e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
FOR ANNUAL AND TRANSITION
REPORTS
PURSUANT TO SECTIONS 13 OR
15(d) OF THE
SECURITIES EXCHANGE ACT OF
1934
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2010
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number: 1-32381
HERBALIFE LTD.
(Exact Name of Registrant as
Specified in Its Charter)
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Cayman Islands
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98-0377871
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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P.O. Box 309GT
Ugland House, South Church Street
Grand Cayman, Cayman Islands
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(Zip Code)
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(Address of Principal Executive
Offices)
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(213) 745-0500
(Registrants
telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Shares, par value $0.002 per share
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229,405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, 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):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether registrant is a shell company (as
defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
There were 59,051,900 common shares outstanding as of
February 17, 2011. The aggregate market value of the
Registrants common shares held by non-affiliates was
approximately $2,101 million as of June 30, 2010,
based upon the last reported sales price on the New York Stock
Exchange on that date of $46.05.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants Definitive Proxy Statement to
be filed with the Securities and Exchange Commission no later
than 120 days after the end of the Registrants fiscal
year ended December 31, 2010, are incorporated by reference
in Part III of this Annual Report on
Form 10-K.
TABLE
OF CONTENTS
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Page
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PART I
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Item 1.
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Business
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4
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Item 1a.
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Risk Factors
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25
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Item 1b.
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Unresolved Staff Comments
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42
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Item 2.
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Properties
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42
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Item 3.
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Legal Proceedings
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42
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Item 4.
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(Removed and Reserved)
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43
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PART II
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Item 5.
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Market for Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases Of Equity Securities
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44
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Item 6.
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Selected Financial Data
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48
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Item 7.
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Managements Discussion and Analysis of Financial Condition
and Results of Operations
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50
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Item 7a.
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Quantitative and Qualitative Disclosures About Market Risk
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79
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Item 8.
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Financial Statements and Supplementary Data
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84
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Item 9.
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Changes In and Disagreements With Accountants On Accounting and
Financial Disclosure
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84
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Item 9a.
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Controls and Procedures
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84
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Item 9b.
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Other Information
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87
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PART III
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Item 10.
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Directors, Executive Officers and Corporate Governance
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87
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Item 11.
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Executive Compensation
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87
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
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87
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Item 13.
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Certain Relationships and Related Transactions, and Director
Independence
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87
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Item 14.
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Principal Accountant Fees and Services
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87
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PART IV
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Item 15.
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Exhibits and Financial Statement Schedules
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88
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Signatures
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131
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2
FORWARD-LOOKING
STATEMENTS
This document contains forward-looking statements
within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements other than
statements of historical fact are forward-looking
statements for purposes of federal and state securities
laws, including any projections of earnings, revenue or other
financial items; any statements of the plans, strategies and
objectives of management for future operations; any statements
concerning proposed new services or developments; any statements
regarding future economic conditions or performance; any
statements of belief; and any statements of assumptions
underlying any of the foregoing. Forward-looking statements may
include the words may, will,
estimate, intend, continue,
believe, expect or
anticipate and any other similar words.
Although we believe that the expectations reflected in any of
our forward-looking statements are reasonable, actual results
could differ materially from those projected or assumed in any
of our forward-looking statements. Our future financial
condition and results of operations, as well as any
forward-looking statements, are subject to change and to
inherent risks and uncertainties, such as those disclosed or
incorporated by reference in our filings with the Securities and
Exchange Commission. Important factors that could cause our
actual results, performance and achievements, or industry
results to differ materially from estimates or projections
contained in our forward-looking statements include, among
others, the following:
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any collateral impact resulting from the ongoing worldwide
financial crisis, including the availability of
liquidity to us, our customers and our suppliers or the
willingness of our customers to purchase products in a
recessionary economic environment;
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our relationship with, and our ability to influence the actions
of, our distributors;
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improper action by our employees or distributors in violation of
applicable law;
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adverse publicity associated with our products or network
marketing organization;
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changing consumer preferences and demands;
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our reliance upon, or the loss or departure of any member of,
our senior management team which could negatively impact our
distributor relations and operating results;
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the competitive nature of our business;
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regulatory matters governing our products, including potential
governmental or regulatory actions concerning the safety or
efficacy of our products and network marketing program,
including the direct selling market in which we operate;
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third party legal challenges to our network marketing program;
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risks associated with operating internationally and the effect
of economic factors, including foreign exchange, inflation,
disruptions or conflicts with our third party importers, pricing
and currency devaluation risks, especially in countries such as
Venezuela;
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uncertainties relating to the application of transfer pricing,
duties, value added taxes, and other tax regulations, and
changes thereto;
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uncertainties relating to interpretation and enforcement of
recently enacted legislation in China governing direct selling;
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our inability to obtain the necessary licenses to expand our
direct selling business in China;
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adverse changes in the Chinese economy, Chinese legal system or
Chinese governmental policies;
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our dependence on increased penetration of existing markets;
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contractual limitations on our ability to expand our business;
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our reliance on our information technology infrastructure and
outside manufacturers;
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the sufficiency of trademarks and other intellectual property
rights;
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product concentration;
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changes in tax laws, treaties or regulations, or their
interpretation;
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taxation relating to our distributors;
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product liability claims; and
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whether we will purchase any of our shares in the open markets
or otherwise.
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Additional factors that could cause actual results to differ
materially from our forward-looking statements are set forth in
this Annual Report on
Form 10-K,
including under the heading Risk Factors,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and in our
Consolidated Financial Statements and the related Notes.
Forward-looking statements in this Annual Report on
Form 10-K
speak only as of the date hereof, and forward-looking statements
in documents attached that are incorporated by reference speak
only as of the date of those documents. We do not undertake any
obligation to update or release any revisions to any
forward-looking statement or to report any events or
circumstances after the date hereof or to reflect the occurrence
of unanticipated events, except as required by law.
The
Company
Unless otherwise noted, the terms we,
our, us, Company and
Herbalife refer to Herbalife Ltd. and its
subsidiaries. Herbalife is a holding company, with substantially
all of its assets consisting of the capital stock of its
indirect, wholly-owned subsidiary, Herbalife International.
PART I
GENERAL
We are a global network marketing company that sells weight
management, nutritional supplement, energy, sports &
fitness products and personal care products. We were founded in
1980 by Mark Hughes. We pursue our mission of changing
peoples lives by providing a financially rewarding
business opportunity to distributors and quality products to
distributors and 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 fiscal year
ended December 31, 2010. As of December 31, 2010, we
sold our products in 74 countries through a network of
approximately 2.1 million independent distributors. In
China, in order to comply with local laws and regulations, we
sell our products through retail stores, sales representatives,
sales employees and licensed business providers. Licensed
business providers are independent service providers that
operate their own business under Chinese law as well as the
conditions set forth by us to sell products and provide services
to our customers. We believe the quality of our products and the
effectiveness of our distribution network, coupled with
geographic expansion, and actively engaged distributors, have
been the primary reasons for our success throughout our
31-year
operating history.
We offer science-based products in four principal categories:
weight management, targeted nutrition, energy,
sports & fitness and Outer Nutrition. Weight
management, targeted nutrition, energy, sports &
fitness and Outer Nutrition accounted for 62.1%, 23.0%, 4.4% and
4.7% of our net sales in fiscal year 2010, respectively. The
weight management product portfolio includes meal replacement
shakes, weight-loss enhancers, appetite suppressors and a
variety of healthy snacks. Our collection of targeted nutrition
products includes dietary supplements which contain vitamins,
minerals and natural ingredients that support total well-being
and long-term good health. The energy, sports &
fitness category includes energy and isotonic drinks to support
a healthy active lifestyle. Our Outer Nutrition products include
skin cleansers, moisturizers and lotions with antioxidants, as
well as anti-aging products.
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We believe that the direct-selling channel is ideally suited to
marketing our products because sales of weight management,
nutrition and personal care products are strengthened by ongoing
personal contact and education between retail consumers and
their distributors. This personal contact may enhance
consumers nutritional and health education as well as
motivate consumers to begin and maintain wellness and weight
management programs. In addition, many of our distributors use
our products themselves, and can therefore provide first-hand
testimonials of the effectiveness of our products to consumers,
which often serve as a powerful sales tool.
We are focused on building and maintaining our distributor
network by offering financially rewarding and flexible career
opportunities through sales of quality, innovative and
efficacious products to health conscious consumers. We believe
the income opportunity provided by our network marketing program
appeals to a broad cross-section of people throughout the world,
particularly those seeking to supplement family income, start a
home business or pursue entrepreneurial, full or part-time,
employment opportunities. Our distributors, who are independent
contractors, can profit from selling our products and can also
earn royalties and bonuses on sales made by the other
distributors whom they recruit to join their sales organizations.
We enable distributors to maximize their potential by providing
a broad array of motivational, educational and support services.
We motivate our distributors through our performance-based
compensation plan, individual recognition, reward programs and
promotions, and participation in local, national and
international Company-sponsored sales events such as
Extravaganzas. We are committed to providing professionally
designed educational training materials that our distributors
can use to enhance recruitment and maximize their sales. We and
our distributor leadership conduct thousands of training
sessions each year throughout the world to educate and motivate
our distributors. These training events teach our distributors
not only how to develop invaluable business-building and
leadership skills, but also how to differentiate our products to
consumers. Our corporate-sponsored training events provide a
forum for distributors, who otherwise operate independently, to
share ideas with us and each other. In addition, we operate an
Internet-based Herbalife Broadcasting Network, which delivers
worldwide, educational, motivational and inspirational content,
including addresses from our Chief Executive Officer, to our
distributors. We further aid our distributors by generating
additional demand for our products through traditional marketing
and public relations activities, such as television ads,
sporting event sponsorships and endorsements.
Our
Competitive Strengths
We believe that our success stems from our ability to motivate
our distributor network through our marketing plan and provide
distributors with a unique go to market strategy that supports
sustainable daily consumption of our innovative and efficacious
products that appeal to consumer preferences for healthy
lifestyles. We have been able to achieve sustained and
profitable growth by capitalizing on the following competitive
strengths:
Distributor
Base
As of December 31, 2010, we had approximately
2.1 million distributors, which includes approximately
161,000 China sales representatives and employees. Collectively,
we refer to this group as distributors.
Approximately 483,000 of our 2.1 million distributors have
become sales leaders, which are comprised of approximately
434,000 sales leaders in the 73 countries where we use our
traditional marketing plan and approximately 49,000 China sales
employees and licensed business providers operating under our
China marketing plan. Collectively, we refer to this group as
sales leaders. We believe that the distributors who
have not attained the sales leader level can be segmented into
three general categories based on their product order patterns:
discount buyers, small retailers and potential sales leaders. We
define discount buyers as customers who have signed up as
distributors to enjoy a discount on their purchases; small
retailers as product users and sales people who generate modest
sales to friends and family; and potential sales leaders as
distributors who are proactively developing a business with the
intention of qualifying to become a sales leader. In 2010,
excluding China, distributor orders for these three general
categories were approximately 29%, 57% and 14%, respectively.
For the approximately 483,000 sales leaders in our organization,
the marketing plan encourages active participation in the
business including building down-line sales organizations of
their own, which can serve to increase their income and increase
our product sales. Sales leaders contribute significantly to our
sales.
5
Product
Portfolio
We are committed to building distributor, customer and brand
loyalty by providing a diverse portfolio of health-oriented and
wellness products. The breadth of our product offerings enables
our distributors to sell a comprehensive package of products
designed to simplify weight management and daily nutrition. We
continue to introduce new products annually and rigorously
review, and if necessary, improve our product formulations,
based upon developments in nutrition science or changes in
regulation. We believe that the longevity and variety in our
product portfolio significantly enhance our distributors
abilities to build their businesses.
Nutrition
Science-Based Product Development
We continue to emphasize and make investments in science-based
product development in the fields of weight management,
nutrition supplement and personal care. We have a growing
internal team of scientists dedicated to continually evaluating
opportunities to enhance our existing products and to develop
new science-based products. These product development efforts
are reviewed by prominent doctors and world-renowned scientists
who constitute our Nutrition Advisory Board. In addition, we
have provided donations to assist in the establishment of the
Mark Hughes Cellular and Molecular Lab at UCLA, or the UCLA Lab,
and we continue to rely on their expertise. We believe that the
UCLA Lab provides opportunities for Herbalife to access
cutting-edge science in botanical, herbal and nutrition
research. In 2007, Herbalife awarded a research grant to the
National Center for Natural Products Research at the University
of Mississippi School of Pharmacy, or NCNPR. The grant will
allow NCNPR scientists to identify and study the biologically
active chemicals found in botanicals, which may be used in the
development of future dietary supplements and skin care products
for Herbalife.
Scalable
Business Model
Our business model enables us to grow our business with only
moderate investment in our infrastructure and other fixed costs.
With the exception of our China business, we require no
Company-employed sales force to market and sell our products. We
incur no direct incremental cost to add a new distributor in our
existing markets, and our distributor compensation varies
directly with sales. In addition, our distributors bear the
majority of our consumer marketing expenses, and sales leaders
sponsor and coordinate a large share of distributor recruiting
and training initiatives. Furthermore, we can readily increase
production and distribution of our products as a result of
having our own manufacturing facilities and our numerous third
party manufacturing relationships as well as our global
footprint of in-house distribution centers.
Geographic
Diversification
We have a proven ability to establish our network marketing
organization in new markets. Since our founding 31 years
ago, we have expanded our presence into 74 countries. While
sales within our local markets may fluctuate due to economic,
market and regulatory conditions, competitive pressures,
political and social instability or for Company-specific
reasons, we believe that our geographic diversity mitigates our
financial exposure to any particular market. We opened two new
markets during 2010 and our strategic plan includes a goal of
opening new markets during 2011.
Our
Business Strategy
We believe that our network marketing model is the most
effective way to sell our products. Our objective is to increase
the recruitment, retention, retailing and productivity of our
distributor base by pursuing the following strategic initiatives:
Product
Strategy
We are committed to providing our distributors with unique,
innovative products to help them increase retail sales and
recruit new distributors. Our product development is focused on
four principal categories: weight management; targeted
nutrition, including everyday wellness and healthy aging;
energy, sports & fitness and Outer Nutrition that
capitalize on the mega trends of obesity and anti-aging. We will
augment our product portfolio on an on-going basis with
additional science-based products and, as appropriate, will
bundle products addressing similar
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health concerns into packages and programs. We are establishing
a core set of products that will be available in key markets
around the world. We are in the process of introducing new
upgraded formulations of existing products to continue to
improve the efficacy and product differentiation of our product
as compared to products that can be found on the retail shelf.
To better support distributors by providing alternative price
points, we will expand our product packaging to provide both
individual serving sizes and larger sizes of our top selling
products. Additionally, each year we plan to have mega
launches of products
and/or
programs, coupled with our major events, to generate continued
excitement among our distributors, to add to our core set of
products and to support our distributor daily methods of
operation, or DMOs. These mega launches will
generally target specific market segments deemed strategic to
us, such as the recent introduction of our COQ10/Omega 3 lines
that support our focus on heart health. To augment the personal
testimonials of our distributors and to provide them with
independent validation of our product efficacy we successfully
completed two sponsored clinical studies in 2008, one sponsored
clinical study in 2009, and two sponsored clinical studies in
2010. In addition, we have up to four clinical studies that are
planned for 2011.
Distributor
Strategy
We continue to increase our investment in events and promotions,
both in absolute dollars and as a percent of net sales as a
catalyst to help our distributors improve the effectiveness and
productivity of their businesses. We work with our distributor
leaders to globalize best-practice business methods to enable
our distributors to improve their penetration in existing
markets. We refer to these business methods as DMOs and they
include such methods as Nutrition Clubs, Lifestyle
Centers/Offices, Weight Loss Challenges, The Total Plan, Super
and Mega HOMs, Roadshows and product sampling. We are
investing in creative product delivery and infrastructure
improvements to increase distributor access to product,
particularly in daily consumption markets with limited credit
card use and poor local delivery services. We have significantly
improved BizWorks, a business system which assists our
distributors in building their businesses more efficiently while
better servicing their existing customers. And finally, to
increase brand awareness we and our distributors have entered
into numerous marketing alliances around the world with top
athletes and sports teams and rolled-out a style guide and brand
asset library so that our distributors have access to the
Herbalife brand logo for use in their marketing efforts.
We also plan to continue creating more access points in markets
with large geographies such as the U.S., Russia, India, Mexico
and Brazil in order to help support our growth and our daily
consumption business models. In 2010, for example, we benefited
from our distribution agreement with a large Mexico retailer
that was initiated at the beginning of the year. This agreement
allows distributors to pick up their product orders at the
customer service counters of approximately 302 locations in
approximately 26 Mexican states. We believe that by leveraging
their distribution system, we are providing distributors with
significantly better product access. In India, the successful
adoption of the Nutrition Club DMO has caused the country to
experience significant growth and an increase to our net sales.
We will continue to evaluate if we need to increase our sales
centers in certain countries in order to support our
Companys growth.
Infrastructure
Strategy
In 2003, we embarked upon a strategic initiative to
significantly upgrade our technology infrastructure throughout
the world. In 2009, we completed the roll-out of an Oracle
enterprise-wide technology solution, which has a scalable and
stable open architecture platform, to support our business
growth and enhance our efficiency and productivity as well as
that of our distributors. We continue to leverage the Oracle
platform adding new modules to help support our business growth,
improve productivity and support our strategic initiatives. In
2010 we implemented Oracles manufacturing module in our
Souzhou, China plant, and in 2011, we plan to implement the same
Oracle module in our Lake Forest facility and, once completed,
our Changsha facility. In addition, we are continually upgrading
our Internet-based marketing and distributor services platform
with tools such as BizWorks, BizWorks 2.0 and MyHerbalife.com
and we have invested in business intelligence tools to enable
better analysis of our business. In 2010 we introduced Mobile
Apps to support our distributors using mobile devices to help
run their businesses. Our Seed To Feed strategy
which encompasses the entire supply chain started in August
2009, when we purchased certain assets of Micelle Laboratories,
Inc., a Lake Forest, California contract manufacturer of food
and nutritional supplements. We purchased these assets in order
to strengthen our global manufacturing capabilities.
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This strategy expanded in 2010 with the announcement of a joint
venture in Changsha China to build a Botanical Extraction
Facility which will provide improved traceability and processing
of our botanical raw materials. We continue to invest in our
employees through comprehensive and global organizational
development programs including our new employee orientation
training, General Manager Training and our Advanced Leadership
Program. We also invest in our Employee Wellness program which
includes providing access to our products, subsidy for
cafeterias and kitchens, providing access to fitness centers and
encouraging annual participation in our Health Assessment
program. Through this program we attempt to increase the
awareness of living a healthy active lifestyle, which also
creates a great philosophical connection to our independent
distributors.
Product
Overview
For 31 years, our products have been designed to help
distributors and customers from around the world lose weight,
improve their health and experience life-changing results. We
have built our heritage on developing unique formulas that blend
the best of nature with innovative techniques from nutritional
science, appealing to the growing base of consumers seeking
differentiated products to support a healthier lifestyle.
As of December 31, 2010, we marketed and sold 126 products
encompassing over 4,000 SKUs through our distributors and
currently have approximately 2,000 trademarks worldwide. We
group our products into four primary categories: weight
management, targeted nutrition, energy, sports &
fitness and Outer Nutrition. Our products are often sold as part
of a program, and therefore our portfolio is comprised of a
series of related products designed to simplify weight
management and nutrition for our consumers and maximize our
distributors cross-selling opportunities. These programs
target specific consumer market segments, such as women, men, as
well as weight-management customers and individuals looking to
enhance their overall well-being and support an active, healthy
lifestyle.
The following table summarizes our products by product category.
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Product Category
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Description
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Representative Products
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Weight Management
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(62.1%, 63.0%, and 62.9% of net sales for 2010, 2009 and 2008,
respectively)
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Meal replacement, protein shakes and supplementation,
weight-loss enhancers and a variety of healthy snacks
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Formula 1 Healthy Meal, Protein Drink Mix, Personalized Protein
Powder, Total
Control®,
Protein Bars and Snacks
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Targeted Nutrition
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(23.0%, 21.2%, and 20.9% of net sales for 2010, 2009 and 2008,
respectively)
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Dietary and nutritional supplements containing quality herbs,
vitamins, minerals and other natural ingredients
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Niteworks®,
Garden
7®
phytonutrient supplement, Best
Defense®
for improved immune system, Kids Line, COQ10 Plus
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Energy, Sports & Fitness
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(4.4%, 4.3%, and 4.2% of net sales for 2010, 2009 and 2008,
respectively)
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Products that support a healthy active lifestyle
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Liftoff®
energy drink,
H(3)Otm
hydration drink, Bulk & Muscle
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Outer Nutrition
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|
|
(4.7%, 5.5%, and 6.2% of net sales for 2010, 2009 and 2008,
respectively)
|
|
Skin cleansers, moisturizers, lotions, shampoos and conditioners
|
|
Skin
Activator®
Anti-Aging line, Herbal Aloe every day line,
NouriFusion®
antioxidant skin care line
|
Literature, Promotional and Other Products
|
|
|
|
|
(5.8%, 6.0%, and 5.8% of net sales for 2010, 2009 and 2008,
respectively)
|
|
Sales aids, informational audiotapes, CDs, DVDs and start-up kits
|
|
International Business Packs, BizWorks
|
8
Weight
Management
Weight Management is our largest product category representing
62.1% of our net sales for the year 2010. Formula 1, our
best-selling product, is a healthy meal with soy protein,
essential vitamins, minerals, herbs and nutrients that is
available in seven delicious flavors and can help support weight
management. It has been part of our basic weight management
program for 31 years and generated approximately 28% of our
net sales for the year 2010. We continue to be amongst the
worldwide leaders of meal replacements. Personalized Protein
Powder is a soy and whey protein product designed as a boost to
Formula 1 to personalize a persons daily protein intake to
help achieve their desired weight and shape. Weight-loss
enhancers, including Total
Control®,
address specific challenges associated with dieting, such as
lack of energy, hunger and food craving, fluid retention,
decreased metabolism and digestive challenges, by building
energy, boosting metabolism, curbing appetite and helping to
promote weight loss. Healthy snacks are formulated to provide
between-meal nutrition and appetite satisfaction. We expanded
the Formula 1 Express Healthy Meal Bar franchise in 2010 by
introducing a Super Berry Flavor in EMEA. We provided further
segmentation of leading product with a Formula 1 Allergen Free
product in the U.S. and we initiated the concept of
seasonal flavors with a limited edition Formula 1 Holiday
Pumpkin Spice flavor in the U.S. We also launched Afresh
Cardamom Tea in India.
Targeted
Nutrition
We market numerous dietary and nutritional supplements designed
to meet our customers specific nutritional needs. Each of
these supplements contains quality botanicals, vitamins,
minerals and other natural ingredients and focuses on specific
life stages of our customers, including women, men, children and
those with health concerns, including heart health, healthy
aging, digestive health, or immune solutions.
Niteworks®
is a product developed in conjunction with Nobel Laureate in
Medicine, Dr. Louis Ignarro, that supports energy,
circulatory and vascular health and enhances blood flow to the
heart, brain and other vital organs. Garden
7®
designed by Dr. David Heber, head of our Nutrition Advisory
Board, is designed to provide the phytonutrient benefits of
seven servings of fruits and vegetables and has anti-oxidant and
health-boosting properties. Best
Defense®
is an effervescent drink that helps boost immunity. In 2010, we
further expanded distribution of our successful Aloe line by
introducing our popular Mango flavored Aloe Concentrate into
Mexico. In 2010, as part of our heart health line, we introduced
CoQ10 Plus in the U.S. and as part of our regional product
strategy, we launched Quickspark in Austria. We continued to
upgrade several targeted nutrition products with more modern
formulations and better efficacy.
Energy,
Sports & Fitness
We entered into the high growth energy drink category in 2005
with the introduction of
Liftoff®,
an innovative, effervescent energy drink containing a
proprietary blend of B-vitamins, guarana, ginseng, ginkgo and
caffeine to increase energy and improve mental clarity for
better performance throughout the day. In 2007, we launched
H3Otm
Fitness Drink to provide rapid hydration, sustained muscle
energy plus antioxidant protection for people living a healthy,
active lifestyle. In 2008, we introduced H30 Pro in EMEA to
provide an isotonic drink to individuals participating in high
activity sports.
Outer
Nutrition
Our Outer Nutrition products complement our weight management
and targeted nutrition products and aim to improve the
appearance of the body, skin and hair. These products include
skin cleansers, toners, moisturizers and facial masks, shampoos
and conditioners, body-wash items and a selection of fragrances
for men and women. Our Herbal Aloe line is our
introductory line providing distributors with cleansers, lotions
and soaps that help sooth the skin.
NouriFusion®
Multivitamin skin care products are formulated with antioxidant
Vitamins A, C and E for a healthy, glowing complexion. In 2006,
we launched a full line of anti-aging products as an extension
of our successful Skin
Activator®
product, an advanced face cream that contains a
collagen-building Glucosamine Complex to reduce the appearance
of fine lines and wrinkles. In the past few years, we launched a
number of regional products to address local market needs
including a Soft Green Body Care line in Brazil in 2008, the
Whitening Serum under the NouriFusion brand in the Asia Pacific
region, and the Lively Fragrances perfume line in Brazil in 2009.
9
Literature,
Promotional and Other Products
We also sell literature and promotional materials, including
sales aids, informational audiotapes, videotapes, CDs and DVDs
designed to support our distributors marketing efforts, as
well as
start-up
kits called International Business Packs for new
distributors. In 2006, we introduced BizWorks, a customizable
retail website for our distributors to enhance the on-line
experience and improve their productivity.
Product
Development
We are committed to providing our distributors with unique,
innovative science-based products to help them increase
recruitment, retention and retailing. We believe this can be
best accomplished in part by introducing new products and by
upgrading, reformulating and repackaging existing product lines.
Our internal team of scientists and product developers
collaborate with our Nutrition Advisory Board to formulate,
review and evaluate new product ideas. Once a particular market
opportunity has been identified, our scientists along with our
marketing and sales teams work closely with distributors to
effect a successful development and launch of the product. Our
research and development is performed by in-house staff and
outside consultants. For all periods presented, research and
development costs were expensed as incurred and were not
material.
A progressive product development process was deployed in 2010
to accelerate the introduction of new products and to improve
the launch of products. Cross-functional teams from Product
Marketing, Product Development, Sciences, Licensing,
Manufacturing and Finance were formed and assigned to major
product initiatives.
The product development process is a stage-gate process based on
best in class practices in our industry. The process
consists of five stages: identification, feasibility assessment,
development, launch and learn. The project teams obtain
approvals from a corporate steering team comprised of key
executives in the Company. The process defines each
departments roles and responsibilities and sets clear
deliverables for each stage. It creates a succinct process from
the beginning of the development cycle to the end.
New product ideas are generated and narrowed down to high
potential ideas that fill our business needs and conform to our
overall strategy. We test the most promising ideas with
distributors and customers using a variety of qualitative and
quantitative tools. This testing is followed by a feasibility
assessment which includes a review of product and package
prototypes, product positioning and messaging, process design,
analysis of manufacturing issues and providing preliminary
financial projections of product sales. The next stage is the
development phase in which we finalize the formula, process,
manufacturing strategy, product positioning, pricing, labeling
and other related matters. The fourth stage is the launch phase
in which we prepare promotional and sales materials, complete
the supply chain plan, create product and financial forecasts,
and complete other final preparations for launch. After the
product is launched, we closely track sales performance and the
lessons learned so we can update and improve the product
development process. In addition, we have significantly
increased our investment in clinical studies and in our science
program to substantiate claims and the efficacy of our products.
We reorganized our technical team in 2010 for greater efficiency
in product development as well as to carry out related product
development strategies both globally and regionally. During
2010, we added new talents to our technical and scientific teams
and additional resources to the Companys Nutrition
Advisory Board.
In 2010, we launched the Herbalife Nutrition Institute. The
Institute is an informational resource dedicated to promoting
excellence in the field of nutrition. The Institutes
website is our primary communication vehicle, an educational
resource for the general public, government agencies, the
scientific community, and Herbalife Independent distributors,
about good nutrition and basic health. Its mission is to
encourage and support research and education on the relationship
between good health, balanced nutrition and a healthy active
lifestyle. In addition to providing research and education on
the website and through sponsored conferences and symposia, the
Institute will have associations with major nutrition science
organizations.
Part of the Herbalife Nutrition Institute is the Companys
Nutrition Advisory Board. The Nutrition Advisory Board is
comprised of leading experts around the world in the fields of
nutrition and health who educate Herbalife independent
distributors and in China, sales employees, on the principles of
nutrition, physical activity and healthy
10
lifestyle. The Institute and the Nutrition Advisory Board are
chaired by David Heber, M.D., Ph.D., director of the
Center for Human Nutrition at the University of California, Los
Angeles (UCLA).
We believe that it is important to maintaining our relationships
with members of our Nutrition Advisory Board and the editorial
board of the Herbalife Nutrition Institute that we recognize the
time and effort that they expend on our behalf. Each member of
our Nutrition Advisory Board other than Dr. Heber receives
a monthly retainer of up to $5,000, plus up to $3,000 for every
day that they appear at a non-southern California distributor
event and up to $2,000 for every day that they need to travel to
such events. Members of the editorial board of the Herbalife
Nutrition Institute are compensated for their time and efforts
by receiving a $5,000 annual stipend, except Dr. Lou
Ignarro. We do pay a consulting firm, with which
Dr. Ignarro is affiliated, a royalty on sales of
Niteworks®,
certain healthy heart products, and other products
that we may mutually designate in the future that are, in each
case, sold with the aid of Dr. Ignarros consulting,
promotional or endorsement services, with such amounts totaling
$2.3 million, $1.9 million, and $2.1 million, in
2010, 2009, and 2008 respectively. Generally, other than the
equity awards granted in 2010 and 2005, Dr. Heber receives
no direct compensation from us although we do reimburse him for
travel expenses and we do pay to a firm, with which
Dr. Heber is affiliated, a quarterly fixed royalty of
$75,000.
We have also made contributions to the UCLA Lab. We have
invested in this lab since 2002 with total donations of
approximately $1.4 million which includes donations of lab
equipment and software. UCLA agreed that the donations would be
used for further research and education in the fields of weight
management and botanical dietary supplements. In addition, we
have made donations from time to time to UCLA to fund research
and educational programs. While our direct relationship with
UCLA involves clinical studies and research regarding botanical
ingredients, we intend to take full advantage of the expertise
at UCLA by committing to support research that will further our
understanding of the benefits of phytochemicals. Additionally in
2010, we initiated a botanical identification program with UCLA
which is intended to help with the operational activities in our
Botanical Extraction facility in Changsha, China once it is
completed and our quality labs in both China and the U.S.
We believe our focus on nutrition and botanical science and our
efforts at combining our internal research and development
efforts with the scientific expertise of our Nutrition Advisory
Board and the educational skills of the Nutrition Advisory Board
and the resources of the UCLA Lab should result in meaningful
product differentiation and give our distributors and consumers
increased confidence in our products.
Network
Marketing Program
General
Our products are distributed through a global network marketing
organization comprised of approximately 2.1 million
independent distributors in 74 countries, including in China
where, due to regulations, our sales are conducted through
Company operated retail stores, sales representatives, sales
employees and licensed business providers. In China, in the
areas where we have a direct selling license, our
representatives, licensed business providers and employees can
sell Herbalife product outside the retail establishments. In
addition to helping our distributors achieve their goals of
health and wellness through use of our products, we offer our
distributors, who are independent contractors, attractive income
opportunities. Distributors may earn income on their own sales
and can also earn royalties and bonuses on sales made by the
distributors in their sales organizations. We believe that our
products are particularly well-suited to the network marketing
distribution channel because sales of weight management and
health and wellness products are strengthened by ongoing
personal contact and coaching between retail consumers and
distributors. We believe our continued commitment to developing
innovative, science-based products will enhance our ability to
attract new distributors as well as increase the productivity
and retention of existing distributors. Furthermore, our
international sponsorship program, which permits distributors to
sponsor distributors in other countries where we are licensed to
do business and where we have obtained required product
approvals, provides a significant advantage to our distributors
in developing and growing their businesses. China has its own
unique marketing program.
On July 18, 2002, we entered into an agreement with our
distributors that no material changes adverse to the
distributors will be made to our marketing plan without their
consent and that we will continue to distribute Herbalife
products exclusively through our independent distributors. We
believe that this agreement has
11
strengthened our relationship with our existing distributors,
improved our ability to recruit new distributors and generally
increased the long-term stability of our business.
Structure
of the Network Marketing Program
To become a distributor in most markets, a person must be
sponsored by an existing distributor and must purchase an
International Business Pack, or IBP. The IBP is a distributor
kit available in local languages. The product and literature
contents in the kits vary slightly to meet individual market
needs. An example is the large size U.S. IBP, which costs
$90.95 and includes a canister of Formula 1 shake mix, two
bottles of nutritional supplements, Herbal Concentrate (Tea),
Liftoff®
(an energy drink), and Hand Sanitizer, along with a handy tote,
booklets describing us, our compensation plan and rules of
conduct, various training and promotional materials, distributor
applications and a product catalog. The smaller
U.S. version costs $54.95 and includes sample products, a
handy tote, and essentially the same print and promotional
materials as included in the larger kit version. To become a
sales leader, or qualify for a higher level, including the
Qualified Producer level introduced in October 2009,
distributors must achieve specified volumes of product sales or
earn certain amounts of royalty overrides during specified time
periods and must re-qualify for the levels once each year. To
attain sales leader status, a distributor generally must be
responsible for sales of products representing at least 4,000
volume points in one month or 2,500 volume points in two
consecutive months. An additional optional qualification,
introduced globally in October 2009, allows for a distributor to
achieve sales leader level by personally placing orders with
Herbalife that accumulate to 5,000 Volume Points within
12 months. China has its own unique marketing program.
Volume points are point values assigned to each of our products
that are usually equal in all countries and are essentially
based on the suggested retail price of U.S. products. Sales
leaders may then attain higher levels, (consisting of the World
Team, the Global Expansion Team, the Millionaire Team, the
Presidents Team, the Chairmans Club and the Founders
Circle) and earn increasing amounts of royalty overrides based
on sales in their downline organizations and, for members of our
Global Expansion Team and above, earn production bonuses on
sales in their downline organizations.
The following table sets forth the number of our sales leaders
and sales leader retention rates as of each of the following
re-qualification periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At the End of February
|
|
|
|
Number of Sales Leaders
|
|
|
Sales Leader Retention Rate
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
North America
|
|
|
64,668
|
|
|
|
63,726
|
|
|
|
64,383
|
|
|
|
43.3
|
%
|
|
|
42.2
|
%
|
|
|
43.5
|
%
|
Mexico
|
|
|
47,068
|
|
|
|
50,099
|
|
|
|
60,685
|
|
|
|
50.4
|
%
|
|
|
45.2
|
%
|
|
|
44.4
|
%
|
South & Central America
|
|
|
51,060
|
|
|
|
67,876
|
|
|
|
67,808
|
|
|
|
34.1
|
%
|
|
|
32.2
|
%
|
|
|
34.7
|
%
|
EMEA
|
|
|
47,080
|
|
|
|
53,371
|
|
|
|
59,446
|
|
|
|
51.9
|
%
|
|
|
48.7
|
%
|
|
|
46.6
|
%
|
Asia Pacific (excluding China)
|
|
|
75,635
|
|
|
|
59,631
|
|
|
|
57,355
|
|
|
|
38.6
|
%
|
|
|
35.1
|
%
|
|
|
34.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales Leaders
|
|
|
285,511
|
|
|
|
294,703
|
|
|
|
309,677
|
|
|
|
43.0
|
%
|
|
|
40.3
|
%
|
|
|
41.0
|
%
|
China Sales Employees
|
|
|
27,415
|
|
|
|
29,684
|
|
|
|
25,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide Total Sales Leaders
|
|
|
312,926
|
|
|
|
324,387
|
|
|
|
334,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In February of each year, we remove from the rank of sales
leader those individuals who did not satisfy the sales leader
qualification requirements during the preceding twelve months.
Distributors who meet the sales leader requirements at any time
during the year are promoted to sales leader status at that
time, including any sales leaders who were removed, but who
subsequently re-qualified. For the latest twelve month
re-qualification period ending January 2011, approximately 49%
of our sales leaders re-qualified. Typically, distributors who
purchase our product for personal consumption or for short term
weight loss or income goals may stay with us for several months
to one year while sales leaders who have committed time and
effort to build a sales organization generally stay for longer
periods. We rely on certifications from the selling distributors
as to the amount and source of product sales to other
distributors which are not directly verifiable by us. For sales
leaders to re-qualify and retain their distributor organization
and associated earnings, they need to earn 4,000 volume points
in one month or 2,500 volume points in
12
each of two consecutive months. In order to increase retailing
of our products, we have modified our re-qualification criteria
to provide that any distributor that earns at least 5,000 volume
points in any
12-month
period can re-qualify as a sales leader and retain a discount of
50% from suggested retail prices, but will forfeit their
distributor organization and associated earnings.
Distributor
Earnings
Distributor earnings are derived from several sources. First,
distributors may earn profits by purchasing our products at
wholesale prices, which are discounted 25% to 50% from suggested
retail prices depending on the distributors level within
our distributor network, and selling our products to retail
customers or to other distributors. Second, distributors who
sponsor other distributors and establish their own sales
organizations may earn (1) royalty overrides, up to 15% of
product retail sales in the aggregate, (2) production
bonuses, up to 7% of product retail sales in the aggregate and
(3) the Mark Hughes bonus, up to 1% of product retail sales
in the aggregate. Royalty overrides and bonuses together with
the distributor allowances represent the potential earnings to
distributors of up to approximately 73% of retail sales. Each
distributors success is dependent on two primary factors:
(1) the time, effort and commitment a distributor puts into
his or her Herbalife business and (2) the product sales
made by a distributor and his or her sales organization.
Distributors, with the exception of China, earn the right to
receive royalty overrides upon attaining the level of sales
leader and above, and production bonuses upon attaining the
level of Global Expansion Team and above. Once a distributor
becomes a sales leader, he or she has an incentive to qualify,
by earning specified amounts of royalty overrides, as a member
of the Global Expansion Team, the Millionaire Team or the
Presidents Team, and thereby receive production bonuses of
up to 7%. We believe that the right of distributors to earn
royalty overrides and production bonuses contributes
significantly to our ability to retain our most productive
distributors.
Many of our non-sales leader distributors join Herbalife to
obtain a 25% discount on our products and become a discount
consumer or have a part-time retail income goal in mind. We do
not track the retail income of these distributors.
Under the regulations published by the Chinese Government,
direct selling companies are limited to the payment of gross
compensation to direct sellers of up to a maximum 30% of the
revenue they generate through their own sales of products to
consumers. We have incurred and will continue to incur
substantial ongoing additional costs relating to the inclusion
in the China business model of Company operated retail stores,
sales representatives, sales employees and licensed business
providers and Company provided training and certification
procedures for sales personnel, features not common elsewhere in
our traditional business model.
Distributor
Motivation and Training
We believe that motivation and training are key elements in
distributor success and that we and our distributor sales
leaders have established a consistent schedule of events to
support these needs. We and our distributor leadership conduct
thousands of training sessions annually on local, regional and
global levels to educate and motivate our distributors. Every
month, there are hundreds of
one-day
Success Training Seminars held throughout the world. Annually,
in each major territory or region, there is a
three-day
World Team School that focuses on product and business
development and is typically attended by 2,000 to 10,000
distributors. Additionally, we host an Extravaganza at which our
distributors from the region can come to learn about new
products, expand their skills and celebrate their success. In
2010, we held Extravaganzas in key markets such as Brazil,
Ecuador, Singapore, Ukraine, Italy, Sweden, Macau, South Africa,
Mexico, China and the United States. In addition to these
training sessions, we have our own Herbalife Broadcast
Network on the Internet that we use to provide
distributors continual training and the most current product and
marketing information.
Distributor reward and recognition is a significant factor in
motivating our distributors. In 2010, 2009, and 2008 we invested
approximately $101.6 million, $84.1 million, and
$89.6 million, respectively, in regional and worldwide
events and promotions to motivate our distributors to achieve
and exceed both sales and recruiting goals. An example of our
worldwide promotions are the Active World Team Promotion. The
Active World Team Promotion provides cash and recognition
incentives to distributors who achieve all three requirements
for becoming a World Team Member and thus have proven themselves
adept at building a well-balanced business. Regional
13
Vacation Promotions were in place in China, Brazil,
Asia-Pacific, North America, Mexico, South America/Central
America, Russia and Europe. These promotions provided trips for
over 4,000 qualifying distributors to go on vacations or cruises
in various locations worldwide.
Geographic
Presence
As of December 31, 2010, we conducted business in 74
countries throughout the world. The following chart sets forth
the countries we currently operate in as of December 31,
2010, organized in the Companys six geographic regions,
and the year in which we commenced operations.
|
|
|
|
|
|
|
Year
|
|
Country
|
|
Entered
|
|
|
North America
|
|
|
|
|
USA
|
|
|
1980
|
|
Canada
|
|
|
1982
|
|
Jamaica
|
|
|
1999
|
|
Aruba
|
|
|
2010
|
|
Mexico
|
|
|
1989
|
|
South and Central America
|
|
|
|
|
Dominican Republic
|
|
|
1994
|
|
Venezuela
|
|
|
1994
|
|
Argentina
|
|
|
1994
|
|
Brazil
|
|
|
1995
|
|
Chile
|
|
|
1997
|
|
Panama
|
|
|
2000
|
|
Colombia
|
|
|
2001
|
|
Bolivia
|
|
|
2004
|
|
Costa Rica
|
|
|
2006
|
|
Peru
|
|
|
2006
|
|
El Salvador
|
|
|
2007
|
|
Ecuador
|
|
|
2008
|
|
Honduras
|
|
|
2008
|
|
Nicaragua
|
|
|
2008
|
|
Guatemala
|
|
|
2008
|
|
Paraguay
|
|
|
2009
|
|
Asia Pacific
|
|
|
|
|
Australia
|
|
|
1983
|
|
New Zealand
|
|
|
1988
|
|
Japan
|
|
|
1989
|
|
Hong Kong
|
|
|
1992
|
|
Philippines
|
|
|
1994
|
|
Taiwan
|
|
|
1995
|
|
South Korea
|
|
|
1996
|
|
Thailand
|
|
|
1997
|
|
Indonesia
|
|
|
1998
|
|
India
|
|
|
1999
|
|
Macau
|
|
|
2002
|
|
Singapore
|
|
|
2003
|
|
Malaysia
|
|
|
2006
|
|
Vietnam
|
|
|
2009
|
|
China
|
|
|
2001
|
|
|
|
|
|
|
|
|
Year
|
|
Country
|
|
Entered
|
|
|
EMEA
|
|
|
|
|
United Kingdom
|
|
|
1984
|
|
Spain
|
|
|
1989
|
|
Israel
|
|
|
1989
|
|
France
|
|
|
1990
|
|
Germany
|
|
|
1990
|
|
Portugal
|
|
|
1992
|
|
Czech Republic
|
|
|
1992
|
|
Italy
|
|
|
1992
|
|
Netherlands
|
|
|
1993
|
|
Belgium
|
|
|
1994
|
|
Poland
|
|
|
1994
|
|
Denmark
|
|
|
1994
|
|
Sweden
|
|
|
1994
|
|
Russia
|
|
|
1995
|
|
Austria
|
|
|
1995
|
|
Switzerland
|
|
|
1995
|
|
South Africa
|
|
|
1995
|
|
Norway
|
|
|
1995
|
|
Finland
|
|
|
1995
|
|
Greece
|
|
|
1996
|
|
Turkey
|
|
|
1998
|
|
Botswana
|
|
|
1998
|
|
Lesotho
|
|
|
1998
|
|
Namibia
|
|
|
1998
|
|
Swaziland
|
|
|
1998
|
|
Iceland
|
|
|
1999
|
|
Slovak Republic
|
|
|
1999
|
|
Cyprus
|
|
|
2000
|
|
Ireland
|
|
|
2000
|
|
Croatia
|
|
|
2001
|
|
Latvia
|
|
|
2002
|
|
Ukraine
|
|
|
2002
|
|
Estonia
|
|
|
2003
|
|
Lithuania
|
|
|
2003
|
|
Hungary
|
|
|
2005
|
|
Zambia
|
|
|
2007
|
|
Romania
|
|
|
2008
|
|
Bulgaria
|
|
|
2010
|
|
14
The following table shows net sales by geographic region.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
Net Sales
|
|
|
Percent of
|
|
|
Countries
|
|
|
|
Year Ended December 31,
|
|
|
Total Net Sales
|
|
|
December 31,
|
|
Geographic Region
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2010
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
614.1
|
|
|
$
|
529.0
|
|
|
$
|
496.9
|
|
|
|
22.5
|
%
|
|
|
4
|
|
Mexico
|
|
|
334.0
|
|
|
|
263.0
|
|
|
|
352.2
|
|
|
|
12.2
|
%
|
|
|
1
|
|
South & Central America
|
|
|
390.4
|
|
|
|
366.9
|
|
|
|
383.6
|
|
|
|
14.3
|
%
|
|
|
16
|
|
EMEA
|
|
|
527.8
|
|
|
|
504.2
|
|
|
|
570.7
|
|
|
|
19.3
|
%
|
|
|
38
|
|
Asia Pacific
|
|
|
683.5
|
|
|
|
509.2
|
|
|
|
410.8
|
|
|
|
25.0
|
%
|
|
|
14
|
|
China
|
|
|
184.4
|
|
|
|
152.3
|
|
|
|
145.0
|
|
|
|
6.7
|
%
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
|
|
$
|
2,734.2
|
|
|
$
|
2,324.6
|
|
|
$
|
2,359.2
|
|
|
|
100.0
|
%
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The top six countries worldwide represented approximately 62.3%,
59.4%, and 58.0% of net sales in 2010, 2009, and 2008,
respectively. For financial data by segment see Note 10,
Segment Information to the notes to our consolidated
financial statements.
In many instances, after entering a new country, we experience
an initial period of rapid growth in sales as new distributors
are recruited, that is then followed by a decline in sales. We
believe that a significant factor affecting these markets is the
opening of other new markets within the same geographic region
or within the same or similar language or cultural bases. Some
distributors tend to focus their attention on the business
opportunities provided by these newer markets instead of
developing their established sales organizations in existing
markets to focus on driving deeper penetration. Additionally, in
some instances, we have become aware that certain sales in
certain existing markets were attributable to purchasers who
distributed our products in countries that had not yet been
opened. When these countries were opened, the sales in existing
markets shifted to the newly opened markets, resulting in a
decline in sales in the existing markets. To the extent we
decide to open new markets in the future, we will continue to
seek to minimize the impact on distributor focus in existing
markets while ensuring that adequate distributor support
services and introduction of daily consumption-based DMOs,
along with other Herbalife systems are in place to support
growth while maintaining prior sales levels within the region.
Manufacturing
and Distribution
The majority of our weight management, nutritional and personal
care products are manufactured for us by third party
manufacturing companies. We own proprietary formulations for
substantially all of our weight management products and dietary
and nutritional supplements. We source our products from
multiple manufacturers, with our top three suppliers accounting
for approximately 42% of our product purchases in 2010. In
addition, many of our products can be made available from a
secondary vendor if necessary. We work closely with our vendors
in an effort to achieve the highest quality standards and
product availability. We also self-manufacture weight
management, nutritional and personal care products for the China
market in our Suzhou China manufacturing facility to which we
recently made modifications. In addition, we are currently
making modifications to our recently acquired manufacturing
facility in Lake Forest, California in order to increase
capability and capacity. Following completion of these
modifications, we expect to increase our self manufacturing in
the future to approximately 40% of our worldwide demand. In the
current era of increasing regulatory scrutiny we are
transforming our supply chain to become more vertically
integrated, including building relationships all the way back to
the source farms and entering a joint venture to build a
botanical extraction facility in Changsha, Hunan, China by the
end of 2011. We call this initiative Seed to Feed.
We also have made significant investments in our own state of
the art quality control labs in the U.S. and China at which
we routinely test products from our owned facilities and from
our contract manufacturers and raw material vendors. We have
established excellent relationships with our contract
manufacturers and continue to obtain improvements in product
quality and product delivery. Some of our key input materials
such as soy and whey proteins, fructose and packaging materials
are subject to pricing fluctuations driven by commodities
pricing. We are
15
confident that we can mitigate potential cost increases of these
materials with our cost reduction program and, when necessary,
by raising the prices of our products.
In order to coordinate and manage the manufacturing of our
products, we utilize a significant demand planning and
forecasting process that is directly tied to our production
planning and purchasing systems. Using this sophisticated
Oracle-based planning software and process allows us to maintain
our inventory at levels that are adequate to support the growth
in our business and provide exceptional service to distributors
while minimizing working capital and inventory obsolescence.
Our global distribution system features centralized and
decentralized distribution and telephone ordering systems
coupled with storefront distributor service centers. Our major
distribution warehouses have automated
pick-to-light
systems which consistently deliver high order accuracy and
inspection of every shipment before it is sent to delivery.
Shipping and processing standards for orders placed are either
the same day or the following business day. We are currently
upgrading the software and hardware in our largest distribution
centers to support future business growth as well as support the
ongoing shift to daily consumption business models which leads
to more frequent and smaller orders.
Our products are distributed to foreign markets either from the
facilities of our contract manufacturers or from our Los
Angeles, Memphis or Venray, Netherlands distribution centers.
Products are distributed in the United States market from our
Los Angeles distribution center, our Memphis distribution center
or from our sales centers in Dallas, New York, Chicago, Phoenix,
Houston and Tracy, California. Products distributed globally are
generally transported by truck, cargo ship or plane to our
international markets and are warehoused in either one of our
foreign distribution centers or a contracted third party
warehouse and distribution center. After the products arrive in
a foreign market, distributors purchase the products from the
local distribution center or the associated sales center.
Generally, the products manufactured in Europe are shipped to a
centralized warehouse facility, from which delivery by truck,
ship or plane to other international markets occurs.
Product
Return and Buy-Back Policies
In most markets, our products include a customer satisfaction
guarantee. Under this guarantee any customer who is not
satisfied with a Herbalife product for any reason may return it
or any unused portion of it within 30 days of purchase to
their distributor from whom it was purchased for a full refund
from the distributor or credit toward the purchase of another
Herbalife product. If they return the products to us on a timely
basis, the distributor may obtain replacement product from us
for such returned products. In addition, in most jurisdictions,
we maintain a buy-back program pursuant to which we will
repurchase products sold to a distributor provided that the
distributor resigns as an Herbalife distributor, returns the
product in marketable condition generally within twelve months
of original purchase and meets certain documentation and other
requirements. We believe this buy-back policy addresses a number
of the regulatory and compliance issues pertaining to network
marketing, in that it offers monetary protection to distributors
who want to exit their Herbalife business. Product returns and
buy-back expenses were approximately 0.4%, 0.5%, and 0.8% of
retail sales for the years ended December 31, 2010, 2009
and 2008, respectively. The decline in the product return and
buy-back percentage was primarily due to the global emphasis on
daily consumption DMOs, which provide a more sustainable
business foundation for our distributors.
Management
Information, Internet and Telecommunication Systems
In order to facilitate our continued growth and support
distributor activities, we continually upgrade our applications,
infrastructure and telecommunication systems. These systems
include: (1) three data centers located in Colorado
Springs, Hong Kong, and Venray, Netherlands, which connect our
international markets through a dedicated wide area network that
provides on-line, real-time computer connectivity and access to
our global Oracle Enterprise Resource Planning (ERP) platform as
well as legacy operating systems and other key transactional and
analytical systems; (2) local area networks of personal
computers within our markets, serving our regional
administrative staffs; (3) an international
e-mail
system through which our employees communicate; (4) a
standardized Avaya Northern Telecom Meridian telecommunication
system in most of our markets; and (5) Internet websites to
provide a variety of online services for distributors such as
status of qualifications, meeting announcements, product
information, application forms, educational materials and, in
select markets including the
16
United States, sales ordering capabilities. These systems
are designed to provide, among other things, financial and
operating data for management, timely and accurate product
ordering, royalty override payment processing, inventory
management and detailed distributor records. We intend to
continue to invest in these systems in order to strengthen our
operating platform and support the future growth of our business.
Regulation
General
In both our United States and foreign markets, we are affected
by extensive laws, governmental regulations, administrative
determinations, court decisions and similar constraints. Such
laws, regulations and other constraints exist at the federal,
state or local levels in the United States and at all levels of
government in foreign jurisdictions, including regulations
pertaining to: (1) the formulation, manufacturing,
packaging, labeling, distribution, importation, sale and storage
of our products; (2) product claims and advertising,
including direct claims and advertising by us, as well as claims
and advertising by distributors, for which we may be held
responsible; (3) our network marketing program;
(4) transfer pricing and similar regulations that affect
the level of U.S. and foreign taxable income and customs
duties; and (5) taxation of our independent distributors
(which in some instances may impose an obligation on us to
collect the taxes and maintain appropriate records).
Products
In the United States, the formulation, manufacturing, packaging,
storing, labeling, promotion, advertising, distribution and sale
of our products are subject to regulation by various
governmental agencies, including (1) the Food and Drug
Administration, or FDA, (2) the Federal Trade Commission,
or FTC, (3) the Consumer Product Safety Commission, or
CPSC, (4) the United States Department of Agriculture, or
USDA, (5) the Environmental Protection Agency, or EPA,
(6) the United States Postal Service, (7) United
States Customs and Border Patrol, and (8) the Drug
Enforcement Administration. Our activities also are regulated by
various agencies of the states, localities and foreign countries
in which our products are manufactured, distributed and sold.
The FDA, in particular, regulates the formulation, manufacture
and labeling of
over-the-counter,
or OTC, drugs, conventional foods, dietary supplements, and
cosmetics such as those distributed by us. FDA regulations
require us and our suppliers to meet relevant current good
manufacturing practice, or cGMP, regulations for the
preparation, packing and storage of foods and OTC drugs.
Herbalife has implemented enhancements, modifications and
improvements to its manufacturing and corporate quality
processes and believes we are compliant with the FDAs cGMP
final rule with respect to dietary supplements sold by Herbalife
in the United States. The final cGMP rule has resulted in
additional costs. See item 1A Risk Factors
for further discussion regarding the promulgated cGMP
regulations. If we were to be found not in compliance with cGMP
regulations, it could have a material adverse effect on our
results of operations and financial statements.
Most OTC drugs are subject to FDA Monographs that establish
labeling and composition requirements for these products. Those
of our products which are classified as OTC drugs must comply
with these Monographs, and our manufacturers must list all
products with the FDA and follow cGMP. Our cosmetic products are
regulated for safety by the FDA, which requires that ingredients
meet industry standards for non-allergenicity and non-toxicity.
Performance claims for cosmetics may not be
therapeutic.
The U.S. Dietary Supplement Health and Education Act of
1994, or DSHEA, revised the provisions of the Federal Food, Drug
and Cosmetic Act, or FFDCA, concerning the composition and
labeling of dietary supplements and, we believe, the revisions
are generally favorable to the dietary supplement industry. The
legislation created a new statutory class of dietary
supplements. This new class includes vitamins, minerals, herbs,
amino acids and other dietary substances for human use to
supplement the diet, and the legislation grandfathers, with some
limitations, dietary ingredients that were on the market before
October 15, 1994. A dietary supplement that contains a
dietary ingredient that was not on the market before
October 15, 1994 will require evidence of a history of use
or other evidence of safety establishing that it is reasonably
expected to be safe. Manufacturers or marketers of dietary
supplements in the United States and certain other jurisdictions
that make product performance claims, including
structure/function claims, must have substantiation in their
possession that the statements are truthful and not misleading.
Should the FDA promulgate guidance on the use of New Dietary
Ingredients, the Company may be
17
required to substantiate that so-called
grandfathered ingredients used in our products were
actually used in commerce in food prior to the passage of DSHEA
on October 15, 1994. The majority of the products marketed
by us in the United States are classified as conventional foods
or dietary supplements under the FFDCA. Internationally, the
majority of products marketed by us are classified as foods or
food supplements.
In January 2000, the FDA issued a regulation that defines the
types of statements that can be made concerning the effect of a
dietary supplement on the structure or function of the body
pursuant to DSHEA. Under DSHEA, dietary supplement labeling may
bear structure or function claims, which are claims that the
products affect the structure or function of the body, without
prior FDA approval, but with notification to the FDA. They may
not bear a claim that they can prevent, treat, cure, mitigate or
diagnose disease (a disease claim). The regulation describes how
the FDA distinguishes disease claims from structure/function
claims. During 2004, the FDA issued guidance, paralleling an
earlier guidance from the FTC, defining a manufacturers
obligations to substantiate structure/function claims. The FDA
also issued a Structure/Function Claims Small Entity Compliance
Guide. In addition, the agency permits companies to use
FDA-approved full and qualified health claims for products
containing specific ingredients that meet stated requirements.
As a marketer of dietary and nutritional supplements and other
products that are ingested by consumers, we are subject to the
risk that one or more of the ingredients in our products may
become the subject of regulatory action. A number of states
restricted the sale of dietary supplements containing botanical
sources of ephedrine alkaloids. We stopped sales of dietary
supplements containing botanical sources of ephedrine alkaloids
due to a shift in consumer preference for ephedra free
products and a significant increase in products liability
insurance premiums for products containing botanical sources of
ephedrine group alkaloids. On December 31, 2002, we ceased
sales of
Thermojetics®
original green herbal tablets containing ephedrine alkaloids
derived from Chinese Ma huang, as well as
Thermojetics®
green herbal tablets and
Thermojetics®
gold herbal tablets (the latter two containing the herb Sida
cordifolia which is another botanical source of ephedrine
alkaloids). On February 6, 2004, the FDA published a rule
finding that dietary supplements containing ephedrine alkaloids
present an unreasonable risk of illness or injury under
conditions of use recommended or suggested in the labeling of
the product, or, if no conditions of use are suggested in the
labeling, under ordinary conditions of use, and are therefore
adulterated.
The FDAs decision to ban ephedra triggered a significant
reaction by the national media, some of whom are calling for the
repeal or amendment of DSHEA. These media view supposed
weaknesses within DSHEA as the underlying reason why
ephedra was allowed to remain on the market. We have been
advised that DSHEA opponents in Congress may use this anti-DSHEA
momentum to advance new legislation during the
112th Congress to amend or repeal DSHEA or to regulate
specific product types or the use of specific ingredients. If
this should occur we believe that the DSHEA opponents may
propose the following: (1) premarket approval for safety
and effectiveness of dietary ingredients; (2) specific
premarket review of dietary ingredient stimulants;
(3) reversal of the burden of proof standard which now
rests on the FDA; and (4) a redefining of dietary
ingredient to remove either botanicals or selected classes
of ingredients now treated as dietary ingredients.
On December 22, 2007, a law went into effect in the United
States mandating the reporting of all serious adverse events
occurring within the United States which involve dietary
supplements or OTC drugs. We believe that we are in full
compliance with this law having promulgated and implemented a
worldwide procedure governing adverse event identification,
investigation and reporting which is managed by our Global
Product Science, Safety and Compliance department in
collaboration with our Regulatory Affairs department, our
Medical Affairs department and our Distributor Relations Call
Centers. As a result of our receipt of adverse event reports, we
may from time to time elect, or be required, to remove a product
from a market, either temporarily or permanently.
On June 25, 2007, the FDA published its final rule
regulating current good manufacturing practices, or cGMP, for
dietary supplements. This final rule became effective on
August 24, 2007. The final rule requires that companies
establish written procedures governing: (1) personnel,
(2) plant and equipment cleanliness, (3) lab and
testing, (4) packaging and labeling, and
(5) distribution. The FDA also required 100 percent
identity testing of all incoming raw materials, although an
interim final rule enables companies to petition for an
exemption from the 100 percent testing requirement if they
can demonstrate the existence of an appropriate statistical
sampling program. The cGMPs help ensure that dietary supplements
and dietary ingredients are not adulterated with contaminants or
impurities, and are labeled to accurately reflect the active
ingredients and other ingredients in the products. We have
18
evaluated the final cGMP rule with respect to its potential
impact upon the various contract manufacturers that we use to
manufacture our products, some of which might not have met the
new standards. It is important to note that the final cGMP rule,
in an effort to limit disruption, included a three-year phase-in
for small businesses. The final cGMP rule has resulted in
additional costs. See Item 1A Risk Factors
for further discussion regarding the promulgated cGMP
regulations.
Some of the products marketed by us are considered conventional
foods and are currently labeled as such. Within the United
States, this category of products is subject to the Nutrition,
Labeling and Education Act, or NLEA, and regulations promulgated
under the NLEA. The NLEA regulates health claims, ingredient
labeling and nutrient content claims characterizing the level of
a nutrient in the product. The ingredients added to conventional
foods must either be generally recognized as safe by experts, or
GRAS, or be approved as food additives under FDA regulations.
In foreign markets, prior to commencing operations and prior to
making or permitting sales of our products in the market, we may
be required to obtain an approval, license or certification from
the relevant countrys ministry of health or comparable
agency. Where a formal approval, license or certification is not
required, we nonetheless seek a favorable opinion of counsel
regarding our compliance with applicable laws. Prior to entering
a new market in which a formal approval, license or certificate
is required, we work extensively with local authorities in order
to obtain the requisite approvals. The approval process
generally requires us to present each product and product
ingredient to appropriate regulators and, in some instances,
arrange for testing of products by local technicians for
ingredient analysis. The approvals may be conditioned on
reformulation of our products, or may be unavailable with
respect to some products or some ingredients. Product
reformulation or the inability to introduce some products or
ingredients into a particular market may have an adverse effect
on sales. We must also comply with product labeling and
packaging regulations that vary from country to country. Our
failure to comply with these regulations can result in a product
being removed from sale in a particular market, either
temporarily or permanently.
In 2005 Herbalife voluntarily elected to withdraw its
Sesame & Herb tablet product from the Israeli market.
This product, which has been on the market since 1989, was sold
only in Israel. Herbalifes voluntary decision to withdraw
this product accompanied the initiation of a review by the
Israeli Ministry of Health of anecdotal case reports of
individuals having varying liver conditions when it was reported
that a small number of these individuals had consumed Herbalife
products. Herbalife scientists and medical doctors have closely
cooperated with the Ministry of Health to facilitate this
review. No regulatory action has been taken by the Israeli
Ministry of Health or by any of the 24 other regulatory agencies
around the world which have looked into related matters.
The FTC, which exercises jurisdiction over the advertising of
all of our products, has in the past several years instituted
enforcement actions against several dietary supplement companies
and against manufacturers of weight loss products generally for
false and misleading advertising of some of their products.
These enforcement actions have often resulted in consent decrees
and monetary payments by the companies involved. In addition,
the FTC has increased its scrutiny of the use of testimonials,
which we also utilize, as well as the role of expert endorsers
and product clinical studies. Although we have not been the
target of FTC enforcement action for the advertising of our
products, we cannot be sure that the FTC, or comparable foreign
agencies, will not question our advertising or other operations
in the future. It is unclear whether the FTC will subject our
advertisements to increased surveillance to ensure compliance
with the principles set forth in its published advertising
guidance.
In Europe, where an EU Health Claim regulation is in effect, the
European Food Safety Authority, or EFSA, issued opinions
following its review of a number of proposed claims dossiers. If
accepted by the European Commission, the EFSAs opinions
could have a limiting effect on the use of certain
nutrition-specific claims made for our products. Such an outcome
could have an adverse effect on existing product
wellness, well-being and good for
you claims presently made on existing product labeling,
literature and advertising. Herbalife is currently seeking
regulatory support for its current product claims while
preparing for the possibility that based on limited acceptance
of our claims by EFSA we may be precluded from continued use of
such product claims.
In some countries, regulations applicable to the activities of
our distributors also may affect our business because in some
countries we are, or regulators may assert that we are,
responsible for our distributors conduct. In these
countries, regulators may request or require that we take steps
to ensure that our distributors comply with local regulations.
The types of regulated conduct include: (1) representations
concerning our products; (2) income
19
representations made by us
and/or
distributors; (3) public media advertisements, which in
foreign markets may require prior approval by regulators; and
(4) sales of products in markets in which the products have
not been approved, licensed or certified for sale.
In some markets, it is possible that improper product claims by
distributors could result in our products being reviewed by
regulatory authorities and, as a result, being classified or
placed into another category as to which stricter regulations
are applicable. In addition, we might be required to make
labeling changes.
We are unable to predict the nature of any future laws,
regulations, interpretations or applications, nor can we predict
what effect additional governmental regulations or
administrative orders, when and if promulgated, would have on
our business in the future. They could, however, require:
(1) the reformulation of some products not capable of being
reformulated; (2) imposition of additional record keeping
requirements; (3) expanded documentation of the properties
of some products; (4) expanded or different labeling;
(5) additional scientific substantiation regarding product
ingredients, safety or usefulness;
and/or
(6) additional distributor compliance surveillance and
enforcement action by us. Any or all of these requirements could
have a material adverse effect on our results of operations and
financial condition.
All of our officers and directors are subject to a permanent
injunction issued in October 1986 pursuant to the settlement of
an action instituted by the California Attorney General, the
State Health Director and the Santa Cruz County District
Attorney. We consented to the entry of this injunction without
in any way admitting the allegations of the complaint. The
injunction prevents us and our officers and directors from
making specified claims in future advertising of our products
and required us to implement some documentation systems with
respect to payments to our distributors. At the same time, the
injunction does not prevent us from continuing to make specified
claims concerning our products that have been made and are being
made, provided that we have a reasonable basis for making the
claims.
Network
Marketing Program
Our network marketing program is subject to a number of federal
and state regulations administered by the FTC and various state
agencies as well as regulations in foreign markets administered
by foreign agencies. Regulations applicable to network marketing
organizations generally are directed at ensuring that product
sales ultimately are made to consumers and that advancement
within our organization is based on sales of the
organizations products rather than investments in the
organization or other non-retail sales related criteria. For
instance, in some markets, there are limits on the extent to
which distributors may earn royalty overrides on sales generated
by distributors that were not directly sponsored by the
distributor. When required by law, we obtain regulatory approval
of our network marketing program or, when this approval is not
required, the favorable opinion of local counsel as to
regulatory compliance. Nevertheless, we remain subject to the
risk that, in one or more markets, our marketing system could be
found not to be in compliance with applicable regulations.
Failure by us to comply with these regulations could have a
material adverse effect on our business in a particular market
or in general.
On April 12, 2006, the FTC, issued a notice of proposed
rulemaking which, if implemented in its originally proposed
form, would have regulated sellers of business
opportunities in the United States. As originally proposed
this rule would have applied to us and, if adopted in its
originally proposed form, could have adversely affected our
U.S. business. On March 18, 2008 the FTC issued a
revised proposed rule and, as indicated in the announcement
accompanying the proposed rule, the revised proposal does not
attempt to cover multilevel marketing companies such as
Herbalife. If the revised rule is implemented as it is now
proposed we believe that it would not significantly impact our
U.S. business. Based on information currently available, we
anticipate that the rule may become final within a year.
The FTC has approved revisions to its Guides Concerning the Use
of Endorsements and Testimonials in Advertising, or Guides,
which became effective on December 1, 2009. Although the
Guides are not binding, they explain how the FTC interprets
Section 5 of the FTC Acts prohibition on unfair or
deceptive acts or practices. Consequently, the FTC could bring a
Section 5 enforcement action based on practices that are
inconsistent with the Guides. Under the revised Guides,
advertisements that feature a consumer and convey his or her
atypical experience with a product or service are required to
clearly disclose the results that consumers can generally
expect. In contrast to the
20
1980 version of the Guides, which allowed advertisers to
describe atypical results in a testimonial as long as they
included a disclaimer such as results not typical,
the revised Guides no longer contain such a safe harbor. The
revised Guides also add new examples to illustrate the
long-standing principle that material connections
between advertisers and endorsers (such as payments or free
products), connections that consumers might not expect, must be
disclosed. Herbalife has adapted its practices and rules
regarding the practices of its independent distributors to
comply with the revised Guides. However, it is possible that our
use, and that of our independent distributors, of testimonials
in the advertising and promotion of our products, including but
not limited to our weight management products and of our income
opportunity will be significantly impacted and therefore might
negatively impact our sales.
We also are subject to the risk of private party challenges to
the legality of our network marketing program. For example, in
Webster v. Omnitrition International, Inc., 79 F.3d
776 (9th Cir. 1996), the multi-level marketing program of
Omnitrition International, Inc., or Omnitrition, was
successfully challenged in a class action by Omnitrition
distributors who alleged that Omnitrition was operating an
illegal pyramid scheme in violation of federal and
state laws. We believe that our network marketing program
satisfies the standards set forth in the Omnitrition case and
other applicable statutes and case law defining a legal network
marketing system, in part based upon significant differences
between our marketing system and that described in the
Omnitrition case.
We are also subject to the risk of private party challenges to
the legality of our network marketing program. The multi-level
marketing programs of other companies have been successfully
challenged in the past, and in a current lawsuit, allegations
have been made challenging the legality of our network marketing
program in Belgium. Test Ankoop-Test Achat, a Belgian consumer
protection organization, sued Herbalife International Belgium,
S.V., or HIB, on August 26, 2004, alleging that HIB
violated Article 84 of the Belgian Fair Trade Practices Act
by engaging in pyramid selling, i.e., establishing a
network of professional or non-professional sales people who
hope to make a profit more through the expansion of that network
rather than through the sale of products to end-consumers. The
plaintiff is seeking a payment of 25,000 (equal to
approximately $33,000 as of December 31, 2010) per
purported violation as well as costs of the trial. For the year
ended December 31, 2010, our net sales in Belgium were
approximately $16.8 million. Currently, the lawsuit is in
the pleading stage. The plaintiffs filed their initial brief on
September 27, 2005. We filed a reply brief on May 9,
2006 and on December 9, 2008 plaintiffs filed a responsive
brief and on June 24, 2009 we filed a reply brief. An oral
hearing was held on November 3, 2010. The court issued an
interim judgment on November 24, 2010 ordering the parties
to address a change in the underlying Belgian statute. A hearing
is scheduled for March 2, 2011. An adverse judicial
determination with respect to our network marketing program, or
in proceedings not involving us directly but which challenge the
legality of multi-level marketing systems, in Belgium or in any
other market in which we operate, could negatively impact our
business. We believe that we have meritorious defenses to the
suit.
It is an ongoing part of our business to monitor and respond to
regulatory and legal developments, including those that may
affect our network marketing program. However, the regulatory
requirements concerning network marketing programs do not
include bright line rules and are inherently fact-based. An
adverse judicial determination with respect to our network
marketing program could have a material adverse effect on our
business. An adverse determination could: (1) require us to
make modifications to our network marketing program,
(2) result in negative publicity or (3) have a
negative impact on distributor morale. In addition, adverse
rulings by courts in any proceedings challenging the legality of
multi-level marketing systems, even in those not involving us
directly, could have a material adverse effect on our operations.
Transfer
Pricing and Similar Regulations
In many countries, including the United States, we are subject
to transfer pricing and other tax regulations designed to ensure
that appropriate levels of income are reported as earned by our
U.S. or local entities and are taxed accordingly. In
addition, our operations are subject to regulations designed to
ensure that appropriate levels of customs duties are assessed on
the importation of our products.
Although we believe that we are in substantial compliance with
all applicable regulations and restrictions, we are subject to
the risk that governmental authorities could audit our transfer
pricing and related practices and assert that additional taxes
are owed. For example, we are currently subject to pending or
proposed audits that are at various levels of review, assessment
or appeal in a number of jurisdictions involving transfer
pricing issues, income
21
taxes, duties, value added taxes, withholding taxes and related
interest and penalties in material amounts. In some
circumstances, additional taxes, interest and penalties have
been assessed, and we will be required to appeal or litigate to
reverse the assessments. We have taken advice from our tax
advisors and believe that there are substantial defenses to the
allegations that additional taxes are owed, and we are
vigorously defending against the imposition of additional
proposed taxes. The ultimate resolution of these matters may
take several years, and the outcome is uncertain.
In the event that the audits or assessments are concluded
adversely to us, we may or may not be able to offset or mitigate
the consolidated effect of foreign income tax assessments
through the use of U.S. foreign tax credits. Currently, we
anticipate utilizing the majority of our foreign tax credits in
the year in which they arise with the unused amount carried
forward. Because the laws and regulations governing
U.S. foreign tax credits are complex and subject to
periodic legislative amendment, we cannot be sure that we would
in fact be able to take advantage of any foreign tax credits in
the future. As a result, adverse outcomes in these matters could
have a material impact on our financial condition and operating
results.
Other
Regulations
We also are subject to a variety of other regulations in various
foreign markets, including regulations pertaining to social
security assessments, employment and severance pay requirements,
import/export regulations and antitrust issues. As an example,
in many markets, we are substantially restricted in the amount
and types of rules and termination criteria that we can impose
on distributors without having to pay social security
assessments on behalf of the distributors and without incurring
severance obligations to terminated distributors. In some
countries, we may be subject to these obligations in any event.
Our failure to comply with these regulations could have a
material adverse effect on our business in a particular market
or in general. Assertions that we failed to comply with
regulations or the effect of adverse regulations in one market
could adversely affect us in other markets as well by causing
increased regulatory scrutiny in those other markets or as a
result of the negative publicity generated in those other
markets.
Compliance
Procedures
As indicated above, Herbalife, our products and our network
marketing program are subject, both directly and indirectly
through distributors conduct, to numerous federal, state
and local regulations, both in the United States and foreign
markets. Beginning in 1985, we began to institute formal
regulatory compliance measures by developing a system to
identify specific complaints against distributors and to remedy
any violations of Herbalifes rules by distributors through
appropriate sanctions, including warnings, suspensions and, when
necessary, terminations. In our manuals, seminars and other
training programs and materials, we emphasize that distributors
are prohibited from making therapeutic claims for our products.
Our general policy regarding acceptance of distributor
applications from individuals who do not reside in one of our
markets is to refuse to accept the individuals distributor
application. From time to time, exceptions to the policy are
made on a
country-by-country
basis.
In order to comply with regulations that apply to both us and
our distributors, we conduct considerable research into the
applicable regulatory framework prior to entering any new market
to identify all necessary licenses and approvals and applicable
limitations on our operations in that market. Typically, we
conduct this research with the assistance of local legal counsel
and other representatives. We devote substantial resources to
obtaining the necessary licenses and approvals and bringing our
operations into compliance with the applicable limitations. We
also research laws applicable to distributor operations and
revise or alter our distributor manuals and other training
materials and programs to provide distributors with guidelines
for operating a business, marketing and distributing our
products and similar matters, as required by applicable
regulations in each market. We are, however, unable to monitor
our sales leaders and distributors effectively to ensure that
they refrain from distributing our products in countries where
we have not commenced operations, and we do not devote
significant resources to this type of monitoring.
22
In addition, regulations in existing and new markets often are
ambiguous and subject to considerable interpretive and
enforcement discretion by the responsible regulators. Moreover,
even when we believe that we and our distributors are initially
in compliance with all applicable regulations, new regulations
regularly are being added and the interpretation of existing
regulations is subject to change. Further, the content and
impact of regulations to which we are subject may be influenced
by public attention directed at us, our products or our network
marketing program, so that extensive adverse publicity about us,
our products or our network marketing program may result in
increased regulatory scrutiny.
It is an ongoing part of our business to anticipate and respond
to new and changing regulations and to make corresponding
changes in our operations to the extent practicable. Although we
devote considerable resources to maintaining our compliance with
regulatory constraints in each of our markets, we cannot be sure
that (1) we would be found to be in full compliance with
applicable regulations in all of our markets at any given time
or (2) the regulatory authorities in one or more markets
will not assert, either retroactively or prospectively or both,
that our operations are not in full compliance. These assertions
or the effect of adverse regulations in one market could
negatively affect us in other markets as well by causing
increased regulatory scrutiny in those other markets or as a
result of the negative publicity generated in those other
markets. These assertions could have a material adverse effect
on us in a particular market or in general. Furthermore,
depending upon the severity of regulatory changes in a
particular market and the changes in our operations that would
be necessitated to maintain compliance, these changes could
result in our experiencing a material reduction in sales in the
market or determining to exit the market altogether. In this
event, we would attempt to devote the resources previously
devoted to such market to a new market or markets or other
existing markets. However, we cannot be sure that this
transition would not have an adverse effect on our business and
results of operations either in the short or long-term.
Trademarks
and Proprietary Formulas
We use the umbrella trademarks Herbalife and the Tri-Leaf design
worldwide, and protect several other trademarks and trade names
related to our products and operations, such as
Niteworks®,
Nourifusion®,
and
Liftoff®.
Our trademark registrations are issued through the United States
Patent and Trademark Office, or USPTO, and comparable agencies
in the foreign countries. We consider our trademarks and trade
names to be an important factor in our business. We also take
care in protecting the intellectual property rights of our
proprietary formulas by restricting access to our formulas
within the Company to those persons or departments that require
access to them to perform their functions, and by requiring our
finished goods-suppliers and consultants to execute supply and
non-disclosure agreements that seek to contractually protect our
intellectual property rights. Disclosure of these formulas, in
redacted form, is also necessary to obtain sanitary
registrations in many countries. We also make efforts to protect
some unique formulations under patent law. We strive to protect
all new product developments as the confidential trade secrets
of the Company and its inventor employees. However, despite our
efforts, we may be unable to prevent third parties from
infringing upon or misappropriating our proprietary rights.
Competition
The business of marketing weight management and nutrition
products is highly competitive. This market segment includes
numerous manufacturers, distributors, marketers, retailers and
physicians that actively compete for the business of consumers
both in the U.S. and abroad. The market is highly sensitive
to the introduction of new products or weight management plans,
including various prescriptions and over the counter drugs that
may rapidly capture a significant share of the market. As a
result, our ability to remain competitive depends in part upon
the successful introduction of new products. In addition, we
anticipate that we will be subject to increasing competition in
the future from sellers that utilize electronic commerce. We
cannot be sure of the impact of electronic commerce or that it
will not adversely affect our business.
We are subject to significant competition for the recruitment of
distributors from other network marketing organizations,
including those that market weight management products,
nutritional supplements and personal care products, as well as
other types of products. Some of our competitors are
substantially larger than we are, and have considerably greater
financial resources than we have. Our ability to remain
competitive depends, in significant part, on our success in
recruiting and retaining distributors through an attractive
compensation plan and other incentives. We believe that our
production bonus program, international sponsorship program and
other
23
compensation and incentive programs provide our distributors
with significant earning potential. However, we cannot be sure
that our programs for recruitment and retention of distributors
will be successful.
Executive
Officers of the Registrant
The table sets forth certain information regarding each person
who serves as an executive officer of the Company.
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Name
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Age
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Position with the Company
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Michael O. Johnson
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56
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Chief Executive Officer, Director,
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Chairman of the Board
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Desmond Walsh
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53
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President
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Richard Goudis
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Chief Operating Officer
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Brett R. Chapman
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55
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General Counsel and Corporate Secretary
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John DeSimone
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Chief Financial Officer
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Michael O. Johnson is Chairman and Chief Executive
Officer of the Company. Mr. Johnson joined the Company in
April 2003 as Chief Executive Officer and became Chairman of the
Board in May 2007. Before joining the Company Mr. Johnson
spent 17 years with The Walt Disney Company, where he most
recently served as President of Walt Disney International, and
also served as President of Asia Pacific for The Walt Disney
Company and President of Buena Vista Home Entertainment.
Mr. Johnson has also previously served as a publisher of
Audio Times magazine, and has directed the regional sales
efforts of Warner Amex Satellite Entertainment Company for three
of its television channels, including MTV, Nickelodeon and The
Movie Channel. Mr. Johnson formerly served as a director of
Univision Communications, Inc., a television company serving
Spanish-speaking Americans, and served on the Board of Regents
for Loyola High School of Los Angeles. Mr. Johnson received
his Bachelor of Arts in Political Science from Western State
College.
Desmond Walsh is the President of the Company and has
held this position since January 2010. Mr. Walsh joined the
Company in January 2004 as Senior Vice President, Worldwide
Distributor Sales and was promoted to Executive Vice President
for Worldwide Operations and Sales in April 2008. From 2001 to
2004, Mr. Walsh served as the Senior Vice President of the
commercial division of DMX Music. Prior to DMX Music,
Mr. Walsh spent five years as Vice President and General
Manager of Supercomm, Inc., a subsidiary of the Walt Disney
Company. Mr. Walsh also previously served in management
positions at MovieQuik Systems, a division of The Southland
Corporation (now 7-Eleven) and at Commtron Corporation, a
leading consumer electronics and video distribution company.
Mr. Walsh received his Bachelor of Laws degree from the
University of London.
Richard Goudis is Chief Operating Officer of the Company
and has held this position since January 2010. Mr. Goudis
joined the Company in June 2004 as Chief Financial Officer after
serving as the Chief Operating Officer of Rexall Sundown, a
Nasdaq 100 company that was sold to Royal Numico in 2000,
from 1998 to 2001. After the sale to Royal Numico,
Mr. Goudis had operations responsibility for all of Royal
Numicos U.S. investments, including General Nutrition
Centers, or GNC, Unicity International and Rexall Sundown. From
2002 to May 2004, Mr. Goudis was a partner at Flamingo
Capital Partners, a firm he founded in 2002. Mr. Goudis
also previously worked at Sunbeam Corporation and
Pratt & Whitney. Mr. Goudis graduated from the
University of Massachusetts with a degree in Accounting and he
received his MBA from Nova Southeastern University.
Brett R. Chapman is General Counsel and Corporate
Secretary of the Company and has held these positions since
October 2003. Before joining the Company in October 2003, Mr.
Chapman spent thirteen years at The Walt Disney Company, most
recently as its Senior Vice President and Deputy General
Counsel, with responsibility for all legal matters relating to
Disneys Media Networks Group, including the ABC Television
Network, the companys cable properties including The
Disney Channel and ESPN, and Disneys radio and internet
businesses. Prior to working at The Walt Disney Company,
Mr. Chapman was an associate at the law firm of Skadden,
Arps, Slate, Meagher & Flom LLP. Mr. Chapman
received his Bachelor of Science and Master of Science in
Business Administration from California State University,
Northridge and his Juris Doctorate from Southwestern University
School of Law.
John DeSimone is Chief Financial Officer of the Company
and has held this position since January 2010. Mr. DeSimone
joined the Company in November 2007 as Senior Vice
President Finance and was promoted to
24
the position of Senior Vice President
Finance & Distributor Operations in December 2008.
From June 2004 through October 2007, Mr. DeSimone served as
the Chief Executive Officer of Mobile Ventures, LLC (formerly
known as Autoware, Inc.), an automotive aftermarket accessory
distributor and retailer. Prior to working at Mobile Ventures,
LLC, Mr. DeSimone previously served as the Controller, Vice
President of Finance and Chief Financial Officer of Rexall
Sundown, Inc., a multinational manufacturer and distributor of
nutritional supplements and sports nutrition products that was
publicly traded while Mr. DeSimone served as its Controller
and Vice President of Finance. Mr. DeSimone received his
Bachelor of Science in Business Administration from Bryant
College (now known as Bryant University).
Employees
As of December 31, 2010, we had approximately
4,500 employees. In China, as of December 31, 2010, we
also had labor contracts with approximately 49,000 employed
sales representatives. These numbers do not include our
distributors, who are independent contractors rather than
employees. Except for some employees in Mexico and in certain
European countries, none of our employees are members of any
labor union, and we have never experienced any business
interruption as a result of any labor disputes.
Available
Information
Our Internet website address is www.Herbalife.com. We
make available free of charge on our website our Annual Reports
on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, or the Exchange Act, as soon as reasonably
practical after we file such material with, or furnish it to,
the Securities and Exchange Commission, or SEC. This information
is also available in print to any shareholder who requests it,
with any such requests addressed to Investor Relations,
800 West Olympic Blvd., Suite 406, Los Angeles, CA
90015. Certain of these documents may also be obtained by
calling the SEC at
1-800-SEC-0330.
The SEC also maintains an Internet website that contains
reports, and other information regarding issuers that file
electronically with the SEC at www.sec.gov. We also make
available free of charge on our website our Corporate Governance
Guidelines, our Code of Business Conduct and Ethics, and the
Charters of our Audit Committee, Corporate Governance and
Nominating Committee, and Compensation Committee.
Item 1A.
RISK FACTORS
The
worldwide financial and economic crisis could
negatively impact our access to credit and the sales of our
products and could harm our financial condition and operating
results.
We are closely monitoring various aspects of the current
worldwide financial and economic crisis and its
potential impact on us, our liquidity, our access to capital,
our operations and our overall financial condition. While we
have historically met our funding needs utilizing cash flow from
operating activities and while we believe we will have
sufficient resources to meet current debt service obligations in
a timely manner, no assurances can be given that the current
overall downturn in the world economy will not significantly
adversely impact us and our business operations. We note
economic and financial markets are fluid and we cannot ensure
that there will not be in the near future a material adverse
deterioration in our sales or liquidity.
Our
failure to establish and maintain distributor relationships for
any reason could negatively impact sales of our products and
harm our financial condition and operating
results.
We distribute our products exclusively through approximately
2.1 million independent distributors, and we depend upon
them directly for substantially all of our sales. To increase
our revenue, we must increase the number of, or the productivity
of, our distributors. Accordingly, our success depends in
significant part upon our ability to recruit, retain and
motivate a large base of distributors. The loss of a significant
number of distributors for any reason could negatively impact
sales of our products and could impair our ability to attract
new distributors. In our efforts to attract and retain
distributors, we compete with other network marketing
organizations, including those in the weight management, dietary
and nutritional supplement and personal care and cosmetic
product industries. Our
25
operating results could be harmed if our existing and new
business opportunities and products do not generate sufficient
interest to retain existing distributors and attract new
distributors.
Our distributor organization has a high turnover rate, which is
a common characteristic found in the direct selling industry. In
light of this fact, we have our sales leaders re-qualify
annually in order to maintain a more accurate count of their
numbers. For the latest twelve month re-qualification period
ending January 2011, approximately 49% of our sales leaders
re-qualified. Distributors who purchase our product for personal
consumption or for short-term income goals may stay with us for
several months to one year. Sales leaders who have committed
time and effort to build a sales organization will generally
stay for longer periods. Distributors have highly variable
levels of training, skills and capabilities. The turnover rate
of our distributors, and our operating results, can be adversely
impacted if we, and our senior distributor leadership, do not
provide the necessary mentoring, training and business support
tools for new distributors to become successful sales people in
a short period of time.
We estimate that, of our approximately 2.1 million
independent distributors, we had approximately 483,000 sales
leaders as of December 31, 2010. These sales leaders,
together with their downline sales organizations, account for
substantially all of our revenues. Our distributors, including
our sales leaders, may voluntarily terminate their distributor
agreements with us at any time. The loss of a group of leading
sales leaders, together with their downline sales organizations,
or the loss of a significant number of distributors for any
reason, could negatively impact sales of our products, impair
our ability to attract new distributors and harm our financial
condition and operating results.
Since
we cannot exert the same level of influence or control over our
independent distributors as we could were they our own
employees, our distributors could fail to comply with our
distributor policies and procedures, which could result in
claims against us that could harm our financial condition and
operating results.
Excluding our China sales employees, our distributors are
independent contractors and, accordingly, we are not in a
position to directly provide the same direction, motivation and
oversight as we would if distributors were our own employees. As
a result, there can be no assurance that our distributors will
participate in our marketing strategies or plans, accept our
introduction of new products, or comply with our distributor
policies and procedures.
Extensive federal, state and local laws regulate our business,
products and network marketing program. Because we have expanded
into foreign countries, our policies and procedures for our
independent distributors differ due to the different legal
requirements of each country in which we do business. While we
have implemented distributor policies and procedures designed to
govern distributor conduct and to protect the goodwill
associated with Herbalife trademarks and tradenames, it can be
difficult to enforce these policies and procedures because of
the large number of distributors and their independent status.
Violations by our independent distributors of applicable law or
of our policies and procedures in dealing with customers could
reflect negatively on our products and operations and harm our
business reputation. In addition, it is possible that a court
could hold us civilly or criminally accountable based on
vicarious liability because of the actions of our independent
distributors.
Adverse
publicity associated with our products, ingredients or network
marketing program, or those of similar companies, could harm our
financial condition and operating results.
The size of our distribution force and the results of our
operations may be significantly affected by the publics
perception of the Company and similar companies. This perception
is dependent upon opinions concerning:
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the safety and quality of our products and ingredients;
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the safety and quality of similar products and ingredients
distributed by other companies;
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our distributors;
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our network marketing program; and
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the direct selling business generally.
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Adverse publicity concerning any actual or purported failure of
our Company or our independent distributors to comply with
applicable laws and regulations regarding product claims and
advertising, good manufacturing practices, the regulation of our
network marketing program, the licensing of our products for
sale in our target markets or other aspects of our business,
whether or not resulting in enforcement actions or the
imposition of penalties, could have an adverse effect on the
goodwill of our Company and could negatively affect our ability
to attract, motivate and retain distributors, which would
negatively impact our ability to generate revenue. We cannot
ensure that all distributors will comply with applicable legal
requirements relating to the advertising, labeling, licensing or
distribution of our products.
In addition, our distributors and consumers
perception of the safety and quality of our products and
ingredients as well as similar products and ingredients
distributed by other companies can be significantly influenced
by media attention, publicized scientific research or findings,
widespread product liability claims and other publicity
concerning our products or ingredients or similar products and
ingredients distributed by other companies. For example, in May
2008 public allegations were made that certain of our products
contain excessive amounts of lead thereby triggering disclosure
and labeling requirements under California Proposition 65.
Following an investigation, these allegations were publicly
withdrawn by the allegations initiator. While we have confidence
in our products because they fall within FDA suggested
guidelines as well as applicable state regulations for the
amount of lead that consumers can safely ingest and do not
believe they trigger disclosure or labeling requirements under
California Proposition 65, negative publicity such as this can
disrupt our business. Adverse publicity, whether or not accurate
or resulting from consumers use or misuse of our products,
that associates consumption of our products or ingredients or
any similar products or ingredients with illness or other
adverse effects, questions the benefits of our or similar
products or claims that any such products are ineffective,
inappropriately labeled or have inaccurate instructions as to
their use, could lead to lawsuits or other legal challenges and
could negatively impact our reputation, the market demand for
our products, or our general business.
From time to time we receive inquiries from government agencies
and third parties requesting information concerning our
products. We fully cooperate with these inquiries including,
when requested, by the submission of detailed technical dossiers
addressing product composition, manufacturing, process control,
quality assurance, and contaminant testing. We understand that
such materials are undergoing review by regulators in certain
markets. In the course of one such inquiry the Spanish Ministry
of Health elected to issue a press release, or communicado, to
inform the public of a then on-going inquiry and dialogue with
our Company. Upon completion of its review of Herbalife products
distributed in Spain, the Spanish Ministry of Health withdrew
its communicado in April 2009. We are confident in the safety of
our products when used as directed. However, there can be no
assurance that regulators in these or other markets will not
take actions that might delay or prevent the introduction of new
products, or require the reformulation or the temporary or
permanent withdrawal of certain of our existing products from
their markets.
Adverse publicity relating to us, our products or our
operations, including our network marketing program or the
attractiveness or viability of the financial opportunities
provided thereby, has had, and could again have, a negative
effect on our ability to attract, motivate and retain
distributors. In the mid-1980s, our products and marketing
program became the subject of regulatory scrutiny in the United
States, resulting in large part from claims and representations
made about our products by our independent distributors,
including impermissible therapeutic claims. The resulting
adverse publicity caused a rapid, substantial loss of
distributors in the United States and a corresponding reduction
in sales beginning in 1985. We expect that negative publicity
will, from time to time, continue to negatively impact our
business in particular markets.
Our
failure to appropriately respond to changing consumer
preferences and demand for new products or product enhancements
could significantly harm our distributor and customer
relationships and product sales and harm our financial condition
and operating results.
Our business is subject to changing consumer trends and
preferences, especially with respect to weight management
products. Our continued success depends in part on our ability
to anticipate and respond to these changes, and we may not
respond in a timely or commercially appropriate manner to such
changes. Furthermore, the nutritional supplement industry is
characterized by rapid and frequent changes in demand for
products and new product introductions and enhancements. Our
failure to accurately predict these trends could negatively
impact
27
consumer opinion of our products, which in turn could harm our
customer and distributor relationships and cause the loss of
sales. The success of our new product offerings and enhancements
depends upon a number of factors, including our ability to:
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accurately anticipate customer needs;
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innovate and develop new products or product enhancements that
meet these needs;
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successfully commercialize new products or product enhancements
in a timely manner;
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price our products competitively;
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manufacture and deliver our products in sufficient volumes and
in a timely manner; and
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differentiate our product offerings from those of our
competitors.
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If we do not introduce new products or make enhancements to meet
the changing needs of our customers in a timely manner, some of
our products could be rendered obsolete, which could negatively
impact our revenues, financial condition and operating results.
Due to
the high level of competition in our industry, we might fail to
retain our customers and distributors, which would harm our
financial condition and operating results.
The business of marketing weight management and nutrition
products is highly competitive and sensitive to the introduction
of new products or weight management plans, including various
prescription drugs, which may rapidly capture a significant
share of the market. These market segments include numerous
manufacturers, distributors, marketers, retailers and physicians
that actively compete for the business of consumers both in the
United States and abroad. In addition, we anticipate that we
will be subject to increasing competition in the future from
sellers that utilize electronic commerce. Some of these
competitors have longer operating histories, significantly
greater financial, technical, product development, marketing and
sales resources, greater name recognition, larger established
customer bases and better-developed distribution channels than
we do. Our present or future competitors may be able to develop
products that are comparable or superior to those we offer,
adapt more quickly than we do to new technologies, evolving
industry trends and standards or customer requirements, or
devote greater resources to the development, promotion and sale
of their products than we do. For example, if our competitors
develop other diet or weight loss treatments that prove to be
more effective than our products, demand for our products could
be reduced. Accordingly, we may not be able to compete
effectively in our markets and competition may intensify.
We are also subject to significant competition for the
recruitment of distributors from other network marketing
organizations, including those that market weight management
products, dietary and nutritional supplements and personal care
products as well as other types of products. We compete for
global customers and distributors with regard to weight
management, nutritional supplement and personal care products.
Our competitors include both direct selling companies such as
NuSkin Enterprises, Natures Sunshine, Alticor/Amway,
Melaleuca, Avon Products, Oriflame, Tupperware and Mary Kay, as
well as retail establishments such as Weight Watchers, Jenny
Craig, General Nutrition Centers, Wal-Mart and retail pharmacies.
In addition, because the industry in which we operate is not
particularly capital intensive or otherwise subject to high
barriers to entry, it is relatively easy for new competitors to
emerge who will compete with us for our distributors and
customers. In addition, the fact that our distributors may
easily enter and exit our network marketing program contributes
to the level of competition that we face. For example, a
distributor can enter or exit our network marketing system with
relative ease at any time without facing a significant
investment or loss of capital because (1) we have a low
upfront financial cost to become a Herbalife distributor,
(2) we do not require any specific amount of time to work
as a distributor, (3) we do not insist on any special
training to be a distributor and (4) we do not prohibit a
new distributor from working with another company. Our ability
to remain competitive therefore depends, in significant part, on
our success in recruiting and retaining distributors through an
attractive compensation plan, the maintenance of an attractive
product portfolio and other incentives. We cannot ensure that
our programs for recruitment and retention of distributors will
be successful and if they are not, our financial condition and
operating results would be harmed.
28
We are
affected by extensive laws, governmental regulations,
administrative determinations, court decisions and similar
constraints both domestically and abroad, and our failure or our
distributors failure to comply with these constraints
could lead to the imposition of significant penalties or claims,
which could harm our financial condition and operating
results.
In both domestic and foreign markets, the formulation,
manufacturing, packaging, labeling, distribution, importation,
exportation, licensing, sale and storage of our products are
affected by extensive laws, governmental regulations,
administrative determinations, court decisions and similar
constraints. Such laws, regulations and other constraints may
exist at the federal, state or local levels in the United States
and at all levels of government in foreign jurisdictions. There
can be no assurance that we or our distributors are in
compliance with all of these regulations. Our failure or our
distributors failure to comply with these regulations or
new regulations could disrupt our distributors sale of our
products, or lead to the imposition of significant penalties or
claims and could negatively impact our business. In addition,
the adoption of new regulations or changes in the
interpretations of existing regulations may result in
significant compliance costs or discontinuation of product sales
and may negatively impact the marketing of our products,
resulting in significant loss of sales revenues.
In April 2006, the FTC issued a notice of proposed rulemaking
which, if implemented in its originally proposed form, would
have regulated all sellers of business opportunities
in the United States. As originally proposed this rule would
have applied to us and, if adopted in its originally proposed
form, could have adversely impacted our U.S. business. On
March 18, 2008, the FTC issued a revised proposed rule and,
as indicated in the announcement accompanying the proposed rule,
the revised proposal does not attempt to cover multilevel
marketing companies such as Herbalife. If the revised rule were
implemented as it is now proposed, we believe that it would not
significantly impact our U.S. business. Based on
information currently available, we anticipate that the rule may
become final within the year.
The FTC has approved revisions to its Guides Concerning the Use
of Endorsements and Testimonials in Advertising, or Guides,
which became effective on December 1, 2009. Although the
Guides are not binding, they explain how the FTC interprets
Section 5 of the FTC Acts prohibition on unfair or
deceptive acts or practices. Consequently, the FTC could bring a
Section 5 enforcement action based on practices that are
inconsistent with the Guides. Under the revised Guides,
advertisements that feature a consumer and convey his or her
atypical experience with a product or service will be required
to clearly disclose the results that consumers can generally
expect. In contrast to the 1980 version of the Guides, which
allowed advertisers to describe atypical results in a
testimonial as long as they included a disclaimer such as
results not typical, the revised Guides no longer
contain such a safe harbor. The revised Guides also add new
examples to illustrate the long-standing principle that
material connections between advertisers and
endorsers (such as payments or free products), connections that
consumers might not expect, must be disclosed. Herbalife has
revised its marketing materials to be compliant with the revised
Guides. However, it is possible that our use, and that of our
independent distributors, of testimonials in the advertising and
promotion of our products, including but not limited to our
weight management products and of our income opportunity will be
significantly impacted and therefore might negatively impact our
sales.
Governmental regulations in countries where we plan to commence
or expand operations may prevent or delay entry into those
markets. In addition, our ability to sustain satisfactory levels
of sales in our markets is dependent in significant part on our
ability to introduce additional products into such markets.
However, governmental regulations in our markets, both domestic
and international, can delay or prevent the introduction, or
require the reformulation or withdrawal, of certain of our
products. During the second quarter of 2008 the Spanish Ministry
of Health issued a press release, or communicado, informing the
public of a then on-going inquiry into the safety of our
Companys products sold in Spain. Upon completion of its
review of Herbalife products distributed in Spain, the Spanish
Ministry of Health withdrew its communicado. Any such regulatory
action, whether or not it results in a final determination
adverse to us, could create negative publicity, with detrimental
effects on the motivation and recruitment of distributors and,
consequently, on sales.
The FDA has published its final rule for cGMPs affecting the
manufacture, packing, labeling and holding of dietary
supplements distributed in the United States. Under dietary
supplement cGMPs, manufacturers must qualify ingredient
suppliers in order to use their products in dietary supplements.
One of the many requirements of the cGMP final rule is that the
manufacturer conduct 100 percent identity testing on all
dietary ingredients used in the
29
manufacture of dietary supplements or petition the FDA for an
exemption from this requirement. We are unaware of any company
having submitted such a petition. Herbalife has implemented a
comprehensive quality assurance program that is designed to
maintain compliance with the cGMPs for dietary supplements
manufactured by or on behalf of Herbalife for distribution in
the United States. However, if contract manufacturers whose
products bear Herbalife labels fail to comply with the cGMPs,
this could negatively impact Herbalifes reputation and
ability to sell its products even though Herbalife is not
directly liable under the cGMPs for such compliance. For
example, in September 2009 one of Herbalifes contract
manufacturers, Coats International, received a FDA cGMP 483
inspection report noting a number of compliance deficiencies
involving its manufacturing of two aloe-based products.
Subsequently, in April 2010 Coats International received a FDA
issued warning letter. Both of these letters generated publicity
within the trade media. Coats International has taken remedial
action to comply with the cGMP requirements. Further, in
complying with the dietary supplement cGMPs, we have experienced
increases in some product costs as a result of the necessary
increase in testing of raw ingredients and finished products and
this may cause us to seek alternate suppliers.
Our
network marketing program could be found to be not in compliance
with current or newly adopted laws or regulations in one or more
markets, which could prevent us from conducting our business in
these markets and harm our financial condition and operating
results.
Our network marketing program is subject to a number of federal
and state regulations administered by the FTC and various state
agencies in the United States as well as regulations on direct
selling in foreign markets administered by foreign agencies. We
are subject to the risk that, in one or more markets, our
network marketing program could be found not to be in compliance
with applicable law or regulations. Regulations applicable to
network marketing organizations generally are directed at
preventing fraudulent or deceptive schemes, often referred to as
pyramid or chain sales schemes, by
ensuring that product sales ultimately are made to consumers and
that advancement within an organization is based on sales of the
organizations products rather than investments in the
organization or other non-retail sales-related criteria. The
regulatory requirements concerning network marketing programs do
not include bright line rules and are inherently
fact-based, and thus, we are subject to the risk that these laws
or regulations or the enforcement or interpretation of these
laws and regulations by governmental agencies or courts can
change. The failure of our network marketing program to comply
with current or newly adopted regulations could negatively
impact our business in a particular market or in general.
We are also subject to the risk of private party challenges to
the legality of our network marketing program. The multi-level
marketing programs of other companies have been successfully
challenged in the past and in a current lawsuit allegations have
been made challenging the legality of our network marketing
program in Belgium. Test Ankoop-Test Achat, a Belgian consumer
protection organization, sued Herbalife International Belgium,
S.V., or HIB, on August 26, 2004, alleging that HIB
violated Article 84 of the Belgian Fair Trade Practices Act
by engaging in pyramid selling, i.e., establishing a
network of professional or non-professional sales people who
hope to make a profit more through the expansion of that network
rather than through the sale of products to end-consumers. The
plaintiff is seeking a payment of 25,000 (equal to
approximately $33,000 as of December 31, 2010) per
purported violation as well as costs of the trial. For the year
ended December 31, 2010, our net sales in Belgium were
approximately $16.8 million. The plaintiffs filed their
initial brief on September 27, 2005 and on May 9, 2006
we filed a reply brief. On December 9, 2008 plaintiffs
filed a responsive brief and on June 24, 2009 we filed a
reply brief. An oral hearing was held on November 3, 2010.
The Court issued an interim judgment on November 24, 2010
ordering the parties to address a change in the underlying
Belgian statute. A hearing is scheduled for March 2, 2011.
An adverse judicial determination with respect to our network
marketing program, or in proceedings not involving us directly
but which challenge the legality of multi-level marketing
systems, in Belgium or in any other market in which we operate,
could negatively impact our business. We believe that we have
meritorious defenses to the suit.
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, attorneys 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
30
further use
and/or
misappropriation of the Companys trade secrets on
December 11, 2007. Defendants appealed the courts
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 Herbalifes claims for misappropriation of
trade secrets and breach of contract. On May 5, 2010, the
District Court granted summary judgment for Herbalife on
defendants endless chain-scheme counterclaim. Herbalife
voluntarily dismissed its remaining claims, and on May 14,
2010 the District Court issued a final judgment dismissing all
of the parties claims. On June 10, 2010 the
defendants appealed from that judgment and on June 21, 2010
Herbalife cross-appealed. The Company believes that there is
merit to its appeal, and it will prevail upon both its appeal as
well as the defendants appeal.
A
substantial portion of our business is conducted in foreign
markets, exposing us to the risks of trade or foreign exchange
restrictions, increased tariffs, foreign currency fluctuations,
disruptions or conflicts with our third party importers and
similar risks associated with foreign operations.
Approximately 78% of our net sales for the year ended
December 31, 2010, were generated outside the United
States, exposing our business to risks associated with foreign
operations. For example, a foreign government may impose trade
or foreign exchange restrictions or increased tariffs, which
could negatively impact our operations. We are also exposed to
risks associated with foreign currency fluctuations. For
instance, purchases from suppliers are generally made in
U.S. dollars while sales to distributors are generally made
in local currencies. Accordingly, strengthening of the
U.S. dollar versus a foreign currency could have a negative
impact on us. Although we engage in transactions to protect
against risks associated with foreign currency fluctuations, we
cannot be certain any hedging activity will effectively reduce
our exchange rate exposure. Additionally we may be negatively
impacted by conflicts with or disruptions caused or faced by our
third party importers, as well as conflicts between such
importers and local governments or regulating agencies. Our
operations in some markets also may be adversely affected by
political, economic and social instability in foreign countries.
As we continue to focus on expanding our existing international
operations, these and other risks associated with international
operations may increase, which could harm our financial
condition and operating results.
Currency restrictions enacted by the Venezuelan government in
2003 have become more restrictive and have impacted the ability
of our subsidiary in Venezuela, or 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 remains
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 lawful but less
favorable parallel market mechanism for currency exchange. In
May 2010, this less favorable parallel market was discontinued.
In June 2010, the Venezuelan government introduced additional
regulations under a newly regulated system, SITME, which is
controlled by the Central Bank of Venezuela. SITME provides a
mechanism to exchange Bolivars into U.S. dollars through
the purchase and sale of U.S. dollar denominated bonds
issued in Venezuela. However, SITME is only available in certain
limited circumstances. Specifically, SITME can only be used for
product purchases and it is not available for other matters such
as the payment of dividends. Also, SITME can only be used for
amounts of up to $50,000 per day and $350,000 per month and is
generally only available to the extent that the applicant has
not exchanged and received U.S. dollars via the CADIVI
process within the previous 90 days. While we currently
plan to continue to import products into Venezuela and exchange
Bolivars for U.S. dollars based on the exchange mechanisms
prescribed by the Venezuelan government, if the current currency
restrictions are not lifted
31
or eased, our product supplies in the Venezuelan market may be
limited and we may make changes to Herbalife Venezuelas
operations each of which could negatively impact our business.
If the foreign currency restrictions in Venezuela intensify or
do not improve, we may be required to deconsolidate Herbalife
Venezuela for U.S. GAAP purposes and would be subject to
the risk of impairment. If any of these events were to occur it
could result in a negative impact to our consolidated earnings.
See Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations, within this
Annual Report for a further discussion on Venezuela.
Our
expansion in China is subject to general, as well as
industry-specific, economic, political and legal developments
and risks in China and requires that we utilize a different
business model from that which we use elsewhere in the
world.
Our expansion of operations into China is subject to risks and
uncertainties related to general economic, political and legal
developments in China, among other things. The Chinese
government exercises significant control over the Chinese
economy, including but not limited to controlling capital
investments, allocating resources, setting monetary policy,
controlling foreign exchange and monitoring foreign exchange
rates, implementing and overseeing tax regulations, providing
preferential treatment to certain industry segments or companies
and issuing necessary licenses to conduct business. Accordingly,
any adverse change in the Chinese economy, the Chinese legal
system or Chinese governmental, economic or other policies could
have a material adverse effect on our business in China and our
prospects generally.
In August 2005, China published regulations governing direct
selling (effective December 1, 2005) and prohibiting
pyramid promotional schemes (effective November 1, 2005),
and a number of administrative methods and proclamations were
issued in September 2005 and in September 2006. These
regulations require us to use a business model different from
that which we offer in other markets. To allow us to operate
under these regulations, we have created and introduced a model
specifically for China. In China, we have Company-operated
retail stores that sell through employed sales personnel to
customers and preferred customers. We provide training and
certification procedures for sales personnel in China. We also
have non-employee sales representatives who sell through our
retail stores. Our sales representatives are permitted by the
terms of our direct selling licenses to sell away from fixed
retail locations in the provinces of Jiangsu, Guangdong,
Shandong, Zhejiang, Guizhou, Beijing, Fujian, Sichuan, Hubei,
Shanxi, Shanghai, Jiangxi, Liaoning, Jilin, Henan, and
Chongqing. We have also engaged independent service providers
that meet both the requirements to operate their own business
under Chinese law as well as the conditions set forth by
Herbalife to sell products and provide services to Herbalife
customers. These features are not common to the business model
we employ elsewhere in the world, and based on the direct
selling licenses we have received and the terms of those which
we hope to receive in the future to conduct a direct selling
enterprise in China, our business model in China will continue
in some part to incorporate such features. The direct selling
regulations require us to apply for various approvals to conduct
a direct selling enterprise in China. The process for obtaining
the necessary licenses to conduct a direct selling business is
protracted and cumbersome and involves multiple layers of
Chinese governmental authorities and numerous governmental
employees at each layer. While direct selling licenses are
centrally issued, such licenses are generally valid only in the
jurisdictions within which related approvals have been obtained.
Such approvals are generally awarded on local and provincial
bases, and the approval process requires involvement with
multiple ministries at each level. Our participation and conduct
during the approval process is guided not only by distinct
Chinese practices and customs, but is also subject to applicable
laws of China and the other jurisdictions in which we operate
our business, including the U.S., as well as our internal code
of ethics. There is always a risk that in attempting to comply
with local customs and practices in China during the application
process or otherwise, we will fail to comply with requirements
applicable to us in China itself or in other jurisdictions, and
any such failure to comply with applicable requirements could
prevent us from obtaining the direct selling licenses or related
local or provincial approvals. Furthermore, we rely on certain
key personnel in China to assist us during the approval process,
and the loss of any such key personnel could delay or hinder our
ability to obtain licenses or related approvals. For all of the
above reasons, there can be no assurance that we will obtain
additional direct-selling licenses, or obtain related approvals
to expand into any or all of the localities or provinces in
China that are important to our business. Our inability to
obtain, retain, or renew any or all of the licenses or related
approvals that are required for us to operate in China could
negatively impact our business.
32
Additionally, although certain regulations have been published
with respect to obtaining such approvals, operating under such
approvals and otherwise conducting business in China, other
regulations are pending, and there is uncertainty regarding the
interpretation and enforcement of Chinese regulations. The
regulatory environment in China is evolving, and officials in
the Chinese government exercise broad discretion in deciding how
to interpret and apply regulations. We cannot be certain that
our business model will continue to be deemed by national or
local Chinese regulatory authorities to be compliant with any
such regulations. The Chinese government rigorously monitors the
direct selling market in China, and in the past has taken
serious action against companies that the government believed
were engaging in activities they regarded to be in violation of
applicable law, including shutting down their businesses and
imposing substantial fines. As a result, there can be no
guarantee that the Chinese governments current or future
interpretation and application of the existing and new
regulations will not negatively impact our business in China,
result in regulatory investigations or lead to fines or
penalties against us or our Chinese distributors.
Chinese regulations prevent persons who are not Chinese
nationals from engaging in direct selling in China. We cannot
guarantee that any of our distributors living outside of China
or any of our sales representatives, employed sales personnel or
independent service providers in China have not engaged or will
not engage in activities that violate our policies in this
market, or that violate Chinese law or other applicable law, and
therefore result in regulatory action and adverse publicity.
China enacted a labor contract law which took effect
January 1, 2008 and on September 18, 2008 an
implementing regulation took effect. On October 28, 2010
China enacted a social insurance law that will come into effect
on July 1, 2011. We have reviewed and will continue to
review our employment contracts and contractual relations with
employees in China, which include certain of our employed sales
personnel, and have made and will make such changes as we
believe to be necessary or appropriate to bring these contracts
and contractual relations into compliance with these laws and
their implementing regulations. In addition, we continue to
monitor the situation to determine how these laws and
regulations will be implemented in practice. There is no
guarantee that these laws will not adversely impact us, require
us to change our treatment of our employed sales personnel, or
cause us to change our operating plan for China.
If our operations in China are successful, we may experience
rapid growth in China, and there can be no assurances that we
will be able to successfully manage rapid expansion of
manufacturing operations and a rapidly growing and dynamic sales
force. There also can be no assurances that we will not
experience difficulties in dealing with or taking employment
related actions (such as hiring, terminations and salary
administration, including social benefit payments) with respect
to our employed sales personnel, particularly given the highly
regulated nature of the employment relationship in China. If we
are unable to effectively manage such growth and expansion of
our retail stores, manufacturing operations or our employed
sales personnel, our government relations may be compromised and
our operations in China may be harmed.
Our China business model, particularly with regard to sales
management responsibilities and remuneration, differs from our
traditional business model. There is a risk that such changes
and transitions may not be understood by our distributors or
employees, may be viewed negatively by our distributors or
employees, or may not be correctly utilized by our distributors
or employees. If that is the case, our business could be
negatively impacted.
If we
fail to further penetrate existing markets or successfully
expand our business into new markets, then the growth in sales
of our products, along with our operating results, could be
negatively impacted.
The success of our business is to a large extent contingent on
our ability to continue to grow by entering new markets and
further penetrating existing markets. Our ability to further
penetrate existing markets or to successfully expand our
business into additional countries in Eastern Europe, Southeast
Asia, South America or elsewhere, to the extent we believe that
we have identified attractive geographic expansion opportunities
in the future, is subject to numerous factors, many of which are
out of our control.
In addition, government regulations in both our domestic and
international markets can delay or prevent the introduction, or
require the reformulation or withdrawal, of some of our
products, which could negatively impact our business, financial
condition and results of operations. Also, our ability to
increase market penetration in certain countries may be limited
by the finite number of persons in a given country inclined to
pursue a direct selling
33
business opportunity or consumers willing to purchase Herbalife
products. Moreover, our growth will depend upon improved
training and other activities that enhance distributor retention
in our markets. While we have recently experienced significant
growth in certain of our markets, we cannot assure you that such
growth levels will continue in the immediate or long term
future. Furthermore, our efforts to support growth in such
international markets could be hampered to the extent that our
infrastructure in such markets is deficient when compared to our
more developed markets, such as the U.S. Therefore, we
cannot assure you that our general efforts to increase our
market penetration and distributor retention in existing markets
will be successful. If we are unable to continue to expand into
new markets or further penetrate existing markets, our operating
results could suffer.
Our
contractual obligation to sell our products only through our
Herbalife distributor network and to refrain from changing
certain aspects of our marketing plan may limit our
growth.
We are a party to an agreement with our distributors that
provides assurances that we will not sell Herbalife products
through any distribution channel other than our network of
independent Herbalife distributors. Thus, we are contractually
prohibited from expanding our business by selling Herbalife
products through other distribution channels that may be
available to our competitors, such as over the internet, through
wholesale sales, by establishing retail stores or through mail
order systems. Since this is an open-ended commitment, there can
be no assurance that we will be able to take advantage of
innovative new distribution channels that are developed in the
future.
In addition, this agreement with our distributors provides that
we will not change certain aspects of our marketing plan without
the consent of a specified percentage of our distributors. For
example, our agreement with our distributors provides that we
may increase, but not decrease, the discount percentages
available to our distributors for the purchase of products or
the applicable royalty override percentages, including
roll-ups,
and production and other bonus percentages available to our
distributors at various qualification levels within our
distributor hierarchy. We may not modify the eligibility or
qualification criteria for these discounts, royalty overrides
and production and other bonuses unless we do so in a manner to
make eligibility
and/or
qualification easier than under the applicable criteria in
effect as of the date of the agreement. Our agreement with our
distributors further provides that we may not vary the criteria
for qualification for each distributor tier within our
distributor hierarchy, unless we do so in such a way so as to
make qualification easier.
Although we reserved the right to make these changes to our
marketing plan without the consent of our distributors in the
event that changes are required by applicable law or are
necessary in our reasonable business judgment to account for
specific local market or currency conditions to achieve a
reasonable profit on operations, there can be no assurance that
our agreement with our distributors will not restrict our
ability to adapt our marketing plan to the evolving requirements
of the markets in which we operate. As a result, our growth may
be limited.
We
depend on the integrity and reliability of our information
technology infrastructure, and any related inadequacies may
result in substantial interruptions to our
business.
Our ability to provide products and services to our distributors
depends on the performance and availability of our core
transactional systems. We upgraded our back office systems
globally to the Oracle Enterprise Suite which is supported by a
robust hardware and network infrastructure. The Oracle
Enterprise Suite is a scalable and stable solution that provides
a solid foundation upon which we are building our next
generation Distributor facing Internet toolset. While we
continue to invest in our information technology infrastructure,
there can be no assurance that there will not be any significant
interruptions to such systems or that the systems will be
adequate to meet all of our future business needs.
The most important aspect of our information technology
infrastructure is the system through which we record and track
distributor sales, volume points, royalty overrides, bonuses and
other incentives. We have encountered, and may encounter in the
future, errors in our software or our enterprise network, or
inadequacies in the software and services supplied by our
vendors, although to date none of these errors or inadequacies
has had a meaningful adverse impact on our business. Any such
errors or inadequacies that we may encounter in the future may
result in substantial interruptions to our services and may
damage our relationships with, or cause us to lose, our
distributors if the errors or inadequacies impair our ability to
track sales and pay royalty overrides, bonuses and other
incentives, which would harm our financial condition and
operating results. Such errors may be expensive or difficult to
correct in a timely manner, and we may have little or no control
over whether any inadequacies in software or services supplied
to us by third parties are corrected, if at all.
34
Since
we rely on independent third parties for the manufacture and
supply of certain of our products, if these third parties fail
to reliably supply products to us at required levels of quality
and which are manufactured in compliance with applicable laws,
including the dietary supplement cGMPs, then our financial
condition and operating results would be harmed.
The majority of our products are manufactured at third party
contract manufacturers, with the exception of our products sold
in China, which are manufactured in our Suzhou China facility,
and certain of our top selling products which are starting to be
manufactured in our manufacturing facility located in Lake
Forest, California. It is the Companys intention to expand
the capacity of this recently acquired manufacturing facility to
produce additional products for our North America and
international markets. We cannot assure you that our outside
contract manufacturers will continue to reliably supply products
to us at the levels of quality, or the quantities, we require,
and in compliance with applicable laws, including under the
FDAs cGMP regulations. While we are not presently aware of
any current liquidity issues with our suppliers, we cannot
assure you that they will not experience financial hardship as a
result of the current global financial crisis.
Our supply contracts generally have a two-year term. Except for
force majeure events such as natural disasters and other acts of
God, and non-performance by Herbalife, our manufacturers
generally cannot unilaterally terminate these contracts. These
contracts can generally be extended by us at the end of the
relevant time period and we have exercised this right in the
past. Globally we have over 40 suppliers of our products. For
our major products, we have both primary and secondary
suppliers. Our major suppliers include Natures Bounty
(U.S.) and Fine Foods (Italy) for meal replacements, protein
powders and nutritional supplements, Valentine Enterprises
(U.S.) for meal replacements and protein powders and PharmaChem
Labs for teas and
Niteworks®.
Additionally we use contract manufacturers in India, Brazil,
Korea, Japan and Germany to support our global business. In the
event any of our contract manufacturers were to become unable or
unwilling to continue to provide us with products in required
volumes and at suitable quality levels, we would be required to
identify and obtain acceptable replacement manufacturing
sources. There is no assurance that we would be able to obtain
alternative manufacturing sources on a timely basis. An extended
interruption in the supply of products would result in the loss
of sales. In addition, any actual or perceived degradation of
product quality as a result of reliance on contract
manufacturers may have an adverse effect on sales or result in
increased product returns and buybacks. Also, as we experience
ingredient and product price pressure in the areas of soy, dairy
products, plastics, and transportation reflecting global
economic trends, we believe that we have the ability to mitigate
some of these cost increases through improved optimization of
our supply chain coupled with select increases in the retail
prices of our products.
If we
fail to protect our trademarks and tradenames, then our ability
to compete could be negatively affected, which would harm our
financial condition and operating results.
The market for our products depends to a significant extent upon
the goodwill associated with our trademark and tradenames. We
own, or have licenses to use, the material trademark and trade
name rights used in connection with the packaging, marketing and
distribution of our products in the markets where those products
are sold. Therefore, trademark and trade name protection is
important to our business. Although most of our trademarks are
registered in the United States and in certain foreign countries
in which we operate, we may not be successful in asserting
trademark or trade name protection. In addition, the laws of
certain foreign countries may not protect our intellectual
property rights to the same extent as the laws of the United
States. The loss or infringement of our trademarks or tradenames
could impair the goodwill associated with our brands and harm
our reputation, which would harm our financial condition and
operating results.
Unlike in most of the other markets in which we operate, limited
protection of intellectual property is available under Chinese
law. Accordingly, we face an increased risk in China that
unauthorized parties may attempt to copy or otherwise obtain or
use our trademarks, copyrights, product formulations or other
intellectual property. Further, since Chinese commercial law is
relatively undeveloped, we may have limited legal recourse in
the event we encounter significant difficulties with
intellectual property theft or infringement. As a result, we
cannot assure you that we will be able to adequately protect our
product formulations or other intellectual property.
We permit the limited use of our trademarks by our independent
distributors to assist them in the marketing of our products. It
is possible that doing so may increase the risk of unauthorized
use or misuse of our trademarks in markets where their
registration status differs from that asserted by our
independent distributors, or they may be used in
35
association with claims or products in a manner not permitted
under applicable laws and regulations. Were this to occur it is
possible that this could diminish the value of these marks or
otherwise impair our further use of these marks.
If our
distributors fail to comply with labeling laws, then our
financial condition and operating results would be
harmed.
Although the physical labeling of our products is not within the
control of our independent distributors, our distributors must
nevertheless advertise our products in compliance with the
extensive regulations that exist in certain jurisdictions, such
as the United States, which considers product advertising to be
labeling for regulatory purposes.
Our products are sold principally as foods, dietary supplements
and cosmetics and are subject to rigorous FDA and related legal
regimens limiting the types of therapeutic claims that can be
made for our products. The treatment or cure of disease, for
example, is not a permitted claim for these products. While we
train our distributors and attempt to monitor our
distributors marketing materials, we cannot ensure that
all such materials comply with applicable regulations, including
bans on therapeutic claims. If our distributors fail to comply
with these restrictions, then we and our distributors could be
subjected to claims, financial penalties, mandatory product
recalls or relabeling requirements, which could harm our
financial condition and operating results. Although we expect
that our responsibility for the actions of our independent
distributors in such an instance would be dependent on a
determination that we either controlled or condoned a
noncompliant advertising practice, there can be no assurance
that we could not be held vicariously liable for the actions of
our independent distributors.
If our
intellectual property is not adequate to provide us with a
competitive advantage or to prevent competitors from replicating
our products, or if we infringe the intellectual property rights
of others, then our financial condition and operating results
would be harmed.
Our future success and ability to compete depend upon our
ability to timely produce innovative products and product
enhancements that motivate our distributors and customers, which
we attempt to protect under a combination of copyright,
trademark and trade secret laws, confidentiality procedures and
contractual provisions. However, our products are generally not
patented domestically or abroad, and the legal protections
afforded by common law and contractual proprietary rights in our
products provide only limited protection and may be
time-consuming and expensive to enforce
and/or
maintain. Further, despite our efforts, we may be unable to
prevent third parties from infringing upon or misappropriating
our proprietary rights or from independently developing
non-infringing products that are competitive with, equivalent to
and/or
superior to our products.
Monitoring infringement
and/or
misappropriation of intellectual property can be difficult and
expensive, and we may not be able to detect every infringement
or misappropriation of our proprietary rights. Even if we do
detect infringement or misappropriation of our proprietary
rights, litigation to enforce these rights could cause us to
divert financial and other resources away from our business
operations. Further, the laws of some foreign countries do not
protect our proprietary rights to the same extent as do the laws
of the United States.
Additionally, third parties may claim that products or marks
that we have independently developed or which bear certain of
our trademarks infringe upon their intellectual property rights
and there can be no assurance that one of more of our products
or marks will not be found to infringe upon third party
intellectual property rights in the future. For example, in a
pending action in the U.S. federal courts, the adidas
companies have alleged that certain uses of Herbalifes
Tri-Leaf device mark upon sports apparel items infringe upon
their Trefoil mark associated with such goods. They
have also alleged that such uses of Herbalifes Tri-Leaf
device and certain Herbalife trademark applications constitute a
breach of a 1998 agreement between the parties. We are
contesting these claims and do not believe that we are
infringing on any third party intellectual property rights, nor
do we believe that the 1998 agreement should be interpreted as
alleged by adidas. Nevertheless it is possible that an adverse
judgment on one or more claims might issue, awarding damages
and/or injunctive relief to adidas that could limit
Herbalifes ability to display its Tri-Leaf mark in
connection with certain sports apparel, sports equipment, or
sports-related marketing and services.
36
Since
one of our products constitutes a significant portion of our
retail sales, significant decreases in consumer demand for this
product or our failure to produce a suitable replacement should
we cease offering it would harm our financial condition and
operating results.
Our Formula 1 meal replacement product constitutes a significant
portion of our sales, accounting for approximately 28% of net
sales for the fiscal year ended December 31, 2010, and
approximately 29% of net sales for the fiscal years ended
December 31, 2009 and 2008. If consumer demand for this
product decreases significantly or we cease offering this
product without a suitable replacement, then our financial
condition and operating results would be harmed.
If we
lose the services of members of our senior management team, then
our financial condition and operating results could be
harmed.
We depend on the continued services of our Chairman and Chief
Executive Officer, Michael O. Johnson, and our current senior
management team as they work closely with the senior distributor
leadership to create an environment of inspiration, motivation
and entrepreneurial business success. Although we have entered
into employment agreements with certain members of our senior
management team, and do not believe that any of them are
planning to leave or retire in the near term, we cannot assure
you that our senior managers will remain with us. The loss or
departure of any member of our senior management team could
adversely impact our distributor relations and operating
results. If any of these executives do not remain with us, our
business could suffer. Also, the loss of key personnel,
including our regional and country managers, could negatively
impact our ability to implement our business strategy, and our
continued success will also be dependent on our ability to
retain existing, and attract additional, qualified personnel to
meet our needs. We currently do not maintain key
person life insurance with respect to our senior
management team.
The
covenants in our existing indebtedness limit our discretion with
respect to certain business matters, which could limit our
ability to pursue certain strategic objectives and in turn harm
our financial condition and operating results.
Our credit facility contains numerous financial and operating
covenants that restrict our and our subsidiaries ability
to, among other things:
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pay dividends, redeem share capital or capital stock and make
other restricted payments and investments;
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incur additional debt or issue preferred shares;
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impose dividend or other distribution restrictions on our
subsidiaries;
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create liens on our and our subsidiaries assets;
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engage in transactions with affiliates;
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guarantee other indebtedness; and
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merge, consolidate or sell all or substantially all of our
assets and the assets of our subsidiaries.
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In addition, our credit facility requires us to meet certain
financial ratios and financial conditions. Our ability to comply
with these covenants may be affected by events beyond our
control, including prevailing economic, financial and industry
conditions. Failure to comply with these covenants could result
in a default causing all amounts to become due and payable under
our credit facility, which is secured by substantially all of
our assets, against which the lenders thereunder could proceed
to foreclose.
If we
do not comply with transfer pricing, customs duties, VAT, and
similar regulations, then we may be subjected to additional
taxes, duties, interest and penalties in material amounts, which
could harm our financial condition and operating
results.
As a multinational corporation, in many countries including the
United States we are subject to transfer pricing and other tax
regulations designed to ensure that our intercompany
transactions are consummated at prices that have not been
manipulated to produce a desired tax result, that appropriate
levels of income are reported as earned by our United States or
local entities, and that we are taxed appropriately on such
transactions. In addition, our operations are
37
subject to regulations designed to ensure that appropriate
levels of customs duties are assessed on the importation of our
products. We are currently subject to pending or proposed audits
that are at various levels of review, assessment or appeal in a
number of jurisdictions involving transfer pricing issues,
income taxes, customs duties, value added taxes, withholding
taxes, sales and use and other taxes and related interest and
penalties in material amounts. For example, we are currently
appealing tax assessments in Spain, Brazil, and Mexico. In some
circumstances, additional taxes, interest and penalties have
been assessed and we will be required to pay the assessments or
post surety, in order to challenge the assessments. The
imposition of new taxes, even pass-through taxes such as VAT,
could have an impact on our perceived product pricing and
therefore a potential negative impact on our business. We have
reserved in the consolidated financial statements an amount that
we believe represents the most likely outcome of the resolution
of these disputes, but if we are incorrect in our assessment we
may have to pay the full amount asserted which could potentially
be material. Ultimate resolution of these matters may take
several years, and the outcome is uncertain. If the United
States Internal Revenue Service or the taxing authorities of any
other jurisdiction were to successfully challenge our transfer
pricing practices or our positions regarding the payment of
income taxes, customs duties, value added taxes, withholding
taxes, sales and use, and other taxes, we could become subject
to higher taxes and our revenue and earnings could be adversely
affected. On May 7, 2010, we received an administrative
assessment from the Mexican Tax Administration Service in an
amount equivalent to approximately $93 million, translated
at the period ended spot rate, for various items, the majority
of which was VAT allegedly owed on certain of our products
imported into Mexico during years 2005 and 2006. This assessment
is subject to interest and inflationary adjustments. 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, 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. Any adverse outcomes in these
matters could have a material impact on our financial condition
and operating results.
Changes
in tax laws, treaties or regulations, or their interpretation
could adversely affect us.
A change in applicable tax laws, treaties or regulations or
their interpretation could result in a higher effective tax rate
on our worldwide earnings and such change could be significant
to our financial results. Tax legislative proposals intending to
eliminate some perceived tax advantages of companies that have
legal domiciles outside the U.S. but have certain
U.S. connections have repeatedly been introduced in the
U.S. Congress. If these proposals are enacted, the result
would increase our effective tax rate and could have a material
adverse effect on the Companys financial condition and
results of operations.
We may
be held responsible for certain taxes or assessments relating to
the activities of our distributors, which could harm our
financial condition and operating results.
Our distributors are subject to taxation, and in some instances,
legislation or governmental agencies impose an obligation on us
to collect taxes, such as value added taxes, and to maintain
appropriate records. In addition, we are subject to the risk in
some jurisdictions of being responsible for social security and
similar taxes with respect to our distributors. In the event
that local laws and regulations or the interpretation of local
laws and regulations change to require us to treat our
independent distributors as employees, or that our distributors
are deemed by local regulatory authorities in one or more of the
jurisdictions in which we operate to be our employees rather
than independent contractors under existing laws and
interpretations, we may be held responsible for social security
and related taxes in those jurisdictions, plus any related
assessments and penalties, which could harm our financial
condition and operating results.
We may
incur material product liability claims, which could increase
our costs and harm our financial condition and operating
results.
Our products consist of vitamins, minerals and botanicals and
other ingredients that are classified as foods or dietary
supplements and are not subject to pre-market regulatory
approval in the United States. Our products could contain
contaminated substances, and some of our products contain some
ingredients that do not have long histories of human
consumption. We rely upon published raw material, single
ingredient, clinical studies and conduct limited clinical
studies on some key products but not all products. Previously
unknown adverse reactions resulting from
38
human consumption of these ingredients could occur. 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 may again be, subjected to various
product liability claims, including that the products contain
contaminants, the products include inadequate instructions as to
their uses, or the products include inadequate warnings
concerning side effects and interactions with other substances.
It is possible that widespread product liability claims could
increase our costs, and adversely affect our revenues and
operating income. Moreover, liability claims arising from a
serious adverse event may increase our costs through higher
insurance premiums and deductibles, and may make it more
difficult to secure adequate insurance coverage in the future.
In addition, our product liability insurance may fail to cover
future product liability claims, thereby requiring us to pay
substantial monetary damages and adversely affecting our
business. Finally, given the higher level of self-insured
retentions that we have accepted under our current product
liability insurance policies, which are as high as approximately
$10 million, in certain cases we may be subject to the full
amount of liability associated with any injuries, which could be
substantial.
Several years ago, a number of states restricted the sale of
dietary supplements containing botanical sources of ephedrine
alkaloids and on February 6, 2004, the FDA banned the use
of such ephedrine alkaloids. Until late 2002, we had sold
Thermojetics®
original green herbal tablets,
Thermojetics®
green herbal tablets and
Thermojetics®
gold herbal tablets, all of which contained ephedrine alkaloids.
Accordingly, we run the risk of product liability claims related
to the ingestion of ephedrine alkaloids contained in those
products. Currently, we have been named as a defendant in
product liability lawsuits seeking to link the ingestion of
certain of the aforementioned products to subsequent alleged
medical problems suffered by plaintiffs. Although we believe
that we have meritorious defenses to the allegations contained
in these lawsuits, and are vigorously defending these claims,
there can be no assurance that we will prevail in our defense of
any or all of these matters.
We are
subject to, among other things, requirements regarding the
effectiveness of internal controls over financial reporting. In
connection with these requirements, we conduct regular audits of
our business and operations. Our failure to identify or correct
deficiencies and areas of weakness in the course of these audits
could adversely affect our financial condition and operating
results.
We are required to comply with various corporate governance and
financial reporting requirements under the Sarbanes-Oxley Act of
2002, as well as new rules and regulations adopted by the SEC,
the Public Company Accounting Oversight Board and the New York
Stock Exchange. In particular, we are required to include
management and auditor reports on the effectiveness of internal
controls over financial reporting as part of our annual reports
on
Form 10-K,
pursuant to Section 404 of the Sarbanes-Oxley Act. We
expect to continue to spend significant amounts of time and
money on compliance with these rules. Our failure to correct any
noted weaknesses in internal controls over financial reporting
could result in the disclosure of material weaknesses which
could have a material adverse effect upon the market value of
our stock.
On a regular and on-going basis, we conduct audits through our
internal audit department of various aspects of our business and
operations. These internal audits are conducted to insure
compliance with our policies and to strengthen our operations
and related internal controls. The Audit Committee of our Board
of Directors regularly reviews the results of these internal
audits and, when appropriate, suggests remedial measures and
actions to correct noted deficiencies or strengthen areas of
weakness. There can be no assurance that these internal audits
will uncover all material deficiencies or areas of weakness in
our operations or internal controls. If left undetected and
uncorrected, such deficiencies and weaknesses could have a
material adverse effect on our financial condition and results
of operations.
From time to time, the results of these internal audits may
necessitate that we conduct further investigations into aspects
of our business or operations. In addition, our business
practices and operations may periodically be investigated by one
or more of the many governmental authorities with jurisdiction
over our worldwide operations. In the event that these
investigations produce unfavorable results, we may be subjected
to fines, penalties or loss of licenses or permits needed to
operate in certain jurisdictions, any one of which could have a
material adverse effect on our financial condition or operating
results.
39
Holders
of our common shares may face difficulties in protecting their
interests because we are incorporated under Cayman Islands
law.
Our corporate affairs are governed by our amended and restated
memorandum and articles of association, by the Companies Law
(2010 Revision), or the Companies Law, and the common law of the
Cayman Islands. The rights of our shareholders and the fiduciary
responsibilities of our directors under Cayman Islands law are
not as clearly established as under statutes or judicial
precedent in existence in jurisdictions in the United States.
Therefore, shareholders may have more difficulty in protecting
their interests in the face of actions by our management or
board of directors than would shareholders of a corporation
incorporated in a jurisdiction in the United States, due to the
comparatively less developed nature of Cayman Islands law in
this area.
Shareholders of Cayman Islands exempted companies such as
Herbalife have no general rights under Cayman Islands law to
inspect corporate records and accounts or to obtain copies of
lists of our shareholders. Our directors have discretion under
our articles of association to determine whether or not, and
under what conditions, our corporate records may be inspected by
our shareholders, but are not obliged to make them available to
our shareholders. This may make it more difficult for you to
obtain the information needed to establish any facts necessary
for a shareholder motion or to solicit proxies from other
shareholders in connection with a proxy contest.
A shareholder can bring a suit personally where its individual
rights have been, or are about to be, infringed. Where an action
is brought to redress any loss or damage suffered by us, we
would be the proper plaintiff, and a shareholder could not
ordinarily maintain an action on our behalf, except where it was
permitted by the courts of the Cayman Islands to proceed with a
derivative action. Our Cayman Islands counsel, Maples and
Calder, is not aware of any reported decisions in relation to a
derivative action brought in a Cayman Islands court. However,
based on English authorities, which would in all likelihood be
of persuasive authority in the Cayman Islands, a shareholder may
be permitted to bring a claim derivatively on the Companys
behalf, where:
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a company is acting or proposing to act illegally or outside the
scope of its corporate authority;
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the act complained of, although not acting outside the scope of
its corporate authority, could be effected only if authorized by
more than a simple majority vote; or
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those who control the company are perpetrating a fraud on
the minority.
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Provisions
of our articles of association and Cayman Islands corporate law
may impede a takeover or make it more difficult for shareholders
to change the direction or management of the Company, which
could reduce shareholders opportunity to influence
management of the Company.
Our articles of association permit our board of directors to
issue preference shares from time to time, with such rights and
preferences as they consider appropriate. Our board of directors
could authorize the issuance of preference shares with terms and
conditions and under circumstances that could have an effect of
discouraging a takeover or other transaction.
In addition, our articles of association contain certain other
provisions which could have an effect of discouraging a takeover
or other transaction or preventing or making it more difficult
for shareholders to change the direction or management of our
Company, including a classified board, the inability of
shareholders to act by written consent, a limitation on the
ability of shareholders to call special meetings of shareholders
and advance notice provisions. As a result, our shareholders may
have less input into the management of our Company than they
might otherwise have if these provisions were not included in
our articles of association.
The Cayman Islands have provisions under the Companies Law (2010
Revision) to facilitate mergers and consolidations between
Cayman Islands companies and non-Cayman Islands companies. These
provisions, contained within Part XVA of the Companies Law
(2010 Revision), are broadly similar to the merger provisions as
provided for under Delaware Law.
There are however a number of important differences that could
impede a takeover. First, the thresholds for approval of the
merger plan by shareholders are higher. The thresholds are
(a) a shareholder resolution by majority in number
representing 75% in value of the shareholders voting together as
one class or (b) if the shares to be issued to each
shareholder in the consolidated or surviving company are to have
the same rights and economic value as the
40
shares held in the constituent company, a special resolution of
the shareholders (being
662/3%
of those present in person or by proxy and voting) voting
together as one class.
As it is not expected that the shares would have the same rights
and economic value following a takeover by way of merger, it is
expected that the first test is the one which would commonly
apply. This threshold essentially has three requirements:
a majority in number of the shareholders of the
Company must approve the transaction, such approving majority
must hold at least 75% in value of all the
outstanding shares and the shareholders must vote together as
one class.
Additionally, the consent of each holder of a fixed or floating
security interest (in essence a documented security interest as
opposed to one arising by operation of law) is required to be
obtained unless the Grand Court of the Cayman Islands waives
such requirement.
The merger provisions contained within Part XVA of the
Companies Law (2010 Revision) do contain shareholder appraisal
rights similar to those provided for under Delaware law. Such
rights are limited to a merger under Part XVA and do apply
to schemes of arrangement as discussed below.
The Companies Law (2010 Revision) also contains separate
statutory provisions that provide for the merger, reconstruction
and amalgamation of companies. Those are commonly referred to in
the Cayman Islands as schemes of arrangement.
The procedural and legal requirements necessary to consummate
these transactions are more rigorous and take longer to complete
than the procedures typically required to consummate a merger in
the United States. Under Cayman Islands law and practice, a
scheme of arrangement in relation to a solvent Cayman Islands
company must be approved at a shareholders meeting by a
majority of each class of the companys shareholders who
are present and voting (either in person or by proxy) at such
meeting. The shares voted in favor of the scheme of arrangement
must also represent at least 75% of the value of each relevant
class of the companys shareholders present and voting at
the meeting. The convening of these meetings and the terms of
the amalgamation must also be sanctioned by the Grand Court of
the Cayman Islands. Although there is no requirement to seek the
consent of the creditors of the parties involved in the scheme
of arrangement, the Grand Court typically seeks to ensure that
the creditors have consented to the transfer of their
liabilities to the surviving entity or that the scheme of
arrangement does not otherwise materially adversely affect
creditors interests. Furthermore, the court will only
approve a scheme of arrangement if it is satisfied that:
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the statutory provisions as to majority vote have been complied
with;
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the shareholders who voted at the meeting in question fairly
represent the relevant class of shareholders to which they
belong;
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the scheme of arrangement is such as a businessman would
reasonably approve; and
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the scheme of arrangement is not one that would more properly be
sanctioned under some other provision of the Companies Law.
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If the scheme of arrangement is approved, the dissenting
shareholder would have no rights comparable to appraisal rights,
which would otherwise ordinarily be available to dissenting
shareholders of U.S. corporations, providing rights to
receive payment in cash for the judicially determined value of
the shares.
In addition, if an offer by a third party to purchase shares in
us has been approved by the holders of at least 90% of our
outstanding shares (not including such a third party) pursuant
to an offer within a four-month period of making such an offer,
the purchaser may, during the two months following expiration of
the four-month period, require the holders of the remaining
shares to transfer their shares on the same terms on which the
purchaser acquired the first 90% of our outstanding shares. An
objection can be made to the Grand Court of the Cayman Islands,
but this is unlikely to succeed unless there is evidence of
fraud, bad faith, collusion or inequitable treatment of the
shareholders.
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There
is uncertainty as to shareholders ability to enforce
certain foreign civil liabilities in the Cayman
Islands.
We are incorporated as an exempted company with limited
liability under the laws of the Cayman Islands. A material
portion of our assets are located outside of the United States.
As a result, it may be difficult for our shareholders to enforce
judgments against us or judgments obtained in U.S. courts
predicated upon the civil liability provisions of the federal
securities laws of the United States or any state of the United
States.
We have been advised by our Cayman Islands counsel, Maples and
Calder, that although there is no statutory enforcement in the
Cayman Islands of judgments obtained in the United States, the
courts of the Cayman Islands will based on the
principle that a judgment by a competent foreign court imposes
upon the judgment debtor an obligation to pay the sum for which
judgment has been given recognize and enforce a
foreign judgment of a court of competent jurisdiction if such
judgment is final, for a liquidated sum, not in respect of taxes
or a fine or penalty, is not inconsistent with a Cayman Islands
judgment in respect of the same matters, and was not obtained in
a manner, and is not of a kind, the enforcement of which is
contrary to the public policy of the Cayman Islands. There is
doubt, however, as to whether the Grand Court of the Cayman
Islands will (1) recognize or enforce judgments of
U.S. courts predicated upon the civil liability provisions
of the federal securities laws of the United States or any state
of the United States, or (2) in original actions brought in
the Cayman Islands, impose liabilities predicated upon the civil
liability provisions of the federal securities laws of the
United States or any state of the United States, on the grounds
that such provisions are penal in nature.
The Grand Court of the Cayman Islands may stay proceedings if
concurrent proceedings are being brought elsewhere.
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Item 1B.
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UNRESOLVED
STAFF COMMENTS
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None.
As of December 31, 2010, we leased all of our physical
properties. During 2008, we relocated many of our corporate
executive offices to the LA Live complex in downtown Los
Angeles, California, where we currently occupy approximately
65,000 square feet under a lease expiring in 2018. We also
lease approximately 316,000 square feet of general office
space in Torrance, California, with terms expiring in 2016, for
our North America and South America regional headquarters,
including some of our corporate support functions. Additionally,
we lease warehouse facilities in Los Angeles, California and
Memphis, Tennessee of approximately 82,000 square feet and
130,000 square feet, respectively. The Los Angeles and
Memphis lease agreements have terms through June 2011 and
December 2016, respectively. In Lake Forest, California, we also
lease warehouse, manufacturing plant and office space of
approximately 123,000 square feet under leases expiring in
2019 and 2020. In Venray, Netherlands, we lease our European
centralized warehouse of approximately 150,000 square feet
under an arrangement expiring in June 2020 for which we have a
renewal option. In Guadalajara, Mexico we lease approximately
82,000 square feet of warehouse space with the term of the
lease expiring in January 2015. We also lease warehouse,
manufacturing plant and office space in a majority of our other
geographic areas of operation. We believe that our existing
facilities are adequate to meet our current requirements and
that comparable space is readily available at each of these
locations.
|
|
Item 3.
|
LEGAL
PROCEEDINGS
|
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
42
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, attorneys 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 Companys trade secrets on
December 11, 2007. Defendants appealed the courts
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 Herbalifes claims for misappropriation of
trade secrets and breach of contract. On May 5, 2010, the
District Court granted summary judgment for Herbalife on
defendants endless chain-scheme counterclaim. Herbalife
voluntarily dismissed its remaining claims, and on May 14,
2010, the District Court issued a final judgment dismissing all
of the parties claims. On June 10, 2010 the
defendants appealed from that judgment and on June 21,
2010, Herbalife cross-appealed. The Company believes that there
is merit to its appeal, and it will prevail upon both its appeal
as well as the defendants appeal.
Certain of the Companys 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
$93 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 Companys 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 Companys existing
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.
|
|
Item 4.
|
(REMOVED
AND RESERVED)
|
43
PART II
|
|
Item 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Information
with Respect to our Common Shares
Our common shares are listed on the New York Stock Exchange, or
NYSE, and trade under the symbol HLF. The following
table sets forth the range of the high and low sales prices for
our common shares in each of the relevant fiscal quarters
presented, based upon quotations on the NYSE consolidated
transaction reporting system.
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
High
|
|
|
Low
|
|
|
March 31, 2010
|
|
$
|
46.70
|
|
|
$
|
37.06
|
|
June 30, 2010
|
|
$
|
53.00
|
|
|
$
|
42.33
|
|
September 30, 2010
|
|
$
|
60.65
|
|
|
$
|
44.95
|
|
December 31, 2010
|
|
$
|
71.29
|
|
|
$
|
59.50
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
High
|
|
|
Low
|
|
|
March 31, 2009
|
|
$
|
23.46
|
|
|
$
|
12.12
|
|
June 30, 2009
|
|
$
|
31.98
|
|
|
$
|
14.71
|
|
September 30, 2009
|
|
$
|
35.87
|
|
|
$
|
28.92
|
|
December 31, 2009
|
|
$
|
44.43
|
|
|
$
|
31.47
|
|
The market price of our common shares is subject to fluctuations
in response to variations in our quarterly operating results,
general trends in the market for our products and product
candidates, economic and currency exchange issues in the foreign
markets in which we operate as well as other factors, many of
which are not within our control. In addition, broad market
fluctuations, as well as general economic, business and
political conditions may adversely affect the market for our
common shares, regardless of our actual or projected performance.
The closing price of our common shares on February 17,
2011, was $68.34. The approximate number of holders of record of
our common shares as of February 17, 2011 was 801. This
number of holders of record does not represent the actual number
of beneficial owners of our common shares because shares are
frequently held in street name by securities dealers
and others for the benefit of individual owners who have the
right to vote their shares.
44
Performance
Graph
Our common shares began trading on the NYSE on December 16,
2004. Set forth below is information comparing the cumulative
total shareholder return and share price appreciation plus
dividends on our common shares with the cumulative total return
of the S&P 500 Index and a market weighted index of
publicly traded peers over the five year period ended
December 31, 2010. The graph assumes that $100 is invested
in each of our common shares, the S&P 500 Index and the
index of publicly traded peers on December 31, 2005 and
that all dividends were reinvested. The publicly traded
companies in the peer group are Avon Products, Inc.,
Natures Sunshine Products, Inc., Tupperware Corporation,
Nu Skin Enterprises Inc., USANA Health Sciences Inc., Weight
Watchers International, Inc. and Mannatech, Inc.
Comparison
of Cumulative Five Year Total Return
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/05
|
|
|
12/31/06
|
|
|
12/31/07
|
|
|
12/31/08
|
|
|
12/31/09
|
|
|
12/31/10
|
Herbalife Ltd.
|
|
|
$
|
100.00
|
|
|
|
$
|
123.49
|
|
|
|
$
|
125.66
|
|
|
|
$
|
69.37
|
|
|
|
$
|
134.14
|
|
|
|
$
|
230.05
|
|
S&P 500 Index
|
|
|
$
|
100.00
|
|
|
|
$
|
115.79
|
|
|
|
$
|
122.16
|
|
|
|
$
|
76.96
|
|
|
|
$
|
97.33
|
|
|
|
$
|
111.99
|
|
Peer Index
|
|
|
$
|
100.00
|
|
|
|
$
|
114.20
|
|
|
|
$
|
126.98
|
|
|
|
$
|
81.69
|
|
|
|
$
|
115.80
|
|
|
|
$
|
119.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
Information
with Respect to Dividends
During the second quarter of 2007, the Companys board of
directors adopted a regular quarterly cash dividend program. The
Companys board of directors authorized a $0.20 per common
share dividend each quarter from the adoption of the program
through the second quarter of 2010. On August 2, 2010, the
Companys board of directors approved an increase in the
quarterly cash dividend to $0.25 per common share, an increase
of $0.05 per common share from prior quarters. The aggregate
amount of dividends paid and declared during fiscal year 2010,
2009, and 2008 was approximately $53.7 million,
$48.7 million, and $50.7 million, respectively.
The declaration of future dividends is subject to the discretion
of the Companys board of directors and will depend upon
various factors, including the Companys net earnings,
financial condition, restrictions imposed by the Companys
credit agreement, cash requirements, future prospects and other
factors deemed relevant by the board of directors. For example,
the senior credit facility entered into on July 21, 2006,
as amended, permits payments of dividends as long as no default
or event of default exists and the sum of the amounts paid with
respect to dividends and share repurchases does not exceed the
sum of $450.0 million plus 75% of cumulative consolidated
net income from the first quarter of 2007 to the last day of the
quarter most recently ended prior to the date of dividend. There
is no guarantee that the board of directors will not terminate
the quarterly dividend program.
Information
with Respect to Securities Authorized for Issuance Under Equity
Compensation Plans
The following table sets forth as of December 31, 2010,
information with respect to (a) number of securities to be
issued upon exercise of outstanding options, warrants and
rights, (b) the weighted average exercise price of
outstanding options, warrants and rights and (c) the number
of securities remaining available for future issuance under
equity compensation plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
Number of Securities
|
|
|
|
|
|
Remaining Available for
|
|
|
|
to be Issued
|
|
|
Weighted Average
|
|
|
Future Issuance Under
|
|
|
|
Upon Exercise of
|
|
|
Exercise Price of
|
|
|
Equity Compensation Plans
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
(Excluding Securities
|
|
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
in Column (a))(2)
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved by security holders(1)
|
|
|
6,970,212
|
|
|
$
|
28.75
|
|
|
|
1,833,174
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,970,212
|
|
|
$
|
28.75
|
|
|
|
1,833,174
|
|
|
|
|
(1) |
|
Consists of five plans: The WH Holdings (Cayman Islands) Ltd.
Stock Incentive Plan, the WH Holdings (Cayman Islands) Ltd.
Independent Directors Stock Incentive Plan, the Herbalife Ltd.
2004 Stock Incentive Plan, the Amended and Restated Herbalife
Ltd. 2005 Stock Incentive Plan, and the Amended and Restated
Herbalife Ltd. Independent Directors Deferred Compensation and
Stock Unit Plan. In February 2008, a shareholder approved
Employee Stock Purchase Plan was implemented. The terms of these
plans are summarized in Note 9, Share-Based
Compensation, to the notes to our consolidated financial
statements. |
|
(2) |
|
Includes 941,733 common shares available for future issuance
under the shareholder approved Employee Stock Purchase Plan
which was implemented in February 2008. |
46
Information
with Respect to Purchases of Equity Securities by the
Issuer
On April 17, 2009, the Companys share repurchase
program adopted on April 18, 2007 expired pursuant to its
terms. On April 30, 2009, the Company announced that its
board of directors authorized a new program for the Company to
repurchase up to $300 million of Herbalife common shares
during the next two years, at such times and prices as
determined by the Companys management. On May 3,
2010, the Companys board of directors approved an increase
to the share repurchase authorization from $300 million to
$1 billion. In addition, the Companys board of
directors approved the extension of the expiration date of the
share repurchase program from April 2011 to December 2014. As of
December 31, 2010, the approximate dollar value of shares
that could be repurchased under the Companys share
repurchase program was approximately $776.7 million.
The following is a summary of our repurchases of common shares
during the three months ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
|
|
|
Purchased as
|
|
|
Value of Shares
|
|
|
|
Total Number
|
|
|
Average Price
|
|
|
Part of Publicly
|
|
|
that May Yet be
|
|
|
|
of Shares
|
|
|
Paid per
|
|
|
Announced
|
|
|
Purchased Under the
|
|
Period
|
|
Purchased
|
|
|
Share
|
|
|
Plans or Programs
|
|
|
Plans or Programs
|
|
|
October 1 October 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
826,688,278
|
|
November 1 November 30
|
|
|
507,742
|
|
|
$
|
67.71
|
|
|
|
507,742
|
|
|
$
|
792,309,246
|
|
December 1 December 31
|
|
|
225,271
|
|
|
$
|
69.34
|
|
|
|
225,271
|
|
|
$
|
776,688,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
733,013
|
|
|
$
|
68.21
|
|
|
|
733,013
|
|
|
$
|
776,688,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
Item 6.
|
SELECTED
FINANCIAL DATA
|
The following table sets forth certain of our historical
financial data. We have derived the selected historical
consolidated financial data for the years ended
December 31, 2010, 2009, 2008, 2007 and 2006 from our
audited financial statements and the related notes. Not all
periods shown below are discussed in this Annual Report on
Form 10-K.
The selected consolidated historical financial data set forth
below are not necessarily indicative of the results of future
operations and should be read in conjunction with the discussion
under Item 7 Managements Discussion
and Analysis of Financial Condition and Results of
Operations, and the historical consolidated financial
statements and accompanying notes included elsewhere in this
document.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(In thousands except per share data)
|
|
|
|
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,734,226
|
|
|
$
|
2,324,577
|
|
|
$
|
2,359,213
|
|
|
$
|
2,145,839
|
|
|
$
|
1,885,534
|
|
Cost of sales
|
|
|
558,811
|
|
|
|
493,134
|
|
|
|
458,396
|
|
|
|
438,382
|
|
|
|
380,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,175,415
|
|
|
|
1,831,443
|
|
|
|
1,900,817
|
|
|
|
1,707,457
|
|
|
|
1,505,196
|
|
Royalty overrides
|
|
|
900,248
|
|
|
|
761,501
|
|
|
|
796,718
|
|
|
|
760,110
|
|
|
|
675,245
|
|
Selling, general and administrative expenses(1)
|
|
|
887,655
|
|
|
|
773,911
|
|
|
|
771,847
|
|
|
|
634,190
|
|
|
|
573,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income(1)
|
|
|
387,512
|
|
|
|
296,031
|
|
|
|
332,252
|
|
|
|
313,157
|
|
|
|
256,946
|
|
Interest expense, net
|
|
|
7,417
|
|
|
|
5,103
|
|
|
|
13,222
|
|
|
|
10,573
|
|
|
|
39,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
380,095
|
|
|
|
290,928
|
|
|
|
319,030
|
|
|
|
302,584
|
|
|
|
217,405
|
|
Income taxes
|
|
|
89,562
|
|
|
|
87,582
|
|
|
|
97,840
|
|
|
|
111,133
|
|
|
|
74,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
290,533
|
|
|
$
|
203,346
|
|
|
$
|
221,190
|
|
|
$
|
191,451
|
|
|
$
|
143,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
4.88
|
|
|
$
|
3.32
|
|
|
$
|
3.47
|
|
|
$
|
2.75
|
|
|
$
|
2.02
|
|
Diluted
|
|
$
|
4.67
|
|
|
$
|
3.22
|
|
|
$
|
3.36
|
|
|
$
|
2.63
|
|
|
$
|
1.92
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
59,502
|
|
|
|
61,221
|
|
|
|
63,785
|
|
|
|
69,497
|
|
|
|
70,814
|
|
Diluted
|
|
|
62,256
|
|
|
|
63,097
|
|
|
|
65,769
|
|
|
|
72,714
|
|
|
|
74,509
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail sales(2)
|
|
$
|
4,306,262
|
|
|
$
|
3,690,061
|
|
|
$
|
3,811,159
|
|
|
$
|
3,511,003
|
|
|
$
|
3,100,205
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
380,402
|
|
|
|
285,056
|
|
|
|
272,988
|
|
|
|
270,811
|
|
|
|
184,447
|
|
Investing activities
|
|
|
(69,136
|
)
|
|
|
(71,322
|
)
|
|
|
(84,964
|
)
|
|
|
(43,390
|
)
|
|
|
(66,808
|
)
|
Financing activities
|
|
|
(254,480
|
)
|
|
|
(213,327
|
)
|
|
|
(205,067
|
)
|
|
|
(203,511
|
)
|
|
|
(55,044
|
)
|
Depreciation and amortization
|
|
|
68,621
|
|
|
|
62,437
|
|
|
|
48,732
|
|
|
|
35,115
|
|
|
|
29,995
|
|
Capital expenditures(3)
|
|
|
68,125
|
|
|
|
60,128
|
|
|
|
106,813
|
|
|
|
49,027
|
|
|
|
66,870
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(In thousands except per share data)
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
190,550
|
|
|
$
|
150,801
|
|
|
$
|
150,847
|
|
|
$
|
187,407
|
|
|
$
|
154,323
|
|
Receivables, net
|
|
|
85,612
|
|
|
|
76,958
|
|
|
|
70,002
|
|
|
|
58,729
|
|
|
|
51,758
|
|
Inventories
|
|
|
182,467
|
|
|
|
145,962
|
|
|
|
134,392
|
|
|
|
128,648
|
|
|
|
146,036
|
|
Total working capital
|
|
|
124,770
|
|
|
|
83,536
|
|
|
|
82,869
|
|
|
|
111,478
|
|
|
|
132,215
|
|
Total assets
|
|
|
1,232,220
|
|
|
|
1,146,050
|
|
|
|
1,121,318
|
|
|
|
1,067,243
|
|
|
|
1,016,933
|
|
Total debt
|
|
|
178,166
|
|
|
|
250,333
|
|
|
|
351,631
|
|
|
|
365,152
|
|
|
|
185,438
|
|
Shareholders equity(4)
|
|
|
487,212
|
|
|
|
359,311
|
|
|
|
241,731
|
|
|
|
182,244
|
|
|
|
353,890
|
|
Cash dividends per common share
|
|
|
0.90
|
|
|
|
0.80
|
|
|
|
0.80
|
|
|
|
0.60
|
|
|
|
|
|
|
|
|
(1) |
|
The years ended December 31, 2009, 2008, 2007, and 2006
include approximately $1.3 million, $6.7 million,
$5.8 million and $7.5 million of severance and related
expenses, respectively, associated with restructuring. |
|
(2) |
|
Retail sales represent the gross sales amount reflected on our
invoices to our distributors. We do not receive the full retail
sales amount. 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 total approximately
50% of suggested retail sales prices. Distributor allowances as
a percentage of sales may vary by country depending upon
regulatory restrictions that limit or otherwise restrict
distributor allowances. Net sales represents product
sales and shipping & handling revenues. |
|
|
|
Retail sales data is discussed in greater detail in
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Our use of retail sales reflects the fundamental role of
retail sales in our accounting systems, internal
controls and operations, including the basis upon which the
distributors are being paid. In addition, information in daily
and monthly reports reviewed by our management includes retail
sales data. |
The following represents the reconciliation of retail sales to
net sales for each of the periods set forth above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Retail sales
|
|
$
|
4,306,262
|
|
|
$
|
3,690,061
|
|
|
$
|
3,811,159
|
|
|
$
|
3,511,003
|
|
|
$
|
3,100,205
|
|
Distributor allowance
|
|
|
(1,968,769
|
)
|
|
|
(1,696,444
|
)
|
|
|
(1,778,866
|
)
|
|
|
(1,658,569
|
)
|
|
|
(1,472,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
|
2,337,493
|
|
|
|
1,993,617
|
|
|
|
2,032,293
|
|
|
|
1,852,434
|
|
|
|
1,627,678
|
|
Shipping & handling revenues
|
|
|
396,733
|
|
|
|
330,960
|
|
|
|
326,920
|
|
|
|
293,405
|
|
|
|
257,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,734,226
|
|
|
$
|
2,324,577
|
|
|
$
|
2,359,213
|
|
|
$
|
2,145,839
|
|
|
$
|
1,885,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
Includes acquisition of property, plant and equipment from
capitalized leases and other long-term debt of
$0.4 million, $18.2 million, $7.1 million, and
$2.6 million for the years ended December 31, 2009,
2008, 2007, and 2006, respectively. |
|
(4) |
|
During the years ended December 31, 2010, 2009, 2008 and
2007, we paid an aggregate $53.7 million,
$48.7 million, $50.7 million and $41.5 million in
dividends, respectively, and repurchased $150.1 million,
$73.2 million, $137.0 million and $365.8 million
of our common shares through open market purchases,
respectively. During the year ended December 31, 2006 we
did not declare any dividends or repurchase any of our common
shares. |
49
|
|
Item 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
You should read the following discussion and analysis in
conjunction with Item 6 Selected Financial Data
and our consolidated financial statements and related notes,
each included elsewhere in this Annual Report on
Form 10-K.
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 peoples
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 December 31, 2010, we sold
our products in 74 countries through a network of approximately
2.1 million independent distributors. In China, we sell our
products through retail stores, sales representatives, sales
employees and licensed business providers. We believe the
quality of our products and the effectiveness of our
distribution network, coupled with geographic expansion, have
been the primary reasons for our success throughout our
31-year
operating history.
Our products are grouped in four principal categories: weight
management, targeted nutrition, energy, sports &
fitness and Outer Nutrition, along with literature and
promotional items. Our products are often sold in programs that
are comprised of a series of related products and literature
designed to simplify weight management and nutrition for
consumers and maximize our distributors cross-selling
opportunities.
Industry-wide factors that affect us and our competitors include
the global obesity epidemic and the aging of the worldwide
population, which are driving demand for nutrition and
wellness-related products along with the global increase in
under and unemployment which can affect the recruitment and
retention of distributors seeking part time or full time income
opportunities.
While we are closely monitoring the current global economic
crisis, we remain focused on the opportunities and challenges in
retailing of our products, recruiting and retaining
distributors, improving distributor productivity, opening new
markets, further penetrating existing markets, globalizing
successful distributor methods of operation such as Nutrition
Clubs and Weight Loss Challenges, introducing new products and
globalizing existing products, developing niche market segments
and further investing in our infrastructure. Management remains
intently focused on the Venezuela market and especially the
limited ability to repatriate cash.
We report revenue from our six regions:
|
|
|
|
|
North America, which consists of the U.S., Canada and Jamaica;
|
|
|
|
Mexico;
|
|
|
|
South and Central America;
|
|
|
|
EMEA, which consists of Europe, the Middle East and Africa;
|
|
|
|
Asia Pacific (excluding China), which consists of Asia, New
Zealand and Australia; and
|
|
|
|
China.
|
Volume
Points by Geographic Region
A key non-financial measure we focus on is Volume Points on a
Royalty Basis, or Volume Points, which is essentially our
weighted unit measure of product sales volume. It is a useful
measure that we rely on as it excludes the impact of foreign
currency fluctuations, changes in retail pricing, and ignores
the differences generated by varying retail pricing across
geographic markets. The Volume Point measure, in the aggregate
and in each region, can be a measure of our sales volume as well
as of sales volume trends. In general, an increase in Volume
Points in a particular geographic region or country indicates an
increase in our sales volume which results in an increase in our
50
local currency net sales; a decrease in Volume Points in a
particular geographic region or country indicates a decrease in
our sales volume, which results in decreasing local currency net
sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
|
|
|
|
(Volume points in millions)
|
|
|
North America
|
|
|
888.5
|
|
|
|
779.9
|
|
|
|
13.9
|
%
|
|
|
779.9
|
|
|
|
750.4
|
|
|
|
3.9
|
%
|
Mexico
|
|
|
563.0
|
|
|
|
493.4
|
|
|
|
14.1
|
%
|
|
|
493.4
|
|
|
|
545.9
|
|
|
|
(9.6
|
)%
|
South & Central America
|
|
|
427.4
|
|
|
|
412.0
|
|
|
|
3.7
|
%
|
|
|
412.0
|
|
|
|
430.6
|
|
|
|
(4.3
|
)%
|
EMEA
|
|
|
486.6
|
|
|
|
466.4
|
|
|
|
4.3
|
%
|
|
|
466.4
|
|
|
|
497.1
|
|
|
|
(6.2
|
)%
|
Asia Pacific (excluding China)
|
|
|
723.6
|
|
|
|
570.7
|
|
|
|
26.8
|
%
|
|
|
570.7
|
|
|
|
438.7
|
|
|
|
30.1
|
%
|
China
|
|
|
144.2
|
|
|
|
115.3
|
|
|
|
25.1
|
%
|
|
|
115.3
|
|
|
|
115.9
|
|
|
|
(0.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
|
|
|
3,233.3
|
|
|
|
2,837.7
|
|
|
|
13.9
|
%
|
|
|
2,837.7
|
|
|
|
2,778.6
|
|
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Active Sales Leaders by Geographic Region
With the continued expansion of daily consumption business
models in our different markets, we believe the Average Active
Sales Leader metric, which represents the monthly average number
of sales leaders that place an order from us in a given quarter,
is a useful metric. We rely on this metric as an indication of
the engagement level of sales leaders in a given region. Changes
in the Average Active Sales Leader metric may be indicative of
the current momentum in a region as well as the potential for
higher annual retention levels and future sales growth through
utilization of consumption based Daily Methods of Operations, or
DMOs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
For the Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
North America
|
|
|
49,305
|
|
|
|
43,299
|
|
|
|
13.9
|
%
|
|
|
43,299
|
|
|
|
40,811
|
|
|
|
6.1
|
%
|
Mexico
|
|
|
38,084
|
|
|
|
34,545
|
|
|
|
10.2
|
%
|
|
|
34,545
|
|
|
|
36,969
|
|
|
|
(6.6
|
)%
|
South & Central America
|
|
|
28,821
|
|
|
|
27,935
|
|
|
|
3.2
|
%
|
|
|
27,935
|
|
|
|
27,163
|
|
|
|
2.8
|
%
|
EMEA
|
|
|
33,531
|
|
|
|
32,594
|
|
|
|
2.9
|
%
|
|
|
32,594
|
|
|
|
33,349
|
|
|
|
(2.3
|
)%
|
Asia Pacific (excluding China)
|
|
|
35,899
|
|
|
|
28,529
|
|
|
|
25.8
|
%
|
|
|
28,529
|
|
|
|
25,563
|
|
|
|
11.6
|
%
|
China
|
|
|
6,848
|
|
|
|
5,920
|
|
|
|
15.7
|
%
|
|
|
5,920
|
|
|
|
5,762
|
|
|
|
2.7
|
%
|
Worldwide(1)
|
|
|
185,774
|
|
|
|
166,625
|
|
|
|
11.5
|
%
|
|
|
166,625
|
|
|
|
163,326
|
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
(1) |
|
Worldwide Average Active Sales Leaders may not equal the sum of
the Average Active Sales Leaders in each region due to the
calculation being an average of Sales Leaders active in a
period, not a summation. |
Number of
New Sales Leaders by Geographic Region during the Reporting
Period
We also focus on the number of distributors qualified as new
sales leaders under our compensation system. Excluding China,
distributors qualify for sales leader status based on their
Volume Points. The changes in the total number of sales leaders
or changes in the productivity of sales leaders may cause Volume
Points to increase or decrease. The fluctuation in the number of
new sales leaders has historically been a general indicator of
the level of distributor recruitment. Given our ongoing
transition to daily consumption DMOs coupled with the changes in
our marketing plan implemented in late 2009, we are evaluating
the usefulness of this measure to our ongoing business. The
additional optional qualification introduced globally from the
changes in our marketing plan has contributed to the increase in
the number of new sales leaders.
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
North America
|
|
|
41,171
|
|
|
|
38,248
|
|
|
|
7.6
|
%
|
|
|
38,248
|
|
|
|
43,517
|
|
|
|
(12.1
|
)%
|
Mexico
|
|
|
25,473
|
|
|
|
21,826
|
|
|
|
16.7
|
%
|
|
|
21,826
|
|
|
|
26,046
|
|
|
|
(16.2
|
)%
|
South & Central America
|
|
|
24,977
|
|
|
|
29,052
|
|
|
|
(14.0
|
)%
|
|
|
29,052
|
|
|
|
45,416
|
|
|
|
(36.0
|
)%
|
EMEA
|
|
|
20,979
|
|
|
|
21,722
|
|
|
|
(3.4
|
)%
|
|
|
21,722
|
|
|
|
27,132
|
|
|
|
(19.9
|
)%
|
Asia Pacific (excluding China)
|
|
|
61,190
|
|
|
|
51,912
|
|
|
|
17.9
|
%
|
|
|
51,912
|
|
|
|
40,905
|
|
|
|
26.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total New Sales Leaders
|
|
|
173,790
|
|
|
|
162,760
|
|
|
|
6.8
|
%
|
|
|
162,760
|
|
|
|
183,016
|
|
|
|
(11.1
|
)%
|
New China Sales Employees
|
|
|
24,875
|
|
|
|
23,003
|
|
|
|
8.1
|
%
|
|
|
23,003
|
|
|
|
26,262
|
|
|
|
(12.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide Total New Sales Leaders
|
|
|
198,665
|
|
|
|
185,763
|
|
|
|
6.9
|
%
|
|
|
185,763
|
|
|
|
209,278
|
|
|
|
(11.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Sales Leaders and Retention Rates by Geographic Region as of
Re-qualification Period
Our compensation system requires each sales leader to re-qualify
for such status each year, prior to February, in order to
maintain their 50% discount on product and be eligible to
receive royalty payments. In February of each year, we demote
from the rank of sales leader those distributors who did not
satisfy the re-qualification requirements during the preceding
twelve months. The re-qualification requirement does not apply
to new sales leaders (i.e. those who became sales leaders
subsequent to the January re-qualification of the prior year).
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Leaders Statistics (Excluding China)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
January 1 total sales leaders
|
|
|
431.3
|
|
|
|
456.9
|
|
|
|
451.6
|
|
January & February new sales leaders
|
|
|
21.2
|
|
|
|
20.6
|
|
|
|
28.6
|
|
Demoted sales leaders (did not re-qualify)
|
|
|
(165.9
|
)
|
|
|
(181.4
|
)
|
|
|
(167.7
|
)
|
Other sales leaders (resigned, etc)
|
|
|
(1.1
|
)
|
|
|
(1.4
|
)
|
|
|
(2.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of February total sales leaders
|
|
|
285.5
|
|
|
|
294.7
|
|
|
|
309.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The distributor statistics below further highlight the
calculation for retention.
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Leaders Retention (Excluding China)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Sales leaders needed to re-qualify
|
|
|
290.9
|
|
|
|
304.0
|
|
|
|
284.0
|
|
Demoted sales leaders (did not re-qualify)
|
|
|
(165.9
|
)
|
|
|
(181.4
|
)
|
|
|
(167.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total re-qualified
|
|
|
125.0
|
|
|
|
122.6
|
|
|
|
116.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retention rate
|
|
|
43.0
|
%
|
|
|
40.3
|
%
|
|
|
41.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
North America
|
|
|
64,668
|
|
|
|
63,726
|
|
|
|
64,383
|
|
|
|
43.3
|
%
|
|
|
42.2
|
%
|
|
|
43.5
|
%
|
Mexico
|
|
|
47,068
|
|
|
|
50,099
|
|
|
|
60,685
|
|
|
|
50.4
|
%
|
|
|
45.2
|
%
|
|
|
44.4
|
%
|
South & Central America
|
|
|
51,060
|
|
|
|
67,876
|
|
|
|
67,808
|
|
|
|
34.1
|
%
|
|
|
32.2
|
%
|
|
|
34.7
|
%
|
EMEA
|
|
|
47,080
|
|
|
|
53,371
|
|
|
|
59,446
|
|
|
|
51.9
|
%
|
|
|
48.7
|
%
|
|
|
46.6
|
%
|
Asia Pacific (excluding China)
|
|
|
75,635
|
|
|
|
59,631
|
|
|
|
57,355
|
|
|
|
38.6
|
%
|
|
|
35.1
|
%
|
|
|
34.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales leaders
|
|
|
285,511
|
|
|
|
294,703
|
|
|
|
309,677
|
|
|
|
43.0
|
%
|
|
|
40.3
|
%
|
|
|
41.0
|
%
|
China Sales Employees
|
|
|
27,415
|
|
|
|
29,684
|
|
|
|
25,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide Total Sales Leaders
|
|
|
312,926
|
|
|
|
324,387
|
|
|
|
334,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
The number of sales leaders by geographic region as of the
quarterly reporting dates will normally be higher than the
number of sales leaders by geographic region as of the
re-qualification period because sales leaders who do not
re-qualify during the relevant twelve-month period will be
deleted from the rank of sales leader the following February.
Since sales leaders purchase most of our products for resale to
other distributors and consumers, comparisons of sales leader
totals on a
year-to-year
basis are indicators of our recruitment and retention efforts in
different geographic regions.
The value of the average monthly purchase of Herbalife products
by our sales leaders has remained relatively constant over time.
Consequently, increases in our sales are driven by our retention
of sales leaders, our recruitment and retention of distributors
and by our distributors increased adoption of daily
consumption business methods.
We provide distributors with products, support materials,
training, special events and a competitive compensation program.
If a distributor wants to pursue the Herbalife business
opportunity, the distributor is responsible for growing his or
her business and personally pays for the sales activities
related to attracting new customers and recruiting distributors
by hosting events such as Herbalife Opportunity Meetings or
Success Training Seminars; by advertising Herbalifes
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 costs
related to product
53
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 Item 7A Quantitative and
Qualitative Disclosures about Market Risk.
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.
54
The following table sets forth selected results of our
operations expressed as a percentage of net sales for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
20.4
|
|
|
|
21.2
|
|
|
|
19.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
79.6
|
|
|
|
78.8
|
|
|
|
80.6
|
|
Royalty overrides(1)
|
|
|
32.9
|
|
|
|
32.8
|
|
|
|
33.8
|
|
Selling, general and administrative expenses(1)
|
|
|
32.5
|
|
|
|
33.3
|
|
|
|
32.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
14.2
|
|
|
|
12.7
|
|
|
|
14.1
|
|
Interest expense, net
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
13.9
|
|
|
|
12.5
|
|
|
|
13.5
|
|
Income taxes
|
|
|
3.3
|
|
|
|
3.8
|
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
10.6
|
|
|
|
8.7
|
|
|
|
9.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Compensation to our China sales employees and licensed business
providers is included in selling, general and administrative
expenses while distributor compensation for all other countries
is included in royalty overrides. |
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. Managements 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 years ended December 31,
2010, 2009 and 2008, 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
55
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. 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. Managements
strategy is to review the applicability of expanding successful
country initiatives throughout a region, and where appropriate,
financially support the globalization of these initiatives.
Summary
Financial Results for the year ended December 31, 2010
compared to the year ended December 31, 2009
Net sales for the year ended December 31, 2010 increased
17.6% to $2,734.2 million as compared to
$2,324.6 million in 2009. In local currency, net sales for
the year ended December 31, 2010 increased 17.4% as
compared to the same periods in 2009. The increase in net sales
was primarily due to the continued successful adoption and
operation of daily consumption business models, an increase in
average active sales leaders, branding activities and increased
distributor recruiting.
Net income for the year ended December 31, 2010 increased
42.9% to $290.5 million, or $4.67 per diluted share,
compared to $203.3 million, or $3.22 per diluted share, for
the same period in 2009. The increase was primarily driven by
higher operating margin and lower effective tax rate and was
partially offset by higher salaries, bonuses and benefits,
higher distributor promotion and event costs, higher China sales
employee and licensed business provider costs, higher credit
card fees, higher non-income tax expenses and higher
depreciation expense.
Net income for the year ended December 31, 2010 included a
$15.1 million unfavorable impact related to the
remeasurement of monetary assets and liabilities resulting from
Venezuela being designated as a highly inflationary economy
beginning January 1, 2010; a $12.7 million unfavorable
impact related to incremental U.S. dollar costs of 2009
imports into Venezuela which were recorded at the unfavorable
parallel market exchange rate and were not devalued based on
2010 exchange rates but rather recorded to cost of sales at
their historical dollar costs as products were sold in the first
quarter of 2010; a $5.8 million favorable impact resulting
from receipt of U.S. dollars approved by the Venezuelan
governments foreign exchange commission, CADIVI, at the
official exchange rate relating to 2009 product importations
which were previously registered with CADIVI; a
$14.5 million one-time favorable impact to income taxes
related to Venezuela becoming a highly inflationary economy; a
$4.0 million pre-tax ($2.6 million post-tax) foreign
exchange gain in Herbalife Venezuela as a result of remeasuring
its Bolivar denominated monetary assets and liabilities as of
June 30, 2010 at the SITME rate of 5.3 Bolivars per
U.S. dollar as opposed to the last parallel market rate of
8.3 Bolivars per U.S. dollar. Net income for the year ended
December 31, 2010 also included a $3.2 million tax
benefit from an international income tax audit settlement.
Net income for the year ended December 31, 2009 included a
$12.2 million unfavorable after tax impact (net of
$6.6 million tax benefit) related to incremental
U.S. dollar cost of imports into Venezuela at the
unfavorable parallel market exchange rate rather than the
official currency exchange rate; a $0.9 million unfavorable
after tax impact (net of $0.4 million tax benefit) in
connection with our restructuring activities; and a
$3.8 million net favorable impact to income taxes from the
expiration of certain statute of limitations offset by a charge
for an international income tax audit settlement.
56
Year
ended December 31, 2010 compared to year ended
December 31, 2009
Net
Sales
The following chart reconciles retail sales to net sales:
Sales by
Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shipping &
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shipping &
|
|
|
|
|
|
Change
|
|
|
|
Retail
|
|
|
Distributor
|
|
|
Product
|
|
|
Handling
|
|
|
Net
|
|
|
Retail
|
|
|
Distributor
|
|
|
Product
|
|
|
Handling
|
|
|
Net
|
|
|
in Net
|
|
|
|
Sales
|
|
|
Allowance
|
|
|
Sales
|
|
|
Revenues
|
|
|
Sales
|
|
|
Sales
|
|
|
Allowance
|
|
|
Sales
|
|
|
Revenues
|
|
|
Sales
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
977.3
|
|
|
$
|
(465.9
|
)
|
|
$
|
511.4
|
|
|
$
|
102.7
|
|
|
$
|
614.1
|
|
|
$
|
844.8
|
|
|
$
|
(403.1
|
)
|
|
$
|
441.7
|
|
|
$
|
87.3
|
|
|
$
|
529.0
|
|
|
|
16.1
|
%
|
Mexico
|
|
|
539.8
|
|
|
|
(263.4
|
)
|
|
|
276.4
|
|
|
|
57.6
|
|
|
|
334.0
|
|
|
|
431.5
|
|
|
|
(210.3
|
)
|
|
|
221.2
|
|
|
|
41.8
|
|
|
|
263.0
|
|
|
|
27.0
|
%
|
South & Central America
|
|
|
637.8
|
|
|
|
(303.4
|
)
|
|
|
334.4
|
|
|
|
56.0
|
|
|
|
390.4
|
|
|
|
605.3
|
|
|
|
(291.9
|
)
|
|
|
313.4
|
|
|
|
53.5
|
|
|
|
366.9
|
|
|
|
6.4
|
%
|
EMEA
|
|
|
854.5
|
|
|
|
(413.6
|
)
|
|
|
440.9
|
|
|
|
86.9
|
|
|
|
527.8
|
|
|
|
816.0
|
|
|
|
(394.2
|
)
|
|
|
421.8
|
|
|
|
82.4
|
|
|
|
504.2
|
|
|
|
4.7
|
%
|
Asia Pacific
|
|
|
1,088.5
|
|
|
|
(498.5
|
)
|
|
|
590.0
|
|
|
|
93.5
|
|
|
|
683.5
|
|
|
|
825.3
|
|
|
|
(382.1
|
)
|
|
|
443.2
|
|
|
|
66.0
|
|
|
|
509.2
|
|
|
|
34.2
|
%
|
China
|
|
|
208.4
|
|
|
|
(24.0
|
)
|
|
|
184.4
|
|
|
|
|
|
|
|
184.4
|
|
|
|
167.2
|
|
|
|
(14.9
|
)
|
|
|
152.3
|
|
|
|
|
|
|
|
152.3
|
|
|
|
21.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
|
|
$
|
4,306.3
|
|
|
$
|
(1,968.8
|
)
|
|
$
|
2,337.5
|
|
|
$
|
396.7
|
|
|
$
|
2,734.2
|
|
|
$
|
3,690.1
|
|
|
$
|
(1,696.5
|
)
|
|
$
|
1,993.6
|
|
|
$
|
331.0
|
|
|
$
|
2,324.6
|
|
|
|
17.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
The North America region reported net sales of
$614.1 million for the year ended December 31, 2010.
Net sales increased $85.1 million, or 16.1%, for the year
ended December 31, 2010 as compared to the same period in
2009. In local currency, net sales increased 15.8% for the year
ended December 31, 2010 as compared to the same period in
2009. The overall increase in the region was a result of net
sales growth in the U.S. of $82.6 million, or 16.1%,
for the year ended December 31, 2010 as compared to the
same period in 2009.
In the U.S. we continue to see the success of our
distributors converting their business focus toward a daily
consumption business model, especially the Nutrition Club DMO,
and its extension into Commercial Clubs and Central Clubs, along
with the continued development of the Weight Loss Challenge DMO.
In terms of volume, the mix of business in the U.S. was
63.7% in the U.S. Latin market and 36.3% in the General
market for the year ended December 31, 2010. Sales growth
was 8.6% in the U.S. Latin market and 25.7% in the General
market for the year ended December 31, 2010. Given the
ongoing transition of the overall region to a higher level of
utilization of daily consumption DMOs, we do not believe
there is an ongoing benefit to evaluating the U.S. market
as a bifurcated business. Therefore, we will return to
discussing it on a consolidated basis beginning in 2011.
In October 2010, the region hosted Regional Extravaganzas, one
in Atlanta for the U.S. Latin Market and one in Los Angeles for
both the U.S. Latin Market and the General Market, with over
20,000 combined attendees. In December, the General Market
hosted a Future President Team Retreat with approximately 250
attendees. Also, during 2010, the region hosted different events
including a series of Leadership Development Weekends as well as
Nutrition Club and Academy tours. In total almost 50,000
distributors attended these events.
Average active sales leaders in the region increased 13.9% for
the year ended December 31, 2010 as compared to the same
period in 2009. Average active sales leaders in the
U.S. increased 14.6% for the year ended December 31,
2010 as compared to the same period in 2009. Total sales leaders
in the region increased 4.7% as of December 31, 2010
compared to December 31, 2009.
Mexico
The Mexico region reported net sales of $334.0 million for
the year ended December 31, 2010. Net sales for the year
ended December 31, 2010 increased $71.0 million, or
27.0%, as compared to the same period in 2009. In local
currency, net sales for the year ended December 31, 2010
increased 19.2% as compared to the same period in 2009. The
fluctuation of foreign currency rates had a favorable impact of
$20.5 million on net sales for the year ended
December 31, 2010.
57
We believe that local currency sales during fiscal year 2010
benefited from our distribution agreement with a large Mexico
retailer that was initiated at the beginning of the year. This
agreement allows distributors to pick up their product orders at
the customer service counters of 302 locations in 26 Mexican
states. We believe that by leveraging their distribution system,
we are providing distributors with significantly better product
access.
Average active sales leaders in Mexico increased 10.2% for the
year ended December 31, 2010 as compared to the same period
in 2009. Total sales leaders in Mexico increased 0.7% as of
December 31, 2010, compared to December 31, 2009.
In September 2010, Mexico hosted a regional extravaganza with
total attendance of 18,200.
South
and Central America
The South and Central America region reported net sales of
$390.4 million for the year ended December 31, 2010.
Net sales increased $23.5 million, or 6.4%, for the year
ended December 31, 2010 as compared to the same period in
2009. In local currency, net sales increased 18.5% for the year
ended December 31, 2010 as compared to the same period in
2009. The fluctuation of foreign currency rates had a
$44.5 million unfavorable impact on net sales for the year
ended December 31, 2010. The increase in net sales for the
year ended December 31, 2010 was driven by increases in net
sales in the majority of the countries in the region including
Brazil, Ecuador and Bolivia, partially offset by a decline in
Venezuela.
In Brazil, the regions largest market, net sales increased
$44.5 million, or 26.1%, for the year ended
December 31, 2010 as compared to the same period in 2009.
In local currency, net sales increased 13.5% for the year ended
December 31, 2010 as compared to the same period in 2009.
The increase in local currency net sales was primarily the
result of the successful adoption of Nutrition Clubs and other
daily consumption based DMOs. The fluctuation of foreign
currency rates had a $21.5 million favorable impact on net
sales in Brazil for the year ended December 31, 2010.
Venezuela, the regions second largest market, experienced
a net sales decrease of $44.1 million, or 51.7%, for the
year ended December 31, 2010 as compared to the same period
in 2009. The decrease in net sales reflects the impact of
re-measuring Venezuelas local sales at the parallel market
exchange rate and the new regulated market rate during fiscal
year 2010. During the year ended December 31, 2010 the
average applicable exchange rate was 63% less favorable compared
to the official exchange rate that was used to translate
Venezuelas local sales during the same period in 2009. In
local currency, net sales increased 29.1% for the year ended
December 31, 2010 as compared to the same period in 2009.
The sales growth in local currency was partially driven by price
increases of 12%, 8%, and 10% in March 2010, July 2010, and
November 2010, respectively. See Liquidity and Capital
Resources Working Capital and Operating Activities
in this section for further discussion on currency exchange
rate issues in Venezuela.
Average active sales leaders in the region increased 3.2% for
the year ended December 31, 2010 as compared to the same
period in 2009. Total sales leaders in the region decreased
21.7% as of December 31, 2010 compared to December 31,
2009.
In February 2010, the region hosted an Extravaganza in Quito,
Ecuador with over 12,500 attendees.
EMEA
The EMEA region reported net sales of $527.8 million for
the year ended December 31, 2010. Net sales increased
$23.6 million, or 4.7%, for the year ended
December 31, 2010 as compared to the same period in 2009.
In local currency, net sales increased 7.1% for the year ended
December 31, 2010 as compared to the same period in 2009.
The fluctuation of foreign currency rates had an unfavorable
impact on net sales of $12.1 million for the year ended
December 31, 2010. The increase in net sales for the year
ended December 31, 2010 was driven by increases in net
sales in Russia, Norway, Commonwealth of Independent States, or
CIS countries, and Spain, partially offset by decreases in
France and Italy.
Net sales in Italy, our largest market in the region, decreased
$6.7 million, or 5.7%, for the year ended December 31,
2010 as compared to the same period in 2009. In local currency,
net sales decreased 0.9% for the year
58
ended December 31, 2010 as compared to the same period in
2009. The decrease in net sales was primarily driven by a shift
in focus to daily consumption DMOs and away from recruiting.
This decline is similar to what we have seen in other markets
like Taiwan and Brazil as they were transitioning from a
recruiting model to a daily consumption model.
Net sales in Russia, our second largest market in the region,
increased $12.9 million, or 41.4%, for the year ended
December 31, 2010 as compared to the same period in 2009.
In local currency, net sales increased 36.6% for the year ended
December 31, 2010 as compared to the same period in 2009.
The increase in Russia was driven by the ongoing adoption of the
Commercial Nutrition Club.
Net sales in Spain, our third largest market in the region,
increased $4.4 million, or 12.2%, for the year ended
December 31, 2010 as compared to the same period in 2009.
In local currency, net sales in Spain increased 18.3% for the
year ended December 31, 2010 as compared to the same period
in 2009. The increase in Spain was mainly due to the positive
effect of increased distributor engagement and recruitment.
Net sales in France, our fourth largest market in the region,
decreased $9.2 million, or 22.4%, for the year ended
December 31, 2010 as compared to the same period in 2009.
In local currency, net sales in France decreased 18.7% for the
year ended December 31, 2010 as compared to the same period
in 2009. The decrease in net sales in France was mainly due to
lower recruiting.
Average active sales leaders in the region increased 2.9% for
the year ended December 31, 2010 as compared to the same
period in 2009. Total sales leaders in the region decreased 6.7%
as of December 31, 2010 compared to December 31, 2009.
In July 2010, the region hosted Extravaganzas in Stockholm,
Sweden with 5,800 attendees, in Turin, Italy with 8,300
attendees, and in Kiev, Ukraine with 3,300 attendees. In
December 2010, South Africa held an Extravaganza with
approximately 1,700 attendees.
Asia
Pacific
The Asia Pacific region, which excludes China, reported net
sales of $683.5 million for the year ended
December 31, 2010. Net sales increased $174.3 million,
or 34.2%, for the year ended December 31, 2010 as compared
to the same period in 2009. In local currency, net sales
increased 26.6% for the year ended December 31, 2010 as
compared to the same period in 2009. The fluctuation of foreign
currency rates had a favorable impact of $38.9 million on
net sales for the year ended December 31 2010. The increase in
net sales for the year ended December 31, 2010 was broad
based with virtually every country in the region showing
year-over-year
net sales growth led by Korea, India, Malaysia, Indonesia, and
Vietnam.
Net sales in South Korea, our largest market in the region,
increased $93.9 million, or 81.7%, for the year ended
December 31, 2010 as compared to the same period in 2009.
In local currency, net sales increased 67.1% for the year ended
December 31, 2010 as compared to the same period in 2009.
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 Premium Herbalife Opportunity
Meeting. The fluctuation of foreign currency rates had a
favorable impact on net sales of $16.8 million for the year
ended December 31, 2010 as compared to the same period in
2009.
Net sales in Taiwan, our second largest market in the region,
increased $2.0 million, or 1.2%, for the year ended
December 31, 2010 as compared to the same period in 2009.
In local currency, net sales decreased 3.3% for the year ended
December 31, 2010 as compared to the same period in 2009.
The fluctuation of foreign currency rates had a favorable impact
on net sales of $7.4 million for the year ended
December 31, 2010 as compared to the same period in 2009.
Net sales in Malaysia, our third largest market in the region,
increased $13.7 million, or 26.9%, for the year ended
December 31, 2010 as compared to the same period in 2009,
reflecting the continued success of the Road Show DMO, which has
generated positive distributor momentum and increased
recruiting. In local currency, net sales increased 15.9% for the
year ended December 31, 2010 as compared to the same period
in 2009. The fluctuation of foreign currency rates had a
favorable impact on net sales of $5.6 million for the year
ended December 31, 2010 as compared to the same period in
2009.
59
Net sales in Japan, our fourth largest market in the region,
decreased $0.7 million, or 1.3%, for the year ended
December 31, 2010 as compared to the same period in 2009.
In local currency, net sales increased 3.6% for the year ended
December 31, 2010 as compared to the same period in 2009.
The fluctuation of foreign currency rates had an unfavorable
impact on net sales of $2.8 million for the year ended
December 31, 2010 as compared to the same period in 2009.
Despite the modest increase in local currency net sales in 2010,
the market continues to be negatively impacted by low recruiting
activity.
Net sales in India, our fifth largest market in the region,
increased $29.2 million, or 112.8%, for the year ended
December 31, 2010 as compared to the same period in 2009.
In local currency, net sales increased 101.8% for the year ended
December 31, 2010 as compared to the same period in 2009.
The increase in net sales for the year ended December 31,
2010 was driven primarily by the successful adoption of the
Nutrition Club DMO. The fluctuation of foreign currency rates
had a favorable impact on net sales of $2.9 million for the
year ended December 31, 2010 as compared to the same period
in 2009.
In May 2010, the region hosted an Extravaganza in Singapore with
almost 18,000 attendees. In September 2010, the region hosted a
Herbalife University in Macau, China with approximately 8,000
attendees.
Average active sales leaders in the region increased 25.8% for
the year ended December 31, 2010 as compared to the same
period in 2009. Total sales leaders in the region increased
21.6% as of December 31, 2010 compared to December 31,
2009.
China
Net sales in China were $184.4 million for the year ended
December 31, 2010. Net sales increased $32.1 million,
or 21.1%, for the year ended December 31, 2010 as compared
to the same period in 2009. In local currency, net sales
increased 20.0% for the year ended December 31, 2010 as
compared to the same period in 2009. The fluctuation of foreign
currency rates had a favorable impact of $1.8 million on
net sales for the year ended December 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 methods of operation. As experienced in other
markets, such as Brazil, which have gone through a similar
transition, China has experienced a slow-down in sales growth as
the licensed business providers begin to build their nutrition
club business. 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 December 31, 2010, 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. In October 2010, the region
hosted a 5 year anniversary rally with approximately 12,000
attendees.
Average active sales leaders in China increased 15.7% for the
year ended December 31, 2010 as compared to the same period
in 2009. Total sales leaders in China decreased 1.2% as of
December 31, 2010 compared to December 31, 2009.
60
Sales by
Product Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shipping &
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shipping &
|
|
|
|
|
|
% Change
|
|
|
|
Retail
|
|
|
Distributor
|
|
|
Product
|
|
|
Handling
|
|
|
Net
|
|
|
Retail
|
|
|
Distributor
|
|
|
Product
|
|
|
Handling
|
|
|
Net
|
|
|
in Net
|
|
|
|
Sales
|
|
|
Allowance
|
|
|
Sales
|
|
|
Revenues
|
|
|
Sales
|
|
|
Sales
|
|
|
Allowance
|
|
|
Sales
|
|
|
Revenues
|
|
|
Sales
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weight Management
|
|
$
|
2,749.1
|
|
|
$
|
(1,303.4
|
)
|
|
$
|
1,445.7
|
|
|
$
|
253.2
|
|
|
$
|
1,698.9
|
|
|
$
|
2,392.2
|
|
|
$
|
(1,142.0
|
)
|
|
$
|
1,250.2
|
|
|
$
|
214.6
|
|
|
$
|
1,464.8
|
|
|
|
16.0
|
%
|
Targeted Nutrition
|
|
|
1,018.2
|
|
|
|
(482.8
|
)
|
|
|
535.4
|
|
|
|
93.8
|
|
|
|
629.2
|
|
|
|
806.3
|
|
|
|
(384.9
|
)
|
|
|
421.4
|
|
|
|
72.3
|
|
|
|
493.7
|
|
|
|
27.4
|
%
|
Energy, Sports and Fitness
|
|
|
196.3
|
|
|
|
(93.1
|
)
|
|
|
103.2
|
|
|
|
18.1
|
|
|
|
121.3
|
|
|
|
161.2
|
|
|
|
(77.0
|
)
|
|
|
84.2
|
|
|
|
14.5
|
|
|
|
98.7
|
|
|
|
22.9
|
%
|
Outer Nutrition
|
|
|
206.3
|
|
|
|
(97.8
|
)
|
|
|
108.5
|
|
|
|
19.0
|
|
|
|
127.5
|
|
|
|
209.6
|
|
|
|
(100.1
|
)
|
|
|
109.5
|
|
|
|
18.8
|
|
|
|
128.3
|
|
|
|
(0.6
|
)%
|
Literature, Promotional and Other
|
|
|
136.4
|
|
|
|
8.3
|
|
|
|
144.7
|
|
|
|
12.6
|
|
|
|
157.3
|
|
|
|
120.8
|
|
|
|
7.5
|
|
|
|
128.3
|
|
|
|
10.8
|
|
|
|
139.1
|
|
|
|
13.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,306.3
|
|
|
$
|
(1,968.8
|
)
|
|
$
|
2,337.5
|
|
|
$
|
396.7
|
|
|
$
|
2,734.2
|
|
|
$
|
3,690.1
|
|
|
$
|
(1,696.5
|
)
|
|
$
|
1,993.6
|
|
|
$
|
331.0
|
|
|
$
|
2,324.6
|
|
|
|
17.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales for all product categories increased for the year
ended December 31, 2010 as compared to the year ended
December 31, 2009, except for a slight decrease in Outer
Nutrition, mainly due to the factors described in the above
discussions of the individual geographic regions. In addition,
net sales for Outer Nutrition decreased in part due to the
distributor focus on DMOs that are centered towards Weight
Management products.
Gross
Profit
Gross profit was $2,175.4 million for the year ended
December 31, 2010, as compared to $1,831.4 million for
the year ended December 31, 2009. As a percentage of net
sales, gross profit for the year ended December 31, 2010
increased to 79.6%, as compared to 78.8% for the same period in
2009. The increase in the gross profit as a percentage of net
sales for the year ended December 31, 2010, as compared to
the same period in 2009, was primarily due to a favorable impact
from currency fluctuations, cost savings throughout our supply
chain, and a decreased unfavorable foreign exchange impact of
$12.7 million recognized during the year ended
December 31, 2010 relating to the incremental
U.S. dollar cost of importing finished goods into Venezuela
at the unfavorable parallel market rate rather than the official
currency exchange, as compared to $18.8 million recognized
during the year ended December 31, 2009. These increases to
the gross profit as a percentage of net sales were partially
offset by country mix and by the unfavorable impact of
remeasuring Herbalife Venezuelas Bolivar net sales at the
less favorable old parallel market rate and at the less
favorable SITME exchange rate during 2010, as opposed to being
translated at the CADIVI official rate during 2009. See
Liquidity and Capital Resources Working Capital
and Operating Activities in this section for further
discussion on currency exchange rate issues in Venezuela. We
believe that we 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 $900.2 million for the year ended
December 31, 2010, as compared to $761.5 million for
the same period in 2009. Royalty overrides as a percentage of
net sales was 32.9% for the year ended December 31, 2010,
as compared to 32.8% for the same period in 2009. 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
$887.7 million for the year ended December 31, 2010,
as compared to $773.9 million for the same period in 2009.
Selling, general and administrative expenses as a percentage of
net sales was 32.5% for the year ended December 31, 2010,
as compared to 33.3% for the same period in 2009.
61
The increase in selling, general and administrative expenses for
the year ended December 31, 2010 included
$32.7 million in higher salaries, bonuses and benefits,
excluding China sales employees; $5.5 million in higher
depreciation and amortization expense; and higher variable
expenses including $29.2 million in higher distributor
promotion and event costs, $8.3 million in higher expenses
related to China sales employees and licensed business
providers, $8.0 million in higher credit card fees and
$7.4 million in higher non-income tax expense.
We expect 2011 selling, general and administrative expenses to
increase in absolute dollars over 2010 levels reflecting higher
salaries and benefits excluding China sales employees, China
sales employee costs, and China licensed business provider
service fees, increased depreciation, primarily related to our
global Oracle implementation, and various sales growth
initiatives, including distributor events and promotions.
Net
Interest Expense
Net interest expense is as follows:
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Year Ended
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Year Ended
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|
December 31,
|
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December 31,
|
|
Net Interest Expense
|
|
2010
|
|
|
2009
|
|
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|
(Dollars in millions)
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|
|
Interest expense
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|
|
9.7
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|
|
|
9.6
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|
Interest income
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(2.3
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)
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|
(4.5
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)
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Net Interest Expense
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$
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7.4
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$
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5.1
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|
The increase in net interest expense for the year ended
December 31, 2010 as compared to the same period in 2009,
was primarily due to the decrease in interest income generated
from Herbalife Venezuelas cash and cash equivalents and an
increase in interest expense relating to our interest rate swap
agreements, partially offset by lower interest expense on our
senior secured credit facility due to lower average debt balance
during 2010 as compared to 2009. See Liquidity and
Capital Resources in this section for further
discussion on our senior secured credit facility.
Income
Taxes
Income taxes were $89.6 million for the year ended
December 31, 2010, as compared to $87.6 million for
the same period in 2009. As a percentage of pre-tax income, the
effective income tax rate was 23.6% for the year ended
December 31, 2010, as compared to 30.1% for the year ended
December 31, 2009. The decrease in the effective tax rate
for the year ended December 31, 2010, as compared to the
same period in 2009, was primarily due to the ability to utilize
$3.0 million of foreign tax credit carrybacks, the
conversion of Venezuela to a highly inflationary economy as
discussed below and a favorable decision in a foreign tax audit
which resulted in a one-time tax benefit of $3.2 million.
In addition, the decrease in the operating effective rate
reflects favorable changes in the country mix and non-cash
benefit of $3.1 million due to the expiration of certain
statue of limitations. The 2010 effective tax rate is not
indicative of the future income tax rates and includes certain
nonrecurring income tax benefits as discussed within this
section.
Venezuela has experienced cumulative inflation of at least 100%
during the three year period ending December 31, 2009.
Therefore, as of January 1, 2010 the Bolivar is
hyperinflationary for U.S. federal income tax purposes. As
a result, because Herbalife Venezuela is considered a dual
incorporated entity, it is now required to account for its
operations using the Dollar Approximate Separate Transactions
Method of accounting (DASTM). The transitional impact of DASTM
resulted in a deferred income tax benefit of approximately
$14.5 million recorded during the first quarter of 2010.
See Liquidity and Capital Resources Working
Capital and Operating Activities in this section for further
discussion on Venezuela becoming a highly inflationary economy.
Summary
Financial Results for the year ended December 31, 2009
compared to the year ended December 31, 2008
Net sales for the year ended December 31, 2009 decreased
1.5% to $2,324.6 million as compared to
$2,359.2 million in 2008. The decrease was primarily due to
the unfavorable impact of currency fluctuations of
62
$155.6 million. In local currency, net sales for the year
ended December 31, 2009 increased 5.1%, as compared to the
same period in 2008. For the year ended December 31, 2009,
net sales in U.S. dollars in our top ten countries
including the U.S., Brazil, Taiwan, China, Italy, South Korea,
Venezuela and Malaysia increased 7.4%, 12.2%, 28.0%, 5.0%, 5.2%,
56.9%, 6.9% and 30.8%, respectively, as compared to the same
period in 2008, while Mexico and Japan, decreased 25.3% and
14.5%, respectively, as compared to the same period in 2008. The
increase in net sales in most of our top markets was mainly due
to the successful conversions to daily consumption business
models, branding activities and increased distributor
recruiting. In Mexico, the negative impact of the Value Added
Tax, or VAT, that has been levied by the Mexican government on
the import and resale of certain nutrition products, which we
began collecting from our distributors during the third quarter
of 2008 contributed to the decline in net sales and distributor
and sales leader recruiting. In Japan, lower net sales were
mainly due to decline in distributor recruiting.
Net income for the year ended December 31, 2009 decreased
8.1% to $203.3 million, or $3.22 per diluted share,
compared to $221.2 million, or $3.36 per diluted share, for
the same period in 2008. The decrease was primarily driven by
currency related revenue declines, higher cost of goods sold,
depreciation expense, salaries and benefits, and advertising and
promotion expense, partially offset by lower professional fees,
sales event costs and interest expense and lower effective tax
rate.
Net income for the year ended December 31, 2009 included a
$12.2 million unfavorable after tax impact (net of
$6.6 million tax benefit) related to incremental
U.S. dollar cost of imports into Venezuela at the
unfavorable parallel market exchange rate rather than the
official currency exchange rate; a $0.9 million unfavorable
after tax impact (net of $0.4 million tax benefit) in
connection with our restructuring activities; and a
$3.8 million net favorable impact to income taxes from the
expiration of certain statute of limitations offset by a charge
for an international income tax audit settlement. Net income for
the year ended December 31, 2008 included a
$4.8 million unfavorable after tax impact related to
restructuring activities (net of $1.9 million tax benefit)
and a $6.1 million valuation allowance on deferred tax
asset for deferred interest.
Year
ended December 31, 2009 compared to year ended
December 31, 2008
Net
Sales
The following chart reconciles retail sales to net sales:
Sales by
Geographic Region
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Year Ended December 31,
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2009
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2008
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Shipping &
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Shipping &
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Change
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Retail
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Distributor
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Product
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Handling
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Net
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Retail
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Distributor
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Product
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Handling
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Net
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in Net
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Sales
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Allowance
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Sales
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Revenues
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Sales
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Sales
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Allowance
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Sales
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Revenues
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Sales
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Sales
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(Dollars in millions)
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North America
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$
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844.8
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$
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(403.1
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)
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$
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441.7
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$
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87.3
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|
$
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529.0
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$
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795.3
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$
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(379.2
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)
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$
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416.1
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$
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80.8
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$
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496.9
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6.5
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%
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Mexico
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431.5
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(210.3
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)
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221.2
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41.8
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263.0
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584.3
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(284.8
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)
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299.5
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52.7
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352.2
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(25.3
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)%
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South & Central America
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605.3
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(291.9
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)
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313.4
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53.5
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366.9
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665.9
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(332.9
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)
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333.0
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50.6
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383.6
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(4.4
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)%
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EMEA
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816.0
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(394.2
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)
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421.8
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82.4
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504.2
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927.7
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(449.1
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)
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478.6
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92.1
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570.7
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(11.7
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)%
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Asia Pacific
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825.3
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(382.1
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)
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443.2
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66.0
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|
509.2
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678.1
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(318.0
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)
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360.1
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50.7
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410.8
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|
|
24.0
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%
|
China
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167.2
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(14.9
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)
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152.3
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152.3
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159.9
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(14.9
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)
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145.0
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145.0
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5.0
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%
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Worldwide
|
|
$
|
3,690.1
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|
$
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(1,696.5
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)
|
|
$
|
1,993.6
|
|
|
$
|
331.0
|
|
|
$
|
2,324.6
|
|
|
$
|
3,811.2
|
|
|
$
|
(1,778.9
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)
|
|
$
|
2,032.3
|
|
|
$
|
326.9
|
|
|
$
|
2,359.2
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|
|
|
(1.5
|
)%
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|
North
America
The North America region reported net sales of
$529.0 million for the year ended December 31, 2009.
Net sales increased $32.1 million, or 6.5%, for the year
ended December 31, 2009 as compared to the same period in
2008. In local currency, net sales increased 6.7% for the year
ended December 31, 2009 as compared to the same period in
2008. The overall increase in the region was a result of net
sales growth in the U.S. of $35.3 million, or 7.4%, as
compared to the same period in 2008.
63
We continue to see the success of our distributors converting
their business focus toward a daily consumption business model,
especially the Nutrition Club DMO, and its extension into
Commercial Clubs and Central Clubs, along with the continued
development of the Weight Loss Challenge DMO. We also
implemented a 5% price increase in the U.S. in February
2009. In terms of volume, the mix of business in the
U.S. was 67% in the U.S. Latin market and 33% in the
General market for the year ended December 31, 2009.
In October 2009, the region hosted a U.S. Latin market and
General market Extravaganzas in Atlanta, GA. More than 14,000
distributors attended with 11,800 attending the U.S. Latin
market event and 2,800 attending the General market event. Also,
during 2009, the region hosted different events including a
Why Herbalife, Why Now? tour, a series of Leadership
Development Weekends, a Nutrition Club tour and a Recruiting
tour. In total more than 30,000 distributors attended these
events.
New sales leaders in the region decreased 12.1% for the year
ended December 31, 2009, as compared to the same period in
2008. Total sales leaders in the region decreased 2.2% as of
December 31, 2009 compared to December 31, 2008. New
sales leaders in the U.S. decreased 11.7% for the year
ended December 31, 2009, as compared to the same period in
2008.
Mexico
The Mexico region reported net sales of $263.0 million for
the year ended December 31, 2009. Net sales for the year
ended December 31, 2009, decreased $89.2 million, or
25.3%, as compared to the same period in 2008. In local
currency, net sales for the year ended December 31, 2009
decreased 8.9% as compared to the same period in 2008. The
fluctuation of foreign currency rates had an unfavorable impact
of $57.7 million on net sales for the year ended
December 31, 2009.
Net sales comparisons for 2009 versus 2008 were negatively
impacted by the collection of a VAT from our distributors that
has been levied by the Mexican government on the import and
resale of certain nutrition products. We began charging the VAT
to distributors in the third quarter of 2008. Distributors
previously paid 0% VAT on purchases of most of our nutrition
products. Because Nutrition Clubs are the predominant DMO in
Mexico, and are retail price-sensitive, the VAT increase has
caused our volumes to decline. For the year ended
December 31, 2008, this VAT increase affected approximately
58% of our sales volume in the region. For the first three
quarters of 2009 this VAT increase affected approximately 58% of
sales volume but for the fourth quarter of 2009, this VAT
increase affected only approximately 20% of our sales volume.
The reduced impact in the fourth quarter was due to the
introduction in October 2009 of several re-formulated nutrition
products which are not subject to the VAT charge that replaced
our existing products that were subject to the VAT. Through the
third quarter, net sales in local currency were 12.7% lower in
2009 on a
year-to-date
basis as compared to 2008. In the fourth quarter, local currency
net sales increased 8.2% compared to the same period in 2008 and
increased 1.2% sequentially compared to the third quarter of
2009.
New sales leaders in Mexico decreased 16.2% for the year ended
December 31, 2009, as compared to the same period in 2008.
Total sales leaders in Mexico decreased 14.1% as of
December 31, 2009, compared to December 31, 2008.
In September 2009, Mexico hosted an Extravaganza with over
14,600 attendees. In addition, during 2009, Mexico also hosted a
motivational Global Expansion Team/Millionaire Team Retreat and
Active Sales Leader schools. Total combined attendance at these
two events was over 4,000 distributors.
South
and Central America
The South and Central America region reported net sales of
$366.9 million for the year ended December 31, 2009.
Net sales decreased $16.7 million or 4.4%, for the year
ended December 31, 2009, as compared to the same period in
2008. In local currency, net sales were relatively flat for the
year ended December 31, 2009, as compared to the same
period in 2008. The fluctuation of foreign currency rates had a
$17.3 million unfavorable impact on net sales for the year
ended December 31, 2009. The increase in local currency net
sales in the region for the year ended December 31, 2009
was attributable to sales growth in Brazil and Venezuela as well
as a full year of sales in Ecuador
64
which was opened in the fourth quarter of 2008. Offsetting these
increases were sales declines in Peru, Argentina, Bolivia,
Chile, and Colombia.
In Brazil, the regions largest market, net sales increased
$18.5 million, or 12.2%, for the year ended
December 31, 2009, as compared to the same period in 2008.
In local currency, net sales increased 20.4% for the year ended
December 31, 2009, as compared to the same period in 2008.
The increase in local currency net sales was primarily a result
of distributors successfully transforming this market into a
more balanced mix of recruiting, retailing and retention via the
Nutrition Club and other daily consumption based DMOs. The
fluctuation of foreign currency rates had a $12.5 million
unfavorable impact on net sales for the year ended
December 31, 2009.
Venezuela, the regions second largest market, experienced
a net sales increase of $5.5 million, or 6.9%, for the year
ended December 31, 2009, as compared to the same period in
2008. The increase in sales for the year ended December 31,
2009, compared to 2008 primarily reflected lower sales in the
prior year due to the cumulative effect from price increases of
20% and 25% in January and May 2008, respectively. In October
2008, we instituted changes in non-resident distributor
compensation to address currency controls imposed by the
Venezuelan government. Also, in June 2009 we instituted a 10%
price increase along with further changes in non-resident
distributor compensation to adjust for inflation and currency
issues. Sales increased sequentially from the third to the
fourth quarter of 2009 by 14.9%.
New sales leaders in the region decreased 36.0% for the year
ended December 31, 2009, as compared to the same period in
2008. The decrease was driven by a decline in new sales leaders
in several markets including Argentina which decreased 72.8% for
the year ended December 31, 2009, as compared to the same
period in 2008; Peru, which decreased 61.0% for the year ended
December 31, 2009, as compared to the same period in 2008;
and Bolivia, which decreased 66.6% for the year ended
December 31, 2009, as compared to the same period in 2008.
Total sales leaders in the region decreased 14.4% as of
December 31, 2009 compared to December 31, 2008.
EMEA
The EMEA region reported net sales of $504.2 million for
the year ended December 31, 2009. Net sales decreased
$66.5 million, or 11.7%, for the year ended
December 31, 2009, as compared to the same period in 2008.
In local currency, net sales decreased 3.7% for the year ended
December 31, 2009, as compared to the same period in 2008.
The fluctuation of foreign currency rates had an unfavorable
impact on net sales of $45.5 million for the year ended
December 31, 2009.
Among the largest markets in the region, Italy, France and
Spain, net sales increased 5.2%, and decreased 24.3% and 29.1%,
respectively, for the year ended December 31, 2009, as
compared to the same period in 2008. In local currency, Italy
reported a net sales increase of 11.3% while France and Spain
reported net sales decreases of 19.3% and 25.0%, respectively,
for the year ended December 31, 2009, as compared to the
same period in 2008.
In Spain, we are beginning to see an improvement resulting from
the withdrawal of the Spanish Ministry of Health alert regarding
Herbalife products. This alert was withdrawn in April 2009
requiring no action by the Company. Although Spain local
currency net sales were down 25.0% for the full year 2009
compared to 2008, local currency net sales in the fourth quarter
of 2009 were 1.9% higher as compared to the same period in 2008.
In Russia, net sales decreased by 15.2% for the year ended
December 31, 2009, as compared to the same period in 2008.
In local currency, however, net sales increased by 8.2% for the
year ended December 31, 2009, as compared to the same
period in 2008. The increase in local currency net sales was
primarily driven by the adoption of the Office Club concept
where all DMOs are carried out from a combined Office and
Commercial Nutrition Club location. Net sales in the Netherlands
decreased 7.5% for the year ended December 31, 2009, as
compared to the same period in 2008. In local currency, however,
net sales decreased only 2.0% for the year ended
December 31, 2009, as compared to the prior year period
reflecting a re-activated distributor base that is utilizing the
Wellness Evaluation and Healthy Breakfast DMOs. Net sales in
Portugal decreased 43.7% for the year ended December 31,
2009, as compared to the same period in 2008. However, in local
currency, Portugal net sales declined 40.6% for the year ended
December 31, 2009, as it continues to transition towards a
daily consumption model. We are beginning to see some
improvement in Portugal as local currency net sales for the
fourth quarter of 2009 were down only 6.9% compared to the same
period in 2008.
65
For the year ended December 31, 2009, new sales leaders for
the region decreased 19.9%. For the year ended December 31,
2009, the most significant decreases occurred in Spain,
Portugal, France, and the Commonwealth of Independent States of
Russia, or CIS countries, of 53.0%, 65.7%, 38.7% and 33.6%,
respectively. These declines were partially offset by increases
in Italy, Czech Republic, and Turkey where new sales leaders
increased 5.1%, 57.1%, and 12.5%, respectively. Total sales
leaders in the region decreased 12.5% as of December 31,
2009 compared to December 31, 2008.
In July 2009, EMEA held three regional Extravaganzas in Russia,
Italy, and the Czech Republic with approximate attendance of
2,400, 7,600, and 7,800, respectively. In October 2009, South
Africa held an Extravaganza with approximately 1,200 attendees.
Asia
Pacific
The Asia Pacific region, which excludes China, reported net
sales of $509.2 million for the year ended
December 31, 2009. Net sales increased $98.4 million,
or 24.0%, for the year ended December 31, 2009, as compared
to the same period in 2008. In local currency, net sales
increased 32.7% for the year ended December 31, 2009, as
compared to the same period in 2008. The fluctuation of foreign
currency rates had an unfavorable impact of $36.0 million
on net sales for the year ended December 31, 2009. The
increase in net sales in Asia Pacific for the year ended
December 31, 2009, was primarily attributable to net sales
increases in three of our largest markets in the region, Taiwan,
South Korea and Malaysia, partially offset by a decrease in
Japan. The increase in net sales in India, one of our emerging
markets, also contributed to the increase in net sales in the
region.
Net sales in Taiwan, our largest market in the region, increased
$36.1 million, or 28.0%, for the year ended
December 31, 2009, as compared to the same period in 2008.
In local currency, net sales increased 34.3% for the year ended
December 31, 2009, as compared to the same period in 2008.
Adoption of the Nutrition Club DMO, in the form of Commercial
Clubs, continues to be a positive catalyst for growth in this
country. The fluctuation of foreign currency rates had an
unfavorable impact on net sales of $8.1 million for the
year ended December 31, 2009, as compared to the same
period in 2008.
Net sales in South Korea, our second largest market in the
region, increased $41.7 million, or 56.9%, for the year
ended December 31, 2009, as compared to the same period in
2008. In local currency, net sales increased 77.2% for the year
ended December 31, 2009, as compared to the same period in
2008. The increase in local currency net sales for the year
ended December 31, 2009 was primarily driven by the
adoption of the Nutrition Club DMO, in the form of Commercial
Clubs along with the Premium Herbalife Opportunity Meeting. The
fluctuation of foreign currency rates had an unfavorable impact
on net sales of $14.8 million for the year ended
December 31, 2009, as compared to the same period in 2008.
Net sales in Japan, our third largest market in the region,
decreased $9.7 million, or 14.5%, for the year ended
December 31, 2009, as compared to the same period in 2008.
In local currency, net sales decreased 10.6% for the year ended
December 31, 2009, as compared to the same period in 2008.
The decrease in local currency net sales for the year ended
December 31, 2009, was driven by a continuing decline in
distributor recruiting. The fluctuation of foreign currency
rates had an unfavorable impact on net sales of
$2.6 million for the year ended December 31, 2009, as
compared to the same period in 2008.
Net sales in Malaysia, our fourth largest market in the region,
increased $12.0 million, or 30.8%, for the year ended
December 31, 2009, as compared to the same period in 2008,
reflecting the continued success of the Road Show DMO, which has
generated positive distributor momentum and increased
recruiting. In local currency, net sales increased 39.2% for the
year ended December 31, 2009, as compared to the same
period in 2008. The fluctuation of foreign currency rates had an
unfavorable impact on net sales of $3.3 million for the
year ended December 31, 2009, as compared to the same
period in 2008.
Net sales in India increased $12.8 million, or 97.7%, for
the year ended December 31, 2009, as compared to the same
period in 2008. In local currency, net sales increased 117.8%
for the year ended December 31, 2009, as compared to the
same period in 2008. The increase in local currency net sales
for the year ended December 31, 2009, was driven by the
adoption of the Nutrition Club DMO. The number of clubs at
December 31, 2009 was 555
66
compared to 100 at December 31, 2008. The fluctuation of
foreign currency rates had an unfavorable impact on net sales of
$2.6 million for the year ended December 31, 2009, as
compared to the same period in 2008.
In June, Korea hosted a regional Extravaganza with approximately
13,800 attendees. In September, Taiwan hosted an Asia-Pacific
regional University with attendance of approximately 11,000
distributors.
New sales leaders in the region increased 26.9% for the year
ended December 31, 2009, as compared to the same period in
2008. New sales leaders for India, Korea and Taiwan increased
112.4%, 71.8% and 19.8%, respectively, for the year ended
December 31, 2009 compared to the same period in 2008.
These increases were offset by declines in Japan and Philippines
of 57.0% and 10.5%, respectively, for the year ended
December 31, 2009 compared to the same period in 2008.
Total sales leaders in the region increased 15.0% as of
December 31, 2009 compared to December 31, 2008.
China
Net sales in China were $152.3 million for the year ended
December 31, 2009. Net sales increased $7.3 million,
or 5.0%, for the year ended December 31, 2009, as compared
to the same period in 2008. In local currency, net sales
increased 3.6% for the year ended December 31, 2009, as
compared to the same period in 2008. The fluctuation of foreign
currency rates had a favorable impact of $2.1 million on
net sales for the year ended December 31, 2009.
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 methods of operation. As experienced in other
markets, such as Brazil, which have gone through a similar
transition, China has been experiencing a slow-down in sales
growth as service providers begin to build their nutrition club
business.
In early July 2009, Chinas Ministry of Commerce granted
five additional licenses for us to conduct direct-selling
business in the provinces of Fujian, ShanXi, Sichuan,
Hubei, and Shanghai. All licenses became effective immediately,
except Shanghai, which was activated in July 2010 after we
opened our service outlets. Additionally, our license for
Beijing, which was granted in July 2008 with the same condition
as noted above for Shanghai, was activated in July 2009. We
received our first direct-selling license in China in March 2007
for the cities of Suzhou and Nanjing in the Jiangsu province. An
additional license was granted in July of the same year to
conduct business throughout the entire Jiangsu province. In July
2008, we received five additional licenses for the provinces of
Beijing, Guangdong, Shandong, Zhejiang and Guizhou. The 11
provinces in which we now have direct-selling licenses represent
an addressable population of approximately 599 million. As
of December 31, 2009, we were operating 75 retail stores in
30 provinces in China.
New sales employees in China decreased 12.4% for the year ended
December 31, 2009, as compared to the same period in 2008.
Total sales employees in China increased 2.7% as of
December 31, 2009 compared to December 31, 2008.
Sales by
Product Category
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shipping &
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shipping &
|
|
|
|
|
|
% Change
|
|
|
|
Retail
|
|
|
Distributor
|
|
|
Product
|
|
|
Handling
|
|
|
Net
|
|
|
Retail
|
|
|
Distributor
|
|
|
Product
|
|
|
Handling
|
|
|
Net
|
|
|
in Net
|
|
|
|
Sales
|
|
|
Allowance
|
|
|
Sales
|
|
|
Revenues
|
|
|
Sales
|
|
|
Sales
|
|
|
Allowance
|
|
|
Sales
|
|
|
Revenues
|
|
|
Sales
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weight Management
|
|
$
|
2,392.2
|
|
|
$
|
(1,142.0
|
)
|
|
$
|
1,250.2
|
|
|
$
|
214.6
|
|
|
$
|
1,464.8
|
|
|
$
|
2,469.9
|
|
|
$
|
(1,196.8
|
)
|
|
$
|
1,273.1
|
|
|
$
|
211.9
|
|
|
$
|
1,485.0
|
|
|
|
(1.4
|
)%
|
Targeted Nutrition
|
|
|
806.3
|
|
|
|
(384.9
|
)
|
|
|
421.4
|
|
|
|
72.3
|
|
|
|
493.7
|
|
|
|
818.0
|
|
|
|
(396.4
|
)
|
|
|
421.6
|
|
|
|
70.2
|
|
|
|
491.8
|
|
|
|
0.4
|
%
|
Energy, Sports and Fitness
|
|
|
161.2
|
|
|
|
(77.0
|
)
|
|
|
84.2
|
|
|
|
14.5
|
|
|
|
98.7
|
|
|
|
165.6
|
|
|
|
(80.2
|
)
|
|
|
85.4
|
|
|
|
14.2
|
|
|
|
99.6
|
|
|
|
(0.9
|
)%
|
Outer Nutrition
|
|
|
209.6
|
|
|
|
(100.1
|
)
|
|
|
109.5
|
|
|
|
18.8
|
|
|
|
128.3
|
|
|
|
243.8
|
|
|
|
(118.1
|
)
|
|
|
125.7
|
|
|
|
20.9
|
|
|
|
146.6
|
|
|
|
(12.5
|
)%
|
Literature, Promotional and Other
|
|
|
120.8
|
|
|
|
7.5
|
|
|
|
128.3
|
|
|
|
10.8
|
|
|
|
139.1
|
|
|
|
113.9
|
|
|
|
12.6
|
|
|
|
126.5
|
|
|
|
9.7
|
|
|
|
136.2
|
|
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,690.1
|
|
|
$
|
(1,696.5
|
)
|
|
$
|
1,993.6
|
|
|
$
|
331.0
|
|
|
$
|
2,324.6
|
|
|
$
|
3,811.2
|
|
|
$
|
(1,778.9
|
)
|
|
$
|
2,032.3
|
|
|
$
|
326.9
|
|
|
$
|
2,359.2
|
|
|
|
(1.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales for Weight Management, Energy, Sports and Fitness and
Outer Nutrition products decreased for the year ended
December 31, 2009, as compared to the same period in 2008,
partially offset by an increase in Targeted
67
Nutrition and Literature, Promotional and Other product category
for the year ended December 31, 2009, as compared to the
same period in 2008, mainly due to the factors described in the
above discussions of the individual geographic regions. In
addition, net sales for Outer Nutrition decreased in part due to
the distributor focus on DMOs that are centered towards Weight
Management products.
Gross
Profit
Gross profit was $1,831.4 million for the year ended
December 31, 2009, as compared to $1,900.8 million for
the same period in 2008. As a percentage of net sales, gross
profit for the year ended December 31, 2009 decreased to
78.8%, as compared to 80.6% for the same period in 2008. The
decrease was primarily due to the unfavorable impact from
currency fluctuations, changes in country mix, and the
unfavorable impact during 2009 of recognizing $18.8 million
incremental U.S. dollar cost of imports into Venezuela at
the unfavorable parallel market exchange rate rather than the
official currency exchange rate. See Liquidity and Capital
Resources Working Capital and Operating Activities
in this section for further discussion on currency exchange
rate issues in Venezuela.
Royalty
Overrides
Royalty overrides as a percentage of net sales was 32.8% for the
year ended December 31, 2009, as compared to 33.8% for the
same period in 2008. The decrease for the year ended
December 31, 2009, was primarily due to changes in country
mix and the increase in net sales in China where compensation to
our full-time sales employees and licensed business providers 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. 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.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses as a percentage of
net sales was 33.3% for the year ended December 31, 2009,
as compared to 32.7% for the same period in 2008.
For the year ended December 31, 2009, selling, general and
administrative expenses increased $2.1 million to
$773.9 million compared to the same period in 2008. The
increase for the year ended December 31, 2009 included
$7.6 million in higher salaries and benefits, primarily
related to China sales employees and licensed business
providers; and $13.8 million in higher depreciation and
amortization expenses, related to the development of our
technology infrastructure and the expansion and relocation of
certain operations to new facilities. These increases were
offset by $6.9 million in lower professional fees;
$5.5 million in lower advertising, promotion costs and
distributor sales events primarily reflecting currency
fluctuations and location of events; $2.6 million in lower
bad debt expense; $2.6 million in lower litigation costs;
and $1.4 million in lower occupancy costs.
Net
Interest Expense
Net interest expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
Net Interest Expense
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Interest expense
|
|
|
9.6
|
|
|
|
20.1
|
|
Interest income
|
|
|
(4.5
|
)
|
|
|
(6.9
|
)
|
|
|
|
|
|
|
|
|
|
Net Interest Expense
|
|
$
|
5.1
|
|
|
$
|
13.2
|
|
|
|
|
|
|
|
|
|
|
The decrease in interest expense for the year ended
December 31, 2009 as compared to the same period in 2008
was primarily due to lower interest rates and lower average debt
balance in 2009 as compared to 2008. See Liquidity and
Capital Resources in this section for further
discussion on our senior secured credit facility.
68
Income
Taxes
Income taxes were $87.6 million for the year ended
December 31, 2009, as compared to $97.8 for the same period
in 2008. As a percentage of pre-tax income, the effective income
tax rate was 30.1% for the year ended December 31, 2009, as
compared to 30.7% for the same period in 2008. The decrease in
the effective tax rate for the year ended December 31,
2009, as compared to the same period in 2008, was primarily due
to a change in the operating effective rate reflecting changes
in the country mix, and a non-cash benefit of $4.9 million
due to the expiration of certain statute of limitations,
partially offset by a charge for an international income tax
audit settlement of $1.1 million.
Restructuring
Costs
As part of our restructurings, we recorded $1.3 million and
$6.7 million of professional fees, severance and related
costs for the year ended December 31, 2009 and 2008,
respectively. All such amounts were included in selling, general
and administrative expenses.
Liquidity
and Capital Resources for fiscal years 2010, 2009 and
2008
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. We are closely monitoring various aspects of the
current worldwide financial crisis and we do not believe that
there has been or will be a material impact on our liquidity
from this crisis. 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 the recent years, which together, since
the inception of these programs in 2007, amounted to
approximately $920.8 million. Our use of the credit
facility for these purposes and not for general working capital
and capital expenditure needs has limited the impact that the
current worldwide credit crisis has on us. While a significant
net sales decline could potentially affect the availability of
funds, many of our largest expenses are purely variable in
nature, which could protect our funding in all but a dramatic
net sales downturn. Further we maintain a revolving credit
facility which had $219.0 million of undrawn capacity as of
December 31, 2010, and is comprised of banks who are
continuing to support the facility through the current worldwide
financial crisis.
For the year ended December 31, 2010, we generated
$380.4 million of operating cash flow, as compared to
$285.1 million for the same period in 2009. The increase in
cash generated from operations was primarily due to an increase
in operating income of $91.5 million driven by a 17.6%
growth in net sales for the year ended December 31, 2010 as
compared to the same period in 2009.
For the year ended December 31, 2009, we generated
$285.1 million of operating cash flow, as compared to
$273.0 million for the same period in 2008. The increase in
cash generated from operations was primarily due to the increase
in non-cash items included in net income for the year ended
December 31, 2009, as compared to the same period in 2008,
lower interest payments due to lower average debt balance and
lower interest rates and the favorable change in operating
assets for the year ended December 31, 2009, compared to
the same period in 2008. This was partially offset by lower
operating income, higher income tax payments, and unfavorable
change in operating liabilities for the year ended
December 31, 2009, as compared to the same period in 2008.
Capital expenditures, including capital leases, for the years
ended December 31, 2010, 2009 and 2008 were
$68.1 million, $60.1 million and $106.8 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. In 2008 and 2009, capital
expenditures primarily related to the global roll-out of Oracle
Order Management System. The decrease in 2009 from 2008
primarily reflects lower spending as the Oracle roll-out project
was completed during
69
the third quarter of 2009. We expect to incur total capital
expenditures of approximately $80 million to
$90 million for the full year of 2011.
We entered into a $300.0 million senior secured credit
facility, comprised of a $200.0 million term loan and a
revolving credit facility of $100.0 million, with a
syndicate of financial institutions as lenders in July 2006. In
September 2007, we amended our senior secured credit facility,
increasing the revolving credit facility by $150.0 million
to $250.0 million to fund the increase in our share
repurchase program discussed below. The term loan matures on
July 21, 2013 and the revolving credit facility is
available until July 21, 2012. The term loan bears interest
at LIBOR plus a margin of 1.5%, or the base rate, which
represents the prime rate offered by major U.S. banks, plus
a margin of 0.50%. The revolving credit facility bears interest
at LIBOR plus a margin of 1.25%, or the base rate, which
represents the prime rate offered by major U.S. banks, plus
a margin of 0.25%. On December 31, 2010, 2009 and 2008, the
weighted average interest rate was 1.75%, 1.66% and 3.04%,
respectively.
The senior secured credit facility requires us to comply with a
leverage ratio and an interest coverage ratio. In addition, the
senior secured credit facility contains customary covenants,
including covenants that limit or restrict our ability to incur
liens, incur indebtedness, make investments, dispose of assets,
make certain restricted payments, merge or consolidate and enter
into certain transactions with affiliates. As of
December 31, 2010, we were in compliance with these
covenants.
During 2010, we borrowed an aggregate amount of
$427.0 million under the revolving credit facility and paid
$487.0 million of the revolving credit facility. During
2009, we borrowed an aggregate amount of $212.0 million
under the revolving credit facility and paid $298.7 million
of the revolving credit facility. During 2008, we borrowed an
aggregate amount of $118.0 million and paid
$149.0 million of the revolving credit facility. During the
years ended December 31, 2010, 2009, and 2008, these
borrowings were primarily related to our share repurchases and
dividends program as discussed further below.
We are currently planning to refinance our senior secured credit
facility, which consists of a revolving credit facility and a
term loan that are expiring in July 2012 and July 2013,
respectively, as discussed in greater detail above. This will
allow us to better support our growth and strategic initiatives,
as well as to continue to fund our dividend program, and our
share repurchase program as discussed further below. The
refinancing is expected to be completed during the first half of
2011.
The following summarizes our contractual obligations including
interest at December 31, 2010, 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(1)
|
|
$
|
182.1
|
|
|
$
|
4.6
|
|
|
$
|
177.5
|
|
|
$
|
|
|
|
$
|
|
|
Capital leases
|
|
|
3.1
|
|
|
|
1.6
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
161.5
|
|
|
|
39.0
|
|
|
|
58.2
|
|
|
|
39.6
|
|
|
|
24.7
|
|
Other
|
|
|
21.5
|
|
|
|
11.5
|
|
|
|
10.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
368.2
|
|
|
$
|
56.7
|
|
|
$
|
247.2
|
|
|
$
|
39.6
|
|
|
$
|
24.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The estimated interest payments on our senior credit facility
are based on interest rates effective at December 31, 2010. |
Our consolidated balance sheet as of December 31, 2010
included $38.5 million in unrecognized tax benefits. The
future payments related to these unrecognized tax benefits have
not been presented in the table above due to the uncertainty of
the amounts and potential timing of cash settlements with the
tax authorities, and whether any settlement would occur.
Off-Balance
Sheet Arrangements
At December 31, 2010 and December 31, 2009, we had no
material off-balance sheet arrangements as defined in
Item 303(a)(4)(ii) of
Regulation S-K.
70
Share
Repurchases
On April 18, 2007, our board of directors authorized the
repurchase of up to $300 million of our common shares
during the next two years, at such times and prices as
determined by our management, as market conditions warrant. On
August 23, 2007, our board of directors approved an
increase of $150 million, raising the total value of our
common shares authorized to be repurchased to $450 million.
On May 20, 2008, our board of directors approved an
additional increase of $150 million to our previously
authorized share repurchase program raising the total value of
common shares authorized to be repurchased to $600 million.
On April 17, 2009, our share repurchase program adopted on
April 18, 2007 expired pursuant to its terms. On
April 30, 2009, our board of directors authorized a new
program for us to repurchase up to $300 million of our
common shares during the next two years, at such times and
prices as determined by management, as market conditions
warrant. 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.
During the year ended December 31, 2010, we repurchased
approximately 2.9 million of our common shares through open
market purchases at an aggregate cost of approximately
$150.1 million or an average cost of $52.25 per share.
During the year ended December 31, 2009, we repurchased
approximately 2.0 million of our common shares through open
market purchases at an aggregate cost of approximately
$73.2 million or an average cost of $36.60 per share.
During the year ended December 31, 2008, we repurchased
approximately 4.6 million of our common shares through open
market purchases at an aggregate cost of $137.0 million, or
an average cost of $29.60 per share. As of December 31,
2010, the remaining authorized capacity under the share
repurchase program was $776.7 million.
The number of shares issued upon vesting or exercise for certain
restricted stock units and stock appreciation rights granted,
pursuant to the Companys share-based compensation plans,
is net of the minimum statutory withholding requirements that
the Company pays on behalf of its employees. Although shares
withheld are not issued, they are treated as common share
repurchases for accounting purposes, as they reduce the number
of shares that would have been issued upon vesting.
Dividends
During the second quarter of 2007, the Companys board of
directors adopted a regular quarterly cash dividend program. The
Companys board of directors authorized a $0.20 per common
share dividend each quarter from the adoption of the program
through the second quarter of 2010. On August 2, 2010, the
Companys board of directors approved an increase in the
quarterly cash dividend to $0.25 per common share, an increase
of $0.05 per common share from prior quarters. The aggregate
amount of dividends paid and declared during fiscal year 2010,
2009, and 2008 was approximately $53.7 million,
$48.7 million and $50.7 million, respectively.
Working
Capital and Operating Activities
As of December 31, 2010, 2009 and 2008, we had positive
working capital of $124.8 million, $83.5 million, and
$82.9 million, respectively. Cash and cash equivalents were
$190.6 million at December 31, 2010, and
$150.8 million at December 31, 2009 and 2008.
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 debt service on our term loan
and amounts outstanding under our revolving 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 II, Item 7A
Quantitative and Qualitative Disclosures about Market
Risk.
71
Currency
Restrictions in Venezuela
Currency restrictions enacted by the Venezuelan government in
2003 have become more restrictive and have impacted the ability
of the Companys 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 remains 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 parallel
market mechanism for currency exchanges until this less
favorable parallel market was discontinued in May 2010.
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.
Although Venezuela is an important market in our South and
Central America Region, Herbalife Venezuelas net sales
represented less than 2%, 4% and 4% of the our consolidated net
sales for the years ended December 31, 2010, 2009 and 2008,
respectively, and its total assets represented less than 3% and
6% of our consolidated total assets as of December 31, 2010
and 2009, respectively.
Pre-Highly
Inflationary Economy in Venezuela and Herbalife Venezuelas
Cash and Cash Equivalents at December 31,
2009
During the fourth quarter of 2009, due to the currency
restrictions in obtaining U.S. dollars at the official
currency exchange rate and in order to mitigate the
Companys currency exchange risk in Venezuela, Herbalife
Venezuela entered into a series of parallel market transactions
and exchanged 105.0 million Bolivars for approximately
$19.5 million U.S. dollars at an average rate of
approximately 5.4 Bolivars per U.S. dollar. Also, during
the fourth quarter of 2009, Herbalife Venezuela settled
$13.6 million of its U.S. dollar denominated
non-CADIVI registered intercompany shipment payables that were
initially recorded and then subsequently remeasured at the
parallel market exchange rate. Therefore, the settlement of
these intercompany shipment payables did not result in any net
foreign exchange gains or losses recorded in our accompanying
consolidated statement of income for the year ended
December 31, 2009. Incremental costs of $18.8 million,
related to the importation of products into Venezuela at the
unfavorable parallel market exchange rate, were recorded in
costs of sales in our consolidated statement of income for the
year ended December 31, 2009.
As of December 31, 2009, Herbalife Venezuelas
$5.9 million U.S. dollar cash and cash equivalents
residing in its U.S. dollar bank account were remeasured to
Bolivars at the parallel market exchange rate of approximately
5.9 Bolivars per U.S. dollar. These remeasured cash and
cash equivalents were translated at the official rate of 2.15
Bolivars per U.S. dollar and reported as $15.8 million
in the Companys consolidated balance sheet at
December 31, 2009. Based on our specific facts and
circumstances, U.S. GAAP required us to use the dividend
remittance rate (the official exchange rate) for translation
purposes and the parallel market exchange rate (the applicable
rate at which a particular transaction could be settled), for
certain remeasurement purposes. Due to the difference between
the remeasurement rate and translation rate, the cash and cash
equivalents relating to Herbalife Venezuela reported on our
consolidated balance sheet at December 31, 2009, was
$9.9 million greater than the U.S. dollar amount
residing in Herbalife Venezuelas U.S. dollar bank
account and therefore did not necessarily reflect the true
purchasing power of the reported U.S. dollar cash and cash
equivalents. At December 31, 2009, Herbalife Venezuela
reported cash and cash equivalents of approximately
$34.2 million, of which $15.8 million was denominated
in U.S. dollars
72
and $18.4 million was denominated in Bolivars. The cash and
cash equivalents were translated into our consolidated financial
statements at the official exchange rate, which was the rate
applicable for dividend remittance.
Highly
Inflationary Economy and Accounting in Venezuela
Venezuelas inflation rate as measured using the blended
National Consumer Price Index and Consumer Price Index rate
exceeded a three-year cumulative inflation rate of 100% as of
December 31, 2009. Accordingly, effective January 1,
2010, Venezuela was considered a highly inflationary economy.
Pursuant to the highly inflationary basis of accounting under
U.S. GAAP, Herbalife Venezuela changed its functional
currency from the Bolivar to the U.S. dollar. Subsequent
movements in the Bolivar to U.S. dollar exchange rate will
impact our consolidated earnings. Prior to January 1, 2010
when the Bolivar was the functional currency, movements in the
Bolivar to U.S. dollar were recorded as a component of
equity through other comprehensive income. Pursuant to highly
inflationary accounting rules, we are no longer required to
translate Herbalife Venezuelas financial statements since
their functional currency is now the U.S. dollar.
Based on relevant facts and circumstances at the applicable
times, under the highly inflationary basis of accounting, we
used the parallel market exchange rate for remeasurement
purposes until the parallel market was discontinued in May 2010.
On January 1, 2010, in connection with the determination
that Venezuela was a highly inflationary economy, we remeasured
Herbalife Venezuelas opening balance sheets monetary
assets and liabilities at the parallel market rate, which
resulted in us recording a non-tax deductible foreign exchange
loss of $15.1 million. This charge included the
$9.9 million foreign exchange loss relating to Herbalife
Venezuelas U.S. dollar cash and cash equivalents that
were remeasured at the parallel market rate and then translated
at the official rate at December 31, 2009. Also, Herbalife
Venezuelas $34.2 million cash and cash equivalents
reported in our consolidated balance sheet at December 31,
2009, which included U.S. dollar denominated cash, was
reduced to approximately $12.5 million on January 1,
2010. However, nonmonetary assets, such as inventory, reported
on our consolidated balance sheet at December 31, 2009,
remained at historical cost subsequent to Venezuela becoming a
highly inflationary economy. Therefore, the incremental costs
related to our 2009 imported products recorded at the parallel
market exchange rate negatively impacted our consolidated
earnings for the year ended December 31, 2010 by
approximately $12.7 million as these products were sold
during the first quarter of 2010. This amount is not tax
deductible. See Note 12, Income Taxes in our notes
to consolidated financial statements, for additional discussion
on the income tax impact related to Venezuela becoming highly
inflationary.
Official
Exchange Rate Devaluations in Venezuela in 2010
In early January 2010, Venezuela announced an official exchange
rate devaluation of the Bolivar to an official rate of 4.3
Bolivars per U.S. dollar for non-essential items and 2.6
Bolivars per U.S. dollar for essential items. Our imports
fall into both classifications. During 2010, because we used the
parallel market exchange rate for remeasurement purposes until
the parallel market was discontinued in May 2010 and then used
the SITME rate thereafter, any U.S. dollars obtained from
CADIVI at the official rate had a positive impact on our
consolidated net earnings. Specifically, we recorded
$5.8 million of foreign exchange gains to selling, general
and administrative expenses within our accompanying consolidated
statement of income for the year ended December 31, 2010,
as a result of receiving U.S. dollars approved by CADIVI at
the official exchange rate. The majority of Herbalife
Venezuelas 2010 importations were not registered with
CADIVI so the official exchange rates are not available to pay
for these U.S. imports. As of December 31, 2010,
Herbalife Venezuela also has an outstanding intercompany
dividend payable to our Company of $2.5 million, which was
declared in December 2008 and registered with CADIVI. The
request to obtain U.S. dollars at the official rate to
settle the outstanding intercompany dividend payable is pending
CADIVIs approval. Also, at December 31, 2010,
Herbalife Venezuela had outstanding intercompany shipment
payable balances of $2.6 million, primarily relating to
2010, which are registered with CADIVI and are pending
CADIVIs approval.
In late December 2010, Venezuela announced that the CADIVI
official exchange rate of 2.6 Bolivars per U.S. dollar will
be eliminated and the CADIVI official exchange of 4.3 Bolivars
per U.S. dollar will be used for all essential items and
non-essential items beginning January 2011. This devaluation did
not have a material impact on our consolidated financial
statements. At December 31, 2010, we used the SITME rate of
5.3 Bolivars per U.S. dollar for remeasurement purposes. We
expect that any U.S. dollars obtained from CADIVI at the
official exchange rate of 4.3 Bolivars per U.S. dollar will
have a positive impact on our consolidated net earnings, and the
impact of any U.S. dollars obtained from the Venezuelan
government and PDVSA bond offerings on our consolidated earnings
will depend on the prevailing exchange rates during those
periods.
73
Remeasurement
of Herbalife Venezuelas Monetary Assets and
Liabilities
During the second quarter of 2010, we recorded a
$4.0 million pre-tax ($2.6 million post-tax) net
foreign exchange gain to selling, general and administrative
expenses, within the Companys consolidated statement of
income, as a result of remeasuring Herbalife Venezuelas
Bolivar denominated monetary assets and liabilities as of
June 30, 2010 at the SITME rate of 5.3 Bolivars per
U.S. dollar as opposed to the last parallel market rate
prior to the closure of the parallel market in May 2010 of 8.3
Bolivars per U.S. dollar. Herbalife Venezuelas cash
and cash equivalents, primarily denominated in Bolivars,
increased by $5.2 million as a result of using the SITME
rate as opposed to the last quoted parallel market rate during
the second quarter of 2010. During the third quarter of 2010 and
thereafter, we continued to use the SITME rate of 5.3 Bolivars
per U.S. dollar to remeasure its Bolivar denominated
transactions. As of December 31, 2010, Herbalife
Venezuelas net monetary Bolivar denominated assets and
liabilities approximated $19.4 million which included
Bolivar denominated cash and cash equivalents approximating
$24.6 million, and were all remeasured at the new regulated
rate under the SITME, except for the $2.5 million
intercompany dividend which was remeasured at the CADIVI
official rate. While we continue to monitor the new exchange
mechanism and restrictions under SITME, there is no assurance
that we will be able to exchange Bolivars into U.S. dollars
on a timely basis. Therefore, these remeasured amounts,
including cash and cash equivalents, being reported on our
accompanying consolidated balance sheet using the SITME rate may
not accurately represent the amount of U.S. dollars we
could ultimately realize.
Consolidation
of Herbalife Venezuela
We plan to continue our operation in Venezuela and to import
products into Venezuela despite the foreign currency constraints
that exist in the country. 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 accompanying
consolidated financial statements for U.S. GAAP purposes.
Substantially all of Herbalife Venezuelas 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 the Companys
products. In addition, we plan to utilize the SITME market to
the extent allowable under current restrictions in order to
exchange Bolivars for U.S. dollars. We also plan to access
government and PDVSA bond offerings when they are made
available. 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. See Subsequent Events, within this section for
further discussion on Herbalife Venezuela.
74
Quarterly
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
|
(In thousands except per share data)
|
|
|
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
738,356
|
|
|
$
|
688,431
|
|
|
$
|
688,806
|
|
|
$
|
618,633
|
|
|
$
|
630,871
|
|
|
$
|
600,218
|
|
|
$
|
571,805
|
|
|
$
|
521,683
|
|
Cost of sales
|
|
|
148,513
|
|
|
|
133,265
|
|
|
|
136,561
|
|
|
|
140,472
|
|
|
|
136,515
|
|
|
|
131,777
|
|
|
|
122,442
|
|
|
|
102,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
589,843
|
|
|
|
555,166
|
|
|
|
552,245
|
|
|
|
478,161
|
|
|
|
494,356
|
|
|
|
468,441
|
|
|
|
449,363
|
|
|
|
419,283
|
|
Royalty overrides
|
|
|
244,088
|
|
|
|
224,061
|
|
|
|
224,780
|
|
|
|
207,319
|
|
|
|
204,580
|
|
|
|
194,639
|
|
|
|
186,750
|
|
|
|
175,532
|
|
Selling, general and administrative expenses
|
|
|
239,512
|
|
|
|
230,150
|
|
|
|
211,110
|
|
|
|
206,883
|
|
|
|
205,691
|
|
|
|
195,968
|
|
|
|
190,794
|
|
|
|
181,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
106,243
|
|
|
|
100,955
|
|
|
|
116,355
|
|
|
|
63,959
|
|
|
|
84,085
|
|
|
|
77,834
|
|
|
|
71,819
|
|
|
|
62,293
|
|
Interest expense, net
|
|
|
1,126
|
|
|
|
2,192
|
|
|
|
2,146
|
|
|
|
1,953
|
|
|
|
1,016
|
|
|
|
1,037
|
|
|
|
1,338
|
|
|
|
1,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
105,117
|
|
|
|
98,763
|
|
|
|
114,209
|
|
|
|
62,006
|
|
|
|
83,069
|
|
|
|
76,797
|
|
|
|
70,481
|
|
|
|
60,581
|
|
Income taxes
|
|
|
24,127
|
|
|
|
23,024
|
|
|
|
32,276
|
|
|
|
10,135
|
|
|
|
27,413
|
|
|
|
18,902
|
|
|
|
22,228
|
|
|
|
19,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
80,990
|
|
|
$
|
75,739
|
|
|
$
|
81,933
|
|
|
$
|
51,871
|
|
|
$
|
55,656
|
|
|
$
|
57,895
|
|
|
$
|
48,253
|
|
|
$
|
41,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.37
|
|
|
$
|
1.28
|
|
|
$
|
1.38
|
|
|
$
|
0.86
|
|
|
$
|
0.92
|
|
|
$
|
0.95
|
|
|
$
|
0.78
|
|
|
$
|
0.68
|
|
Diluted
|
|
$
|
1.31
|
|
|
$
|
1.22
|
|
|
$
|
1.32
|
|
|
$
|
0.83
|
|
|
$
|
0.88
|
|
|
$
|
0.91
|
|
|
$
|
0.77
|
|
|
$
|
0.67
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
59,082
|
|
|
|
59,221
|
|
|
|
59,527
|
|
|
|
60,160
|
|
|
|
60,492
|
|
|
|
61,234
|
|
|
|
61,642
|
|
|
|
61,510
|
|
Diluted
|
|
|
62,058
|
|
|
|
61,946
|
|
|
|
62,103
|
|
|
|
62,672
|
|
|
|
63,004
|
|
|
|
63,397
|
|
|
|
62,929
|
|
|
|
61,614
|
|
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, attorneys 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 Companys trade secrets on
December 11, 2007. Defendants appealed the courts
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
75
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 Herbalifes claims for
misappropriation of trade secrets and breach of contract. On
May 5, 2010, the District Court granted summary judgment
for Herbalife on defendants endless chain-scheme
counterclaim. Herbalife voluntarily dismissed its remaining
claims, and on May 14, 2010, the District Court issued a
final judgment dismissing all of the parties claims. On
June 10, 2010 the defendants appealed from that judgment
and on June 21, 2010, Herbalife cross-appealed. The Company
believes that there is merit to its appeal, and it will prevail
upon both its appeal as well as the defendants appeal.
Certain of the Companys 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
$93 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 Companys 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 Companys existing
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.
Subsequent
Events
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 upcoming Annual General Meeting of
Shareholders to be held on April 28, 2011. If approved by
our shareholders, 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. The stock split
will not be effective unless approved by our shareholders at the
meeting.
On February 22, 2011, we announced that our Board of
Directors approved a quarterly cash dividend of $0.25 per common
share, for the fourth quarter of 2010, to shareholders of record
as of the close of business on March 8, 2011, payable on
March 22, 2011.
In February 2011, Herbalife Venezuela purchased U.S. dollar
denominated bonds with a face value of $20 million
U.S. dollars from a PDVSA bond offering for 86 million
Bolivars and then immediately sold the bonds for
U.S. dollars at an expected average effective rate of 5.7
Bolivars per U.S. dollar. These 86 million Bolivars
were remeasured at the 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. We expect to receive approximately
$15 million U.S. dollars in late February or early
March 2011 as a result of this conversion and final settlement.
This conversion is expected to result in us recording a net
pre-tax loss of approximately $1.3 million
U.S. dollars in our 2011 consolidated statement of income
and will be reflected in our consolidated financial statements
at March 31, 2011 and for the quarter ending March 31,
2011.
76
Critical
Accounting Policies
Our Consolidated Financial Statements are prepared in conformity
with U.S. GAAP, which 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
December 31, 2010, we sold products in 74 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%, 0.5% and 0.8% of
retail sales for the years ended December 31, 2010, 2009,
and 2008, respectively.
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
managements 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 $9.4 million
and $9.3 million as of December 31, 2010, and
December 31, 2009, 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
77
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
assets 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 units 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, or ASC 805. 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 December 31, 2010 and 2009,
we had goodwill of approximately $102.9 million, and
$102.5 million, respectively, and marketing related
intangible assets of approximately $310.0 million for both
periods. No marketing related intangibles or goodwill impairment
was recorded during years ended December 31, 2010, 2009 and
2008.
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
78
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.
New
Accounting Pronouncements
In December 2010, the FASB, issued Accounting Standards Update,
or ASU,
2010-28,
Intangibles-Goodwill and Other (Topic 350): When to Perform
Step 2 of the Goodwill Impairment Test for Reporting Units with
Zero or Negative Carrying Amounts (a consensus of the FASB
Emerging Issues Task Force). ASU
2010-28
provides amendments to Accounting Standards Codification, or
ASC, Topic 350, Intangibles Goodwill and
Other. Pursuant to ASU
2010-28, if
any entity during Step 1 of a goodwill impairment test
determines reporting units with zero or negative carrying
amounts, then they should perform Step 2 of the goodwill
impairment test if it is more likely than not that a goodwill
impairment exists. In determining whether it is more likely than
not that a goodwill impairment exists, an entity should consider
whether there are any adverse qualitative factors indicating
that an impairment may exist. The qualitative factors are
consistent with the existing guidance and examples in ASC Topic
350, which requires that goodwill of a reporting unit be tested
for impairment between annual tests if an event occurs or
circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying amount. As a
result, goodwill impairments may be reported sooner or more
often compared to current practice. ASU
2010-28 is
effective for fiscal years and interim periods within those
years, beginning after December 15, 2010, with early
adoption not permitted. We do not expect that the adoption of
ASU 2010-28
will have a material impact on our consolidated financial
statements.
|
|
Item 7A.
|
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 apply 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
79
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 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 Topic 815 for these hedges. These
contracts allow us to sell Euros in exchange for
U.S. dollars at specified contract rates. As of
December 31, 2010 and 2009, the aggregate notional amounts
of these contracts outstanding were approximately
$32.1 million and $66.8 million, respectively. At
December 31, 2010, the outstanding contracts were expected
to mature over the next twelve 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 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. As of
December 31, 2009, we recorded assets at fair value of
$2.3 million relating to all outstanding foreign currency
contracts designated as cash-flow hedges. We assess hedge
effectiveness and measure hedge ineffectiveness at least
quarterly. During the years ended December 31, 2010 and
2009, the ineffective portion relating to these hedges was
immaterial and the hedges remained effective as of
December 31, 2010 and 2009.
80
As of December 31, 2010 and 2009, the majority of our
outstanding foreign currency forward contracts had maturity
dates of less than one year with the majority of freestanding
derivatives expiring within three months.
The table below describes all foreign currency forward contracts
that were outstanding as of December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Average
|
|
|
Original
|
|
|
Fair
|
|
|
|
Contract
|
|
|
Notional
|
|
|
Value
|
|
Foreign Currency
|
|
Rate
|
|
|
Amount
|
|
|
Gain (Loss)
|
|
|
|
|
|
|
(In millions)
|
|
|
(In millions)
|
|
|
At December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy BRL sell USD
|
|
|
1.68
|
|
|
$
|
7.6
|
|
|
$
|
0.1
|
|
Buy EUR sell ARS
|
|
|
5.27
|
|
|
|
1.3
|
|
|
|
|
|
Buy EUR sell JPY
|
|
|
113.89
|
|
|
|
1.2
|
|
|
|
(0.1
|
)
|
Buy EUR sell MXN
|
|
|
16.58
|
|
|
|
35.5
|
|
|
|
|
|
Buy EUR sell RUB
|
|
|
40.99
|
|
|
|
1.8
|
|
|
|
|
|
Buy EUR sell USD
|
|
|
1.34
|
|
|
|
101.4
|
|
|
|
0.1
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|
Buy INR sell USD
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|
|
44.81
|
|
|
|
4.5
|
|
|
|
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Buy JPY sell EUR
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|
|
111.90
|
|
|
|
1.2
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|
|
|
|
|
Buy JPY sell USD
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|
|
82.57
|
|
|
|
19.4
|
|
|
|
0.4
|
|
Buy KRW sell USD
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|
|
1,146.51
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|
|
|
21.0
|
|
|
|
0.4
|
|
Buy MXN sell EUR
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|
|
16.45
|
|
|
|
8.0
|
|
|
|
|
|
Buy MXN sell USD
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|
|
12.37
|
|
|
|
4.5
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|
|
|
|
|
Buy MYR sell USD
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|
|
3.10
|
|
|
|
12.2
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|
|
|
0.1
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|
Buy PEN sell USD
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2.80
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|
|
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10.3
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|
|
|
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|
Buy PHP sell USD
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|
|
43.89
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|
|
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0.1
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|
|
|
|
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Buy TWD sell USD
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|
|
29.17
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|
|
|
2.6
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|
|
|
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Buy USD sell BRL
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|
1.72
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|
|
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14.9
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|
|
|
(0.5
|
)
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Buy USD sell COP
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|
|
1,917.51
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|
|
|
4.3
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|
|
|
|
|
Buy USD sell EUR
|
|
|
1.32
|
|
|
|
74.3
|
|
|
|
(1.0
|
)
|
Buy USD sell GBP
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|
|
1.56
|
|
|
|
4.0
|
|
|
|
|
|
Buy USD sell INR
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|
|
45.78
|
|
|
|
8.7
|
|
|
|
(0.2
|
)
|
Buy USD sell JPY
|
|
|
81.59
|
|
|
|
9.8
|
|
|
|
(0.1
|
)
|
Buy USD sell KRW
|
|
|
1,138.90
|
|
|
|
4.9
|
|
|
|
(0.1
|
)
|
Buy USD sell MXN
|
|
|
12.45
|
|
|
|
4.9
|
|
|
|
|
|
Buy USD sell PEN
|
|
|
2.81
|
|
|
|
5.2
|
|
|
|
|
|
Buy USD sell PHP
|
|
|
44.11
|
|
|
|
2.8
|
|
|
|
|
|
Buy USD sell RUB
|
|
|
31.48
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total forward contracts
|
|
|
|
|
|
$
|
367.7
|
|
|
$
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Original
|
|
|
Fair
|
|
|
|
Contract
|
|
|
Notional
|
|
|
Value
|
|
Foreign Currency
|
|
Rate
|
|
|
Amount
|
|
|
Gain (Loss)
|
|
|
|
|
|
|
(In millions)
|
|
|
(In millions)
|
|
|
At December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy EUR sell MXN
|
|
|
19.67
|
|
|
$
|
32.6
|
|
|
$
|
(1.6
|
)
|
Buy JPN sell USD
|
|
|
90.60
|
|
|
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16.9
|
|
|
|
(0.5
|
)
|
Buy USD sell EUR
|
|
|
1.48
|
|
|
|
77.2
|
|
|
|
2.6
|
|
Buy CLP sell USD
|
|
|
523.79
|
|
|
|
5.3
|
|
|
|
0.2
|
|
Buy USD sell CLP
|
|
|
509.40
|
|
|
|
2.9
|
|
|
|
|
|
Buy HKD sell USD
|
|
|
7.75
|
|
|
|
6.5
|
|
|
|
|
|
Buy JPY sell EUR
|
|
|
131.55
|
|
|
|
3.3
|
|
|
|
|
|
Buy EUR sell JPY
|
|
|
131.59
|
|
|
|
3.3
|
|
|
|
|
|
Buy USD sell BRL
|
|
|
1.78
|
|
|
|
7.3
|
|
|
|
(0.1
|
)
|
Buy USD sell ZAR
|
|
|
7.86
|
|
|
|
1.3
|
|
|
|
(0.1
|
)
|
Buy ZAR sell USD
|
|
|
7.49
|
|
|
|
1.3
|
|
|
|
|
|
Buy USD sell PHP
|
|
|
47.49
|
|
|
|
6.3
|
|
|
|
(0.1
|
)
|
Buy USD sell KRW
|
|
|
1,181.27
|
|
|
|
1.9
|
|
|
|
|
|
Buy USD sell INR
|
|
|
46.72
|
|
|
|
3.0
|
|
|
|
|
|
Buy USD sell COP
|
|
|
1,983.88
|
|
|
|
3.5
|
|
|
|
0.1
|
|
Buy EUR sell USD
|
|
|
1.43
|
|
|
|
45.2
|
|
|
|
|
|
Buy EUR sell HKD
|
|
|
11.26
|
|
|
|
2.6
|
|
|
|
|
|
Buy MXN sell USD
|
|
|
13.19
|
|
|
|
8.5
|
|
|
|
|
|
Buy GBP sell USD
|
|
|
1.63
|
|
|
|
5.7
|
|
|
|
|
|
Buy USD sell RUB
|
|
|
29.78
|
|
|
|
1.3
|
|
|
|
|
|
Buy COP sell USD
|
|
|
2,053.31
|
|
|
|
4.2
|
|
|
|
|
|
Buy KRW sell USD
|
|
|
1,167.38
|
|
|
|
1.9
|
|
|
|
|
|
Buy BRL sell USD
|
|
|
1.78
|
|
|
|
0.6
|
|
|
|
|
|
Buy EUR sell GBP
|
|
|
0.89
|
|
|
|
3.3
|
|
|
|
|
|
Buy MXN sell EUR
|
|
|
18.81
|
|
|
|
7.0
|
|
|
|
|
|
Buy PHP sell USD
|
|
|
46.47
|
|
|
|
3.2
|
|
|
|
|
|
Buy RUB sell USD
|
|
|
30.25
|
|
|
|
0.3
|
|
|
|
|
|
Buy USD sell MXN
|
|
|
13.15
|
|
|
|
1.7
|
|
|
|
|
|
Buy USD sell JPN
|
|
|
92.46
|
|
|
|
7.9
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total forward contracts
|
|
|
|
|
|
$
|
266.0
|
|
|
$
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 and 2009 we did not have any
outstanding foreign currency option contracts.
Most of our foreign subsidiaries designate their local
currencies as their functional currencies. At December 31,
2010 and December 31, 2009, the total amount of our foreign
subsidiary cash was $188.2 million and $149.6 million,
respectively, of which $5.8 million and $11.9 million,
respectively, was invested in U.S. dollars.
Currency restrictions enacted by the Venezuelan government in
2003 have become more restrictive and have impacted the ability
of our subsidiary in Venezuela, or 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 remains
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
82
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 newly regulated system, SITME, which is
controlled by the Central Bank of Venezuela. SITME provides a
mechanism to exchange Bolivars into U.S. dollars through
the purchase and sale of U.S. dollar denominated bonds
issued in Venezuela. However, SITME is only available in certain
limited circumstances. Specifically, SITME can only be used for
product purchases and it is not available for other matters such
as the payment of dividends. Also, SITME can only be used for
amounts of up to $50,000 per day and $350,000 per month and is
generally only available to the extent that the applicant has
not exchanged and received U.S. dollars via the CADIVI
process within the previous 90 days.
Venezuelas inflation rate as measured using the blended
National Consumer Price Index and Consumer Price Index rate
exceeded a three-year cumulative inflation rate of 100% as of
December 31, 2009. In early January 2010, Venezuela
announced an official exchange rate devaluation of the Bolivar
to an official rate of 4.3 Bolivars per U.S. dollar for
non-essential items and 2.6 Bolivars per U.S. dollar for
essential items. Our imports fall into both classifications.
In late December 2010, Venezuela announced that the CADIVI
official exchange rate of 2.6 Bolivars per U.S. dollar will
be eliminated and the CADIVI official exchange of 4.3 Bolivars
per U.S. dollar will be used for all essential items and
non-essential items beginning January 2011. This devaluation did
not have a material impact to our consolidated financial
statements. At December 31, 2010, we used the SITME rate of
5.3 Bolivars per U.S. dollar for remeasurement purposes. We
expect that any U.S. dollars obtained from CADIVI at the
official exchange rate will have a positive impact on our
consolidated net earnings, and the impact of any U.S. dollars
obtained from the Venezuelan government and PDVSA bond offerings
on our consolidated earnings will depend on the prevailing
exchange rates during those periods. See Item 7
Managements Discussion and Analysis of Financial
Condition and Results of Operations, for a further
discussion on how the currency restrictions in Venezuela have
impacted Herbalife Venezuelas operations.
Interest
Rate Risk
As of December 31, 2010, the aggregate annual maturities of
our senior secured credit facility were expected to be:
2011-$1.5 million; 2012-$32.5 million; and
2013-$140.9 million. The fair value of our senior secured
credit facility approximates its carrying value of
$174.9 million as of December 31, 2010 and
$236.4 million as of December 31, 2009. Our senior
secured credit facility bears a variable interest rate, and on
December 31, 2010 and 2009, the weighted average interest
rate was 1.75% and 1.66%, respectively.
Under our senior secured credit facility, we were obligated to
enter into interest rate hedges for up to 25% of the aggregate
principal amount of the term loan for a minimum of three years.
On August 23, 2006, we entered into an interest rate swap
agreement. This agreement provided for us to pay interest for a
three-year period at a fixed rate of 5.26% on the initial
notional principal amount of $180.0 million while receiving
interest for the same period at the LIBOR rate on the same
notional principal amount. The notional amount was scheduled to
be reduced by $20.0 million in the second, third and fourth
quarters of each year commencing January 1, 2007 throughout
the term of the swap. The swap had been designated as a cash
flow hedge against the variability in LIBOR interest rate on our
term loan at LIBOR plus 1.50%, thereby fixing our effective rate
on the notional amounts at 6.76%. In September 2009, the
interest swap expired and was consequently settled. As of
December 31, 2009, there were no amounts remaining in other
comprehensive income relating to this expired interest swap and
the swap had no value.
On June 26, 2009, we entered into an interest rate swap
agreement, with an effective date of June 30, 2009, which
expired on September 30, 2009. The swap notional amount was
$20 million, where we paid three month LIBOR and received
one month LIBOR plus 0.185%. During September 2009, the interest
rate swap agreement expired and all outstanding amounts were
settled. We elected not to apply hedge accounting for this
interest rate swap.
83
During August 2009, we entered into four interest rate swap
agreements with an effective date of December 31, 2009. The
agreements, collectively, provide for us 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 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. The swaps have been designated as cash flow hedges
against the variability in the LIBOR interest rate on our term
loan at LIBOR plus 1.50%, thereby fixing our weighted average
effective rate on the notional amounts at 4.28%. We formally
assess, both at inception and at least quarterly thereafter,
whether the derivatives used in hedging transactions are
effective in offsetting changes in cash flows of the hedged
item. As of December 31, 2010 the hedge relationships
qualified as effective hedges under the 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. As of December 31, 2010,
and December 31, 2009, the fair value of the interest rate
swap agreements are based on third-party bank quotes and we
recorded the interest rate swaps as a liability at fair value of
$6.6 million and $2.6 million, respectively.
Our exposure to interest rate volatility risk relating to our
senior secured credit facility is partially mitigated by our
interest rate swaps. Based on the outstanding balances of our
senior secured credit facility and our interest rate swaps at
December 31, 2010, a hypothetical 50-basis-point change, in
interest rates prevailing at that date, sustained for one year,
would not represent a material potential net change in fair
value, earnings, or cash flows.
|
|
Item 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Our consolidated financial statements and notes thereto and the
reports of KPMG LLP, independent registered public accounting
firm, are set forth in the Index to Financial Statements under
Item 15 Exhibits and Financial Statement
Schedules of this Annual Report on
Form 10-K,
and is incorporated herein by reference.
|
|
Item 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
Item 9A.
|
CONTROLS
AND PROCEDURES
|
Disclosure
Controls and Procedures
The Company maintains disclosure controls and procedures as
defined in
Rule 13a-15(e)
under the Exchange Act. Based on an evaluation of the
Companys disclosure controls and procedures as of the end
of the period covered by this report conducted by the
Companys management, with the participation of the Chief
Executive Officer and Chief Financial Officer, the Chief
Executive Officer and Chief Financial Officer have concluded
that the Companys disclosure controls and procedures were
effective as of December 31, 2010.
Managements
Report on Internal Control over Financial Reporting
The SEC, as directed by Section 404 of the Sarbanes-Oxley
Act of 2002, adopted rules which require the Company to include
in its Annual Report on
Form 10-K,
an assessment by management of the effectiveness of the
Companys internal control over financial reporting as
defined in
Rule 13a-15(f)
under the Exchange Act. In addition, the Companys
independent auditors must attest to and report on the
effectiveness of the Companys internal control over
financial reporting.
Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting
as defined in
Rule 13a-15(f)
under the Exchange Act. The Companys internal control over
financial reporting is designed to provide reasonable assurance
to the Companys management and Board of Directors
regarding the preparation and fair presentation of published
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect all misstatements.
Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial
statement preparation and presentation.
84
The Companys management carried out an evaluation, under
the supervision and with the participation of the Companys
Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the Companys internal control over
financial reporting based on the framework in Internal
Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based
upon this evaluation, under the framework in Internal
Control Integrated Framework, our management
concluded that our internal control over financial reporting was
effective as of December 31, 2010.
The independent registered public accounting firm that audited
the financial statements included in this Annual Report on
Form 10-K
has issued an attestation report on the Companys internal
control over financial reporting, which is set forth below.
Changes
in Internal Control over Financial Reporting
There were no changes in our internal control over financial
reporting (as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) that occurred during the fourth quarter
ended December 31, 2010 that have materially affected, or
are reasonably likely to materially affect, our internal control
over financial reporting.
85
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Herbalife Ltd.:
We have audited Herbalife Ltd. and subsidiaries (the
Company) internal control over financial reporting
as of December 31, 2010, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Companys management is responsible
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the
accompanying managements report on internal control over
financial reporting. Our responsibility is to express an opinion
on the Companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Herbalife Ltd. and subsidiaries maintained, in
all material respects, effective internal control over financial
reporting as of December 31, 2010, based on criteria
established in Internal Control Integrated
Framework issued by the COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Herbalife Ltd. and subsidiaries
as of December 31, 2010 and 2009, and the related
consolidated statements of income, changes in shareholders
equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 2010, and
our report dated February 22, 2011 expressed an unqualified
opinion on those consolidated financial statements.
Los Angeles, California
February 22, 2011
86
|
|
Item 9B.
|
OTHER
INFORMATION
|
None.
PART III.
|
|
Item 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information required under this Item is incorporated herein
by reference to our definitive proxy statement to be filed with
the SEC no later than 120 days after the close of our
fiscal year ended December 31, 2010, except that the
information required with respect to our executive officers is
set forth under Item 1 Business, of this
Annual Report on
Form 10-K,
and is incorporated herein by reference.
|
|
Item 11.
|
EXECUTIVE
COMPENSATION
|
The information required under this Item is incorporated herein
by reference to our definitive proxy statement to be filed with
the SEC no later than 120 days after the close of our
fiscal year ended December 31, 2010.
|
|
Item 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The information required under this Item is incorporated herein
by reference to our definitive proxy statement to be filed with
the SEC no later than 120 days after the close of our
fiscal year ended December 31, 2010, except that the
information required with respect to our equity compensation
plans is set forth under Item 5 Market for
Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities of this Annual Report
on
Form 10-K,
and is incorporated herein by reference.
|
|
Item 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The information required under this Item is incorporated herein
by reference to our definitive proxy statement to be filed with
the SEC no later than 120 days after the close of our
fiscal year ended December 31, 2010.
|
|
Item 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
The information required under this Item is incorporated herein
by reference to our definitive proxy statement to be filed with
the SEC no later than 120 days after the close of our
fiscal year ended December 31, 2010.
87
PART IV
|
|
Item 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
The following documents are filed as part of this Annual Report
on
Form 10-K,
or incorporated herein by reference:
1. Financial Statements. The following
financial statements of Herbalife Ltd. are filed as part of this
Annual Report on
Form 10-K
on the pages indicated:
|
|
|
|
|
|
|
Page No.
|
|
HERBALIFE LTD. AND SUBSIDIARIES
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
94
|
|
Consolidated Balance Sheets as of December 31, 2010 and 2009
|
|
|
95
|
|
Consolidated Statements of Income for the years ended
December 31, 2010, 2009 and 2008
|
|
|
96
|
|
Consolidated Statements of Changes in Shareholders Equity
and Comprehensive Income for the years ended December 31,
2010, 2009 and 2008
|
|
|
97
|
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2010, 2009 and 2008
|
|
|
98
|
|
Notes to Consolidated Financial Statements
|
|
|
99
|
|
2. Financial Statement
Schedules. Schedules are omitted because the
required information is inapplicable, not material, or the
information is presented in the consolidated financial
statements or related notes.
3. Exhibits. The exhibits listed in the
Exhibit Index immediately below are filed as part of this
Annual Report on
Form 10-K,
or are incorporated by reference herein.
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Reference
|
|
|
3
|
.1
|
|
Form of Amended and Restated Memorandum and Articles of
Association of Herbalife Ltd.
|
|
(d)
|
|
4
|
.1
|
|
Form of Share Certificate
|
|
(d)
|
|
10
|
.1
|
|
Form of Indemnity Agreement between Herbalife International Inc.
and certain officers and directors of Herbalife International
Inc.
|
|
(a)
|
|
10
|
.2#
|
|
Herbalife International of America, Inc.s Senior Executive
Deferred Compensation Plan, effective January 1, 1996, as
amended
|
|
(a)
|
|
10
|
.3#
|
|
Herbalife International of America, Inc.s Management
Deferred Compensation Plan, effective January 1, 1996, as
amended
|
|
(a)
|
|
10
|
.4
|
|
Master Trust Agreement between Herbalife International of
America, Inc. and Imperial Trust Company, Inc., effective
January 1, 1996
|
|
(a)
|
|
10
|
.5#
|
|
Herbalife International Inc. 401K Profit Sharing Plan and Trust,
as amended
|
|
(a)
|
|
10
|
.6
|
|
Trust Agreement for Herbalife 2001 Executive Retention
Plan, effective March 15, 2001
|
|
(a)
|
|
10
|
.7#
|
|
Herbalife 2001 Executive Retention Plan, effective
March 15, 2001
|
|
(a)
|
|
10
|
.8
|
|
Notice to Distributors regarding Amendment to Agreements of
Distributorship, dated as of July 18, 2002 between
Herbalife International, Inc. and each Herbalife Distributor
|
|
(a)
|
|
10
|
.9
|
|
Indemnity agreement dated as of July 31, 2002, by and among
WH Holdings (Cayman Islands) Ltd., WH Acquisition Corp.,
Whitney & Co., LLC, Whitney V, L.P., Whitney
Strategic Partners V, L.P., GGC Administration, L.L.C.,
Golden Gate Private Equity, Inc., CCG Investments (BVI), L.P.,
CCG Associates-AI, LLC, CCG Investment Fund-AI, LP, CCG AV,
LLC-Series C, CCG AV, LLC-Series C, CCG AV,
LLC-Series E, CCG Associates-QP, LLC and WH Investments Ltd.
|
|
(a)
|
88
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Reference
|
|
|
10
|
.10#
|
|
Independent Directors Stock Option Plan of WH Holdings
(Cayman Islands) Ltd.
|
|
(a)
|
|
10
|
.11#
|
|
WH Holdings (Cayman Islands) Ltd. Stock Incentive Plan, as
restated, dated as of November 5, 2003
|
|
(a)
|
|
10
|
.12#
|
|
Non-Statutory Stock Option Agreement, dated as of April 3,
2003 between WH Holdings (Cayman Islands) Ltd. and Michael O.
Johnson
|
|
(a)
|
|
10
|
.13#
|
|
Side Letter Agreement dated as of April 3, 2003 by and
among WH Holdings (Cayman Islands) Ltd., Michael O. Johnson and
the Shareholders listed therein
|
|
(a)
|
|
10
|
.14#
|
|
Form of Non-Statutory Stock Option Agreement (Non-Executive
Agreement)
|
|
(a)
|
|
10
|
.15#
|
|
Form of Non-Statutory Stock Option Agreement (Executive
Agreement)
|
|
(a)
|
|
10
|
.16
|
|
Indemnity Agreement, dated as of February 9, 2004, among WH
Capital Corporation and Brett R. Chapman
|
|
(a)
|
|
10
|
.17
|
|
First Amendment to Amended and Restated WH Holdings (Cayman
Islands) Ltd. Stock Incentive Plan, dated November 5, 2003
|
|
(a)
|
|
10
|
.18
|
|
Registration Rights Agreement, dated as of July 31, 2002,
by and among WH Holdings (Cayman Islands) Ltd., Whitney V,
L.P., Whitney Strategic Partners V, L.P., WH Investments
Ltd., CCG Investments (BVI), L.P., CCG Associates-QP, LLC, CCG
Associates-AI, LLC, CCG Investment Fund-AI, L.P., CCG AV,
LLC-Series C and CCG AV, LLC-Series E.
|
|
(b)
|
|
10
|
.19
|
|
Share Purchase Agreement, dated as of July 31, 2002, by and
among WH Holdings (Cayman Islands) Ltd., Whitney Strategic
Partners V, L.P., WH Investments Ltd., Whitney V,
L.P., CCG Investments (BVI), L.P., CCG Associates-QP, LLC, CCG
Associates-AI, LLC, CCG Investment Fund-AI, LP, CCG AV,
LLC-Series C and CCG AV, LLC-Series E.
|
|
(b)
|
|
10
|
.20
|
|
Form of Indemnification Agreement between Herbalife Ltd. and the
directors and certain officers of Herbalife Ltd.
|
|
(c)
|
|
10
|
.21#
|
|
Herbalife Ltd. 2004 Stock Incentive Plan, effective
December 1, 2004
|
|
(c)
|
|
10
|
.22
|
|
Indemnification Agreement, dated as of December 13, 2004,
by and among Herbalife Ltd., Herbalife International, Inc.,
Whitney V, L.P., Whitney Strategic Partners V, L.P.,
CCG Investments (BVI), L.P., CCG Associates-QP, LLC, CCG
Associates-AI, LLC, CCG Investment Fund-AI, LP, CCG AV,
LLC-Series C, CCG AV, LLC-Series E, CCG CI, LLC and
GGC Administration, LLC.
|
|
(d)
|
|
10
|
.23#
|
|
Amendment No. 1 to Herbalife Ltd. 2004 Stock Incentive Plan
|
|
(e)
|
|
10
|
.24#
|
|
Form of Stock Bonus Award Agreement
|
|
(e)
|
|
10
|
.25#
|
|
Form of 2004 Herbalife Ltd. 2004 Stock Incentive Plan Stock
Option Agreement
|
|
(v)
|
|
10
|
.26#
|
|
Form of 2004 Herbalife Ltd. 2004 Stock Incentive Plan
Non-Employee Director Stock Option Agreement
|
|
(v)
|
|
10
|
.27#
|
|
Independent Directors Stock Unit Award Agreement
|
|
(f)
|
|
10
|
.28#
|
|
Amended and Restated Herbalife Ltd. 2005 Stock Incentive Plan
|
|
(g)
|
|
10
|
.29#
|
|
Form of Herbalife Ltd. 2005 Stock Incentive Plan Stock Unit
Award Agreement
|
|
(h)
|
|
10
|
.30#
|
|
Form of Herbalife Ltd. 2005 Stock Incentive Plan Stock
Appreciation Right Award Agreement
|
|
(h)
|
|
10
|
.31#
|
|
Form of Herbalife Ltd. 2005 Stock Incentive Plan Stock Unit
Award Agreement applicable to Mr. Michael O. Johnson
|
|
(i)
|
|
10
|
.32#
|
|
Form of Herbalife Ltd. 2005 Stock Incentive Plan Stock
Appreciation Right Award Agreement applicable to
Mr. Michael O. Johnson
|
|
(i)
|
|
10
|
.33#
|
|
Form of Herbalife Ltd. 2005 Stock Incentive Plan Stock Unit
Award Agreement applicable to Messrs. Brett R. Chapman and
Richard Goudis
|
|
(j)
|
|
10
|
.34#
|
|
Form of Herbalife Ltd. 2005 Stock Incentive Plan Stock
Appreciation Right Award Agreement applicable to
Messrs. Brett R. Chapman and Richard Goudis
|
|
(j)
|
89
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Reference
|
|
|
10
|
.35
|
|
Form of Credit Agreement, dated as of July 21, 2006, by and
among Herbalife International Inc., Herbalife Ltd., WH
Intermediate Holdings Ltd., HBL Ltd., WH Luxembourg Holdings
S.á.R.L., Herbalife International Luxembourg S.á.R.L.,
HLF Luxembourg Holdings, S.á.R.L., WH Capital Corporation,
WH Luxembourg Intermediate Holdings S.á.R.L., HV Holdings
Ltd., Herbalife Distribution Ltd., Herbalife Luxembourg
Distribution S.á.R.L., and the Subsidiary Guarantors party
thereto in favor of Merrill Lynch Capital Corporation, as
Collateral Agent
|
|
(k)
|
|
10
|
.36
|
|
Form of Security Agreement, dated as of July 21, 2006, by
and among Herbalife International, Inc., Herbalife Ltd., WH
Intermediate Holdings Ltd., HBL Ltd., WH Luxembourg Holdings
S.á.R.L., Herbalife International Luxembourg S.á.R.L.,
HLF Luxembourg Holdings, S.á.R.L., WH Capital Corporation,
WH Luxembourg Intermediate Holdings S.á.R.L., HV Holdings
Ltd., Herbalife Distribution Ltd., Herbalife Luxembourg
Distribution S.á.R.L., and the Subsidiary Guarantors party
thereto in favor of Merrill Lynch Capital Corporation, as
Collateral Agent
|
|
(k)
|
|
10
|
.37#
|
|
Stock Unit Agreement by and between Herbalife Ltd. and Brett R.
Chapman dated October 10, 2006
|
|
(l)
|
|
10
|
.38#
|
|
Amendment dated October 10, 2006, to Stock Option Agreement
by and between Herbalife Ltd. and Brett R. Chapman dated
September 1, 2004
|
|
(l)
|
|
10
|
.39#
|
|
Amendment dated October 10, 2006, to Stock Option Agreement
by and between Herbalife Ltd. and Brett R. Chapman dated
December 1, 2004
|
|
(l)
|
|
10
|
.40#
|
|
Amendment dated October 10, 2006, to Stock Option Agreement
by and between Herbalife Ltd. and Brett R. Chapman dated
April 27, 2005
|
|
(l)
|
|
10
|
.41#
|
|
Stock Unit Agreement by and between Herbalife Ltd. and Richard
P. Goudis dated October 24, 2006
|
|
(m)
|
|
10
|
.42#
|
|
Amendment dated October 24, 2006, to Stock Option Agreement
by and between Herbalife Ltd. and Richard P. Goudis dated
June 14, 2004
|
|
(m)
|
|
10
|
.43#
|
|
Amendment dated October 24, 2006, to Stock Option Agreement
by and between Herbalife Ltd. and Richard P. Goudis dated
September 1, 2004
|
|
(m)
|
|
10
|
.44#
|
|
Amendment dated October 24, 2006, to Stock Option Agreement
by and between Herbalife Ltd. and Richard P. Goudis dated
December 1, 2004
|
|
(m)
|
|
10
|
.45#
|
|
Amendment dated October 24, 2006, to Stock Option Agreement
by and between Herbalife Ltd. and Richard P. Goudis dated
April 27, 2005
|
|
(m)
|
|
10
|
.46#
|
|
Form of Herbalife Ltd. 2005 Stock Incentive Plan Stock Unit
Award Agreement applicable to Michael O Johnson
|
|
(n)
|
|
10
|
.47#
|
|
Form of Herbalife Ltd. 2005 Stock Incentive Plan Stock
Appreciation Right Award Agreement applicable to Michael O.
Johnson
|
|
(n)
|
|
10
|
.48#
|
|
Form of Herbalife Ltd. 2005 Stock Incentive Plan Stock Unit
Award Agreement applicable to Messrs. Richard P. Goudis and
Brett R. Chapman
|
|
(n)
|
|
10
|
.49#
|
|
Form of Herbalife Ltd. 2005 Stock Incentive Plan Stock
Appreciation Right Award Agreement applicable to
Messrs. Richard P. Goudis and Brett R. Chapman
|
|
(n)
|
|
10
|
.50#
|
|
Form of Herbalife Ltd. 2005 Stock Incentive Plan Stock Unit
Award Agreement
|
|
(n)
|
|
10
|
.51#
|
|
Form of Herbalife Ltd. 2005 Stock Incentive Plan Stock
Appreciation Right Award Agreement
|
|
(n)
|
|
10
|
.52
|
|
First Amendment dated June 21, 2007, to Form of Credit
Agreement, dated as of July 21, 2006, by and among
Herbalife International Inc., Herbalife Ltd., WH Intermediate
Holdings Ltd., HBL Ltd., WH Luxembourg Holdings S.á.R.L.,
Herbalife International Luxembourg S.á.R.L., HLF Luxembourg
Holdings, S.á.R.L., WH Capital Corporation, WH Luxembourg
Intermediate Holdings S.á.R.L., HV Holdings Ltd., Herbalife
Distribution Ltd., Herbalife Luxembourg Distribution
S.á.R.L., and the Subsidiary Guarantors party thereto in
favor of Merrill Lynch Capital Corporation, as Collateral Agent
|
|
(o)
|
90
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Reference
|
|
|
10
|
.53
|
|
Second Amendment dated September 17, 2007, to Form of
Credit Agreement, dated as of July 21, 2006, by and among
Herbalife International Inc., Herbalife Ltd., WH Intermediate
Holdings Ltd., HBL Ltd., WH Luxembourg Holdings S.á.R.L.,
Herbalife International Luxembourg S.á.R.L., HLF Luxembourg
Holdings, S.á.R.L., WH Capital Corporation, WH Luxembourg
Intermediate Holdings S.á.R.L., HV Holdings Ltd., Herbalife
Distribution Ltd., Herbalife Luxembourg Distribution
S.á.R.L., and the Subsidiary Guarantors party thereto in
favor of Merrill Lynch Capital Corporation, as Collateral Agent
|
|
(o)
|
|
10
|
.54
|
|
Third Amendment dated November 30, 2007, to Form of Credit
Agreement, dated as of July 21, 2006, by and among
Herbalife International Inc., Herbalife Ltd., WH Intermediate
Holdings Ltd., HBL Ltd., WH Luxembourg Holdings S.á.R.L.,
Herbalife International Luxembourg S.á.R.L., HLF Luxembourg
Holdings, S.á.R.L., WH Capital Corporation, WH Luxembourg
Intermediate Holdings S.á.R.L., HV Holdings Ltd., Herbalife
Distribution Ltd., Herbalife Luxembourg Distribution
S.á.R.L., and the Subsidiary Guarantors party thereto in
favor of Merrill Lynch Capital Corporation, as Collateral Agent
|
|
(p)
|
|
10
|
.55#
|
|
Herbalife Ltd. Employee Stock Purchase Plan
|
|
(p)
|
|
10
|
.56
|
|
Fourth Amendment dated February 21, 2008, to Form of Credit
Agreement, dated as of July 21, 2006, by and among
Herbalife International Inc., Herbalife Ltd., WH Intermediate
Holdings Ltd., HBL Ltd., WH Luxembourg Holdings S.á.R.L.,
Herbalife International Luxembourg S.á.R.L., HLF Luxembourg
Holdings, S.á.R.L., WH Capital Corporation, WH Luxembourg
Intermediate Holdings S.á.R.L., HV Holdings Ltd., Herbalife
Distribution Ltd., Herbalife Luxembourg Distribution
S.á.R.L., and the Subsidiary Guarantors party thereto in
favor of Merrill Lynch Capital Corporation, as Collateral Agent
|
|
(p)
|
|
10
|
.57#
|
|
Employment Agreement dated as of March 27, 2008 between
Michael O. Johnson and Herbalife International of America, Inc.
|
|
(q)
|
|
10
|
.58#
|
|
Stock Unit Award Agreement by and between Herbalife Ltd. and
Michael O. Johnson, dated March 27, 2008.
|
|
(q)
|
|
10
|
.59#
|
|
Stock Appreciation Right Award Agreement by and between
Herbalife Ltd. and Michael O. Johnson, dated March 27, 2008.
|
|
(q)
|
|
10
|
.60#
|
|
Stock Appreciation Right Award Agreement by and between
Herbalife Ltd. and Michael O. Johnson, dated March 27, 2008.
|
|
(q)
|
|
10
|
.61
|
|
Fifth Amendment dated September 25, 2008, to Form of Credit
Agreement, dated as of July 21, 2006, by and among
Herbalife International Inc., Herbalife Ltd., WH Intermediate
Holdings Ltd., HBL Ltd., WH Luxembourg Holdings S.á.R.L.,
Herbalife International Luxembourg S.á.R.L., HLF Luxembourg
Holdings, S.á.R.L., WH Capital Corporation, WH Luxembourg
Intermediate Holdings S.á.R.L., HV Holdings Ltd., Herbalife
Distribution Ltd., Herbalife Luxembourg Distribution
S.á.R.L., and the Subsidiary Guarantors party thereto in
favor of Merrill Lynch Capital Corporation, as Collateral Agent
|
|
(r)
|
|
10
|
.62#
|
|
Amendment to Herbalife International Inc. 401K Profit Sharing
Plan and Trust
|
|
(s)
|
|
10
|
.63#
|
|
Form of Independent Directors Stock Appreciation Right Award
Agreement
|
|
(t)
|
|
10
|
.64#
|
|
Herbalife Ltd. Amended and Restated Independent Directors
Deferred Compensation and Stock Unit Plan
|
|
(t)
|
|
10
|
.65#
|
|
Amended and Restated Employment Agreement by and between Richard
P. Goudis and Herbalife International of America, Inc., dated as
of January 1, 2010.
|
|
(u)
|
|
10
|
.66#
|
|
Severance Agreement by and between Desmond Walsh and Herbalife
International of America, Inc., dated as of January 1, 2010.
|
|
(u)
|
|
10
|
.67#
|
|
Form of Herbalife Ltd. 2005 Stock Incentive Plan Stock Unit
Award Agreement
|
|
(v)
|
|
10
|
.68#
|
|
Amended and Restated Non-Management Directors Compensation Plan
|
|
(v)
|
|
10
|
.69#
|
|
Amendment to Form of Non-Employee Directors Stock Appreciation
Right Award Agreement
|
|
(v)
|
|
10
|
.70#
|
|
Amended and Restated Employment Agreement by and between Brett
Chapman and Herbalife International of America, Inc., dated as
of June 1, 2010.
|
|
(w)
|
91
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Reference
|
|
|
10
|
.71#
|
|
First Amendment to the Amended and Restated Employment Agreement
by and between Richard P. Goudis and Herbalife International of
America, Inc., dated as of December 28, 2010.
|
|
(x)
|
|
10
|
.72#
|
|
First Amendment to the Amended and Restated Employment Agreement
by and between Brett R.Chapman and Herbalife International of
America, Inc., dated as of December 26, 2010.
|
|
(x)
|
|
21
|
.1
|
|
Subsidiaries of the Registrant
|
|
*
|
|
23
|
.1
|
|
Consent of KPMG LLP Independent Registered Public
Accounting Firm
|
|
*
|
|
31
|
.1
|
|
Rule 13a-14(a)
Certification of Chief Executive Officer
|
|
*
|
|
31
|
.2
|
|
Rule 13a-14(a)
Certification of Chief Financial Officer
|
|
*
|
|
32
|
.1
|
|
Section 1350 Certification of Chief Executive Officer
|
|
*
|
|
32
|
.2
|
|
Section 1350 Certification of Chief Financial Officer
|
|
*
|
|
101
|
.INS
|
|
XBRL Instance Document
|
|
**
|
|
101
|
.SCH
|
|
XBRL Taxonomy Extension Schema Document
|
|
**
|
|
101
|
.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
**
|
|
101
|
.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
**
|
|
101
|
.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
**
|
|
101
|
.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
**
|
|
|
|
* |
|
Filed herewith. |
|
# |
|
Management contract or compensatory plan or arrangement. |
|
** |
|
Furnished, not filed |
|
(a) |
|
Previously filed on October 1, 2004 as an Exhibit to the
Companys registration statement on
Form S-1
(File No. 333-119485)
and is incorporated herein by reference. |
|
(b) |
|
Previously filed on November 9, 2004 as an Exhibit to
Amendment No. 2 to the Companys registration statement on
Form S-1
(File No.
333-119485)
and is incorporated herein by reference. |
|
(c) |
|
Previously filed on December 2, 2004 as an Exhibit to
Amendment No. 4 to the Companys registration statement on
Form S-1
(File No.
333-119485)
and is incorporated herein by reference. |
|
(d) |
|
Previously filed on December 14, 2004 as an Exhibit to
Amendment No. 5 to the Companys registration
statement on
Form S-1
(File No.
333-119485)
and is incorporated herein by reference. |
|
(e) |
|
Previously filed on February 17, 2005 as an Exhibit to the
Companys registration statement on
Form S-8
(File
No. 333-122871)
and is incorporated herein by reference. |
|
(f) |
|
Previously filed on February 28, 2006 as an Exhibit to the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2005 and is incorporated
herein by reference. |
|
(g) |
|
Previously filed on April 30, 2010 as an Exhibit to the
Companys Current Report on
Form 8-K
and is incorporated herein by reference. |
|
(h) |
|
Previously filed on March 29, 2006 as an Exhibit to the
Companys Current Report on
Form 8-K
and is incorporated herein by reference. |
|
(i) |
|
Previously filed on March 29, 2006 as an Exhibit to the
Companys Current Report on
Form 8-K
and is incorporated herein by reference. |
|
(j) |
|
Previously filed on March 31, 2006 as an Exhibit to the
Companys Current Report on
Form 8-K
and is incorporated herein by reference. |
|
(k) |
|
Previously filed on November 13, 2006 as an Exhibit to the
Companys Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2006 and is
incorporated by reference. |
92
|
|
|
(l) |
|
Previously filed on October 12, 2006 as an Exhibit to the
Companys Current Report on
Form 8-K
and is incorporated herein by reference. |
|
(m) |
|
Previously filed on October 26, 2006 as an Exhibit to the
Companys Current Report on
Form 8-K
and is incorporated herein by reference. |
|
(n) |
|
Previously filed on May 29, 2007 as an Exhibit to the
Companys Current Report on
Form 8-K
and is incorporated herein by reference. |
|
(o) |
|
Previously filed on November 6, 2007 as an Exhibit to the
Companys Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2007 and is
incorporated by reference. |
|
(p) |
|
Previously filed on February 26, 2008 as an Exhibit to the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2007 and is incorporated
herein by reference. |
|
(q) |
|
Previously filed on April 7, 2008 as an Exhibit to the
Companys Current Report on
Form 8-K
and is incorporated herein by reference. |
|
(r) |
|
Previously filed on November 3, 2008 as an Exhibit to the
Companys Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2008 and is
incorporated by reference. |
|
(s) |
|
Previously filed on May 4, 2009 as an Exhibit to the
Companys Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2009 and is incorporated by
reference. |
|
(t) |
|
Previously filed on May 3, 2010 as an Exhibit to the
Companys Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2010 and is incorporated by
reference. |
|
(u) |
|
Previously filed on June 17, 2010 as an Exhibit to the
Companys Current Report on
Form 8-K
and is incorporated herein by reference. |
|
(v) |
|
Previously filed on August 2, 2010 as an Exhibit to the
Companys Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2010 and is incorporated by
reference. |
|
(w) |
|
Previously filed on August 3, 2010 as an Exhibit to the
Companys Current Report on
Form 8-K
and is incorporated herein by reference. |
|
(x) |
|
Previously filed on December 29, 2010 as an Exhibit to the
Companys Current Report on
Form 8-K
and is incorporated herein by reference. |
93
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Herbalife Ltd.:
We have audited the accompanying consolidated balance sheets of
Herbalife Ltd. and subsidiaries (the Company) as of
December 31, 2010 and 2009, and the related consolidated
statements of income, changes in shareholders equity and
comprehensive income, and cash flows for each of the years in
the three-year period ended December 31, 2010. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Herbalife Ltd. and subsidiaries as of
December 31, 2010 and 2009, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2010, in conformity
with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Herbalife Ltd. and subsidiaries internal control over
financial reporting as of December 31, 2010, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated
February 22, 2011, expressed an unqualified opinion on the
effectiveness of the Companys internal control over
financial reporting.
Los Angeles, California
February 22, 2011
94
HERBALIFE
LTD.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except share amounts)
|
|
|
ASSETS
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
190,550
|
|
|
$
|
150,801
|
|
Receivables, net of allowance for doubtful accounts of $3,202
(2010) and $3,982 (2009)
|
|
|
85,612
|
|
|
|
76,958
|
|
Inventories
|
|
|
182,467
|
|
|
|
145,962
|
|
Prepaid expenses and other current assets
|
|
|
93,963
|
|
|
|
101,181
|
|
Deferred income taxes
|
|
|
42,994
|
|
|
|
38,600
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
595,586
|
|
|
|
513,502
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment at cost:
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
|
5,409
|
|
|
|
5,254
|
|
Equipment
|
|
|
272,881
|
|
|
|
266,555
|
|
Leasehold improvements
|
|
|
66,049
|
|
|
|
53,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
344,339
|
|
|
|
325,401
|
|
Less: accumulated depreciation and amortization
|
|
|
(166,912
|
)
|
|
|
(147,392
|
)
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
177,427
|
|
|
|
178,009
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan assets
|
|
|
18,536
|
|
|
|
17,410
|
|
Other assets
|
|
|
25,880
|
|
|
|
21,306
|
|
Deferred financing costs, net of accumulated amortization of
$2,279 (2010) and $1,778 (2009)
|
|
|
998
|
|
|
|
1,498
|
|
Marketing related intangibles and other intangible assets, net
|
|
|
310,894
|
|
|
|
311,782
|
|
Goodwill
|
|
|
102,899
|
|
|
|
102,543
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,232,220
|
|
|
$
|
1,146,050
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
43,784
|
|
|
$
|
37,330
|
|
Royalty overrides
|
|
|
162,141
|
|
|
|
144,689
|
|
Accrued compensation
|
|
|
69,376
|
|
|
|
65,043
|
|
Accrued expenses
|
|
|
141,867
|
|
|
|
107,943
|
|
Current portion of long-term debt
|
|
|
3,120
|
|
|
|
12,402
|
|
Advance sales deposits
|
|
|
35,145
|
|
|
|
22,261
|
|
Income taxes payable
|
|
|
15,383
|
|
|
|
40,298
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
470,816
|
|
|
|
429,966
|
|
NON-CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
175,046
|
|
|
|
237,931
|
|
Deferred compensation plan liability
|
|
|
20,167
|
|
|
|
16,629
|
|
Deferred income taxes
|
|
|
55,572
|
|
|
|
77,613
|
|
Other non-current liabilities
|
|
|
23,407
|
|
|
|
24,600
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
745,008
|
|
|
|
786,739
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
Common shares, $0.002 par value, 500.0 million shares
authorized, 58.9 million (2010) and 60.2 million
(2009) shares outstanding
|
|
|
118
|
|
|
|
120
|
|
Paid-in capital in excess of par value
|
|
|
257,375
|
|
|
|
222,882
|
|
Accumulated other comprehensive loss
|
|
|
(27,285
|
)
|
|
|
(23,396
|
)
|
Retained earnings
|
|
|
257,004
|
|
|
|
159,705
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
487,212
|
|
|
|
359,311
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
1,232,220
|
|
|
$
|
1,146,050
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to consolidated financial statements.
95
HERBALIFE
LTD.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Product sales
|
|
$
|
2,337,493
|
|
|
$
|
1,993,617
|
|
|
$
|
2,032,293
|
|
Shipping & handling revenues
|
|
|
396,733
|
|
|
|
330,960
|
|
|
|
326,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
2,734,226
|
|
|
|
2,324,577
|
|
|
|
2,359,213
|
|
Cost of sales
|
|
|
558,811
|
|
|
|
493,134
|
|
|
|
458,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,175,415
|
|
|
|
1,831,443
|
|
|
|
1,900,817
|
|
Royalty overrides
|
|
|
900,248
|
|
|
|
761,501
|
|
|
|
796,718
|
|
Selling, general and administrative expenses
|
|
|
887,655
|
|
|
|
773,911
|
|
|
|
771,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
387,512
|
|
|
|
296,031
|
|
|
|
332,252
|
|
Interest expense
|
|
|
9,664
|
|
|
|
9,613
|
|
|
|
20,115
|
|
Interest income
|
|
|
2,247
|
|
|
|
4,510
|
|
|
|
6,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
380,095
|
|
|
|
290,928
|
|
|
|
319,030
|
|
Income taxes
|
|
|
89,562
|
|
|
|
87,582
|
|
|
|
97,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
290,533
|
|
|
$
|
203,346
|
|
|
$
|
221,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
4.88
|
|
|
$
|
3.32
|
|
|
$
|
3.47
|
|
Diluted
|
|
$
|
4.67
|
|
|
$
|
3.22
|
|
|
$
|
3.36
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
59,502
|
|
|
|
61,221
|
|
|
|
63,785
|
|
Diluted
|
|
|
62,256
|
|
|
|
63,097
|
|
|
|
65,769
|
|
See the accompanying notes to consolidated financial statements.
96
HERBALIFE
LTD.
AND
COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Common
|
|
|
Excess of
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Shareholders
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
par Value
|
|
|
Loss
|
|
|
Earnings
|
|
|
Equity
|
|
|
Income
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Balance at December 31, 2007
|
|
$
|
129
|
|
|
$
|
160,872
|
|
|
$
|
(3,947
|
)
|
|
$
|
25,190
|
|
|
$
|
182,244
|
|
|
|
|
|
Issuance of 1.7 million common shares from exercise of
stock options, SARs, warrants, employee stock purchase plan, and
restricted stock grants
|
|
|
3
|
|
|
|
19,505
|
|
|
|
|
|
|
|
|
|
|
|
19,508
|
|
|
|
|
|
Excess tax benefit from exercise of stock options, SARs and
restricted stock grants
|
|
|
|
|
|
|
15,289
|
|
|
|
|
|
|
|
|
|
|
|
15,289
|
|
|
|
|
|
Additional capital from share based compensation
|
|
|
|
|
|
|
17,788
|
|
|
|
|
|
|
|
|
|
|
|
17,788
|
|
|
|
|
|
Repurchases of common shares
|
|
|
(9
|
)
|
|
|
(15,739
|
)
|
|
|
|
|
|
|
(123,173
|
)
|
|
|
(138,921
|
)
|
|
|
|
|
Dividends ($0.80 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,700
|
)
|
|
|
(50,700
|
)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
221,190
|
|
|
|
221,190
|
|
|
$
|
221,190
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
(24,770
|
)
|
|
|
|
|
|
|
(24,770
|
)
|
|
|
(24,770
|
)
|
Unrealized gain on derivatives, net of income taxes of $205
|
|
|
|
|
|
|
|
|
|
|
103
|
|
|
|
|
|
|
|
103
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
196,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
123
|
|
|
$
|
197,715
|
|
|
$
|
(28,614
|
)
|
|
$
|
72,507
|
|
|
$
|
241,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 0.9 million common shares from exercise of
stock options, SARs, restricted stock grants, and employee stock
purchase plan
|
|
|
2
|
|
|
|
7,882
|
|
|
|
|
|
|
|
|
|
|
|
7,884
|
|
|
|
|
|
Excess tax benefit from exercise of stock options, SARs and
restricted stock grants
|
|
|
|
|
|
|
3,587
|
|
|
|
|
|
|
|
|
|
|
|
3,587
|
|
|
|
|
|
Additional capital from share based compensation
|
|
|
|
|
|
|
20,907
|
|
|
|
|
|
|
|
|
|
|
|
20,907
|
|
|
|
|
|
Repurchases of common shares
|
|
|
(5
|
)
|
|
|
(8,269
|
)
|
|
|
|
|
|
|
(66,367
|
)
|
|
|
(74,641
|
)
|
|
|
|
|
Dividends and dividend equivalents ($0.80 per share)
|
|
|
|
|
|
|
1,060
|
|
|
|
|
|
|
|
(49,781
|
)
|
|
|
(48,721
|
)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203,346
|
|
|
|
203,346
|
|
|
$
|
203,346
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
5,248
|
|
|
|
|
|
|
|
5,248
|
|
|
|
5,248
|
|
Unrealized loss on derivatives, net of income taxes of ($40)
|
|
|
|
|
|
|
|
|
|
|
(30
|
)
|
|
|
|
|
|
|
(30
|
)
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
208,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
120
|
|
|
$
|
222,882
|
|
|
$
|
(23,396
|
)
|
|
$
|
159,705
|
|
|
$
|
359,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 1.7 million common shares from exercise of
stock options, SARs and restricted stock grants
|
|
|
4
|
|
|
|
15,305
|
|
|
|
|
|
|
|
|
|
|
|
15,309
|
|
|
|
|
|
Excess tax benefit from exercise of stock options, SARs and
restricted stock grants
|
|
|
|
|
|
|
16,727
|
|
|
|
|
|
|
|
|
|
|
|
16,727
|
|
|
|
|
|
Additional capital from share based compensation
|
|
|
|
|
|
|
22,969
|
|
|
|
|
|
|
|
|
|
|
|
22,969
|
|
|
|
|
|
Repurchases of common shares
|
|
|
(6
|
)
|
|
|
(21,088
|
)
|
|
|
|
|
|
|
(138,914
|
)
|
|
|
(160,008
|
)
|
|
|
|
|
Dividends and dividend equivalents ($0.90 per share)
|
|
|
|
|
|
|
580
|
|
|
|
|
|
|
|
(54,320
|
)
|
|
|
(53,740
|
)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
290,533
|
|
|
|
290,533
|
|
|
$
|
290,533
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
583
|
|
|
|
|
|
|
|
583
|
|
|
|
583
|
|
Unrealized loss on derivatives, net of income taxes of ($1,222)
|
|
|
|
|
|
|
|
|
|
|
(4,472
|
)
|
|
|
|
|
|
|
(4,472
|
)
|
|
|
(4,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
286,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
118
|
|
|
$
|
257,375
|
|
|
$
|
(27,285
|
)
|
|
$
|
257,004
|
|
|
$
|
487,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to consolidated financial statements.
97
HERBALIFE
LTD.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
290,533
|
|
|
$
|
203,346
|
|
|
$
|
221,190
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
68,621
|
|
|
|
62,437
|
|
|
|
48,732
|
|
Excess tax benefits from share-based payment arrangements
|
|
|
(16,410
|
)
|
|
|
(3,266
|
)
|
|
|
(14,602
|
)
|
Share based compensation expenses
|
|
|
22,969
|
|
|
|
20,907
|
|
|
|
17,788
|
|
Amortization of discount and deferred financing costs
|
|
|
500
|
|
|
|
491
|
|
|
|
481
|
|
Deferred income taxes
|
|
|
(24,631
|
)
|
|
|
(11,226
|
)
|
|
|
(4,103
|
)
|
Unrealized foreign exchange transaction loss (gain)
|
|
|
(7,142
|
)
|
|
|
4,809
|
|
|
|
15,243
|
|
Foreign exchange loss from adoption of highly inflationary
accounting in Venezuela
|
|
|
15,131
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
2,527
|
|
|
|
340
|
|
|
|
1,963
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(7,593
|
)
|
|
|
2,361
|
|
|
|
(18,529
|
)
|
Inventories
|
|
|
(31,516
|
)
|
|
|
(1,742
|
)
|
|
|
(27,572
|
)
|
Prepaid expenses and other current assets
|
|
|
10,254
|
|
|
|
(7,781
|
)
|
|
|
(23,966
|
)
|
Other assets
|
|
|
(3,485
|
)
|
|
|
2,109
|
|
|
|
1,800
|
|
Accounts payable
|
|
|
6,650
|
|
|
|
(9,500
|
)
|
|
|
8,922
|
|
Royalty overrides
|
|
|
15,732
|
|
|
|
9,102
|
|
|
|
13,375
|
|
Accrued expenses and accrued compensation
|
|
|
31,092
|
|
|
|
(3,461
|
)
|
|
|
12,412
|
|
Advance sales deposits
|
|
|
12,439
|
|
|
|
8,779
|
|
|
|
1,917
|
|
Income taxes payable
|
|
|
(8,807
|
)
|
|
|
4,700
|
|
|
|
24,191
|
|
Deferred compensation plan liability
|
|
|
3,538
|
|
|
|
2,651
|
|
|
|
(6,254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
380,402
|
|
|
|
285,056
|
|
|
|
272,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(68,125
|
)
|
|
|
(59,768
|
)
|
|
|
(88,601
|
)
|
Proceeds from sale of property, plant and equipment
|
|
|
115
|
|
|
|
102
|
|
|
|
76
|
|
Deferred compensation plan assets
|
|
|
(1,126
|
)
|
|
|
(1,656
|
)
|
|
|
3,561
|
|
Acquisition of business
|
|
|
|
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
(69,136
|
)
|
|
|
(71,322
|
)
|
|
|
(84,964
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(53,740
|
)
|
|
|
(48,721
|
)
|
|
|
(50,700
|
)
|
Borrowings from long-term debt
|
|
|
427,000
|
|
|
|
211,974
|
|
|
|
118,000
|
|
Principal payments on long-term debt
|
|
|
(499,451
|
)
|
|
|
(313,089
|
)
|
|
|
(167,481
|
)
|
Increase in deferred financing costs
|
|
|
|
|
|
|
|
|
|
|
(75
|
)
|
Share repurchases
|
|
|
(160,008
|
)
|
|
|
(74,641
|
)
|
|
|
(138,921
|
)
|
Excess tax benefits from share-based payment arrangements
|
|
|
16,410
|
|
|
|
3,266
|
|
|
|
14,602
|
|
Proceeds from exercise of stock options and sale of stock under
employee stock purchase plan
|
|
|
15,309
|
|
|
|
7,884
|
|
|
|
19,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN FINANCING ACTIVITIES
|
|
|
(254,480
|
)
|
|
|
(213,327
|
)
|
|
|
(205,067
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
|
|
(17,037
|
)
|
|
|
(453
|
)
|
|
|
(19,517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
39,749
|
|
|
|
(46
|
)
|
|
|
(36,560
|
)
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
150,801
|
|
|
|
150,847
|
|
|
|
187,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
190,550
|
|
|
$
|
150,801
|
|
|
$
|
150,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH PAID DURING THE YEAR
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
9,295
|
|
|
$
|
10,011
|
|
|
$
|
17,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
111,497
|
|
|
$
|
95,139
|
|
|
$
|
73,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON CASH ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired under capital leases and other long-term debt
|
|
$
|
576
|
|
|
$
|
388
|
|
|
$
|
36,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to consolidated financial statements.
98
HERBALIFE
LTD.
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 2.1 million
independent distributors, except in China, where the Company
currently sells its products through retail stores, sales
representatives, sales employees and licensed business
providers. The Company reports revenue in six geographic
regions: North America, which consists of the U.S., Canada and
Jamaica; Mexico; South and Central America; EMEA, which consists
of Europe, the Middle East and Africa; Asia Pacific (excluding
China) which consists of Asia, New Zealand and Australia; and
China.
The Companys consolidated financial statements refer to
Herbalife and its subsidiaries.
New
Accounting Pronouncements
In December 2010, the Financial Accounting Standards Board, or
FASB, issued Accounting Standards Update, or ASU,
2010-28,
Intangibles-Goodwill and Other (Topic 350): When to Perform
Step 2 of the Goodwill Impairment Test for Reporting Units with
Zero or Negative Carrying Amounts (a consensus of the FASB
Emerging Issues Task Force) or ASU
2010-28. ASU
2010-28
provides amendments to Accounting Standards Codification, or
ASC, Topic 350, Intangibles Goodwill and
Other. Pursuant to ASU
2010-28, if
any entity during Step 1 of a goodwill impairment test
determines reporting units with zero or negative carrying
amounts exist, then they should perform Step 2 of the goodwill
impairment test if it is more likely than not that a goodwill
impairment exists. In determining whether it is more likely than
not that a goodwill impairment exists, an entity should consider
whether there are any adverse qualitative factors indicating
that an impairment may exist. The qualitative factors are
consistent with the existing guidance and examples in ASC Topic
350, which requires that goodwill of a reporting unit be tested
for impairment between annual tests if an event occurs or
circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying amount. As a
result, goodwill impairments may be reported sooner or more
often compared to current practice. ASU
2010-28 is
effective for fiscal years and interim periods within those
years, beginning after December 15, 2010, with early
adoption not permitted. The Company does not expect that the
adoption of ASU
2010-28 will
have a material impact on the Companys consolidated
financial statements.
Significant
Accounting Policies
In June 2009, the FASB issued the FASB Accounting Standards
Codification, or the Codification, which is the single
source of authoritative nongovernmental U.S. generally
accepted accounting principles, or GAAP. Rules and interpretive
releases of the SEC under authority of federal securities laws
are also sources of authoritative GAAP for SEC reporting
companies. The Codification, which changes the referencing of
financial standards, became effective for interim and annual
periods ending on or after September 15, 2009. All existing
non-SEC accounting standards are superseded as described in the
Codification. All other non-SEC accounting literature not
included in the Codification is non-authoritative. The adoption
of the Codification did not have a significant impact on the
Companys consolidated financial statements and references
to standards issued prior to the Codification have been replaced
with a description of the applicable FASB authoritative guidance
or with the updated accounting standard codification number.
Consolidation
Policy
The consolidated financial statements include the accounts of
Herbalife Ltd. and its subsidiaries. All significant
intercompany transactions and accounts have been eliminated.
99
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Business
Combinations
In December 2007, the FASB issued authoritative guidance
relating to Business Combinations that established principles
and requirements for how an acquirer recognizes and measures in
its financial statements the identifiable assets acquired, the
liabilities assumed, any non controlling interest in the
acquiree and the goodwill acquired. The guidance also modifies
the recognition for preacquisition contingencies, such as
environmental or legal issues, restructuring plans and acquired
research and development value in purchase accounting. The
guidance requires the acquirer to recognize changes in the
amount of its deferred tax benefits that are recognizable
because of a business combination either in income from
continuing operations in the period of the combination or
directly in contributed capital, depending on the circumstances.
The guidance also establishes disclosure requirements which will
enable users to evaluate the nature and financial effects of the
business combination. The Company adopted the guidance on
January 1, 2009, which did not have a material impact on
its consolidated financial statements.
During August 2009, the Company purchased certain assets of
Micelle Laboratories, Inc., a Lake Forest, California contract
manufacturer of food and nutritional supplements. The Company
purchased the assets in order to strengthen its global
manufacturing capabilities. The purchase price is not material
to the Companys consolidated financial statements and for
accounting purposes the acquisition, or the Micelle Acquisition,
was recorded as a business combination pursuant to FASB ASC 805,
Business Combinations.
Foreign
Currency Translation and Transactions
In the majority of the countries that the Company operates, the
functional currency is the local currency. The Companys
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. Foreign exchange translation adjustments are included in
accumulated other comprehensive loss on the accompanying
consolidated balance sheets. Foreign currency transaction gains
and losses, which include the cost of foreign currency
derivative contracts and the related settlement gains and losses
but excluding certain foreign currency derivatives designated as
cash flow hedges as discussed in Note 11, Derivative
Instruments and Hedging Activities, are included in selling,
general and administrative expenses in the accompanying
consolidated statements of income. The Company recorded net
foreign currency transaction losses of $7.3 million,
$7.7 million, and $5.7 million, for the years ended
December 31, 2010, 2009, and 2008, respectively, which
includes the foreign exchange impact relating to the
Companys Venezuelan subsidiary, Herbalife Venezuela.
Herbalife Venezuelas foreign currency financial statement
impact is discussed further below within this Note.
Forward
Exchange Contracts, Option Contracts and Interest Rate
Swaps
The Company enters into foreign currency derivative instruments
such as forward exchange contracts and option contracts in
managing its foreign exchange risk on sales to distributors,
purchase commitments denominated in foreign currencies,
intercompany transactions and bank loans. The Company also
enters into interest rate swaps in managing its interest rate
risk on its variable rate term loan. The Company does not use
the contracts for trading purposes.
In accordance with FASB ASC Topic 815, Derivatives and
Hedging, or ASC 815, the Company designates certain of
its derivative instruments as cash flow hedges and formally
documents its hedge relationships, including identification of
the hedging instruments and the hedged items, as well as its
risk management objectives and strategies for undertaking the
hedge transaction, at the time the derivative contract is
executed. The Company assesses the effectiveness of the hedge
both at inception and on an ongoing basis and determines whether
the hedge is highly or perfectly effective in offsetting changes
in cash flows of the hedged item. The Company records the
effective portion of changes in the estimated fair value in
accumulated other comprehensive income (loss) and subsequently
reclassifies the related amount of accumulated other
comprehensive income (loss) to earnings when the hedged item and
underlying transaction impacts earnings. If it is determined
that a derivative has ceased to be a highly effective hedge, the
Company will discontinue hedge accounting for such transaction.
For derivatives that are not designated as hedges, all changes
in estimated fair value are recognized in the consolidated
statements of income.
100
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On January 1, 2009, the Company adopted FASB authoritative
guidance that requires additional financial statement
disclosures on derivative instruments as required by
ASC 815. This adoption did not have any financial impact on
the Companys consolidated financial statements and only
required additional financial statement disclosures on
derivative instruments. The Company has applied the requirements
of this standard on a prospective basis as disclosed in
Note 11, Derivative Instruments and Hedging
Activities. Accordingly, disclosures related to annual
periods prior to the date of adoption have not been presented.
Cash and
Cash Equivalents
The Company considers all highly liquid investments purchased
with a maturity of three months or less to be cash equivalents.
Cash and cash equivalents are comprised primarily of money
market accounts and foreign and domestic bank accounts. To
reduce its credit risk, the Company monitors the credit standing
of the financial institutions that hold the Companys cash
and cash equivalents.
In May 2010, the FASB issued ASU
2010-19,
Foreign Currency Issues: Multiple Foreign Currency Exchange
Rates, or ASU
2010-19,
which codifies the SEC staff announcement made at the
March 18, 2010, Emerging Issues Task Force meeting. ASU
2010-19
provides the SEC staffs view on certain foreign currency
issues relating to investments in Venezuela. ASU
2010-19
became effective on March 18, 2010. The Company has adopted
this guidance. During fiscal year 2009, due to the difference
between the foreign currency remeasurement rate and translation
rate relating to Herbalife Venezuela, the cash and cash
equivalents reported on the Companys consolidated balance
sheet at December 31, 2009, was $9.9 million greater
than the U.S. dollar amount residing in Herbalife
Venezuelas U.S. dollar bank account and therefore did
not necessarily reflect the true purchasing power of the
U.S. dollar cash and cash equivalents. Herbalife
Venezuelas financial statement impact relating to the
Companys reported consolidated cash and cash equivalents
and its foreign exchange transactions is discussed further below
within this Note.
Accounts
Receivable
Accounts receivable consist principally of receivables from
credit card companies, arising from the sale of products to the
Companys distributors, and receivables from importers, who
are utilized in a limited number of countries to sell products
to distributors. Due to the geographic dispersion of its credit
card receivables, the collection risk is not considered to be
significant. The receivables from credit card companies were
$51.4 million and $43.4 million as of
December 31, 2010 and 2009, respectively. Substantially all
of the receivables from credit card companies were current as of
December 31, 2010 and 2009. Although receivables from
importers can be significant, the Company performs ongoing
credit evaluations of its importers and maintains an allowance
for potential credit losses. The Company considers customer
credit-worthiness, past and current transaction history with the
customer, contractual terms, current economic industry trends,
and changes in customer payment terms when determining whether
collectibility is reasonably assured and whether to record
allowances for its receivables. If the financial condition of
the Companys customers deteriorates and adversely affects
their ability to make payments, additional allowances will be
recorded. The Company believes that it provides adequate
allowances for receivables from its distributors and importers
which are not material to its consolidated financial statements.
As of December 31, 2010, the majority of the Companys
total outstanding accounts receivable were current.
Fair
Value of Financial Instruments
Effective January 1, 2008, the Company adopted FASB
authoritative guidance as it applies to the nonfinancial assets
and nonfinancial liabilities. The FASB authoritative guidance
clarifies the definition of fair value, prescribes methods for
measuring fair value, establishes a fair value hierarchy based
on the inputs used to measure fair value, and expands
disclosures about fair value measurements. As disclosed in
Note 14, Fair Value Measurements, the Company has
properly measured and disclosed its financial instruments.
101
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has estimated the fair value of its financial
instruments using the following methods and assumptions:
|
|
|
|
|
The carrying amounts of cash and cash equivalents, receivables
and accounts payable approximate fair value due to the
short-term maturities of these instruments;
|
|
|
|
The fair value of option and forward contracts are based on
dealer quotes; and
|
|
|
|
The carrying values of the Companys variable rate debt
instruments are considered to approximate their fair values
because interest rates of those instruments approximate current
rates offered to the Company.
|
Inventories
Inventories are stated at lower of cost (on the
first-in,
first-out basis) or market. The Company had reserves for
obsolete and slow moving inventory totaling $9.4 million
and $9.3 million as of December 31, 2010 and 2009,
respectively.
Deferred
Financing Costs
Deferred financing costs represent fees and expenses related to
the borrowing of the Companys long-term debt and are
amortized under the effective interest method over the term of
the related debt.
Long-Lived
Assets
Depreciation of furniture, fixtures, and equipment (includes
computer hardware and software) is computed on a straight-line
basis over the estimated useful lives of the related assets,
which range from three to ten years. Leasehold improvements are
amortized on a straight-line basis over the life of the related
asset or the term of the lease, whichever is shorter.
Depreciation of furniture, fixtures, equipment, and amortization
of leasehold improvements totaled $67.7 million,
$62.2 million, and $48.7 million, for the years ended
December 31, 2010, 2009 and 2008, respectively.
Long-lived assets are reviewed for impairment, based on
undiscounted cash flows, whenever events or changes in
circumstances indicate that the carrying amount of such assets
may not be recoverable. Measurement of an impairment loss is
based on the estimated fair value of the asset.
Goodwill and marketing related intangible assets with indefinite
lives are evaluated on an annual basis for impairment or more
frequently if events or changes in circumstances indicate that
the asset might be impaired. During the years ended
December 31, 2010, 2009 and 2008, there were no goodwill or
marketing related intangible asset impairments. At
December 31, 2010, 2009 and 2008, the marketing related
intangible asset balance was $310.0 million. As of
December 31, 2010, 2009, and 2008, the goodwill balance was
$102.9 million, $102.5 million, and
$110.7 million, respectively. The $0.4 million
increase in goodwill in 2010 from 2009 was primarily due to the
effect of an adjustment to the fair value of inventory acquired
in the Micelle Acquisition. The $8.2 million net decrease
in goodwill in 2009 from 2008 was primarily due to a
$12.1 million decrease related to a change in deferred tax
liability, partially offset by a $3.9 million increase
related to the Micelle Acquisition.
Intangible assets with finite lives are amortized over their
expected lives, which are two years for product certifications,
three years for the distributor network and non-compete
agreements, five years for product formulas and seven years for
customer relationships. At December 31, 2008, intangible
assets with finite lives had been fully amortized. During fiscal
year 2009, the Companys intangible assets with finite
lives increased to $1.7 million, net of $0.2 million
amortization, due to the Micelle Acquisition. As of
December 31, 2010, the Companys intangible assets
with finite lives decreased to $0.8 million. The annual
amortization expense for finite life intangibles was
$0.9 million, $0.2 million, and zero for the years
ended December 31, 2010, 2009, and 2008, respectively. At
December 31, 2010, the annual expected amortization expense
is as follows: 2011 $0.4 million;
2012 $0.2 million; 2013
$0.1 million; and 2014 $0.1 million.
102
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income
Taxes
Income tax expense includes income taxes payable for the current
year and the change in deferred income tax assets and
liabilities for the future tax consequences of events that have
been recognized in the Companys financial statements or
income tax returns. A valuation allowance is recognized to
reduce the carrying value of deferred income tax assets if it is
believed to be more likely than not that a component of the
deferred income tax assets will not be realized.
The Company accounts for uncertainty in income taxes in
accordance with FASB authoritative guidance which clarifies the
accounting and reporting for uncertainties in income taxes
recognized in an enterprises financial statements. This
guidance prescribes a comprehensive model for the financial
statement recognition, measurement, presentation and disclosure
of uncertain tax positions taken or expected to be taken in
income tax returns. See Note 12, Income Taxes, for
further discussion on income taxes.
Royalty
Overrides
An independent distributor may earn commissions, called royalty
overrides or production bonuses, based on retail volume. Such
commissions are based on the retail sales volume of certain
other members of the independent sales force who are sponsored
by the distributor. In addition, such commissions are recorded
when the products are shipped and revenue is recognized.
Non-U.S. royalty
checks that have aged, for a variety of reasons, beyond a
certainty of being paid, are taken back into income. Management
has estimated this period of certainty to be three years
worldwide.
Comprehensive
Income
Comprehensive income consists of net earnings, foreign currency
translation adjustments and the effective portion of the
unrealized gains or losses on derivatives. Comprehensive income
is presented in the consolidated statements of
shareholders equity and comprehensive income.
Components of accumulated other comprehensive income (loss)
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Foreign currency translation adjustment
|
|
$
|
(21,852
|
)
|
|
$
|
(22,435
|
)
|
|
$
|
(27,683
|
)
|
Unrealized loss on derivatives, net of tax
|
|
|
(5,433
|
)
|
|
|
(961
|
)
|
|
|
(931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income (loss)
|
|
$
|
(27,285
|
)
|
|
$
|
(23,396
|
)
|
|
$
|
(28,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Leases
The Company leases all of its physical properties under
operating leases. Certain lease agreements generally include
rent holidays and tenant improvement allowances. The Company
recognizes rent holiday periods on a straight-line basis over
the lease term beginning when the Company has the right to the
leased space. The Company also records tenant improvement
allowances and rent holidays as deferred rent liabilities and
amortizes the deferred rent over the terms of the lease to rent.
Research
and Development
The Companys research and development is performed by
in-house staff and outside consultants. For all periods
presented, research and development costs were expensed as
incurred and were not material.
103
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Weighted average shares used in basic computations
|
|
|
59,502
|
|
|
|
61,221
|
|
|
|
63,785
|
|
Dilutive effect of exercise of equity grants outstanding
|
|
|
2,538
|
|
|
|
1,734
|
|
|
|
1,803
|
|
Dilutive effect of warrants(1)
|
|
|
216
|
|
|
|
142
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in diluted computations
|
|
|
62,256
|
|
|
|
63,097
|
|
|
|
65,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At December 31, 2010, the Company had 0.5 million
warrants outstanding, with an exercise price of $15.50, which
will expire on December 1, 2014. |
There were an aggregate of 0.8 million, 2.8 million
and 2.3 million of equity grants, consisting of stock
options, stock appreciation rights, and stock units, that were
outstanding during the years ended December 31, 2010, 2009
and 2008, respectively, but were not included in the computation
of diluted earnings per share because their effect would be
anti-dilutive.
Revenue
Recognition
Revenue is recognized when products are shipped and title and
risk of loss passes to the independent distributor or importer.
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. Shipping and handling costs paid by
the Company are included in cost of sales. The Company generally
receives the net sales price in cash or through credit card
payments at the point of sale. The Company currently presents
sales taxes collected from customers on a net basis. Related
royalty overrides are recorded when revenue is recognized.
Allowances for product returns, primarily in connection with the
Companys buyback program, are provided at the time the
sale is recorded. 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.
Share-Based
Payments
The Company accounts for share-based compensation in accordance
with FASB authoritative guidance which requires the measurement
of share-based compensation expense for all share-based payment
awards made to employees for service. The Company measures
share-based compensation cost at the grant date, based on the
fair value of the award, and recognizes the expense on a
straight-line basis over the employees requisite service
period.
Use of
Estimates
The preparation of financial statements in conformity with
U.S. GAAP requires management to make estimates and
assumptions. Such estimates and assumptions affect the reported
amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates. The Company
104
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
evaluates its estimates and assumptions on an ongoing basis
using historical experience and other factors, including the
current economic environment, which the Company believes to be
reasonable under the circumstances. The Company adjusts such
estimates and assumptions when facts and circumstances dictate.
Illiquid credit markets, volatile equity, and foreign currency
have combined to increase the uncertainty inherent in such
estimates and assumptions. As future events and their effects
cannot be determined with precision, actual results could differ
from these estimates. Changes in estimates resulting from
continuing changes in the economic environment will be reflected
in the financial statements in future periods.
Currency
Restrictions in Venezuela
Currency restrictions enacted by the Venezuelan government in
2003 have become more restrictive and have impacted the ability
of the Companys 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 remains uncertain. In certain instances, the Company has
made appropriate applications through CADIVI for approval to
obtain U.S. dollars so that Herbalife Venezuela can pay for
imported products and an annual dividend at the official
exchange rate. As an alternative exchange mechanism, the Company
has 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 the
Company effectively purchased bonds with its Bolivars and then
sold the bonds for U.S. dollars. In other instances, the
Company used a legal parallel market mechanism for currency
exchanges until this less favorable parallel market was
discontinued in May 2010.
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.
Although Venezuela is an important market in the Companys
South and Central America Region, Herbalife Venezuelas net
sales represented less than 2%, 4% and 4% of the Companys
consolidated net sales for the years ended December 31,
2010, 2009 and 2008, respectively, and its total assets
represented less than 3% and 6% of the Companys
consolidated total assets as of December 31, 2010 and 2009,
respectively.
Pre-Highly
Inflationary Economy in Venezuela and Herbalife Venezuelas
Cash and Cash Equivalents at December 31, 2009
During the fourth quarter of 2009, due to the currency
restrictions in obtaining U.S. dollars at the official
currency exchange rate and in order to mitigate the
Companys currency exchange risk in Venezuela, Herbalife
Venezuela entered into a series of parallel market transactions
and exchanged 105.0 million Bolivars for approximately
$19.5 million U.S. dollars at an average rate of
approximately 5.4 Bolivars per U.S. dollar. Also, during
the fourth quarter of 2009, Herbalife Venezuela settled
$13.6 million of its U.S. dollar denominated
non-CADIVI registered intercompany shipment payables that were
initially recorded and then subsequently remeasured at the
parallel market exchange rate. Therefore, the settlement of
these intercompany shipment payables did not result in any net
foreign exchange gains or losses recorded in the accompanying
consolidated statement of income for the year ended
December 31, 2009. Incremental costs of $18.8 million,
related to the importation of products into Venezuela at the
unfavorable parallel market exchange rate, were recorded in
costs of sales in the Companys consolidated statement of
income for the year ended December 31, 2009.
105
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2009, Herbalife Venezuelas
$5.9 million U.S. dollar cash and cash equivalents
residing in its U.S. dollar bank account were remeasured to
Bolivars at the parallel market exchange rate of approximately
5.9 Bolivars per U.S. dollar. These remeasured cash and
cash equivalents were translated at the official rate of 2.15
Bolivars per U.S. dollar and reported as $15.8 million
in the Companys consolidated balance sheet at
December 31, 2009. Based on the Companys specific
facts and circumstances, U.S. GAAP required the Company to
use the dividend remittance rate (the official exchange rate)
for translation purposes and the parallel market exchange rate
(the applicable rate at which a particular transaction could be
settled), for certain remeasurement purposes. Due to the
difference between the remeasurement rate and translation rate,
the cash and cash equivalents relating to Herbalife Venezuela
reported on the Companys consolidated balance sheet at
December 31, 2009, was $9.9 million greater than the
U.S. dollar amount residing in Herbalife Venezuelas
U.S. dollar bank account and therefore did not necessarily
reflect the true purchasing power of the reported
U.S. dollar cash and cash equivalents. At December 31,
2009, Herbalife Venezuela reported cash and cash equivalents of
approximately $34.2 million, of which $15.8 million
was denominated in U.S. dollars and $18.4 million was
denominated in Bolivars. The cash and cash equivalents were
translated into the consolidated financial statements at the
official exchange rate, which was the rate applicable for
dividend remittance.
Highly
Inflationary Economy and Accounting in Venezuela
Venezuelas inflation rate as measured using the blended
National Consumer Price Index and Consumer Price Index rate
exceeded a three-year cumulative inflation rate of 100% as of
December 31, 2009. Accordingly, effective January 1,
2010, Venezuela was considered a highly inflationary economy.
Pursuant to the highly inflationary basis of accounting under
U.S. GAAP, Herbalife Venezuela changed its functional
currency from the Bolivar to the U.S. dollar. Subsequent
movements in the Bolivar to U.S. dollar exchange rate will
impact the Companys consolidated earnings. Prior to
January 1, 2010 when the Bolivar was the functional
currency, movements in the Bolivar to U.S. dollar were
recorded as a component of equity through other comprehensive
income. Pursuant to highly inflationary accounting rules, the
Company is no longer required to translate Herbalife
Venezuelas financial statements since their functional
currency is now the U.S. dollar.
Based on relevant facts and circumstances at the applicable
times, under the highly inflationary basis of accounting, the
Company used the parallel market exchange rate for remeasurement
purposes until the parallel market was discontinued in May 2010.
On January 1, 2010, in connection with the determination
that Venezuela was a highly inflationary economy, the Company
remeasured Herbalife Venezuelas opening balance
sheets monetary assets and liabilities at the parallel
market rate, which resulted in the Company recording a non-tax
deductible foreign exchange loss of $15.1 million. This
charge included the $9.9 million foreign exchange loss
relating to Herbalife Venezuelas U.S. dollar cash and
cash equivalents that were remeasured at the parallel market
rate and then translated at the official rate at
December 31, 2009. Also, Herbalife Venezuelas
$34.2 million cash and cash equivalents reported in the
Companys consolidated balance sheet at December 31,
2009, which included U.S. dollar denominated cash, was
reduced to approximately $12.5 million on January 1,
2010. However, nonmonetary assets, such as inventory, reported
on the Companys consolidated balance sheet at
December 31, 2009, remained at historical cost subsequent
to Venezuela becoming a highly inflationary economy. Therefore,
the incremental costs related to the Companys 2009
imported products recorded at the parallel market exchange rate
negatively impacted the Companys consolidated statement of
income for the year ended December 31, 2010 by
approximately $12.7 million as these products were sold
during the first quarter of 2010. This amount is not tax
deductible. See Note 12, Income Taxes, for
additional discussion on the income tax impact related to
Venezuela becoming a highly inflationary economy.
Official
Exchange Rate Devaluations in Venezuela in 2010
In early January 2010, Venezuela announced an official exchange
rate devaluation of the Bolivar to an official rate of 4.3
Bolivars per U.S. dollar for non-essential items and 2.6
Bolivars per U.S. dollar for essential items. The
Companys imports fall into both classifications. During
2010, because the Company used the parallel market
106
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
exchange rate for remeasurement purposes until the parallel
market was discontinued in May 2010 and then used the SITME rate
thereafter, any U.S. dollars obtained from CADIVI at the
official rate had a positive impact to the Companys
consolidated net earnings. Specifically, the Company recorded
$5.8 million of foreign exchange gains to selling, general
and administrative expenses within the Companys
consolidated statement of income for the year ended
December 31, 2010, as a result of receiving
U.S. dollars approved by CADIVI at the official exchange
rate. The majority of Herbalife Venezuelas 2010
importations were not registered with CADIVI so the official
exchange rates are not available to pay for these
U.S. imports. As of December 31, 2010, Herbalife
Venezuela also has an outstanding intercompany dividend payable
to the Company of $2.5 million, which was declared in
December 2008 and registered with CADIVI. The request to obtain
U.S. dollars at the official rate to settle the outstanding
intercompany dividend payable is pending CADIVIs approval.
Also, at December 31, 2010, Herbalife Venezuela had
outstanding intercompany shipment payable balances of
$2.6 million, primarily relating to 2010, which are
registered with CADIVI and are pending CADIVIs approval.
In late December 2010, Venezuela announced that the CADIVI
official exchange rate of 2.6 Bolivars per U.S. dollar will
be eliminated and the CADIVI official exchange of 4.3 Bolivars
per U.S. dollar will be used for all essential items and
non-essential items beginning January 2011. This devaluation did
not have a material impact on the Companys consolidated
financial statements. At December 31, 2010, the Company
used the SITME rate of 5.3 Bolivars per U.S. dollar for
remeasurement purposes.
Remeasurement
of Herbalife Venezuelas Monetary Assets and
Liabilities
During the second quarter of 2010, the Company recorded a
$4.0 million pre-tax ($2.6 million post-tax) net
foreign exchange gain to selling, general and administrative
expenses, within the Companys consolidated statement of
income, as a result of remeasuring its Bolivar denominated
monetary assets and liabilities as of June 30, 2010 at the
SITME rate of 5.3 Bolivars per U.S. dollar as opposed to
the last parallel market rate prior to the closure of the
parallel market in May 2010 of 8.3 Bolivars per
U.S. dollar. Herbalife Venezuelas cash and cash
equivalents, primarily denominated in Bolivars, increased by
$5.2 million as a result of using the SITME rate as opposed
to the last quoted parallel market rate during the second
quarter of 2010. During the third quarter of 2010 and
thereafter, the Company continued to use the SITME rate of 5.3
Bolivars per U.S. dollar to remeasure its Bolivar
denominated transactions. As of December 31, 2010,
Herbalife Venezuelas net monetary Bolivar denominated
assets and liabilities approximated $19.4 million which
included Bolivar denominated cash and cash equivalents
approximating $24.6 million, and were all remeasured at the
new regulated rate under the SITME, except for the
$2.5 million intercompany dividend which was remeasured at
the CADIVI official rate. While the Company continues to monitor
the new exchange mechanism and restrictions under SITME, there
is no assurance that the Company will be able to exchange
Bolivars into U.S. dollars on a timely basis. Therefore,
these remeasured amounts, including cash and cash equivalents,
being reported on the Companys consolidated balance sheet
using the SITME rate may not accurately represent the amount of
U.S. dollars that the Company could ultimately realize.
Consolidation
of Herbalife Venezuela
The Company plans to continue its operation in Venezuela and to
import products into Venezuela despite the foreign currency
constraints that exist in the country. Herbalife Venezuela will
continue to apply for legal exchange mechanisms to convert its
Bolivars to U.S. dollars. Despite the currency exchange
restrictions in Venezuela, the Company continues to control
Herbalife Venezuela and its operations. The mere existence of
the exchange restrictions discussed above does not in and of
itself create a presumption that this lack of exchangeability is
other-than-temporary,
nor does it create a presumption that an entity should
deconsolidate its Venezuelan operations. Therefore, the Company
continues to consolidate Herbalife Venezuela in its consolidated
financial
107
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
statements for U.S. GAAP purposes. Substantially all of
Herbalife Venezuelas Bolivar denominated assets and
liabilities are currently being remeasured at the SITME rate.
See Note 15, Subsequent Events, for further
information on Herbalife Venezuela.
Inventories consist primarily of finished goods available for
resale and can be categorized as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Weight Management, Targeted Nutrition and Energy, Sports and
Fitness
|
|
$
|
159.4
|
|
|
$
|
123.6
|
|
Outer Nutrition
|
|
|
9.7
|
|
|
|
11.4
|
|
Literature, Promotional and Others
|
|
|
13.4
|
|
|
|
11.0
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
182.5
|
|
|
$
|
146.0
|
|
|
|
|
|
|
|
|
|
|
The following are the major classes of inventory (in millions):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Raw materials
|
|
$
|
13.7
|
|
|
$
|
5.5
|
|
Work in process
|
|
|
0.6
|
|
|
|
0.1
|
|
Finished goods
|
|
|
168.2
|
|
|
|
140.4
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
182.5
|
|
|
$
|
146.0
|
|
|
|
|
|
|
|
|
|
|
Total inventories are presented net of the reserves for obsolete
and slow moving inventory of $9.4 million and
$9.3 million at December 31, 2010 and 2009,
respectively.
Long-term debt consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Borrowings under senior credit facility
|
|
$
|
174.9
|
|
|
$
|
236.4
|
|
Capital leases
|
|
|
2.9
|
|
|
|
4.8
|
|
Other debt
|
|
|
0.3
|
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
178.1
|
|
|
|
250.3
|
|
Less: current portion
|
|
|
3.1
|
|
|
|
12.4
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
175.0
|
|
|
$
|
237.9
|
|
|
|
|
|
|
|
|
|
|
Interest expense was $9.7 million, $9.6 million, and
$20.1 million, for the years ended December 31, 2010,
2009 and 2008, respectively.
On July 21, 2006, the Company entered into a
$300.0 million senior secured credit facility, comprised of
a $200.0 million term loan and a $100.0 million
revolving credit facility, with a syndicate of financial
institutions as lenders. In September 2007, the Company and its
lenders amended the credit agreement, increasing the amount of
the revolving credit facility by an aggregate principal amount
of $150.0 million to $250.0 million primarily to
finance the increase in its share repurchase program. See
Note 8, Shareholders Equity, for further
discussion of the share repurchase program and the share
repurchase amounts during the years ended December 31,
2010, 2009 and
108
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2008. The term loan bears interest at LIBOR plus a margin of
1.5%, or the base rate plus a margin of 0.50%, and matures on
July 21, 2013. The revolving credit facility bears interest
at LIBOR plus a margin of 1.25%, or the base rate plus a margin
of 0.25%, and is available until July 21, 2012. On
December 31, 2010, and December 31, 2009, the weighted
average interest rate for the senior secured credit facility was
1.75% and 1.66%, respectively. The Company incurred
approximately $2.3 million of debt issuance costs in
connection with entering into the senior secured credit facility
in July 2006, which are being amortized over the term of the
senior secured credit facility. The fair value of the
Companys senior secured credit facility approximates its
carrying value.
The senior secured credit facility requires the Company to
comply with a leverage ratio and an interest coverage ratio. In
addition, the senior secured credit facility contains customary
covenants, including covenants that limit or restrict the
Companys ability to incur liens, incur indebtedness, make
investments, dispose of assets, make certain restricted
payments, merge or consolidate and enter into certain
transactions with affiliates. As of December 31, 2010 and
2009, the Company was compliant with its debt covenants.
As of December 31, 2010, the Company was obligated to pay
approximately $0.4 million of the term loan every quarter
until June 30, 2013, and the remaining principal on
July 21, 2013. As of December 31, 2010 and 2009, the
amounts outstanding under the term loan were $143.9 million
and $145.4 million, respectively.
During 2010, the Company borrowed an aggregate amount of
$427.0 million and paid a total amount of
$487.0 million of the revolving credit facility. During
2009, the Company borrowed an aggregate amount of
$212.0 million and paid a total amount of
$298.7 million of the revolving credit facility. During
2008, the Company borrowed an aggregate amount of
$118.0 million and paid a total amount of
$149.0 million of the revolving credit facility. As of
December 31, 2010 and 2009, the amounts outstanding under
the revolving credit facility were $31.0 million and
$91.0 million, respectively.
Annual scheduled principal payments under the Companys
senior credit facility are: $1.5 million,
$32.5 million, and $140.9 million for the years ended
December 31, 2011, 2012 and 2013, respectively. See
Note 5, Lease obligations, for payments due under
capital leases and operating leases.
The Company has warehouse, office, furniture, fixtures and
equipment leases, which expire at various dates through 2020.
Under the lease agreements, the Company is also obligated to pay
property taxes, insurance and maintenance costs.
Certain leases contain renewal options. Future minimum rental
commitments for non-cancelable operating leases and capital
leases at December 31, 2010, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Capital
|
|
|
2011
|
|
$
|
39.0
|
|
|
$
|
1.6
|
|
2012
|
|
|
32.2
|
|
|
|
1.5
|
|
2013
|
|
|
26.0
|
|
|
|
|
|
2014
|
|
|
21.4
|
|
|
|
|
|
2015
|
|
|
18.2
|
|
|
|
|
|
Thereafter
|
|
|
24.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
161.5
|
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
Less: amounts included above representing interest
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
|
|
|
|
$
|
2.9
|
|
|
|
|
|
|
|
|
|
|
Rental expense for the years ended December 31, 2010, 2009
and 2008, was $43.5 million, $39.7 million, and
$40.8 million, respectively.
109
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Property, plant and equipment under capital leases is included
in property, plant and equipment on the accompanying
consolidated balance sheets as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Equipment
|
|
$
|
10.7
|
|
|
$
|
15.8
|
|
Less: accumulated depreciation
|
|
|
(8.8
|
)
|
|
|
(12.2
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1.9
|
|
|
$
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Employee
compensation plans
|
The Company maintains a profit sharing plan pursuant to
Sections 401(a) and (k) of the Internal Revenue Code
of 1986, as amended, or the Code. The plan is available to
substantially all employees who meet the length of service
requirements. Prior to January 1, 2009, employees could
elect to contribute between 2% to 17% of their compensation, and
the Company would make matching contributions in an amount equal
to one dollar for each dollar of deferred earnings not to exceed
3% of the participants earnings. Participants partially
vested in the Company contributions after one year and fully
vested after five years. Effective January 1, 2009, the
Company amended its profit sharing plan. Starting
January 1, 2009, employees may elect to contribute up to
75% of their compensation; however, contributions are limited to
a maximum annual amount as set periodically by the Code. The
Company will make matching contributions in an amount equal to
one dollar for each dollar of deferred earnings up to the first
1%, and then make matching contributions in an amount equal to
50% of one dollar for each dollar on the subsequent 5% of
deferred earnings. The contributions become fully vested after
two years. The Company contributed $2.3 million,
$2.2 million, and $2.0 million, to its profit sharing
plan during the years ended December 31, 2010, 2009, and
2008, respectively.
The Company has non-qualified deferred compensation plans for
select groups of management: the Herbalife Management Deferred
Compensation Plan and the Herbalife Senior Executive Deferred
Compensation Plan. The deferred compensation plans allow
eligible employees to elect annually to defer up to 75% of their
base annual salary and up to 100% of their annual bonus for each
calendar year, or the Annual Deferral Amount. The Company makes
matching contributions on behalf of each participant in the
Senior Executive Deferred Compensation Plan. The Senior
Executive Deferred Compensation Plan provides that the amount of
the matching contributions is to be determined by the Company at
its discretion. For 2009 and 2008, the matching contribution was
3% of a participants base salary. In 2010, the
Companys matching contribution was increased to 3.5% to
align with the 401(k) retirement plan match.
Each participant in either of the non-qualified deferred
compensation plans discussed above has, at all times, a fully
vested and non-forfeitable interest in each years
contribution, including interest credited thereto, and in any
Company matching contributions, if applicable. In connection
with a participants election to defer an Annual Deferral
Amount, the participant may also elect to receive a short-term
payout, equal to the Annual Deferral Amount plus interest. Such
amount is payable in two or more years from the first day of the
year in which the Annual Deferral Amount is actually deferred.
The total deferred compensation of the two non-qualified
deferred compensation plans, net of participant contributions,
was an expense of $2.1 million and $2.6 million for
the years ended December 31, 2010 and 2009, respectively,
and a benefit of $4.5 million for the year ended
December 31, 2008. The total long-term deferred
compensation liability under the two deferred compensation plans
was $20.2 million and $16.6 million at
December 31, 2010 and 2009, respectively.
The deferred compensation plans are unfunded and their benefits
are paid from the general assets of the Company, except that the
Company has contributed to a rabbi trust whose
assets will be used to pay the benefits if the Company remains
solvent, but can be reached by the Companys creditors if
the Company becomes insolvent. The value of the assets in the
rabbi trust was $18.5 million and
$17.4 million as of December 31, 2010 and 2009,
respectively.
110
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, attorneys 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 Companys trade secrets on
December 11, 2007. Defendants appealed the courts
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 Herbalifes claims for misappropriation of
trade secrets and breach of contract. On May 5, 2010, the
District Court granted summary judgment for Herbalife on
defendants endless chain-scheme counterclaim. Herbalife
voluntarily dismissed its remaining claims, and on May 14,
2010, the District Court issued a final judgment dismissing all
of the parties claims. On June 10, 2010 the
defendants appealed from that judgment and on June 21,
2010, Herbalife cross-appealed. The Company believes that there
is merit to its appeal, and it will prevail upon both its appeal
as well as the defendants appeal.
Certain of the Companys 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
$93 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 Companys 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 Companys existing
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
111
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
The Company had 58.9 million, 60.2 million, and
61.4 million common shares outstanding at December 31,
2010, 2009 and 2008, respectively. In December 2004, the Company
authorized 7.5 million preference shares at $0.002 par
value. The 7.5 million authorized preference shares
remained unissued as of December 31, 2010. Preference
shares may be issued from time to time in one or more series,
each of such series to have such voting powers (full or limited
or without voting powers), designations, preferences and
relative, participating, optional or other special rights and
qualifications, limitations or restrictions as determined by the
Companys board of directors.
Dividends
The declaration of future dividends is subject to the discretion
of the Companys 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 senior credit facility, entered into on
July 21, 2006, as amended, permits payments of dividends as
long as no default or event of default exists and the sum of the
amounts paid with respect to dividends and share repurchases
does not exceed the sum of $450.0 million plus 75% of
cumulative consolidated net income from the first quarter of
2007 to the last day of the quarter most recently ended prior to
the date of the dividend.
During the second quarter of 2007, the Companys board of
directors adopted a regular quarterly cash dividend program. The
Companys board of directors authorized a $0.20 per common
share cash dividend each quarter from the adoption of the
program through the second quarter of 2010. On August 2,
2010, the Companys board of directors approved an increase
in the quarterly cash dividend to $0.25 per common share, an
increase of $0.05 per common share from prior quarters. The
aggregate amount of dividends paid and declared during the
fiscal years ended December 31, 2010, 2009, and 2008, was
approximately $53.7 million, $48.7 million, and
$50.7 million, respectively.
Share
Repurchases
On April 18, 2007, the Companys board of directors
authorized the repurchase of up to $300 million of the
Companys common shares during the next two years, at such
times and prices as determined by Company management, as market
conditions warrant. On August 23, 2007, the Companys
board of directors approved an increase of $150 million to
its previously authorized share repurchase program raising the
total value of Company common shares authorized to be
repurchased to $450 million. On May 20, 2008, the
Companys board of directors approved an additional
increase of $150 million to the share repurchase program
raising the total value of Company common shares authorized to
be repurchased to $600 million. On April 17, 2009, the
Companys share repurchase program adopted on
April 18, 2007 expired pursuant to its terms.
On April 30, 2009, the Company announced that its board of
directors authorized a new program for the Company to repurchase
up to $300 million of Herbalife common shares during the
next two years, at such times and prices as determined by the
Companys management as market conditions warrant. On
May 3, 2010, the Companys board of directors approved
an increase to the share repurchase authorization from
$300 million to $1 billion. In addition, the
Companys board of directors approved the extension of the
expiration date of the share repurchase
112
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
program from April 2011 to December 2014. As of
December 31, 2010, the remaining authorized capacity under
the Companys share repurchase program was approximately
$776.7 million.
During the year ended December 31, 2010, the Company
repurchased 2.9 million of its common shares through open
market purchases at an aggregate cost of approximately
$150.1 million or an average cost of $52.25 per share.
During the year ended December 31, 2009, the Company
repurchased 2.0 million of its common shares through open
market purchases at an aggregate cost of approximately
$73.2 million or an average cost of $36.60 per share.
During the year ended December 31, 2008, the Company
repurchased approximately 4.6 million of common shares
through open market purchases at an aggregate cost of
$137.0 million, or an average cost of $29.60 per share.
The aggregate purchase price of the common shares repurchased
was reflected as a reduction to shareholders equity. The
Company allocated the purchase price of the repurchased shares
as a reduction to retained earnings, common shares and
additional
paid-in-capital.
The number of shares issued upon vesting or exercise for certain
restricted stock units and stock appreciation rights granted,
pursuant to the Companys share-based compensation plans,
is net of the minimum statutory withholding requirements that
the Company pays on behalf of its employees. Although shares
withheld are not issued, they are treated as common share
repurchases for accounting purposes, as they reduce the number
of shares that would have been issued upon vesting.
|
|
9.
|
Share-Based
Compensation
|
The Company has five share-based compensation plans, the WH
Holdings (Cayman Islands) Ltd. Stock Incentive Plan, or the
Management Plan, the WH Holdings (Cayman Islands) Ltd.
Independent Directors Stock Incentive Plan, or the Independent
Directors Plan, the Herbalife Ltd. 2004 Stock Incentive Plan, or
the 2004 Stock Incentive Plan, the Amended and Restated
Herbalife Ltd. 2005 Stock Incentive Plan, or the 2005 Stock
Incentive Plan, and the Amended and Restated Herbalife Ltd.
Independent Directors Deferred Compensation and Stock Unit Plan,
or the Independent Director Stock Unit Plan. The Management Plan
provides for the grant of options to purchase common shares of
Herbalife to members of the Companys management. The
Independent Directors Plan provides for the grant of options to
purchase common shares of Herbalife to the Companys
independent directors. The 2004 Stock Incentive Plan replaced
the Management Plan and the Independent Directors Plan and after
the adoption thereof, no additional awards were made under
either the Management Plan or the Independent Directors Plan.
However, the shares remaining available for issuance under these
plans were absorbed by and became available for issuance under
the 2004 Stock Incentive Plan. The terms of the 2005 Stock
Incentive Plan are substantially similar to the terms of the
2004 Stock Incentive Plan. The 2005 Stock Incentive Plan
authorizes the issuance of 4,000,000 common shares pursuant to
awards granted under the plan, plus any shares that remained
available for issuance under the 2004 Stock Incentive Plan at
the time of the adoption of the 2005 Stock Incentive Plan. The
purpose of the Independent Directors Stock Unit Plan is to
facilitate equity ownership in the Company by its independent
directors through the award of stock units. At December 31,
2010 an aggregate of approximately 0.9 million common
shares remain available for future issuance under the
share-based compensation plans.
The Companys share-based compensation plans provide for
grants of stock options, stock appreciation rights, or SARS, and
stock units, which are collectively referred to herein as
awards. Stock options typically vest quarterly over a five-year
period beginning on the grant date, and certain stock option
grants vest over a period of less than five years. Certain SARS
vest quarterly over a five-year period beginning on the grant
date. Other SARS vest annually over a three-year period. The
contractual term of stock options and SARS is ten years. Stock
unit awards under the 2005 Incentive Plan, or Incentive Plan
Stock Units, vest annually over a three year period which is
equal to the contractual term. Stock units awarded under the
Independent Directors Stock Unit Plan, or Independent Director
Stock Units, vest at a rate of 25% on each January 15,
April 15, July 15 and October 15. In January 2009, the
Company amended the Independent Directors Plan to comply with
newly issued Code Section 457A to eliminate the deferral
election and to move to SARS from stock units. In March 2008,
the Company granted stock unit awards to its Chairman and Chief
Executive Officer, which vest over a four-year period at a rate
of 30% during each of the first three years and 10%
113
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
during the fourth year. In February 2009, the Company granted
stock units and SARS to certain employees subject to continued
service, one-third of which vest on the third anniversary of the
date of grant, one-third of which vest on the fourth anniversary
of the date of grant, and the remaining one-third of which vest
on the fifth anniversary of the date of grant. In 2010, the
Company granted other stock units to certain key employees
subject to continued service, one half of which vest on the
first anniversary of the date of the grant, and the remaining
half of which vest on the second anniversary of the date of the
grant. Awards can be subject to market and service conditions,
or market condition awards, or to only continued service with
the Company, or service condition awards. All awards granted by
the Company are either market condition awards or service
condition awards. Unless otherwise determined at the time of
grant, the value of each stock unit shall be equal to one common
share of Herbalife. The Companys stock compensation awards
outstanding as of December 31, 2010 include stock options,
SARS, and stock units.
In March 2008, the Company granted SARS with market conditions
to its Chairman and Chief Executive Officer, which will fully
vest at the end of four years subject to his continued
employment through that date and the achievement of certain
conditions related to the market value of the Companys
common shares. The market conditions include targets for stock
price appreciation of both a 10% and a 15% compound annual
growth rate.
The Company records compensation expense over the requisite
service period which is equal to the vesting period. For awards
granted on or after January 1, 2006, the compensation
expense is recognized on a straight-line basis over the vesting
term. Stock-based compensation expense is included in selling,
general and administrative expenses in the consolidated
statements of income. For the years ended December 31,
2010, 2009, and 2008, share-based compensation expense, relating
to service condition awards, amounted to $20.0 million,
$18.4 million, and $15.9 million, respectively. For
the years ended December 31, 2010, 2009 and 2008,
share-based compensation expense, relating to market condition
awards, amounted to $3.0 million, $2.7 million and
$1.9 million, respectively. For the years ended
December 31, 2010, 2009, and 2008, the related income tax
benefits recognized in earnings for all awards amounted to
$7.4 million, $7.9 million, and $6.7 million,
respectively.
As of December 31, 2010, the total unrecognized
compensation cost related to non-vested service condition stock
awards was $25.9 million and the related weighted-average
period over which it is expected to be recognized is
approximately 1.5 years. As of December 31, 2010, the
total unrecognized compensation cost related to non-vested
market condition stock awards was $3.5 million and the
related weighted-average period over which it is expected to be
recognized is approximately 1.2 years.
For the years ended December 31, 2010, 2009, and 2008,
excess tax benefits of $16.7 million, $3.6 million,
and $15.3 million, respectively, were generated from
exercises of awards.
Stock units are valued at the market value on the date of grant.
The fair value of all SARS and stock options are estimated on
the date of grant using the Black-Scholes-Merton option-pricing
model and Monte Carlo lattice model, respectively. The expected
term of the SARS and stock options are based on the simple
average of the average vesting period and the life of the award,
or the simplified method, because of the limited historical
data. All groups of employees have been determined to have
similar historical exercise patterns for valuation purposes. The
expected volatility of the SARS and stock options are based upon
the historical volatility of the Companys common shares
and it is also validated against the volatility rates of a peer
group of companies. The risk free interest rate is based on the
implied yield on a U.S. Treasury zero-coupon issue with a
remaining term equal to the expected term of the SARS and stock
options. The expected dividend yield assumption is based on the
Companys historical and expected amount of dividend
payouts.
114
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
There were no stock options granted during the years ended
December 31, 2010, 2009 and 2008. The following table
summarizes the weighted average assumptions used in the
calculation of the fair value for service condition awards for
the years ended December 31, 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARS
|
|
|
Independent Directors SARS
|
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Expected volatility
|
|
|
48.3
|
%
|
|
|
48.5
|
%
|
|
|
39.5
|
%
|
|
|
48.2
|
%
|
|
|
48.6
|
%
|
|
|
|
|
Dividends yield
|
|
|
1.8
|
%
|
|
|
5.7
|
%
|
|
|
2.0
|
%
|
|
|
1.7
|
%
|
|
|
5.8
|
%
|
|
|
|
|
Expected term
|
|
|
6.4 years
|
|
|
|
6.5 years
|
|
|
|
6.2 years
|
|
|
|
3.8 years
|
|
|
|
3.8 years
|
|
|
|
|
|
Risk-free interest rate
|
|
|
2.4
|
%
|
|
|
2.3
|
%
|
|
|
2.6
|
%
|
|
|
1.3
|
%
|
|
|
1.4
|
%
|
|
|
|
|
There were no market condition awards granted during the years
ended December 31, 2010 and 2009. For market condition
awards granted during the year ended December 31, 2008, the
following table summarizes the weighted average assumptions used
in the calculation of the fair value:
|
|
|
|
|
|
|
SARS
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
Expected volatility
|
|
|
38.5
|
%
|
Dividends yield
|
|
|
1.6
|
%
|
Expected term
|
|
|
5.5 years
|
|
Risk-free interest rate
|
|
|
2.6
|
%
|
The following tables summarize the activity under all
share-based compensation plans, which includes all stock awards,
for the year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
Stock Options & SARS
|
|
Awards
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Value(1)
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Outstanding at December 31, 2009
|
|
|
7,372
|
|
|
$
|
24.84
|
|
|
|
5.9 years
|
|
|
$
|
123.6
|
|
Granted
|
|
|
890
|
|
|
$
|
45.17
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,813
|
)
|
|
$
|
20.77
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(59
|
)
|
|
$
|
32.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010(2)
|
|
|
6,390
|
|
|
$
|
28.75
|
|
|
|
5.7 years
|
|
|
$
|
253.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010
|
|
|
3,302
|
|
|
$
|
23.20
|
|
|
|
4.1 years
|
|
|
$
|
149.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The intrinsic value is the amount by which the current market
value of the underlying stock exceeds the exercise price of the
stock award. |
|
(2) |
|
Includes 0.8 million market condition awards that were
outstanding as of December 31, 2010. |
115
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
|
Aggregate
|
|
Incentive Plan and Independent Directors Stock Units
|
|
Shares
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
|
|
|
(In millions)
|
|
|
Outstanding and nonvested at December 31, 2009
|
|
|
689.5
|
|
|
$
|
26.35
|
|
|
$
|
18.2
|
|
Granted
|
|
|
121.1
|
|
|
$
|
45.71
|
|
|
|
5.5
|
|
Vested
|
|
|
(221.3
|
)
|
|
$
|
34.04
|
|
|
|
(7.5
|
)
|
Forfeited
|
|
|
(9.1
|
)
|
|
$
|
23.13
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and nonvested at December 31, 2010
|
|
|
580.2
|
|
|
$
|
27.51
|
|
|
$
|
16.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value of service condition
awards granted during the years ended December 31, 2010,
2009, and 2008 was $21.88, $6.42, and $23.58, respectively. The
weighted-average grant date fair value of market condition
awards granted during the year ended December 31, 2008 was
$14.59. The total intrinsic value of service condition awards
exercised during the years ended December 31, 2010, 2009
and 2008 was $63.8 million, $16.4 million, and
$45.8 million, respectively. There were no market condition
awards exercised during the years ended December 31, 2010,
2009, and 2008.
Employee
Stock Purchase Plan
During 2007, the Company adopted a qualified employee stock
purchase plan, or ESPP, which was implemented during the first
quarter of 2008. In connection with the adoption of the ESPP,
the Company has reserved for issuance a total of 1 million
common shares. At December 31, 2010, approximately
0.9 million common shares remain available for future
issuance. Under the terms of the ESPP, rights to purchase common
shares may be granted to eligible qualified employees subject to
certain restrictions. The ESPP enables the Companys
eligible employees, through payroll withholdings, to purchase a
limited number of common shares at 85% of the fair market value
of a common share at the purchase date. Purchases are made on a
quarterly basis.
The Company is a network marketing company that sells a wide
range of weight management products, nutritional supplements and
personal care products within one industry segment as defined
under the FASB ASC Topic 280, Segment Reporting. The
Companys 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.
The Company sells products in 74 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 Companys 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
116
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
aggregation. The operating information for the Primary Reporting
Segment and China, and sales by product line are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Reporting Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
595.4
|
|
|
$
|
512.9
|
|
|
$
|
477.6
|
|
Mexico
|
|
|
334.0
|
|
|
|
263.0
|
|
|
|
352.2
|
|
Others
|
|
|
1,620.4
|
|
|
|
1,396.4
|
|
|
|
1,384.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Primary Reporting Segment
|
|
|
2,549.8
|
|
|
|
2,172.3
|
|
|
|
2,214.2
|
|
China
|
|
|
184.4
|
|
|
|
152.3
|
|
|
|
145.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales
|
|
$
|
2,734.2
|
|
|
$
|
2,324.6
|
|
|
$
|
2,359.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Margin(1)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Reporting Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
257.0
|
|
|
$
|
220.0
|
|
|
$
|
200.5
|
|
Mexico
|
|
|
131.7
|
|
|
|
104.0
|
|
|
|
155.4
|
|
Others
|
|
|
721.5
|
|
|
|
613.3
|
|
|
|
623.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Primary Reporting Segment
|
|
|
1,110.2
|
|
|
|
937.3
|
|
|
|
978.9
|
|
China(3)
|
|
|
165.0
|
|
|
|
132.6
|
|
|
|
125.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Margin
|
|
$
|
1,275.2
|
|
|
$
|
1,069.9
|
|
|
$
|
1,104.0
|
|
Selling, general and administrative expense
|
|
|
887.7
|
|
|
|
773.9
|
|
|
|
771.8
|
|
Interest expense
|
|
|
9.7
|
|
|
|
9.6
|
|
|
|
20.1
|
|
Interest income
|
|
|
2.3
|
|
|
|
4.5
|
|
|
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
380.1
|
|
|
|
290.9
|
|
|
|
319.0
|
|
Income taxes
|
|
|
89.6
|
|
|
|
87.6
|
|
|
|
97.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
290.5
|
|
|
$
|
203.3
|
|
|
$
|
221.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
51.0
|
|
|
$
|
45.4
|
|
|
$
|
91.7
|
|
Mexico
|
|
|
2.5
|
|
|
|
1.4
|
|
|
|
1.4
|
|
China
|
|
|
3.1
|
|
|
|
3.7
|
|
|
|
3.7
|
|
Others
|
|
|
11.5
|
|
|
|
9.6
|
|
|
|
10.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital Expenditures
|
|
$
|
68.1
|
|
|
$
|
60.1
|
|
|
$
|
106.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Net sales by product line:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weight Management
|
|
$
|
1,698.9
|
|
|
$
|
1,464.8
|
|
|
$
|
1,485.0
|
|
Targeted Nutrition
|
|
|
629.2
|
|
|
|
493.7
|
|
|
|
491.8
|
|
Energy, Sports & Fitness
|
|
|
121.3
|
|
|
|
98.7
|
|
|
|
99.6
|
|
Outer Nutrition
|
|
|
127.5
|
|
|
|
128.3
|
|
|
|
146.6
|
|
Literature, Promotional and Other(4)
|
|
|
157.3
|
|
|
|
139.1
|
|
|
|
136.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales
|
|
$
|
2,734.2
|
|
|
$
|
2,324.6
|
|
|
$
|
2,359.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales by geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America(5)
|
|
$
|
614.1
|
|
|
$
|
529.0
|
|
|
$
|
496.9
|
|
Mexico
|
|
|
334.0
|
|
|
|
263.0
|
|
|
|
352.2
|
|
South & Central America
|
|
|
390.4
|
|
|
|
366.9
|
|
|
|
383.6
|
|
EMEA(6)
|
|
|
527.8
|
|
|
|
504.2
|
|
|
|
570.7
|
|
Asia Pacific(7)
|
|
|
683.5
|
|
|
|
509.2
|
|
|
|
410.8
|
|
China
|
|
|
184.4
|
|
|
|
152.3
|
|
|
|
145.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales
|
|
$
|
2,734.2
|
|
|
$
|
2,324.6
|
|
|
$
|
2,359.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating margin consists of net sales less cost of sales and
royalty overrides. |
|
(2) |
|
In the third quarter of 2010, the Company changed its method of
allocation for certain costs to its business segments.
Historical information presented has been reclassified to
conform to the current presentation. This change had no effect
on the Companys consolidated statements of income. |
|
(3) |
|
Compensation to China sales employees and service fees to China
licensed business providers totaling $87.3 million,
$79.1 million and $70.3 million for the years ended
December 31, 2010, 2009 and 2008, respectively, are
included in selling, general and administrative expenses while
distributor compensation for all other countries is included in
royalty overrides. |
|
(4) |
|
Product buybacks and returns in all product categories are
included in the literature, promotional and other category. |
|
(5) |
|
Consists of the U.S., Canada and Jamaica. |
|
(6) |
|
Consists of Europe, Middle East and Africa. |
|
(7) |
|
Consists of Asia (excluding China), New Zealand and Australia. |
As of December 31, 2010 and 2009, total assets for the
Companys Primary Reporting Segment were
$1,162.1 million and $1,097.1 million, respectively.
Total assets for the China segment were $70.1 million and
$49.0 million as of December 31, 2010 and 2009,
respectively.
As of December 31, 2010 and 2009, goodwill allocated to the
Companys reporting units included in the Companys
Primary Reporting Segment was $99.8 million and
$99.4 million, respectively. Goodwill allocated to the
China segment was $3.1 million as of December 31, 2010
and 2009.
As of December 31, 2010, the net property, plant and
equipment located in the U.S. and in all foreign countries
was $141.1 million and $36.3 million, respectively. As
of December 31, 2009, the net property, plant and equipment
located in the U.S. and in all foreign countries was
$145.3 million and $32.7 million, respectively.
118
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2010, the deferred tax assets related to
the U.S. and all foreign countries was $65.8 million
and $34.8 million, respectively. As of December 31,
2009, the deferred tax assets related to the U.S. and all
the foreign countries was $43.5 million and
$33.8 million, respectively.
Most of the Companys foreign subsidiaries designate their
local currencies as their functional currency. As of
December 31, 2010 and 2009, the total amount of cash held
by foreign subsidiaries reported in the Companys
consolidated balance sheet was $188.2 million and
$149.6 million, respectively, of which $5.8 million
and $11.9 million, respectively, was maintained or invested
in U.S. dollars. See Note 2, Basis of Presentation,
for further discussion on Herbalife Venezuelas cash
and cash equivalents.
|
|
11.
|
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 Companys variable rate term loan. The hedged risk
is the variability of forecasted interest rate cash flows, where
the hedging strategy involves the purchase of interest rate
swaps. For the outstanding cash flow hedges on interest rate
exposures at December 31, 2010, the maximum length of time
over which the Company is hedging certain of these exposures is
less than three years.
Under its senior secured credit facility, the Company was
obligated to enter into interest rate hedges for up to 25% of
the aggregate principal amount of the term loan for a minimum of
three years. On August 23, 2006, the Company entered into
an interest rate swap agreement. The agreement provided for the
Company to pay interest for a three-year period at a fixed rate
of 5.26% on the initial notional principal amount of
$180.0 million while receiving interest for the same period
at the LIBOR rate on the same notional principal amount. The
notional amount was scheduled to be reduced by
$20.0 million in the second, third and fourth quarters of
each year commencing January 1, 2007 throughout the term of
the swap. The swap had been designated as a cash flow hedge
against the variability in the LIBOR interest rate on the
Companys term loan at LIBOR plus 1.50%, thereby fixing the
Companys effective rate on the notional amounts at 6.76%.
In September 2009, the interest swap expired and was
consequently settled. As of December 31, 2009, there were
no amounts remaining in other comprehensive income relating to
this expired interest swap and the swap had no value.
On June 26, 2009, the Company entered into an interest rate
swap agreement, with an effective date of June 30, 2009,
which expired on September 30, 2009. The swap notional
amount was $20 million, where the Company paid three month
LIBOR and received one month LIBOR plus 0.185%. As of
December 31, 2009, the interest rate swap agreement expired
and all outstanding amounts were settled. The Company elected
not to apply hedge accounting for this interest rate swap.
During August 2009, the Company entered into four interest rate
swap agreements with an effective date of December 31,
2009. The agreements collectively provide for the Company to pay
interest for less than a four-year period at a weighted average
fixed rate of 2.78% on notional amounts aggregating to
$140.0 million while receiving interest for the same period
at the one month LIBOR rate on the same notional amounts. These
agreements will expire in July 2013. These swaps have been
designated as cash flow hedges against the variability in the
LIBOR interest rate on the Companys term loan at LIBOR
plus 1.50%, thereby fixing the Companys weighted average
effective rate on the notional amounts at 4.28%. The Company
formally assesses both at inception and at least quarterly
thereafter, whether the derivatives used in hedging transactions
are effective in offsetting changes in cash flows of the hedged
item. As of December 31, 2010, the hedge relationships
qualified as effective hedges under FASB ASC Topic 815,
Derivatives and Hedging, or ASC 815. Consequently, all
changes in the fair value of the derivatives are deferred and
recorded in other comprehensive income (loss) until the related
forecasted transactions are recognized in the consolidated
statements of income. The fair value of the interest rate swap
agreements are based on third-party bank quotes. At
December 31, 2010 and December 31, 2009, the Company
recorded the interest rate swaps as liabilities at their fair
value of $6.6 million and $2.6 million, respectively.
119
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The table below describes the interest rate swaps in aggregate,
and the fair value of the liabilities that were outstanding as
of December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Notional
|
|
|
Swap
|
|
|
Fair
|
|
|
Maturity
|
|
Interest Rate
|
|
Amounts
|
|
|
Rate
|
|
|
Value
|
|
|
Dates
|
|
|
|
(In millions)
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
At December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
140.0
|
|
|
|
2.78
|
%
|
|
$
|
(6.6
|
)
|
|
|
July 2013
|
|
At December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
140.0
|
|
|
|
2.78
|
%
|
|
$
|
(2.6
|
)
|
|
|
July 2013
|
|
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 Companys 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 December 31, 2010 and 2009, the aggregate notional
amounts of these contracts outstanding were approximately
$32.1 million and $66.8 million, respectively. At
December 31, 2010, the outstanding contracts were expected
to mature over the next twelve months. The Companys
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 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. As of
December 31, 2009, the Company recorded assets at fair
value of $2.3 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 years ended December 31,
2010 and 2009, the ineffective portion relating to these hedges
was immaterial and the hedges remained effective as of
December 31, 2010 and 2009.
As of December 31, 2010 and 2009, the majority of the
Companys outstanding foreign currency forward contracts
had maturity dates of less than one year with the majority of
freestanding derivatives expiring within three months. There
were no foreign currency option contracts outstanding as of
December 31, 2010 and 2009.
120
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The table below describes all foreign currency forward contracts
that were outstanding as of December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Original
|
|
|
Fair Value
|
|
Foreign Currency
|
|
Contract Rate
|
|
|
Notional Amount
|
|
|
Gain (Loss)
|
|
|
|
|
|
|
(In millions)
|
|
|
(In millions)
|
|
|
At December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy BRL sell USD
|
|
|
1.68
|
|
|
$
|
7.6
|
|
|
$
|
0.1
|
|
Buy EUR sell ARS
|
|
|
5.27
|
|
|
|
1.3
|
|
|
|
|
|
Buy EUR sell JPY
|
|
|
113.89
|
|
|
|
1.2
|
|
|
|
(0.1
|
)
|
Buy EUR sell MXN
|
|
|
16.58
|
|
|
|
35.5
|
|
|
|
|
|
Buy EUR sell RUB
|
|
|
40.99
|
|
|
|
1.8
|
|
|
|
|
|
Buy EUR sell USD
|
|
|
1.34
|
|
|
|
101.4
|
|
|
|
0.1
|
|
Buy INR sell USD
|
|
|
44.81
|
|
|
|
4.5
|
|
|
|
|
|
Buy JPY sell EUR
|
|
|
111.90
|
|
|
|
1.2
|
|
|
|
|
|
Buy JPY sell USD
|
|
|
82.57
|
|
|
|
19.4
|
|
|
|
0.4
|
|
Buy KRW sell USD
|
|
|
1,146.51
|
|
|
|
21.0
|
|
|
|
0.4
|
|
Buy MXN sell EUR
|
|
|
16.45
|
|
|
|
8.0
|
|
|
|
|
|
Buy MXN sell USD
|
|
|
12.37
|
|
|
|
4.5
|
|
|
|
|
|
Buy MYR sell USD
|
|
|
3.10
|
|
|
|
12.2
|
|
|
|
0.1
|
|
Buy PEN sell USD
|
|
|
2.80
|
|
|
|
10.3
|
|
|
|
|
|
Buy PHP sell USD
|
|
|
43.89
|
|
|
|
0.1
|
|
|
|
|
|
Buy TWD sell USD
|
|
|
29.17
|
|
|
|
2.6
|
|
|
|
|
|
Buy USD sell BRL
|
|
|
1.72
|
|
|
|
14.9
|
|
|
|
(0.5
|
)
|
Buy USD sell COP
|
|
|
1,917.51
|
|
|
|
4.3
|
|
|
|
|
|
Buy USD sell EUR
|
|
|
1.32
|
|
|
|
74.3
|
|
|
|
(1.0
|
)
|
Buy USD sell GBP
|
|
|
1.56
|
|
|
|
4.0
|
|
|
|
|
|
Buy USD sell INR
|
|
|
45.78
|
|
|
|
8.7
|
|
|
|
(0.2
|
)
|
Buy USD sell JPY
|
|
|
81.59
|
|
|
|
9.8
|
|
|
|
(0.1
|
)
|
Buy USD sell KRW
|
|
|
1,138.90
|
|
|
|
4.9
|
|
|
|
(0.1
|
)
|
Buy USD sell MXN
|
|
|
12.45
|
|
|
|
4.9
|
|
|
|
|
|
Buy USD sell PEN
|
|
|
2.81
|
|
|
|
5.2
|
|
|
|
|
|
Buy USD sell PHP
|
|
|
44.11
|
|
|
|
2.8
|
|
|
|
|
|
Buy USD sell RUB
|
|
|
31.48
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total forward contracts
|
|
|
|
|
|
$
|
367.7
|
|
|
$
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Original
|
|
|
Fair Value
|
|
Foreign Currency
|
|
Contract Rate
|
|
|
Notional Amount
|
|
|
Gain (Loss)
|
|
|
|
|
|
|
(In millions)
|
|
|
(In millions)
|
|
|
At December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy EUR sell MXN
|
|
|
19.67
|
|
|
$
|
32.6
|
|
|
$
|
(1.6
|
)
|
Buy JPN sell USD
|
|
|
90.60
|
|
|
|
16.9
|
|
|
|
(0.5
|
)
|
Buy USD sell EUR
|
|
|
1.48
|
|
|
|
77.2
|
|
|
|
2.6
|
|
Buy CLP sell USD
|
|
|
523.79
|
|
|
|
5.3
|
|
|
|
0.2
|
|
Buy USD sell CLP
|
|
|
509.40
|
|
|
|
2.9
|
|
|
|
|
|
Buy HKD sell USD
|
|
|
7.75
|
|
|
|
6.5
|
|
|
|
|
|
Buy JPY sell EUR
|
|
|
131.55
|
|
|
|
3.3
|
|
|
|
|
|
Buy EUR sell JPY
|
|
|
131.59
|
|
|
|
3.3
|
|
|
|
|
|
Buy USD sell BRL
|
|
|
1.78
|
|
|
|
7.3
|
|
|
|
(0.1
|
)
|
Buy USD sell ZAR
|
|
|
7.86
|
|
|
|
1.3
|
|
|
|
(0.1
|
)
|
Buy ZAR sell USD
|
|
|
7.49
|
|
|
|
1.3
|
|
|
|
|
|
Buy USD sell PHP
|
|
|
47.49
|
|
|
|
6.3
|
|
|
|
(0.1
|
)
|
Buy USD sell KRW
|
|
|
1,181.27
|
|
|
|
1.9
|
|
|
|
|
|
Buy USD sell INR
|
|
|
46.72
|
|
|
|
3.0
|
|
|
|
|
|
Buy USD sell COP
|
|
|
1,983.88
|
|
|
|
3.5
|
|
|
|
0.1
|
|
Buy EUR sell USD
|
|
|
1.43
|
|
|
|
45.2
|
|
|
|
|
|
Buy EUR sell HKD
|
|
|
11.26
|
|
|
|
2.6
|
|
|
|
|
|
Buy MXN sell USD
|
|
|
13.19
|
|
|
|
8.5
|
|
|
|
|
|
Buy GBP sell USD
|
|
|
1.63
|
|
|
|
5.7
|
|
|
|
|
|
Buy USD sell RUB
|
|
|
29.78
|
|
|
|
1.3
|
|
|
|
|
|
Buy COP sell USD
|
|
|
2,053.31
|
|
|
|
4.2
|
|
|
|
|
|
Buy KRW sell USD
|
|
|
1,167.38
|
|
|
|
1.9
|
|
|
|
|
|
Buy BRL sell USD
|
|
|
1.78
|
|
|
|
0.6
|
|
|
|
|
|
Buy EUR sell GBP
|
|
|
0.89
|
|
|
|
3.3
|
|
|
|
|
|
Buy MXN sell EUR
|
|
|
18.81
|
|
|
|
7.0
|
|
|
|
|
|
Buy PHP sell USD
|
|
|
46.47
|
|
|
|
3.2
|
|
|
|
|
|
Buy RUB sell USD
|
|
|
30.25
|
|
|
|
0.3
|
|
|
|
|
|
Buy USD sell MXN
|
|
|
13.15
|
|
|
|
1.7
|
|
|
|
|
|
Buy USD sell JPN
|
|
|
92.46
|
|
|
|
7.9
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total forward contracts
|
|
|
|
|
|
$
|
266.0
|
|
|
$
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following tables summarize the derivative activity during
the year ended December 31, 2010 and 2009, relating to all
the Companys derivatives.
Gains
and Losses on Derivative Instruments
The following table summarizes gains (losses) relating to
derivative instruments recorded in other comprehensive income
(loss) during the year ended December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized
|
|
|
|
in Other Comprehensive Income (Loss)
|
|
|
|
For the Year Ended
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
(In millions)
|
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts relating to inventory and
intercompany management fee hedges
|
|
$
|
5.6
|
|
|
$
|
2.4
|
|
Interest rate swaps
|
|
$
|
(7.5
|
)
|
|
$
|
(2.6
|
)
|
As of December 31, 2010, the estimated amount of existing
net losses related to cash flow hedges recorded in accumulated
other comprehensive income (loss) that are expected to be
reclassified into earnings over the next twelve months was
$4.6 million.
The following table summarizes gains (losses) relating to
derivative instruments recorded to income during the year ended
December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
|
|
|
|
|
|
Recognized in Income
|
|
|
|
|
|
For the Year Ended
|
|
|
Location of Gain (Loss)
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
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)
|
|
$
|
|
|
|
$
|
(0.3
|
)
|
|
Selling, general
and administrative
expenses
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
|
$
|
(9.4
|
)
|
|
$
|
(15.8
|
)
|
|
Selling, general
and administrative
expenses
|
|
|
|
(1) |
|
For foreign exchange contracts designated as hedging
instruments, the amounts recognized in income (loss) represent
the amounts excluded from the assessment of hedge effectiveness.
There were no ineffective amounts reported for derivatives
designated as hedging instruments. |
123
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes gains (losses) relating to
derivative instruments reclassified from accumulated other
comprehensive loss into income during the year ended
December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Reclassified
|
|
|
Location of Gain
|
|
|
from Accumulated Other
|
|
|
(Loss) Reclassified
|
|
|
Comprehensive Loss into Income
|
|
|
from Accumulated Other
|
|
|
For the Year Ended
|
|
|
Comprehensive Loss into
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
Income (effective portion)
|
|
|
(In millions)
|
|
|
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts relating to inventory hedges
|
|
$
|
1.8
|
|
|
$
|
0.8
|
|
|
Cost of sales
|
Foreign exchange currency contracts relating to intercompany
management fee hedges
|
|
$
|
6.6
|
|
|
$
|
|
|
|
Selling, general and
administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
$
|
(3.6
|
)
|
|
$
|
(1.0
|
)
|
|
Interest expense, net
|
The Company reports its derivatives at fair value as either
assets or liabilities within its consolidated balance sheet. See
Note 14, Fair Value Measurements, for information on
derivative fair values and their consolidated balance sheet
location as of December 31, 2010, and December 31,
2009.
The components of income before income taxes are as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Domestic
|
|
$
|
69.5
|
|
|
$
|
94.9
|
|
|
$
|
101.7
|
|
Foreign
|
|
|
310.6
|
|
|
|
196.0
|
|
|
|
217.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
380.1
|
|
|
$
|
290.9
|
|
|
$
|
319.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes are as follows (in millions of U.S. dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
$
|
75.6
|
|
|
$
|
61.9
|
|
|
$
|
48.4
|
|
Federal
|
|
|
30.3
|
|
|
|
30.9
|
|
|
|
45.0
|
|
State
|
|
|
8.3
|
|
|
|
6.0
|
|
|
|
8.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114.2
|
|
|
|
98.8
|
|
|
|
101.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(3.2
|
)
|
|
|
2.5
|
|
|
|
9.4
|
|
Federal
|
|
|
(22.0
|
)
|
|
|
(13.1
|
)
|
|
|
(12.6
|
)
|
State
|
|
|
0.6
|
|
|
|
(0.6
|
)
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24.6
|
)
|
|
|
(11.2
|
)
|
|
|
(4.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
89.6
|
|
|
$
|
87.6
|
|
|
$
|
97.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Venezuela has experienced cumulative inflation of at least 100%
during the three year period ended December 31, 2009.
Therefore, as of January 1, 2010 the Bolivar is
hyperinflationary for U.S. federal income tax purposes. As
a result, because Herbalife Venezuela is considered a dual
incorporated entity, it is now required to account for its
operations using the Dollar Approximate Separate Transactions
Method of accounting (DASTM). The transitional impact of DASTM
resulted in a deferred income tax benefit of approximately
$14.5 million recorded during the first quarter of 2010
which is included within the Companys consolidated
statement of income for the year ended December 31, 2010.
See Note 2, Basis of Presentation, for a further
discussion on Herbalife Venezuela and Venezuelas highly
inflationary economy.
The significant categories of temporary differences that gave
rise to deferred tax assets and liabilities are as follows (tax
effected in millions):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Accruals not currently deductible
|
|
$
|
47.5
|
|
|
$
|
36.4
|
|
Foreign tax credits and tax loss carryforwards of certain
foreign subsidiaries
|
|
|
4.2
|
|
|
|
6.1
|
|
Depreciation/amortization
|
|
|
17.1
|
|
|
|
3.0
|
|
Deferred compensation plan
|
|
|
25.1
|
|
|
|
23.5
|
|
Deferred interest expense
|
|
|
118.4
|
|
|
|
56.8
|
|
Accrued state income taxes
|
|
|
1.3
|
|
|
|
0.5
|
|
Accrued vacation
|
|
|
3.4
|
|
|
|
3.5
|
|
Other
|
|
|
12.3
|
|
|
|
7.1
|
|
|
|
|
|
|
|
|
|
|
Gross deferred income tax assets
|
|
|
229.3
|
|
|
|
136.9
|
|
Less: valuation allowance
|
|
|
(128.7
|
)
|
|
|
(59.6
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
$
|
100.6
|
|
|
$
|
77.3
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
$
|
109.5
|
|
|
$
|
110.7
|
|
Inventory deductibles
|
|
|
(1.1
|
)
|
|
|
0.3
|
|
Unrealized foreign exchange
|
|
|
1.2
|
|
|
|
1.8
|
|
Other
|
|
|
3.6
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax liabilities
|
|
$
|
113.2
|
|
|
$
|
116.3
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax accounts
|
|
$
|
(12.6
|
)
|
|
$
|
(39.0
|
)
|
|
|
|
|
|
|
|
|
|
The Company recognizes valuation allowances on deferred tax
assets reported if, based on the weight of the evidence it is
more likely than not that some or all of the deferred tax assets
will not be realized. The Company believes that the majority of
its deferred tax assets will be realized because of the reversal
of certain significant taxable temporary differences and
anticipated future taxable income from operations.
At December 31, 2010, the Companys deferred tax
assets consisted primarily of foreign tax loss carryforwards and
deferred expenses and were reduced by valuation allowances of
$128.7 million. At December 31, 2009, the
Companys deferred tax assets consisted primarily of
foreign tax loss carryforwards and deferred expenses and were
reduced by valuation allowances of $59.6 million. The
foreign tax loss carryforwards of $4.2 million expire in
varying amounts between 2011 and indefinitely.
At December 31, 2010, the Companys
U.S. consolidated group had approximately
$73.5 million of unremitted earnings that were permanently
reinvested from substantially all of its foreign subsidiaries.
In addition, at December 31, 2010, Herbalife Ltd. had
approximately $1.4 billion of permanently reinvested
unremitted
125
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
earnings relating to its operating subsidiaries. Since these
unremitted earnings have been permanently reinvested, deferred
taxes were not provided on these unremitted earnings. Further,
it is not practicable to determine the amount of unrecognized
deferred taxes with respect to these unremitted earnings.
The applicable statutory income tax rate in the Cayman Islands
was zero for Herbalife Ltd. for the years being reported. For
purposes of the reconciliation between the provision for income
taxes at the statutory rate and the provision for income taxes
at the effective tax rate, a notional 35% tax rate is applied as
follows (in millions of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Tax expense at United States statutory rate
|
|
$
|
133.0
|
|
|
$
|
101.8
|
|
|
$
|
111.7
|
|
Increase (decrease) in tax resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Differences between U.S. and foreign tax rates on foreign
income, including withholding taxes
|
|
|
(77.8
|
)
|
|
|
(31.1
|
)
|
|
|
(9.7
|
)
|
U.S. tax (benefit) on foreign income net of foreign tax credits
|
|
|
(19.3
|
)
|
|
|
(24.6
|
)
|
|
|
(26.3
|
)
|
Increase (decrease) in valuation allowances
|
|
|
69.1
|
|
|
|
47.4
|
|
|
|
8.7
|
|
State taxes, net of federal benefit
|
|
|
5.9
|
|
|
|
4.7
|
|
|
|
5.4
|
|
Unrecognized tax benefits
|
|
|
(10.9
|
)
|
|
|
(5.1
|
)
|
|
|
5.7
|
|
Venezuela DASTM hyperinflationary impact
|
|
|
(14.5
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
4.1
|
|
|
|
(5.5
|
)
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
89.6
|
|
|
$
|
87.6
|
|
|
$
|
97.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2010, 2009 and 2008,
the Company benefited from the terms of a tax holiday in the
Peoples Republic of China. The tax holiday commenced on
January 1, 2008 and will conclude on December 31,
2012. Under the terms of the holiday, the Company was subject to
a zero tax rate in China during 2008 and 2009 and was subject to
a graduated tax rate of 11% in 2010. The tax rate will gradually
increase, during the years
2011-2012 to
a maximum of 25%.
As of December 31, 2010, the total amount of the
unrecognized tax benefits, including related interest and
penalties was $38.5 million. The unrecognized tax benefits
primarily relate to uncertainties from international transfer
pricing issues, the deductibility of certain operating expenses
in various jurisdictions, anticipated settlements in foreign tax
audits and the expiration of the statute of limitations in
several jurisdictions. If the total amount of unrecognized tax
benefits was recognized, $31.6 million of unrecognized tax
benefits, $5.6 million of interest and $1.3 million of
penalties would impact the effective tax rate.
The Company accounts for the interest and penalties generated by
tax contingencies as a component of income tax expense. During
the year ended December 31, 2010, the Company recorded a
reversal of interest and penalties expense related to uncertain
tax positions of $1.9 million and $1.0 million,
respectively. As of December 31, 2010, total accrued
interest and penalties were $5.6 million and
$1.3 million, respectively.
126
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following changes occurred in the amount of unrecognized tax
benefits (including related interest and penalties) during the
years ended December 31, 2010, 2009 and 2008 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
Beginning balance of unrecognized tax benefits
|
|
$
|
49.1
|
|
|
$
|
52.8
|
|
|
$
|
50.3
|
|
|
|
|
|
Additions for current year tax positions
|
|
|
4.3
|
|
|
|
4.6
|
|
|
|
5.9
|
|
|
|
|
|
Additions for prior year tax positions
|
|
|
3.0
|
|
|
|
2.1
|
|
|
|
3.5
|
|
|
|
|
|
Reductions for prior year tax positions
|
|
|
(2.4
|
)
|
|
|
(1.3
|
)
|
|
|
(3.1
|
)
|
|
|
|
|
Reductions for audit settlements
|
|
|
(12.6
|
)
|
|
|
(2.8
|
)
|
|
|
(0.8
|
)
|
|
|
|
|
Reductions for the expiration of statutes of limitation
|
|
|
(3.1
|
)
|
|
|
(7.7
|
)
|
|
|
(3.0
|
)
|
|
|
|
|
Changes due to foreign currency translation adjustments
|
|
|
0.2
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance of unrecognized tax benefits
|
|
$
|
38.5
|
|
|
$
|
49.1
|
|
|
$
|
52.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits (including related interest and
penalties) decreased $10.8 million during the year ended
December 31, 2010, which was partially offset by an
increase of $0.2 million due to foreign currency
fluctuations. The $0.2 million benefit attributable to
foreign currency fluctuations was accounted for as a decrease to
other comprehensive income.
The Company believes that it is reasonably possible that the
amount of unrecognized tax benefits could decrease by up to
approximately $8.1 million within the next twelve months.
Of this possible decrease, $2.0 million would be due to the
settlement of audits or resolution of administrative or judicial
proceedings. The remaining possible decrease of
$6.1 million would be due to the expiration of statute of
limitations in various jurisdictions.
As of December 31, 2010, the Companys tax filings are
subject to examination in the U.S. federal jurisdiction and
various state jurisdictions for the years ending on or after
December 31, 2006. The Companys tax filings are also
subject to examination in significant foreign jurisdictions for
the years ending on or after December 31, 2006.
|
|
13.
|
Restructuring
Reserve
|
During the fourth quarter of 2007, the Company initiated the
second phase of its Realignment for Growth plan. The Company
recorded $1.9 million and $4.0 million of professional
fees, severance and related costs for the years ended
December 31, 2008 and 2007, respectively, relating to the
second phase of its Realignment for Growth plan. As of
December 31, 2010, there were no amounts outstanding
related to these charges.
During the fourth quarter of 2008, the Company initiated a
Restructuring Program and incurred approximately
$4.8 million of professional fees, severance and related
costs during the year ended December 31, 2008. For the year
ended December 31, 2009, the Company recorded an additional
$1.3 million of professional fees, severance and related
costs relating to this restructuring program. As of
December 31, 2010, there no amounts outstanding related to
these charges.
All amounts related to the Realignment for Growth plan and the
Restructuring Program are included in selling, general and
administrative expenses and there were no balances outstanding
as of December 31, 2010 relating to these programs. The
following table summarizes the components of the Companys
restructuring reserve as of
127
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2010, 2009, and 2008 and expenses incurred
during the years ended December 31, 2010, 2009 and 2008 (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retention
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
Benefits
|
|
|
Others
|
|
|
Total
|
|
|
Balance as of December 31, 2007
|
|
$
|
2.9
|
|
|
$
|
|
|
|
$
|
0.6
|
|
|
$
|
3.5
|
|
Charges
|
|
|
6.2
|
|
|
|
|
|
|
|
0.5
|
|
|
|
6.7
|
|
Cash payments
|
|
|
(5.8
|
)
|
|
|
|
|
|
|
(1.1
|
)
|
|
|
(6.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
$
|
3.3
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges
|
|
|
0.6
|
|
|
|
|
|
|
|
0.7
|
|
|
|
1.3
|
|
Cash payments
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
(0.7
|
)
|
|
|
(4.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
$
|
0.1
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2010
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.
|
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.
128
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
Level 2 derivatives and are shown below at their gross
values at December 31, 2010, and December 31, 2009:
Fair
Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant
|
|
|
Significant
|
|
|
|
|
|
Other
|
|
|
Other
|
|
|
|
|
|
Observable
|
|
|
Observable
|
|
|
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
(Level 2)
|
|
|
(Level 2)
|
|
|
|
|
|
Fair Value at
|
|
|
Fair Value at
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Derivative Balance Sheet Location
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(In millions)
|
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts relating to inventory and
intercompany management fee hedges
|
|
Prepaid expenses and other current assets
|
|
$
|
0.6
|
|
|
$
|
2.3
|
|
Derivatives not designated as cash flow hedging
instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
|
Prepaid expenses and other current assets
|
|
$
|
2.3
|
|
|
$
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.9
|
|
|
$
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts relating to inventory and
intercompany management fee hedges
|
|
Accrued expenses
|
|
$
|
0.8
|
|
|
$
|
|
|
Interest rate swaps
|
|
Accrued expenses
|
|
$
|
6.6
|
|
|
$
|
2.6
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
|
Accrued expenses
|
|
$
|
3.0
|
|
|
$
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10.4
|
|
|
$
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
On February 18, 2011, the Companys Board of Directors
approved a
two-for-one
split of the Companys common shares, subject to approval
by the Companys shareholders at the Companys
upcoming Annual General Meeting of Shareholders to be held on
April 28, 2011. If approved by the Companys
shareholders one additional common share
129
HERBALIFE
LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
will be distributed to the Companys shareholders on or
around May 17, 2011, for each common share held on
May 10, 2011. The stock split will not be effective
unless approved by the Companys shareholders at the
meeting.
On February 22, 2011, the Company announced that its Board
of Directors approved a quarterly cash dividend of $0.25 per
common share, for the fourth quarter of 2010, to shareholders of
record as of the close of business on March 8, 2011,
payable on March 22, 2011.
In February 2011, Herbalife Venezuela purchased U.S. dollar
denominated bonds with a face value of $20 million
U.S. dollars from a PDVSA bond offering for 86 million
Bolivars and then immediately sold the bonds for
U.S. dollars at an expected average effective rate of 5.7
Bolivars per U.S. dollar. These 86 million Bolivars
were remeasured at the SITME rate of 5.3 Bolivars per
U.S. dollar and recorded as cash and cash equivalents of
$16.3 million on the Companys consolidated balance
sheet at December 31, 2010. The Company expects to receive
approximately $15 million U.S. dollars in late
February or early March 2011 as a result of this conversion and
final settlement. This conversion is expected to result in the
Company recording a net pre-tax loss of approximately
$1.3 million U.S. dollars in its 2011 consolidated
statement of income and will be reflected in the Companys
consolidated financial statements at March 31, 2011 and for
the quarter ending March 31, 2011.
|
|
16.
|
Quarterly
Information (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In millions, except per share data)
|
|
|
First Quarter Ended March 31
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
618.6
|
|
|
$
|
521.7
|
|
Gross profit
|
|
|
478.2
|
|
|
|
419.3
|
|
Net income
|
|
|
51.9
|
|
|
|
41.5
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.86
|
|
|
$
|
0.68
|
|
Diluted
|
|
$
|
0.83
|
|
|
$
|
0.67
|
|
Second Quarter Ended June 30
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
688.8
|
|
|
$
|
571.8
|
|
Gross profit
|
|
|
552.2
|
|
|
|
449.4
|
|
Net income
|
|
|
81.9
|
|
|
|
48.3
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.38
|
|
|
$
|
0.78
|
|
Diluted
|
|
$
|
1.32
|
|
|
$
|
0.77
|
|
Third Quarter Ended September 30
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
688.4
|
|
|
$
|
600.2
|
|
Gross profit
|
|
|
555.2
|
|
|
|
468.4
|
|
Net income
|
|
|
75.7
|
|
|
|
57.9
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.28
|
|
|
$
|
0.95
|
|
Diluted
|
|
$
|
1.22
|
|
|
$
|
0.91
|
|
Fourth Quarter Ended December 31
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
738.4
|
|
|
$
|
630.9
|
|
Gross profit
|
|
|
589.8
|
|
|
|
494.4
|
|
Net income
|
|
|
81.0
|
|
|
|
55.7
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.37
|
|
|
$
|
0.92
|
|
Diluted
|
|
$
|
1.31
|
|
|
$
|
0.88
|
|
130
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereto duly authorized.
HERBALIFE LTD.
John DeSimone
Chief Financial Officer
Dated: February 22, 2011
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
date indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ MICHAEL
O. JOHNSON
Michael
O. Johnson
|
|
Chief Executive Officer, Director,
Chairman of the Board
(Principal Executive Officer)
|
|
February 22, 2011
|
|
|
|
|
|
/s/ JOHN
DESIMONE
John
DeSimone
|
|
Chief Financial Officer
(Principal Financial Officer)
|
|
February 22, 2011
|
|
|
|
|
|
/s/ BOSCO
CHIU
Bosco
Chiu
|
|
Vice President and Principal Accounting Officer (Principal
Accounting Officer)
|
|
February 22, 2011
|
|
|
|
|
|
/s/ LEROY
BARNES
Leroy
Barnes
|
|
Director
|
|
February 22, 2011
|
|
|
|
|
|
/s/ RICHARD
BERMINGHAM
Richard
Bermingham
|
|
Director
|
|
February 22, 2011
|
|
|
|
|
|
/s/ PEDRO
CARDOSO
Pedro
Cardoso
|
|
Director
|
|
February 22, 2011
|
|
|
|
|
|
/s/ MURRAY
H. DASHE
Murray
H. Dashe
|
|
Director
|
|
February 22, 2011
|
|
|
|
|
|
/s/ JEFFREY
T. DUNN
Jeffrey
T. Dunn
|
|
Director
|
|
February 22, 2011
|
|
|
|
|
|
/s/ LAWRENCE
M. HIGBY
Lawrence
M. Higby
|
|
Director
|
|
February 22, 2011
|
|
|
|
|
|
/s/ COLOMBE
M. NICHOLAS
Colombe
M. Nicholas
|
|
Director
|
|
February 22, 2011
|
|
|
|
|
|
/s/ JOHN
TARTOL
John
Tartol
|
|
Director
|
|
February 22, 2011
|
131