UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 1-32381

HERBALIFE LTD.

(Exact name of registrant as specified in its charter)

Cayman Islands		98-0377871
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

P.O. Box 309GT
Ugland House, South Church Street
Grand Cayman, Cayman Islands
(Address of principal executive offices) (Zip code)

(213) 745-0500
(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

Number of shares of registrant’s common shares outstanding as of October 26, 2011 was 116,322,699

 

 

HERBALIFE LTD.

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			3
Unaudited Condensed Consolidated Balance Sheets			3
Unaudited Condensed Consolidated Statements of Income			4
Unaudited Condensed Consolidated Statements of Cash Flows			5
Notes to Unaudited Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosures About Market Risk			36
Item 4. Controls and Procedures			38
Forward Looking Statements			39
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			40
Item 1A. Risk Factors			40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			55
Item 3. Defaults Upon Senior Securities			55
Item 4. (Removed and Reserved)			55
Item 5. Other Information			55
Item 6. Exhibits			56
Signatures and Certifications			59
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

Item 1.		FINANCIAL STATEMENTS

HERBALIFE LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

		September 30,				December 31,
		2011				2010
		(In thousands, except share amounts)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	261,521			$	190,550
Receivables, net of allowance for doubtful accounts of $2,199 (2011) and $3,202 (2010)			112,475				85,612
Inventories			222,501				182,467
Prepaid expenses and other current assets			93,715				93,963
Deferred income taxes			43,662				42,994
Total current assets			733,874				595,586
Property, at cost, net of accumulated depreciation and amortization of $179,713 (2011) and $166,912 (2010)			182,772				177,427
Deferred compensation plan assets			19,063				18,536
Deferred financing costs, net			5,091				998
Other assets			29,833				25,880
Marketing related intangibles and other intangible assets, net			311,935				310,894
Goodwill			105,488				102,899
Total assets		$	1,388,056			$	1,232,220
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	61,857			$	43,784
Royalty overrides			190,697				162,141
Accrued compensation			69,646				69,376
Accrued expenses			145,150				141,867
Current portion of long-term debt			1,762				3,120
Advance sales deposits			60,129				35,145
Income taxes payable			21,304				15,383
Total current liabilities			550,545				470,816
NON-CURRENT LIABILITIES:
Long-term debt, net of current portion			220,298				175,046
Deferred compensation plan liability			22,290				20,167
Deferred income taxes			55,844				55,572
Other non-current liabilities			22,600				23,407
Total liabilities			871,577				745,008
CONTINGENCIES
SHAREHOLDERS’ EQUITY:
Common shares, $0.001 par value; 1.0 billion shares authorized; 116.1 million (2011) and 117.8 million (2010) shares outstanding			116				118
Paid-in-capital in excess of par value			280,515				248,693
Accumulated other comprehensive loss			(36,012	)			(27,285	)
Retained earnings			271,860				265,686
Total shareholders’ equity			516,479				487,212
Total liabilities and shareholders’ equity		$	1,388,056			$	1,232,220

See the accompanying notes to unaudited condensed consolidated financial statements.

HERBALIFE LTD.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2011				2010				2011				2010
						(In thousands, except per share amounts)
Product sales		$	763,272			$	588,635			$	2,190,153			$	1,705,230
Shipping & handling revenues			131,946				99,796				379,815				290,640
Net sales			895,218				688,431				2,569,968				1,995,870
Cost of sales			175,308				133,265				509,124				410,298
Gross profit			719,910				555,166				2,060,844				1,585,572
Royalty overrides			290,842				224,061				844,451				656,160
Selling, general & administrative expenses			277,721				230,150				788,472				648,143
Operating income			151,347				100,955				427,921				281,269
Interest expense, net			345				2,192				3,848				6,291
Income before income taxes			151,002				98,763				424,073				274,978
Income taxes			42,980				19,879				116,852				62,048
NET INCOME		$	108,022			$	78,884			$	307,221			$	212,930
Earnings per share:
Basic		$	0.92			$	0.67			$	2.60			$	1.79
Diluted		$	0.87			$	0.63			$	2.44			$	1.69
Weighted average shares outstanding:
Basic			116,975				118,442				118,059				119,286
Diluted			124,275				125,613				125,889				126,216
Dividends declared per share		$	0.20			$	0.13			$	0.53			$	0.33

See the accompanying notes to unaudited condensed consolidated financial statements.

HERBALIFE LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Nine Months Ended
		September 30,				September 30,
		2011				2010
		(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	307,221			$	212,930
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			54,440				51,755
Excess tax benefits from share-based payment arrangements			(24,030	)			(6,572	)
Share-based compensation expenses			17,244				16,870
Amortization of discount and deferred financing costs			721				374
Deferred income taxes			(7,000	)			(16,989	)
Unrealized foreign exchange transaction loss (gain)			8,324				(7,536	)
Write-off of deferred financing costs			914				—
Foreign exchange loss from adoption of highly inflationary accounting in Venezuela			—				15,131
Other			1,383				2,911
Changes in operating assets and liabilities:
Receivables			(31,834	)			(13,965	)
Inventories			(51,649	)			(32,921	)
Prepaid expenses and other current assets			(3,733	)			5,744
Other assets			(4,742	)			(2,328	)
Accounts payable			19,484				12,852
Royalty overrides			33,851				3,601
Accrued expenses and accrued compensation			7,579				11,622
Advance sales deposits			27,416				32,399
Income taxes payable			35,914				(16,955	)
Deferred compensation plan liability			2,123				2,198
NET CASH PROVIDED BY OPERATING ACTIVITIES			393,626				271,121
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property			(61,514	)			(42,199	)
Proceeds from sale of property			213				64
Deferred compensation plan assets			(527	)			(371	)
NET CASH USED IN INVESTING ACTIVITIES			(61,828	)			(42,506	)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid			(62,177	)			(38,934	)
Borrowings from long-term debt			791,700				338,000
Principal payments on long-term debt			(747,896	)			(379,465	)
Deferred financing costs			(5,728	)			—
Share repurchases			(268,795	)			(106,163	)
Excess tax benefits from share-based payment arrangements			24,030				6,572
Proceeds from exercise of stock options and sale of stock under employee stock purchase plan			15,947				11,521
NET CASH USED IN FINANCING ACTIVITIES			(252,919	)			(168,469	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH			(7,908	)			(17,457	)
NET CHANGE IN CASH AND CASH EQUIVALENTS			70,971				42,689
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			190,550				150,801
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	261,521			$	193,490
CASH PAID DURING THE PERIOD
Interest paid		$	6,457			$	7,195
Income taxes paid		$	88,079			$	84,120

See the accompanying notes to unaudited condensed consolidated financial statements.

HERBALIFE LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Organization

Herbalife Ltd., a Cayman Islands exempt limited liability company, or Herbalife, was incorporated on April 4, 2002. Herbalife Ltd. (and together with its subsidiaries, the “Company”) is a leading global network marketing company that sells weight management, nutritional supplements, energy, sports & fitness products and personal care products through a network of approximately 2.5 million independent distributors, except in China, where the Company sells its products through retail stores, sales representatives and independent service providers. The Company reports revenue in six geographic regions: North America; Mexico; South and Central America; EMEA, which consists of Europe, the Middle East and Africa; Asia Pacific (excluding China); and China.

2. Significant Accounting Policies

Basis of Presentation

The unaudited interim financial information of the Company has been prepared in accordance with Article 10 of the Securities and Exchange Commission’s, or the SEC, Regulation S-X. Accordingly, it does not include all of the information required by generally accepted accounting principles in the U.S., or U.S. GAAP, for complete financial statements. The condensed consolidated balance sheet at December 31, 2010 was derived from the audited financial statements at that date and does not include all the disclosures required by U.S. GAAP. The Company’s unaudited condensed consolidated financial statements as of September 30, 2011, and for the three and nine months ended September 30, 2011 and 2010, include Herbalife and all of its direct and indirect subsidiaries. In the opinion of management, the accompanying financial information contains all adjustments, consisting of normal recurring adjustments, necessary to present fairly the Company’s unaudited condensed consolidated financial statements as of September 30, 2011, and for the three and nine months ended September 30, 2011 and 2010. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, or the 2010 10-K. Operating results for the three and nine months ended September 30, 2011, are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

On April 28, 2011, the Company’s shareholders approved a two-for-one stock split, or the stock split, of the Company’s common shares. One additional common share was distributed to the Company’s shareholders on or around May 17, 2011, for each common share held on May 10, 2011. All references in the financial statements and notes to number of shares and per share amounts have been retrospectively adjusted for all periods presented to reflect the stock split.

New Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2011-08, Testing Goodwill for Impairment. This ASU permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity concludes it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then there is no need to perform the two-step impairment test. This ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The adoption of this ASU will not have a material impact on the Company’s consolidated financial statements, as it is intended to simplify the assessment for goodwill impairment.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This ASU will require companies to present the components of net and comprehensive income in either one or two consecutive financial statements and eliminates the option to present other comprehensive income in the statement of changes in shareholders’ equity. This ASU is effective for fiscal years and interim periods within those years, beginning after December 15, 2011. The Company is currently evaluating the potential impact of this adoption on its consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU expands existing disclosure requirements for fair value measurements and provides additional information on how to measure fair value. The Company is required to apply this ASU prospectively for interim and annual periods beginning after December 15, 2011. The Company is currently evaluating the potential impact of this adoption on its consolidated financial statements.

Change in Accounting Principle

In the second quarter of 2011, the Company changed its method of accounting for excess tax benefits recognized as a result of the exercise of employee stock options, stock appreciation rights, or SARs, and other share-based equity grants, from the tax-law-ordering method to the with-and-without method. Under the tax law ordering method, the deduction for share-based compensation is applied against income tax liabilities before other credits are applied, such as foreign tax credits. The with-and-without method applies the deduction for share-based compensation against taxable income after other credits have been applied against taxable income, to the extent allowable and subject to applicable limitations. The with-and-without method separately determines the impact of the tax benefit from share-based compensation after considering the tax effects related to the Company’s on-going operations. A benefit is recorded when deductions for share-based compensation reduces income taxes payable or increases income taxes refund receivable. The Company believes that the with-and-without method is a preferable method of determining the benefit applicable to share-based compensation because it better reflects the Company’s ongoing operations. This change in accounting method primarily impacts the allocation of income taxes and tax benefits between continuing operations, deferred tax items, and additional paid in capital for financial reporting purposes, but it does not have any impact on the ultimate amount of income tax reported on the Company’s income tax returns and it does not impact the Company’s income taxes payable included within its accompanying consolidated balance sheet. This change in accounting principle does not impact the consolidated financial statements related to fiscal years prior to 2010.

This change in accounting principle is applied to all periods presented and the following tables summarize the impact of this change on the Company’s consolidated financial statements, and as applicable, to the notes to the consolidated financial statements:

Consolidated Balance Sheet

		December 31, 2010
		As Previously
		Reported				As Adjusted
		(in thousands)
Paid-in capital in excess of par value		$	257,375			$	248,693
Retained earnings		$	257,004			$	265,686

Consolidated Statements of Income

		Three Months Ended								Nine Months Ended
		September 30, 2010								September 30, 2010
		As Previously								As Previously
		Reported				As Adjusted				Reported				As Adjusted
		(In thousands, except per share amount)
Income Taxes		$	23,024			$	19,879			$	65,435			$	62,048
Net Income		$	75,739			$	78,884			$	209,543			$	212,930
Basic earnings per share (1)		$	0.64			$	0.67			$	1.76			$	1.79
Diluted earnings per share (1)		$	0.61			$	0.63			$	1.68			$	1.69

Common Share Amounts Used to Compute Basic and Diluted Earnings Per Share

		Three Months Ended								Nine Months Ended
		September 30, 2010								September 30, 2010
		As Previously								As Previously
		Reported (1)				As Adjusted				Reported (1)				As Adjusted
		(In thousands)
Weighted average shares used in basic computations			118,442				118,442				119,286				119,286
Dilutive effect of exercise of equity grants outstanding			5,010				6,731				4,800				6,516
Dilutive effect of warrants			440				440				414				414
Weighted average shares used in diluted computations			123,892				125,613				124,500				126,216

Consolidated Statement of Cash Flows

		Nine Months Ended
		September 30, 2010
		As Previously
		Reported				As Adjusted
		(In thousands)
Net Income		$	209,543			$	212,930
Excess tax benefits from share-based payment arrangements		$	(9,959	)		$	(6,572	)
Income taxes payable		$	(13,568	)		$	(16,955	)
Net cash provided by operating activities		$	267,734			$	271,121
Excess tax benefits from share-based payment arrangements		$	9,959			$	6,572
Net cash used in financing activities		$	(165,082	)		$	(168,469	)

If the Company had not changed from the prior tax law ordering method of accounting for excess tax benefits in the second quarter of fiscal year 2011, income taxes, net income and earnings per share would have been reflected as noted below:

Consolidated Statements of Income

		Three Months Ended				Nine Months Ended
		September 30, 2011				September 30, 2011
		As Computed Under Prior Method
		(In thousands, except per share amount)
Income Taxes		$	44,594			$	120,800
Net Income		$	106,408			$	303,273
Basic earnings per share		$	0.91			$	2.57
Diluted earnings per share		$	0.87			$	2.45

Venezuela

In February 2011, Herbalife Venezuela purchased U.S. dollar denominated bonds with a face value of $20 million U.S. dollars in a bond offering from Petróleos de Venezuela, S.A., a Venezuelan state-owned petroleum company, for 86 million Bolivars and then immediately sold the bonds for $15 million U.S. dollars, resulting in an average effective conversion rate of 5.7 Bolivars per U.S. dollar. The 86 million Bolivars were previously remeasured at the regulated system rate, or SITME rate, of 5.3 Bolivars per U.S. dollar and recorded as cash and cash equivalents of $16.3 million on the Company’s consolidated balance sheet at December 31, 2010. This Bolivar to U.S. dollar conversion resulted in the Company recording a net pre-tax loss of $1.3 million U.S. dollars during the first quarter of 2011 which is included in its condensed consolidated statement of income for the nine months ended September 30, 2011.

As of September 30, 2011, Herbalife Venezuela’s net monetary assets and liabilities denominated in Bolivars was approximately $21.5 million, and included approximately $29.0 million in Bolivar denominated cash and cash equivalents. The majority of these Bolivar denominated assets and liabilities were remeasured at the SITME rate. Although Venezuela is an important market in the Company’s South and Central America region, Herbalife Venezuela’s net sales represented less than 2% of the Company’s consolidated net sales for both the nine months ended September 30, 2011 and 2010, and its total assets represented less than 3% of the Company’s consolidated total assets as of both September 30, 2011 and December 31, 2010.

See the Company’s 2010 10-K for further information on Herbalife Venezuela and Venezuela’s highly inflationary economy.

3. Inventories

Inventories consist primarily of finished goods available for resale and the following are the major classes of inventory:

		September 30,				December 31,
		2011				2010
		(In millions)
Raw materials		$	23.3			$	13.7
Work in process			2.0				0.6
Finished goods			197.2				168.2
Total		$	222.5			$	182.5

4. Long-Term Debt

Long-term debt consists of the following:

		September 30,				December 31,
		2011				2010
		(In millions)
Borrowings under the prior senior secured credit facility		$	—			$	174.9
Borrowings under the new senior secured revolving credit facility			220.0				—
Capital leases			1.9				2.9
Other debt			0.2				0.3
Total			222.1				178.1
Less: current portion			1.8				3.1
Long-term portion		$	220.3			$	175.0

Interest expense was $3.1 million and $2.7 million for the three months ended September 30, 2011 and 2010, respectively, and $9.5 million and $7.7 million for the nine months ended September 30, 2011 and 2010, respectively. Interest expense for the nine months ended September 30, 2011 included a $0.9 million write-off of unamortized deferred financing costs resulting from the extinguishment of the prior senior secured credit facility, or the Prior Credit Facility, as discussed below.

On March 9, 2011, the Company entered into a $700.0 million senior secured revolving credit facility, or the New Credit Facility, with a syndicate of financial institutions as lenders and terminated its Prior Credit Facility that consisted of a term loan and a revolving credit facility. The New Credit Facility has a five year maturity and expires on March 9, 2016. During March 2011, U.S. dollar borrowings under the New Credit Facility incurred interest at the base rate plus a margin of 0.75% or LIBOR plus a margin of 1.75%. After March 2011, based on the Company’s consolidated leverage ratio, U.S. dollar borrowings under the New Credit Facility bear interest at either LIBOR plus the applicable margin between 1.50% and 2.50% or the base rate plus the applicable margin between 0.50% and 1.50%. The Company, based on its consolidated leverage ratio, pays a commitment fee between 0.25% and 0.50% per annum on the unused portion of the New Credit Facility. The New Credit Facility also permits the Company to borrow limited amounts in Mexican Peso and Euro currencies based on variable rates. The base rate under the New Credit Facility represents the highest of the Federal Funds Rate plus 0.50%, one-month LIBOR plus 1.00%, and the prime rate offered by Bank of America.

In March 2011, the Company used $196.0 million in U.S. dollar borrowings under the New Credit Facility to repay all amounts outstanding under the Prior Credit Facility. The Company incurred approximately $5.7 million of debt issuance costs in connection with the New Credit Facility. These debt issuance costs were recorded as deferred financing costs on the Company’s condensed consolidated balance sheet and are being amortized over the term of the New Credit Facility. On September 30, 2011 and December 31, 2010, the weighted average interest rate for borrowings under the New Credit Facility and the Prior Credit Facility was 1.72% and 1.75%, respectively.

The New Credit Facility requires the Company to comply with a leverage ratio and an interest coverage ratio. In addition, the New Credit Facility contains customary covenants, including covenants that limit or restrict the Company’s ability to incur liens, incur indebtedness, make investments, dispose of assets, make certain restricted payments, pay dividends, repurchase its common shares, merge or consolidate and enter into certain transactions with affiliates. As of September 30, 2011, the Company was compliant with its debt covenants.

During the three months ended March 31, 2011, the Company borrowed $235.7 million and $54.0 million under the New Credit Facility and Prior Credit Facility, respectively, and paid a total of $55.7 million and $228.9 million of the New Credit Facility and Prior Credit Facility, respectively. During the three months ended June 30, 2011, the Company borrowed $101.0 million under the New Credit Facility and paid a total of $123.0 million of the New Credit Facility. During the three months ended September 30, 2011, the Company borrowed $401.0 million under the New Credit Facility and paid a total of $339.0 million of the New Credit Facility. As of September 30, 2011, the U.S. dollar amount outstanding under the New Credit Facility was $220.0 million. There were no outstanding foreign currency borrowings as of September 30, 2011 under the New Credit Facility. As of December 31, 2010, the amounts outstanding under the Prior Credit Facility, consisting of a term loan and revolving facility, were $143.9 million and $31.0 million, respectively.

5. Contingencies

The Company is from time to time engaged in routine litigation. The Company regularly reviews all pending litigation matters in which it is involved and establishes reserves deemed appropriate by management for these litigation matters when a probable loss estimate can be made.

As a marketer of dietary and nutritional supplements and other products that are ingested by consumers or applied to their bodies, the Company has been and is currently subjected to various product liability claims. The effects of these claims to date have not been material to the Company, and the reasonably possible range of exposure on currently existing claims is not material to the Company. The Company believes that it has meritorious defenses to the allegations contained in the lawsuits. The Company currently maintains product liability insurance with an annual deductible of $10 million.

Certain of the Company’s subsidiaries have been subject to tax audits by governmental authorities in their respective countries. In certain of these tax audits, governmental authorities are proposing that significant amounts of additional taxes and related interest and penalties are due. The Company and its tax advisors believe that there are substantial defenses to their allegations that additional taxes are owed, and the Company is vigorously contesting the additional proposed taxes and related charges. On May 7, 2010, the Company received an assessment from the Mexican Tax Administration Service in an amount equivalent to approximately $84 million, translated at the period ended spot rate, for various items, the majority of which was Value Added Tax, or VAT, allegedly owed on certain of the Company’s products imported into Mexico during the years 2005 and 2006. This assessment is subject to interest and inflationary adjustments. On July 8, 2010, the Company initiated a formal administrative appeal process. On May 13, 2011, the Mexican Tax Administration Service issued a resolution on the Company’s administrative appeal. The resolution nullified the assessment. Since, the Mexican Tax Administration Service can further review the tax audit findings and re-issue some or all of the original assessment, the Company commenced litigation in the Tax Court of Mexico in August 2011 to dispute the assertions made by the Mexican Tax Administration Service in the case. Prior to the nullification the Company entered into agreements with certain insurance companies to allow for the potential issuance of surety bonds in support of its appeal of the assessment. Such surety bonds, if issued, would not affect the availability of the Company’s New Credit Facility. These arrangements with the insurance companies remain in place in the event that the assessment is re-issued. The Company has not recorded a provision as the Company, based on its analysis and guidance from its advisors, does not believe a loss would be probable if the assessment is re-issued or if any additional assessment is issued. Further, the Company is currently unable to reasonably estimate a possible loss or range of loss that could result from an unfavorable outcome if the assessment was re-issued or any additional assessments were to be issued for these or other periods. The Company believes that it has meritorious defenses if the assessment is re-issued or would have meritorious defenses if any additional assessment is issued.

These matters may take several years to resolve. While the Company believes it has meritorious defenses, it cannot be sure of their ultimate resolution. Although the Company has reserved amounts for certain matters that the Company believes represent the most likely outcome of the resolution of these related disputes, if the Company is incorrect in the assessment, the Company may have to record additional expenses, when it becomes probable that an increased potential liability is warranted.

6. Comprehensive Income

Total comprehensive income consisted of the following:

		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2011				2010				2011				2010
		(In millions)
Net income		$	108.0			$	78.9			$	307.2			$	212.9
Unrealized gain (loss) on derivative instruments, net of taxes			3.6				(9.3	)			3.8				(4.7	)
Foreign currency translation adjustment			(32.7	)			23.8				(12.5	)			3.5
Comprehensive income		$	78.9			$	93.4			$	298.5			$	211.7

7. Segment Information

The Company is a network marketing company that sells a wide range of weight management products, nutritional supplements and personal care products within one industry segment as defined under the FASB Accounting Standards Codification, or ASC Topic 280, Segment Reporting. The Company’s products are manufactured by third party providers and by the Company in its Suzhou, China facility and in its Lake Forest, California facility, and are then sold to independent distributors who sell Herbalife products to retail consumers or other distributors. Revenues reflect sales of products by the Company to distributors and are categorized based on geographic location.

As of September 30, 2011, the Company sold products in 78 countries throughout the world and is organized and managed by geographic regions. The Company aggregates its operating segments, excluding China, into one reporting segment, or the Primary Reporting Segment, as management believes that the Company’s operating segments have similar operating characteristics and similar long term operating performance. In making this determination, management believes that the operating segments are similar in the nature of the products sold, the product acquisition process, the types of customers to whom products are sold, the methods used to distribute the products, and the nature of the regulatory environment. China has been identified as a separate reporting segment as it does not meet the criteria for aggregation. The operating information for the Primary Reporting Segment and China, and sales by product line are as follows:

		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2011				2010				2011				2010
		(In millions)
Net Sales:
Primary Reporting Segment
United States		$	175.1			$	150.6			$	516.7			$	458.9
Mexico			112.9				83.5				330.7				236.3
Others			552.2				402.7				1,570.5				1,165.5
Total Primary Reporting Segment			840.2				636.8				2,417.9				1,860.7
China			55.0				51.6				152.1				135.2
Total Net Sales		$	895.2			$	688.4			$	2,570.0			$	1,995.9

Contribution Margin(1)(2):
Primary Reporting Segment
United States		$	79.2			$	64.9			$	225.3			$	196.0
Mexico			48.1				36.4				139.5				93.5
Others			252.5				183.9				717.0				517.4
Total Primary Reporting Segment			379.8				285.2				1,081.8				806.9
China			49.2				46.0				134.6				122.5
Total Contribution Margin		$	429.0			$	331.2			$	1,216.4			$	929.4
Selling, general and administrative expenses			277.7				230.2				788.5				648.1
Interest expense, net			0.3				2.2				3.8				6.3
Income before income taxes			151.0				98.8				424.1				275.0
Income taxes			43.0				19.9				116.9				62.1
Net Income		$	108.0			$	78.9			$	307.2			$	212.9

Net sales by product line:
Weight Management		$	560.1			$	428.1			$	1,611.0			$	1,245.8
Targeted Nutrition			205.3				160.4				582.8				458.9
Energy, Sports and Fitness			45.7				31.9				124.6				87.8
Outer Nutrition			35.4				30.2				109.0				92.2
Literature, promotional and other(3)			48.7				37.8				142.6				111.2
Total Net Sales		$	895.2			$	688.4			$	2,570.0			$	1,995.9

Net sales by geographic region:
North America		$	180.7			$	155.5			$	532.9			$	473.2
Mexico			112.9				83.5				330.7				236.3
South and Central America			143.7				95.0				399.1				269.2
EMEA			147.7				121.2				463.6				387.6
Asia Pacific			255.2				181.6				691.6				494.4
China			55.0				51.6				152.1				135.2
Total Net Sales		$	895.2			$	688.4			$	2,570.0			$	1,995.9

As of September 30, 2011 and December 31, 2010, total assets for the Company’s Primary Reporting Segment were $1,305.9 million and $1,162.1 million, respectively. As of September 30, 2011 and December 31, 2010, total assets for the China segment were $82.2 million and $70.1 million, respectively.

8. Share-Based Compensation

The Company has share-based compensation plans, which are more fully described in Note 9, Share-based Compensation, to the Consolidated Financial Statements in the 2010 10-K. During the nine months ended September 30, 2011, the Company granted stock awards subject to continued service, consisting of stock units and SARs, with vesting terms fully described in the 2010 10-K. There were no stock options granted during the three and nine months ended September 30, 2011 and 2010.

In August 2011, the Company granted 0.9 million SARS subject to service, market and performance conditions to its Chairman and Chief Executive Officer. These awards will vest on December 31, 2014, subject to his continued employment through that date, the Company’s stock price appreciating and exceeding a targeted price, and the Company’s achievement of certain volume point performance targets. The fair value of these SARS was determined on the date of the grant using the Monte Carlo lattice model.

For the three months ended September 30, 2011 and 2010, share-based compensation expense amounted to $6.1 million each period. For the nine months ended September 30, 2011 and 2010, share-based compensation expense amounted to $17.2 million and $16.9 million, respectively. As of September 30, 2011, the total unrecognized compensation cost related to all non-vested stock awards was $47.3 million and the related weighted-average period over which it is expected to be recognized is approximately 2.0 years.

All share and per share data have been adjusted for the two-for-one stock split discussed in Note 2, Significant Accounting Policies.

The following tables summarize the activity under all share-based compensation plans for the nine months ended September 30, 2011:

										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic
Stock Options & SARs		Awards				Price				Term				Value
		(In thousands)												(In millions)
Outstanding at December 31, 2010			12,780			$	14.38			5.7 years				$	253.1
Granted(1)			2,081			$	54.82
Exercised			(2,826	)		$	12.54
Forfeited			(132	)		$	19.83
Outstanding at September 30, 2011			11,903			$	21.83			5.6 years				$	382.1
Exercisable at September 30, 2011			5,094			$	12.98			4.1 years				$	206.9

The weighted-average grant date fair value of SARs granted during the three months ended September 30, 2011 and 2010 was $17.40 and $11.02, respectively. The weighted-average grant date fair value of SARs granted during the nine months ended September 30, 2011 and 2010 was $19.63 and $9.31, respectively. The total intrinsic value of stock options and SARs exercised during the three months ended September 30, 2011 and 2010, was $36.8 million and $25.8 million, respectively. The total intrinsic value of stock options and SARs exercised during the nine months ended September 30, 2011 and 2010, was $100.9 million and $39.3 million, respectively.

						Weighted
						Average
						Grant Date
Incentive Plan and Independent Directors Stock Units		Shares				Fair Value
		(In thousands)
Outstanding and nonvested December 31, 2010			1,160.5			$	13.76
Granted			24.3			$	42.55
Vested			(453.5	)		$	17.77
Forfeited			(10.8	)		$	12.18
Outstanding and nonvested at September 30, 2011			720.5			$	12.23

The total vesting date fair value of stock units which vested during the three months ended September 30, 2011 and 2010, was $0.5 million and $0.4 million, respectively. The total vesting date fair value of stock units which vested during the nine months ended September 30, 2011 and 2010, was $8.1 million and $7.3 million, respectively.

The Company recognizes excess tax benefits associated with share-based compensation to shareholders’ equity only when realized. When assessing whether excess tax benefits relating to share-based compensation have been realized, the Company follows the with-and-without approach which was adopted in the second quarter of 2011. Under this approach, excess tax benefits related to share-based compensation are not deemed to be realized until after the utilization of all other tax benefits available to the Company, which are also subject to applicable limitations. As of September 30, 2011, and December 31, 2010, the Company had $12.6 million and $8.7 million, respectively, of unrealized excess tax benefits. See Note 2, Significant Accounting Policies, for further discussion of the Company’s change in accounting principle from the tax-law-ordering method to the with-and-without approach.

9. Income Taxes

As of September 30, 2011, the total amount of unrecognized tax benefits, related interest and penalties was $32.4 million, $5.6 million and $1.3 million, respectively. During the nine months ended September 30, 2011, the Company recorded tax, interest and penalties related to uncertain tax positions of $5.1 million, $1.2 million and $0.2 million, respectively, and reduced uncertain tax positions due to the expiration of statutes of limitations for tax, interest and penalties of $3.6 million, $1.1 million and $0.1 million, respectively. During the nine months ended September 30, 2011, uncertain tax positions were also reduced by foreign currency translation adjustments of $0.9 million, resulting in a year to date net increase in unrecognized tax benefits and related interest and penalties of $0.8 million. The unrecognized tax benefits relate primarily to uncertainties from international transfer pricing issues and the deductibility of certain operating expenses in various jurisdictions. If the total amount of unrecognized tax benefits were recognized, $32.4 million of unrecognized tax benefits, $5.6 million of interest and $1.3 million of penalties would impact the effective tax rate.

During the nine months ended September 30, 2011, the Company benefited from the terms of a tax holiday in the People’s Republic of China. The tax holiday commenced on January 1, 2008 and will conclude on December 31, 2012. Under the terms of the holiday, the Company was subject to a zero tax rate in China during 2008 and 2009, 11% tax rate in 2010, and is subject to a graduated rate of 12% in 2011. The tax rate will gradually increase to a maximum rate of 25% in 2013.

10. Derivative Instruments and Hedging Activities

Interest Rate Risk Management

The Company engages in an interest rate hedging strategy for which the hedged transactions are forecasted interest payments on the Company’s New Credit Facility, which is a variable rate credit facility. The hedged risk is the variability of forecasted interest rate cash flows, where the hedging strategy involves the purchase of interest rate swaps. For the outstanding cash flow hedges on interest rate exposures at September 30, 2011, the Company is hedging certain of its monthly interest rate exposures over approximately one year and ten months.

During August 2009, the Company entered into four interest rate swap agreements with an effective date of December 31, 2009. The agreements collectively provide for the Company to pay interest for less than a four-year period at a weighted average fixed rate of 2.78% on notional amounts aggregating to $140.0 million while receiving interest for the same period at the one month LIBOR rate on the same notional amounts. These agreements will expire in July 2013. These swaps at inception were designated as cash flow hedges against the variability in the LIBOR interest rate on the Company’s term loan under the Prior Credit Facility or against the variability in the LIBOR interest rate on the replacement debt. The Company’s term loan under the Prior Credit Facility was terminated in March 2011 and refinanced with the New Credit Facility as discussed further in Note 4, Long-Term Debt. The Company’s swaps remain effective and continue to be designated as cash flow hedges against the variability in certain LIBOR interest rate borrowings under the New Credit Facility at LIBOR plus 1.50% to 2.50%, fixing the Company’s weighted average effective rate on the notional amounts at 4.28% to 5.28%. There was no hedge ineffectiveness recorded as result of this refinancing event.

The Company assesses hedge effectiveness and measures hedge ineffectiveness at least quarterly. During the three and nine months ended September 30, 2011 and 2010, the ineffective portion relating to these hedges was immaterial and the hedges remained effective as of September 30, 2011. Consequently, all changes in the fair value of the derivatives are deferred and recorded in other comprehensive income (loss) until the related forecasted transactions are recognized in the consolidated statements of income. The fair value of the interest rate swap agreements are based on third-party bank quotes. At September 30, 2011 and December 31, 2010, the Company recorded the interest rate swaps as liabilities at their fair value of $6.0 million and $6.6 million, respectively.

Foreign Currency Instruments

The Company also designates certain foreign currency derivatives, such as certain foreign currency forward and option contracts, as freestanding derivatives for which hedge accounting does not apply. The changes in the fair market value of these freestanding derivatives are included in selling, general and administrative expenses in the Company’s consolidated statements of income. The Company uses foreign currency forward contracts to hedge foreign-currency-denominated intercompany transactions and to partially mitigate the impact of foreign currency fluctuations. The Company also uses foreign currency option contracts to partially mitigate the impact of foreign currency fluctuations. The fair value of the forward and option contracts are based on third-party bank quotes.

The Company designates as cash-flow hedges those foreign currency forward contracts it entered into to hedge forecasted inventory purchases and intercompany management fees that are subject to foreign currency exposures. Forward contracts are used to hedge forecasted inventory purchases over specific months. Changes in the fair value of these forward contracts, excluding forward points, designated as cash-flow hedges are recorded as a component of accumulated other comprehensive income (loss) within shareholders’ equity, and are recognized in cost of sales in the consolidated statement of income during the period which approximates the time the hedged inventory is sold. The Company also hedges forecasted intercompany management fees over specific months. These contracts allow the Company to sell Euros in exchange for U.S. dollars at specified contract rates. Changes in the fair value of these forward contracts designated as cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) within shareholders’ equity, and are recognized in selling, general and administrative expenses in the consolidated statement of income during the period when the hedged item and underlying transaction affect earnings.

As of September 30, 2011, and December 31, 2010, the aggregate notional amounts of cash-flow designated hedge foreign currency contracts outstanding were approximately $41.2 million and $32.1 million, respectively. At September 30, 2011, these outstanding contracts were expected to mature over the next twelve months. The Company’s derivative financial instruments are recorded on the consolidated balance sheet at fair value based on third-party bank quotes. As of September 30, 2011, the Company recorded assets at fair value of $2.1 million and liabilities at fair value of $0.2 million relating to all outstanding foreign currency contracts designated as cash-flow hedges. As of December 31, 2010, the Company recorded assets at fair value of $0.6 million and liabilities at fair value of $0.8 million relating to all outstanding foreign currency contracts designated as cash-flow hedges. The Company assesses hedge effectiveness and measures hedge ineffectiveness at least quarterly. During the three and nine months ended September 30, 2011 and 2010, the ineffective portion relating to these hedges was immaterial and the hedges remained effective as of September 30, 2011.

As of September 30, 2011, and December 31, 2010, the majority of the Company’s outstanding foreign currency forward contracts had maturity dates of less than twelve months with the majority of freestanding derivatives expiring within one month and three months, respectively. There were no foreign currency option contracts outstanding as of September 30, 2011, and December 31, 2010. See Part I, Item 3 — Quantitative and Qualitative Disclosures About Market Risk in this Quarterly Report on Form 10-Q for foreign currency instruments outstanding as of September 30, 2011.

Gains and Losses on Derivative Instruments

The following table summarizes gains (losses) relating to derivative instruments recorded in other comprehensive income (loss) during the three and nine months ended September 30, 2011 and 2010:

		Amount of Gain (Loss) Recognized
		in Other Comprehensive Income (Loss)
		For the Three Months Ended								For the Nine Months Ended
		September 30, 2011				September 30, 2010				September 30, 2011				September 30, 2010
		(In millions)
Derivatives designated as hedging instruments:
Foreign exchange currency contracts relating to inventory and intercompany management fee hedges		$	3.5			$	(8.1	)		$	1.0			$	5.3
Interest rate swaps		$	(0.7	)		$	(2.4	)		$	(2.2	)		$	(8.2	)

The following table summarizes gains (losses) relating to derivative instruments recorded to income during the three and nine months ended September 30, 2011 and 2010:

				Amount of Gain (Loss)
		Location of Gain		Recognized in Income
		(Loss)		For the Three Months Ended							For the Nine Months Ended
		Recognized in Income		September 30, 2011				September 30, 2010			September 30, 2011				September 30, 2010
		(In millions)
Derivatives designated as hedging instruments:
Foreign exchange currency contracts relating to inventory hedges and intercompany management fee hedges (1)		Selling, general and administrative expenses		$	(0.3	)		$	0.1		$	(0.3	)		$	—
Derivatives not designated as hedging instruments:
Foreign exchange currency contracts		Selling, general and administrative expenses		$	2.7			$	2.0		$	3.8			$	(7.3	)

The following table summarizes gains (losses) relating to derivative instruments reclassified from accumulated other comprehensive loss into income during the three and nine months ended September 30, 2011 and 2010:

		Location of Gain
		(Loss)		Amount of Gain (Loss) Reclassified
		Reclassified		from Accumulated
		from Accumulated		Other Comprehensive
		Other Comprehensive		Loss into Income
		Loss into Income		For the Three Months Ended								For the Nine Months Ended
		(Effective Portion)		September 30, 2011				September 30, 2010				September 30, 2011				September 30, 2010
		(In millions)
Derivatives designated as hedging instruments:
Foreign exchange currency contracts relating to inventory hedges		Cost of sales		$	—			$	1.1			$	(0.3	)		$	0.4
Foreign exchange currency contracts relating to intercompany management fee hedges		Selling, general and administrative expenses		$	(0.7	)		$	1.9			$	(2.2	)		$	6.5
Interest rate contracts		Interest expense, net		$	(0.9	)		$	(0.9	)		$	(2.7	)		$	(2.7	)

The Company reports its derivatives at fair value as either assets or liabilities within its condensed consolidated balance sheet. See Note 13, Fair Value Measurements, for information on derivative fair values and their condensed consolidated balance sheet location as of September 30, 2011, and December 31, 2010.

11. Shareholders’ Equity

Dividends

The declaration of future dividends is subject to the discretion of the Company’s board of directors and will depend upon various factors, including the Company’s earnings, financial condition, restrictions imposed by the New Credit Facility and the terms of any other indebtedness that may be outstanding, cash requirements, future prospects and other factors deemed relevant by its board of directors. The New Credit Facility entered into on March 9, 2011, permits payments of dividends as long as no default or event of default exists and the consolidated leverage ratio specified in the New Credit Facility is not exceeded.

On February 22, 2011, the Company announced that its board of directors approved a cash dividend of $0.13 per common share in an aggregate amount of $14.8 million that was paid to shareholders on March 22, 2011. On May 2, 2011, the Company announced that its board of directors approved a cash dividend of $0.20 per common share in an aggregate amount of $23.9 million that was paid to shareholders on June 7, 2011. On August 1, 2011, the Company announced that its board of directors approved a cash dividend of $0.20 per common share in an aggregate amount of $23.5 million that was paid to shareholders on August 29, 2011.

The aggregate amount of dividends declared and paid during the three months ended September 30, 2011 and 2010, were $23.5 million and $14.9 million, respectively. The aggregate amount of dividends declared and paid during the nine months ended September 30, 2011 and 2010, were $62.2 million and $39.0 million, respectively.

Share Repurchases

On April 30, 2009, the Company announced that its board of directors authorized a program for the Company to repurchase up to $300 million of Herbalife common shares during the next two years, at such times and prices as determined by the Company’s management. On May 3, 2010, the Company’s board of directors approved an increase to the share repurchase authorization from $300 million to $1 billion. In addition, the Company’s board of directors approved the extension of the expiration date of the share repurchase program from April 2011 to December 2014. The New Credit Facility permits repurchase of common shares as long as no default or event of default exists and the consolidated leverage ratio specified in the New Credit Facility is not exceeded.

The Company did not repurchase any common shares in the open market during the three months ended March 31, 2011. During the three months ended June 30, 2011, the Company repurchased approximately 1.8 million of its common shares through open market purchases at an aggregate cost of approximately $98.8 million or an average cost of $54.15 per share. During the three months ended September 30, 2011, the Company repurchased approximately 2.8 million of its common shares through open market purchases at an aggregate cost of approximately $150.0 million or an average cost of $54.06 per share. As of September 30, 2011, the remaining authorized capacity under the Company’s share repurchase program was approximately $527.9 million.

The aggregate purchase price of any common shares repurchased is reflected as a reduction to shareholders’ equity. The Company allocates the purchase price of the repurchased shares as a reduction to retained earnings, common shares and additional paid-in-capital.

The number of shares issued upon vesting or exercise for certain restricted stock units and SARs granted, pursuant to the Company’s share-based compensation plans, is net of the minimum statutory withholding requirements that the Company pays on behalf of its employees. Although shares withheld are not issued, they are treated as common share repurchases in the Company’s condensed consolidated financial statements, as they reduce the number of shares that would have been issued upon vesting. These shares do not count against the authorized capacity under the Company’s share repurchase program described above.

Stock Split

On April 28, 2011, the Company’s shareholders approved a 2-for-1 split of the Company’s common shares. One additional common share was distributed to the Company’s shareholders on or around May 17, 2011, for each common share held on May 10, 2011. All common shares subject to outstanding equity awards and warrants, as well as the number of common shares reserved for issuance under the Company’s share-based compensation plans, were adjusted proportionately.

12. Earnings Per Share

Basic earnings per share represents net income for the period common shares were outstanding, divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share represents net income divided by the weighted average number of common shares outstanding, inclusive of the effect of dilutive securities such as outstanding stock options, SARs, stock units and warrants.

The following are the common share amounts used to compute the basic and diluted earnings per share for each period:

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2011				2010				2011				2010
		(in thousands)
Weighted average shares used in basic computations			116,975				118,442				118,059				119,286
Dilutive effect of exercise of equity grants outstanding			7,034				6,731				7,572				6,516
Dilutive effect of warrants			266				440				258				414
Weighted average shares used in diluted computations			124,275				125,613				125,889				126,216

There were an aggregate of 2.0 million and 2.1 million of equity grants that were outstanding during the three and nine months ended September 30, 2011, and an aggregate of 1.6 million and 3.4 million of equity grants that were outstanding during the three and nine months ended September 30, 2010, respectively, consisting of stock options, SARs, and stock units, but were not included in the computation of diluted earnings per share because their effect would be anti-dilutive.

13. Fair Value Measurements

The Company applies the provisions of FASB ASC Topic 820, Fair Value Measurements and Disclosures, or ASC 820, for its financial and non-financial assets and liabilities. ASC 820 defines fair value as 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. ASC 820 establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 inputs are unobservable inputs for the asset or liability.

The Company measures certain assets and liabilities at fair value as discussed throughout the notes to its consolidated financial statements. Foreign exchange currency contracts and interest rate swaps are valued using standard calculations and models. Foreign exchange currency contracts are valued primarily based on inputs such as observable forward rates, spot rates and foreign currency exchange rates at the reporting period ended date. Interest rate swaps are valued primarily based on inputs such as LIBOR and swap yield curves at the reporting period ended date. Assets or liabilities that have recurring measurements and are measured at fair value consisted of only Level 2 derivatives and are shown below at their gross values at September 30, 2011 and December 31, 2010:

Fair Value Measurements at Reporting Date Using

				Significant				Significant
				Other				Other
				Observable				Observable
				Inputs				Inputs
				(Level 2)				(Level 2)
		Derivative Balance		Fair Value at				Fair Value at
		Sheet		September 30,				December 31,
		Location		2011				2010
		(in millions)
ASSETS:
Derivatives designated as cash flow hedging instruments:
Foreign exchange currency contracts relating to intercompany management fee hedges		Prepaid expenses and other current assets		$	2.1			$	0.6
Derivatives not designated as cash flow hedging instruments:
Foreign exchange currency contracts		Prepaid expenses and other current assets		$	0.5			$	2.3
				$	2.6			$	2.9
LIABILITIES:
Derivatives designated as cash flow hedging instruments:
Foreign exchange currency contracts relating to inventory and intercompany management fee hedges		Accrued expenses		$	0.2			$	0.8
Interest rate swaps		Accrued expenses		$	6.0			$	6.6
Derivatives not designated as hedging instruments:
Foreign exchange currency contracts		Accrued expenses		$	2.9			$	3.0
				$	9.1			$	10.4

14. Subsequent Events

On October 31, 2011, the Company announced that its board of directors approved a cash dividend of $0.20 per common share, payable on November 28, 2011 to shareholders of record as of November 14, 2011.

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

Overview

We are a global network marketing company that sells weight management products, nutritional supplements, energy, sports & fitness products and personal care products. We pursue our mission of “changing people’s lives” by providing a financially rewarding business opportunity to distributors and quality products to distributors and their customers who seek a healthy lifestyle. We are one of the largest network marketing companies in the world with net sales of approximately $2.7 billion for the year ended December 31, 2010. As of September 30, 2011, we sold our products in 78 countries through a network of approximately 2.5 million independent distributors. In China, we sell our products through retail stores, sales representatives and independent service providers. Due to changes in China’s labor laws, effective in the third quarter of 2011, we no longer have sales employees in China as they have been transferred into independent service providers. We believe the quality of our products and the effectiveness of our distribution network, coupled with geographic expansion, has been the primary reasons for our success throughout our 31-year operating history.

Our products are grouped in four principal categories: weight management, targeted nutrition, energy, sports & fitness and Outer Nutrition, along with literature and promotional items. Our products are often sold in programs that are comprised of a series of related products and literature designed to simplify weight management and nutrition for consumers and maximize our distributors’ cross-selling opportunities.

Industry-wide factors that affect us and our competitors include the global obesity epidemic and the aging of the worldwide population, which are driving demand for nutrition and wellness-related products along with the global increase in under and unemployment which can affect the recruitment and retention of distributors seeking part time or full time income opportunities.

While we continue to monitor the current global financial crisis, we remain focused on the opportunities and challenges in retailing of our products, recruiting and retaining distributors, improving distributor productivity, opening new markets, further penetrating existing markets, globalizing successful Distributor Methods of Operation, or DMO, such as Nutrition Clubs and Weight Loss Challenges, introducing new products and globalizing existing products, developing niche market segments and further investing in our infrastructure. Management also continues to monitor the Venezuela market and especially the limited ability to repatriate cash.

We report revenue from our six regions:

	•		North America;
	•		Mexico;
	•		South and Central America;
	•		EMEA, which consists of Europe, the Middle East and Africa;
	•		Asia Pacific (excluding China); and
	•		China.

Volume Points by Geographic Region

A key non-financial measure we focus on is Volume Points on a Royalty Basis, or Volume Points, which is essentially our weighted average measure of product sales volume. Volume Points, which are unaffected by exchange rates or price increases, are used by management as a proxy for sales trends because in general, an increase in Volume Points in a particular geographic region or country indicates an increase in our local currency net sales while a decrease in Volume Points in a particular geographic region or country indicates a decrease in our local currency net sales.

We assign a Volume Point value to a product when it is first introduced into the market. The specific number of Volume Points assigned to a product is based on a Volume Point to U.S. dollar ratio that we use for the vast majority of new products. If a product is available in different quantities then the various sizes will have different Volume Point values. If a new product is not introduced in or otherwise expected to be sold in the U.S., we will determine the Volume Point value for that product based on a review of various factors in the regions and countries in which we will market the product, including the Volume Point to local currency ratio of existing products in the relevant countries. In general, once assigned, a Volume Point value is consistent in each region and country and does not change from year to year. The reason volume points are used in the manner described above is that we use volume points for distributor qualification and recognition purposes and therefore attempts to keep volume points for a similar or like product consistent on a global basis. However, because Volume Points are a function of value rather than product type or size, they are not a reliable measure for product mix. As an example, an increase in Volume Points in a specific country or region could mean a significant increase in sales of less expensive product or a marginal increase in sales of an expensive product.

		Three Months Ended September 30,												Nine Months Ended September 30,
		2011				2010				% Change				2011				2010				% Change
		(Volume points in millions)
North America			252.9				225.4				12.2	%			754.9				688.3				9.7	%
Mexico			180.6				146.2				23.5	%			519.1				408.2				27.2	%
South & Central America			149.7				107.3				39.5	%			403.9				304.5				32.6	%
EMEA			132.4				114.3				15.8	%			407.3				361.3				12.7	%
Asia Pacific (excluding China)			261.2				191.8				36.2	%			703.8				535.7				31.4	%
China			40.3				39.4				2.3	%			110.7				106.2				4.2	%
Worldwide			1,017.1				824.4				23.4	%			2,899.7				2,404.2				20.6	%

Average Active Sales Leaders by Geographic Region

With the continued expansion of daily consumption DMOs in our different markets, we believe the Average Active Sales Leader metric, which represents the monthly average number of sales leaders that place an order from us in a given quarter, is a useful metric. We rely on this metric as an indication of the engagement level of sales leaders in a given region. Changes in the Average Active Sales Leader metric may be indicative of the current momentum in a region as well as the potential for higher annual retention levels and future sales growth through utilization of daily consumption DMOs.

		Three Months Ended September 30,												Nine Months Ended September 30,
		2011				2010				% Change				2011				2010				% Change
North America			58,897				51,095				15.3	%			55,788				48,682				14.6	%
Mexico			49,772				39,521				25.9	%			46,206				36,950				25.1	%
South & Central America			35,993				29,548				21.8	%			33,343				27,979				19.2	%
EMEA			39,227				33,625				16.7	%			37,604				32,858				14.4	%
Asia Pacific (excluding China)			51,644				37,291				38.5	%			45,885				34,688				32.3	%
China			9,533				7,548				26.3	%			8,393				6,514				28.8	%
Worldwide(1)			236,191				191,072				23.6	%			219,817				180,306				21.9	%

Number of Sales Leaders and Retention Rates by Geographic Region as of Re-qualification Period

Our compensation system requires each sales leader to re-qualify for such status each year, prior to February, in order to maintain their 50% discount on products and be eligible to receive royalty payments. In February of each year, we demote from the rank of sales leader those distributors who did not satisfy the re-qualification requirements during the preceding twelve months. The re-qualification requirement does not apply to new sales leaders (i.e., those who became sales leaders subsequent to the January re-qualification of the prior year).

Sales Leaders Statistics (Excluding China)		2011				2010
		(In thousands)
January 1 total sales leaders			434.2				431.3
January & February new sales leaders			28.9				21.2
Demoted sales leaders (did not re-qualify)			(144.8	)			(165.9	)
Other sales leaders (resigned, etc)			(0.8	)			(1.1	)
End of February total sales leaders			317.5				285.5

The distributor statistics below further highlight the calculation for retention.

Sales Leaders Retention (Excluding China)		2011				2010
		(In thousands)
Sales leaders needed to re-qualify			283.2				290.9
Demoted sales leaders (did not re-qualify)			(144.8	)			(165.9	)
Total re-qualified			138.4				125.0
Retention rate			48.9	%			43.0	%

The table below reflects the number of sales leaders as of February of the year indicated (subsequent to the annual re-qualification date) and sales leader retention rate by year and by region.

		Number of Sales Leaders								Sales Leaders Retention Rate
		2011				2010				2011				2010
North America			72,152				64,668				48.6	%			43.3	%
Mexico			54,526				47,068				57.9	%			50.4	%
South & Central America			50,288				51,060				47.3	%			34.1	%
EMEA			49,696				47,080				58.6	%			51.9	%
Asia Pacific (excluding China)			90,822				75,635				38.4	%			38.6	%
Total Sales leaders			317,484				285,511				48.9	%			43.0	%
China			30,543				27,415
Worldwide Total Sales Leaders			348,027				312,926

The number of sales leaders by geographic region as of the quarterly reporting dates will normally be higher than the number of sales leaders by geographic region as of the re-qualification period because sales leaders who do not re-qualify during the relevant twelve-month period will be removed from the rank of sales leader the following February. Since sales leaders purchase most of our products for resale to other distributors and consumers, comparisons of sales leader totals on a year-to-year basis are indicators of our recruitment and retention efforts in different geographic regions.

The value of the average monthly purchase of Herbalife products by our sales leaders has remained relatively constant over time. Consequently, increases in our sales are driven primarily by our retention of sales leaders, our recruitment and retention of distributors and by our distributors’ increased adoption of daily consumption DMOs.

We provide distributors with products, support materials, training, special events and a competitive compensation program. If a distributor wants to pursue the Herbalife business opportunity, the distributor is responsible for growing his or her business and personally pays for the sales activities related to attracting new customers and recruiting distributors by hosting events such as Herbalife Opportunity Meetings or Success Training Seminars; by advertising Herbalife’s products; by purchasing and using promotional materials such as t-shirts, buttons and caps; by utilizing and paying for direct mail and print material such as brochures, flyers, catalogs, business cards, posters and banners and telephone book listings; by purchasing inventory for sale or use as samples; and by training, mentoring and following up (in person or via the phone or internet) with customers and recruits on how to use Herbalife products and/or pursue the Herbalife business opportunity.

Presentation

“Retail sales” represent the gross sales amounts on our invoices to distributors before distributor allowances, as defined below, and “net sales,” which reflect distributor allowances and shipping and handling revenues, represent what we collect and recognize as net sales in our financial statements. We discuss retail sales because of its fundamental role in our compensation systems, internal controls and operations, including its role as the basis upon which distributor discounts, royalties and bonuses are awarded. In addition, it is used as the basis for certain information included in daily and monthly reports reviewed by our management. However, such a measure is not in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. Retail sales should not be considered in isolation from, nor as a substitute for, net sales and other consolidated income or cash flow statement data prepared in accordance with U.S. GAAP, or as a measure of profitability or liquidity. A reconciliation of net sales to retail sales is presented below under “Results of Operations.” “Product sales” represent the actual product purchase price paid to us by our distributors, after giving effect to distributor discounts referred to as “distributor allowances,” which approximate 50% of retail sales prices. Distributor allowances as a percentage of retail sales may vary by country depending upon regulatory restrictions that limit or otherwise restrict distributor allowances. We also offer reduced distributor allowances with respect to certain products worldwide.

Our international operations have provided and will continue to provide a significant portion of our total net sales. As a result, total net sales will continue to be affected by fluctuations in the U.S. dollar against foreign currencies. In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency fluctuations, in addition to comparing the percent change in net sales from one period to another in U.S. dollars, we also compare the percent change in net sales from one period to another period using “net sales in local currency” disclosure. Net sales in local currency is not a U.S. GAAP financial measure. Net sales in local currency removes from net sales in U.S. dollars the impact of changes in exchange rates between the U.S. dollar and the functional currencies of our foreign subsidiaries, by translating the current period net sales into U.S. dollars using the same foreign currency exchange rates that were used to translate the net sales for the previous comparable period. We believe presenting net sales in local currency is useful to investors because it allows a more meaningful comparison of net sales of our foreign operations from period to period. However, net sales in local currency measures should not be considered in isolation or as an alternative to net sales in U.S. dollars measures that reflect current period exchange rates, or to other financial measures calculated and presented in accordance with U.S. GAAP.

Our “gross profit” consists of net sales less “cost of sales,” which represents our manufacturing costs, the price we pay to our raw material suppliers and manufacturers of our products as well as shipping and handling costs related to product shipments, duties and tariffs, freight expenses relating to shipment of products to distributors and importers and similar expenses.

“Royalty overrides” are our most significant expense and consist of:

	•		royalty overrides and production bonuses which total approximately 15% and 7%, respectively, of the retail sales of weight management, targeted nutrition, energy, sports & fitness, Outer Nutrition and promotional products;
	•		the Mark Hughes bonus payable to some of our most senior distributors in the aggregate amount of up to 1% of retail sales of weight management, targeted nutrition, energy, sports & fitness, Outer Nutrition products and promotional products; and
	•		other discretionary incentive cash bonuses to qualifying distributors.

Royalty overrides are generally earned based on retail sales and provide potential earnings to distributors of up to 23% of retail sales or approximately 33% of our net sales. Royalty overrides are generally compensation to distributors for the development, retention and improved productivity of their sales organizations and are paid to several levels of distributors on each sale. Due to restrictions on direct selling in China, our sales employees in China, prior to the transfer into independent service providers, were compensated with wages, bonuses and benefits and our independent service providers in China are compensated with service fees instead of the distributor allowances and royalty overrides utilized in our traditional marketing program. Compensation to China sales employees and independent service providers are included in selling, general and administrative expenses. Because of local country regulatory constraints, we may be required to modify our typical distributor incentive plans as described above. We also pay reduced royalty overrides with respect to certain products worldwide. Consequently, the total royalty override percentage may vary over time.

Royalty overrides together with distributor allowances of up to 50% of retail sales prices represent the potential earnings to distributors of up to approximately 73% of retail sales.

Our “contribution margins” consist of net sales less cost of sales and royalty overrides.

“Selling, general and administrative expenses” represent our operating expenses, components of which include labor and benefits, sales events, professional fees, travel and entertainment, distributor marketing, occupancy costs, communication costs, bank fees, depreciation and amortization, foreign exchange gains and losses and other miscellaneous operating expenses.

Most of our sales to distributors outside the United States are made in the respective local currencies. In preparing our financial statements, we translate revenues into U.S. dollars using average exchange rates. Additionally, the majority of our purchases from our suppliers generally are made in U.S. dollars. Consequently, a strengthening of the U.S. dollar versus a foreign currency can have a negative impact on our reported sales and contribution margins and can generate transaction losses on intercompany transactions. Throughout the last five years, foreign currency exchange rates have fluctuated significantly. From time to time, we enter into foreign exchange forward and option contracts to partially mitigate our foreign currency exchange risk as discussed in further detail in Part I, Item 3 — Quantitative and Qualitative Disclosures about Market Risk.

Summary Financial Results

Net sales for the three and nine months ended September 30, 2011 were $895.2 million and $2,570.0 million, respectively. Net sales increased $206.8 million, or 30.0%, and $574.1 million, or 28.8%, for the three and nine months ended September 30, 2011, respectively, as compared to the same periods in 2010. In local currency, net sales for the three and nine months ended September 30, 2011 increased 24.1% and 22.8%, respectively, as compared to the same periods in 2010. The increase in net sales was primarily due to the continued successful adoption and operation of daily consumption DMOs; increased distributor engagement as reflected by record 2011 sales leader retention and an increase in average active sales leaders; branding activities and increased distributor recruiting.

Net income for the three and nine months ended September 30, 2011 was $108.0 million, or $0.87 per diluted share, and $307.2 million, or $2.44 per diluted share, respectively. Net income increased $29.1 million, or 36.9%, and $94.3 million, or 44.3%, for the three and nine months ended September 30, 2011, respectively, as compared to the same periods in 2010. The increase for the three and nine months ended September 30, 2011 was primarily due to higher contribution margin driven by net sales growth discussed above, partially offset by higher selling, general and administrative expenses to support the growth of our business and higher income taxes. In addition, net income for the nine months ended September 30, 2010 was also negatively impacted by matters related to Venezuela, as described below.

Net income for the nine months ended September 30, 2011 included a $0.9 million pre-tax ($0.7 million post-tax) additional interest expense from the write-off of unamortized deferred financing costs resulting from the debt refinancing arrangement in March 2011. See Note 4, Long Term Debt, to the Notes to Condensed Consolidated Financial Statements for further information on our debt refinancing.

Net income for the three and nine months ended September 30, 2010 included a $3.2 million tax benefit from an international income tax audit settlement. Net income for the nine months ended September 30, 2010 also included a $15.1 million unfavorable impact related to remeasurement of monetary assets and liabilities resulting from Venezuela being designated as a highly inflationary economy beginning January 1, 2010; a $12.7 million unfavorable impact related to incremental U.S. dollar costs of 2009 imports into Venezuela which were recorded at the unfavorable parallel market exchange rate and were not devalued based on 2010 exchange rates but rather recorded to cost of sales at their historical dollar costs as products were sold in the first quarter of 2010; a $3.7 million favorable impact resulting from receipt of U.S. dollars approved by the Venezuelan government’s foreign exchange commission, CADIVI, at the official exchange rate relating to 2009 product importations which were previously registered with CADIVI, a $14.5 million one-time favorable impact to income taxes related to Venezuela becoming a highly inflationary economy and a $4.0 million pre-tax ($2.6 million post-tax) foreign exchange gain in Herbalife Venezuela as a result of remeasuring its Bolivar denominated monetary assets and liabilities as of June 30, 2010 at the SITME rate of 5.3 Bolivars per U.S. dollar as opposed to the last parallel market rate of 8.3 Bolivars per U.S. dollar. See the discussion below under Liquidity and Capital Resources — Venezuela for further information on Herbalife Venezuela and Venezuela’s highly inflationary economy.

Results of Operations

Our results of operations for the periods below are not necessarily indicative of results of operations for future periods, which depend upon numerous factors, including our ability to recruit new distributors and retain existing distributors, open new markets, further penetrate existing markets, introduce new products and programs that will help our distributors increase their retail efforts and develop niche market segments.

The following table sets forth selected results of our operations expressed as a percentage of net sales for the periods indicated:

		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2011				2010				2011				2010
Operations:
Net sales			100.0	%			100.0	%			100.0	%			100.0	%
Cost of sales			19.6				19.4				19.8				20.6
Gross profit			80.4				80.6				80.2				79.4
Royalty overrides(1)			32.5				32.5				32.9				32.9
Selling, general and administrative expenses(1)			31.0				33.4				30.7				32.4
Operating income			16.9				14.7				16.6				14.1
Interest expense, net			—				0.3				0.1				0.3
Income before income taxes			16.9				14.4				16.5				13.8
Income taxes			4.8				2.9				4.6				3.1
Net income			12.1	%			11.5	%			11.9	%			10.7	%

Net Sales

The following chart reconciles retail sales to net sales:

Sales by Geographic Region

		Three Months Ended September 30,
		2011																				2010
														Shipping &																				Shipping &
		Retail				Distributor				Product				Handling				Net				Retail				Distributor				Product				Handling				Net				Change in
		Sales				Allowance				Sales				Revenues				Sales				Sales				Allowance				Sales				Revenues				Sales				Net Sales
		(Dollars in millions)
North America		$	287.2			$	(136.9	)		$	150.3			$	30.4			$	180.7			$	248.3			$	(118.7	)		$	129.6			$	25.9			$	155.5								16.2	%
Mexico			182.6				(89.1	)			93.5				19.4				112.9				134.8				(65.7	)			69.1				14.4				83.5								35.2	%
South & Central America			233.6				(111.1	)			122.5				21.2				143.7				148.5				(67.6	)			80.9				14.1				95.0								51.3	%
EMEA			236.3				(112.8	)			123.5				24.2				147.7				196.5				(95.6	)			100.9				20.3				121.2								21.9	%
Asia Pacific			398.2				(179.7	)			218.5				36.7				255.2				290.5				(134.0	)			156.5				25.1				181.6								40.5	%
China			65.8				(10.8	)			55.0				—				55.0				59.0				(7.4	)			51.6				—				51.6								6.6	%
Worldwide		$	1,403.7			$	(640.4	)		$	763.3			$	131.9			$	895.2			$	1,077.6			$	(489.0	)		$	588.6			$	99.8			$	688.4								30.0	%