
13,042
3,311
108,415
61,099
176,251 $
50,365
158,780
289,463 $
49,444
13,234
352,141
301,498
45,495
14,186
361,179
167,128
519,269 $
193,284
554,463
$
F-34
Table of Contents
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
NOTE L—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:
Net sales:
China
United States
Long-lived Assets:
China
United States
2016
Year Ended
2017
2018
$ 437,386 $ 482,965 $ 586,518
$ 130,427 $ 121,056 $ 116,299
$
$
96,248 $
59,589 $
89,509
49,195
NOTE M—QUARTERLY FINANCIAL RESULTS (Unaudited)
The following table summarizes quarterly financial information for fiscal years 2017 and 2018.
2017
Net sales
Gross profit
Net earnings (loss)
Earnings (Loss) per share:
Basic
Diluted
2018
Net sales
Gross profit
Net earnings
Earnings per share:
Basic
Diluted
First
Second
Third
Fourth
$ 255,323 $ 257,063 $ 261,765 $ 273,114
$ 212,669 $ 213,161 $ 214,630 $ 227,401
(5,851)
$
21,358 $
23,259 $
23,769 $
$
$
0.87 $
0.86 $
0.95 $
0.93 $
0.98 $
0.97 $
(0.24)
(0.24)
First
Second
Third
Fourth
$ 291,998 $ 301,460 $ 296,767 $ 299,023
$ 242,623 $ 251,469 $ 244,890 $ 249,556
32,331
$
33,907 $
31,040 $
28,946 $
$
$
1.20 $
1.19 $
1.40 $
1.36 $
1.28 $
1.24 $
1.35
1.32
NOTE N—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.
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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
NOTE N—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:
Net earnings available to common shareholders
Weighted average common shares outstanding—basic
Dilutive effect of in-the-money equity awards
Weighted average common shares outstanding—diluted
Earnings per common share from net earnings—basic
Earnings per common share from net earnings—diluted
2018
2016
Year Ended
2017
$ 100,041 $ 62,535 $ 126,224
24,105
24,349
537
359
24,642
24,708
5.24
5.12
24,185
862
25,047
2.57 $
2.53 $
4.14 $
3.99 $
$
$
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:
2016
2,242
Year Ended
2017
2,060
2018
451
Subsequent to December 29, 2018, and through February 22, 2019, the Company repurchased and retired 284 shares of common stock
for $30,000, at an average market price of $105.78 per share.
NOTE O—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 29, 2018, Gull Global, Ltd. owned 42.12% 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 Amarevita S DE RL DE CV (formerly Medicis, S.C.) ("Amarevita"), 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 Amarevita and Amarevita 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 Amarevita 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.
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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
NOTE O—RELATED-PARTY TRANSACTIONS (Continued)
Amarevita 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, Amarevita provides physicians and other medical staff to speak at USANA Associate events. Finally, Amarevita
performs health assessments and physical examinations for the Company's Executives. In consideration for these services, USANA paid
Amarevita $322, $337, and $162 in 2016, 2017, and 2018, respectively. The Company's agreements with Amarevita were approved by the
Audit Committee in advance of the Company's entry into the agreements. USANA's collaboration with Amarevita 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 $523,
$781, and $804 in 2016, 2017 and 2018, respectively. Nathan Guest is a sales representative for Drive Marketing's various direct selling
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.
The Company has had a long standing contractual relationship with Shane Farmer, the sole owner of Dark Horse Rowing, LLC
located in San Diego, California. Mr. Farmer provides consulting and other advisory services to the Company related to its development of
nutritional products. The Company paid Dark Horse Rowing, LLC $136, $135, and $136 in 2016, 2017 and 2018, respectively. During
2017, Shane Farmer became the stepson of Dr. Wentz, the Company's founder and Chairman of the Board. Mr. Farmer is one of many
consultants and experts utilized by the Company to advise on nutrition. The Company's relationship with Dark Horse Rowing is terminable
at will by the Company at any time without any continuing commitment.
F-37
Table of Contents
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at
beginning of
period
Charged to
costs and
expenses
Charged to
other
accounts
Deductions
end of period
Balance at
Description
December 31, 2016
Allowance for sales returns
Allowance for doubtful accounts
Valuation allowance—deferred tax
assets
December 30, 2017
Allowance for sales returns
Allowance for doubtful accounts
Valuation allowance—deferred tax
assets
December 29, 2018
Allowance for sales returns
Allowance for doubtful accounts
Valuation allowance—deferred tax
$
$
$
$
$
$
$
$
521
1,936
607
696
743
640
632
325
213
220
33
44
14
13,340
307
8
assets
$
13,980
30,219
F-38
—
—
—
—
—
—
—
—
—
38 $
1,413 $
— $
108 $
432 $
696
743
640
632
325
— $
13,980
100 $
194 $
839
139
— $
44,199
HE/ILl H SCILNCI '> USANA HEALTH SCIENCES, INC. AUTHORIZED COMMON STOCK:50,000,000 SHARES $.001 PAR VALUE INCORPORATED UNDER THE LAWS OF THE STATE OF UTAH Shares of USANA HEALTH SCIENCES,INC.Common Stock transferable on the books of the Corporation in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. "" ·-t-S: f' Dated: )> ' c -i D-cz> :Il N m 0 (J) I Gi 4c :Il m CHIEF EXECUTIVE OFFICER
Exhibit 4.1
The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM TEN ENT JTTEN - as tenants in common - as tenants by the entireties - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT-...................Custodian...................... (Cust) (Minor) under Uniform Gilts to Minors Act ............................ (State) Additional abbreviations may also be used though not in the above list. For value received, ___ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTlFYING NUMBER OF ASSIGNEE PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE --------------------- - - --------------Shares of the Captial stock represented by the within Certificate, and do hereby irrevocably constitute and appoint _ Attorney to transfer the said stock on the books of the within-named Corporation with full power of substitution in the premises. Dated, __ SIGNATURE(S) GUARANTEED: s 1ure s Uis -rff N Ys %5 g L s tft AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM). PURSUANT TO S.E.C.RULE 17Ad·15.
USANA HEALTH SCIENCES, INC.
CODE OF ETHICS FOR DIRECTORS AND EMPLOYEES
Exhibit 14
This Code of Ethics for Directors and Employees (the “Code) has been adopted by the Board of Directors (the “Board”) of
USANA Health Sciences, Inc. (the “Company”). The purpose of this Code is to encourage directors, officers, and employees of the
Company to conduct themselves in an ethical manner and to deter them from wrongdoing in the course of the Company’s business. This
Code has been adopted pursuant to listing standards of the New York Stock Exchange which are applicable to the Company as well as the
rules and regulations that have been promulgated by the U.S. Securities and Exchange Commission (the “SEC”).
1. Covered Persons. The persons who shall be covered by this Code are all members of the Company’s Board and all of
the Company’s employees, including officers of the Company. These persons are hereafter collectively referred to as “Directors and
Employees.”
2. Honest and Ethical Behavior. The Directors and Employees shall act in an honest and ethical manner in conducting
the business of the Company. All Directors and Employees are required to be familiar with the Code, comply with its provisions and
report any suspected violations as described below in paragraph 10, below, “Reports of Violations of this Code.”
3. Conflicts of Interest.
3.1 A conflict of interest occurs when an individual’s private interest (or the interest of a member of his or her
family) interferes, or even appears to interfere, with the interests of the Company as a whole. A conflict of interest can arise when a
Director or Employee (or a member of his or her family) takes actions or has interests that may make it difficult to perform his or her
work for the Company objectively and effectively. Conflicts of interest also arise when a Director or Employee (or a member of his or her
family) receives improper personal benefits as a result of his or her position in the Company.
3.2 Loans by the Company to, or guarantees by the Company of obligations of, employees or their family
members are of special concern and could constitute improper personal benefits to the recipients of such loans or guarantees, depending
on the facts and circumstances. Loans by the Company to, or guarantees by the Company of obligations of, any Director or executive
officer or their family members are expressly prohibited.
unless specifically authorized as described in paragraph 3.4.
3.3 Whether or not a conflict of interest exists or will exist can be unclear. Conflicts of interest should be avoided
who become aware of an actual or potential conflict
3.4 Persons other than Directors and executive officers who have questions about a potential conflict of interest or
should discuss the matter with, and seek a determination and prior authorization or approval from, their supervisor or the General Counsel.
A supervisor may not authorize or approve conflict of interest matters or make determinations as to whether a problematic conflict of
interest exists without first providing the General Counsel with a written description of the activity and seeking the General Counsel’s
written approval. If the supervisor is himself involved in the potential or actual conflict, the matter should instead be discussed directly
with the General Counsel. Directors and executive officers must seek determinations and prior authorizations or approvals of potential
conflicts of interest exclusively from the Audit Committee of the Board of Directors of the Company.
4. Corporate Opportunities. The Directors and Employees may not (a) take for themselves personal opportunities that
are discovered through the use of Company property, information or position; (b) use Company property, information or position for
personal gain; or (c) directly or indirectly compete with the Company. The Directors and Employees owe a duty to the Company to
advance its legitimate interests when the opportunity to do so arises.
5. Fair Dealing. The Directors and Employees should endeavor to deal fairly with the Company’s customers, suppliers,
and competitors. None should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information,
misrepresentation of material facts, or any other unfair dealing practice.
6. Protection of Company Assets.
carelessness and waste have a direct impact on the Company’s profitability and are prohibited.
6.1 All Directors and Employees should protect the Company’s assets and ensure their efficient use. Theft,
be permitted. Any suspected incident of fraud or theft should be reported for investigation immediately.
6.2 All Company assets should be used only for legitimate business purposes, though incidental personal use may
6.3 The obligation to protect Company assets includes the Company’s proprietary information. Proprietary
information includes intellectual property such as trade secrets, patents, trademarks, and copyrights, as well as business and marketing
plans, engineering and manufacturing ideas, designs, databases, records and any non-public financial data or reports. Unauthorized use or
distribution of this information is prohibited and could also be illegal and result in civil or criminal penalties.
7. Confidentiality. The Directors and Employees must maintain the confidentiality of information entrusted to them by
the Company or its customers, except when disclosure is authorized or legally required. Confidential information includes all non-public
information (regardless of its source) that might be of use to the Company’s competitors or harmful to the Company or its customers,
suppliers or partners if disclosed.
8. Disclosures to the SEC and to the Public. The Company is required from time to time to file reports and documents
with the SEC (the “Reports”). Additionally, the Company may from time to time make other required or permitted disclosures to the
public (“Public Disclosures”).
8.1 Whenever a Director or Employee shall have responsibility for the preparation of these Reports and/or Public
Disclosures, or shall be involved in the process of preparing such Reports and/or Public Disclosures, the Director or Employee shall take
reasonable steps to ensure that they are materially accurate and complete, that they are reasonably understandable to an average, adult
investor, and, if they are required to be filed with the SEC, that they are so filed in a timely manner.
and other financial information, must comply with applicable federal securities laws and SEC rules.
8.2 The Company’s periodic reports and other documents filed with the SEC, including all financial statements
8.3 Each Director and Employee who contributes in any way to the preparation or verification of the Company’s
financial statements and other financial information must ensure that the Company’s books, records and accounts are accurately
maintained. Each Director and Employee must cooperate fully with the Company’s accounting and internal audit departments, as well as
the Company’s independent public accountants and counsel.
8.4 Each Director and Employee who is involved in the Company’s disclosure process must:
control over financial reporting; and
(a) be familiar with and comply with the Company’s disclosure controls and procedures and its internal
communications about the financial and business condition of the Company provide full, fair, accurate, timely and understandable
disclosure.
(b) take all necessary steps to ensure that all Reports filed with the SEC and all other public
9. Compliance with Laws. The Directors and Employees shall make reasonable efforts to comply materially with all
applicable governmental laws, rules, and regulations, including insider trading laws, in conducting the Company’s business:
regulations in the cities, states and countries in which the Company operates.
9.1 Directors and Employees should comply, both in letter and spirit, with all applicable laws, rules and
9.2 Although not all Directors and Employees are expected to know the details of all applicable laws, rules and
regulations, it is important to know enough to determine when to seek advice from appropriate personnel. Questions about compliance
should be addressed to the General Counsel.
9.3 No Director or Employee may purchase or sell any Company securities while in possession of material non-
public information regarding the Company, nor may any Director or Employee purchase or sell another company’s securities while in
possession of material non-public information regarding that company. It is against Company policies and illegal for any Director or
Employee to use material non-public information regarding the Company or any other company to:
(a) obtain profit for himself or herself; or
information.
(b) directly or indirectly “tip” others who might make an investment decision on the basis of that
10. Reports of Violations of this Code. If a Director or Employee either personally violates this Code or becomes aware
that another Director or Employee has violated this Code, the Director or Employee shall promptly notify the Chairman of the Board, the
Chief Executive Officer, or the President of such violation. If the Director or Employee believes that such notification would not result in
a reasonable remedying response, the Director or Employee shall promptly notify such other members of the Board or officers of the
Company whom the Director or Employee believes will provide a reasonable remedying response.
11. Determination of Whether a Violation has Occurred. Upon receiving a report of an alleged violation of this Code,
the person who receives such report shall promptly conduct a reasonable investigation of the allegations to determine if such allegations
are true and if they constitute a violation of this Code. Such investigation shall include the interview of appropriate witnesses, including
the accused person, and the collection of relevant documents. In conducting such an investigation, the investigators will keep reasonable
records of their actions. Prior to the imposition by the Board of any sanctions, as described below, the accused person shall have a
reasonable opportunity to present his or her case to the Board or to an appropriate committee thereof, unless the Board, upon the advice of
counsel, determines otherwise.
12. Sanctions. If, after a reasonable inquiry, the Board (or an appropriate committee thereof) determines that a Director or
Employee has violated any provision of this Code, then the Board (or the committee) shall have the authority to recommend or impose
such sanctions, including dismissal, on such Director or Employee as the Board (or the committee) shall determine in its discretion. In
this regard, the Board (or the committee) shall act promptly and consistently.
13. Protection of Persons Who Report Violations. No Director or Employee shall take any action to retaliate in any
manner against a person who reports a possible violation of this Code, and such retaliation shall itself constitute a separate violation of this
Code.
14. Waivers. Any waiver of this Code shall only be made by the Board. If the Board grants a waiver of this Code to a
member of the Board or to an executive officer of the Company, then the Company shall publicly disclose such waiver as required by
NYSE rules and by SEC rules, using SEC Form 8-K (as it may be amended). Any other waiver need not be publicly disclosed in this
manner. The Company does not tolerate acts of retaliation against any Director or Employee who makes a good faith report of known or
suspected acts of misconduct or other violations of this Code.
15. Public Availability. The Company shall make this Code publicly available by appropriate means.
SUBSIDIARIES
EXHIBIT 21
Set forth below is a list of all active subsidiaries of the Registrant, the state or other jurisdiction of incorporation or organization of each,
and the names under which subsidiaries do business as of February 26, 2019.
Name
Jurisdiction of Incorporation
USANA Canada Holding, Inc.
USANA Health Sciences, China, Inc.
USANA Health Sciences New Zealand, Inc.
International Holdings, Inc.
FMG Productions, Inc. (dba USANA Studios)
UHS Essential Health Philippines, Inc.
USANA Sense Company, Inc.
Pet Lane Inc.
USANA Acquisition Corporation
USANA Canada Co.
USANA Australia Pty, Ltd.
USANA Health Sciences (NZ) Corporation
USANA Hong Kong Limited
USANA Health Sciences Japan, LLC.
USANA Health Sciences Korea Ltd.
USANA Health Sciences Singapore Pte, Ltd.
USANA Mexico S.A. de C.V.
Mercadotecnia Nutricional S de R.L. de C.V.
UHS Essential Health Malaysia SND BHD
BabyCare Holdings Ltd.
BabyCare Ltd.
Delaware
Delaware
Delaware
Delaware
Utah
Utah
Utah
Delaware
Utah
Canada
Australia
New Zealand
Hong Kong
Japan
South Korea
Singapore
Mexico
Mexico
Malaysia
Utah / Cayman Islands
People’s Republic of China
Tianjin BabyCare Biological Science and Technology Ltd
People’s Republic of China
Tianjin Health Resources Sales Co., Ltd
People’s Republic of China
USANA Health Sciences (Thailand) Ltd
Thailand
USANA Health Sciences (France) SAS
USANA Asia Holding Ltd.
USANA Health Sciences (Colombia) SAS
PT. USANA Health Sciences Indonesia
France
Singapore
Colombia
Indonesia
Except as noted above, each subsidiary listed above is doing business under its corporate name.
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Board of Directors
USANA Health Sciences, Inc.:
We consent to the incorporation by reference in the registration statements (Nos. 333-96645, 333-128103, 333-133385, 333-174695, and
333-206070) on Form S-8 and (No. 333-169946) on Form S-3 of USANA Health Sciences, Inc. of our reports dated February 26, 2019,
with respect to the consolidated balance sheets of USANA Health Sciences, Inc. as of December 29, 2018 and December 30, 2017, 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 29, 2018, and the related notes and financial statement schedule II (collectively, the consolidated financial
statements), and the effectiveness of internal control over financial reporting as of December 29, 2018, which reports appear in the
December 29, 2018 annual report on Form 10-K of USANA Health Sciences, Inc.
Our report dated February 26, 2019, on the consolidated financial statements refers to a change in the method of accounting for revenue
from contracts with customers in 2018 due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards
Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606).
/s/ KPMG
Salt Lake City, Utah
February 26, 2019
I, Kevin G. Guest, certify that:
CHIEF EXECUTIVE OFFICER CERTIFICATION
EXHIBIT 31.1
1. I have reviewed this Annual Report on Form 10-K of USANA Health Sciences, Inc. (the “Registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented
in this report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, 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;
c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the
Registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
Registrant’s internal control over financial reporting.
Date: February 26, 2019
/s/ Kevin G. Guest
Kevin G. Guest
Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
I, G. Douglas Hekking, certify that:
CHIEF FINANCIAL OFFICER CERTIFICATION
1. I have reviewed this Annual Report on Form 10-K of USANA Health Sciences, Inc. (the “Registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods
presented in this report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the
Registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting;
and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
Registrant’s internal control over financial reporting.
Date: February 26, 2019
/s/ G. Douglas Hekking
G. Douglas Hekking
Chief Financial Officer
(Principal Accounting and Financial Officer)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
The undersigned hereby certifies that the Annual Report on Form 10-K of USANA Health Sciences, Inc. for the period ended
December 29, 2018 as filed February 26, 2019 with the Securities and Exchange Commission, fully complies with the requirements of
Section 13(a) or 15(d) of The Securities Exchange Act of 1934 (15 U.S.C. 78m) and that the information contained in the Report fairly
presents, in all material respects, the financial condition and results of operations of USANA Health Sciences, Inc.
Date: February 26, 2019
/s/ Kevin G. Guest
Kevin G. Guest
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
The undersigned hereby certifies that the Annual Report on Form 10-K of USANA Health Sciences, Inc. for the period ended
December 29, 2018 as filed February 26, 2019 with the Securities and Exchange Commission, fully complies with the requirements of
Section 13(a) or 15(d) of The Securities Exchange Act of 1934 (15 U.S.C. 78m) and that the information contained in the Report fairly
presents, in all material respects, the financial condition and results of operations of USANA Health Sciences, Inc.
Date: February 26, 2019
/s/ G. Douglas Hekking
G. Douglas Hekking
Chief Financial Officer
(Principal Accounting and Financial Officer)