HERBALIFE NUTRITION LTD.

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HERBALIFE NUTRITION LTD. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/02/2021 | 03:22pm EDT
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with other information, including our
condensed consolidated financial statements and related notes included in Part
I, Item 1, Financial Statements, and Part II, Item 1A, Risk Factors, of this
Quarterly Report on Form 10-Q, and our consolidated financial statements
appearing in our Annual Report on Form 10-K for the year ended December 31,
2020, or the 2020 10-K. Unless the context otherwise requires, all references
herein to the "Company," "we," "us" or "our," or similar terms, refer to
Herbalife Nutrition Ltd., a Cayman Islands exempted company with limited
liability, and its consolidated subsidiaries.

Overview


We are a global nutrition company that sells weight management; targeted
nutrition; energy, sports, and fitness; and outer nutrition products to and
through independent members, or Members. In China, we sell our products to and
through independent service providers and sales representatives to customers and
preferred customers, as well as through Company-operated retail platforms when
necessary. We refer to Members that distribute our products and achieve certain
qualification requirements as "sales leaders."

We provide high-quality, science-backed products to Members and their customers
who seek a healthy lifestyle and we also offer a business opportunity to those
Members who seek additional income. We believe enhanced consumer awareness and
demand for our products due to global trends such as the obesity epidemic,
increasing interest in a fit and active lifestyle, living healthier and the rise
of entrepreneurship, coupled with the effectiveness of personalized selling
through a direct sales channel, have been the primary reasons for our continued
success.

Our products are grouped in four principal categories: weight management;
targeted nutrition; energy, sports, and fitness; and outer nutrition, along with
literature, promotional, and other items. Our products are often sold through a
series of related products and literature designed to simplify weight management
and nutrition for consumers and maximize our Members' cross-selling
opportunities.

While we continue to monitor the current global financial environment and the
impacts of the COVID-19 pandemic, we remain focused on the opportunities and
challenges in retailing our products and enhancing the customer experience,
sponsoring and retaining Members, improving Member productivity, further
penetrating existing markets, globalizing successful Daily Methods of Operation,
or DMOs, such as Nutrition Clubs, Fit Clubs, and Weight Loss Challenges,
introducing new products and globalizing existing products, developing niche
market segments and further investing in our infrastructure.

We sell our products in six geographic regions:

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

On July 15, 2016, we reached a settlement with the U.S. Federal Trade
Commission, or FTC, and entered into the Consent Order, which resolved the FTC's
multi-year investigation of the Company. We continue to monitor the impact of
the Consent Order and our board of directors established the Implementation
Oversight Committee in connection with the Consent Order, and more recently, our
Audit Committee assumed oversight of continued compliance with the Consent
Order. While we currently do not expect the settlement to have a long-term and
materially adverse impact on our business and our Member base, our business and
our Member base, particularly in the U.S., may be negatively impacted. The terms
of the Consent Order do not change our going to market through direct selling by
independent distributors, and compensating those distributors based upon the
product they and their sales organization sell. See Part II, Item 1A, Risk
Factors, of this Quarterly Report on Form 10-Q for a discussion of risks related
to the settlement with the FTC.

                                       34

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COVID-19 Pandemic


During March 2020, the World Health Organization declared the outbreak of
coronavirus disease 2019, or COVID-19, as a pandemic. The outbreak and
subsequent global spread of the virus has impacted the general public, companies
and state, local and national governments and economies worldwide, as well as
global financial markets, and caused unemployment to increase. Public health
organizations and international, federal, state and local governments have
implemented measures to combat the spread of COVID-19, including restrictions on
movement such as quarantines, "stay-at-home" orders and social distancing
ordinances and restricting or prohibiting outright some or all forms of
commercial and business activity. These measures, or others that may be
implemented in the future, although temporary in nature, have continued
intermittently for many markets.

Our business and operations have been affected by the pandemic in manners, in
some cases adversely, and degrees that vary by market and we expect that the
effects may extend through 2021 and possibly beyond. For the health and safety
of our employees, our Members, and their customers, we implemented temporary
access restrictions at many of our physical business locations and locations
where Members conduct their business activities, some of which measures
continue. Generally, we have been able to satisfy current levels of demand.
While demand for our nutritional products continues to be at or above
pre-pandemic levels and pandemic constraints have been lessened in most markets,
including by the designation of our nutritional business as "essential" or other
similar characterization, our operations have been and continue to be disrupted.
The most significant impacts we have seen, depending on market, include:

?
Broad-based supply chain challenges, including increased costs in freight,
labor, and certain raw materials, and constrained ability to deliver product to
Members and/or have Members pick product up from our access points due to
facility closures and other precautionary measures we have implemented;
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Restrictions or outright prohibitions on in-person training and promotional
meetings and events for Members that are a key aspect of our business model,
such as our annual regional Extravaganzas;
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Constrained ability of Members to have face-to-face contact with their
customers, including at Nutrition Clubs; and
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Slowed office operations as many of our employees have limited access to their
regular place of employment.

We and our Members have responded to the pandemic and its impacts on our business and theirs by adapting operations and taking a number of proactive measures to mitigate those impacts. The most significant measures include:


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Adapting product access to the varying market-specific challenges, including
shifting to more home product delivery from Member pick-up, and shifting to
online or phone orders only from in-person ordering;
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Enhancing our training and promotion of technological tools offered to support
Members' online operations and accelerating the launch of certain
functionalities, such as functions that facilitate our Members' ability to
communicate and transact with Nutrition Club customers;
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Members continuing to or increasing the ways they leverage the Internet and
social media for customer contact including training, order-taking, and
acceptance of payment;
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Member-operated Nutrition Clubs adding to or shifting from on-site offerings of
single servings to carry-out and home delivery of single servings, as well as
sales of fully packaged products;
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Instituting product purchase limitations for certain in-demand products to help
ensure as many Members and their customers have fair access to these products
and to minimize out-of-stock conditions; and
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Physical changes at our major facilities, such as our manufacturing plants and
distribution centers, including pre-entry temperature checks, face masks for
employees, and plexiglass barriers, and employees working from home where
possible rather than at company offices.

We believe our cash on hand as of September 30, 2021 and as of the date of this
filing, combined with cash flows from operating activities, is sufficient to
meet our foreseeable needs for the next twelve months. We also have access to
our revolving credit facility to supplement our cash-generating ability if
necessary.

Although we believe that our responsive measures have been effective in limiting
the adverse impact of the pandemic on most markets, the ongoing impact of the
COVID-19 pandemic will affect our business, financial condition, and results of
operations in future quarters, including their comparability to prior periods.
Given the unpredictable, unprecedented, and fluid nature of the pandemic and its
economic consequences, we are unable to predict the duration and extent to which
the pandemic and its related impacts will impact our business, financial
condition, and results of operations. A more detailed discussion of the
pandemic's impact on net sales for the third quarter and first nine months of
2021 and its expected impact in future periods, as well as the impacts specific
to each geographic region, are discussed further in the Sales by Geographic
Region section below. See Part II, Item 1A, Risk Factors, of this Quarterly
Report on Form 10-Q for a further discussion of risks related to the COVID-19
pandemic.

                                       35
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Volume Points by Geographic Region


A key non-financial measure we focus on is Volume Points on a Royalty Basis, or
Volume Points, which is essentially our weighted-average measure of product
sales volume. Volume Points, which are unaffected by exchange rates or price
changes, are used by management as a proxy for sales trends because in general,
excluding the impact of price changes, an increase in Volume Points in a
particular geographic region or country indicates an increase in our local
currency net sales while a decrease in Volume Points in a particular geographic
region or country indicates a decrease in our local currency net sales. The
criteria we use to determine how and when we recognize Volume Points are not
identical to our revenue recognition policies under U.S. GAAP. Unlike net sales,
which are generally recognized when the product is delivered and when control
passes to the Member, as discussed in greater detail in Note 2, Significant
Accounting Policies, to the Condensed Consolidated Financial Statements included
in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q,
we recognize Volume Points when a Member pays for the order, which is generally
prior to the product being delivered. Further, the periods in which Volume
Points are tracked can vary slightly from the fiscal periods for which we report
our results under U.S. GAAP. Therefore, there can be timing differences between
the product orders for which net sales are recognized and for which Volume
Points are recognized within a given period. However, historically these timing
differences generally have been immaterial in the context of using changes in
Volume Points as a proxy to explain volume-driven changes in net sales.

The specific number of Volume Points assigned to a product, which is generally
consistent across all markets, is based on a Volume Point to suggested retail
price ratio for similar products. If a product is available in different
quantities, the various sizes will have different Volume Point values. In
general, once assigned, a Volume Point value is consistent in each region and
country and does not change from year to year. We use Volume Points for Member
qualification and recognition purposes, as well as a proxy for sales trends, and
therefore we generally keep Volume Points for a similar or like product
consistent on a global basis. However, because Volume Points are a function of
value rather than product type or size, they are not a reliable measure for
product mix. As an example, an increase in Volume Points in a specific country
or region could mean a significant increase in sales of less expensive products
or a marginal increase in sales of more expensive products.



                                                  Three Months Ended                                      Nine Months Ended
                                   September 30,       September 30,                       September 30,       September 30,
                                       2021                2020            % Change            2021                2020            % Change
                                                                         (Volume Points in millions)
North America                               438.4               501.0          (12.5 )%           1,409.8             1,349.4            4.5 %
Mexico                                      208.3               232.3          (10.3 )%             640.8               655.6           (2.3 )%
South and Central America                   124.4               150.7          (17.5 )%             374.3               386.5           (3.2 )%
EMEA                                        390.3               423.1           (7.8 )%           1,260.0             1,166.5            8.0 %
Asia Pacific                                489.5               448.9            9.0 %            1,469.5             1,211.3           21.3 %
China                                        91.6               143.5          (36.2 )%             299.0               412.8          (27.6 )%
Worldwide                                 1,742.5             1,899.5           (8.3 )%           5,453.4             5,182.1            5.2 %




Volume Points decreased 8.3% and increased 5.2% for the three and nine months
ended September 30, 2021, including a mixed impact of COVID-19 pandemic
conditions across our markets, after having increased 23.2% and 13.8% for the
same periods in 2020. The comparative 2021 and 2020 results by region discussed
below are greatly impacted, we believe, by the significance and timing of
pandemic conditions and our and our Members' ability to respond to the
conditions, which varied by region and by market within regions. Although
pandemic conditions had adverse operational impacts across all markets, we
believe during certain periods our Members in certain markets where we saw
increased net sales and Volume Point growth for some periods were more focused
on their business due to those conditions, particularly the North America region
and certain EMEA markets during the second half of 2020 and first half of 2021.

We believe North America's Volume Point decrease for the third quarter of 2021,
after a significant year-over-year increase for the third quarter of 2020,
reflects in part the comparison to a 2020 base period that saw a record level of
sales. We believe the Volume Point increase for the year-to-date period versus
the 2020 period, although well below the rate of year-over-year increase for the
2020 period, reflects both the continuing success and expansion of our
Distributors as well as the enhanced motivation and focus of our Members due to
pandemic conditions seen through the first half of 2021. We believe Mexico's
Volume Point decreases for the third quarter and first nine months of 2021,
after a year-over-year increase for the third quarter of 2020 and a small
decline for the first nine months of 2020, is due to ongoing difficult economic
conditions in the market, exacerbated by the adverse impact of intermittent
pandemic-related constraints.

                                       36

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The South and Central America region saw a significant decrease in Volume Points
for the third quarter of 2021 versus the prior-year period, after a significant
year-over-year increase for the third quarter of 2020. The current-year quarter
was impacted by continuing intermittent adverse impacts of the pandemic seen
across most markets in the region. The first nine months of 2021 saw a small
Volume Point decline versus the 2020 period after essentially even
year-over-year results for the 2020 period. The volume decline was greatest in
Brazil, our largest market in the region, as it saw adverse pandemic effects as
well as longer-term negative momentum. EMEA has seen Volume Point growth in
recent years, a result we believe of customer-oriented efforts including Member
training, brand awareness, and product line expansion, as well as Member success
in leveraging online approaches and new Member recruitment, plus, during the
second half of 2020 and first half of 2021, enhanced motivation and focus of our
Members due to pandemic conditions. Volume Points declined significantly,
however, for the third quarter versus the 2020 period due in part to comparison
to base periods that saw record levels of sales.

The Asia Pacific region saw Volume Point increases for the third quarter and
first nine months of 2021 versus the prior-year periods, led by the India market
and continuing favorable long-term trends seen in the region. The third quarter
Volume Point growth was below the rate seen for the 2020 period due to
intermittent adverse pandemic conditions in most markets. China saw significant
Volume Point decreases for the third quarter and first nine months of 2021,
versus increases for the prior-year periods. Results for the 2021 periods
reflect some adverse near-term impact of efforts we are making to ultimately
strengthen the consistency and sustainability of our business in China and the
continuing impact on sales and training meetings of pandemic conditions and the
residual effects of the Chinese government's 100-day review of the health
product industry, or the Review, which concluded in April 2019. Also notable is
that the growth rates for the 2020 periods were favorably impacted by weakened
2019 base periods due to disruption from Review.

Across most markets, we expect COVID-19 pandemic conditions to continue to
impact Volume Point results; however, we are unable to predict the duration or
magnitude of these effects. Results and more regional or country-specific
impacts of the COVID-19 pandemic are discussed further below in the applicable
sections of Sales by Geographic Region.

Presentation

"Net sales" represent product sales to our Members, net of "distributor allowances," and inclusive of any shipping and handling revenues, as described further below.


Our Members purchase product from us at a suggested retail price, less discounts
referred to as "distributor allowance." Each Member's level of discount is
determined by qualification based on their volume of purchases. In cases where a
Member has qualified for less than the maximum discount, the remaining discount,
which we also refer to as a wholesale commission, is received by their
sponsoring Members. Distributor allowances may also vary by country depending
upon regulatory restrictions that limit or otherwise restrict distributor
allowances. We also offer reduced distributor allowances with respect to certain
products worldwide.

For U.S. GAAP purposes, shipping and handling services relating to product sales
are recognized as fulfillment activities on our performance obligation to
transfer products and are therefore recorded within net sales as part of product
sales and are not considered as separate revenues.

In certain geographic markets, we have introduced segmentation of our Member
base into two categories: "preferred members" - who are simply consumers who
wish to purchase product for their own household use, and "distributors" - who
are Members who also wish to resell products or build a sales organization.
Additionally, in certain markets we are simplifying our pricing by eliminating
certain shipping and handling charges and recovering those costs within
suggested retail price. As we continue to extend the segmentation of our
distributors and preferred members to additional geographic markets and consider
other pricing simplification efforts for our Members, the utility of, and
therefore management's reliance on, total retail value has decreased and we have
discontinued the disclosure of this non-GAAP retail value information.

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

                                       37

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Additionally, the impact of foreign currency fluctuations in Venezuela and the
price increases we implement as a result of the highly inflationary economy in
that market can each, when considered in isolation, have a disproportionately
large impact to our consolidated results despite the offsetting nature of these
drivers and that net sales in Venezuela, which represent less than 1% of our
consolidated net sales, are not material to our consolidated results. Therefore,
in certain instances, we believe it is helpful to provide additional information
with respect to these factors as reported and excluding the impact of Venezuela
to illustrate the disproportionate nature of Venezuela's individual pricing and
foreign exchange impact to our consolidated results. However, excluding the
impact of Venezuela from these measures is not in accordance with U.S. GAAP and
should not be considered in isolation or as an alternative to the presentation
and discussion thereof calculated in accordance with U.S. GAAP.

Our "gross profit" consists of net sales less "cost of sales," which represents
our manufacturing costs, the price we pay to our raw material suppliers and
manufacturers of our products as well as shipping and handling costs including
duties, tariffs, and similar expenses.

While certain Members may profit from their activities by reselling our products
for amounts greater than the prices they pay us, Members that develop, retain,
and manage other Members may earn additional compensation for those activities,
which we refer to as "Royalty overrides." Royalty overrides are a significant
operating expense and consist of:

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royalty overrides and production bonuses;
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the Mark Hughes bonus payable to some of our most senior Members; and
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other discretionary incentive cash bonuses to qualifying Members.

Royalty overrides are compensation to Members for the development, retention and
improved productivity of their sales organizations and are paid to several
levels of Members on each sale. Royalty overrides are compensation for services
rendered to us and, as such, are recorded as an operating expense.

In China, our independent service providers are compensated for marketing, sales
support, and other services instead of the distributor allowances and royalty
overrides utilized in our global Marketing Plan. Service fees to China
independent service providers are included in selling, general, and
administrative expenses.

Because of local country regulatory constraints, we may be required to modify
our Member incentive plans as described above. We also pay reduced royalty
overrides with respect to certain products worldwide. Consequently, the total
Royalty override percentage may vary over time.

Our "contribution margins" consist of net sales less cost of sales and Royalty overrides.


"Selling, general, and administrative expenses" represent our operating
expenses, which include labor and benefits, service fees to China independent
service providers, sales events, professional fees, travel and entertainment,
Member promotions, occupancy costs, communication costs, bank fees, depreciation
and amortization, foreign exchange gains and losses, and other miscellaneous
operating expenses.

Our "other operating income" consists of government grant income related to China.

Our "other expense, net" consists of non-operating income and expenses such as gains or losses on extinguishment of debt.


Most of our sales to Members outside the United States are made in the
respective local currencies. In preparing our financial statements, we translate
revenues into U.S. dollars using average exchange rates. Additionally, the
majority of our purchases from our suppliers generally are made in U.S. dollars.
Consequently, a strengthening of the U.S. dollar versus a foreign currency can
have a negative impact on our reported sales and contribution margins and can
generate foreign currency losses on intercompany transactions. Foreign currency
exchange rates can fluctuate significantly. From time to time, we enter into
foreign currency derivatives 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, of this Quarterly Report on Form
10-Q.

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Summary Financial Results


Net sales for the three and nine months ended September 30, 2021 were $1,430.9
million and $4,484.8 million, respectively. Net sales decreased $90.9 million,
or 6.0% ($90.8 million, or 6.0% excluding Venezuela), and increased $353.7
million, or 8.6% ($353.7 million, or 8.6% excluding Venezuela), for the three
and nine months ended September 30, 2021, respectively, as compared to the same
periods in 2020. In local currency, net sales decreased 7.3% and increased 6.2%
(decreased 7.6% and increased 5.7% excluding Venezuela) for the three and nine
months ended September 30, 2021, respectively, as compared to the same periods
in 2020. The 6.0% decrease in net sales for the three months ended September 30,
2021 was primarily driven by a decrease in sales volume, as indicated by an 8.3%
decrease in Volume Points, and a 2.5% unfavorable impact of country sales mix,
partially offset by a 2.8% favorable impact of price increases (2.5% favorable
impact excluding Venezuela) and a 1.3% favorable impact of fluctuations in
foreign currency exchange rates (1.6% favorable impact excluding Venezuela). The
8.6% increase in net sales for the nine months ended September 30, 2021 was
primarily driven by an increase in sales volume, as indicated by a 5.2% increase
in Volume Points, a 3.0% favorable impact of price increases (2.4% favorable
impact excluding Venezuela), and a 2.4% favorable impact of fluctuations in
foreign currency exchange rates (2.9% favorable impact excluding Venezuela),
partially offset by a 2.8% unfavorable impact of country sales mix.

Net income for the three and nine months ended September 30, 2021 was $117.4
million, or $1.09 per diluted share, and $409.0 million, or $3.73 per diluted
share, respectively. Net income decreased $20.7 million, or 15.0%, and increased
$110.2 million, or 36.9%, for the three and nine months ended September 30,
2021, respectively, as compared to the same periods in 2020. The decrease in net
income for the three months ended September 30, 2021 was mainly due to $60.3
million lower contribution margin driven by lower net sales, partially offset by
$43.4 million lower selling, general, and administrative expenses. The increase
in net income for the nine months ended September 30, 2021 was mainly due to
$93.6 million higher contribution margin driven by higher net sales and $60.6
million lower selling, general, and administrative expenses driven by $83.1
million of expenses relating to the SEC and DOJ investigations relating to the
FCPA matter in China in 2020 (See Note 5, Contingencies, to the Condensed
Consolidated Financial Statements included in Part I, Item 1, Financial
Statements, of this Quarterly Report on Form 10-Q), partially offset by a $24.6
million loss on extinguishment of our 2026 Notes (See Note 4, Long-Term Debt, to
the Condensed Consolidated Financial Statements included in Part I, Item 1,
Financial Statements, of this Quarterly Report on Form 10-Q) and $23.0 million
higher interest expense, net.

Net income for the three months ended September 30, 2021 included a $6.0 million
pre-tax unfavorable impact ($6.5 million post-tax) of non-cash interest expense
related to the 2024 Convertible Notes (See Note 4, Long-Term Debt, to the
Condensed Consolidated Financial Statements included in Part I, Item 1,
Financial Statements, of this Quarterly Report on Form 10-Q); a $3.9 million
pre-tax unfavorable impact ($3.7 million post-tax) of transformation initiative
expenses, primarily relating to professional fees; a $2.5 million pre-tax
unfavorable impact ($2.3 million post-tax) from expenses related to the COVID-19
pandemic, and such expenses are expected to continue in future periods; a $0.6
million pre-tax unfavorable impact ($0.5 million post-tax) of debt issuance
costs related to the amendment of our 2018 Credit Facility (See Note 4,
Long-Term Debt, to the Condensed Consolidated Financial Statements included in
Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q); a
$0.2 million favorable impact of loss on extinguishment of our 2026 Notes; and a
$0.1 million unfavorable impact of non-income tax items.

Net income for the nine months ended September 30, 2021 included a $24.6 million
pre-tax unfavorable impact ($19.1 million post-tax) of loss on extinguishment of
our 2026 Notes; a $17.6 million pre-tax unfavorable impact ($18.3 million
post-tax) of non-cash interest expense related to the 2024 Convertible Notes; an
$11.8 million pre-tax unfavorable impact ($9.7 million post-tax) from expenses
related to the COVID-19 pandemic, and such expenses are expected to continue in
future periods; a $7.6 million pre-tax unfavorable impact ($6.9 million
post-tax) of transformation initiative expenses, primarily relating to
professional fees; a $7.4 million pre-tax favorable impact ($5.6 million
post-tax) of net benefit on non-income tax items; and a $1.7 million pre-tax
unfavorable impact ($1.4 million post-tax) of debt issuance costs related to the
amendment of our 2018 Credit Facility.

The income tax impact of the expenses discussed above is based on forecasted
items affecting our 2021 full year effective tax rate. Adjustments to forecasted
items unrelated to these expenses, as well as impacts related to interim
reporting, will have an effect on the income tax impact of these items in
subsequent periods.

Net income for the three months ended September 30, 2020 included a $5.5 million
pre-tax unfavorable impact ($5.1 million post-tax) of non-cash interest expense
related to the 2024 Convertible Notes; a $4.7 million pre-tax unfavorable impact
($4.4 million post-tax) from expenses related to the COVID-19 pandemic; and a
$0.4 million pre-tax unfavorable impact ($4.7 million post-tax) from expenses
related to regulatory inquiries.

Net income for the nine months ended September 30, 2020 included an $85.7
million unfavorable impact ($81.0 million post-tax) from expenses related to
regulatory inquiries and a legal accrual, which includes $83.1 million of
expenses relating to the SEC and DOJ investigations relating to the FCPA matter
in China; a $16.6 million pre-tax unfavorable impact ($14.6 million post-tax)
from expenses related to the COVID-19 pandemic; a $16.2 million pre-tax
unfavorable impact ($16.4 million post-tax) of non-cash interest expense related
to the 2024 Convertible Notes; and a $0.5 million pre-tax unfavorable impact
($0.4 million post-tax) of debt issuance costs related to the amendment of our
2018 Credit Facility.

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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 sponsor Members and retain sales leaders, further
penetrate existing markets, introduce new products and programs that will help
our Members increase their retail efforts and develop niche market segments.

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




                                                   Three Months Ended                       Nine Months Ended
                                           September 30,        September 30,       September 30,       September 30,
                                               2021                 2020                2021                2020
Operations:
Net sales                                           100.0 %              100.0 %             100.0 %             100.0 %
Cost of sales                                        21.3                 21.2                21.0                20.4
Gross profit                                         78.7                 78.8                79.0                79.6
Royalty overrides(1)                                 31.5                 30.4                31.4                30.3
Selling, general, and administrative
expenses(1)                                          34.0                 34.8                33.4                37.7
Other operating income                                  -                    -                (0.3 )              (0.3 )
Operating income                                     13.2                 13.6                14.5                11.9
Interest expense, net                                 2.6                  2.3                 2.5                 2.1
Other expense, net                                      -                    -                 0.6                   -
Income before income taxes                           10.6                 11.3                11.4                 9.8
Income taxes                                          2.4                  2.2                 2.3                 2.6
Net income                                            8.2 %                9.1 %               9.1 %               7.2 %




(1) Service fees to our independent service providers in China are included in
selling, general, and administrative expenses while Member compensation for all
other countries is included in Royalty overrides.

Reporting Segment Results


We aggregate our operating segments, excluding China, into a reporting segment,
or the Primary Reporting Segment. The Primary Reporting Segment includes the
North America, Mexico, South and Central America, EMEA, and Asia Pacific
regions. China has been identified as a separate reporting segment as it does
not meet the criteria for aggregation. See Note 6, Segment Information, to the
Condensed Consolidated Financial Statements included in Part I, Item 1,
Financial Statements, of this Quarterly Report on Form 10-Q for further
discussion of our reporting segments. See below for discussions of net sales and
contribution margin by our reporting segments.

Net Sales by Reporting Segment


The Primary Reporting Segment reported net sales of $1,276.9 million and
$3,985.7 million for the three and nine months ended September 30, 2021,
respectively, representing a decrease of $24.9 million, or 1.9% ($24.8 million,
or 1.9% excluding Venezuela), and an increase of $474.0 million, or 13.5%
($474.0 million, or 13.5% excluding Venezuela), for the three and nine months
ended September 30, 2021, respectively, as compared to the same periods in 2020.
In local currency, net sales decreased 2.7% and increased 11.8% (decreased 3.1%
and increased 11.2% excluding Venezuela) for the three and nine months ended
September 30, 2021, respectively, as compared to the same periods in 2020. The
1.9% decrease in net sales for the three months ended September 30, 2021 was
primarily due to a decrease in sales volume, as indicated by a 6.0% decrease in
Volume Points, partially offset by a 3.3% favorable impact of price increases
(2.9% favorable impact excluding Venezuela) and a 0.8% favorable impact of
fluctuations in foreign currency exchange rates (1.2% favorable impact excluding
Venezuela). The 13.5% increase in net sales for the nine months ended September
30, 2021 was primarily due to an increase in sales volume, as indicated by an
8.1% increase in Volume Points, a 3.5% favorable impact of price increases (2.9%
favorable impact excluding Venezuela), and a 1.7% favorable impact of
fluctuations in foreign currency exchange rates (2.3% favorable impact excluding
Venezuela).

For a discussion of China's net sales for the three and nine months ended September 30, 2021, see the China section of Sales by Geographic Region below.

Contribution Margin by Reporting Segment

As discussed above under "Presentation," contribution margin consists of net sales less cost of sales and Royalty overrides.

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The Primary Reporting Segment reported contribution margin of $538.8 million, or
42.2% of net sales, and $1,690.3 million, or 42.4% of net sales, for the three
and nine months ended September 30, 2021, respectively, representing an increase
of $0.6 million, or 0.1% ($0.3 million, or 0.1% excluding Venezuela), and $204.9
million, or 13.8% ($204.4 million, or 13.8% excluding Venezuela), for the three
and nine months ended September 30, 2021, respectively, as compared to the same
periods in 2020. The 0.1% increase in contribution margin for the three months
ended September 30, 2021 was primarily the result of a 5.4% favorable impact of
price increases (4.8% favorable impact excluding Venezuela), partially offset by
a 6.0% unfavorable impact of volume decreases. The 13.8% increase in
contribution margin for the nine months ended September 30, 2021 was primarily
the result of an 8.1% favorable impact of volume increases and a 5.6% favorable
impact of price increases (4.6% favorable impact excluding Venezuela).

China reported contribution margin of $136.9 million and $442.0 million for the
three and nine months ended September 30, 2021, respectively, representing a
decrease of $60.9 million, or 30.8%, and $111.3 million, or 20.1%, for the three
and nine months ended September 30, 2021, respectively, as compared to the same
periods in 2020. The 30.8% decrease in contribution margin for the three months
ended September 30, 2021 was primarily the result of a 36.2% unfavorable impact
of volume decreases, partially offset by a 5.3% favorable impact of fluctuations
in foreign currency exchange rates. The 20.1% decrease in contribution margin
for the nine months ended September 30, 2021 was primarily the result of a 27.6%
unfavorable impact of volume decreases, partially offset by a 6.1% favorable
impact of fluctuations in foreign currency exchange rates.

Sales by Geographic Region

Net sales by geographic region were as follows:




                                                 Three Months Ended                                      Nine Months Ended
                                  September 30,       September 30,                       September 30,       September 30,
                                      2021                2020            % Change            2021                2020            % Change
                                                                           (Dollars in millions)
North America                    $         354.8     $         398.7          (11.0 )%   $       1,126.6     $       1,062.4            6.0 %
Mexico                                     117.5               110.3            6.5 %              354.5               321.6           10.2 %
South and Central America                   89.2               102.7          (13.1 )%             272.0               264.6            2.8 %
EMEA                                       321.9               334.3           (3.7 )%           1,043.8               893.3           16.8 %
Asia Pacific                               393.5               355.8           10.6 %            1,188.8               969.8           22.6 %
China                                      154.0               220.0          (30.0 )%             499.1               619.4          (19.4 )%
Worldwide                        $       1,430.9     $       1,521.8           (6.0 )%   $       4,484.8     $       4,131.1            8.6 %




Changes in net sales are directly associated with the retailing of our products,
recruitment of new Members, and retention of sales leaders. Our strategies
involve providing quality products, improved DMOs, including daily consumption
approaches such as Nutrition Clubs, easier access to product, systemized
training and education of Members on our products and methods, leveraging
technology to make it easier for our Members to do business, and continued
promotion and branding of Herbalife products.

Management's role, in-country and at the region and corporate level, is to
provide Members with a competitive, broad, and innovative product line, offer
leading-edge business tools and technology services, and encourage strong
teamwork and Member leadership to make doing business with Herbalife simple. We
have provided to our Members enhanced technology tools for ordering, business
performance, and customer retailing to make it easier for them to do business
with us and to optimize their customers' experiences. Management uses the
Marketing Plan, which reflects the rules for our global network marketing
organization that specify the qualification requirements and general
compensation structure for Members, coupled with educational and motivational
programs and promotions to encourage Members to increase retailing, retention,
and recruiting, which in turn affect net sales. Such programs include sales
events such as Extravaganzas, Leadership Development Weekends and World Team
Schools where large groups of Members network with other Members, learn
retailing, retention, and recruiting techniques from our leading Members, 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. We also use event and non-event product promotions to motivate Members
to increase retailing, retention, and recruiting activities. These promotions
have prizes ranging from qualifying for events to product prizes and vacations.
A program that we have seen success with in many markets is the Member
Activation Program, under which new Members, who order a modest number of Volume
Points in each of their first three months, earn a prize. Our objective is to
improve the quality of sales leaders by encouraging new Members to begin
acquiring retail customers before attempting to qualify for sales leader status.
Additionally, in certain markets we have begun to utilize the segmentation of
our Member base into "preferred members" and "distributors" for more targeted
and efficient communication and promotions for these two differently motivated
types of Members. In certain other markets that have not been segmented, we have
begun using Member data to similarly categorize Members for communication and
promotion efforts.

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DMOs are being generated in many of our markets and are globalized where
applicable through the combined efforts of Members and country, regional and
corporate management. While we support a number of different DMOs, one of the
most popular DMOs is the daily consumption DMO. Under our traditional DMO, a
Member typically sells to its customers on a somewhat infrequent basis (e.g.,
monthly) which provides fewer opportunities for interaction with their
customers. Under a daily consumption DMO, a Member interacts with its customers
on a more frequent basis, including such activities as weekly weigh-ins, which
enables the Member to better educate and advise customers about nutrition and
the proper use of the products and helps promote daily usage as well, thereby
helping the Member grow his or her business. Specific examples of globalized
DMOs include the Nutrition Club concept in Mexico, the Healthy Breakfast concept
in Russia, and the Weight Loss Challenge in the United States. Management's
strategy is to review the applicability of expanding successful country
initiatives throughout a region, and where appropriate, support the
globalization of these initiatives.

As discussed further by market below, the Company has responded to COVID-19
pandemic conditions by adapting how it communicates with, services, and
transacts with our Members and our Members have similarly adapted their DMOs and
other activities. These responsive actions have varied by region and by market
due to the differing market- and regional-specific impacts of the pandemic and
the conditions and challenges unique to a particular market or region
independent of the impacts of the pandemic. The factors described above help
Members increase their business, which in turn helps drive Volume Point growth
in our business, and thus, net sales growth. The discussion below of net sales
details some of the specific drivers of changes in our business and causes of
sales fluctuations during the three and nine months ended September 30, 2021 as
compared to the same periods in 2020, as well as the unique growth or
contraction factors specific to certain geographic regions or significant
markets within a region during these periods. Net sales fluctuations, both
Company-wide and within a particular geographic region or market, are primarily
the result of changes in volume, changes in prices, or changes in foreign
currency translation rates. The discussion of changes in net sales quantifies
the impact of those drivers that are quantifiable such as changes in foreign
currency translation rates, and cites the estimated impact of any significant
price changes. The remaining drivers, which management believes are the primary
drivers of changes in volume, are typically qualitative factors whose impact
cannot be quantified. We use Volume Points as an indication for changes in sales
volume.

We expect the impact of the COVID-19 pandemic to impact our results of
operations in future quarters and their comparability to prior periods, both on
a consolidated basis and at the regional level. However, given the
unpredictable, unprecedented, and fluid nature of the pandemic and its economic
consequences, we are unable to predict the extent to which the pandemic and its
related impacts will adversely impact our business, financial condition, and
results of operations, including the impact it may have on our regions and
individual markets. See below for a more detailed discussion of the pandemic's
impact on net sales for the third quarter and first nine months of 2021 for each
geographic region and individual market.

North America


The North America region reported net sales of $354.8 million and $1,126.6
million for the three and nine months ended September 30, 2021, respectively.
Net sales decreased $43.9 million, or 11.0%, and increased $64.2 million, or
6.0%, for the three and nine months ended September 30, 2021, respectively, as
compared to the same periods in 2020. In local currency, net sales decreased
11.1% and increased 5.8% for the three and nine months ended September 30, 2021,
respectively, as compared to the same periods in 2020. The 11.0% decrease in net
sales for the three months ended September 30, 2021 was primarily due to a
decrease in sales volume, as indicated by a 12.5% decrease in Volume Points,
partially offset by a 1.0% favorable impact of price increases. The 6.0%
increase in net sales for the nine months ended September 30, 2021 was primarily
due to an increase in sales volume, as indicated by a 4.5% increase in Volume
Points, and a 1.4% favorable impact of price increases.

Net sales in the U.S. were $345.3 million and $1,093.0 million for the three and
nine months ended September 30, 2021, respectively. Net sales decreased $41.4
million, or 10.7%, and increased $59.1 million, or 5.7%, for the three and nine
months ended September 30, 2021, respectively, as compared to the same periods
in 2020.

The region has generally seen growth in recent years, supported by product line
expansion and deployment of enhanced technology tools to support our
distributors' businesses and optimize their customers' experiences with
Herbalife. The number of active Nutrition Clubs in the region has continued to
grow and the Nutrition Club DMO is a focus area for training and technological
support of our Members. Our communications, promotions, and other operations in
the region are targeted to our distributors, or their preferred members or
retail customers as appropriate. Our promotional program is designed to
encourage consistency and sustainability in our Members' businesses.
Additionally, we believe that pandemic conditions may have been a contributing
factor in the motivation and focus of our Members, contributing to
year-over-year sales volume increases during the second half of 2020 and the
first half of 2021.

The third quarter of 2021 saw a sales volume decline compared to the 2020 period, due in part to comparison to a base period that saw a record level of sales. Higher sales in the Energy, Sports, and Fitness product category contributed to sales volume for the quarter.

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In response to the pandemic conditions, product distribution to our Members was
temporarily altered during 2020 to allow online and phone-in orders only.
Currently, two of our three major U.S. distribution centers are shipping product
only, with no in-person pick-ups permitted, and our sales centers are for
pick-up only, with no orders taken on-site; however, our Members' ability to
obtain product has not materially decreased. Our access points, including
distribution centers and sales centers, generally allow in-person pick-up
orders, with exceptions as local conditions warrant; however, our access points
generally continue to not allow in-person orders. Members' Nutrition Clubs,
which represent a major DMO for the region, are operating in some areas as
pick-up points for product only, and returning to traditional on-site
consumption approach as local conditions allow. Nutrition Club sales volume
increased for both the quarter and the year-to-date period versus the prior-year
periods, including the impact of home deliveries from Nutrition Clubs to their
customers, an approach that has seen increased use as a response to the
pandemic. Our Member training and promotion events, such as our Success Training
Seminars and our Leadership Development Weekends, have shifted to a "virtual"
online approach, with in-person events to be reinstituted commencing in the
fourth quarter on a case-by-case basis as conditions allow. Promotional
activities aimed at our Members continue, though prizes that have involved
travel to events have shifted to cash and other awards. Certain modified
practices by us and our Members may prove to be lasting improvements, such as
events and trainings that are offered virtually as well as in-person and
expanded use of social media channels.

Mexico


The Mexico region reported net sales of $117.5 million and $354.5 million for
the three and nine months ended September 30, 2021, respectively. Net sales
increased $7.2 million, or 6.5%, and $32.9 million, or 10.2%, for the three and
nine months ended September 30, 2021, respectively, as compared to the same
periods in 2020. In local currency, net sales decreased 3.5% and increased 2.5%
for the three and nine months ended September 30, 2021, respectively, as
compared to the same periods in 2020. The 6.5% increase in net sales for the
three months ended September 30, 2021 was primarily due to a 10.0% favorable
impact of fluctuations in foreign currency exchange rates, a 4.1% favorable
impact of price increases, and a 1.2% favorable impact of timing differences
between the recognition of net sales and Volume Points, partially offset by a
decrease in sales volume, as indicated by a 10.3% decrease in Volume Points. The
10.2% increase in net sales for the nine months ended September 30, 2021 was
primarily due to a 7.7% favorable impact of fluctuations in foreign currency
exchange rates and a 4.3% favorable impact of price increases, partially offset
by a decrease in sales volume, as indicated by a 2.3% decrease in Volume Points.

Mexico saw lower sales volume for the quarter and year-to-date period versus the
prior-year periods. Mexico has faced ongoing difficult economic conditions, as
well as the adverse impact of intermittent pandemic-related constraints,
particularly on Nutrition Club operations which are important to the market.
Although nearly all product access points in Mexico, both Company-operated and
third party, have remained open, in some areas Nutrition Clubs are operating
under restrictions such as for product pick-up only. During March 2021 we
introduced Member segmentation to the market by adding a preferred customer
program option for new Members; we have seen some decline in new Members since
that time which we believe is due in part to Members adapting to the
segmentation.

South and Central America


The South and Central America region reported net sales of $89.2 million and
$272.0 million for the three and nine months ended September 30, 2021,
respectively. Net sales decreased $13.5 million, or 13.1% ($13.3 million, or
13.1% excluding Venezuela), and increased $7.4 million, or 2.8% ($7.4 million,
or 2.8% excluding Venezuela), for the three and nine months ended September 30,
2021, respectively, as compared to the same periods in 2020. In local currency,
net sales decreased 4.8% and increased 15.0% (decreased 9.9% and increased 7.0%
excluding Venezuela) for the three and nine months ended September 30, 2021,
respectively, as compared to the same periods in 2020. The 13.1% decrease in net
sales for the three months ended September 30, 2021 was due to a decrease in
sales volume, as indicated by a 17.5% decrease in Volume Points, and an 8.3%
unfavorable impact of fluctuations in foreign currency exchange rates (3.2%
unfavorable impact excluding Venezuela), partially offset by a 9.9% favorable
impact of price increases (4.8% favorable impact excluding Venezuela). The 2.8%
increase in net sales for the nine months ended September 30, 2021 was due to a
12.5% favorable impact of price increases (4.5% favorable impact excluding
Venezuela) and a 4.0% favorable impact of sales mix, partially offset by a 12.2%
unfavorable impact of fluctuations in foreign currency exchange rates (4.2%
unfavorable impact excluding Venezuela) and a decrease in sales volume, as
indicated by a 3.2% decrease in Volume Points.

The region saw sales volume decreases for the quarter and, to a lesser extent,
the year-to-date period versus the prior-year periods. For the third quarter,
the sales volume decline was seen across most markets in the region due, we
believe, to continuing intermittent adverse impacts of the pandemic seen across
most markets. For the year-to-date period, region results were mixed by market.
Sales volume declines were greatest in Brazil, our largest market in the region;
sales volume increases were led by Chile and Peru.

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Pandemic impacts have varied by market across the region, but have at times
included product shipping delays and suspension of product access points and
Members' Nutrition Clubs, requiring reliance on shipping product to Members' and
customers' homes. More broadly, markets across the region are focused on
building more sustainable business for our Members through daily product
consumption and retailing. We believe the region is seeing success leveraging
social media, utilizing cash prize promotions, and using the weight management
challenge DMO. The region is also introducing Member segmentation on a
market-by-market basis by adding preferred customer program options for new
Members.

Net sales in Brazil were $15.9 million and $49.2 million for the three and nine
months ended September 30, 2021, respectively. Net sales decreased $4.9 million,
or 23.6%, and $13.2 million, or 21.1%, for the three and nine months ended
September 30, 2021, respectively, as compared to the same periods in 2020. In
local currency, net sales decreased 25.7% and 15.3% for the three and nine
months ended September 30, 2021, respectively, as compared to the same periods
in 2020. The fluctuation of foreign currency exchange rates had a favorable
impact of $0.4 million and an unfavorable impact of $3.6 million on net sales
for the three and nine months ended September 30, 2021, respectively. Sales
volumes declined in the market for the quarter and year-to-date period versus
the prior-year periods. COVID-19 pandemic conditions continue in the market and
have constrained our business and that of our Members, particularly the
important Nutrition Club DMO. Although Members' Nutrition Clubs are currently
operating, we have seen declines in both the number of Clubs and their customer
traffic. Home delivery is operating and other product access points are open for
pick-up. More broadly, the market has seen some years of negative momentum,
though we continue to support our Members with innovative measures, such as the
Preferred Member program, and work with Member leadership to identify best
practices for replication within the market.

Net sales in Peru were $14.0 million and $45.3 million for the three and nine
months ended September 30, 2021, respectively. Net sales decreased $3.1 million,
or 18.0%, and increased $0.7 million, or 1.4%, for the three and nine months
ended September 30, 2021, respectively, as compared to the same periods in 2020.
In local currency, net sales decreased 6.5% and increased 12.1% for the three
and nine months ended September 30, 2021, respectively, as compared to the same
periods in 2020. The fluctuation of foreign currency exchange rates had an
unfavorable impact of $2.0 million and $4.8 million on net sales for the three
and nine months ended September 30, 2021, respectively. Sales volume decreased
for the quarter and increased for the year-to-date period versus the respective
prior-year periods. The market continues to experience intermittent disruptions
due to COVID-19 pandemic conditions, and we have adapted our business with steps
including taking orders by Internet and phone and shipping product to Member
homes. Members' Nutrition Clubs were also modified for home delivery only or are
open for partial operation. The market has seen Members' leveraging social media
and using the weight management challenge DMO.

EMEA


The EMEA region reported net sales of $321.9 million and $1,043.8 million for
the three and nine months ended September 30, 2021, respectively. Net sales
decreased $12.4 million, or 3.7%, and increased $150.5 million, or 16.8%, for
the three and nine months ended September 30, 2021, respectively, as compared to
the same periods in 2020. In local currency, net sales decreased 4.5% and
increased 12.6% for the three and nine months ended September 30, 2021,
respectively, as compared to the same periods in 2020. The 3.7% decrease in net
sales for the three months ended September 30, 2021 was primarily due to a
decrease in sales volume, as indicated by a 7.8% decrease in Volume Points,
partially offset by a 2.9% favorable impact of price increases and a 0.8%
favorable impact of fluctuations in foreign currency exchange rates. The 16.8%
increase in net sales for the nine months ended September 30, 2021 was primarily
due to an increase in sales volume, as indicated by an 8.0% increase in Volume
Points, a 4.2% favorable impact of fluctuations in foreign currency exchange
rates, and a 3.6% favorable impact of price increases.

Although Volume Points decreased year-over-year in the third quarter of 2021,
the general, overall trend of Volume Point growth that has been seen across the
EMEA region for a number of years reflects, we believe, efforts to enhance the
quality and activity of sales leaders including Member training, brand
awareness, and product line expansion, as well as enhanced technology tools for
ordering, business performance, and customer retailing. Nearly all markets saw
sales volume declines for the third quarter of 2021 versus 2020, however, and
results for the first nine months of 2021 versus those of 2020 have been mixed
by market. Declines include the effect of comparison to base periods that saw
record levels of sales; we believe that pandemic conditions may have been a
contributing factor in the motivation and focus of our Members in certain
markets of the region during the second half of 2020 and first half of 2021.
Volume declines for the third quarter were greatest for South Africa and the
United Kingdom. Volume increases for the year-to-date period were greatest for
Turkey, Italy, and Spain, and volume decline was most significant for South
Africa.

Due to COVID-19 pandemic conditions, our sales centers and other product access
points in certain markets within the region have at times been closed or open
for limited operations only, leaving shipping for home delivery as the primary
distribution channel while those conditions persist. Members are turning further
to social media to carry out their sales and oversight activities. Although we
and our Members are anxious to reinstitute face-to-face approaches, we believe
these adaptations have been successful in limiting the adverse impact of the
pandemic.

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Net sales in Spain were $44.8 million and $148.0 million for the three and nine
months ended September 30, 2021, respectively. Net sales decreased $4.0 million,
or 8.1%, and increased $23.0 million, or 18.4%, for the three and nine months
ended September 30, 2021, respectively, as compared to the same periods in 2020.
In local currency, net sales decreased 8.9% and increased 11.0% for the three
and nine months ended September 30, 2021, respectively, as compared to the same
periods in 2020. The fluctuation of foreign currency exchange rates had a
favorable impact of $0.4 million and $9.3 million on net sales for the three and
nine months ended September 30, 2021, respectively. In recent years, Spain has
generally seen sales volume increases as it benefited from programs of
promotions and sponsorships that have raised brand awareness through healthy
active lifestyle and contributed to broad-based success across Member sales
organizations in the market. After the first quarter of 2020 saw a small sales
volume decline due to pandemic disruption, subsequent quarters saw volume
increases as our Members continued to adapt to pandemic conditions, such as
leveraging online tools for meetings, trainings, and selling activities. The
third quarter of 2021 saw a sales volume decrease year-over-year as the 2020
base period reflected significant strength. In response to pandemic conditions,
we have temporarily shifted our Member support operations to primarily online
activities, as well as continuing normal home delivery.

Net sales in Italy were $39.1 million and $130.7 million for the three and nine
months ended September 30, 2021, respectively. Net sales decreased $0.4 million,
or 0.8%, and increased $26.9 million, or 26.0%, for the three and nine months
ended September 30, 2021, respectively, as compared to the same periods in 2020.
In local currency, net sales decreased 1.8% and increased 18.1% for the three
and nine months ended September 30, 2021, respectively, as compared to the same
periods in 2020. The fluctuation of foreign currency exchange rates had a
favorable impact of $0.4 million and $8.2 million on net sales for the three and
nine months ended September 30, 2021, respectively. Sales volume declined
slightly for the quarter and increased year-to-date versus the prior-year
periods. After weakened performance in our business and pandemic conditions in
the country contributed to a sales volume decline for the first quarter of 2020,
we believe adaptation by Members to pandemic conditions, such as online
communication with Members and home delivery, as well as heightened demand for
our products and business opportunity, have been contributing factors to our
sales volume increase through the second quarter of 2021 and generally
strengthened performance for subsequent quarters.

Net sales in Russia were $36.0 million and $106.6 million for the three and nine
months ended September 30, 2021, respectively. Net sales decreased $0.7 million,
or 1.7%, and $4.5 million, or 4.0%, for the three and nine months ended
September 30, 2021, respectively, as compared to the same periods in 2020. In
local currency, net sales decreased 2.3% and increased 0.2% for the three and
nine months ended September 30, 2021, respectively, as compared to the same
periods in 2020. The fluctuation of foreign currency exchange rates had a
favorable impact of $0.2 million and an unfavorable impact of $4.7 million on
net sales for the three and nine months ended September 30, 2021, respectively.
Russia saw a sales volume decline for the quarter and year-to-date period versus
the prior-year periods. Members' Nutrition Clubs, a key DMO for the market, are
operating primarily online due to pandemic conditions, an approach that Members
are taking time to adapt to, as supported by Herbalife with new products,
training, and promotion for all levels of Membership. Our sales centers are open
for product pick-up, although we continue to support home delivery for the
market. Product access expansion, such as same-day express delivery in many
areas has enabled growth in smaller cities. During the third quarter of 2020, we
introduced Member segmentation to the market by adding a preferred customer
program option for new Members. Russia had a 4% price increase in September 2021
and a 5% price increase in September 2020.

Asia Pacific


The Asia Pacific region, which excludes China, reported net sales of $393.5
million and $1,188.8 million for the three and nine months ended September 30,
2021, respectively. Net sales increased $37.7 million, or 10.6%, and $219.0
million, or 22.6%, for the three and nine months ended September 30, 2021,
respectively, as compared to the same periods in 2020. In local currency, net
sales increased 9.5% and 19.8% for the three and nine months ended September 30,
2021, respectively, as compared to the same periods in 2020. The 10.6% increase
in net sales for the three months ended September 30, 2021 was primarily due to
an increase in sales volume, as indicated by a 9.0% increase in Volume Points, a
4.1% favorable impact of price increases, and a 1.1% favorable impact of
fluctuations in foreign currency exchange rates, partially offset by a 3.6%
unfavorable impact of sales mix. The 22.6% increase in net sales for the nine
months ended September 30, 2021 was primarily due to an increase in sales
volume, as indicated by a 21.3% increase in Volume Points, a 3.0% favorable
impact of price increases, and a 2.8% favorable impact of fluctuations in
foreign currency exchange rates, partially offset by a 4.1% unfavorable impact
of sales mix.

Volume Point and net sales increases in recent years for most markets in the
region are a result, we believe, of a customer-focused business, daily
consumption DMOs including Nutrition Clubs, and ongoing product line expansion.
COVID-19 pandemic conditions, such as closed sales centers and operating
constraints on Members' Nutrition Clubs, have had an intermittent adverse impact
on results. The volume increase for the third quarter versus the prior-year
period was driven by India, as other markets across the region generally saw
volume declines. The volume increase for the year-to-date period versus the
prior-year period was led by India, Vietnam, and Malaysia.

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Net sales in India were $140.3 million and $380.5 million for the three and nine
months ended September 30, 2021, respectively. Net sales increased $44.1
million, or 45.8%, and $135.6 million, or 55.3%, for the three and nine months
ended September 30, 2021, respectively, as compared to the same periods in 2020.
In local currency, net sales increased 45.3% and 54.0% for the three and nine
months ended September 30, 2021, respectively, as compared to the same periods
in 2020. The fluctuation of foreign currency exchange rates had a favorable
impact of $0.5 million and $3.3 million on net sales for the three and nine
months ended September 30, 2021, respectively. Sales volumes have increased in
India in recent years as we continued to expand our product line and make it
easier for our Members to do business, such as by adding product access points
and payment methods, and introducing a customer-direct shipping capability for
our Members. Additionally, we believe adaption by our Members to
pandemic-related operating constraints, such as greater use of online marketing
and training tools and online Nutrition Club operation, has broadened their
geographic reach enabling them to expand their businesses.

Pandemic-related operating constraints continue to be intermittent in the
market, as conditions evolve by area and Indian states institute constraints as
warranted. We are increasing our manufacturing capacity to continue to meet
demand. We continue to take Member orders and payments online. Company locations
are now open for the taking of orders and payments and pick-up of product,
though home delivery volumes continue to exceed pre-pandemic levels and home
delivery is becoming an important distribution channel for the market.
Disruption to our collections and expenditures of cash have eased, though we
continue to move transactions to electronic collection and payment for operating
efficiency purposes and for Member convenience.

Regulatory restrictions on direct selling in India, including registration requirements for our distributors, have reduced the number of new distributors. However, we have seen a significant increase in new Preferred Members since these do not have similar registration requirements and as distributors encourage the Preferred Membership pathway for their customers.


Net sales in Vietnam were $60.8 million and $206.8 million for the three and
nine months ended September 30, 2021, respectively. Net sales increased $7.3
million, or 13.5%, and $56.9 million, or 38.0%, for the three and nine months
ended September 30, 2021, respectively, as compared to the same periods in 2020.
In local currency, net sales increased 12.1% and 36.4% for the three and nine
months ended September 30, 2021, respectively, as compared to the same periods
in 2020. The fluctuation of foreign currency exchange rates had a favorable
impact of $0.8 million and $2.4 million on net sales for the three and nine
months ended September 30, 2021, respectively. Vietnam continues to see
year-over-year sales volume growth as sales leadership continues to focus on
sustainable, consumption-oriented business practices and the number of product
access points are increased. COVID-19 pandemic-related operating constraints,
such as the closure of Members' Nutrition Clubs for in-person customer servicing
and some home delivery disruption, continue to be intermittent and contributed
to a reduced rate of year-over-year volume growth for the third quarter of 2021.
We and our Members have adapted to such constraints by moving events, trainings,
and product ordering online, as well as providing home delivery. Further changes
to direct-selling regulations in the market are expected to be proposed to the
government for preliminary approval in late 2021. We continue to assess and
monitor these preliminary draft regulations.

Net sales in Indonesia were $38.3 million and $121.1 million for the three and
nine months ended September 30, 2021, respectively. Net sales decreased $4.3
million, or 9.9%, and $10.2 million, or 7.7%, for the three and nine months
ended September 30, 2021, respectively, as compared to the same periods in 2020.
In local currency, net sales decreased 11.7% and 9.4% for the three and nine
months ended September 30, 2021, respectively, as compared to the same periods
in 2020. The fluctuation of foreign currency exchange rates had a favorable
impact of $0.8 million and $2.2 million on net sales for the three and nine
months ended September 30, 2021, respectively. The sales volume decline for the
quarter and year-to-date period versus the prior-year periods are attributable
in part, we believe, to ongoing pandemic conditions. These conditions include
intermittent constraints on the operating hours and capacity of our product
access points. Our sales centers have continued to operate via online ordering,
home delivery, and pick-up, which were already established methods for the
market. Many Members' Nutrition Clubs, the major DMO for the market, have
experienced pandemic-related constraints on their activities, including
limitations on operating hours and capacity. Additionally, we have applied to
comply with new online licensing and filing requirements, subject to review by
the government; we continue to monitor this review.

Net sales in South Korea were $35.1 million and $103.9 million for the three and
nine months ended September 30, 2021, respectively. Net sales increased $1.1
million, or 3.1%, and $6.5 million, or 6.7%, for the three and nine months ended
September 30, 2021, respectively, as compared to the same periods in 2020. In
local currency, net sales increased 0.6% and 0.5% for the three and nine months
ended September 30, 2021, respectively, as compared to the same periods in 2020.
The fluctuation of foreign currency exchange rates had a favorable impact of
$0.9 million and $6.0 million on net sales for the three and nine months ended
September 30, 2021, respectively. Sales volumes increased slightly for the
quarter and year-to-date period versus the prior-year periods as pandemic
conditions eased somewhat and social interactions in the market such as visits
to Members' Nutrition Clubs increased, and as our Members continue to adapt to
virtual approaches for their businesses. Pandemic conditions continue to be
intermittent with potential ongoing adverse impact on sales volumes, however,
including suspension of our training facilities, constraints on Nutrition Clubs
operations, and restrictions on gatherings.

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China


The China region reported net sales of $154.0 million and $499.1 million for the
three and nine months ended September 30, 2021, respectively. Net sales
decreased $66.0 million, or 30.0%, and $120.3 million, or 19.4%, for the three
and nine months ended September 30, 2021, respectively, as compared to the same
periods in 2020. In local currency, net sales decreased 34.6% and 25.5% for the
three and nine months ended September 30, 2021, respectively, as compared to the
same periods in 2020. The 30.0% decrease in net sales for the three months ended
September 30, 2021 was primarily due to a decrease in sales volume, as indicated
by a 36.2% decrease in Volume Points, partially offset by a 4.6% favorable
impact of fluctuations in foreign currency exchange rates. The 19.4% decrease in
net sales for the nine months ended September 30, 2021 was primarily due to a
decrease in sales volume, as indicated by a 27.6% decrease in Volume Points,
partially offset by a 6.1% favorable impact of fluctuations in foreign currency
exchange rates.

The volume declines for the quarter and year-to-date period versus the
prior-year periods were attributable, we believe, to several factors including
efforts we are making to ultimately strengthen the consistency and
sustainability of our business in China. In December 2020 we increased the
requirements for our sales representatives in China to be eligible to apply to
become independent service providers, with further modification during the third
quarter of 2021. We believe these changes will ultimately strengthen our
business by improving the quality of our independent service providers, but as
our Members acclimate to these new requirements we have seen declines in the
number of new independent service providers and net sales. Also, the frequency
and attendance of our and our Members' in-person training and sales meetings,
which are important to the business as they are a central channel for attracting
and retaining customers, providing personal and professional development for our
Members, and promoting our products, are below the levels of prior years due to
the intermittent effects of the COVID-19 pandemic and residual effects of the
Chinese government's 100-day review of the health product industry, which
concluded in April 2019.

Focus areas for China include enhancing our digital capabilities and offerings,
such as improving the integration of our technological tools to make it easier
for our Members to do business. We have expanded our product line for the China
market and continue to conduct sales promotions in the region.

Sales by Product Category

Net sales by product category were as follows:




                                                 Three Months Ended                                      Nine Months Ended
                                  September 30,       September 30,                       September 30,       September 30,
                                      2021                2020            % Change            2021                2020            % Change
                                                                           (Dollars in millions)
Weight Management                $         828.7     $         910.4           (9.0 )%   $       2,620.7     $       2,484.3            5.5 %
Targeted Nutrition                         400.9               415.8           (3.6 )%           1,252.2             1,127.1           11.1 %
Energy, Sports, and Fitness                145.5               125.2           16.2 %              421.8               322.9           30.6 %
Outer Nutrition                             24.3                28.2          (13.8 )%              82.1                80.5            2.0 %
Literature, Promotional, and
Other(1)                                    31.5                42.2          (25.4 )%             108.0               116.3           (7.1 )%
Total                            $       1,430.9     $       1,521.8           (6.0 )%   $       4,484.8     $       4,131.1            8.6 %



(1) Product buybacks and returns in all product categories are included in the Literature, Promotional, and Other category.


Net sales for all major categories for the three and nine months ended September
30, 2021 as compared to the same periods in 2020 followed the trends of total
net sales, as the business factors described in the above discussions of the
individual geographic regions apply generally to all product categories. The
exception was the Energy, Sports, and Fitness product category, which saw
increased net sales for both the three and nine months ended September 30, 2021
based on strength in the North America region.

Gross Profit


Gross profit was $1,125.7 million and $1,199.1 million for the three months
ended September 30, 2021 and 2020, respectively, and $3,542.1 million and
$3,289.9 million for the nine months ended September 30, 2021 and 2020,
respectively. Gross profit as a percentage of net sales was 78.7% and 78.8% for
the three months ended September 30, 2021 and 2020, respectively, or an
unfavorable net decrease of 13 basis points, and 79.0% and 79.6% for the nine
months ended September 30, 2021 and 2020, respectively, or an unfavorable net
decrease of 66 basis points.

                                       47
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The decrease in gross profit as a percentage of net sales for the three months
ended September 30, 2021 as compared to the same period in 2020 included
unfavorable changes in country mix of 45 basis points, unfavorable cost changes
related to self-manufacturing and sourcing of 33 basis points primarily related
to increased freight costs, and the unfavorable impact of higher inventory
write-downs of 10 basis points, partially offset by the favorable impact of
retail price increases of 67 basis points (favorable impact of 59 basis points
excluding Venezuela), and favorable other cost changes of 8 basis points.

The decrease in gross profit as a percentage of net sales for the nine months
ended September 30, 2021 as compared to the same period in 2020 included
unfavorable changes in country mix of 52 basis points, the unfavorable impact of
foreign currency fluctuations of 43 basis points (unfavorable impact of 33 basis
points excluding Venezuela), the unfavorable impact of higher inventory
write-downs of 14 basis points, unfavorable cost changes related to
self-manufacturing and sourcing of 10 basis points, and unfavorable cost changes
of 10 basis points relating to increased freight costs due to orders shifting
toward home delivery versus Member pick-up, partially offset by the favorable
impact of retail price increases of 60 basis points (favorable impact of 50
basis points excluding Venezuela) and favorable other cost changes of 3 basis
points.

Generally, gross profit as a percentage of net sales may vary from period to
period due to the impact of foreign currency fluctuations, changes in country
mix as volume changes among countries with varying margins, retail price
increases, cost changes related to self-manufacturing and sourcing, and
inventory write-downs.

Royalty Overrides


Royalty overrides were $450.0 million and $463.1 million for the three months
ended September 30, 2021 and 2020, respectively, and $1,409.8 million and
$1,251.2 million for the nine months ended September 30, 2021 and 2020,
respectively. Royalty overrides as a percentage of net sales were 31.5% and
30.4% for the three months ended September 30, 2021 and 2020, respectively, and
31.4% and 30.3% for the nine months ended September 30, 2021 and 2020,
respectively.

Service fees to our independent service providers in China are included in
selling, general, and administrative expenses while Member compensation for all
other countries is included in Royalty overrides. Generally, Royalty overrides
as a percentage of net sales may vary from period to period due to changes in
the mix of products and countries because full royalty overrides are not paid on
certain products and in certain countries.

Selling, General, and Administrative Expenses


Selling, general, and administrative expenses were $486.3 million and $529.7
million for the three months ended September 30, 2021 and 2020, respectively,
and $1,498.9 million and $1,559.5 million for the nine months ended September
30, 2021 and 2020, respectively. Selling, general, and administrative expenses
as a percentage of net sales were 34.0% and 34.8% for the three months ended
September 30, 2021 and 2020, respectively, and 33.4% and 37.7% for the nine
months ended September 30, 2021 and 2020, respectively.

The decrease in selling, general, and administrative expenses for the three
months ended September 30, 2021 as compared to the same period in 2020 was
driven by $38.2 million in lower service fees for China independent service
providers due to lower sales in China, $5.5 million in lower foreign exchange
losses, and $5.0 million in lower Member event and promotion costs, partially
offset by $6.1 million in higher professional fees.

The decrease in selling, general, and administrative expenses for the nine
months ended September 30, 2021 as compared to the same period in 2020 was
driven by $83.1 million of expenses relating to the SEC and DOJ investigations
relating to the FCPA matter in China in 2020 (See Note 5, Contingencies, to the
Condensed Consolidated Financial Statements included in Part I, Item 1,
Financial Statements, of this Quarterly Report on Form 10-Q) and $72.9 million
in lower service fees for China independent service providers due to lower sales
in China, partially offset by $55.4 million in higher labor and benefits costs,
$21.9 million in higher professional fees, and $14.7 million in higher Member
event and promotion costs.

Other Operating Income

We did not recognize any other operating income for the three months ended
September 30, 2021. The $0.6 million of other operating income for the three
months ended September 30, 2020 consisted of $0.6 million of government grant
income for China (See Note 2, Significant Accounting Policies, to the Condensed
Consolidated Financial Statements included in Part I, Item 1, Financial
Statements, of this Quarterly Report on Form 10-Q).

The $16.4 million of other operating income for the nine months ended September
30, 2021 consisted of $16.4 million of government grant income for China. The
$13.0 million of other operating income for the nine months ended September 30,
2020 consisted of $13.0 million of government grant income for China.

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Interest Expense, Net

Interest expense, net was as follows:




                                                   Three Months Ended                        Nine Months Ended
                                           September 30,         September 30,       September 30,        September 30,
                                               2021                  2020                2021                 2020
                                                                          (in millions)
Interest expense                          $          38.8       $          37.0     $         115.5      $          96.4
Interest income                                      (1.1 )                (1.8 )              (3.5 )               (7.4 )
Interest expense, net                     $          37.7       $          35.2     $         112.0      $          89.0




The increase in interest expense, net for the three and nine months ended
September 30, 2021 as compared to the same periods in 2020 was primarily due to
an increase in our overall weighted-average borrowings, partially offset by a
decrease in our overall weighted-average interest rate.

Other Expense, Net


The $24.6 million of other expense, net for the nine months ended September 30,
2021 consisted of a loss on the extinguishment of the 2026 Notes (See Note 4,
Long-Term Debt, to the Condensed Consolidated Financial Statements included in
Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q).

Income Taxes


Income taxes were $34.3 million and $33.6 million for the three months ended
September 30, 2021 and 2020, respectively, and $104.2 million and $104.4 million
for the nine months ended September 30, 2021 and 2020, respectively. The
effective income tax rate was 22.6% and 19.5% for the three months ended
September 30, 2021 and 2020, respectively, and 20.3% and 25.9% for the nine
months ended September 30, 2021 and 2020, respectively. The increase in the
effective tax rate for the three months ended September 30, 2021 as compared to
the same period in 2020 was primarily due to a decrease in net benefits from
discrete events, partially offset by changes in the geographic mix of our
income. The decrease in the effective tax rate for the nine months ended
September 30, 2021 as compared to the same period in 2020 was primarily due to
changes in the geographic mix of our income and a decrease in expense from
discrete events.

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. Variations in sales of our products
directly affect the availability of funds. There are no material contractual
restrictions on our ability to transfer and remit funds among our international
affiliated companies. However, there are foreign currency restrictions in
certain countries which could reduce our ability to timely obtain U.S. dollars.
Even with these restrictions and the impacts of the COVID-19 pandemic, we
believe we will have sufficient resources, including cash flow from operating
activities and access to capital markets, to meet debt service obligations in a
timely manner and be able to continue to meet our objectives.

Historically, our debt has not resulted from the need to fund our normal
operations, but instead has resulted primarily from our share repurchase
programs. Since inception in 2007, total share repurchases amounted to
approximately $6.3 billion. While a significant net sales decline could
potentially affect the availability of funds, many of our largest expenses are
variable in nature, which we believe protects our funding in all but a dramatic
net sales downturn. Our $678.2 million cash and cash equivalents as of September
30, 2021 and our senior secured credit facility, in addition to cash flow from
operations, can be used to support general corporate purposes, including any
future share repurchases, dividends, and strategic investment opportunities.

We have a cash pooling arrangement with a financial institution for cash
management purposes. This cash pooling arrangement allows certain of our
participating subsidiaries to withdraw cash from this financial institution
based upon our aggregate cash deposits held by subsidiaries who participate in
the cash pooling arrangement. We did not owe any amounts to this financial
institution under the pooling arrangement as of September 30, 2021 and December
31, 2020.

                                       49
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For the nine months ended September 30, 2021, we generated $374.9 million of
operating cash flow as compared to $516.1 million for the same period in 2020.
The decrease in our operating cash flow was the result of $282.7 million of
unfavorable changes in operating assets and liabilities, partially offset by
$141.5 million of higher net income excluding non-cash and reconciling items
disclosed within our condensed consolidated statement of cash flows. The $282.7
million change in operating assets and liabilities was primarily the result of
unfavorable changes in inventories, prepaid expenses and other current assets,
royalty overrides, and other current liabilities, partially offset by a
favorable change in receivables. The unfavorable change in other current
liabilities included unfavorable changes in accrued compensation, accrued
interest, and settlement of Mexico VAT assessments, partially offset by a
favorable impact in 2021 due to the prior-year settlement of the SEC and DOJ
investigations relating to the FCPA matter in China. The $141.5 million of
higher net income excluding non-cash and reconciling items was primarily driven
by higher contribution margin driven by higher net sales (See Summary Financial
Results above for further discussion) and lower selling, general, and
administrative expenses primarily as a result of the $83.1 million in higher
expenses recognized in 2020 related to the SEC and DOJ investigations relating
to the FCPA matter in China.

Capital expenditures, including accrued capital expenditures, were $102.1
million and $74.8 million for the nine months ended September 30, 2021 and 2020,
respectively. The majority of these expenditures represented investments in
management information systems, including initiatives to develop web-based
Member tools, as well as expansion of our manufacturing and distribution
facilities. We expect to incur total capital expenditures of approximately $145
million to $175 million for the full year of 2021.

In March 2021, we hosted our annual global Herbalife Honors event virtually
where sales leaders from around the world met, shared best practices, and
conducted leadership training, and our management awarded Members $81.1 million
of Mark Hughes bonus payments related to their 2020 performance. In March 2020,
our management awarded Members $71.3 million of Mark Hughes bonus payments
related to their 2019 performance.

Management has begun efforts to design and build a transformation program to
optimize global processes through investment in and realignment of the
infrastructure and locations of certain supporting functions and is also
separately assessing the realignment of certain front office functions and
exploring new technology to ensure the Company is optimally structured to better
support distributors and customers. In connection with the aforementioned
initiatives, for the three and nine months ended September 30, 2021, we incurred
$3.9 million and $7.6 million of expenses, respectively, primarily relating to
professional fees. We continue to assess the scope of these initiatives and
accordingly cannot estimate the total amounts to be incurred.

Senior Secured Credit Facility


On August 16, 2018, we entered into a $1.25 billion senior secured credit
facility, or the 2018 Credit Facility, consisting of a $250.0 million term loan
A, or the 2018 Term Loan A, a $750.0 million term loan B, or the 2018 Term Loan
B, and a $250.0 million revolving credit facility, or the 2018 Revolving Credit
Facility, with a syndicate of financial institutions as lenders. The 2018 Term
Loan B matures upon the earlier of: (i) August 18, 2025, or (ii) December 15,
2023 if the outstanding principal on the 2024 Convertible Notes, as defined
below, exceeds $350.0 million and we exceed certain leverage ratios as of that
date. All obligations under the 2018 Credit Facility are unconditionally
guaranteed by certain direct and indirect wholly-owned subsidiaries of Herbalife
Nutrition Ltd. and secured by the equity interests of certain of Herbalife
Nutrition Ltd.'s subsidiaries and substantially all of the assets of the
domestic loan parties. Also on August 16, 2018, we issued $400.0 million
aggregate principal amount of senior unsecured notes, or the 2026 Notes as
described below, and used the proceeds from the 2018 Credit Facility and the
2026 Notes to repay in full the $1,178.1 million outstanding under our prior
senior secured credit facility.

On December 12, 2019, we amended the 2018 Credit Facility which, among other
things, reduced the interest rate for borrowings under the 2018 Term Loan B. We
incurred approximately $1.2 million of debt issuance costs in connection with
the amendment. For accounting purposes, pursuant to the Financial Accounting
Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 470,
Debt, or ASC 470, this transaction was accounted for as a modification of the
2018 Credit Facility. The debt issuance costs were recognized in interest
expense, net within our condensed consolidated statement of income during the
three months ended December 31, 2019.

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On March 19, 2020, we amended the 2018 Credit Facility which, among other
things, extended the maturity of both the 2018 Term Loan A and 2018 Revolving
Credit Facility to the earlier of: (i) March 19, 2025 or (ii) September 15, 2023
if the outstanding principal on the 2024 Convertible Notes, as defined below,
exceeds $350.0 million and we exceed certain leverage ratios as of that date;
increased borrowings under the 2018 Term Loan A from $234.4 million to a total
of $264.8 million; increased the total available borrowing capacity under 2018
Revolving Credit Facility from $250.0 million to $282.5 million; and reduced the
interest rate for borrowings under both the 2018 Term Loan A and 2018 Revolving
Credit Facility. We incurred approximately $1.6 million of debt issuance costs
in connection with the amendment. For accounting purposes, pursuant to ASC 470,
this transaction was accounted for as a modification of the 2018 Credit
Facility. Of the $1.6 million of debt issuance costs, approximately $1.1 million
was recorded on our condensed consolidated balance sheet and is being amortized
over the life of the 2018 Credit Facility using the effective-interest method,
and approximately $0.5 million was recognized in interest expense, net within
our condensed consolidated statement of income during the three months ended
March 31, 2020.

On February 10, 2021, we amended the 2018 Credit Facility which, among other
things, reduced the interest rate for borrowings under the 2018 Term Loan B. We
incurred approximately $1.1 million of debt issuance costs in connection with
the amendment. For accounting purposes, pursuant to ASC 470, this transaction
was accounted for as a modification of the 2018 Credit Facility. The debt
issuance costs were recognized in interest expense, net within our condensed
consolidated statement of income during the three months ended March 31, 2021.

On July 30, 2021, we amended the 2018 Credit Facility which, among other things,
increased borrowings under the 2018 Term Loan A from $245.0 million to a total
of $286.2 million; increased the total available borrowing capacity under the
2018 Revolving Credit Facility from $282.5 million to $330.0 million; reduced
the interest rate for borrowings under the 2018 Term Loan A and 2018 Revolving
Credit Facility; and amended the commitment fee on the undrawn portion of the
2018 Revolving Credit Facility. As a result of the amendment, the applicable
margin for the 2018 Term Loan A and 2018 Revolving Credit Facility may also be
subject to certain premiums or discounts tied to criteria determined by certain
sustainability targets. We incurred approximately $1.4 million of debt issuance
costs in connection with the amendment. For accounting purposes, pursuant to ASC
470, this transaction was accounted for as a modification of the 2018 Credit
Facility. Of the $1.4 million of debt issuance costs, approximately $0.8 million
was recorded on our condensed consolidated balance sheet and is being amortized
over the life of the 2018 Credit Facility using the effective-interest method,
and approximately $0.6 million was recognized in interest expense, net within
our condensed consolidated statement of income during the three months ended
September 30, 2021.

The 2018 Credit Facility requires us to comply with a leverage ratio. The 2018
Credit Facility also contains affirmative and negative covenants customary for
financings of this type, including, among other things, limitations or
prohibitions on repurchasing common shares, declaring and paying dividends and
other distributions, redeeming and repurchasing certain other indebtedness,
loans and investments, additional indebtedness, liens, mergers, asset sales and
transactions with affiliates. In addition, the 2018 Credit Facility contains
customary events of default. As of September 30, 2021 and December 31, 2020, we
were in compliance with our debt covenants under the 2018 Credit Facility.

The 2018 Term Loan A and 2018 Term Loan B are payable in consecutive quarterly
installments which began on December 31, 2018. Interest is due at least
quarterly on amounts outstanding under the 2018 Credit Facility. In addition,
beginning in 2020, we may be required to make mandatory prepayments towards the
2018 Term Loan B based on our consolidated leverage ratio and annual excess cash
flows as defined under the terms of the 2018 Credit Facility. We are also
permitted to make voluntary prepayments. Amounts outstanding under the 2018 Term
Loan A and 2018 Term Loan B may be voluntarily prepaid without premium or
penalty, subject to customary breakage fees in connection with the prepayment of
a eurocurrency loan. These prepayments, if any, will be applied against
remaining quarterly installments owed under the 2018 Term Loan A and 2018 Term
Loan B in order of maturity with the remaining principal due upon maturity,
unless directed otherwise by us. Based on the 2020 consolidated leverage ratio
and excess cash flow calculation, both as defined under the terms of the 2018
Credit Facility, we will not be required to make a mandatory prepayment in 2021
toward the 2018 Term Loan B.

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During the nine months ended September 30, 2021, we borrowed an aggregate amount
of $531.2 million under the 2018 Credit Facility and repaid a total amount of
$415.8 million on amounts outstanding under the 2018 Credit Facility, including
a $60.0 million prepayment on amounts outstanding under the 2018 Term Loan B.
During the nine months ended September 30, 2020, we borrowed an aggregate amount
of $30.4 million under the 2018 Credit Facility and repaid a total amount of
$15.6 million on amounts outstanding under the 2018 Credit Facility. As of
September 30, 2021 and December 31, 2020, the U.S. dollar amount outstanding
under the 2018 Credit Facility was $1,100.1 million and $984.7 million,
respectively. Of the $1,100.1 million outstanding under the 2018 Credit Facility
as of September 30, 2021, $282.6 million was outstanding under the 2018 Term
Loan A, $667.5 million was outstanding under the 2018 Term Loan B, and $150.0
million was outstanding under the 2018 Revolving Credit Facility. Of the $984.7
million outstanding under the 2018 Credit Facility as of December 31, 2020,
$251.6 million was outstanding under the 2018 Term Loan A and $733.1 million was
outstanding under the 2018 Term Loan B. There were no borrowings outstanding
under the 2018 Revolving Credit Facility as of December 31, 2020. There were no
outstanding foreign currency borrowings under the 2018 Credit Facility as of
September 30, 2021 and December 31, 2020. As of September 30, 2021 and December
31, 2020, the weighted-average interest rate for borrowings under the 2018
Credit Facility was 2.65% and 3.39%, respectively.

See Note 4, Long-Term Debt, to the Condensed Consolidated Financial Statements
included in Part I, Item 1, Financial Statements, of this Quarterly Report on
Form 10-Q for a further discussion on the 2018 Credit Facility.

Convertible Senior Notes due 2024


In March 2018, we issued $550.0 million aggregate principal amount of
convertible senior notes due 2024, or the 2024 Convertible Notes. The 2024
Convertible Notes are senior unsecured obligations which rank effectively
subordinate to any of our existing and future secured indebtedness, including
amounts outstanding under the 2018 Credit Facility, to the extent of the value
of the assets securing such indebtedness. The 2024 Convertible Notes pay
interest at a rate of 2.625% per annum payable semiannually in arrears on March
15 and September 15 of each year, beginning on September 15, 2018. Unless
redeemed, repurchased or converted in accordance with their terms prior to such
date, the 2024 Convertible Notes mature on March 15, 2024. The primary purpose
of the issuance of the 2024 Convertible Notes was to repurchase a portion of the
2019 Convertible Notes. See Note 4, Long-Term Debt, to the Condensed
Consolidated Financial Statements included in Part I, Item 1, Financial
Statements, of this Quarterly Report on Form 10-Q for a further discussion on
our 2024 Convertible Notes.

Senior Notes due 2025

In May 2020, we issued $600.0 million aggregate principal amount of senior notes
due 2025, or the 2025 Notes. The 2025 Notes are senior unsecured obligations
which rank effectively subordinate to any of our existing and future secured
indebtedness, including amounts outstanding under the 2018 Credit Facility, to
the extent of the value of the assets securing such indebtedness. The 2025 Notes
pay interest at a rate of 7.875% per annum payable semiannually in arrears on
March 1 and September 1 of each year, beginning on March 1, 2021. The 2025 Notes
mature on September 1, 2025, unless redeemed or repurchased in accordance with
their terms prior to such date. The primary purpose of the issuance of the 2025
Notes was for general corporate purposes, including share repurchases and other
capital investment projects. See Note 4, Long-Term Debt, to the Condensed
Consolidated Financial Statements included in Part I, Item 1, Financial
Statements, of this Quarterly Report on Form 10-Q for a further discussion on
our 2025 Notes.

Senior Notes due 2026

In August 2018, we issued $400.0 million aggregate principal amount of senior
notes due 2026, or the 2026 Notes. The 2026 Notes were senior unsecured
obligations which ranked effectively subordinate to any of our existing and
future secured indebtedness, including amounts outstanding under the 2018 Credit
Facility, to the extent of the value of the assets securing such indebtedness.
The 2026 Notes paid interest at a rate of 7.250% per annum payable semiannually
in arrears on February 15 and August 15 of each year, beginning on February 15,
2019. The 2026 Notes were to mature on August 15, 2026, unless redeemed or
repurchased in accordance with their terms prior to such date. The primary
purpose of the issuance of the 2026 Notes was to refinance a portion of our 2017
Credit Facility.

In May 2021, we issued $600.0 million aggregate principal of new senior notes
due 2029 as described below, and subsequently used a portion of the proceeds to
redeem all $400.0 million of our existing 2026 Notes for an aggregate purchase
price of $428.5 million, which included $7.7 million of accrued interest. See
Note 4, Long-Term Debt, to the Condensed Consolidated Financial Statements
included in Part I, Item 1, Financial Statements, of this Quarterly Report on
Form 10-Q for a further discussion on our 2026 Notes.

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Senior Notes due 2029


In May 2021, we issued $600.0 million aggregate principal amount of senior notes
due 2029, or the 2029 Notes. The 2029 Notes are senior unsecured obligations
which rank effectively subordinate to any of our existing and future secured
indebtedness, including amounts outstanding under the 2018 Credit Facility, to
the extent of the value of the assets securing such indebtedness. The 2029 Notes
pay interest at a rate of 4.875% per annum payable semiannually in arrears on
June 1 and December 1 of each year, beginning on December 1, 2021. The 2029
Notes mature on June 1, 2029, unless redeemed or repurchased in accordance with
their terms prior to such date. The primary purpose of the issuance of the 2029
Notes was to repurchase the 2026 Notes as well as for general corporate
purposes, which may include shares repurchases and other capital investment
projects. See Note 4, Long-Term Debt, to the Condensed Consolidated Financial
Statements included in Part I, Item 1, Financial Statements, of this Quarterly
Report on Form 10-Q for a further discussion on our 2029 Notes.

Cash and Cash Equivalents


The majority of our foreign subsidiaries designate their local currencies as
their functional currencies. As of September 30, 2021, the total amount of our
foreign subsidiary cash and cash equivalents was $485.9 million, of which $19.4
million was invested in U.S. dollars. As of September 30, 2021, the total amount
of cash and cash equivalents held by Herbalife Nutrition Ltd. and its U.S.
entities, inclusive of U.S. territories, was $192.3 million.

For earnings not considered to be indefinitely reinvested deferred taxes have
been provided. For earnings considered to be indefinitely reinvested, deferred
taxes have not been provided. Should we make a determination to remit the cash
and cash equivalents from our foreign subsidiaries that are considered
indefinitely reinvested to Herbalife Nutrition Ltd. for the purpose of
repatriation of undistributed earnings, we would need to accrue and pay taxes.
As of December 31, 2020, Herbalife Nutrition Ltd. had approximately $2.6 billion
of permanently reinvested unremitted earnings relating to its operating
subsidiaries. As of December 31, 2020, we do not have any plans to repatriate
these unremitted earnings to Herbalife Nutrition Ltd.; therefore, we do not have
any liquidity concerns relating to these unremitted earnings and related cash
and cash equivalents. See Note 12, Income Taxes, to the Consolidated Financial
Statements included in our 2020 10-K for additional discussion on our unremitted
earnings.

Off-Balance Sheet Arrangements

As of September 30, 2021 and December 31, 2020, we had no material off-balance sheet arrangements.


Dividends

We have not declared or paid cash dividends since 2014. The declaration of
future dividends is subject to the discretion of our board of directors and will
depend upon various factors, including our earnings, financial condition,
Herbalife Nutrition Ltd.'s available distributable reserves under Cayman Islands
law, restrictions imposed by the 2018 Credit Facility and the terms of any other
indebtedness that may be outstanding, cash requirements, future prospects, and
other factors deemed relevant by our board of directors.

Share Repurchases


On February 9, 2021, our board of directors authorized a new three-year $1.5
billion share repurchase program that will expire on February 9, 2024, which
replaced our prior share repurchase authorization that was set to expire on
October 30, 2023 and had approximately $7.9 million of remaining authorized
capacity when it was replaced. This share repurchase program allows us, which
includes an indirect wholly-owned subsidiary of Herbalife Nutrition Ltd., to
repurchase our common shares at such times and prices as determined by
management, as market conditions warrant, and to the extent Herbalife Nutrition
Ltd.'s distributable reserves are available under Cayman Islands law. The 2018
Credit Facility permits us to repurchase our common shares as long as no default
or event of default exists and other conditions, such as specified consolidated
leverage ratios, are met. As of September 30, 2021, the remaining authorized
capacity under our $1.5 billion share repurchase program was approximately $1.2
billion.

                                       53
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During January 2021, we repurchased from Mr. Carl C. Icahn and certain of his
affiliates an aggregate of approximately 12.5 million common shares of ours at
an aggregate cost of approximately $600.0 million, or $48.05 per share, and
subsequently retired these shares. In addition, during the nine months ended
September 30, 2021, we repurchased approximately 5.7 million of our common
shares through open-market purchases at an aggregate cost of approximately
$281.1 million, or an average cost of $49.27 per share, and subsequently retired
these shares. In total, during the nine months ended September 30, 2021, we
repurchased approximately 18.2 million of our common shares at an aggregate cost
of approximately $881.1 million, or an average cost of $48.43 per share. In
August 2020, we completed our modified Dutch auction tender offer and then
subsequently paid cash to repurchase and retire a total of approximately 15.4
million of our common shares at an aggregate cost of approximately $750.0
million, or $48.75 per share. In addition, during the nine months ended
September 30, 2020, we repurchased approximately 1.4 million of our common
shares through open-market purchases at an aggregate cost of approximately $67.1
million, or an average cost of $46.44 per share, and subsequently retired these
shares. In total, during the nine months ended September 30, 2020, we
repurchased approximately 16.8 million of our common shares at an aggregate cost
of approximately $817.1 million, or an average cost of $48.55 per share.

As of both September 30, 2021 and December 31, 2020, we held approximately 10.0
million of treasury shares for U.S. GAAP purposes. These treasury shares
increased our shareholders' deficit and are reflected at cost within our
accompanying condensed consolidated balance sheets. Although these shares are
owned by an indirect wholly-owned subsidiary of ours and remain legally
outstanding, they are reflected as treasury shares under U.S. GAAP and therefore
reduce the number of common shares outstanding within our condensed consolidated
financial statements and the weighted-average number of common shares
outstanding used in calculating earnings per share. The common shares of
Herbalife Nutrition Ltd. held by the indirect wholly-owned subsidiary, however,
remain outstanding on the books and records of our transfer agent and therefore
still carry voting and other share rights related to ownership of our common
shares, which may be exercised. So long as it is consistent with applicable
laws, such shares will be voted by such subsidiary in the same manner, and to
the maximum extent possible in the same proportion, as all other votes cast with
respect to any matter properly submitted to a vote of Herbalife Nutrition Ltd.'s
shareholders.

See Note 10, Shareholders' Deficit, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q, for a further discussion on our share repurchases.

Working Capital and Operating Activities


As of September 30, 2021 and December 31, 2020, we had working capital of $488.4
million and $648.5 million, respectively, or a decrease of $160.1 million. The
decrease was primarily due to a decrease in cash and cash equivalents and an
increase in accounts payable, partially offset by increases in inventories and
prepaid expenses and other current assets and decreases in royalty overrides and
other current liabilities.

We expect that cash and funds provided from operations, available borrowings
under the 2018 Credit Facility, and access to capital markets will provide
sufficient working capital to operate our business, to make expected capital
expenditures, and to meet foreseeable liquidity requirements for the next twelve
months and thereafter.

The majority of our purchases from suppliers are generally made in U.S. dollars,
while sales to our Members 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 contribution margins and can generate transaction gains
or 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, of this Quarterly Report on Form
10-Q.

Contingencies


See Note 5, Contingencies, to the Condensed Consolidated Financial Statements
included in Part I, Item 1, Financial Statements, of this Quarterly Report on
Form 10-Q, for a further discussion of our contingencies as of September 30,
2021.

Critical Accounting Policies


U.S. GAAP requires us to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the year. We regularly evaluate our estimates and
assumptions related to revenue recognition, allowance for product returns,
inventory, 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.

                                       54

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We are a nutrition company that sells a wide range of weight management;
targeted nutrition; energy, sports, and fitness; and outer nutrition products.
Our products are manufactured by us in our Changsha, Hunan, China extraction
facility; Suzhou, China facility; Nanjing, China facility; Lake Forest,
California facility; and Winston-Salem, North Carolina facility; and by
third-party providers, and then are sold to Members who consume and sell
Herbalife products to retail consumers or other Members. As of September 30,
2021, we sold products in 95 markets throughout the world and we are organized
and managed by geographic region. We 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, the nature of the regulatory
environment, and their economic characteristics.

We generally recognize revenue upon delivery when control passes to the Member.
Product sales are recognized net of product returns, and discounts referred to
as "distributor allowances." We generally receive the net sales price in cash or
through credit card payments at the point of sale. Royalty overrides are
generally recorded when revenue is recognized. See Note 2, Significant
Accounting Policies, to the Condensed Consolidated Financial Statements included
in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q,
for a further discussion of distributor compensation in the U.S.

Allowances for product returns, primarily in connection with our buyback
program, are provided at the time the sale is recorded. This accrual is based
upon historical return rates for each country and the relevant return pattern,
which reflects anticipated returns to be received over a period of up to 12
months following the original sale. Historically, product returns and buybacks
have not been significant. Product returns and buybacks were approximately 0.1%
of net sales for each of the three and nine months ended September 30, 2021 and
2020.

We adjust our inventories to lower of cost and net realizable value.
Additionally we adjust the carrying value of our inventory based on assumptions
regarding future demand for our products and market conditions. If future demand
and market conditions are less favorable than management's assumptions,
additional inventory write-downs could be required. Likewise, favorable future
demand and market conditions could positively impact future operating results if
previously written down inventories are sold. We have obsolete and slow moving
inventories which have been adjusted downward $28.1 million and $23.0 million to
present them at their lower of cost and net realizable value in our condensed
consolidated balance sheets as of September 30, 2021 and December 31, 2020,
respectively.

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.

As part of the annual goodwill impairment test, which is performed at the
reporting unit level, we may conduct an assessment of qualitative factors to
determine whether it is more likely than not that the fair value of a reporting
unit is less than its carrying amount. In a qualitative assessment, we would
consider the macroeconomic conditions, including any deterioration of general
conditions and industry and market conditions, including any deterioration in
the environment where the reporting unit operates, increased competition,
changes in the products/services and regulatory and political developments, cost
of doing business, overall financial performance, including any declining cash
flows and performance in relation to planned revenues and earnings in past
periods, other relevant reporting unit specific facts, such as changes in
management or key personnel or pending litigation, and events affecting the
reporting unit, including changes in the carrying value of net assets. If we
determine that it is more likely than not that the fair value of the reporting
unit is less than its carrying value, then we would perform the quantitative
goodwill impairment test as required. If we determine that it is not more likely
than not that the fair value of the reporting unit is less than the carrying
value, then no further testing is required. During fiscal year 2020, we
performed a qualitative assessment and determined that it is not more likely
than not that the fair value of each reporting unit is less than its respective
carrying value.

For our marketing-related intangible assets, we may also utilize a qualitative
assessment similar to the one described above, with the exception that the test
is performed at the consolidated level rather than at the reporting unit level.
During fiscal year 2020, we performed a qualitative assessment of our
marketing-related intangible assets and determined that it is not more likely
than not that the fair value of the assets is less than their carrying value.

If we are required to determine the fair value of each reporting unit using the
quantitative method, we primarily use an income approach in order to determine
the fair value of a reporting unit and compare it to its carrying amount. The
determination of the fair value of the reporting units requires us to make
significant estimates and assumptions. These estimates and assumptions include
estimates of future revenues and expense growth rates, capital expenditures and
the depreciation and amortization related to these capital expenditures,
discount rates, and other inputs. Due to the inherent uncertainty involved in
making these estimates, actual future results could differ. Changes in
assumptions regarding future results or other underlying assumptions could have
a significant impact on the fair value of the reporting unit. 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 over its
fair value.

                                       55
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If we are required to determine the fair value of our marketing-related
intangible assets using the quantitative method, we use a discounted cash flow
model, or the income approach, under the relief-from-royalty method to determine
the fair value of our marketing related intangible assets in order to confirm
there is no impairment required. An impairment loss is recognized to the extent
that the carrying amount of the assets exceeds their fair value.

As of September 30, 2021 and December 31, 2020, we had goodwill of approximately
$96.4 million and $100.5 million, respectively. The decrease in goodwill during
the nine months ended September 30, 2021 was due to foreign currency translation
adjustments. As of both September 30, 2021 and December 31, 2020, we had
marketing-related intangible assets of approximately $310.0 million. No
marketing-related intangibles or goodwill impairment was recorded during the
three and nine months ended September 30, 2021 and 2020. See Note 2, Significant
Accounting Policies, to the Condensed Consolidated Financial Statements included
in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q
for a further discussion.

Contingencies are accounted for in accordance with 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. We also
disclose material contingencies when we believe a loss is not probable but
reasonably possible as required by ASC 450. Accounting for contingencies such as
legal and non-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.

We evaluate the realizability of our deferred tax assets by assessing the
valuation allowance and by adjusting the amount of such allowance, if necessary.
Although realization is not assured, we believe it is more likely than not that
the net carrying value will be realized. The amount of the carryforwards that is
considered realizable, however, could change if estimates of future taxable
income 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 condensed 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. 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 us 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 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 foreign currency transactions in accordance with FASB ASC Topic
830, Foreign Currency Matters. In a majority of the countries where we operate,
the functional currency is the local currency. Our foreign subsidiaries' asset
and liability accounts are translated for condensed consolidated financial
reporting purposes into U.S. dollar amounts at period-end exchange rates.
Revenue and expense accounts are translated at the average rates during the
year. Our foreign currency translation adjustments are included in accumulated
other comprehensive loss on our accompanying condensed consolidated balance
sheets. Foreign currency transaction gains and losses and foreign currency
remeasurements are generally included in selling, general, and administrative
expenses in the accompanying condensed consolidated statements of income.

New Accounting Pronouncements

See discussion under Note 2, Significant Accounting Policies, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q, for information on new accounting pronouncements.

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