UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

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

Commission file number: 1-32381

HERBALIFE LTD.

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

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

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

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

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

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

Large accelerated filer þ

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o

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

Number of shares of registrant’s common shares outstanding as of April 29, 2010 was 59,951,384

 

 

HERBALIFE LTD.

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets			3
Unaudited Consolidated Statements of Income			4
Unaudited Consolidated Statements of Cash Flows			5
Notes to Unaudited Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3. Quantitative and Qualitative Disclosures About Market Risk			32
Item 4. Controls and Procedures			35
Forward Looking Statements			35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			37
Item 1A. Risk Factors			37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			52
Item 3. Defaults Upon Senior Securities			52
Item 4. (Removed and Reserved)			52
Item 5. Other Information			52
Item 6. Exhibits			52
Signatures and Certifications			58
Exhibit 10.72
Exhibit 10.73
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

PART I. FINANCIAL INFORMATION

Item 1.		FINANCIAL STATEMENTS

HERBALIFE LTD.

CONSOLIDATED BALANCE SHEETS
(Unaudited)

		March 31,				December 31,
		2010				2009
		(In thousands, except share amounts)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	165,271			$	150,801
Receivables, net of allowance for doubtful accounts of $4,493 (2010) and $3,982 (2009)			87,484				76,958
Inventories			146,440				145,962
Prepaid expenses and other current assets			107,810				101,181
Deferred income taxes			52,715				38,600
Total current assets			559,720				513,502
Property, at cost, net of accumulated depreciation and amortization of $160,082 (2010) and $147,392 (2009)			172,702				178,009
Deferred compensation plan assets			17,489				17,410
Deferred financing costs, net of accumulated amortization of $1,902 (2010) and $1,778 (2009)			1,375				1,498
Marketing related intangibles and other intangible assets, net			311,189				311,782
Goodwill			102,549				102,543
Other Assets			21,725				21,306
Total assets		$	1,186,749			$	1,146,050
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	55,717			$	37,330
Royalty overrides			136,902				144,689
Accrued compensation			51,031				65,043
Accrued expenses			106,805				107,943
Current portion of long-term debt			3,372				12,402
Advance sales deposits			48,429				22,261
Income taxes payable			42,407				40,298
Total current liabilities			444,663				429,966
NON-CURRENT LIABILITIES:
Long-term debt, net of current portion			244,008				237,931
Deferred compensation plan liability			17,673				16,629
Deferred income taxes			78,376				77,613
Other non-current liabilities			24,216				24,600
Total liabilities			808,936				786,739
CONTINGENCIES
SHAREHOLDERS’ EQUITY:
Common shares, $0.002 par value, 500.0 million shares authorized, 59.9 million (2010) and 60.2 million (2009) shares outstanding			120				120
Paid-in-capital in excess of par value			227,604				222,882
Accumulated other comprehensive loss			(26,508	)			(23,396	)
Retained earnings			176,597				159,705
Total shareholders’ equity			377,813				359,311
Total liabilities and shareholders’ equity		$	1,186,749			$	1,146,050

See the accompanying notes to unaudited consolidated financial statements.

HERBALIFE LTD.

CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

		Three Months Ended
		March 31,				March 31,
		2010				2009
		(In thousands, except per share amounts)
Product sales		$	527,222			$	446,948
Handling & freight income			91,411				74,735
Net sales			618,633				521,683
Cost of sales			140,472				102,400
Gross profit			478,161				419,283
Royalty overrides			207,319				175,532
Selling, general & administrative expenses			206,883				181,458
Operating income			63,959				62,293
Interest expense, net			1,953				1,712
Income before income taxes			62,006				60,581
Income taxes			10,135				19,039
NET INCOME		$	51,871			$	41,542
Earnings per share:
Basic		$	0.86			$	0.68
Diluted		$	0.83			$	0.67
Weighted average shares outstanding:
Basic			60,160				61,510
Diluted			62,672				61,614
Dividends declared per share		$	0.20			$	0.20

See the accompanying notes to unaudited consolidated financial statements.

HERBALIFE LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Three Months Ended
		March 31,				March 31,
		2010				2009
		(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	51,871			$	41,542
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			17,262				14,821
(Excess) Deficiency in tax benefits from share-based payment arrangements			(2,606	)			963
Share-based compensation expenses			5,295				4,880
Amortization of discount and deferred financing costs			124				121
Deferred income taxes			(13,671	)			586
Unrealized foreign exchange transaction (gain) loss			(2,608	)			6,537
Foreign exchange loss from adoption of highly inflationary accounting in Venezuela			15,131				—
Other			1,078				919
Changes in operating assets and liabilities:
Receivables			(12,048	)			(4,047	)
Inventories			474				12,235
Prepaid expenses and other current assets			(4,357	)			979
Other assets			(71	)			750
Accounts payable			19,311				(9,566	)
Royalty overrides			(7,081	)			(1,035	)
Accrued expenses and accrued compensation			(14,022	)			(6,703	)
Advance sales deposits			26,741				16,666
Income taxes payable			5,566				6,574
Deferred compensation plan liability			1,044				(206	)
NET CASH PROVIDED BY OPERATING ACTIVITIES			87,433				86,016
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property			(11,623	)			(14,073	)
Proceeds from sale of property			3				—
Deferred compensation plan assets			(79	)			612
NET CASH USED IN INVESTING ACTIVITIES			(11,699	)			(13,461	)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid			(12,065	)			(12,300	)
Borrowings from long-term debt			102,000				19,000
Principal payments on long-term debt			(104,951	)			(25,487	)
Share repurchases			(28,010	)			—
Excess (Deficiency in) tax benefits from share-based payment arrangements			2,606				(963	)
Proceeds from exercise of stock options and sale of stock under employee stock purchase plan			1,888				365
NET CASH USED IN FINANCING ACTIVITIES			(38,532	)			(19,385	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH			(22,732	)			(9,284	)
NET CHANGE IN CASH AND CASH EQUIVALENTS			14,470				43,886
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			150,801				150,847
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	165,271			$	194,733
CASH PAID DURING THE PERIOD
Interest paid		$	2,691			$	3,429
Income taxes paid, net		$	13,430			$	13,374
NON CASH ACTIVITIES
Assets acquired under capital leases and other long-term debt		$	—			$	280

See the accompanying notes to unaudited consolidated financial statements.

HERBALIFE LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Organization

Herbalife Ltd., a Cayman Islands exempted limited liability company, or Herbalife, was incorporated on April 4, 2002. Herbalife Ltd. (and together with its subsidiaries, the “Company”) is a leading global network marketing company that sells weight management, nutritional supplement, energy, sports & fitness products and personal care products through a network of approximately 2.1 million independent distributors, except in China, where the Company currently sells its products through retail stores, sales representatives, sales employees and licensed business providers. The Company reports revenue in six geographic regions: North America, which consists of the U.S., Canada and Jamaica; Mexico; South and Central America; EMEA, which consists of Europe, the Middle East and Africa; Asia Pacific (excluding China) which consists of Asia, New Zealand and Australia; and China.

2. Basis of Presentation

The unaudited interim financial information of the Company has been prepared in accordance with Article 10 of the Securities and Exchange Commission’s, or the SEC, Regulation S-X. Accordingly, it does not include all of the information required by generally accepted accounting principles in the U.S., or GAAP, for complete financial statements. The Company’s unaudited consolidated financial statements as of March 31, 2010, and for the three months ended March 31, 2010 and 2009, include Herbalife and all of its direct and indirect subsidiaries. In the opinion of management, the accompanying financial information contains all adjustments, consisting of normal recurring adjustments, necessary to present fairly the Company’s unaudited consolidated financial statements as of March 31, 2010, and for the three months ended March 31, 2010 and 2009. These unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, or the 2009 10-K. Operating results for the three months ended March 31, 2010, are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

Recently Adopted Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board, or FASB, issued Final Accounting Standards Update 2010-06, Improving Disclosures about Fair Value Measurements, or ASU 2010-06. ASU 2010-06 sets forth additional requirements and guidance regarding disclosures of fair value measurements. ASU 2010-06 requires the gross presentation of activity within the Level 3 fair value measurement roll forward and details of transfers in and out of Level 1 and 2 fair value measurements. It also clarifies two existing disclosure requirements of Accounting Standards Codification, or ASC, Topic 820, Fair Value Measurements and Disclosures, or ASC 820, relating to the level of disaggregation of fair value measurements and disclosures on inputs and valuation techniques. ASU 2010-06 is effective for fiscal years and interim periods beginning after December 15, 2009, except for the Level 3 roll forward, which is effective for fiscal years and interim periods beginning after December 15, 2010. The adoption of this guidance did not have a material impact to the Company’s consolidated financial statements.

In June 2009, the FASB issued guidance to revise the approach to determine when a variable interest entity, or VIE, should be consolidated. The new consolidation model for VIE’s considers whether the Company has the power to direct the activities that most significantly impact the VIE’s economic performance and shares in the significant risks and rewards of the entity. The guidance on VIE’s requires companies to continually reassess VIE’s to determine if consolidation is appropriate and provide additional disclosures. The guidance is effective for the Company’s 2010 fiscal year. The adoption of this guidance did not have a material impact to the Company’s consolidated financial statements.

3. Venezuela’s Currency Restrictions and Highly Inflationary Economy

Currency restrictions enacted by the Venezuelan government in 2003 have become more restrictive and have impacted the ability of the Company’s subsidiary in Venezuela, Herbalife Venezuela, to obtain U.S. dollars in exchange for Venezuelan Bolivars, or Bolivars, at the official foreign exchange rate from the Venezuelan government and its Foreign Exchange Commission, CADIVI. The application and approval processes have been intermittently delayed in recent periods. In certain instances, the Company has made appropriate applications through CADIVI, for approval to obtain U.S. dollars to pay for imported products and an annual dividend at the official exchange rate. In other instances, in order to timely provide products to its distributors, the Company did not submit applications but instead has used a legal parallel market mechanism for payment. In this legal parallel market Bolivars can be exchanged for U.S. dollars, but at a less favorable exchange rate than the official rate.

Venezuela’s inflation rate as measured using the blended National Consumer Price Index and Consumer Price Index rate exceeded the three-year cumulative inflation rate of 100% as of December 31, 2009. Accordingly, effective January 1, 2010, Venezuela is considered a highly inflationary economy. Pursuant to the highly inflationary basis of accounting, Herbalife Venezuela changed its functional currency from the Bolivar to the U.S. dollar. Subsequent movements in the Bolivar to U.S. dollar exchange rate will impact the Company’s consolidated earnings. Beginning January 1, 2010, based on the Company’s current facts and circumstances, the Company uses the parallel market exchange rate for remeasurement purposes and the Company is no longer required to translate Herbalife Venezuela’s financial statements since their functional currency is now the U.S. dollar. The Company’s ability to access the official exchange rate and the parallel market exchange rate could impact what exchange rates the Company will use for remeasurement purposes in future periods.

On January 1, 2010, upon Venezuela being designated as a highly inflationary economy, the Company recorded foreign exchange losses in its consolidated statement of income relating to the remeasurement of Herbalife Venezuela’s monetary assets and liabilities. The Company used the parallel market exchange rate for remeasurement of Herbalife Venezuela’s monetary assets and liabilities on its opening balance sheet and recorded non-tax deductible foreign exchange losses of $15.1 million primarily relating to Herbalife Venezuela’s cash and cash equivalents. This charge included a $9.9 million foreign exchange loss relating to Herbalife Venezuela’s U.S. dollar cash and cash equivalents that were remeasured at the less favorable parallel market rate and then translated at the official rate at December 31, 2009, as discussed in the 2009 10-K. Also, Herbalife Venezuela’s $34.2 million cash and cash equivalents reported on the Company’s consolidated balance sheet at December 31, 2009, which included U.S. dollar denominated cash, was reduced to approximately $12.5 million on January 1, 2010. However, nonmonetary assets, such as inventory, reported on the Company’s consolidated balance sheet at December 31, 2009, remained at historical cost subsequent to Venezuela becoming a highly inflationary economy. Therefore, the incremental costs related to the Company’s 2009 imported products recorded at the unfavorable parallel market exchange rate negatively impacted the Company’s first quarter 2010 consolidated statement of income by approximately $12.7 million, non-tax deductible, as these products were sold during the first quarter of 2010. See Note 9, Income Taxes, for additional discussion on income tax impact related to Venezuela becoming highly inflationary.

In early January 2010, Venezuela announced an official exchange rate devaluation of the Bolivar to an official rate of 4.30 Bolivars per U.S. dollar for non-essential items and 2.60 Bolivars per U.S. dollar for essential items. The Company’s imports fall into both classifications. Since the Company is using the unfavorable parallel market exchange rate for remeasurement purposes, U.S. dollars obtained from CADIVI at the official rate could have a positive impact to the Company’s consolidated net earnings. During the three months ended March 31, 2010, $3.7 million foreign exchange gains were recorded in the Company’s consolidated statement of income as result of receiving U.S. dollars approved by CADIVI at the official exchange rate in the first quarter of 2010 primarily relating to certain product importations in 2009 which were previously registered with CADIVI. The Company continues to assess and monitor the current economic and political environment in Venezuela. As of March 31, 2010, the parallel market rate was approximately 38% and 62% less favorable than the official exchange rates for non-essential and essential items, respectively.

4. Long-Term Debt

Long-term debt consists of the following:

		March 31,				December 31,
		2010				2009
		(In millions)
Borrowings under senior secured credit facility		$	243.0			$	236.4
Capital leases			4.4				4.8
Other debt			—				9.1
Total			247.4				250.3
Less: current portion			3.4				12.4
Long-term portion		$	244.0			$	237.9

Interest expense was $2.4 million and $3.3 million for the three months ended March 31, 2010 and 2009, respectively.

On July 21, 2006, the Company entered into a $300.0 million senior secured credit facility, comprised of a $200.0 million term loan and a $100.0 million revolving credit facility, with a syndicate of financial institutions as lenders. In September 2007, the Company and its lenders amended the credit agreement, increasing the amount of the revolving credit facility by an aggregate principal amount of $150.0 million to $250.0 million primarily to finance the increase in its share repurchase program. See Note 11, Shareholders’ Equity, for further discussion of the share repurchase program. The term loan bears interest at LIBOR plus a margin of 1.5%, or the base rate plus a margin of 0.50%, and matures on July 21, 2013. The revolving credit facility bears interest at LIBOR plus a margin of 1.25%, or the base rate plus a margin of 0.25%, and is available until July 21, 2012. On March 31, 2010, and December 31, 2009, the weighted average interest rate for the senior secured credit facility was 1.64% and 1.66%, respectively. The Company incurred approximately $2.3 million of debt issuance costs in connection with entering into the senior secured credit facility in July 2006, which are being amortized over the term of the senior secured credit facility. The fair value of the Company’s senior secured credit facility approximates its carrying value.

The senior secured credit facility requires the Company to comply with a leverage ratio and an interest coverage ratio. In addition, the senior secured credit facility contains customary covenants, including covenants that limit or restrict the Company’s ability to incur liens, incur indebtedness, make investments, dispose of assets, make certain restricted payments, merge or consolidate and enter into certain transactions with affiliates. As of March 31, 2010, the Company was compliant with its debt covenants.

As of March 31, 2010, the Company is 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 March 31, 2010 and December 31, 2009, the amounts outstanding under the term loan were $145.0 million and $145.4 million, respectively.

During the first quarter of 2010, the Company borrowed an additional $102.0 million under the revolving credit facility and paid $95.0 million of the revolving credit facility. As of March 31, 2010 and December 31, 2009, the amounts outstanding under the revolving credit facility were $98.0 million and $91.0 million, respectively.

Through the course of conducting regular business operations, certain vendors and government agencies may require letters of credit to be issued. As of March 31, 2010 and December 31, 2009, the Company had an aggregate of $2.6 million and $2.8 million, respectively, of issued but undrawn letters of credit.

5. Contingencies

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

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

On April 16, 2007, Herbalife International of America, Inc. filed a Complaint in the United States District Court for the Central District of California against certain former Herbalife distributors who had left the Company to join a competitor. The Complaint alleged breach of contract, misappropriation of trade secrets, intentional interference with prospective economic advantage, intentional interference with contract, unfair competition, constructive trust and fraud and seeks monetary damages, attorney’s fees and injunctive relief. (Herbalife International of America, Inc. v. Robert E. Ford, et al) The court entered a Preliminary Injunction against the defendants enjoining them from further use and/or misappropriation of the Company’s trade secrets on December 11, 2007. Defendants appealed the court’s entry of the Preliminary Injunction to the U.S. Court of Appeals for the Ninth Circuit. That court affirmed, in relevant part, the Preliminary Injunction. On December 3, 2007, the defendants filed a counterclaim alleging that the Company had engaged in unfair and deceptive business practices, intentional and negligent interference with prospective economic advantage, false advertising and that the Company was an endless chain scheme in violation of California law and seeking restitution, contract rescission and an injunction. Both sides engaged in discovery and filed cross motions for Summary Judgment. On August 25, 2009, the court granted partial summary judgment for Herbalife on all of defendants’ claims except the claim that the Company is an endless chain scheme which under applicable law is a question of fact that can only be determined at trial. The court denied defendants’ motion for Summary Judgment on Herbalife’s claims for misappropriation of trade secrets and breach of contract. On March 9, 2010 the Court heard oral argument by the parties on Herbalife’s motion for summary judgment to dismiss the defendant’s sole remaining counterclaim, and a decision is pending. No date has been set for trial. The Company believes that there is merit to its remaining claims for relief and that it has meritorious defenses to the remaining counterclaim if the counterclaim is not dismissed by summary judgment.

Certain of the Company’s subsidiaries have been subject to tax audits by governmental authorities in their respective countries. In certain of these tax audits, governmental authorities are proposing that significant amounts of additional taxes and related interest and penalties are due. The Company and its tax advisors believe that there are substantial defenses to their allegations that additional taxes are owed, and the Company is vigorously contesting the additional proposed taxes and related charges.

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 an amount that the Company believes represents the most likely outcome of the resolution of these disputes, if the Company is incorrect in the assessment the Company may have to record additional expenses.

6. Comprehensive Income

Total comprehensive income consisted of the following:

		Three Months Ended
		March 31,				March 31,
		2010				2009
		(In millions)
Net income		$	51.9			$	41.5
Unrealized gain on derivative instruments, net of tax			2.1				2.0
Foreign currency translation adjustment			(5.2	)			(10.7	)
Comprehensive income		$	48.8			$	32.8

7. Segment Information

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

The Company sells products in 73 countries throughout the world and is organized and managed by geographic regions. The Company aggregates its operating segments, excluding China, into one reporting segment, or the Primary Reporting Segment, as management believes that the Company’s operating segments have similar operating characteristics and similar long term operating performance. In making this determination, management believes that the operating segments are similar in the nature of the products sold, the product acquisition process, the types of customers to whom products are sold, the methods used to distribute the products, and the nature of the regulatory environment. China has been identified as a separate reporting segment as it does not meet the criteria for aggregation. The operating information for the Primary Reporting Segment and China, and sales by product line are as follows:

		Three Months Ended
		March 31,				March 31,
		2010				2009
		(In millions)
Net Sales:
Primary Reporting Segment
United States		$	146.7			$	119.1
Mexico			71.8				59.2
Others			367.7				316.6
Total Primary Reporting Segment			586.2				494.9
China			32.4				26.8
Total Net Sales		$	618.6			$	521.7

		Three Months Ended
		March 31,				March 31,
		2010				2009
		(In millions)
Operating Margin(1):
Primary Reporting Segment
United States		$	67.2			$	57.0
Mexico			24.2				26.3
Others			150.1				137.8
Total Primary Reporting Segment			241.5				221.1
China(2)			29.3				22.6
Total Operating Margin		$	270.8			$	243.7
Selling, general and administrative expenses(2)			206.9				181.5
Interest expense, net			1.9				1.7
Income before income taxes			62.0				60.5
Income taxes			10.1				19.0
Net Income		$	51.9			$	41.5

		Three Months Ended
		March 31,				March 31,
		2010				2009
		(In millions)
Net sales by product line:
Weight Management		$	387.2			$	329.2
Targeted Nutrition			138.6				110.0
Energy, Sports and Fitness			25.8				21.6
Outer Nutrition			31.0				31.5
Literature, promotional and other(3)			36.0				29.4
Total Net Sales		$	618.6			$	521.7
Net sales by geographic region:
North America(4)		$	151.3			$	123.1
Mexico			71.8				59.2
South and Central America			91.3				75.3
EMEA(5)			130.8				123.3
Asia Pacific(6)			141.0				114.0
China			32.4				26.8
Total Net Sales		$	618.6			$	521.7

As of March 31, 2010 and December 31, 2009, total assets for the Company’s Primary Reporting Segment were $1,136.7 million and $1,097.1 million, respectively. Total assets for the China segment were $50.0 million and $49.0 million as of March 31, 2010 and December 31, 2009, respectively.

8. Share-Based Compensation

The Company has share-based compensation plans, which are more fully described in Note 9 to the Consolidated Financial Statements in the 2009 10-K. During the three months ended March 31, 2010, the Company granted stock awards subject to continued service, consisting of stock units and stock appreciation rights, with vesting terms fully described in the 2009 10-K. Also, during the three months ended March 31, 2010, the Company granted other stock units to certain key employees subject to continued service, one half of which vest on the first anniversary of the date of the grant, and the remaining half of which vest on the second anniversary of the date of the grant.

For the three months ended March 31, 2010 and 2009, share-based compensation expense amounted to $5.3 million and $4.9 million, respectively. As of March 31, 2010, the total unrecognized compensation cost related to all non-vested stock awards was $28.9 million and the related weighted-average period over which it is expected to be recognized is approximately 1.7 years.

The following tables summarize the activity under all stock-based compensation plans for the three months ended March 31, 2010:

										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic
Stock Options & Stock Appreciation Rights		Awards				Price				Term				Value
		(In thousands)												(In millions)
Outstanding at December 31, 2009			7,372			$	24.84			5.9 years				$	123.6
Granted			174			$	41.15
Exercised			(204	)		$	12.42
Forfeited			(17	)		$	31.29
Outstanding at March 31, 2010			7,325			$	25.56			5.8 years				$	152.5
Exercisable at March 31, 2010			4,402			$	20.85			4.7 years				$	111.2

						Weighted
						Average
						Grant Date				Aggregate
Incentive Plan and Independent Directors Stock Units		Shares				Fair Value				Fair Value
		(In thousands)								(In millions)
Outstanding and nonvested at December 31, 2009			689.5			$	26.35			$	18.2
Granted			18.3			$	39.82				0.7
Vested			(167.5	)		$	32.40				(5.4	)
Cancelled			(4.8	)		$	22.86				(0.1	)
Outstanding and nonvested at March 31, 2010			535.5			$	24.95			$	13.4

The weighted-average grant date fair value of stock awards granted during the three months ended March 31, 2010 and 2009 was $20.23 and $5.85, respectively. The total intrinsic value of stock awards exercised during the three months ended March 31, 2010 and 2009, was $6.0 million and $1.2 million, respectively.

9. Income Taxes

As of March 31, 2010, the total amount of unrecognized tax benefits, related interest, and penalties was $38.8 million, $8.7 million and $2.5 million, respectively. During the three months ended March 31, 2010, the Company recorded tax, interest, and penalties related to uncertain tax positions of $0.6 million, $1.6 million and $0.1 million, respectively. During the three months ended March 31, 2010, the unrecognized tax benefits were reduced by the expiration of the statutes of limitations for tax of $1.1 million and interest of $0.3 million, which resulted in a year to date net decrease for tax of $0.5 million and a net increase for interest of $1.3 million. The unrecognized tax benefits relate primarily to uncertainties from international transfer pricing issues and the deductibility of certain operating expenses in various jurisdictions. If the total amount of unrecognized tax benefits were recognized, $38.8 million of unrecognized tax benefits, $8.7 million of interest and $2.5 million of penalties, would impact the effective tax rate.

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

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

10. Derivative Instruments and Hedging Activities

Interest Rate Risk Management

The Company engages in an interest rate hedging strategy for which the hedged transactions are forecasted interest payments on the Company’s 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 March 31, 2010, the maximum length of time over which the Company is hedging certain of these exposures is less than four years.

During August 2009, the Company entered into four interest rate swap agreements with an effective date of December 31, 2009. The agreements, collectively, provide for the Company to pay interest for less than a four-year period at a weighted average fixed rate of 2.78% on notional amounts aggregating to $140 million while receiving interest for the same period at the one month LIBOR rate on the same notional amounts. These agreements will expire in July 2013. These swaps have been designated as cash flow hedges against the variability in the LIBOR interest rate on the term loan at LIBOR plus 1.50%, thereby fixing the Company’s weighted average effective rate on the notional amounts at 4.28%. The Company formally assesses both at inception and at least quarterly thereafter, whether the derivatives used in hedging transactions are effective in offsetting changes in cash flows of the hedged item. As of March 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. As of March 31, 2010 and December 31, 2009, the Company recorded the interest rate swaps as liabilities at their fair value of $4.3 million and $2.6 million, respectively.

Foreign Currency Instruments

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

The Company also purchases foreign currency forward contracts in order to hedge forecasted inventory purchases and intercompany management fees that are designated as cash-flow hedges and are subject to foreign currency exposures. The Company applied the hedge accounting rules as required by ASC 815 for these hedges. These contracts allow the Company to sell Euros in exchange for U.S. dollars at specified contract rates. As of March 31, 2010, the aggregate notional amounts of these contracts outstanding were approximately $91.1 million and were expected to mature over the next fifteen months. The Company’s derivative financial instruments are recorded on the consolidated balance sheet at fair value based on quoted market rates. Forward contracts are used to hedge forecasted inventory purchases over specific months. Changes in the fair value of these forward contracts, excluding forward points, designated as cash-flow hedges are recorded as a component of accumulated other comprehensive income (loss) within shareholders’ equity, and are recognized in cost of sales in the consolidated statement of income during the period which approximates the time the hedged inventory is sold. The Company also hedges forecasted intercompany management fees over specific months. Changes in the fair value of these U.S. dollar forward contracts designated as cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) within shareholders’ equity, and are recognized in selling, general and administrative expenses in the consolidated statement of income during the period when the hedged item and underlying transaction affect earnings. As of March 31, 2010, and December 31, 2009, the Company recorded assets at fair values of $5.3 million and $2.3 million, respectively, relating to all outstanding foreign currency contracts designated as cash-flow hedges. The Company assesses hedge effectiveness and measures hedge ineffectiveness at least quarterly. During the quarter ended March 31, 2010, the ineffective portion relating to these hedges was immaterial and the hedges remained effective as of March 31, 2010.

As of March 31, 2010, substantially all of the Company’s outstanding foreign currency forward contracts have maturity dates of less than fifteen months with the majority of freestanding derivatives expiring within six months. There were no foreign currency option contracts outstanding as of March 31, 2010. See Part I, Item 3 — Quantitative and Qualitative Disclosures About Market Risk in this Quarterly Report on Form 10-Q for foreign currency instruments outstanding as of March 31, 2010.

Gains and Losses on Derivative Instruments

The following table summarizes gains (losses) relating to derivative instruments recorded in other comprehensive loss during the three months ended March 31, 2010 and 2009:

		Amount of Gain (Loss) Recognized
		in Other Comprehensive Loss
		For the Three Months Ended
		March 31, 2010				March 31, 2009
		(In millions)
Derivatives designated as hedging instruments:
Foreign exchange currency contracts relating to inventory and intercompany management fee hedges		$	5.1			$	2.4
Interest rate swaps		$	(2.5	)		$	—

The following table summarizes gains (losses) relating to derivative instruments recorded to income during the three months ended March 31, 2010 and 2009:

		Amount of Gain (Loss)
		Recognized in Income
		For the Three Months Ended								Location of Gain (Loss)
		March 31, 2010				March 31, 2009				Recognized in Income
		(In millions)
Derivatives designated as hedging instruments:
Foreign exchange currency contracts relating to inventory hedges and intercompany management fee hedges (1)		$	(0.1	)		$	(0.2	)		Selling, general and administrative expenses
Derivatives not designated as hedging instruments:
Foreign exchange currency contracts		$	(7.5	)		$	(0.3	)		Selling, general and administrative expenses

The following table summarizes gains (losses) relating to derivative instruments reclassified from accumulated other comprehensive loss into income during the three months ended March 31, 2010 and 2009:

										Location of Gain (Loss)
		Amount of Gain (Loss) Reclassified								Reclassified
		from Accumulated Other Comprehensive								from Accumulated Other
		Loss into Income								Comprehensive
		For the Three Months Ended								Loss into Income
		March 31, 2010				March 31, 2009				(Effective Portion)
		(In millions)
Derivatives designated as hedging instruments:
Foreign exchange currency contracts relating to inventory hedges		$	(0.6	)		$	—			Cost of sales
Foreign exchange currency contracts relating to intercompany management fee hedges		$	1.6			$	—			Selling, general and administrative expenses
Interest rate contracts		$	(0.9	)		$	(0.4	)		Interest expense, net

The Company reports its derivatives at fair value as either assets or liabilities within its consolidated balance sheet. See Note 13, Fair Value Measurements, for information on derivative fair values and their consolidated balance sheet location as of March 31, 2010, and December 31, 2009.

11. Shareholders’ Equity

Dividends

On February 19, 2010, the Company’s board of directors approved a quarterly cash dividend of $0.20 per common share in an aggregate amount of $12.1 million, for the fourth quarter of 2009 that was paid to shareholders on March 16, 2010. The aggregate amount of dividends declared and paid during the three months ended March 31, 2010 and 2009 were $12.1 million and $12.3 million, respectively.

Share Repurchases

On April 17, 2009, the Company’s share repurchase program adopted on April 18, 2007 expired pursuant to its terms. On April 30, 2009, the Company announced that its board of directors authorized a new program for the Company to repurchase up to $300 million of Herbalife common shares during the next two years, at such times and prices as determined by the Company’s management. During the three months ended March 31, 2010, the Company repurchased approximately 0.6 million of its common shares through open market purchases at an aggregate cost of approximately $25.0 million or an average cost of $41.42 per share. As of March 31, 2010, the remaining authorized capacity under the Company’s share repurchase program was approximately $201.8 million.

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

The number of shares issued upon vesting or exercise for certain restricted stock units and stock appreciation rights granted, pursuant to the Company’s share-based compensation plans, is net of the minimum statutory withholding requirements that the Company pays on behalf of its employees. Although shares withheld are not issued, they are treated as common share repurchases for accounting purposes, as they reduce the number of shares that would have been issued upon vesting.

12. Earnings Per Share

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

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

		For the Three Months
		Ended March 31,
		2010				2009
		(In thousands)
Weighted average shares used in basic computations			60,160				61,510
Dilutive effect of exercise of equity grants outstanding			2,319				61
Dilutive effect of warrants			193				43
Weighted average shares used in diluted computations			62,672				61,614

Equity grants, consisting of stock options, stock appreciation rights, and stock units, of an aggregate of 1.8 million and 3.7 million were outstanding during the three months ended March 31, 2010 and 2009, respectively, but were not included in the computation of diluted earnings per share because their effect would be anti-dilutive.

13. Fair Value Measurements

The Company applies the provisions of ASC 820 for its financial and non-financial assets and liabilities. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:

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

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

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

The Company measures certain assets and liabilities at fair value as discussed throughout the notes to its consolidated financial statements. Foreign exchange currency contracts are based on observable forward and spot rates. Interest rate swaps are estimated based on LIBOR/swap yield curves at the reporting date. Assets or liabilities that have recurring measurements and are measured at fair value consisted of Level 2 derivatives and are shown below at their gross values at March 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
		Derivative Balance Sheet		March 31,				December 31,
		Location		2010				2009
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		$	5.3			$	2.3
Derivatives not designated as cash flow hedging instruments:
Foreign exchange currency contracts		Prepaid expenses and other current assets		$	0.1			$	0.9
				$	5.4			$	3.2
LIABILITIES:
Derivatives designated as cash flow hedging instruments:
Interest rate swaps		Accrued expenses		$	4.3			$	2.6
Derivatives not designated as hedging instruments:
Foreign exchange currency contracts		Accrued expenses		$	5.2			$	2.6
				$	9.5			$	5.2

14. Subsequent Event

On April 29, 2010, the Company announced that its board of directors has authorized a $0.20 per common share cash dividend for the first quarter of 2010, payable on May 24, 2010 to shareholders of record as of May 10, 2010.

On May 3, 2010, the Company’s board of directors approved an increase to the current share repurchase authorization from $300 million to $1 billion, of which approximately $100 million has already been utilized. In addition, the Company’s board of directors approved the extension of the expiration date of the share repurchase program from April 2011 to December 2014.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a global network marketing company that sells weight management products, nutritional supplements, energy, sports & fitness products and personal care products. We pursue our mission of “changing people’s lives” by providing a financially rewarding business opportunity to distributors and quality products to distributors and their customers who seek a healthy lifestyle. We are one of the largest network marketing companies in the world with net sales of approximately $2.3 billion for the year ended December 31, 2009. As of March 31, 2010, we sold our products in 73 countries through a network of approximately 2.1 million independent distributors. In China, we sell our products through retail stores, sales representatives, sales employees and licensed business providers. We believe the quality of our products and the effectiveness of our distribution network, coupled with geographic expansion, have been the primary reasons for our success throughout our 30-year operating history.

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

Industry-wide factors that affect us and our competitors include the increasing prevalence of obesity 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.

While we are closely monitoring the current global economic crisis, the Company remains focused on the opportunities and challenges in retailing of our products, recruiting and retaining distributors, improving distributor productivity, opening new markets, further penetrating existing markets including China, the U.S., Brazil, Mexico and Russia, globalizing successful distributor methods of operation such as Nutrition Clubs and Weight Loss Challenges, introducing new products and globalizing existing products, developing niche market segments and further investing in our infrastructure. Management remains intently focused on the Venezuela market and especially the limited ability to repatriate cash at the official exchange rate.

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 and ignores the differences generated by varying retail pricing across geographic markets. The Volume Point measure, in the aggregate and in each region, can be a measure of our sales volume as well as of sales volume trends. In general, an increase in Volume Points in a particular geographic region or country indicates an increase in our sales volume which results in an increase in our local currency net sales; a decrease in Volume Points in a particular geographic region or country indicates a decrease in our sales volume, which results in decreasing local currency net sales.

		Three Months Ended March 31,
		2010				2009				% Change
		(Volume points in millions)
North America			220.1				186.5				18.0	%
Mexico			124.2				120.4				3.2	%
South & Central America			101.1				102.6				(1.5	)%
EMEA			119.5				124.1				(3.7	)%
Asia Pacific (excluding China)			152.2				145.0				5.0	%
China			25.6				20.8				23.1	%
Worldwide			742.7				699.4				6.2	%

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 the company 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 DMOs.

		Three Months Ended March 31,
		2010				2009				% Change
		(Average Active Sales Leaders)
North America			45,831				40,285				13.8	%
Mexico			34,481				33,173				3.9	%
South & Central America			27,217				26,685				2.0	%
EMEA			32,044				32,118				(0.2	)%
Asia Pacific (excluding China)			31,903				26,832				18.9	%
China			5,318				5,031				5.7	%
Worldwide Average Active Sales Leaders (1)			169,715				157,999				7.4	%

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 is a general indicator of the level of distributor recruitment.

		Three Months Ended March 31,
		2010				2009				% Change
		(New Sales Leaders)
North America			8,127				7,893				3.0	%
Mexico			4,140				4,351				(4.8	)%
South & Central America			5,827				7,715				(24.5	)%
EMEA			3,877				5,236				(26.0	)%
Asia Pacific (excluding China)			11,562				10,737				7.7	%
Total New Sales Leaders			33,533				35,932				(6.7	)%
New China Sales Employees and Licensed Business Providers			4,245				4,327				(1.9	)%
Worldwide Total New Sales Leaders			37,778				40,259				(6.2	)%

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

The distributor statistics below further highlight the calculation for retention.

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

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

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

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

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

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

Presentation

“Retail sales” represent the gross sales amounts on our invoices to distributors before distributor allowances, as defined below, and “net sales,” which reflect distributor allowances and handling and freight income, represent what we collect and recognize as net sales in our financial statements. We discuss retail sales because of its fundamental role in our compensation systems, internal controls and operations, including its role as the basis upon which distributor discounts, royalties and bonuses are awarded. In addition, it is used as the basis for certain information included in daily and monthly reports reviewed by our management. However, such a measure is not in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. You should not consider retail sales 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 changes in the U.S. dollar against foreign currencies. In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency fluctuations, in addition to comparing the percent change in net sales from one period to another in U.S. dollars, we also compare the percent change in the net sales from one period to another period using “net sales in local currency” disclosure. Such net sales in local currency is not a U.S. GAAP financial measure. Net sales in local currency removes from net sales in U.S. dollars the impact of changes in exchange rates between the U.S. dollar and the functional currencies of our foreign subsidiaries, by translating the current period net sales into U.S. dollars using the same foreign currency exchange rates that were used to translate the net sales for the previous period. We believe presenting net sales in local currency basis is useful to investors because it allows a more meaningful comparison of the net sales of our foreign operations from period to period. However, net sales in local currency measures should not be considered in isolation or as an alternative to net sales in U.S. dollars measures that reflect current period exchange rates, or to other financial measures calculated and presented in accordance with GAAP.

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

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

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

Royalty overrides are generally earned based on retail sales and provide potential earnings to distributors of up to 23% of retail sales or approximately 33% of our net sales. Royalty overrides together with distributor allowances of up to 50% represent the potential earnings to distributors of up to approximately 73% of retail sales. The compensation to distributors is generally for the development, retention and improved productivity of their distributor sales organizations and is paid to several levels of distributors on each sale. Due to restrictions on direct selling in China, our full-time employed sales representatives in China are compensated with wages, bonuses and benefits and our licensed business providers in China are compensated with service fees instead of the distributor allowances and royalty overrides utilized in our traditional marketing program used in our other five regions. Because of local country regulatory constraints, we may be required to modify our typical distributor incentive plans as described above. Consequently, the total distributor discount percentage may vary over time. We also offer reduced distributor allowances and pay reduced royalty overrides with respect to certain products worldwide.

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

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

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

Summary Financial Results

Net sales for the three months ended March 31, 2010 increased 18.6% to $618.6 million as compared to $521.7 million in 2009. In local currency, net sales for the three months ended March 31, 2010 increased 13.3%, as compared to the same period in 2009. For the three months ended March 31, 2010, net sales in U.S. dollars in our top ten countries for the period, namely the U.S., Mexico, Brazil, South Korea, China, Italy, Malaysia and India increased 23.2%, 21.3%, 42.1%, 109.5%, 20.5%, 5.0%, 16.7% and 102.0%, respectively, as compared to the same period in 2009, while Taiwan and Japan, decreased 12.0% and 6.6%, respectively, as compared to the same period in 2009. The increase in net sales in most of our top markets 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. The decline in Taiwan was mainly due to a government coupon promotion in the first quarter of 2009 that increased net sales in that period and was not available in 2010. In Japan, lower net sales were mainly due to decline in distributor recruiting and average active sales leaders.

Net income for the three months ended March 31, 2010 increased 24.9% to $51.9 million, or $0.83 per diluted share, compared to $41.5 million, or $0.67 per diluted share, for the same period in 2009. The increase was primarily driven by higher net sales and lower effective tax rate, and was partially offset by certain charges related to Venezuela discussed below, higher cost of goods sold including the Venezuela related charges, and higher royalties, depreciation expense, salaries and benefits, and advertising and promotion expense.

Net income for the three months ended March 31, 2010 included a $15.1 million unfavorable impact related to remeasurement of monetary assets and liabilities resulting from Venezuela being designated as a highly inflationary economy beginning January 1, 2010; a $12.7 million unfavorable impact related to incremental U.S. dollar costs of 2009 imports into Venezuela which were recorded at the unfavorable parallel market exchange rate and were not devalued based on 2010 exchange rates but rather recorded to cost of sales at their historical dollar costs as products were sold in the first quarter of 2010; a $3.7 million favorable impact resulting from receipt of U.S. dollars approved by the Venezuelan government’s Foreign Exchange Commission, or CADIVI, at the official exchange rate relating to 2009 product importations which were previously registered with CADIVI and a $14.5 million one-time favorable impact to income taxes related to Venezuela becoming a highly inflationary economy. Net income for the three months ended March 31, 2009 included a $0.4 million unfavorable after tax impact in connection with our restructuring activities.

Results of Operations

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

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

		Three Months Ended
		March 31,				March 31,
		2010				2009
Operations:
Net sales			100.0	%			100.0	%
Cost of sales			22.7				19.6
Gross profit			77.3				80.4
Royalty overrides(1)			33.5				33.7
Selling, general and administrative expenses(1)			33.4				34.8
Operating income			10.4				11.9
Interest expense, net			0.3				0.3
Income before income taxes			10.1				11.6
Income taxes			1.6				3.6
Net income			8.5	%			8.0	%

Net Sales

The following chart reconciles retail sales to net sales:

Sales by Geographic Region

		Three Months Ended March 31,
		2010																				2009
														Handling																				Handling
		Retail				Distributor				Product				& Freight				Net				Retail				Distributor				Product				& Freight				Net				Change in
		Sales				Allowance				Sales				Income				Sales				Sales				Allowance				Sales				Income				Sales				Net Sales
		(Dollars in millions)
North America		$	240.6			$	(114.7	)		$	125.9			$	25.4			$	151.3			$	196.6			$	(93.7	)		$	102.9			$	20.2			$	123.1				22.9	%
Mexico			116.1				(56.7	)			59.4				12.4				71.8				97.8				(47.7	)			50.1				9.1				59.2				21.3	%
South & Central America			151.9				(73.0	)			78.9				12.4				91.3				124.3				(59.9	)			64.4				10.9				75.3				21.2	%
EMEA			209.3				(100.4	)			108.9				21.9				130.8				199.9				(96.8	)			103.1				20.2				123.3				6.1	%
Asia Pacific			227.1				(105.4	)			121.7				19.3				141.0				189.3				(89.7	)			99.6				14.4				114.0				23.7	%
China			35.5				(3.1	)			32.4				—				32.4				29.0				(2.2	)			26.8				—				26.8				20.9	%
Worldwide		$	980.5			$	(453.3	)		$	527.2			$	91.4			$	618.6			$	836.9			$	(390.0	)		$	446.9			$	74.8			$	521.7				18.6	%

Changes in net sales are directly associated with the recruiting and retention of our distributor force, retailing of our products, the quality and completeness of our product offerings that the distributor force has to sell and the number of countries in which we operate. Management’s role, both in-country and at the region and corporate level is to provide distributors with a competitive and broad product line, encourage strong teamwork and leadership among the Chairman’s Club and President’s Team distributors and offer leading edge business tools 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 points in our business, and thus, net sales. 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 during the three months ended March 31, 2010, as well as the unique growth or contraction factors specific to certain geographic regions or major countries. We believe that the correct business foundation, coupled with ongoing training and promotional initiatives, is required to increase recruiting and retention of distributors and retailing of our products. This correct business foundation includes strong country management that works closely with the distributor leadership, actively engaged and unified distributor leadership, a broad product line that appeals to local consumer needs, a favorable regulatory environment, a scalable and stable technology platform and an attractive distributor marketing plan. Initiatives, such as Success Training Seminars, Leadership Development Weekends, Promotional Events and regional Extravaganzas are integral components of developing a highly motivated and educated distributor sales organization that will work toward increasing the recruitment and retention of distributors.

We anticipate that our strategy will continue to include creating and maintaining growth within existing markets, while expanding into new markets. In addition, new ideas and Daily Method of Operations, or 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. Management’s strategy is to review the applicability of expanding successful country initiatives throughout a region, and where appropriate, financially support the globalization of these initiatives.

North America

The North America region reported net sales of $151.3 million for the three months ended March 31, 2010. Net sales increased $28.2 million, or 22.9%, for the three months ended March 31, 2010 as compared to the same period in 2009. In local currency, net sales increased 22.4% for the three months ended March 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 $27.6 million, or 23.2%, as compared to the same period in 2009.

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 65% in the U.S. Latin market and 35% in the General market for the three months ended March 31, 2010.

In January 2010, the region hosted a U.S. Latin market Future President’s Team Retreat with almost 500 attendees. The region also hosted January Spectaculars for the General market and Mega Escuelas for the Latin market. There were more than 8,100 attendees in 15 cities.

Average active sales leaders in the region increased 13.8% for the three months ended March 31, 2010, as compared to the same period in 2009. Average active sales leaders in the U.S. increased 14.5% for the three months ended March 31, 2010, as compared to the same period in 2009. Total sales leaders in the region increased 2.2% as of March 31, 2010 compared to March 31, 2009.

In March 2010, Herbalife hosted its annual global Herbalife Leadership Summit event in Orlando, Florida where President Team members and other qualifying distributors from around the world met and shared best practices, conducted leadership training and Herbalife management awarded distributors an aggregate of $36.5 million in Mark Hughes bonus payments related to 2009 performance. The summit was followed by qualified distributors attending Worldwide Vacations at Atlantis, Bahamas and Don Cesar in Florida. The combined attendance for the Worldwide Vacations was 3,100 distributors.

We believe the fiscal year 2010 net sales in North America should increase year over year primarily as a result of the continuing transformation of our distributor business focus to a daily consumption model.

Mexico

The Mexico region reported net sales of $71.8 million for the three months ended March 31, 2010. Net sales for the three months ended March 31, 2010, increased $12.6 million, or 21.3%, as compared to the same period in 2009. In local currency, net sales for the three months ended March 31, 2010 increased 7.8% as compared to the same period in 2009. The fluctuation of foreign currency rates had a favorable impact of $8.0 million on net sales for the three months ended March 31, 2010.

We believe that local currency sales in the first quarter benefited from our distribution agreement with a large Mexico retailer. This agreement allows distributors to pick up their product orders at 307 locations in 26 Mexican states. We believe that by leveraging their distribution system, we are providing distributors with better product accessibility.

Average active sales leaders in Mexico increased 3.9% for the three months ended March 31, 2010, as compared to the same period in 2009. Total sales leaders in Mexico decreased 6.6% as of March 31, 2010, compared to March 31, 2009.

In February 2010, Mexico hosted a Future President’s Team retreat with over 500 attendees. They also hosted a distributor leadership retreat with approximately 950 attendees.

We believe the fiscal year 2010 net sales in Mexico should increase year over year due to increase in volume as well as the assumption of a slightly favorable currency exchange rate.

South and Central America

The South and Central America region reported net sales of $91.3 million for the three months ended March 31, 2010. Net sales increased $16.0 million or 21.2%, for the three months ended March 31, 2010, as compared to the same period in 2009. In local currency, net sales increased 29.6% for the three months ended March 31, 2010, as compared to the same period in 2009. The fluctuation of foreign currency rates had a $6.2 million unfavorable impact on net sales for the three months ended March 31, 2010. The increase in local currency net sales in the region for the three months ended March 31, 2010 was attributable to sales growth in several markets including Brazil, Venezuela, Ecuador, Bolivia and Colombia which increased 10.9%, 50.8%, 79.7%, 96.2% and 95.8%, respectively, partially offset by sales decline in Chile of 21.1%.

In Brazil, the region’s largest market, net sales increased $13.9 million, or 42.1%, for the three months ended March 31, 2010, as compared to the same period in 2009. In local currency, net sales increased 10.9% for the three months ended March 31, 2010, as compared to the same period in 2009. 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 $10.3 million favorable impact on net sales in Brazil for the three months ended March 31, 2010.

Venezuela, the region’s second largest market, experienced a net sales decrease of $8.7 million, or 50.4%, for the three months ended March 31, 2010, as compared to the same period in 2009. The decrease in sales reflects the impact of remeasuring Venezuela’s local sales at the parallel market exchange rate during fiscal year 2010, under highly inflationary accounting rules, which is 67% less favorable than the official exchange rate that was used to translate Venezuela’s local sales in 2009. In local currency, net sales increased 50.8% for the three months ended March 31, 2010, as compared to the same period in 2009. The sales growth in local currency was partially driven by a price increase of 10%, 9%, and 12% in June 2009, October 2009, and March 2010, respectively. We expect to make ongoing changes, as necessary, in pricing in Venezuela to mitigate the impact of inflation, currency devaluations, and currency restrictions.

Average active sales leaders in the region increased 2.0% for the three months ended March 31, 2010, as compared to the same period in 2009. The increase was driven by increases in average active sales leaders in several markets including Brazil which increased 3.8% for the three months ended March 31, 2010, as compared to the same period in 2009; and Ecuador, which increased 50.3% for the three months ended March 31, 2010, as compared to the same period in 2009. Total sales leaders in the region decreased 25.1% as of March 31, 2010 compared to March 31, 2009. We believe this decrease reflects current economic conditions coupled with the transition, in several markets, to DMOs which focus on daily consumption.

In February 2010, the region hosted an Extravaganza in Quito, Ecuador with over 12,500 attendees.

We believe the fiscal year 2010 net sales in South and Central America will show a slight decrease year over year. This assumes the negative impact of re-measuring Venezuela’s local sales under highly inflationary accounting rules at the parallel market exchange rate during fiscal year 2010 compared to the official exchange rate that was used to translate Venezuela’s local sales in 2009. We expect the decrease in Venezuela net sales to be largely offset by slightly higher volume in other countries, price increases throughout the region, and, other than in Venezuela, a more favorable currency exchange rate than in 2009.

EMEA

The EMEA region reported net sales of $130.8 million for the three months ended March 31, 2010. Net sales increased $7.5 million, or 6.1%, for the three months ended March 31, 2010, as compared to the same period in 2009. In local currency, net sales decreased 2.0% for the three months ended March 31, 2010, as compared to the same period in 2009. The fluctuation of foreign currency rates had a favorable impact on net sales of $9.9 million for the three months ended March 31, 2010.

Among the largest markets in the region, Italy, Spain and Russia, net sales increased 5.0%, 12.4% and 21.2%, respectively, for the three months ended March 31, 2010, as compared to the same period in 2009. In local currency, Italy reported a net sales decrease of 0.9% while both Spain and Russia reported net sales increases of 6.1% for the three months ended March 31, 2010, in each case as compared to the same period in 2009. 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.

In other markets in the region, net sales in France decreased 16.5% and net sales in the Netherlands increased 0.9% for the three months ended March 31, 2010, as compared to the same period in 2009. In local currency, France and Netherlands net sales decreased 21.0% and 4.9%, respectively, for the three months ended March 31, 2010, as compared to the same period in 2009.

Average active sales leaders in the region remained relatively flat for the three months ended March 31, 2010, as compared to the same period in 2009. Total sales leaders in the region decreased 11.3% as of March 31, 2010 compared to March 31, 2009.

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

We believe fiscal year 2010 net sales in EMEA will show an increase year over year due primarily to favorable currency exchange rate.

Asia Pacific

The Asia Pacific region, which excludes China, reported net sales of $141.0 million for the three months ended March 31, 2010. Net sales increased $27.0 million, or 23.7%, for the three months ended March 31, 2010, as compared to the same period in 2009. In local currency, net sales increased 10.6% for the three months ended March 31, 2010, as compared to the same period in 2009. The fluctuation of foreign currency rates had a favorable impact of $15.0 million on net sales for the three months ended March 31, 2010. The increase in U.S. dollar net sales in Asia Pacific for the three months ended March 31, 2010, was primarily attributable to net sales increases in South Korea, India, Indonesia and Malaysia, of 109.5%, 102.0%, 98.8% and 16.7%, respectively, partially offset by decreases in Taiwan and Japan of 12.0% and 6.6%, respectively.

Net sales in Taiwan, our largest market in the region, decreased $5.2 million, or 12.0%, for the three months ended March 31, 2010, as compared to the same period in 2009. In local currency, net sales decreased 17.3% for the three months ended March 31, 2010, as compared to the same period in 2009. The decrease in first quarter sales compared to the prior year reflects the favorable impact of a government coupon promotion run in February and March of 2009 which increased net sales in those months and was not repeated this year. The fluctuation of foreign currency rates had a favorable impact on net sales of $2.3 million for the three months ended March 31, 2010, as compared to the same period in 2009.

Net sales in South Korea, our second largest market in the region, increased $18.7 million, or 109.5%, for the three months ended March 31, 2010, as compared to the same period in 2009. In local currency, net sales increased 69.1% for the three months ended March 31, 2010, as compared to the same period in 2009. The increase in local currency net sales for the three months ended March 31, 2010 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 $6.9 million for the three months ended March 31, 2010, as compared to the same period in 2009.

Net sales in Japan, our third largest market in the region, decreased $1.0 million, or 6.6%, for the three months ended March 31, 2010, as compared to the same period in 2009. In local currency, net sales decreased 12.0% for the three months ended March 31, 2010, as compared to the same period in 2009. The decrease in local currency net sales for the three months ended March 31, 2010, was driven by a continuing decline in distributor recruiting. The fluctuation of foreign currency rates had a favorable impact on net sales of $0.8 million for the three months ended March 31, 2010, as compared to the same period in 2009.

Net sales in Malaysia, our fourth largest market in the region, increased $1.9 million, or 16.7%, for the three months ended March 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 8.7% for the three months ended March 31, 2010, as compared to the same period in 2009. The fluctuation of foreign currency rates had a favorable impact on net sales of $0.9 million for the three months ended March 31, 2010, as compared to the same period in 2009.

Net sales in India, our fifth largest market in the region, increased $5.1 million, or 102.0%, for the three months ended March 31, 2010, as compared to the same period in 2009. In local currency, net sales increased 85.9% for the three months ended March 31, 2010, as compared to the same period in 2009. The increase in local currency net sales for the three months ended March 31, 2010, was driven by the adoption of the Nutrition Club DMO. The number of clubs at March 31, 2010 was 725 compared to 142 at March 31, 2009. The fluctuation of foreign currency rates had a favorable impact on net sales of $0.8 million for the three months ended March 31, 2010, as compared to the same period in 2009.

There were no major events in the region for first quarter 2010.

Average active sales leaders in the region increased 18.9% for the three months ended March 31, 2010, as compared to the same period in 2009. Average active sales leaders for South Korea, India and Malaysia increased 72.2%, 89.3% and 18.9%, respectively, for the three months ended March 31, 2010 compared to the same period in 2009. These increases were offset by declines in Japan and Australia of 22.2% and 10.4%, respectively, for the three months ended March 31, 2010 compared to the same period in 2009. Total sales leaders in the region increased 22.5% as of March 31, 2010 compared to March 31, 2009.

We believe the fiscal year 2010 net sales in Asia Pacific should increase year over year due primarily to higher volume in existing markets as well as the full year impact of Vietnam (which was opened during the fourth quarter of 2009).

China

Net sales in China were $32.4 million for the three months ended March 31, 2010. Net sales increased $5.6 million, or 20.9%, for the three months ended March 31, 2010, as compared to the same period in 2009. In local currency, net sales increased 20.4% for the three months ended March 31, 2010, as compared to the same period in 2009. The fluctuation of foreign currency rates did not have a significant impact on net sales for the three months ended March 31, 2010.

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

As of March 31, 2010, we have direct-selling licenses in 11 provinces which represent an addressable population of approximately 599 million people and we are operating 75 retail stores in 30 provinces in China.

Active sales employees in China increased 5.7% for the three months ended March 31, 2010, as compared to the same period in 2009. Total sales employees in China decreased 8.0% as of March 31, 2010 compared to March 31, 2009.

We believe the fiscal year 2010 net sales in China should slightly increase year over year, primarily as a result of higher volume due to continued adoption and expansion of nutrition clubs.

Sales by Product Category

		Three Months Ended March 31,
		2010																								2009
																		Handling																				Handling
		Retail								Distributor				Product				& Freight				Net				Retail				Distributor				Product				& Freight				Net				% Change in
		Sales								Allowance				Sales				Income				Sales				Sales				Allowance				Sales				Income				Sales				Net Sales
		(In millions)
Weight Management						$	630.6			$	(302.2	)		$	328.4			$	58.8			$	387.2			$	542.8			$	(262.1	)		$	280.7			$	48.5			$	329.2				17.6	%
Targeted Nutrition							225.7				(108.2	)			117.5				21.1				138.6				181.4				(87.6	)			93.8				16.2				110.0				26.0	%
Energy, Sports and Fitness							42.1				(20.2	)			21.9				3.9				25.8				35.5				(17.1	)			18.4				3.2				21.6				19.4	%
Outer Nutrition							50.6				(24.3	)			26.3				4.7				31.0				52.0				(25.1	)			26.9				4.6				31.5				(1.6	)%
Literature, Promotional and Other							31.5				1.6				33.1				2.9				36.0				25.2				1.9				27.1				2.3				29.4				22.4	%
Total						$	980.5			$	(453.3	)		$	527.2			$	91.4			$	618.6			$	836.9			$	(390.0	)		$	446.9			$	74.8			$	521.7				18.6	%

Net sales for Weight Management, Targeted Nutrition, Energy, Sports and Fitness and Literature, Promotional and Other product categories increased for the three months ended March 31, 2010, as compared to the same period in 2009, partially offset by a slight decrease in Outer Nutrition product category for the three months ended March 31, 2010, as compared to the same period in 2009, 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 $478.2 million for the three months ended March 31, 2010, as compared to $419.3 million for the same period in 2009. As a percentage of net sales, gross profit for the three months ended March 31, 2010 decreased to 77.3%, as compared to 80.4% for the same period in 2009. The decrease was primarily due to $12.7 million of incremental costs related to imports during 2009 into Venezuela at the unfavorable parallel market exchange rate, which were recognized in cost of sales during the first quarter of 2010 as these products were sold, the unfavorable impact of remeasuring Herbalife Venezuela’s Bolivar net sales at the unfavorable parallel market exchange rate during 2010, as opposed to being translated at the official rate during 2009, the unfavorable impact of other currency fluctuations, and changes in country mix. 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 of these cost pressures through improved optimization of our supply chain coupled with select increases in the retail prices of our products.

Royalty Overrides

Royalty overrides as a percentage of net sales was 33.5% for the three months ended March 31, 2010, as compared to 33.7% 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 percent 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 as a percentage of net sales was 33.4% for the three months ended March 31, 2010, as compared to 34.8% for the same period in 2009.

For the three months ended March 31, 2010, selling, general and administrative expenses increased $25.4 million to $206.9 million compared to the same period in 2009. The increase for the three months ended March 31, 2010, included $11.4 million net foreign exchange loss related to Venezuela, $6.1 million in higher salaries and benefits, excluding China sales employees; $2.6 million in higher expenses related to China sales employees and licensed business providers, $2.5 million in higher depreciation expense, $2.3 million in higher credit card fees and $1.6 million in higher advertising and promotion costs. These increases were partially offset by a decrease of approximately $2.3 million in professional fees.

We expect 2010 selling, general and administrative expenses to increase in absolute dollars over 2009 levels reflecting higher China sales employee costs and licensed business provider service fees, increased depreciation, primarily related to our global Oracle implementation, and various sales growth initiatives, including distributor promotions.

Net Interest Expense

Net interest expense is as follows:

		Three Months Ended
		March 31,				March 31,
Net Interest Expense		2010				2009
		(Dollars in millions)
Interest expense			2.4				3.3
Interest income			(0.5	)			(1.6	)
Net interest expense		$	1.9			$	1.7

Net interest expense for the three months ended March 31, 2010 was relatively flat compared to the same period in 2009. The decrease in interest expense and interest income for the three months ended March 31, 2010 was primarily due to lower interest rates in 2010 as compared to 2009.

Income Taxes

Income taxes were $10.1 million for the three months ended March 31, 2010, as compared to $19.0 million for the same period in 2009. As a percentage of pre-tax income, the effective income tax rate was 16.3% for the three months ended March 31, 2010, as compared to 31.4% for the same period in 2009. The decrease in the effective tax rate for the three months ended March 31, 2010, as compared to the same period in 2009, was primarily due to the conversion of Venezuela to a highly inflationary economy, as well as the change in the operating effective rate reflecting changes in the country mix and a non-cash benefit of $1.6 million due to the expiration of certain statute of limitations.

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

Subsequent Event

On April 29, 2010, we announced that our board of directors has authorized a $0.20 per common share cash dividend for the first quarter of 2010, payable on May 24, 2010 to shareholders of record as of May 10, 2010.

On May 3, 2010, our board of directors approved an increase to the current share repurchase authorization from $300 million to $1 billion, of which approximately $100 million has already been utilized. In addition, our board of directors approved the extension of the expiration date of the share repurchase program from April 2011 to December 2014.

Liquidity and Capital Resources

We have historically met our working capital and capital expenditure requirements, including funding for expansion of operations, through net cash flows provided by operating activities. Our principal source of liquidity is our operating cash flows. Variations in sales of our products would directly affect the availability of funds. There are no material contractual restrictions on the ability to transfer and remit funds among our international affiliated companies. 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 $754.0 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 $152.0 million of undrawn capacity as of March 31, 2010, and is comprised of banks who are continuing to support the facility through the recent worldwide financial crisis.

For the three months ended March 31, 2010, we generated $87.4 million of operating cash flow, as compared to $86.0 million for the same period in 2009. The slight increase in cash generated from operations was primarily due to higher cash-related net income for the three months ended March 31, 2010, as compared to the same period in 2009.

Capital expenditures, including capital leases, for the three months ended March 31, 2010, were $11.6 million as compared to $14.4 million for the same period in 2009. The majority of these expenditures represented investments in management information systems, the development of our distributor internet initiatives, and the expansion of our domestic and international facilities. We expect to incur total capital expenditures of approximately $75.0 million for the full year of 2010.

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%. 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.

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 the first quarter of 2010 we borrowed an aggregate amount of $102.0 million and paid $95.0 million of the revolving credit facility. These borrowings were primarily related to our share repurchases and dividends program as discussed further below.

The following summarizes our contractual obligations including interest at March 31, 2010, and the effect such obligations are expected to have on our liquidity and cash flows in future periods:

		Payments Due by Period
																										2015 &
		Total				2010				2011				2012				2013				2014				Thereafter
		(Dollars in millions)
Borrowings under the senior credit facility		$	254.7			$	4.2			$	5.5			$	102.8			$	142.2			$	—			$	—
Capital leases			4.6				1.4				1.7				1.5				—				—				—
Operating leases			150.7				27.4				28.3				23.1				19.0				17.2				35.7
Other			10.7				5.4				5.3				—				—				—				—
Total		$	420.7			$	38.4			$	40.8			$	127.4			$	161.2			$	17.2			$	35.7

Off Balance Sheet Arrangements

At March 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.

Share Repurchases

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.

During the quarter ended March 31, 2010, we repurchased approximately 0.6 million of our common shares through open market purchases at an aggregate cost of approximately $25.0 million or an average cost of $41.42 per share. As of March 31, 2010, the approximate dollar value of remaining capacity under our share repurchase program was approximately $201.8 million.

Dividends

On February 19, 2010, our board of directors approved a quarterly cash dividend of $0.20 per common share in an aggregate amount of $12.1 million, for the fourth quarter of 2009 that was paid to shareholders on March 16, 2010.

Working Capital and Operating Activities

As of March 31, 2010 and December 31, 2009, we had positive working capital of $115.1 million and $83.5 million, respectively. Cash and cash equivalents were $165.3 million and $150.8 million at March 31, 2010, and December 31, 2009, respectively.

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 I, Item 3 — Quantitative and Qualitative Disclosures about Market Risk.

Venezuela’s Currency Restrictions and Highly Inflationary Economy

Currency restrictions enacted by the Venezuelan government in 2003 have become more restrictive and have impacted the ability of our subsidiary in Venezuela, Herbalife Venezuela, to obtain U.S. dollars in exchange for Venezuelan Bolivars, or Bolivars, at the official foreign exchange rate from the Venezuelan government and its Foreign Exchange Commission, CADIVI. The application and approval processes have been intermittently delayed in recent periods. In certain instances, we have made appropriate applications through CADIVI, for approval to obtain U.S. dollars to pay for imported products and an annual dividend at the official exchange rate. In other instances, in order to timely provide products to our distributors, we did not submit applications but instead have used a legal parallel market mechanism for payment. In this legal parallel market Bolivars can be exchanged for U.S. dollars, but at a less favorable exchange rate than the official rate. If CADIVI does not approve further exchanges at the official exchange rate, Herbalife Venezuela could continue to use a legal parallel exchange process to exchange U.S. dollars in addition to going through CADIVI to obtain the official rate.

Venezuela’s inflation rate as measured using the blended National Consumer Price Index and Consumer Price Index rate exceeded the three-year cumulative inflation rate of 100% as of December 31, 2009. Accordingly, effective January 1, 2010, Venezuela is considered a highly inflationary economy. Pursuant to the highly inflationary basis of accounting, 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. Beginning January 1, 2010, based on our current facts and circumstances, we use the parallel market exchange rate for remeasurement purposes and we are no longer required to translate Herbalife Venezuela’s financial statements since their functional currency is now the U.S. dollar. Our ability to access the official exchange rate and the parallel market exchange rate could impact what exchange rates we will use for remeasurement purposes in future periods.

On January 1, 2010, upon Venezuela being designated as a highly inflationary economy, we recorded foreign exchange losses in our consolidated statement of income relating to the remeasurement of Herbalife Venezuela’s monetary assets and liabilities. We used the parallel market exchange rate for remeasurement of Herbalife Venezuela’s monetary assets and liabilities on its opening balance sheet and recorded non-tax deductible foreign exchange losses of $15.1 million primarily relating to Herbalife Venezuela’s cash and cash equivalents. This charge included a $9.9 million foreign exchange loss relating to Herbalife Venezuela’s U.S. dollar cash and cash equivalents that were remeasured at the less favorable parallel market rate and then translated at the official rate at December 31, 2009, as discussed in the 2009 10-K. Also, Herbalife Venezuela’s $34.2 million cash and cash equivalents reported on 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 unfavorable parallel market exchange rate negatively impacted our first quarter 2010 consolidated statement of income by approximately $12.7 million, non-tax deductible, as these products were sold during the first quarter of 2010.

In early January 2010, Venezuela announced an official exchange rate devaluation of the Bolivar to an official rate of 4.30 Bolivars per U.S. dollar for non-essential items and 2.60 Bolivars per U.S. dollar for essential items. Herbalife Venezuela’s imports fall into both classifications. Since we are using the unfavorable parallel market exchange rate for remeasurement purposes, U.S. dollars obtained from CADIVI at the official rate could have a positive impact to our consolidated net earnings. During the three months ended March 31, 2010, $3.7 million foreign exchange gains were recorded in our consolidated statement of income as result of receiving U.S. dollars approved by CADIVI at the official exchange rate in the first quarter of 2010 primarily relating to certain product importations in 2009 which were previously registered with CADIVI. We continue to assess and monitor the current economic and political environment in Venezuela. As of March 31, 2010, the parallel market rate was approximately 38% and 62% less favorable than the official exchange rates for non-essential and essential items, respectively. During 2010, we plan to continue making applications with CADIVI in order to obtain U.S. dollars at the official foreign exchange rate from CADIVI.

Herbalife Venezuela’s net sales represented less than 2% of our consolidated worldwide net sales for the three months ended March 31, 2010. At March 31, 2010, Herbalife Venezuela had reported cash and cash equivalents of approximately $8.3 million, the majority of which were denominated in Bolivars and remeasured at the less favorable parallel market rate.

Contingencies

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

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

On April 16, 2007, Herbalife International of America, Inc. filed a Complaint in the United States District Court for the Central District of California against certain former Herbalife distributors who had left the Company to join a competitor. The Complaint alleged breach of contract, misappropriation of trade secrets, intentional interference with prospective economic advantage, intentional interference with contract, unfair competition, constructive trust and fraud and seeks monetary damages, attorney’s fees and injunctive relief. (Herbalife International of America, Inc. v. Robert E. Ford, et al) The court entered a Preliminary Injunction against the defendants enjoining them from further use and/or misappropriation of the Company’s trade secrets on December 11, 2007. Defendants appealed the court’s entry of the Preliminary Injunction to the U.S. Court of Appeals for the Ninth Circuit. That court

affirmed, in relevant part, the Preliminary Injunction. On December 3, 2007, the defendants filed a counterclaim alleging that the Company had engaged in unfair and deceptive business practices, intentional and negligent interference with prospective economic advantage, false advertising and that the Company was an endless chain scheme in violation of California law and seeking restitution, contract rescission and an injunction. Both sides engaged in discovery and filed cross motions for Summary Judgment. On August 25, 2009, the court granted partial summary judgment for Herbalife on all of defendants’ claims except the claim that the Company is an endless chain scheme which under applicable law is a question of fact that can only be determined at trial. The court denied defendants’ motion for Summary Judgment on Herbalife’s claims for misappropriation of trade secrets and breach of contract. On March 9, 2010 the Court heard oral argument by the parties on Herbalife’s motion for summary judgment to dismiss the defendant’s sole remaining counterclaim, and a decision is pending. No date has been set for trial. The Company believes that there is merit to its remaining claims for relief and that it has meritorious defenses to the remaining counterclaim if the counterclaim is not dismissed by summary judgment.

Certain of the Company’s subsidiaries have been subject to tax audits by governmental authorities in their respective countries. In certain of these tax audits, governmental authorities are proposing that significant amounts of additional taxes and related interest and penalties are due. The Company and its tax advisors believe that there are substantial defenses to their allegations that additional taxes are owed, and the Company is vigorously contesting the additional proposed taxes and related charges.

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 an amount that the Company believes represents the most likely outcome of the resolution of these disputes, if the Company is incorrect in the assessment the Company may have to record additional expenses.

Critical Accounting Policies

Our Consolidated Financial Statements are prepared in conformity with U.S. GAAP, which require 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, stock-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 recently acquired manufacturing facility located in Lake Forest, California, and then are sold to independent distributors who sell Herbalife products to retail consumers or other distributors. We sell products in 73 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 freight 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 the merchandise is shipped.

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 historic 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% and 0.6% of retail sales for the three months ended March 31, 2010 and 2009, respectively.

We record reserves against our inventory to provide for estimated obsolete or unsalable inventory based on assumptions about future demand for our products and market conditions. If future demand and market conditions are less favorable than management’s assumptions, additional reserves could be required. Likewise, favorable future demand and market conditions could positively impact future operating results if previously reserved for inventory is sold. We reserved for obsolete and slow moving inventory totaling $11.2 million and $9.3 million as of March 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 of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

Goodwill and marketing related intangible assets not subject to amortization are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. In order to estimate the fair value of goodwill, we primarily use the discounted cash flow model, known as the income approach. The determination of impairment is made at the reporting unit level and consists of two steps. First, we determine the fair value of a reporting unit and compare it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill and other intangibles over the implied fair value. The implied fair value of goodwill is determined in a similar manner as how the amount of goodwill recognized in a business combination is determined, in accordance with FASB ASC Topic 805, Business Combinations, 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 March 31, 2010 and December 31, 2009, we had goodwill of approximately $102.5 million and marketing franchise of approximately $310.0 million. No marketing related intangibles or goodwill impairment was recorded during the quarter ended March 31, 2010.

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

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

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

We account for share-based compensation in accordance with the FASB ASC Topic 718, Compensation-Stock Compensation, or ASC 718. Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the value of the award and is recognized as an expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating our stock price volatility and employee stock award exercise behaviors. Our expected volatility is primarily 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 substantially all 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.

Recently Adopted Accounting Pronouncements

In January 2010, the FASB, issued Final Accounting Standards Update 2010-06, Improving Disclosures about Fair Value Measurements, or ASU 2010-06. ASU 2010-06 sets forth additional requirements and guidance regarding disclosures of fair value measurements. ASU 2010-06 requires the gross presentation of activity within the Level 3 fair value measurement roll forward and details of transfers in and out of Level 1 and 2 fair value measurements. It also clarifies two existing disclosure requirements of ASC, Topic 820, Fair Value Measurements and Disclosures, or ASC 820, relating to the level of disaggregation of fair value measurements and disclosures on inputs and valuation techniques. ASU 2010-06 is effective for fiscal years and interim periods beginning after December 15, 2009, except for the Level 3 roll forward, which is effective for fiscal years and interim periods beginning after December 15, 2010. The adoption of this guidance did not have a material impact to the Company’s consolidated financial statements.

In June 2009, the FASB issued guidance to revise the approach to determine when a variable interest entity, or VIE, should be consolidated. The new consolidation model for VIE’s considers whether the Company has the power to direct the activities that most significantly impact the VIE’s economic performance and shares in the significant risks and rewards of the entity. The guidance on VIE’s requires companies to continually reassess VIE’s to determine if consolidation is appropriate and provide additional disclosures. The guidance is effective for the Company’s 2010 fiscal year. The adoption of this guidance did not have a material impact to the Company’s consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

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

Foreign Exchange Risk

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

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

We also purchase foreign currency forward contracts in order to hedge forecasted inventory purchases and intercompany management fees that are designated as cash-flow hedges and are subject to foreign currency exposures. We applied the hedge accounting rules as required by ASC Topic 815 for these hedges. These contracts allow us to sell Euros in exchange for U.S. dollars at specified contract rates. As of March 31, 2010, the aggregate notional amounts of these contracts outstanding were approximately $91.1million and were expected to mature over the next fifteen months. Our derivative financial instruments are recorded on the consolidated balance sheet at fair value based on quoted market rates. For the forecasted inventory purchases, the forward contracts are used to hedge forecasted inventory purchases over specific months. Changes in the fair value of these forward contracts, excluding forward points, designated as cash-flow hedges are recorded as a component of accumulated other comprehensive income (loss) within shareholders’ equity, and are recognized in cost of sales in the consolidated statement of income during the period which approximates the time the hedged inventory is sold. We also hedge forecasted intercompany management fees over specific months. Changes in the fair value of these forward contracts designated as cash flow hedges are recorded as a component of accumulated other comprehensive loss within shareholders’ equity, and are recognized in selling, general and administrative expenses in the consolidated statement of income in the period when the hedged item and underlying transaction affects earnings. As of March 31, 2010 and December 31, 2009, we recorded assets at fair value of $5.3 million and $2.3 million, respectively, 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 three months ended March 31, 2010, the ineffective portion relating to these hedges was immaterial and the hedges remained effective as of March 31, 2010.

As of March 31, 2010, all of our foreign exchange forward contracts had a maturity of less than fifteen months, with substantially all expiring within one year. As of March 31, 2010, there were no outstanding foreign exchange option contracts.

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

		Average								Fair
		Contract				Notional				Value
Foreign Currency		Rate				Amount				Gain (Loss)
						(In millions)				(In millions)
At March 31, 2010
Buy JPY sell USD			92.18			$	15.3			$	(0.2	)
Buy EUR sell USD			1.38			$	46.1			$	(1.0	)
Buy EUR sell GBP			0.87			$	3.3			$	0.1
Buy EUR sell MXN			18.04			$	30.1			$	(2.3	)
Buy GBP sell EUR			0.89			$	1.7			$	—
Buy MXN sell USD			12.60			$	11.5			$	0.2
Buy PHP sell USD			45.37			$	3.3			$	—
Buy TWD sell USD			31.93			$	4.5			$	—
Buy USD sell BRL			1.90			$	6.8			$	(0.4	)
Buy USD sell COP			2,034.86			$	4.9			$	(0.3	)
Buy USD sell MXN			13.13			$	11.0			$	(0.7	)
Buy USD sell PHP			46.38			$	5.8			$	(0.1	)
Buy USD sell RUB			30.39			$	1.3			$	—
Buy USD sell EUR			1.43			$	101.9			$	5.2
Buy CLP sell USD			504.55			$	2.6			$	(0.1	)
Buy INR sell USD			45.13			$	0.4			$	—
Buy MYR sell USD			3.27			$	4.5			$	—
Buy PEN sell USD			2.84			$	2.4			$	—
Buy RUB sell USD			29.50			$	0.3			$	—
Buy USD sell CLP			527.50			$	2.5			$	—
Buy USD sell INR			46.79			$	4.3			$	(0.2	)
Buy USD sell JPY			92.83			$	6.8			$	—
Buy USD sell KRW			1,136.15			$	2.5			$	—
Buy USD sell TWD			31.83			$	2.7			$	—
Total forward contracts						$	276.5			$	0.2