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 incorporation or organization)		(I.R.S. Employer 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 April 27, 2011 was 59,618,612

 

 

HERBALIFE LTD.

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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			17
Item 3. Quantitative and Qualitative Disclosures About Market Risk			33
Item 4. Controls and Procedures			36
Forward Looking Statements			37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			38
Item 1A. Risk Factors			38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			53
Item 3. Defaults Upon Senior Securities			53
Item 4. (Removed and Reserved)			53
Item 5. Other Information			53
Item 6. Exhibits			54
Signatures and Certifications			58
Exhibit 10.24
Exhibit 10.25
Exhibit 10.26
Exhibit 10.27
Exhibit 10.28
Exhibit 10.29
Exhibit 10.58
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.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

		March 31,				December 31,
		2011				2010
		(In thousands, except share amounts)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	260,766			$	190,550
Receivables, net of allowance for doubtful accounts of $2,895 (2011) and $3,202 (2010)			107,893				85,612
Inventories			184,321				182,467
Prepaid expenses and other current assets			110,400				93,963
Deferred income taxes			42,355				42,994
Total current assets			705,735				595,586
Property, at cost, net of accumulated depreciation and amortization of $185,928 (2011) and $166,912 (2010)			187,733				177,427
Deferred compensation plan assets			18,732				18,536
Deferred financing costs, net of accumulated amortization of $65 (2011) and $2,279 (2010)			5,451				998
Other assets			26,639				25,880
Marketing related intangibles and other intangible assets, net			310,815				310,894
Goodwill			102,899				102,899
Total assets		$	1,358,004			$	1,232,220
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	53,725			$	43,784
Royalty overrides			173,076				162,141
Accrued compensation			52,540				69,376
Accrued expenses			138,523				141,867
Current portion of long-term debt			1,753				3,120
Advance sales deposits			56,928				35,145
Income taxes payable			18,340				15,383
Total current liabilities			494,885				470,816
NON-CURRENT LIABILITIES:
Long-term debt, net of current portion			181,188				175,046
Deferred compensation plan liability			23,197				20,167
Deferred income taxes			55,220				55,572
Other non-current liabilities			23,216				23,407
Total liabilities			777,706				745,008
CONTINGENCIES
SHAREHOLDERS’ EQUITY:
Common shares, $0.002 par value, 500.0 million shares authorized, 59.4 million (2011) and 58.9 million (2010) shares outstanding			119				118
Paid-in-capital in excess of par value			262,617				257,375
Accumulated other comprehensive loss			(12,074	)			(27,285	)
Retained earnings			329,636				257,004
Total shareholders’ equity			580,298				487,212
Total liabilities and shareholders’ equity		$	1,358,004			$	1,232,220

See the accompanying notes to unaudited condensed consolidated financial statements.

HERBALIFE LTD.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

		Three Months Ended
		March 31,				March 31,
		2011				2010
		(In thousands, except per share)
Product sales		$	676,789			$	527,222
Shipping & handling revenues			118,307				91,411
Net sales			795,096				618,633
Cost of sales			162,793				140,472
Gross profit			632,303				478,161
Royalty overrides			264,377				207,319
Selling, general & administrative expenses			244,526				206,883
Operating income			123,400				63,959
Interest expense, net			2,648				1,953
Income before income taxes			120,752				62,006
Income taxes			33,184				10,135
NET INCOME		$	87,568			$	51,871
Earnings per share:
Basic		$	1.48			$	0.86
Diluted		$	1.41			$	0.83
Weighted average shares outstanding:
Basic			59,103				60,160
Diluted			61,908				62,672
Dividends declared per share		$	0.25			$	0.20

See the accompanying notes to unaudited condensed consolidated financial statements.

HERBALIFE LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Three Months Ended
		March 31,				March 31,
		2011				2010
		(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	87,568			$	51,871
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			18,562				17,262
(Excess) Deficiency in tax benefits from share-based payment arrangements			(6,794	)			(2,606	)
Share-based compensation expenses			5,604				5,295
Amortization of discount and deferred financing costs			149				124
Deferred income taxes			921				(13,671	)
Unrealized foreign exchange transaction (gain) loss			1,383				(2,608	)
Write-off of deferred financing costs			914				—
Foreign exchange loss from adoption of highly inflationary accounting in Venezuela			—				15,131
Other			751				1,078
Changes in operating assets and liabilities:
Receivables			(20,493	)			(12,048	)
Inventories			4,184				474
Prepaid expenses and other current assets			(13,582	)			(4,357	)
Other assets			(251	)			(71	)
Accounts payable			8,861				19,311
Royalty overrides			7,340				(7,081	)
Accrued expenses and accrued compensation			(21,122	)			(14,022	)
Advance sales deposits			20,998				26,741
Income taxes payable			9,494				5,566
Deferred compensation plan liability			3,030				1,044
NET CASH PROVIDED BY OPERATING ACTIVITIES			107,517				87,433
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property			(28,325	)			(11,623	)
Proceeds from sale of property			2				3
Deferred compensation plan assets			(197	)			(79	)
NET CASH USED IN INVESTING ACTIVITIES			(28,520	)			(11,699	)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid			(14,819	)			(12,065	)
Borrowings from long-term debt			289,700				102,000
Principal payments on long-term debt			(284,924	)			(104,951	)
Deferred financing costs			(5,516	)			—
Share repurchases			(8,965	)			(28,010	)
Excess (Deficiency in) tax benefits from share-based payment arrangements			6,794				2,606
Proceeds from exercise of stock options and sale of stock under employee stock purchase plan			1,689				1,888
NET CASH USED IN FINANCING ACTIVITIES			(16,041	)			(38,532	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH			7,260				(22,732	)
NET CHANGE IN CASH AND CASH EQUIVALENTS			70,216				14,470
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			190,550				150,801
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	260,766			$	165,271
CASH PAID DURING THE PERIOD
Interest paid		$	2,093			$	2,691
Income taxes paid		$	21,874			$	13,430

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 2.3 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 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 March 31, 2011, and for the three months ended March 31, 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 March 31, 2011, and for the three months ended March 31, 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 months ended March 31, 2011, are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

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 in its condensed consolidated statement of income for the three months ended March 31, 2011.

As of March 31, 2011, Herbalife Venezuela’s net monetary Bolivar denominated assets and liabilities was approximately $9.0 million, and included approximately $13.1 million in Bolivar denominated cash and cash equivalents and approximately $4.8 million in U.S. dollar denominated cash. 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 three months ended March 31, 2011 and 2010 and its total assets represented less than 3% of the Company’s consolidated total assets as of both March 31, 2011 and December 31, 2010.

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

3. Long-Term Debt

Long-term debt consists of the following:

		March 31,				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			180.0				—
Capital leases			2.6				2.9
Other debt			0.3				0.3
Total			182.9				178.1
Less: current portion			1.7				3.1
Long-term portion		$	181.2			$	175.0

Interest expense was $3.3 million and $2.4 million for the three months ended March 31, 2011 and 2010, respectively. Interest expense for the three months ended March 31, 2011 included a $0.9 million write–off of unamortized deferred financing costs resulting from the extinguishment of the prior senior secured 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 senior secured credit facility, or the 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 will 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, will pay 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 $5.5 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 March 31, 2011 and December 31, 2010, the weighted average interest rate for borrowings under the New Credit Facility and the Prior Credit Facility was 1.99% 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, merge or consolidate and enter into certain transactions with affiliates. As of March 31, 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. As of March 31, 2011, the U.S. dollar amount outstanding under the New Credit Facility was $180.0 million. 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. There were no outstanding foreign currency borrowings as of March 31, 2011 under the New Credit Facility.

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 parties have reached a settlement of the case which they are in the process of documenting. Herbalife will incur no financial liability in this settlement.

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 approximately $96 million, translated at the 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 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. In connection with the appeal of the assessment, the Company may be required to post bonds for some or all of the assessed amount. Therefore, 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 New Credit Facility. 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 in respect to this assessment or any additional assessments that may be issued for these or other periods. 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
		March 31,				March 31,
		2011				2010
		(In millions)
Net income		$	87.6			$	51.9
Unrealized gain on derivative instruments, net of taxes			0.3				2.1
Foreign currency translation adjustment			14.9				(5.2	)
Comprehensive income		$	102.8			$	48.8

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 Financial Accounting Standards Board, or 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 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.

As of March 31, 2011, the Company sold products in 75 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
		March 31,				March 31,
		2011				2010
		(in millions)
Net Sales:
Primary Reporting Segment
United States		$	162.2			$	146.7
Mexico			103.9				71.8
Others			483.3				367.7
Total Primary Reporting Segment			749.4				586.2
China			45.7				32.4
Total Net Sales		$	795.1			$	618.6
Operating Margin(1)(2):
Primary Reporting Segment
United States		$	68.4			$	65.1
Mexico			40.4				24.9
Others			218.8				151.1
Total Primary Reporting Segment			327.6				241.1
China (3)			40.3				29.7
Total Operating Margin		$	367.9			$	270.8
Selling, general and administrative expenses			244.5				206.9
Interest expense, net			2.6				1.9
Income before income taxes			120.8				62.0
Income taxes			33.2				10.1
Net Income		$	87.6			$	51.9

		Three Months Ended
		March 31,				March 31,
		2011				2010
		(in millions)
Net sales by product line:
Weight Management		$	498.6			$	387.2
Targeted Nutrition			180.2				138.6
Energy, Sports and Fitness			35.5				25.8
Outer Nutrition			36.6				31.0
Literature, promotional and other(4)			44.2				36.0
Total Net Sales		$	795.1			$	618.6
Net sales by geographic region:
North America(5)		$	167.0			$	151.3
Mexico			103.9				71.8
South and Central America			125.3				91.3
EMEA(6)			153.9				130.8
Asia Pacific(7)			199.3				141.0
China			45.7				32.4
Total Net Sales		$	795.1			$	618.6

As of March 31, 2011 and December 31, 2010, total assets for the Company’s Primary Reporting Segment were $1,287.7 million and $1,162.1 million, respectively. As of March 31, 2011 and December 31, 2010, total assets for the China segment were $70.3 million and $70.1 million, respectively.

7. 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 three months ended March 31, 2011, the Company granted stock awards subject to continued service, consisting of stock units and stock appreciation rights, with vesting terms fully described in the 2010 10-K.

For the three months ended March 31, 2011 and 2010, share-based compensation expense amounted to $5.6 million and $5.3 million, respectively. As of March 31, 2011, the total unrecognized compensation cost related to all non-vested stock awards was $25.6 million and the related weighted-average period over which it is expected to be recognized is approximately 1.5 years.

The following tables summarize the activity under all share-based compensation plans for the three months ended March 31, 2011:

										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, 2010			6,390			$	28.75			5.7 years				$	253.1
Granted			20			$	73.73
Exercised			(334	)		$	26.22
Forfeited			(34	)		$	32.80
Outstanding at March 31, 2011			6,042			$	29.02			5.5 years				$	316.2
Exercisable at March 31, 2011			3,416			$	24.34			4.2 years				$	194.8

						Weighted
						Average
						Grant Date				Aggregate
Incentive Plan and Independent Directors Stock Units		Shares				Fair Value				Fair Value
		(In thousands)								(In millions)
Outstanding and nonvested December 31, 2010			580.2			$	27.51			$	16.0
Granted			6.8			$	74.68				0.5
Vested			(173.2	)		$	33.08				(5.7	)
Forfeited			(3.0	)		$	15.10				(0.1	)
Outstanding and nonvested at March 31, 2011			410.8			$	26.04			$	10.7

The weighted-average grant date fair value of stock awards granted during the three months ended March 31, 2011 and 2010 was $41.74 and $20.23, respectively. The total intrinsic value of stock awards exercised during the three months ended March 31, 2011 and 2010, was $16.9 million and $1.2 million, respectively.

8. Income Taxes

As of March 31, 2011, the total amount of unrecognized tax benefits, related interest and penalties was $31.4 million, $5.5 million and $1.3 million, respectively. During the three months ended March 31, 2011, the Company recorded tax, interest and penalties related to uncertain tax positions of $1.9 million, $0.5 million and $0.1 million respectively. During the three months ended March 31, 2011 the unrecognized tax benefits were reduced by the expiration of the statutes of limitations for tax of $2.1 million, interest of $0.6 million and penalties of $0.1 million which resulted in a year to date net decrease for tax and related interest of $0.2 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, $31.4 million of unrecognized tax benefits, $5.5 million of interest and $1.3 million of penalties, would impact the effective tax rate.

During the three months ended March 31, 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.

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 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 March 31, 2011, the Company is hedging certain of its monthly interest rate exposures over approximately two years and four 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 prior term loan or against the variability in the LIBOR interest rate on the replacement debt. The Company’s prior term loan was terminated in March 2011 and refinanced with the New Credit Facility as discussed further in Note 3, 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%, thereby now 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 formally assesses both at inception and at least quarterly thereafter, whether derivatives used in hedging transactions are effective in offsetting changes in cash flows of the hedged item. As of March 31, 2011, the hedge relationships continued to qualify 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. At March 31, 2011 and December 31, 2010, the Company recorded the interest rate swaps as liabilities at their fair value of $5.7 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 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 March 31, 2011, and December 31, 2010, the aggregate notional amounts of these contracts outstanding were approximately $21.6 million and $32.1 million, respectively. At March 31, 2011, the outstanding contracts were expected to mature over the next nine months. The Company’s derivative financial instruments are recorded on the consolidated balance sheet at fair value based on third-party bank quotes. 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 March 31, 2011, the Company recorded liabilities at fair value of $2.1 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 months ended March 31, 2011 and 2010, the ineffective portion relating to these hedges was immaterial and the hedges remained effective as of March 31, 2011.

As of March 31, 2011, and December 31, 2010, the majority of the Company’s outstanding foreign currency forward contracts had maturity dates of less than nine months with the majority of freestanding derivatives expiring within two months. There were no foreign currency option contracts outstanding as of March 31, 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 March 31, 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 months ended March 31, 2011 and 2010:

		Amount of Gain (Loss) Recognized
		in Other Comprehensive Income (Loss)
		For the Three Months Ended
		March 31, 2011				March 31, 2010
		(In millions)
Derivatives designated as cash flow hedging instruments:
Foreign exchange currency contracts relating to inventory and intercompany management fee hedges		$	(1.9	)		$	5.1
Interest rate swaps		$	—			$	(2.5	)

The following table summarizes gains (losses) relating to derivative instruments recorded to income during the three months ended March 31, 2011 and 2010:

		Amount of Gain (Loss)
		Recognized in Income								Location of Gain
		For the Three Months Ended								(Loss)
		March 31, 2011				March 31, 2010				Recognized in Income
		(In millions)
Derivatives designated as cash flow hedging instruments:
Foreign exchange currency contracts relating to inventory hedges and intercompany management fee hedges (1)		$	0.1			$	(0.1	)		Selling, general and administrative expenses
Derivatives not designated as hedging instruments:
Foreign exchange currency contracts		$	2.9			$	(7.5	)		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 months ended March 31, 2011 and 2010:

										Location of Gain
		Amount of Gain (Loss) Reclassified								(Loss)
		from Accumulated								Reclassified
		Other Comprehensive								from Accumulated
		Loss into Income								Other Comprehensive
		For the Three Months Ended								Loss into Income
		March 31, 2011				March 31, 2010				(Effective Portion)
		(In millions)
Derivatives designated as cash flow hedging instruments:
Foreign exchange currency contracts relating to inventory hedges		$	(0.2	)		$	(0.6	)		Cost of sales
Foreign exchange currency contracts relating to intercompany management fee hedges		$	(0.6	)		$	1.6			Selling, general and administrative expenses
Interest rate contracts		$	(0.9	)		$	(0.9	)		Interest expense, net

The Company reports its derivatives at fair value as either assets or liabilities within its condensed consolidated balance sheet. See Note 12, Fair Value Measurements, for information on derivative fair values and their condensed consolidated balance sheet location as of March 31, 2011, and December 31, 2010.

10. 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 its earnings, financial condition, restrictions imposed by its credit agreement, 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 quarterly cash dividend of $0.25 per common share in an aggregate amount of $14.8 million that was paid to shareholders on March 22, 2011. The aggregate amount of dividends declared and paid during the three months ended March 31, 2011 and 2010 were $14.8 million and $12.1 million, respectively.

Share Repurchases

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. The Company did not repurchase any common shares in the open market during the three months ended March 31, 2011. As of March 31, 2011, the remaining authorized capacity under the Company’s share repurchase program was approximately $776.7 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 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 in the Company’s condensed consolidated financial statements, as they reduce the number of shares that would have been issued upon vesting.

Stock Split

On February 18, 2011, the Company’s board of directors approved a two-for-one split of the Company’s common shares, subject to approval by the Company’s shareholders at the Company’s Annual General Meeting of Shareholders held on April 28, 2011. See Note 14, Subsequent Events, for further information on the stock split being approved by the Company’s shareholders on April 28, 2011.

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 on a pre-split basis:

		For the Three Months
		Ended March 31,
		2011				2010
		(in thousands)
Weighted average shares used in basic computations			59,103				60,160
Dilutive effect of exercise of equity grants outstanding			2,684				2,319
Dilutive effect of warrants			121				193
Weighted average shares used in diluted computations			61,908				62,672

There were an aggregate of 0.1 million and 1.8 million of equity grants that were outstanding during the three months ended March 31, 2011 and 2010, respectively, consisting of stock options, stock appreciation rights, and stock units, but were not included in the computation of diluted earnings per share because their effect would be anti-dilutive. See Note 14, Subsequent Events, for the computation of the Company’s historical net earnings per share on a pro-forma post-split basis.

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 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 March 31, 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		March 31,				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		$	—			$	0.6
Derivatives not designated as cash flow hedging instruments:
Foreign exchange currency contracts		Prepaid expenses and other current assets		$	4.1			$	2.3
				$	4.1			$	2.9
LIABILITIES:
Derivatives designated as cash flow hedging instruments:
Foreign exchange currency contracts relating to inventory and intercompany management fee hedges		Accrued expenses		$	2.1			$	0.8
Interest rate swaps		Accrued expenses		$	5.7			$	6.6
Derivatives not designated as hedging instruments:
Foreign exchange currency contracts		Accrued expenses		$	1.3			$	3.0
				$	9.1			$	10.4

13. Inventories

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

		March 31,				December 31,
		2011				2010
Raw materials		$	17.7			$	13.7
Work in process			0.8				0.6
Finished goods			165.8				168.2
Total		$	184.3			$	182.5

Total inventories are presented net of the reserves for obsolete and slow moving inventory of $10.6 million and $9.4 million at March 31, 2011 and December 31, 2010, respectively.

14. Subsequent Events

On April 28, 2011, the Company’s shareholders approved a 2-for-1 split of the Company’s common shares. One additional common share will be 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 equity compensation plans, will be adjusted proportionately.

All numbers in the consolidated financial statements are presented on a pre-split basis. The Company’s historical net earnings per share on a pro-forma basis would be as follows:

		Three Months Ended
		March 31,				March 31,
		2011				2010
		(unaudited)
Basic net income per share:
As reported		$	1.48			$	0.86
Pro forma		$	0.74			$	0.43
Diluted net income per share:
As reported		$	1.41			$	0.83
Pro forma		$	0.71			$	0.41

On May 2, 2011, the Company announced that its board of directors approved a post stock split cash dividend of $0.20 per common share, payable on June 7, 2011 to shareholders of record as of May 24, 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 March 31, 2011, we sold our products in 75 countries through a network of approximately 2.3 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 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.

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 continues to monitor 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 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 the Company uses 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 March 31,
		2011				2010				% Change
		(in millions)
North America			243.0				220.1				10.4	%
Mexico			164.5				124.2				32.4	%
South & Central America			125.1				101.1				23.7	%
EMEA			138.0				119.5				15.5	%
Asia Pacific (excluding China)			198.7				152.2				30.6	%
China			32.8				25.6				28.1	%
Worldwide			902.1				742.7				21.5	%

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 March 31,
		2011				2010				% Change
North America			52,549				45,831				14.7	%
Mexico			42,480				34,481				23.2	%
South & Central America			30,970				27,217				13.8	%
EMEA			35,960				32,044				12.2	%
Asia Pacific (excluding China)			40,510				31,903				27.0	%
China			7,272				5,318				36.7	%
Worldwide(1)			205,036				169,715				20.8	%

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 Sales Employees			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 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.

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 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. 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 months ended March 31, 2011 increased 28.5% to $795.1 million as compared to $618.6 million for the three months ended March 31, 2010. In local currency, net sales for the three months ended March 31, 2011 increased 24.7% 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 months ended March 31, 2011 increased 68.8% to $87.6 million, or $1.41 per diluted share, compared to $51.9 million, or $0.83 per diluted share, for the same period in 2010. The increase was primarily due to higher operating margin driven by net sales growth discussed above, partially offset by higher salaries, bonuses and benefits, higher distributor promotion and event costs, higher expenses related to China sales employees and licensed business providers and higher non-income tax expense. In addition, net income for the three months ended March 31, 2010 was also negatively impacted by matters related to Venezuela, as described below.

Net income for the three months ended March 31, 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 3, Long Term Debt, to the Notes to Condensed Consolidated Financial Statements for further information on our debt refinancing.

Net income for the three months ended March 31, 2010 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 U.S. 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 were remeasured at the less favorable parallel exchange rate; and a $14.5 million one-time favorable impact to income taxes related to Venezuela becoming a 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
		March 31,				March 31,
		2011				2010
Operations:
Net sales			100.0	%			100.0	%
Cost of sales			20.5				22.7
Gross profit			79.5				77.3
Royalty overrides(1)			33.2				33.5
Selling, general and administrative expenses(1)			30.8				33.4
Operating income			15.5				10.4
Interest expense, net			0.3				0.3
Income before income taxes			15.2				10.1
Income taxes			4.2				1.6
Net income			11.0	%			8.5	%

Net Sales

The following chart reconciles retail sales to net sales:

Sales by Geographic Region

		Three Months Ended March 31,
		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		$	265.8			$	(127.0	)		$	138.8			$	28.2			$	167.0			$	240.6			$	(114.7	)		$	125.9			$	25.4			$	151.3				10.4	%
Mexico			168.0				(82.0	)			86.0				17.9				103.9				116.1				(56.7	)			59.4				12.4				71.8				44.7	%
South & Central America			205.6				(98.2	)			107.4				17.9				125.3				151.9				(73.0	)			78.9				12.4				91.3				37.2	%
EMEA			248.3				(119.4	)			128.9				25.0				153.9				209.3				(100.4	)			108.9				21.9				130.8				17.7	%
Asia Pacific			314.3				(144.3	)			170.0				29.3				199.3				227.1				(105.4	)			121.7				19.3				141.0				41.3	%
China			50.8				(5.1	)			45.7				—				45.7				35.5				(3.1	)			32.4				—				32.4				41.0	%
Worldwide		$	1,252.8			$	(576.0	)		$	676.8			$	118.3			$	795.1			$	980.5			$	(453.3	)		$	527.2			$	91.4			$	618.6				28.5	%

Changes in net sales are directly associated with the recruiting and retention of our distributor force, retailing of our products, the quality and completeness of our product offerings that the distributor force has to sell and the number of countries in which we operate. Management’s role, both in-country and at the region and corporate level, is to provide distributors with a competitive and broad product line, encourage strong teamwork and distributor leadership and offer leading edge business tools and technology services to make doing business with Herbalife simple. Management uses the distributor marketing program coupled with educational and motivational tools and promotions to incentivize distributors to increase recruiting, retention and retailing, which in turn affect net sales. Such tools include Company sponsored sales events such as Extravaganzas, Leadership Development Weekends and World Team Schools where large groups of distributors gather, thus allowing them to network with other distributors, learn recruiting, retention and retailing techniques from our leading distributors and become more familiar with how to market and sell our products and business opportunities. Accordingly, management believes that these development and motivation programs increase the productivity of the sales leader network. The expenses for such programs are included in selling, general and administrative expenses. Sales are driven by several factors, including the number and productivity of distributors and sales leaders who continually build, educate and motivate their respective distribution and sales organizations. We also use event and non-event product promotions to motivate distributors to increase recruiting, retention and retailing activities. These promotions have prizes ranging from qualifying for events to product prizes and vacations. The costs of these promotions are included in selling, general and administrative expenses.

The factors described above have helped distributors increase their business, which in turn helps drive Volume Point growth in our business, and thus, net sales growth. The discussion below of net sales by geographic region further details some of the specific drivers of growth of our business and causes of sales increases and decreases during the three months ended March 31, 2011 and 2010, as well as the unique growth or contraction factors specific to certain geographic regions or major countries. We believe that the correct business foundation, coupled with ongoing training and promotional initiatives, is required to increase recruiting and retention of distributors and retailing of our products. This correct business foundation includes strong country management that works closely with the distributor leadership, actively engaged and unified distributor leadership, a broad product line that appeals to local consumer needs, a favorable regulatory environment, a scalable and stable technology platform and an attractive distributor marketing plan. Initiatives, such as Success Training Seminars, Leadership Development Weekends, Promotional Events and regional Extravaganzas are integral components of developing a highly motivated and educated distributor sales organization that will work toward increasing the recruitment and retention of distributors.

We anticipate that our strategy will continue to include creating and maintaining growth within existing markets, while expanding into new markets. In addition, new ideas and DMOs, are being generated in many of our regional markets and are globalized where applicable, through the combined efforts of distributors, country management or regional and corporate management. While we support a number of different DMOs, one of the more popular DMOs is the daily consumption DMO. Under our traditional DMO, a distributor typically sells to its customers on a somewhat infrequent basis (e.g., monthly) which provides fewer opportunities for interaction with their customers. Under a daily consumption DMO, a distributor interacts with its customers on a more frequent basis which enables the distributor to better educate and advise customers about nutrition and the proper use of the products and helps promote daily usage as well, thereby helping the distributor grow his or her business. Specific examples of DMOs include the Club concept in Mexico, Premium Herbalife Opportunity Meetings in Korea, the Healthy Breakfast concept in Russia, and the Internet/Sampling and Weight Loss Challenge in the U.S. Management’s strategy is to review the applicability of expanding successful country initiatives throughout a region, and where appropriate, financially support the globalization of these initiatives.

North America

The North America region reported net sales of $167.0 million for the three months ended March 31, 2011. Net sales increased $15.7 million, or 10.4%, for the three months ended March 31, 2011, as compared to the same period in 2010. In local currency, net sales increased 10.3% for the three months ended March 31, 2011, as compared to the same period in 2010. The overall increase in the region was a result of net sales growth in the U.S. of $15.5 million, or 10.6%, for the three months ended March 31, 2011 as compared to the same period in 2010. We instituted a 3% price increase in the U.S. in early March 2011 which contributed modestly to local currency sales growth.

In the U.S. we continue to see the success of our distributors converting their business focus toward a daily consumption DMO, especially the Nutrition Club DMO, and its extension into Commercial Clubs, along with the continued development of the Weight Loss Challenge DMO. The success of these DMOs have resulted in higher levels of distributor engagement and momentum as reflected by record sales leader retention of 48.3% in 2011 compared to 43.1% in 2010.

Average active sales leaders in the region increased 14.7% for the three months ended March 31, 2011 as compared to the same period in 2010. Average active sales leaders in the U.S. increased 15.0% for the three months ended March 31, 2011 as compared to the same period in 2010. Total sales leaders in the region increased 11.1% as of March 31, 2011 compared to March 31, 2010.

In January 2011, the region hosted a Future President’s Team Retreat with approximately 700 attendees. As part of our “city by city” tour, the region also hosted January Spectaculars and Mega Escuelas where there were more than 9,200 attendees in 14 cities.

In March 2011, Herbalife hosted its annual global Herbalife Honors event in Los Angeles, California where President Team members from around the world met and shared best practices, conducted leadership trainings and Herbalife management awarded distributors $41.3 million in Mark Hughes bonus payments related to 2010 performance.

Mexico

The Mexico region reported net sales of $103.9 million for the three months ended March 31, 2011. Net sales for the three months ended March 31, 2011 increased $32.1 million, or 44.7%, as compared to the same period in 2010. In local currency, net sales for the three months ended March 31, 2011 increased 36.5% as compared to the same period in 2010. The fluctuation of foreign currency rates had a favorable impact of $5.8 million on net sales for the three months ended March 31, 2011.

We believe that the growth in local currency sales is the result of increased distributor engagement as reflected by record 2011 sales leader retention of 57.9% compared to 50.4% in 2010. In addition, since the beginning of 2010 we have significantly expanded our distribution network and product access throughout the country.

Average active sales leaders in Mexico increased 23.2% for the three months ended March 31, 2011 as compared to the same period in 2010. Total sales leaders in Mexico increased 18.9% as of March 31, 2011, compared to March 31, 2010.

In January 2011, the region hosted a Future President’s Team Retreat and Future Millionaire Team Retreat with approximately 550 and 1,300 attendees, respectively.

South and Central America

The South and Central America region reported net sales of $125.3 million for the three months ended March 31, 2011. Net sales increased $34.0 million, or 37.2%, for the three months ended March 31, 2011 as compared to the same period in 2010. In local currency, net sales increased 28.4% for the three months ended March 31, 2011 as compared to the same period in 2010. The fluctuation of foreign currency rates had a $8.0 million favorable impact on net sales for the three months ended March 31, 2011. The increase in net sales for the three months ended March 31, 2011 was driven by increases in net sales in all but three countries in the region.

In Brazil, the region’s largest market, net sales increased $24.1 million, or 51.5%, for the three months ended March 31, 2011 as compared to the same period in 2010. In local currency, net sales increased 40.1% for the three months ended March 31, 2011 as compared to the same period in 2010. The increase in local currency net sales was primarily the result of the successful adoption of Nutrition Clubs and other daily consumption DMOs. The fluctuation of foreign currency rates had a $5.3 million favorable impact on net sales in Brazil for the three months ended March 31, 2011. Sales leader retention in 2011 was a record 46.7% compared to 42.6% in 2010.

Venezuela, the region’s second largest market, experienced a net sales increase of $3.0 million, or 35.0%, for the three months ended March 31, 2011 as compared to the same period in 2010. In local currency, net sales increased 10.3% for the three months ended March 31, 2011 as compared to the same period in 2010. The sales growth in local currency was partially driven by price increases of 8% and 10% in July 2010 and November 2010, respectively. See Liquidity and Capital Resources — Working Capital and Operating Activities below for further discussion of currency exchange rate issues in Venezuela. Sales leader retention in 2011 was 42.0% compared to 31.2% in 2010.

Average active sales leaders in the region increased 13.8% for the three months ended March 31, 2011 as compared to the same period in 2010. Total sales leaders in the region increased 0.7% as of March 31, 2011 compared to March 31, 2010.

In February 2011, the region hosted two Extravaganzas in Buenos Aires, Argentina and Bogota, Colombia. Together, the events had over 15,000 attendees.

EMEA

The EMEA region reported net sales of $153.9 million for the three months ended March 31, 2011. Net sales increased $23.1 million, or 17.7%, for the three months ended March 31, 2011 as compared to the same period in 2010. In local currency, net sales increased 17.5% for the three months ended March 31, 2011 as compared to the same period in 2010. The fluctuation of foreign currency rates had a favorable impact on net sales of $0.2 million for the three months ended March 31, 2011. The increase in net sales for the three months ended March 31, 2011 was driven by increases in net sales in Russia, Commonwealth of Independent States, Italy and Ukraine, partially offset by a decrease in France.

Net sales in Italy, our largest market in the region, increased $2.3 million, or 8.0%, for the three months ended March 31, 2011 as compared to the same period in 2010. In local currency, net sales increased 9.3% for the three months ended March 31, 2011 as compared to the same period in 2010. The increase in net sales was primarily driven by the transition to daily consumption DMOs from the traditional recruiting model. Sales leader retention for 2011 was 58.8% compared to 58.1% in 2010.

Net sales in Russia, our second largest market in the region, increased $8.9 million, or 94.2%, for the three months ended March 31, 2011 as compared to the same period in 2010. In local currency, net sales increased 90.2% for the three months ended March 31, 2011 as compared to the same period in 2010. The increase in Russia was driven by the ongoing adoption of the Commercial Nutrition Club along with additional sales centers which have increased access to our products. Sales leader retention for 2011 was a record 69.6% compared to 60.4% in 2010.

Net sales in Spain, our third largest market in the region, increased $1.5 million, or 15.6%, for the three months ended March 31, 2011 as compared to the same period in 2010. In local currency, net sales in Spain increased 17.0% for the three months ended March 31, 2011 as compared to the same period in 2010. The increase in Spain was mainly due to the positive effect of increased distributor engagement and recruitment which was aided by our sponsorship of FC Barcelona. Sales leader retention for 2011 was a record 65.5% compared to 44.8% in 2011.

Net sales in France, our fourth largest market in the region, decreased $2.5 million, or 27.2%, for the three months ended March 31, 2011 as compared to the same period in 2010. In local currency, net sales in France decreased 26.3% for the three months ended March 31, 2011 as compared to the same period in 2010. The decrease in net sales in France was mainly due to lower recruiting. Sales leader retention in 2011 was 43.5% compared to 36.6% in 2010.

Average active sales leaders in the region increased 12.2% for the three months ended March 31, 2011 as compared to the same period in 2010. Total sales leaders in the region increased 6.0% as of March 31, 2011 compared to March 31, 2010.

There were no major events for the region in the first quarter.

Asia Pacific

The Asia Pacific region, which excludes China, reported net sales of $199.3 million for the three months ended March 31, 2011. Net sales increased $58.3 million, or 41.3%, for the three months ended March 31, 2011 as compared to the same period in 2010. In local currency, net sales increased 35.6% for the three months ended March 31, 2011 as compared to the same period in 2010. The fluctuation of foreign currency rates had a favorable impact of $8.1 million on net sales for the three months ended March 31 2011. The increase in net sales for the three months ended March 31, 2011 was broad based with all but three countries in the region showing year-over-year net sales growth led by South Korea, India, Malaysia, and Indonesia.

Net sales in South Korea, our largest market in the region, increased $26.3 million, or 73.7%, for the three months ended March 31, 2011 as compared to the same period in 2010. In local currency, net sales increased 69.9% for the three months ended March 31, 2011 as compared to the same period in 2010. The increase in net sales was primarily driven by the successful adoption and operation of the Nutrition Club DMO, in the form of Commercial Clubs along with the Mega and Premium Herbalife Opportunity Meetings. The fluctuation of foreign currency rates had a favorable impact on net sales of $1.3 million for the three months ended March 31, 2011 as compared to the same period in 2010. Sales leader retention in 2011 was 38.1% compared to 36.5% in 2010.

Net sales in Taiwan, our second largest market in the region, increased $0.7 million, or 1.8%, for the three months ended March 31, 2011 as compared to the same period in 2010. In local currency, net sales decreased 6.6% for the three months ended March 31, 2011 as compared to the same period in 2010. The fluctuation of foreign currency rates had a favorable impact on net sales of $3.1 million for the three months ended March 31, 2011 as compared to the same period in 2010. Sales leader retention in 2011 was 41.0% compared to 43.0% in 2010.

Net sales in India, our third largest market in the region, increased $16.6 million, or 164.7%, for the three months ended March 31, 2011 as compared to the same period in 2010. In local currency, net sales increased 160.9% for the three months ended March 31, 2011 as compared to the same period in 2010. The increase in net sales for the three months ended March 31, 2011 was primarily driven by the successful adoption of the Nutrition Club DMO. The fluctuation of foreign currency rates had a favorable impact on net sales of $0.4 million for the three months ended March 31, 2011 as compared to the same period in 2010. Sales leader retention in 2011 was a record 32.9% compared to 31.5% in 2010.

Net sales in Malaysia, our fourth largest market in the region, increased $5.5 million, or 41.3%, for the three months ended March 31, 2011 as compared to the same period in 2010, reflecting the continued success of the Road Show DMO, which has generated positive distributor momentum and increased recruiting. In local currency, net sales increased 27.7% for the three months ended March 31, 2011 as compared to the same period in 2010. The fluctuation of foreign currency rates had a favorable impact on net sales of $1.8 million for the three months ended March 31, 2011 as compared to the same period in 2010. Sales leader retention stayed constant in 2011 compared to 2010 at 32.6%.

Net sales in Japan, our fifth largest market in the region, decreased $0.1 million, or 0.5%, for the three months ended March 31, 2011 as compared to the same period in 2010. In local currency, net sales increased 1.8% for the three months ended March 31, 2011 as compared to the same period in 2010. The fluctuation of foreign currency rates had an unfavorable impact on net sales of $0.3 million for the three months ended March 31, 2011 as compared to the same period in 2010. Sales leader retention in 2011 was a record 62.7% compared to 52.0% in 2010. The earthquake and resulting tsunami in early March do not appear to have had a significant negative impact on sales following these tragedies. Japan represented approximately 2% of our worldwide sales for the quarter ended March 31, 2011.

Average active sales leaders in the region increased 27.0% for the three months ended March 31, 2011 as compared to the same period in 2010. Total sales leaders in the region increased 22.1% as of March 31, 2011 compared to March 31, 2010.

There were no major events for the region in the first quarter.

China

Net sales in China were $45.7 million for the three months ended March 31, 2011. Net sales increased $13.3 million, or 41.0%, for the three months ended March 31, 2011 as compared to the same period in 2010. In local currency, net sales increased 36.3% for the three months ended March 31, 2011 as compared to the same period in 2010. The fluctuation of foreign currency rates had a favorable impact of $1.6 million on net sales for the three months ended March 31, 2010.

The current focus in China is to expand the Nutrition Club DMO to enhance the retail focus and thereby increase the emphasis on daily consumption DMOs. We believe that the Nutrition Club concept is slowly starting to gain traction as evidenced by the growth in clubs over the past year. While we believe the Nutrition Club DMO has tremendous potential to expand throughout China and achieve success similar to Taiwan and South Korea, we also realize that the process is still in its early development stage and will most likely build gradually over the next few years.

As of March 31, 2011, we had direct-selling licenses in 16 provinces and we were operating 71 retail stores in 30 provinces in China. The 16 provinces in which we now have direct-selling licenses represent an addressable population of approximately 844 million.

Average active sales leaders in China increased 36.7% for the three months ended March 31, 2011 as compared to the same period in 2010. Total sales leaders in China increased 10.8% as of March 31, 2011 compared to March 31, 2010.

Sales by Product Category

		Three Months Ended March 31,
		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
		(In millions)
Weight Management		$	806.1			$	(383.7	)		$	422.4			$	76.2			$	498.6			$	630.6			$	(302.2	)		$	328.4			$	58.8			$	387.2				28.8	%
Targeted Nutrition			291.5				(138.8	)			152.7				27.5				180.2				225.7				(108.2	)			117.5				21.1				138.6				30.0	%
Energy, Sports and Fitness			57.5				(27.4	)			30.1				5.4				35.5				42.1				(20.2	)			21.9				3.9				25.8				37.6	%
Outer Nutrition			59.1				(28.1	)			31.0				5.6				36.6				50.6				(24.3	)			26.3				4.7				31.0				18.1	%
Literature, Promotional and Other			38.6				2.0				40.6				3.6				44.2				31.5				1.6				33.1				2.9				36.0				22.8	%
Total		$	1,252.8			$	(576.0	)		$	676.8			$	118.3			$	795.1			$	980.5			$	(453.3	)		$	527.2			$	91.4			$	618.6				28.5	%

Net sales for all product categories increased for the three months ended March 31, 2011 as compared to the same periods in 2010, mainly due to the factors described in the above discussions of the individual geographic regions.

Gross Profit

Gross profit was $632.3 million for the three months ended March 31, 2011, as compared to $478.2 million for the three months ended March 31, 2010. As a percentage of net sales, gross profit for the three months ended March 31, 2011 increased to 79.5%, as compared to 77.3% for the same period in 2010, or a favorable net increase of 220 basis points. 216 basis points of the favorable net increase related to circumstances surrounding Herbalife Venezuela and Venezuela’s highly inflationary economy, the circumstances of which are described in great detail throughout our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, or the 2010 10-K. Specifically, the 216 basis point increase resulted from the combination of (i) 206 favorable basis points from recognizing an unfavorable foreign exchange impact of $12.7 million during the first quarter 2010, relating to the incremental U.S. dollar cost of importing finished goods into Venezuela at the unfavorable parallel market rate rather than the CADIVI official rate, and (ii) 10 favorable basis points from the impact of remeasuring Herbalife Venezuela’s Bolivar net sales at the SITME rate during the first quarter 2011, as opposed to being measured at the less favorable old parallel market rate during the first quarter 2010. See Liquidity and Capital Resources — Working Capital and Operating Activities below for further discussion on currency exchange rate issues in Venezuela. We believe that at least in the near term we will continue to have the ability to partially mitigate certain cost pressures through improved optimization of our supply chain coupled with select increases in the retail prices of our products.

Royalty Overrides

Royalty overrides were $264.4 million for the three months ended March 31, 2011, as compared to $207.3 million for the same period in 2010. Royalty overrides as a percentage of net sales was 33.2% for the three months ended March 31, 2011, as compared to 33.5% for the same period in 2010. Generally, this ratio varies slightly from period to period due to changes in the mix of products and countries because full royalty overrides are not paid on certain products and in certain countries. Compensation to our full-time sales employees and licensed business providers in China is included in selling, general and administrative expenses as opposed to royalty overrides where it is included for all other distributors under our worldwide marketing plan. We anticipate fluctuations in royalty overrides as a percentage of net sales reflecting the growth prospect of our China business relative to that of our worldwide business.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $244.5 million for the three months ended March 31, 2011, as compared to $206.9 million for the same period in 2010. Selling, general and administrative expenses as a percentage of net sales was 30.8% for the three months ended March 31, 2011, as compared to 33.4% for the same period in 2010.

The increase in selling, general and administrative expenses for the three months ended March 31, 2011 included $16.5 million in higher salaries, bonuses and benefits, excluding China sales employees; higher variable expenses including $12.1 million in higher distributor promotion and event costs, $5.6 million in higher expenses related to China sales employees and licensed business providers, $2.3 million in higher credit card fees and $5.6 million in higher non-income tax expense; partially offset by lower foreign exchange losses of $10.3 million mainly due to a $11.4 million net foreign exchange loss related to Venezuela that was recorded during the three months ended March 31, 2010.

Net Interest Expense

Net interest expense is as follows:

		Three Months Ended
		March 31,				March 31,
Net Interest Expense		2011				2010
		(Dollars in millions)
Interest expense			3.3				2.4
Interest income			(0.7	)			(0.5	)
Net interest expense		$	2.6			$	1.9

The increase in net interest expense for the three months ended March 31, 2011 as compared to the same period in 2010 was primarily due to the write-off of unamortized deferred financing cost related to the extinguishment of our Prior Credit Facility. See Liquidity and Capital Resources below for further discussion of the refinancing.

Income Taxes

Income taxes were $33.2 million for the three month ended March 31, 2011, as compared to $10.1 million for the same period in 2010. As a percentage of pre-tax income, the effective income tax rate was 27.5% for the three months ended March 31, 2011, as compared to 16.3% for the same period in 2010. The increase in the effective tax rate for the three months ended March 31, 2011, as compared to the same period in 2010, was primarily due to the conversion of Venezuela to a hyperinflationary currency in 2010, for which a $14.5 million deferred income tax benefit was recorded during the three months ended March 31, 2010, as well as a change in the operating effective rate reflecting changes in the country mix. See Note 12, Income Taxes, in the notes to the consolidated financial statements in the 2010 10-K for additional discussion on the income tax impact related to Venezuela becoming a highly inflationary economy.

Subsequent Events

On April 28, 2011, our shareholders approved a 2-for-1 split of our common shares. One additional common share will be distributed to our shareholders on or around May 17, 2011, for each common share held on May 10, 2011.

On May 2, 2011, we announced that our board of directors approved a post stock split cash dividend of $0.20 per common share, payable on June 7, 2011 to shareholders of record as of May 24, 2011.

Liquidity and Capital Resources

We have historically met our working capital and capital expenditure requirements, including funding for expansion of operations, through net cash flows provided by operating activities. Our principal source of liquidity is our operating cash flows. Variations in sales of our products would directly affect the availability of funds. There are no material contractual restrictions on the ability to transfer and remit funds among our international affiliated companies. However, as discussed below there are foreign currency restrictions in Venezuela. As noted above, we have historically met our funding needs utilizing cash flow from operating activities and we believe we will have sufficient resources to meet debt service obligations in a timely manner. Our existing debt has not resulted from the need to fund our normal operations, but instead has effectively resulted from our share repurchase and dividend activities over recent years, which together, since the inception of these programs in 2007, amounted to approximately $935.6 million. While a significant net sales decline could potentially affect the availability of funds, many of our largest expenses are purely variable in nature, which we believe protects our funding in all but a dramatic net sales downturn. Further, as discussed in greater detail below, we maintain a revolving credit facility, recently executed on March 9, 2011, which had $520.0 million of undrawn capacity as of March 31, 2011.

For the three months ended March 31, 2011, we generated $107.5 million of operating cash flow, as compared to $87.4 million for the same period in 2010. The increase in cash generated from operations was primarily due to an increase in operating income of $59.4 million driven by a 28.5% growth in net sales for the three months ended March 31, 2011 as compared to the same period in 2010.

Capital expenditures, including capital leases, for the three months ended March 31, 2011 and 2010, were $28.3 million and $11.6 million, respectively. The majority of these expenditures represented investments in management information systems, the development of our distributor internet initiatives, and the expansion of our warehouse, sales centers and manufacturing facilities domestically and internationally. We expect to incur total capital expenditures of approximately $80 million to $90 million for all of 2011.

On March 9, 2011, we 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 senior secured credit facility, or the 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 our consolidated leverage ratio, U.S. dollar borrowings under the New Credit Facility will 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%. We, based on our consolidated leverage ratio, will pay 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 us 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, we used $196.0 million in U.S. dollar borrowings under the New Credit Facility to repay all amounts outstanding under the Prior Credit Facility. We incurred approximately $5.5 million of debt issuance costs in connection with the New Credit Facility. These debt issuance costs were recorded as deferred financing costs on our condensed consolidated balance sheet and are being amortized over the term of the New Credit Facility. On March 31, 2011 and December 31, 2010, the weighted average interest rate for borrowings under the New Credit Facility and the Prior Credit Facility was 1.99% and 1.75%, respectively.

The New Credit Facility requires us 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 our ability to incur liens, incur indebtedness, make investments, dispose of assets, make certain restricted payments, pay dividends, merge or consolidate and enter into certain transactions with affiliates. As of March 31, 2011, we were in compliance with these covenants.

During the three months ended March 31, 2011, we borrowed $235.7 million and $54.0 million under the New Credit Facility and the 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.

The following summarizes our contractual obligations including interest at March 31, 2011, and the effect such obligations are expected to have on our liquidity and cash flows in future periods:

		Payments Due by Period
																		2016 &
		Total				2011				2012 – 2013				2014 – 2015				Thereafter
		(Dollars in millions)
Borrowings under the senior credit facility, including expected interest		$	197.8			$	2.7			$	7.2			$	7.2			$	180.7
Capital leases, including expected interest			2.7				1.6				1.1				—				—
Operating leases			168.4				31.9				65.8				43.0				27.7
Other			16.5				6.5				10.0				—				—
Total		$	385.4			$	42.7			$	84.1			$	50.2			$	208.4

Off Balance Sheet Arrangements

At March 31, 2011 and December 31, 2010, we had no material off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.

Dividends

The declaration of future dividends is subject to the discretion of our board of directors and will depend upon various factors, including our earnings, financial condition, restrictions imposed by the New Credit Facility, cash requirements, future prospects and other factors deemed relevant by our board of directors. The New Credit Facility 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, we announced that our board of directors approved a quarterly cash dividend of $0.25 per common share in an aggregate amount of $14.8 million that was paid to shareholders on March 22, 2011. The aggregate amount of dividends declared and paid during the three months ended March 31, 2011 and 2010 were $14.8 million and $12.1 million, respectively.

Share Repurchases

On April 30, 2009, we announced that our board of directors authorized a new program for us to repurchase up to $300 million of Herbalife common shares during the next two years, at such times and prices as determined by management. On May 3, 2010, our board of directors approved an increase to the share repurchase authorization from $300 million to $1 billion. In addition, our board of directors approved the extension of the expiration date of the share repurchase program from April 2011 to December 2014. We did not repurchase any common shares in the open market during the three months ended March 31, 2011. As of March 31, 2011, the remaining authorized capacity under our share repurchase program was approximately $776.7 million.

Stock Split

On February 18, 2011, our Board of Directors approved a two-for-one split of our common shares, subject to approval by our shareholders at our Annual General Meeting of Shareholders held on April 28, 2011. See Note 14, Subsequent Events, to the Notes to the Condensed Consolidated Financial Statements for further information on the stock split being approved by our shareholders on April 28, 2011.

Working Capital and Operating Activities

As of March 31, 2011 and December 31, 2010, we had positive working capital of $210.9 million, and $124.8 million, respectively. Cash and cash equivalents were $260.8 million at March 31, 2011 and $190.6 million at December 31, 2010.

We expect that cash and funds provided from operations and available borrowings under our revolving credit facility will provide sufficient working capital to operate our business, to make expected capital expenditures and to meet foreseeable liquidity requirements, including amounts outstanding under our New Credit Facility, for the next twelve months.

The majority of our purchases from suppliers are generally made in U.S. dollars, while sales to our distributors generally are made in local currencies. Consequently, strengthening of the U.S. dollar versus a foreign currency can have a negative impact on net sales and operating margins and can generate transaction losses on intercompany transactions. For discussion of our foreign exchange contracts and other hedging arrangements, see Part I, Item 3 — Quantitative and Qualitative Disclosures about Market Risk.

Venezuela

Currency Restrictions

Currency restrictions enacted by the Venezuelan government in 2003 have become more restrictive and have impacted the ability of our 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, we have 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. As an alternative exchange mechanism, we have also participated in certain bond offerings from the Venezuelan government and from Petróleos de Venezuela, S.A. or PDVSA, a Venezuelan state-owned petroleum company, where we effectively purchased bonds with our Bolivars and then sold the bonds for U.S. dollars. In other instances, we used a legal 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 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.

In late December 2010, Venezuela announced that the CADIVI official exchange rate of 2.6 Bolivars per U.S. dollar would be eliminated and the CADIVI official exchange of 4.3 Bolivars per U.S. dollar would be used for all essential items and non-essential items beginning January 2011. This devaluation did not have a material impact on our condensed consolidated financial statements. At March 31, 2011, we used the SITME rate of 5.3 Bolivars per U.S. dollar for remeasurement purposes.

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 PDVSA 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 our consolidated balance sheet at December 31, 2010. This Bolivar to U.S. dollar conversion resulted in us recording a net pre-tax loss of $1.3 million U.S. dollars in our condensed consolidated statement of income for the three months ended March 31, 2011.

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

Consolidation of Herbalife Venezuela

We plan to continue our operation in Venezuela and to import products into Venezuela despite the foreign currency constraints. 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, we continue 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, we continue to consolidate Herbalife Venezuela in our consolidated financial statements for U.S. GAAP purposes. Substantially all of Herbalife Venezuela’s Bolivar denominated assets and liabilities are currently being remeasured at the SITME rate.

Although there are delays in the CADIVI approval process, when applicable, we plan to continue applying to CADIVI to obtain the official rate relating to the importation of our products. In addition, we plan to utilize the SITME market to the extent allowable under current restrictions in order to exchange Bolivars to U.S. dollars. Our 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. We continue to assess and monitor the current economic and political environment in Venezuela.

As of March 31, 2011, Herbalife Venezuela’s net monetary Bolivar denominated assets and liabilities were approximately $9.0 million, and included approximately $13.1 million in Bolivar denominated cash and cash equivalents and approximately $4.8 million in U.S. dollar denominated cash. The majority of these Bolivar denominated assets and liabilities were remeasured at the regulated SITME rate. Although Venezuela is an important market in our South and Central America Region, Herbalife Venezuela’s net sales represented less than 2% of our consolidated net sales for both the three months ended March 31, 2011 and 2010 and its total assets represented less than 3% of our consolidated total assets as of both March 31, 2011 and December 31, 2010.

Contingencies

We are from time to time engaged in routine litigation. We regularly review all pending litigation matters in which we are involved and establish 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, we have been and are currently subjected to various product liability claims. The effects of these claims to date have not been material to us, and the reasonably possible range of exposure on currently existing claims is not material to us. We believe that we have meritorious defenses to the allegations contained in the lawsuits. We currently maintain 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 our 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 parties have reached a settlement of the case which they are in the process of documenting. Herbalife will incur no financial liability in this settlement.

Certain of our 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. We and our tax advisors believe that there are substantial defenses to their allegations that additional taxes are owed, and we are vigorously contesting the additional proposed taxes and related charges. On May 7, 2010, we received an administrative assessment from the Mexican Tax Administration Service in an amount equivalent to approximately $96 million, translated at the 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 during the years 2005 and 2006. This assessment is subject to interest and inflationary adjustments. On July 8, 2010, we initiated a formal administrative appeal process. In connection with the appeal of the assessment, we may be required to post bonds for some or all of the assessed amount. Therefore, in July 2010, we 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 our New Credit Facility. We did not record a provision as we, based on analysis and guidance from our advisors, do not believe a loss is probable. Further, we are currently unable to reasonably estimate a possible loss or range of loss that could result from an unfavorable outcome in respect to this assessment or any additional assessments that may be issued for these or other periods. We believe that we have meritorious defenses and are vigorously pursuing the appeal, but final resolution of this matter could take several years.

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

Critical Accounting Policies

U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. We regularly evaluate our estimates and assumptions related to revenue recognition, allowance for product returns, inventory reserves, share-based compensation expense, goodwill and purchased intangible asset valuations, deferred income tax asset valuation allowances, uncertain tax positions, tax contingencies, and other loss contingencies. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses. Actual results could differ from those estimates. We consider the following policies to be most critical in understanding the judgments that are involved in preparing the financial statements and the uncertainties that could impact our operating results, financial condition and cash flows.

We are a network marketing company that sells a wide range of weight management products, nutritional supplements, energy, sports & fitness products and personal care products within one industry segment as defined under Financial Accounting Standard Board, or FASB, Accounting Standards Codification, or ASC, Topic 280, Segment Reporting. Our products are manufactured by third party providers and manufactured in our Suzhou, China facility, and in our manufacturing facility located in Lake Forest, California, and then are sold to independent distributors who sell Herbalife products to retail consumers or other distributors. As of March 31, 2011, we sold products in 75 countries throughout the world and we are organized and managed by geographic region. We have elected to aggregate our operating segments into one reporting segment, except China, as management believes that our 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.

Revenue is recognized when products are shipped and title and risk of loss passes to the independent distributor or importer or as products are sold in our retail stores in China. Sales are recognized on a net sales basis, which reflects product returns, net of discounts referred to as “distributor allowances”, and amounts billed for shipping and handling costs. We generally receive the net sales price in cash or through credit card payments at the point of sale. Related royalty overrides and allowances for product returns are recorded when revenue is recognized.

Allowances for product returns, primarily in connection with our buyback program, are provided at the time the product is shipped. This accrual is based upon historical return rates for each country and the relevant return pattern, which reflects anticipated returns to be received over a period of up to 12 months following the original sale. Historically, product returns and buybacks have not been significant. Product returns and buybacks were approximately 0.4% of retail sales for both the three months ended March 31, 2011 and 2010.

We record reserves against our inventory to provide for estimated obsolete or unsalable inventory based on assumptions regarding future demand for our products and market conditions. If future demand and market conditions are less favorable than management’s assumptions, additional reserves could be required. Likewise, favorable future demand and market conditions could positively impact future operating results if previously reserved for inventory is sold. We reserved for obsolete and slow moving inventory totaling $10.6 million and $9.4 million as of March 31, 2011 and December 31, 2010, respectively.

In accordance with the FASB ASC Topic 360, Property, Plant and Equipment, property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

Goodwill and marketing related intangible assets not subject to amortization are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. In order to estimate the fair value of goodwill, we primarily use the discounted cash flow model, known as the income approach. The determination of impairment is made at the reporting unit level and consists of two steps. First, we determine the fair value of a reporting unit and compare it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill and other intangibles over the implied fair value. The implied fair value of goodwill is determined in a similar manner as how the amount of goodwill recognized in a business combination is determined, in accordance with FASB ASC Topic 805, Business Combinations. We would assign the fair value of a reporting unit to all of the assets and liabilities of that reporting unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. As of March 31, 2011, and December 31, 2010, we had goodwill of approximately $102.9 million for both periods, and marketing related intangible assets of approximately $310.0 million for both periods No marketing related intangibles or goodwill impairment was recorded during the three months ended March 31, 2011 and 2010.

Contingencies are accounted for in accordance with the FASB ASC Topic 450, Contingencies, or ASC 450. ASC 450 requires that we record an estimated loss from a loss contingency when information available prior to issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Accounting for contingencies such as legal and income tax matters requires us to use judgment related to both the likelihood of a loss and the estimate of the amount or range of loss. Many of these legal and tax contingencies can take years to be resolved. Generally, as the time period increases over which the uncertainties are resolved, the likelihood of changes to the estimate of the ultimate outcome increases.

Deferred income tax assets have been established for net operating loss carryforwards of certain foreign subsidiaries and have been reduced by a valuation allowance to reflect them at amounts estimated to be ultimately realized. The net operating loss carryforwards expire in varying amounts over a future period of time. Realization of the income tax carryforwards is dependent on generating sufficient taxable income prior to expiration of the carryforwards. Although realization is not assured, we believe it is more likely than not that the net carrying value of the income tax carryforwards will be realized. The amount of the income tax carryforwards that is considered realizable, however, could change if estimates of future taxable income during the carryforward period are adjusted. In the ordinary course of our business, there are many transactions and calculations where the tax law and ultimate tax determination is uncertain. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate prior to the completion and filing of tax returns for such periods. This process requires estimating both our geographic mix of income and our uncertain tax positions in each jurisdiction where we operate. These estimates involve complex issues and require us to make judgments about the likely application of the tax law to our situation, as well as with respect to other matters, such as anticipating the positions that we will take on tax returns prior to our actually preparing the returns and the outcomes of disputes with tax authorities. The ultimate resolution of these issues may take extended periods of time due to examinations by tax authorities and statutes of limitations. In addition, changes in our business, including acquisitions, changes in our international corporate structure, changes in the geographic location of business functions or assets, changes in the geographic mix and amount of income, as well as changes in our agreements with tax authorities, valuation allowances, applicable accounting rules, applicable tax laws and regulations, rulings and interpretations thereof, developments in tax audit and other matters, and variations in the estimated and actual level of annual pre-tax income can affect the overall effective income tax rate.

We account for uncertain tax positions in accordance with the FASB ASC Topic 740, Income Taxes, or ASC 740, which provides guidance on the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, we must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.

We account for share-based compensation in accordance with the FASB ASC Topic 718, Compensation-Stock Compensation, or ASC 718. Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the value of the award and is recognized as an expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating our stock price volatility and employee stock award exercise behaviors. Our expected volatility is based upon the historical volatility of our common shares and, due to the limited period of public trading data for our common shares, it is also validated against the volatility of a company peer group. The expected life of awards is based on the simple average of the average vesting period and the life of the award, or the simplified method. As share-based compensation expense recognized in the Statements of Income is based on awards ultimately expected to vest, the amount of expense has been reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. If actual forfeitures differ from estimates, additional expense or reversal of previous expense are recorded. Forfeitures were estimated based on historical experience.

We account for foreign currency transactions in accordance with ASC Topic 830, Foreign Currency Matters. In a majority of the countries where we operate, the functional currency is the local currency. Our foreign subsidiaries’ asset and liability accounts are translated for consolidated financial reporting purposes into U.S. dollar amounts at year-end exchange rates. Revenue and expense accounts are translated at the average rates during the year. Our foreign exchange translation adjustments are included in accumulated other comprehensive loss on our accompanying consolidated balance sheets. Foreign currency transaction gains and losses and foreign currency remeasurements are included in selling, general and administrative expenses in the accompanying consolidated statements of income.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks, which arise during the normal course of business from changes in interest rates and foreign currency exchange rates. On a selected basis, we use derivative financial instruments to manage or hedge these risks. All hedging transactions are authorized and executed pursuant to written guidelines and procedures.

We have adopted FASB ASC Topic 815, Derivatives and Hedging, or ASC 815, which established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair-value hedge, the changes in the fair value of the derivative and the underlying hedged item are recognized concurrently in earnings. If the derivative is designated as a cash-flow hedge, changes in the fair value of the derivative are recorded in other comprehensive income (loss) and are recognized in the consolidated statements of income when the hedged item affects earnings. ASC 815 defines the requirements for designation and documentation of hedging relationships as well as ongoing effectiveness assessments in order to use hedge accounting. For a derivative that does not qualify as a hedge, changes in fair value are recognized concurrently in earnings.

A discussion of our primary market risk exposures and derivatives is presented below.

Foreign Exchange Risk

We transact business globally and are subject to risks associated with changes in foreign exchange rates. Our objective is to minimize the impact to earnings and cash flow fluctuations associated with foreign exchange rate fluctuations. We enter into foreign exchange derivatives in the ordinary course of business primarily to reduce exposure to currency fluctuations attributable to intercompany transactions, translation of local currency revenue, inventory purchases subject to foreign currency exposure, and to partially mitigate the impact of foreign currency rate fluctuations. Due to the recent significant volatility in the foreign exchange market, our current strategy, in general, is to hedge some of the significant exposures on a short-term basis. We will continue to monitor the foreign exchange market and evaluate our hedging strategy accordingly. With the exception of our foreign exchange forward contracts relating to forecasted inventory purchases and intercompany management fees as discussed below in this section, all of our foreign exchange contracts are designated as free standing derivatives for which hedge accounting does not apply. The changes in the fair market value of the derivatives not qualifying as cash flow hedges are included in selling, general and administrative expenses in our consolidated statements of income.

The foreign exchange forward contracts designated as free standing derivatives are used to hedge advances between subsidiaries and to partially mitigate the impact of foreign currency fluctuations. Foreign exchange average rate option contracts are also used to mitigate the impact of foreign currency rate fluctuations. The objective of these contracts is to neutralize the impact of foreign currency movements on the operating results of our subsidiaries. The fair value of forward and option contracts is based on third-party bank quotes.

We also purchase 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. We applied the hedge accounting rules as required by ASC 815 for these hedges. These contracts allow us to sell Euros in exchange for U.S. dollars at specified contract rates. As of March 31, 2011, and December 31, 2010, the aggregate notional amounts of these contracts outstanding were approximately $21.6 million and $32.1 million, respectively. At March 31, 2011, the outstanding contracts were expected to mature over the next nine months. Our derivative financial instruments are recorded on the consolidated balance sheet at fair value based on quoted market rates. For the forecasted inventory purchases, the 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. We also hedge 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 loss within shareholders’ equity, and are recognized in selling, general and administrative expenses in the consolidated statement of income in the period when the hedged item and underlying transaction affects earnings. As of March 31, 2011, we recorded liabilities at fair value of $2.1 million relating to all outstanding foreign currency contracts designated as cash-flow hedges. As of December 31, 2010, we 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. We assess hedge effectiveness and measures hedge ineffectiveness at least quarterly. During the three months ended March 31, 2011 and 2010, the ineffective portion relating to these hedges was immaterial and the hedges remained effective as of March 31, 2011.

As of March 31, 2011, and December 31, 2010, the majority of our outstanding foreign currency forward contracts had maturity dates of less than nine months with the majority of freestanding derivatives expiring within two months. There were no foreign currency option contracts outstanding as of March 31, 2011 and December 31, 2010.

The following table provides information about the details of our foreign exchange forward contracts:

		Average								Fair
		Contract				Notional				Value
Foreign Currency		Rate				Amount				Gain (Loss)
						(In millions)				(In millions)
At March 31, 2011
Buy BRL sell USD			1.69			$	5.9			$	0.2
Buy CLP sell EUR			685.00			$	0.3			$	—
Buy EUR sell ARS			5.72			$	0.7			$	—
Buy EUR sell AUD			1.42			$	0.6			$	—
Buy EUR sell CLP			681.97			$	0.9			$	—
Buy EUR sell GBP			0.88			$	2.5			$	—
Buy EUR sell JPY			112.68			$	2.2			$	0.1

		Average								Fair
		Contract				Notional				Value
Foreign Currency		Rate				Amount				Gain (Loss)
						(In millions)				(In millions)
Buy EUR sell MXN			16.65			$	23.6			$	0.3
Buy EUR sell MYR			4.29			$	1.0			$	—
Buy EUR sell RUB			40.33			$	1.7			$	—
Buy EUR sell USD			1.37			$	81.6			$	2.7
Buy EUR sell ZAR			9.88			$	0.9			$	—
Buy GBP sell EUR			0.87			$	3.2			$	—
Buy GBP sell ILS			5.74			$	1.4			$	—
Buy GBP sell USD			1.61			$	6.3			$	—
Buy INR sell USD			45.53			$	0.8			$	—
Buy JPY sell EUR			115.81			$	0.3			$	—
Buy JPY sell USD			81.50			$	9.8			$	(0.2	)
Buy KRW sell USD			1,125.00			$	14.2			$	0.3
Buy MXN sell EUR			16.65			$	4.7			$	(0.1	)
Buy MXN sell USD			12.16			$	1.0			$	—
Buy MYR sell EUR			4.28			$	0.2			$	—
Buy MYR sell USD			3.07			$	12.3			$	0.2
Buy PEN sell USD			2.81			$	5.5			$	—
Buy RUB sell USD			28.40			$	0.7			$	—
Buy USD sell BRL			1.69			$	17.2			$	(0.5	)
Buy USD sell COP			1,905.21			$	4.2			$	(0.1	)
Buy USD sell EUR			1.37			$	65.9			$	(2.2	)
Buy USD sell GBP			1.60			$	6.6			$	—
Buy USD sell INR			45.48			$	4.4			$	(0.1	)
Buy USD sell JPY			81.19			$	2.5			$	0.1
Buy USD sell KRW			1,123.70			$	0.9			$	—
Buy USD sell MXN			12.04			$	1.7			$	—
Buy USD sell MYR			3.06			$	0.9			$	—
Buy USD sell PHP			43.60			$	3.2			$	—
Buy USD sell RUB			29.36			$	1.3			$	—
Buy USD sell ZAR			7.07			$	0.8			$	—
Buy ZAR sell EUR			9.92			$	0.7			$	—
Buy ZAR sell USD			7.01			$	0.2			$	—
Total forward contracts						$	292.8			$	0.7