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.

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 July 28, 2010 was 59,190,966

 

 

HERBALIFE LTD.

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements		3
Unaudited Consolidated Balance Sheets		3
Unaudited Consolidated Statements of Income		4
Unaudited Consolidated Statements of Cash Flows		5
Notes to Unaudited Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
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		61
Exhibit 10.26
Exhibit 10.27
Exhibit 10.67
Exhibit 10.68
Exhibit 10.71
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

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

HERBALIFE LTD.

CONSOLIDATED BALANCE SHEETS
(Unaudited)

		June 30,				December 31,
		2010				2009
		(In thousands, except share amounts)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	170,218			$	150,801
Receivables, net of allowance for doubtful accounts of $3,568 (2010) and $3,982 (2009)			85,411				76,958
Inventories			152,035				145,962
Prepaid expenses and other current assets			114,097				101,181
Deferred income taxes			53,546				38,600
Total current assets			575,307				513,502
Property, at cost, net of accumulated depreciation and amortization of $175,245 (2010) and $147,392 (2009)			167,320				178,009
Deferred compensation plan assets			16,724				17,410
Deferred financing costs, net of accumulated amortization of $2,026 (2010) and $1,778 (2009)			1,250				1,498
Other assets			22,587				21,306
Marketing related intangibles and other intangible assets, net			311,091				311,782
Goodwill			102,899				102,543
Total assets		$	1,197,178			$	1,146,050
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	48,318			$	37,330
Royalty overrides			141,017				144,689
Accrued compensation			52,100				65,043
Accrued expenses			117,090				107,943
Current portion of long-term debt			3,071				12,402
Advance sales deposits			51,770				22,261
Income taxes payable			29,126				40,298
Total current liabilities			442,492				429,966
NON-CURRENT LIABILITIES:
Long-term debt, net of current portion			240,280				237,931
Deferred compensation plan liability			17,358				16,629
Deferred income taxes			79,273				77,613
Other non-current liabilities			23,659				24,600
Total liabilities			803,062				786,739
CONTINGENCIES
SHAREHOLDERS’ EQUITY:
Common shares, $0.002 par value, 500.0 million shares authorized, 59.1 million (2010) and 60.2 million (2009) shares outstanding			118				120
Paid-in-capital in excess of par value			232,735				222,882
Accumulated other comprehensive loss			(39,126	)			(23,396	)
Retained earnings			200,389				159,705
Total shareholders’ equity			394,116				359,311
Total liabilities and shareholders’ equity		$	1,197,178			$	1,146,050

See the accompanying notes to unaudited consolidated financial statements.

HERBALIFE LTD.

CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,				June 30,				June 30,				June 30,
		2010				2009				2010				2009
		(Unaudited)
		(In thousands, except per share amounts)
Product sales		$	589,373			$	490,899			$	1,116,595			$	937,847
Handling & freight income			99,433				80,906				190,844				155,641
Net sales			688,806				571,805				1,307,439				1,093,488
Cost of sales			136,561				122,442				277,033				224,842
Gross profit			552,245				449,363				1,030,406				868,646
Royalty overrides			224,780				186,750				432,099				362,282
Selling, general & administrative expenses			211,110				190,794				417,993				372,252
Operating income			116,355				71,819				180,314				134,112
Interest expense, net			2,146				1,338				4,099				3,050
Income before income taxes			114,209				70,481				176,215				131,062
Income taxes			32,276				22,228				42,411				41,267
NET INCOME		$	81,933			$	48,253			$	133,804			$	89,795
Earnings per share:
Basic		$	1.38			$	0.78			$	2.24			$	1.46
Diluted		$	1.32			$	0.77			$	2.14			$	1.44
Weighted average shares outstanding:
Basic			59,527				61,642				59,843				61,583
Diluted			62,103				62,929				62,389				62,413
Dividends declared per share		$	0.20			$	0.20			$	0.40			$	0.40

See the accompanying notes to unaudited consolidated financial statements.

HERBALIFE LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Six Months Ended
		June 30,				June 30,
		2010				2009
		(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	133,804			$	89,795
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			34,403				29,686
(Excess) Deficiency in tax benefits from share-based payment arrangements			(4,705	)			982
Share-based compensation expenses			10,820				10,024
Amortization of discount and deferred financing costs			248				244
Deferred income taxes			(15,053	)			(1,657	)
Unrealized foreign exchange transaction (gain) loss			(12,345	)			2,545
Foreign exchange loss from adoption of highly inflationary accounting in Venezuela			15,131				—
Other			1,619				154
Changes in operating assets and liabilities:
Receivables			(11,616	)			(4,938	)
Inventories			(12,172	)			12,022
Prepaid expenses and other current assets			(15,099	)			971
Other assets			(2,229	)			(679	)
Accounts payable			13,781				1,202
Royalty overrides			1,072				(3,622	)
Accrued expenses and accrued compensation			5,670				(19,587	)
Advance sales deposits			30,937				17,164
Income taxes payable			(4,604	)			(12,599	)
Deferred compensation plan liability			729				557
NET CASH PROVIDED BY OPERATING ACTIVITIES			170,391				122,264
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property			(23,917	)			(26,801	)
Proceeds from sale of property			6				60
Deferred compensation plan assets			686				(252	)
NET CASH USED IN INVESTING ACTIVITIES			(23,225	)			(26,993	)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid			(24,061	)			(24,617	)
Borrowings from long-term debt			229,000				59,000
Principal payments on long-term debt			(235,715	)			(97,009	)
Share repurchases			(79,220	)			(972	)
Excess (Deficiency in) tax benefits from share-based payment arrangements			4,705				(982	)
Proceeds from exercise of stock options and sale of stock under employee stock purchase plan			4,400				791
NET CASH USED IN FINANCING ACTIVITIES			(100,891	)			(63,789	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH			(26,858	)			(893	)
NET CHANGE IN CASH AND CASH EQUIVALENTS			19,417				30,589
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			150,801				150,847
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	170,218			$	181,436
CASH PAID DURING THE PERIOD
Interest paid		$	4,988			$	6,560
Income taxes paid, net		$	58,718			$	54,473
NON CASH ACTIVITIES
Assets acquired under capital leases and other long-term debt		$	—			$	327

See the accompanying notes to unaudited consolidated financial statements.

HERBALIFE LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Organization

Herbalife Ltd., a Cayman Islands exempted 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 2.1 million independent distributors, except in China, where the Company currently sells its products through retail stores, sales representatives, sales employees and licensed business providers. The Company reports revenue in six geographic regions: North America, which consists of the U.S., Canada and Jamaica; Mexico; South and Central America; EMEA, which consists of Europe, the Middle East and Africa; Asia Pacific (excluding China) which consists of Asia, New Zealand and Australia; 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 GAAP, for complete financial statements. The Company’s unaudited consolidated financial statements as of June 30, 2010, and for the three and six months ended June 30, 2010 and 2009, 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 consolidated financial statements as of June 30, 2010, and for the three and six months ended June 30, 2010 and 2009. These unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, or the 2009 10-K. Operating results for the three and six months ended June 30, 2010, are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

New Accounting Pronouncements

In May 2010, the Financial Accounting Standards Board, or FASB, issued Final Accounting Standards Update 2010-19, Foreign Currency Issues: Multiple Foreign Currency Exchange Rates, or ASU 2010-19, which codifies the SEC staff announcement made at the March 18, 2010, Emerging Issues Task Force meeting. ASU 2010-19 provides the SEC staff’s view on certain foreign currency issues relating to investments in Venezuela. ASU 2010-19 became effective on March 18, 2010. The Company has adopted this guidance and the financial statement impact relating to this adoption is discussed further below.

Venezuela

Currency Restrictions

Currency restrictions enacted by the Venezuelan government in 2003 have become more restrictive and have impacted the ability of the Company’s subsidiary in Venezuela, Herbalife Venezuela, to obtain U.S. dollars in exchange for Venezuelan Bolivars, or Bolivars, at the official foreign exchange rates from the Venezuelan government and its foreign exchange commission, CADIVI. The application and approval processes have been intermittently delayed and the timing and ability to obtain U.S. dollars at the official exchange rates remain uncertain. In certain instances, the Company has made appropriate applications through CADIVI for approval to obtain U.S. dollars so that Herbalife Venezuela can pay for imported products and an annual dividend at the official exchange rate. In other instances, the Company used a lawful but less favorable parallel market mechanism for currency exchange. In May 2010, this less favorable parallel market was discontinued.

In June 2010, the Venezuelan government introduced additional regulations under a new regulated system, SITME, which is controlled by the Central Bank of Venezuela. SITME provides a mechanism to exchange Bolivars into U.S. dollars through the purchase and sale of U.S. dollar denominated bonds issued in Venezuela. However, SITME is only available in certain limited circumstances. Specifically, SITME can only be used for product purchases and it is not available for other matters such as the payment of dividends. Also, SITME can only be used for amounts of up to $50,000 per day and $350,000 per month and is generally only available to the extent the applicant has not exchanged and received U.S. dollars via the CADIVI process within the previous 90 days. While the Company currently plans to continue to import products into Venezuela and exchange Bolivars for U.S. dollars based on the exchange mechanisms prescribed by the Venezuelan government, if the current SITME restrictions are not lifted or substantially eased, the Company may make significant changes to Herbalife Venezuela’s operations which could negatively impact the Company’s business.

Highly Inflationary Economy and Accounting

Venezuela’s inflation rate as measured using the blended National Consumer Price Index and Consumer Price Index rate exceeded a three-year cumulative inflation rate of 100% as of December 31, 2009. Accordingly, effective January 1, 2010, Venezuela was considered a highly inflationary economy. Pursuant to the highly inflationary basis of accounting under U.S. GAAP, Herbalife Venezuela changed its functional currency from the Bolivar to the U.S. dollar. Subsequent movements in the Bolivar to U.S. dollar exchange rate will impact the Company’s consolidated earnings. Prior to January 1, 2010 when the Bolivar was the functional currency, movements in the Bolivar to U.S. dollar were recorded as a component of equity through other comprehensive income. Pursuant to highly inflationary accounting rules, the Company is no longer required to translate Herbalife Venezuela’s financial statements since their functional currency is now the U.S. dollar.

Based on relevant facts and circumstances at the applicable times, the Company used the parallel market exchange rate for remeasurement purposes effective January 1, 2010 until the parallel market was discontinued in May 2010. On January 1, 2010, in connection with the determination that Venezuela was a highly inflationary economy, the Company remeasured Herbalife Venezuela’s opening balance sheet’s monetary assets and liabilities at the parallel market rate, which resulted in the Company recording a non-tax deductible foreign exchange loss of $15.1 million. This charge included a $9.9 million foreign exchange loss relating to Herbalife Venezuela’s U.S. dollar cash and cash equivalents that were remeasured at the parallel market rate and then translated at the official rate at December 31, 2009, as discussed in the Company’s 2009 10-K. Also, Herbalife Venezuela’s $34.2 million cash and cash equivalents reported in the Company’s consolidated balance sheet at December 31, 2009, which included U.S. dollar denominated cash, was reduced to approximately $12.5 million on January 1, 2010. However, nonmonetary assets, such as inventory, reported on the Company’s consolidated balance sheet at December 31, 2009, remained at historical cost subsequent to Venezuela becoming a highly inflationary economy. Therefore, the incremental costs related to the Company’s 2009 imported products recorded at the parallel market exchange rate negatively impacted the Company’s first quarter 2010 consolidated statement of income by approximately $12.7 million as these products were sold during the first quarter of 2010. This amount is non tax deductible. See Note 8, Income Taxes, for additional discussion on income tax impact related to Venezuela becoming highly inflationary.

Official Exchange Rate Devaluation

In early January 2010, Venezuela announced an official exchange rate devaluation of the Bolivar to an official rate of 4.30 Bolivars per U.S. dollar for non-essential items and 2.60 Bolivars per U.S. dollar for essential items. The Company’s imports fall into both classifications. During 2010, because the Company used the parallel market exchange rate for remeasurement purposes until the parallel market was discontinued in May 2010, any U.S. dollars obtained from CADIVI at the official rate had a positive impact to the Company’s consolidated net earnings. Specifically, the Company recorded $0.1 million and $3.8 million of foreign exchange gains, in the three and six months ended June 30, 2010, respectively, to selling, general and administrative expenses within the Company’s consolidated statements of income as a result of receiving U.S. dollars approved by CADIVI at the official exchange rate, primarily related to products imported in 2009 and early 2010. The majority of Herbalife Venezuela’s 2010 importations were not registered with CADIVI so the official exchange rates are not available to pay for these U.S. imports. Herbalife Venezuela also has an outstanding dividend payable to the Company of $4.2 million, which was declared in December 2008 and registered with CADIVI. The request to obtain U.S. dollars at the official rate to settle the outstanding dividend payable is pending CADIVI’s approval. Also, Herbalife Venezuela has an outstanding intercompany payable balance of $0.1 million, which was registered with CADIVI in 2009 and is pending CADIVI’s approval.

Remeasurement of Monetary Assets and Liabilities

During the second quarter of 2010, the Company recorded a $4.0 million pre-tax ($2.6 million post-tax) net foreign exchange gain to selling, general and administrative expenses, within the Company’s consolidated statement of income, 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 prior to the closure of the parallel market in May 2010 of 8.3 Bolivars per U.S. dollar. Herbalife Venezuela’s cash and cash equivalents, primarily denominated in Bolivars, increased by $5.2 million as a result of using the SITME rate as opposed to the last quoted parallel market rate. As of June 30, 2010, Herbalife Venezuela’s net monetary Bolivar denominated assets and liabilities approximated $11.1 million U.S. dollars which included Bolivar denominated cash and cash equivalents approximating $14.3 million U.S. dollars, and were all remeasured at the new regulated rate under the SITME. However, the amounts remeasured using the new regulated rate may not represent the true economics because of the restrictions that currently exist in the SITME. While the Company continues to monitor the new exchange mechanism and restrictions under SITME, there is no assurance that the Company will be able to exchange Bolivars into U.S. dollars on a timely basis. Therefore, these remeasured amounts, including cash and cash equivalents, being reported on the Company’s consolidated balance sheet using the new regulated rate may not accurately represent the amount of U.S. dollars that the Company could ultimately realize.

Consolidation of Herbalife Venezuela

The Company currently plans to continue its operation in Venezuela and to import products into Venezuela. Herbalife Venezuela will continue to apply for legal exchange mechanisms to convert its Bolivars to U.S. dollars. Despite the currency exchange restrictions in Venezuela, the Company continues to control Herbalife Venezuela and its operations. The mere existence of the exchange restrictions discussed above does not in and of itself create a presumption that this lack of exchangeability is other-than-temporary, nor does it create a presumption that an entity should deconsolidate its Venezuelan operations. Therefore, the Company continues to consolidate Herbalife Venezuela in its consolidated financial statements for U.S. GAAP purposes. Herbalife Venezuela’s Bolivar denominated assets and liabilities are currently being remeasured at the SITME rate for remeasurement purposes. However, this may not represent the true economics since there are currency volume and exchange restrictions that exist in this market.

Although there are delays in the CADIVI approval process, when applicable, the Company plans to continue applying to CADIVI to obtain the official rate relating to the importation of the Company’s products. In addition, the Company plans to utilize the SITME market to the extent allowable under current restrictions in order to exchange Bolivars to U.S. dollars. The Company’s ability to access the official exchange rate and the SITME rate could impact what exchange rates will be used for remeasurement purposes in future periods. The Company continues to assess and monitor the current economic and political environment in Venezuela.

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 the six months ended June 30, 2010, and its total assets represented less than 3% of the Company’s consolidated total assets as of June 30, 2010.

3. Long-Term Debt

Long-term debt consists of the following:

		June 30,				December 31,
		2010				2009
		(In millions)
Borrowings under senior secured credit facility		$	239.6			$	236.4
Capital leases			3.7				4.8
Other debt			0.1				9.1
Total			243.4				250.3
Less: current portion			3.1				12.4
Long-term portion		$	240.3			$	237.9

Interest expense was $2.5 million and $2.9 million for the three months ended June 30, 2010 and 2009, respectively, and $5.0 million and $6.2 million for the six months ended June 30, 2010 and 2009, respectively.

On July 21, 2006, the Company entered into a $300.0 million senior secured credit facility, comprised of a $200.0 million term loan and a $100.0 million revolving credit facility, with a syndicate of financial institutions as lenders. In September 2007, the Company and its lenders amended the credit agreement, increasing the amount of the revolving credit facility by an aggregate principal amount of $150.0 million to $250.0 million primarily to finance the increase in its share repurchase program. See Note 10, Shareholders’ Equity, for further discussion of the share repurchase program. The term loan bears interest at LIBOR plus a margin of 1.5%, or the base rate plus a margin of 0.50%, and matures on July 21, 2013. The revolving credit facility bears interest at LIBOR plus a margin of 1.25%, or the base rate plus a margin of 0.25%, and is available until July 21, 2012. On June 30, 2010, and December 31, 2009, the weighted average interest rate for the senior secured credit facility was 1.77% and 1.66%, respectively. The Company incurred approximately $2.3 million of debt issuance costs in connection with entering into the senior secured credit facility in July 2006, which are being amortized over the term of the senior secured credit facility. The fair value of the Company’s senior secured credit facility approximates its carrying value.

The senior secured credit facility requires the Company to comply with a leverage ratio and an interest coverage ratio. In addition, the senior secured 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, merge or consolidate and enter into certain transactions with affiliates. As of June 30, 2010, the Company was compliant with its debt covenants.

As of June 30, 2010, the Company was obligated to pay approximately $0.4 million of the term loan every quarter until June 30, 2013, and the remaining principal on July 21, 2013. As of June 30, 2010 and December 31, 2009, the amounts outstanding under the term loan were $144.6 million and $145.4 million, respectively.

During the first quarter of 2010, the Company borrowed an additional $102.0 million under the revolving credit facility and paid $95.0 million of the revolving credit facility. During the second quarter of 2010, the Company borrowed an additional $127.0 million under the revolving credit facility and paid $130.0 million of the revolving credit facility. As of June 30, 2010 and December 31, 2009, the amounts outstanding under the revolving credit facility were $95.0 million and $91.0 million, respectively.

Through the course of conducting regular business operations, certain vendors and government agencies may require letters of credit to be issued. As of June 30, 2010 and December 31, 2009, the Company had an aggregate of $2.4 million and $2.8 million, respectively, of issued but undrawn letters of credit.

4. 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.

On April 16, 2007, Herbalife International of America, Inc. filed a Complaint in the United States District Court for the Central District of California against certain former Herbalife distributors who had left the Company to join a competitor. The Complaint alleged breach of contract, misappropriation of trade secrets, intentional interference with prospective economic advantage, intentional interference with contract, unfair competition, constructive trust and fraud and seeks monetary damages, attorney’s fees and injunctive relief. (Herbalife International of America, Inc. v. Robert E. Ford, et al) The court entered a Preliminary Injunction against the defendants enjoining them from further use and/or misappropriation of the Company’s trade secrets on December 11, 2007. Defendants appealed the court’s entry of the Preliminary Injunction to the U.S. Court of Appeals for the Ninth Circuit. That court affirmed, in relevant part, the Preliminary Injunction. On December 3, 2007, the defendants filed a counterclaim alleging that the Company had engaged in unfair and deceptive business practices, intentional and negligent interference with prospective economic advantage, false advertising and that the Company was an endless chain scheme in violation of California law and seeking restitution, contract rescission and an injunction. Both sides engaged in discovery and filed cross motions for Summary Judgment. On August 25, 2009, the court granted partial summary judgment for Herbalife on all of defendants’ claims except the claim that the Company is an endless chain scheme which under applicable law is a question of fact that can only be determined at trial. The court denied defendants’ motion for Summary Judgment on Herbalife’s claims for misappropriation of trade secrets and breach of contract. On May 5, 2010, the District Court granted summary judgment for Herbalife on defendants’ endless chain-scheme counterclaim. Herbalife voluntarily dismissed its remaining claims, and on May 14, 2010, the District Court issued a final judgment dismissing all of the parties’ claims. On June 10, 2010 the defendants appealed from that judgment and on June 21, 2010, Herbalife cross-appealed. The Company believes that there is merit to, and it will prevail upon, its appeal.

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 administrative assessment from the Mexican Tax Administration Service in an amount equivalent to $89 million, translated at the quarterly period ended spot rate, for various items, the majority of which was Value Added Tax allegedly owed on certain of the Company’s products imported into Mexico. On July 8, 2010, the Company initiated a formal administrative appeal process. In accordance with U.S. GAAP, the Company did not record a provision as the Company, based on analysis and guidance from its advisors, does not believe a loss is probable. Further, the Company is currently unable to reasonably estimate a possible loss or range of loss that could result from an unfavorable outcome. The Company believes that it has meritorious defenses and is vigorously pursuing the appeal, but final resolution of this matter could take several years.

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.

5. Comprehensive Income

Total comprehensive income consisted of the following:

		Three Months Ended								Six Months Ended
		June 30,				June 30,				June 30,				June 30,
		2010				2009				2010				2009
		(In millions)
Net income		$	81.9			$	48.3			$	133.8			$	89.8
Unrealized gain/(loss) on derivative instruments			2.5				(1.3	)			4.6				0.7
Foreign currency translation adjustment			(15.1	)			10.2				(20.3	)			(0.5	)
Comprehensive income		$	69.3			$	57.2			$	118.1			$	90.0

6. 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, in the Company’s Suzhou China facility, and in its recently acquired manufacturing facility located in Lake Forest, California, and then are sold to independent distributors who sell Herbalife products to retail consumers or other distributors. Revenues reflect sales of products to distributors based on the distributors’ geographic location.

The Company sells products in 73 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								Six Months Ended
		June 30,				June 30,				June 30,				June 30,
		2010				2009				2010				2009
		(In millions)
Net Sales:
Primary Reporting Segment
United States		$	161.7			$	134.2			$	308.3			$	253.2
Mexico			80.9				66.4				152.7				125.6
Others			395.0				330.6				762.8				647.3
Total Primary Reporting Segment			637.6				531.2				1,223.8				1,026.1
China			51.2				40.6				83.6				67.4
Total Net Sales		$	688.8			$	571.8			$	1,307.4			$	1,093.5
Operating Margin(1):
Primary Reporting Segment
United States		$	62.9			$	57.7			$	130.1			$	114.6
Mexico			31.5				25.1				55.7				51.4
Others			186.4				143.8				336.6				281.8
Total Primary Reporting Segment			280.8				226.6				522.4				447.8
China (2)			46.6				36.0				75.9				58.6
Total Operating Margin		$	327.4			$	262.6			$	598.3			$	506.4
Selling, general and administrative expenses			211.1				190.8				418.0				372.3
Interest expense, net			2.1				1.3				4.1				3.0
Income before income taxes			114.2				70.5				176.2				131.1
Income taxes			32.3				22.2				42.4				41.3
Net Income		$	81.9			$	48.3			$	133.8			$	89.8

		Three Months Ended								Six Months Ended
		June 30,				June 30,				June 30,				June 30,
		2010				2009				2010				2009
		(In millions)
Net sales by product line:
Weight Management		$	430.5			$	363.8			$	817.7			$	693.0
Targeted Nutrition			159.8				120.9				298.4				230.9
Energy, Sports and Fitness			30.1				24.0				55.9				45.6
Outer Nutrition			31.0				32.3				62.0				63.8
Literature, promotional and other(3)			37.4				30.8				73.4				60.2
Total Net Sales		$	688.8			$	571.8			$	1,307.4			$	1,093.5
Net sales by geographic region:
North America(4)		$	166.4			$	138.3			$	317.7			$	261.4
Mexico			80.9				66.4				152.7				125.6
South and Central America			82.8				85.4				174.1				160.7
EMEA(5)			135.6				126.6				266.4				249.9
Asia Pacific(6)			171.9				114.5				312.9				228.5
China			51.2				40.6				83.6				67.4
Total Net Sales		$	688.8			$	571.8			$	1,307.4			$	1,093.5

As of June 30, 2010 and December 31, 2009, total assets for the Company’s Primary Reporting Segment were $1,135.4 million and $1,097.1 million, respectively. Total assets for the China segment were $61.8 million and $49.0 million as of June 30, 2010 and December 31, 2009, respectively.

7. Share-Based Compensation

The Company has share-based compensation plans, which are more fully described in Note 9 to the Consolidated Financial Statements in the 2009 10-K. During the six months ended June 30, 2010, the Company granted stock awards subject to continued service, consisting of stock units and stock appreciation rights, with vesting terms fully described in the 2009 10-K. Also, during the six months ended June 30, 2010, the Company granted other stock units to certain key employees subject to continued service, one half of which vest on the first anniversary of the date of the grant, and the remaining half of which vest on the second anniversary of the date of the grant.

For the three months ended June 30, 2010 and 2009, share-based compensation expense amounted to $5.5 million and $5.3 million, respectively. For the six months ended June 30, 2010 and 2009, share-based compensation expense amounted to $10.8 million and $10.2 million, respectively. As of June 30, 2010, the total unrecognized compensation cost related to all non-vested stock awards was $39.6 million and the related weighted-average period over which it is expected to be recognized is approximately 3.3 years.

The following tables summarize the activity under all share-based compensation plans for the six months ended June 30, 2010:

										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic
Stock Options & Stock Appreciation Rights		Awards				Price				Term				Value
		(In thousands)												(In millions)
Outstanding at December 31, 2009			7,372			$	24.84			5.9 years				$	123.6
Granted			872			$	44.94
Exercised			(480	)		$	16.52
Forfeited			(44	)		$	31.52
Outstanding at June 30, 2010			7,720			$	25.56			5.8 years				$	152.5
Exercisable at June 30, 2010			4,477			$	20.85			4.7 years				$	111.2

						Weighted
						Average
						Grant Date				Aggregate
Incentive Plan and Independent Directors Stock Units		Shares				Fair Value				Fair Value
		(In thousands)								(In millions)
Outstanding and nonvested at December 31, 2009			689.5			$	26.35			$	18.2
Granted			96.8			$	44.91				4.3
Vested			(203.2	)		$	33.74				(6.8	)
Forfeited			(7.0	)		$	22.53				(0.2	)
Outstanding and nonvested at June 30, 2010			576.1			$	26.91			$	15.5

The weighted-average grant date fair value of stock awards granted during the three months ended June 30, 2010 and 2009 was $21.43 and $10.76, respectively. The weighted-average grant date fair value of stock awards granted during the six months ended June 30, 2010 and 2009 was $21.19 and $5.95, respectively. The total intrinsic value of stock awards exercised during the three months ended June 30, 2010 and 2009, was $7.5 million and $0.6 million, respectively, and during the six months ended June 30, 2010 and 2009, it was $13.4 million and $1.8 million, respectively.

8. Income Taxes

As of June 30, 2010, the total amount of unrecognized tax benefits, related interest, and penalties was $39.6 million, $7.7 million and $2.4 million, respectively. During the six months ended June 30, 2010, the Company recorded tax, interest, and penalties related to uncertain tax positions of $0.3 million, $0.3 million and $0.1 million, respectively. 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, $39.6 million of unrecognized tax benefits, $7.7 million of interest and $2.4 million of penalties, would impact the effective tax rate.

During the six months ended June 30, 2010, 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 and is subject to a graduated rate of 11% in 2010. The tax rate will gradually increase during the years 2010-2012 to a maximum of 25%.

Venezuela’s cumulative inflation rate exceeded 100% during the three-year period ended December 31, 2009. Therefore, beginning January 1, 2010, Venezuela was considered a highly inflationary economy for U.S. federal income tax purposes. As a result, for U.S. federal income tax purposes, Herbalife Venezuela is required to account for its operations using the Dollar Approximate Separate Transactions Method of accounting, or DASTM, and use the U.S. dollar as its functional currency. The transitional impact of DASTM resulted in a one-time deferred income tax benefit of approximately $14.5 million. This benefit was recorded in the three months ended March 31, 2010.

9. 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 variable rate term loan. 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 June 30, 2010, the maximum length of time over which the Company is hedging certain of these exposures is less than four years.

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 have been designated as cash flow hedges against the variability in the LIBOR interest rate on the term loan at LIBOR plus 1.50%, thereby fixing the Company’s weighted average effective rate on the notional amounts at 4.28%. The Company formally assesses both at inception and at least quarterly thereafter, whether the derivatives used in hedging transactions are effective in offsetting changes in cash flows of the hedged item. As of June 30, 2010, the hedge relationships qualified as effective hedges under FASB ASC Topic 815, Derivatives and Hedging, or ASC 815. 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. As of June 30, 2010 and December 31, 2009, the Company recorded the interest rate swaps as liabilities at their fair value of $6.7 million and $2.6 million, respectively.

Foreign Currency Instruments

The Company also designates certain 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 the 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 also purchases foreign currency forward contracts in order to hedge forecasted inventory purchases and intercompany management fees that are designated as cash-flow hedges and are subject to foreign currency exposures. The Company applied the hedge accounting rules as required by ASC 815 for these hedges. These contracts allow the Company to sell Euros in exchange for U.S. dollars at specified contract rates. As of June 30, 2010, the aggregate notional amounts of these contracts outstanding were approximately $80.5 million and were expected to mature over the next fifteen months. The Company’s derivative financial instruments are recorded on the consolidated balance sheet at fair value based on quoted market rates. 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. 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 June 30, 2010, and December 31, 2009, the Company recorded assets at fair values of $9.3 million and $2.3 million, respectively, 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 quarter ended June 30, 2010, the ineffective portion relating to these hedges was immaterial and the hedges remained effective as of June 30, 2010.

As of June 30, 2010, substantially all of the Company’s outstanding foreign currency forward contracts have maturity dates of less than fifteen months with the majority of derivatives expiring within one year. There were no foreign currency option contracts outstanding as of June 30, 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 June 30, 2010.

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 six months ended June 30, 2010 and 2009:

		Amount of Gain (Loss) Recognized
		in Other Comprehensive Income (Loss)
		For the Three Months Ended								For the Six Months Ended
		June 30, 2010				June 30, 2009				June 30, 2010				June 30, 2009
		(In millions)
Derivatives designated as hedging instruments:
Foreign exchange currency contracts relating to inventory and intercompany management fee hedges		$	8.3			$	(1.8	)		$	13.3			$	0.6
Interest rate swaps		$	(3.3	)		$	—			$	(5.9	)		$	—

The following table summarizes gains (losses) relating to derivative instruments recorded to income during the three and six months ended June 30, 2010 and 2009:

		Amount of Gain (Loss)
		Recognized in Income
		For the Three Months Ended								For the Six Months Ended								Location of Gain (Loss)
		June 30, 2010				June 30, 2009				June 30, 2010				June 30, 2009				Recognized in Income
		(In millions)
Derivatives designated as hedging instruments:
Foreign exchange currency contracts relating to inventory hedges and intercompany management fee hedges (1)		$	—			$	(0.2	)		$	(0.1	)		$	—			Selling, general and administrative expenses
Derivatives not designated as hedging instruments:
Foreign exchange currency contracts		$	(1.7	)		$	(9.5	)		$	(9.2	)		$	(9.8	)		Selling, general and administrative expenses

The following table summarizes gains (losses) relating to derivative instruments reclassified from accumulated other comprehensive loss into income during the three and six months ended June 30, 2010 and 2009:

		Amount of Gain (Loss) Reclassified																Location of Gain (Loss)
		from Accumulated																Reclassified
		Other Comprehensive																from Accumulated
		Loss into Income																Other Comprehensive
		For the Three Months Ended								For the Six Months Ended								Loss into Income
		June 30, 2010				June 30, 2009				June 30, 2010				June 30, 2009				(Effective Portion)
		(In millions)
Derivatives designated as hedging instruments:
Foreign exchange currency contracts relating to inventory hedges		$	(0.1	)		$	0.4			$	(0.7	)		$	0.4			Cost of sales
Foreign exchange currency contracts relating to intercompany management fee hedges		$	2.9			$	—			$	4.6			$	—			Selling, general and administrative expenses
Interest rate contracts		$	(0.9	)		$	(0.4	)		$	(1.8	)		$	(0.8	)		Interest expense, net

The Company reports its derivatives at fair value as either assets or liabilities within its consolidated balance sheet. See Note 12, Fair Value Measurements, for information on derivative fair values and their consolidated balance sheet location as of June 30, 2010, and December 31, 2009.

10. Shareholders’ Equity

Dividends

On February 19, 2010, the Company’s board of directors approved a quarterly cash dividend of $0.20 per common share in an aggregate amount of $12.1 million that was paid to shareholders on March 16, 2010. On April 29, 2010, the Company’s board of directors approved a quarterly cash dividend of $0.20 per common share in an aggregate amount of $12.0 million that was paid to shareholders on May 24, 2010.

The aggregate amount of dividends declared and paid during the three months ended June 30, 2010 and 2009 were $12.0 million and $12.3 million, respectively. The aggregate amount of dividends declared and paid during the six months ended June 30, 2010 and 2009 were $24.1 million and $24.6 million, respectively.

Share Repurchases

On April 17, 2009, the Company’s share repurchase program adopted on April 18, 2007 expired pursuant to its terms. On April 30, 2009, the Company announced that its board of directors authorized a new 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. During the three months ended March 31, 2010, the Company repurchased approximately 0.6 million of its common shares through open market purchases at an aggregate cost of approximately $25.0 million or an average cost of $41.42 per share. During the three months ended June 30, 2010, the Company repurchased approximately 1.1 million of its common shares through open market purchases at an aggregate cost of approximately $50.2 million or an average cost of $46.21 per share. As of June 30, 2010, the remaining authorized capacity under the Company’s share repurchase program was approximately $851.6 million.

The aggregate purchase price of the common shares repurchased was reflected as a reduction to shareholders’ equity. The Company allocated 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 stock appreciation rights 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 for accounting purposes, as they reduce the number of shares that would have been issued upon vesting.

11. 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, stock appreciation rights, 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 Six Months
		Ended June 30,								Ended June 30,
		2010				2009				2010				2009
		(in thousands)
Weighted average shares used in basic computations			59,527				61,642				59,843				61,583
Dilutive effect of exercise of equity grants outstanding			2,371				1,175				2,347				748
Dilutive effect of warrants			205				112				199				82
Weighted average shares used in diluted computations			62,103				62,929				62,389				62,413

There were an aggregate of 2.0 million and 2.9 million of equity grants, consisting of stock options, stock appreciation rights, and stock units, that were outstanding during the three months ended June 30, 2010 and 2009, respectively, but were not included in the computation of diluted earnings per share because their effect would be anti-dilutive. There were an aggregate of 2.2 million and 3.5 million of equity grants, consisting of stock options, stock appreciation rights, and stock units, that were outstanding during the six months ended June 30, 2010 and 2009, respectively, but were not included in the computation of diluted earnings per share because their effect would be anti-dilutive.

12. 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 are based on observable forward and spot rates. Interest rate swaps are estimated based on LIBOR and swap yield curves at the reporting date. Assets or liabilities that have recurring measurements and are measured at fair value consisted of Level 2 derivatives and are shown below at their gross values at June 30, 2010, and December 31, 2009:

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				June 30,				December 31,
		Location				2010				2009
		(in millions)
ASSETS:
Derivatives designated as cash flow hedging instruments:
Foreign exchange currency contracts relating to inventory and intercompany management fee hedges		Prepaid expenses and other current assets				$	9.3			$	2.3
Derivatives not designated as cash flow hedging instruments:
Foreign exchange currency contracts		Prepaid expenses and other current assets				$	0.9			$	0.9
						$	10.2			$	3.2
LIABILITIES:
Derivatives designated as cash flow hedging instruments:
Interest rate swaps		Accrued expenses				$	6.7			$	2.6
Derivatives not designated as hedging instruments:
Foreign exchange currency contracts		Accrued expenses				$	1.6			$	2.6
						$	8.3			$	5.2

13. Subsequent Event

In connection with the appeal of the assessment from the Mexican Tax Administration Service discussed in Note 4, Contingencies, the Company may be required to post bonds for some or all of the assessed amount. Accordingly, in July 2010, 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 existing credit facility.

On August 2, 2010, the Company announced that its board of directors has authorized an increase in the quarterly cash dividend from $0.20 to $0.25 per common share, payable on August 26, 2010 to shareholders of record as of August 12, 2010.

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 $2.3 billion for the year ended December 31, 2009. As of June 30, 2010, we sold our products in 73 countries through a network of approximately 2.1 million independent distributors. In China, we sell our products through retail stores, sales representatives, sales employees and licensed business providers. We believe the quality of our products and the effectiveness of our distribution network, coupled with geographic expansion, have been the primary reasons for our success throughout our 30-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 are closely monitoring the current global economic crisis, the Company remains 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 including China, the U.S., Brazil, Mexico and Russia, globalizing successful distributor methods of operation 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 remains intently focused on the Venezuela market and especially the limited ability to repatriate cash.

We report revenue from our six regions:

	•		North America, which consists of the U.S., Canada and Jamaica;
	•		Mexico;
	•		South and Central America;
	•		EMEA, which consists of Europe, the Middle East and Africa;
	•		Asia Pacific (excluding China), which consists of Asia, New Zealand and Australia; 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 unit measure of product sales volume. It is a useful measure that we rely on as it excludes the impact of foreign currency fluctuations, changes in retail pricing, and ignores the differences generated by varying retail pricing across geographic markets. The Volume Point measure, in the aggregate and in each region, can be a measure of our sales volume as well as of sales volume trends. In general, an increase in Volume Points in a particular geographic region or country indicates an increase in our sales volume which results in an increase in our local currency net sales; a decrease in Volume Points in a particular geographic region or country indicates a decrease in our sales volume, which results in decreasing local currency net sales.

		Three Months Ended June 30,												Six Months Ended June 30,
		2010				2009				% Change				2010				2009				% Change
		(Volume points in millions)
North America			242.8				200.5				21.1	%			463.0				387.0				19.6	%
Mexico			137.8				124.3				10.9	%			262.0				244.7				7.1	%
South & Central America			96.2				98.0				(1.8	)%			197.2				200.5				(1.6	)%
EMEA			127.5				117.3				8.7	%			247.0				241.4				2.3	%
Asia Pacific (excluding China)			191.6				125.4				52.8	%			343.8				270.4				27.1	%
China			41.2				32.8				25.6	%			66.8				53.6				24.6	%
Worldwide			837.1				698.3				19.9	%			1,579.8				1,397.6				13.0	%

Average Active Sales Leaders by Geographic Region

With the continued expansion of daily consumption business models 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 consumption based Daily Methods of Operations, or DMOs.

		Three Months Ended June 30,												Six Months Ended June 30,
		2010				2009				% Change				2010				2009				% Change
North America			49,120				42,710				15.0	%			47,475				41,498				14.4	%
Mexico			36,848				33,655				9.5	%			35,664				33,414				6.7	%
South & Central America			27,173				26,981				0.7	%			27,195				26,833				1.3	%
EMEA			32,904				31,862				3.3	%			32,474				31,990				1.5	%
Asia Pacific (excluding China)			34,871				25,631				36.1	%			33,387				26,232				27.3	%
China			6,676				6,363				4.9	%			5,997				5,697				5.3	%
Worldwide(1)			180,132				160,912				11.9	%			174,923				159,456				9.7	%

Number of New Sales Leaders by Geographic Region during the Reporting Period

We also focus on the number of distributors qualified as new sales leaders under our compensation system. Excluding China, distributors qualify for sales leader status based on their Volume Points. The changes in the total number of sales leaders or changes in the productivity of sales leaders may cause Volume Points to increase or decrease. The fluctuation in the number of new sales leaders has historically been a general indicator of the level of distributor recruitment. Given our ongoing transition to daily consumption DMOs coupled with the recent changes in our marketing plan, we are evaluating the usefulness of this measure to our ongoing business.

		Three Months Ended June 30,												Six Months Ended June 30,
		2010				2009				% Change				2010				2009				% Change
North America			12,558				10,633				18.1	%			20,685				18,526				11.7	%
Mexico			6,806				6,316				7.8	%			10,946				10,667				2.6	%
South & Central America			5,639				8,121				(30.6	)%			11,466				15,836				(27.6	)%
EMEA			5,637				6,704				(15.9	)%			9,514				11,940				(20.3	)%
Asia Pacific (excluding China)			15,240				13,183				15.6	%			26,802				23,920				12.0	%
Total New Sales Leaders			45,880				44,957				2.1	%			79,413				80,889				(1.8	)%
New China Sales Employees and Licensed Business Providers			7,288				6,771				7.6	%			11,533				11,098				3.9	%
Worldwide Total New Sales Leaders			53,168				51,728				2.8	%			90,946				91,987				(1.1	)%

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 product 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)		2010				2009
		(In thousands)
January 1 total sales leaders			431.3				456.9
January & February new sales leaders			21.2				20.6
Demoted sales leaders (did not re-qualify)			(165.9	)			(181.4	)
Other sales leaders (resigned, etc)			(1.1	)			(1.4	)
End of February total sales leaders			285.5				294.7

The distributor statistics below further highlight the calculation for retention.

Sales Leaders Retention (Excluding China)		2010				2009
		(In thousands)
Sales leaders needing to re-qualify			290.9				304.0
Demoted sales leaders (did not re-qualify)			(165.9	)			(181.4	)
Total re-qualified			125.0				122.6
Retention rate			43.0	%			40.3	%

The table below reflects the number of sales leaders as of February (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
		2010				2009				2010				2009
North America			64,668				63,726				43.3	%			42.2	%
Mexico			47,068				50,099				50.4	%			45.2	%
South and Central America			51,060				67,876				34.1	%			32.2	%
EMEA			47,080				53,371				51.9	%			48.7	%
Asia Pacific (excluding China)			75,635				59,631				38.6	%			35.1	%
Total Sales leaders			285,511				294,703				43.0	%			40.3	%
China Sales Employees and Licensed Business Providers			27,415				29,684
Worldwide Total Sales Leaders			312,926				324,387

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 deleted 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 by our retention of sales leaders, our recruitment and retention of distributors and by our distributors’ increased adoption of daily consumption business methods.

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 handling and freight income, 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.

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 the net sales from one period to another period using “net sales in local currency” disclosure. Such 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 basis is useful to investors because it allows a more meaningful comparison of the 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 the prices we pay to our raw material suppliers and manufacturers of our products as well as 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 together with distributor allowances of up to 50% represent the potential earnings to distributors of up to approximately 73% of retail sales. The compensation to distributors is generally for the development, retention and improved productivity of their distributor sales organizations and is paid to several levels of distributors on each sale. Due to restrictions on direct selling in China, our full-time employed sales representatives in China are compensated with wages, bonuses and benefits and our licensed business providers in China are compensated with service fees instead of the distributor allowances and royalty overrides utilized in our traditional marketing program used in our other five regions. Because of local country regulatory constraints, we may be required to modify our typical distributor incentive plans as described above. Consequently, the total distributor discount percentage may vary over time. We also offer reduced distributor allowances and pay reduced royalty overrides with respect to certain products worldwide.

Our “operating 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 operating 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 six months ended June 30, 2010 were $688.8 million and $1,307.4 million, respectively. Net sales increased $117.0 million, or 20.5%, and $214.0 million, or 19.6%, for the three and six months ended June 30, 2010, respectively, as compared to the same periods in 2009. In local currency, net sales for the three and six months ended June 30, 2010 increased 20.0% and 16.8%, respectively, as compared to the same periods in 2009. The increase in net sales was primarily due to the continued successful adoption and operation of daily consumption business models, an increase in average active sales leaders, branding activities and increased distributor recruiting.

Net income for the three and six months ended June 30, 2010 was $81.9 million, or $1.32 per diluted share, and $133.8 million, or $2.14 per diluted share, respectively. Net income increased $33.7 million, or 69.8%, and $44.0 million, or 49.0%, for the three and six months ended June 30, 2010, respectively, as compared to the same periods in 2009. The increase was primarily driven by higher net sales, lower effective tax rate, lower professional fees and lower foreign exchange losses, and was partially offset by higher cost of goods sold including the Venezuela related charges, higher royalties, higher salaries and benefits, higher China sales employee and licensed business provider costs, higher distributor promotion and event costs and higher depreciation expense.

Net income for the three months ended June 30, 2010 included 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. Net income for the six months ended June 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, or CADIVI, at the official exchange rate relating to 2009 product importations which were previously registered with CADIVI and a $14.5 million one-time favorable impact to income taxes related to Venezuela becoming a highly inflationary economy.

Net income for the three months ended June 30, 2009 included $1.1 million tax expense resulting from an international income tax audit settlement. Net income for the six months ended June 30, 2009 also included a $0.4 million unfavorable after tax impact in connection with our restructuring activities.

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								Six Months Ended
		June 30,				June 30,				June 30,				June 30,
		2010				2009				2010				2009
Operations:
Net sales			100.0	%			100.0	%			100.0	%			100.0	%
Cost of sales			19.8				21.4				21.2				20.6
Gross profit			80.2				78.6				78.8				79.4
Royalty overrides(1)			32.7				32.6				33.0				33.1
Selling, general and administrative expenses(1)			30.6				33.4				32.0				34.0
Operating income			16.9				12.6				13.8				12.3
Interest expense, net			0.3				0.3				0.3				0.3
Income before income taxes			16.6				12.3				13.5				12.0
Income taxes			4.7				3.9				3.3				3.8
Net income			11.9	%			8.4	%			10.2	%			8.2	%

Net Sales

The following chart reconciles retail sales to net sales:

Sales by Geographic Region

		Three Months Ended June 30,
		2010																				2009
														Handling																				Handling
		Retail				Distributor				Product				& Freight				Net				Retail				Distributor				Product				& Freight				Net				Change in
		Sales				Allowance				Sales				Income				Sales				Sales				Allowance				Sales				Income				Sales				Net Sales
		(Dollars in millions)
North America		$	265.0			$	(126.2	)		$	138.8			$	27.6			$	166.4			$	220.7			$	(105.3	)		$	115.4			$	22.9			$	138.3				20.3	%
Mexico			130.7				(63.8	)			66.9				14.0				80.9				109.3				(53.3	)			56.0				10.4				66.4				21.8	%
South & Central America			136.4				(65.9	)			70.5				12.3				82.8				143.1				(69.8	)			73.3				12.1				85.4				(3.0	)%
EMEA			218.7				(105.4	)			113.3				22.3				135.6				204.2				(98.1	)			106.1				20.5				126.6				7.1	%
Asia Pacific			274.6				(125.9	)			148.7				23.2				171.9				186.4				(86.9	)			99.5				15.0				114.5				50.1	%
China			58.1				(6.9	)			51.2				—				51.2				44.6				(4.0	)			40.6				—				40.6				26.1	%
Worldwide		$	1,083.5			$	(494.1	)		$	589.4			$	99.4			$	688.8			$	908.3			$	(417.4	)		$	490.9			$	80.9			$	571.8				20.5	%
		Six Months Ended June 30,
		2010																				2009
														Handling																				Handling
		Retail				Distributor				Product				& Freight				Net				Retail				Distributor				Product				& Freight				Net				Change in
		Sales				Allowance				Sales				Income				Sales				Sales				Allowance				Sales				Income				Sales				Net Sales
		(Dollars in millions)
North America		$	505.6			$	(240.9	)		$	264.7			$	53.0			$	317.7			$	417.3			$	(199.0	)		$	218.3			$	43.1			$	261.4				21.5	%
Mexico			246.8				(120.5	)			126.3				26.4				152.7				207.1				(101.0	)			106.1				19.5				125.6				21.6	%
South & Central America			288.3				(138.9	)			149.4				24.7				174.1				267.4				(129.7	)			137.7				23.0				160.7				8.3	%
EMEA			428.0				(205.8	)			222.2				44.2				266.4				404.1				(194.9	)			209.2				40.7				249.9				6.6	%
Asia Pacific			501.7				(231.3	)			270.4				42.5				312.9				375.7				(176.6	)			199.1				29.4				228.5				36.9	%
China			93.6				(10.0	)			83.6				—				83.6				73.6				(6.2	)			67.4				—				67.4				24.0	%
Worldwide		$	2,064.0			$	(947.4	)		$	1,116.6			$	190.8			$	1,307.4			$	1,745.2			$	(807.4	)		$	937.8			$	155.7			$	1,093.5				19.6	%