item 14 principal accountant fees services following services provided kpmg llp fiscal 2003 2004 1auditrelated fees auditrelated fees billed following services assistance sarbanesoxley section 404 2tax fees tax fees billed following services tax compliance international tax guidance 3all fees billed following services project management consulting relating various information technology projects distributor process improvements supply chain management preapproval policy companys external auditor engaged provide audit nonaudit services company unless engagement preapproved audit committee board directors compliance sarbanesoxley act 2002 audit related tax services preapproved 2004 preapproval policy adopted company late 2003 part iv item 15item 14 principal accounting fees services information required item incorporated herein reference definitive proxy statement filed commission later 120 days close fiscal year ended december 31 2005 part iv item 15item 14 principal accounting fees services information required item incorporated herein reference definitive proxy statement filed commission later 120 days close fiscal year ended december 31 2006 part iv item 15item 14 principal accounting fees services information required item incorporated herein reference definitive proxy statement filed sec later 120 days close fiscal year ended december 31 2007 part iv item 15item 14 principal accounting fees services information required item incorporated herein reference definitive proxy statement filed sec later 120 days close fiscal year ended december 31 2008 part iv item 15item 14 principal accounting fees services information required item incorporated herein reference definitive proxy statement filed sec later 120 days close fiscal year ended december 31 2011 part iv item 15item 14 principal accounting fees services information required item incorporated herein reference definitive proxy statement filed sec later 120 days close fiscal year ended december 31 2012 part iv item 15item 14 principal accounting fees services information required item incorporated herein reference definitive proxy statement filed sec later 120 days close fiscal year ended december 31 2014 part iv item 15item 14 principal accounting fees services information required item incorporated herein reference definitive proxy statement filed sec later 120 days close fiscal year ended december 31 2015 part iv item 15item 14 principal accounting fees services information required item incorporated herein reference definitive proxy statement filed sec later 120 days close fiscal year ended december 31 2016 part iv item 15item 14 principal accounting fees services information required item incorporated herein reference definitive proxy statement filed sec later 120 days close fiscal year ended december 31 2017 part iv item 15item 14 principal accountant fees services information required item incorporated herein reference definitive proxy statement filed sec later 120 days close fiscal year ended december 31 2018 part iv item 15item 14 principal accountant fees services information required item incorporated herein reference definitive proxy statement filed sec later 120 days close fiscal year ended december 31 2020 part iv item 15item 14 principal accounting fees services information required item incorporated herein reference definitive proxy statement filed sec later 120 days close fiscal year ended december 31 2010 part iv item 15item 14 principal accounting fees services information required item incorporated herein reference definitive proxy statement filed sec later 120 days close fiscal year ended december 31 2013 part iv item 15item 14 principal accountant fees services information required item incorporated herein reference definitive proxy statement filed sec later 120 days close fiscal year ended december 31 2019 part iv item 15item 14 principal accounting fees services information required item incorporated herein reference definitive proxy statement filed sec later 120 days close fiscal year ended december 31 2009 part iv item 15 item 7 managements discussion analysis financial condition results operations read following discussion analysis conjunction selected financial data related notes consolidated financial statements related notes included elsewhere document overview global network marketing company sells weight management nutritional supplement personal care products pursue mission changing peoples lives providing financially rewarding business opportunity distributors quality products distributors customers seek healthy lifestyle one largest network marketing companies world net sales approximately 13 billion year ended december 31 2004 sell products 59 countries network one million independent distributors believe quality products effectiveness distribution network coupled geographic expansion primary reasons success throughout 25year operating history offer products three principal categories weight management products nutritional supplements refer inner nutrition personal care products refer outer nutrition® products often sold programs comprised series related products designed simplify weight management nutrition consumers maximize distributors crossselling opportunities industrywide factors affect us competitors include increasing prevalence obesity aging worldwide population driving demand nutrition wellnessrelated products recruitment retention distributors opportunities challenges upon focused driving retailing product recruitment retention distributors improving distributor productivity entering new markets penetrating existing markets pursuing local distributor initiatives introducing new products developing niche market segments investing infrastructure continuing strengthen cooperation senior management distributor leadership focus key initiatives key nonfinancial measure focus volume points royalty basis hereafter volume points essentially weighted unit measure product sales volume useful measure us excludes impact foreign currency fluctuations ignores differences generated varying retail pricing across geographic markets general increase volume points particular region country directionally indicates increase local currency net sales volume points geographic region another key nonfinancial measure focus number distributors qualified supervisors compensation system distributors qualify supervisor status based volume points growth number supervisors general indicator level distributor recruitment generally drives net sales particular country region compensation system requires supervisor requalify status year prior february significant variation number supervisors fourth quarter first quarter given year due timing requalification process fluctuation normal consistent reflect dramatic underlying change business comparing two sequential quarters become meaningful period throughout year following tables show trends number supervisors reporting period region fluctuations within notable country discussed appropriate net sales section pertinent february year delete rank supervisor supervisors satisfy supervisor qualification requirements preceding twelve months distributors meet supervisor requirements time year promoted supervisor status time including supervisors deleted subsequently requalified number supervisors geographic region reporting period number supervisors geographic region requalification period 2004 certain modifications made requalification criteria resulting approximately 19000 additional supervisors including approximately 9000 relating change business model russia supervisors must requalify annually requalification period covers twelve months starting february ending following january number supervisors geographic region reporting dates normally higher number supervisors geographic region requalification period supervisors requalify relevant twelvemonth period dropped rank supervisor february since supervisors purchase products resale distributors consumers comparisons supervisor totals yeartoyear period basis good indicators recruitment retention efforts different geographic regions value average monthly purchase herbalife products supervisors remained relatively constant time consequently increases sales driven primarily retention supervisors recruitment retention distributors rather increases productivity overall supervisor base modification 2004 supervisor requalification criteria limited test modification allowed distributors otherwise would failed requalify supervisors continue receive benefit product discounts forfeiting downline royalties believe test successful retained approximately 10000 distributors generated approximately 12 million additional volume points would represent approximately 94 million net sales 52 million operating margin immaterial impact selling general administrative expenses result test company modified supervisor requalification criteria distributors 2005 company cannot predict effect modification certainty believe modification likely lead higher level supervisor retention increased product sales provide distributors products support material training special events competitive compensation program distributor wants pursue herbalife business opportunity distributor responsible growing business personally pays sales activities related attracting new customers recruiting distributors hosting events herbalife opportunity meetings success training seminars advertising herbalifes products purchasing using promotional materials tshirts buttons caps utilizing paying direct mail print material brochures flyers catalogs business cards posters banners telephone book listings purchasing inventory sale use samples training mentoring following person via phone internet customers recruits use herbalife products andor pursue herbalife business opportunity presentation result acquisition herbalife international inc herbalife international july 31 2002 investment group led whitney co llc whitney golden gate private equity inc golden gate acquisition audited financial statements included elsewhere herein consist financial information herbalife international subsidiaries collectively predecessor herbalife ltd subsidiaries collectively successor us company results operations cash flows predecessor prior acquisition incorporated following discussion historical results cash flows predecessor results predecessor reflect purchase accounting adjustments included results subsequent acquisition due results purchase accounting applied result acquisition additional interest expense associated debt incurred finance acquisition results operations may comparable respects results operations predecessor prior acquisition however management believes discussion 2002 operations made meaningful combining results predecessor accordingly purpose managements discussion analysis financial condition results operations results operations including segment operations cash flows year ended december 31 2002 derived combining results operations cash flows predecessor period starting january 1 2002 july 31 2002 results operations cash flows successor period starting august 1 2002 december 31 2002 terms us company refer predecessor acquisition periods july 31 2002 successor acquisition periods subsequent july 31 2002 entire year january 1 2002 december 31 2002 context requires retail sales represent gross sales amounts invoices distributors distributor allowances defined net sales reflects distribution allowances handling freight income company collects recognizes net sales financial statements discuss retail sales fundamental role compensation systems internal controls operations including role basis upon distributor discounts royalties bonuses awarded addition information daily monthly reports reviewed management relies retail sales data however measure accordance generally accepted accounting principles us gaap consider retail sales isolation substitute net sales consolidated income cash flow statement data prepared accordance gaap measure profitability liquidity reconciliation net sales retail sales presented product sales represent actual product purchase price paid us distributors giving effect distributor discounts referred distributor allowances approximate 50 retail sales prices distributor allowances percentage sales may vary country depending upon regulatory restrictions limit otherwise restrict distributor allowances gross profit consists net sales less cost sales represents prices pay raw material suppliers manufacturers products well costs related product shipments duties tariffs freight expenses relating shipment products distributors importers similar expenses royalty overrides significant expense consist •royalty overrides commissions bonuses total approximately 15 7 respectively retail sales weight management inner nutrition outer nutrition® promotional products •the mark hughes bonus payable senior distributors aggregate amount approximately 1 retail sales weight management inner nutrition outer nutrition® promotional products •other discretionary incentive cash bonuses qualifying distributors royalty overrides generally earned based retail sales approximate aggregate 23 retail sales approximately 35 net sales royalty overrides together distributor allowances represent potential earnings distributors approximately 73 retail sales compensation distributors generally development retention improved productivity distributor sales organizations paid several levels distributors sale local country regulatory constraints may required modify typical distributor incentive plans described consequently total distributor discount percentage may vary time also offer reduced distributor allowances pay reduced royalty overrides respect certain products worldwide nonus royalty checks aged variety reasons beyond certainty paid taken back income management calculated period certainty three years worldwide whereas previously period varied country ranging 12 months 30 years order achieve consistency among countries company adjusted period amounts would taken income three years companywide basis impact change year ended december 31 2004 pretax benefit approximately 24 million selling general administrative expenses represent operating expenses components include labor benefits sales events professional fees travel entertainment distributor marketing occupancy costs communication costs bank fees depreciation amortization foreign exchange gains losses miscellaneous operating expenses 1134 notes refers herbalife internationals 1134 senior subordinated notes due 2010 912 notes refers 912 notes due 2011 sales distributors outside united states made respective local currencies preparing financial statements translate revenues us dollars using average exchange rates additionally majority purchases suppliers generally made us dollars consequently strengthening us dollar versus foreign currency negative impact reported sales operating margins generate transaction losses intercompany transactions throughout last five years foreign currency exchange rates fluctuated significantly time enter foreign exchange forward contracts option contracts mitigate foreign currency exchange risk summary financial results year ended december 31 2004 net sales increased 130 compared period 2003 driven increases regions except decrease japan increases resulted combination increase number supervisors generally favorable foreign currency exchange rates comprehensive promotional program europe launch new products decrease japan driven factors including ineffective prior country management limited product launches net results year ended december 31 2004 including 715 million pretax recapitalization expenses approximately 605 million net tax loss 143 million loss 027 per diluted share 512 million lower prioryear net income 368 million earnings 069 per diluted share recapitalization expenses first fourth quarters 2004 715 million pretax resulted repurchase 1512 senior notes 1134 notes refinancing herbalife internationals term loan net results also impacted interest expense associated 912 notes higher promotional expenses labor costs partially offset 130 increase net sales favorable impact aged royalties favorable impact appreciation foreign currencies overall appreciation foreign currencies 129 million favorable impact net results 2004 results operations results operations periods described necessarily indicative results operations future periods depend upon numerous factors including ability recruit retain new distributors open new markets penetrate existing markets introduce new products develop niche market segments following table sets forth selected results operations expressed percentage net sales periods indicated year ended december 31 2004 compared year ended december 31 2003 net sales following chart reconciles retail sales net sales geographic region changes net sales directly associated recruiting retention retailing distributor force quality completeness product offerings distributor force sell number countries operate managements role incountry corporate level provide distributors competitive broad product line ensure strong teamwork leadership among chairmans club presidents team distributors offer leading edge business tools make business herbalife simple management uses marketing program coupled educational motivational tools incent distributors drive recruiting retention retailing turn affect net sales tools include corporate sales eventsextravaganzas world team schoolswhere large groups distributors gather thus allowing network distributors learn recruiting retention retailing techniques leading distributors become familiar market sell products business opportunities accordingly management believes development motivation programs increase productivity supervisor network expenses programs included selling general administrative expenses example barcelona extravaganza held august 2004 mentioned sales driven several factors including number productivity distributor leaders continually build educate motivate respective distribution sales organizations also use product event nonevent promotions motivate distributors increase recruiting retention retailing activities promotions ranged 2003 laptop computer promotion vacations qualifying events distributors meet certain selling recruiting goals costs promotions included selling general administration expenses current example atlanta challenge discussed similar sales events possible us draw precise quantitative correlation successful promotion resultant longterm effect net sales factors described driven growth business following net sales geographic region discussion details factors describes unique growth factors specific certain major countries company believes correct foundation coupled ongoing training promotional initiatives required increase recruiting retention distributors retailing product correct foundation includes strong country management works closely distributor leadership broad product line appeals local consumer needs favorable regulatory environment scalable stable technology platform attractive marketing plan initiatives success training seminars world team schools promotional events regional extravaganzas integral components developing highly motivated educated distributor sales organization work toward increasing recruitment retention distributors companys strategy included continue include generating maintaining growth within existing markets generally expect continue spend current level selling general administrative expenses percent net sales maintain stimulate sales growth making strategic investments new initiatives discussed business strategy section addition new ideas generated regional markets either distributors country management corporate management examples nutrition clubs mexico total plan brazil described net sales discussion managements strategy review applicability expanding successful country initiatives throughout region andor globally appropriate americas net sales americas increased 438 million 103 year ended december 31 2004 compared 2003 local currency net sales increased 107 year ended december 31 2004 compared 2003 fluctuation foreign currency rates negative impact 16 million net sales year ended december 31 2004 overall increase result net sales growth brazil mexico 292 million 288 million 744 391 respectively year ended december 31 2004 countries continue benefit strong country distributor leadership focuses recruiting retention distributor force retails product line business opportunity attractive demographics countries net sales growth brazil mexico partially offset net sales decrease us 220 million 80 continued net sales growth brazil evidenced increased number supervisors 546 december 31 2004 compared 2003 expansion total plan strong distributor leadership highly effective country management team good product portfolio total plan low cost lead generating method distributors use personal care line products offer consultations obtain referrals concept specifically supports retailing recruiting initiatives catalyst growth brazil continued net sales growth mexico evidenced increased number supervisors 330 december 31 2004 compared december 31 2003 reflects renewed emphasis distributor customer retention programs nutrition clubs new innovative means distributors retailing products new customers may eventually become distributors products costs set nutrition club generally nominal borne solely distributor distributors opened 2000 nutrition clubs date growth brazil mexico partly offset decline net sales us 220 million 80 year ended december 31 2004 compared december 31 2003 evidenced 61 decrease number supervisors december 31 2004 compared 2003 similar volume point decrease compared prior year continuation downward trend us although decrease 2004 lower decrease experienced 2003 contributing factors continued decline include distraction among senior distributor leadership related transition new senior management team strong competition direct selling companies marketing difficulties experienced transition new shapeworks™ product line launched march 2004 transition new shapeworks™ product line us cost approximately 42 million primarily recorded selling general administrative expenses approximately 06 million related several previous versions package design labels related promotional materials cost expected incurred future transitions product regions believe us continues viable market therefore taken numerous steps turn business around example organized regional miniextravaganza sales events opening regional sales center dallas created us country management team previously us managed americas region introduced retailing recruiting programs used successfully brazil mexico total plan nutrition clubs multiple regional miniextravaganzas cost approximately 19 million 2004 recorded selling general administrative expenses expect similar level spending 2005 help stimulate growth us market regional sales centers small walk distribution centers opening key areas us feel underdeveloped walk centers allow distributors interact us personal basis believe assist distributors recruiting retention efforts set regional sales center dallas incurred 04 million capital expenditures spend approximately 06 million annual operating expenses extent management chooses continue expand model throughout us based upon thorough financial review would expect similar level expenditure regional sales center company may potentially open managements evaluation area yet completed management senior distributor leadership continue target promotions events products specific key us metro areas believe increase efficiency spending increasing market penetration expect 2005 sales americas region continue positive year growth primarily result expected continuation strong momentum mexico brazil leveling decline us europe net sales europe increased 879 million 196 year ended december 31 2004 compared 2003 local currency net sales increased 86 year ended december 31 2004 compared 2003 fluctuation foreign currency rates positive impact net sales 494 million year ended december 31 2004 european markets recorded net sales growth partly result eightmonth promotion ending june 2004 helped distributors increase recruiting retention supported motivation training barcelona extravaganza july 2004 spent 39 million recorded selling general administrative expenses eight month incremental sales promotion called billion dollar challenge barcelona extravaganza net cost 18 million recorded selling general administrative expenses november 2004 launch shapeworks™ europe bologna world team school well received distributors reflecting smoother launch us earlier year net sales spain 138 million 725 year ended december 31 2004 compared 2003 due cohesive renewed focus distributor leadership increasing emphasis locally health nutrition success billion dollar challenge barcelona extravaganza net sales turkey 114 million 857 year ended december 31 2004 compared 2003 due increasing acceptance direct selling concept turkey well energetic distributor leadership group italy one largest european markets net sales 71 million 112 year ended december 31 2004 compared 2003 driven strong country management distributor leadership collaboration recruiting retention programs netherlands another larger european markets net sales 83 million 178 year ended december 31 2004 compared 2003 partly due corporatedistributor cosponsored tv program fitness challenge increased visibility herbalife name companys cost related fitness challenge less 01 million recorded selling general administrative expenses currently reviewing whether repeat sponsorship 2005 addition initiated new worldwide promotion atlanta challenge barcelona extravaganza july means incent distributors qualify 25th anniversary extravaganza april 2005 atlanta 25th anniversary cruise special worldwide vacation promotion separate occurring connection 25th anniversary extravaganza atlanta expected cost approximately 60 million event distributors qualified 2004 accordingly accrued expense selling general administrative expenses expect similar promotion 2005 25thanniversary extravaganza replace major regional extravaganzas 2005 although may still hold smaller regional events carry excitement momentum event expect net cost 25th anniversary extravaganza atlanta approximately 64 million first quarter 2004 took management product distribution russia greece prior used thirdparty importer manage distribute product distributors countries opened administrative office companyoperated distribution center countries closely align business model countries around world allow direct interaction distributors feel improve communication ultimately enhance recruiting retention distributors countries cost change business model countries 10 million capital expenditures 44 million transition costs expect incur future 59 million net additional annual operating expenses transition costs operating expenses recorded selling general administrative expenses believe 2005 sales continue positive year volume growth partly due european introduction shapeworks™ momentum expect generate extravaganza new products business tools launched extravaganza asiapacific rim net sales asiapacific rim increased 390 million 233 year ended december 31 2004 compared 2003 local currency net sales increased 192 year ended december 31 2004 compared 2003 fluctuation foreign currency rates 68 million positive impact net sales year ended december 31 2004 overall increase attributable mainly increase taiwan partly offset decrease south korea net sales taiwan increased 238 million 496 year ended december 31 2004 2003 due primarily increase number supervisors 340 december 31 2004 compared time last year highly engaged distributor leadership strong country management increased local distributor trainings initiatives promote individual recognition well performing distributors new product launches positive momentum bangkok extravaganza held september various regional promotions bangkok extravaganza net cost 17 million recorded selling general administrative expenses 2005 regional extravaganzas replaced 25thanniversary atlanta extravaganza management evaluate need smaller regional events carry excitement momentum 25thanniversary atlanta extravaganza around world unable attend net sales south korea decreased 80 million 183 year ended december 31 2004 compared 2003 appears numerous initiatives begun fourth quarter 2003 making impact illustrate improvement volume flat improvement prior years trend net sales increased 110 fourth quarter compared period last year expect south korea report positive year sales growth 2005 late 2004 introduced shapeworks™ south korea cost less 01 million recorded selling general administrative expenses believe help recruiting retailing initiatives overall believe continued local distributor training positive momentum bangkok extravaganza along launch shapeworks™ momentum expect generate 25th anniversary extravaganza new products business tools launched 25thanniversary extravaganza contribute ongoing sales increases asiapacific rim region 2005 japan net sales japan decreased 205 million 172 year ended december 31 2004 compared 2003 local currency net sales japan decreased 229 year ended december 31 2004 compared 2003 fluctuation foreign currency rates 68 million favorable impact net sales year ended december 31 2004 net sales decline 2004 continuation fiveyear downward trend japan albeit slower rate reporting period driven primarily ineffective prior country management properly motivated distributor leadership introduced new products timely manner meet distributor expectations weakness exacerbated strong competition direct selling companies general deterioration japanese economy third quarter 2004 appointed new country manager currently focusing uniting motivating distributor leadership improve recruiting retention distributors process expanding product line address local country demographic needs example late 2004 introduced green tea flavored formula 1 created individual serving packets formula 1 product 2005 opening new sales office central location tokyo significant improvement existing location believe give us greater visibility key population center combination implementing new brand volume incentive promotional programs believe initiatives help improve financial performance 2005 sales product category increased emphasis science weight management nutrition past two years illustrated assembly scientific advisory board medical advisory board resulted numerous product introductions like niteworks™ garden 7™ introduction shapeworks™ personalized meal replacement program due launch shapeworks™ product line march 2004 introduction new personal care products net sales weight management products outer nutrition® products increased higher rate net sales inner nutrition products rationalization outer nutrition® product line 2002 resulted initial decrease sales since line represented approximately 9 net sales product line today designed complement weight management inner nutrition product lines products improving appearance body skin hair literature promotional includes product buybacks returns product categories increased due decrease returns refunds expect shifts within categories time launch new products gross profit gross profit 10398 million year ended december 31 2004 compared 9236 million 2003 percentage net sales gross profit year ended december 31 2004 decreased 797 794 compared 2003 decrease gross profit percentage net sales year ended december 31 2004 attributable mainly increase provisions made slow moving obsolete inventory 48 million well small sales mix variance partially offset lower raw material vendor costs generally gross profit percentages vary significantly percentage sales due ongoing cost reduction initiatives provisions slow moving obsolete inventory additionally believe ability mitigate price increases raising prices products shifting product sourcing alternative manufacturers royalty overrides royalty overrides percentage net sales 355 year ended december 31 2004 compared 358 2003 percentage net sales royalty overrides decreased 03 year ended december 31 2004 compared 2003 due primarily 24 million favorable impact aged royalties generally ratio varies slightly period due changes mix products countries full royalty overrides paid certain products certain countries due structure global compensation plan expect see significant fluctuations royalty overrides percent net sales selling general administrative expenses selling general administrative expenses percentage net sales 333 year ended december 31 2004 compared 346 2003 year ended december 31 2004 selling general administrative expenses increased 348 million 4361 million 4013 million 2003 increase included 154 million higher salaries benefits due primarily normal merit increases impact foreign currency fluctuations lower bonus expense 2003 based fully achieving targets year increases related strengthening management team regionally us 138 million additional professional fees associated higher legal accounting expenses including sarbanesoxley compliance technology expenses higher manufacturing consulting expenses related startup facility china 45 million additional promotional expenses related primarily shapeworks™ launch eightmonth european promotion program noted ended june 2004 expenses related 25th anniversary promotions detailed discussion net sales region 122 million higher nonincome taxes due primarily higher sales certain jurisdictions 26 million relating recapitalization march expect recur 2005 30 million higher provisions made doubtful accounts changes discussed include unfavorable impact foreign currency fluctuations operating expenses 93 million increases partially offset 87 million lower litigation expenses 46 million lower foreign exchange transaction losses 117 million lower amortization expense intangibles year ended december 31 2004 compared 2003 due final allocation third quarter 2003 purchase price connection acquisition december 2004 reached agreement equity sponsors terminate monitoring fee agreement exchange issuance 700000 warrants using blackscholes model calculated fair value consideration approximately 29 million included 2004 expenses target product gross profit approximately 80 net sales allows us economically remit royalties distributor organization pay vendors product cover operating costs associated product development licensing warehousing distribution transportation generally target promotions advertising particular product brand significant promotions generally aimed generating increased levels recruiting retention distributors example european billion dollar challenge first half 2004 promotion distributors qualified various levels award based incremental sales volume achieved generally major new product launched expenditures related rollout promotion products based breadth manner product launch costs could material immaterial example detailed previously net sales discussion introduced shapeworks™ united states 2004 extravaganza cost approximately 37 million net costs labeling packaging revisions prior introduction product launched europe bologna event miniextravaganza cost 05 million south korea tied major event cost less 01 million product brand advertising generally handled distributors although 2005 anticipate participating sponsoring certain sporting events raise awareness recognition herbalife brand finalized plans expect spending events would material 2005 expect 2005 selling general administrative expenses increase approximately 7 8 2004 levels reflecting general salary merit increases investments china sales events although expect percentage net sales expenses remain flat 2004 levels net interest expense net interest expense 1233 million year ended december 31 2004 compared 415 million 2003 higher interest expense 2004 primarily due two recapitalizations 2004 noted table 82 million additional interest expense associated 2750 million principal amount 912 notes issued march 2004 part continuation fourth quarter 2004 recapitalization exercised contract provision redeem 40 110 million 912 notes required notice period redemption completed february 4 2005 premium writeoff deferred financing fees 142 million associated redemption included interest expense first quarter 2005 income taxes income taxes 297 million year ended december 31 2004 compared 287 million 2003 percentage pretax income estimated effective income tax rate 1928 year ended december 31 2004 compared 438 2003 increase effective tax rate year ended december 31 2004 compared 2003 caused primarily expenses related recapitalizations significant portion nondeductible interest expense associated 912 notes excluding impact recapitalization expenses 715 million 2004 effective tax rate would approximately 47 2005 believe effective tax rate decrease 43 reflecting lower level non deductible interest impact 142 million premium writeoff deferred financing fees noted interest expense estimate unfavorable impact effective tax rate including expenses could high 4 foreign currency fluctuations currency fluctuations favorable impact 129 million net results year ended december 31 2004 compared current year net results would using last years foreign exchange rates year ended december 31 2004 regional effects favorable 75 million europe favorable 27 million asiapacific rim favorable 02 million americas favorable 25 million japan net results net results year ended december 31 2004 including 715 million pretax recapitalization expenses approximately 605 million net tax loss 143 million loss 027 per diluted share 512 million lower prioryear net income 368 million earnings 069 per diluted share recapitalization expenses first fourth quarters 2004 715 million pretax resulted repurchase 1512 senior notes 1134notes refinancing herbalife internationals term loan net results also impacted interest expense associated 912 notes higher promotional expenses labor costs partially offset 130 increase net sales favorable impact aged royalties favorable impact appreciation foreign currencies overall appreciation foreign currencies 129 million favorable impact net results 2004 year ended december 31 2003 compared year ended december 31 2002 year ended december 31 2003 net income increased 368 million 232 million 2002 net sales year ended december 31 2003 increased 60 11594 million 10937 million 2002 helped appreciation foreign currencies primarily euro excluding impact pretax amortization expense intangibles resulting acquisition 345 million 15 million 2003 2002 respectively transaction expenses 609 million 2002 relating acquisition 2003 legal related costs associated litigation resulting acquisition 51 million 62 million incremental fees expenses paid equity sponsors 2003 favorable impact foreign currency appreciation approximately 158 million 2003 operating income increased 57 1370 million 2003 1296 million 2002 improved result attributed increased sales throughout europe brazil mexico partly offset decreased sales us japan south korea expect sales us japan south korea improve following execution revitalization initiatives 2004 described anticipate impact associated discovery bse united states expect issue material effect business net sales following chart reconciles retail sales net sales geographic regions net sales growth americas flat 2002 local currency net sales increased 19 slight increase result increases brazil mexico mostly offset declining sales us net sales brazil mexico increased 714 133 respectively net sales us declined 103 2003 fourth quarter 2003 rate net sales decline us slowed connection introduction new sales promotion 2004 goal revitalize us market new product introductions enhanced use internet tools opening strategically located sales centers implementation distributor leadership initiatives net sales europe increased 1055 million 308 2003 compared prior year local currency net sales increased 147 compared 2002 appreciation euro european currencies primary reason overall sales increase net sales many established countries like belgium 1151 france 599 netherlands 332 spain 722 switzerland 549 turkey 3715 showed notable growth reported us dollars 2004 goal increase sales strengthening presence europe particular russia greece expanding distributor services taking management product distribution past handled third party importers net sales asiapacific rim decreased 180 million 97 2003 compared prior year local currency net sales decreased 133 sales decrease due 325 million 425 decline south korea partly offset 96 million 250 increase taiwan 2003 implemented several new initiatives help distributors south korea regain momentum including improving incentive arrangements introducing new internet tools several new products believe initiatives helped stabilize sales second half 2003 net sales japan decreased 219 million 155 2003 compared prior year local currency net sales japan decreased 228 decline japanese market last year continued due strong competition general deterioration economic conditions japan 2004 goal revitalize japanese market new product introductions enhanced use internet tools implementation distributor leadership initiatives sales product category increase net sales weight management inner nutrition products due increased emphasis sciencebased products addition 2002 rationalized outer nutrition® line eliminating color cosmetics resulting decreased net sales 2003 believe outer nutrition® product line better aligned product categories gross profit gross profit 9236 million year ended december 31 2003 compared 8582 million prior year percentage net sales gross profit year ended december 31 2003 increased 785 797 compared prior year increase gross profit reflected inventory management initiatives reduced obsolescence 35 million decrease freight duty expenses 32 million favorable impact stronger foreign currencies royalty overrides royalty overrides percentage net sales 358 year ended december 31 2003 compared 354 prior year ratio varies slightly period primarily due change mix products countries full royalty overrides paid certain products certain countries due structure compensation plan expect see significant fluctuations royalty overrides percent sales selling general administrative expenses selling general administrative expenses percentage net sales 346 year ended december 31 2003 compared 314 prior year ended december 31 2003 expenses increased 584 million 4013 million 3429 million prior year increase included 345 million amortization expense intangibles 2003 compared 15 million 2002 addition selling general administrative expenses unfavorably impacted approximately 109 million due appreciation foreign currencies approximately 69 million due increased promotional expenses approximately 91 million due litigation costs related legal expenses approximately 62 million due fees expenses paid equity sponsors subsequent acquisition lower salaries wages expense partly offset increased expense reflecting efficiencies realized various cost savings initiatives acquisition transaction expenses 2002 recorded 219 million relating fees 390 million stock option expenses connection acquisition net interest expense net interest expense 415 million year ended december 31 2003 compared 225 million prior year increase mainly due full years interest expense relating term loan 1134 notes 155 senior notes 2003 compared five months interest expense items 2002 income taxes income taxes 287 million year ended december 31 2003 compared 213 million prior year percentage pretax income annual effective income tax rate 438 2003 476 2002 higher effective tax rate 2002 reflected primarily nondeductibility certain acquisitionrelated expenses incurred 2002 foreign currency fluctuations currency fluctuations favorable impact 95 million net income year ended december 31 2003 compared current year net income would using 2002 foreign exchange rates year ended december 31 2003 regional effects unfavorable impact 32 million americas favorable impact 15 million asiapacific rim favorable impact 112 million europe material impact japan net income net income year ended december 31 2003 368 million compared net income 232 million prior year net income increased primarily factors noted liquidity capital resources historically met working capital expenditure requirements including funding expansion operations net cash flows provided operating activities principal source liquidity operating cash flows variations sales products would directly affect availability funds material restrictions ability transfer remit funds among international affiliated companies year ended december 31 2004 generated 802 million operating cash flows compared 946 million 2003 decrease cash generated operations reflected increase interest paid 522 million resulted higher total interest increased longterm borrowings recapitalization first quarter 2004 premiums paid 406 million related redemptions 1512 senior notes 912 notes first quarter fourth quarter 2004 respectively partially offset increase operating income 317 million primarily driven 13 percent growth net sales capital expenditures including capital leases year ended december 31 2004 303 million compared 204 million 2003 majority expenditures represented investments management information systems internet tools distributors office facilities equipment united states expect incur capital expenditures 400 million 2005 connection acquisition consummated certain related financing transactions including herbalife internationals issuance 1134 notes amount 1650 million entering senior credit facility consisting term loan amount 1800 million revolving credit facility amount 250 million march 2004 lenders amended herbalife internationals existing senior credit facility terms amendment made prepayment 400 million reduce outstanding amounts herbalife internationals senior credit facility connection prepayment lenders herbalife internationals senior credit facility waived march 31 2004 mandatory amortization payment 65 million along mandatory 50 excess cash flow payment year ended december 31 2003 amendment also lowered interest rate libor plus 25 margin increased capital spending allowance herbalife internationals existing senior credit facility permitted us complete recapitalization schedule principal payments also modified obligated pay approximately 44 million march 31 2004 subsequent quarter june 30 2008 march 2004 herbalife whollyowned subsidiary wh capital corporation completed 2750 million offering 912 notes proceeds offering together available cash used pay 1831 million original issue price cash due upon conversion 1041 million outstanding herbalife 12 series cumulative convertible preferred shares including 20 million warrants exercised connection offering pay accrued unpaid dividends 385 million redeem 1512 senior notes pay related fees expenses interest 912 notes paid cash semiannually arrears april 1 october 1 year 912 notes general unsecured obligations ranking equally existing future senior indebtedness senior herbalifes future subordinated indebtedness also 912 notes effectively subordinated existing future indebtedness liabilities herbalifes subsidiaries december 2004 herbalife completed initial public offering connection series recapitalization transactions completed including tender outstanding 1134 notes 999 accepted tender offer replacement existing term loan revolving credit facility new 225 million senior credit facility addition redeemed 110 million principal value excluding discounts 40 outstanding 912 notes february 2005 cash value 1205 million including premium 105 million new 225 million senior credit facility consists senior secured revolving credit facility total availability 250 million senior secured term loan facility aggregate principal amount 2000 million revolver available december 21 2009 revolver bears interest libor plus 2 term loan bears interest libor plus 214 obligated pay 05 million every quarter september 30 2010 remaining principal december 21 2010 term loan december 31 2004 amounts borrowed revolving credit facility new senior credit facility 912 notes include customary covenants restrict among things ability incur additional debt pay dividends make certain restricted payments incur liens merge sell substantially assets enter various transactions affiliates additionally new senior credit facility includes covenants relating maintenance certain leverage fixed charge coverage interest coverage ratios requirements make early payments extent excess cash flow defined following summarizes contractual obligations including interest december 31 2004 effect obligations expected liquidity cash flows future periods whitney golden gate andor affiliates parties share purchase agreement share purchase agreement pursuant originally purchased preferred shares terms share purchase agreement whitney golden gate could subject approval board directors 75 shareholders require us pay dividend shareholders related certain income may taxable resulting ownership shares completed analysis regard payment based analysis made 14 million 49 million dividend payments shareholders fourth quarter 2004 related certain income may taxable years ended december 31 2003 december 31 2004 respectively connection initial public offering paid special cash dividend stockholders record prior offering amount 1397 million declaration future dividends subject discretion board directors depend upon various factors including net earnings financial condition restrictions imposed credit agreement cash requirements future prospects factors deemed relevant board directors credit agreement permits payments dividends long default exist amount exceed 200 million per fiscal year provided amount dividends may increased 25 consolidated net income prior fiscal year leverage ratio defined credit agreement four fiscal quarters fiscal year less equal 200100 recently entered termination agreement parties share purchase agreement pursuant termination agreement share purchase agreement obligations liabilities parties share purchase agreement terminated consideration termination share purchase agreement entered tax indemnification agreement certain equity sponsors andor affiliates consideration termination share purchase agreement entered tax indemnification agreement certain equity sponsors andor affiliates pursuant agreed indemnify parties federal income tax liability related losses incur respect income herbalife would includible gross income party taxable period section 951a internal revenue code 1986 amended code terms tax indemnification agreement assume purpose indemnified party united states shareholder defined section 951b code however obligation provide indemnity respect taxes related losses incurred reimbursed share purchase agreement new credit facility permits us pay tax indemnity payments restricts aggregate amount pay given year 15 million currently anticipate amounts required pay agreement future immaterial us december 31 2004 negative working capital 16 million cash equivalents 2016 million december 31 2004 compared 1507 million december 31 2003 expect cash funds provided operations available borrowings new revolving credit facility provide sufficient working capital operate business make expected capital expenditures meet foreseeable liquidity requirements including debt service 912 notes new senior credit facility assurance however business service debt including outstanding notes fund liquidity needs majority purchases suppliers generally made us dollars sales herbalife distributors generally made local currencies consequently strengthening us dollar versus foreign currency negative impact operating margins generate transaction losses intercompany transactions discussion foreign exchange contracts hedging arrangements see quantitative qualitative disclosures market risks described quarterly results operations common shares earnings per share data successor gives effect 12 reverse stock split took effect december 1 2004 contingencies time engaged routine litigation regularly review pending litigation matters involved establish reserves deemed appropriate management litigation matters probable loss estimate made herbalife international defendant purported class action lawsuit us district court california jacobs v herbalife international inc et al originally filed february 19 2002 challenging marketing practices several distributors herbalife international various state federal laws plaintiffs alleged nwtw system operated certain independent distributors herbalife products placed much emphasis recruiting encouraged excessively large purchases product promotional materials distributors plaintiffs also alleged nwtw pressured distributors disseminate promotional materials misleading way described income could generated use nwtw system well way described herbalife business opportunity addition plaintiffs alleged nwtw violated certain state laws prohibiting racketeering endless chain schemes insufficient disclosure assisted marketing plans unfair deceptive business practices plaintiffs sought hold herbalife international vicariously liable actions independent distributors without way admitting liability wrongdoing company reached binding settlement plaintiffs terms settlement company paid 3 million fund distributed former supervisorlevel distributors purchased nwtw materials defendants matter ii pay maximum aggregate amount 1 million refund former supervisorlevel distributors amounts paid purchase nwtw materials defendants matter iii offer rebates maximum aggregate amount 2 million certain new purchases herbalife products current supervisorlevel distributors purchased nwtw materials defendants matter related settlement amounts excluding potential future discounts included 2003 selling general administrative expenses herbalife international certain distributors named defendants purported class action lawsuit filed july 16 2003 circuit court ohio county state west virginia mey v herbalife international inc et al complaint alleges certain telemarketing practices certain herbalife international distributors violate telephone consumer protection act tcpa seeks hold herbalife international liable practices distributors specifically plaintiffs complaint alleges several herbalife internationals distributors used prerecorded telephone messages autodialers contact prospective customers violation tcpas prohibition practices herbalife internationals distributors independent contractors distributors fact violated tcpa also violated herbalifes policies require distributors comply applicable federal state local laws believe meritorious defenses suit marketer dietary nutritional supplements products ingested consumers applied bodies currently subjected various product liability claims effects claims date material us reasonably possible range exposure currently existing claims material us believe meritorious defenses allegations contained lawsuits currently maintain product liability insurance self insured retention 10 million certain subsidiaries subject tax audits governmental authorities respective countries certain tax audits governmental authorities proposing significant amounts additional taxes related interest penalties due aggregate amount assessed taxes penalties interest date approximately 67 million tax advisors believe substantial defenses allegations additional taxes owing vigorously contesting additional proposed taxes related charges matters may take several years resolve cannot sure ultimate resolution however opinion management adverse outcomes likely result material effect financial condition operating results opinion based belief losses suffer would material meritorious defenses although reserved amount believe represents likely outcome resolution disputes incorrect assessment may record additional expenses item 7aitem 7 management’s discussion analysis financial condition results operations read following discussion analysis conjunction “selected financial data” consolidated financial statements related notes included elsewhere annual report form 10k overview global network marketing company sells weight management nutritional supplement personal care products pursue mission “changing people’s lives” providing financially rewarding business opportunity distributors quality products distributors customers seek healthy lifestyle one largest network marketing companies world net sales approximately 16 billion year ended december 31 2005 sell products 60 countries network one million independent distributors believe quality products effectiveness distribution network coupled geographic expansion primary reasons success throughout 26year operating history offer products three principal categories weight management products nutritional supplements refer “inner nutrition” personal care products refer “outer nutrition®” products often sold programs comprised series related products designed simplify weight management nutrition consumers maximize distributors’ crossselling opportunities industrywide factors affect us competitors include increasing prevalence obesity aging worldwide population driving demand nutrition wellnessrelated products recruitment retention distributors opportunities challenges upon focused driving retailing product recruitment retention distributors improving distributor productivity entering new markets including china penetrating existing markets pursuing local distributor initiatives introducing new products developing niche market segments investing infrastructure key nonfinancial measure focus volume points royalty basis hereafter “volume points” essentially weighted unit measure product sales volume useful measure us excludes impact foreign currency fluctuations ignores differences generated varying retail pricing across geographic markets general increase volume points particular region country directionally indicates increase local currency net sales volume points geographic region another key nonfinancial measure focus number distributors qualified supervisors compensation system distributors qualify supervisor status based volume points growth number supervisors general indicator level distributor recruitment generally drives net sales particular country region compensation system requires supervisor requalify status year prior february significant variation number supervisors fourth quarter first quarter given year due timing requalification process fluctuation normal consistent reflect dramatic underlying change business comparing two sequential quarters become meaningful period throughout year following tables show trends number supervisors reporting period region fluctuations within notable country discussed appropriate net sales section pertinent february year delete rank supervisor supervisors satisfy supervisor qualification requirements preceding twelve months distributors meet supervisor requirements time year promoted supervisor status time including supervisors deleted subsequently requalified number supervisors geographic region reporting period number supervisors geographic region requalification period 2004 certain modifications made requalification criteria resulting approximately 19000 additional supervisors including approximately 9000 relating change business model russia supervisors must requalify annually requalification period covers twelve months starting february ending following january number supervisors geographic region reporting dates normally higher number supervisors geographic region requalification period supervisors requalify relevant twelvemonth period dropped rank supervisor february since supervisors purchase products resale distributors consumers comparisons supervisor totals yeartoyear period basis good indicators recruitment retention efforts different geographic regions value average monthly purchase herbalife products supervisors remained relatively constant time consequently increases sales driven primarily retention supervisors recruitment retention distributors rather increases productivity overall supervisor base 2004 made modification supervisor requalification criteria limited test modification allowed distributors otherwise would failed requalify supervisors continue purchase products company receive benefit product discounts forfeiting downline royalties believe test successful retained approximately 10000 distributors generated approximately 12 million additional volume points annualized basis would represent approximately 94 million net sales 52 million operating margin immaterial impact selling general administrative expenses result test company modified supervisor requalification criteria distributors 2005 provide distributors products support material training special events competitive compensation program distributor wants pursue herbalife business opportunity distributor responsible growing business personally pays sales activities related attracting new customers recruiting distributors hosting events herbalife opportunity meetings success training seminars advertising herbalife’s products purchasing using promotional materials tshirts buttons caps utilizing paying direct mail print material brochures flyers catalogs business cards posters banners telephone book listings purchasing inventory sale use samples training mentoring following person via phone internet customers recruits use herbalife products andor pursue herbalife business opportunity presentation “retail sales” represent gross sales amounts invoices distributors distributor allowances defined “net sales” reflects distribution allowances handling freight income company collects recognizes net sales financial statements discuss retail sales fundamental role compensation systems internal controls operations including role basis upon distributor discounts royalties bonuses awarded addition information daily monthly reports reviewed management relies retail sales data however measure accordance generally accepted accounting principles us “gaap” consider retail sales isolation substitute net sales consolidated income cash flow statement data prepared accordance gaap measure profitability liquidity reconciliation net sales retail sales presented “results operations” “product sales” represent actual product purchase price paid us distributors giving effect distributor discounts referred “distributor allowances” approximate 50 retail sales prices distributor allowances percentage sales may vary country depending upon regulatory restrictions limit otherwise restrict distributor allowances “gross profit” consists net sales less “cost sales” represents prices pay raw material suppliers manufacturers products well costs related product shipments duties tariffs freight expenses relating shipment products distributors importers similar expenses “royalty overrides” significant expense consist • royalty overrides commissions bonuses total approximately 15 7 respectively retail sales weight management inner nutrition outer nutrition® promotional products • mark hughes bonus payable senior distributors aggregate amount 1 retail sales weight management inner nutrition outer nutrition® promotional products • discretionary incentive cash bonuses qualifying distributors royalty overrides generally earned based retail sales approximate aggregate 22 retail sales approximately 35 net sales royalty overrides together distributor allowances represent potential earnings distributors approximately 73 retail sales compensation distributors generally development retention improved productivity distributor sales organizations paid several levels distributors sale local country regulatory constraints may required modify typical distributor incentive plans described consequently total distributor discount percentage may vary time also offer reduced distributor allowances pay reduced royalty overrides respect certain products worldwide nonus royalty checks aged variety reasons beyond certainty paid taken back income management calculated period certainty three years worldwide whereas previously period varied country ranging 12 months 30 years order achieve consistency among countries company adjusted period amounts would taken income three years companywide basis beginning third quarter 2004 “operating margins” consist net sales less cost sales royalty overrides “selling general administrative expenses” represent operating expenses components include labor benefits sales events professional fees travel entertainment distributor marketing occupancy costs communication costs bank fees depreciation amortization foreign exchange gains losses miscellaneous operating expenses “1134 notes” refers herbalife international’s 1134 senior subordinated notes due 2010 “912 notes” refers 912 notes due 2011 sales distributors outside united states made respective local currencies preparing financial statements translate revenues us dollars using average exchange rates additionally majority purchases suppliers generally made us dollars consequently strengthening us dollar versus foreign currency negative impact reported sales operating margins generate transaction losses intercompany transactions throughout last five years foreign currency exchange rates fluctuated significantly time enter foreign exchange forward contracts option contracts mitigate foreign currency exchange risk summary financial results year ended december 31 2005 net sales increased 196 compared 2004 driven increases regions except decrease japan combination continued strong recruitment retention distributors retailing products key markets various promotions leading 25th anniversary extravaganza atlanta april 2005 worldwide cup promotions 2005 generally favorable foreign currency exchange rates launch new products liftoff tm nourifusiontm coupled ongoing roll shapeworkstm niteworkstm countries along globalization distributor best practices nutrition clubs total plan contributed sales increase sales growth us south korea encouraging result effort commitment turn around countries establishment new country management reinvigoration product portfolio reengagement distributor leadership regions continued strong sales growth mexico primarily attributable growth nutrition clubs party planning concept year ended december 31 2005 net income 931 million 128 per diluted share compared prioryear net loss 143 million loss 027 per diluted share net income reported includes effect recapitalization transaction expenses 142 million 715 million approximately 605 million net tax 2005 2004 respectively noncash tax charge 55 million associated moving china subsidiary within global corporate structure second quarter 2005 favorable aftertax impact 25 million relating change allowance uncollectible royalty overrides receivables distributors third quarter 2005 partially offset 15 million favorable aftertax impact aged royalties third quarter 2004 improvement net income result 196 increase net sales continued favorable impact appreciation foreign currencies lower interest income tax expense partially offset expenditures undertaking business initiatives resulting higher operating expenses primarily increased labor benefits incentive compensation event promotion expenses overall appreciation foreign currencies 108 million favorable impact net income year ended december 31 2005 results operations results operations periods described necessarily indicative results operations future periods depend upon numerous factors including ability recruit new distributors retain existing distributors open new markets penetrate existing markets introduce new products programs help distributors increase retail efforts develop niche market segments following table sets forth selected results operations expressed percentage net sales periods indicated year ended december 31 2005 compared year ended december 31 2004 net sales following chart reconciles retail sales net sales geographic region changes net sales directly associated recruiting retention distributor force retailing products quality completeness product offerings distributor force sell number countries operate management’s role incountry corporate level provide distributors competitive broad product line encourage strong teamwork leadership among chairman’s club president’s team distributors offer leading edge business tools make business herbalife simple management uses distributor marketing program coupled educational motivational tools incent distributors drive recruiting retention retailing turn affect net sales tools include corporate sales events extravaganzas world team schools large groups distributors gather thus allowing network distributors learn recruiting retention retailing techniques leading distributors become familiar market sell products business opportunities accordingly management believes development motivation programs increase productivity supervisor network expenses programs included selling general administrative expenses sales driven several factors including number productivity distributors supervisors continually build educate motivate respective distribution sales organizations also use event nonevent product promotions motivate distributors increase recruiting retention retailing activities promotions prizes ranging qualifying events vacations costs promotions included selling general administrative expenses factors described driven growth business following net sales geographic region discussion details factors describes unique growth factors specific certain major countries company believes correct business foundation coupled ongoing training promotional initiatives required increase recruiting retention distributors retailing company’s products correct business foundation includes strong country management works closely distributor leadership unified distributor leadership broad product line appeals local consumer needs favorable regulatory environment scalable stable technology platform attractive distributor marketing plan initiatives success training seminars world team schools promotional events regional extravaganzas integral components developing highly motivated educated distributor sales organization work toward increasing recruitment retention distributors company’s strategy continue include creating maintaining growth within existing markets expect increase spending selling general administrative expenses maintain stimulate sales growth making strategic investments new initiatives addition new ideas generated regional markets either distributors country management corporate management examples nutrition clubs mexico total plan brazil generationh “genh” us described net sales discussion management’s strategy review applicability expanding successful country initiatives throughout region andor globally appropriate financially support globalization initiatives americas net sales americas increased 2135 million 456 year ended december 31 2005 compared 2004 local currency net sales increased 392 year ended december 31 2005 compared 2004 fluctuation foreign currency rates positive impact 300 million net sales year ended december 31 2005 overall increase result net sales growth mexico brazil us 1165 million 432 million 318 million 1138 631 126 respectively year ended december 31 2005 countries continue benefit strong country distributor leadership focuses recruiting retention distributor force retails product line business opportunity attractive demographics countries continued net sales growth mexico evidenced increased number supervisors 773 december 31 2005 compared december 31 2004 reflects renewed emphasis distributor customer retention programs nutrition clubs new innovative means distributors retailing products new customers may eventually become distributors products costs set nutrition club generally nominal borne solely distributor distributors operating 27000 nutrition clubs worldwide approximately 25000 open mexico continued net sales growth brazil evidenced increased number supervisors 333 december 31 2005 compared december 31 2004 result expansion total plan strong distributor leadership highly effective country management team good product portfolio total plan low cost lead generating method distributors use personal care line products offer consultations obtain referrals concept specifically supports retailing recruiting initiatives catalyst growth brazil december 2005 brazil held 10th anniversary event 10000 distributors attendance event new products firm cell radiant c scrub cleanser body lotion launched support total plan reinforcing objective increase recruitment retailing retention distributors demonstration online distributor tool bizworks provided highlight benefits real time organizational volume reports means improve efficiency distributors positive momentum event help continue sales growth trend 2006 net sales growth us evidenced increased number supervisors 47 december 31 2005 compared december 31 2004 volume point increase 145 compared prior year result numerous steps taken 2004 2005 improve business us including establishment dedicated us country management team branding efforts sponsorship jp morgan chase tennis tournament avp volleyball tour nautica malibu triathlon various promotions 2005 president’s team challenge world team bonus atlanta challenge connection 25th anniversary extravaganza worldwide cup promotion net sales exceeded annual results 2004 25th anniversary extravaganza two new products introduced liftofftm nourifusiontm liftofftm represents company’s entry energy drink market intended support genh program attract younger demographic segment distributor organization nourifusiontm supports total plan method operation strategic launch improve diversity product portfolio since skin care outer nutrition category least developed 2005 october 2005 introduced comprehensive heart health line incorporates niteworkstm corecomplextm trishieldtm megagarlictm herbalifelinetm endorsed dr louis ignarro world team schoolleadership development weekend held october 2005 launched 2006 worldwide promotion active world team believe coupled product launches branding initiatives positive impact sales growth 2006 believe 2006 sales americas region continue positive year growth primarily result expected continuation strong momentum mexico brazil us europe net sales europe increased 91 million 17 year ended december 31 2005 compared 2004 local currency net sales increased 10 year ended december 31 2005 compared 2004 fluctuation foreign currency rates positive impact net sales 35 million year ended december 31 2005 throughout 2004 europe experienced sales growth compared 2003 partly due billion dollar challenge promotion first second quarters 2004 sales growth expected sustainable 2005 markets sustain growth spain france south africa two key markets germany netherlands experienced sales declines 208 162 respectively year ended december 31 2005 recently appointed new country manager germany new management team developing turnaround plan 2006 reengage local distributor leadership rebuild confidence among distributors improve recruiting retention german leadership begun work together improve brand image implement genh initiative formed executive committee focus initiatives netherlands taken steps reengage local distributor leadership promote genh initiative within country net sales spain 76 million 231 year ended december 31 2005 compared 2004 increase net sales primarily due unified distributor leadership increasing emphasis locally health nutrition continuing positive impact certain promotions 2005 france one largest european markets net sales 66 million 258 year ended december 31 2005 compared 2004 partly due adoption new nutritional distributor training program special vacation promotion net sales south africa 71 million 517 compared 2004 primarily due unified distributor leadership successful promotional activity additionally south africa celebrated 10th anniversary business country major sales event third quarter concluded year world team school budapest hungary 8000 european distributors attended product leadership business opportunity training sessions event specific training nutrition clubs 2006 active world team promotion introduced believe 2006 net sales europe continue positive year volume growth partly due global local branding initiatives sponsoring london triathlon intended continually improve corporate brand reputation market introduction new products region liftofftm addition recent changes management teams regionally locally expect formulate implement successful strategy turn around several declining markets europe continue positive growth trends others asiapacific rim net sales asiapacific rim increased 386 million 187 year ended december 31 2005 compared 2004 local currency net sales increased 142 year ended december 31 2005 compared 2004 fluctuation foreign currency rates 93 million positive impact net sales year ended december 31 2005 overall increase attributable mainly increases taiwan south korea net sales taiwan increased 184 million 256 year ended december 31 2005 2004 due primarily increase number supervisors 247 december 31 2005 compared time last year highly engaged distributor leadership increased local distributor trainings initiatives promote individual recognition well performing distributors new product launches positive momentum world team school held singapore october 2005 25th anniversary atlanta extravaganza worldwide cup promotion singapore world team school attended approximately 5000 distributors received product leadership business opportunity training net sales south korea increased 122 million 340 year ended december 31 2005 compared 2004 improvement 2005 result positive momentum sales events promotions discussed unified focus korea’s country distributor leadership also late 2004 introduced shapeworkstm south korea positive impact recruiting retailing initiatives 2005 overall believe continued local distributor training positive momentum singapore world team school launch new products nourifusiontm launched south korea taiwan late 2005 opening malaysia february 2006 introduction new business tools contribute ongoing sales increases support continued globalization nutrition clubs total plan asiapacific rim region 2006 japan net sales japan decreased 41 million 41 year ended december 31 2005 compared 2004 local currency net sales japan decreased 23 year ended december 31 2005 compared 2004 fluctuation foreign currency rates negative 18 million impact net sales year ended december 31 2005 net sales decline 2005 continuation sixyear downward trend japan albeit slower rate reporting period driven primarily ineffective prior country management properly motivated distributor leadership lack new product introductions third quarter 2004 appointed new country manager focused uniting motivating distributor leadership improve recruiting retention distributors process expanding product line address local country demographic needs second quarter 2005 launched nourifusiontm supported launch formal total plan training distributors nourifusiontm international business pack’s also created synchronize method operation introduction kit 2005 opened new sales office central upscale location tokyo significant improvement existing location believe give us greater visibility key population center first floor sales office nutrition center distributors bring customers potential distributors sample products conduct meetings hold trainings december 2005 held japan spectacular kobe japan making biggest event japan 5 years approximately 6000 distributors attending positive momentum also generated worldwide cup promotion 2005 third quarter 2005 niteworkstm introduced japan special vacation promotion launched believe initiatives combination implementation new brand volume incentive promotional programs continue improve sales trends 2006 sales product category increased emphasis science weight management nutrition past two years resulted product introductions niteworkstm garden 7 tm introduction shapeworkstm personalized meal replacement program due launch shapeworkstm march 2004 united states ongoing rollout countries introduction new outer nutrition® products like nourifusiontm increased use total plan distributors brazil worldwide uses outer nutrition products foundation net sales weight management products outer nutrition® products increased higher rate net sales inner nutrition products sales outer nutrition products increased 327 year ended december 31 2005 greater rate growth category literature promotional net product buybacks returns product categories increased due primarily increase literature sales selling starter kits new distributors decrease returns refunds expect growth rates within categories vary time launch new products gross profit gross profit 12510 million year ended december 31 2005 compared 10398 million 2004 percentage net sales gross profit year ended december 31 2005 increased 794 798 compared 2004 generally gross profit percentages vary significantly percentage sales due product country mix ongoing cost reduction initiatives provisions slow moving obsolete inventory additionally believe ability mitigate ingredient manufacturing cost increases suppliers raising prices products shifting product sourcing alternative manufacturers royalty overrides royalty overrides percentage net sales 355 years ended december 31 2004 2005 favorable pretax impact 40 million relating change allowance uncollectible royalty overrides receivables distributors third quarter 2005 partially offset favorable pretax impact 24 million aged royalty checks third quarter 2004 generally royalty overrides percentage net sales varies slightly period due changes mix products countries varying royalty overrides paid certain products certain countries due structure global compensation plan coupled current country mix business expect see significant fluctuations royalty overrides percent net sales selling general administrative expenses selling general administrative expenses percentage net sales improved 304 year ended december 31 2005 compared 333 2004 unfavorable impact foreign currency fluctuations 82 million year ended december 31 2005 year ended december 31 2005 selling general administrative expenses increased 402 million 4763 million 4361 million 2004 increase included 231 million higher salaries benefits due primarily normal merit increases increased staffing higher incentive compensation 57 million relating legal litigation expenses additional professional fees primarily associated strengthening technology infrastructure 160 million additional advertising promotion expenses related primarily related 2005 worldwide cup promotion helped drive worldwide sales growth 54 million higher travel entertainment expenses 56 million higher occupancy cost support growth business increases partially offset 92 million lower monitoring fees expenses due termination related agreements whitney golden gate 98 million lower amortization expenses 07 million foreign exchange gain 2005 versus 19 million loss 2004 expect 2006 selling general administrative expenses increase absolute dollars 2005 levels reflecting general salary merit increases investments china various sales growth initiatives including sales events globalization best practices nutrition clubs total plan development directtoconsumer initiative percentage net sales expenses remain consistent 2005 levels net interest expense net interest expense 439 million year ended december 31 2005 compared 1233 million 2004 higher interest expense 2004 primarily due two recapitalizations 2004 noted table 82 million additional interest expense associated 2750 million principal amount 9 12 notes issued march 2004 part continuation fourth quarter 2004 recapitalization exercised contract provision redeem 40 110 million 912 notes required notice period redemption completed february 4 2005 premium writeoff deferred financing fees 142 million associated redemption included interest expense first quarter 2005 income taxes income taxes 820 million year ended december 31 2005 compared 297 million 2004 percentage pretax income estimated effective income tax rate 468 year ended december 31 2005 compared 1928 2004 decrease effective tax rate year ended december 31 2005 compared 2004 caused primarily impact less nondeductible interest including aforementioned nondeductible recapitalization charges period offsetting benefits 55 million noncash tax charge associated moving china subsidiary within global corporate structure second quarter 2005 additionally stronger expected revenue growth past several quarters management’s outlook midteens revenue growth rate continue throughout 2006 caused decrease valuation allowances required certain deferred tax assets increase current taxes certain areas worldwide transfer pricing overall tax structures impacted foreign currency fluctuations currency fluctuations favorable impact 108 million net results year ended december 31 2005 compared current year net results would using last year’s foreign exchange rates year ended december 31 2005 regional effects favorable 07 million europe favorable 24 million asiapacific rim favorable 70 million americas favorable 07 million japan net results year ended december 31 2005 net income 931 million 128 per diluted share compared prioryear net loss 143 million loss 027 per diluted share net income reported includes effect recapitalization transaction expenses 142 million 715 million approximately 605 million net tax 2005 2004 respectively noncash tax charge 55 million associated moving china subsidiary within global corporate structure second quarter 2005 favorable aftertax impact 25 million relating change allowance uncollectible royalty overrides receivables distributors third quarter 2005 partially offset 15 million favorable aftertax impact aged royalties third quarter 2004 improvement net income result 196 increase net sales continued favorable impact appreciation foreign currencies lower interest income tax expense partially offset expenditures undertaking business initiatives resulting higher operating expenses primarily increased labor benefits incentive compensation promotion expense overall appreciation foreign currencies 108 million favorable impact net income year ended december 31 2005 year ended december 31 2004 compared year ended december 31 2003 net sales following chart reconciles retail sales net sales geographic regions changes net sales directly associated recruiting retention retailing distributor force quality completeness product offerings distributor force sell number countries operate management’s role incountry corporate level provide distributors competitive broad product line ensure strong teamwork leadership among chairman’s club president’s team distributors offer leading edge business tools make business herbalife simple management uses marketing program coupled educational motivational tools incent distributors drive recruiting retention retailing turn affect net sales tools include corporate sales events extravaganzas world team schools large groups distributors gather thus allowing network distributors learn recruiting retention retailing techniques leading distributors become familiar market sell products business opportunities accordingly management believes development motivation programs increase productivity supervisor network expenses programs included selling general administrative expenses example barcelona extravaganza held august 2004 mentioned sales driven several factors including number productivity distributor leaders continually build educate motivate respective distribution sales organizations also use product event nonevent promotions motivate distributors increase recruiting retention retailing activities promotions ranged 2003 laptop computer promotion vacations qualifying events distributors meet certain selling recruiting goals costs promotions included selling general administration expenses current example “atlanta challenge” discussed similar sales events possible us draw precise quantitative correlation successful promotion resultant longterm effect net sales factors described driven growth business following net sales geographic region discussion details factors describes unique growth factors specific certain major countries company believes correct foundation coupled ongoing training promotional initiatives required increase recruiting retention distributors retailing product correct foundation includes strong country management works closely distributor leadership broad product line appeals local consumer needs favorable regulatory environment scalable stable technology platform attractive marketing plan initiatives success training seminars world team schools promotional events regional extravaganzas integral components developing highly motivated educated distributor sales organization work toward increasing recruitment retention distributors company’s strategy included continue include generating maintaining growth within existing markets generally expect continue spend current level selling general administrative expenses percent net sales maintain stimulate sales growth making strategic investments new initiatives discussed business strategy section addition new ideas generated regional markets either distributors country management corporate management examples nutrition clubs mexico total plan brazil described net sales discussion management’s strategy review applicability expanding successful country initiatives throughout region andor globally appropriate americas net sales americas increased 438 million 103 year ended december 31 2004 compared 2003 local currency net sales increased 107 year ended december 31 2004 compared 2003 fluctuation foreign currency rates negative impact 16 million net sales year ended december 31 2004 overall increase result net sales growth brazil mexico 292 million 288 million 744 391 respectively year ended december 31 2004 countries continue benefit strong country distributor leadership focuses recruiting retention distributor force retails product line business opportunity attractive demographics countries net sales growth brazil mexico partially offset net sales decrease us 220 million 80 continued net sales growth brazil evidenced increased number supervisors 546 december 31 2004 compared 2003 expansion total plan strong distributor leadership highly effective country management team good product portfolio total plan low cost lead generating method distributors use personal care line products offer consultations obtain referrals concept specifically supports retailing recruiting initiatives catalyst growth brazil continued net sales growth mexico evidenced increased number supervisors 330 december 31 2004 compared december 31 2003 reflects renewed emphasis distributor customer retention programs nutrition clubs new innovative means distributors retailing products new customers may eventually become distributors products costs set nutrition club generally nominal borne solely distributor distributors opened 2000 nutrition clubs date growth brazil mexico partly offset decline net sales us 220 million 80 year ended december 31 2004 compared december 31 2003 evidenced 61 decrease number supervisors december 31 2004 compared 2003 similar volume point decrease compared prior year continuation downward trend us although decrease 2004 lower decrease experienced 2003 contributing factors continued decline include distraction among senior distributor leadership related transition new senior management team strong competition direct selling companies marketing difficulties experienced transition new shapeworkstm product line launched march 2004 transition new shapeworkstm product line us cost approximately 42 million primarily recorded selling general administrative expenses approximately 06 million related several previous versions package design labels related promotional materials cost expected incurred future transitions product regions believe us continues viable market therefore taken numerous steps turn business around example organized regional “miniextravaganza” sales events opening regional sales center dallas created us country management team previously us managed americas region introduced retailing recruiting programs used successfully brazil mexico total plan nutrition clubs multiple regional miniextravaganzas cost approximately 19 million 2004 recorded selling general administrative expenses expect similar level spending 2005 help stimulate growth us market regional sales centers small walk distribution centers opening key areas us feel underdeveloped walk centers allow distributors interact us personal basis believe assist distributors recruiting retention efforts set regional sales center dallas incurred 04 million capital expenditures spend approximately 06 million annual operating expenses extent management chooses continue expand model throughout us based upon thorough financial review would expect similar level expenditure regional sales center company may potentially open management’s evaluation area yet completed management senior distributor leadership continue target promotions events products specific key us metro areas believe increase efficiency spending increasing market penetration europe net sales europe increased 879 million 196 year ended december 31 2004 compared 2003 local currency net sales increased 86 year ended december 31 2004 compared 2003 fluctuation foreign currency rates positive impact net sales 494 million year ended december 31 2004 european markets recorded net sales growth partly result eightmonth promotion ending june 2004 helped distributors increase recruiting retention supported motivation training barcelona extravaganza july 2004 spent 39 million recorded selling general administrative expenses eight month incremental sales promotion called “billion dollar challenge” barcelona extravaganza net cost 18 million recorded selling general administrative expenses november 2004 launch shapeworkstm europe bologna world team school well received distributors reflecting smoother launch us earlier year net sales spain 138 million 725 year ended december 31 2004 compared 2003 due cohesive renewed focus distributor leadership increasing emphasis locally health nutrition success billion dollar challenge barcelona extravaganza net sales turkey 114 million 857 year ended december 31 2004 compared 2003 due increasing acceptance direct selling concept turkey well energetic distributor leadership group italy one largest european markets net sales 71 million 112 year ended december 31 2004 compared 2003 driven strong country management distributor leadership collaboration recruiting retention programs netherlands another larger european markets net sales 83 million 178 year ended december 31 2004 compared 2003 partly due corporatedistributor cosponsored tv program “fitness challenge” increased visibility herbalife name company’s cost related fitness challenge less 01 million recorded selling general administrative expenses currently reviewing whether repeat sponsorship 2005 addition initiated new worldwide promotion atlanta challenge barcelona extravaganza july means incent distributors qualify 25th anniversary extravaganza april 2005 atlanta 25th anniversary cruise special worldwide vacation promotion separate occurring connection 25th anniversary extravaganza atlanta expected cost approximately 60 million event distributors qualified 2004 accordingly accrued expense selling general administrative expenses expect similar promotion 2005 25th anniversary extravaganza replace major regional extravaganzas 2005 although may still hold smaller regional events carry excitement momentum event expect net cost 25th anniversary extravaganza atlanta approximately 64 million first quarter 2004 took management product distribution russia greece prior used thirdparty importer manage distribute product distributors countries opened administrative office companyoperated distribution center countries closely align business model countries around world allow direct interaction distributors feel improve communication ultimately enhance recruiting retention distributors countries cost change business model countries 10 million capital expenditures 44 million transition costs expect incur future 59 million net additional annual operating expenses transition costs operating expenses recorded selling general administrative expenses asiapacific rim net sales asiapacific rim increased 390 million 233 year ended december 31 2004 compared 2003 local currency net sales increased 192 year ended december 31 2004 compared 2003 fluctuation foreign currency rates 68 million positive impact net sales year ended december 31 2004 overall increase attributable mainly increase taiwan partly offset decrease south korea net sales taiwan increased 238 million 496 year ended december 31 2004 2003 due primarily increase number supervisors 340 december 31 2004 compared time last year highly engaged distributor leadership strong country management increased local distributor trainings initiatives promote individual recognition well performing distributors new product launches positive momentum bangkok extravaganza held september various regional promotions bangkok extravaganza net cost 17 million recorded selling general administrative expenses 2005 regional extravaganzas replaced 25th anniversary atlanta extravaganza management evaluate need smaller regional events carry excitement momentum 25th anniversary atlanta extravaganza around world unable attend net sales south korea decreased 80 million 183 year ended december 31 2004 compared 2003 appears numerous initiatives begun fourth quarter 2003 making impact illustrate improvement volume flat improvement prior year’s trend net sales increased 110 fourth quarter compared period last year expect south korea report positive year sales growth 2005 late 2004 introduced shapeworkstm south korea cost less 01 million recorded selling general administrative expenses believe help recruiting retailing initiatives japan net sales japan decreased 205 million 172 year ended december 31 2004 compared 2003 local currency net sales japan decreased 229 year ended december 31 2004 compared 2003 fluctuation foreign currency rates 68 million favorable impact net sales year ended december 31 2004 net sales decline 2004 continuation fiveyear downward trend japan albeit slower rate reporting period driven primarily ineffective prior country management properly motivated distributor leadership introduced new products timely manner meet distributor expectations weakness exacerbated strong competition direct selling companies general deterioration japanese economy third quarter 2004 appointed new country manager currently focusing uniting motivating distributor leadership improve recruiting retention distributors process expanding product line address local country demographic needs example late 2004 introduced green tea flavored formula 1 created individual serving “packets” formula 1 product 2005 opening new sales office central location tokyo significant improvement existing location believe give us greater visibility key population center combination implementing new brand volume incentive promotional programs believe initiatives help improve financial performance 2005 sales product category increased emphasis science weight management nutrition past two years illustrated assembly scientific advisory board medical advisory board resulted numerous product introductions like niteworkstm garden 7tm introduction shapeworkstm personalized meal replacement program due launch shapeworkstm product line march 2004 introduction new personal care products net sales weight management products outer nutrition® products increased higher rate net sales inner nutrition products rationalization outer nutrition® product line 2002 resulted initial decrease sales since line represented approximately 9 net sales product line today designed complement weight management inner nutrition product lines products improving appearance body skin hair literature promotional includes product buybacks returns product categories increased due decrease returns refunds expect shifts within categories time launch new products gross profit gross profit 10398 million year ended december 31 2004 compared 9236 million 2003 percentage net sales gross profit year ended december 31 2004 decreased 797 794 compared 2003 decrease gross profit percentage net sales year ended december 31 2004 attributable mainly increase provisions made slow moving obsolete inventory 48 million well small sales mix variance partially offset lower raw material vendor costs generally gross profit percentages vary significantly percentage sales due ongoing cost reduction initiatives provisions slow moving obsolete inventory additionally believe ability mitigate price increases raising prices products shifting product sourcing alternative manufacturers royalty overrides royalty overrides percentage net sales 355 year ended december 31 2004 compared 358 2003 percentage net sales royalty overrides decreased 03 year ended december 31 2004 compared 2003 due primarily 24 million favorable impact aged royalties generally ratio varies slightly period due changes mix products countries full royalty overrides paid certain products certain countries due structure global compensation plan expect see significant fluctuations royalty overrides percent net sales selling general administrative expenses selling general administrative expenses percentage net sales 333 year ended december 31 2004 compared 346 2003 year ended december 31 2004 selling general administrative expenses increased 348 million 4361 million 4013 million 2003 increase included 154 million higher salaries benefits due primarily normal merit increases impact foreign currency fluctuations lower bonus expense 2003 based fully achieving targets year increases related strengthening management team regionally us 138 million additional professional fees associated higher legal accounting expenses including sarbanesoxley compliance technology expenses higher manufacturing consulting expenses related startup facility china 45 million additional promotional expenses related primarily shapeworkstm launch eightmonth european promotion program noted ended june 2004 expenses related 25 th anniversary promotions detailed discussion net sales region 122 million higher nonincome taxes due primarily higher sales certain jurisdictions 26 million relating recapitalization march expect recur 2005 30 million higher provisions made doubtful accounts changes discussed include unfavorable impact foreign currency fluctuations operating expenses 93 million increases partially offset 87 million lower litigation expenses 46 million lower foreign exchange transaction losses 117 million lower amortization expense intangibles year ended december 31 2004 compared 2003 due final allocation third quarter 2003 purchase price connection acquisition december 2004 reached agreement equity sponsors terminate monitoring fee agreement exchange issuance 700000 warrants using blackscholes model calculated fair value consideration approximately 29 million included 2004 expenses target product gross profit approximately 80 net sales allows us economically remit royalties distributor organization pay vendors product cover operating costs associated product development licensing warehousing distribution transportation generally target promotions advertising particular product brand significant promotions generally aimed generating increased levels recruiting retention distributors example european billion dollar challenge first half 2004 promotion distributors qualified various levels award based incremental sales volume achieved generally major new product launched expenditures related rollout promotion products based breadth manner product launch costs could material immaterial example detailed previously net sales discussion introduced shapeworkstm united states 2004 extravaganza cost approximately 37 million net costs labeling packaging revisions prior introduction product launched europe bologna event “miniextravaganza” cost 05 million south korea tied major event cost less 01 million product brand advertising generally handled distributors although 2005 anticipate participating sponsoring certain sporting events raise awareness recognition herbalife brand finalized plans expect spending events would material 2005 net interest expense net interest expense 1233 million year ended december 31 2004 compared 415 million 2003 higher interest expense 2004 primarily due two recapitalizations 2004 noted table 82 million additional interest expense associated 2750 million principal amount 912 notes issued march 2004 part continuation fourth quarter 2004 recapitalization exercised contract provision redeem 40 110 million 912 notes required notice period redemption completed february 4 2005 premium writeoff deferred financing fees 142 million associated redemption included interest expense first quarter 2005 income taxes income taxes 297 million year ended december 31 2004 compared 287 million 2003 percentage pretax income estimated effective income tax rate 1928 year ended december 31 2004 compared 438 2003 increase effective tax rate year ended december 31 2004 compared 2003 caused primarily expenses related recapitalizations significant portion nondeductible interest expense associated 912 notes excluding impact recapitalization expenses 715 million 2004 effective tax rate would approximately 47 2005 believe effective tax rate decrease 43 reflecting lower level non deductible interest impact 142 million premium writeoff deferred financing fees noted interest expense estimate unfavorable impact effective tax rate including expenses could high 4 foreign currency fluctuations currency fluctuations favorable impact 129 million net results year ended december 31 2004 compared current year net results would using last year’s foreign exchange rates year ended december 31 2004 regional effects favorable 75 million europe favorable 27 million asiapacific rim favorable 02 million americas favorable 25 million japan net results net results year ended december 31 2004 including 715 million pretax recapitalization expenses approximately 605 million net tax loss 143 million loss 027 per diluted share 512 million lower prioryear net income 368 million earnings 069 per diluted share recapitalization expenses first fourth quarters 2004 715 million pretax resulted repurchase 1512 senior notes 1134 notes refinancing herbalife international’s term loan net results also impacted interest expense associated 912 notes higher promotional expenses labor costs partially offset 130 increase net sales favorable impact aged royalties favorable impact appreciation foreign currencies overall appreciation foreign currencies 129 million favorable impact net results 2004 liquidity capital resources historically met working capital expenditure requirements including funding expansion operations net cash flows provided operating activities principal source liquidity operating cash flows variations sales products would directly affect availability funds material restrictions ability transfer remit funds among international affiliated companies year ended december 31 2005 generated 1434 million operating cash flows compared 801 million 2004 increase cash generated operations reflected increase operating income 804 million primarily driven 196 growth net sales decrease interest paid 2005 499 million partially offset increase income taxes paid 449 million increase inventory capital expenditures including capital leases year ended december 31 2005 326 million compared 303 million 2004 majority expenditures represented investments management information systems internet tools distributors relocation facility japan expansion facilities china expect incur capital expenditures 45 million 2006 2005 2006 investment years us china expand business operating loss 2005 22 million currently anticipate fund operating loss approximately 100 million 2006 addition total capital expenditures working capital 150 million planned buildout retail stores offices expansion capabilities manufacturing facility 2005 invested approximately 45 million capital expenditures china december 2004 herbalife completed initial public offering connection several recapitalization transactions completed including tender outstanding 1134 notes 999 accepted tender offer replacement existing term loan revolving credit facility new 2250 million senior credit facility addition redeemed 110 million principal amount excluding discounts 40 outstanding 912 notes february 2005 cash amount 1241 million including premium 105 million accrued interest 36 million interest expense 2005 includes redemption amount 142 million represents 105 million premium 37 million write deferred financing cost discount 2250 million senior credit facility consists senior secured revolving credit facility total availability 250 million senior secured term loan facility aggregate principal amount 2000 million revolver available december 21 2009 revolver bears interest libor plus 2 april 2005 senior credit facility amended whereby interest rate reduced libor plus 214 libor plus 134 addition amount payable connection partial full refinancing loan within first year amendment shall equal 101 principal amount august 2005 senior credit facility amended permit purchase repurchase redemption 500 million aggregate principal amount 912 notes due 2011 repurchases 912 notes 2005 regard term loan obligated pay 02 million every quarter september 30 2010 remaining principal amount december 21 2010 2005 prepaid approximately 1090 million senior credit facility resulting approximately 22 million additional interest expense writeoff deferred financing fees december 31 2005 outstanding balance term loan 898 million amounts borrowed revolving credit facility senior credit facility 912 notes include customary covenants restrict among things ability incur additional debt pay dividends make certain restricted payments incur liens merge sell substantially assets enter various transactions affiliates additionally senior credit facility includes covenants relating maintenance certain leverage fixed charge coverage interest coverage ratios requirements make early payments extent excess cash flow defined therein following summarizes contractual obligations including interest december 31 2005 effect obligations expected liquidity cash flows future periods whitney golden gate andor affiliates parties share purchase agreement “share purchase agreement” pursuant originally purchased preferred shares terms share purchase agreement whitney golden gate could subject approval board directors 75 shareholders require us pay dividend shareholders related certain income may taxable resulting ownership shares made dividend payments 63 million shareholders fourth quarter 2004 related certain income may taxable years ended december 31 2003 december 31 2004 december 2004 entered termination agreement parties share purchase agreement pursuant termination agreement share purchase agreement obligations liabilities parties share purchase agreement terminated consideration termination share purchase agreement entered tax indemnification agreement whitney golden gate andor affiliates pursuant agreed indemnify parties federal income tax liability related losses incur respect income herbalife would includible gross income party taxable period section 951a internal revenue code 1986 amended “code” terms tax indemnification agreement assume purpose indemnified party “united states shareholder” defined section 951b code however obligation provide indemnity respect taxes related losses incurred reimbursed share purchase agreement senior credit facility permits us pay tax indemnity payments restricts aggregate amount pay given year 15 million currently anticipate amounts required paid agreement 2005 result secondary offering december 2005 whitney golden gate sold approximately 126 million shares longer controlled foreign corporation consequently 2006 thereafter payments agreement required connection initial public offering paid special cash dividend stockholders record prior offering amount 1397 million declaration future dividends subject discretion board directors depend upon various factors including earnings financial condition restrictions imposed credit agreement cash requirements future prospects factors deemed relevant board directors credit agreement permits payments dividends long default exists amount exceed 200 million per fiscal year provided amount dividends may increased 25 consolidated net income prior fiscal year leverage ratio defined credit agreement four fiscal quarters fiscal year less equal 200100 december 31 2005 positive working capital 141 million cash equivalents 882 million december 31 2005 compared 2016 million december 31 2004 expect cash funds provided operations available borrowings new revolving credit facility provide sufficient working capital operate business make expected capital expenditures meet foreseeable liquidity requirements including debt service 912 notes new senior credit facility assurance however business service debt including outstanding notes fund liquidity needs majority purchases suppliers generally made us dollars sales herbalife distributors generally made local currencies consequently strengthening us dollar versus foreign currency negative impact operating margins generate transaction losses intercompany transactions discussion foreign exchange contracts hedging arrangements see quantitative qualitative disclosures market risks described quarterly results operations common shares earnings per share data company gives effect 12 reverse stock split took effect december 1 2004 contingencies time engaged routine litigation regularly review pending litigation matters involved establish reserves deemed appropriate management litigation matters probable loss estimate made herbalife international certain independent distributors named defendants purported class action lawsuit filed february 17 2005 superior court california county san francisco served herbalife international march 14 2005 minton v herbalife international et al case transferred los angeles county superior court plaintiff challenging marketing practices certain herbalife international independent distributors herbalife international various state laws prohibiting “endless chain schemes” insufficient disclosure assisted marketing plans unfair deceptive business practices fraud deceit plaintiff alleges freedom group system operated certain independent distributors herbalife international products places much emphasis recruiting encourages excessively large purchases product promotional materials distributors plaintiff also alleges freedom group pressured distributors disseminate misleading promotional materials plaintiff seeks hold herbalife international vicariously liable actions independent distributors seeking damages injunctive relief company believes meritorious defenses suit herbalife international certain distributors named defendants purported class action lawsuit filed july 16 2003 circuit court ohio county state west virginia mey v herbalife international inc et al complaint alleges certain telemarketing practices certain herbalife international distributors violate telephone consumer protection act tcpa seeks hold herbalife international vicariously liable practices distributors specifically plaintiffs’ complaint alleges several herbalife international’s distributors used prerecorded telephone messages autodialers contact prospective customers violation tcpa’s prohibition practices herbalife international’s distributors independent contractors distributors fact violated tcpa also violated herbalife’s policies require distributors comply applicable federal state local laws company believes meritorious defenses suit marketer dietary nutritional supplements products ingested consumers applied bodies currently subjected various product liability claims effects claims date material us reasonably possible range exposure currently existing claims material us believe meritorious defenses allegations contained lawsuits currently maintain product liability insurance annual deductible 10 million certain subsidiaries subject tax audits governmental authorities respective countries certain tax audits governmental authorities proposing significant amounts additional taxes related interest penalties due tax advisors believe substantial defenses allegations additional taxes owed vigorously contesting additional proposed taxes related charges matters may take several years resolve cannot sure ultimate resolution however opinion management adverse outcomes likely result material effect financial condition operating results opinion based belief losses suffer would material meritorious defenses although reserved amount believe represents likely outcome resolution disputes incorrect assessment may record additional expenses critical accounting policies consolidated financial statements prepared conformity accounting principles generally accepted united states require us make estimates assumptions affect reported amounts assets liabilities disclosures contingent assets liabilities date financial statements reported amounts revenue expenses year actual results could differ estimates consider following policies critical understanding judgments involved preparing financial statements uncertainties could impact results operations financial condition cash flows network marketing company sells wide range weight management products nutritional supplements personal care products within one industry segment defined sfas 131 “disclosures segments enterprise related information” products manufactured third party providers sold independent distributors sell herbalife products retail consumers distributors sell products 60 countries throughout world organized managed geographic region first quarter 2003 elected aggregate operating segments one reporting segment management believes operating segments similar operating characteristics similar long term operating performance making determination management believes operating segments similar nature products sold product acquisition process types customers products sold methods used distribute products nature regulatory environment revenue recognized products shipped title passes independent distributor importer amounts billed freight handling costs included net sales generally receive net sales price cash credit card payments point sale related royalty overrides allowances product returns recorded merchandise shipped allowances product returns primarily connection buyback program provided time product shipped accrual based upon historic return rates country vary zero approximately 50 retail sales relevant return pattern reflects anticipated returns received period 12 months following original sale historically product returns buybacks significant product returns buybacks approximately 19 11 10 retail sales years ended december 31 2003 2004 2005 respectively material changes estimates recognized year ended december 31 2005 years ended december 31 2004 2003 record reserves inventory provide estimated obsolete unsalable inventory based assumptions future demand products market conditions future demand market conditions less favorable management’s assumptions additional reserves could required likewise favorable future demand market conditions could positively impact future operating results previously reserved inventory sold reserved obsolete slow moving inventory totaling 42 million 62 million 80 million december 31 2003 2004 2005 respectively accordance sfas 144 longlived assets property plant equipment purchased intangibles subject amortization reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable recoverability assets held used measured comparison carrying amount asset estimated undiscounted future cash flows expected generated asset carrying amount asset exceeds estimated future cash flows impairment charge recognized amount carrying amount asset exceeds fair value asset assets disposed would separately presented balance sheet reported lower carrying amount fair value less costs sell longer depreciated assets liabilities disposed group classified held sale would presented separately appropriate asset liability sections balance sheet goodwill intangibles subject amortization tested annually impairment tested impairment frequently events circumstances indicate asset might impaired impairment loss recognized extent carrying amount exceeds asset’s fair value determination made reporting unit level consists two steps first company determines fair value reporting unit compares carrying amount second carrying amount reporting unit exceeds fair value impairment loss recognized excess carrying amount reporting unit’s goodwill intangibles implied fair value implied fair value determined allocating fair value reporting unit manner similar purchase price allocation accordance sfas 141 business combinations residual fair value allocation implied fair value reporting unit goodwill intangibles december 31 2005 goodwill approximately 1342 million marketing franchise 3100 million writedowns recognized year ended december 31 2004 goodwill reduced 2005 approximately 333 million due primarily reduction valuation allowance established time acquisition preacquisition tax benefits contingencies accounted accordance sfas 5 “accounting contingencies” sfas 5 requires record estimated loss contingency information available prior issuance financial statements indicates probable asset impaired liability incurred date financial statements amount loss reasonably estimated accounting contingencies legal income tax matters requires us use judgment many legal tax contingencies take years resolved generally time period increases uncertainties resolved likelihood changes estimate ultimate outcome increases deferred income tax assets established net operating loss carryforwards certain foreign subsidiaries reduced valuation allowance reflect amounts estimated ultimately recognized net operating loss carryforwards expire varying amounts future period time realization income tax carryforwards dependent generating sufficient taxable income prior expiration carryforwards although realization assured believe likely net carrying value income tax carryforwards realized amount income tax carryforwards considered realizable however could change estimates future taxable income carryforward period adjusted new accounting pronouncements december 2004 financial accounting standards board “fasb” enacted statement financial accounting standards 123 revised 2004 “sfas 123r” “sharebased payment” replaces statement financial accounting standards 123 “sfas 123” accounting stockbased compensation” supersedes accounting principle board “apb” opinion 25 “accounting stock issued employees” sfas 123r requires measurement employee sharebased payments employees including grants employee stock options using fairvaluebased method recording expense consolidated statements operations required adopt sfas 123r first quarter fiscal year 2006 pro forma disclosures previously permitted sfas 123 longer alternative financial statement recognition see note 2 notes consolidated financial statements pro forma net income net income per share amounts fiscal 2002 fiscal 2004 used fairvaluebased method similar methods required sfas 123r measure compensation expense employee stock incentive awards although yet determined whether adoption sfas 123r result amounts similar current pro forma disclosures sfas 123 evaluating requirements sfas 123r preliminary basis expect adoption cumulative pretax impact less 15 million period 2006 2010 related share based awards issued prior year end 2005 consolidated statements operations full impact adopting sfas 123r cannot accurately estimated time depend market value amount share based awards granted future periods december 2004 fasb issued fasb staff position fas 1092 “accounting disclosure guidance foreign earnings repatriation provision within american jobs creations act 2004” “ajca” ajca introduces limited time 85 dividends received deduction repatriation certain foreign earnings us taxpayer repatriation provision provided certain criteria met sfas 1092 provides accounting disclosure guidance repatriation provision provide material benefit company december 2004 fasb issued sfas 151 “inventory costs amendment arb 43 chapter 4” requires abnormal amounts idle facility expense freight handling costs wasted material spoilage recognized currentperiod charges addition statement requires allocation fixed production overheads costs conversion based normal capacity production facilities sfas 151 effective fiscal years beginning june 15 2005 company adopt statement required management believe adoption material effect company’s results operations financial condition liquidity may 2005 fasb issued sfas 154 “accounting changes error corrections” sfas 154 requires restatement prior periods’ financial statements changes accounting principle unless impracticable determine either periodspecific effects cumulative effect change also sfas 154 requires retrospective application change accounting principle limited direct effects change sfas 154 effective accounting changes corrections errors made fiscal years beginning december 15 2005 management believe adoption sfas 154 material impact company’s consolidated financial statements item 7aitem 7 management’s discussion analysis financial condition results operations read following discussion analysis conjunction “selected financial data” consolidated financial statements related notes included elsewhere annual report form 10k overview global network marketing company sells weight management nutritional supplement personal care products pursue mission “changing people’s lives” providing financially rewarding business opportunity distributors quality products distributors customers seek healthy lifestyle one largest network marketing companies world net sales approximately 19 billion year ended december 31 2006 sell products 63 countries network 15 million independent distributors china order comply local legislation sell products retail stores employed sales force believe quality products effectiveness distribution network coupled geographic expansion primary reasons success throughout 27year operating history offer products three principal categories weight management products nutritional supplements refer “targeted nutrition” personal care products refer “outer nutrition®” products often sold programs comprised series related products designed simplify weight management nutrition consumers maximize distributors’ crossselling opportunities industrywide factors affect us competitors include increasing prevalence obesity aging worldwide population driving demand nutrition wellnessrelated products recruitment retention distributors opportunities challenges upon focused retailing products recruitment retention distributors improving distributor productivity new markets penetrating existing markets including china globalizing successful distributor methods operation nutrition clubs introducing new products developing niche market segments investing infrastructure july 2006 changed geographic units four seven units part ongoing realignment growth efforts changes intended create growth opportunities distributors support faster decision making across organization reducing layers management improve sharing ideas tools accelerate growth high potential markets new geographic units report revenue • north america consists us canada jamaica dominican republic • mexico central america consists mexico costa rica panama • brazil • south america southeast asia includes new zealand australia excludes brazil • emea consists europe middle east africa • greater china consists china taiwan hong kong • north asia consists japan korea historical information presented related geographic units reclassified conform current geographic presentation key nonfinancial measure focus volume points royalty basis volume points essentially weighted unit measure product sales volume useful measure us excludes impact foreign currency fluctuations ignores differences generated varying retail pricing across geographic markets general increase volume points particular group country directionally indicates increase local currency net sales volume points geographic unit number new supervisors geographic unit reporting period another key nonfinancial measure focus number distributors qualified new supervisors compensation system distributors qualify supervisor status based volume points growth number new supervisors general indicator level distributor recruitment generally drives net sales particular country group number supervisors retention rates geographic unit requalification period compensation system requires supervisor requalify status year prior february year delete rank supervisor distributors satisfy supervisor qualification requirements preceding twelve months distributors meet supervisor requirements time year promoted supervisor status time including supervisors deleted subsequently requalified supervisors must requalify annually requalification period covers twelve months starting february ending following january number supervisors geographic unit reporting dates normally higher number supervisors geographic unit requalification period supervisors requalify relevant twelvemonth period dropped rank supervisor following february latest twelve month requalification period ending january 2007 approximately 425 percent supervisors requalified order increase retailing products modified requalification criteria 2005 retain supervisors since supervisors purchase products resale distributors consumers comparisons supervisor totals yeartoyear period basis good indicators recruitment retention efforts different geographic units value average monthly purchase herbalife products supervisors remained relatively constant time consequently increases sales driven primarily retention supervisors recruitment retention distributors rather increases productivity overall supervisor base provide distributors products support material training special events competitive compensation program distributor wants pursue herbalife business opportunity distributor responsible growing business personally pays sales activities related attracting new customers recruiting distributors hosting events herbalife opportunity meetings success training seminars advertising herbalife’s products purchasing using promotional materials tshirts buttons caps utilizing paying direct mail print material brochures flyers catalogs business cards posters banners telephone book listings purchasing inventory sale use samples training mentoring following person via phone internet customers recruits use herbalife products andor pursue herbalife business opportunity presentation “retail sales” represent gross sales amounts invoices distributors distributor allowances defined “net sales” reflect distribution allowances handling freight income represent collect recognize net sales financial statements discuss retail sales fundamental role compensation systems internal controls operations including role basis upon distributor discounts royalties bonuses awarded addition used basis certain information included daily monthly reports reviewed management however measure accordance generally accepted accounting principles us gaap consider retail sales isolation substitute net sales consolidated income cash flow statement data prepared accordance gaap measure profitability liquidity reconciliation net sales retail sales presented “results operations” “product sales” represent actual product purchase price paid us distributors giving effect distributor discounts referred “distributor allowances” approximate 50 retail sales prices distributor allowances percentage sales may vary country depending upon regulatory restrictions limit otherwise restrict distributor allowances “gross profit” consists net sales less “cost sales” represents prices pay raw material suppliers manufacturers products well costs related product shipments duties tariffs freight expenses relating shipment products distributors importers similar expenses “royalty overrides” significant expense consist • royalty overrides production bonuses total approximately 15 7 respectively retail sales weight management targeted nutrition outer nutrition® promotional products • mark hughes bonus payable senior distributors aggregate amount 1 retail sales weight management targeted nutrition outer nutrition® promotional products • discretionary incentive cash bonuses qualifying distributors royalty overrides generally earned based retail sales approximate aggregate 22 retail sales approximately 36 net sales royalty overrides together distributor allowances represent potential earnings distributors approximately 73 retail sales compensation distributors generally development retention improved productivity distributor sales organizations paid several levels distributors sale due restrictions direct selling china fulltime employed sales representatives china compensated wages bonuses benefits instead distributors earnings distributor allowances royalty overrides local country regulatory constraints may required modify typical distributor incentive plans described consequently total distributor discount percentage may vary time also offer reduced distributor allowances pay reduced royalty overrides respect certain products worldwide “operating margins” consist net sales less cost sales royalty overrides “selling general administrative expenses” represent operating expenses components include labor benefits sales events professional fees travel entertainment distributor marketing occupancy costs communication costs bank fees depreciation amortization foreign exchange gains losses miscellaneous operating expenses sales distributors outside united states made respective local currencies preparing financial statements translate revenues us dollars using average exchange rates additionally majority purchases suppliers generally made us dollars consequently strengthening us dollar versus foreign currency negative impact reported sales operating margins generate transaction losses intercompany transactions throughout last five years foreign currency exchange rates fluctuated significantly time enter foreign exchange forward contracts option contracts mitigate foreign currency exchange risk summary financial results net income year ended december 31 2006 increased 537 1431 million 192 per diluted share compared 931 million 128 per diluted share 2005 increase driven revenue growth primarily mexico us markets lower interest expense following debt refinancing july 2006 lower effective income tax rate net income 2006 included 143 million additional interest expense related refinancing arrangements july 2006 37 million tax benefit resulting international income tax settlement 27 million additional tax benefit refinancing transactions 22 million favorable impact adjustment income tax accrual 49 million unfavorable tax impact connection realignment growth plan fourth quarter 2006 partially offset 70 million expense connection adoption new accounting rules stock based compensation 124 million charge continued buildout china infrastructure net income 2005 included 142 million additional interest expense related clawback 95 notes favorable tax impact 23 million charge relating change allowance uncollectible royalty overrides receivables distributors third quarter 2005 noncash tax charge 55 million associated moving china subsidiary within global corporate structure second quarter 2005 overall appreciation foreign currencies 06 million unfavorable impact net income 2006 net sales year ended december 31 2006 increased 203 18855 million 15668 million 2005 increase reflects continued retailing success distributors using nutrition club operating method mexico us adopted similar methods another large distributor group within us significant success retailing model focus generating sales leads mailing free samples potential customers growth two markets accounted 652 overall increase net sales brazil south american countries also experienced significant sales growth net sales southeast asia primarily due opening malaysia january 2006 continued expansion chinese market 42 stores 21 provinces expect 100 stores 30 provinces end 2007 expansion china resulted 269 million increase net sales 165 overall increase greater china region net sales regions europe north asia flat 56 respectively compared net sales 2005 overall appreciation foreign currencies 152 million favorable impact net sales 2006 representing 10 total sales increase results operations results operations periods described necessarily indicative results operations future periods depend upon numerous factors including ability recruit new distributors retain existing distributors open new markets penetrate existing markets introduce new products programs help distributors increase retail efforts develop niche market segments following table sets forth selected results operations expressed percentage net sales periods indicated year ended december 31 2006 compared year ended december 31 2005 net sales following chart reconciles retail sales net sales geographic region changes net sales directly associated recruiting retention distributor force retailing products quality completeness product offerings distributor force sell number countries operate management’s role incountry corporate level provide distributors competitive broad product line encourage strong teamwork leadership among chairman’s club president’s team distributors offer leading edge business tools make business herbalife simple management uses distributor marketing program coupled educational motivational tools promotions incentivize distributors increase recruiting retention retailing turn affect net sales tools include corporate sales events extravaganzas world team schools large groups distributors gather thus allowing network distributors learn recruiting retention retailing techniques leading distributors become familiar market sell products business opportunities accordingly management believes development motivation programs increase productivity supervisor network expenses programs included selling general administrative expenses sales driven several factors including number productivity distributors supervisors continually build educate motivate respective distribution sales organizations also use event nonevent product promotions motivate distributors increase recruiting retention retailing activities promotions prizes ranging qualifying events prizes vacations costs promotions included selling general administrative expenses factors described helped distributors increase business turn driven growth business following net sales geographic unit discussion details factors describes unique growth factors specific certain major countries believe correct business foundation coupled ongoing training promotional initiatives required increase recruiting retention distributors retailing products correct business foundation includes strong country management works closely distributor leadership unified distributor leadership broad product line appeals local consumer needs favorable regulatory environment scalable stable technology platform attractive distributor marketing plan initiatives success training seminars world team schools promotional events regional extravaganzas integral components developing highly motivated educated distributor sales organization work toward increasing recruitment retention distributors strategy continue include creating maintaining growth within existing markets expanding new markets expect increase spending selling general administrative expenses maintain stimulate sales growth making strategic investments new initiatives new markets addition new ideas distributor business methods generated regional markets either distributors country management corporate management examples nutrition clubs mexico total plan brazil wellness coach france sampling program us generation herbalife genh many markets described “net sales” management’s strategy review applicability expanding successful country initiatives throughout region andor globally appropriate financially support globalization initiatives north america net sales north america increased 542 million 178 year ended december 31 2006 compared 2005 local currency net sales increased 174 year ended december 31 2006 compared 2005 fluctuation foreign currency rates positive impact 10 million net sales year ended december 31 2006 overall increase result net sales growth us 535 million 188 year ended december 31 2006 us continues benefit strong retailing especially increasing latino distribution base improved retention distributor force retails products product line business opportunity attractive demographics country us also expanded branding efforts include sponsorship avp volleyball tour bay breakers run 2006 amgen tour california bicycle race aeg home depot center torrance ca 2006 nautica triatholon various new promotions including 2006 active world team promotion 2006 president team challenge 2006 introduced several new products including convenient water mixable version top selling formula one shake reformulated reduced retail price version garden 7tm product nourifusion personal care line individual use packets recently launched best defense skin activator line extensions believe activities critical maintain expand upon positive momentum created within us distributors sales force believe 2007 sales north america continue positive year growth primarily result expected continuation strong momentum us rapid success expansion nutrition club daily method operation dmo increased distribution focus providing samples product individual use packets support retailing recruiting efforts distributors plan open new sales center phoenix az first quarter 2007 particular stimulate sales within vicinity new sales center mexico central america net sales mexico central america year ended december 31 2006 increased 1569 million 714 compared 2005 local currency net sales year ended december 31 2006 increased 720 compared 2005 fluctuation foreign currency rates unfavorable impact 14 million net sales year ended december 31 2006 overall increase result net sales growth mexico 1543 million 705 year ended december 31 2006 compared 2005 increase new supervisors along continued expansion distributors adopting nutrition clubs dmo contributed net sales growth mexico improved distributor retention rate 57 supervisor growth 819 december 31 2006 compared december 31 2005 estimate distributors operating approximately 34000 nutrition clubs mexico 2006 opened additional sales center mexico city held presidents team tour attended approximately 9000 distributors hosted mexico extravaganza mexico city attended 11000 distributors held two active supervisor schools approximately 4300 distributors attended additionally relocated mexico headquarters main warehouse guadalajara plan open new sales center mexico city support expansion business december 2006 held several supervisor training schools 11500 distributors attended believe full year 2007 sales mexico central america flat compared 2006 sales levels believe root causes declining yearoveryear growth rate related infrastructure training distributor business practice issues outlined infrastructure plan double distributor access points products improve overall customer service experience fourth quarter 2006 added three new third party sales centers intend add another six first half 2007 improve product availability remote areas developed comprehensive training plan mexican distributor leadership improve quality service nutrition club customers also implementing extensive training compliance auditing program surrounding nutrition club dmo promote distributor best practices believe hampering nutrition club growth believe efforts result mexico sales regaining momentum towards second half year 2007 bring full year net sales levels even full year 2006 brazil net sales brazil increased 265 million 237 year ended december 31 2006 compared 2005 local currency net sales increased 111 year ended december 31 2006 compared 2005 fluctuation foreign currency rates favorable impact 142 million net sales year ended december 31 2006 net sales growth trend brazil result strong supervisor growth 150 december 31 2006 compared 2005 strong distributor leadership highly effective country management team introduction new distributor promotion launched third quarter 2006 addition expansion total plan lead generation method introduction nutrition club method dmo market key catalysts growth year held world team school attended 4500 distributors launched nourifusion personal care line additionally held brazil extravaganza december 2006 approximately 11000 distributors attended believe 2007 sales brazil continue positive year growth primarily result increase nutrition club dmo plans refine product portfolio help us compete aggressively personal care industry leveraging product knowledge total plan dmo well expanding locally manufactured products although net sales brazil expected increase 2007 year basis began experiencing slower revenue growth rate 2006 expected continue 2007 south america southeast asia net sales south america southeast asia increased 680 million 518 year ended december 31 2006 compared 2005 local currency net sales increased 498 year ended december 31 2006 compared period 2005 fluctuation foreign currency rates 25 million favorable impact net sales year ended december 31 2006 overall increase attributable mainly net sales increases colombia argentina venezuela bolivia opening malaysia february 2006 new market year held extravaganza southeast asia region bangkok thailand attended 15000 distributors 13 countries held south america extravaganza brazil held supervisor mega schools south american markets reaching 6500 distributors conducted world training school korea approximately 5000 distributors attended opened peru december 2006 colombia argentina venezuela bolivia experienced sales increases 2330 675 632 1327 respectively year ended december 31 2006 growth result new supervisor growth positive momentum local events including millionaires’ retreats held panama pucon chile sponsored activities bogota colombia marathon third quarter 2006 several new product launches cell activator cell u loss chile total control venezuela opened malaysia market february 2006 10000 people attended various opening events net sales year ended december 31 2006 253 million december 2006 opened peru 63rd country believe 2007 sales south america southeast asia continue positive year growth primarily result opening peru continued momentum argentina opening el salvador february 2007 planned opening paraguay 2007 ability respond quickly distributor consumer needs result realignment growth efforts emea net sales europe remained flat nominal increase 27 million 05 year ended december 31 2006 compared 2005 local currency net sales increased 06 year ended december 31 2006 compared 2005 fluctuation foreign currency rates unfavorable impact net sales 02 million year ended december 31 2006 portugal france spain continued grow experienced sales increases 419 243 156 respectively germany netherlands continued declines net sales 199 202 respectively year ended december 31 2006 compared 2005 first quarter 2006 decentralized regional call centers italy france netherlands effort improve service support distributors previously serviced united kingdom process also opened first sales center netherlands additionally third quarter extravaganza held athens greece attended 15000 distributors 40 countries held regional world team school lisbon portugal approximately 7500 world tab members attended net sales increases portugal france spain continued primarily due well balanced performance across distributor retailing recruiting retention efforts united distributor leadership working closely local management program focus total plan addition increasing emphasis good health nutrition france supported promoted local nutritionists year two nutrition advisory board members appointed france spain decline germany primarily driven loss momentum resulting decrease supervisors 253 december 31 2006 compared december 31 2005 germany recently constituted strategy group comprised distributor leaders regional management focused turnaround initiatives business activity well brand building new product introductions significant distributor training undertaken concentrating long term customers nutrition clubs wellness coaching dmo’s addition improved distributor communications key focus new online tools provided net sales decline netherlands primarily driven lower recruiting new distributors reconstituted distributor strategy group working closely regional management focused initiatives reverse trend included national supervisor recruitment drive launch liftofftm june 2006 highly successful spring spectacular event appointment member global nutritional advisory board progress made turnaround expected slow germany netherlands net sales 2007 expected levels 2006 countries expect 2007 net sales emea flat compared 2006 identified several highpotential markets russia poland developing strategic initiatives along distributors grow sales increase local branding activities includes sponsoring london triathlon moscow marathon italian beach volleyball championship nice ironman triathlon madrid triathlon intended continually improve corporate brand reputation market also enhancing distributor communication processes training introduction new products region notably liftofftm introduced 17 markets emea group 2006 additionally launched formula 1 cookies cream lisbon world team school greater china greater china net sales increased 185 million 165 year ended december 31 2006 respectively compared 2005 local currency net sales increased 165 year ended december 31 2006 compared 2005 fluctuation foreign currency rates impact net sales year ended december 31 2006 overall increase net sales attributable sales increase china taiwan hong kong continued experience decline sales net sales china increased 269 million 321 million year ended december 31 2006 compared 2005 since march 2005 opened 42 retail stores 21 provinces throughout china net sales taiwan decreased 36 million 40 year ended december 31 2006 compared 2005 local currency net sales taiwan decreased 31 year ended december 31 2006 compared 2005 fluctuation foreign currency rates unfavorable impact net sales 09 million year ended december 31 2006 decrease net sales primarily attributable loss focus local distributor leadership key members 2006 attention primarily directed towards opening malaysia emerging business opportunity china saw trend improve 4th quarter sales taiwan increased 139 compared 2005 2006 invested incremental 200 china infrastructure including working capital 56 million capital expenditures 34 million net sales hong kong decreased 48 million 288 year ended december 31 2006 compared 2005 decline net sales primarily result loss momentum attributable focus emerging opportunity china resulting decrease supervisors 244 december 31 2006 compared december 31 2005 believe 2007 sales greater china continue positive year growth primarily result continued expansion retail presence continued efforts enhance product portfolio china expect 100 stores 30 provinces end 2007 currently awaiting approval direct selling license china approved allow sales growth accelerate china north asia north asia net sales decreased 81 million 57 year ended december 31 2006 compared 2005 local currency net sales decreased 50 year ended december 31 2006 compared 2005 fluctuation foreign currency rates unfavorable impact 09 million net sales year ended december 31 2006 decrease net sales north asia attributable decrease net sales japan discussed net sales japan decreased 162 million 171 year ended december 31 2006 compared 2005 decline sales primarily attributable increased competition new companies entering market spite decrease net sales number new distributors supervisor retention rate improving compared period last year improved retention rate caused increase number distributors taking advantage modified requalification criteria believe 2007 sales north asia begin positive year growth believe modified requalification criteria along new sales center osaka new products local promotions lead increased sales 2007 plan remain focused reinvigorating distributor leadership exporting successful dmos market sales product category continued emphasis science weight management nutrition recent years resulted product introductions shapeworkstm personalized meal replacement program formula 1 instant nutritional snack mix niteworkstm supports energy circulatory vascular health garden 7tm provides seven servings fruits vegetables liftofftm innovative effervescent energy product due launch products together continued positive sales momentum discussed net sales weight management products targeted nutrition products increased higher rate entire company net sales declines outer nutrition reflects country mix along distributors shifting procedures products sold dmo primarily nutrition clubs expect shifts within categories time launch new products new dmo’s shift buying patterns gross profit gross profit 15052 million year ended december 31 2006 compared 12510 million 2005 percentage net sales gross profit year ended december 31 2006 remained flat 798 compared period 2005 generally gross profit percentages vary significantly percentage net sales due product country mix currency fluctuation importation product cost provisions slow moving obsolete inventory additionally believe ability mitigate ingredient manufacturing cost increases suppliers raising prices products shifting product sourcing alternative manufacturers royalty overrides royalty overrides percentage net sales 358 year ended december 31 2006 compared 355 period 2005 increase year ended december 31 2006 primarily due favorable pretax impact 40 million relating change allowance uncollectible royalty overrides receivables distributors third quarter 2005 generally ratio varies slightly period due changes mix products countries full royalty overrides paid certain products certain countries due structure global compensation plan expect see significant fluctuations royalty overrides percent net sales selling general administrative expenses selling general administrative expenses percentage net sales remained flat 304 year ended december 31 2006 compared period 2005 unfavorable impact foreign currency fluctuations 97 million year ended december 31 2006 year ended december 31 2006 selling general administrative expenses increased 967 million 5730 million 4763 million 2005 increase included 475 million higher labor benefits due primarily normal merit increases severance related realignment growth plan discussed note 13 consolidated financial statements higher compensation costs associated employee sales representatives china higher stock based compensation expenses mostly adopting new accounting rules stock based compensation 86 million relating legal litigation expenses 26 million professional fees primarily associated consulting expense realignment growth plan 108 million higher occupancy expenses primarily due new facilities duplicate rent transitioned new facilities 2006 52 million higher employees bonuses 59 million higher depreciation expenses increases partially offset 99 million lower amortization expenses 26 million lower advertising promotion expenses expect 2007 selling general administrative expenses increase absolute dollars 2006 levels reflecting general salary merit increases continued investments china various sales growth initiatives including sales events promotions begin see labor savings 2007 resulted realignment growth plan completed fourth quarter 2006 result initiatives selling general administrative expenses percentage net sales remain 2006 levels net interest expense net interest expense 395 million year ended december 31 2006 compared 439 million 2005 interest expense 2006 lower primarily due redemption 1650 million principal amount 912 notes due 2011 repayment prior credit facility originally entered december 21 2004 prior credit facility 796 million third quarter 2006 partially offset recapitalization expenses noted table 2004 exercised contract provision redeem 40 1100 million 912 notes required notice period redemption completed february 4 2005 premium writeoff deferred financing fees 142 million associated redemption included interest expense first quarter 2005 third quarter 2006 repaid amounts outstanding prior credit facility 796 million redeemed 1650 million aggregate principal amount 912 notes premium writeoff deferred financing fees 229 million associated recapitalization included interest expense 2006 part recapitalization entered 300 million senior secured credit facility new credit facility borrowed 2000 million pursuant term loan new credit facility september 2006 prepaid 200 million new term loan resulting approximately 01 million additional interest expense writeoff deferred financing fees management’s expectations continue prepay outstanding debt 2007 restructuring costs july 2006 initiated realignment employee base part realignment growth plan incurred 75 million severance related costs fourth quarter 2006 expect complete realignment 2007 corresponding severance related cost 2007 expected approximately 10 million december 31 2006 accrued liability employees’ severance retention related costs 51 million income taxes income taxes 743 million year ended december 31 2006 compared 820 million 2005 percentage pretax income estimated effective income tax rate 342 year ended december 31 2006 compared 468 2005 decrease effective tax rate year ended december 31 2006 compared 2005 caused primarily impact nondeductible interest recapitalization charges 2005 settlement international tax audit 2006 tax benefit bond redemption 2006 22 million favorable impact adjustment income tax accrual fourth quarter 2006 excluding effects settlement international tax audit tax benefit bond redemption items effective tax rate year ended december 31 2006 would 380 foreign currency fluctuations currency fluctuations unfavorable impact 06 million net results year ended december 31 2006 compared current year net results would using last year’s foreign exchange rates year ended december 31 2006 regional effects favorable 01 million north america unfavorable 34 million mexico central america favorable 13 million brazil favorable 10 million south america southeast asia favorable 27 million emea favorable 07 million greater china unfavorable 30 million north asia year ended december 31 2005 compared year ended december 31 2004 net sales management’s discussion analysis financial condition results operations year ended december 31 2005 2004 changed conform december 31 2006 presentation due change geographic units four seven units july 1 2006 following chart reconciles retail sales net sales changes net sales directly associated recruiting retention distributor force retailing products quality completeness product offerings distributor force sell number countries operate management’s role incountry corporate level provide distributors competitive broad product line encourage strong teamwork leadership among chairman’s club president’s team distributors offer leading edge business tools make business herbalife simple management uses distributor marketing program coupled educational motivational tools incent distributors drive recruiting retention retailing turn affect net sales tools include corporate sales events extravaganzas world team schools large groups distributors gather thus allowing network distributors learn recruiting retention retailing techniques leading distributors become familiar market sell products business opportunities accordingly management believes development motivation programs increase productivity supervisor network expenses programs included selling general administrative expenses sales driven several factors including number productivity distributor supervisors continually build educate motivate respective distribution sales organizations also use event nonevent product promotions motivate distributors increase recruiting retention retailing activities promotions prizes ranging qualifying events vacations qualification parties distributors meet certain selling recruiting goals costs promotions included selling general administrative expenses factors described driven growth business following net sales geographic region discussion details factors describes unique growth factors specific certain major countries company believes correct business foundation coupled ongoing training promotional initiatives required increase recruiting retention distributors retailing company’s products correct business foundation includes strong country management works closely distributor leadership unified distributor leadership broad product line appeals local consumer needs favorable regulatory environment scalable stable technology platform attractive distributor marketing plan initiatives success training seminars world team schools promotional events regional extravaganzas integral components developing highly motivated educated distributor sales organization work toward increasing recruitment retention distributors company’s strategy continue include creating maintaining growth within existing markets expect increase spending selling general administrative expenses maintain stimulate sales growth making strategic investments new initiatives addition new ideas generated regional markets either distributors country management corporate management examples nutrition clubs mexico total plan brazil genh us described net sales discussion management’s strategy review applicability expanding successful country initiatives throughout region andor globally appropriate financially support globalization initiatives north america net sales north america increased 325 million 120 year ended december 31 2005 compared 2004 local currency net sales increased 116 year ended december 31 2005 compared 2004 fluctuation foreign currency rates positive impact 12 million net sales year ended december 31 2005 overall increase result net sales growth us 318 million 126 year ended december 31 2005 us continues benefit strong country distributor leadership focuses recruiting retention distributor force retails product line business opportunity attractive demographics country net sales growth us evidenced increased number supervisors 47 december 31 2005 compared december 31 2004 volume point increase 141 compared prior year result numerous steps taken 2004 2005 improve business us including establishment dedicated us country management team branding efforts sponsorship jp morgan chase tennis tournament avp volleyball tour nautica malibu triathlon various promotions 2005 president’s team challenge world team bonus atlanta challenge connection 25th anniversary extravaganza worldwide cup promotion net sales exceeded annual results 2004 25th anniversary extravaganza two new products introduced liftofftm nourifusiontm liftofftm represents company’s entry energy drink market intended support genh program attract younger demographic segment distributor organization nourifusiontm supports total plan method operation strategic launch improve diversity product portfolio since skin care outer nutrition category least developed 2005 october 2005 introduced comprehensive heart health line incorporates niteworkstm corecomplextm trishieldtm megagarlictm herbalifelinetm endorsed dr louis ingarro world team schoolleadership development weekend held october 2005 launched 2006 worldwide promotion active world team believe coupled product launches branding initiatives positive impact sales growth 2006 mexico central america net sales mexico central america year ended december 31 2005 increased 1167 million 1132 compared 2004 local currency net sales year ended december 31 2005 increased 1044 compared 2005 fluctuation foreign currency rates favorable impact 90 million net sales year ended december 31 2005 overall increase result net sales growth mexico 1165 million 1138 year ended december 31 2005 compared 2004 continued net sales growth mexico evidenced increased number supervisors 773 december 31 2005 compared december 31 2004 reflects renewed emphasis distributor customer retention programs nutrition clubs new innovative means distributors retailing products new customers may eventually become distributors products costs set nutrition club generally nominal borne solely distributor distributors operating 25000 nutrition clubs worldwide approximately 18000 open mexico brazil net sales brazil increased 432 million 631 year ended december 31 2005 compared 2004 local currency net sales increased 350 year ended december 31 2005 compared 2004 fluctuation foreign currency rates favorable impact 193 million net sales year ended december 31 2005 continued net sales growth brazil evidenced increased number supervisors 333 december 31 2005 compared december 31 2004 result expansion total plan strong distributor leadership highly effective country management team good product portfolio total plan low cost lead generating method distributors use personal care line products offer facials obtain referrals concept specifically supports retailing recruiting initiatives catalyst growth brazil december 2005 brazil held 10th anniversary event 10000 distributors attendance event new products firm cell radiant c scrub cleanser body lotion launched support total plan reinforcing objective increase recruitment retention retailing distributors demonstration online distributor tool bizworks provided highlight benefits real time organizational volume reports means improve efficiency distributors positive momentum event help continue sales growth trend 2006 south america southeast asia net sales south america southeast asia increased 266 million 254 year ended december 31 2005 compared 2004 local currency net sales increased 243 year ended december 31 2005 compared 2004 fluctuation foreign currency rates 13 million favorable impact net sales year ended december 31 2005 overall increase attributable mainly net sales increases chile argentina venezuela india chile argentina venezuela experienced sales increases 1099 721 626 respectively year ended december 31 2005 compared 2004 net sales growth trend reflects strong supervisor growth 1035 641 406 respectively additionally growth result positive momentum local events including introduction nutrition club dmo genh educational meetings countries india experienced sales increase 323 year ended december 31 2005 compared 2004 net sales growth trend primarily result strong supervisor growth 336 emea net sales emea increased 91 million 17 year ended december 31 2005 compared 2004 local currency net sales increased 10 year ended december 31 2005 compared 2004 fluctuation foreign currency rates positive impact net sales 35 million year ended december 31 2005 throughout 2004 europe experienced sales growth compared 2003 partly due billion dollar challenge promotion first second quarters 2004 sales growth expected sustainable 2005 markets sustain growth spain france south africa two key markets germany netherlands experienced sales declines 208 162 respectively year ended december 31 2005 net sales spain 76 million 231 year ended december 31 2005 compared 2004 increase net sales primarily due unified distributor leadership increasing emphasis locally health nutrition continuing positive impact certain promotions 2005 france one largest european markets net sales 66 million 258 year ended december 31 2005 compared 2004 partly due adoption new nutritional distributor training program special vacation promotion net sales south africa 71 million 517 compared 2004 primarily due unified distributor leadership successful promotional activity additionally south africa celebrated 10th anniversary business country major sales event third quarter appointed new country manager germany new management team developed turnaround plan 2006 reengage local distributor leadership rebuild confidence among distributors improve recruiting retention german leadership began work together improve brand image implemented genh initiative formed executive committee focus initiatives netherlands took steps reengage local distributor leadership promote genh initiative within country concluded year large successful world team school budapest hungary 8000 european distributors attended product leadership business opportunity training sessions event specific training nutrition clubs 2006 active world team promotion introduced greater china greater china net sales increased 208 million 228 year ended december 31 2005 compared 2004 local currency net sales increased 186 year ended december 31 2005 compared 2004 fluctuation foreign currency rates positive impact net sales 36 million year ended december 31 2005 overall increase attributable mainly increase taiwan net sales taiwan increased 184 million 256 year ended december 31 2005 2004 due primarily increase number supervisors 247 december 31 2005 compared time last year highly engaged distributor leadership increased local distributor trainings initiatives promote individual recognition well performing distributors new product launches positive momentum world team school held singapore october 2005 25th anniversary atlanta extravaganza worldwide cup promotion singapore world team school attended approximately 5000 distributors received product leadership business opportunity training net sales south korea increased 122 million 340 year ended december 31 2005 compared 2004 improvement 2005 result positive momentum sales events promotions discussed unified focus korea’s country distributor leadership also late 2004 introduced shapeworkstm south korea positive impact recruiting retailing initiatives 2005 north asia north asia net sales increased 81 million 60 year ended december 31 2005 compared 2004 local currency net sales increased 37 year ended december 31 2005 compared 2004 fluctuation foreign currency rates favorable impact 32 million net sales year ended december 31 2005 overall increase net sales attributable increase south korea japan continued experience decline sales net sales south korea increased 122 million 340 year ended december 31 2005 compared 2004 improvement 2005 result positive momentum sales events promotions discussed unified focus korea’s country distributor leadership also late 2004 introduced shapeworkstm south korea positive impact recruiting retailing initiatives 2005 net sales japan decreased 41 million 41 year ended december 31 2005 compared 2004 local currency net sales japan decreased 23 year ended december 31 2005 compared 2004 fluctuation foreign currency rates negative 18 million impact net sales year ended december 31 2005 net sales decline 2005 continuation sixyear downward trend japan albeit slower rate driven primarily ineffective prior country management properly motivated distributor leadership lack new product introductions third quarter 2004 appointed new country manager focused uniting motivating distributor leadership improve recruiting retention distributors expanded product line address local country demographic needs second quarter 2005 launched nourifusiontm supported launch formal total plan training distributors nourifusiontm international business pack’s also created synchronize method operation introduction kit positive momentum also generated worldwide cup promotion 2005 third quarter 2005 niteworkstm introduced japan special vacation promotion launched sales product category increased emphasis science weight management nutrition past two years resulted product introductions niteworkstm garden 7tm introduction shapeworkstm personalized meal replacement program due launch shapeworkstm march 2004 united states ongoing rollout countries introduction new outer nutrition® products like nourifusiontm increased use total plan distributors brazil worldwide uses outer nutrition products foundation net sales weight management products outer nutrition® products increased higher rate net sales inner nutrition products sales outer nutrition products increased 327 year ended december 31 2005 greater rate growth category literature promotional net product buybacks returns product categories increased due primarily increase literature sales selling starter kits new distributors decrease returns refunds expect growth rates within categories vary time launch new products gross profit gross profit 12510 million year ended december 31 2005 compared 10398 million 2004 percentage net sales gross profit year ended december 31 2005 increased 794 798 compared 2004 generally gross profit percentages vary significantly percentage sales due product country mix ongoing cost reduction initiatives provisions slow moving obsolete inventory additionally believe ability mitigate ingredient manufacturing cost increases suppliers raising prices products shifting product sourcing alternative manufacturers royalty overrides royalty overrides percentage net sales 355 years ended december 31 2004 2005 favorable pretax impact 40 million relating change allowance uncollectible royalty overrides receivables distributors third quarter 2005 partially offset favorable pretax impact 24 million aged royalty checks third quarter 2004 generally royalty overrides percentage net sales varies slightly period due changes mix products countries varying royalty overrides paid certain products certain countries due structure global compensation plan coupled current country mix business expect see significant fluctuations royalty overrides percent net sales selling general administrative expenses selling general administrative expenses percentage net sales improved 304 year ended december 31 2005 compared 333 2004 improvement primarily reflects highly fixed nature sga cost structure financial leverage operating model sales increase unfavorable impact foreign currency fluctuations 82 million year ended december 31 2005 year ended december 31 2005 selling general administrative expenses increased 402 million 4763 million 4361 million 2004 increase included 231 million higher salaries benefits due primarily normal merit increases increased staffing higher incentive compensation 57 million relating legal litigation expenses additional professional fees primarily associated strengthening technology infrastructure 160 million additional advertising promotion expenses related primarily related 2005 worldwide cup promotion helped drive worldwide sales growth 54 million higher travel entertainment expenses 56 million higher occupancy cost support growth business increases partially offset 92 million lower monitoring fees expenses due termination related agreements whitney golden gate 98 million lower amortization expenses 07 million foreign exchange gain 2005 versus 19 million loss 2004 expect 2006 selling general administrative expenses increase absolute dollars 2005 levels reflecting general salary merit increases investments china various sales growth initiatives including sales events globalization best practices nutrition clubs total plan development directtoconsumer initiative percentage net sales expenses remain consistent 2005 levels net interest expense net interest expense 439 million year ended december 31 2005 compared 1233 million 2004 higher interest expense 2004 primarily due two recapitalizations 2004 noted table 82 million additional interest expense associated 2750 million principal amount 912 notes issued march 2004 part continuation fourth quarter 2004 recapitalization exercised contract provision redeem 40 110 million 912 notes required notice period redemption completed february 4 2005 premium writeoff deferred financing fees 142 million associated redemption included interest expense first quarter 2005 income taxes income taxes 820 million year ended december 31 2005 compared 297 million 2004 percentage pretax income estimated effective income tax rate 468 year ended december 31 2005 compared 1928 2004 decrease effective tax rate year ended december 31 2005 compared 2004 caused primarily impact less nondeductible interest including aforementioned nondeductible recapitalization charges period offsetting benefits 55 million noncash tax charge associated moving china subsidiary within global corporate structure second quarter 2005 increase taxes due impact worldwide transfer pricing tax structure result stronger expected revenue growth past several quarters management’s outlook midteens revenue growth rate continue throughout 2006 foreign currency fluctuations currency fluctuations favorable impact 108 million net results year ended december 31 2005 compared current year net results would using last year’s foreign exchange rates year ended december 31 2005 regional effects favorable 03 million north america favorable 27 million mexico central america favorable 39 million brazil favorable 02 million south america southeast asia favorable 07 million emea favorable 11 million greater china favorable 19 million north asia net results year ended december 31 2005 net income 931 million 128 per diluted share compared prioryear net loss 143 million loss 027 per diluted share net income reported includes effect recapitalization transaction expenses 142 million 715 million approximately 605 million net tax 2005 2004 respectively noncash tax charge 55 million associated moving china subsidiary within global corporate structure second quarter 2005 favorable aftertax impact 25 million relating change allowance uncollectible royalty overrides receivables distributors third quarter 2005 partially offset 15 million favorable aftertax impact aged royalties third quarter 2004 improvement net income result 196 increase net sales continued favorable impact appreciation foreign currencies lower interest income tax expense partially offset higher operating expenses primarily increased labor benefits incentive compensation promotion expense overall appreciation foreign currencies 108 million favorable impact net income year ended december 31 2005 liquidity capital resources historically met working capital expenditure requirements including funding expansion operations net cash flows provided operating activities principal source liquidity operating cash flows variations sales products would directly affect availability funds material restrictions ability transfer remit funds among international affiliated companies year ended december 31 2006 generated 1844 million operating cash flows compared 1434 million 2005 increase cash generated operations reflected increase operating income 379 million primarily driven 203 growth net sales capital expenditures including capital leases year ended december 31 2006 669 million compared 326 million 2005 majority expenditures represented development internet tools distributors relocation inglewood office warehouse facility memphis expansion retail stores china expect incur capital expenditures 450 million 2007 continue invest china operating loss china 2005 22 million 2006 operating income 17 million currently anticipate operating income approximately 15 million 2007 addition total capital expenditures working capital 20 million expansion retail stores 2006 invested approximately 42 million capital expenditures china february 2005 redeemed 1100 million principal amount 912 notes issued march 2004 cash amount 1241 million including premium 105 million accrued interest 36 million interest expense 2005 includes redemption amount 142 million represents 105 million premium 37 million writeoff deferred financing cost discount connection debt refinancing july 2006 see redeemed remaining 1650 million principal amount 912 notes total amount 1878 million including premium 166 million accrued interest 62 million interest expense 2006 includes call premium 166 million 46 million writeoff discounts deferred financing costs terminated prior credit facility july 2006 connection debt refinancing prepaid amounts outstanding prior credit facility amounting 796 million interest expense third quarter 2006 includes 17 million writeoff deferred financing cost entered new credit facility 3000 million senior secured credit facility syndicate financial institutions lenders new credit facility comprises 2000 million term loan revolving credit facility 1000 million term loan matures july 21 2013 revolving credit facility available july 21 2012 term loan bears interest libor plus margin 15 revolver bears interest libor rate plus margin 125 borrowed 2000 million pursuant new term loan august 2006 september 2006 company made prepayment 200 million term loan resulting 01 million additional interest expense writeoff unamortized deferred financing costs december 31 2006 company obligated pay approximately 04 million new term loan every quarter june 30 2013 remaining principal july 21 2013 july 2006 also redeemed outstanding 01 million principal amount 1134 notes due 2010 following summarizes contractual obligations including interest december 31 2006 effect obligations expected liquidity cash flows future periods december 31 2006 positive working capital 1322 million cash equivalents 1543 million december 31 2006 compared 882 million december 31 2005 expect cash funds provided operations available borrowings new revolving credit facility provide sufficient working capital operate business make expected capital expenditures meet foreseeable liquidity requirements including debt service new term loan assurance however business service debt fund liquidity needs majority purchases suppliers generally made us dollars sales herbalife distributors generally made local currencies consequently strengthening us dollar versus foreign currency negative impact operating margins generate transaction losses intercompany transactions discussion foreign exchange contracts hedging arrangements see quantitative qualitative disclosures market risks described quarterly results operations contingencies time engaged routine litigation regularly review pending litigation matters involved establish reserves deemed appropriate management litigation matters probable loss estimate made herbalife international certain independent distributors named defendants purported class action lawsuit filed february 17 2005 superior court california county san francisco served herbalife international march 14 2005 minton v herbalife international et al case transferred los angeles county superior court plaintiff challenging marketing practices certain herbalife international independent distributors herbalife international various state laws prohibiting “endless chain schemes” insufficient disclosure assisted marketing plans unfair deceptive business practices fraud deceit plaintiff alleges freedom group system operated certain independent distributors herbalife international products places much emphasis recruiting encourages excessively large purchases product promotional materials distributors plaintiff also alleges freedom group pressured distributors disseminate misleading promotional materials plaintiff seeks hold herbalife international vicariously liable actions independent distributors seeking damages injunctive relief company believes meritorious defenses suit herbalife international certain distributors named defendants class action lawsuit filed july 16 2003 circuit court ohio county state west virginia mey v herbalife international inc et al complaint alleges certain telemarketing practices certain herbalife international distributors violate telephone consumer protection act tcpa seeks hold herbalife international vicariously liable practices distributors specifically plaintiffs’ complaint alleges several herbalife international’s distributors used prerecorded telephone messages contact prospective customers violation tcpa’s prohibition practices herbalife international’s distributors independent contractors distributors fact violated tcpa also violated herbalife’s policies require distributors comply applicable federal state local laws company believes meritorious defenses suit marketer dietary nutritional supplements products ingested consumers applied bodies currently subjected various product liability claims effects claims date material us reasonably possible range exposure currently existing claims material us believe meritorious defenses allegations contained lawsuits currently maintain product liability insurance annual deductible 10 million certain subsidiaries subject tax audits governmental authorities respective countries certain tax audits governmental authorities proposing significant amounts additional taxes related interest penalties due tax advisors believe substantial defenses allegations additional taxes owed vigorously contesting additional proposed taxes related charges matters may take several years resolve cannot sure ultimate resolution however opinion management adverse outcomes likely result material effect financial condition operating results opinion based belief losses suffer would material meritorious defenses although reserved amount believe represents likely outcome resolution disputes incorrect assessment may record additional expenses subsequent events previously disclosed february 2 2007 board directors received proposal whitney v lp affiliates acquire outstanding common shares price 3800 per share cash whitney v lp affiliates currently aggregate approximately 259 voting power share capital board directors established special committee consisting solely independent directors review proposal assurance enter transaction based information set forth forms 4 filed february 8 12 2007 form 13 ga filed february 14 2007 golden gate affiliated funds believe february 7 2007 golden gate affiliated funds longer beneficially common shares critical accounting policies consolidated financial statements prepared conformity accounting principles generally accepted united states require us make estimates assumptions affect reported amounts assets liabilities disclosures contingent assets liabilities date financial statements reported amounts revenue expenses year actual results could differ estimates consider following policies critical understanding judgments involved preparing financial statements uncertainties could impact results operations financial condition cash flows network marketing company sells wide range weight management products nutritional supplements personal care products within one industry segment defined statement financial accounting standards sfas 131 “disclosures segments enterprise related information” products manufactured third party providers sold independent distributors sell herbalife products retail consumers distributors sell products 63 countries throughout world organized managed geographic region first quarter 2003 elected aggregate operating segments one reporting segment management believes operating segments similar operating characteristics similar long term operating performance making determination management believes operating segments similar nature products sold product acquisition process types customers products sold methods used distribute products nature regulatory environment revenue recognized products shipped title passes independent distributor importer amounts billed freight handling costs included net sales generally receive net sales price cash credit card payments point sale related royalty overrides allowances product returns recorded merchandise shipped allowances product returns primarily connection buyback program provided time product shipped accrual based upon historic return rates country relevant return pattern reflects anticipated returns received period 12 months following original sale historically product returns buybacks significant product returns buybacks approximately 11 10 retail sales years ended december 31 2004 2005 2006 respectively material changes estimates recognized year ended december 31 2006 years ended december 31 2005 2004 respectively record reserves inventory provide estimated obsolete unsalable inventory based assumptions future demand products market conditions future demand market conditions less favorable management’s assumptions additional reserves could required likewise favorable future demand market conditions could positively impact future operating results previously reserved inventory sold reserved obsolete slow moving inventory totaling 62 million 80 million 114 million december 31 2004 2005 2006 respectively accordance sfas 144 “longlived assets” property plant equipment purchased intangibles subject amortization reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable recoverability assets held used measured comparison carrying amount asset estimated undiscounted future cash flows expected generated asset carrying amount asset exceeds estimated future cash flows impairment charge recognized amount carrying amount asset exceeds fair value asset assets disposed would separately presented balance sheet reported lower carrying amount fair value less costs sell longer depreciated assets liabilities disposed group classified held sale would presented separately appropriate asset liability sections balance sheet goodwill intangibles subject amortization tested annually impairment tested impairment frequently events circumstances indicate asset might impaired impairment loss recognized extent carrying amount exceeds asset’s fair value determination made reporting unit level consists two steps first company determines fair value reporting unit compares carrying amount second carrying amount reporting unit exceeds fair value impairment loss recognized excess carrying amount reporting unit’s goodwill intangibles implied fair value implied fair value determined allocating fair value reporting unit manner similar purchase price allocation accordance sfas 141 business combinations residual fair value allocation implied fair value reporting unit’s goodwill intangibles december 31 2006 goodwill approximately 1132 million marketing franchise 3118 million writedowns recognized year ended december 31 2006 goodwill reduced 2006 approximately 210 million due primarily effect settlement international tax audit related preacquisition period realization preacquisition net operating losses contingencies accounted accordance sfas 5 “accounting contingencies” sfas 5 requires record estimated loss contingency information available prior issuance financial statements indicates probable asset impaired liability incurred date financial statements amount loss reasonably estimated accounting contingencies legal income tax matters requires us use judgment many legal tax contingencies take years resolved generally time period increases uncertainties resolved likelihood changes estimate ultimate outcome increases deferred income tax assets established net operating loss carryforwards certain foreign subsidiaries reduced valuation allowance reflect amounts estimated ultimately recognized net operating loss carryforwards expire varying amounts future period time realization income tax carryforwards dependent generating sufficient taxable income prior expiration carryforwards although realization assured believe likely net carrying value income tax carryforwards realized amount income tax carryforwards considered realizable however could change estimates future taxable income carryforward period adjusted account stockbased compensation accordance sfas 123r “sharebased payment” fair value recognition provisions statement sharebased compensation cost measured grant date based value award recognized expense vesting period determining fair value sharebased awards grant date requires judgment including estimating stock price volatility employee stock award exercise behaviors expected volatility primarily based upon historical volatility herbalife’s common stock due limited period puclic trading data common stock also validated volatility company peer group expected life awards based observed historical exercise patterns vary time stockbased compensation expense recognized statements income based awards ultimately expected vest amount expense reduced estiemated forfeitures sfas 123r requires forfeitures estimated time grant revised necessary subsequent periods actual forfeitures differ estimates forfeitures estimated based historical experience new accounting pronouncements july 2006 financial accounting standards board fasb issued fasb interpretation 48 “accounting uncertainty income taxes” interpretation fasb statement 109 “accounting income taxes” fin 48 fin 48 clarifies accounting reporting uncertainties income taxes recognized enterprise’s financial statements interpretation prescribes comprehensive model financial statement recognition measurement presentation disclosure uncertain tax positions taken expected taken income tax returns fin 48 adopted beginning fiscal year 2007 expect impact material consolidated financial statements june 2006 fasb ratified consensuses emerging issues task force eitf issue 063 “how taxes collected customers remitted governmental authorities presented income statement gross versus net presentation” eitf 063 eitf 063 clarifies scope issue includes tax assessed governmental authority directly imposed revenueproducing transaction seller customer indicates income statement presentation either gross basis net basis taxes within scope issue accounting policy decision disclosed furthermore taxes reported gross basis enterprise disclose amounts taxes interim annual financial statements period income statement presented adopt eitf 063 beginning fiscal year 2007 currently present sales taxes collected customers net basis include disclosure accounting policy consolidated financial statements upon adoption eitf 063 september 2006 fasb issued 157 “fair value measurement” defines fair value establishes framework measuring fair value accordance gaap expands disclosures fair value measurements provisions sfas 157 effective fiscal years beginning november 15 2007 currently evaluating impact adopting sfas 157 september 2006 securities exchange commission issued staff accounting bulletin 108 “considering effects prior year misstatements quantifying misstatements current year financial statements” provides interpretive guidance effects carryover reversal prior year misstatements considered quantifying current year misstatement guidance effective fiscal years ending november 15 2006 allows onetime transitional cumulative effect adjustment beginningofyear retained earnings first fiscal year ending november 15 2006 errors previously deemed material guidance sab 108 adoption sab 108 2006 material effect consolidated financial statements item 7aitem 7 management’s discussion analysis financial condition results operations read following discussion analysis conjunction item 6 selected financial data consolidated financial statements related notes included elsewhere annual report form 10k overview global network marketing company sells weight management nutritional supplement energy fitness products personal care products pursue mission “changing people’s lives” providing financially rewarding business opportunity distributors quality products distributors customers seek healthy lifestyle one largest network marketing companies world net sales approximately 21 billion year ended december 31 2007 sell products 65 countries network 17 million independent distributors except china sell products retail stores employed sales force believe quality products effectiveness distribution network coupled geographic expansion primary reasons success throughout 28year operating history quarter ended june 30 2007 reorganized product categories better reflect distributors sell products programs products grouped four principal categories weight management targeted nutrition energy fitness products outer nutrition products often sold programs comprised series related products designed simplify weight management nutrition consumers maximize distributors’ crossselling opportunities industrywide factors affect us competitors include increasing prevalence obesity aging worldwide population driving demand nutrition wellnessrelated products recruitment retention distributors opportunities challenges upon focused retailing products recruitment retention distributors improving distributor productivity new markets penetrating existing markets including china globalizing successful distributor methods operation nutrition clubs introducing new products developing niche market segments investing infrastructure late 2007 changed geographic regions seven five regions part ongoing realignment growth plan updated regional structure allows us better support distributor leadership enhance synergies within regions new geographic regions report revenue • north america consists us canada jamaica • mexico central america consists mexico costa rica el salvador panama dominican republic • south america including brazil • emea consists europe middle east africa • asia pacific including countries former greater china north asia south east asia regions historical information presented annual report form 10k relating geographic regions reclassified conform current geographic presentation volume points geographic region key nonfinancial measure focus volume points royalty basis volume points essentially weighted unit measure product sales volume useful measure us excludes impact foreign currency fluctuations ignores differences generated varying retail pricing across geographic markets general increase volume points particular geographic region country indicates increase local currency net sales number new sales leaders geographic region reporting period another key nonfinancial measure focus number distributors qualified new sales leaders compensation system excluding china distributors qualify supervisor status based volume points growth number new sales leaders general indicator level distributor recruitment generally drives net sales particular country geographic region number supervisors retention rates geographic region requalification period compensation system requires supervisor requalify status year prior february order maintain 50 discount product eligible receive royalty payments february year demote rank supervisor distributors satisfy supervisor requalification requirements preceding twelve months requalification requirement apply new supervisors ie became supervisors subsequent january requalification prior year distributor statistics highlight calculation retention table reflects number sales leaders february subsequent annual requalification date supervisor retention rate year region number supervisors geographic region quarterly reporting dates normally higher number supervisors geographic region requalification period supervisors requalify relevant twelvemonth period dropped rank supervisor following february since supervisors purchase products resale distributors consumers comparisons supervisor totals yeartoyear period basis good indicators recruitment retention efforts different geographic regions value average monthly purchase herbalife products sales leaders remained relatively constant time consequently increases sales driven primarily retention supervisors recruitment retention distributors rather increases productivity overall supervisor base provide distributors products support materials training special events competitive compensation program distributor wants pursue herbalife business opportunity distributor responsible growing business personally pays sales activities related attracting new customers recruiting distributors hosting events herbalife opportunity meetings success training seminars advertising herbalife’s products purchasing using promotional materials tshirts buttons caps utilizing paying direct mail print material brochures flyers catalogs business cards posters banners telephone book listings purchasing inventory sale use samples training mentoring following person via phone internet customers recruits use herbalife products andor pursue herbalife business opportunity presentation “retail sales” represent gross sales amounts invoices distributors distributor allowances defined “net sales” reflect distribution allowances handling freight income represent collect recognize net sales financial statements discuss retail sales fundamental role compensation systems internal controls operations including role basis upon distributor discounts royalties bonuses awarded addition used basis certain information included daily monthly reports reviewed management however measure accordance generally accepted accounting principles us gaap consider retail sales isolation substitute net sales consolidated income cash flow statement data prepared accordance gaap measure profitability liquidity reconciliation net sales retail sales presented “results operations” “product sales” represent actual product purchase price paid us distributors giving effect distributor discounts referred “distributor allowances” approximate 50 retail sales prices distributor allowances percentage retail sales may vary country depending upon regulatory restrictions limit otherwise restrict distributor allowances “gross profit” consists net sales less “cost sales” represents prices pay raw material suppliers manufacturers products well costs related product shipments duties tariffs freight expenses relating shipment products distributors importers similar expenses “royalty overrides” significant expense consist • royalty overrides production bonuses total approximately 15 7 respectively retail sales weight management targeted nutrition energy fitness outer nutrition promotional products • mark hughes bonus payable senior distributors aggregate amount 1 retail sales weight management targeted nutrition energy fitness outer nutrition • discretionary incentive cash bonuses qualifying distributors royalty overrides generally earned based retail sales approximate aggregate 22 retail sales approximately 36 net sales royalty overrides together distributor allowances represent potential earnings distributors approximately 73 retail sales compensation distributors generally development retention improved productivity distributor sales organizations paid several levels distributors sale due restrictions direct selling china fulltime employed sales representatives china compensated wages bonuses benefits instead distributors earnings distributor allowances royalty overrides local country regulatory constraints may required modify typical distributor incentive plans described consequently total distributor discount percentage may vary time also offer reduced distributor allowances pay reduced royalty overrides respect certain products worldwide “operating margins” consist net sales less cost sales royalty overrides “selling general administrative expenses” represent operating expenses components include labor benefits sales events professional fees travel entertainment distributor marketing occupancy costs communication costs bank fees depreciation amortization foreign exchange gains losses miscellaneous operating expenses sales distributors outside united states made respective local currencies preparing financial statements translate revenues us dollars using average exchange rates additionally majority purchases suppliers generally made us dollars consequently strengthening us dollar versus foreign currency negative impact reported sales operating margins generate transaction losses intercompany transactions throughout last five years foreign currency exchange rates fluctuated significantly time enter foreign exchange forward contracts option contracts mitigate foreign currency exchange risk discussed detail item 7aitem 7 management’s discussion analysis financial condition results operations read following discussion analysis conjunction item 6 selected financial data consolidated financial statements related notes included elsewhere annual report form 10k overview global network marketing company sells weight management products nutritional supplements energy sports fitness products personal care products pursue mission “changing people’s lives” providing financially rewarding business opportunity distributors quality products distributors customers seek healthy lifestyle one largest network marketing companies world net sales approximately 24 billion year ended december 31 2008 december 31 2008 sold products 70 countries network 19 million independent distributors except china sell products retail stores employed sales force believe quality products effectiveness distribution network coupled geographic expansion primary reasons success throughout 29year operating history products grouped four principal categories weight management targeted nutrition energy sports fitness outer nutrition products often sold programs comprised series related products designed simplify weight management nutrition consumers maximize distributors’ crossselling opportunities industrywide factors affect us competitors include increasing prevalence obesity aging worldwide population driving demand nutrition wellnessrelated products recruitment retention distributors closely monitoring current global economic crisis company remains focused opportunities challenges retailing products recruiting retaining distributors improving distributor productivity opening new markets penetrating existing markets including china us brazil mexico russia globalizing successful distributor methods operation nutrition clubs introducing new products developing niche market segments investing infrastructure late 2008 changed geographic regions five six regions updated regional structure allows us better support distributor leadership enhance synergies within region new geographic regions report revenue • north america consists us canada jamaica • mexico central america consists mexico costa rica el salvador panama dominican republic honduras nicaragua guatemala • south america includes brazil • emea consists europe middle east africa • asia pacific consists asia excluding china new zealand australia • china historical information presented annual report form 10k relating geographic regions reclassified conform current geographic presentation volume points geographic region key nonfinancial measure focus volume points royalty basis volume points essentially weighted unit measure product sales volume useful measure rely excludes impact foreign currency fluctuations ignores differences generated varying retail pricing across geographic markets volume point measure aggregate region measure sales volume well sales volume trends general increase volume points particular geographic region country indicates increase sales volume results increase local currency net sales decrease volume points particular geographic region country indicates decrease sales volume results decreasing local currency net sales number new sales leaders geographic region reporting period another key nonfinancial measure focus number distributors qualified new sales leaders compensation system excluding china distributors qualify supervisor status based volume points changes total number sales leaders changes productivity sales leaders may cause volume points increase decrease fluctuation number new sales leaders general indicator level distributor recruitment number supervisors retention rates geographic region requalification period compensation system requires supervisor requalify status year prior february order maintain 50 discount product eligible receive royalty payments february year demote rank supervisor distributors satisfy supervisor requalification requirements preceding twelve months requalification requirement apply new supervisors ie became supervisors subsequent january requalification prior year distributor statistics highlight calculation retention table reflects number sales leaders february subsequent annual requalification date supervisor retention rate year region 1 china sales employees represent cumulative total employed sales force active inactive operating china marketing plan sell products retail stores begin annual reevaluation process commencing early 2009 determine ongoing sales employees china anticipate reduction figure following annual reevaluation process number supervisors geographic region quarterly reporting dates normally higher number supervisors geographic region requalification period supervisors requalify relevant twelvemonth period dropped rank supervisor following february since supervisors purchase products resale distributors consumers comparisons supervisor totals yeartoyear basis good indicators recruitment retention efforts different geographic regions value average monthly purchase herbalife products sales leaders remained relatively constant time consequently increases sales driven primarily retention supervisors recruitment retention distributors rather increases productivity overall supervisor base provide distributors products support materials training special events competitive compensation program distributor wants pursue herbalife business opportunity distributor responsible growing business personally pays sales activities related attracting new customers recruiting distributors hosting events herbalife opportunity meetings success training seminars advertising herbalife’s products purchasing using promotional materials tshirts buttons caps utilizing paying direct mail print material brochures flyers catalogs business cards posters banners telephone book listings purchasing inventory sale use samples training mentoring following person via phone internet customers recruits use herbalife products andor pursue herbalife business opportunity presentation “retail sales” represent gross sales amounts invoices distributors distributor allowances defined “net sales” reflect distribution allowances handling freight income represent collect recognize net sales financial statements discuss retail sales fundamental role compensation systems internal controls operations including role basis upon distributor discounts royalties bonuses awarded addition used basis certain information included daily monthly reports reviewed management however measure accordance generally accepted accounting principles us gaap consider retail sales isolation substitute net sales consolidated income cash flow statement data prepared accordance gaap measure profitability liquidity reconciliation net sales retail sales presented “results operations” “product sales” represent actual product purchase price paid us distributors giving effect distributor discounts referred “distributor allowances” approximate 50 retail sales prices distributor allowances percentage retail sales may vary country depending upon regulatory restrictions limit otherwise restrict distributor allowances “gross profit” consists net sales less “cost sales” represents prices pay raw material suppliers manufacturers products well costs related product shipments duties tariffs freight expenses relating shipment products distributors importers similar expenses “royalty overrides” significant expense consist • royalty overrides production bonuses total approximately 15 7 respectively retail sales weight management targeted nutrition energy sports fitness outer nutrition promotional products • mark hughes bonus payable senior distributors aggregate amount 1 retail sales weight management targeted nutrition energy sports fitness outer nutrition • discretionary incentive cash bonuses qualifying distributors royalty overrides generally earned based retail sales approximate aggregate 21 retail sales approximately 34 net sales royalty overrides together distributor allowances represent potential earnings distributors approximately 73 retail sales compensation distributors generally development retention improved productivity distributor sales organizations paid several levels distributors sale due restrictions direct selling china fulltime employed sales representatives china compensated wages bonuses benefits instead distributor allowances royalty overrides utilized traditional marketing program used five regions local country regulatory constraints may required modify typical distributor incentive plans described consequently total distributor discount percentage may vary time also offer reduced distributor allowances pay reduced royalty overrides respect certain products worldwide “operating margins” consist net sales less cost sales royalty overrides “selling general administrative expenses” represent operating expenses components include labor benefits sales events professional fees travel entertainment distributor marketing occupancy costs communication costs bank fees depreciation amortization foreign exchange gains losses miscellaneous operating expenses sales distributors outside united states made respective local currencies preparing financial statements translate revenues us dollars using average exchange rates additionally majority purchases suppliers generally made us dollars consequently strengthening us dollar versus foreign currency negative impact reported sales operating margins generate transaction losses intercompany transactions throughout last five years foreign currency exchange rates fluctuated significantly time enter foreign exchange forward option contracts mitigate foreign currency exchange risk discussed detail item 7aitem 7 management’s discussion analysis financial condition results operations read following discussion analysis conjunction item 6 selected financial data consolidated financial statements related notes included elsewhere annual report form 10k global network marketing company sells weight management products nutritional supplements energy sports fitness products personal care products pursue mission “changing people’s lives” providing financially rewarding business opportunity distributors quality products distributors customers seek healthy lifestyle one largest network marketing companies world net sales approximately 35 billion year ended december 31 2011 december 31 2011 sold products 79 countries network approximately 27 million independent distributors china sell products retail stores sales representatives sales officers independent service providers due changes china’s labor laws effective third quarter 2011 longer sales employees china transitioned independent service providers believe quality products effectiveness distribution network coupled geographic expansion primary reasons success throughout 32year operating history products grouped four principal categories weight management targeted nutrition energy sports fitness outer nutrition along literature promotional items products often sold programs comprised series related products literature designed simplify weight management nutrition consumers maximize distributors’ crossselling opportunities industrywide factors affect us competitors include global obesity epidemic aging worldwide population driving demand nutrition wellnessrelated products along global increase unemployment affect recruitment retention distributors seeking part time full time income opportunities continue monitor current global financial crisis remain focused opportunities challenges retailing products recruiting retaining distributors improving distributor productivity opening new markets penetrating existing markets globalizing successful distributor methods operation dmo nutrition clubs weight loss challenges introducing new products globalizing existing products developing niche market segments investing infrastructure management also continues monitor venezuela market especially limited ability repatriate cash report revenue six regions • north america • mexico • south central america • emea consists europe middle east africa • asia pacific excluding china • china volume points geographic region key nonfinancial measure focus volume points royalty basis volume points essentially weighted average measure product sales volume points unaffected exchange rates price increases used management proxy sales trends general increase volume points particular geographic region country indicates increase local currency net sales decrease volume points particular geographic region country indicates decrease local currency net sales assign volume point value product first introduced market specific number volume points assigned product based volume point us dollar ratio use vast majority new products product available different quantities various sizes different volume point values new product introduced otherwise expected sold us determine volume point value product based review various factors regions countries market product including volume point local currency ratio existing products relevant countries general assigned volume point value consistent region country change year reason volume points used manner described use volume points distributor qualification recognition purposes therefore attempts keep volume points similar like product consistent global basis however volume points function value rather product type size reliable measure product mix example increase volume points specific country region could mean significant increase sales less expensive product marginal increase sales expensive product average active sales leaders geographic region continued expansion daily consumption dmos different markets believe average active sales leader metric represents monthly average number sales leaders place order us given quarter useful metric rely metric indication engagement level sales leaders given region changes average active sales leader metric may indicative current momentum region well potential higher annual retention levels future sales growth utilization daily consumption dmos 1 worldwide average active sales leaders may equal sum average active sales leaders region due calculation average sales leaders active period summation fact sales leaders active one region counted worldwide amount number sales leaders retention rates geographic region requalification period compensation system requires sales leader requalify status year prior february order maintain 50 discount products eligible receive royalty payments february year demote rank sales leader distributors satisfy requalification requirements preceding twelve months requalification requirement apply new sales leaders ie became sales leaders subsequent january requalification prior year distributor statistics highlight calculation retention table reflects number sales leaders february year indicated subsequent annual requalification date sales leader retention rate year region number sales leaders geographic region quarterly reporting dates normally higher number sales leaders geographic region requalification period sales leaders requalify relevant twelvemonth period removed rank sales leader following february since sales leaders purchase products resale distributors consumers comparisons sales leader totals yeartoyear basis indicators recruitment retention efforts different geographic regions value average monthly purchase herbalife products sales leaders remained relatively constant time consequently increases sales driven primarily retention sales leaders recruitment retention distributors’ increased adoption daily consumption dmos provide distributors products support materials training special events competitive compensation program distributor wants pursue herbalife business opportunity distributor responsible growing business personally pays sales activities related attracting new customers recruiting distributors hosting events herbalife opportunity meetings success training seminars advertising herbalife’s products purchasing using promotional materials tshirts buttons caps utilizing paying direct mail print material brochures flyers catalogs business cards posters banners telephone book listings purchasing inventory sale use samples training mentoring following person via phone internet customers recruits use herbalife products andor pursue herbalife business opportunity presentation “retail sales” represent gross sales amounts invoices distributors distributor allowances defined “net sales” reflect distributor allowances shipping handling revenues represent collect recognize net sales financial statements discuss retail sales fundamental role compensation systems internal controls operations including role basis upon distributor discounts royalties bonuses awarded addition used basis certain information included daily monthly reports reviewed management however measure accordance us generally accepted accounting principles us gaap retail sales considered isolation substitute net sales consolidated income cash flow statement data prepared accordance us gaap measure profitability liquidity reconciliation net sales retail sales presented “results operations” “product sales” represent actual product purchase price paid us distributors giving effect distributor discounts referred “distributor allowances” approximate 50 retail sales prices distributor allowances percentage retail sales may vary country depending upon regulatory restrictions limit otherwise restrict distributor allowances also offer reduced distributor allowances respect certain products worldwide international operations provided continue provide significant portion total net sales result total net sales continue affected fluctuations us dollar foreign currencies order provide framework assessing underlying businesses performed excluding effect foreign currency fluctuations addition comparing percent change net sales one period another us dollars also compare percent change net sales one period another period using “net sales local currency” disclosure net sales local currency us gaap financial measure net sales local currency removes net sales us dollars impact changes exchange rates us dollar functional currencies foreign subsidiaries translating current period net sales us dollars using foreign currency exchange rates used translate net sales previous comparable period believe presenting net sales local currency useful investors allows meaningful comparison net sales foreign operations period however net sales local currency measures considered isolation alternative net sales us dollars measures reflect current period exchange rates financial measures calculated presented accordance us gaap “gross profit” consists net sales less “cost sales” represents manufacturing costs price pay raw material suppliers manufacturers products well shipping handling costs related product shipments duties tariffs freight expenses relating shipment products distributors importers similar expenses “royalty overrides” significant expense consist • royalty overrides production bonuses total approximately 15 7 respectively retail sales weight management targeted nutrition energy sports fitness outer nutrition promotional products • mark hughes bonus payable senior distributors aggregate amount 1 retail sales weight management targeted nutrition energy sports fitness outer nutrition products promotional products • discretionary incentive cash bonuses qualifying distributors royalty overrides generally earned based retail sales provide potential earnings distributors 23 retail sales approximately 33 net sales royalty overrides generally compensation distributors development retention improved productivity sales organizations paid several levels distributors sale due restrictions direct selling china sales employees china prior transition independent service providers compensated wages bonuses benefits independent service providers china compensated service fees instead distributor allowances royalty overrides utilized traditional marketing program compensation china sales employees independent service providers included selling general administrative expenses local country regulatory constraints may required modify typical distributor incentive plans described also pay reduced royalty overrides respect certain products worldwide consequently total royalty override percentage may vary time royalty overrides together distributor allowances 50 retail sales prices represent potential earnings distributors approximately 73 retail sales “contribution margins” consist net sales less cost sales royalty overrides “selling general administrative expenses” represent operating expenses components include labor benefits sales events professional fees travel entertainment distributor marketing occupancy costs communication costs bank fees depreciation amortization foreign exchange gains losses miscellaneous operating expenses sales distributors outside united states made respective local currencies preparing financial statements translate revenues us dollars using average exchange rates additionally majority purchases suppliers generally made us dollars consequently strengthening us dollar versus foreign currency negative impact reported sales contribution margins generate transaction losses intercompany transactions throughout last five years foreign currency exchange rates fluctuated significantly time enter foreign exchange forward option contracts partially mitigate foreign currency exchange risk discussed detail item 7aitem 7 management’s discussion analysis financial condition results operations use retail sales reflects fundamental role “retail sales” systems internal controls operations including basis upon distributors paid addition information daily monthly reports reviewed management includes retail sales data following represents reconciliation retail sales net sales periods set forth 3 includes acquisition property plant equipment capitalized leases longterm debt 13 million 04 million 0 04 million 182 million years ended december 31 2012 2011 2010 2009 2008 respectively 4 years ended december 31 2012 2011 2010 2009 2008 paid aggregate 1351 million 855 million 537 million 487 million 507 million dividends respectively repurchased 5278 million 2988 million 1501 million 732 million 1370 million common shares open market purchases respectively item 7 management’s discussion analysis financial condition results operations read following discussion analysis conjunction item 6 selected financial data consolidated financial statements related notes included elsewhere annual report form 10k leading global nutrition company sells weight management products nutritional supplements energy sports fitness products personal care products utilizing network marketing distribution december 31 2012 sold products network 32 million distributors include approximately 02 million china sales representatives sales officers independent service providers many simply discount customers china currently sell products retail stores sales representatives sales officers independent service providers pursue mission “changing people’s lives” providing high quality sciencebased products distributors customers seek healthy lifestyle also offer financially rewarding business opportunity distributors seek part time full time income believe global obesity epidemic made quality products relevant effectiveness distribution network coupled geographic expansion primary reasons success throughout 33year operating history december 31 2012 sold products 88 countries products grouped four principal categories weight management targeted nutrition energy sports fitness outer nutrition along literature promotional items products often sold series related products literature designed simplify weight management nutrition consumers maximize distributors’ crossselling opportunities industrywide factors affect us competitors include global obesity epidemic aging worldwide population driving demand nutrition wellnessrelated products along global increase employment unemployment affect recruitment retention distributors seeking part time full time income opportunities continue monitor current global financial environment remain focused opportunities challenges retailing products recruiting retaining distributors improving distributor productivity opening new markets penetrating existing markets globalizing successful distributor methods operation dmos nutrition clubs weight loss challenges introducing new products globalizing existing products developing niche market segments investing infrastructure management also continues monitor venezuelan market especially limited ability repatriate cash report revenue six regions • north america • mexico • south central america • emea consists europe middle east africa • asia pacific excluding china • china volume points geographic region key nonfinancial measure focus volume points royalty basis volume points essentially weighted average measure product sales volume points unaffected exchange rates price changes used management proxy sales trends general increase volume points particular geographic region country indicates increase local currency net sales decrease volume points particular geographic region country indicates decrease local currency net sales assign volume point value product first introduced market value unaffected subsequent exchange rate price changes specific number volume points assigned product generally consistent across markets based volume point suggested retail price ratio similar products product available different quantities various sizes different volume point values general assigned volume point value consistent region country change year reason volume points used manner described use volume points distributor qualification recognition purposes therefore attempt keep volume points similar like product consistent global basis however volume points function value rather product type size reliable measure product mix example increase volume points specific country region could mean significant increase sales less expensive products marginal increase sales expensive products average active sales leaders geographic region continued expansion daily consumption dmos different markets believe average active sales leader useful metric represents monthly average number sales leaders place order including orders nonsales leaders downline given period rely metric indication engagement level sales leaders given region changes average active sales leader metric may indicative current momentum region well potential changes annual retention levels future sales growth rate utilization daily consumption dmos 1 worldwide average active sales leaders may equal sum average active sales leaders region due calculation average sales leaders active period summation fact sales leaders active one region counted worldwide amount number sales leaders retention rates geographic region requalification period compensation system requires sales leader requalify status year prior february order maintain 50 discount products eligible receive royalty payments february year demote rank sales leader distributors satisfy requalification requirements preceding twelve months requalification requirement apply new sales leaders ie became sales leaders subsequent january requalification prior year distributor statistics highlight calculation retention table reflects number sales leaders end february year indicated subsequent annual requalification date sales leader retention rate year region number sales leaders geographic region quarterly reporting dates normally higher number sales leaders geographic region requalification period sales leaders requalify relevant twelvemonth period removed rank sales leader following february since sales leaders purchase products resale distributors consumers comparisons sales leader totals yeartoyear basis indicators recruitment retention efforts different geographic regions provide distributors products support materials training special events competitive compensation program distributor wants pursue herbalife business opportunity distributor responsible growing business personally pays sales activities related attracting new customers recruiting distributors hosting events herbalife opportunity meetings success training seminars advertising herbalife’s products purchasing using promotional materials tshirts buttons caps utilizing paying direct mail print material brochures flyers catalogs business cards posters banners telephone book listings purchasing inventory sale use samples training mentoring following person via phone internet customers recruits use herbalife products andor pursue herbalife business opportunity presentation “retail sales” represent suggested retail price products sell distributors gross sales amount reflected invoices price paid us distributors purchase product us discount suggested retail price refer discounts “distributor allowance” refer retail sales less distributor allowances “product sales” total distributor allowances fixed percentage approximately 50 suggested retail sales prices distributor allowances percentage retail sales may vary country depending upon regulatory restrictions limit otherwise restrict distributor allowances also offer reduced distributor allowances respect certain products worldwide distributor’s level discount determined qualification based volume purchases cases distributor qualified less maximum discount remaining discount received sponsoring distributors therefore product sales recognized net product returns distributor allowances “net sales” equal product sales plus “shipping handling revenues” generally represents collect visibility sales independent distributors customers figure would differ reported “retail sales” factors including amount product purchased distributors personal consumption b prices charged distributors customers suggested retail prices discuss retail sales fundamental role systems internal controls operations including role basis upon distributor discounts royalties bonuses awarded addition used basis certain information included daily monthly reports reviewed management however measure accordance us generally accepted accounting principles us gaap retail sales considered isolation substitute net sales consolidated income cash flow statement data prepared accordance us gaap measure profitability liquidity reconciliation retail sales net sales presented “results operations” international operations provided continue provide significant portion total net sales result total net sales continue affected fluctuations us dollar foreign currencies order provide framework assessing underlying businesses performed excluding effect foreign currency fluctuations addition comparing percent change net sales one period another us dollars also compare percent change net sales one period another period using “net sales local currency” disclosure net sales local currency us gaap financial measure net sales local currency removes net sales us dollars impact changes exchange rates us dollar functional currencies foreign subsidiaries translating current period net sales us dollars using foreign currency exchange rates used translate net sales previous comparable period believe presenting net sales local currency useful investors allows meaningful comparison net sales foreign operations period however net sales local currency measures considered isolation alternative net sales us dollars measures reflect current period exchange rates financial measures calculated presented accordance us gaap “gross profit” consists net sales less “cost sales” represents manufacturing costs price pay raw material suppliers manufacturers products well shipping handling costs related product shipments duties tariffs freight expenses relating shipment products distributors importers similar expenses distributors potentially profit activities reselling products amounts greater prices pay us distributors develop retain manage distributors earn additional compensation activities refer “royalty overrides” royalty overrides significant operating expense consist • royalty overrides production bonuses total approximately 15 7 respectively retail sales weight management targeted nutrition energy sports fitness outer nutrition promotional products • mark hughes bonus payable senior distributors aggregate amount 1 retail sales weight management targeted nutrition energy sports fitness outer nutrition products promotional products • discretionary incentive cash bonuses qualifying distributors royalty overrides generally earned based retail sales provide potential earnings distributors 23 retail sales approximately 33 net sales royalty overrides compensation distributors development retention improved productivity sales organizations paid several levels distributors sale royalty overrides compensation services rendered company recorded operating expense due restrictions direct selling china sales employees china prior transfer independent service providers compensated wages bonuses benefits independent service providers china compensated service fees instead distributor allowances royalty overrides utilized traditional marketing program compensation china sales employees independent service providers included selling general administrative expenses local country regulatory constraints may required modify distributor incentive plans described also pay reduced royalty overrides respect certain products worldwide consequently total royalty override percentage may vary time percentages noted royalty overrides together distributor allowances 50 suggested retail sales prices represent potential earnings distributors approximately 73 retail sales “contribution margins” consist net sales less cost sales royalty overrides “selling general administrative expenses” represent operating expenses include labor benefits sales events professional fees travel entertainment distributor promotions occupancy costs communication costs bank fees depreciation amortization foreign exchange gains losses miscellaneous operating expenses sales distributors outside united states made respective local currencies preparing financial statements translate revenues us dollars using average exchange rates additionally majority purchases suppliers generally made us dollars consequently strengthening us dollar versus foreign currency negative impact reported sales contribution margins generate transaction losses intercompany transactions throughout last five years foreign currency exchange rates fluctuated significantly time enter foreign exchange forward option contracts partially mitigate foreign currency exchange risk discussed detail item 7aitem 7 management’s discussion analysis financial condition results operations read following discussion analysis conjunction item 6 selected financial data consolidated financial statements related notes included elsewhere annual report form 10k global nutrition company sells weight management targeted nutrition energy sports fitness outer nutrition products december 31 2014 sold products network 40 million independent members included approximately 02 million china sell products retail stores sales representatives sales officers independent service providers china process making terminology change “distributors” “members” since discount customers refer members distribute products achieve certain qualification requirements “sales leaders” pursue mission “changing people’s lives” providing high quality sciencebased products members customers seek healthy lifestyle also offer financially rewarding business opportunity members seek part time full time income believe global obesity epidemic made quality products relevant effectiveness distribution network coupled geographic expansion primary reasons success throughout 35year operating history december 31 2014 sold products 91 countries products grouped four principal categories weight management targeted nutrition energy sports fitness outer nutrition along literature promotional items products often sold series related products literature designed simplify weight management nutrition consumers maximize members’ crossselling opportunities industrywide factors affect us competitors include global obesity epidemic aging worldwide population driving demand weight management nutrition wellnessrelated products along global increase employment unemployment affect recruitment retention members seeking part time full time income opportunities continue monitor current global financial environment remain focused opportunities challenges retailing products recruiting retaining members improving member productivity opening new markets penetrating existing markets globalizing successful distributor methods operation dmos nutrition clubs weight loss challenges introducing new products globalizing existing products developing niche market segments investing infrastructure management also continues monitor venezuelan market especially limited ability repatriate cash report revenue six regions • north america • mexico • south central america • emea consists europe middle east africa • asia pacific excluding china • china volume points geographic region key nonfinancial measure focus volume points royalty basis volume points essentially weighted average measure product sales volume points unaffected exchange rates price changes used management proxy sales trends general excluding impact price changes increase volume points particular geographic region country indicates increase local currency net sales decrease volume points particular geographic region country indicates decrease local currency net sales assign volume point value product first introduced market value unaffected subsequent exchange rate price changes specific number volume points assigned product generally consistent across markets based volume point suggested retail price ratio similar products product available different quantities various sizes different volume point values general assigned volume point value consistent region country change year reason volume points used manner described use volume points member qualification recognition purposes therefore attempt keep volume points similar like product consistent global basis however volume points function value rather product type size reliable measure product mix example increase volume points specific country region could mean significant increase sales less expensive products marginal increase sales expensive products believe sequential increases total volume points 2014 2013 20 131 respectively reflects success competitive strengths business strategies discussed greater detail item 1 business annual report form 10k achieving objective sustainable sales growth retailing recruiting retention despite decrease rate growth last several years 2014 mexico saw slower volume point growth north america asia pacific regions saw declines volume points continuing multipleyear trend decreasing volume point growth rates regions believe trend result members adjusting certain revisions operations marketing plan designed improve training retention sales leaders south central america region also saw decline volume points following several years growth reasons similar regions noted well impact order size product import limitations instituted venezuela market average active sales leaders geographic region continued expansion daily consumption dmos different markets objective improve member retention believe average active sales leader useful metric represents monthly average number sales leaders place order including orders nonsales leader members downline sales organization given period rely metric indication engage ment level sales leaders integral success therefore indication success strategies execution changes average active sales leader metric may indicative potential changes annual retention levels future sales growth 1 worldwide average active sales leaders may equal sum average active sales leaders region due calculation average sales leaders active period summation fact sales leaders active one region counted worldwide amount believe trend increasing worldwide average active sales leaders periods reflected table attributable company’s success making herbalife business opportunity appealing facilitating sales leader success providing quality products improved dmos including daily consumption approaches nutrition clubs easier access product systemized training members products methods continued promotion branding herbalife products although average active sales leaders increased region 2014 2013 compared prior year period several regions seen growth rate decrease period 2014 north america mexico asia pacific regions saw continued multipleyear decline average active sales leader growth rates reasons rate volume point growth decreased regions south central america region also saw lower growth rate 2014 compared 2013 reasons rate volume point growth decreased partially offset determination require sales leaders venezuela requalify twelvemonth period ended january 31 2014 given long term qualitative nature strategies magnitude impact strategy sales leaders’ engagement cannot quantified may vary time market number sales leaders retention rates geographic region requalification period compensation system requires sales leader requalify status year prior february order maintain 50 discount products eligible receive royalty payments february year demote rank sales leader members satisfy requalification requirements preceding twelve months requalification requirement apply new sales leaders ie became sales leaders subsequent january requalification prior year latest twelve month requalification period ending january 2015 approximately 542 sales leaders excluding china venezuela argentina requalified require venezuelan sales leaders requalify temporarily period ended january 2014 due product supply limitation resulting currency restrictions venezuela requalification requirement resumed period ended january 2015 providing market time adjust supply levels require argentinean sales leaders requalify temporarily period ended january 2015 due product supply challenges resulting importation restrictions venezuela argentina included normalized basis percentage would 534 member statistics highlight calculation retention table reflects number sales leaders end february year indicated subsequent annual requalification date sales leader retention rate year region sales leaders generally purchase products resale members retail consumers number sales leaders geographic region quarterly reporting dates normally higher number sales leaders geographic region requalification period sales leaders requalify relevant twelvemonth period removed rank sales leader following february comparisons sales leader totals yeartoyear basis indicators recruitment retention efforts different geographic regions provide members products support materials training special events competitive compensation program member wants pursue herbalife business opportunity member responsible growing business personally pays sales activities related attracting new customers recruiting members activities may include hosting events herbalife opportunity meetings success training seminars advertising herbalife’s products purchasing using promotional materials tshirts buttons caps utilizing paying direct mail print material brochures flyers catalogs business cards posters banners telephone book listings purchasing inventory sale use samples training mentoring customers recruits use herbalife products andor pursue herbalife business opportunity retention rate remained relatively consistent 2012 2014 consider high level increased 2015 believe result efforts made improve sustainability sales leaders’ businesses presentation “retail sales” represent suggested retail price products sell members gross sales amount reflected invoices retail sales nongaap measure may comparable similarlytitled measures used companies price paid us members purchase product us discount suggested retail price refer discounts “distributor allowance” refer retail sales less distributor allowances “product sales” total distributor allowances 2014 2013 2012 418 441 457 retail sales respectively distributor allowances percentage retail sales may vary country depending upon regulatory restrictions limit otherwise restrict distributor allowances also offer reduced distributor allowances respect certain products worldwide member’s level discount determined qualification based volume purchases cases member qualified less maximum discount remaining discount also refer wholesale commission received sponsoring members therefore product sales recognized net product returns distributor allowances “net sales” equal product sales plus “shipping handling revenues” generally represents collect 2013 simplified pricing structure markets increasing suggested retail prices reducing total shipping handling fees eliminating “packaging handling” line item invoices members impact total member cost conjunction method distributor allowances marketing plan payouts generally utilizes 90 95 suggested retail price depending product market apply discounts 50 distributor allowances payout rates 15 royalty overrides 7 production bonuses approximately 1 mark hughes bonus consequently revision pricing structure meaningful impact amounts distributor allowance payouts marketing plan materially impact consolidated net sales profitability visibility sales members customers figure would differ reported “retail sales” factors including amount product purchased members personal consumption b prices charged members customers suggested retail prices discuss retail sales fundamental role systems internal controls operations correlation member discounts royalty overrides addition retail sales component financial reports use analyze financial results however measure accordance us generally accepted accounting principles us gaap retail sales considered isolation substitute net sales consolidated income cash flow statement data prepared accordance us gaap measure profitability liquidity reconciliation retail sales net sales presented results operations international operations provided continue provide significant portion total net sales result total net sales continue affected fluctuations us dollar foreign currencies order provide framework assessing underlying businesses performed excluding effect foreign currency fluctuations addition comparing percent change net sales one period another us dollars also compare percent change net sales one period another period using “net sales local currency” net sales local currency us gaap financial measure net sales local currency removes net sales us dollars impact changes exchange rates us dollar functional currencies foreign subsidiaries translating current period net sales us dollars using foreign currency exchange rates used translate net sales previous comparable period believe presenting net sales local currency useful investors allows meaningful comparison net sales foreign operations period however net sales local currency measures considered isolation alternative net sales us dollar measures reflect current period exchange rates financial measures calculated presented accordance us gaap “gross profit” consists net sales less “cost sales” represents manufacturing costs price pay raw material suppliers manufacturers products well shipping handling costs including duties tariffs similar expenses members potentially profit activities reselling products amounts greater prices pay us members develop retain manage members earn additional compensation activities refer “royalty overrides” royalty overrides significant operating expense consist • royalty overrides production bonuses • mark hughes bonus payable senior members • discretionary incentive cash bonuses qualifying members 2014 2013 2012 total royalty overrides 297 310 329 net sales respectively royalty overrides compensation members development retention improved productivity sales organizations paid several levels members sale royalty overrides compensation services rendered us recorded operating expense due restrictions direct selling china independent service providers china compensated service fees instead distributor allowances royalty overrides utilized traditional marketing program compensation china independent service providers included selling general administrative expenses local country regulatory constraints may required modify member incentive plans described also pay reduced royalty overrides respect certain products worldwide consequently total royalty override percentage may vary time percentages noted “contribution margins” consist net sales less cost sales royalty overrides “selling general administrative expenses” represent operating expenses include labor benefits service fees china service providers sales events professional fees travel entertainment member promotions occupancy costs communication costs bank fees depreciation amortization foreign exchange gains losses miscellaneous operating expenses “other expense net” consists nonoperating expenses impairments availableforsale investments sales members outside united states made respective local currencies preparing financial statements translate revenues us dollars using average exchange rates additionally majority purchases suppliers generally made us dollars consequently strengthening us dollar versus foreign currency negative impact reported sales contribution margins generate foreign currency losses intercompany transactions foreign currency exchange rates fluctuate significantly time enter foreign currency derivatives partially mitigate foreign currency exchange risk discussed detail item 7aitem 7 management’s discussion analysis financial condition results operations read following discussion analysis conjunction item 6 selected financial data consolidated financial statements related notes included elsewhere annual report form 10k global nutrition company sells weight management targeted nutrition energy sports fitness outer nutrition products december 31 2015 sold products network 40 million independent members included approximately 03 million china sell products retail stores sales representatives sales officers independent service providers refer members distribute products achieve certain qualification requirements “sales leaders” pursue mission “changing people’s lives” providing high quality sciencebased products members customers seek healthy lifestyle also offer financially rewarding business opportunity members seek part time full time income believe global obesity epidemic made quality products relevant effectiveness distribution network coupled geographic expansion primary reasons success throughout 36year operating history december 31 2015 sold products 93 countries products grouped four principal categories weight management targeted nutrition energy sports fitness outer nutrition along literature promotional items products often sold series related products literature designed simplify weight management nutrition consumers maximize members’ crossselling opportunities industrywide factors affect us competitors include global obesity epidemic aging worldwide population driving demand weight management nutrition wellnessrelated products along global increase employment unemployment affect recruitment retention members seeking part time full time income opportunities continue monitor current global financial environment remain focused opportunities challenges retailing products recruiting retaining members improving member productivity opening new markets penetrating existing markets globalizing successful distributor methods operation dmos nutrition clubs weight loss challenges introducing new products globalizing existing products developing niche market segments investing infrastructure management also continues monitor venezuelan market especially limited ability repatriate cash report revenue six regions · north america · mexico · south central america · emea consists europe middle east africa · asia pacific excluding china · china volume points geographic region key nonfinancial measure focus volume points royalty basis volume points essentially weighted average measure product sales volume points unaffected exchange rates price changes used management proxy sales trends general excluding impact price changes increase volume points particular geographic region country indicates increase local currency net sales decrease volume points particular geographic region country indicates decrease local currency net sales assign volume point value product first introduced market value unaffected subsequent exchange rate price changes specific number volume points assigned product generally consistent across markets based volume point suggested retail price ratio similar products product available different quantities various sizes different volume point values general assigned volume point value consistent region country change year reason volume points used manner described use volume points member qualification recognition purposes therefore attempt keep volume points similar like product consistent global basis however volume points function value rather product type size reliable measure product mix example increase volume points specific country region could mean significant increase sales less expensive products marginal increase sales expensive products volume points decreased 20 2015 increased 20 2014 20102013 period volume points increased annual rates ranging approximately 1321 reflecting success competitive strengths business strategies discussed greater detail item 1 business annual report form 10k achieving objective sustainable sales growth retailing recruiting retention believe 2015 volume point decline modest growth 2014 particularly comparison period 2010 2013 reflect members adjusting certain revisions operations marketing plan designed improve training retention sales leaders particularly north america mexico asia pacific excluding china regions south central america region also saw decline volume points extended period reasons similar regions noted well impact order size product import limitations instituted venezuela market certain revisions impact results discussed applicable sections sales geographic region believe changes marketing plan well competitive strengths business strategies contribute achieving longterm objective sustainable sales growth retailing recruiting retention despite decrease volume points 2015 average active sales leaders geographic region continued expansion daily consumption dmos different markets objective improve member retention believe average active sales leader useful metric represents monthly average number sales leaders place order including orders nonsales leader members downline sales organization given period rely metric indication engagement level sales leaders integral success therefore indication success strategies execution changes average active sales leader metric may indicative potential changes annual retention levels future sales growth 1 worldwide average active sales leaders may equal sum average active sales leaders region due calculation average sales leaders active period summation fact sales leaders active one region counted worldwide amount believe trend increasing worldwide average active sales leaders periods reflected table attributable company’s success making herbalife business opportunity appealing facilitating sales leader success providing quality products improved dmos including daily consumption approaches nutrition clubs easier access product systemized training members products methods continued promotion branding herbalife products although average active sales leaders increased worldwide 2015 2014 compared prior year period regions seen trend decreasing growth rate recent periods two regions saw declines average active sales leaders 2015 north america mexico south central america asia pacific regions saw continued multipleyear decline average active sales leader growth rates mexico south central america decline average active sales leaders 2015 reasons discussed regarding longerterm decreasing rate volume point growth regions decrease south central america region 2014 2013 partially offset determination require sales leaders venezuela requalify twelvemonth period ended january 31 2014 discussed greater detail given long term qualitative nature strategies magnitude impact strategy sales leader engagement cannot quantified may vary time market number sales leaders retention rates geographic region requalification period compensation system requires sales leader requalify status year prior february order maintain 50 discount products eligible receive royalty payments february year demote rank sales leader members satisfy requalification requirements preceding twelve months requalification requirement apply new sales leaders ie became sales leaders subsequent january requalification prior year latest twelve month requalification period ending january 2016 approximately 542 sales leaders excluding china venezuela argentina requalified twelve month requalification period ended january 2015 approximately 542 sales leaders excluding china venezuela argentina requalified require venezuelan sales leaders requalify temporarily period ended january 2014 therefore excluded retention calculation year due product supply limitation resulting currency restrictions venezuela requalification requirement resume requalification period ended january 2015 market time adjust supply levels since january 2014 retention rate would impacted positively essentially venezuelan sales leaders requalified january 2015 retention rate would impacted negatively including sales leaders would demoted 2014 excluded venezuelan sales leaders sales leader retention calculation years require venezuelan sales leaders requalify period ended january 2016 therefore excluded retention calculation year due unfavorable economic environment resulting renewed product supply limitations require argentinean sales leaders requalify temporarily requalification period ended january 2015 due product supply challenges resulting importation restrictions therefore excluded retention calculation year argentina requalification requirement resume requalification period ended january 2016 product supply issues greatly reduced market year since january 2015 retention rate would impacted positively essentially argentina sales leaders requalified january 2016 retention rate would impacted negatively including sales leaders would demoted 2015 excluded argentina sales leaders sales leader retention calculation years venezuela argentina included normalized basis 2016 2015 retention rates would 537 534 respectively member statistics highlight calculation retention 1 although requalification requirement sales leaders venezuela resumed requalification period ended january 2015 described venezuela sales leaders excluded sales leader retention calculation requalification period ended january 2015 venezuela sales leaders included sales leaders statistics table reflects number sales leaders end february year indicated subsequent annual requalification date sales leader retention rate year region sales leaders generally purchase products resale members retail consumers number sales leaders geographic region quarterly reporting dates normally higher number sales leaders geographic region requalification period sales leaders requalify relevant twelvemonth period removed rank sales leader following february comparisons sales leader totals yeartoyear basis indicators recruitment retention efforts different geographic regions provide members products support materials training special events competitive compensation program member wants pursue herbalife business opportunity member responsible growing business personally pays sales activities related attracting new customers recruiting members activities may include hosting events herbalife opportunity meetings success training seminars advertising herbalife’s products purchasing using promotional materials tshirts buttons caps utilizing paying direct mail print material brochures flyers catalogs business cards posters banners telephone book listings purchasing inventory sale use samples training mentoring customers recruits use herbalife products andor pursue herbalife business opportunity retention rate requalification period ended january 2016 remained consistent versus prior year historically high level company believe performance result efforts made improve sustainability sales leaders’ businesses presentation “retail sales” represent suggested retail price products sell members gross sales amount reflected invoices retail sales nongaap measure may comparable similarlytitled measures used companies price paid us members purchase product us discount suggested retail price refer discounts “distributor allowance” refer retail sales less distributor allowances “product sales” total distributor allowances 2015 2014 2013 401 418 441 retail sales respectively distributor allowances marketing plan payouts generally utilize 90 95 suggested retail price depending product market apply discounts 50 distributor allowances payout rates 15 royalty overrides 7 production bonuses approximately 1 mark hughes bonus distributor allowances percentage retail sales may vary country depending upon regulatory restrictions limit otherwise restrict distributor allowances also offer reduced distributor allowances respect certain products worldwide member’s level discount determined qualification based volume purchases cases member qualified less maximum discount remaining discount also refer wholesale commission received sponsoring members therefore product sales recognized net product returns distributor allowances “net sales” equal product sales plus “shipping handling revenues” generally represents collect visibility sales members customers figure would differ reported “retail sales” factors including amount product purchased members personal consumption b prices charged members customers suggested retail prices discuss retail sales fundamental role systems internal controls operations correlation member discounts royalty overrides addition retail sales component financial reports use analyze financial results however measure accordance us generally accepted accounting principles us gaap retail sales considered isolation substitute net sales consolidated income cash flow statement data prepared accordance us gaap measure profitability liquidity reconciliation retail sales net sales presented results operations international operations provided continue provide significant portion total net sales result total net sales continue affected fluctuations us dollar foreign currencies order provide framework assessing underlying businesses performed excluding effect foreign currency fluctuations addition comparing percent change net sales one period another us dollars also compare percent change net sales one period another period using “net sales local currency” net sales local currency us gaap financial measure net sales local currency removes net sales us dollars impact changes exchange rates us dollar functional currencies foreign subsidiaries translating current period net sales us dollars using foreign currency exchange rates used translate net sales previous comparable period believe presenting net sales local currency useful investors allows meaningful comparison net sales foreign operations period however net sales local currency measures considered isolation alternative net sales us dollar measures reflect current period exchange rates financial measures calculated presented accordance us gaap “gross profit” consists net sales less “cost sales” represents manufacturing costs price pay raw material suppliers manufacturers products well shipping handling costs including duties tariffs similar expenses members potentially profit activities reselling products amounts greater prices pay us members develop retain manage members earn additional compensation activities refer “royalty overrides” royalty overrides significant operating expense consist · royalty overrides production bonuses · mark hughes bonus payable senior members · discretionary incentive cash bonuses qualifying members 2015 2014 2013 total royalty overrides 280 297 310 net sales respectively royalty overrides compensation members development retention improved productivity sales organizations paid several levels members sale royalty overrides compensation services rendered us recorded operating expense due restrictions direct selling china independent service providers china compensated service fees instead distributor allowances royalty overrides utilized worldwide marketing program compensation china independent service providers included selling general administrative expenses local country regulatory constraints may required modify member incentive plans described also pay reduced royalty overrides respect certain products worldwide consequently total royalty override percentage may vary time percentages noted “contribution margins” consist net sales less cost sales royalty overrides “selling general administrative expenses” represent operating expenses include labor benefits service fees china service providers sales events professional fees travel entertainment member promotions occupancy costs communication costs bank fees depreciation amortization foreign exchange gains losses miscellaneous operating expenses “other expense net” consists nonoperating expenses impairments availableforsale investments sales members outside united states made respective local currencies preparing financial statements translate revenues us dollars using average exchange rates additionally majority purchases suppliers generally made us dollars consequently strengthening us dollar versus foreign currency negative impact reported sales contribution margins generate foreign currency losses intercompany transactions foreign currency exchange rates fluctuate significantly time enter foreign currency derivatives partially mitigate foreign currency exchange risk discussed detail item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis financial condition results operations read conjunction item 6 selected financial data consolidated financial statements related notes included elsewhere annual report form 10k global nutrition company sells weight management targeted nutrition energy sports fitness outer nutrition products independent members china sell products independent service providers sales representatives sales officers customers preferred customers well companyoperated retail stores necessary refer members distribute products achieve certain qualification requirements “sales leaders” pursue mission “changing people’s lives” providing high quality sciencebased products members customers seek healthy lifestyle also offer business opportunity members seek additional income believe global obesity epidemic made quality products relevant effectiveness distribution network coupled geographic expansion primary reasons success throughout 37year operating history products grouped four principal categories weight management targeted nutrition energy sports fitness outer nutrition along literature promotional items products often sold series related products literature designed simplify weight management nutrition consumers maximize members’ crossselling opportunities industrywide factors affect us competitors include global obesity epidemic aging worldwide population rising public health care costs driving demand weight management nutrition wellnessrelated products along global increase employment unemployment affect recruitment retention members seeking additional income opportunities continue monitor current global financial environment remain focused opportunities challenges retailing products recruiting retaining members improving member productivity penetrating existing markets opening new markets globalizing successful distributor methods operation dmos nutrition clubs weight loss challenges introducing new products globalizing existing products developing niche market segments investing infrastructure management also continues monitor venezuelan market especially limited ability repatriate cash report revenue six regions • north america • mexico • south central america • emea consists europe middle east africa • asia pacific excluding china • china july 15 2016 reached settlement ftc entered proposed stipulation entry order permanent injunction monetary judgment consent order resolved ftc’s multiyear investigation company consent order became effective july 25 2016 effective date upon final approval us district court central district california pursuant consent order agreed implement certain new procedures enhance certain existing procedures us 10 months effective date implement among requirements consent order requires us categorize existing future members us either “preferred members” simply consumers wish purchase product household use “distributors” members wish resell products build sales organization although required may 2017 october 2016 initiated process allowing existing members us affirmatively elect classified either preferred members independent distributors also agreed compensate distributors us retail sales within downline organizations include purchases preferred members purchases distributor personal consumption within allowable limits sales product distributor customers consent order also requires distributors meet certain conditions opening nutrition clubs andor entering leases herbalife business united states consent order also prohibits company making expressly implication representation regarding amount level income including fulltime parttime income participant reasonably expect earn company’s network marketing program unless representation nonmisleading company possesses competent reliable evidence sufficient substantiate representation true intend monitor impact consent order regularly board directors established implementation oversight committee connection consent order committee met meet regularly management oversee compliance terms consent order currently expect settlement longterm materially adverse impact business member base business member base particularly us may negatively impacted adjust changes terms settlement change going market direct selling independent distributors compensating distributors based upon product sales organization sell time settlement process implementing many new enhanced procedures however terms settlement costs comply therewith could adversely affect business operations results operations financial condition see item 1a risk factors annual report form 10k discussion risks related settlement ftc volume points geographic region key nonfinancial measure focus volume points royalty basis volume points essentially weightedaverage measure product sales volume points unaffected exchange rates price changes used management proxy sales trends general excluding impact price changes increase volume points particular geographic region country indicates increase local currency net sales decrease volume points particular geographic region country indicates decrease local currency net sales assign volume point value product first introduced market value unaffected subsequent exchange rate price changes specific number volume points assigned product generally consistent across markets based volume point suggested retail price ratio similar products product available different quantities various sizes different volume point values general assigned volume point value consistent region country change year reason volume points used manner described use volume points member qualification recognition purposes therefore attempt keep volume points similar like product consistent global basis however volume points function value rather product type size reliable measure product mix example increase volume points specific country region could mean significant increase sales less expensive products marginal increase sales expensive products volume points increased 46 2016 decreased 20 2015 believe increase 2016 reflects success competitive strengths business strategies discussed greater detail item 1 business annual report form 10k achieving objective sustainable sales growth retailing recruiting retention believe 2016 volume point increases north america mexico asia pacific excluding china regions additionally reflect members adjusting certain revisions operations marketing plan designed improve training retention sales leaders increase asia pacific excluding china region came despite significant decrease south korea market south central america region saw decline volume points 2016 certain countryspecific reasons within region china region believe lower rate sales volume increase compared recent years attributable factors members testing new business methods prove sustainable traditional methods certain marketing plan revisions impact results discussed applicable sections sales geographic region number sales leaders retention rates geographic region requalification period compensation system requires sales leader requalify status year prior february order maintain 50 discount products eligible receive royalty payments february year demote rank sales leader members satisfy requalification requirements preceding twelve months requalification requirement apply new sales leaders ie became sales leaders subsequent january requalification prior year latest twelve month requalification period ending january 2017 approximately 609 sales leaders excluding china venezuela requalified figure excludes sales leaders united states converted preferred member individuals eligible requalification individuals included calculation figure would 593 venezuela excluded retention figures year ended january 2017 due revised requalification criteria comparable prior periods markets excluded 2016 2014 sales leaders market required requalify years due product supply limitations excluded 2015 comparative purposes argentina excluded retention figure year ended january 2015 sales leaders market required requalify year due product supply limitations excluded 2016 comparative purposes member statistics highlight calculation retention 1 although sales leaders argentina venezuela required requalify twelvemonth periods ended january 2016 2015 respectively described argentina venezuela sales leaders excluded sales leader retention table calculations requalification periods comparative purposes argentina venezuela sales leaders figures included sales leaders statistics table 2016 2015 respectively table reflects number sales leaders end february year indicated subsequent annual requalification date sales leader retention rate year region sales leaders generally purchase products resale members retail consumers number sales leaders geographic region quarterly reporting dates normally higher number sales leaders geographic region requalification period sales leaders requalify relevant twelvemonth period removed rank sales leader following february comparisons sales leader totals yeartoyear basis indicators recruitment retention efforts different geographic regions retention rate requalification period ended january 2017 significantly improved compared prior year periods believe performance result efforts made improve sustainability sales leaders’ businesses presentation “retail sales” represent suggested retail price products sell members gross sales amount reflected invoices retail sales nongaap measure may comparable similarlytitled measures used companies price paid us members purchase product us discount suggested retail price refer discounts “distributor allowance” refer retail sales less distributor allowances “product sales” total distributor allowances 2016 2015 2014 404 401 418 retail sales respectively distributor allowances marketing plan payouts generally utilize 90 95 suggested retail price depending product market apply discounts 50 distributor allowances payout rates 15 royalty overrides 7 production bonuses approximately 1 mark hughes bonus distributor allowances percentage retail sales may vary country depending upon regulatory restrictions limit otherwise restrict distributor allowances also offer reduced distributor allowances respect certain products worldwide member’s level discount determined qualification based volume purchases cases member qualified less maximum discount remaining discount also refer wholesale commission received sponsoring members therefore product sales recognized net product returns distributor allowances “net sales” equal product sales plus “shipping handling revenues” generally represents collect visibility sales members customers figure would differ reported “retail sales” factors including amount product purchased members personal consumption b prices charged members customers suggested retail prices discuss retail sales fundamental role systems internal controls operations correlation member discounts royalty overrides addition retail sales component financial reports use analyze financial results however measure accordance us generally accepted accounting principles us gaap retail sales considered isolation substitute net sales consolidated income cash flow statement data prepared accordance us gaap measure profitability liquidity reconciliation retail sales net sales presented results operations international operations provided continue provide significant portion total net sales result total net sales continue affected fluctuations us dollar foreign currencies order provide framework assessing underlying businesses performed excluding effect foreign currency fluctuations addition comparing percent change net sales one period another us dollars also compare percent change net sales one period another period using “net sales local currency” net sales local currency us gaap financial measure net sales local currency removes net sales us dollars impact changes exchange rates us dollar local currencies foreign subsidiaries translating current period net sales us dollars using foreign currency exchange rates used translate net sales previous comparable period believe presenting net sales local currency useful investors allows meaningful comparison net sales foreign operations period however net sales local currency measures considered isolation alternative net sales us dollar measures reflect current period exchange rates financial measures calculated presented accordance us gaap “gross profit” consists net sales less “cost sales” represents manufacturing costs price pay raw material suppliers manufacturers products well shipping handling costs including duties tariffs similar expenses members excluding members china preferred members potentially profit activities reselling products amounts greater prices pay us members develop retain manage members earn additional compensation activities refer “royalty overrides” royalty overrides significant operating expense consist • royalty overrides production bonuses • mark hughes bonus payable senior members • discretionary incentive cash bonuses qualifying members royalty overrides compensation members development retention improved productivity sales organizations paid several levels members sale royalty overrides compensation services rendered us recorded operating expense due restrictions direct selling china independent service providers china compensated marketing sales support services fees reflecting quality service sales contributions factors instead distributor allowances royalty overrides utilized traditional marketing program compensation china independent service providers included selling general administrative expenses local country regulatory constraints may required modify member incentive plans described also pay reduced royalty overrides respect certain products worldwide consequently total royalty override percentage may vary time percentages noted “contribution margins” consist net sales less cost sales royalty overrides “selling general administrative expenses” represent operating expenses include labor benefits service fees china service providers sales events professional fees travel entertainment member promotions occupancy costs communication costs bank fees depreciation amortization foreign exchange gains losses miscellaneous operating expenses “other operating income” consists government grant income related china arbitration award connection reaudit company’s 2010 2012 financial statements resignation kpmg company’s independent registered public accounting firm “other expense net” consists nonoperating expenses impairments availableforsale investments sales members outside united states made respective local currencies preparing financial statements translate revenues us dollars using average exchange rates additionally majority purchases suppliers generally made us dollars consequently strengthening us dollar versus foreign currency negative impact reported sales contribution margins generate foreign currency losses intercompany transactions foreign currency exchange rates fluctuate significantly time enter foreign currency derivatives partially mitigate foreign currency exchange risk discussed detail item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis financial condition results operations read conjunction item 6 selected financial data consolidated financial statements related notes included elsewhere annual report form 10k global nutrition company sells weight management targeted nutrition energy sports fitness outer nutrition products independent members china sell products independent service providers sales representatives sales officers customers preferred customers well companyoperated retail stores necessary refer members distribute products achieve certain qualification requirements “sales leaders” pursue purpose make world healthier happier providing high quality sciencebased products members customers seek healthy lifestyle also offer business opportunity members seek additional income believe global obesity epidemic made products relevant effectiveness distribution network coupled geographic expansion primary reasons success throughout 38year operating history products grouped four principal categories weight management targeted nutrition energy sports fitness outer nutrition along literature promotional items products often sold series related products literature designed simplify weight management nutrition consumers maximize members’ crossselling opportunities industrywide factors affect us competitors include global obesity epidemic aging worldwide population rising public health care costs driving demand weight management nutrition wellnessrelated products along global increase employment unemployment affect recruitment retention members seeking additional income opportunities continue monitor current global financial environment remain focused opportunities challenges retailing products sponsoring retaining members improving member productivity penetrating existing markets opening new markets globalizing successful distributor methods operation dmos nutrition clubs weight loss challenges introducing new products globalizing existing products developing niche market segments investing infrastructure report revenue six regions • north america • mexico • south central america • emea consists europe middle east africa • asia pacific excluding china • china july 15 2016 reached settlement us federal trade commission ftc entered proposed stipulation entry order permanent injunction monetary judgment consent order resolved ftc’s multiyear investigation company monitoring impact consent order board directors established implementation oversight committee connection consent order committee met meet regularly management oversee compliance terms consent order currently expect settlement longterm materially adverse impact business member base business member base particularly us may negatively impacted adjust changes terms consent order change going market direct selling independent distributors compensating distributors based upon product sales organization sell see item 1 business annual report form 10k discussion consent order item 1a risk factors annual report form 10k discussion risks related settlement ftc volume points geographic region key nonfinancial measure focus volume points royalty basis volume points essentially weightedaverage measure product sales volume points unaffected exchange rates price changes used management proxy sales trends general excluding impact price changes increase volume points particular geographic region country indicates increase local currency net sales decrease volume points particular geographic region country indicates decrease local currency net sales criteria use determine recognize volume points identical revenue recognition policies us gaap unlike net sales generally recognized product delivered title risk rewards pass member discussed greater detail note 2 basis presentation consolidated financial statements recognize volume points member pays order generally prior product delivered periods volume points tracked vary slightly fiscal periods report results us gaap therefore timing differences product orders net sales recognized volume points recognized within given period however historically timing differences generally immaterial context using changes volume points proxy explain volumedriven changes net sales management evaluating current approach assigning maintaining volume point values certain products markets changes approach may impact use volume points proxy sales trends future periods currently specific number volume points assigned product generally consistent across markets based volume point suggested retail price ratio similar products product available different quantities various sizes different volume point values general assigned volume point value consistent region country change year reason volume points used manner described use volume points member qualification recognition purposes therefore attempt keep volume points similar like product consistent global basis however volume points function value rather product type size reliable measure product mix example increase volume points specific country region could mean significant increase sales less expensive products marginal increase sales expensive products volume points decreased 36 2017 increased 46 2016 significantly volume point growth 2016 north america region decreased reflecting believe transitionary impact member focus consent order implementation actions including training new tools methods documenting sales time spent train sales organizations mexico region also saw volume point decline previous year increase attributable part difficult economic environment emea china regions saw lower rates volume point increase 2017 versus 2016 due region countryspecific reasons discussed south central america region saw continuing though lesser decline volume points 2017 generally markets region continue transition sustainable customeroriented business practices asia pacific excluding china region continued see mixed results across markets results discussed applicable sections sales geographic region presentation “retail value” represents suggested retail price products sell members gross sales amount reflected invoices retail value nongaap measure may comparable similarlytitled measures used companies price paid us members purchase product us discount suggested retail price refer discounts “distributor allowance” refer retail value less distributor allowances “product sales” total distributor allowances 2017 2016 2015 405 404 401 retail value respectively distributor allowances marketing plan payouts generally utilize 90 95 suggested retail price depending product market apply discounts 50 distributor allowances payout rates 15 royalty overrides 7 production bonuses approximately 1 mark hughes bonus distributor allowances percentage retail value may vary country depending upon regulatory restrictions limit otherwise restrict distributor allowances also offer reduced distributor allowances respect certain products worldwide member’s level discount determined qualification based volume purchases cases member qualified less maximum discount remaining discount also refer wholesale commission received sponsoring members therefore product sales recognized net product returns distributor allowances “net sales” equal product sales plus “shipping handling revenues” generally represents collect visibility sales members customers figure would differ reported “retail value” factors including amount product purchased members personal consumption b prices charged members customers suggested retail prices discuss retail value fundamental role systems internal controls operations correlation member discounts royalty overrides addition retail value component financial reports use analyze financial results among things provide additional detail visibility net sales results companywide geographic region product category basis therefore nongaap measure may useful investors provides investors information used management measure accordance us generally accepted accounting principles us gaap retail value considered isolation substitute net sales consolidated income cash flow statement data prepared accordance us gaap measure profitability liquidity reconciliation retail value net sales presented results operations international operations provided continue provide significant portion total net sales result total net sales continue affected fluctuations us dollar foreign currencies order provide framework assessing underlying businesses performed excluding effect foreign currency fluctuations addition comparing percent change net sales one period another us dollars also compare percent change net sales one period another period using “net sales local currency” net sales local currency us gaap financial measure net sales local currency removes net sales us dollars impact changes exchange rates us dollar local currencies foreign subsidiaries translating current period net sales us dollars using foreign currency exchange rates used translate net sales previous comparable period believe presenting net sales local currency useful investors allows meaningful comparison net sales foreign operations period however net sales local currency measures considered isolation alternative net sales us dollar measures reflect current period exchange rates financial measures calculated presented accordance us gaap “gross profit” consists net sales less “cost sales” represents manufacturing costs price pay raw material suppliers manufacturers products well shipping handling costs including duties tariffs similar expenses certain members may profit activities reselling products amounts greater prices pay us members develop retain manage members may earn additional compensation activities refer “royalty overrides” royalty overrides significant operating expense consist • royalty overrides production bonuses • mark hughes bonus payable senior members • discretionary incentive cash bonuses qualifying members royalty overrides compensation members development retention improved productivity sales organizations paid several levels members sale royalty overrides compensation services rendered us recorded operating expense china independent service providers compensated marketing sales support services instead distributor allowances royalty overrides utilized global marketing plan service fees china independent service providers included selling general administrative expenses local country regulatory constraints may required modify member incentive plans described also pay reduced royalty overrides respect certain products worldwide consequently total royalty override percentage may vary time percentages noted “contribution margins” consist net sales less cost sales royalty overrides “selling general administrative expenses” represent operating expenses include labor benefits service fees china service providers sales events professional fees travel entertainment member promotions occupancy costs communication costs bank fees depreciation amortization foreign exchange gains losses miscellaneous operating expenses “other operating income” consists government grant income related china arbitration award connection reaudit 2010 2012 financial statements resignation kpmg independent registered public accounting firm “other income expense net” consists nonoperating income expenses impairments availableforsale investments gains losses due subsequent changes fair value cvr see note 8 shareholders’ deficit equity consolidated financial statements information cvr sales members outside united states made respective local currencies preparing financial statements translate revenues us dollars using average exchange rates additionally majority purchases suppliers generally made us dollars consequently strengthening us dollar versus foreign currency negative impact reported sales contribution margins generate foreign currency losses intercompany transactions foreign currency exchange rates fluctuate significantly time enter foreign currency derivatives partially mitigate foreign currency exchange risk discussed detail item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis financial condition results operations read conjunction item 6 selected financial data consolidated financial statements related notes included elsewhere annual report form 10k overview global nutrition company sells weight management targeted nutrition energy sports fitness outer nutrition products independent members china sell products independent service providers sales representatives sales officers customers preferred customers well companyoperated retail platforms necessary refer members distribute products achieve certain qualification requirements “sales leaders” pursue purpose make world healthier happier providing high quality sciencebased products members customers seek healthy lifestyle also offer business opportunity members seek additional income believe enhanced consumer awareness demand products due trends global obesity epidemic increasing healthcare costs aging populations coupled effectiveness personalized selling direct sales channel primary reasons continued success products grouped four principal categories weight management targeted nutrition energy sports fitness outer nutrition along literature promotional items products often sold series related products literature designed simplify weight management nutrition consumers maximize members’ crossselling opportunities continue monitor current global financial environment remain focused opportunities challenges retailing products enhancing customer experience sponsoring retaining members improving member productivity penetrating existing markets globalizing successful distributor methods operation dmos nutrition clubs fit clubs weight loss challenges introducing new products globalizing existing products developing niche market segments investing infrastructure sell products six geographic regions • north america • mexico • south central america • emea consists europe middle east africa • asia pacific excluding china • china july 15 2016 reached settlement ftc entered consent order resolved ftc’s multiyear investigation company continue monitor impact consent order board directors established implementation oversight committee connection consent order committee met meet regularly management oversee compliance terms consent order currently expect settlement longterm materially adverse impact business member base business member base particularly us may negatively impacted terms consent order change going market direct selling independent distributors compensating distributors based upon product sales organization sell see part item 1 business annual report form 10k discussion consent order part item 1a risk factors annual report form 10k discussion risks related settlement ftc volume points geographic region key nonfinancial measure focus volume points royalty basis volume points essentially weightedaverage measure product sales volume points unaffected exchange rates price changes used management proxy sales trends general excluding impact price changes increase volume points particular geographic region country indicates increase local currency net sales decrease volume points particular geographic region country indicates decrease local currency net sales criteria use determine recognize volume points identical revenue recognition policies us gaap unlike net sales generally recognized product delivered control passes member discussed greater detail note 2 basis presentation consolidated financial statements included part iv item 15 annual report form 10k recognize volume points member pays order generally prior product delivered periods volume points tracked vary slightly fiscal periods report results us gaap therefore timing differences product orders net sales recognized volume points recognized within given period however historically timing differences generally immaterial context using changes volume points proxy explain volumedriven changes net sales evaluating current approach assigning maintaining volume point values certain products markets changes approach may impact use volume points proxy sales trends future periods currently specific number volume points assigned product generally consistent across markets based volume point suggested retail price ratio similar products product available different quantities various sizes different volume point values general assigned volume point value consistent region country change year strategic reasons certain volume point values adjusted 2018 mexico region certain markets north america south central america regions reason volume points used manner described use volume points member qualification recognition purposes therefore generally keep volume points similar like product consistent global basis however volume points function value rather product type size reliable measure product mix example increase volume points specific country region could mean significant increase sales less expensive products marginal increase sales expensive products 1 excluding volume point adjustments made 2018 certain products certain markets percent change year ended december 31 2018 would increase 112 2 excluding volume point adjustments made 2018 certain products percent change year ended december 31 2018 would increase 34 3 excluding volume point adjustments made 2018 certain products certain markets percent change year ended december 31 2018 would decrease 67 4 excluding volume point adjustments made 2018 certain products mexico certain markets north america south central america regions noted percent change year ended december 31 2018 would increase 90 volume points increased 95 2018 decreased 36 2017 excluding impact adjustments made 2018 volume points increased 90 year believe north america’s volume point increase decrease 2017 reflects successful adaptation date members consent order implementation actions including new tools methods documenting sales well favorable comparison year business market somewhat disrupted implementation efforts believe mexico’s increase year decrease prior year reflects contribution programs designed increase activity productivity sales leaders promotions encourage sponsorship member activity south central america region saw continuing lesser decline volume points 2018 believe certain markets region progressed transitioning sustainable customeroriented business practices refined promotional approaches emea region saw increased volume point growth result believe customeroriented efforts including member training brand awareness product line expansion volume point growth asia pacific region though still somewhat mixed country improved many markets focusing customerbased business daily consumption dmos including nutrition clubs expansion product lines volume point increase china year contributed believe efforts including active promotional marketing campaigns new product introductions results discussed applicable sections sales geographic region presentation “retail value” represents suggested retail price products sell members gross sales amount reflected invoices retail value nongaap measure may comparable similarlytitled measures used companies price paid us members purchase product us discount suggested retail price refer discounts “distributor allowance” refer retail value less distributor allowances “product sales” total distributor allowances 397 405 404 retail value years ended december 31 2018 2017 2016 respectively distributor allowances marketing plan payouts generally utilize 90 95 suggested retail price depending product market apply discounts 50 distributor allowances payout rates 15 royalty overrides 7 production bonuses approximately 1 mark hughes bonus distributor allowances percentage retail value may vary country depending upon regulatory restrictions limit otherwise restrict distributor allowances also offer reduced distributor allowances respect certain products worldwide member’s level discount determined qualification based volume purchases cases member qualified less maximum discount remaining discount also refer wholesale commission received sponsoring members therefore product sales recognized net product returns distributor allowances “net sales” equal product sales plus shipping handling generally represents collect us gaap purposes shipping handling services relating product sales recognized fulfillment activities performance obligation transfer products therefore recorded within net sales part product sales considered separate revenues asc 606 visibility sales members customers figure would differ reported “retail value” factors including amount product purchased members personal consumption b prices charged members customers suggested retail prices discuss retail value fundamental role systems internal controls operations correlation member discounts royalty overrides addition retail value component financial reports use analyze financial results among things provide additional detail visibility net sales results companywide geographic region product category basis therefore nongaap measure may useful investors provides investors information used management measure accordance us generally accepted accounting principles us gaap retail value considered isolation substitute net sales consolidated income cash flow statement data prepared accordance us gaap measure profitability liquidity reconciliation retail value net sales presented results operations international operations provided continue provide significant portion total net sales result total net sales continue affected fluctuations us dollar foreign currencies order provide framework assessing underlying businesses performed excluding effect foreign currency fluctuations addition comparing percent change net sales one period another us dollars also compare percent change net sales one period another period using “net sales local currency” net sales local currency us gaap financial measure net sales local currency removes net sales us dollars impact changes exchange rates us dollar local currencies foreign subsidiaries translating current period net sales us dollars using foreign currency exchange rates used translate net sales previous comparable period believe presenting net sales local currency useful investors allows meaningful comparison net sales foreign operations period however net sales local currency measures considered isolation alternative net sales us dollar measures reflect current period exchange rates financial measures calculated presented accordance us gaap additionally impact foreign currency fluctuations venezuela price increases implement result highly inflationary economy market considered isolation disproportionately large impact consolidated results despite offsetting nature drivers net sales venezuela represent less 1 consolidated net sales material consolidated results therefore certain instances believe helpful provide additional information respect factors reported excluding impact venezuela illustrate disproportionate nature venezuela’s individual pricing foreign exchange impact consolidated results however excluding impact venezuela measures accordance us gaap considered isolation alternative presentation discussion thereof calculated accordance us gaap “gross profit” consists net sales less “cost sales” represents manufacturing costs price pay raw material suppliers manufacturers products well shipping handling costs including duties tariffs similar expenses certain members may profit activities reselling products amounts greater prices pay us members develop retain manage members may earn additional compensation activities refer “royalty overrides” royalty overrides significant operating expense consist • royalty overrides production bonuses • mark hughes bonus payable senior members • discretionary incentive cash bonuses qualifying members royalty overrides compensation members development retention improved productivity sales organizations paid several levels members sale royalty overrides compensation services rendered us recorded operating expense china independent service providers compensated marketing sales support services instead distributor allowances royalty overrides utilized global marketing plan service fees china independent service providers included selling general administrative expenses local country regulatory constraints may required modify member incentive plans described also pay reduced royalty overrides respect certain products worldwide consequently total royalty override percentage may vary time “contribution margins” consist net sales less cost sales royalty overrides “selling general administrative expenses” represent operating expenses include labor benefits service fees china service providers sales events professional fees travel entertainment member promotions occupancy costs communication costs bank fees depreciation amortization foreign exchange gains losses miscellaneous operating expenses “other operating income” consists government grant income related china arbitration award connection reaudit 2010 2012 financial statements resignation kpmg independent registered public accounting firm “other expense income net” consists nonoperating income expenses gains losses extinguishment debt gains losses due subsequent changes fair value nontransferable contractual contingent value right cvr provided share tendered october 2017 modified dutch auction tender offer see note 8 shareholders’ deficit consolidated financial statements included part iv item 15 annual report form 10k information cvr sales members outside united states made respective local currencies preparing financial statements translate revenues us dollars using average exchange rates additionally majority purchases suppliers generally made us dollars consequently strengthening us dollar versus foreign currency negative impact reported sales contribution margins generate foreign currency losses intercompany transactions foreign currency exchange rates fluctuate significantly time enter foreign currency derivatives partially mitigate foreign currency exchange risk discussed detail item 7a quantitative qualitative disclosures market risk results operations results operations periods necessarily indicative results operations future periods depend upon numerous factors including ability sponsor members retain sales leaders penetrate existing markets introduce new products programs help members increase retail efforts develop niche market segments following table sets forth selected results operations expressed percentage net sales periods indicated 1 service fees independent service providers china included selling general administrative expenses member compensation countries included royalty overrides changes net sales directly associated retailing products recruitment new members retention sales leaders strategies involve providing quality products improved dmos including daily consumption approaches nutrition clubs easier access product systemized training education members products methods continued promotion branding herbalife products management’s role incountry region corporate level provide members competitive broad innovative product line offer leadingedge business tools technology services encourage strong teamwork member leadership make business herbalife simple management uses marketing plan reflects rules global network marketing organization specify qualification requirements general compensation structure members coupled educational motivational tools promotions encourage members increase retailing retention recruiting turn affect net sales tools include sales events extravaganzas leadership development weekends world team schools large groups members gather thus allowing network members learn retailing retention recruiting techniques leading members become familiar market sell products business opportunities accordingly management believes development motivation programs increase productivity sales leader network expenses programs included selling general administrative expenses also use event nonevent product promotions motivate members increase retailing retention recruiting activities promotions prizes ranging qualifying events product prizes vacations program seen success many markets member activation program new members order modest number volume points first three months earn prize objective improve quality sales leaders encouraging new members begin acquiring retail customers attempting qualify sales leader status additionally certain markets begun utilize segmentation member base “preferred members” “distributors” targeted efficient communication promotions two differently motivated types members certain markets segmented begun using member data similarly categorize members communication promotion efforts dmos generated many markets globalized applicable combined efforts members country regional corporate management support number different dmos one popular dmos daily consumption dmo traditional dmo member typically sells customers somewhat infrequent basis eg monthly provides fewer opportunities interaction customers daily consumption dmo member interacts customers frequent basis including activities weekly weighins enables member better educate advise customers nutrition proper use products helps promote daily usage well thereby helping member grow business specific examples dmos include nutrition club concept mexico healthy breakfast concept russia internetsampling weight loss challenge united states management’s strategy review applicability expanding successful country initiatives throughout region appropriate support globalization initiatives factors described help members increase business turn helps drive volume point growth business thus net sales growth discussion net sales details specific drivers changes business causes sales fluctuations year ended december 31 2018 compared period 2017 year ended december 31 2017 compared period 2016 well unique growth contraction factors specific certain geographic regions significant countries within region periods net sales fluctuations companywide within particular geographic region country primarily result changes volume changes prices changes foreign currency translation rates discussion changes net sales quantifies impact drivers quantifiable changes foreign currency translation rates cites estimated impact significant price changes remaining drivers management believes primary drivers changes volume typically qualitative factors whose impact cannot quantified use volume points indication changes sales volume evaluating current approach assigning maintaining volume point values certain products markets changes approach may impact use volume points proxy sales trends future periods financial results year ended december 31 2018 compared year ended december 31 2017 net sales year ended december 31 2018 increased 105 48918 million compared 44277 million 2017 local currency net sales year ended december 31 2018 increased 1034 113 excluding venezuela compared period 2017 increase net sales year ended december 31 2018 primarily driven increase sales volume indicated 95 increase volume points 948 favorable impact price increases 26 favorable impact excluding venezuela partially offset 929 unfavorable impact fluctuations foreign currency rates 09 unfavorable impact excluding venezuela net income year ended december 31 2018 increased 387 2966 million 198 per diluted share compared 2139 million 129 per diluted share period 2017 increase year ended december 31 2018 primarily due 2836 million higher contribution margin higher net sales 897 million lower income taxes partially offset 1966 million higher selling general administrative expenses 92 million unfavorable impact due fair value changes relating revaluation cvr see note 8 shareholders’ deficit consolidated financial statements included part iv item 15 annual report form 10k 131 million loss extinguishment 4750 million 2019 convertible notes see note 4 longterm debt consolidated financial statements included part iv item 15 annual report form 10k 354 million loss extinguishment 2017 credit facility see note 4 longterm debt consolidated financial statements included part iv item 15 annual report form 10k net income year ended december 31 2018 included 298 million pretax favorable impact 212 million posttax government grant income china 535 million unfavorable impact noncash interest expense related 2019 convertible notes 2024 convertible notes forward transactions see note 4 longterm debt consolidated financial statements included part iv item 15 annual report form 10k 104 million pretax unfavorable impact 94 million posttax expenses related regulatory inquiries 47 million pretax unfavorable impact 36 million posttax foreign exchange losses related currency devaluation venezuela first quarter 2018 131 million unfavorable impact loss extinguishment 4750 million 2019 convertible notes see note 4 longterm debt consolidated financial statements included part iv item 15 annual report form 10k 354 million pretax unfavorable impact 280 million posttax loss extinguishment 2017 credit facility see note 4 longterm debt consolidated financial statements included part iv item 15 annual report form 10k 88 million unfavorable impact loss revaluation cvr see note 8 shareholders’ deficit consolidated financial statements included part iv item 15 annual report form 10k 295 million unfavorable impact valuation allowance deferred tax assets related limited utilization foreign tax credit carryforwards result us tax reform see note 12 income taxes consolidated financial statements included part iv item 15 annual report form 10k net income year ended december 31 2017 included 508 million pretax favorable impact 362 million posttax government grant income china 477 million unfavorable impact noncash interest expense related 2019 convertible notes forward transactions see note 4 longterm debt consolidated financial statements included part iv item 15 annual report form 10k 137 million pretax unfavorable impact 90 million posttax expenses related regulatory inquiries 50 million pretax unfavorable impact 38 million posttax related legal advisory services expenses response allegations negative information put forward marketplace hedge fund manager started late 2012 see selling general administrative expenses discussion 177 million pretax unfavorable impact 117 million posttax related implementation consent order comprised 147 million legal advisory expenses 30 million product discounts related preferred member conversions 1533 million unfavorable impact provisional net expense related us tax reform see note 12 income taxes consolidated financial statements included part iv item 15 annual report form 10k 04 million favorable impact gain revaluation cvr provided participants october 2017 modified dutch auction tender offer see note 8 shareholders’ deficit consolidated financial statements included part iv item 15 annual report form 10k reporting segment results aggregate operating segments excluding china reporting segment primary reporting segment primary reporting segment includes north america mexico south central america emea asia pacific regions china identified separate reporting segment meet criteria aggregation see note 10 segment information consolidated financial statements included part iv item 15 annual report form 10k discussion reporting segments see discussions net sales contribution margin reporting segments net sales reporting segment primary reporting segment reported net sales 38842 million year ended december 31 2018 representing increase 3424 million 97 3385 million 96 excluding venezuela compared period 2017 local currency net sales increased 1264 113 excluding venezuela year ended december 31 2018 compared period 2017 97 increase net sales year ended december 31 2018 primarily due increase sales volume indicated 100 increase volume points 1182 favorable impact price increases 30 favorable impact excluding venezuela partially offset 1167 unfavorable impact fluctuations foreign currency rates 17 unfavorable impact excluding venezuela 14 unfavorable impact country sales mix discussion china’s net sales year ended december 31 2018 compared period 2017 see china section sales geographic region contribution margin reporting segment discussed “presentation” contribution margin consists net sales less cost sales royalty overrides primary reporting segment reported contribution margin 16935 million year ended december 31 2018 representing increase 1593 million 104 compared period 2017 104 increase contribution margin year ended december 31 2018 primarily result 1766 favorable impact price increases 47 favorable impact excluding venezuela 115 favorable impact volume increases partially offset 1737 unfavorable impact fluctuations foreign currency exchange rates 09 unfavorable impact excluding venezuela 37 unfavorable impact country sales mix 10 unfavorable impact cost changes related selfmanufacturing strategic sourcing china reported contribution margin 9150 million year ended december 31 2018 representing increase 1243 million 157 compared period 2017 157 increase contribution margin primarily result 57 favorable impact volume increases 33 favorable impact fluctuations foreign currency exchange rates 39 favorable impact sales mix 12 favorable impact price increases sales geographic region following chart reconciles retail value net sales geographic region 1 retail value nongaap measure may comparable similarlytitled measures used companies see “presentation” discussion calculate retail value believe measure useful investors north america north america region reported net sales 9483 million year ended december 31 2018 net sales increased 1081 million 129 year ended december 31 2018 compared period 2017 local currency net sales increased 128 year ended december 31 2018 compared period 2017 129 increase net sales year ended december 31 2018 primarily due increase sales volume indicated 119 increase volume points 112 excluding impact volume point adjustments noted volume points geographic region section 31 favorable impact price increases net sales us 9259 million year ended december 31 2018 net sales increased 1076 million 131 year ended december 31 2018 compared period 2017 part consent order effective may 2017 implemented certain new procedures enhanced certain existing procedures united states believe north america’s sales volume increase year decrease 2017 reflects successful adaptation date members consent order implementation actions including new tools methods documenting sales well favorable comparison prior year periods business market somewhat disrupted implementation efforts region leveraging segmentation member base distributors preferred members target refine communications promotions requirements distributors document customer sales utilized pilot lower sales volume thresholds sales leader qualification north america also implemented programs encourage sponsorship increase distributor preferred member customer activity continued extend product line mexico region reported net sales 4679 million year ended december 31 2018 net sales increased 252 million 57 year ended december 31 2018 compared period 2017 local currency net sales increased 78 year ended december 31 2018 compared period 2017 57 increase net sales year ended december 31 2018 primarily due 53 favorable impact price increases increase sales volume indicated 52 increase volume points 34 excluding impact volume point adjustments noted volume points geographic region section partially offset 21 unfavorable impact fluctuations foreign currency exchange rates believe volume point increase year ended december 31 2018 decrease prior year despite continuing difficult economic conditions market reflects contribution programs designed increase activity productivity sales leaders promotions encourage sponsorship new member activity efforts supported communications targeted member level within marketing plan distribution channel utilized continue expand product access market tariffs enacted mexican government 2018 products imported united states applicable significant portion product line may adverse impact future sales remain place particularly company deems necessary increase product prices south central america south central america region reported net sales 4376 million year ended december 31 2018 net sales decreased 367 million 77 406 million 87 excluding venezuela year ended december 31 2018 compared period 2017 local currency net sales increased 8587 decreased 11 excluding venezuela year ended december 31 2018 compared period 2017 77 decrease net sales year ended december 31 2018 due 8639 favorable impact price increases 35 favorable impact excluding venezuela offset 8665 unfavorable impact fluctuations foreign currency exchange rates 76 unfavorable impact excluding venezuela decline sales volume indicated 54 decrease volume points 67 excluding impact volume point adjustments noted volume points geographic region section market attributes vary across region general marketing plan changes intended build sustainable business members focus daily product consumption retailing taking hold slowly region seen global regions working member leadership explore operational promotional approaches consistent direction suitable markets well exploring product affordability approaches certain markets brazil region’s largest market net sales 1429 million year ended december 31 2018 net sales decreased 477 million 250 year ended december 31 2018 compared period 2017 local currency net sales decreased 153 year ended december 31 2018 compared period 2017 fluctuation foreign currency exchange rates unfavorable impact 186 million net sales year ended december 31 2018 noted region broadly marketing plan changes intended build sustainable business members focus daily product consumption retailing taking hold slowly seen regions additionally members brazil saw product costs increase second third quarter year implemented pass certain indirect taxes previously absorbed market faces uncertain economic political outlook well new competitive pressures help stimulate sales growth increasing number product access points enhancing training efforts expanding product offering market refining sales leader qualification criteria net sales peru 643 million year ended december 31 2018 net sales increased 21 million 33 year ended december 31 2018 compared period 2017 local currency net sales increased 41 year ended december 31 2018 compared period 2017 fluctuation foreign currency exchange rates unfavorable impact 05 million net sales year ended december 31 2018 product prices peru increased 3 october 2018 believe favorable comparison year due success 2018 revised event qualifications promotions market well lower sales volume prior year first quarter believe due severe inclement weather emea region reported net sales 9770 million year ended december 31 2018 net sales increased 1083 million 125 year ended december 31 2018 compared period 2017 local currency net sales increased 124 year ended december 31 2018 compared period 2017 125 increase net sales year ended december 31 2018 primarily due increase sales volume indicated 121 increase volume points 24 favorable impact price increases net sales growth broadbased across emea region 2018 generally reflecting believe efforts enhance quality activity sales leaders including member training brand awareness product line expansion well enhanced technology tools ordering business performance customer retailing volume point net sales growth year led spain russia turkey net sales italy 1414 million year ended december 31 2018 net sales increased 20 million 14 year ended december 31 2018 compared period 2017 local currency net sales decreased 35 year ended december 31 2018 compared period 2017 fluctuation foreign currency exchange rates favorable impact 68 million net sales year ended december 31 2018 italy seen decline momentum several years growth revised certain member promotions trainings communications ways believe targeted market december 2018 segmented member base italy distributors preferred customers comparable distributors preferred members united states net sales russia 1374 million year ended december 31 2018 net sales increased 69 million 53 year ended december 31 2018 compared period 2017 local currency net sales increased 133 year ended december 31 2018 compared period 2017 fluctuation foreign currency exchange rates unfavorable impact 104 million net sales year ended december 31 2018 market continues focus expansion success nutrition clubs success new products new education training communication approaches enhanced brand awareness activities including media campaigns social media net sales spain 1250 million year ended december 31 2018 net sales increased 217 million 210 year ended december 31 2018 compared period 2017 local currency net sales increased 157 year ended december 31 2018 compared period 2017 fluctuation foreign currency exchange rates favorable impact 55 million net sales year ended december 31 2018 spain benefited ongoing programs promotions sponsorships well social media activity raised brand awareness healthy active lifestyle contributed momentum market asia pacific asia pacific region excludes china reported net sales 10534 million year ended december 31 2018 net sales increased 1375 million 150 year ended december 31 2018 compared period 2017 local currency net sales increased 167 year ended december 31 2018 compared period 2017 150 increase net sales year ended december 31 2018 primarily due increase sales volume indicated 186 increase volume points 21 favorable impact price increases partially offset 29 unfavorable impact changes country sales mix resulting lower percentage sales volume coming markets higher prices 17 unfavorable impact fluctuations foreign currency exchange rates volume point net sales performance increased region mixed country continuing increases india indonesia well significant contributions vietnam malaysia partially offset declines primarily south korea taiwan volume point net sales performance vietnam strong latter half 2018 anticipation increase regulatory required trainings hours participate direct selling commences february 2019 net sales india 2440 million year ended december 31 2018 net sales increased 590 million 319 year ended december 31 2018 compared period 2017 local currency net sales increased 392 year ended december 31 2018 compared period 2017 fluctuation foreign currency exchange rates unfavorable impact 136 million net sales year ended december 31 2018 drive sustainable business growth india continues expand product line add product access points including pickup locations enhance brand presence utilize associate activation program india member base segmented associates preferred customers comparable distributors preferred members respectively united states net sales indonesia 1424 million year ended december 31 2018 net sales increased 94 million 70 year ended december 31 2018 compared period 2017 local currency net sales increased 139 year ended december 31 2018 compared period 2017 fluctuation foreign currency exchange rates unfavorable impact 91 million net sales year ended december 31 2018 indonesia market continued strengthen focusing customerbased business daily consumption nutrition clubs training activities supported new product introductions targeted communications net sales south korea 1356 million year ended december 31 2018 net sales decreased 12 million 09 year ended december 31 2018 compared period 2017 local currency net sales decreased 36 year ended december 31 2018 compared period 2017 fluctuation foreign currency exchange rates favorable impact 38 million net sales year ended december 31 2018 several years transitionary impact marketing plan changes including certain changes unique south korea led contraction business market management focused fostering daily consumptions practices south korea achieved yearoveryear volume point net sales growth fourth quarter 2018 net sales taiwan 1123 million year ended december 31 2018 net sales decreased 55 million 47 year ended december 31 2018 compared period 2017 local currency net sales decreased 56 year ended december 31 2018 compared period 2017 fluctuation foreign currency exchange rates favorable impact 10 million net sales year ended december 31 2018 taiwan sales continued decline market adjusts programs training intended help members establish customerbased sustainable business approaches succeeded elsewhere nutrition clubs china region reported net sales 10076 million year ended december 31 2018 net sales increased 1217 million 137 year ended december 31 2018 compared period 2017 local currency net sales increased 113 year ended december 31 2018 compared period 2017 137 increase net sales year ended december 31 2018 primarily due increase sales volume indicated 57 increase volume points 35 favorable sales mix variance 24 favorable impact fluctuations foreign currency exchange rates 10 favorable fullyear impact price increases made 2017 increase volume year driven believe efforts including active marketing promotional training campaigns including use social media well new product introductions one new program intended enhance training quality activity certain service providers provides additional service fee incentives also announced new initiative china growth impact investment program stimulate development business china help address challenging publicpolicy issues rise obesity sales volume growth fourth quarter 2018 slowed challenging economic industry conditions may persist 2019 sales product category 1 product buy backs returns product categories included literature promotional category 2 retail value nongaap measure may comparable similarlytitled measures used companies see “presentation” discussion calculate retail value believe measure useful investors net sales product categories except outer nutrition literature promotional increased year ended december 31 2018 compared period 2017 trends business factors described discussions individual geographic regions apply generally product categories gross profit gross profit 39725 million year ended december 31 2018 compared 35791 million period 2017 gross profit percentage net sales 812 year ended december 31 2018 compared 808 period 2017 favorable net increase 37 basis points increase gross profit percentage net sales year ended december 31 2018 compared period 2017 included favorable impact retail price increases 1659 basis points favorable impact 45 basis points excluding venezuela partially offset unfavorable impact foreign currency fluctuations 1565 basis points favorable impact 47 basis points excluding venezuela unfavorable cost changes related selfmanufacturing strategic sourcing 41 basis points unfavorable cost changes 10 basis points unfavorable impact higher inventory writedowns 5 basis points unfavorable changes country mix 1 basis point net favorable impact foreign currency fluctuations retail price increases venezuela year ended december 31 2018 compared period 2017 2 basis points generally gross profit percentage net sales may vary period due impact foreign currency fluctuations changes country mix volume changes among countries varying margins retail price increases cost changes related selfmanufacturing strategic sourcing inventory writedowns royalty overrides royalty overrides 13640 million year ended december 31 2018 compared 12542 million period 2017 royalty overrides percentage net sales 279 year ended december 31 2018 compared 283 period 2017 service fees independent service providers china included selling general administrative expenses member compensation countries included royalty overrides generally royalty overrides percentage net sales may vary slightly period due changes mix products countries full royalty overrides paid certain products certain countries selling general administrative expenses selling general administrative expenses 19552 million year ended december 31 2018 compared 17586 million period 2017 selling general administrative expenses percentage net sales 399 year ended december 31 2018 compared 397 period 2017 increase selling general administrative expenses year ended december 31 2018 driven 1037 million higher service fees china independent service providers due sales growth china new program provides certain service providers additional service fee incentives 276 million higher member promotion event costs 232 million higher professional fees 230 million relating importer fees due change income statement classification pursuant asc 606 discussed note 2 basis presentation consolidated financial statements included part iv item 15 annual report form 10k 150 million higher labor employee benefit costs partially offset 191 million lower nonincome tax expense 146 million lower advertising sponsorships operating income operating income 298 million year ended december 31 2018 compared 508 million period 2017 relating government grant income china see note 2 basis presentation consolidated financial statements included part iv item 15 annual report form 10k discussion interest expense net interest expense net follows increase interest expense net year ended december 31 2018 compared period 2017 primarily due increase overall borrowings partially offset higher interest income earned expense income net 573 million expense net year ended december 31 2018 consists 88 million loss revaluation cvr provided participants october 2017 modified dutch auction tender offer see note 8 shareholders’ deficit consolidated financial statements included part iv item 15 annual report form 10k 131 million loss extinguishment 4750 million aggregate principal amount 2019 convertible notes see note 4 longterm debt consolidated financial statements included part iv item 15 annual report form 10k 354 million loss extinguishment company’s 2017 senior secured credit facility see note 4 longterm debt consolidated financial statements included part iv item 15 annual report form 10k 04 million income net year ended december 31 2017 relates gain revaluation cvr provided participants october 2017 modified dutch auction tender offer see note 8 shareholders’ deficit consolidated financial statements included part iv item 15 annual report form 10k income taxes income taxes 1676 million year ended december 31 2018 compared 2573 million period 2017 effective income tax rate 361 year ended december 31 2018 compared 546 period 2017 decrease effective tax rate year ended december 31 2018 compared period 2017 primarily due decrease net tax expense result us tax reform impacted ability benefit certain foreign tax credit carryforwards valuation allowances 295 million 1533 million recorded 2018 2017 respectively well increase net benefits discrete events partially offset impact changes geographic mix income included discrete events years ended december 31 2018 2017 impact 531 million 311 million respectively excess tax benefits sharebased compensation arrangements see note 12 income taxes consolidated financial statements included part iv item 15 annual report form 10k additional discussion financial results year ended december 31 2017 compared year ended december 31 2016 net sales year ended december 31 2017 decreased 14 44277 million compared 44884 million 2016 local currency net sales year ended december 31 2017 decreased 11 compared period 2016 decrease net sales year ended december 31 2017 primarily result decrease sales volume indicated decrease volume points unfavorable change country sales mix reduced net sales 36 11 respectively partially offset impact price increases increased net sales approximately 30 net income year ended december 31 2017 decreased 177 2139 million 129 per diluted share compared 2600 million 151 per diluted share period 2016 decrease year ended december 31 2017 primarily due decline sales discussed 297 million arbitration award 2016 related reaudit higher interest expense related new credit facility higher income taxes primarily due 1533 million provisional net expense related us tax reform see note 12 income taxes consolidated financial statements included part iv item 15 annual report form 10k partially offset 2030 million regulatory settlements 2016 higher government grant income china net income year ended december 31 2017 included 508 million pretax favorable impact 362 million posttax government grant income china 477 million unfavorable impact noncash interest expense related convertible notes forward transactions see note 4 longterm debt consolidated financial statements included part iv item 15 annual report form 10k 137 million pretax unfavorable impact 90 million posttax expenses related regulatory inquiries 50 million pretax unfavorable impact 38 million posttax related legal advisory services expenses response allegations negative information put forward marketplace hedge fund manager started late 2012 see selling general administrative expenses discussion 177 million pretax unfavorable impact 117 million posttax related implementation consent order comprised 147 million legal advisory expenses 30 million product discounts related preferred member conversions 1533 million unfavorable impact provisional net expense related us tax reform see note 12 income taxes consolidated financial statements included part iv item 15 annual report form 10k 04 million favorable impact gain revaluation cvr provided participants modified dutch auction tender offer see note 8 shareholders’ deficit equity consolidated financial statements included part iv item 15 annual report form 10k net income year ended december 31 2016 included 2030 million pretax unfavorable impact 1330 million posttax related regulatory settlements 342 million pretax favorable impact 243 million posttax government grant income china 297 million pretax favorable impact 258 million posttax related arbitration award connection reaudit 451 million unfavorable impact noncash interest expense related convertible notes forward transactions see note 4 longterm debt consolidated financial statements included part iv item 15 annual report form 10k 163 million pretax unfavorable impact 108 million posttax expenses related regulatory inquiries 121 million pretax unfavorable impact 90 million posttax related legal advisory services expenses response allegations negative information put forward marketplace hedge fund manager started late 2012 see selling general administrative expenses discussion 36 million pretax unfavorable impact 26 million posttax related expenses incurred recovery costs associated reaudit 2010 2012 financial statements resignation kpmg independent registered public accounting firm 107 million pretax unfavorable impact 71 million posttax related implementation consent order comprised 90 million legal advisory expenses 17 million product discounts related preferred member conversions reporting segment results aggregate operating segments excluding china reporting segment primary reporting segment primary reporting segment includes north america mexico south central america emea asia pacific regions china identified separate reporting segment meet criteria aggregation see note 10 segment information consolidated financial statements included part iv item 15 annual report form 10k discussion reporting segments see discussions net sales contribution margin reporting segments net sales reporting segment primary reporting segment reported net sales 35418 million year ended december 31 2017 net sales primary reporting segment decreased 778 million 21 year ended december 31 2017 compared period 2016 local currency net sales decreased 24 year ended december 31 2017 compared period 2016 primary reporting segment decrease net sales year ended december 31 2017 primarily result decrease sales volume indicated decrease volume points unfavorable change country sales mix reduced net sales 43 15 respectively partially offset impact price increases increased net sales approximately 30 discussion china’s net sales year ended december 31 2017 compared period 2016 see china section sales geographic region contribution margin reporting segment discussed “presentation” contribution margin consists net sales less cost sales royalty overrides primary reporting segment reported contribution margin 15342 million year ended december 31 2017 contribution margin primary reporting segment decreased 377 million 24 year ended december 31 2017 compared period 2016 24 decrease year ended december 31 2017 primarily result volume decreases indicated decrease volume points unfavorable country sales mix reduced contribution margin 40 44 respectively partially offset favorable impact price increases cost savings strategic sourcing selfmanufacturing increased contribution margin approximately 46 10 respectively china reported contribution margin 7907 million year ended december 31 2017 contribution margin china relatively flat compared period 2016 primarily result price increases increased contribution margin approximately 36 partially offset unfavorable impact fluctuations foreign currency exchange rates reduced contribution margin approximately 29 sales geographic region following chart reconciles retail value net sales geographic region 1 retail value nongaap measure may comparable similarlytitled measures used companies see “presentation” discussion calculate retail value believe measure useful investors north america north america region reported net sales 8402 million year ended december 31 2017 net sales decreased 1155 million 121 year ended december 31 2017 compared period 2016 local currency net sales decreased 121 year ended december 31 2017 compared period 2016 decrease net sales year ended december 31 2017 compared period 2016 result net sales decrease us 1167 million 125 121 decrease net sales north america region primarily result decrease sales volume indicated 120 decrease volume points part consent order implemented certain new procedures enhanced certain existing procedures united states believe north america’s volume point decreases year ended december 31 2017 versus increase 2016 reflected transitionary impact member focus consent order implementation actions including training new tools methods documenting sales time spent train sales organizations similar transitionary impact occurred result marketing plan changes made 2014 expect consent order longterm material adverse impact net sales north america region member base north america implemented programs encourage sponsorship increase distributor preferred member customer activity continued extend product line including introduction trial packs snack sizes popular products mexico region reported net sales 4427 million year ended december 31 2017 net sales year ended december 31 2017 decreased 39 million 09 compared period 2016 local currency net sales year ended december 31 2017 increased 05 compared period 2016 09 decrease net sales year ended december 31 2017 primarily result decrease sales volume indicated 48 decrease volume points effect strong us dollar resulting impact fluctuations foreign currency exchange rates reduced net sales approximately 13 reductions net sales partially offset price increases contributed approximately 52 net sales believe volume point decline year ended december 31 2017 increase 2016 attributable difficult economic environment marked rising inflation weaker peso well adverse impact damaging natural disaster greater mexico city area third quarter 2017 following inception member activation program designed enhance quality sales leaders saw fewer new members higher level activity among new members south central america south central america region reported net sales 4743 million year ended december 31 2017 net sales decreased 144 million 29 year ended december 31 2017 compared period 2016 local currency net sales increased 04 year ended december 31 2017 compared period 2016 excluding venezuela saw significant price increases response highly inflationary environment south central america local currency net sales decreased 60 year ended december 31 2017 29 decrease net sales year ended december 31 2017 primarily result decrease sales volume indicated 104 decrease volume points effect strong us dollar resulting impact fluctuations foreign currency exchange rates reduced net sales approximately 33 reductions net sales partially offset price increases increased net sales approximately 107 volume declines widespread across region marketspecific factors members many markets continued transition sustainable customeroriented business practices effect price increases net sales region largest venezuela market brazil region’s largest market net sales 1906 million year ended december 31 2017 net sales increased 08 million 04 year ended december 31 2017 compared period 2016 local currency net sales decreased 77 year ended december 31 2017 compared period 2016 fluctuation foreign currency exchange rates favorable impact 153 million net sales brazil year ended december 31 2017 marketing plan changes intended build sustainable business members focus daily product consumption retailing taking hold following lengthy transition period addition introduced programs brazil successful regions improve member activity also increased number product access points enhanced training efforts expanded product offering including launch soy milk product changes icms tax legislation effective april 2016 reduced net sales approximately 40 million first quarter 2017 net sales peru 623 million year ended december 31 2017 net sales decreased 22 million 33 year ended december 31 2017 compared period 2016 local currency net sales decreased 66 year ended december 31 2017 compared period 2016 fluctuation foreign currency exchange rates favorable impact 21 million net sales year ended december 31 2017 areas region peru saw volume declines transitioned sustainable consumption retailingoriented business practices declines year also attributed severe inclement weather first quarter 2017 changes qualification levels certain promotions achieve objectives increasing number qualifying members emea region reported net sales 8687 million year ended december 31 2017 net sales increased 531 million 65 year ended december 31 2017 compared period 2016 local currency net sales increased 42 year ended december 31 2017 compared period 2016 65 increase net sales year ended december 31 2017 primarily result increase sales volume indicated 37 increase volume points price increases increased net sales approximately 24 effect fluctuations foreign currency exchange rates increased net sales approximately 23 increases net sales partially offset unfavorable change country sales mix resulting lower percentage sales volume coming markets higher prices though emea region made large number markets different characteristics levels success generally believe volume growth region correlated programs enhanced quality activity sales leaders continued focus customeroriented initiatives net sales italy 1394 million year ended december 31 2017 net sales increased 16 million 12 year ended december 31 2017 compared period 2016 local currency net sales decreased 05 year ended december 31 2017 compared period 2016 fluctuation foreign currency exchange rates favorable impact 23 million net sales italy year ended december 31 2017 italy saw modest decline new members several years growth net sales russia 1304 million year ended december 31 2017 net sales increased 245 million 232 year ended december 31 2017 compared period 2016 local currency net sales increased 78 year ended december 31 2017 compared period 2016 fluctuation foreign currency exchange rates favorable impact 163 million net sales russia year ended december 31 2017 product prices russia increased 5 february 2017 5 march 2016 market continued utilize member activation program attract enhance quality new members market success new products new training communication approaches program reactivate former members net sales spain 1033 million year ended december 31 2017 net sales increased 45 million 46 year ended december 31 2017 compared period 2016 local currency net sales spain increased 25 year ended december 31 2017 compared period 2016 fluctuation foreign currency exchange rates favorable impact 20 million net sales spain year ended december 31 2017 product prices spain increased 2 july 2017 spain benefited ongoing programs promotions sponsorships raised brand awareness healthy active lifestyle asia pacific asia pacific region excludes china reported net sales 9159 million year ended december 31 2017 net sales increased 29 million 03 year ended december 31 2017 compared period 2016 local currency net sales decreased 09 year ended december 31 2017 compared period 2016 03 increase net sales year ended december 31 2017 primarily result increase sales volume indicated 12 increase volume points price increases increased net sales approximately 13 well effect fluctuations foreign currency exchange rates increased net sales approximately 12 increases net sales partially offset unfavorable change country sales mix resulting lower percentage sales volume coming markets higher prices reduced net sales approximately 29 volume points performance region mixed country continuing increases indonesia india well markets offset declines primarily south korea taiwan net sales india 1851 million year ended december 31 2017 net sales increased 172 million 102 year ended december 31 2017 compared period 2016 local currency net sales increased 68 year ended december 31 2017 compared period 2016 fluctuation foreign currency exchange rates favorable impact 58 million net sales year ended december 31 2017 india segmented members preferred members distributors required local regulations india continued expand product line added product pickup locations members utilized associate activation program net sales south korea 1368 million year ended december 31 2017 net sales decreased 410 million 231 year ended december 31 2017 compared period 2016 local currency net sales decreased 249 year ended december 31 2017 compared period 2016 fluctuation foreign currency exchange rates favorable impact 33 million net sales year ended december 31 2017 south korea market impacted marketing plan changes including certain changes unique market believe changes efforts including member activation program saw success market supported improved retailing opportunity net sales indonesia 1330 million year ended december 31 2017 net sales increased 191 million 167 year ended december 31 2017 compared period 2016 local currency net sales increased 174 year ended december 31 2017 compared period 2016 fluctuation foreign currency exchange rates unfavorable impact 08 million net sales year ended december 31 2017 indonesia market continued strengthen focusing customerbased business daily consumption nutrition clubs training activities new products increased number product access points market expanded citybycity training promotion approach introduced member pack oriented toward business builders net sales taiwan 1178 million year ended december 31 2017 net sales decreased 96 million 75 year ended december 31 2017 compared period 2016 local currency net sales decreased 128 year ended december 31 2017 compared period 2016 fluctuation foreign currency exchange rates favorable impact 67 million net sales year ended december 31 2017 taiwan sales declined versus prior years market adjusted members optimized programs training intended help members establish customerbased sustainable business approaches china net sales china 8859 million year ended december 31 2017 net sales increased 171 million 20 year ended december 31 2017 compared period 2016 local currency net sales increased 40 year ended december 31 2017 compared period 2016 net sales increase year result price increases effective april 2017 increased net sales approximately 33 increase sales volume indicated 14 increase volume points partially offset unfavorable impact fluctuations foreign currency exchange rates reduced net sales approximately 20 although sales volume saw slight increase year ended december 31 2017 believe lower rate increase volume versus recent years attributable factors reduction number nutrition clubs members cases consolidated smaller clubs larger commercialized clubs government limitations companies conducting commercial meetings ahead national congress held fall 2017 member overemphasis social media business methods traditional methods introduced member activation program new members expanded online ordering platform added new products market renewed branding campaign sales product category 1 product buy backs returns product categories included literature promotional category 2 retail value nongaap measure may comparable similarlytitled measures used companies see “presentation” discussion calculate retail value believe measure useful investors net sales product categories except targeted nutrition decreased year ended december 31 2017 compared period 2016 trend business factors described discussions individual geographic regions apply generally product categories gross profit gross profit 35791 million year ended december 31 2017 compared 36338 million period 2016 percentage net sales gross profit year ended december 31 2017 808 compared 810 period 2016 unfavorable net decrease 13 basis points gross profit rate year ended december 31 2017 included unfavorable impact foreign currency fluctuations 90 basis points country mix 9 basis points cost changes 9 basis points partially offset favorable impact retail price increases 61 basis points cost savings strategic sourcing selfmanufacturing 34 basis points generally gross profit percentage net sales may vary period due impact foreign currency fluctuations changes country mix volume changes among countries varying margins retail price increases cost savings strategic sourcing selfmanufacturing inventory writedowns royalty overrides royalty overrides 12542 million year ended december 31 2017 compared 12726 million period 2016 royalty overrides percentage net sales 283 year ended december 31 2017 compared 284 period 2016 compensation independent service providers china included selling general administrative expenses opposed royalty overrides included members generally royalty overrides percentage net sales may vary slightly period due changes mix products countries full royalty overrides paid certain products certain countries selling general administrative expenses selling general administrative expenses 17586 million year ended december 31 2017 compared 19669 million period 2016 selling general administrative expenses percentage net sales 397 year ended december 31 2017 compared 438 period 2016 decrease selling general administrative expenses year ended december 31 2017 driven 2030 million regulatory settlements 2016 112 million lower professional fees primarily lower expenses related allegations raised hedge fund manager lower expenses related recovery costs kpmg associated reaudit 2010 2012 financial statements 95 million lower member promotion event costs 92 million lower travel expenses due cost control initiatives 91 million lower advertising sponsorship expenses partially offset 257 million higher labor employee benefit costs 124 million higher service fees china independent service providers related sales growth china late 2012 hedge fund manager publicly raised allegations regarding legality network marketing program announced hedge fund manager taken significant short position regarding common shares leading intense public scrutiny significant stock price volatility engaged legal advisory services firms assist responding allegations perform related services connection events year ended december 31 2017 recorded approximately 50 million expenses related matter approximately 32 million related legal advisory professional service fees year ended december 31 2016 recorded approximately 121 million expenses related matter approximately 95 million related legal advisory professional service fees operating income operating income 508 million year ended december 31 2017 compared 638 million period 2016 decrease operating income due arbitration award received 2016 connection reaudit 2010 2012 financial statements resignation kpmg independent registered public accounting firm see note 2 basis presentation consolidated financial statements included part iv item 15 annual report form 10k discussion partially offset increase government grant income related china interest expense net interest expense net follows increase net interest expense year ended december 31 2017 compared period 2016 primarily due increase interest expense due higher interest rates increased borrowing amounts relating new 145 billion senior secured credit facility includes 13 billion term loan b entered february 15 2017 discussed liquidity capital resources increases partially offset higher interest income resulting higher cash balances mainly due proceeds new term loan b expense income net 04 million income year ended december 31 2017 relates gain revaluation cvr provided participants modified dutch auction tender offer closed october 2017 see note 8 shareholders’ deficit consolidated financial statements included part iv item 15 annual report form 10k income taxes income taxes 2573 million year ended december 31 2017 compared 1047 million period 2016 percentage pretax income effective income tax rate 546 year ended december 31 2017 compared 287 period 2016 increase effective tax rate year ended december 31 2017 compared period 2016 primarily due establishment valuation allowance us foreign tax credits see note 12 income taxes consolidated financial statements included part iv item 15 annual report form 10k additional discussion liquidity capital resources historically met working capital expenditure requirements including funding expansion operations net cash flows provided operating activities variations sales products directly affect availability funds material contractual restrictions ability transfer remit funds among international affiliated companies however foreign currency restrictions certain countries could reduce ability timely obtain us dollars even restrictions believe sufficient resources including cash flow operating activities access capital markets meet debt service obligations timely manner able continue meet objectives historically debt resulted need fund normal operations instead resulted primarily share repurchase programs since inception 2007 total share repurchases amounted approximately 45 billion significant net sales decline could potentially affect availability funds many largest expenses variable nature believe protects funding dramatic net sales downturn 11989 million cash equivalents senior secured credit facility addition cash flow operations used support general corporate purposes including future share repurchases dividends strategic investment opportunities cash pooling arrangement financial institution cash management purposes cash pooling arrangement allows certain participating subsidiaries withdraw cash financial institution based upon aggregate cash deposits held subsidiaries participate cash pooling arrangement owe amounts financial institution pooling arrangement december 31 2018 2017 year ended december 31 2018 generated 6484 million operating cash flow compared 5908 million period 2017 increase operating cash flow result higher net income see financial results discussion favorable changes operating assets liabilities partially offset lower noncash items change operating assets liabilities primarily result favorable changes receivables accounts payable current liabilities partially offset unfavorable changes inventories prepaid expenses current assets decrease noncash items primarily result changes deferred income taxes mainly due impact us tax reform enacted fourth quarter 2017 354 million loss extinguishment 2017 credit facility 131 million loss extinguishment 4750 million aggregate principal 2019 convertible notes 92 million unfavorable impact due fair value changes relating revaluation cvr year ended december 31 2017 generated 5908 million operating cash flow compared 3673 million period 2016 increase operating cash flow result higher noncash items favorable changes operating assets liabilities partially offset lower net income increase noncash items primarily result changes deferred income taxes mainly due impact us tax reform favorable change operating assets liabilities primarily result favorable changes inventories prepaid expenses current assets partially offset unfavorable changes receivables current liabilities decrease net income primarily result lower contribution margin due lower net sales higher interest expense new credit facility higher income taxes also mainly due impact us tax reform partially offset lower selling general administrative expenses mainly due 2030 million regulatory settlements 2016 changes deferred income taxes related us tax reform net impact operating cash flow decreased net income 1533 million increased noncash adjustments net income 1533 million capital expenditures including accrued capital expenditures years ended december 31 2018 2017 2016 882 million 951 million 1443 million respectively majority expenditures represented investments management information systems including initiatives develop webbased member tools expect incur total capital expenditures approximately 135 million 175 million full year 2019 march 2018 hosted annual global herbalife honors event los angeles california sales leaders around world met shared best practices conducted leadership training awarded members 648 million mark hughes bonus payments related 2017 performance march 2017 awarded members 652 million mark hughes bonus payments related 2016 performance senior secured credit facility february 15 2017 entered 14500 million senior secured credit facility 2017 credit facility consisting 13000 million term loan b 2017 term loan b 1500 million revolving credit facility 2017 revolving credit facility syndicate financial institutions lenders 2017 revolving credit facility mature february 15 2022 2017 term loan b mature february 15 2023 2017 credit facility amended effective march 16 2018 make certain technical amendments connection offering 2024 convertible notes defined terminated 2017 credit facility august 16 2018 11781 million outstanding repaid full prior termination 2017 term loan b recently bore interest either eurocurrency rate plus margin 550 base rate plus margin 450 2017 revolving credit facility recently bore interest either eurocurrency rate plus margin either 450 475 base rate plus margin either 350 375 based consolidated leverage ratio august 16 2018 entered new 125 billion senior secured credit facility 2018 credit facility consisting 2500 million term loan 2018 term loan 7500 million term loan b 2018 term loan b 2500 million revolving credit facility 2018 revolving credit facility 2018 term loan 2018 revolving credit facility mature august 16 2023 2018 term loan b matures august 18 2025 however 2018 term loan 2018 revolving credit facility mature february 14 2019 outstanding principal 2019 convertible notes defined exceeds 3500 million exceed certain leverage ratios date addition 2018 term loan b mature either may 16 2019 outstanding principal 2019 convertible notes defined exceeds 3500 million exceed certain leverage ratios date ii december 15 2023 outstanding principal 2024 convertible notes defined exceeds 3500 million exceed certain leverage ratios date exceed certain leverage ratios february 14 2019 2018 term loan 2018 revolving credit facility continue mature august 16 2023 obligations 2018 credit facility unconditionally guaranteed certain direct indirect whollyowned subsidiaries herbalife nutrition ltd secured equity interests certain herbalife nutrition ltd’s subsidiaries substantially assets domestic loan parties also august 16 2018 issued 400 million aggregate principal amount senior unsecured notes 2026 notes described used proceeds 2018 credit facility 2026 notes repay full 11781 million outstanding 2017 credit facility accounting purposes pursuant asc 470 debt transactions accounted extinguishment 2017 credit facility recognized loss extinguishment 354 million result recorded expense income net within consolidated statements income year ended december 31 2018 credit facility requires us comply leverage ratio 2018 credit facility also contains affirmative negative covenants customary financings type including among things limitations prohibitions repurchasing common shares declaring paying dividends distributions redeeming repurchasing certain indebtedness loans investments additional indebtedness liens mergers asset sales transactions affiliates addition 2018 credit facility contains customary events default december 31 2018 2017 compliance debt covenants 2018 credit facility 2017 credit facility respectively 2018 term loan 2018 term loan b payable consecutive quarterly installments began december 31 2018 interest due least quarterly amounts outstanding 2018 credit facility addition may required make mandatory prepayments towards 2018 term loan b based consolidated leverage ratio annual excess cash flows defined terms 2018 credit facility also permitted make voluntary prepayments prior february 16 2019 amounts voluntarily prepaid 2018 term loan 2018 term loan b incur prepayment premium 1 thereafter amounts outstanding 2018 term loan 2018 term loan b may voluntarily prepaid without premium penalty subject customary breakage fees connection prepayment eurocurrency loan prepayments applied remaining quarterly installments owed 2018 term loan 2018 term loan b order maturity remaining principal due upon maturity unless directed otherwise us year ended december 31 2018 borrowed aggregate amount 10000 million 2018 credit facility repaid total amount 12319 million including 50 million amounts outstanding 2018 credit facility 12269 million repay full amounts outstanding 2017 credit facility year ended december 31 2017 borrowed aggregate amount 13000 million 2017 credit facility repaid total amount 4831 million including 731 million amounts outstanding 2017 credit facility 4100 million repay full amounts outstanding 2011 credit facility year ended december 31 2016 borrowed aggregate amount 2000 million repaid total amount 4297 million amounts outstanding 2011 credit facility december 31 2018 2017 us dollar amount outstanding 2018 credit facility 2017 credit facility 9950 million 12269 million respectively 9950 million outstanding 2018 credit facility december 31 2018 2469 million outstanding 2018 term loan 7481 million outstanding 2018 term loan b 12269 million outstanding 2017 credit facility december 31 2017 12269 million outstanding 2017 term loan b borrowings outstanding 2018 revolving credit facility 2017 revolving credit facility december 31 2018 2017 respectively outstanding foreign currency borrowings december 31 2018 2017 2018 credit facility 2017 credit facility respectively december 31 2018 2017 weightedaverage interest rate borrowings 2018 credit facility 2017 credit facility 680 679 respectively see note 4 longterm debt consolidated financial statements included part iv item 15 annual report form 10k discussion 2018 credit facility 2017 credit facility convertible senior notes due 2019 february 2014 issued 115 billion aggregate principal amount convertible senior notes due 2019 convertible notes 2019 convertible notes senior unsecured obligations rank effectively subordinate existing future secured indebtedness including amounts outstanding 2018 credit facility extent value assets securing indebtedness 2019 convertible notes pay interest rate 200 per annum payable semiannually arrears february 15 august 15 year beginning august 15 2014 2019 convertible notes mature august 15 2019 unless earlier repurchased converted primary purpose issuance 2019 convertible notes share repurchase purposes march 2018 issued 550 million aggregate principal new convertible senior notes due 2024 described subsequently used proceeds along cash hand repurchase 4750 million existing 2019 convertible notes limited number holders privately negotiated transactions aggregate purchase price 5835 million included 10 million accrued interest see note 4 longterm debt consolidated financial statements included part iv item 15 annual report form 10k discussion 2019 convertible notes convertible senior notes due 2024 march 2018 issued 5500 million aggregate principal amount convertible senior notes due 2024 convertible notes 2024 convertible notes senior unsecured obligations rank effectively subordinate existing future secured indebtedness including amounts outstanding 2018 credit facility extent value assets securing indebtedness 2024 convertible notes pay interest rate 2625 per annum payable semiannually arrears march 15 september 15 year beginning september 15 2018 2024 convertible notes mature march 15 2024 unless redeemed repurchased converted accordance terms prior date primary purpose issuance 2024 convertible notes repurchase portion 2019 convertible notes see note 4 longterm debt consolidated financial statements included part iv item 15 annual report form 10k discussion 2024 convertible notes senior notes due 2026 august 2018 issued 4000 million aggregate principal amount senior notes due 2026 notes 2026 notes senior unsecured obligations rank effectively subordinate existing future secured indebtedness including amounts outstanding 2018 credit facility extent value assets securing indebtedness 2026 notes pay interest rate 7250 per annum payable semiannually arrears february 15 august 15 year beginning february 15 2019 2026 notes mature august 15 2026 unless redeemed repurchased accordance terms prior date primary purpose issuance 2026 notes refinance portion 2017 credit facility see note 4 longterm debt consolidated financial statements included part iv item 15 annual report form 10k discussion 2026 notes contractual obligations following summarizes contractual obligations including interest december 31 2018 effect obligations expected liquidity cash flows future periods 1 estimated interest payments 2018 credit facility based interest rates effective december 31 2018 2 consolidated balance sheet december 31 2018 includes 585 million unrecognized tax benefits future payments related unrecognized tax benefits presented table due uncertainty amounts potential timing cash settlements tax authorities whether settlement would occur cash equivalents majority foreign subsidiaries designate local currencies functional currencies december 31 2018 2017 total amount foreign subsidiary cash equivalents 8703 million 11335 million respectively 3094 million 6333 million respectively invested us dollars december 31 2018 2017 total amount cash equivalents held herbalife nutrition ltd us entities inclusive us territories 3286 million 1453 million respectively earnings considered indefinitely reinvested deferred taxes provided earnings considered indefinitely reinvested deferred taxes provided make determination remit cash equivalents foreign subsidiaries considered indefinitely reinvested us consolidated group purpose repatriation undistributed earnings would need accrue pay taxes december 31 2018 us consolidated group approximately 1166 million permanently reinvested unremitted earnings certain foreign subsidiaries monies ever needed remitted impact tax consequences overall liquidity position would material december 31 2018 herbalife nutrition ltd approximately 23 billion permanently reinvested unremitted earnings relating operating subsidiaries result decision invest china growth impact investment fund approximately 1198 million unremitted earnings permanently reinvested december 31 2018 december 31 2018 plans repatriate unremitted earnings herbalife nutrition ltd therefore liquidity concerns relating unremitted earnings related cash equivalents see note 12 income taxes consolidated financial statements included part iv item 15 annual report form 10k additional discussion unremitted earnings offbalance sheet arrangements december 31 2018 2017 material offbalance sheet arrangements defined item 303a4ii regulation sk dividends declaration future dividends subject discretion board directors depend upon various factors including earnings financial condition herbalife nutrition ltd’s available distributable reserves cayman islands law restrictions imposed 2018 credit facility terms indebtedness may outstanding cash requirements future prospects factors deemed relevant board directors share repurchases october 30 2018 board directors authorized new fiveyear 15 billion share repurchase program expire october 30 2023 replaced prior share repurchase authorization set expire february 21 2020 approximately 1133 million remaining authorized capacity replaced share repurchase program allows us includes indirect whollyowned subsidiary herbalife nutrition ltd repurchase common shares times prices determined management market conditions warrant extent herbalife nutrition ltd’s distributable reserves available cayman islands law 2018 credit facility permits us repurchase common shares long default event default exists conditions specified consolidated leverage ratios met december 31 2018 remaining authorized capacity 15 billion share repurchase program 15 billion conjunction issuance 2019 convertible notes february 2014 paid approximately 6858 million enter prepaid forward share repurchase transactions forward transactions certain financial institutions forward counterparties pursuant purchased approximately 199 million common shares average cost 3451 per share settlement around august 15 2019 maturity date 2019 convertible notes subject ability forward counterparty elect settle portion forward transactions early shares treated retired shares basic diluted eps purposes see note 8 shareholders’ deficit consolidated financial statements included part iv item 15 annual report form 10k discussion forward transactions year ended december 31 2018 indirect whollyowned subsidiary purchased 8400 herbalife nutrition ltd’s common shares openmarket purchases aggregate cost approximately 03 million average cost 3390 per share year ended december 31 2017 indirect whollyowned subsidiary purchased approximately 100 million herbalife nutrition ltd’s common shares openmarket purchases aggregate cost approximately 3286 million average cost 3281 per share repurchases increased total shareholders’ deficit reflected cost within accompanying consolidated balance sheets although shares owned indirect whollyowned subsidiary remain legally outstanding reflected treasury shares us gaap therefore reduce number common shares outstanding within consolidated financial statements weightedaverage number common shares outstanding used calculating earnings per share common shares herbalife nutrition ltd held indirect whollyowned subsidiary however remain outstanding books records transfer agent therefore still carry voting share rights related ownership common shares may exercised long consistent applicable laws shares voted subsidiary manner maximum extent possible proportion votes cast respect matter properly submitted vote herbalife nutrition ltd’s shareholders december 31 2018 2017 held approximately 100 million treasury shares us gaap purposes may 2018 completed modified dutch auction tender offer subsequently paid cash repurchase retire total approximately 114 million common shares aggregate cost approximately 6000 million 5250 per share october 2017 completed modified dutch auction tender offer subsequently paid cash repurchase retire total approximately 135 million common shares aggregate cost approximately 4578 million 3400 per share total repurchased 114 million 235 million common shares aggregate cost approximately 6003 million 7864 million average cost 5249 3349 per share years ended december 31 2018 2017 respectively repurchase common shares open market year ended december 31 2016 see note 8 shareholders’ deficit consolidated financial statements included part iv item 15 annual report form 10k discussion share repurchases connection october 2017 modified dutch auction tender offer incurred 16 million transaction costs also provided cvr share tendered allowing participants tender offer receive contingent cash payment event herbalife acquired goingprivate transaction defined cvr agreement within two years commencement tender offer initial fair value cvr 73 million recorded liability fourth quarter 2017 corresponding increase shareholders’ deficit determining initial fair value cvr used lattice model included inputs underlying stock price strike price time expiration dividend yield subsequent changes fair value cvr liability using similar valuation approach initial fair value determination recognized within consolidated balance sheets corresponding gains losses recognized expense income net within consolidated statements income reporting period cvr expires august 2019 terminated due goingprivate transaction also incorporated valuation cvr goingprivate probability input considered level 3 input fair value hierarchy increase decrease input could significantly impacted fair value cvr reporting date subsequent increase decrease input inputs described subsequent valuations could significantly impact fair value cvr recognized 88 million loss expense income net within consolidated statement income year ended december 31 2018 due change fair value cvr primarily driven increase market price common shares partially offset decrease probability goingprivate transaction result shortening term cvr expires pursuant terms recognized 04 million gain expense income net within consolidated statement income year ended december 31 2017 due change fair value cvr december 31 2018 2017 fair value cvr 157 million 69 million respectively see note 8 shareholders’ deficit consolidated financial statements included part iv item 15 annual report form 10k discussion cvr capped call transactions february 2014 connection issuance 2019 convertible notes paid approximately 1238 million enter capped call transactions respect common shares capped call transactions certain financial institutions capped call transactions expected generally reduce potential dilution upon conversion 2019 convertible notes event market price common shares greater strike price capped call transactions initially set 4314 per common share based retroactive adjustment due twoforone stock split described note 2 basis presentation consolidated financial statements included part iv item 15 annual report form 10k reduction potential dilution subject cap based cap price initially set 6039 per common share based retroactive adjustment due twoforone stock split described note 2 basis presentation consolidated financial statements included part iv item 15 annual report form 10k march 2018 connection repurchase portion 2019 convertible notes entered partial settlement agreements option counterparties capped call transactions terminate portion capped call transactions case notional amount corresponding aggregate principal amount 2019 convertible notes repurchased see note 8 shareholders’ deficit consolidated financial statements included part iv item 15 annual report form 10k discussion capped call transactions working capital operating activities december 31 2018 2017 working capital 2162 million 9535 million respectively decrease 7373 million decrease primarily due decrease cash equivalents increase current portion longterm debt primarily relating 2019 convertible notes described note 4 longterm debt consolidated financial statements included part iv item 15 annual report form 10k increase current liabilities expect cash funds provided operations available borrowings 2018 credit facility access capital markets provide sufficient working capital operate business make expected capital expenditures meet foreseeable liquidity requirements next twelve months thereafter majority purchases suppliers generally made us dollars sales members generally made local currencies consequently strengthening us dollar versus foreign currency negative impact net sales contribution margins generate transaction gains losses intercompany transactions discussion foreign exchange contracts hedging arrangements see item 7a quantitative qualitative disclosures market risk quarterly results operations 1 fourth quarters 2018 2017 include impact us tax reform enacted fourth quarter 2017 described note 12 income taxes consolidated financial statements included part iv item 15 annual report form 10k contingencies see note 7 contingencies consolidated financial statements included part iv item 15 annual report form 10k information contingencies december 31 2018 subsequent events see note 15 subsequent events consolidated financial statements included part iv item 15 annual report form 10k information regarding subsequent events critical accounting policies us gaap requires us make estimates assumptions affect reported amounts assets liabilities disclosures contingent assets liabilities date financial statements reported amounts revenue expenses year regularly evaluate estimates assumptions related revenue recognition allowance product returns inventory goodwill purchased intangible asset valuations deferred income tax asset valuation allowances uncertain tax positions tax contingencies loss contingencies base estimates assumptions current facts historical experience various factors believe reasonable circumstances results form basis making judgments carrying values assets liabilities recording revenue costs expenses actual results could differ estimates consider following policies critical understanding judgments involved preparing financial statements uncertainties could impact operating results financial condition cash flows nutrition company sells wide range weight management targeted nutrition energy sports fitness outer nutrition products manufactured us changsha hunan china extraction facility suzhou china facility nanjing china facility lake forest california facility winstonsalem north carolina facility third party providers sold members consume sell herbalife products retail consumers members december 31 2018 sold products 94 countries throughout world organized managed geographic region aggregate operating segments one reporting segment except china management believes operating segments similar operating characteristics similar long term operating performance making determination management believes operating segments similar nature products sold product acquisition process types customers products sold methods used distribute products nature regulatory environment economic characteristics generally recognize revenue upon delivery control passes member product sales recognized net product returns discounts referred “distributor allowances” generally receive net sales price cash credit card payments point sale royalty overrides generally recorded revenue recognized see note 2 basis presentation consolidated financial statements included part iv item 15 annual report form 10k discussion adoption financial accounting standards board fasb accounting standards codification asc topic 606 revenue recognition contracts customers initial application january 1 2018 distributor compensation us allowances product returns primarily connection buyback program provided time sale recorded accrual based upon historical return rates country relevant return pattern reflects anticipated returns received period 12 months following original sale historically product returns buybacks significant product returns buybacks approximately 01 product sales years ended december 31 2018 2017 2016 adjust inventories lower cost net realizable value additionally adjust carrying value inventory based assumptions regarding future demand products market conditions future demand market conditions less favorable management’s assumptions additional inventory writedowns could required likewise favorable future demand market conditions could positively impact future operating results previously written inventories sold obsolete slow moving inventories adjusted downward 298 million 308 million present lower cost net realizable value consolidated balance sheets december 31 2018 2017 respectively goodwill marketingrelated intangible assets subject amortization tested annually impairment tested impairment frequently events circumstances indicate asset might impaired impairment loss recognized extent carrying amount exceeds asset’s fair value part annual goodwill impairment test performed reporting unit level may conduct assessment qualitative factors determine whether likely fair value reporting unit less carrying amount qualitative assessment would consider macroeconomic conditions including deterioration general conditions industry market conditions including deterioration environment reporting unit operates increased competition changes productsservices regulatory political developments cost business overall financial performance including declining cash flows performance relation planned revenues earnings past periods relevant reporting unit specific facts changes management key personnel pending litigation events affecting reporting unit including changes carrying value net assets determine likely fair value reporting unit less carrying value would perform twostep goodwill impairment test required determine likely fair value reporting unit less carrying value testing required fiscal year 2018 performed qualitative assessment determined likely fair value reporting unit less respective carrying value marketingrelated intangible assets may also utilize qualitative assessment similar one described exception test performed consolidated level rather reporting unit level fiscal year 2018 performed qualitative assessment marketingrelated intangible assets determined likely fair value assets less carrying value required determine fair value reporting unit using twostep process primarily use income approach order estimate fair value goodwill first determine fair value reporting unit compare carrying amount determination fair value reporting units requires us make significant estimates assumptions estimates assumptions include estimates future revenues expense growth rates capital expenditures depreciation amortization related capital expenditures discount rates inputs due inherent uncertainty involved making estimates actual future results could differ changes assumptions regarding future results underlying assumptions could significant impact fair value reporting unit second carrying amount reporting unit exceeds fair value impairment loss recognized excess carrying amount reporting unit’s goodwill intangibles implied fair value determined step 2 goodwill impairment test also step 1 goodwill impairment test determine reporting units zero negative carrying amounts perform step 2 goodwill impairment test likely goodwill impairment exists step 2 goodwill impairment test implied fair value goodwill determined similar manner amount goodwill recognized business combination determined accordance financial accounting standards board fasb accounting standards codification asc topic 805 business combinations would assign fair value reporting unit assets liabilities reporting unit reporting unit acquired business combination fair value reporting unit price paid acquire reporting unit excess fair value reporting unit amounts assigned assets liabilities implied fair value goodwill required determine fair value marketingrelated intangible assets using quantitative method use discounted cash flow model income approach relieffromroyalty method determine fair value marketing related intangible assets order confirm impairment required december 31 2018 2017 goodwill approximately 929 million 969 million respectively december 31 2018 2017 marketingrelated intangible assets approximately 3100 million decrease goodwill year ended december 31 2018 due foreign currency translation adjustments marketingrelated intangibles goodwill impairment recorded year ended december 31 2018 2017 contingencies accounted accordance fasb asc topic 450 contingencies asc 450 asc 450 requires record estimated loss contingency information available prior issuance financial statements indicates probable asset impaired liability incurred date financial statements amount loss reasonably estimated also disclose material contingencies believe loss probable reasonably possible required asc 450 accounting contingencies legal nonincome tax matters requires us use judgment related likelihood loss estimate amount range loss many legal tax contingencies take years resolved generally time period increases uncertainties resolved likelihood changes estimate ultimate outcome increases evaluate realizability deferred tax assets assessing valuation allowance adjusting amount allowance necessary although realization assured believe likely net carrying value realized amount carryforwards considered realizable however could change estimates future taxable income adjusted ordinary course business many transactions calculations tax law ultimate tax determination uncertain part process preparing consolidated financial statements required estimate income taxes jurisdictions operate prior completion filing tax returns periods estimates involve complex issues require us make judgments likely application tax law situation well respect matters anticipating positions take tax returns prior us actually preparing returns outcomes disputes tax authorities ultimate resolution issues may take extended periods time due examinations tax authorities statutes limitations addition changes business including acquisitions changes international corporate structure changes geographic location business functions assets changes geographic mix amount income well changes agreements tax authorities valuation allowances applicable accounting rules applicable tax laws regulations rulings interpretations thereof developments tax audit matters variations estimated actual level annual pretax income affect overall effective income tax rate account uncertain tax positions accordance fasb asc topic 740 income taxes asc 740 provides guidance determination tax benefits claimed expected claimed tax return recorded financial statements asc 740 must recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate resolution december 22 2017 us enacted 2017 tax cuts jobs act us tax reform contains several key tax provisions affect us including limited onetime mandatory transition tax accumulated foreign earnings changes sourcing calculation foreign income reduction corporate income tax rate 21 effective january 1 2018 required recognize effect tax law changes period enactment determining transition tax remeasuring us deferred tax assets liabilities well reassessing net realizability deferred tax assets liabilities december 2017 sec staff issued staff accounting bulletin 118 income tax accounting implications tax cuts jobs act allows us record provisional amounts measurement period extend beyond one year enactment date see note 12 income taxes consolidated financial statements included part iv item 15 annual report form 10k discussion us tax reform made accounting policy election account global intangible lowtaxed income period cost incurred account foreign currency transactions accordance fasb asc topic 830 foreign currency matters majority countries operate functional currency local currency foreign subsidiaries’ asset liability accounts translated consolidated financial reporting purposes us dollar amounts periodend exchange rates revenue expense accounts translated average rates year foreign currency translation adjustments included accumulated comprehensive loss accompanying consolidated balance sheets foreign currency transaction gains losses foreign currency remeasurements generally included selling general administrative expenses accompanying consolidated statements income new accounting pronouncements see discussion note 2 basis presentation consolidated financial statements included part iv item 15 annual report form 10k information new accounting pronouncements item 7aitem 7 management ’ discussion analysis f financial condition results operations following discussion analysis financial condition results operations read conjunction part item 1a risk factors part ii item 6 selected financial data consolidated financial statements related notes included elsewhere annual report form 10k section annual report form 10k generally discusses 2020 2019 items yearoveryear comparisons 2020 2019 discussions 2018 items yearoveryear comparisons 2019 2018 included annual report form 10k found part ii item 7 management’s discussion analysis financial condition results operations annual report form 10k year ended december 31 2019 10k overview global nutrition company sells weight management targeted nutrition energy sports fitness outer nutrition products independent members china sell products independent service providers sales representatives customers preferred customers well companyoperated retail platforms necessary refer members distribute products achieve certain qualification requirements “sales leaders” provide highquality sciencebacked products members customers seek healthy lifestyle also offer business opportunity members seek additional income believe enhanced consumer awareness demand products due global trends obesity epidemic increasing interest fit active lifestyle living healthier rise entrepreneurship coupled effectiveness personalized selling direct sales channel primary reasons continued success products grouped four principal categories weight management targeted nutrition energy sports fitness outer nutrition along literature promotional items products often sold series related products literature designed simplify weight management nutrition consumers maximize members’ crossselling opportunities continue monitor current global financial environment impacts covid19 pandemic remain focused opportunities challenges retailing products enhancing customer experience sponsoring retaining members improving member productivity penetrating existing markets globalizing successful daily methods operation dmos nutrition clubs fit clubs weight loss challenges introducing new products globalizing existing products developing niche market segments investing infrastructure sell products six geographic regions • north america • mexico • south central america • emea consists europe middle east africa • asia pacific excluding china • china july 15 2016 reached settlement ftc entered consent order resolved ftc’s multiyear investigation company continue monitor impact consent order board directors established implementation oversight committee connection consent order recently audit committee assumed oversight continued compliance consent order implementation oversight committee met regularly management oversee compliance terms consent order currently expect settlement longterm materially adverse impact business member base business member base particularly us may negatively impacted terms consent order change going market direct selling independent distributors compensating distributors based upon product sales organization sell see part item 1 business annual report form 10k discussion consent order part item 1a risk factors annual report form 10k discussion risks related settlement ftc covid19 pandemic march 2020 world health organization declared outbreak coronavirus disease 2019 covid19 pandemic outbreak subsequent global spread virus impacted general public companies state local national governments economies worldwide well global financial markets caused unemployment increase public health organizations international federal state local governments implemented measures combat spread covid19 including restrictions movement quarantines “stayathome” orders social distancing ordinances restricting prohibiting outright forms commercial business activity measures others may implemented future although temporary nature may become restrictive continue indefinitely business operations affected pandemic manners degrees vary market expect effects extend beyond 2020 health safety employees members customers implemented temporary access restrictions many physical business locations members conduct business activities measures continue generally able satisfy current levels demand nutritional products continues prepandemic levels pandemic constraints lessened markets designation nutritional business “essential” similar characterization operations continue disrupted significant impacts seen depending market include • constrained ability deliver product members andor members pick product access points due facility closures precautionary measures implemented • restrictions outright prohibitions inperson training promotional meetings events members key aspect business model annual regional extravaganzas • constrained ability members facetoface contact customers including nutrition clubs • slowed office operations many employees limited access regular place employment members responded pandemic impacts business adapting operations taking number proactive measures mitigate impacts significant measures include • adapting product access varying marketspecific challenges including shifting home product delivery member pickup shifting online phone orders inperson ordering • enhancing training promotion technological tools offered support members’ online operations accelerating launch certain functionalities functions facilitate members’ ability communicate transact nutrition club customers • members continuing increasing ways leverage internet social media customer contact including training ordertaking acceptance payment • memberoperated nutrition clubs adding shifting onsite offerings single servings carryout home delivery single servings well sales fully packaged products • instituting product purchase limitations certain indemand products help ensure many members customers fair access products minimize outofstock conditions • physical changes major facilities manufacturing plants distribution centers including preentry temperature checks face masks employees plexiglass barriers employees working home possible rather company offices believe cash hand december 31 2020 date filing combined cash flows operating activities sufficient meet foreseeable needs next twelve months also access revolving credit facility supplement cashgenerating ability necessary although believe responsive measures effective limiting adverse impact pandemic markets ongoing impact covid19 pandemic affect business financial condition results operations future quarters including comparability prior periods given unpredictable unprecedented fluid nature pandemic economic consequences unable predict duration extent pandemic related impacts impact business financial condition results operations detailed discussion pandemic’s impact net sales 2020 expected impact future periods well impacts specific geographic region discussed sales geographic region section see part item 1a risk factors annual report form 10k discussion risks related covid19 pandemic volume points geographic region key nonfinancial measure focus volume points royalty basis volume points essentially weightedaverage measure product sales volume points unaffected exchange rates price changes used management proxy sales trends general excluding impact price changes increase volume points particular geographic region country indicates increase local currency net sales decrease volume points particular geographic region country indicates decrease local currency net sales criteria use determine recognize volume points identical revenue recognition policies us gaap unlike net sales generally recognized product delivered control passes member discussed greater detail note 2 basis presentation consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k recognize volume points member pays order generally prior product delivered periods volume points tracked vary slightly fiscal periods report results us gaap therefore timing differences product orders net sales recognized volume points recognized within given period however historically timing differences generally immaterial context using changes volume points proxy explain volumedriven changes net sales specific number volume points assigned product generally consistent across markets based volume point suggested retail price ratio similar products product available different quantities various sizes different volume point values general assigned volume point value consistent region country change year strategic reasons certain volume point values adjusted 2018 certain markets north america south central america regions volume point adjustments 2020 2019 material use volume points member qualification recognition purposes well proxy sales trends therefore generally keep volume points similar like product consistent global basis however volume points function value rather product type size reliable measure product mix example increase volume points specific country region could mean significant increase sales less expensive products marginal increase sales expensive products 1 excluding volume point adjustments made 2018 certain products certain markets percent change year ended december 31 2019 would increase 62 2 excluding volume point adjustments made 2018 certain products certain markets percent change year ended december 31 2019 would decrease 86 3 excluding volume point adjustments made 2018 certain products certain markets north america south central america regions noted percent change year ended december 31 2019 would increase 28 volume points increased 141 2020 including mixed impact covid19 pandemic conditions across markets increased 30 2019 although pandemic conditions adverse operational impacts across markets believe members certain markets seen increased net sales volume point growth focused business particularly north america region certain emea markets despite expectation volume point growth 2021 certain able sustain rate volume point growth 2021 compared 2020 believe north america’s volume point increase 2020 well increase prior year reflects continuing success expansion distributors supported product line expansion technological tools well targeted communications promotions believe mexico’s slight decrease year somewhat larger decrease prior year reflects continuing difficult economic conditions market offset somewhat second half year program promotions encourage member sponsorship activity years declines south central america region saw increase volume points 2020 despite pandemicrelated continuing declines several markets including brazil believe efforts build sustainable business members focus daily product consumption retailing take hold certain markets region emea saw increased volume point growth year versus 2019 result believe customeroriented efforts including member training brand awareness product line expansion well strong business momentum including new member recruitment asia pacific region saw volume point increases year continuing favorable longterm trends seen region although growth rate seen 2019 due adverse impact pandemic conditions region especially india south korea china achieved volume point increases year compared decline 2019 weakened disruption chinese government’s 100day review concluded april 2019 health product industry china saw yearoveryear volume point declines latter part year across markets expect covid19 pandemic conditions continue impact volume point results however unable predict duration magnitude effects results regional countryspecific impacts covid19 pandemic discussed applicable sections sales geographic region presentation “net sales ” represents product sales members net distributor allowances inclusive shipping handling revenues described members purchase product us suggested retail price less discounts referred “distributor allowance ” member’s level discount determined qualification based volume purchases cases member qualified less maximum discount remaining discount also refer wholesale commission received sponsoring members distributor allowances may also vary country depending upon regulatory restrictions limit otherwise restrict distributor allowances also offer reduced distributor allowances respect certain products worldwide us gaap purposes shipping handling services relating product sales recognized fulfillment activities performance obligation transfer products therefore recorded within net sales part product sales considered separate revenues certain geographic markets introduced segmentation member base two categories “preferred members” simply consumers wish purchase product household use “distributors” members also wish resell products build sales organization additionally certain markets simplifying pricing eliminating certain shipping handling charges recovering costs within suggested retail price continue extend segmentation distributors preferred members additional geographic markets consider pricing simplification efforts members utility therefore management’s reliance total retail value decreased discontinuing disclosure nongaap retail value information international operations provided continue provide significant portion total net sales result total net sales continue affected fluctuations us dollar foreign currencies order provide framework assessing underlying businesses performed excluding effect foreign currency fluctuations addition comparing percent change net sales one period another us dollars also compare percent change net sales one period another period using “net sales local currency ” net sales local currency us gaap financial measure net sales local currency removes net sales us dollars impact changes exchange rates us dollar local currencies foreign subsidiaries translating current period net sales us dollars using foreign currency exchange rates used translate net sales previous comparable period believe presenting net sales local currency useful investors allows meaningful comparison net sales foreign operations period however net sales local currency measures considered isolation alternative net sales us dollar measures reflect current period exchange rates financial measures calculated presented accordance us gaap additionally impact foreign currency fluctuations venezuela price increases implement result highly inflationary economy market considered isolation disproportionately large impact consolidated results despite offsetting nature drivers net sales venezuela represent less 1 consolidated net sales material consolidated results therefore certain instances believe helpful provide additional information respect factors reported excluding impact venezuela illustrate disproportionate nature venezuela’s individual pricing foreign exchange impact consolidated results however excluding impact venezuela measures accordance us gaap considered isolation alternative presentation discussion thereof calculated accordance us gaap “gross profit ” consists net sales less “cost sales ” represents manufacturing costs price pay raw material suppliers manufacturers products well shipping handling costs including duties tariffs similar expenses certain members may profit activities reselling products amounts greater prices pay us members develop retain manage members may earn additional compensation activities refer “royalty overrides ” royalty overrides significant operating expense consist • royalty overrides production bonuses • mark hughes bonus payable senior members • discretionary incentive cash bonuses qualifying members royalty overrides compensation members development retention improved productivity sales organizations paid several levels members sale royalty overrides compensation services rendered us recorded operating expense china independent service providers compensated marketing sales support services instead distributor allowances royalty overrides utilized global marketing plan service fees china independent service providers included selling general administrative expenses local country regulatory constraints may required modify member incentive plans described also pay reduced royalty overrides respect certain products worldwide consequently total royalty override percentage may vary time “contribution margins ” consist net sales less cost sales royalty overrides “selling general administrative expenses ” represent operating expenses include labor benefits service fees china independent service providers sales events professional fees travel entertainment member promotions occupancy costs communication costs bank fees depreciation amortization foreign exchange gains losses miscellaneous operating expenses “other operating income ” consists government grant income related china finalization insurance recoveries connection flooding one warehouses mexico september 2017 “other expense income net” consists nonoperating income expenses gains losses extinguishment debt gains losses due subsequent changes fair value nontransferable contractual contingent value right cvr provided share tendered october 2017 modified dutch auction tender offer see note 8 shareholders’ deficit consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k information cvr sales members outside united states made respective local currencies preparing financial statements translate revenues us dollars using average exchange rates additionally majority purchases suppliers generally made us dollars consequently strengthening us dollar versus foreign currency negative impact reported sales contribution margins generate foreign currency losses intercompany transactions foreign currency exchange rates fluctuate significantly time enter foreign currency derivatives partially mitigate foreign currency exchange risk discussed detail part ii item 7a quantitative qualitative disclosures market risk annual report form 10k results operations results operations periods necessarily indicative results operations future periods depend upon numerous factors including ability sponsor members retain sales leaders penetrate existing markets introduce new products programs help members increase retail efforts develop niche market segments following table sets forth selected results operations expressed percentage net sales periods indicated 1 service fees independent service providers china included selling general administrative expenses member compensation countries included royalty overrides changes net sales directly associated retailing products recruitment new members retention sales leaders strategies involve providing quality products improved dmos including daily consumption approaches nutrition clubs easier access product systemized training education members products methods continued promotion branding herbalife products management’s role incountry region corporate level provide members competitive broad innovative product line offer leadingedge business tools technology services encourage strong teamwork member leadership make business herbalife simple management uses marketing plan reflects rules global network marketing organization specify qualification requirements general compensation structure members coupled educational motivational tools promotions encourage members increase retailing retention recruiting turn affect net sales tools include sales events extravaganzas leadership development weekends world team schools large groups members gather thus allowing network members learn retailing retention recruiting techniques leading members become familiar market sell products business opportunities accordingly management believes development motivation programs increase productivity sales leader network expenses programs included selling general administrative expenses also use event nonevent product promotions motivate members increase retailing retention recruiting activities promotions prizes ranging qualifying events product prizes vacations program seen success many markets member activation program new members order modest number volume points first three months earn prize objective improve quality sales leaders encouraging new members begin acquiring retail customers attempting qualify sales leader status additionally certain markets begun utilize segmentation member base “preferred members” “distributors” targeted efficient communication promotions two differently motivated types members certain markets segmented begun using member data similarly categorize members communication promotion efforts dmos generated many markets globalized applicable combined efforts members country regional corporate management support number different dmos one popular dmos daily consumption dmo traditional dmo member typically sells customers somewhat infrequent basis eg monthly provides fewer opportunities interaction customers daily consumption dmo member interacts customers frequent basis including activities weekly weighins enables member better educate advise customers nutrition proper use products helps promote daily usage well thereby helping member grow business specific examples dmos include nutrition club concept mexico healthy breakfast concept russia internetsampling weight loss challenge united states management’s strategy review applicability expanding successful country initiatives throughout region appropriate support globalization initiatives discussed market sales geographic region company responded covid19 pandemic conditions adapting communicates services transacts members similarly adapted dmos activities responsive actions varied region market due differing market regionalspecific impacts pandemic conditions challenges unique particular market region independent impacts pandemic factors described help members increase business turn helps drive volume point growth business thus net sales growth discussion net sales details specific drivers changes business causes sales fluctuations year ended december 31 2020 compared period 2019 well unique growth contraction factors specific certain geographic regions significant countries within region periods net sales fluctuations companywide within particular geographic region country primarily result changes volume changes prices changes foreign currency translation rates discussion changes net sales quantifies impact drivers quantifiable changes foreign currency translation rates cites estimated impact significant price changes remaining drivers management believes primary drivers changes volume typically qualitative factors whose impact cannot quantified use volume points indication changes sales volume expect impact covid19 pandemic impact results operations future quarters comparability prior periods consolidated basis regional level however given unpredictable unprecedented fluid nature pandemic economic consequences unable predict extent pandemic related impacts adversely impact business financial condition results operations including impact may regions individual markets see sales geographic region detailed discussion pandemic’s impact net sales year geographic region individual market financial results year ended december 31 2020 compared year ended december 31 2019 net sales 55418 million year ended december 31 2020 net sales increased 6647 million 136 6646 million 136 excluding venezuela year ended december 31 2020 compared period 2019 local currency net sales increased 175 166 excluding venezuela year ended december 31 2020 compared period 2019 136 increase net sales year ended december 31 2020 primarily driven increase sales volume indicated 141 increase volume points 36 favorable impact price increases 27 favorable impact excluding venezuela partially offset 38 unfavorable impact fluctuations foreign currency rates 29 unfavorable impact excluding venezuela described sales geographic region section despite expectation net sales growth 2021 certain sustain rate net sales growth 2021 compared 2020 net income 3726 million 277 per diluted share year ended december 31 2020 net income increased 616 million 198 year ended december 31 2020 compared period 2019 increase net income year ended december 31 2020 mainly due 2302 million higher contribution margin driven higher net sales 82 million lower interest expense net partially offset 1347 million higher selling general administrative expenses primarily driven 841 million higher labor benefits costs 431 million higher expenses relating sec doj investigations relating fcpa matter china see note 7 contingencies consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k 170 million lower china government grant income 157 million unfavorable impact expense income net relating cvr revaluations 2019 described net income year ended december 31 2020 included 859 million unfavorable impact 854 million posttax expenses related regulatory inquiries legal accrual includes 831 million expenses relating sec doj investigations relating fcpa matter china 218 million unfavorable impact noncash interest expense related 2024 convertible notes see note 5 longterm debt consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k 212 million pretax unfavorable impact 192 million posttax expenses related covid19 pandemic expenses expected continue future periods 05 million pretax unfavorable impact 04 million posttax debt issuance costs related amendment 2018 credit facility net income year ended december 31 2019 included 755 million pretax unfavorable impact 741 million posttax expenses related regulatory inquiries sec investigation relating disclosures regarding marketing plan china see note 7 contingencies consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k sec doj investigations relating fcpa matter china 382 million unfavorable impact noncash interest expense related 2019 convertible notes 2024 convertible notes forward transactions see note 5 longterm debt consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k 190 million pretax unfavorable impact 172 million posttax accrual mexico vat assessments 12 million pretax unfavorable impact 09 million posttax debt issuance costs related amendment 2018 term loan b 157 million favorable impact gain revaluation cvr see note 8 shareholders’ deficit consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k 60 million pretax favorable impact 59 million posttax related finalization insurance recoveries connection flooding one warehouses mexico september 2017 damaged certain inventory stored within warehouse see note 7 contingencies consolidated financial statements included company’s annual report form 10k year ended december 31 2018 10k reporting segment results aggregate operating segments excluding china reporting segment primary reporting segment primary reporting segment includes north america mexico south central america emea asia pacific regions china identified separate reporting segment meet criteria aggregation see note 10 segment information consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k discussion reporting segments see discussions net sales contribution margin reporting segments net sales reporting segment primary reporting segment reported net sales 47322 million year ended december 31 2020 representing increase 6071 million 147 6069 million 147 excluding venezuela compared period 2019 local currency net sales increased 192 182 excluding venezuela year ended december 31 2020 compared period 2019 147 increase net sales year ended december 31 2020 primarily due increase sales volume indicated 149 increase volume points 42 favorable impact price increases 31 favorable impact excluding venezuela partially offset 45 unfavorable impact fluctuations foreign currency exchange rates 34 unfavorable impact excluding venezuela discussion china’s net sales year ended december 31 2020 compared period 2019 see china section sales geographic region contribution margin reporting segment discussed “presentation” contribution margin consists net sales less cost sales royalty overrides primary reporting segment reported contribution margin 19836 million 419 net sales year ended december 31 2020 representing increase 1900 million 106 1893 million 105 excluding venezuela compared period 2019 106 increase contribution margin year ended december 31 2020 primarily result 149 favorable impact volume increases 65 favorable impact price increases 49 favorable impact excluding venezuela partially offset 59 unfavorable impact fluctuations foreign currency exchange rates 42 unfavorable impact excluding venezuela 32 unfavorable impact cost changes related selfmanufacturing sourcing increased freight costs orders shifting toward home delivery versus member pickup china reported contribution margin 7175 million year ended december 31 2020 representing increase 402 million 59 compared period 2019 59 increase contribution margin year ended december 31 2020 primarily result 53 favorable impact volume increases sales geographic region net sales geographic region follows north america north america region reported net sales 13729 million year ended december 31 2020 net sales increased 3474 million 339 year ended december 31 2020 compared period 2019 local currency net sales increased 339 year ended december 31 2020 compared period 2019 339 increase net sales year ended december 31 2020 primarily due increase sales volume indicated 317 increase volume points 29 favorable impact price increases net sales us 13345 million year ended december 31 2020 net sales increased 3319 million 331 year ended december 31 2020 compared period 2019 growth region continues supported product line expansion deployment enhanced technology tools support distributors’ businesses optimize customers’ experiences herbalife number active nutrition clubs region continued grow nutrition club dmo focus area training technological support members communications promotions operations region targeted distributors preferred members retail customers appropriate promotional program designed encourage consistency sustainability members’ businesses strengthened momentum including increased membership market resulted higher rate growth net sales 2020 compared 2019 response pandemic conditions product distribution members altered allow online phonein orders two major us distribution centers shipping product inperson pickups permitted sales centers pickup orders taken onsite yet however members’ ability obtain product materially decreased late third quarter memphis distribution center began allowing pickup orders however continue allow inperson orders sales centers members’ nutrition clubs represent major dmo region operating areas pickup points product versus traditional onsite consumption approach nutrition club sales volume increased versus prior year including impact home deliveries nutrition clubs customers approach seen increased use response pandemic member training promotion events success training seminars leadership development weekends shifted “virtual” online approach promotional activities aimed members continue though prizes involved travel events shifted cash awards evidenced continuing volume point growth region believe responsive efforts pandemic conditions effective date believe pandemic conditions may contributing factor motivation focus members certain modified practices us members may prove lasting improvements increased focus customerdirect orders events trainings offered virtually well inperson mexico region reported net sales 4369 million year ended december 31 2020 net sales decreased 367 million 77 year ended december 31 2020 compared period 2019 local currency net sales increased 22 year ended december 31 2020 compared period 2019 77 decrease net sales year ended december 31 2020 primarily due 99 unfavorable impact fluctuations foreign currency exchange rates decrease sales volume indicated 04 decrease volume points partially offset 30 favorable impact price increases believe volume point decrease year reflects difficult economic conditions region consequent slowing business momentum market prior third quarter sales volume weakness offset somewhat additional promotions offered response pandemic conditions despite pandemic conditions nearly product access points mexico companyoperated third party remained open although areas nutrition clubs operating restrictions product pickup south central america south central america region reported net sales 3664 million year ended december 31 2020 net sales decreased 126 million 33 128 million 34 excluding venezuela year ended december 31 2020 compared period 2019 local currency net sales increased 208 91 excluding venezuela year ended december 31 2020 compared period 2019 33 decrease net sales year ended december 31 2020 due 241 unfavorable impact fluctuations foreign currency exchange rates 125 unfavorable impact excluding venezuela partially offset 169 favorable impact price increases 56 favorable impact excluding venezuela increase sales volume indicated 36 increase volume points region saw sales volume increase year versus prior year led colombia chile markets adapted pandemic conditions efforts build sustainable business members focus daily product consumption retailing take hold certain markets region seeing success leveraging social media utilizing cash prize promotions using weight loss challenge dmo covid19 pandemic conditions however impacted region adversely significantly certain markets region including brazil peru ecuador bolivia pandemic impacts varied market across region intermittent included product shipping delays widespread suspension product access points members’ nutrition clubs requiring reliance shipping product members’ customers’ homes net sales brazil 842 million year ended december 31 2020 net sales decreased 270 million 243 year ended december 31 2020 compared period 2019 local currency net sales decreased 25 year ended december 31 2020 compared period 2019 fluctuation foreign currency exchange rates unfavorable impact 243 million net sales year ended december 31 2020 may 2019 segmented member base market distributors preferred members leveraging segmentation communication promotion purposes made preferred members strategic focus order drive larger base new customers expanded product line meet consumer demands new product segments however covid19 pandemic conditions constrained business brazil since march 2020 although members’ nutrition clubs permitted open broader pandemic conditions country adversely impacted sales volumes important dmo market home delivery operating primary distribution channel market though majority product access points open pickup believe price increase announced december 2020 effective january 2021 favorable impact sales volumes late 2020 may adverse factor sales volumes first quarter 2021 net sales peru 617 million year ended december 31 2020 net sales decreased 25 million 40 year ended december 31 2020 compared period 2019 local currency net sales increased 06 year ended december 31 2020 compared period 2019 fluctuation foreign currency exchange rates unfavorable impact 29 million net sales year ended december 31 2020 sales volumes prior year midmarch declined significantly time second quarter due pandemic conditions taking orders internet phone shipping product member homes october 2020 sales centers began open product pickup well home delivery members’ nutrition clubs also modified home delivery open partial operation believe adaptations pandemic conditions well members’ success leveraging social media using weight loss challenge dmo contributed strengthened business momentum second half year slight sales volume increase year versus prior year emea region reported net sales 12083 million year ended december 31 2020 net sales increased 2103 million 211 year ended december 31 2020 compared period 2019 local currency net sales increased 242 year ended december 31 2020 compared period 2019 211 increase net sales year ended december 31 2020 primarily due increase sales volume indicated 211 increase volume points 38 favorable impact price increases partially offset 31 unfavorable impact fluctuations foreign currency exchange rates volume points generally higher across region year volume point growth seen across emea region number years reflects believe efforts enhance quality activity sales leaders including member training brand awareness product line expansion well enhanced technology tools ordering business performance customer retailing addition major markets discussed strong business momentum united kingdom south africa france contributed region net sales growth year due covid19 pandemic conditions sales centers product access points many markets within region currently closed open limited operations leaving shipping home delivery primary distribution channel conditions persist members turning social media carry sales oversight activities adaptations successful limiting adverse impact pandemic believe pandemic conditions may contributing factor motivation focus members certain markets region net sales spain 1720 million year ended december 31 2020 net sales increased 356 million 261 year ended december 31 2020 compared period 2019 local currency net sales increased 233 year ended december 31 2020 compared period 2019 fluctuation foreign currency exchange rates favorable impact 38 million net sales year ended december 31 2020 recent years spain seen sales volume increases benefited programs promotions sponsorships well enhanced technology tools raised brand awareness healthy active lifestyle contributed broadbased success across member sales organizations market response pandemic conditions temporarily shifted operations primarily online activities mitigate negative impacts unable conduct inperson meetings trainings selling activities home delivery continues prevailing distribution channel seen significant disruption first quarter 2020 saw small sales volume decline subsequent quarters seen significant volume increases members appear adapted pandemic conditions leveraging online tools reach customers business momentum increased net sales russia 1472 million year ended december 31 2020 net sales increased 72 million 51 year ended december 31 2020 compared period 2019 local currency net sales increased 171 year ended december 31 2020 compared period 2019 fluctuation foreign currency exchange rates unfavorable impact 169 million net sales year ended december 31 2020 russia achieved sales volume increases year versus prior year despite pandemic disruption commencing late first quarter sales centers reopened product pickup although continue support home delivery market due pandemic conditions nutrition clubs operating primarily online market remain key dmo supported new products training promotion levels membership product access expansion market enabled growth smaller cities third quarter 2020 introduced member segmentation market adding preferred customer program option new members russia approximate 5 price increase september 2020 net sales italy 1419 million year ended december 31 2020 net sales increased 158 million 125 year ended december 31 2020 compared period 2019 local currency net sales increased 101 year ended december 31 2020 compared period 2019 fluctuation foreign currency exchange rates favorable impact 30 million net sales year ended december 31 2020 sales volume increased year versus prior year weakened momentum business pandemic conditions country contributed sales volume decline first quarter year believe adaptation members pandemic conditions online communication members home delivery contributing factor sales volume increase strengthened momentum subsequent quarters asia pacific asia pacific region excludes china reported net sales 13477 million year ended december 31 2020 net sales increased 987 million 79 year ended december 31 2020 compared period 2019 local currency net sales increased 92 year ended december 31 2020 compared period 2019 79 increase net sales year ended december 31 2020 primarily due increase sales volume indicated 80 increase volume points 20 favorable impact price increases partially offset 13 unfavorable impact fluctuations foreign currency exchange rates volume point net sales increases recent years markets region result believe customerfocused business daily consumption dmos including nutrition clubs well product line access point expansion however covid19 pandemic conditions closed sales centers members’ nutrition clubs increased reliance home delivery product distribution adverse impact results times throughout year significantly india south korea indonesia region adapted pandemic conditions varying degrees market many markets achieved sales volume increases year compared prior year volume increases led vietnam india ongoing pandemic conditions contributed volume decreases south korea indonesia net sales india 3491 million year ended december 31 2020 net sales increased 278 million 86 year ended december 31 2020 compared period 2019 local currency net sales increased 139 year ended december 31 2020 compared period 2019 fluctuation foreign currency exchange rates unfavorable impact 169 million net sales year ended december 31 2020 sales volumes increased india recent years continued expand product line make easier members business online signup adding product access points payment methods pandemicrelated operating constraints seen earlier 2020 begun ease members adjusted operations partially mitigate constraints member activities nutrition clubs trainings mainly operating online although certain indian states continued pandemicrelated operating constraints seen reduced product manufacturing capacity manufacturing capacity met demand continue take member orders payments online company locations open taking orders payments pickup product though home delivery volumes continue exceed prepandemic levels disruption collections expenditures cash eased though continue move transactions electronic collection payment operating efficiency purposes member convenience regulatory restrictions direct selling including registration requirements distributors implemented february 2020 reduced number new distributors despite certain subsequent relaxations regulations government response pandemic conditions seen increase new preferred members since similar registration requirements regulatory relaxations ended effective january 2021 continue work distributors adapt regulatory changes net sales vietnam 2126 million year ended december 31 2020 net sales increased 495 million 303 year ended december 31 2020 compared period 2019 local currency net sales increased 303 year ended december 31 2020 compared period 2019 fluctuation foreign currency exchange rates material impact net sales year ended december 31 2020 vietnam continues strong momentum adapted increased directselling regulatory requirements sales leadership continues focus sustainable consumptionoriented business practices covid19 pandemicrelated operating constraints saw second quarter eased somewhat members adapted constraints moving events trainings product ordering online changes directselling regulations market expected proposed late 2021 implementation continue assess monitor preliminary draft regulations net sales indonesia 1812 million year ended december 31 2020 net sales decreased 23 million 13 year ended december 31 2020 compared period 2019 local currency net sales increased 13 year ended december 31 2020 compared period 2019 fluctuation foreign currency exchange rates unfavorable impact 47 million net sales year ended december 31 2020 although indonesia increased sales volumes recent years focusing customerbased business daily consumption nutrition clubs training activities supported increased product access pandemic conditions adverse impact operations results sales centers continued operate via online ordering home delivery pickup already established methods market many members’ nutrition clubs major dmo market experienced pandemicrelated constraints activities responsive measures include online training promotions targeted sales leaders nonsales leader members customers appropriate net sales south korea 1290 million year ended december 31 2020 net sales decreased 146 million 102 year ended december 31 2020 compared period 2019 local currency net sales decreased 90 year ended december 31 2020 compared period 2019 fluctuation foreign currency exchange rates unfavorable impact 17 million net sales year ended december 31 2020 south korea achieved volume point net sales growth 2019 several years transitionary impact marketing plan changes led contraction business market growth continued early part 2020 pandemic conditions however including suspension training facilities members’ nutrition clubs restrictions gatherings affected market since midfebruary believe contributed sales volume declines year versus prior year nutrition clubs open intermittently limited basis sales training activities continue online delivery product continues china region reported net sales 8096 million year ended december 31 2020 net sales increased 576 million 77 year ended december 31 2020 compared period 2019 local currency net sales increased 78 year ended december 31 2020 compared period 2019 77 increase net sales year ended december 31 2020 primarily due increase sales volume indicated 53 increase volume points 23 favorable impact sales mix volume growth year versus prior year despite disruption due covid19 viral outbreak partially attributable comparison weakened 2019 china net sales negatively impacted chinese government’s 100day review health products industry concluded april 2019 review combined negative media coverage review impacted business members significantly reduced activities sales meetings following review activities sales meetings important business central channel attracting retaining customers providing personal professional development members promoting products members begun conducting meetings toward end 2019 first quarter 2020 covid19 pandemic resulted travel restrictions temporary measures commenced early first quarter also negatively impacted business including renewed sales meeting restrictions nutrition club closures members able partially mitigate impact restrictions 2020 taking many sales promotional activities online including sales meetings april 2020 though subject additional changes conditions china operations largely resumed adapted basis manufacturing plants distribution centers open operating normally well nutrition clubs subject certain social distancing measures inperson sales meetings begun held based location size subject government approval though sales meetings also continue successfully held online market still returned levels inperson sales meetings existed prior review however inperson meetings supplemented online meetings focus areas china included expanding ecommerce platform example provide ability china members service customers via personalized sites retail customers purchase products directly company also expanded product line china market launched social mediabased marketing campaigns continued conduct sales promotions region fourth quarter 2020 saw yearoveryear net sales declines china seen decline number new independent service providers net sales fourth quarter 2020 compared third quarter 2020 addition macroeconomic challenges china believe one factor contributing declines recent enhancement made requirements sales representatives china eligible apply become independent service providers believe change contributing factor declines fourth quarter believe enhancement ultimately strengthen business improving quality independent service providers sales product category net sales product category follows 1 product buybacks returns product categories included literature promotional category net sales increased product categories year ended december 31 2020 compared period 2019 trends business factors described discussions individual geographic regions apply generally product categories gross profit gross profit 43912 million 39191 million years ended december 31 2020 2019 respectively gross profit percentage net sales 792 804 years ended december 31 2020 2019 respectively unfavorable net decrease 112 basis points decrease gross profit percentage net sales year ended december 31 2020 compared period 2019 included unfavorable cost changes 64 basis points relating increased freight costs due orders shifting toward home delivery versus member pickup unfavorable impact foreign currency fluctuations 44 basis points unfavorable impact 27 basis points excluding venezuela unfavorable cost changes related selfmanufacturing sourcing 30 basis points includes decreased costs related mexico tariffs unfavorable changes country mix 16 basis points unfavorable impact higher inventory writedowns 15 basis points unfavorable cost changes 11 basis points partially offset favorable impact retail price increases 68 basis points favorable impact 52 basis points excluding venezuela net unfavorable impact foreign currency fluctuations retail price increases venezuela year ended december 31 2020 compared period 2019 1 basis point generally gross profit percentage net sales may vary period due impact foreign currency fluctuations changes country mix volume changes among countries varying margins retail price increases cost changes related selfmanufacturing sourcing inventory writedowns royalty overrides royalty overrides 16901 million 14482 million years ended december 31 2020 2019 respectively royalty overrides percentage net sales 305 297 years ended december 31 2020 2019 respectively service fees independent service providers china included selling general administrative expenses member compensation countries included royalty overrides generally royalty overrides percentage net sales may vary period due changes mix products countries full royalty overrides paid certain products certain countries selling general administrative expenses selling general administrative expenses 20750 million 19403 million years ended december 31 2020 2019 respectively selling general administrative expenses percentage net sales 374 398 years ended december 31 2020 2019 respectively increase selling general administrative expenses year ended december 31 2020 compared period 2019 driven 841 million higher labor benefits costs primarily driven headcount increases support sales growth 431 million higher expenses relating sec doj investigations relating fcpa matter china see note 7 contingencies consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k 351 million higher service fees china independent service providers due higher sales china 128 million higher foreign exchange losses partially offset 244 million lower member event promotion costs mostly resulting cancellations events promotions due covid19 pandemic 190 million expenses relating sec investigation relating disclosures regarding marketing plan china 2019 see note 7 contingencies consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k 174 million lower travel entertainment costs resulting travel restrictions due covid19 pandemic operating income 145 million operating income year ended december 31 2020 consisted 145 million government grant income china see note 2 basis presentation consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k 375 million operating income year ended december 31 2019 consisted 315 million government grant income china 60 million related finalization insurance recoveries connection flooding one warehouses mexico september 2017 damaged certain inventory stored within warehouse see note 7 contingencies consolidated financial statements included part iv item 15 exhibits financial statement schedules 2018 10k interest expense net interest expense net follows decrease interest expense net year ended december 31 2020 compared period 2019 primarily due decrease overall weightedaverage interest rate weightedaverage borrowings partially offset lower interest income earned result lower interest rates expense income net recognize expense income net year ended december 31 2020 157 million income net year ended december 31 2019 consisted 157 million gain revaluation cvr see note 8 shareholders’ deficit consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k income taxes income taxes 1438 million 1404 million years ended december 31 2020 2019 respectively effective income tax rate 278 311 years ended december 31 2020 2019 respectively decrease effective tax rate year ended december 31 2020 compared period 2019 primarily due changes geographic mix income partially offset decrease net benefits discrete events liquidity capital resources historically met working capital expenditure requirements including funding expansion operations net cash flows provided operating activities variations sales products directly affect availability funds material contractual restrictions ability transfer remit funds among international affiliated companies however foreign currency restrictions certain countries could reduce ability timely obtain us dollars even restrictions impacts covid19 pandemic believe sufficient resources including cash flow operating activities access capital markets meet debt service obligations timely manner able continue meet objectives historically debt resulted need fund normal operations instead resulted primarily share repurchase programs since inception 2007 december 31 2020 total share repurchases amounted approximately 54 billion significant net sales decline could potentially affect availability funds many largest expenses variable nature believe protects funding dramatic net sales downturn 10454 million cash equivalents december 31 2020 senior secured credit facility addition cash flow operations used support general corporate purposes including future share repurchases dividends strategic investment opportunities cash pooling arrangement financial institution cash management purposes cash pooling arrangement allows certain participating subsidiaries withdraw cash financial institution based upon aggregate cash deposits held subsidiaries participate cash pooling arrangement owe amounts financial institution pooling arrangement december 31 2020 2019 year ended december 31 2020 generated 6286 million operating cash flow compared 4575 million period 2019 increase operating cash flow result 1024 million favorable changes operating assets liabilities 687 million higher net income excluding noncash items disclosed within consolidated statement cash flows 1024 million change operating assets liabilities primarily result favorable changes royalty overrides current liabilities included favorable changes accrued compensation income taxes payable partially offset unfavorable changes prepaid expenses current assets 687 million higher net income excluding noncash items primarily driven higher contribution margin driven higher net sales see summary financial results discussion partially offset higher selling general administrative expenses primarily higher labor benefits costs higher expenses relating sec doj investigations relating fcpa matter china capital expenditures including accrued capital expenditures years ended december 31 2020 2019 1168 million 1102 million respectively majority expenditures represented investments management information systems including initiatives develop webbased member tools expect incur total capital expenditures approximately 175 million 225 million full year 2021 march 2020 annual global herbalife honors event sales leaders around world meet share best practices conduct leadership training canceled due covid19 pandemic management awarded members 713 million mark hughes bonus payments related 2019 performance march 2019 management awarded members 707 million mark hughes bonus payments related 2018 performance senior secured credit facility february 15 2017 entered 14500 million senior secured credit facility 2017 credit facility consisting 13000 million term loan b 2017 term loan b 1500 million revolving credit facility 2017 revolving credit facility syndicate financial institutions lenders 2017 revolving credit facility mature february 15 2022 2017 term loan b mature february 15 2023 2017 credit facility amended effective march 16 2018 make certain technical amendments connection offering 2024 convertible notes defined terminated 2017 credit facility august 16 2018 11781 million outstanding repaid full august 16 2018 entered 125 billion senior secured credit facility 2018 credit facility consisting 2500 million term loan 2018 term loan 7500 million term loan b 2018 term loan b 2500 million revolving credit facility 2018 revolving credit facility syndicate financial institutions lenders prior amendment described 2018 term loan 2018 revolving credit facility mature august 16 2023 2018 term loan b matures upon earlier august 18 2025 ii december 15 2023 outstanding principal 2024 convertible notes defined exceeds 3500 million exceed certain leverage ratios date obligations 2018 credit facility unconditionally guaranteed certain direct indirect whollyowned subsidiaries herbalife nutrition ltd secured equity interests certain herbalife nutrition ltd’s subsidiaries substantially assets domestic loan parties also august 16 2018 issued 400 million aggregate principal amount senior unsecured notes 2026 notes described used proceeds 2018 credit facility 2026 notes repay full 11781 million outstanding 2017 credit facility accounting purposes pursuant fasb asc topic 470 debt asc 470 transactions accounted extinguishment 2017 credit facility recognized loss extinguishment 354 million result recorded expense income net within consolidated statement income year ended december 31 2018 december 12 2019 amended 2018 credit facility among things reduced interest rate borrowings 2018 term loan b incurred approximately 12 million debt issuance costs connection amendment accounting purposes pursuant asc 470 transaction accounted modification 2018 credit facility debt issuance costs recognized interest expense within consolidated statement income year ended december 31 2019 march 19 2020 amended 2018 credit facility among things extended maturity 2018 term loan 2018 revolving credit facility earlier march 19 2025 ii september 15 2023 outstanding principal 2024 convertible notes defined exceeds 3500 million exceed certain leverage ratios date increased borrowings 2018 term loan 2344 million total 2648 million increased total available borrowing capacity 2018 revolving credit facility 2500 million 2825 million reduced interest rate borrowings 2018 term loan 2018 revolving credit facility incurred approximately 16 million debt issuance costs connection amendment accounting purposes pursuant asc 470 transaction accounted modification 2018 credit facility 16 million debt issuance costs approximately 11 million recorded consolidated balance sheet amortized life 2018 credit facility using effectiveinterest method approximately 05 million recognized interest expense within consolidated statement income year ended december 31 2020 2018 credit facility requires us comply leverage ratio 2018 credit facility also contains affirmative negative covenants customary financings type including among things limitations prohibitions repurchasing common shares declaring paying dividends distributions redeeming repurchasing certain indebtedness loans investments additional indebtedness liens mergers asset sales transactions affiliates addition 2018 credit facility contains customary events default december 31 2020 2019 compliance debt covenants 2018 credit facility 2018 term loan 2018 term loan b payable consecutive quarterly installments began december 31 2018 interest due least quarterly amounts outstanding 2018 credit facility addition beginning 2020 may required make mandatory prepayments towards 2018 term loan b based consolidated leverage ratio annual excess cash flows defined terms 2018 credit facility also permitted make voluntary prepayments amounts outstanding 2018 term loan may voluntarily prepaid without premium penalty subject customary breakage fees connection prepayment eurocurrency loan 2018 credit facility amounts outstanding 2018 term loan b may voluntarily prepaid without premium penalty subject customary breakage fees connection prepayment eurocurrency loan prepayments applied remaining quarterly installments owed 2018 term loan 2018 term loan b order maturity remaining principal due upon maturity unless directed otherwise us based 2020 consolidated leverage ratio excess cash flow calculation defined terms 2018 credit facility required make mandatory prepayment 2021 toward 2018 term loan b year ended december 31 2020 borrowed aggregate amount 304 million 2018 credit facility repaid total amount 207 million amounts outstanding 2018 credit facility year ended december 31 2019 repaid total amount 200 million amounts outstanding 2018 credit facility december 31 2020 2019 us dollar amount outstanding 2018 credit facility 9847 million 9750 million respectively 9847 million outstanding 2018 credit facility december 31 2020 2516 million outstanding 2018 term loan 7331 million outstanding 2018 term loan b 9750 million outstanding 2018 credit facility december 31 2019 2344 million outstanding 2018 term loan 7406 million outstanding 2018 term loan b borrowings outstanding 2018 revolving credit facility december 31 2020 2019 outstanding foreign currency borrowings 2018 credit facility december 31 2020 2019 december 31 2020 2019 weightedaverage interest rate borrowings 2018 credit facility 339 552 respectively see note 5 longterm debt consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k discussion 2018 credit facility convertible senior notes due 2019 february 2014 issued 115 billion aggregate principal amount convertible senior notes due 2019 convertible notes 2019 convertible notes senior unsecured obligations ranked effectively subordinate existing future secured indebtedness including amounts outstanding 2018 credit facility extent value assets securing indebtedness 2019 convertible notes paid interest rate 200 per annum payable semiannually arrears february 15 august 15 year beginning august 15 2014 unless earlier repurchased converted 2019 convertible notes matured august 15 2019 primary purpose issuance 2019 convertible notes share repurchase purposes march 2018 issued 550 million aggregate principal new convertible senior notes due 2024 described subsequently used proceeds along cash hand repurchase 4750 million existing 2019 convertible notes limited number holders privately negotiated transactions aggregate purchase price 5835 million included 10 million accrued interest august 2019 repaid total amount 6750 million repay full amounts outstanding 2019 convertible notes upon maturity well 67 million accrued interest see note 5 longterm debt consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k discussion 2019 convertible notes convertible senior notes due 2024 march 2018 issued 5500 million aggregate principal amount convertible senior notes due 2024 convertible notes 2024 convertible notes senior unsecured obligations rank effectively subordinate existing future secured indebtedness including amounts outstanding 2018 credit facility extent value assets securing indebtedness 2024 convertible notes pay interest rate 2625 per annum payable semiannually arrears march 15 september 15 year beginning september 15 2018 unless redeemed repurchased converted accordance terms prior date 2024 convertible notes mature march 15 2024 primary purpose issuance 2024 convertible notes repurchase portion 2019 convertible notes see note 5 longterm debt consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k discussion 2024 convertible notes senior notes due 2025 may 2020 issued 6000 million aggregate principal amount senior notes due 2025 notes 2025 notes senior unsecured obligations rank effectively subordinate existing future secured indebtedness including amounts outstanding 2018 credit facility extent value assets securing indebtedness 2025 notes pay interest rate 7875 per annum payable semiannually arrears march 1 september 1 year beginning march 1 2021 2025 notes mature september 1 2025 unless redeemed repurchased accordance terms prior date primary purpose issuance 2025 notes general corporate purposes including share repurchases capital investment projects see note 5 longterm debt consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k discussion 2025 notes senior notes due 2026 august 2018 issued 4000 million aggregate principal amount senior notes due 2026 notes 2026 notes senior unsecured obligations rank effectively subordinate existing future secured indebtedness including amounts outstanding 2018 credit facility extent value assets securing indebtedness 2026 notes pay interest rate 7250 per annum payable semiannually arrears february 15 august 15 year beginning february 15 2019 2026 notes mature august 15 2026 unless redeemed repurchased accordance terms prior date primary purpose issuance 2026 notes refinance portion 2017 credit facility see note 5 longterm debt consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k discussion 2026 notes contractual obligations following summarizes contractual obligations including interest december 31 2020 effect obligations expected liquidity cash flows future periods 1 estimated interest payments 2018 credit facility based interest rates effective december 31 2020 2 consolidated balance sheet december 31 2020 includes 601 million unrecognized tax benefits future payments related unrecognized tax benefits presented table due uncertainty amounts potential timing cash settlements tax authorities whether settlement would occur cash equivalents majority foreign subsidiaries designate local currencies functional currencies december 31 2020 total amount foreign subsidiary cash equivalents 4634 million 314 million held us dollars december 31 2020 total amount cash equivalents held herbalife nutrition ltd us entities inclusive us territories 5820 million earnings considered indefinitely reinvested deferred taxes provided earnings considered indefinitely reinvested deferred taxes provided make determination remit cash equivalents foreign subsidiaries considered indefinitely reinvested us consolidated group purpose repatriation undistributed earnings would need accrue pay taxes december 31 2020 us consolidated group approximately 1477 million permanently reinvested unremitted earnings certain foreign subsidiaries monies ever needed remitted impact tax consequences overall liquidity position would material december 31 2020 herbalife nutrition ltd approximately 26 billion permanently reinvested unremitted earnings relating operating subsidiaries result decision invest china growth impact investment program approximately 1139 million unremitted earnings permanently reinvested december 31 2020 december 31 2020 plans repatriate unremitted earnings herbalife nutrition ltd therefore liquidity concerns relating unremitted earnings related cash equivalents see note 12 income taxes consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k additional discussion unremitted earnings offbalance sheet arrangements december 31 2020 2019 material offbalance sheet arrangements defined item 303a4ii regulation sk dividends declared paid cash dividends since 2014 declaration future dividends subject discretion board directors depend upon various factors including earnings financial condition herbalife nutrition ltd’s available distributable reserves cayman islands law restrictions imposed 2018 credit facility terms indebtedness may outstanding cash requirements future prospects factors deemed relevant board directors november 4 2020 board directors declared pro rata distribution stock purchase warrants shareholders one warrant every four common shares held warrant would entitled holder purchase herbalife nutrition common share exercise price 6750 per share would option net share settle warrants exercised future november 10 2020 board directors announced considering additional feedback shareholders longer move forward intended distribution warrants share repurchases october 30 2018 board directors authorized new fiveyear 15 billion share repurchase program expire october 30 2023 replaced prior share repurchase authorization set expire february 21 2020 approximately 1133 million remaining authorized capacity replaced share repurchase program allows us includes indirect whollyowned subsidiary herbalife nutrition ltd repurchase common shares times prices determined management market conditions warrant extent herbalife nutrition ltd’s distributable reserves available cayman islands law 2018 credit facility permits us repurchase common shares long default event default exists conditions specified consolidated leverage ratios met december 31 2020 remaining authorized capacity 15 billion share repurchase program 6079 million conjunction issuance 2019 convertible notes february 2014 paid approximately 6858 million enter prepaid forward share repurchase transactions forward transactions certain financial institutions forward counterparties pursuant purchased approximately 199 million common shares average cost 3451 per share settlement around august 15 2019 maturity date 2019 convertible notes subject ability forward counterparty elect settle portion forward transactions early shares treated retired shares basic diluted eps purposes see note 8 shareholders’ deficit consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k discussion forward transactions august 2020 completed modified dutch auction tender offer subsequently paid cash repurchase retire total approximately 154 million common shares aggregate cost approximately 7500 million 4875 per share addition year ended december 31 2020 repurchased approximately 30 million common shares open market purchases aggregate cost approximately 1421 million average cost 4740 per share subsequently retired shares year ended december 31 2019 repurchase common shares open market purchases december 31 2020 2019 held approximately 100 million treasury shares us gaap purposes treasury shares increased shareholders’ deficit reflected cost within accompanying consolidated balance sheets although shares owned indirect whollyowned subsidiary remain legally outstanding reflected treasury shares us gaap therefore reduce number common shares outstanding within consolidated financial statements weightedaverage number common shares outstanding used calculating earnings per share common shares herbalife nutrition ltd held indirect whollyowned subsidiary however remain outstanding books records transfer agent therefore still carry voting share rights related ownership common shares may exercised long consistent applicable laws shares voted subsidiary manner maximum extent possible proportion votes cast respect matter properly submitted vote herbalife nutrition ltd’s shareholders see note 8 shareholders’ deficit note 15 subsequent events consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k discussion share repurchases connection october 2017 modified dutch auction tender offer incurred 16 million transaction costs also provided nontransferable cvr share tendered allowing participants tender offer receive contingent cash payment event herbalife acquired goingprivate transaction defined cvr agreement within two years commencement tender offer initial fair value cvr 73 million recorded liability fourth quarter 2017 corresponding decrease shareholders’ equity determining initial fair value cvr used lattice model included inputs underlying stock price strike price time expiration dividend yield subsequent changes fair value cvr liability using similar valuation approach initial fair value determination recognized within consolidated balance sheets corresponding gains losses recognized expense income net within consolidated statements income reporting period cvr expired august 2019 terminated due goingprivate transaction also incorporated valuation cvr goingprivate probability input considered level 3 input fair value hierarchy increase decrease input could significantly impacted fair value cvr reporting date cvr expired without value august 21 2019 twoyear anniversary august 21 2017 date commenced related modified dutch auction tender offer year ended december 31 2019 recognized 157 million gain expense income net within consolidated statement income due change fair value cvr driven expiration august 2019 year ended december 31 2018 recognized 88 million loss expense income net within consolidated statement income due change fair value cvr primarily driven increase market price common shares partially offset decrease probability goingprivate transaction result shortening term cvr expired pursuant terms see note 8 shareholders’ deficit consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k discussion cvr capped call transactions february 2014 connection issuance 2019 convertible notes paid approximately 1238 million enter capped call transactions respect common shares capped call transactions certain financial institutions capped call transactions expected generally reduce potential dilution upon conversion 2019 convertible notes event market price common shares greater strike price capped call transactions initially set 4314 per common share reduction potential dilution subject cap based cap price initially set 6039 per common share march 2018 connection repurchase portion 2019 convertible notes entered partial settlement agreements option counterparties capped call transactions terminate portion capped call transactions case notional amount corresponding aggregate principal amount 2019 convertible notes repurchased august 15 2019 convertible notes matured remaining capped call transactions expired unexercised expiration capped call transactions impact consolidated financial statements see note 8 shareholders’ deficit consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k discussion capped call transactions working capital operating activities december 31 2020 2019 working capital 6485 million 5238 million respectively increase 1247 million increase primarily due increases cash equivalents inventories partially offset increases royalty overrides current liabilities expect cash funds provided operations available borrowings 2018 credit facility access capital markets provide sufficient working capital operate business make expected capital expenditures meet foreseeable liquidity requirements next twelve months thereafter majority purchases suppliers generally made us dollars sales members generally made local currencies consequently strengthening us dollar versus foreign currency negative impact net sales contribution margins generate transaction gains losses intercompany transactions discussion foreign exchange contracts hedging arrangements see part ii item 7a quantitative qualitative disclosures market risk annual report form 10k quarterly results operations 1 fourth quarter 2019 includes net favorable adjustment unrecognized tax benefit liability 114 million primarily attributable transfer pricing matters various foreign jurisdictions legal accrual 40 million relating sec doj investigations relating fcpa matter china described note 7 contingencies consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k contingencies see note 7 contingencies consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k information contingencies december 31 2020 subsequent events see note 15 subsequent events consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k information regarding subsequent events including 600 million share repurchase agreement entered january 3 2021 critical accounting policies us gaap requires us make estimates assumptions affect reported amounts assets liabilities disclosures contingent assets liabilities date financial statements reported amounts revenue expenses year regularly evaluate estimates assumptions related revenue recognition allowance product returns inventory goodwill purchased intangible asset valuations deferred income tax asset valuation allowances uncertain tax positions tax contingencies loss contingencies base estimates assumptions current facts historical experience various factors believe reasonable circumstances results form basis making judgments carrying values assets liabilities recording revenue costs expenses actual results could differ estimates consider following policies critical understanding judgments involved preparing financial statements uncertainties could impact operating results financial condition cash flows nutrition company sells wide range weight management targeted nutrition energy sports fitness outer nutrition products manufactured us changsha hunan china extraction facility suzhou china facility nanjing china facility lake forest california facility winstonsalem north carolina facility thirdparty providers sold members consume sell herbalife products retail consumers members december 31 2020 sold products 95 markets throughout world organized managed geographic region aggregate operating segments one reporting segment except china management believes operating segments similar operating characteristics similar longterm operating performance making determination management believes operating segments similar nature products sold product acquisition process types customers products sold methods used distribute products nature regulatory environment economic characteristics generally recognize revenue upon delivery control passes member product sales recognized net product returns discounts referred “distributor allowances” generally receive net sales price cash credit card payments point sale royalty overrides generally recorded revenue recognized see note 2 basis presentation consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k discussion distributor compensation us allowances product returns primarily connection buyback program provided time sale recorded accrual based upon historical return rates country relevant return pattern reflects anticipated returns received period 12 months following original sale historically product returns buybacks significant product returns buybacks approximately 01 net sales years ended december 31 2020 2019 adjust inventories lower cost net realizable value additionally adjust carrying value inventory based assumptions regarding future demand products market conditions future demand market conditions less favorable management’s assumptions additional inventory writedowns could required likewise favorable future demand market conditions could positively impact future operating results previously written inventories sold obsolete slow moving inventories adjusted downward 230 million 151 million present lower cost net realizable value consolidated balance sheets december 31 2020 2019 respectively goodwill marketingrelated intangible assets subject amortization tested annually impairment tested impairment frequently events circumstances indicate asset might impaired part annual goodwill impairment test performed reporting unit level may conduct assessment qualitative factors determine whether likely fair value reporting unit less carrying amount qualitative assessment would consider macroeconomic conditions including deterioration general conditions industry market conditions including deterioration environment reporting unit operates increased competition changes productsservices regulatory political developments cost business overall financial performance including declining cash flows performance relation planned revenues earnings past periods relevant reporting unit specific facts changes management key personnel pending litigation events affecting reporting unit including changes carrying value net assets determine likely fair value reporting unit less carrying value would perform quantitative goodwill impairment test required determine likely fair value reporting unit less carrying value testing required fiscal year 2020 performed qualitative assessment determined likely fair value reporting unit less respective carrying value marketingrelated intangible assets may also utilize qualitative assessment similar one described exception test performed consolidated level rather reporting unit level fiscal year 2020 performed qualitative assessment marketingrelated intangible assets determined likely fair value assets less carrying value required determine fair value reporting unit using quantitative method primarily use income approach order determine fair value reporting unit compare carrying amount determination fair value reporting units requires us make significant estimates assumptions estimates assumptions include estimates future revenues expense growth rates capital expenditures depreciation amortization related capital expenditures discount rates inputs due inherent uncertainty involved making estimates actual future results could differ changes assumptions regarding future results underlying assumptions could significant impact fair value reporting unit carrying amount reporting unit exceeds fair value impairment loss recognized excess carrying amount reporting unit fair value required determine fair value marketingrelated intangible assets using quantitative method use discounted cash flow model income approach relieffromroyalty method determine fair value marketing related intangible assets order confirm impairment required impairment loss recognized extent carrying amount assets exceeds fair value december 31 2020 2019 goodwill approximately 1005 million 915 million respectively increase 90 million 90 million increase 70 million due immaterial acquisition 20 million due foreign currency translation adjustments december 31 2020 2019 marketingrelated intangible assets approximately 3100 million marketingrelated intangibles goodwill impairment recorded years ended december 31 2020 2019 see note 2 basis presentation consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k discussion contingencies accounted accordance fasb asc topic 450 contingencies asc 450 asc 450 requires record estimated loss contingency information available prior issuance financial statements indicates probable asset impaired liability incurred date financial statements amount loss reasonably estimated also disclose material contingencies believe loss probable reasonably possible required asc 450 accounting contingencies legal nonincome tax matters requires us use judgment related likelihood loss estimate amount range loss many legal tax contingencies take years resolved generally time period increases uncertainties resolved likelihood changes estimate ultimate outcome increases evaluate realizability deferred tax assets assessing valuation allowance adjusting amount allowance necessary although realization assured believe likely net carrying value realized amount carryforwards considered realizable however could change estimates future taxable income adjusted ordinary course business many transactions calculations tax law ultimate tax determination uncertain part process preparing consolidated financial statements required estimate income taxes jurisdictions operate prior completion filing tax returns periods estimates involve complex issues require us make judgments likely application tax law situation well respect matters anticipating positions take tax returns prior us actually preparing returns outcomes disputes tax authorities ultimate resolution issues may take extended periods time due examinations tax authorities statutes limitations addition changes business including acquisitions changes international corporate structure changes geographic location business functions assets changes geographic mix amount income well changes agreements tax authorities valuation allowances applicable accounting rules applicable tax laws regulations rulings interpretations thereof developments tax audit matters variations estimated actual level annual pretax income affect overall effective income tax rate account uncertain tax positions accordance fasb asc topic 740 income taxes asc 740 provides guidance determination tax benefits claimed expected claimed tax return recorded financial statements asc 740 must recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate resolution december 22 2017 us enacted tax cuts jobs act 2017 us tax reform contains several key tax provisions affect us including limited onetime mandatory transition tax accumulated foreign earnings changes sourcing calculation foreign income reduction corporate income tax rate 21 effective january 1 2018 required recognize effect tax law changes period enactment determining transition tax remeasuring us deferred tax assets liabilities well reassessing net realizability deferred tax assets liabilities december 2017 sec staff issued staff accounting bulletin 118 income tax accounting implications tax cuts jobs act allows us record provisional amounts measurement period extend beyond one year enactment date see note 12 income taxes consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k discussion us tax reform made accounting policy election account global intangible lowtaxed income period cost incurred account foreign currency transactions accordance fasb asc topic 830 foreign currency matters majority countries operate functional currency local currency foreign subsidiaries’ asset liability accounts translated consolidated financial reporting purposes us dollar amounts periodend exchange rates revenue expense accounts translated average rates year foreign currency translation adjustments included accumulated comprehensive loss accompanying consolidated balance sheets foreign currency transaction gains losses foreign currency remeasurements generally included selling general administrative expenses accompanying consolidated statements income new accounting pronouncements see discussion note 2 basis presentation consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k information new accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations use retail sales reflects fundamental role “retail sales” accounting systems internal controls operations including basis upon distributors paid addition information daily monthly reports reviewed management includes retail sales data following represents reconciliation retail sales net sales periods set forth 3 includes acquisition property plant equipment capitalized leases longterm debt 04 million 182 million 71 million 26 million years ended december 31 2009 2008 2007 2006 respectively 4 years ended december 31 2010 2009 2008 2007 paid aggregate 537 million 487 million 507 million 415 million dividends respectively repurchased 1501 million 732 million 1370 million 3658 million common shares open market purchases respectively year ended december 31 2006 declare dividends repurchase common shares item 7 management’s discussion analysis financial condition results operations read following discussion analysis conjunction item 6 selected financial data consolidated financial statements related notes included elsewhere annual report form 10k overview global network marketing company sells weight management products nutritional supplements energy sports fitness products personal care products pursue mission “changing people’s lives” providing financially rewarding business opportunity distributors quality products distributors customers seek healthy lifestyle one largest network marketing companies world net sales approximately 27 billion year ended december 31 2010 december 31 2010 sold products 74 countries network approximately 21 million independent distributors china sell products retail stores sales representatives sales employees licensed business providers believe quality products effectiveness distribution network coupled geographic expansion primary reasons success throughout 31year operating history products grouped four principal categories weight management targeted nutrition energy sports fitness outer nutrition along literature promotional items products often sold programs comprised series related products literature designed simplify weight management nutrition consumers maximize distributors’ crossselling opportunities industrywide factors affect us competitors include global obesity epidemic aging worldwide population driving demand nutrition wellnessrelated products along global increase unemployment affect recruitment retention distributors seeking part time full time income opportunities closely monitoring current global economic crisis remain focused opportunities challenges retailing products recruiting retaining distributors improving distributor productivity opening new markets penetrating existing markets globalizing successful distributor methods operation nutrition clubs weight loss challenges introducing new products globalizing existing products developing niche market segments investing infrastructure management remains intently focused venezuela market especially limited ability repatriate cash report revenue six regions • north america consists us canada jamaica • mexico • south central america • emea consists europe middle east africa • asia pacific excluding china consists asia new zealand australia • china volume points geographic region key nonfinancial measure focus volume points royalty basis volume points essentially weighted unit measure product sales volume useful measure rely excludes impact foreign currency fluctuations changes retail pricing ignores differences generated varying retail pricing across geographic markets volume point measure aggregate region measure sales volume well sales volume trends general increase volume points particular geographic region country indicates increase sales volume results increase local currency net sales decrease volume points particular geographic region country indicates decrease sales volume results decreasing local currency net sales average active sales leaders geographic region continued expansion daily consumption business models different markets believe average active sales leader metric represents monthly average number sales leaders place order us given quarter useful metric rely metric indication engagement level sales leaders given region changes average active sales leader metric may indicative current momentum region well potential higher annual retention levels future sales growth utilization consumption based daily methods operations dmos 1 worldwide average active sales leaders may equal sum average active sales leaders region due calculation average sales leaders active period summation number new sales leaders geographic region reporting period also focus number distributors qualified new sales leaders compensation system excluding china distributors qualify sales leader status based volume points changes total number sales leaders changes productivity sales leaders may cause volume points increase decrease fluctuation number new sales leaders historically general indicator level distributor recruitment given ongoing transition daily consumption dmos coupled changes marketing plan implemented late 2009 evaluating usefulness measure ongoing business additional optional qualification introduced globally changes marketing plan contributed increase number new sales leaders number sales leaders retention rates geographic region requalification period compensation system requires sales leader requalify status year prior february order maintain 50 discount product eligible receive royalty payments february year demote rank sales leader distributors satisfy requalification requirements preceding twelve months requalification requirement apply new sales leaders ie became sales leaders subsequent january requalification prior year distributor statistics highlight calculation retention table reflects number sales leaders february year indicated subsequent annual requalification date sales leader retention rate year region number sales leaders geographic region quarterly reporting dates normally higher number sales leaders geographic region requalification period sales leaders requalify relevant twelvemonth period deleted rank sales leader following february since sales leaders purchase products resale distributors consumers comparisons sales leader totals yeartoyear basis indicators recruitment retention efforts different geographic regions value average monthly purchase herbalife products sales leaders remained relatively constant time consequently increases sales driven retention sales leaders recruitment retention distributors’ increased adoption daily consumption business methods provide distributors products support materials training special events competitive compensation program distributor wants pursue herbalife business opportunity distributor responsible growing business personally pays sales activities related attracting new customers recruiting distributors hosting events herbalife opportunity meetings success training seminars advertising herbalife’s products purchasing using promotional materials tshirts buttons caps utilizing paying direct mail print material brochures flyers catalogs business cards posters banners telephone book listings purchasing inventory sale use samples training mentoring following person via phone internet customers recruits use herbalife products andor pursue herbalife business opportunity presentation “retail sales” represent gross sales amounts invoices distributors distributor allowances defined “net sales” reflect distributor allowances shipping handling revenues represent collect recognize net sales financial statements discuss retail sales fundamental role compensation systems internal controls operations including role basis upon distributor discounts royalties bonuses awarded addition used basis certain information included daily monthly reports reviewed management however measure accordance us generally accepted accounting principles us gaap retail sales considered isolation substitute net sales consolidated income cash flow statement data prepared accordance us gaap measure profitability liquidity reconciliation net sales retail sales presented “results operations” “product sales” represent actual product purchase price paid us distributors giving effect distributor discounts referred “distributor allowances” approximate 50 retail sales prices distributor allowances percentage retail sales may vary country depending upon regulatory restrictions limit otherwise restrict distributor allowances international operations provided continue provide significant portion total net sales result total net sales continue affected fluctuations us dollar foreign currencies order provide framework assessing underlying businesses performed excluding effect foreign currency fluctuations addition comparing percent change net sales one period another us dollars also compare percent change net sales one period another period using “net sales local currency” disclosure net sales local currency us gaap financial measure net sales local currency removes net sales us dollars impact changes exchange rates us dollar functional currencies foreign subsidiaries translating current period net sales us dollars using foreign currency exchange rates used translate net sales previous comparable period believe presenting net sales local currency useful investors allows meaningful comparison net sales foreign operations period however net sales local currency measures considered isolation alternative net sales us dollars measures reflect current period exchange rates financial measures calculated presented accordance us gaap “gross profit” consists net sales less “cost sales” represents manufacturing costs price pay raw material suppliers manufacturers products well costs related product shipments duties tariffs freight expenses relating shipment products distributors importers similar expenses “royalty overrides” significant expense consist • royalty overrides production bonuses total approximately 15 7 respectively retail sales weight management targeted nutrition energy sports fitness outer nutrition promotional products • mark hughes bonus payable senior distributors aggregate amount 1 retail sales weight management targeted nutrition energy sports fitness outer nutrition products promotional products • discretionary incentive cash bonuses qualifying distributors royalty overrides generally earned based retail sales provide potential earnings distributors 23 retail sales approximately 33 net sales royalty overrides together distributor allowances 50 represent potential earnings distributors approximately 73 retail sales compensation distributors generally development retention improved productivity distributor sales organizations paid several levels distributors sale due restrictions direct selling china fulltime employed sales representatives china compensated wages bonuses benefits licensed business providers china compensated service fees instead distributor allowances royalty overrides utilized traditional marketing program local country regulatory constraints may required modify typical distributor incentive plans described consequently total distributor discount percentage may vary time also offer reduced distributor allowances pay reduced royalty overrides respect certain products worldwide “operating margins” consist net sales less cost sales royalty overrides “selling general administrative expenses” represent operating expenses components include labor benefits sales events professional fees travel entertainment distributor marketing occupancy costs communication costs bank fees depreciation amortization foreign exchange gains losses miscellaneous operating expenses sales distributors outside united states made respective local currencies preparing financial statements translate revenues us dollars using average exchange rates additionally majority purchases suppliers generally made us dollars consequently strengthening us dollar versus foreign currency negative impact reported sales operating margins generate transaction losses intercompany transactions throughout last five years foreign currency exchange rates fluctuated significantly time enter foreign exchange forward option contracts partially mitigate foreign currency exchange risk discussed detail item 7aitem 7 management’s discussion analysis financial condition results operations discuss retail sales fundamental role systems internal controls operations correlation member discounts royalty overrides addition information daily monthly reports reviewed management includes retail sales data following represents reconciliation retail sales net sales periods set forth 3 includes accrued capital expenditures see consolidated statement cash flows capital expenditures paid cash years ended december 31 2013 2012 2011 4 years ended december 31 2013 2012 2011 2010 2009 paid aggregate 1231 million 1351 million 855 million 537 million 487 million dividends respectively repurchased 2974 million 5278 million 2988 million 1501 million 732 million common shares open market purchases respectively item 7 management’s discussion analysis financial condition results operations read following discussion analysis conjunction item 6 selected financial data consolidated financial statements related notes included elsewhere annual report form 10k leading global nutrition company sells weight management products nutritional supplements energy sports fitness products personal care products utilizing network marketing distribution december 31 2013 sold products network 37 million independent members include approximately 02 million china sales representatives sales officers independent service providers many simply discount customers china currently sell products retail stores sales representatives sales officers independent service providers process changing terminology identify “distributors” “members” members participate business opportunity network marketing program presents referred “sales leaders” pursue mission “changing people’s lives” providing high quality sciencebased products members customers seek healthy lifestyle also offer financially rewarding business opportunity members seek part time full time income believe global obesity epidemic made quality products relevant effectiveness distribution network coupled geographic expansion primary reasons success throughout 34year operating history december 31 2013 sold products 91 countries products grouped four principal categories weight management targeted nutrition energy sports fitness outer nutrition along literature promotional items products often sold series related products literature designed simplify weight management nutrition consumers maximize members’ crossselling opportunities industrywide factors affect us competitors include global obesity epidemic aging worldwide population driving demand weight management nutrition wellnessrelated products along global increase employment unemployment affect recruitment retention members seeking part time full time income opportunities continue monitor current global financial environment remain focused opportunities challenges retailing products recruiting retaining members improving member productivity opening new markets penetrating existing markets globalizing successful distributor methods operation dmos nutrition clubs weight loss challenges introducing new products globalizing existing products developing niche market segments investing infrastructure management also continues monitor venezuelan market especially limited ability repatriate cash report revenue six regions • north america • mexico • south central america • emea consists europe middle east africa • asia pacific excluding china • china volume points geographic region key nonfinancial measure focus volume points royalty basis volume points essentially weighted average measure product sales volume points unaffected exchange rates price changes used management proxy sales trends general increase volume points particular geographic region country indicates increase local currency net sales decrease volume points particular geographic region country indicates decrease local currency net sales assign volume point value product first introduced market value unaffected subsequent exchange rate price changes specific number volume points assigned product generally consistent across markets based volume point suggested retail price ratio similar products product available different quantities various sizes different volume point values general assigned volume point value consistent region country change year reason volume points used manner described use volume points member qualification recognition purposes therefore attempt keep volume points similar like product consistent global basis however volume points function value rather product type size reliable measure product mix example increase volume points specific country region could mean significant increase sales less expensive products marginal increase sales expensive products average active sales leaders geographic region continued expansion daily consumption dmos different markets objective improve member retention believe average active sales leader useful metric represents monthly average number sales leaders place order including orders nonsales leader members downline sales organization given period rely metric indication engagement level sales leaders given region changes average active sales leader metric may indicative potential changes annual retention levels future sales growth 1 worldwide average active sales leaders may equal sum average active sales leaders region due calculation average sales leaders active period summation fact sales leaders active one region counted worldwide amount number sales leaders retention rates geographic region requalification period compensation system requires sales leader requalify status year prior february order maintain 50 discount products eligible receive royalty payments february year demote rank sales leader members satisfy requalification requirements preceding twelve months requalification requirement apply new sales leaders ie became sales leaders subsequent january requalification prior year member statistics highlight calculation retention table reflects number sales leaders end february year indicated subsequent annual requalification date sales leader retention rate year region sales leaders purchase products resale members consumers number sales leaders geographic region quarterly reporting dates normally higher number sales leaders geographic region requalification period sales leaders requalify relevant twelvemonth period removed rank sales leader following february comparisons sales leader totals yeartoyear basis indicators recruitment retention efforts different geographic regions provide members products support materials training special events competitive compensation program member wants pursue herbalife business opportunity member responsible growing business personally pays sales activities related attracting new customers recruiting members activities may include hosting events herbalife opportunity meetings success training seminars advertising herbalife’s products purchasing using promotional materials tshirts buttons caps utilizing paying direct mail print material brochures flyers catalogs business cards posters banners telephone book listings purchasing inventory sale use samples training mentoring customers recruits use herbalife products andor pursue herbalife business opportunity presentation “retail sales” represent suggested retail price products sell members gross sales amount reflected invoices price paid us members purchase product us discount suggested retail price refer discounts “distributor allowance” refer retail sales less distributor allowances “product sales” total distributor allowances 2013 2012 2011 441 457 retail sales respectively distributor allowances percentage retail sales may vary country depending upon regulatory restrictions limit otherwise restrict distributor allowances also offer reduced distributor allowances respect certain products worldwide member’s level discount determined qualification based volume purchases cases member qualified less maximum discount remaining discount also refer wholesale commission received sponsoring members therefore product sales recognized net product returns distributor allowances “net sales” equal product sales plus “shipping handling revenues” generally represents collect 2013 simplified pricing structure markets increasing suggested retail prices reducing total shipping handling fees eliminating “packaging handling” line item invoices members impact total member cost conjunction method distributor allowances marketing plan payouts generally utilizes 90 95 suggested retail price depending product market apply discounts 50 distributor allowances payout rates 15 royalty overrides 7 production bonuses approximately 1 mark hughes bonus consequently revision pricing structure meaningful impact amounts distributor allowance payouts marketing plan materially impact consolidated net sales profitability visibility sales members customers figure would differ reported “retail sales” factors including amount product purchased members personal consumption b prices charged members customers suggested retail prices discuss retail sales fundamental role systems internal controls operations correlation member discounts royalty overrides addition used basis certain information included daily monthly reports reviewed management however measure accordance us generally accepted accounting principles us gaap retail sales considered isolation substitute net sales consolidated income cash flow statement data prepared accordance us gaap measure profitability liquidity reconciliation retail sales net sales presented results operations international operations provided continue provide significant portion total net sales result total net sales continue affected fluctuations us dollar foreign currencies order provide framework assessing underlying businesses performed excluding effect foreign currency fluctuations addition comparing percent change net sales one period another us dollars also compare percent change net sales one period another period using “net sales local currency” net sales local currency us gaap financial measure net sales local currency removes net sales us dollars impact changes exchange rates us dollar functional currencies foreign subsidiaries translating current period net sales us dollars using foreign currency exchange rates used translate net sales previous comparable period believe presenting net sales local currency useful investors allows meaningful comparison net sales foreign operations period however net sales local currency measures considered isolation alternative net sales us dollar measures reflect current period exchange rates financial measures calculated presented accordance us gaap “gross profit” consists net sales less “cost sales” represents manufacturing costs price pay raw material suppliers manufacturers products well shipping handling costs including duties tariffs similar expenses members potentially profit activities reselling products amounts greater prices pay us members develop retain manage members earn additional compensation activities refer “royalty overrides” royalty overrides significant operating expense consist • royalty overrides production bonuses • mark hughes bonus payable senior members • discretionary incentive cash bonuses qualifying members 2013 2012 2011 total royalty overrides 310 329 net sales respectively royalty overrides compensation members development retention improved productivity sales organizations paid several levels members sale royalty overrides compensation services rendered company recorded operating expense due restrictions direct selling china independent service providers china compensated service fees instead distributor allowances royalty overrides utilized traditional marketing program compensation china independent service providers included selling general administrative expenses local country regulatory constraints may required modify member incentive plans described also pay reduced royalty overrides respect certain products worldwide consequently total royalty override percentage may vary time percentages noted “contribution margins” consist net sales less cost sales royalty overrides “selling general administrative expenses” represent operating expenses include labor benefits sales events professional fees travel entertainment member promotions occupancy costs communication costs bank fees depreciation amortization foreign exchange gains losses miscellaneous operating expenses sales members outside united states made respective local currencies preparing financial statements translate revenues us dollars using average exchange rates additionally majority purchases suppliers generally made us dollars consequently strengthening us dollar versus foreign currency negative impact reported sales contribution margins generate foreign currency losses intercompany transactions foreign currency exchange rates fluctuate significantly time enter foreign exchange forward option contracts partially mitigate foreign currency exchange risk discussed detail item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis financial condition results operations read conjunction part item 1a risk factors part ii item 6 selected financial data consolidated financial statements related notes included elsewhere annual report form 10k section annual report form 10k generally discusses 2019 2018 items yearoveryear comparisons 2019 2018 discussions 2017 items yearoveryear comparisons 2018 2017 included annual report form 10k found part ii item 7 management’s discussion analysis financial condition results operations annual report form 10k year ended december 31 2018 10k overview global nutrition company sells weight management targeted nutrition energy sports fitness outer nutrition products independent members china sell products independent service providers sales representatives sales officers customers preferred customers well companyoperated retail platforms necessary refer members distribute products achieve certain qualification requirements “sales leaders” provide highquality sciencebacked products members customers seek healthy lifestyle also offer business opportunity members seek additional income believe enhanced consumer awareness demand products due trends global obesity epidemic increasing healthcare costs aging populations coupled effectiveness personalized selling direct sales channel primary reasons continued success products grouped four principal categories weight management targeted nutrition energy sports fitness outer nutrition along literature promotional items products often sold series related products literature designed simplify weight management nutrition consumers maximize members’ crossselling opportunities continue monitor current global financial environment remain focused opportunities challenges retailing products enhancing customer experience sponsoring retaining members improving member productivity penetrating existing markets globalizing successful distributor methods operation dmos nutrition clubs fit clubs weight loss challenges introducing new products globalizing existing products developing niche market segments investing infrastructure sell products six geographic regions • north america • mexico • south central america • emea consists europe middle east africa • asia pacific excluding china • china july 15 2016 reached settlement ftc entered consent order resolved ftc’s multiyear investigation company continue monitor impact consent order board directors established implementation oversight committee connection consent order committee met meet regularly management oversee compliance terms consent order currently expect settlement longterm materially adverse impact business member base business member base particularly us may negatively impacted terms consent order change going market direct selling independent distributors compensating distributors based upon product sales organization sell see part item 1 business annual report form 10k discussion consent order part item 1a risk factors annual report form 10k discussion risks related settlement ftc volume points geographic region key nonfinancial measure focus volume points royalty basis volume points essentially weightedaverage measure product sales volume points unaffected exchange rates price changes used management proxy sales trends general excluding impact price changes increase volume points particular geographic region country indicates increase local currency net sales decrease volume points particular geographic region country indicates decrease local currency net sales criteria use determine recognize volume points identical revenue recognition policies us gaap unlike net sales generally recognized product delivered control passes member discussed greater detail note 2 basis presentation consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k recognize volume points member pays order generally prior product delivered periods volume points tracked vary slightly fiscal periods report results us gaap therefore timing differences product orders net sales recognized volume points recognized within given period however historically timing differences generally immaterial context using changes volume points proxy explain volumedriven changes net sales specific number volume points assigned product generally consistent across markets based volume point suggested retail price ratio similar products product available different quantities various sizes different volume point values general assigned volume point value consistent region country change year strategic reasons certain volume point values adjusted 2018 mexico region certain markets north america south central america regions volume point adjustments 2019 material use volume points member qualification recognition purposes well proxy sales trends therefore generally keep volume points similar like product consistent global basis however volume points function value rather product type size reliable measure product mix example increase volume points specific country region could mean significant increase sales less expensive products marginal increase sales expensive products 1 excluding volume point adjustments made 2018 certain products certain markets percent change years ended december 31 2019 2018 would increase 62 112 respectively 2 excluding volume point adjustments made 2018 certain products percent change year ended december 31 2018 would increase 34 adjustments made beginning 2018 impact 2019 versus 2018 comparison 3 excluding volume point adjustments made 2018 certain products certain markets percent change years ended december 31 2019 2018 would decrease 86 67 respectively 4 excluding volume point adjustments made 2018 certain products mexico certain markets north america south central america regions noted percent change years ended december 31 2019 2018 would increase 28 90 respectively volume points increased 30 2019 increased 95 2018 excluding impact volume point value adjustments made 2018 volume points increased 28 2019 compared 90 2018 believe north america’s volume point increase though 2018 level reflects continuing success distributors supported product line expansion technological tools well targeted communications promotions believe mexico’s decrease year increase prior year reflects difficult economic conditions impacted business momentum market well adverse impact demand products price surcharge instituted february early july 2019 mitigate impact tariffs enacted mexican government products imported united states south central america region saw somewhat larger decline volume points 2019 versus decline 2018 certain markets region continue transition sustainable customeroriented business practices slowly seen markets certain markets faced increased economic political uncertainty despite mixed results across region emea saw continuing though lesser volume point growth result believe customeroriented efforts including member training brand awareness product line expansion continued volume point growth asia pacific region broadbased significant india vietnam indonesia result believe customerfocused business daily consumption dmos including nutrition clubs well product line expansion believe volume point decrease china 2019 increase 2018 driven impact pipeline success new members chinese government’s 100day review concluded april 2019 health product industry results discussed applicable sections sales geographic region presentation “retail value” represents suggested retail price products sell members gross sales amount reflected invoices retail value nongaap measure may comparable similarlytitled measures used companies price paid us members purchase product us discount suggested retail price refer discounts “distributor allowance” refer retail value less distributor allowances “product sales” total distributor allowances 410 397 retail value years ended december 31 2019 2018 respectively depending product market distributor allowances marketing plan payouts 2019 utilized weightedaverage basis approximately 90 suggested retail price applied discounts 50 distributor allowances payout rates 15 royalty overrides 7 production bonuses approximately 1 mark hughes bonus distributor allowances percentage retail value may vary country depending upon regulatory restrictions limit otherwise restrict distributor allowances also offer reduced distributor allowances respect certain products worldwide member’s level discount determined qualification based volume purchases cases member qualified less maximum discount remaining discount also refer wholesale commission received sponsoring members therefore product sales recognized net product returns distributor allowances “net sales” equal product sales plus shipping handling generally represents collect us gaap purposes shipping handling services relating product sales recognized fulfillment activities performance obligation transfer products therefore recorded within net sales part product sales considered separate revenues visibility sales members customers figure would differ reported “retail value” factors including amount product purchased members personal consumption b prices charged members customers suggested retail prices discuss retail value fundamental role systems internal controls operations correlation member discounts royalty overrides addition retail value component financial reports use analyze financial results among things provide additional detail visibility net sales results companywide geographic region product category basis therefore nongaap measure may useful investors provides investors information used management measure accordance us generally accepted accounting principles us gaap retail value considered isolation substitute net sales consolidated income cash flow statement data prepared accordance us gaap measure profitability liquidity reconciliation retail value net sales presented results operations international operations provided continue provide significant portion total net sales result total net sales continue affected fluctuations us dollar foreign currencies order provide framework assessing underlying businesses performed excluding effect foreign currency fluctuations addition comparing percent change net sales one period another us dollars also compare percent change net sales one period another period using “net sales local currency” net sales local currency us gaap financial measure net sales local currency removes net sales us dollars impact changes exchange rates us dollar local currencies foreign subsidiaries translating current period net sales us dollars using foreign currency exchange rates used translate net sales previous comparable period believe presenting net sales local currency useful investors allows meaningful comparison net sales foreign operations period however net sales local currency measures considered isolation alternative net sales us dollar measures reflect current period exchange rates financial measures calculated presented accordance us gaap additionally impact foreign currency fluctuations venezuela price increases implement result highly inflationary economy market considered isolation disproportionately large impact consolidated results despite offsetting nature drivers net sales venezuela represent less 1 consolidated net sales material consolidated results therefore certain instances believe helpful provide additional information respect factors reported excluding impact venezuela illustrate disproportionate nature venezuela’s individual pricing foreign exchange impact consolidated results however excluding impact venezuela measures accordance us gaap considered isolation alternative presentation discussion thereof calculated accordance us gaap “gross profit” consists net sales less “cost sales” represents manufacturing costs price pay raw material suppliers manufacturers products well shipping handling costs including duties tariffs similar expenses certain members may profit activities reselling products amounts greater prices pay us members develop retain manage members may earn additional compensation activities refer “royalty overrides” royalty overrides significant operating expense consist • royalty overrides production bonuses • mark hughes bonus payable senior members • discretionary incentive cash bonuses qualifying members royalty overrides compensation members development retention improved productivity sales organizations paid several levels members sale royalty overrides compensation services rendered us recorded operating expense china independent service providers compensated marketing sales support services instead distributor allowances royalty overrides utilized global marketing plan service fees china independent service providers included selling general administrative expenses local country regulatory constraints may required modify member incentive plans described also pay reduced royalty overrides respect certain products worldwide consequently total royalty override percentage may vary time “contribution margins” consist net sales less cost sales royalty overrides “selling general administrative expenses” represent operating expenses include labor benefits service fees china service providers sales events professional fees travel entertainment member promotions occupancy costs communication costs bank fees depreciation amortization foreign exchange gains losses miscellaneous operating expenses “other operating income” consists government grant income related china finalization insurance recoveries connection flooding one warehouses mexico september 2017 “other income expense net” consists nonoperating income expenses gains losses extinguishment debt gains losses due subsequent changes fair value nontransferable contractual contingent value right cvr provided share tendered october 2017 modified dutch auction tender offer see note 8 shareholders’ deficit consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k information cvr sales members outside united states made respective local currencies preparing financial statements translate revenues us dollars using average exchange rates additionally majority purchases suppliers generally made us dollars consequently strengthening us dollar versus foreign currency negative impact reported sales contribution margins generate foreign currency losses intercompany transactions foreign currency exchange rates fluctuate significantly time enter foreign currency derivatives partially mitigate foreign currency exchange risk discussed detail part ii item 7a quantitative qualitative disclosures market risk annual report form 10k results operations results operations periods necessarily indicative results operations future periods depend upon numerous factors including ability sponsor members retain sales leaders penetrate existing markets introduce new products programs help members increase retail efforts develop niche market segments following table sets forth selected results operations expressed percentage net sales periods indicated 1 service fees independent service providers china included selling general administrative expenses member compensation countries included royalty overrides changes net sales directly associated retailing products recruitment new members retention sales leaders strategies involve providing quality products improved dmos including daily consumption approaches nutrition clubs easier access product systemized training education members products methods continued promotion branding herbalife products management’s role incountry region corporate level provide members competitive broad innovative product line offer leadingedge business tools technology services encourage strong teamwork member leadership make business herbalife simple management uses marketing plan reflects rules global network marketing organization specify qualification requirements general compensation structure members coupled educational motivational tools promotions encourage members increase retailing retention recruiting turn affect net sales tools include sales events extravaganzas leadership development weekends world team schools large groups members gather thus allowing network members learn retailing retention recruiting techniques leading members become familiar market sell products business opportunities accordingly management believes development motivation programs increase productivity sales leader network expenses programs included selling general administrative expenses also use event nonevent product promotions motivate members increase retailing retention recruiting activities promotions prizes ranging qualifying events product prizes vacations program seen success many markets member activation program new members order modest number volume points first three months earn prize objective improve quality sales leaders encouraging new members begin acquiring retail customers attempting qualify sales leader status additionally certain markets begun utilize segmentation member base “preferred members” “distributors” targeted efficient communication promotions two differently motivated types members certain markets segmented begun using member data similarly categorize members communication promotion efforts dmos generated many markets globalized applicable combined efforts members country regional corporate management support number different dmos one popular dmos daily consumption dmo traditional dmo member typically sells customers somewhat infrequent basis eg monthly provides fewer opportunities interaction customers daily consumption dmo member interacts customers frequent basis including activities weekly weighins enables member better educate advise customers nutrition proper use products helps promote daily usage well thereby helping member grow business specific examples dmos include nutrition club concept mexico healthy breakfast concept russia internetsampling weight loss challenge united states management’s strategy review applicability expanding successful country initiatives throughout region appropriate support globalization initiatives factors described help members increase business turn helps drive volume point growth business thus net sales growth discussion net sales details specific drivers changes business causes sales fluctuations year ended december 31 2019 compared period 2018 well unique growth contraction factors specific certain geographic regions significant countries within region periods net sales fluctuations companywide within particular geographic region country primarily result changes volume changes prices changes foreign currency translation rates discussion changes net sales quantifies impact drivers quantifiable changes foreign currency translation rates cites estimated impact significant price changes remaining drivers management believes primary drivers changes volume typically qualitative factors whose impact cannot quantified use volume points indication changes sales volume evaluating current approach assigning maintaining volume point values certain products markets changes approach may impact use volume points proxy sales trends future periods financial results year ended december 31 2019 compared year ended december 31 2018 net sales 48771 million year ended december 31 2019 net sales decreased 147 million 03 19 million less 01 excluding venezuela year ended december 31 2019 compared period 2018 local currency net sales increased 2932 31 excluding venezuela year ended december 31 2019 compared period 2018 03 decrease net sales year ended december 31 2019 primarily driven 2935 unfavorable impact fluctuations foreign currency rates 31 unfavorable impact excluding venezuela 29 unfavorable impact country sales mix partially offset increase sales volume indicated 30 increase volume points 2933 favorable impact price increases 31 favorable impact excluding venezuela net income 3110 million 220 per diluted share year ended december 31 2019 net income increased 144 million 49 year ended december 31 2019 compared period 2018 increase net income year ended december 31 2019 mainly due 149 million lower selling general administrative expenses 730 million favorable impact income expense net relating cvr revaluations losses debt extinguishment 2018 described 292 million lower interest expense net 272 million lower income taxes 77 million higher operating income relating government grant income china insurance recoveries mexico described partially offset 1376 million lower contribution margin driven lower sales china february 2020 viral outbreak china government responded travel restrictions among steps extent duration business disruption related financial impact coronavirus cannot reasonably estimated time could materially impact consolidated results first quarter full year 2020 net income year ended december 31 2019 included 755 million pretax unfavorable impact 741 million posttax expenses related regulatory inquiries sec investigation relating disclosures regarding marketing plan china sec doj investigations relating fcpa matter china see note 7 contingencies consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k 382 million unfavorable impact noncash interest expense related 2019 convertible notes 2024 convertible notes forward transactions see note 5 longterm debt consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k 190 million pretax unfavorable impact 172 million posttax accrual mexico vat assessments 12 million pretax unfavorable impact 09 million posttax debt issuance costs related amendment 2018 term loan b 315 million pretax favorable impact 225 million posttax government grant income china 157 million favorable impact gain revaluation cvr see note 8 shareholders’ deficit consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k 60 million pretax favorable impact 59 million posttax related finalization insurance recoveries connection flooding one warehouses mexico september 2017 damaged certain inventory stored within warehouse see note 7 contingencies consolidated financial statements included 2018 10k net income year ended december 31 2018 included 298 million pretax favorable impact 212 million posttax government grant income china 535 million unfavorable impact noncash interest expense related 2019 convertible notes 2024 convertible notes forward transactions see note 5 longterm debt consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k 104 million pretax unfavorable impact 94 million posttax expenses related regulatory inquiries 47 million pretax unfavorable impact 36 million posttax foreign exchange losses related currency devaluation venezuela first quarter 2018 131 million unfavorable impact loss extinguishment 4750 million 2019 convertible notes see note 5 longterm debt consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k 354 million pretax unfavorable impact 280 million posttax loss extinguishment 2017 credit facility see note 5 longterm debt consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k 88 million unfavorable impact loss revaluation cvr see note 8 shareholders’ deficit consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k 295 million unfavorable impact valuation allowance deferred tax assets related limited utilization foreign tax credit carryforwards result us tax reform see note 12 income taxes consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k reporting segment results aggregate operating segments excluding china reporting segment primary reporting segment primary reporting segment includes north america mexico south central america emea asia pacific regions china identified separate reporting segment meet criteria aggregation see note 10 segment information consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k discussion reporting segments see discussions net sales contribution margin reporting segments net sales reporting segment primary reporting segment reported net sales 41251 million year ended december 31 2019 net sales primary reporting segment increased 2409 million 62 2538 million 66 excluding venezuela compared period 2018 local currency net sales increased 3750 96 excluding venezuela year ended december 31 2019 compared period 2018 62 increase net sales year ended december 31 2019 primarily due increase sales volume indicated 67 increase volume points 3690 favorable impact price increases 35 favorable impact excluding venezuela partially offset 3688 unfavorable impact fluctuations foreign currency rates 31 unfavorable impact excluding venezuela 04 unfavorable impact country sales mix discussion china’s net sales year ended december 31 2019 compared period 2018 see china section sales geographic region contribution margin reporting segment discussed “presentation” contribution margin consists net sales less cost sales royalty overrides primary reporting segment reported contribution margin 17936 million year ended december 31 2019 contribution margin primary reporting segment increased 1001 million 59 1059 million 63 excluding venezuela compared period 2018 59 increase contribution margin year ended december 31 2019 primarily result 5500 favorable impact price increases 52 favorable impact excluding venezuela 67 favorable impact volume increases partially offset 5501 unfavorable impact fluctuations foreign currency exchange rates 48 unfavorable impact excluding venezuela 09 unfavorable impact country sales mix china reported contribution margin 6773 million year ended december 31 2019 contribution margin china decreased 2377 million 260 compared period 2018 260 decrease contribution margin year ended december 31 2019 primarily result 257 unfavorable impact volume decreases 39 unfavorable impact fluctuations foreign currency exchange rates partially offset 18 favorable impact sales mix 16 favorable impact price increases sales geographic region following chart reconciles retail value net sales geographic region 1 retail value nongaap measure may comparable similarlytitled measures used companies see “presentation” discussion calculate retail value believe measure useful investors north america north america region reported net sales 10255 million year ended december 31 2019 net sales increased 772 million 81 year ended december 31 2019 compared period 2018 local currency net sales increased 82 year ended december 31 2019 compared period 2018 81 increase net sales year ended december 31 2019 primarily due increase sales volume indicated 71 increase volume points 62 excluding impact volume point adjustments noted volume points geographic region section 24 favorable impact price increases net sales us 10026 million year ended december 31 2019 net sales increased 767 million 83 year ended december 31 2019 compared period 2018 growth region continues supported product line expansion deployment enhanced technology tools support distributors’ businesses optimize customers’ experiences herbalife communications promotions operations region targeted distributors preferred members retail customers appropriate mexico region reported net sales 4736 million year ended december 31 2019 net sales increased 57 million 12 year ended december 31 2019 compared period 2018 local currency net sales increased 15 year ended december 31 2019 compared period 2018 12 increase net sales year ended december 31 2019 primarily due 54 combined favorable impact price increases 2 price surcharge place february early july 2019 partially offset decrease sales volume indicated 41 decrease volume points 03 unfavorable impact fluctuations foreign currency exchange rates believe volume point decrease year increase prior year reflects difficult economic conditions consequent slowing business momentum market well adverse impact demand products 2 price surcharge instituted february early july 2019 mitigate impact tariffs enacted mexican government products imported united states continue active program member promotions increase number product access payment points south central america south central america region reported net sales 3790 million year ended december 31 2019 net sales decreased 586 million 134 458 million 108 excluding venezuela year ended december 31 2019 compared period 2018 local currency net sales increased 32406 decreased 31 excluding venezuela year ended december 31 2019 compared period 2018 134 decrease net sales year ended december 31 2019 due 32540 unfavorable impact fluctuations foreign currency exchange rates 77 unfavorable impact excluding venezuela offset 32491 favorable impact price increases 52 favorable impact excluding venezuela decline sales volume indicated 80 decrease volume points 86 excluding impact volume point adjustments noted volume points geographic region section marketing plan changes intended build sustainable business members focus daily product consumption retailing taking hold slowly certain markets region elsewhere regions including brazil largest market region working member leadership explore operational promotional approaches consistent direction suitable markets region also continuing see economic political uncertainties net sales brazil 1112 million year ended december 31 2019 net sales decreased 317 million 222 year ended december 31 2019 compared period 2018 local currency net sales decreased 152 year ended december 31 2019 compared period 2018 fluctuation foreign currency exchange rates unfavorable impact 99 million net sales year ended december 31 2019 noted marketing plan changes intended build sustainable business members focus daily product consumption retailing taking hold slowly brazil seen elsewhere regions market continues face uncertain economic outlook faced increased competition within directselling industry first half 2019 additionally members brazil saw product costs increase 2018 implemented pass certain indirect taxes previously absorbed may 2019 segmented member base market distributors preferred members net sales peru 642 million year ended december 31 2019 net sales decreased 01 million 02 year ended december 31 2019 compared period 2018 local currency net sales increased 14 year ended december 31 2019 compared period 2018 fluctuation foreign currency exchange rates unfavorable impact 10 million net sales year ended december 31 2019 slight volume point decrease seen year market leadership similar markets region adapt new business methods emea region reported net sales 9980 million year ended december 31 2019 net sales increased 210 million 21 year ended december 31 2019 compared period 2018 local currency net sales increased 85 year ended december 31 2019 compared period 2018 21 increase net sales year ended december 31 2019 primarily due increase sales volume indicated 58 increase volume points 38 favorable impact price increases partially offset 64 unfavorable impact fluctuations foreign currency exchange rates 17 unfavorable impact changes country sales mix resulting lower percentage sales volume coming markets higher prices volume point results year mixed across region impact net growth significantly offset within net sales adverse foreign exchange rate movement volume point growth generally seen across emea region number years reflects believe efforts enhance quality activity sales leaders including member training brand awareness product line expansion well enhanced technology tools ordering business performance customer retailing net growth volume points net sales periods led south africa spain declines significant italy turkey net sales russia 1400 million year ended december 31 2019 net sales increased 26 million 19 year ended december 31 2019 compared period 2018 local currency net sales increased 51 year ended december 31 2019 compared period 2018 fluctuation foreign currency exchange rates unfavorable impact 44 million net sales year ended december 31 2019 russia continues focus nutrition club dmo supported new products training promotion levels membership product access expansion product prices russia increased 3 april september 2019 net sales spain 1364 million year ended december 31 2019 net sales increased 114 million 91 year ended december 31 2019 compared period 2018 local currency net sales increased 153 year ended december 31 2019 compared period 2018 fluctuation foreign currency exchange rates unfavorable impact 77 million net sales year ended december 31 2019 spain benefited ongoing programs promotions sponsorships well enhanced technology tools raised brand awareness healthy active lifestyle contributed broadbased success across member sales organizations market product prices spain increased approximately 2 february 2019 net sales italy 1261 million year ended december 31 2019 net sales decreased 153 million 108 year ended december 31 2019 compared period 2018 local currency net sales decreased 58 year ended december 31 2019 compared period 2018 fluctuation foreign currency exchange rates unfavorable impact 71 million net sales year ended december 31 2019 directselling industry italy seen slowdown sales contributing weakened momentum business seen decline new members compared prior years december 2018 segmented member base italy distributors preferred customers comparable distributors preferred members united states targeting communication promotion efforts accordingly asia pacific asia pacific region excludes china reported net sales 12490 million year ended december 31 2019 net sales increased 1956 million 186 year ended december 31 2019 compared period 2018 local currency net sales increased 207 year ended december 31 2019 compared period 2018 186 increase net sales year ended december 31 2019 primarily due increase sales volume indicated 212 increase volume points 27 favorable impact price increases partially offset 34 unfavorable impact changes country sales mix resulting lower percentage sales volume coming markets higher prices 21 unfavorable impact fluctuations foreign currency exchange rates volume points net sales increased compared prior year markets region result believe customerfocused business daily consumption dmos including nutrition clubs well product line expansion net sales india 3213 million year ended december 31 2019 net sales increased 773 million 317 year ended december 31 2019 compared period 2018 local currency net sales increased 355 year ended december 31 2019 compared period 2018 fluctuation foreign currency exchange rates unfavorable impact 94 million net sales year ended december 31 2019 continue broaden presence market adding product access points including pickup locations additional cities expanding product line net sales indonesia 1835 million year ended december 31 2019 net sales increased 411 million 289 year ended december 31 2019 compared period 2018 local currency net sales increased 279 year ended december 31 2019 compared period 2018 fluctuation foreign currency exchange rates favorable impact 14 million net sales year ended december 31 2019 indonesia continued strengthen focusing customerbased business daily consumption nutrition clubs training activities supported increased product access expansive market net sales vietnam 1631 million year ended december 31 2019 net sales increased 477 million 413 year ended december 31 2019 compared period 2018 local currency net sales increased 424 year ended december 31 2019 compared period 2018 fluctuation foreign currency exchange rates unfavorable impact 13 million net sales year ended december 31 2019 believe results indicate operational changes made meet increased directselling regulatory requirements successful market continues strong momentum benefits increased scale sales leadership focuses sustainable consumptionoriented business practices net sales south korea 1436 million year ended december 31 2019 net sales increased 80 million 59 year ended december 31 2019 compared period 2018 local currency net sales increased 122 year ended december 31 2019 compared period 2018 fluctuation foreign currency exchange rates unfavorable impact 85 million net sales year ended december 31 2019 south korea achieved volume point net sales growth 2019 several years transitionary impact marketing plan changes including certain changes unique south korea led contraction business market management focused fostering daily consumption practices supported promotional activities including successful member activation program china region reported net sales 7520 million year ended december 31 2019 net sales decreased 2556 million 254 year ended december 31 2019 compared period 2018 local currency net sales decreased 221 year ended december 31 2019 compared period 2018 254 decrease net sales year ended december 31 2019 primarily due decrease sales volume indicated 257 decrease volume points 33 unfavorable impact fluctuations foreign currency exchange rates partially offset 17 favorable sales mix variance 14 favorable impact price increases believe chinese government’s 100day review health products industry concluded april 2019 negatively impacted china net sales 2019 chinese government conducted similar reviews past believe confluence review combined negative media coverage review impacted business members significantly reduced activities sales meetings following review activities sales meetings important business central channel attracting retaining customers providing personal professional development members promoting products members begun conducting meetings attendance levels returned prior levels believe trailing impact pipeline success new members 2019 expanded ecommerce platform provide ability china members service customers via personalized sites retail customers purchase products directly company introduced new products china market working members strengthen nutrition club dmo region february 2020 viral outbreak china certain government jurisdictions responded travel restrictions preventative measures may negatively impact business virus continues spread additional restrictive steps taken sales china elsewhere consolidated results operations could adversely impacted sales product category 1 product buy backs returns product categories included literature promotional category 2 retail value nongaap measure may comparable similarlytitled measures used companies see “presentation” discussion calculate retail value believe measure useful investors net sales increased targeted nutrition energy sports fitness outer nutrition decreased weight management literature promotional year ended december 31 2019 compared period 2018 trends business factors described discussions individual geographic regions apply generally product categories gross profit gross profit 39191 million year ended december 31 2019 compared 39725 million period 2018 gross profit percentage net sales 804 year ended december 31 2019 compared 812 period 2018 unfavorable net decrease 85 basis points decrease gross profit percentage net sales year ended december 31 2019 compared period 2018 included unfavorable impact foreign currency fluctuations 5810 basis points unfavorable impact 86 basis points excluding venezuela unfavorable changes country mix 45 basis points unfavorable cost changes 18 basis points unfavorable cost changes related selfmanufacturing sourcing 9 basis points includes increased costs relating mexico tariffs partially offset favorable impact retail price increases 5782 basis points favorable impact 58 basis points excluding venezuela favorable impact lower inventory writedowns 15 basis points net impact foreign currency fluctuations retail price increases venezuela year ended december 31 2019 compared period 2018 generally gross profit percentage net sales may vary period due impact foreign currency fluctuations changes country mix volume changes among countries varying margins retail price increases cost changes related selfmanufacturing sourcing inventory writedowns royalty overrides royalty overrides 14482 million year ended december 31 2019 compared 13640 million period 2018 royalty overrides percentage net sales 297 year ended december 31 2019 compared 279 period 2018 increase royalty overrides percentage net sales year ended december 31 2019 compared period 2018 primarily due lower net sales china proportion total worldwide net sales service fees independent service providers china included selling general administrative expenses member compensation countries included royalty overrides generally royalty overrides percentage net sales may vary slightly period due changes mix products countries full royalty overrides paid certain products certain countries selling general administrative expenses selling general administrative expenses 19403 million year ended december 31 2019 compared 19552 million period 2018 selling general administrative expenses percentage net sales 398 year ended december 31 2019 compared 399 period 2018 decrease selling general administrative expenses year ended december 31 2019 compared period 2018 driven 1043 million lower service fees china independent service providers due lower sales china 154 million lower foreign exchange losses included 47 million impact devaluation venezuelan bolivar 2018 partially offset approximately 60 million expenses 2019 relating sec investigation relating disclosures regarding marketing plan china sec doj investigations relating fcpa matter china see note 7 contingencies consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k 280 million higher professional fees 218 million higher labor benefits costs operating income 375 million operating income year ended december 31 2019 consisted 315 million government grant income china see note 2 basis presentation consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k 60 million related finalization insurance recoveries connection flooding one warehouses mexico september 2017 damaged certain inventory stored within warehouse see note 7 contingencies consolidated financial statements included part iv item 15 exhibits financial statement schedules 2018 10k 298 million operating income year ended december 31 2018 consisted 298 million government grant income china see note 2 basis presentation consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k interest expense net interest expense net follows decrease interest expense net year ended december 31 2019 compared period 2018 primarily due decreases overall borrowings weightedaverage interest rate well lower noncash interest expense related forward transactions see note 8 shareholders’ deficit consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k income expense net 157 million income net year ended december 31 2019 consisted 157 million gain revaluation cvr see note 8 shareholders’ deficit consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k 573 million expense net year ended december 31 2018 consisted 88 million loss revaluation cvr provided participants october 2017 modified dutch auction tender offer see note 8 shareholders’ deficit consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k 131 million loss extinguishment 4750 million aggregate principal amount 2019 convertible notes see note 5 longterm debt consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k 354 million loss extinguishment company’s 2017 senior secured credit facility see note 5 longterm debt consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k income taxes income taxes 1404 million year ended december 31 2019 compared 1676 million period 2018 effective income tax rate 311 year ended december 31 2019 compared 361 period 2018 decrease effective tax rate year ended december 31 2019 compared period 2018 primarily due changes geographic mix income 295 million favorable impact related valuation allowances recorded 2018 due us tax reform partially offset decrease net benefits discrete events included discrete events year ended december 31 2019 2018 impact 58 million 531 million respectively excess tax benefits sharebased compensation arrangements see note 12 income taxes consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k additional discussion liquidity capital resources historically met working capital expenditure requirements including funding expansion operations net cash flows provided operating activities variations sales products directly affect availability funds material contractual restrictions ability transfer remit funds among international affiliated companies however foreign currency restrictions certain countries could reduce ability timely obtain us dollars even restrictions believe sufficient resources including cash flow operating activities access capital markets meet debt service obligations timely manner able continue meet objectives historically debt resulted need fund normal operations instead resulted primarily share repurchase programs since inception 2007 total share repurchases amounted approximately 45 billion significant net sales decline could potentially affect availability funds many largest expenses variable nature believe protects funding dramatic net sales downturn 8394 million cash equivalents senior secured credit facility addition cash flow operations used support general corporate purposes including future share repurchases dividends strategic investment opportunities cash pooling arrangement financial institution cash management purposes cash pooling arrangement allows certain participating subsidiaries withdraw cash financial institution based upon aggregate cash deposits held subsidiaries participate cash pooling arrangement owe amounts financial institution pooling arrangement december 31 2019 2018 year ended december 31 2019 generated 4575 million operating cash flow compared 6484 million period 2018 decrease operating cash flow result 1414 million unfavorable changes operating assets liabilities 495 million lower net income excluding noncash items disclosed within consolidated statement cash flows 1414 million change operating assets liabilities primarily result unfavorable changes accounts payable current liabilities included unfavorable changes income taxes payable accrued compensation accrued expenses partially offset favorable changes prepaid expenses current assets 495 million lower net income excluding noncash items primarily driven lower sales china approximately 60 million expenses relating sec doj investigations 190 million accrual related mexico vat assessment see note 7 contingencies consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k partially offset lower income taxes 400 million accrual related sec doj investigations 190 million accrual related mexico vat assessment net impact operating cash flow decreased net income 590 million increased net operating assets liabilities 590 million capital expenditures including accrued capital expenditures years ended december 31 2019 2018 1102 million 882 million respectively majority expenditures represented investments management information systems including initiatives develop webbased member tools expect incur total capital expenditures approximately 130 million 170 million full year 2020 march 2019 hosted annual global herbalife honors event singapore sales leaders around world met shared best practices conducted leadership training management awarded members 707 million mark hughes bonus payments related 2018 performance march 2018 management awarded members 648 million mark hughes bonus payments related 2017 performance senior secured credit facility february 15 2017 entered 14500 million senior secured credit facility 2017 credit facility consisting 13000 million term loan b 2017 term loan b 1500 million revolving credit facility 2017 revolving credit facility syndicate financial institutions lenders 2017 revolving credit facility mature february 15 2022 2017 term loan b mature february 15 2023 2017 credit facility amended effective march 16 2018 make certain technical amendments connection offering 2024 convertible notes defined terminated 2017 credit facility august 16 2018 11781 million outstanding repaid full august 16 2018 entered 125 billion senior secured credit facility 2018 credit facility consisting 2500 million term loan 2018 term loan 7500 million term loan b 2018 term loan b 2500 million revolving credit facility 2018 revolving credit facility syndicate financial institutions lenders 2018 term loan 2018 revolving credit facility mature august 16 2023 2018 term loan b matures upon earlier august 18 2025 ii december 15 2023 outstanding principal 2024 convertible notes defined exceeds 3500 million exceed certain leverage ratios december 15 2023 obligations 2018 credit facility unconditionally guaranteed certain direct indirect whollyowned subsidiaries herbalife nutrition ltd secured equity interests certain herbalife nutrition ltd’s subsidiaries substantially assets domestic loan parties also august 16 2018 issued 400 million aggregate principal amount senior unsecured notes 2026 notes described used proceeds 2018 credit facility 2026 notes repay full 11781 million outstanding 2017 credit facility accounting purposes pursuant fasb asc topic 470 debt “asc 470” transactions accounted extinguishment 2017 credit facility recognized loss extinguishment 354 million result recorded income expense net within consolidated statements income year ended december 31 2018 december 12 2019 amended 2018 credit facility among things reduced interest rate borrowings 2018 term loan b incurred approximately 12 million debt issuance costs connection amendment accounting purposes pursuant asc 470 transaction accounted modification 2018 credit facility debt issuance costs recognized interest expense within consolidated statement income year ended december 31 2019 2018 credit facility requires us comply leverage ratio 2018 credit facility also contains affirmative negative covenants customary financings type including among things limitations prohibitions repurchasing common shares declaring paying dividends distributions redeeming repurchasing certain indebtedness loans investments additional indebtedness liens mergers asset sales transactions affiliates addition 2018 credit facility contains customary events default december 31 2019 2018 compliance debt covenants 2018 credit facility 2018 term loan 2018 term loan b payable consecutive quarterly installments began december 31 2018 interest due least quarterly amounts outstanding 2018 credit facility addition beginning 2020 may required make mandatory prepayments towards 2018 term loan b based consolidated leverage ratio annual excess cash flows defined terms 2018 credit facility also permitted make voluntary prepayments amounts outstanding 2018 term loan may voluntarily prepaid without premium penalty subject customary breakage fees connection prepayment eurocurrency loan 2018 credit facility amended amounts voluntarily prepaid 2018 term loan b june 12 2020 incur prepayment premium 1 thereafter amounts outstanding 2018 term loan b may voluntarily prepaid without premium penalty subject customary breakage fees connection prepayment eurocurrency loan prepayments applied remaining quarterly installments owed 2018 term loan 2018 term loan b order maturity remaining principal due upon maturity unless directed otherwise us expect make mandatory prepayment 2020 toward 2018 term loan b based 2019 consolidated leverage ratio excess cash flow calculation defined terms 2018 credit facility year ended december 31 2019 repaid total amount 200 million amounts outstanding 2018 credit facility year ended december 31 2018 borrowed aggregate amount 10000 million 2018 credit facility repaid total amount 12319 million consisting 50 million amounts outstanding 2018 credit facility 12269 million repay full amounts outstanding 2017 credit facility december 31 2019 2018 us dollar amount outstanding 2018 credit facility 9750 million 9950 million respectively 9750 million outstanding 2018 credit facility december 31 2019 2344 million outstanding 2018 term loan 7406 million outstanding 2018 term loan b 9950 million outstanding 2018 credit facility december 31 2018 2469 million outstanding 2018 term loan 7481 million outstanding 2018 term loan b borrowings outstanding 2018 revolving credit facility december 31 2019 2018 outstanding foreign currency borrowings 2018 credit facility december 31 2019 2018 december 31 2019 2018 weightedaverage interest rate borrowings 2018 credit facility 552 680 respectively see note 5 longterm debt consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k discussion 2018 credit facility convertible senior notes due 2019 february 2014 issued 115 billion aggregate principal amount convertible senior notes due 2019 convertible notes 2019 convertible notes senior unsecured obligations ranked effectively subordinate existing future secured indebtedness including amounts outstanding 2018 credit facility extent value assets securing indebtedness 2019 convertible notes paid interest rate 200 per annum payable semiannually arrears february 15 august 15 year beginning august 15 2014 unless earlier repurchased converted 2019 convertible notes matured august 15 2019 primary purpose issuance 2019 convertible notes share repurchase purposes march 2018 issued 550 million aggregate principal new convertible senior notes due 2024 described subsequently used proceeds along cash hand repurchase 4750 million existing 2019 convertible notes limited number holders privately negotiated transactions aggregate purchase price 5835 million included 10 million accrued interest august 2019 repaid total amount 6750 million repay full amounts outstanding 2019 convertible notes upon maturity well 67 million accrued interest see note 5 longterm debt consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k discussion 2019 convertible notes convertible senior notes due 2024 march 2018 issued 5500 million aggregate principal amount convertible senior notes due 2024 convertible notes 2024 convertible notes senior unsecured obligations rank effectively subordinate existing future secured indebtedness including amounts outstanding 2018 credit facility extent value assets securing indebtedness 2024 convertible notes pay interest rate 2625 per annum payable semiannually arrears march 15 september 15 year beginning september 15 2018 unless redeemed repurchased converted accordance terms prior date 2024 convertible notes mature march 15 2024 primary purpose issuance 2024 convertible notes repurchase portion 2019 convertible notes see note 5 longterm debt consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k discussion 2024 convertible notes senior notes due 2026 august 2018 issued 4000 million aggregate principal amount senior notes due 2026 notes 2026 notes senior unsecured obligations rank effectively subordinate existing future secured indebtedness including amounts outstanding 2018 credit facility extent value assets securing indebtedness 2026 notes pay interest rate 7250 per annum payable semiannually arrears february 15 august 15 year beginning february 15 2019 2026 notes mature august 15 2026 unless redeemed repurchased accordance terms prior date primary purpose issuance 2026 notes refinance portion 2017 credit facility see note 5 longterm debt consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k discussion 2026 notes contractual obligations following summarizes contractual obligations including interest december 31 2019 effect obligations expected liquidity cash flows future periods 1 estimated interest payments 2018 credit facility based interest rates effective december 31 2019 2 consolidated balance sheet december 31 2019 includes 514 million unrecognized tax benefits future payments related unrecognized tax benefits presented table due uncertainty amounts potential timing cash settlements tax authorities whether settlement would occur cash equivalents majority foreign subsidiaries designate local currencies functional currencies december 31 2019 total amount foreign subsidiary cash equivalents 4752 million 141 million held us dollars december 31 2019 total amount cash equivalents held herbalife nutrition ltd us entities inclusive us territories 3642 million earnings considered indefinitely reinvested deferred taxes provided earnings considered indefinitely reinvested deferred taxes provided make determination remit cash equivalents foreign subsidiaries considered indefinitely reinvested us consolidated group purpose repatriation undistributed earnings would need accrue pay taxes december 31 2019 us consolidated group approximately 1396 million permanently reinvested unremitted earnings certain foreign subsidiaries monies ever needed remitted impact tax consequences overall liquidity position would material december 31 2019 herbalife nutrition ltd approximately 24 billion permanently reinvested unremitted earnings relating operating subsidiaries result decision invest china growth impact investment program approximately 1119 million unremitted earnings permanently reinvested december 31 2019 december 31 2019 plans repatriate unremitted earnings herbalife nutrition ltd therefore liquidity concerns relating unremitted earnings related cash equivalents see note 12 income taxes consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k additional discussion unremitted earnings offbalance sheet arrangements december 31 2019 2018 material offbalance sheet arrangements defined item 303a4ii regulation sk dividends declared paid cash dividends since 2014 declaration future dividends subject discretion board directors depend upon various factors including earnings financial condition herbalife nutrition ltd’s available distributable reserves cayman islands law restrictions imposed 2018 credit facility terms indebtedness may outstanding cash requirements future prospects factors deemed relevant board directors share repurchases october 30 2018 board directors authorized new fiveyear 15 billion share repurchase program expire october 30 2023 replaced prior share repurchase authorization set expire february 21 2020 approximately 1133 million remaining authorized capacity replaced share repurchase program allows us includes indirect whollyowned subsidiary herbalife nutrition ltd repurchase common shares times prices determined management market conditions warrant extent herbalife nutrition ltd’s distributable reserves available cayman islands law 2018 credit facility permits us repurchase common shares long default event default exists conditions specified consolidated leverage ratios met december 31 2019 remaining authorized capacity 15 billion share repurchase program 15 billion conjunction issuance 2019 convertible notes february 2014 paid approximately 6858 million enter prepaid forward share repurchase transactions forward transactions certain financial institutions forward counterparties pursuant purchased approximately 199 million common shares average cost 3451 per share settlement around august 15 2019 maturity date 2019 convertible notes subject ability forward counterparty elect settle portion forward transactions early shares treated retired shares basic diluted eps purposes see note 8 shareholders’ deficit consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k discussion forward transactions year ended december 31 2019 repurchase common shares openmarket purchases year ended december 31 2018 indirect whollyowned subsidiary purchased 8400 herbalife nutrition ltd’s common shares openmarket purchases aggregate cost approximately 03 million average cost 3390 per share repurchases increased total shareholders’ deficit reflected cost within accompanying consolidated balance sheets although shares owned indirect whollyowned subsidiary remain legally outstanding reflected treasury shares us gaap therefore reduce number common shares outstanding within consolidated financial statements weightedaverage number common shares outstanding used calculating earnings per share common shares herbalife nutrition ltd held indirect whollyowned subsidiary however remain outstanding books records transfer agent therefore still carry voting share rights related ownership common shares may exercised long consistent applicable laws shares voted subsidiary manner maximum extent possible proportion votes cast respect matter properly submitted vote herbalife nutrition ltd’s shareholders december 31 2019 2018 held approximately 100 million treasury shares us gaap purposes may 2018 completed modified dutch auction tender offer subsequently paid cash repurchase retire total approximately 114 million common shares aggregate cost approximately 6000 million 5250 per share total repurchased 114 million common shares aggregate cost approximately 6003 million average cost 5249 per share year ended december 31 2018 see note 8 shareholders’ deficit consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k discussion share repurchases connection october 2017 modified dutch auction tender offer incurred 16 million transaction costs also provided nontransferable cvr share tendered allowing participants tender offer receive contingent cash payment event herbalife acquired goingprivate transaction defined cvr agreement within two years commencement tender offer initial fair value cvr 73 million recorded liability fourth quarter 2017 corresponding decrease shareholders’ equity determining initial fair value cvr used lattice model included inputs underlying stock price strike price time expiration dividend yield subsequent changes fair value cvr liability using similar valuation approach initial fair value determination recognized within consolidated balance sheets corresponding gains losses recognized income expense net within consolidated statements income reporting period cvr expired august 2019 terminated due goingprivate transaction also incorporated valuation cvr goingprivate probability input considered level 3 input fair value hierarchy increase decrease input could significantly impacted fair value cvr reporting date cvr expired without value august 21 2019 twoyear anniversary august 21 2017 date commenced related modified dutch auction tender offer year ended december 31 2019 recognized 157 million gain income expense net within consolidated statement income due change fair value cvr driven expiration august 2019 year ended december 31 2018 recognized 88 million loss income expense net within consolidated statement income due change fair value cvr primarily driven increase market price common shares partially offset decrease probability goingprivate transaction result shortening term cvr expired pursuant terms see note 8 shareholders’ deficit consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k discussion cvr capped call transactions february 2014 connection issuance 2019 convertible notes paid approximately 1238 million enter capped call transactions respect common shares capped call transactions certain financial institutions capped call transactions expected generally reduce potential dilution upon conversion 2019 convertible notes event market price common shares greater strike price capped call transactions initially set 4314 per common share reduction potential dilution subject cap based cap price initially set 6039 per common share march 2018 connection repurchase portion 2019 convertible notes entered partial settlement agreements option counterparties capped call transactions terminate portion capped call transactions case notional amount corresponding aggregate principal amount 2019 convertible notes repurchased august 15 2019 convertible notes matured remaining capped call transactions expired unexercised expiration capped call transactions impact consolidated financial statements see note 8 shareholders’ deficit consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k discussion capped call transactions working capital operating activities december 31 2019 2018 working capital 5238 million 2162 million respectively increase 3076 million increase primarily due increase inventories decreases current portion longterm debt relating repayment 2019 convertible notes current liabilities partially offset decreases cash equivalents prepaid expenses current assets expect cash funds provided operations available borrowings 2018 credit facility access capital markets provide sufficient working capital operate business make expected capital expenditures meet foreseeable liquidity requirements next twelve months thereafter majority purchases suppliers generally made us dollars sales members generally made local currencies consequently strengthening us dollar versus foreign currency negative impact net sales contribution margins generate transaction gains losses intercompany transactions discussion foreign exchange contracts hedging arrangements see part ii item 7a quantitative qualitative disclosures market risk quarterly results operations 1 fourth quarter 2019 includes net favorable adjustment unrecognized tax benefit liability 114 million primarily attributable transfer pricing matters various foreign jurisdictions legal accrual 40 million relating sec doj investigations relating fcpa matter china described note 7 contingencies consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k fourth quarter 2018 includes unfavorable impact us tax reform enacted fourth quarter 2017 described note 12 income taxes consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k contingencies see note 7 contingencies consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k information contingencies december 31 2019 critical accounting policies us gaap requires us make estimates assumptions affect reported amounts assets liabilities disclosures contingent assets liabilities date financial statements reported amounts revenue expenses year regularly evaluate estimates assumptions related revenue recognition allowance product returns inventory goodwill purchased intangible asset valuations deferred income tax asset valuation allowances uncertain tax positions tax contingencies loss contingencies base estimates assumptions current facts historical experience various factors believe reasonable circumstances results form basis making judgments carrying values assets liabilities recording revenue costs expenses actual results could differ estimates consider following policies critical understanding judgments involved preparing financial statements uncertainties could impact operating results financial condition cash flows nutrition company sells wide range weight management targeted nutrition energy sports fitness outer nutrition products manufactured us changsha hunan china extraction facility suzhou china facility nanjing china facility lake forest california facility winstonsalem north carolina facility third party providers sold members consume sell herbalife products retail consumers members december 31 2019 sold products 94 countries throughout world organized managed geographic region aggregate operating segments one reporting segment except china management believes operating segments similar operating characteristics similar long term operating performance making determination management believes operating segments similar nature products sold product acquisition process types customers products sold methods used distribute products nature regulatory environment economic characteristics generally recognize revenue upon delivery control passes member product sales recognized net product returns discounts referred “distributor allowances” generally receive net sales price cash credit card payments point sale royalty overrides generally recorded revenue recognized see note 2 basis presentation consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k discussion distributor compensation us allowances product returns primarily connection buyback program provided time sale recorded accrual based upon historical return rates country relevant return pattern reflects anticipated returns received period 12 months following original sale historically product returns buybacks significant product returns buybacks approximately 01 product sales years ended december 31 2019 2018 adjust inventories lower cost net realizable value additionally adjust carrying value inventory based assumptions regarding future demand products market conditions future demand market conditions less favorable management’s assumptions additional inventory writedowns could required likewise favorable future demand market conditions could positively impact future operating results previously written inventories sold obsolete slow moving inventories adjusted downward 151 million 298 million present lower cost net realizable value consolidated balance sheets december 31 2019 2018 respectively goodwill marketingrelated intangible assets subject amortization tested annually impairment tested impairment frequently events circumstances indicate asset might impaired impairment loss recognized extent carrying amount exceeds asset’s fair value part annual goodwill impairment test performed reporting unit level may conduct assessment qualitative factors determine whether likely fair value reporting unit less carrying amount qualitative assessment would consider macroeconomic conditions including deterioration general conditions industry market conditions including deterioration environment reporting unit operates increased competition changes productsservices regulatory political developments cost business overall financial performance including declining cash flows performance relation planned revenues earnings past periods relevant reporting unit specific facts changes management key personnel pending litigation events affecting reporting unit including changes carrying value net assets determine likely fair value reporting unit less carrying value would perform twostep goodwill impairment test required determine likely fair value reporting unit less carrying value testing required fiscal year 2019 performed qualitative assessment determined likely fair value reporting unit less respective carrying value marketingrelated intangible assets may also utilize qualitative assessment similar one described exception test performed consolidated level rather reporting unit level fiscal year 2019 performed qualitative assessment marketingrelated intangible assets determined likely fair value assets less carrying value required determine fair value reporting unit using twostep process primarily use income approach order estimate fair value goodwill first determine fair value reporting unit compare carrying amount determination fair value reporting units requires us make significant estimates assumptions estimates assumptions include estimates future revenues expense growth rates capital expenditures depreciation amortization related capital expenditures discount rates inputs due inherent uncertainty involved making estimates actual future results could differ changes assumptions regarding future results underlying assumptions could significant impact fair value reporting unit second carrying amount reporting unit exceeds fair value impairment loss recognized excess carrying amount reporting unit’s goodwill intangibles implied fair value determined step 2 goodwill impairment test also step 1 goodwill impairment test determine reporting units zero negative carrying amounts perform step 2 goodwill impairment test likely goodwill impairment exists step 2 goodwill impairment test implied fair value goodwill determined similar manner amount goodwill recognized business combination determined accordance financial accounting standards board fasb accounting standards codification asc topic 805 business combinations would assign fair value reporting unit assets liabilities reporting unit reporting unit acquired business combination fair value reporting unit price paid acquire reporting unit excess fair value reporting unit amounts assigned assets liabilities implied fair value goodwill required determine fair value marketingrelated intangible assets using quantitative method use discounted cash flow model income approach relieffromroyalty method determine fair value marketing related intangible assets order confirm impairment required december 31 2019 2018 goodwill approximately 915 million 929 million respectively december 31 2019 2018 marketingrelated intangible assets approximately 3100 million decrease goodwill year ended december 31 2019 due foreign currency translation adjustments marketingrelated intangibles goodwill impairment recorded years ended december 31 2019 2018 contingencies accounted accordance fasb asc topic 450 contingencies asc 450 asc 450 requires record estimated loss contingency information available prior issuance financial statements indicates probable asset impaired liability incurred date financial statements amount loss reasonably estimated also disclose material contingencies believe loss probable reasonably possible required asc 450 accounting contingencies legal nonincome tax matters requires us use judgment related likelihood loss estimate amount range loss many legal tax contingencies take years resolved generally time period increases uncertainties resolved likelihood changes estimate ultimate outcome increases evaluate realizability deferred tax assets assessing valuation allowance adjusting amount allowance necessary although realization assured believe likely net carrying value realized amount carryforwards considered realizable however could change estimates future taxable income adjusted ordinary course business many transactions calculations tax law ultimate tax determination uncertain part process preparing consolidated financial statements required estimate income taxes jurisdictions operate prior completion filing tax returns periods estimates involve complex issues require us make judgments likely application tax law situation well respect matters anticipating positions take tax returns prior us actually preparing returns outcomes disputes tax authorities ultimate resolution issues may take extended periods time due examinations tax authorities statutes limitations addition changes business including acquisitions changes international corporate structure changes geographic location business functions assets changes geographic mix amount income well changes agreements tax authorities valuation allowances applicable accounting rules applicable tax laws regulations rulings interpretations thereof developments tax audit matters variations estimated actual level annual pretax income affect overall effective income tax rate account uncertain tax positions accordance fasb asc topic 740 income taxes asc 740 provides guidance determination tax benefits claimed expected claimed tax return recorded financial statements asc 740 must recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate resolution december 22 2017 us enacted tax cuts jobs act 2017 us tax reform contains several key tax provisions affect us including limited onetime mandatory transition tax accumulated foreign earnings changes sourcing calculation foreign income reduction corporate income tax rate 21 effective january 1 2018 required recognize effect tax law changes period enactment determining transition tax remeasuring us deferred tax assets liabilities well reassessing net realizability deferred tax assets liabilities december 2017 sec staff issued staff accounting bulletin 118 income tax accounting implications tax cuts jobs act allows us record provisional amounts measurement period extend beyond one year enactment date see note 12 income taxes consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k discussion us tax reform made accounting policy election account global intangible lowtaxed income period cost incurred account foreign currency transactions accordance fasb asc topic 830 foreign currency matters majority countries operate functional currency local currency foreign subsidiaries’ asset liability accounts translated consolidated financial reporting purposes us dollar amounts periodend exchange rates revenue expense accounts translated average rates year foreign currency translation adjustments included accumulated comprehensive loss accompanying consolidated balance sheets foreign currency transaction gains losses foreign currency remeasurements generally included selling general administrative expenses accompanying consolidated statements income new accounting pronouncements see discussion note 2 basis presentation consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k information new accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations read following discussion analysis conjunction item 6 selected financial data consolidated financial statements related notes included elsewhere annual report form 10k overview global network marketing company sells weight management products nutritional supplements energy sports fitness products personal care products pursue mission “changing people’s lives” providing financially rewarding business opportunity distributors quality products distributors customers seek healthy lifestyle one largest network marketing companies world net sales approximately 23 billion year ended december 31 2009 december 31 2009 sold products 72 countries network approximately 20 million independent distributors china sell products retail stores sales representatives sales employees licensed business providers believe quality products effectiveness distribution network coupled geographic expansion primary reasons success throughout 30year operating history products grouped four principal categories weight management targeted nutrition energy sports fitness outer nutrition along literature promotional items products often sold programs comprised series related products literature designed simplify weight management nutrition consumers maximize distributors’ crossselling opportunities industrywide factors affect us competitors include increasing prevalence obesity aging worldwide population driving demand nutrition wellnessrelated products along global increase unemployment affect recruitment retention distributors closely monitoring current global economic crisis company remains focused opportunities challenges retailing products recruiting retaining distributors improving distributor productivity opening new markets penetrating existing markets including china us brazil mexico russia globalizing successful distributor methods operation nutrition clubs weight loss challenges introducing new products globalizing existing products developing niche market segments investing infrastructure management remains intently focused venezuela market especially limited ability repatriate cash official exchange rate first quarter 2009 changed geographic regions designating mexico region combining south america central america single region changes geographic regions implemented create growth opportunities distributors support faster decision making across organization reducing number layers management improve sharing ideas tools accelerate growth high potential markets new geographic regions report revenue • north america consists us canada jamaica • mexico • south central america • emea consists europe middle east africa • asia pacific excluding china consists asia new zealand australia • china historical information presented annual report form 10k relating geographic regions reclassified conform current geographic presentation volume points geographic region key nonfinancial measure focus volume points royalty basis volume points essentially weighted unit measure product sales volume useful measure rely excludes impact foreign currency fluctuations ignores differences generated varying retail pricing across geographic markets volume point measure aggregate region measure sales volume well sales volume trends general increase volume points particular geographic region country indicates increase sales volume results increase local currency net sales decrease volume points particular geographic region country indicates decrease sales volume results decreasing local currency net sales number new sales leaders geographic region reporting period another key nonfinancial measure focus number distributors qualified new sales leaders compensation system excluding china distributors qualify sales leader status based volume points changes total number sales leaders changes productivity sales leaders may cause volume points increase decrease fluctuation number new sales leaders general indicator level distributor recruitment number sales leaders retention rates geographic region requalification period compensation system requires sales leader requalify status year prior february order maintain 50 discount product eligible receive royalty payments february year demote rank sales leader distributors satisfy requalification requirements preceding twelve months requalification requirement apply new sales leaders ie became sales leaders subsequent january requalification prior year distributor statistics highlight calculation retention table reflects number sales leaders february year indicated subsequent annual requalification date sales leader retention rate year region number sales leaders geographic region quarterly reporting dates normally higher number sales leaders geographic region requalification period sales leaders requalify relevant twelvemonth period deleted rank sales leader following february since sales leaders purchase products resale distributors consumers comparisons sales leader totals yeartoyear basis indicators recruitment retention efforts different geographic regions value average monthly purchase herbalife products sales leaders remained relatively constant time consequently increases sales driven retention sales leaders recruitment retention distributors’ increased adoption daily consumption business methods provide distributors products support materials training special events competitive compensation program distributor wants pursue herbalife business opportunity distributor responsible growing business personally pays sales activities related attracting new customers recruiting distributors hosting events herbalife opportunity meetings success training seminars advertising herbalife’s products purchasing using promotional materials tshirts buttons caps utilizing paying direct mail print material brochures flyers catalogs business cards posters banners telephone book listings purchasing inventory sale use samples training mentoring following person via phone internet customers recruits use herbalife products andor pursue herbalife business opportunity presentation “retail sales” represent gross sales amounts invoices distributors distributor allowances defined “net sales” reflect distribution allowances handling freight income represent collect recognize net sales financial statements discuss retail sales fundamental role compensation systems internal controls operations including role basis upon distributor discounts royalties bonuses awarded addition used basis certain information included daily monthly reports reviewed management however measure accordance us generally accepted accounting principles us gaap consider retail sales isolation substitute net sales consolidated income cash flow statement data prepared accordance us gaap measure profitability liquidity reconciliation net sales retail sales presented “results operations” “product sales” represent actual product purchase price paid us distributors giving effect distributor discounts referred “distributor allowances” approximate 50 retail sales prices distributor allowances percentage retail sales may vary country depending upon regulatory restrictions limit otherwise restrict distributor allowances international operations provided continue provide significant portion total net sales result total net sales continue affected changes us dollar foreign currencies order provide framework assessing underlying businesses performed excluding effect foreign currency fluctuations compare percent change net sales one period another period annual report form 10k using “net sales local currency” disclosure net sales local currency us generally accepted accounting principles gaap financial measure net sales local currency removes net sales us dollars impact changes exchange rates us dollar functional currencies foreign subsidiaries translating current period net sales us dollars using foreign currency exchange rates used translate net sales previous period believe presenting net sales local currency basis useful investors allows meaningful comparison net sales foreign operations period however net sales local currency measures considered isolation alternative net sales us dollars measures reflect current period exchange rates financial measures calculated presented accordance gaap “gross profit” consists net sales less “cost sales” represents prices pay raw material suppliers manufacturers products well costs related product shipments duties tariffs freight expenses relating shipment products distributors importers similar expenses “royalty overrides” significant expense consist • royalty overrides production bonuses total approximately 15 7 respectively retail sales weight management targeted nutrition energy sports fitness outer nutrition promotional products • mark hughes bonus payable senior distributors aggregate amount 1 retail sales weight management targeted nutrition energy sports fitness outer nutrition products • discretionary incentive cash bonuses qualifying distributors royalty overrides generally earned based retail sales provide potential earnings distributors 23 retail sales approximately 33 net sales royalty overrides together distributor allowances 50 represent potential earnings distributors approximately 73 retail sales compensation distributors generally development retention improved productivity distributor sales organizations paid several levels distributors sale due restrictions direct selling china fulltime employed sales representatives china compensated wages bonuses benefits licensed business providers china compensated service fees instead distributor allowances royalty overrides utilized traditional marketing program used five regions local country regulatory constraints may required modify typical distributor incentive plans described consequently total distributor discount percentage may vary time also offer reduced distributor allowances pay reduced royalty overrides respect certain products worldwide “operating margins” consist net sales less cost sales royalty overrides “selling general administrative expenses” represent operating expenses components include labor benefits sales events professional fees travel entertainment distributor marketing occupancy costs communication costs bank fees depreciation amortization foreign exchange gains losses miscellaneous operating expenses sales distributors outside united states made respective local currencies preparing financial statements translate revenues us dollars using average exchange rates additionally majority purchases suppliers generally made us dollars consequently strengthening us dollar versus foreign currency negative impact reported sales operating margins generate transaction losses intercompany transactions throughout last five years foreign currency exchange rates fluctuated significantly time enter foreign exchange forward option contracts partially mitigate foreign currency exchange risk discussed detail item 7a item 7a quantitative qualitative disclosures market risk exposed market risks arise normal course business changes interest rates foreign currency exchange rates selected basis use derivative financial instruments manage hedge risks hedging transactions authorized executed pursuant written guidelines procedures adopted sfas 133 accounting derivative instruments hedging activities sfas 133 amended interpreted established accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities derivatives whether designated hedging relationships required recorded balance sheet fair value derivative designated fairvalue hedge changes fair value derivative underlying hedged item recognized concurrently earnings derivative designated cashflow hedge changes fair value derivative recorded comprehensive income oci recognized statement operations hedged item affects earnings sfas 133 defined new requirements designation documentation hedging relationships well ongoing effectiveness assessments order use hedge accounting derivative qualify hedge changes fair value recognized concurrently earnings discussion primary market risk exposures derivatives presented foreign exchange risk enter foreign exchange derivatives ordinary course business primarily reduce exposure currency fluctuations attributable intercompany transactions translation local currency revenue foreign exchange contracts designated cash flow hedges forecasted transactions purchase average rate put options give us right obligation sell foreign currency specified exchange rate strike rate contracts provide protection event foreign currency weakens beyond option strike rate following table provides information details option contracts foreign exchange forward contracts used hedge advances subsidiaries objective contracts neutralize impact foreign currency movements subsidiarys operating results fair value forward contracts based thirdparty bank quotes following table provides information details forward contracts foreign subsidiaries excluding operating hyperinflationary environments designate local currencies functional currency december 31 2004 total amount foreign subsidiary cash 664 million 51 million invested us dollars interest rate risk maintained investment portfolio highquality marketable securities according investment policy may invest taxable tax exempt instruments including assetbacked securities addition policy establishes limits credit quality maturity issuer type instrument use derivative instruments hedge investment portfolio table presents principal cash flows interest rates maturity dates fair values borrowings december 31 2004 fair values fixed rate borrowings determined based recent market trade values fair values variable rate borrowings approximate carrying value variable interest rates disclosed represent rates borrowings december 31 2004 interest rate risk related capital leases significant interest rate cap used hedge interest rate exposure 180 million term loan variable interest rate cap provided protection event three month libor rate increase beyond 5 cap terminated december 22 2004 new 200 million term loan company obligated enter minimum three years december 21 2004 closing date interest rate hedge 25 aggregate principal amount term loan february 24 2005 company entered interest rate swap fulfill obligation critical accounting policies consolidated financial statements prepared conformity accounting principles generally accepted united states require us make estimates assumptions affect reported amounts assets liabilities disclosures contingent assets liabilities date financial statements reported amounts revenue expenses year actual results could differ estimates consider following policies critical understanding judgments involved preparing financial statements uncertainties could impact results operations financial condition cash flows network marketing company sells wide range weight management products nutritional supplements personal care products within one industry segment defined sfas 131 disclosure segments enterprise related information products manufactured third party providers sold independent distributors sell herbalife products retail consumers distributors sell products 59 countries throughout world organized managed geographic region first quarter 2003 elected aggregate operating segments one reporting segment management believes operating segments similar operating characteristics similar long term operating performance making determination management believes operating segments similar nature products sold product acquisition process types customers products sold methods used distribute products nature regulatory environment revenue recognized products shipped title passes independent distributor importer amounts billed freight handling costs included net sales generally receive net sales price cash credit card payments point sale related royalty overrides allowances product returns recorded merchandise shipped allowances product returns primarily connection buyback program provided time product shipped accrual based upon historic return rates country vary zero approximately 50 retail sales relevant return pattern reflects anticipated returns received period 12 months following original sale historically product returns buybacks significant product returns buybacks approximately 24 19 11 years ended december 31 2002 2003 2004 respectively material changes estimates recognized year ended december 31 2004 years ended december 31 2003 2002 record reserves inventory provide estimated obsolete unsalable inventory based assumptions future demand products market conditions future demand market conditions less favorable managements assumptions additional reserves could required likewise favorable future demand market conditions could positively impact future operating results previously reserved inventory sold reserved obsolete slow moving inventory totaling 84 million 42 million 62 million december 31 2002 2003 2004 respectively accordance statement financial accounting standards sfas 144 longlived assets property plant equipment purchased intangibles subject amortization reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable recoverability assets held used measured comparison carrying amount asset estimated undiscounted future cash flows expected generated asset carrying amount asset exceeds estimated future cash flows impairment charge recognized amount carrying amount asset exceeds fair value asset assets disposed would separately presented balance sheet reported lower carrying amount fair value less costs sell longer depreciated assets liabilities disposed group classified held sale would presented separately appropriate asset liability sections balance sheet goodwill intangibles subject amortization tested annually impairment tested impairment frequently events circumstances indicate asset might impaired impairment loss recognized extent carrying amount exceeds assets fair value determination made reporting unit level consists two steps first company determines fair value reporting unit compares carrying amount second carrying amount reporting unit exceeds fair value impairment loss recognized excess carrying amount reporting units goodwill intangibles implied fair value implied fair value determined allocating fair value reporting unit manner similar purchase price allocation accordance sfas 141 business combinations residual fair value allocation implied fair value reporting unit goodwill intangibles december 31 2004 goodwill approximately 1675 million marketing franchise 3100 million writedowns recognized year ended december 31 2002 2003 2004 contingencies accounted accordance sfas 5 accounting contingencies sfas 5 requires record estimated loss contingency information available prior issuance financial statements indicates probable asset impaired liability incurred date financial statements amount loss reasonably estimated accounting contingencies legal income tax matters requires us use judgment many legal tax contingencies take years resolved generally time period increases uncertainties resolved likelihood changes estimate ultimate outcome increases deferred income tax assets established net operating loss carryforwards certain foreign subsidiaries reduced valuation allowance reflect amounts estimated ultimately recognized net operating loss carryforwards expire varying amounts future period time realization income tax carryforwards dependent generating sufficient taxable income prior expiration carryforwards although realization assured believe likely net carrying value income tax carryforwards realized amount income tax carryforwards considered realizable however could change estimates future taxable income carryforward period adjusted new accounting pronouncements december 2004 financial accounting standards board fasb enacted statement financial accounting standards 123revised 2004 sfas 123r sharebased payment replaces statement financial accounting standards 123 sfas 123 accounting stockbased compensation supersedes accounting principle board apb opinion 25 accounting stock issued employees sfas 123r requires measurement employee sharebased payments employees including grants employee stock options using fairvaluebased method recording expense consolidated statements operations accounting provisions sfas 123r effective reporting periods beginning june 15 2005 required adopt sfas 123r third quarter fiscal 2005 pro forma disclosures previously permitted sfas 123 longer alternative financial statement recognition see note 2 notes consolidated financial statements pro forma net income net income per share amounts fiscal 2002 fiscal 2004 used fairvaluebased method similar methods required sfas 123r measure compensation expense employee stock incentive awards although yet determined whether adoption sfas 123r result amounts similar current pro forma disclosures sfas 123 evaluating requirements sfas 123r preliminary basis expect adoption material impact consolidated statements operations relative currently existing options december 2004 fasb issued fasb staff position fas 1092 fas 1092 accounting disclosure guidance foreign earnings repatriation provision within american jobs creations act 2004 ajca introduces limited time 85 dividends received deduction repatriation certain foreign earnings us taxpayer repatriation provision provided certain criteria met fas1092 provides accounting disclosure guidance repatriation provision although fas 1092 effective immediately expect able complete evaluation repatriation provision congress treasury department provides additional clarifying language key elements provision january 2005 treasury department began issue first series clarifying guidance documents related provision expect complete evaluation effects repatriation provision within first two fiscal quarters 2005 item 8item 7a quantitative qualitative disclosures market risk exposed market risks arise normal course business changes interest rates foreign currency exchange rates selected basis use derivative financial instruments manage hedge risks hedging transactions authorized executed pursuant written guidelines procedures adopted sfas 133 “accounting derivative instruments hedging activities” “sfas 133” sfas 133 amended interpreted established accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities derivatives whether designated hedging relationships required recorded balance sheet fair value derivative designated fairvalue hedge changes fair value derivative underlying hedged item recognized concurrently earnings derivative designated cashflow hedge changes fair value derivative recorded comprehensive income “oci” recognized statement operations hedged item affects earnings sfas 133 defined requirements designation documentation hedging relationships well ongoing effectiveness assessments order use hedge accounting derivative qualify hedge changes fair value recognized concurrently earnings discussion primary market risk exposures derivatives presented foreign exchange risk enter foreign exchange derivatives ordinary course business primarily reduce exposure currency fluctuations attributable intercompany transactions translation local currency revenue foreign exchange contracts would qualify cash flow hedges forecasted transactions purchase average rate put options give us right obligation sell foreign currency specified exchange rate “strike rate” objective options provide protection event foreign currency weakens beyond option strike rate fair value option contracts based thirdparty bank quotes following table provides information details option contracts foreign exchange forward contracts used hedge advances subsidiaries objective contracts neutralize impact foreign currency movements subsidiary’s operating results fair value forward contracts based thirdparty bank quotes following table provides information details forward contracts foreign subsidiaries excluding operating hyperinflationary environments designate local currencies functional currency december 31 2005 total amount foreign subsidiary cash 627 million 45 million invested us dollars interest rate risk table presents principal cash flows interest rates maturity dates fair values borrowings december 31 2005 fair values fixed rate borrowings determined based recent market trade values fair values variable rate borrowings approximate carrying value variable interest rates disclosed represent rates borrowings december 31 2005 interest rate risk related capital leases significant 200 million term loan company obligated enter minimum three years december 21 2004 closing date interest rate hedge 25 aggregate principal amount term loan february 24 2005 company entered 125 million notional interest rate swap fulfill obligation october 2005 swap notional partially reduced 90 million match current term loan carrying value december 2005 swap notional reduced 20 million time realized gain 045 million since principal debt still remained 90 million required statement financial accounting standards “sfas” 133 defer gain amortize earnings using effective interest method remaining life debt gain amount recognized december immaterial also december 2005 entered 25 million notional interest rate cap meet term loan 25 hedge obligation item 8item 7a quantitative qualitative disclosures market risk exposed market risks arise normal course business changes interest rates foreign currency exchange rates selected basis use derivative financial instruments manage hedge risks hedging transactions authorized executed pursuant written guidelines procedures adopted sfas 133 “accounting derivative instruments hedging activities” sfas 133 sfas 133 amended interpreted established accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities derivatives whether designated hedging relationships required recorded balance sheet fair value derivative designated fairvalue hedge changes fair value derivative underlying hedged item recognized concurrently earnings derivative designated cashflow hedge changes fair value derivative recorded comprehensive income recognized statement operations hedged item affects earnings sfas 133 defined requirements designation documentation hedging relationships well ongoing effectiveness assessments order use hedge accounting derivative qualify hedge changes fair value recognized concurrently earnings discussion primary market risk exposures derivatives presented foreign exchange risk enter foreign exchange derivatives ordinary course business primarily reduce exposure currency fluctuations attributable intercompany transactions translation local currency revenue foreign exchange contracts designated free standing derivatives hedge accounting apply purchase average rate put options give us right obligation sell foreign currency specified exchange rate strike rate objective options provide protection event foreign currency weakens beyond option strike rate fair value option contracts based thirdparty bank quotes december 31 2006 outstanding option contracts following table provides information details option contracts december 31 2005 foreign exchange forward contracts used hedge advances subsidiaries objective contracts neutralize impact foreign currency movements subsidiary’s operating results fair value forward contracts based thirdparty bank quotes following table provides information details forward contracts foreign subsidiaries excluding operating hyperinflationary environments designate local currencies functional currencies december 31 2006 total amount foreign subsidiary cash 1140 million 44 million invested us dollars interest rate risk december 31 2006 aggregate annual maturities term loan obtained july 2006 200718 million 200818 million 200918 million 2010 18 million 201118 million 1705 million thereafter fair value loan approximates carrying value 1795 million december 31 2006 term loan bears variable interest rate december 31 2006 average interest rate 685 july 21 2006 interest rate swap associated prior credit facility originally entered february 21 2005 terminated due debt refinancing interest income 08 million recorded consolidated statements income quarter ended september 30 2006 new credit facility see note 4 obligated enter interest rate hedge 25 aggregate principal amount term loan minimum three years august 23 2006 entered new interest rate swap agreement provides us pay interest threeyear period fixed rate 526 initial notional principal amount 1800 million receiving interest period libor rate notional principal amount subsequently notional amount reduced 20 million second third fourth quarters year commencing january 1 2007 throughout term swap designated cash flow hedge variability libor interest rate new term loan libor plus 150 thereby fixing effective rate notional amounts 676 december 31 2006 swap notional amount reduced 1600 million scheduled december 31 2006 recorded interest rate swap liability fair value 04 million offsetting amount recorded comprehensive income item 8item 7a quantitative qualitative disclosures market risks currency restrictions enacted venezuelan government 2003 become restrictive impacted ability subsidiary venezuela herbalife venezuela obtain us dollars official foreign exchange rate pay imported products unless official foreign exchange made readily available results herbalife venezuela’s operations could negatively impacted may need obtain us dollars nongovernment sources exchange rate weaker official rate december 31 2007 herbalife venezuela cash balances approximately 180 million primarily denominated bolivars 2006 herbalife venezuela paid certain products converting bolivars us dollars official exchange rate 2008 herbalife venezuela expects convert bolivars us dollars using official foreign exchange rate imports dividends remittances result continue use official foreign exchange rate translate financial statements herbalife venezuela us dollars herbalife venezuela’s net sales represented less 3 consolidated worldwide net sales year 2007 quarterly results operations contingencies time engaged routine litigation regularly review pending litigation matters involved establish reserves deemed appropriate management litigation matters probable loss estimate made herbalife international certain independent distributors named defendants purported class action lawsuit filed february 17 2005 superior court california county san francisco served herbalife international march 14 2005 minton v herbalife international et al case transferred los angeles county superior court plaintiff challenging marketing practices certain herbalife international independent distributors herbalife international various state laws prohibiting “endless chain schemes” insufficient disclosure assisted marketing plans unfair deceptive business practices fraud deceit plaintiff alleges freedom group system operated certain independent distributors herbalife international products places much emphasis recruiting encourages excessively large purchases product promotional materials distributors plaintiff also alleges freedom group pressured distributors disseminate misleading promotional materials plaintiff seeks hold herbalife international vicariously liable actions independent distributors seeking damages injunctive relief january 24 2007 superior court denied class certification claims except claim california law prohibiting “endless chain schemes” claim granted californiaonly class certification provided class counsel able substitute plaintiff california resident claims typical class believe meritorious defenses suit herbalife international certain distributors defendants class action lawsuit filed july 16 2003 circuit court ohio county state west virginia mey v herbalife international inc et al complaint alleged certain telemarketing practices certain herbalife international distributors violated telephone consumer protection act tcpa sought hold herbalife international vicariously liable practices independent distributors specifically plaintiffs’ complaint alleged several herbalife international’s distributors used prerecorded telephone messages faxes contact prospective customers violation tcpa’s prohibition practices without way acknowledging liability wrongdoing us independent distributors defendants reached binding settlement plaintiffs terms settlement defendants collectively paid 7 million fund distributed qualifying class members relevant amount paid us previously fully reserved financial statements settlement received final approval court january 2008 marketer dietary nutritional supplements products ingested consumers applied bodies currently subjected various product liability claims effects claims date material us reasonably possible range exposure currently existing claims material us believe meritorious defenses allegations contained lawsuits currently maintain product liability insurance annual deductible 10 million certain subsidiaries subject tax audits governmental authorities respective countries certain tax audits governmental authorities proposing significant amounts additional taxes related interest penalties due tax advisors believe substantial defenses allegations additional taxes owed vigorously contesting additional proposed taxes related charges matters may take several years resolve cannot sure ultimate resolution however opinion management adverse outcomes likely result material effect financial condition operating results opinion based belief losses suffer would material meritorious defenses although reserved amount believe represents likely outcome resolution disputes incorrect assessment may record additional expenses subsequent events january 28 2008 company issued press release announcing mr peter maslen class iii member board directors communicated decision retire board directors effective close business january 23 2008 company also announced board directors elected mr hal gaba fill vacancy created mr maslen’s retirement effective close business january 23 2008 january 31 2008 company’s board directors approved quarterly cash dividend 020 per common share shareholders record effective february 29 2008 payable march 14 2008 critical accounting policies consolidated financial statements prepared conformity gaap require us make estimates assumptions affect reported amounts assets liabilities disclosures contingent assets liabilities date financial statements reported amounts revenue expenses year actual results could differ estimates consider following policies critical understanding judgments involved preparing financial statements uncertainties could impact operating results financial condition cash flows network marketing company sells wide range weight management products nutritional supplements personal care products within one industry segment defined statement financial accounting standards sfas 131 disclosures segments enterprise related information sfas 131 products manufactured third party providers sold independent distributors sell herbalife products retail consumers distributors sell products 65 countries throughout world organized managed geographic region first quarter 2003 elected aggregate operating segments one reporting segment management believes operating segments similar operating characteristics similar long term operating performance making determination management believes operating segments similar nature products sold product acquisition process types customers products sold methods used distribute products nature regulatory environment revenue recognized products shipped title passes independent distributor importer amounts billed freight handling costs included net sales generally receive net sales price cash credit card payments point sale related royalty overrides allowances product returns recorded merchandise shipped allowances product returns primarily connection buyback program provided time product shipped accrual based upon historic return rates country relevant return pattern reflects anticipated returns received period 12 months following original sale historically product returns buybacks significant product returns buybacks approximately 10 retail sales years ended december 31 2005 2006 2007 material changes estimates recognized years ended december 31 2005 2006 2007 record reserves inventory provide estimated obsolete unsalable inventory based assumptions future demand products market conditions future demand market conditions less favorable management’s assumptions additional reserves could required likewise favorable future demand market conditions could positively impact future operating results previously reserved inventory sold reserved obsolete slow moving inventory totaling 80 million 114 million 12 million december 31 2005 2006 2007 respectively accordance sfas 144 accounting impairment disposal longlived assets property plant equipment purchased intangibles subject amortization reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable recoverability assets held used measured comparison carrying amount asset estimated undiscounted future cash flows expected generated asset carrying amount asset exceeds estimated future cash flows impairment charge recognized amount carrying amount asset exceeds fair value asset assets disposed would separately presented balance sheet reported lower carrying amount fair value less costs sell longer depreciated assets liabilities disposed group classified held sale would presented separately appropriate asset liability sections balance sheet goodwill intangibles subject amortization tested annually impairment tested impairment frequently events circumstances indicate asset might impaired impairment loss recognized extent carrying amount exceeds asset’s fair value determination made reporting unit level consists two steps first company determines fair value reporting unit compares carrying amount second carrying amount reporting unit exceeds fair value impairment loss recognized excess carrying amount reporting unit’s goodwill intangibles implied fair value implied fair value determined allocating fair value reporting unit manner similar purchase price allocation accordance sfas 141 business combinations residual fair value allocation implied fair value reporting unit’s goodwill intangibles december 31 2007 goodwill approximately 1114 million marketing franchise 3100 million goodwill reduced 2007 approximately 17 million due primarily effect settlement international tax audit related preacquisition period realization preacquisition net operating losses contingencies accounted accordance sfas 5 “accounting contingencies” sfas 5 requires record estimated loss contingency information available prior issuance financial statements indicates probable asset impaired liability incurred date financial statements amount loss reasonably estimated accounting contingencies legal income tax matters requires us use judgment many legal tax contingencies take years resolved generally time period increases uncertainties resolved likelihood changes estimate ultimate outcome increases deferred income tax assets established net operating loss carryforwards certain foreign subsidiaries reduced valuation allowance reflect amounts estimated ultimately realized net operating loss carryforwards expire varying amounts future period time realization income tax carryforwards dependent generating sufficient taxable income prior expiration carryforwards although realization assured believe likely net carrying value income tax carryforwards realized amount income tax carryforwards considered realizable however could change estimates future taxable income carryforward period adjusted account stockbased compensation accordance sfas 123r sharebased payment sfas 123r fair value recognition provisions statement sharebased compensation cost measured grant date based value award recognized expense vesting period determining fair value sharebased awards grant date requires judgment including estimating stock price volatility employee stock award exercise behaviors expected volatility primarily based upon historical volatility common shares due limited period public trading data common shares also validated volatility company peer group expected life awards based observed historical exercise patterns vary time stockbased compensation expense recognized statements income based awards ultimately expected vest amount expense reduced estimated forfeitures sfas 123r requires forfeitures estimated time grant revised necessary subsequent periods actual forfeitures differ estimates forfeitures estimated based historical experience account uncertain tax positions accordance financial accounting standards board fasb interpretation 48 accounting uncertainty income taxes fin 48 interpretation sfas 109 accounting income taxes sfas 109 fin 48 addressed determination tax benefits claimed expected claimed tax return recorded financial statements fin 48 must recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate resolution impact adoption fin 48 material impact results operations financial condition liquidity new accounting pronouncements december 2007 fasb issued sfas 141 revised 2007 business combinations sfas 141r replaces fasb statement 141 sfas 141r establishes principles requirements acquirer recognizes measures financial statements identifiable assets acquired liabilities assumed non controlling interest acquiree goodwill acquired sfas 141r also modifies recognition preacquisition contingencies environmental legal issues restructuring plans acquired research development value purchase accounting sfas 141r amends sfas 109 require acquirer recognize changes amount deferred tax benefits recognizable business combination either income continuing operations period combination directly contributed capital depending circumstances sfas 141r also establishes disclosure requirements enable users evaluate nature financial effects business combination sfas 141r effective beginning entity’s fiscal year begins december 15 2008 currently evaluating potential impact adoption sfas 141r consolidated financial statements may 2 2007 fasb issued fasb staff position fin 481 definition settlement fasb interpretation 48 fsp fin 481 amends fin 48 provide guidance enterprise determine whether tax position effectively settled purpose recognizing previously unrecognized tax benefits fsp fin 481 tax position considered effectively settled taxing authority completed examination enterprise plan appeal remote taxing authority would reexamine tax position future fsp fin 481 effective retroactively january 1 2007 adoption fsp fin 481 material impact consolidated financial position operating results april 2007 fasb issued fasb staff position fin 391 amendment fasb interpretation 39 fsp fin 391 fsp fin 391 modifies fin 39 offsetting amounts related certain contracts permits companies offset cash collateral receivables payables net derivative positions certain circumstances fsp fin 391 effective fiscal years beginning november 15 2007 early adoption permitted believe adoption fsp fin 391 material effect consolidated financial statements february 2007 fasb issued sfas 159 fair value option financial assets financial liabilities sfas 159 permits entities choose measure many financial instruments certain items fair value sfas 159 also establishes presentation disclosure requirements designed facilitate comparisons entities choose different measurement attributes similar types assets liabilities sfas 159 applies reporting periods beginning november 15 2007 believe adoption sfas 159 material impact consolidated financial statements september 2006 fasb issued sfas 157 fair value measurement sfas 157 defines fair value establishes framework measuring fair value accordance gaap expands disclosures fair value measurements provisions sfas 157 effective fiscal years beginning november 15 2007 february 2008 fasb issued fsp fas 1571 fsp fas 1572 fsp 1571 amends sfas 157 exclude sfas 13 accounting leases related interpretive accounting pronouncements address leasing transactions fsp fas 1572 delay effective date sfas 157 nonfinancial assets nonfinancial liabilities except recognized disclosed fair value financial statements recurring basis least annually fsp fas 1572 partially defers effective date sfas 157 fiscal years beginning november 15 2008 interim periods within fiscal years items within scope fsp 1572 effective fiscal 2008 adopt sfas 157 except applies nonfinancial assets nonfinancial liabilities noted fsp fas 1572 believe adoption sfas 157 material impact consolidated financial statements item 7a quantitative qualitative disclosures market risk exposed market risks arise normal course business changes interest rates foreign currency exchange rates selected basis use derivative financial instruments manage hedge risks hedging transactions authorized executed pursuant written guidelines procedures adopted sfas 133 accounting derivative instruments hedging activities sfas 133 sfas 133 amended interpreted established accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities derivatives whether designated hedging relationships required recorded balance sheet fair value derivative designated fairvalue hedge changes fair value derivative underlying hedged item recognized concurrently earnings derivative designated cashflow hedge changes fair value derivative recorded comprehensive income oci recognized statement operations hedged item affects earnings sfas 133 defines requirements designation documentation hedging relationships well ongoing effectiveness assessments order use hedge accounting derivative qualify hedge changes fair value recognized concurrently earnings discussion primary market risk exposures derivatives presented foreign exchange risk enter foreign exchange derivatives ordinary course business primarily reduce exposure currency fluctuations attributable intercompany transactions translation local currency revenue foreign exchange contracts designated free standing derivatives hedge accounting apply purchase average rate put options give us right obligation sell foreign currency specified exchange rate strike rate contracts provide protection event foreign currency weakens beyond option strike rate also enter various forward extra contracts combination foreign forward exchange contract option provide protection adverse market movement strike rate slightly worse forward participate favorable currency move predetermined trigger level obliged sell foreign currency strike rate spot exchange rate traded trigger rate december 31 2007 outstanding option contracts foreign exchange forward contracts used hedge advances subsidiaries objective contracts neutralize impact foreign currency movements subsidiary’s operating results also purchased ratio forward contracts protect adverse market movement rate better current forward fair value forward contracts based thirdparty bank quotes foreign exchange forward contracts maturity less one year majority maturing within 31 days less december 31 2007 following table provides information details forward contracts foreign subsidiaries excluding operating hyperinflationary environments designate local currencies functional currencies december 31 2007 total amount foreign subsidiary cash 1548 million 84 million invested us dollars interest rate risk december 31 2007 aggregate annual maturities senior secured credit facility entered july 2006 amended 200815 million 200915 million 2010 15 million 201115 million 20122102 million 1409 million thereafter fair value senior secured credit facility approximates carrying value 3571 million december 31 2007 senior secured credit facility bears variable interest rate december 31 2007 average interest rate 626 july 21 2006 interest rate swap associated prior credit facility originally entered february 21 2005 terminated due debt refinancing interest income 08 million recorded consolidated statements income quarter ended september 30 2006 senior secured credit facility obligated enter interest rate hedge 25 aggregate principal amount term loan minimum three years august 23 2006 entered new interest rate swap agreement provides us pay interest threeyear period fixed rate 526 initial notional principal amount 1800 million receiving interest period libor rate notional principal amount notional amount scheduled reduced 20 million second third fourth quarters year commencing january 1 2007 throughout term swap designated cash flow hedge variability libor interest rate new term loan libor plus 150 thereby fixing effective rate notional amounts 676 december 31 2006 swap notional amount reduced 1600 million scheduled december 31 2007 swap notional amount reduced 1000 million scheduled december 31 2007 recorded interest rate swap liability fair value 14 million offsetting amount recorded comprehensive income item 8item 7a quantitative qualitative disclosures market risk summary financial results net sales year ended december 31 2008 increased 99 23592 million 21458 million 2007 year ended december 31 2008 net sales many top countries including china us venezuela brazil italy taiwan increased 908 140 532 141 186 162 respectively compared period 2007 increases net sales mainly due continued success various dmo’s nutrition club dmo expansion commercial clubs central clubs wellness coach dmo weight loss challenge dmo healthy breakfast dmo well distributor momentum sales extravaganzas held year increase number new sales leaders compared prior year period overall appreciation foreign currencies 529 million favorable impact net sales year ended december 31 2008 representing 25 total net sales increase 2134 million net income year ended december 31 2008 increased 155 2212 million 336 per diluted share compared 1915 million 263 per diluted share period 2007 increase driven revenue growth many markets lower effective tax rate partially offset higher labor costs sales events costs advertising promotion expenses depreciation expense net income year ended december 31 2008 included 48 million unfavorable tax impact related restructuring costs 61 million valuation allowance deferred tax asset deferred interest net income year ended december 31 2007 included unfavorable tax impact 38 million completion first phase start second phase realignment growth plan increase tax reserves 36 million 21 million net tax benefit resulting various international tax settlements results operations results operations periods described necessarily indicative results operations future periods depend upon numerous factors including ability recruit new distributors retain existing distributors open new markets penetrate existing markets introduce new products programs help distributors increase retail efforts develop niche market segments following table sets forth selected results operations expressed percentage net sales periods indicated 1 compensation china sales employees included selling general administrative expenses distributor compensation countries included royalty overrides year ended december 31 2008 compared year ended december 31 2007 net sales following chart reconciles retail sales net sales geographic region changes net sales directly associated recruiting retention distributor force retailing products quality completeness product offerings distributor force sell number countries operate management’s role incountry corporate level provide distributors competitive broad product line encourage strong teamwork leadership among chairman’s club president’s team distributors offer leading edge business tools make business herbalife simple management uses distributor marketing program coupled educational motivational tools promotions incentivize distributors increase recruiting retention retailing turn affect net sales tools include company sponsored sales events extravaganzas world team schools large groups distributors gather thus allowing network distributors learn recruiting retention retailing techniques leading distributors become familiar market sell products business opportunities accordingly management believes development motivation programs increase productivity supervisor network expenses programs included selling general administrative expenses sales driven several factors including number productivity distributors sales leaders continually build educate motivate respective distribution sales organizations also use event nonevent product promotions motivate distributors increase recruiting retention retailing activities promotions prizes ranging qualifying events product prizes vacations costs promotions included selling general administrative expenses factors described helped distributors increase business turn driven growth business discussion net sales geographic region details specific causes growth business well describes unique growth factors specific certain geographic regions major countries believe correct business foundation coupled ongoing training promotional initiatives required increase recruiting retention distributors retailing products correct business foundation includes strong country management works closely distributor leadership unified distributor leadership broad product line appeals local consumer needs favorable regulatory environment scalable stable technology platform attractive distributor marketing plan initiatives success training seminars world team schools promotional events regional extravaganzas integral components developing highly motivated educated distributor sales organization work toward increasing recruitment retention distributors strategy continue include creating maintaining growth within existing markets expanding new markets addition new ideas dmos generated regional markets globalized applicable either distributors country management corporate management examples dmos include club concept mexico total plan brazil wellness coach france internetsampling weight loss challenge us management’s strategy review applicability expanding successful country initiatives throughout region appropriate financially support globalization initiatives north america north america region reported net sales 4969 million year ended december 31 2008 net sales increased 582 million 133 year ended december 31 2008 compared 2007 local currency net sales increased 132 year ended december 31 2008 compared 2007 overall increase result net sales growth us 586 million 140 year ended december 31 2008 compared 2007 increase net sales north america primarily due continued success distributors converting business focus toward daily consumption business model especially nutrition club dmo extension commercial clubs central clubs along recent development weight loss challenge dmo terms volume mix business us 64 spanish speaking 36 nonspanish speaking year ended december 31 2008 october 2008 region hosted extravaganza los angeles attended 13000 distributors new supervisors region increased 25 year ended december 31 2008 compared period 2007 total supervisors region increased 101 new supervisor growth united states 29 year ended december 31 2008 compared period 2007 believe fiscal year 2009 net sales north america increase year primarily result successful transformation distributor business focus daily consumption model mexico central america mexico central america region reported net sales 3752 million year ended december 31 2008 net sales year ended december 31 2008 decreased 94 million 24 compared 2007 local currency net sales year ended december 31 2008 decreased 23 compared 2007 fluctuation foreign currency rates unfavorable impact 06 million net sales year ended december 31 2008 net sales mexico decline 187 million 50 year ended december 31 2008 compared 2007 third quarter 2008 began collecting value added tax vat distributors levied mexican government import resale certain products distributors previously paid 0 vat purchases products vat increase impacted approximately 58 volume mexican market predominant dmo mexico retail pricesensitive caused volumes decline process challenging assessment several fronts however nearterm products continue subject vat expect volume growth constrained new supervisors region decreased 187 year ended december 31 2008 compared period 2007 mexico’s new supervisors decreased 207 year ended december 31 2008 total supervisor growth region decreased 80 july 2008 region hosted extravaganza mexico city attended 15000 distributors believe fiscal year 2009 net sales mexico central america show year decrease reflecting lower volumes due recent vat charge coupled assumed unfavorable currency fluctuations south america south america region reported net sales 3606 million year ended december 31 2008 net sales increased 605 million 202 year ended december 31 2008 compared 2007 local currency net sales increased 160 year ended december 31 2008 compared period 2007 fluctuation foreign currency rates 124 million favorable impact net sales year ended december 31 2008 increase net sales region attributable net sales increases venezuela peru brazil partially offset decline argentina brazil region’s largest market net sales increased 188 million 141 year ended december 31 2008 compared period 2007 increase net sales result successfully transforming market balanced mix recruiting retailing retention via nutrition club dmo addition timing year’s extravaganza held july 2008 versus december 2007 year ago created positive distributor momentum favorable foreign currency fluctuations 90 million also contributed increase net sales year ended december 31 2008 venezuela region’s second largest market experienced net sales increase 277 million 532 year ended december 31 2008 compared period 2007 however volumes slowed second half year result price increases 20 25 january may 2008 respectively addition extravaganza held brazil february 2008 south america region also hosted extravaganza events argentina venezuela 20000 distributors attendance new supervisors region decreased 52 year ended december 31 2008 compared period 2007 year ended december 31 2008 decrease driven declines argentina colombia brazil 468 252 74 respectively compared period 2007 declines offset increases new supervisor growth bolivia peru increased 521 233 respectively year ended december 31 2008 compared period 2007 total supervisor growth region increased 130 believe fiscal year 2009 net sales south america show decline primarily due challenging volume comparisons venezuela argentina peru assumed unfavorable currency fluctuations partially offset success daily consumption dmo’s primarily brazil well product price increase emea region reported net sales 5707 million year ended december 31 2008 net sales increased 30 million 05 year ended december 31 2008 compared 2007 local currency net sales decreased 49 year ended december 31 2008 compared 2007 fluctuation foreign currency rates favorable impact net sales 307 million year ended december 31 2008 among largest markets region italy france reported net sales increases 186 150 respectively spain reported net sales decrease 140 case year ended december 31 2008 compared period 2007 increase net sales italy france driven growth total plan wellness evaluations healthy breakfast dmos decrease net sales spain reflects impact negative media reports april 2008 relating spanish ministry health issuing press release regarding ongoing inquiry products sell spain net sales increased russia 379 year ended december 31 2008 compared period 2007 primarily driven adoption nutrition club concept form breakfast club dmo net sales netherlands increased 24 year ended december 31 2008 compared period 2007 reflect reactivated distributor base utilizing wellness evaluation healthy breakfast dmos increases offset declines germany portugal germany net sales declined 220 year ended december 31 2008 compared period 2007 transitions daily consumption models including nutrition clubs wellness evaluations portugal net sales declined 477 year ended december 31 2008 compared period 2007 due weaker recruiting efforts market similar brazil 2006 transitions toward daily consumption methods year ended december 31 2008 new supervisors region decreased 148 declines portugal germany spain 693 498 299 respectively declines offset increases russia france italy new supervisors increased 439 147 134 respectively year ended december 31 2008 total supervisor growth region decreased 106 june 2008 emea region hosted extravaganza event barcelona 16000 distributors attendance believe fiscal year 2009 net sales emea show decrease due primarily assumed unfavorable currency fluctuations asia pacific asia pacific region excludes china reported net sales 4108 million year ended december 31 2008 net sales increased 321 million 85 year ended december 31 2008 compared period 2007 local currency net sales increased 91 year ended december 31 2008 compared period 2007 fluctuation foreign currency rates unfavorable impact 23 million net sales year ended december 31 2008 increase net sales asia pacific primarily attributable increases three largest markets region taiwan south korea malaysia partially offset decrease japan net sales taiwan largest market region increased 180 million 162 year ended december 31 2008 compared period 2007 adoption nutrition club dmo form commercial clubs positive catalyst growth country net sales south korea second largest market region increased 75 million 115 year ended december 31 2008 compared period 2007 driven branding activities adoption nutrition club dmo form commercial clubs net sales japan third largest market region decreased 77 million 103 year ended december 31 2008 compared period 2007 driven decline distributor recruiting net sales malaysia fourth largest market region increased 159 million 689 year ended december 31 2008 compared period 2007 reflecting positive distributor momentum increased recruiting march 2008 herbalife hosted annual global herbalife honors event singapore president team members around world met shared best practices herbalife management awarded mark hughes bonus certain distributors addition july 2008 hosted regional extravaganza bangkok attendance approximately 18000 distributors new supervisors region increased 18 year ended december 31 2008 compared period 2007 new supervisors malaysia korea taiwan increased 556 285 80 respectively year ended december 31 2008 increases offset declines japan thailand 427 309 respectively year ended december 31 2008 total supervisor growth region increased 15 believe fiscal year 2009 net sales asia pacific show modest decrease due assumed unfavorable foreign currency fluctuations believe volume sales higher 2009 due continued adoption daily consumption dmos several key markets china net sales china 1450 million year ended december 31 2008 net sales increased 690 million 908 year ended december 31 2008 compared period 2007 local currency net sales increased 743 year ended december 31 2008 compared period 2007 fluctuation foreign currency rates favorable impact 126 million net sales year ended december 31 2008 december 31 2008 84 stores china across 30 provinces additionally third quarter 2008 received approval five additional direct selling licenses provinces beijing guangdong shandong zhejiang excluding ningbo guizhou beijing direct selling license permit us sell away fixed retail locations beijing outlet inspected confirmed relevant authority six direct selling licenses operate china addition recently submitted applications five additional direct selling licenses china new sales employees china increased 709 year ended december 31 2008 compared period 2007 total sales employees china increased 1164 believe fiscal year 2009 net sales china increase year primarily result continued new store openings improved store productivity introduction nutrition clubs sales product category net sales product categories increased year ended december 31 2008 compared period 2007 mainly due sales momentum discussed expect growth rates within product categories vary time launch new products gross profit gross profit 19008 million year ended december 31 2008 compared 17075 million 2007 percentage net sales gross profit year ended december 31 2008 increased slightly 806 compared 796 period 2007 increase gross profit percentage primarily due country mix foreign exchange fluctuations generally gross profit percentages vary significantly percentage net sales experiencing ingredient product price pressure areas soy dairy products plastics transportation reflecting current global economic trends believe ability mitigate cost increases improved optimization supply chain coupled select increases retail prices products royalty overrides royalty overrides percentage net sales 338 year ended december 31 2008 compared 354 period 2007 decrease year ended december 31 2008 primarily due increase net sales china compensation fulltime employee sales representatives included selling general administrative expenses opposed royalty overrides included distributors worldwide marking plan generally ratio varies slightly period due changes mix products countries full royalty overrides paid certain products certain countries anticipate fluctuations royalty overrides percent net sales reflecting growth prospect china business relative worldwide business selling general administrative expenses selling general administrative expenses percentage net sales 327 year ended december 31 2008 compared 296 period 2007 year ended december 31 2008 selling general administrative expenses increased 1376 million 7718 million 6342 million 2007 increase year ended december 31 2008 included 643 million higher salaries benefits due primarily normal merit increases higher stock based compensation expenses unfavorable impact foreign currency fluctuations coupled severance related restructuring discussed note 13 restructuring reserve notes consolidated financial statements higher compensation costs associated fulltime employee sales representatives china 141 million higher distributor sales events costs 136 million higher depreciation amortization expenses related mostly development technology infrastructure expansion relocation new facilities 112 million higher advertising promotion expenses 34 million higher credit card fees due increase sales 32 million higher professional fees increases partially offset lower foreign currency exchange losses 67 million compared 2007 expect 2009 selling general administrative expenses increase absolute dollars 2008 levels reflecting higher china sales employee costs increased depreciation primarily related global oracle implementation various sales growth initiatives including distributor promotions result factors selling general administrative expenses percentage net sales expected 2008 levels excluding china sales employee costs expect selling general administrative expenses percentage net sales approximately equal 2008 levels net interest expense net interest expense follows increase interest expense year ended december 31 2008 compared period 2007 primarily due higher average balance long term borrowings partially offset lower interest rates 2008 compared 2007 see “liquidity capital resources” section discussion senior secured credit facility income taxes income taxes 978 million year ended december 31 2008 compared 1111 million 2007 percentage pretax income effective income tax rate 307 year ended december 31 2008 compared 367 2007 decrease effective tax rate year ended december 31 2008 compared period 2007 primarily due decrease operating effective tax rate reflecting country mix tax holiday china favorable impact global entity structuring planning offset increase unrecognized tax benefits year ended december 31 2008 valuation allowance deferred tax asset deferred interest excluding effect valuation allowance deferred tax asset deferred interest effective tax rate year ended december 31 2008 would approximately 288 restructuring costs july 2006 initiated realignment employee base part first phase realignment growth plan fourth quarter 2007we initiated second phase realignment growth plan fourth quarter 2008 initiated new restructuring program part restructurings recorded 67 million 58 million professional fees severance related costs year ended december 31 2008 2007 respectively amounts included selling general administrative expenses year ended december 31 2007 compared year ended december 31 2006 discussion years ended december 31 2007 2006 revised originally disclosed conform december 31 2008 presentation connection restructuring geographic regions five six regions late 2008 following chart reconciles retail sales net sales geographic region north america north america region reported net sales 4387 million year ended december 31 2007 net sales increased 811 million 227 year ended december 31 2007 compared 2006 local currency net sales increased 225 year ended december 31 2007 compared 2006 fluctuation foreign currency rates positive impact 08 million net sales year ended december 31 2007 overall increase result net sales growth us 808 million 239 year ended december 31 2007 increase net sales north america led distributor momentum behind nutrition club dmo among latino distributors well lead generationsampling dmo among nonlatino distributors united states october 2007 region hosted 7000 distributors long beach california annual herbalife university latino development weekend event new supervisors region increased 196 year ending december 31 2007 compared period 2006 led new supervisor growth united states 208 total supervisor growth region increased 199 mexico central america mexico central america region reported net sales 3846 million year ended december 31 2007 net sales year ended december 31 2007 increased 77 million 20 compared 2006 local currency net sales year ended december 31 2007 increased 22 compared 2006 fluctuation foreign currency rates unfavorable impact 06 million net sales year ended december 31 2007 net sales mexico decline 23 million 06 year ended december 31 2007 compared 2006 new supervisors region decreased 193 year ending december 31 2007 compared period 2006 driving decline mexico whose number supervisors decreased 212 2007 total supervisor growth region increased 221 experiencing explosive sales growth 2004 2006 2007 rebuilding year mexico management team conjunction distributor leadership addressed issues infrastructure needs well distributor training infrastructure enhancements included introduction sales centers expansion current distribution facilities addition tollfree phone line enhanced ethical business practices ebp resources december 31 2007 20 locations throughout mexico increase 6 locations expansion 3 sales centers december 31 2006 additions designed provide additional distributor access points support expansion business addition distributor leadership invested significant time training distributors nutrition club operations marketing plan mexico central america opened el salvador 64th country february 2007 year 2007 net sales el salvador 49 million making region’s second largest market south america south america region reported net sales 3001 million year ended december 31 2007 net sales increased 760 million 339 year ended december 31 2007 compared 2006 local currency net sales increased 270 year ended december 31 2007 compared period 2006 fluctuation foreign currency rates 155 million favorable impact net sales year ended december 31 2007 increase attributable net sales increases venezuela argentina peru partially offset decline brazil new supervisors region increased 253 year ending december 31 2007 compared period 2006 driven new supervisor growth venezuela argentina increased 3913 269 respectively offset 317 decline brazil total supervisor growth region increased 261 brazil region’s largest market net sales decline primarily due distributors transitioning balanced mix recruiting retailing retention via nutrition club dmo effort build sustainable platform longterm growth also contributing sales decline fact senior distributor leadership brazil focused building new business peru opened december 2006 net sales 280 million year ending december 31 2007 brazil hosted southeastern extravaganza december 2007 6000 distributors attendance launched three additional products within unique green tea based outer care product line called soft green line strategically positioned brazil fuel growth large personal care segment strategically priced compete multilevel marketing companies venezuela region’s second largest market experienced strong growth net sales 3173 year ending december 31 2007 compared 2006 total supervisors increased 2460 year argentina region’s third largest market experienced sales growth 275 year ended december 31 2007 emea region reported net sales 5677 million year ended december 31 2007 net sales increased 197 million 36 year ended december 31 2007 compared 2006 local currency net sales decreased 43 year ended december 31 2007 compared 2006 fluctuation foreign currency rates favorable impact net sales 431 million year ended december 31 2007 among largest markets region spain france italy reported net sales increases 259 181 143 respectively germany netherlands net sales declined 211 190 respectively time period growth western markets driven wellness coach dmo addition eastern european countries shown signs potential longterm growth including net sales gains russia 44 driven adoption nutrition club concept form breakfast club dmo year ending december 31 2007 new supervisors region decreased 137 gains spain france italy 176 73 58 respectively offsetting declines germany netherlands 465 253 respectively total supervisor growth region declined 56 emea zambia 65th country opened july 2007 asia pacific asia pacific region reported net sales 3787 million year ended december 31 2007 net sales increased 319 million 92 year ended december 31 2007 compared 2006 local currency net sales increased 62 year ended december 31 2007 compared 2006 fluctuation foreign currency rates favorable impact 106 million net sales year ended december 31 2007 increase net sales asia pacific attributable increase net sales taiwan presence continues grow country partially offset decrease japan net sales taiwan largest market region increased 240 million 277 year ended december 31 2007 compared 2006 adoption nutrition club dmo fueled growth country net sales japan third largest market region decreased 38 million 48 year ended december 31 2007 compared period 2006 business trends japan made sequential improvement 2007 fourth quarter 2007 net sales increasing 71 compared third quarter 2007 37 compared fourth quarter 2006 new supervisors region increased 26 year ending december 31 2007 compared period 2006 driving growth taiwan japan thailand 407 121 227 respectively total supervisor growth region increased 71 china net sales china 760 million year ended december 31 2007 net sales increased 439 million 1368 year ended december 31 2007 compared period 2006 local currency net sales increased 1255 year ended december 31 2007 compared period 2006 fluctuation foreign currency rates favorable impact 37 million net sales year ended december 31 2007 march 23 2007 received direct sellers license cities suzhou nanjing jiangsu province july 9 2007 received expanded direct sellers license entire jiangsu province new sales employees china increased 1370 year ended december 31 2007 compared period 2006 total sales employee growth china increased 1882 sales product category following historical information related sales organized product categories reclassified conform current product line presentation emphasis science weight management energy nutrition resulted product introductions niteworks® garden 7® best defense® liftoff® h3otm new kids line due launch products together continued positive sales momentum discussed net sales weight management products targeted nutrition products energy sports fitness products increased compared 2006 change product mix due various dmos well change country mix resulted decrease sales outer nutrition products 2007 gross profit gross profit 17075 million year ended december 31 2007 compared 15052 million 2006 percentage net sales gross profit year ended december 31 2007 decreased slightly 796 compared 798 period 2006 generally gross profit percentages vary significantly percentage net sales due product country mix ongoing cost reduction initiatives provisions slow moving obsolete inventory royalty overrides royalty overrides percentage net sales 354 year ended december 31 2007 compared 358 period 2006 decrease year ended december 31 2007 primarily due changes mix products countries increase sales china compensation fulltime employee sales representatives included selling general administrative expenses opposed royalty overrides included distributors worldwide marking plan generally ratio varies slightly period due changes mix products countries full royalty overrides paid certain products certain countries selling general administrative expenses selling general administrative expenses percentage net sales 296 year ended december 31 2007 compared 304 period 2006 year ended december 31 2007 selling general administrative expenses increased 612 million 6342 million 5730 million 2006 increase included 385 million higher salaries benefits due primarily normal merit increases severance related realignment growth plan discussed note 13 restructuring reserve notes consolidated financial statements higher compensation costs associated fulltime employee sales representatives china 101 million higher foreign exchange losses 47 million higher credit card fees due increase sales 38 million higher depreciation amortization related mostly development customer initiative etailing distributor support websites launched april 2007 expansion relocation new facilities increases partially offset 62 million lower professional fees net interest expense net interest expense 106 million year ended december 31 2007 compared 395 million 2006 interest expense 2007 289 million lower 2006 primarily due recapitalization expenses recorded 2006 related redemption 1650 million principal amount 912 notes due 2011 repayment 796 million term loan prior senior credit facility originally entered december 21 2004 table shows break amounts comprising interest expense periods indicated see “liquidity capital resources” discussion senior secured credit facility income taxes income taxes 1111 million year ended december 31 2007 compared 743 million 2006 percentage pretax income estimated effective income tax rate 367 year ended december 31 2007 compared 342 2006 increase effective tax rate year ended december 31 2007 compared 2006 primarily due increase unrecognized tax benefits ie income tax reserves related adoption fin 48 defined 2007 settlement international tax audit 2006 tax benefit bond redemption 2006 22 million favorable impact adjustment income tax accrual fourth quarter 2006 excluding effect increase prior year unrecognized tax benefits nonrecurring items effective tax rate year ended december 31 2007 would approximately 357 compared 38 2006 restructuring costs july 2006 company initiated realignment employee base part first phase realignment growth plan company recorded 18 million 105 million professional fees severance related costs relating restructuring years ended december 31 2007 2006 respectively amounts included selling general administrative expenses fourth quarter 2007 company initiated second phase realignment growth plan incurred approximately 40 million professional fees severance related costs relating restructuring net results net income year ended december 31 2007 increased 338 1915 million 263 per diluted share compared 1431 million 192 per diluted share 2006 increase driven revenue growth many markets expansion operating profit margins reduction interest expense following debt refinancing july 2006 partially offset higher labor costs depreciation expense foreign exchange losses net income 2007 included unfavorable tax impact 38 million completion first phase start second phase realignment growth plan increase tax reserves 36 million 21 million net tax benefit resulting various international tax settlements net income 2006 included 143 million additional interest expense related refinancing arrangements july 2006 37 million tax benefit resulting international tax settlement 27 million additional tax benefit refinancing transactions 22 million favorable impact adjustment income tax accrual 49 million unfavorable tax impact connection realignment growth plan fourth quarter 2006 amounts 2006 partially offset 70 million expense connection adoption new accounting rules stock based compensation 124 million charge continued buildout infrastructure china liquidity capital resources historically met working capital expenditure requirements including funding expansion operations net cash flows provided operating activities principal source liquidity operating cash flows variations sales products would directly affect availability funds material restrictions ability transfer remit funds among international affiliated companies closely monitoring various aspects current worldwide financial crisis believe material impact liquidity crisis noted historically met funding needs utilizing cash flow operating activities believe sufficient resources meet debt service obligations timely manner existing debt primarily resulted share repurchase activities need fund normal operations therefore limiting impact current worldwide credit crisis us significant net sales decline could potentially affect availability funds many largest expenses purely variable nature could protect funding dramatic net sales downturn maintain revolving credit facility 723 million undrawn capacity december 31 2008 comprised banks continuing support facility recent worldwide financial crisis year ended december 31 2008 generated 2730 million operating cash flow compared 2708 million period 2007 increase cash generated operations primarily due increase operating income 191 million driven 99 growth net sales year ended december 31 2008 compared period 2007 partially offset higher income tax payments higher receivable balance resulting higher sales volume increase inventory purchases capital expenditures including capital leases year ended december 31 2008 1068 million compared 490 million period 2007 majority expenditures represented investments management information systems development distributor internet initiatives expansion facilities domestically internationally increase 2007 primarily related oracle upgrade implementation certain regions expect incur capital expenditures approximately 600 million 2009 entered 3000 million senior secured credit facility comprised 2000 million term loan revolving credit facility 1000 million syndicate financial institutions lenders july 2006 term loan matures july 21 2013 revolving credit facility available july 21 2012 term loan bears interest libor plus margin 15 base rate represents prime rate offered major us banks plus margin 050 revolving credit facility bears interest libor plus margin 125 base rate represents prime rate offered major us banks plus margin 025 march 2007 made prepayment 295 million term loan borrowings september 2007 credit agreement amended increasing revolving credit facility 1500 million fund increase share repurchase program discussed 2007 borrowed aggregate amount 2937 million revolving credit facility fund share repurchase program paid 850 million revolving credit facility first quarter 2008 paid 300 million revolving credit facility second quarter 2008 borrowed aggregate amount 400 million paid 280 million revolving credit facility third quarter 2008 paid 450 million revolving credit facility september 2008 borrowed aggregate amount 100 million revolving credit facility fourth quarter 2008 company borrowed additional 680 million revolving credit facility fund share repurchase program paid 460 million revolving credit facility following summarizes contractual obligations including interest december 31 2008 effect obligations expected liquidity cash flows future periods offbalance sheet arrangements december 31 2008 december 31 2007 material offbalance sheet arrangements defined item 303a4ii regulation sk share repurchases april 18 2007 board directors authorized repurchase 300 million common shares next two years times prices determined management market conditions warrant august 23 2007 board directors approved increase 150 million raising total value common shares authorized repurchased 450 million year ended december 31 2007 repurchased approximately 91 million common shares open market purchases aggregate cost 3658 million average cost 4042 per share may 20 2008 board directors approved additional increase 150 million previously authorized share repurchase program raising total value common shares authorized repurchased 600 million yearended december 31 2008 repurchased approximately 46 million common shares open market purchases aggregate cost 1370 million average cost 2960 per share december 31 2008 since inception share repurchase program repurchased approximately 137 million common shares aggregate cost 5028 million average cost 3676 per share dividends second quarter 2007 board directors adopted regular quarterly cash dividend program april 18 august 6 october 30 2007 board directors authorized 020 per common share cash dividend aggregate amount dividends paid declared fiscal year 2007 approximately 415 million 2008 board directors authorized 020 per common share cash dividend january 31 may 1 august 5 october 30 2008 aggregate amount dividends paid declared fiscal year 2008 approximately 507 million working capital operating activities december 31 2008 2007 positive working capital 829 million 1115 million respectively cash equivalents 1508 million december 31 2008 compared 1874 million december 31 2007 expect cash funds provided operations available borrowings revolving credit facility provide sufficient working capital operate business make expected capital expenditures meet foreseeable liquidity requirements including debt service term loan majority purchases suppliers generally made us dollars sales distributors generally made local currencies consequently strengthening us dollar versus foreign currency negative impact net sales operating margins generate transaction losses intercompany transactions discussion foreign exchange contracts hedging arrangements see part ii item 7a quantitative qualitative disclosures market risks currency restrictions enacted venezuelan government 2003 become restrictive impacted ability herbalife venezuela obtain us dollars official foreign exchange rate unless official foreign exchange made readily available results herbalife venezuela’s operations could negatively impacted may obtain us dollars alternative sources exchange rate weaker official rate december 31 2008 herbalife venezuela cash balances approximately 355 million primarily denominated bolivars continue evaluate political economic environment venezuela potential changes may affect operations currently making appropriate applications venezuelan government acquisition us dollars official exchange rate pay imported product pay annual dividend herbalife venezuela’s net sales represented less 4 consolidated worldwide net sales year ended december 31 2008 quarterly results operations contingencies company time engaged routine litigation company regularly reviews pending litigation matters involved establishes reserves deemed appropriate management litigation matters probable loss estimate made marketer dietary nutritional supplements products ingested consumers applied bodies company currently subjected various product liability claims effects claims date material company reasonably possible range exposure currently existing claims material company believes meritorious defenses allegations contained lawsuits company currently maintains product liability insurance annual deductible 10 million certain company’s subsidiaries subject tax audits governmental authorities respective countries certain tax audits governmental authorities proposing significant amounts additional taxes related interest penalties due company tax advisors believe substantial defenses allegations additional taxes owed company vigorously contesting additional proposed taxes related charges matters may take several years resolve company cannot sure ultimate resolution however opinion management adverse outcomes likely result material adverse effect company’s financial condition operating results opinion based belief losses suffered excess amounts reserved would material company meritorious defenses although company reserved amount company believes represents likely outcome resolution disputes company incorrect assessment company may record additional expenses subsequent event february 20 2009 company’s board directors approved quarterly cash dividend 020 per common share fourth quarter shareholders record effective march 3 2009 payable march 17 2009 critical accounting policies consolidated financial statements prepared conformity gaap require us make estimates assumptions affect reported amounts assets liabilities disclosures contingent assets liabilities date financial statements reported amounts revenue expenses year actual results could differ estimates consider following policies critical understanding judgments involved preparing financial statements uncertainties could impact operating results financial condition cash flows network marketing company sells wide range weight management products nutritional supplements energy sports fitness products personal care products within one industry segment defined statement financial accounting standards sfas 131 disclosures segments enterprise related information sfas 131 products manufactured third party providers sold independent distributors sell herbalife products retail consumers distributors sell products 70 countries throughout world organized managed geographic region elected aggregate operating segments one reporting segment except china management believes operating segments similar operating characteristics similar long term operating performance making determination management believes operating segments similar nature products sold product acquisition process types customers products sold methods used distribute products nature regulatory environment revenue recognized products shipped title passes independent distributor importer products sold retail stores china amounts billed freight handling costs included net sales generally receive net sales price cash credit card payments point sale related royalty overrides allowances product returns recorded merchandise shipped allowances product returns primarily connection buyback program provided time product shipped accrual based upon historic return rates country relevant return pattern reflects anticipated returns received period 12 months following original sale historically product returns buybacks significant product returns buybacks approximately 08 retail sales year ended december 31 2008 approximately 1 retail sales years ended december 31 2007 2006 record reserves inventory provide estimated obsolete unsalable inventory based assumptions future demand products market conditions future demand market conditions less favorable management’s assumptions additional reserves could required likewise favorable future demand market conditions could positively impact future operating results previously reserved inventory sold reserved obsolete slow moving inventory totaling 116 million 120 million december 31 2008 december 31 2007 respectively accordance sfas 144 accounting impairment disposal longlived assets property plant equipment purchased intangibles subject amortization reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable recoverability assets held used measured comparison carrying amount asset estimated undiscounted future cash flows expected generated asset carrying amount asset exceeds estimated future cash flows impairment charge recognized amount carrying amount asset exceeds fair value asset assets disposed would separately presented balance sheet reported lower carrying amount fair value less costs sell longer depreciated assets liabilities disposed group classified held sale would presented separately appropriate asset liability sections balance sheet goodwill intangibles subject amortization tested annually impairment tested impairment frequently events circumstances indicate asset might impaired impairment loss recognized extent carrying amount exceeds asset’s fair value determination made reporting unit level consists two steps first determine fair value reporting unit compare carrying amount second carrying amount reporting unit exceeds fair value impairment loss recognized excess carrying amount reporting unit’s goodwill intangibles implied fair value implied fair value determined allocating fair value reporting unit manner similar purchase price allocation accordance sfas 141 business combinations sfas 141 residual fair value allocation implied fair value reporting unit’s goodwill intangibles december 31 2008 december 31 2007 goodwill approximately 1107 million 1115 million respectively marketing franchise 3100 million dates marketing related intangibles goodwill impairment recorded twelve months ended december 31 2008 contingencies accounted accordance sfas 5 accounting contingencies sfas 5 sfas 5 requires record estimated loss contingency information available prior issuance financial statements indicates probable asset impaired liability incurred date financial statements amount loss reasonably estimated accounting contingencies legal income tax matters requires us use judgment many legal tax contingencies take years resolved generally time period increases uncertainties resolved likelihood changes estimate ultimate outcome increases deferred income tax assets established net operating loss carryforwards certain foreign subsidiaries reduced valuation allowance reflect amounts estimated ultimately realized net operating loss carryforwards expire varying amounts future period time realization income tax carryforwards dependent generating sufficient taxable income prior expiration carryforwards although realization assured believe likely net carrying value income tax carryforwards realized amount income tax carryforwards considered realizable however could change estimates future taxable income carryforward period adjusted account stockbased compensation accordance sfas 123r sharebased payment sfas 123r fair value recognition provisions statement sharebased compensation cost measured grant date based value award recognized expense vesting period determining fair value sharebased awards grant date requires judgment including estimating stock price volatility employee stock award exercise behaviors expected volatility primarily based upon historical volatility common shares due limited period public trading data common shares also validated volatility company peer group expected life awards based simple average vesting period life award stockbased compensation expense recognized statements income based awards ultimately expected vest amount expense reduced estimated forfeitures sfas 123r requires forfeitures estimated time grant revised necessary subsequent periods actual forfeitures differ estimates forfeitures estimated based historical experience account uncertain tax positions accordance financial accounting standards board fasb interpretation number 48 income taxes fin 48 fin 48 addressed determination tax benefits claimed expected claimed tax return recorded financial statements fin 48 must recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate resolution effective january 1 2008 adopted sfas 157 fair value measurements sfas 157 except applies nonfinancial assets nonfinancial liabilities subject fsp 1572 sfas 157 clarifies definition fair value prescribes methods measuring fair value establishes fair value hierarchy based inputs used measure fair value expands disclosures fair value measurements discussed note 14 fair value measurements notes consolidated financial statements properly measured disclosed financial instruments accordance sfas 157 new accounting pronouncements march 2008 fasb issued sfas 161 disclosures derivative instruments hedging activities amendment fasb statement 133 sfas 161 sfas 161 expands disclosure requirements derivative instruments hedging activities sfas 161 specifically requires entities provide enhanced disclosures addressing following entity uses derivative instruments b derivative instruments related hedged items accounted sfas 133 accounting derivative instruments hedging activities sfas 133 related interpretations c derivative instruments related hedged items affect entity’s financial position financial performance cash flows sfas 161 effective fiscal years interim periods beginning november 15 2008 believe adoption sfas 161 material impact consolidated financial statements february 2008 fasb issued fasb staff position fas 1572 fsp fas 1572 fsp fas 1572 delay effective date sfas 157 nonfinancial assets nonfinancial liabilities except recognized disclosed fair value financial statements recurring basis least annually fsp fas 1572 partially defers effective date sfas 157 fiscal years beginning november 15 2008 interim periods within fiscal years items within scope fsp 1572 believe adoption fas 157 nonfinancial assets liabilities material impact consolidated financial statements december 2007 fasb issued sfas 141 revised 2007 business combinations sfas 141r replaces sfas 141 sfas 141r establishes principles requirements acquirer recognizes measures financial statements identifiable assets acquired liabilities assumed non controlling interest acquiree goodwill acquired sfas 141r also modifies recognition preacquisition contingencies environmental legal issues restructuring plans acquired research development value purchase accounting sfas 141r amends sfas 109 accounting income taxes require acquirer recognize changes amount deferred tax benefits recognizable business combination either income continuing operations period combination directly contributed capital depending circumstances sfas 141r also establishes disclosure requirements enable users evaluate nature financial effects business combination sfas 141r effective fiscal years beginning december 15 2008 believe adoption sfas 141r material impact consolidated financial statements item 7a quantitative qualitative disclosures market risk exposed market risks arise normal course business changes interest rates foreign currency exchange rates selected basis use derivative financial instruments manage hedge risks hedging transactions authorized executed pursuant written guidelines procedures adopted sfas 133 sfas 133 amended interpreted established accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities derivatives whether designated hedging relationships required recorded balance sheet fair value derivative designated fairvalue hedge changes fair value derivative underlying hedged item recognized concurrently earnings derivative designated cashflow hedge changes fair value derivative recorded comprehensive income oci recognized statement operations hedged item affects earnings sfas 133 defines requirements designation documentation hedging relationships well ongoing effectiveness assessments order use hedge accounting derivative qualify hedge changes fair value recognized concurrently earnings discussion primary market risk exposures derivatives presented foreign exchange risk enter foreign exchange derivatives ordinary course business primarily reduce exposure currency fluctuations attributable intercompany transactions translation local currency revenue inventory purchases subject foreign currency exposure partially mitigate impact foreign currency rate fluctuations exception 45 million foreign exchange forward contracts relating forecasted inventory purchases foreign exchange contracts designated free standing derivatives hedge accounting apply changes fair market value derivatives qualifying cash flow hedges included selling general administrative expenses consolidated statements income foreign exchange forward contracts used hedge advances subsidiaries partially mitigate impact foreign currency fluctuations foreign exchange average rate option contracts also used mitigate impact foreign currency rate fluctuations objective contracts neutralize impact foreign currency movements operating results subsidiaries fair value forward option contracts based thirdparty bank quotes year ended december 31 2008 purchased 45 million forward contracts order hedge forecasted inventory purchases designated cashflow hedges subject foreign currency exposures elected apply hedge accounting rules required sfas 133 hedges contracts allow us sell euros exchange us dollars specified contract rates december 31 2008 approximately 45 million contracts outstanding expected mature next year derivative financial instruments recorded consolidated balance sheet fair value based quoted market rates forward contracts used hedge forecasted inventory purchases specific months changes fair value forward contracts excluding forward points designated cashflow hedges recorded component accumulated comprehensive earnings within stockholders’ equity recognized cost goods sold period approximates time hedged inventory sold december 31 2008 recorded liability fair value 01 million offsetting amounts recorded comprehensive income december 31 2008 foreign exchange forward option contracts maturity one year less majority expiring within 90 days following table provides information details forward contracts december 31 2007 outstanding foreign currency option contracts following table provides information details foreign currency option contracts outstanding december 31 2008 foreign subsidiaries designate local currencies functional currencies december 31 2008 2007 total amount foreign subsidiary cash 1420 million 1548 million respectively 97 million 84 million respectively invested us dollars interest rate risk december 31 2008 aggregate annual maturities senior secured credit facility entered july 2006 amended 200915 million 201015 million 201115 million 20121792 million 1408 million 2013 fair value senior secured credit facility approximates carrying value 3245 million december 31 2008 3571 million december 31 2007 senior secured credit facility bears variable interest rate december 31 2008 2007 weighted average interest rate 304 626 respectively senior secured credit facility obligated enter interest rate hedge 25 aggregate principal amount term loan minimum three years august 23 2006 entered new interest rate swap agreement provides us pay interest threeyear period fixed rate 526 initial notional principal amount 1800 million receiving interest period libor rate notional principal amount notional amount scheduled reduced 200 million second third fourth quarters year commencing january 1 2007 throughout term swap designated cash flow hedge variability libor interest rate new term loan libor plus 150 thereby fixing effective rate notional amounts 676 december 31 2008 swap notional amount 400 million december 31 2008 2007 recorded interest rate swap liability fair value 10 million 14 million respectively offsetting amounts recorded comprehensive income item 8item 7a quantitative qualitative disclosures market risk exposed market risks arise normal course business changes interest rates foreign currency exchange rates selected basis use derivative financial instruments manage hedge risks hedging transactions authorized executed pursuant written guidelines procedures apply fasb asc topic 815 derivatives hedging asc 815 established accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities derivatives whether designated hedging relationships required recorded balance sheet fair value derivative designated fairvalue hedge changes fair value derivative underlying hedged item recognized concurrently earnings derivative designated cashflow hedge changes fair value derivative recorded comprehensive income loss recognized consolidated statements income hedged item affects earnings asc 815 defines requirements designation documentation hedging relationships well ongoing effectiveness assessments order use hedge accounting derivative qualify hedge changes fair value recognized concurrently earnings discussion primary market risk exposures derivatives presented foreign exchange risk transact business globally subject risks associated changes foreign exchange rates objective minimize impact earnings cash flow associated foreign exchange rate fluctuations enter foreign exchange derivatives ordinary course business primarily reduce exposure currency fluctuations attributable intercompany transactions translation local currency revenue inventory purchases subject foreign currency exposure partially mitigate impact foreign currency rate fluctuations due recent significant volatility foreign exchange market current strategy general hedge significant exposures shortterm basis continue monitor foreign exchange market evaluate hedging strategy accordingly exception foreign exchange forward contracts relating forecasted inventory purchases intercompany management fees discussed section foreign exchange contracts designated free standing derivatives hedge accounting apply changes fair value derivatives qualifying cash flow hedges included selling general administrative expenses consolidated statements income foreign exchange forward contracts designated free standing derivatives used hedge advances subsidiaries partially mitigate impact foreign currency fluctuations foreign exchange average rate option contracts also used mitigate impact foreign currency rate fluctuations objective contracts neutralize impact foreign currency movements operating results subsidiaries fair value forward option contracts based thirdparty bank quotes foreign currency derivative contracts generally executed monthly basis also purchase foreign currency forward contracts order hedge forecasted inventory purchases intercompany management fees designated cashflow hedges subject foreign currency exposures applied hedge accounting rules required asc topic 815 hedges contracts allow us sell euros exchange us dollars specified contract rates december 31 2011 2010 aggregate notional amounts contracts outstanding approximately 644 million 321 million respectively december 31 2011 outstanding contracts expected mature next fifteen months derivative financial instruments recorded consolidated balance sheet fair value based quoted market rates forecasted inventory purchases forward contracts used hedge forecasted inventory purchases specific months changes fair value forward contracts excluding forward points designated cashflow hedges recorded component accumulated comprehensive income loss within shareholders’ equity recognized cost sales consolidated statement income period approximates time hedged inventory sold also hedge forecasted intercompany management fees specific months changes fair value forward contracts designated cash flow hedges recorded component accumulated comprehensive loss within shareholders’ equity recognized selling general administrative expenses consolidated statement income period hedged item underlying transaction affects earnings december 31 2011 recorded assets fair value 44 million relating outstanding foreign currency contracts designated cashflow hedges december 31 2010 recorded assets fair value 06 million liabilities fair value 08 million relating outstanding foreign currency contracts designated cashflow hedges assess hedge effectiveness measure hedge ineffectiveness least quarterly years ended december 31 2011 2010 ineffective portion relating hedges immaterial hedges remained effective december 31 2011 2010 december 31 2011 2010 majority outstanding foreign currency forward contracts maturity dates less fifteen months twelve months respectively majority freestanding derivatives expiring within one month three months respectively foreign currency option contracts outstanding december 31 2011 2010 table describes foreign currency forward contracts outstanding december 31 2011 2010 majority foreign subsidiaries designate local currencies functional currencies december 31 2011 december 31 2010 total amount foreign subsidiary cash 2460 million 1882 million respectively 92 million 58 million respectively invested us dollars currency restrictions enacted venezuelan government 2003 become restrictive impacted ability subsidiary venezuela herbalife venezuela obtain us dollars exchange venezuelan bolivars official foreign exchange rates venezuelan government foreign exchange commission cadivi see item 7 management’s discussion analysis financial condition results operations discussion currency restrictions venezuela impacted herbalife venezuela’s operations interest rate risk december 31 2011 2020 million borrowings new credit facility expected mature expire march 9 2016 fair value new credit facility approximates carrying value 2020 million december 31 2011 fair value prior credit facility approximated carrying value 1749 million december 31 2010 new credit facility bears prior credit facility bore variable interest rate december 31 2011 2010 weighted average interest rate new credit facility prior credit facility 189 175 respectively august 2009 entered four interest rate swap agreements effective date december 31 2009 agreements collectively provide us pay interest less fouryear period weighted average fixed rate 278 notional amounts aggregating 1400 million receiving interest period one month libor rate notional amounts agreements expire july 2013 swaps inception designated cash flow hedges variability libor interest rate term loan prior credit facility variability libor interest rate replacement debt term loan prior credit facility terminated march 2011 refinanced new credit facility discussed note 4 longterm debt consolidated financial statements swaps remain effective continue designated cash flow hedges variability certain libor interest rate borrowings new credit facility libor plus 150 250 fixing weighted average effective rate notional amounts 428 528 hedge ineffectiveness recorded result refinancing event assess hedge effectiveness measure hedge ineffectiveness least quarterly years ended december 31 2011 2010 ineffective portion relating hedges immaterial hedges remained effective december 31 2011 consequently changes fair value derivatives deferred recorded comprehensive income loss related forecasted transactions recognized consolidated statements income fair value interest rate swap agreements based thirdparty bank quotes december 31 2011 december 31 2010 recorded interest rate swaps liabilities fair value 51 million 66 million respectively exposure interest rate volatility risk relating new credit facility partially mitigated interest rate swaps based outstanding balances new credit facility interest rate swaps december 31 2011 hypothetical 50basispoint change interest rates prevailing date sustained one year would represent material potential net change fair value earnings cash flows item 8item 7a quantitative qualitative disclosures market risk exposed market risks arise normal course business changes interest rates foreign currency exchange rates selected basis use derivative financial instruments manage hedge risks hedging transactions authorized executed pursuant written guidelines procedures apply fasb asc topic 815 derivatives hedging asc 815 established accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities derivatives whether designated hedging relationships required recorded balance sheet fair value derivative designated fairvalue hedge changes fair value derivative underlying hedged item recognized concurrently earnings derivative designated cashflow hedge changes fair value derivative recorded comprehensive income loss recognized consolidated statements income hedged item affects earnings asc 815 defines requirements designation documentation hedging relationships well ongoing effectiveness assessments order use hedge accounting derivative qualify hedge changes fair value recognized concurrently earnings discussion primary market risk exposures derivatives presented foreign exchange risk transact business globally subject risks associated changes foreign exchange rates objective minimize impact earnings cash flow associated foreign exchange rate fluctuations enter foreign exchange derivatives ordinary course business primarily reduce exposure currency fluctuations attributable intercompany transactions translation local currency revenue inventory purchases subject foreign currency exposure partially mitigate impact foreign currency rate fluctuations due recent significant volatility foreign exchange markets current strategy general hedge significant exposures shortterm basis continue monitor foreign exchange markets evaluate hedging strategy accordingly exception foreign exchange forward contracts relating forecasted inventory purchases intercompany management fees discussed foreign exchange contracts designated free standing derivatives hedge accounting apply changes fair value derivatives qualifying cash flow hedges included selling general administrative expenses consolidated statements income foreign exchange forward contracts designated free standing derivatives used hedge advances subsidiaries partially mitigate impact foreign currency fluctuations foreign exchange average rate option contracts also used mitigate impact foreign currency rate fluctuations objective contracts neutralize impact foreign currency movements operating results subsidiaries fair value forward option contracts based thirdparty quotes foreign currency derivative contracts generally executed monthly basis also purchase foreign currency forward contracts order hedge forecasted inventory transactions intercompany management fees designated cashflow hedges subject foreign currency exposures applied hedge accounting rules required asc 815 hedges contracts allow us buy sell certain currencies specified contract rates december 31 2012 december 31 2011 aggregate notional amounts contracts outstanding approximately 2569 million 644 million respectively december 31 2012 outstanding contracts expected mature next twelve months derivative financial instruments recorded consolidated balance sheet fair value based quoted market rates forecasted inventory transactions forward contracts used hedge forecasted inventory transactions specific months changes fair value forward contracts excluding forward points designated cashflow hedges recorded component accumulated comprehensive income loss within shareholders’ equity recognized cost sales consolidated statement income period approximates time hedged inventory sold also hedge forecasted intercompany management fees specific months changes fair value forward contracts designated cash flow hedges recorded component accumulated comprehensive loss within shareholders’ equity recognized selling general administrative expenses consolidated statement income period hedged item underlying transaction affects earnings december 31 2012 recorded assets fair value 05 million liabilities fair value 33 million relating outstanding foreign currency contracts designated cashflow hedges december 31 2011 recorded assets fair value 44 million relating outstanding foreign currency contracts designated cashflow hedges assess hedge effectiveness measure hedge ineffectiveness least quarterly years ended december 31 2012 2011 ineffective portion relating hedges immaterial hedges remained effective december 31 2012 december 31 2011 december 31 2012 december 31 2011 majority outstanding foreign currency forward contracts maturity dates less twelve months fifteen months respectively majority freestanding derivatives expiring within one month december 31 2012 2011 foreign currency option contracts outstanding december 31 2012 december 31 2011 table describes foreign currency forward contracts outstanding december 31 2012 2011 majority foreign subsidiaries designate local currencies functional currencies december 31 2012 december 31 2011 total amount foreign subsidiary cash 3213 million 2460 million respectively 69 million 92 million respectively invested us dollars currency restrictions enacted venezuelan government become restrictive impacted ability subsidiary venezuela herbalife venezuela obtain us dollars exchange venezuelan bolivars official foreign exchange rates venezuelan government foreign exchange commission cadivi herbalife venezuela also continues limited government restrictions imposed sitme market caused bolivar denominated cash equivalents increase significantly december 31 2012 december 31 2011 992 million 348 million cash equivalents denominated bolivars respectively see item 7 management’s discussion analysis financial condition results operations discussion currency restrictions venezuela impacted herbalife venezuela’s operations interest rate risk december 31 2012 aggregate annual maturities credit facility expected 563 million 2013 812 million 2014 1000 million 2015 2500 million 2016 fair value credit facility approximates carrying value 4875 million december 31 2012 fair value credit facility approximated carrying value 2020 million december 31 2011 credit facility bears variable interest rate december 31 2012 december 31 2011 weighted average interest rate credit facility included borrowings term loan december 31 2012 196 189 respectively august 2009 entered four interest rate swap agreements effective date december 31 2009 agreements collectively provide us pay interest less fouryear period weighted average fixed rate 278 notional amounts aggregating 1400 million receiving interest period one month libor rate notional amounts agreements expire july 2013 swaps inception designated cash flow hedges variability libor interest rate term loan prior credit facility variability libor interest rate replacement debt term loan prior credit facility terminated march 2011 refinanced credit facility discussed note 4 longterm debt consolidated financial statements swaps remain effective continue designated cash flow hedges variability certain libor interest rate borrowings credit facility libor plus 150 250 fixing weighted average effective rate notional amounts 428 528 hedge ineffectiveness recorded result refinancing event assess hedge effectiveness measure hedge ineffectiveness least quarterly years ended december 31 2012 2011 ineffective portion relating hedges immaterial hedges remained effective december 31 2012 december 31 2011 consequently changes fair value derivatives deferred recorded comprehensive income loss related forecasted transactions recognized consolidated statements income fair value interest rate swap agreements based thirdparty quotes december 31 2012 december 31 2011 recorded interest rate swaps liabilities fair value 20 million 51 million respectively exposure interest rate volatility risk relating credit facility partially mitigated interest rate swaps based outstanding balances credit facility interest rate swaps december 31 2012 hypothetical 50basispoint change interest rates prevailing date sustained one year would represent material potential net change fair value earnings cash flows item 8item 7a quantitative qualitative disclosures market risk venezuela currency restrictions herbalife venezuela currently imports products venezuela foreign exchange controls country limit herbalife venezuela’s ability repatriate earnings settle intercompany obligations official rate result bolivardenominated cash equivalents continued accumulate increasing potential impact currency devaluation current operating environment venezuela also continues challenging venezuela business high inflation price controls risk government devalue bolivar see note 2 basis presentation consolidated financial statements discussion currency restrictions venezuela impacted herbalife venezuela’s operations plan utilize official rates extent allowable venezuelan government restrictions order exchange bolivars us dollars also plan access government pdvsa bond offerings alternative legal exchange mechanisms made available discussed note 2 basis presentation consolidated financial statements alternative legal exchange mechanisms less favorable official exchange mechanisms could cause us recognize significant foreign exchange losses less favorable sicad ii rate could also result bolivar denominated cash equivalents reported consolidated balance sheet significantly reduced demonstrate used less favorable rate approximately 180 200 bolivars per us dollar remeasure bolivardenominated cash equivalents december 31 2014 herbalife venezuela’s cash equivalents would reduced approximately 263 million 273 million december 31 2014 unfavorable rates used remeasure herbalife venezuela’s financial statements future periods extent increase local prices restricted could negatively impact future operating income adverse impact venezuelan business ability access sicad ii future official exchange rate could impact exchange rates used remeasurement purposes future periods continue assess monitor current economic political environment venezuela see note 15 subsequent events consolidated financial statements discussion subsequent events related venezuela consolidation herbalife venezuela continue operate venezuela increasing foreign currency constraints continue create significant challenges herbalife venezuela october 2014 herbalife venezuela executed contract venezuelan contract manufacturer locally manufacture products sold herbalife venezuela bolivars expect local contract manufacturing begin sometime 2015 initial volume local contract manufacturing expected significant herbalife venezuela plans expand contract volume local manufacturer include additional products future periods time successful implementing strategy expect us dollardenominated product importations decrease bolivardenominated purchases local venezuela manufacturers increase strategies implemented limit financial exposure currency restrictions devaluations venezuela operation continue support members consumers include operating hour limitations order size limitations limiting member promotions events local bolivardenominated expenses limiting importation products venezuela herbalife venezuela continue apply legal exchange mechanisms convert bolivars us dollars despite currency exchange restrictions venezuela continue control herbalife venezuela operations therefore continue consolidate herbalife venezuela consolidated financial statements herbalife venezuela’s net sales represented approximately 3 6 4 consolidated net sales years ended december 31 2014 2013 2012 respectively total assets represented approximately 2 10 consolidated total assets december 31 2014 2013 respectively december 31 2014 december 31 2013 majority total assets consisted bolivar denominated cash equivalents quarterly results operations 1 december 31 2014 revised estimate employee bonus accrual change estimate result us meeting projected targets change estimate resulted cumulative adjustment increased operating income pretax amount 166 million increased company’s 2014 fourth quarter net income 120 million net tax contingencies see note 7 contingencies consolidated financial statements information contingencies december 31 2014 subsequent events see note 15 subsequent events consolidated financial statements information regarding subsequent events critical accounting policies us gaap requires us make estimates assumptions affect reported amounts assets liabilities disclosures contingent assets liabilities date financial statements reported amounts revenue expenses year regularly evaluate estimates assumptions related revenue recognition allowance product returns inventory goodwill purchased intangible asset valuations deferred income tax asset valuation allowances uncertain tax positions tax contingencies loss contingencies base estimates assumptions current facts historical experience various factors believe reasonable circumstances results form basis making judgments carrying values assets liabilities recording revenue costs expenses actual results could differ estimates consider following policies critical understanding judgments involved preparing financial statements uncertainties could impact operating results financial condition cash flows nutrition company sells wide range weight management targeted nutrition energy sports fitness outer nutrition products manufactured third party providers us changsha hunan china extraction facility suzhou china facility lake forest california facility winstonsalem north carolina facility sold members consume sell herbalife products retail consumers members december 31 2014 sold products 91 countries throughout world organized managed geographic region aggregate operating segments one reporting segment except china management believes operating segments similar operating characteristics similar long term operating performance making determination management believes operating segments similar nature products sold product acquisition process types customers products sold methods used distribute products nature regulatory environment economic characteristics generally recognize revenue upon delivery title risk rewards pass member importer products sold retail stores china independent service providers china net sales include product sales shipping handling revenues product sales recognized net product returns discounts referred “distributor allowances” generally receive net sales price cash credit card payments point sale related royalty overrides recorded revenue recognized allowances product returns primarily connection buyback program provided time sale recorded accrual based upon historical return rates country relevant return pattern reflects anticipated returns received period 12 months following original sale historically product returns buybacks significant product returns buybacks approximately 02 03 product sales years ended december 31 2014 2013 2012 respectively adjust inventories lower cost market additionally adjust carrying value inventory based assumptions regarding future demand products market conditions future demand market conditions less favorable management’s assumptions additional inventory writedowns could required likewise favorable future demand market conditions could positively impact future operating results previously written inventories sold obsolete slow moving inventories adjusted downward 416 million 324 million present lower cost market consolidated balance sheets december 31 2014 december 31 2013 respectively goodwill marketing related intangible assets subject amortization tested annually impairment tested impairment frequently events circumstances indicate asset might impaired impairment loss recognized extent carrying amount exceeds asset’s fair value discussed goodwill impairment testing option perform qualitative assessment whether likely reporting unit’s fair value less carrying amount applying twostep goodwill impairment test conclude likely fair value reporting unit less carrying amount need perform twostep impairment test currently use qualitative assessment option could future elect use option marketing related intangible assets similar qualitative option also currently available however currently use discounted cash flow model income approach relieffromroyalty method determine fair value marketing related intangible assets order confirm impairment required marketing related intangible assets use qualitative assessment option could still future elect use option order estimate fair value goodwill also primarily use income approach determination impairment made reporting unit level consists two steps first determine fair value reporting unit compare carrying amount determination fair value reporting units requires us make significant estimates assumptions estimates assumptions include estimates future revenues expense growth rates capital expenditures depreciation amortization related capital expenditures discount rates inputs due inherent uncertainty involved making estimates actual future results could differ changes assumptions regarding future results underlying assumptions could significant impact fair value reporting unit second carrying amount reporting unit exceeds fair value impairment loss recognized excess carrying amount reporting unit’s goodwill intangibles implied fair value determined step 2 goodwill impairment test also step 1 goodwill impairment test determine reporting units zero negative carrying amounts perform step 2 goodwill impairment test likely goodwill impairment exists step 2 goodwill impairment test implied fair value goodwill determined similar manner amount goodwill recognized business combination determined accordance financial accounting standards board fasb accounting standards codification asc topic 805 business combinations would assign fair value reporting unit assets liabilities reporting unit reporting unit acquired business combination fair value reporting unit price paid acquire reporting unit excess fair value reporting unit amounts assigned assets liabilities implied fair value goodwill december 31 2014 december 31 2013 goodwill approximately 1022 million 1055 million respectively december 31 2014 december 31 2013 marketing related intangible assets approximately 3100 million decrease goodwill year ended december 31 2014 due cumulative translation adjustments marketing related intangibles goodwill impairment recorded years ended december 31 2014 2013 2012 contingencies accounted accordance fasb asc topic 450 contingencies asc 450 asc 450 requires record estimated loss contingency information available prior issuance financial statements indicates probable asset impaired liability incurred date financial statements amount loss reasonably estimated also disclose material contingencies believe loss probable reasonably possible required asc 450 accounting contingencies legal nonincome tax matters requires us use judgment related likelihood loss estimate amount range loss many legal tax contingencies take years resolved generally time period increases uncertainties resolved likelihood changes estimate ultimate outcome increases deferred income tax assets established net operating loss interest carryforwards certain foreign subsidiaries reduced valuation allowance reflect amounts estimated ultimately realized although realization assured believe likely net carrying value realized amount carryforwards considered realizable however could change estimates future taxable income adjusted ordinary course business many transactions calculations tax law ultimate tax determination uncertain part process preparing consolidated financial statements required estimate income taxes jurisdictions operate prior completion filing tax returns periods estimates involve complex issues require us make judgments likely application tax law situation well respect matters anticipating positions take tax returns prior us actually preparing returns outcomes disputes tax authorities ultimate resolution issues may take extended periods time due examinations tax authorities statutes limitations addition changes business including acquisitions changes international corporate structure changes geographic location business functions assets changes geographic mix amount income well changes agreements tax authorities valuation allowances applicable accounting rules applicable tax laws regulations rulings interpretations thereof developments tax audit matters variations estimated actual level annual pretax income affect overall effective income tax rate account uncertain tax positions accordance fasb asc topic 740 income taxes asc 740 provides guidance determination tax benefits claimed expected claimed tax return recorded financial statements asc 740 must recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized financial statements position measured based largest benefit greater fifty percent likelihood realized upon ultimate resolution account foreign currency transactions accordance fasb asc topic 830 foreign currency matters majority countries operate functional currency local currency foreign subsidiaries’ asset liability accounts translated consolidated financial reporting purposes us dollar amounts periodend exchange rates revenue expense accounts translated average rates year foreign exchange translation adjustments included accumulated comprehensive loss accompanying consolidated balance sheets foreign currency transaction gains losses foreign currency remeasurements generally included selling general administrative expenses accompanying consolidated statements income item 7a quantitative qualitative disclosures market risk exposed market risks arise normal course business changes interest rates foreign currency exchange rates selected basis use derivative financial instruments manage hedge risks hedging transactions authorized executed pursuant written guidelines procedures apply fasb asc topic 815 derivatives hedging asc 815 established accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities derivatives whether designated hedging relationships required recorded balance sheet fair value derivative designated fairvalue hedge changes fair value derivative underlying hedged item recognized concurrently earnings derivative designated cashflow hedge changes fair value derivative recorded comprehensive income loss recognized consolidated statements income hedged item affects earnings asc 815 defines requirements designation documentation hedging relationships well ongoing effectiveness assessments order use hedge accounting derivative qualify hedge changes fair value recognized concurrently earnings discussion primary market risk exposures derivatives presented foreign exchange risk transact business globally subject risks associated changes foreign exchange rates objective minimize impact earnings cash flow associated foreign exchange rate fluctuations enter foreign exchange derivatives ordinary course business primarily reduce exposure currency fluctuations attributable intercompany transactions translation local currency revenue inventory purchases subject foreign currency exposure partially mitigate impact foreign currency rate fluctuations due volatility foreign exchange markets current strategy general hedge significant exposures shortterm basis continue monitor foreign exchange markets evaluate hedging strategy accordingly exception foreign exchange forward contracts relating forecasted inventory purchases intercompany management fees discussed foreign exchange contracts designated free standing derivatives hedge accounting apply changes fair value derivatives qualifying cash flow hedges included selling general administrative expenses consolidated statements income foreign exchange forward contracts designated free standing derivatives used hedge advances subsidiaries partially mitigate impact foreign currency fluctuations fair value eign exchange derivative contracts based thirdparty quotes foreign currency derivative contracts generally executed monthly basis also purchase foreign currency forward contracts order hedge forecasted inventory transactions intercompany management fees designated cashflow hedges subject foreign currency exposures applied hedge accounting rules required asc 815 hedges contracts allow us buy sell certain currencies specified contract rates december 31 2014 december 31 2013 aggregate notional amounts contracts outstanding approximately 2253 million 2447 million respectively december 31 2014 outstanding contracts expected mature next twelve months derivative financial instruments recorded consolidated balance sheet fair value based quoted market rates forecasted inventory transactions forward contracts used hedge forecasted inventory transactions specific months changes fair value forward contracts excluding forward points designated cashflow hedges recorded component accumulated comprehensive income loss within shareholders’ deficit equity recognized cost sales consolidated statement income period approximates time hedged inventory sold also hedge forecasted intercompany management fees specific months changes fair value forward contracts designated cash flow hedges recorded component accumulated comprehensive loss within shareholders’ deficit equity recognized selling general administrative expenses consolidated statement income period hedged item underlying transaction affects earnings december 31 2014 recorded assets fair value 123 million liabilities fair value 16 million relating outstanding foreign currency contracts designated cashflow hedges december 31 2013 recorded assets fair value 57 million liabilities fair value 44 million relating outstanding foreign currency contracts designated cashflow hedges years ended december 31 2014 2013 ineffective portion relating hedges immaterial hedges remained effective december 31 2014 december 31 2013 december 31 2014 december 31 2013 majority outstanding foreign currency forward contracts maturity dates less twelve months majority freestanding derivatives expiring within two three months december 31 2014 december 31 2013 respectively see note 11 derivative instruments hedging activities description foreign currency forward contracts outstanding december 31 2014 2013 majority foreign subsidiaries designate local currencies functional currencies december 31 2014 december 31 2013 total amount foreign subsidiary cash 4408 million 5674 million respectively 83 million 68 million respectively invested us dollars december 31 2014 december 31 2013 total amount cash equivalents held parent us entities 2046 million 4056 million respectively currency restrictions enacted venezuelan government become restrictive impacted ability subsidiary venezuela herbalife venezuela obtain us dollars exchange venezuelan bolivars official foreign exchange rates venezuelan government see note 2 basis presentation consolidated financial statements discussion currency restrictions venezuela impacted herbalife venezuela’s operations interest rate risk december 31 2014 aggregate annual maturities credit facility expected 1000 million 2015 7500 million 2016 fair value credit facility approximated carrying value 8500 million december 31 2014 fair value credit facility approximated carrying value 9313 million december 31 2013 credit facility bears variable interest rate december 31 2014 december 31 2013 weighted average interest rate credit facility including borrowings term loan 304 217 respectively december 31 2014 fair value liability component 115 billion convertible notes approximately 8028 million carrying value 9617 million convertible notes pay interest fixed rate 200 per annum payable semiannually arrears february 15 august 15 year beginning august 15 2014 convertible notes mature august 15 2019 unless earlier repurchased converted may redeem convertible notes prior stated maturity date since credit facility based variable interest rates entered new interest swap arrangements since expiration previous interest rate swaps july 2013 interest rates increase decrease 1 year borrowing amounts stayed constant credit facility annual interest expense would increase decrease approximately 85 million item 8item 7a quantitative qualitative disclosures market risk exposed market risks arise normal course business changes interest rates foreign currency exchange rates selected basis use derivative financial instruments manage hedge risks hedging transactions authorized executed pursuant written guidelines procedures apply asc topic 815 derivatives hedging asc 815 established accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities derivatives whether designated hedging relationships required recorded balance sheet fair value derivative designated fairvalue hedge changes fair value derivative underlying hedged item recognized concurrently earnings derivative designated cashflow hedge changes fair value derivative recorded comprehensive income loss recognized consolidated statements income hedged item affects earnings asc 815 defines requirements designation documentation hedging relationships well ongoing effectiveness assessments order use hedge accounting derivative qualify hedge changes fair value recognized concurrently earnings discussion primary market risk exposures derivatives presented foreign exchange risk transact business globally subject risks associated changes foreign exchange rates objective minimize impact earnings cash flow associated foreign exchange rate fluctuations enter foreign exchange derivatives ordinary course business primarily reduce exposure currency fluctuations attributable intercompany transactions translation local currency revenue inventory purchases subject foreign currency exposure partially mitigate impact foreign currency rate fluctuations due volatility foreign exchange markets current strategy general hedge significant exposures shortterm basis continue monitor foreign exchange markets evaluate hedging strategy accordingly exception foreign exchange forward contracts relating forecasted inventory purchases intercompany management fees discussed foreign exchange contracts designated free standing derivatives hedge accounting apply changes fair value derivatives qualifying cash flow hedges included selling general administrative expenses consolidated statements income foreign exchange forward contracts designated free standing derivatives used hedge advances subsidiaries partially mitigate impact foreign currency fluctuations fair value foreign exchange derivative contracts based thirdparty quotes foreign currency derivative contracts generally executed monthly basis also purchase foreign currency forward contracts order hedge forecasted inventory transactions intercompany management fees designated cashflow hedges subject foreign currency exposures applied hedge accounting rules required asc 815 hedges contracts allow us buy sell certain currencies specified contract rates december 31 2015 december 31 2014 aggregate notional amounts contracts outstanding approximately 1128 million 2253 million respectively december 31 2015 outstanding contracts maturity dates less twelve months derivative financial instruments recorded consolidated balance sheet fair value based quoted market rates forecasted inventory transactions forward contracts used hedge forecasted inventory transactions specific months changes fair value forward contracts excluding forward points designated cashflow hedges recorded component accumulated comprehensive income loss within shareholders’ deficit equity recognized cost sales consolidated statement income period approximates time hedged inventory sold also hedge forecasted intercompany management fees specific months changes fair value forward contracts designated cash flow hedges recorded component accumulated comprehensive loss within shareholders’ deficit equity recognized selling general administrative expenses consolidated statement income period hedged item underlying transaction affects earnings december 31 2015 recorded assets fair value 42 million liabilities fair value 05 million relating outstanding foreign currency contracts designated cashflow hedges december 31 2014 recorded assets fair value 123 million liabilities fair value 16 million relating outstanding foreign currency contracts designated cashflow hedges years ended december 31 2015 2014 ineffective portion relating hedges immaterial hedges remained effective december 31 2015 december 31 2014 december 31 2015 december 31 2014 majority outstanding foreign currency forward contracts maturity dates less twelve months majority freestanding derivatives expiring within two months december 31 2015 december 31 2014 see note 11 derivative instruments hedging activities description foreign currency forward contracts outstanding december 31 2015 2014 discussion incorporated herein reference majority foreign subsidiaries designate local currencies functional currencies december 31 2015 december 31 2014 total amount foreign subsidiary cash 3105 million 4408 million respectively 191 million 83 million respectively invested us dollars december 31 2015 december 31 2014 total amount cash equivalents held parent us entities 5793 million 2046 million respectively currency restrictions enacted venezuelan government become restrictive impacted ability subsidiary venezuela herbalife venezuela obtain us dollars exchange venezuelan bolivars official foreign exchange rates venezuelan government see note 2 basis presentation consolidated financial statements discussion currency restrictions venezuela impacted herbalife venezuela’s operations interest rate risk december 31 2015 aggregate annual maturities credit facility expected 2297 million 2016 4100 million 2017 fair value credit facility approximated carrying value 6395 million december 31 2015 fair value credit facility approximated carrying value 8483 million december 31 2014 credit facility bears variable interest rate december 31 2015 december 31 2014 weighted average interest rate credit facility including borrowings term loan 278 304 respectively december 31 2015 fair value liability component 115 billion convertible notes approximately 7959 million carrying value 9825 million december 31 2014 fair value liability component 115 billion convertible notes approximately 8028 million carrying value 9435 million convertible notes pay interest fixed rate 200 per annum payable semiannually arrears february 15 august 15 year beginning august 15 2014 convertible notes mature august 15 2019 unless earlier repurchased converted may redeem convertible notes prior stated maturity date since credit facility based variable interest rates entered new interest swap arrangements since expiration previous interest rate swaps july 2013 interest rates increase decrease 1 year borrowing amounts stayed constant credit facility annual interest expense would increase decrease approximately 64 million item 8item 7a quantitative qualitative disclosures market risk exposed market risks arise normal course business changes interest rates foreign currency exchange rates selected basis use derivative financial instruments manage hedge risks hedging transactions authorized executed pursuant written guidelines procedures apply asc topic 815 derivatives hedging asc 815 established accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities derivatives whether designated hedging relationships required recorded balance sheet fair value derivative designated fairvalue hedge changes fair value derivative underlying hedged item recognized concurrently earnings derivative designated cashflow hedge changes fair value derivative recorded comprehensive income loss recognized consolidated statements income hedged item affects earnings asc 815 defines requirements designation documentation hedging relationships well ongoing effectiveness assessments order use hedge accounting derivative qualify hedge changes fair value recognized concurrently earnings discussion primary market risk exposures derivatives presented foreign exchange risk transact business globally subject risks associated changes foreign exchange rates objective minimize impact earnings cash flow associated foreign exchange rate fluctuations enter foreign exchange derivatives ordinary course business primarily reduce exposure currency fluctuations attributable intercompany transactions translation local currency revenue inventory purchases subject foreign currency exposure partially mitigate impact foreign currency rate fluctuations due volatility foreign exchange markets current strategy general hedge significant exposures shortterm basis continue monitor foreign exchange markets evaluate hedging strategy accordingly exception foreign exchange forward contracts relating forecasted inventory purchases intercompany management fees discussed foreign exchange contracts designated free standing derivatives hedge accounting apply changes fair value derivatives qualifying cash flow hedges included selling general administrative expenses consolidated statements income foreign exchange forward contracts designated free standing derivatives used hedge advances subsidiaries partially mitigate impact foreign currency fluctuations fair value foreign exchange derivative contracts based thirdparty quotes foreign currency derivative contracts generally executed monthly basis also purchase foreign currency forward contracts order hedge forecasted inventory transactions intercompany management fees designated cashflow hedges subject foreign currency exposures applied hedge accounting rules required asc 815 hedges contracts allow us buy sell certain currencies specified contract rates december 31 2016 december 31 2015 aggregate notional amounts contracts outstanding approximately 900 million 1128 million respectively december 31 2016 outstanding contracts maturity dates less fifteen months derivative financial instruments recorded consolidated balance sheets fair value based quoted market rates forecasted inventory transactions forward contracts used hedge forecasted inventory transactions specific months changes fair value forward contracts excluding forward points designated cashflow hedges recorded component accumulated comprehensive income loss within shareholders’ deficit equity recognized cost sales consolidated statement income period approximates time hedged inventory sold also hedge forecasted intercompany management fees specific months changes fair value forward contracts designated cash flow hedges recorded component accumulated comprehensive loss within shareholders’ deficit equity recognized selling general administrative expenses consolidated statement income period hedged item underlying transaction affects earnings december 31 2016 recorded assets fair value 46 million relating outstanding foreign currency contracts designated cashflow hedges december 31 2015 recorded assets fair value 42 million liabilities fair value 05 million relating outstanding foreign currency contracts designated cashflow hedges years ended december 31 2016 2015 ineffective portion relating hedges immaterial hedges remained effective december 31 2016 december 31 2015 december 31 2016 december 31 2015 majority outstanding foreign currency forward contracts maturity dates less twelve months majority freestanding derivatives expiring within one month two months december 31 2016 december 31 2015 respectively see note 11 derivative instruments hedging activities description foreign currency forward contracts outstanding december 31 2016 2015 discussion incorporated herein reference majority foreign subsidiaries designate local currencies functional currencies december 31 2016 december 31 2015 total amount foreign subsidiary cash 3162 million 3105 million respectively 282 million 191 million respectively invested us dollars december 31 2016 december 31 2015 total amount cash equivalents held parent us entities inclusive us territories 5278 million 5793 million respectively currency restrictions enacted venezuelan government become restrictive impacted ability subsidiary venezuela herbalife venezuela obtain us dollars exchange venezuelan bolivars official foreign exchange rates venezuelan government see note 2 basis presentation consolidated financial statements discussion currency restrictions venezuela impacted herbalife venezuela’s operations interest rate risk december 31 2016 aggregate annual maturity credit facility expected 4100 million 2017 fair value credit facility approximated carrying value 4100 million december 31 2016 february 15 2017 entered new credit facility repaid 4100 million outstanding balance senior secured credit facility described note 15 subsequent events december 31 2015 aggregate annual maturities credit facility expected 2297 million 2016 4100 million 2017 fair value credit facility approximated carrying value 6395 million december 31 2015 credit facility bears variable interest rate december 31 2016 december 31 2015 weightedaverage interest rate credit facility 429 278 respectively december 31 2016 fair value liability component 115 billion convertible notes approximately 9613 million carrying value 10248 million december 31 2015 fair value liability component 115 billion convertible notes approximately 7959 million carrying value 9825 million convertible notes pay interest fixed rate 200 per annum payable semiannually arrears february 15 august 15 year beginning august 15 2014 convertible notes mature august 15 2019 unless earlier repurchased converted may redeem convertible notes prior stated maturity date since credit facility based variable interest rates entered new interest swap arrangements since expiration previous interest rate swaps july 2013 interest rates increase decrease 1 year borrowing amounts stayed constant credit facility annual interest expense would increase decrease approximately 41 million item 8item 7a quantitative qualitative disclosures market risk exposed market risks arise normal course business changes interest rates foreign currency exchange rates selected basis use derivative financial instruments manage hedge risks hedging transactions authorized executed pursuant written guidelines procedures apply fasb asc topic 815 derivatives hedging asc 815 established accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities derivatives whether designated hedging relationships required recorded balance sheet fair value derivative designated fairvalue hedge changes fair value derivative underlying hedged item recognized concurrently earnings derivative designated cashflow hedge changes fair value derivative recorded comprehensive income loss recognized consolidated statements income hedged item affects earnings asc 815 defines requirements designation documentation hedging relationships well ongoing effectiveness assessments order use hedge accounting derivative qualify hedge changes fair value recognized concurrently earnings discussion primary market risk exposures derivatives presented foreign exchange risk transact business globally subject risks associated changes foreign exchange rates objective minimize impact earnings cash flow associated foreign exchange rate fluctuations enter foreign exchange derivatives ordinary course business primarily reduce exposure currency fluctuations attributable intercompany transactions translation local currency earnings inventory purchases subject foreign currency exposure partially mitigate impact foreign currency rate fluctuations due volatility foreign exchange markets current strategy general hedge significant exposures shortterm basis continue monitor foreign exchange markets evaluate hedging strategy accordingly exception foreign exchange forward contracts relating forecasted inventory purchases intercompany management fees discussed foreign exchange contracts designated free standing derivatives hedge accounting apply changes fair value derivatives qualifying cash flow hedges included selling general administrative expenses consolidated statements income foreign exchange forward contracts designated free standing derivatives used hedge advances subsidiaries partially mitigate impact foreign currency fluctuations fair value foreign exchange derivative contracts based thirdparty quotes foreign currency derivative contracts generally executed monthly basis also purchase foreign currency forward contracts order hedge forecasted inventory transactions intercompany management fees designated cashflow hedges subject foreign currency exposures applied hedge accounting rules required asc 815 hedges contracts allow us buy sell certain currencies specified contract rates december 31 2017 december 31 2016 aggregate notional amounts contracts outstanding approximately 1049 million 900 million respectively december 31 2017 outstanding contracts expected mature next fifteen months derivative financial instruments recorded consolidated balance sheet fair value based quoted market rates forecasted inventory transactions forward contracts used hedge forecasted inventory transactions specific months changes fair value forward contracts excluding forward points designated cashflow hedges recorded component accumulated comprehensive income loss within shareholders’ deficit equity recognized cost sales consolidated statements income period approximates time hedged inventory sold also hedge forecasted intercompany management fees specific months changes fair value forward contracts designated cash flow hedges recorded component accumulated comprehensive income loss within shareholders’ deficit equity recognized selling general administrative expenses consolidated statements income period hedged item underlying transaction affects earnings december 31 2017 recorded assets fair value 29 million liabilities fair value 40 million relating outstanding foreign currency contracts designated cashflow hedges december 31 2016 recorded assets fair value 46 million relating outstanding foreign currency contracts designated cashflow hedges years ended december 31 2017 2016 ineffective portion relating hedges immaterial hedges remained effective december 31 2017 december 31 2016 december 31 2017 december 31 2016 majority outstanding foreign currency forward contracts maturity dates less twelve months majority freestanding derivatives expiring one month december 31 2017 december 31 2016 respectively see note 11 derivative instruments hedging activities consolidated financial statements description foreign currency forward contracts outstanding december 31 2017 2016 discussion incorporated herein reference majority foreign subsidiaries designate local currencies functional currencies see liquidity capital resources cash equivalents item 7 management’s discussion analysis financial condition results operations discussion foreign subsidiary cash equivalents interest rate risk december 31 2017 aggregate annual maturities credit facility expected 975 million 2018 975 million 2019 975 million 2020 975 million 2021 975 million 2022 7394 million 2023 december 31 2017 fair value term loan approximately 12261 million carrying value 11902 million outstanding borrowings revolving credit facility december 31 2017 fair value prior credit facility approximated carrying value 4100 million december 31 2016 credit facility bears prior credit facility bore variable interest rates december 31 2017 december 31 2016 weighted average interest rate credit facility prior credit facility 679 429 respectively december 31 2017 fair value liability component 115 billion convertible notes approximately 10660 million carrying value 10700 million december 31 2016 fair value liability component 115 billion convertible notes approximately 9613 million carrying value 10248 million convertible notes pay interest fixed rate 200 per annum payable semiannually arrears february 15 august 15 year beginning august 15 2014 convertible notes mature august 15 2019 unless earlier repurchased converted may redeem convertible notes prior stated maturity date since credit facility based variable interest rates entered interest swap arrangements interest rates increase decrease 1 year borrowing amounts stayed constant credit facility annual interest expense could increase decrease approximately 123 million item 8item 7a quantitative qualitative disclosures market risk exposed market risks arise normal course business changes interest rates foreign currency exchange rates selected basis use derivative financial instruments manage hedge certain risks hedging transactions authorized executed pursuant written guidelines procedures apply fasb asc topic 815 derivatives hedging asc 815 established accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities derivatives whether designated hedging relationships required recorded balance sheet fair value derivative designated fairvalue hedge changes fair value derivative underlying hedged item recognized concurrently earnings derivative designated cashflow hedge changes fair value derivative recorded comprehensive income loss recognized consolidated statements income hedged item affects earnings asc 815 defines requirements designation documentation hedging relationships well ongoing effectiveness assessments order use hedge accounting derivative qualify hedge changes fair value recognized concurrently earnings discussion primary market risk exposures derivatives presented foreign exchange risk transact business globally subject risks associated changes foreign exchange rates objective minimize impact earnings cash flow associated foreign exchange rate fluctuations enter foreign exchange derivatives ordinary course business primarily reduce exposure currency fluctuations attributable intercompany transactions translation local currency earnings inventory purchases subject foreign currency exposure partially mitigate impact foreign currency rate fluctuations due volatility foreign exchange markets current strategy general hedge significant exposures shortterm basis continue monitor foreign exchange markets evaluate hedging strategy accordingly exception foreign currency forward contracts relating forecasted inventory purchases intercompany management fees discussed foreign exchange contracts designated freestanding derivatives hedge accounting apply changes fair value derivatives qualifying cash flow hedges included selling general administrative expenses consolidated statements income foreign currency forward contracts designated freestanding derivatives primarily used hedge foreign currencydenominated intercompany transactions partially mitigate impact foreign currency fluctuations fair value foreign exchange derivative contracts based thirdparty quotes foreign currency derivative contracts generally executed monthly basis also purchase foreign currency forward contracts order hedge forecasted inventory transactions intercompany management fees designated cashflow hedges subject foreign currency exposures applied hedge accounting rules required asc 815 hedges contracts allow us buy sell certain currencies specified contract rates december 31 2018 2017 aggregate notional amounts contracts outstanding approximately 438 million 1049 million respectively december 31 2018 outstanding contracts expected mature next eleven months derivative financial instruments recorded consolidated balance sheets fair value based quoted market rates forecasted inventory transactions forward contracts used hedge forecasted inventory transactions specific months changes fair value forward contracts excluding forward points designated cashflow hedges recorded component accumulated comprehensive loss within shareholders’ deficit recognized cost sales consolidated statements income period approximates time hedged inventory sold also hedge forecasted intercompany management fees specific months changes fair value forward contracts designated cash flow hedges recorded component accumulated comprehensive loss within shareholders’ deficit recognized selling general administrative expenses consolidated statements income period hedged item underlying transaction affects earnings december 31 2018 recorded assets fair value 05 million liabilities fair value 07 million relating outstanding foreign currency contracts designated cashflow hedges december 31 2017 recorded assets fair value 29 million liabilities fair value 40 million relating outstanding foreign currency contracts designated cashflow hedges years ended december 31 2018 2017 ineffective portion relating hedges immaterial hedges remained effective december 31 2018 2017 december 31 2018 2017 majority outstanding foreign currency forward contracts maturity dates less twelve months majority freestanding derivatives expiring within one month december 31 2018 2017 respectively see note 11 derivative instruments hedging activities consolidated financial statements included part iv item 15 annual report form 10k description foreign currency forward contracts outstanding december 31 2018 2017 discussion incorporated herein reference majority foreign subsidiaries designate local currencies functional currencies see liquidity capital resources cash equivalents item 7 management’s discussion analysis financial condition results operations discussion foreign subsidiary cash equivalents interest rate risk december 31 2018 aggregate annual maturities 2018 credit facility expected 200 million 2019 216 million 2020 263 million 2021 278 million 2022 1887 million 2023 7106 million thereafter december 31 2018 fair values 2018 term loan 2018 term loan b approximately 2407 million 7293 million respectively carrying values 2454 million 7382 million respectively december 31 2017 fair value 2017 term loan b approximately 12261 million carrying value 11902 million outstanding borrowings 2018 revolving credit facility 2017 revolving credit facility december 31 2018 2017 respectively 2018 credit facility bears variable interest rates december 31 2018 2017 weightedaverage interest rate 2018 credit facility 2017 credit facility 680 679 respectively since 2018 credit facility based variable interest rates entered interest swap arrangements interest rates increase decrease 1 year borrowing amounts stayed constant 2018 credit facility annual interest expense could increase decrease approximately 100 million december 31 2018 fair values liability component 2019 convertible notes 2024 convertible notes approximately 6621 million 4481 million respectively carrying values 6564 million 4160 million respectively december 31 2017 fair value liability component 2019 convertible notes approximately 10660 million carrying value 10700 million 2019 convertible notes pay interest fixed rate 200 per annum payable semiannually arrears february 15 august 15 year beginning august 15 2014 2019 convertible notes mature august 15 2019 unless earlier repurchased converted may redeem 2019 convertible notes prior stated maturity date 2024 convertible notes pay interest fixed rate 2625 per annum payable semiannually arrears march 15 september 15 year beginning september 15 2018 2024 convertible notes mature march 15 2024 unless redeemed repurchased converted accordance terms prior date december 31 2018 fair value 2026 notes approximately 3946 million carrying value 3948 million 2026 notes pay interest fixed rate 7250 per annum payable semiannually arrears february 15 august 15 year beginning february 15 2019 2026 notes mature august 15 2026 unless redeemed repurchased accordance terms prior date 2026 notes recorded carrying value fair value used disclosure purposes increase decrease interest rates would impact consolidated financial statements however interest rates increase decrease 1 fair value could decrease approximately 220 million increase approximately 174 million item 8item 7a quantitative qualitat ive disclosures market risk exposed market risks arise normal course business changes interest rates foreign currency exchange rates selected basis use derivative financial instruments manage hedge certain risks hedging transactions authorized executed pursuant written guidelines procedures apply fasb asc topic 815 derivatives hedging asc 815 established accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities derivatives whether designated hedging relationships required recorded balance sheet fair value derivative designated fairvalue hedge changes fair value derivative underlying hedged item recognized concurrently earnings derivative designated cash flow hedge changes fair value derivative recorded comprehensive income loss recognized consolidated statements income hedged item affects earnings asc 815 defines requirements designation documentation hedging relationships well ongoing effectiveness assessments order use hedge accounting derivative qualify hedge changes fair value recognized concurrently earnings discussion primary market risk exposures derivatives presented foreign exchange risk transact business globally subject risks associated changes foreign exchange rates objective minimize impact earnings cash flow associated foreign exchange rate fluctuations enter foreign exchange derivatives ordinary course business primarily reduce exposure currency fluctuations attributable intercompany transactions translation local currency earnings inventory purchases subject foreign currency exposure partially mitigate impact foreign currency rate fluctuations due volatility foreign exchange markets current strategy general hedge significant exposures shortterm basis continue monitor foreign exchange markets evaluate hedging strategy accordingly exception foreign currency forward contracts relating forecasted inventory purchases intercompany management fees discussed foreign exchange contracts designated freestanding derivatives hedge accounting apply changes fair value derivatives qualifying cash flow hedges included selling general administrative expenses within consolidated statements income foreign currency forward contracts option contracts designated freestanding derivatives primarily used hedge foreign currencydenominated intercompany transactions partially mitigate impact foreign currency fluctuations fair value foreign exchange derivative contracts based thirdparty quotes foreign currency derivative contracts generally executed monthly basis also purchase foreign currency forward contracts order hedge forecasted inventory transactions intercompany management fees designated cash flow hedges subject foreign currency exposures applied hedge accounting rules required asc 815 hedges contracts allow us buy sell certain currencies specified contract rates december 31 2020 2019 aggregate notional amounts contracts outstanding approximately 564 million 664 million respectively december 31 2020 outstanding contracts expected mature next fifteen months derivative financial instruments recorded consolidated balance sheets fair value based quoted market rates forecasted inventory transactions forward contracts used hedge forecasted inventory transactions specific months changes fair value forward contracts designated cash flow hedges excluding forward points recorded component accumulated comprehensive loss within shareholders’ deficit recognized cost sales within consolidated statement income period approximates time hedged inventory sold also hedge forecasted intercompany management fees specific months changes fair value forward contracts designated cash flow hedges excluding forward points recorded component accumulated comprehensive loss within shareholders’ deficit recognized selling general administrative expenses within consolidated statement income period hedged item underlying transaction affect earnings december 31 2020 recorded liabilities fair value 39 million relating outstanding foreign currency contracts designated cash flow hedges december 31 2019 recorded assets fair value 01 million liabilities fair value 19 million relating outstanding foreign currency contracts designated cash flow hedges remained effective december 31 2020 2019 december 31 2020 2019 majority outstanding foreign currency forward contracts maturity dates less twelve months majority freestanding derivatives expiring within one month see note 11 derivative instruments hedging activities consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k description foreign currency forward contracts outstanding december 31 2020 2019 discussion incorporated herein reference majority foreign subsidiaries designate local currencies functional currencies see liquidity capital resources cash equivalents part ii item 7 management’s discussion analysis financial condition results operations annual report form 10k discussion foreign subsidiary cash equivalents interest rate risk december 31 2020 aggregate annual maturities 2018 credit facility expected 207 million 2021 274 million 2022 274 million 2023 340 million 2024 8752 million 2025 december 31 2020 fair values 2018 term loan 2018 term loan b approximately 2519 million 7340 million respectively carrying values 2505 million 7260 million respectively december 31 2019 fair values 2018 term loan 2018 term loan b approximately 2357 million 7448 million respectively carrying values 2332 million 7321 million respectively outstanding borrowings 2018 revolving credit facility december 31 2020 2019 2018 credit facility bears variable interest rates december 31 2020 2019 weightedaverage interest rate borrowings 2018 credit facility 339 552 respectively first quarter 2020 entered various interest rate swap agreements effective dates ranging february 2020 march 2020 agreements collectively provide us pay interest weightedaverage fixed rate 098 aggregate notional amounts 1000 million 2018 credit facility respective expiration dates ranging february 2022 march 2023 receiving interest based libor notional amounts periods inception swap agreements designated cash flow hedges variability certain liborbased borrowings 2018 credit facility effectively fixing interest rate notional amounts weightedaverage effective rate 348 fair values interest rate swap agreements based thirdparty bank quotes december 31 2020 recorded liabilities fair value 10 million relating interest rate swap agreements exposure interest rate volatility risk related 2018 credit facility partially mitigated interest rate swaps interest rates increase decrease 1 year borrowing amounts 2018 credit facility related interest rate swaps remained constant annual interest expense could increase approximately 88 million decrease approximately 13 million variable interest rates payable 2018 credit facility linked libor benchmark establishing rates recent national international regulatory guidance reform proposals regarding libor requiring certain libor tenors discontinued become unavailable end 2021 libor fully discontinued become unavailable benchmark rate june 2023 2018 credit facility includes mechanics facilitate adoption us lenders alternative benchmark rate use place libor may result interest rates higher lower would resulted libor remained effect december 31 2020 fair value liability component 2024 convertible notes approximately 5418 million carrying value 4606 million december 31 2019 fair value liability component 2024 convertible notes approximately 5086 million carrying value 4374 million 2024 convertible notes pay interest fixed rate 2625 per annum payable semiannually arrears march 15 september 15 year beginning september 15 2018 unless redeemed repurchased converted accordance terms prior date 2024 convertible notes mature march 15 2024 december 31 2020 fair value 2025 notes approximately 6563 million carrying value 5929 million 2025 notes pay interest fixed rate 7875 per annum payable semiannually arrears march 1 september 1 year beginning march 1 2021 2025 notes mature september 1 2025 unless redeemed repurchased accordance terms prior date 2025 notes recorded carrying value fair value used disclosure purposes increase decrease interest rates would impact consolidated financial statements however interest rates increase decrease 1 fair value could decrease approximately 102 million increase approximately 104 million december 31 2020 fair value 2026 notes approximately 4250 million carrying value 3959 million december 31 2019 fair value 2026 notes approximately 4241 million carrying value 3953 million 2026 notes pay interest fixed rate 7250 per annum payable semiannually arrears february 15 august 15 year beginning february 15 2019 2026 notes mature august 15 2026 unless redeemed repurchased accordance terms prior date 2026 notes recorded carrying value fair value used disclosure purposes increase decrease interest rates would impact consolidated financial statements however interest rates increase decrease 1 fair value could decrease approximately 26 million increase approximately 26 million item 8item 7a quantitative qualitative disclosures market risk exposed market risks arise normal course business changes interest rates foreign currency exchange rates selected basis use derivative financial instruments manage hedge risks hedging transactions authorized executed pursuant written guidelines procedures apply fasb asc topic 815 derivatives hedging asc 815 established accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities derivatives whether designated hedging relationships required recorded balance sheet fair value derivative designated fairvalue hedge changes fair value derivative underlying hedged item recognized concurrently earnings derivative designated cashflow hedge changes fair value derivative recorded comprehensive income loss recognized consolidated statements income hedged item affects earnings asc 815 defines requirements designation documentation hedging relationships well ongoing effectiveness assessments order use hedge accounting derivative qualify hedge changes fair value recognized concurrently earnings discussion primary market risk exposures derivatives presented foreign exchange risk transact business globally subject risks associated changes foreign exchange rates objective minimize impact earnings cash flow associated foreign exchange rate fluctuations enter foreign exchange derivatives ordinary course business primarily reduce exposure currency fluctuations attributable intercompany transactions translation local currency revenue inventory purchases subject foreign currency exposure partially mitigate impact foreign currency rate fluctuations due recent significant volatility foreign exchange market current strategy general hedge significant exposures shortterm basis continue monitor foreign exchange market evaluate hedging strategy accordingly exception foreign exchange forward contracts relating forecasted inventory purchases intercompany management fees discussed section foreign exchange contracts designated free standing derivatives hedge accounting apply changes fair market value derivatives qualifying cash flow hedges included selling general administrative expenses consolidated statements income foreign exchange forward contracts designated free standing derivatives used hedge advances subsidiaries partially mitigate impact foreign currency fluctuations foreign exchange average rate option contracts also used mitigate impact foreign currency rate fluctuations objective contracts neutralize impact foreign currency movements operating results subsidiaries fair value forward option contracts based thirdparty bank quotes also purchase foreign currency forward contracts order hedge forecasted inventory purchases intercompany management fees designated cashflow hedges subject foreign currency exposures applied hedge accounting rules required asc topic 815 hedges contracts allow us sell euros exchange us dollars specified contract rates december 31 2010 2009 aggregate notional amounts contracts outstanding approximately 321 million 668 million respectively december 31 2010 outstanding contracts expected mature next twelve months derivative financial instruments recorded consolidated balance sheet fair value based quoted market rates forecasted inventory purchases forward contracts used hedge forecasted inventory purchases specific months changes fair value forward contracts excluding forward points designated cashflow hedges recorded component accumulated comprehensive income loss within shareholders’ equity recognized cost sales consolidated statement income period approximates time hedged inventory sold also hedge forecasted intercompany management fees specific months changes fair value forward contracts designated cash flow hedges recorded component accumulated comprehensive loss within shareholders’ equity recognized selling general administrative expenses consolidated statement income period hedged item underlying transaction affects earnings december 31 2010 recorded assets fair value 06 million liabilities fair value 08 million relating outstanding foreign currency contracts designated cashflow hedges december 31 2009 recorded assets fair value 23 million relating outstanding foreign currency contracts designated cashflow hedges assess hedge effectiveness measure hedge ineffectiveness least quarterly years ended december 31 2010 2009 ineffective portion relating hedges immaterial hedges remained effective december 31 2010 2009 december 31 2010 2009 majority outstanding foreign currency forward contracts maturity dates less one year majority freestanding derivatives expiring within three months table describes foreign currency forward contracts outstanding december 31 2010 2009 december 31 2010 2009 outstanding foreign currency option contracts foreign subsidiaries designate local currencies functional currencies december 31 2010 december 31 2009 total amount foreign subsidiary cash 1882 million 1496 million respectively 58 million 119 million respectively invested us dollars currency restrictions enacted venezuelan government 2003 become restrictive impacted ability subsidiary venezuela herbalife venezuela obtain us dollars exchange venezuelan bolivars official foreign exchange rates venezuelan government foreign exchange commission cadivi application approval processes intermittently delayed timing ability obtain us dollars official exchange rates remains uncertain certain instances made appropriate applications cadivi approval obtain us dollars herbalife venezuela pay imported products annual dividend official exchange rate alternative exchange mechanism also participated certain bond offerings venezuelan government petróleos de venezuela sa pdvsa venezuelan stateowned petroleum company effectively purchased bonds bolivars sold bonds us dollars instances used legal less favorable parallel market mechanism currency exchange may 2010 less favorable parallel market discontinued june 2010 venezuelan government introduced additional regulations newly regulated system sitme controlled central bank venezuela sitme provides mechanism exchange bolivars us dollars purchase sale us dollar denominated bonds issued venezuela however sitme available certain limited circumstances specifically sitme used product purchases available matters payment dividends also sitme used amounts 50000 per day 350000 per month generally available extent applicant exchanged received us dollars via cadivi process within previous 90 days venezuela’s inflation rate measured using blended national consumer price index consumer price index rate exceeded threeyear cumulative inflation rate 100 december 31 2009 early january 2010 venezuela announced official exchange rate devaluation bolivar official rate 43 bolivars per us dollar nonessential items 26 bolivars per us dollar essential items imports fall classifications late december 2010 venezuela announced cadivi official exchange rate 26 bolivars per us dollar eliminated cadivi official exchange 43 bolivars per us dollar used essential items nonessential items beginning january 2011 devaluation material impact consolidated financial statements december 31 2010 used sitme rate 53 bolivars per us dollar remeasurement purposes expect us dollars obtained cadivi official exchange rate positive impact consolidated net earnings impact us dollars obtained venezuelan government pdvsa bond offerings consolidated earnings depend prevailing exchange rates periods see item 7 management’s discussion analysis financial condition results operations discussion currency restrictions venezuela impacted herbalife venezuela’s operations interest rate risk december 31 2010 aggregate annual maturities senior secured credit facility expected 201115 million 2012325 million 20131409 million fair value senior secured credit facility approximates carrying value 1749 million december 31 2010 2364 million december 31 2009 senior secured credit facility bears variable interest rate december 31 2010 2009 weighted average interest rate 175 166 respectively senior secured credit facility obligated enter interest rate hedges 25 aggregate principal amount term loan minimum three years august 23 2006 entered interest rate swap agreement provided us pay interest threeyear period fixed rate 526 initial notional principal amount 1800 million receiving interest period libor rate notional principal amount notional amount scheduled reduced 200 million second third fourth quarters year commencing january 1 2007 throughout term swap designated cash flow hedge variability libor interest rate term loan libor plus 150 thereby fixing effective rate notional amounts 676 september 2009 interest swap expired consequently settled december 31 2009 amounts remaining comprehensive income relating expired interest swap value june 26 2009 entered interest rate swap agreement effective date june 30 2009 expired september 30 2009 swap notional amount 20 million paid three month libor received one month libor plus 0185 september 2009 interest rate swap agreement expired outstanding amounts settled elected apply hedge accounting interest rate swap august 2009 entered four interest rate swap agreements effective date december 31 2009 agreements collectively provide us pay interest less fouryear period weighted average fixed rate 278 notional amounts aggregating 140 million receiving interest period one month libor rate notional amounts agreements expire july 2013 swaps designated cash flow hedges variability libor interest rate term loan libor plus 150 thereby fixing weighted average effective rate notional amounts 428 formally assess inception least quarterly thereafter whether derivatives used hedging transactions effective offsetting changes cash flows hedged item december 31 2010 hedge relationships qualified effective hedges asc 815 consequently changes fair value derivatives deferred recorded comprehensive income loss related forecasted transactions recognized consolidated statements income december 31 2010 december 31 2009 fair value interest rate swap agreements based thirdparty bank quotes recorded interest rate swaps liability fair value 66 million 26 million respectively exposure interest rate volatility risk relating senior secured credit facility partially mitigated interest rate swaps based outstanding balances senior secured credit facility interest rate swaps december 31 2010 hypothetical 50basispoint change interest rates prevailing date sustained one year would represent material potential net change fair value earnings cash flows item 8item 7a quantitative qualitative disclosures market risk exposed market risks arise normal course business changes interest rates foreign currency exchange rates selected basis use derivative financial instruments manage hedge risks hedging transactions authorized executed pursuant written guidelines procedures apply fasb asc topic 815 derivatives hedging asc 815 established accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities derivatives whether designated hedging relationships required recorded balance sheet fair value derivative designated fairvalue hedge changes fair value derivative underlying hedged item recognized concurrently earnings derivative designated cashflow hedge changes fair value derivative recorded comprehensive income loss recognized consolidated statements income hedged item affects earnings asc 815 defines requirements designation documentation hedging relationships well ongoing effectiveness assessments order use hedge accounting derivative qualify hedge changes fair value recognized concurrently earnings discussion primary market risk exposures derivatives presented foreign exchange risk transact business globally subject risks associated changes foreign exchange rates objective minimize impact earnings cash flow associated foreign exchange rate fluctuations enter foreign exchange derivatives ordinary course business primarily reduce exposure currency fluctuations attributable intercompany transactions translation local currency revenue inventory purchases subject foreign currency exposure partially mitigate impact foreign currency rate fluctuations due recent significant volatility foreign exchange markets current strategy general hedge significant exposures shortterm basis continue monitor foreign exchange markets evaluate hedging strategy accordingly exception foreign exchange forward contracts relating forecasted inventory purchases intercompany management fees discussed foreign exchange contracts designated free standing derivatives hedge accounting apply changes fair value derivatives qualifying cash flow hedges included selling general administrative expenses consolidated statements income foreign exchange forward contracts designated free standing derivatives used hedge advances subsidiaries partially mitigate impact foreign currency fluctuations foreign exchange average rate option contracts also used mitigate impact foreign currency rate fluctuations objective contracts neutralize impact foreign currency movements operating results subsidiaries fair value forward option contracts based thirdparty quotes foreign currency derivative contracts generally executed monthly basis also purchase foreign currency forward contracts order hedge forecasted inventory transactions intercompany management fees designated cashflow hedges subject foreign currency exposures applied hedge accounting rules required asc 815 hedges contracts allow us buy sell certain currencies specified contract rates december 31 2013 december 31 2012 aggregate notional amounts contracts outstanding approximately 2447 million 2569 million respectively december 31 2013 outstanding contracts expected mature next twelve months derivative financial instruments recorded consolidated balance sheet fair value based quoted market rates forecasted inventory transactions forward contracts used hedge forecasted inventory transactions specific months changes fair value forward contracts excluding forward points designated cashflow hedges recorded component accumulated comprehensive income loss within shareholders’ equity recognized cost sales consolidated statement income period approximates time hedged inventory sold also hedge forecasted intercompany management fees specific months changes fair value forward contracts designated cash flow hedges recorded component accumulated comprehensive loss within shareholders’ equity recognized selling general administrative expenses consolidated statement income period hedged item underlying transaction affects earnings december 31 2013 recorded assets fair value 57 million liabilities fair value 44 million relating outstanding foreign currency contracts designated cashflow hedges december 31 2012 recorded assets fair value 05 million liabilities fair value 33 million relating outstanding foreign currency contracts designated cashflow hedges years ended december 31 2013 2012 ineffective portion relating hedges immaterial hedges remained effective december 31 2013 december 31 2012 december 31 2013 december 31 2012 majority outstanding foreign currency forward contracts maturity dates less twelve months majority freestanding derivatives expiring within three months one month respectively december 31 2013 2012 foreign currency option contracts outstanding december 31 2013 december 31 2012 table describes foreign currency forward contracts outstanding december 31 2013 2012 majority foreign subsidiaries designate local currencies functional currencies december 31 2013 december 31 2012 total amount foreign subsidiary cash 5674 million 3213 million respectively 68 million 69 million respectively invested us dollars december 31 2013 december 31 2012 total amount cash equivalents held us entities 4056 million 122 million respectively currency restrictions enacted venezuelan government become restrictive impacted ability subsidiary venezuela herbalife venezuela obtain us dollars exchange venezuelan bolivars official foreign exchange rates venezuelan government restrictions caused bolivar denominated cash equivalents increase significantly december 31 2013 december 31 2012 2159 million 992 million cash equivalents denominated bolivars respectively see item 7 management’s discussion analysis financial condition results operations discussion currency restrictions venezuela impacted herbalife venezuela’s operations interest rate risk december 31 2013 aggregate annual maturities credit facility expected 813 million 2014 1000 million 2015 7500 million 2016 fair value credit facility approximates carrying value 9313 million december 31 2013 fair value credit facility approximated carrying value 4875 million december 31 2012 credit facility bears variable interest rate december 31 2013 december 31 2012 weighted average interest rate credit facility included borrowings term loan 217 196 respectively august 2009 entered four interest rate swap agreements effective date december 31 2009 agreements collectively provided us pay interest less fouryear period weighted average fixed rate 278 notional amounts aggregating 1400 million receiving interest period one month libor rate notional amounts agreements expired july 2013 swaps inception designated cash flow hedges variability libor interest rate term loan prior credit facility variability libor interest rate replacement debt term loan prior credit facility terminated march 2011 refinanced credit facility discussed note 4 longterm debt consolidated financial statements expiration july 2013 company’s swaps effective designated cash flow hedges variability certain libor interest rate borrowings credit facility libor plus 150 250 fixing company’s weighted average effective rate notional amounts 428 528 hedge ineffectiveness recorded result refinancing event assess hedge effectiveness measure hedge ineffectiveness least quarterly years ended december 31 2013 2012 ineffective portion relating hedges immaterial hedges remained effective expiration july 2013 december 31 2012 consequently changes fair value derivatives deferred recorded comprehensive income loss related forecasted transactions recognized consolidated statements income fair value interest rate swap agreements based thirdparty quotes december 31 2012 recorded interest rate swaps liabilities fair value 20 million amount recorded december 31 2013 interest rate swaps expired based outstanding balances credit facility december 31 2013 hypothetical 50basispoint change interest rates prevailing date sustained one year would represent material potential net change fair value earnings cash flows item 8item 7a quantitative qualitative disclosures market risk exposed market risks arise normal course business changes interest rates foreign currency exchange rates selected basis use derivative financial instruments manage hedge certain risks hedging transactions authorized executed pursuant written guidelines procedures apply fasb asc topic 815 derivatives hedging asc 815 established accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities derivatives whether designated hedging relationships required recorded balance sheet fair value derivative designated fairvalue hedge changes fair value derivative underlying hedged item recognized concurrently earnings derivative designated cash flow hedge changes fair value derivative recorded comprehensive income loss recognized consolidated statements income hedged item affects earnings asc 815 defines requirements designation documentation hedging relationships well ongoing effectiveness assessments order use hedge accounting derivative qualify hedge changes fair value recognized concurrently earnings discussion primary market risk exposures derivatives presented foreign exchange risk transact business globally subject risks associated changes foreign exchange rates objective minimize impact earnings cash flow associated foreign exchange rate fluctuations enter foreign exchange derivatives ordinary course business primarily reduce exposure currency fluctuations attributable intercompany transactions translation local currency earnings inventory purchases subject foreign currency exposure partially mitigate impact foreign currency rate fluctuations due volatility foreign exchange markets current strategy general hedge significant exposures shortterm basis continue monitor foreign exchange markets evaluate hedging strategy accordingly exception foreign currency forward contracts relating forecasted inventory purchases intercompany management fees discussed foreign exchange contracts designated freestanding derivatives hedge accounting apply changes fair value derivatives qualifying cash flow hedges included selling general administrative expenses within consolidated statements income foreign currency forward contracts designated freestanding derivatives primarily used hedge foreign currencydenominated intercompany transactions partially mitigate impact foreign currency fluctuations fair value foreign exchange derivative contracts based thirdparty quotes foreign currency derivative contracts generally executed monthly basis also purchase foreign currency forward contracts order hedge forecasted inventory transactions intercompany management fees designated cashflow hedges subject foreign currency exposures applied hedge accounting rules required asc 815 hedges contracts allow us buy sell certain currencies specified contract rates december 31 2019 2018 aggregate notional amounts contracts outstanding approximately 664 million 438 million respectively december 31 2019 outstanding contracts expected mature next fifteen months derivative financial instruments recorded consolidated balance sheets fair value based quoted market rates forecasted inventory transactions forward contracts used hedge forecasted inventory transactions specific months changes fair value forward contracts designated cash flow hedges excluding forward points recorded component accumulated comprehensive loss within shareholders’ deficit recognized cost sales within company’s consolidated statement income period approximates time hedged inventory sold also hedge forecasted intercompany management fees specific months changes fair value forward contracts designated cash flow hedges excluding forward points recorded component accumulated comprehensive loss within shareholders’ deficit recognized selling general administrative expenses within company’s consolidated statement income period hedged item underlying transaction affect earnings december 31 2019 recorded assets fair value 01 million liabilities fair value 19 million relating outstanding foreign currency contracts designated cash flow hedges december 31 2018 recorded assets fair value 05 million liabilities fair value 07 million relating outstanding foreign currency contracts designated cash flow hedges remained effective december 31 2019 2018 december 31 2019 2018 majority outstanding foreign currency forward contracts maturity dates less twelve months majority freestanding derivatives expiring within one month see note 11 derivative instruments hedging activities consolidated financial statements included part iv item 15 exhibits financial statement schedules annual report form 10k description foreign currency forward contracts outstanding december 31 2019 2018 discussion incorporated herein reference majority foreign subsidiaries designate local currencies functional currencies see liquidity capital resources cash equivalents item 7 management’s discussion analysis financial condition results operations discussion foreign subsidiary cash equivalents interest rate risk december 31 2019 aggregate annual maturities 2018 credit facility expected 216 million 2020 263 million 2021 278 million 2022 1887 million 2023 75 million 2024 7031 million thereafter december 31 2019 fair values 2018 term loan 2018 term loan b approximately 2357 million 7448 million respectively carrying values 2332 million 7321 million respectively december 31 2018 fair values 2018 term loan 2018 term loan b approximately 2407 million 7293 million respectively carrying values 2454 million 7382 million respectively outstanding borrowings 2018 revolving credit facility december 31 2019 2018 credit facility bears variable interest rates december 31 2019 2018 weightedaverage interest rate borrowings 2018 credit facility 552 680 respectively since 2018 credit facility based variable interest rates entered interest swap arrangements interest rates increase decrease 1 year borrowing amounts stayed constant 2018 credit facility annual interest expense could increase decrease approximately 98 million variable interest rates payable 2018 credit facility linked libor benchmark establishing rates recent national international regulatory guidance reform proposals regarding libor expected ultimately cause libor discontinued become unavailable benchmark rate end 2021 2018 credit facility includes mechanics facilitate adoption us lenders alternative benchmark rate use place libor may result interest rates higher lower would resulted libor remained effect december 31 2019 fair value liability component 2024 convertible notes approximately 5086 million carrying value 4374 million december 31 2018 fair values liability component 2019 convertible notes 2024 convertible notes approximately 6621 million 4481 million respectively carrying values 6564 million 4160 million respectively 2019 convertible notes paid interest fixed rate 200 per annum payable semiannually arrears february 15 august 15 year beginning august 15 2014 2019 convertible notes matured august 15 2019 repaid 6750 million outstanding principal cash well 67 million accrued interest 2024 convertible notes pay interest fixed rate 2625 per annum payable semiannually arrears march 15 september 15 year beginning september 15 2018 unless redeemed repurchased converted accordance terms prior date 2024 convertible notes mature march 15 2024 december 31 2019 fair value 2026 notes approximately 4241 million carrying value 3953 million december 31 2018 fair value 2026 notes approximately 3946 million carrying value 3948 million 2026 notes pay interest fixed rate 7250 per annum payable semiannually arrears february 15 august 15 year beginning february 15 2019 2026 notes mature august 15 2026 unless redeemed repurchased accordance terms prior date 2026 notes recorded carrying value fair value used disclosure purposes increase decrease interest rates would impact consolidated financial statements however interest rates increase decrease 1 fair value could decrease approximately 132 million increase approximately 71 million item 8item 7a quantitative qualitative disclosures market risk exposed market risks arise normal course business changes interest rates foreign currency exchange rates selected basis use derivative financial instruments manage hedge risks hedging transactions authorized executed pursuant written guidelines procedures adopted fasb asc topic 815 derivatives hedging asc 815 established accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities derivatives whether designated hedging relationships required recorded balance sheet fair value derivative designated fairvalue hedge changes fair value derivative underlying hedged item recognized concurrently earnings derivative designated cashflow hedge changes fair value derivative recorded comprehensive income loss recognized consolidated statements income hedged item affects earnings asc 815 defines requirements designation documentation hedging relationships well ongoing effectiveness assessments order use hedge accounting derivative qualify hedge changes fair value recognized concurrently earnings discussion primary market risk exposures derivatives presented foreign exchange risk transact business globally subject risks associated changes foreign exchange rates objective minimize impact earnings cash flow fluctuations associated foreign exchange rate fluctuations enter foreign exchange derivatives ordinary course business primarily reduce exposure currency fluctuations attributable intercompany transactions translation local currency revenue inventory purchases subject foreign currency exposure partially mitigate impact foreign currency rate fluctuations due recent significant volatility foreign exchange market current strategy general hedge significant exposures shortterm basis continue monitor foreign exchange market evaluate hedging strategy accordingly exception foreign exchange forward contracts relating forecasted inventory purchases intercompany management fees discussed section foreign exchange contracts designated free standing derivatives hedge accounting apply changes fair market value derivatives qualifying cash flow hedges included selling general administrative expenses consolidated statements income foreign exchange forward contracts designated free standing derivatives used hedge advances subsidiaries partially mitigate impact foreign currency fluctuations foreign exchange average rate option contracts also used mitigate impact foreign currency rate fluctuations objective contracts neutralize impact foreign currency movements operating results subsidiaries fair value forward option contracts based thirdparty bank quotes also purchase foreign currency forward contracts order hedge forecasted inventory purchases intercompany management fees designated cashflow hedges subject foreign currency exposures applied hedge accounting rules required asc topic 815 hedges contracts allow us sell euros exchange us dollars specified contract rates december 31 2009 aggregate notional amounts contracts outstanding approximately 668 million expected mature next fourteen months derivative financial instruments recorded consolidated balance sheet fair value based quoted market rates forecasted inventory purchases forward contracts used hedge forecasted inventory purchases specific months changes fair value forward contracts excluding forward points designated cashflow hedges recorded component accumulated comprehensive income loss within shareholders’ equity recognized cost sales consolidated statement income period approximates time hedged inventory sold also hedge forecasted intercompany management fees specific months changes fair value forward contracts designated cash flow hedges recorded component accumulated comprehensive income loss within shareholders’ equity recognized selling general administrative expenses consolidated statement income period hedged item underlying transaction affects earnings december 31 2009 december 31 2008 recorded asset liability fair value 23 million 01 million respectively relating outstanding foreign currency contracts designated cashflow hedges assess hedge effectiveness measure hedge ineffectiveness least quarterly year ended december 31 2009 ineffective portion relating hedges immaterial hedges remained effective december 31 2009 december 31 2009 2008 substantially foreign exchange forward contracts maturity less one year following table provides information details foreign exchange forward contracts outstanding december 31 2009 outstanding foreign currency option contracts following table provides information details foreign currency option contracts outstanding december 31 2008 foreign subsidiaries designate local currencies functional currencies december 31 2009 2008 total amount foreign subsidiary cash reported consolidated balance sheet 1496 million 1420 million respectively 119 million 97 million respectively invested us dollars currency restrictions enacted venezuelan government 2003 become restrictive impacted ability herbalife venezuela obtain us dollars official foreign exchange rate application approval processes intermittently delayed recent periods timing ability obtain us dollars official exchange rate remains uncertain certain instances made appropriate applications venezuelan government foreign exchange commission cadivi approval obtain us dollars pay imported products annual dividend official exchange rate instances order timely provide products distributors register certain shipments cadivi noncadivi registered instead used legal parallel market mechanism payment cadivi approve exchanges official exchange rate herbalife venezuela could continue use legal parallel exchange process exchange us dollars addition going cadivi obtain official rate parallel market exchange rate approximately 63 less favorable official exchange rate december 31 2009 could deteriorate future periods would negative impact earnings unable access official rate addition beginning january 1 2010 venezuela considered highly inflationary economy plan use parallel market exchange rate remeasurement purposes highly inflationary accounting rules based specific facts circumstances including ability access official exchange rate parallel market exchange rate also early january 2010 venezuela announced official rate devaluation bolivar official rate 430 bolivars per us dollar nonessential items 260 bolivars per us dollar essential items therefore future changes parallel market exchange rate official rate may result significant impact consolidated earnings see item 7 management’s discussion analysis financial condition results operations discussion currency restrictions venezuela impacted herbalife venezuela’s operations interest rate risk december 31 2009 aggregate annual maturities senior secured credit facility expected 201015 million 201115 million 2012925 million 20131409 million fair value senior secured credit facility approximates carrying value 2364 million december 31 2009 3245 million december 31 2008 senior secured credit facility bears variable interest rate december 31 2009 2008 weighted average interest rate 166 304 respectively senior secured credit facility obligated enter interest rate hedges 25 aggregate principal amount term loan minimum three years august 23 2006 entered interest rate swap agreement provided us pay interest threeyear period fixed rate 526 initial notional principal amount 1800 million receiving interest period libor rate notional principal amount notional amount scheduled reduced 200 million second third fourth quarters year commencing january 1 2007 throughout term swap designated cash flow hedge variability libor interest rate new term loan libor plus 150 thereby fixing effective rate notional amounts 676 december 31 2008 swap notional amount 400 million december 31 2008 recorded interest rate swap liability fair value 10 million offsetting amounts recorded comprehensive income september 2009 swap expired consequently settled june 26 2009 entered interest rate swap agreement effective date june 30 2009 expired september 30 2009 swap notional amount 20 million paid three month libor received one month libor plus 0185 september 2009 interest rate swap agreement expired outstanding amounts settled elected apply hedge accounting interest rate swap august 2009 entered four interest rate swap agreements effective date december 31 2009 agreements collectively provide us pay interest less fouryear period weighted average fixed rate 278 notional amounts aggregating 140 million receiving interest period one month libor rate notional amounts agreements expire july 2013 swaps designated cash flow hedges variability libor interest rate term loan libor plus 150 thereby fixing weighted average effective rate notional amounts 428 formally assess inception least quarterly thereafter whether derivatives used hedging transactions effective offsetting changes cash flows hedged item december 31 2009 hedge relationships qualified effective hedges asc 815 consequently changes fair value derivatives deferred recorded comprehensive income loss related forecasted transactions recognized consolidated statements income december 31 2009 fair value interest rate swap agreements based thirdparty bank quotes recorded interest rate swaps liability fair value 26 million item 8 item 8 financial statements supplementary data financial statements notes thereto reports kpmg llp deloitte touche llp independent registered public accounting firms set forth index financial statements part iii item 15 incorporated herein reference item 9item 8 financial statements supplementary data financial statements notes thereto report kpmg llp independent registered public accounting firm set forth index financial statements item 15 exhibits financial statement schedules annual report form 10k incorporated herein reference item 9item 8 financial statements supplementary data financial statements notes thereto reports kpmg llp independent registered public accounting firm set forth index financial statements item 15 exhibits financial statement schedules annual report form 10k incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements notes thereto reports kpmg llp independent registered public accounting firm set forth index financial statements item 15 exhibits financial statement schedules annual report form 10k incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements notes thereto reports kpmg llp independent registered public accounting firm set forth index financial statements item 15 exhibits financial statement schedules annual report form 10k incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements notes thereto reports kpmg llp independent registered public accounting firm set forth index financial statements item 15 exhibits financial statement schedules annual report form 10k incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements notes thereto reports kpmg llp independent registered public accounting firm set forth index financial statements item 15 exhibits financial statement schedules annual report form 10k incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements notes thereto report pricewaterhousecoopers llp independent registered public accounting firm set forth index financial statements item 15 exhibits financial statement schedules annual report form 10k incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements notes thereto report pricewaterhousecoopers llp independent registered public accounting firm set forth index financial statements item 15 exhibits financial statement schedules annual report form 10k incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements notes thereto report pricewaterhousecoopers llp independent registered public accounting firm set forth index financial statements item 15 exhibits financial statement schedules annual report form 10k incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements notes thereto report pricewaterhousecoopers llp independent registered public accounting firm set forth index financial statements item 15 exhibits financial statement schedules annual report form 10k incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements notes thereto report pricewaterhousecoopers llp independent registered public accounting firm set forth index financial statements part iv item 15 exhibits financial statement schedules annual report form 10k incorporated herein reference supplementary financial information respect selected quarterly financial data set forth item 7 management’s discussion analysis financial condition results operations annual report form 10k incorporated herein reference item 9item 8 financial stateme nts supplementary data consolidated financial statements notes thereto report pricewaterhousecoopers llp independent registered public accounting firm set forth index financial statements part iv item 15 exhibits financial statement schedules annual report form 10k incorporated herein reference supplementary financial information respect selected quarterly financial data set forth part ii item 7 management’s discussion analysis financial condition results operations annual report form 10k incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements notes thereto reports kpmg llp independent registered public accounting firm set forth index financial statements item 15 exhibits financial statement schedules annual report form 10k incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements notes thereto report pricewaterhousecoopers llp independent registered public accounting firm set forth index financial statements item 15 exhibits financial statement schedules annual report form 10k incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements notes thereto report pricewaterhousecoopers llp independent registered public accounting firm set forth index financial statements part iv item 15 exhibits financial statement schedules annual report form 10k incorporated herein reference supplementary financial information respect selected quarterly financial data set forth part ii item 7 management’s discussion analysis financial condition results operations annual report form 10k incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements notes thereto reports kpmg llp independent registered public accounting firm set forth index financial statements item 15 exhibits financial statement schedules annual report form 10k incorporated herein reference item 9 item 15 exhibits financial statement schedules reports form 8k athe following documents filed part form 10k 1financial statements following financial statements herbalife ltd filed part annual report form 10 k pages indicated herbalife ltd subsidiaries page report independent registered public accounting firm kpmg llp report independent registered public accounting firm deloitte touche llp consolidated balance sheets december 31 2003 2004 consolidated statements operations seven months ended july 31 2002 five months ended december 31 2002 years ended december 31 2003 2004 consolidated statements changes shareholders equity seven months ended july 31 2002 five months ended december 31 2002 years ended december 31 2003 2004 consolidated statements cash flows seven months ended july 31 2002 five months ended december 31 2002 years ended december 31 2003 2004 notes consolidated financial statements 2schedules omitted required information inapplicable information presented consolidated financial statements related notes 3exhibits exhibits listed exhibit index immediately preceding exhibits filed part annual report form 10k exhibit index exhibit number description reference 21 agreement plan merger dated april 10 2002 among herbalife international inc wh holdings cayman islands ltd wh acquisition corp 31 form amended restated memorandum articles association herbalife ltd 41 indenture dated june 27 2002 wh acquisition corp wh intermediate holdings ltd wh luxembourg holdings sàrl wh luxembourg intermediate holdings sàrl wh luxembourg cm sàrl bank new york trustee governing 1134 senior subordinated notes due 2010 42 indenture dated march 8 2004 wh holdings cayman islands ltd wh capital corporation bank new york trustee governing 912 notes due 2011 43 form share certificate 91 shareholders agreement dated july 31 2002 among wh holdings cayman islands ltd whitney v lp whitney strategic partners v lp wh investments ltd ccg investments bvi lp ccg associatesqp llc ccg associatesai llc ccg investment fundai lp ccg av llcseries c ccg av llcseries e certain persons 92 institutional shareholders agreement dated july 31 2002 among wh holdings cayman islands ltd whitney v lp whitney strategic partners v lp wh investments ltd ccg investments bvi lp ccg associatesqp llc ccg associatesai llc ccg investment fundai lp ccg av llcseries c ccg av llcseries e certain persons 93 voting agreement dated december 31 2004 among whitney v lp whitney strategic partners v lp whitney private debt fund lp green river offshore fund ltd one hand ccg investments bvi lp ccg associatesqp llc ccg associatesai llc ccg investment fundai lp ccg av llcseries c ccg av llcseries e ccg ci llc hand 101 form indemnity agreement herbalife international inc certain officers directors herbalife international inc 102 office lease agreement herbalife international america inc state teachers retirement system dated july 11 1995 103 herbalife international america incs senior executive deferred compensation plan effective january 1 1996 amended 104 herbalife international america incs management deferred compensation plan effective january 1 1996 amended 105 master trust agreement herbalife international america inc imperial trust company inc effective january 1 1996 106 herbalife international inc 401k profit sharing plan trust amended 107 trust agreement herbalife 2001 executive retention plan effective march 15 2001 108 herbalife 2001 executive retention plan effective march 15 2001 109 separation agreement general release dated may 17 2002 robert sandler herbalife international inc herbalife international america inc clarification 1010 agreement retention legal services dated may 20 2002 among herbalife international inc herbalife international america inc robert sandler 1011 purchase agreement dated june 21 2002 among wh acquisition corp herbalife international inc wh intermediate holdings ltd wh luxembourg holdings sàrl wh luxembourg intermediate holdings sàrl wh luxembourg cm sàrl ubs warburg llc 1012 registration rights agreement dated june 27 2002 among wh acquisition corp wh intermediate holdings ltd wh luxembourg holdings sàrl wh luxembourg intermediate holdings sàrl wh luxembourg cm sàrl ubs warburg llc 1013 credit agreement dated july 31 2002 among herbalife international inc wh holdings cayman islands ltd wh intermediate holdings ltd wh luxembourg holdings sàrl wh luxembourg intermediate holdings sàrl wh luxembourg cm sàrl subsidiary guarantors party thereto certain lenders agents named therein 1014 security agreement dated july 31 2002 herbalife international inc wh holdings cayman islands ltd wh intermediate holdings ltd wh luxembourg herbalife sàrl wh luxembourg intermediate holdings sàrl wh luxembourg cm sàrl subsidiary guarantors party thereto favor ubs ag stamford branch collateral agent 1015 notice distributors regarding amendment agreements distributorship dated july 18 2002 herbalife international inc herbalife distributor 1016 monitoring fee agreement dated july 31 2002 wh holdings cayman islands ltd herbalife international inc whitney co llc 1017 monitoring fee agreement dated july 31 2002 wh holdings cayman islands ltd herbalife international inc ggc administration llc 1018 indemnity agreement dated july 31 2002 among wh holdings cayman islands ltd wh acquisition corp whitney co llc whitney v lp whitney strategic partners v lp ggc administration llc golden gate private equity inc ccg investments bvi lp ccg associatesai llc ccg investment fundai lp ccg av llcseries c ccg av llcseries c ccg av llcseries e ccg associatesqp llc wh investments ltd 1019 independent directors stock option plan wh holdings cayman islands ltd 1020 amendment 1 credit agreement dated december 18 2002 among herbalife international inc wh holdings cayman islands ltd wh intermediate holdings ltd wh luxembourg holdings sàrl wh luxembourg intermediate holdings sàrl wh luxembourg cm sàrl subsidiary guarantors listed therein lenders party thereto ubs ag stamford branch 1021 employment agreement dated march 10 2003 brian kane herbalife international inc herbalife international america inc 1022 employment agreement dated march 10 2003 carol hannah herbalife international inc herbalife international america inc 1023 nonstatutory stock option agreement dated march 10 2003 wh holdings cayman islands ltd brian kane 1024 nonstatutory stock option agreement dated march 10 2003 wh holdings cayman islands ltd carol hannah 1025 wh holdings cayman islands ltd stock incentive plan restated dated november 5 2003 1026 side letter agreement dated march 10 2003 among wh holdings cayman islands ltd brian kane carol hannah shareholders listed therein 1027 employment agreement dated april 3 2003 michael johnson herbalife international inc herbalife international america inc 1028 nonstatutory stock option agreement dated april 3 2003 wh holdings cayman islands ltd michael johnson 1029 side letter agreement dated april 3 2003 among wh holdings cayman islands ltd michael johnson shareholders listed therein 1030 employment agreement dated july 14 2003 matt wisk herbalife international america inc 1031 employment agreement dated july 31 2003 gregory l probert herbalife international america inc 1032 employment agreement dated october 6 2003 brett r chapman herbalife international america inc 1033 form nonstatutory stock option agreement nonexecutive agreement 1034 form nonstatutory stock option agreement executive agreement 1035 registration rights agreement dated march 8 2004 among wh holdings cayman islands ltd wh capital corporation ubs securities llc 1036 indemnity agreement dated february 9 2004 among wh capital corporation gregory probert 1037 indemnity agreement dated february 9 2004 among wh capital corporation brett r chapman 1038 stock subscription agreement wh capital corporation dated february 9 2004 wh capital corporation wh holdings cayman islands ltd 1039 first amendment amended restated wh holdings cayman islands ltd stock incentive plan dated november 5 2003 1040 separation agreement general release dated may 1 2004 among herbalife international inc herbalife international america inc carol hannah 1041 consulting agreement dated may 1 2004 among herbalife international america inc carol hannah 1042 employment agreement dated june 1 2004 among herbalife international america inc richard goudis 1043 purchase agreement dated march 3 2004 among wh holdings cayman islands ltd wh capital corporation ubs securities llc 1044 registration rights agreement dated july 31 2002 among wh holdings cayman islands ltd whitney v lp whitney strategic partners v lp wh investments ltd ccg investments bvi lp ccg associatesqp llc ccg associatesai llc ccg investment fundai lp ccg av llcseries c ccg av llcseries e b 1045 share purchase agreement dated july 31 2002 among wh holdings cayman islands ltd whitney strategic partners v lp wh investments ltd whitney v lp ccg investments bvi lp ccg associatesqp llc ccg associatesai llc ccg investment fundai lp ccg av llcseries c ccg av llcseries e b 1046 form indemnification agreement herbalife ltd directors certain officers herbalife ltd c 1047 herbalife ltd 2004 stock incentive plan effective december 1 2004 c 1048 termination agreement dated december 1 2004 herbalife ltd herbalife international inc whitney co llc 1049 termination agreement dated december 1 2004 herbalife ltd herbalife international inc ggc administration llc 1050 termination agreement dated december 13 2004 among herbalife ltd whitney v lp whitney strategic partners v lp ccg investments bvi lp ccg associatesqp llc ccg associatesai llc ccg investment fundai lp ccg av llcseries c ccg av llcseries e ccg ci llc 1051 indemnification agreement dated december 13 2004 among herbalife ltd herbalife international inc whitney v lp whitney strategic partners v lp ccg investments bvi lp ccg associatesqp llc ccg associatesai llc ccg investment fundai lp ccg av llcseries c ccg av llcseries e ccg ci llc ggc administration llc 1052 amendment 1 herbalife ltd 2004 stock incentive plan e 1053 form stock bonus award agreement e 211 list subsidiaries wh holdings cayman islands ltd 231 consent kpmg llp independent registered public accounting firm 232 consent deloitte touche llp independent registered public accounting firm 311 certification chief operating officer 312 certification chief financial officer 321 certification chief operating officer 322 certification chief financial officer 991 disposition agreement dated december 13 2004 among whitney v lp delaware limited partnership whitney strategic partners v lp delaware limited partnership whitney private debt fund lp delaware limited partnership green river offshore fund ltd cayman islands company one hand ccg investments bvi lp british virgin islands limited partnership ccg associatesqp llc delaware limited liability company ccg associatesai llc delaware limited liability company ccg investment fundai lp delaware limited partnership ccg av llcseries c delaware limited liability company ccg av llcseries e delaware limited liability company ccg ci llc delaware limited liability company hand 992 contract services consultant herbalife international luxembourg sarl brian kane dated october 18 2004 993 compromise agreement herbalife international luxembourg sarl brian kane dated october 18 2004 994 employment agreement dated january 1 2005 herbalife ltd henry burdick filed herewith apreviously filed october 1 2004 exhibit like number companys registration statement form s1 file 333119485 incorporated herein reference bpreviously filed november 9 2004 exhibit like number amendment 2 companys registration statement form s1 file 333119485 incorporated herein reference cpreviously filed december 2 2004 exhibit like number amendment 4 companys registration statement form s1 file 333119485 incorporated herein reference dpreviously filed december 14 2004 exhibit like number amendment 5 companys registration statement form s1 file 333119485 incorporated herein reference epreviously filed february 17 2005 exhibit companys registration statement form s8 file 333122871 incorporated herein reference report independent registered public accounting firm board directors herbalife ltd audited accompanying consolidated balance sheets herbalife ltd formerly wh holdings cayman islands ltd subsidiaries december 31 2004 2003 related consolidated statements operations changes shareholders equity comprehensive income cash flows years ended twoyear period december 31 2004 consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion consolidated financial statements referred present fairly material respects financial position herbalife ltd december 31 2004 2003 results operations cash flows years twoyear period ended december 31 2004 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states effectiveness herbalife ltd subsidiaries internal control financial reporting december 31 2004 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated march 14 2005 expressed unqualified opinion managements assessment effective operation internal control financial reporting kpmg llp los angeles california march 14 2005 report independent registered public accounting firm board directors stockholders herbalife ltd audited accompanying consolidated statements operations changes shareholders equity comprehensive income loss cash flows herbalife ltd formerly wh holdings cayman islands ltd subsidiaries successor fivemonth period ended december 31 2002 also audited related consolidated statements operations changes shareholders equity comprehensive income loss cash flows herbalife international inc subsidiaries predecessor wholly owned subsidiary successor sevenmonth period ended july 31 2002 financial statements responsibility successor predecessor management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects results operations successor cash flows fivemonth period ended december 31 2002 results operations predecessor cash flows sevenmonth period ended july 31 2002 conformity accounting principles generally accepted united states america deloitte touche llp los angeles california february 19 2004 december 1 2004 earnings per share information effect reverse stock split described note 1 herbalife ltd formerly wh holdings cayman islands ltd consolidated balance sheets december 31 see accompanying notes consolidated financial statements herbalife ltd formerly wh holdings cayman islands ltd consolidated statements operations see accompanying notes consolidated financial statements herbalife ltd formerly wh holdings cayman islands ltd consolidated statements changes shareholders equity comprehensive income loss see accompanying notes consolidated financial statements see accompanying notes consolidated financial statements herbalife ltd formerly wh holdings cayman islands ltd consolidated statements cash flows see accompanying notes consolidated financial statements herbalife ltd formerly wh holdings cayman islands ltd notes consolidated financial statements 1 organization herbalife ltd formerly wh holdings cayman islands ltd cayman islands exempted limited liability company herbalife incorporated april 4 2002 direct indirect wholly owned subsidiaries wh intermediate holdings ltd cayman islands company wh intermediate wh luxembourg holdings sàrl luxembourg unipersonal limited liability company lux holdings wh luxembourg cm sàrl luxembourg unipersonal limited liability company wh acquisition corp nevada corporation wh acquisition formed behalf whitney co llc whitney golden gate private equity inc golden gate order acquire herbalife international inc nevada corporation subsidiaries herbalife international july 31 2002 acquisition herbalife subsidiaries referred collectively herein company ipo recapitalization december 16 2004 herbalife completed initial public offering ipo whereby offered common shares part series recapitalization transactions follows •a tender offer 1598 million outstanding 1134 senior subordinated notes due 2010 issued herbalife international referred 1134 notes •the replacement herbalife internationals existing 2050 million senior credit facility new 2250 million senior credit facility •the payment 1398 million special cash dividend current shareholders herbalife new purchasers herbalife common shares ipo entitled participate special cash dividend amendment herbalifes memorandum articles association 1 effect 12 reverse stock split herbalifes common shares 2 increase herbalifes authorized common shares 500 million shares 3 increase herbalifes authorized preference shares 75 million shares took effect december 1 2004 planned continuation ipo recapitalization herbalife exercised contract provision december 2004 redeem 40 110 million principal value excluding premium 105 million 912 notes required notice period redemption completed february 4 2005 premium writeoff deferred financing fees 142 million associated redemption included interest expense first quarter 2005 connection ipo recapitalization company incurred 237 million fees expenses 194 million associated ipo included equity 43 million associated establishment new credit facility included deferred financing costs acquisition july 31 2002 wh acquisition merged herbalife international herbalife international surviving corporation acquisition consummated pursuant agreement plan merger result acquisition herbalife international delisted nasdaq national market acquisition accounted purchase accordance statement financial accounting standards sfas 141 business combinations accordingly acquired assets liabilities recorded fair value different bases accounting used prepare company predecessor consolidated financial statements future primary differences expected relate additional interest expense new debt amortization intangibles amortization deferred financing costs recorded date acquisition company completed final allocation purchase price connection acquisition 2003 based independent valuation study used basis make final determination values allocated various finite indefinite lived intangible assets well goodwill result completion purchase price allocation process certain reclassifications made certain categories intangible assets goodwill previously identified preliminary basis december 31 2002 total purchase price approximately 6515 million allocated acquired assets assumed liabilities based upon respective fair value closing date using valuations studies finalized following table summarizes fair values assets acquired liabilities assumed date acquisition marketing related intangibles considered indefinite life subject amortization distributor network expected life three years product formulas expected life five years product certifications expected life two years none intangibles expected deductible tax purposes result finalization purchase price allocation third quarter 2003 company recorded additional amortization expense 191 million tax relating periods prior july 1 2003 company recorded total amortization expense 345 million tax 2003 15 million period august 1 december 31 2002 addition amounts marketing franchise trademark trade name december 31 2002 combined presented marketing related intangibles accompanying balance sheet conform current year presentation connection acquisition predecessor incurred transaction expenses stock option payments approximately 547 million reflected predecessor financial statements company also incurred transaction expenses approximately 62 million addition company incurred debt issuance costs approximately 443 million capitalized deferred financing costs companys consolidated balance sheet following unaudited pro forma results year ended december 31 2002 based historical financial statements predecessor adjusted give effect acquisition related financing transactions occurred beginning period presented acquisition financed •gross proceeds 1629 million sale 1134 notes face value 1650 million •borrowings 1800 million 2050 million senior credit facility •contributions net proceeds 240 million herbalife sale 1512 senior notes 1512 senior notes face value 380 million •contribution whitney golden gate selected members herbalife internationals distributor organization senior management 1760 million sale 12 series cumulative convertible preferred shares herbalife preferred shares herbalife •use available cash balances herbalife international approximately 2171 million connection acquisition herbalife contributed proceeds sale preferred shares sale senior notes totaling 2000 million wh intermediate capital immediately upon consummation acquisition wh intermediate assumed indirectly one subsidiaries liability 72 million expenses relating acquisition related financing transactions herbalife resulting net capital contribution 1928 million 2 basis presentation companys consolidated financial statements refer herbalife international subsidiaries periods july 31 2002 herbalife subsidiaries periods subsequent july 31 2002 addition predecessor refers herbalife international subsidiaries periods july 31 2002 successor refers herbalife subsidiaries periods subsequent july 31 2002 successor consolidated financial statements also include interest expense amortization debt issuance costs incurred prior consummation acquisition common shares earnings per share data successor gives effect 12 reverse stock split took effect december 1 2004 company also officially changed name wh holdings cayman islands ltd herbalife ltd effective december 1 2004 new accounting pronouncements december 2004 financial accounting standards board fasb enacted statement financial accounting standards 123revised 2004 sfas 123r sharebased payment replaces statement financial accounting standards 123 sfas 123 accounting stockbased compensation supersedes accounting principle board apb opinion 25 accounting stock issued employees sfas 123r requires measurement employee sharebased payments employees including grants employee stock options using fairvaluebased method recording expense consolidated statements operations accounting provisions sfas 123r effective reporting periods beginning june 15 2005 company required adopt sfas 123r third quarter fiscal 2005 pro forma disclosures previously permitted sfas 123 longer alternative financial statement recognition see note 2 notes consolidated financial statements pro forma net income net income per share amounts fiscal 2002 fiscal 2004 used fairvaluebased method similar methods required sfas 123r measure compensation expense employee stock incentive awards although yet determined whether adoption sfas 123r result amounts similar current pro forma disclosures sfas 123 evaluating requirements sfas 123r expect adoption material impact consolidated statements income net income per share december 2004 fasb issued fasb staff position fas 1092 fas 1092 accounting disclosure guidance foreign earnings repatriation provision within american jobs creations act 2004 ajca introduces limited time 85 dividends received deduction repatriation certain foreign earnings us taxpayer repatriation provision provided certain criteria met fas 1092 provides accounting disclosure guidance repatriation provision although fas 1092 effective immediately expect able complete evaluation repatriation provision congress treasury department provides additional clarifying language key elements provision january 2005 treasury department began issue first series clarifying guidance documents related provision expect complete evaluation effects repatriation provision within first two fiscal quarters 2005 significant accounting policies consolidation policy consolidated financial statements period beginning august 1 2002 include accounts herbalife subsidiaries periods prior august 1 2002 include accounts herbalife international subsidiaries significant intercompany transactions accounts eliminated translation foreign currencies substantially countries company operates functional currency local currency foreign subsidiaries asset liability accounts translated consolidated financial reporting purposes us dollar amounts yearend exchange rates revenue expense accounts translated average rates year foreign exchange translation adjustments included accumulated comprehensive income loss accompanying consolidated balance sheets transaction losses include cost forward exchange option contracts 04 million 14 million 65 million 19 million seven months ended july 31 2002 five months ended december 31 2002 year ended december 31 2003 year ended december 31 2004 respectively included selling general administrative expenses accompanying consolidated statement income forward exchange contracts option contracts company enters forward exchange contracts option contracts managing foreign exchange risk sales distributors purchase commitments denominated foreign currencies intercompany transactions bank loans company also enters interest rate caps swaps managing interest rate risk variable rate term loan company use contracts trading purposes company adopted sfas 133 accounting derivative instruments hedging activities sfas 133 amended interpreted established accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities derivatives whether designated hedging relationships required recorded balance sheet fair value derivative designated fairvalue hedge changes fair value derivative underlying hedged item recognized concurrently earnings derivative designated cashflow hedge changes fair value derivative recorded comprehensive income oci recognized statement operations hedged item affects earnings sfas 133 defined new requirements designation documentation hedging relationships well ongoing effectiveness assessments order use hedge accounting derivative qualify hedge changes fair value recognized concurrently earnings cash equivalents company considers highly liquid investments purchased maturity three months less cash equivalents cash equivalents comprised primarily money market accounts foreign domestic bank accounts reduce credit risk company monitors credit standing financial institutions hold companys cash equivalents restricted cash companys restricted cash december 31 2003 pertained payment reserve account used provide payment scheduled interest amounts due senior notes march 31 2005 amounts deposited pledged bank new york collateral agent benefit holders senior notes 1512 senior notes repaid part acquisition related financing transactions march 2004 restricted cash december 31 2004 accounts receivable accounts receivable consist principally receivables credit card companies arising sale product companys distributors receivables importers utilized limited number countries sell products distributors due geographic dispersion credit card receivables collection risk considered significant although receivables importers significant company performs ongoing credit evaluations importers maintains allowance potential credit losses company believes provides adequate allowances receivables distributors fair value financial instruments company estimated fair value financial instruments using following methods assumptions •the carrying amounts cash equivalents restricted cash receivables accounts payable approximate fair value due shortterm maturities instruments •marketable securities based quoted market prices instruments •foreign exchange contracts based exchange rates period end •the fair value option forward contracts based dealer quotes •the book values companys variable rate debt instruments considered approximate fair values interest rates instruments approximate current rates offered company •the fair values fixed rate borrowings determined based recent market trade values inventories stated lower cost firstin firstout basis market company reserves obsolete slow moving inventory totaling 42 million 62 million december 31 2003 2004 respectively deferred financing costs deferred financing costs represent fees expenses related borrowing companys long term debt amortized term related debt longlived assets depreciation furniture fixtures equipment including computer hardware software computed straightline basis estimated useful lives related assets range three five years leasehold improvements amortized straightline basis life related asset term lease whichever shorter longlived assets reviewed impairment based undiscounted cash flows whenever events changes circumstances indicate carrying amount assets may recoverable measurement impairment loss based estimated fair market value asset goodwill intangible assets indefinite lives evaluated annual basis impairment frequently events changes circumstances indicate asset might impaired intangible assets finite lives amortized expected lives three years distributor network five years product formulas two years product certifications annual amortization expense intangibles 15 million 2002 345 million 2003 239 million 2004 140 million 2005 31 million 2006 18 million 2007 income taxes income tax expense includes income taxes payable current year change deferred income tax assets liabilities future tax consequences events recognized companys financial statements income tax returns valuation allowance recognized reduce carrying value deferred income tax assets believed likely component deferred income tax assets realized royalty overrides independent distributor may earn commissions called royalty overrides production bonuses based retail volume commissions based retail sales volume certain members independent sales force sponsored distributor addition commissions recorded products shipped nonus royalty checks aged variety reasons beyond certainty paid taken back income management calculated period certainty three years worldwide whereas previously period varied country ranging 12 months 30 years order achieve consistency among countries company adjusted period amounts would taken income three years companywide basis impact change year ended december 31 2004 pretax benefit approximately 24 million research development companys research development primarily performed outside consultants periods presented research development costs expensed incurred material earnings per share earnings per share data successor restated reflect 12 reverse stock split see paragraph 1 note 2 basic earnings per share represents net income period common shares outstanding divided weighted average number shares common stock outstanding period diluted earnings per share represents net income divided weighted average number shares outstanding inclusive effect dilutive securities companys preferred shares converted common shares march 8 2004 august 1 2002 date conversion company outstanding common shares accordingly basic earnings per share information presented periods diluted earnings per share periods assumes conversion preferred shares common shares includes dilutive effect outstanding stock options warrants periods march 8 2004 include basic earnings per share information reflects common shares outstanding subsequent conversion diluted earnings per share periods also reflects dilutive effect outstanding stock options following share amounts used compute basic diluted earnings per share period thousands options purchase 98 million 29 million 33 million shares common stock prices ranging 088 250 50 2464 088 352 outstanding 2004 2003 five months ended december 31 2002 respectively included computation diluted earnings per share option exercise prices greater average market price shares common stock potential issuance options would decrease loss per share therefore options would antidilutive 2001 seven months ended july 31 2002 number shares excluded computation diluted earnings per share immaterial revenue recognition revenue recognized products shipped title passes independent distributor importer sales recognized net sales basis reflects product returns net discounts referred distributor allowances amounts billed freight handling costs freight handling costs paid company included cost sales company generally receives net sales price cash credit card payments point sale related royalty overrides allowances product returns recorded merchandise shipped allowances product returns primarily connection buyback program provided time product shipped accrual based upon historic return rates country vary zero approximately 50 net sales relevant return pattern reflects anticipated returns received period 12 months following original sale accounting stock options december 2002 fasb issued sfas 148 accounting stock based compensationtransition disclosure sfas 148 amends sfas 123 accounting stockbased compensation provide alternative methods transition voluntary change fair value based method accounting stockbased employee compensation addition sfas 148 amends disclosure requirements sfas 123 require prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method used reported results company applies intrinsicvaluebased method accounting prescribed accounting principles board apb opinion 25 accounting stock issued employees related interpretations including fasb interpretation 44 accounting certain transactions involving stock compensation interpretation apb opinion 25 issued march 2000 account stockbased awards employees options granted employees compensation expense recorded date grant current market price underlying stock exceeded exercise price sfas 123 established accounting disclosure requirements using fairvaluebased method accounting stockbased employee compensation plans allowed sfas 123 company elected continue apply intrinsicvaluebased method accounting described adopted disclosure requirements sfas 123 following tables illustrate effect net income fairvaluebased method applied outstanding unvested awards period millions except per share amounts use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates reclassifications certain reclassifications made prior year financial statements conform current year presentation 3 inventories consist primarily finished goods available resale categorized follows 4 longterm debt longterm debt consists following interest expense 02 million 252 million 415 million 1233 million seven months ended july 31 2002 five months ended december 31 2002 years ended december 31 2003 2004 connection acquisition company consummated certain related financing transactions including issuance wh acquisition june 27 2002 1650 million 1134 senior subordinated notes 1134 notes issued 98716 par due july 15 2010 interest 1134 notes paid semi annually january 15th july 15th year first payment made january 15 2003 connection financing company incurred 251 million debt issuance costs amortized term debt using effective interest rate method third quarter 2003 company repurchased 5 million principal value 1134 notes fair value 1134 notes 1896 million 02 million december 31 2003 2004 respectively addition company borrower entered credit agreement dated july 31 2002 guarantors party lenders party rabobank international documentation agent general electric capital corporation syndication agent ubs securities llc successor interest ubs warburg llc arranger ubs ag stamford branch administrative agent collateral agent issuing bank credit agreement provides term loan amount 1800 million revolving credit facility amount 250 million collectively senior credit facility conjunction financing company incurred 167 million debt issuance costs amortized term debt using effective interest method revolving credit facility available july 31 2007 term loan revolving credit facility bear interest option company either alternate base rate libor rate plus case applicable margin initially base rate applicable margin term loan 300 libor rate applicable margin 400 december 31 2003 amounts borrowed revolving credit facility december 31 2003 company selected libor rate alternative three months total interest rate 51 december 31 2003 accordance terms senior credit facility october 30 2002 herbalife purchased threeyear 5 libor interest rate cap covering 438 million term loan december 31 2003 interest rate cap 344 million december 22 2004 interest rate cap cancelled also connection acquisition company issued sold 380 million principal amount 1512 senior notes 1512 senior notes due july 15 2011 1512 senior notes accrue interest rate 155 per annum interest required paid march 31 june 30 september 30 december 31 year commencing september 30 2002 accordance terms 1512 senior notes 125 per annum interest payable quarterly paid cash 30 per annum interest payable quarterly paid issuance additional notes principal amount 1512 senior notes required paid july 15 2011 net proceeds issuance 1512 senior notes company established deposited 125 million payment reserve account provide payment due scheduled cash interest payments march 31 2005 certain circumstances amounts due 1512 senior notes amounts deposited payment reserve account pledged company bank new york collateral agent benefit holders 1512 senior notes balance payment reserve account 57 million december 31 2003 reflected restricted cash balance sheet connection sale companys 1512 senior notes company issued warrants right purchase approximately 20 million preferred shares exercise price 001 per share whitney held warrants right purchase 09 million company allocated 18 million capital surplus issuance warrants july 31 2002 1512 senior notes discounted amount 1134 notes senior credit facility guaranteed guarantors defined note 15 herein senior credit facility also guaranteed herbalife obligations senior credit facility secured first priority pledges shares guarantors b 65 equity interests foreign subsidiaries herbalife international guarantors hiip investment co llc herbalife foreign sales corporation importadora distribuidora herbalife international de chile limitada herbalife international greece sa herbalife hungary trading limited pt herbalife indonesia herbalife international sbn bhd hbl international maroc sàrl herbalife international products nv herbalife international holdings inc herbalife international sa herbalife dominicana sa herbalife del ecuador sa ii security interests liens accounts receivable inventory property assets herbalife guarantors escrow account interest senior notes 1134 notes senior credit facility 1512 senior notes include customary covenants restrict among things ability incur additional debt pay dividends make certain restricted payments incur liens merge sell substantially assets enter various transactions affiliates additionally senior credit facility includes covenants relating maintenance certain leverage fixed charge coverage interest coverage ratios december 2002 company lenders amended credit agreement terms amendment company made prepayment 400 million december 30 2002 connection prepayment lenders waived december 31 2002 march 31 2003 mandatory amortization payments 75 million along mandatory 50 excess cash flow payment solely year ended december 31 2002 companys debt agreement provision requires company make early payments extent excess cash flow defined addition herbalife international allowed pay certain monitoring fees whitney golden gate terms original credit agreement accrued paid obligations credit agreement paid full amortization principal payments also modified herbalife international obligated pay approximately 22 million june 30 2003 pay 65 million subsequent quarter march 31 2008 final payment june 30 2008 approximately 87 million december 31 2003 herbalife international estimated mandatory 50 excess cash flow payment 2003 40 million paid first quarter 2004 consequently future quarterly principal payments reduced however company may obligated make future excess cash flow payments described addition herbalife international granted right make purchase 25 million aggregate principal amount 1134 notes life credit agreement provided herbalife meets agreed upon leverage ratio december 31 2003 certain whitney affiliated companies provided funding 51 million term loan senior credit facility 13 million 1134 notes held 173 million 1512 senior notes march 2004 company lenders amended credit agreement terms amendment company made prepayment 400 million reduce outstanding amounts credit agreement connection prepayment lenders credit agreement waived march 31 2004 mandatory amortization payment 65 million along mandatory 50 excess cash flow payment year ended december 31 2003 amendment also lowered interest rate libor plus 25 margin increased capital spending allowance credit agreement permitted herbalife complete recapitalization schedule principal payments also modified company obligated pay approximately 44 million march 31 2004 subsequent quarter june 30 2008 march 2004 herbalife whollyowned subsidiary wh capital corporation completed 2750 million offering 912 notes due 2011 proceeds offering together available cash used pay original issue price cash due upon conversion 1041 million outstanding herbalife 12 series cumulative convertible preferred shares including 20 million warrants exercised described pay accrued unpaid dividends redeem herbalifes 1512 senior notes pay related fees expenses total price 521 million redeem 1512 senior notes consisted 396 million aggregate principal amount excluding 17 million unamortized discount 114 million purchase premium 11 million accrued interest january 1 2004 including march 8 2004 time july 31 2002 july 15 2012 warrants issued 1512 senior notes could exercised purchase equivalent amount preferred stock exercise price 001 per share number warrants outstanding july 31 2002 exercised march 8 2004 purchase equivalent amount preferred shares 2040816 proceeds 912 notes used part redeem convert preferred shares common shares interest 912 notes paid cash semiannually arrears april 1 october 1 year starting october 1 2004 912 notes herbalifes general unsecured obligations ranking equally existing future senior indebtedness senior herbalifes future subordinated indebtedness also 912 notes effectively subordinated existing future indebtedness liabilities herbalifes subsidiaries february 2005 company redeemed 110 million principal value 40 outstanding principal amount cash payment 1205 million including premium 105 million connection initial public offering december 2004 company made tender offer outstanding 1134 notes received tenders 999 outstanding principal amount purchase price amounted 1972 million including accrued interest 81 million premium 293 million addition 206 million interest recorded related write deferred financing costs discount company also paid entire amount borrowings senior credit facility amounting 669 million including accrued interest fees additional 62 million interest also recorded result write deferred financing costs concurrently closing offering company entered new 2250 million senior credit facility syndicate financial institutions including affiliates morgan stanley co incorporated merril lynch pierce fenner smith incorporated joint lead arrangers joint bookmanagers senior credit facility consists senior secured revolving credit facility total availability 250 million senior secured term loan facility aggregate principal amount 2000 million revolver available december 21 2009 revolver bears interest libor plus 20 term loan initially bears interest libor plus 214 company obligated pay 05 million every quarter september 30 2010 remaining principal december 21 2010 term loan december 31 2004 amounts borrowed revolving credit facility annual scheduled payments longterm debt including 110 million principal redemption 912 notes 1203 million 2005 66 million 2006 43 million 2007 20 million 2008 20 million 2009 3511 million thereafter 5 lease obligations company warehouse office furniture fixtures equipment leases expire various dates 2011 lease agreements company also obligated pay property taxes insurance maintenance costs certain leases contain renewal options future minimum rental commitments noncancelable operating leases capital leases december 31 2004 follows rental expense seven months ended july 31 2002 five month period ended december 31 2002 years ended december 31 2003 2004 116 million 86 million 210 million 225 million respectively property capital leases included property accompanying consolidated balance sheets follows 6 employee compensation plans company maintains profit sharing plan pursuant sections 401 k internal revenue code plan available substantially employees meet length service requirements employees may elect contribute 2 17 compensation company make matching contributions amount equal one dollar deferred earnings exceed 3 participants earnings participants partially vested company contributions one year fully vested five years company contributed 08 million 06 million 13 million seven months ended july 31 2002 five months ended december 31 2002 years ended december 31 2003 2004 respectively company two nonqualified deferred compensation plans select groups management plan senior executive plan deferred compensation plans allow eligible employees elect annually defer 50 base annual salary 100 annual bonus calendar year annual deferral amount company makes matching contributions behalf participant senior executive plan effective 2002 senior executive plan amended provide amount matching contributions determined company discretion 2004 matching contribution 3 participants base salary participant either two deferred compensation plans times fully vested nonforfeitable interest years contribution including interest credited thereto company matching contributions applicable connection participants election defer annual deferral amount participant may also elect receive shortterm payout equal annual deferral amount plus interest amount payable two years first day year annual deferral amount actually deferred july 2002 company adopted additional deferred compensation plan supplemental plan supplemental plan allows employees participate highly compensated eligible participate change control plan administrative committee manages administers plans deferred compensation committee allows eligible employees defer 100 change control payments participant supplemental plan deemed invested funds provide return equal shortterm afr within meaning code entire interest participant supplemental plan always fully vested nonforfeitable connection participants election defer change control payment participant may also elect receive shortterm payout equal deferral amount plus earnings payable two years first day year deferral amount actually deferred subject shortterm payout provision specified exceptions unforeseeable financial emergencies participant may withdraw without incurring ten percent 10 withdrawal penalty portion account supplemental plan prior date participant either 1 determined deferred compensation committee incurred permanent total disability 2 dies otherwise terminates employment company total deferred compensation expense three deferred compensation plans net participant contributions 19 million 13 million 10 million seven months ended july 31 2002 five months ended december 31 2002 years ended december 31 2003 2004 respectively total longterm deferred compensation liability two deferred compensation plans 224 million 139 million december 31 2003 2004 respectively company executive retention plan purpose executive retention plan provide financial incentives select group management highly compensated employees company continue provide services company period immediately change control defined result certain actions herbalife internationals board acquisition deemed change control executive retention plan thus consummation acquisition result payment benefit pursuant executive retention plan company also established executive retention trust provide benefits executive retention plan executive retention trust irrevocable trust established institutional trustee administrative committee executive retention plan establish individual account executive retention trust participant executive retention plan occurrence change control administrative committee control investment assets executive retention trust determine allocation assets executive retention trust individual accounts participants participant qualifies benefit executive retention plan receive lump sum benefit equal dollar amount individual account executive retention trust benefit shall paid within 90 days participant qualifies benefit participants employment company terminates participant qualifies benefit executive retention plan participants account executive retention trust revert company participants benefit executive retention plan reduced amount would cause payment federal excise tax deferred compensation plans unfunded benefits paid general assets company except company contributed rabbi trust whose assets used pay benefits company remains solvent reached companys creditors company becomes insolvent value assets rabbi trust 185 million 119 million december 31 2003 2004 respectively company also contributed executive retention trust irrevocable trust irrevocable trusts assets used pay benefits executive retention plan intended reachable companys creditors value assets irrevocable trust 28 million 02 million december 31 2003 2004 respectively company two change control plans senior management change control plan management employee change control plan pursuant agreements place prior signing merger agreement upon consummation acquisition certain companys executives received change control payments making necessary adjustments purposes section 280g 4999 code 76 million pursuant herbalife management employee change control plan place prior signing merger agreement eligible employees within one year occurrence change control involuntarily terminated company would entitled receive one year base compensation agreement expired july 31 2003 result acquisition change control payments made expensed july 2002 7 transactions related parties company entered agreements whitney golden gate pay monitoring fees services fees expenses monitoring fee agreements company obligated pay annual amount 50 million less 25 million initial period ten years subject provisions credit agreement amended period august 1 december 31 2002 years ended december 31 2003 2004 company expensed monitoring fees amount 21 million 50 million 75 million expenses 01 million 34 million 18 million respectively see note 9 notes consolidated financial statements details termination monitoring fee agreements selected members companys distributor organization senior management purchased either herbalife equity sponsors herbalifes 12 series cumulative convertible preferred shares price paid participating members companys distributor organization senior management equity sponsors august october 31 2002 offering 176 per share january 31 2003 offering members companys presidents team equity sponsors 197 per share connection may 20 2003 offering equity club price paid members companys presidents team equity sponsors members companys chairmans club herbalife 221 per share michael johnson companys chief executive officer purchased herbalife 203620 shares june 24 2003 price paid mr johnson price paid members companys distributor organization may 20 2003 offering francis tirelli companys former chief executive officer entered separation general release agreement company effective december 24 2002 preferred shares previously owned mr tirrelli purchased certain existing shareholders connection therewith advance 05 million made companys subsidiary herbalife international america inc shareholders december 31 2003 2004 03 million 00 million respectively outstanding june 2003 herbalife entered subscription agreement chief executive officer michael johnson pursuant herbalife issued 02 million newly issued preferred shares price 221 per share deemed represent fair value price paid mr johnson price paid members companys distributors may 2003 offering 2004 whitney co acquired 50 percent indirect ownership interest shuster laboratories inc provider product testing formula development herbalife total purchases shuster labs 2004 56000 2004 whitney co acquired though one affiliated companies ownership interest tba entertainment provider creative services herbalife services performed 2004 herbalife february 2005 payment 750000 made tba entertainment services relating 25th anniversary extravaganza 2004 golden gate capital llc acquired 47 percent ownership interest leiner health products inc nutritional manufacturer supplier certain herbalife products total purchases leiner health products inc 2004 530000 january 2005 whitney together affiliates acquired stauber performance ingredients stauber valueadded distributor bulk specialy nutraceutical ingredients total purchases stauber herbalife approximately 76177 fiscal years ended december 31 2004 company believes transactions entities done arms length basis fair market pricing 8 contingencies company time engaged routine litigation company regularly reviews pending litigation matters involved establishes reserves deemed appropriate management litigation matters probable loss estimate made herbalife international defendant purported class action lawsuit us district court california jacobs v herbalife international inc et al originally filed february 19 2002 challenging marketing practices several distributors herbalife international various state federal laws plaintiffs alleged newest way wealth nwtw system operated certain independent distributors herbalife products placed much emphasis recruiting encouraged excessively large purchases product promotional materials distributors plaintiffs also alleged nwtw pressured distributors disseminate promotional materials misleading way described income could generated use nwtw system well way described herbalife business opportunity addition plaintiffs alleged nwtw violated certain state laws prohibiting racketeering endless chain schemes insufficient disclosure assisted marketing plans unfair deceptive business practices plaintiffs sought hold herbalife international vicariously liable actions independent distributors without way admitting liability wrongdoing company reached binding settlement plaintiffs terms settlement company paid 3 million fund distributed former supervisorlevel distributors purchased nwtw materials defendants matter ii pay maximum aggregate amount 1 million refund former supervisorlevel distributors amounts paid purchase nwtw materials defendants matter iii offer rebates maximum aggregate amount 2 million certain new purchases herbalife products current supervisorlevel distributors purchased nwtw materials defendants matter related settlement amounts excluding potential future discounts included 2003 selling general administrative expenses herbalife international certain distributors named defendants purported class action lawsuit filed july 16 2003 circuit court ohio county state west virginia mey v herbalife international inc et al herbalife international removed lawsuit federal court recently remanded lawsuit state court complaint alleges certain telemarketing practices certain herbalife international distributors violate telephone consumer protection act seeks hold herbalife international liable practices distributors specifically plaintiffs complaint alleges several herbalifes distributors used prerecorded telephone messages autodialers contact prospective customers violation tcpas prohibition practices herbalifes distributors independent contractors distributors fact violated tcpa also violated herbalifes policies require distributors comply applicable federal state local laws company believes meritorious defenses suit marketer dietary nutritional supplements products ingested consumers applied bodies company subjected various product liability claims effects claims date material company reasonably possible range exposure currently existing claims material company believes meritorious defenses allegations contained lawsuits company currently maintains product liability insurance annual self insured retention 100 million certain companys subsidiaries subject tax audits governmental authorities respective countries certain tax audits governmental authorities proposing significant amounts additional taxes related interest penalties due aggregate amount assessed taxes penalties interest date approximately 67 million company tax advisors believe meritorious defenses allegations additional taxes owing company vigorously contesting additional proposed taxes related charges matters may take several years resolve company cannot sure ultimate resolution however opinion management adverse outcomes likely result material adverse effect financial condition operating results opinion based belief losses suffered excess amounts reserved would material company meritorious defenses although company reserved amount company believes represents likely outcome resolution disputes company incorrect assessment company may record additional expenses 9 shareholders equity december 31 2002 company authorized 103 million preferred shares 0001 par value company increased number authorized preferred shares 103 million 106 million july 31 2003 july 31 2002 100 million preferred shares issued 176 million private placement offering may 30 2003 additional 18 million preferred shares sold 4 million private placement offering august 27 2002 additional 02 million preferred shares sold companys chief executive officer michael johnson pursuant subscription agreement entered june 2003 preferred shares dividend provisions liquidation preference common shares preferred shares entitled receive cash dividends rate per annum equal 12 original issue price unpaid dividends compounded quarterly basis dividends cumulative accrual date whether earned declared upon conversion preferred shares accrued unpaid dividends paid company cash payment dividends subject restrictions imposed debt documents total undeclared unpaid cumulative dividends preferred shares 328 million december 31 2003 march 8 2004 preferred shares redeemed original issue price 1831 million addition dividends 385 million converted common shares onetoone basis december 31 2004 company authorized 75 million preference shares 0002 par value authorized preference shares unissued preference shares may issued time one series voting powers full limited without voting powers designations preferences relative participating optional special rights qualifications limitations restrictions december 2004 company completed ipo offered common shares part series recapitalization transactions connection ipo see discussion note 1 notes consolidated financial statements details recapitalization company 686 million common shares outstanding december 31 2004 common shares outstanding december 31 2003 2002 wh holdings cayman islands ltd stock incentive plan management plan herbalife established stock option plan provides grant options purchase common shares herbalife ltd members management herbalife international option plan administered committee appointed board herbalife upon conversion options common shares herbalife members management herbalife international required enter shareholders agreement registration rights agreement herbalife wh holdings cayman islands ltd independent directors stock option plan independent directors plan herbalife established independent directors stock option plan provides grant options purchase common shares herbalife independent directors herbalife management plan independent directors plan collectively plans call options granted exercise prices less fair value underlying shares date grant options plans vest become exercisable quarterly 5 increments unless provided otherwise applicable grant agreement options granted plans contractual life 10 years shares issued exercise subject certain repurchase provisions following termination employment directorship november 6 2003 board company approved amendment stock option plan wh holdings cayman islands ltd stock incentive plan certain senior management employees senior plan previous terms company determined options substantively vest since could repurchased company lower fair market value exercise price accordingly company concluded would measurement date liquidity event occurred companys repurchase right would expire gaap purposes plan compensation expense recognized company also concluded amendments result fixed plan measurement date november 6 2003 independent directors plan upon termination independent director herbalife institutional shareholders right repurchase shares termination voluntary due resignation cause amount equal lesser fair market value time termination b exercise price ii involuntary without cause death retirement disability amount equal greater fair market value time termination b exercise price herbalife ltd 2004 stock incentive plan 2004 stock incentive plan purpose 2004 stock incentive plan enable us attract motivate reward retain directors officers employees consultants align interests shareholders providing increasing proprietary interest company 2004 stock incentive plan provide grant incentive nonqualified options purchase herbalife common shares stock appreciation rights restricted stock restricted stock units performance units directors officers employees consultants selected compensation committee receive awards plan 2004 stock incentive plan intended replace two existing equity compensation plans management plan independent directors plan additional awards made either management plan independent directors plan however shares remaining available issuance plans absorbed become available issuance 2004 stock incentive plan maximum number common shares may issued pursuant awards granted 2004 stock incentive plan 5000000 plus shares remain available issuance management plan independent directors plan subject certain adjustments corporate transactions addition shares subject awards either management plan independent directors plan 2004 stock incentive plan returned herbalife upon cancellation expiration forfeiture award payment satisfaction purchase price exercise price tax withholding obligation award become available award grants 2004 stock incentive plan taken together 134 million shares available grant management plan independent directors plan 2004 stock incentive plan december 31 2004 company granted options net cancellations acquire approximately 103 million common shares management plan 2004 incentive plan approximately 04 million common shares independent directors plan directors aggregate three plans company granted options acquire approximately 107 million common shares equal 156 december 31 2004 share capital additional stock options stock appreciation rights granted either management plan independent directors plan option outstanding july 31 2002 december 31 2002 december 31 2003 december 31 2004 related option information follows fair value stock options granted periods presented determined using blackscholes option pricing model following weighted average assumptions following table summarizes information regarding option groups outstanding december 31 2004 december 1 2004 company agreed whitney ggc administration llc terminate monitoring fees agreements consideration 07 million warrants warrant gives holder ability purchase one share companys common shares price 1550 per share 07 million warrants outstanding december 31 2004 fair value warrants granted 411 per share approximately 29 million included fourth quarter 2004 selling general administrative expenses determined using blackscholes option pricing model assumptions used valuation include 30 price volatility 372 risk free rate return 0 dividend yield 5year expected exercise term 10 segment information company network marketing company sells wide range weight management products nutritional supplements personal care products within one industry segment defined sfas 131 disclosures segments enterprise related information companys products manufactured third party providers sold independent distributors sell herbalife products retail consumers distributors company sells products 59 countries throughout world organized managed geographic region first quarter 2003 company elected aggregate operating segments one reporting segment management believes companys operating segments similar operating characteristics similar long term operating performance making determination management believes operating segments similar nature products sold product acquisition process types customers products sold methods used distribute products nature regulatory environment revenues reflect sales products distributors based distributors geographic location sales attributed united states reported geographic operating information companys geographic operating information sales product line follows 11 derivative instruments hedging activities company designates certain derivatives cash flow hedges company engages foreign exchange hedging strategy hedged transactions forecasted foreign currency denominated intercompany transactions hedged risk variability foreign currency hedging strategy involves purchase sale average rate options outstanding cash flow hedges foreign exchange exposures december 31 2004 maximum length time company hedging exposures 12 months company also engages interest rate hedging strategy hedged transactions forecasted interest payments variable rate term loan hedged risk variability interest rate hedging strategy involves purchase interest rate caps qualifying highly effective cash flow hedges changes effective portion fair value derivative recorded comprehensive income oci ineffective portion hedges material periods presented recognized income currently december 31 2003 2004 pretax net loss oci 14 million 04 million respectively 2004 pretax net loss oci 17 million reclassified earnings substantially remaining oci amounts reclassified earnings within 12 months company designates certain derivatives free standing derivatives hedge accounting apply changes fair market value derivatives recorded companys statement income company purchases average rate put options give company right obligation sell foreign currency specified exchange rate strike rate contracts provide protection event foreign currency weakens beyond option strike rate fair value option contracts based thirdparty bank quotes following table provides information details companys option contracts certain option contracts designated cash flow hedges fair value hedges certain option contracts freestanding derivatives foreign exchange forward contracts also used hedge advances subsidiaries objective contracts neutralize impact foreign currency movements subsidiarys operating results fair value forward contracts based thirdparty bank quotes table describes forward contracts outstanding forward contracts freestanding derivatives foreign subsidiaries excluding operating hyperinflationary environments designate local currencies functional currency year end total amount cash held foreign subsidiaries primarily japan korea 664 million 51 million maintained invested us dollars interest rate caps used hedge interest rate exposure variable interest rate term loan provide protection event libor rates increase beyond cap rate interest rate caps designated cash flow hedges december 2004 company terminated interest rate caps time termination 01 million recorded interest expense table describes interest rate caps outstanding 12 income taxes components income taxes income taxes follows tax effects temporary differences gave rise deferred income tax assets liabilities follows december 31 2004 companys deferred income tax asset foreign tax credits 441 million net operating loss carryforwards certain foreign subsidiaries 26 million reduced valuation allowance 411 million tax benefits recognized future reduction valuation allowance 317 million benefits allocated reduce goodwill 2004 company recorded deferred tax liability 21 million connection recording comprehensive income year related currency translation total deferred tax liability december 31 2004 relating accumulated comprehensive income 53 million net operating loss carryforwards expire varying amounts 2005 2014 foreign tax credit carryforwards expire varying amounts 2010 2013 realization income tax carryforwards dependent generating sufficient taxable income prior expiration carryforwards although realization assured management believes likely net carrying value income tax carryforwards realized amount income tax carryforwards considered realizable however could reduced estimates future taxable income carryforward period reduced deferred income taxes 39 million provided undistributed earnings nonus subsidiaries expected permanently reinvested subsidiaries applicable statutory rate cayman islands zero herbalife ltd years ended december 31 2004 2003 purposes reconciliation provision income taxes statutory effective tax rate national us 35 rate applied follows 13 restructuring reserve date acquisition company began assess formulate plan reduce costs business recorded severance restructuring accrual part cost acquisition accrued severance employees including executives corporate functions administrative support identified time acquisition actions required plan termination began immediately consummation transaction remaining balance restructuring reserve december 31 2004 07 million represents scheduled severance payments employees following table summarizes activity companys restructuring accrual subsequent july 31 2002 14 supplemental information consolidated financial statement data december 31 2003 2002 year ended december 31 2003 period inception december 31 2002 aggregated entities guarantee senior subordinated notes guarantors entities guarantee senior subordinated notes nonguarantors guarantors include wh intermediate lux holdings lux intermediate lux cm collectively parent guarantors herbalife internationals operating subsidiaries brazil finland israel japan mexico united kingdom us herbalife investment co llc sweden taiwan thailand collectively subsidiary guarantors subsidiaries nonguarantors herbalife ltd guarantor senior subordinated notes consolidating condensed statements income years ended december 31 2004 2003 periods january 1 july 31 2002 august 1 december 31 2002 summarized follows millions consolidating condensed balance sheet data december 31 2004 december 31 2003 summarized follows millions consolidating condensed statement cash flows data years ended december 31 2004 2003 periods january 1 july 31 2002 august 1 december 31 2002 summarized follows millions 15 quarterly information unaudited 1 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated signature title date michael johnson michael johnson chief executive officer director principal executive offices march 14 2005 richard goudis richard goudis chief financial officer principal financial officer march 14 2005 david pezzullo david pezzullo chief accounting officer principal accounting officer march 14 2005 peter castleman peter castleman director chairman board march 14 2005 henry burdick henry burdick director vice chairman march 14 2005 ken diekroeger ken diekroeger director march 14 2005 james fordyce james fordyce director march 14 2005 jesse rogers jesse rogers director march 14 2005 charles orr charles orr director march 14 2005 peter maslen peter maslen director march 14 2005 richard bermingham richard bermingham director march 14 2005 leroy barnes leroy barnes director march 14 2005 leslie stanford leslie stanford director march 14 2005 markus lehmann markus lehmann director march 14 2005 form 10k forward looking statements company part item 1 business item 2 properties item 3 legal proceedings item 4 submission matters vote security holders part ii item 5 market registrants common equity related shareholder matters issuer purchases equity securities item 6 selected financial data item 7 managements discussion analysis financial condition results operations item 7a quantitative qualitative disclosures market risk item 8 financial statements supplementary data item 9 changes disagreements accountants accounting financial disclosure item 9a controls procedures item 9b information part iii item 10 directors executive officers registrant item 11 executive compensation item 12 security ownership certain beneficial owners management related stockholder matters item 13 certain relationships related transactions item 14 principal accountant fees services part iv item 15 exhibits financial statement schedules reports form 8k exhibit index report independent registered public accounting firm report independent registered public accounting firm herbalife ltd formerly wh holdings cayman islands ltd consolidated balance sheets december 31 herbalife ltd formerly wh holdings cayman islands ltd consolidated statements operations herbalife ltd formerly wh holdings cayman islands ltd consolidated statements changes shareholders equity comprehensive income loss herbalife ltd formerly wh holdings cayman islands ltd consolidated statements cash flows herbalife ltd formerly wh holdings cayman islands ltd notes consolidated financial statements 1 signaturesitem 15 exhibits financial statement schedules following documents filed part annual report form 10k incorporated herein reference 1 financial statements following financial statements herbalife ltd filed part annual report form 10k pages indicated 2 financial statement schedules omitted required information inapplicable information presented consolidated financial statements related notes 3 exhibits listed exhibit index immediately filed part annual report form 10k incorporated reference herein exhibit index filed herewith management contract compensatory plan arrangement previously filed october 1 2004 exhibit company’s registration statement form s1 file 333119485 incorporated herein reference b previously filed november 9 2004 exhibit amendment 2 company’s registration statement form s1 file 333119485 incorporated herein reference c previously filed december 2 2004 exhibit amendment 4 company’s registration statement form s1 file 333119485 incorporated herein reference previously filed december 14 2004 exhibit amendment 5 company’s registration statement form s1 file 333119485 incorporated herein reference e previously filed february 17 2005 exhibit company’s registration statement form s8 file 333122871 incorporated herein reference f previously filed march 14 2005 exhibit company’s annual report form 10k year ended december 31 2004 incorporated herein reference g previously filed may 9 2005 exhibit company’s quarterly report form 10q quarter ended march 31 2005 incorporated herein reference h previously filed may 13 2005 exhibit company’s current report form 8k incorporated herein reference previously filed june 14 2005 exhibit company’s current report form 8k incorporated herein reference k previously filed august 23 2005 exhibit company’s current report form 8k incorporated herein reference l previously filed september 23 2005 exhibit company’s current report form 8k incorporated herein reference previously filed august 3 2005 exhibit company’s current report form 10q quarter ended june 30 2005 incorporated herein reference report independent registered public accounting firm board directors herbalife ltd audited accompanying consolidated balance sheets herbalife ltd formerly wh holdings cayman islands ltd subsidiaries december 31 2005 2004 related consolidated statements operations changes shareholders’ equity comprehensive income loss cash flows years threeyear period ended december 31 2005 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audit conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position herbalife ltd subsidiaries december 31 2005 2004 results operations cash flows years threeyear period ended december 31 2005 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states effectiveness herbalife ltd’s internal control financial reporting december 31 2005 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso report dated february 28 2006 expressed unqualified opinion management’s assessment effective operation internal control financial reporting kpmg llp los angeles california february 28 2006 herbalife ltd formerly wh holdings cayman islands ltd consolidated balance sheets see accompanying notes consolidated financial statements herbalife ltd formerly wh holdings cayman islands ltd consolidated statements operations see accompanying notes consolidated financial statements herbalife ltd formerly wh holdings cayman islands ltd consolidated statements changes shareholders’ equity comprehensive income loss see accompanying notes consolidated financial statements herbalife ltd formerly wh holdings cayman islands ltd consolidated statements cash flows see accompanying notes consolidated financial statements herbalife ltd formerly wh holdings cayman islands ltd notes consolidated financial statements 1 organization herbalife ltd cayman islands exempted limited liability company “herbalife” incorporated april 4 2002 direct indirect whollyowned subsidiaries wh intermediate holdings ltd cayman islands company “wh intermediate” wh luxembourg holdings sàrl luxembourg unipersonal limited liability company “lux holdings” wh luxembourg cm sàrl luxembourg unipersonal limited liability company wh acquisition corp nevada corporation “wh acquisition” formed behalf whitney co llc “whitney” golden gate private equity inc “golden gate” order acquire herbalife international inc nevada corporation subsidiaries “herbalife international” july 31 2002 “acquisition” herbalife subsidiaries referred collectively herein company ipo recapitalization december 16 2004 herbalife completed initial public offering common shares “ipo” part series recapitalization transactions including • tender offer 1598 million outstanding 1134 senior subordinated notes due 2010 “1134 notes” issued herbalife international • replacement herbalife international’s existing 2050 million senior credit facility new 2250 million senior credit facility • payment 1398 million special cash dividend preipo shareholders herbalife • amendment herbalife’s memorandum articles association 1 effect 12 reverse stock split herbalife’s common shares 2 increase herbalife’s authorized common shares 500 million shares 3 increase herbalife’s authorized preference shares 75 million shares took effect december 1 2004 planned continuation ipo recapitalization herbalife exercised contract provision december 2004 redeem 40 1100 million principal value excluding premium 105 million 912 notes due 2011 “912 notes” required notice period redemption completed february 4 2005 redemption premium 105 million writeoff deferred financing fees 37 million associated redemption included interest expense first quarter 2005 connection ipo recapitalization secondary company incurred 247 million fees expenses 198 million associated ipo included equity 49 million associated establishment new credit facility included deferred financing costs secondary offering december 19 2005 herbalife completed secondary public offering 13 million common shares held certain existing shareholders selling shareholders received net proceeds sale common shares sold offering accordingly herbalife receive proceeds sale common shares 2 basis presentation company’s consolidated financial statements refer herbalife subsidiaries common shares earnings per share data successor gives effect 12 reverse stock split took effect december 1 2004 company also officially changed name wh holdings cayman islands ltd herbalife ltd effective december 1 2004 herbalife ltd formerly wh holdings cayman islands ltd notes consolidated financial statements continued new accounting pronouncements december 2004 financial accounting standards board “fasb” enacted statement financial accounting standards 123 revised 2004 “sharebased payment” “sfas 123r” replaces statement financial accounting standards 123 accounting stockbased compensation” “sfas 123” supersedes accounting principle board “apb” opinion 25 “accounting stock issued employees” “apb 25” sfas 123r requires measurement employee sharebased payments employees including grants employee stock options using fairvaluebased method recording expense consolidated statements operations company required adopt sfas 123r first quarter fiscal year 2006 pro forma disclosures previously permitted sfas 123 longer alternative financial statement recognition see note 2 notes consolidated financial statements pro forma net income loss net income loss per share amounts fiscal 2002 fiscal 2005 presented company used fairvaluebased method similar methods required sfas 123r measure compensation expense employee stock incentive awards although company yet determined whether adoption sfas 123r result amounts similar current pro forma disclosures sfas 123 evaluating requirements sfas 123r preliminary basis company expects adoption cumulative pretax impact less 15 million period 2006 2010 related share based awards issued prior year end 2005 consolidated statements operations full impact adopting sfas 123r cannot accurately estimated time depend market value amount share based awards granted future periods december 2004 fasb issued fasb staff position fas 1092 “accounting disclosure guidance foreign earnings repatriation provision within american jobs creations act 2004” “sfas 1092” american jobs creation act “ajca” introduces limited time 85 dividends received deduction repatriation certain foreign earnings us taxpayer repatriation provision provided certain criteria met sfas 1092 provides accounting disclosure guidance repatriation provision provide material benefit company december 2004 fasb issued sfas 151 “inventory costs amendment arb 43 chapter 4” “sfas 151” requires abnormal amounts idle facility expense freight handling costs wasted material spoilage recognized currentperiod charges addition statement requires allocation fixed production overheads costs conversion based normal capacity production facilities sfas 151 effective fiscal years beginning june 15 2005 company adopt statement required management believe adoption material effect company’s results operations financial condition liquidity may 2005 fasb issued sfas 154 “accounting changes error corrections” “sfas 154” sfas 154 requires restatement prior periods’ financial statements changes accounting principle unless impracticable determine either periodspecific effects cumulative effect change also sfas 154 requires retrospective application change accounting principle limited direct effects change sfas 154 effective accounting changes corrections errors made fiscal years beginning december 15 2005 management believe adoption sfas 154 material impact company’s consolidated financial statements reclassifications certain reclassifications made prior period financial statements conform current period presentation herbalife ltd formerly wh holdings cayman islands ltd notes consolidated financial statements continued significant accounting policies consolidation policy consolidated financial statements include accounts company subsidiaries significant intercompany transactions accounts eliminated foreign currency translation substantially countries company operates functional currency local currency foreign subsidiaries’ asset liability accounts translated consolidated financial reporting purposes us dollar amounts yearend exchange rates revenue expense accounts translated average rates year foreign exchange translation adjustments included accumulated comprehensive income loss accompanying consolidated balance sheets transaction gains losses include cost forward exchange option contracts related settlement gains losses included selling general administrative expenses accompanying consolidated statement income company recorded losses 65 million 19 million years ended december 31 2003 2004 respectively gain 07 million year ended december 31 2005 forward exchange contracts option contracts company enters forward exchange contracts option contracts managing foreign exchange risk sales distributors purchase commitments denominated foreign currencies intercompany transactions bank loans company also enters interest rate caps swaps managing interest rate risk variable rate term loan company use contracts trading purposes accordance sfas 133 “accounting derivative instruments hedging activities” company designates certain derivative instruments cash flow hedges formally documents hedge relationships including identification hedging instruments hedged items well risk management objectives strategies undertaking hedge transaction time derivative contract executed company assesses effectiveness hedge inception ongoing basis determines whether hedge highly perfectly effective offsetting changes cash flows hedged item company records effective portion changes estimated fair value accumulated comprehensive income loss subsequently reclassifies related amount accumulated comprehensive income loss earnings hedging relationship terminated determined derivative ceased highly effective hedge company discontinue hedge accounting transaction derivatives designated hedges “freestanding derivatives” changes estimated fair value recognized consolidated statements operations cash equivalents company considers highly liquid investments purchased maturity three months less cash equivalents cash equivalents comprised primarily money market accounts foreign domestic bank accounts reduce credit risk company monitors credit standing financial institutions hold company’s cash equivalents restricted cash restricted cash december 31 2004 december 31 2005 herbalife ltd formerly wh holdings cayman islands ltd notes consolidated financial statements continued accounts receivable accounts receivable consist principally receivables credit card companies arising sale product company’s distributors receivables importers utilized limited number countries sell products distributors due geographic dispersion credit card receivables collection risk considered significant although receivables importers significant company performs ongoing credit evaluations importers maintains allowance potential credit losses company believes provides adequate allowances receivables distributors fair value financial instruments company estimated fair value financial instruments using following methods assumptions • carrying amounts cash equivalents restricted cash receivables accounts payable approximate fair value due shortterm maturities instruments • marketable securities based quoted market prices instruments • foreign exchange contracts based exchange rates period end • fair value option forward contracts based dealer quotes • book values company’s variable rate debt instruments considered approximate fair values interest rates instruments approximate current rates offered company • fair values fixed rate borrowings determined based recent market trade values disclosed note 4 notes consolidated financial statements inventories stated lower cost firstin firstout basis market company reserves obsolete slow moving inventory totaling 62 million 80 million december 31 2004 2005 respectively deferred financing costs deferred financing costs represent fees expenses related borrowing company’s longterm debt amortized term related debt longlived assets depreciation furniture fixtures equipment including computer hardware software computed straightline basis estimated useful lives related assets range three five years leasehold improvements amortized straightline basis life related asset term lease whichever shorter longlived assets reviewed impairment based undiscounted cash flows whenever events changes circumstances indicate carrying amount assets may recoverable measurement impairment loss based estimated fair market value asset goodwill intangible assets indefinite lives evaluated annual basis impairment frequently events changes circumstances indicate asset might impaired intangible assets finite lives amortized expected lives three years distributor network five years herbalife ltd formerly wh holdings cayman islands ltd notes consolidated financial statements continued product formulas two years product certifications annual amortization expense intangibles 345 million 2003 239 million 2004 140 million 2005 31 million 2006 18 million 2007 zero years thereafter december 31 2004 2005 goodwill balance 1675 million 1342 million respectively 333 million decrease due primarily reduction valuation allowance established time acquisition preacquisition tax benefits income taxes income tax expense includes income taxes payable current year change deferred income tax assets liabilities future tax consequences events recognized company’s financial statements income tax returns valuation allowance recognized reduce carrying value deferred income tax assets believed likely component deferred income tax assets realized royalty overrides independent distributor may earn commissions called royalty overrides production bonuses based retail volume commissions based retail sales volume certain members independent sales force sponsored distributor addition commissions recorded products shipped nonus royalty checks aged variety reasons beyond certainty paid taken back income management calculated period certainty three years worldwide whereas previously period varied country ranging 12 months 30 years order achieve consistency among countries third quarter 2004 company adjusted period amounts would taken income three years companywide basis impact change year ended december 31 2004 pretax benefit approximately 24 million research development company’s research development primarily performed outside consultants periods presented research development costs expensed incurred material earnings per share basic earnings per share represents net income period common shares outstanding divided weighted average number shares common stock outstanding period diluted earnings per share represents net income divided weighted average number shares outstanding inclusive effect dilutive securities company’s preferred shares converted common shares march 8 2004 august 1 2002 date conversion company outstanding common shares accordingly basic earnings per share information presented periods diluted earnings per share periods assumes conversion preferred shares common shares includes dilutive effect outstanding stock options warrants periods march 8 2004 include basic earnings per share information reflects common shares outstanding subsequent conversion diluted earnings per share periods also reflects dilutive effect outstanding stock options warrants herbalife ltd formerly wh holdings cayman islands ltd notes consolidated financial statements continued following share amounts used compute basic diluted earnings per share period thousands options purchase 59 million 15 million 14 million common shares prices ranging 250 1232 1200 2500 2300 2945 outstanding 2003 2004 2005 respectively included computation diluted earnings per share option exercise prices greater average market price common shares potential issuance options would decrease loss per share therefore options would antidilutive revenue recognition revenue recognized products shipped title passes independent distributor importer sales recognized net sales basis reflects product returns net discounts referred “distributor allowances” amounts billed freight handling costs freight handling costs paid company included cost sales company generally receives net sales price cash credit card payments point sale related royalty overrides allowances product returns recorded merchandise shipped allowances product returns primarily connection buyback program provided time product shipped accrual based upon historic return rates country vary zero approximately 50 net sales relevant return pattern reflects anticipated returns received period 12 months following original sale historically product returns significant allowances product returns consistent actual returns accounting stock options december 2002 fasb issued sfas 148 “accounting stock based compensation transition disclosure” “sfas 148” sfas 148 amends sfas 123 provide alternative methods transition voluntary change fair value based method accounting stockbased employee compensation addition sfas 148 amends disclosure requirements sfas 123 require prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method used reported results company applies intrinsicvaluebased method accounting prescribed apb 25 related interpretations including fasb interpretation 44 “accounting certain transactions involving stock compensation” interpretation apb 25 issued march 2000 account stockbased awards employees options granted employees compensation expense recorded date grant current market price underlying common shares exceeds exercise price sfas 123 established accounting disclosure requirements using fairvaluebased method accounting stockbased employee compensation plans allowed sfas 123 company elected continue apply herbalife ltd formerly wh holdings cayman islands ltd notes consolidated financial statements continued intrinsicvaluebased method accounting described adopted disclosure requirements sfas 123 following tables illustrate effect net income loss fairvaluebased method applied outstanding unvested awards period millions except per share amounts fair value stock options granted periods presented determined using blackscholes option pricing model following weighted average assumptions use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates herbalife ltd formerly wh holdings cayman islands ltd notes consolidated financial statements continued 3 inventories consist primarily finished goods available resale categorized follows millions 4 longterm debt longterm debt consists following millions interest expense 415 million 1233 million 439 million years ended december 31 2003 2004 2005 respectively connection acquisition company consummated certain related financing transactions including issuance wh acquisition june 27 2002 1650 million 1134 notes issued 98716 par interest 1134 notes paid semi annually january 15th july 15th year first payment made january 15 2003 connection financing company incurred 251 million debt issuance costs amortized term debt using effective interest rate method third quarter 2003 company repurchased 50 million principal value 1134 notes fair value 1134 notes 02 million 01 million december 31 2004 2005 respectively subsequently connection ipo company made tender offer outstanding 1134 notes received tenders 999 outstanding principal amount purchase price amounted 1972 million including accrued interest 81 million 293 million purchase premium addition 206 million interest recorded related write deferred financing costs discount company also paid entire amount borrowings senior credit facility amounting 669 million including accrued interest fees additional 62 million interest also recorded result write deferred financing costs herbalife ltd formerly wh holdings cayman islands ltd notes consolidated financial statements continued march 2004 herbalife whollyowned subsidiary wh capital corporation completed 2750 million offering 912 notes proceeds offering together available cash used pay original issue price cash due upon conversion 1041 million outstanding preferred shares including 20 million warrants exercised described pay accrued unpaid dividends redeem herbalife’s 1512 senior notes due july 15 2011 “1512 senior notes” pay related fees expenses total price 521 million redeem 1512 senior notes consisted 396 million aggregate principal amount excluding 17 million unamortized discount 114 million purchase premium 11 million accrued interest january 1 2004 including march 8 2004 time july 31 2002 july 15 2012 warrants issued 1512 senior notes could exercised purchase equivalent amount preferred stock exercise price 001 per share total number warrants outstanding july 31 2002 exercised march 8 2004 purchase equivalent amount preferred shares 2040816 proceeds 912 notes used part redeem convert preferred shares common shares interest 912 notes paid cash semiannually arrears april 1 october 1 year starting october 1 2004 912 notes herbalife’s general unsecured obligations ranking equally existing future senior indebtedness senior herbalife’s future subordinated indebtedness also 912 notes effectively subordinated existing future indebtedness liabilities herbalife’s subsidiaries february 2005 company redeemed 1100 million principal value 40 outstanding principal amount 912 notes cash payment 1205 million including purchase premium 105 million fair value 912 notes 3053 million 1782 million december 31 2004 2005 respectively concurrently closing ipo company entered 2250 million senior credit facility syndicate financial institutions including affiliates morgan stanley co incorporated merril lynch pierce fenner smith incorporated joint lead arrangers joint bookmanagers senior credit facility consists senior secured revolving credit facility total availability 250 million senior secured term loan facility aggregate principal amount 2000 million revolver available december 21 2009 revolver bears interest libor plus 20 term loan initially bears interest libor plus 214 april 2005 senior credit facility amended whereby interest rate reduced libor plus 214 libor plus 134 addition amount payable connection partial full refinancing loan within first year amendment shall equal 101 principal amount august 2005 senior credit facility amended permit purchase repurchase redemption 500 million aggregate principal amount 912 notes company obligated pay 02 million every quarter september 30 2010 remaining principal december 21 2010 term loan december 31 2005 amounts borrowed revolver annual scheduled principal payments longterm debt 98 million 2006 36 million 2007 11 million 2008 09 million 2009 863 million 2010 1650 million thereafter 5 lease obligations company warehouse office furniture fixtures equipment leases expire various dates 2016 lease agreements company also obligated pay property taxes insurance maintenance costs herbalife ltd formerly wh holdings cayman islands ltd notes consolidated financial statements continued certain leases contain renewal options future minimum rental commitments noncancelable operating leases capital leases december 31 2005 follows millions rental expense years ended december 31 2003 2004 2005 210 million 225 million 256 million respectively property capital leases included property accompanying consolidated balance sheets follows millions 6 employee compensation plans company maintains profit sharing plan pursuant sections 401a k internal revenue code 1986 amended “code” plan available substantially employees meet length service requirements employees may elect contribute 2 17 compensation company make matching contributions amount equal one dollar deferred earnings exceed 3 participants earnings participants partially vested company contributions one year fully vested five years company contributed 13 million years ended december 31 2003 2004 14 million year ended december 31 2005 company nonqualified deferred compensation plans select groups management “management plan” “senior executive plan” deferred compensation plans allow eligible employees elect annually defer 50 base annual salary 100 annual bonus calendar year “annual deferral amount” company makes matching contributions behalf participant senior executive plan senior executive plan provides amount matching contributions determined company discretion 2005 matching contribution 3 participant’s base salary participant either deferred compensation plans discussed times fully vested nonforfeitable interest year’s contribution including interest credited thereto company matching contributions applicable connection participant’s election defer annual deferral amount participant may also elect receive shortterm payout equal annual deferral amount plus herbalife ltd formerly wh holdings cayman islands ltd notes consolidated financial statements continued interest amount payable two years first day year annual deferral amount actually deferred july 2002 company adopted additional deferred compensation plan “supplemental plan” supplemental plan allows employees participate highly compensated eligible participate change control plan administrative committee manages administers plans “deferred compensation committee” allows eligible employees defer 100 change control payments participant supplemental plan deemed invested funds provide return equal shortterm afr within meaning code entire interest participant supplemental plan always fully vested nonforfeitable connection participant’s election defer change control payment defined supplemental plan participant may also elect receive shortterm payout equal deferral amount plus earnings payable two years first day year deferral amount actually deferred subject shortterm payout provision specified exceptions unforeseeable financial emergencies participant may withdraw without incurring ten percent 10 withdrawal penalty portion account supplemental plan prior date participant either 1 determined deferred compensation committee incurred permanent total disability 2 dies otherwise terminates employment company total deferred compensation expense three deferred compensation plans net participant contributions 10 million years ended december 31 2003 2004 09 million year ended december 31 2005 total longterm deferred compensation liability three deferred compensation plans 139 million 151 million december 31 2004 2005 respectively deferred compensation plans unfunded benefits paid general assets company except company contributed “rabbi trust” whose assets used pay benefits company remains solvent reached company’s creditors company becomes insolvent value assets “rabbi trust” 119 million 131 million december 31 2004 2005 respectively value assets irrevocable trust 02 million december 31 2004 company executive retention plan purpose executive retention plan provide financial incentives select group management highly compensated employees company continue provide services company period immediately change control defined executive retention plan company also established executive retention trust provide benefits executive retention plan executive retention trust irrevocable trust established institutional trustee 2005 executive retention plan trust terminated consequently balance trust december 31 2005 result certain actions herbalife international’s board acquisition deemed change control executive retention plan thus consummation acquisition result payment benefit pursuant executive retention plan 7 transactions related parties company entered agreements whitney golden gate pay monitoring fees services fees expenses monitoring fee agreements company obligated pay annual amount 50 million less 25 million initial period ten years subject provisions herbalife international’s credit agreement december 1 2004 company agreed whitney golden gate terminate monitoring fee agreements consideration 07 million warrants valued approximately 29 million using blackscholes option pricing model entire impact termination monitoring fee agreements included selling general administrative expenses 2004 herbalife ltd formerly wh holdings cayman islands ltd notes consolidated financial statements continued years ended december 31 2003 2004 company expensed monitoring fees amount 50 million 75 million expenses 34 million 18 million respectively december 2004 company entered termination agreement parties share purchase agreement executed connection acquisition pursuant termination agreement share purchase agreement obligations liabilities parties share purchase agreement terminated consideration termination share purchase agreement company entered tax indemnification agreement whitney golden gate andor affiliates pursuant company agreed indemnify parties federal income tax liability related losses incur respect income herbalife would includible gross income party taxable period section 951a code terms tax indemnification agreement company assumes purpose indemnified party “united states shareholder” defined section 951b code company however obligation provide indemnity respect taxes related losses incurred reimbursed share purchase agreement company’s senior credit facility permits company pay tax indemnity payments restricts aggregate amount company pay given year 15 million company currently anticipates amounts required paid agreement 2005 result secondary offering december 2005 whitney golden gate sold approximately 126 million shares longer controlled foreign corporation consequently 2006 thereafter payments agreement required 2004 whitney acquired 50 percent indirect ownership interest shuster laboratories inc “shuster” provider product testing formula development herbalife years ended december 31 2004 2005 total purchases shuster 56000 32000 respectively 2004 whitney acquired 50 percent indirect ownership interest tba entertainment “tba” provider creative services herbalife services provided tba 2004 year ended december 31 2005 payment 57 million made tba services relating 25th anniversary extravaganza majority reimbursements extravaganza expenses paid third parties 2004 golden gate acquired 47 percent ownership interest leiner health products inc “leiner” nutritional manufacturer supplier certain herbalife products years ended december 31 2004 2005 total purchases leiner 05 million 01 million respectively january 2005 whitney together affiliates acquired 77 percent ownership interest stauber performance ingredients “stauber” valueadded distributor bulk specialty nutraceutical ingredients year ended december 31 2005 total purchases stauber 18 million 8 contingencies company time engaged routine litigation company regularly reviews pending litigation matters involved establishes reserves deemed appropriate management litigation matters probable loss estimate made herbalife international certain independent distributors named defendants purported class action lawsuit filed february 17 2005 superior court california county san francisco served herbalife international march 14 2005 minton v herbalife international et al case transferred los angeles county superior court plaintiff challenging marketing practices certain herbalife international independent distributors herbalife international various state laws prohibiting “endless chain schemes” insufficient disclosure assisted marketing plans unfair deceptive business practices fraud deceit plaintiff alleges freedom group system operated certain herbalife ltd formerly wh holdings cayman islands ltd notes consolidated financial statements continued independent distributors herbalife international products places much emphasis recruiting encourages excessively large purchases product promotional materials distributors plaintiff also alleges freedom group pressured distributors disseminate misleading promotional materials plaintiff seeks hold herbalife international vicariously liable actions independent distributors seeking damages injunctive relief company believes meritorious defenses suit herbalife international certain distributors named defendants purported class action lawsuit filed july 16 2003 circuit court ohio county state west virginia mey v herbalife international inc et al complaint alleges certain telemarketing practices certain herbalife international distributors vicariously violate telephone consumer protection act tcpa seeks hold herbalife international liable practices distributors specifically plaintiffs’ complaint alleges several herbalife international’s distributors used prerecorded telephone messages autodialers contact prospective customers violation tcpa’s prohibition practices herbalife international’s distributors independent contractors distributors fact violated tcpa also violated herbalife’s policies require distributors comply applicable federal state local laws company believes meritorious defenses suit marketer dietary nutritional supplements products ingested consumers applied bodies company currently subjected various product liability claims effects claims date material company reasonably possible range exposure currently existing claims material company believes meritorious defenses allegations contained lawsuits company currently maintains product liability insurance annual deductible 10 million certain company’s subsidiaries subject tax audits governmental authorities respective countries certain tax audits governmental authorities proposing significant amounts additional taxes related interest penalties due company tax advisors believe substantial defenses allegations additional taxes owed company vigorously contesting additional proposed taxes related charges matters may take several years resolve company cannot sure ultimate resolution however opinion management adverse outcomes likely result material adverse effect financial condition operating results opinion based belief losses suffered excess amounts reserved would material company meritorious defenses although company reserved amount company believes represents likely outcome resolution disputes company incorrect assessment company may record additional expenses 9 shareholders’ equity total undeclared unpaid cumulative dividends preferred shares 328 million december 31 2003 march 8 2004 preferred shares redeemed original issue price 1831 million addition dividends 385 million converted common shares onetoone basis declaration future dividends subject discretion company’s board directors depend upon various factors including earnings financial condition restrictions imposed credit agreement cash requirements future prospects factors deemed relevant board directors credit agreement permits payments dividends long default exists amount exceed 200 million per fiscal year provided amount dividends may increased 25 consolidated net income prior fiscal year leverage ratio defined credit agreement four fiscal quarters fiscal year less equal 200100 herbalife ltd formerly wh holdings cayman islands ltd notes consolidated financial statements continued december 2004 company authorized 75 million preference shares 0002 par value authorized preference shares unissued preference shares may issued time one series voting powers full limited without voting powers designations preferences relative participating optional special rights qualifications limitations restrictions december 2004 company completed ipo offered common shares part series recapitalization transactions connection ipo see discussion note 1 notes consolidated financial statements details recapitalization company 699 million 686 million common shares outstanding december 31 2005 2004 respectively common shares outstanding december 31 2003 company five stock based compensation plans wh holdings cayman islands ltd stock incentive plan “management plan” wh holdings cayman islands ltd independent directors stock incentive plan “independent directors plan” herbalife ltd 2004 incentive plan “2004 stock incentive plan” 2005 stock incentive plan “2005 stock incentive plan” herbalife ltd executive incentive plan “executive incentive plan” management plan provides grant options purchase common shares herbalife members company’s management independent directors plan provides grant options purchase common shares herbalife company’s independent directors 2004 stock incentive plan intended replace management plan independent directors plan additional awards made either management plan independent directors plan however shares remaining available issuance plans absorbed become available issuance 2004 stock incentive plan 2005 stock incentive plan authorizes issuance 40 million common shares pursuant awards plus shares remain available issuance 2004 stock incentive plan terms 2005 stock incentive plan substantially similar terms 2004 stock incentive plan purpose executive incentive plan govern award payment annual bonuses certain company executives taken together 60 million common shares available grant five stock based compensation plans december 31 2005 company granted options net cancellations acquire approximately 123 million common shares five stock based compensation plans equals 177 december 31 2005 share capital herbalife ltd formerly wh holdings cayman islands ltd notes consolidated financial statements continued options outstanding december 31 2005 december 31 2004 december 31 2003 related option information follows herbalife ltd formerly wh holdings cayman islands ltd notes consolidated financial statements continued following table summarizes information regarding option groups outstanding december 31 2005 december 1 2004 company agreed whitney ggc administration llc terminate monitoring fees agreements consideration 07 million warrants warrant gives holder ability purchase one common share price 1550 per share 07 million warrants outstanding december 31 2005 fair value warrants granted 411 per share approximately 29 million included fourth quarter 2004 selling general administrative expenses determined using blackscholes option pricing model assumptions used valuation include 30 price volatility 372 risk free rate return 0 dividend yield 5year expected exercise term 10 segment information company network marketing company sells wide range weight management products nutritional supplements personal care products within one industry segment defined sfas 131 “disclosures segments enterprise related information” company’s products manufactured third party providers sold independent distributors sell herbalife products retail consumers distributors company sells products 60 countries throughout world organized managed geographic region first quarter 2003 company elected aggregate operating segments one reporting segment management believes company’s operating segments similar operating characteristics herbalife ltd formerly wh holdings cayman islands ltd notes consolidated financial statements continued similar long term operating performance making determination management believes operating segments similar nature products sold product acquisition process types customers products sold methods used distribute products nature regulatory environment revenues reflect sales products distributors based distributors’ geographic location sales attributed united states reported geographic operating information company’s geographic operating information sales product line follows 1 operating margin consists net sales less cost sales royalty overrides 2 product buybacks returns product categories included literature promotional category herbalife ltd formerly wh holdings cayman islands ltd notes consolidated financial statements continued december 31 2005 net property located us foreign countries 470 million 179 million respectively december 31 2004 net property located us foreign countries 432 million 122 million respectively 11 derivative instruments hedging activities company designates certain derivatives cash flow hedges company engages foreign exchange hedging strategy hedged transactions forecasted foreign currency denominated intercompany transactions hedged risk variability forecasted foreign currency cash flows hedging strategy involves purchase average rate options company also engages interest rate hedging strategy hedged transactions forecasted interest payments company’s variable rate term loan hedged risk variability forecasted interest rate cash flows hedging strategy involves purchase interest rate swaps december 31 2005 company outstanding cash flow hedges foreign exchange exposure outstanding cash flow hedges interest rate exposures december 31 2004 december 31 2005 maximum length time company hedging exposures approximately three years interest rate swap outstanding december 31 2005 accounted shortcut method defined sfas 133 assumes hedge perfectively effective consequently changes fair value derivative deferred recorded herbalife ltd formerly wh holdings cayman islands ltd notes consolidated financial statements continued comprehensive income “oci” related forecasted transaction recognized consolidated statements income estimated net amount existing gains expected reclassified earnings next 12 months 01 million december 31 2005 pretax oci balance related cash flow hedge 02 million 01 million aftertax company designates certain derivatives free standing derivatives hedge accounting apply changes fair market value derivatives recorded company’s statements income company purchases average rate put options give company right obligation sell foreign currency specified exchange rate “strike rate” contracts provide protection event foreign currency weakens beyond strike rate company also uses foreign currency forward contracts give company obligation buy sell foreign currency specified time rate contracts used protect changes functional currency equivalent value intercompany third party nonfunctional currency payables receivables december 2005 company entered short term interest rate cap agreement designated hedge accounting cap provides protection event three month libor rate increase beyond 475 place along interest rate swap fulfill company’s obligation hedge least 25 term debt notional amount fair values option forward contracts interest rate cap based thirdparty bank quotes following table provides information details company’s option contracts certain option contracts designated cash flow hedges fair value hedges certain option contracts freestanding derivatives herbalife ltd formerly wh holdings cayman islands ltd notes consolidated financial statements continued foreign exchange forward contracts also used hedge advances subsidiaries objective contracts neutralize impact foreign currency movements subsidiary’s operating results fair value forward contracts based thirdparty bank quotes herbalife ltd formerly wh holdings cayman islands ltd notes consolidated financial statements continued tables describe forward contracts outstanding dates indicated forward contracts freestanding derivatives herbalife ltd formerly wh holdings cayman islands ltd notes consolidated financial statements continued foreign subsidiaries excluding operating hyperinflationary environments designate local currencies functional currency year end total amount cash held foreign subsidiaries primarily japan brazil mexico korea 627 million 45 million maintained invested us dollars interest rate caps swaps used hedge interest rate exposure variable interest rate term loan table describes interest rate caps swaps outstanding 12 income taxes components income taxes millions herbalife ltd formerly wh holdings cayman islands ltd notes consolidated financial statements continued income taxes follows millions tax effects temporary differences gave rise deferred income tax assets liabilities follows millions december 31 2005 company’s deferred income tax asset foreign net operating loss carryforwards certain foreign subsidiaries 94 million reduced valuation allowance 67 million tax benefits recognized future reduction valuation allowance 01 million benefits allocated reduce goodwill herbalife ltd formerly wh holdings cayman islands ltd notes consolidated financial statements continued 2005 company recorded decrease valuation allowance 475 million decrease 331 million allocated reduce goodwill valuation allowance related preacquisition carryover attributes decrease primarily due increased actual forecast foreign source income operations 2005 company recorded deferred tax liability 30 million connection foreign currency translation total deferred tax liability december 31 2005 relating accumulated comprehensive income 31 million net foreign operating loss carryforwards 265 million expire varying amounts 2006 indefinitely foreign tax credit carryforwards expire varying amounts 2010 2013 realization income tax carryforwards dependent generating sufficient taxable income prior expiration carryforwards although realization assured management believes likely net carrying value income tax carryforwards realized amount income tax carryforwards considered realizable however could reduced estimates future taxable income carryforward period reduced deferred income taxes 11 million provided undistributed earnings nonus subsidiaries expected permanently reinvested subsidiaries applicable statutory rate cayman islands zero herbalife ltd years ended december 31 2005 2004 2003 purposes reconciliation provision income taxes statutory effective tax rate national us 35 rate applied follows 13 restructuring reserve date acquisition company began assess formulate plan reduce costs business recorded severance restructuring accrual part cost acquisition accrued severance employees including executives corporate functions administrative support identified time acquisition actions required plan termination began immediately consummation transaction balance restructuring reserve december 31 2005 zero herbalife ltd formerly wh holdings cayman islands ltd notes consolidated financial statements continued following table summarizes activity company’s restructuring accrual subsequent july 31 2002 years three years ended december 31 2005 millions 14 quarterly information unaudited signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereto duly authorized herbalife ltd richard goudis richard goudis chief financial officer dated february 28 2006 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicateditem 15 exhibits financial statement schedules following documents filed part annual report form 10k incorporated herein reference 1 financial statements following financial statements herbalife ltd filed part annual report form 10k pages indicated 2 financial statement schedules omitted required information inapplicable information presented consolidated financial statements related notes 3 exhibits listed exhibit index immediately filed part annual report form 10k incorporated reference herein exhibit index filed herewith management contract compensatory plan arrangement previously filed october 1 2004 exhibit company’s registration statement form s1 file 333119485 incorporated herein reference b previously filed november 9 2004 exhibit amendment 2 company’s registration statement form s1 file 333119485 incorporated herein reference c previously filed december 2 2004 exhibit amendment 4 company’s registration statement form s1 file 333119485 incorporated herein reference previously filed december 14 2004 exhibit amendment 5 company’s registration statement form s1 file 333119485 incorporated herein reference e previously filed february 17 2005 exhibit company’s registration statement form s8 file 333122871 incorporated herein reference f previously filed march 14 2005 exhibit company’s annual report form 10k year ended december 31 2004 incorporated herein reference g previously filed may 9 2005 exhibit company’s quarterly report form 10q quarter ended march 31 2005 incorporated herein reference h previously filed may 13 2005 exhibit company’s current report form 8k incorporated herein reference previously filed june 14 2005 exhibit company’s current report form 8k incorporated herein reference k previously filed august 23 2005 exhibit company’s current report form 8k incorporated herein reference l previously filed september 23 2005 exhibit company’s current report form 8k incorporated herein reference previously filed august 3 2005 exhibit company’s current report form 10q quarter ended june 30 2005 incorporated herein reference n previously filed february 28 2006 exhibit company’s annual report form 10k year ended december 31 2005 incorporated herein reference previously filed march 29 2006 exhibit company’s current report form 8k incorporated herein reference p previously filed march 29 2006 exhibit company’s current report form 8k incorporated herein reference q previously filed march 30 2006 exhibit company’s current report form 8k incorporated herein reference r previously filed march 31 2006 exhibit company’s current report form 8k incorporated herein reference previously filed may 3 2006 exhibit company’s quarterly report form 10q quarter ended march 31 2006 incorporated herein reference previously filed may 5 2006 exhibit company’s current report form 8k incorporated herein reference u previously filed november 13 2006 exhibit company’s quarterly report form 10q quarter ended september 30 2006 incorporated reference v previously filed october 12 2006 exhibit company’s current report form 8k incorporated herein reference w previously filed october 26 2006 exhibit company’s current report form 8k incorporated herein reference report independent registered public accounting firm board directors herbalife ltd audited accompanying consolidated balance sheets herbalife ltd subsidiaries december 31 2006 2005 related consolidated statements operations changes shareholders’ equity comprehensive income loss cash flows years threeyear period ended december 31 2006 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position herbalife ltd subsidiaries december 31 2006 2005 results operations cash flows years threeyear period ended december 31 2006 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states effectiveness herbalife ltd’s internal control financial reporting december 31 2006 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso report dated february 26 2007 expressed unqualified opinion management’s assessment effective operation internal control financial reporting discussed note 9 consolidated financial statements effective january 1 2006 company adopted provisions statement financial accounting standards 123r “sharebased payment” kpmg llp los angeles california february 26 2007 herbalife ltd consolidated balance sheets see accompanying notes consolidated financial statements herbalife ltd consolidated statements operations see accompanying notes consolidated financial statements herbalife ltd consolidated statements changes shareholders’ equity comprehensive income loss see accompanying notes consolidated financial statements herbalife ltd consolidated statements cash flows see accompanying notes consolidated financial statements herbalife ltd notes consolidated financial statements 1 organization herbalife ltd cayman islands exempted limited liability company herbalife incorporated april 4 2002 direct indirect whollyowned subsidiaries wh intermediate holdings ltd cayman islands company wh luxembourg holdings sàrl luxembourg unipersonal limited liability company wh luxembourg cm sàrl luxembourg unipersonal limited liability company wh acquisition corp nevada corporation formed behalf whitney co llc whitney golden gate private equity inc golden gate order acquire herbalife international inc nevada corporation subsidiaries herbalife international july 31 2002 acquisition herbalife subsidiaries referred collectively herein company ipo recapitalization december 16 2004 herbalife completed initial public offering common shares ipo part series recapitalization transactions including • tender offer 1598 million herbalife international’s outstanding 1134 senior subordinated notes due 2010 1134 notes • replacement herbalife international’s existing 2050 million senior credit facility new 2250 million senior credit facility • payment 1398 million special cash dividend preipo shareholders herbalife • amendment herbalife’s memorandum articles association 1 effect 12 reverse stock split herbalife’s common shares 2 increase herbalife’s authorized common shares 500 million shares 3 increase herbalife’s authorized preference shares 75 million shares took effect december 1 2004 planned continuation ipo recapitalization herbalife exercised contract provision december 2004 redeem 40 1100 million principal value excluding premium 105 million company’s 912 notes due 2011 912 notes required notice period redemption completed february 4 2005 redemption premium 105 million writeoff deferred financing fees 37 million associated redemption included interest expense first quarter 2005 connection ipo recapitalization company incurred 247 million fees expenses 198 million associated ipo included equity 49 million associated establishment credit facility included deferred financing costs credit facility fully repaid third quarter 2006 associated deferred financing costs written see note 4 discussion secondary offering december 19 2005 herbalife completed secondary public offering 13 million common shares held certain existing shareholders selling shareholders received net proceeds sale common shares offering accordingly herbalife receive proceeds sale common shares 2 basis presentation company’s consolidated financial statements refer herbalife subsidiaries common shares earnings per share data successor give effect 12 reverse stock split took effect december 1 2004 company also officially changed name wh holdings cayman islands ltd herbalife ltd effective december 1 2004 herbalife ltd notes consolidated financial statements continued new accounting pronouncements july 2006 fasb issued fasb interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 accounting income taxes fin 48 fin 48 clarifies accounting reporting uncertainties income taxes recognized enterprise’s financial statements interpretation prescribes comprehensive model financial statement recognition measurement presentation disclosure uncertain tax positions taken expected taken income tax returns fin 48 adopted beginning fiscal year 2007 management expect impact material company’s consolidated financial statements june 2006 fasb ratified consensuses emerging issues task force eitf issue 063 taxes collected customers remitted governmental authorities presented income statement gross versus net presentation eitf 063 eitf 063 clarifies scope issue includes tax assessed governmental authority directly imposed revenueproducing transaction seller customer indicates income statement presentation either gross basis net basis taxes within scope issue accounting policy decision disclosed furthermore taxes reported gross basis enterprise disclose amounts taxes interim annual financial statements period income statement presented company adopt eitf 063 beginning fiscal year 2007 company currently present sales taxes collected customers net basis include disclosure accounting policy company’s consolidated financial statements upon adoption eitf 063 september 2006 fasb issued 157 fair value measurement sfas 157 defines fair value establishes framework measuring fair value accordance gaap expands disclosures fair value measurements provisions sfas 157 effective fiscal years beginning november 15 2007 company currently evaluating impact adopting sfas 157 september 2006 securities exchange commission issued staff accounting bulletin 108 considering effects prior year misstatements quantifying misstatements current year financial statements sab 108 provides interpretive guidance effects carryover reversal prior year misstatements considered quantifying current year misstatement guidance effective fiscal years ending november 15 2006 allows onetime transitional cumulative effect adjustment beginningofyear retained earnings first fiscal year ending november 15 2006 errors previously deemed material guidance sab 108 adoption sab 108 2006 material effect company’s consolidated financial statements reclassifications certain reclassifications made prior period financial statements conform current period presentation significant accounting policies consolidation policy consolidated financial statements include accounts company subsidiaries significant intercompany transactions accounts eliminated foreign currency translation substantially countries company operates functional currency local currency foreign subsidiaries’ asset liability accounts translated consolidated financial reporting purposes us dollar amounts yearend exchange rates revenue expense accounts translated average rates herbalife ltd notes consolidated financial statements continued year foreign exchange translation adjustments included accumulated comprehensive income loss accompanying consolidated balance sheets transaction gains losses include cost forward exchange option contracts related settlement gains losses included selling general administrative expenses accompanying consolidated statement income company recorded transaction losses 19 million 23 million years ended december 31 2004 2006 respectively transaction gain 07 million year ended december 31 2005 forward exchange contracts option contracts company enters forward exchange contracts option contracts managing foreign exchange risk sales distributors purchase commitments denominated foreign currencies intercompany transactions bank loans company also enters interest rate swaps managing interest rate risk variable rate term loan company use contracts trading purposes accordance sfas 133 accounting derivative instruments hedging activities company designates certain derivative instruments cash flow hedges formally documents hedge relationships including identification hedging instruments hedged items well risk management objectives strategies undertaking hedge transaction time derivative contract executed company assesses effectiveness hedge inception ongoing basis determines whether hedge highly perfectly effective offsetting changes cash flows hedged item company records effective portion changes estimated fair value accumulated comprehensive income loss subsequently reclassifies related amount accumulated comprehensive income loss earnings hedging relationship terminated determined derivative ceased highly effective hedge company discontinue hedge accounting transaction derivatives designated hedges changes estimated fair value recognized consolidated statements operations cash equivalents company considers highly liquid investments purchased maturity three months less cash equivalents cash equivalents comprised primarily money market accounts foreign domestic bank accounts reduce credit risk company monitors credit standing financial institutions hold company’s cash equivalents accounts receivable accounts receivable consist principally receivables credit card companies arising sale product company’s distributors receivables importers utilized limited number countries sell products distributors due geographic dispersion credit card receivables collection risk considered significant although receivables importers significant company performs ongoing credit evaluations importers maintains allowance potential credit losses company believes provides adequate allowances receivables distributors fair value financial instruments company estimated fair value financial instruments using following methods assumptions • carrying amounts cash equivalents receivables accounts payable approximate fair value due shortterm maturities instruments • marketable securities based quoted market prices instruments herbalife ltd notes consolidated financial statements continued • foreign exchange contracts based exchange rates period end • fair value option forward contracts based dealer quotes • book values company’s variable rate debt instruments considered approximate fair values interest rates instruments approximate current rates offered company • fair values fixed rate borrowings determined based recent market trade values disclosed note 4 consolidated financial statements inventories stated lower cost firstin firstout basis market company reserves obsolete slow moving inventory totaling 80 million 114 million december 31 2005 2006 respectively deferred financing costs deferred financing costs represent fees expenses related borrowing company’s longterm debt amortized term related debt longlived assets depreciation furniture fixtures equipment including computer hardware software computed straightline basis estimated useful lives related assets range three five years leasehold improvements amortized straightline basis life related asset term lease whichever shorter depreciation property equipment totaled 200 million 214 million 273 million year ended december 31 2004 2005 2006 respectively longlived assets reviewed impairment based undiscounted cash flows whenever events changes circumstances indicate carrying amount assets may recoverable measurement impairment loss based estimated fair market value asset goodwill intangible assets indefinite lives evaluated annual basis impairment frequently events changes circumstances indicate asset might impaired intangible assets finite lives amortized expected lives three years distributor network five years product formulas two years product certifications annual amortization expense intangibles 239 million 140 million 31 million years ended december 31 2004 2005 2006 respectively 18 million year ended december 31 2007 zero years thereafter december 31 2005 2006 goodwill balance 1342 million 1132 million respectively 210 million decrease due primarily effect settlement international tax audit related preacquisition period realization preacquisition net operating losses income taxes income tax expense includes income taxes payable current year change deferred income tax assets liabilities future tax consequences events recognized company’s financial statements income tax returns valuation allowance recognized reduce carrying value deferred income tax assets believed likely component deferred income tax assets realized herbalife ltd notes consolidated financial statements continued royalty overrides independent distributor may earn commissions called royalty overrides production bonuses based retail volume commissions based retail sales volume certain members independent sales force sponsored distributor addition commissions recorded products shipped nonus royalty checks aged variety reasons beyond certainty paid taken back income management calculated period certainty three years worldwide whereas previously period varied country ranging 12 months 30 years order achieve consistency among countries third quarter 2004 company adjusted period amounts would taken income three years companywide basis impact change year ended december 31 2004 pretax benefit approximately 24 million operating leases company leases physical properties operating leases certain lease agreements generally include rent holidays tenant improvement allowances company recognizes rent holiday periods straightline basis lease term beginning date company takes possession leased space company also records tenant improvement allowances rent holidays deferred rent liabilities amortizes deferred rent terms lease rent research development company’s research development performed inhouse staff outside consultants periods presented research development costs expensed incurred material earnings per share basic earnings per share represents net income period common shares outstanding divided weighted average number shares common stock outstanding period diluted earnings per share represents net income divided weighted average number shares outstanding inclusive effect dilutive securities company’s preferred shares converted common shares march 8 2004 august 1 2002 date conversion company outstanding common shares accordingly basic earnings per share information presented periods diluted earnings per share periods assumes conversion preferred shares common shares includes dilutive effect outstanding stock options warrants periods march 8 2004 include basic earnings per share information reflects common shares outstanding subsequent conversion diluted earnings per share periods also reflects dilutive effect outstanding stock options warrants following share amounts used compute basic diluted earnings per share period thousands herbalife ltd notes consolidated financial statements continued options purchase 15 million 14 million 03 million common shares prices ranging 1200 2500 2300 2945 3660 4016 outstanding 2004 2005 2006 respectively included computation diluted earnings per share option exercise prices greater average market price common shares potential issuance options would decrease loss per share therefore options would antidilutive revenue recognition revenue recognized products shipped title passes independent distributor importer sales recognized net sales basis reflects product returns net discounts referred “distributor allowances” amounts billed freight handling costs freight handling costs paid company included cost sales company generally receives net sales price cash credit card payments point sale related royalty overrides allowances product returns recorded merchandise shipped allowances product returns primarily connection buyback program provided time product shipped accrual based upon historic return rates country relevant return pattern reflects anticipated returns received period 12 months following original sale historically product returns significant allowances product returns consistent actual returns accounting stock options prior january 1 2006 company applied intrinsic value method outlined accounting principles board apb opinion 25 accounting stock issued employees apb 25 related interpretations accounting sharebased awards made plans intrinsic value method compensation expense recorded date grant extent current market price underlying stock exceeds exercise price allowed sfas 123 company adopted disclosure requirements sfas 123 following tables illustrate effect net income loss fairvaluebased method applied outstanding unvested awards period millions except per share amounts herbalife ltd notes consolidated financial statements continued january 1 2006 company adopted sfas 123r sharebased payment sfas 123r statement replaces sfas 123 supersedes apb 25 sfas 123r requires sharebased compensation recognized expense financial statements cost measured based fair value awards granted company used modified prospective transition method requires recognition compensation expense prospective basis accordingly prior period financial statements restated fair value stock options granted periods presented determined using blackscholes option pricing model following weighted average assumptions use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates 3 inventories consist primarily finished goods available resale categorized follows millions inventories presented net reserves obsolete slow moving inventory 80 million 114 million december 31 2005 2006 respectively herbalife ltd notes consolidated financial statements continued 4 longterm debt longterm debt consists following millions interest expense 1233 million 439 million 395 million years ended december 31 2004 2005 2006 respectively february 2005 company redeemed 1100 million principal amount 912 notes redemption price 1241 million included purchase premium 105 million accrued interest 36 million 2005 company prepaid approximately 1090 million term loan 2250 million senior secured credit facility originally entered december 21 2004 prior credit facility resulting approximately 22 million additional interest expense writeoff unamortized deferred financing costs march 2006 company made prepayment term loan prior credit facility 98 million consequently company expensed 02 million related unamortized deferred financing costs first quarter 2006 july 21 2006 company entered 3000 million senior secured credit facility new credit facility syndicate financial institutions lenders new credit facility comprised 2000 million term loan 1000 million revolving credit facility replaced prior credit facility new term loan bears interest libor rate plus margin 15 base rate plus margin 050 matures july 21 2013 new revolver bears interest libor rate plus margin 125 base rate plus margin 025 available july 21 2012 company incurred approximately 23 million debt issuance costs amortized term debt company used 650 million available cash 150 million borrowings new revolving credit facility repay amounts outstanding prior credit facility amounting 796 million consequently company expensed 17 million unamortized deferred financing costs related prior credit facility also july 2006 company redeemed outstanding 01 million aggregate principal amount 1134 notes august 23 2006 company borrowed 2000 million pursuant term loan new credit facility repay borrowings new revolver fund redemption 912 notes total redemption price 912 notes 1878 million consisting 1650 million aggregate principal amount 166 million purchase premium 62 million accrued interest redemption premium 166 million writeoff unamortized deferred financing costs discounts 46 million associated 912 notes included interest expense third quarter 2006 september 2006 company made prepayment term loan new credit facility 200 million resulting 01 million additional interest expense writeoff unamortized deferred financing costs december 31 2006 company obligated pay approximately 04 million quarter herbalife ltd notes consolidated financial statements continued june 30 2013 remaining principal july 21 2013 new term loan new term loan bears variable interest rate december 31 2006 average interest rate 685 annual scheduled principal payments longterm debt 56 million 30 million 25 million 19 million 19 million year ended december 31 2007 2008 2009 2010 2011 1705 million thereafter december 31 2006 borrowings outstanding new revolver 5 lease obligations company warehouse office furniture fixtures equipment leases expire various dates 2016 lease agreements company also obligated pay property taxes insurance maintenance costs certain leases contain renewal options future minimum rental commitments noncancelable operating leases capital leases december 31 2006 follows millions rental expense years ended december 31 2004 2005 2006 225 million 256 million 344 million respectively property capital leases included property accompanying consolidated balance sheets follows millions 6 employee compensation plans company maintains profit sharing plan pursuant sections 401a k internal revenue code 1986 amended code plan available substantially employees meet length service requirements employees may elect contribute 2 17 compensation company make matching contributions amount equal one dollar deferred earnings exceed 3 participants earnings participants partially vested company contributions one year fully vested five years company contributed 13 million year ended december 31 2004 14 million year ended december 31 2005 16 million year ended december 31 2006 herbalife ltd notes consolidated financial statements continued company nonqualified deferred compensation plans select groups management “management plan” “senior executive plan” deferred compensation plans allow eligible employees elect annually defer 50 base annual salary 100 annual bonus calendar year annual deferral amount company makes matching contributions behalf participant senior executive plan senior executive plan provides amount matching contributions determined company discretion 2006 matching contribution 3 participant’s base salary participant either nonqualified deferred compensation plans discussed times fully vested nonforfeitable interest year’s contribution including interest credited thereto company matching contributions applicable connection participant’s election defer annual deferral amount participant may also elect receive shortterm payout equal annual deferral amount plus interest amount payable two years first day year annual deferral amount actually deferred total deferred compensation expense two nonqualified deferred compensation plans net participant contributions 10 million years ended december 31 2004 09 million year ended december 31 2005 18 million year ended december 31 2006 total longterm deferred compensation liability two deferred compensation plans 151 million 182 million december 31 2005 2006 respectively deferred compensation plans unfunded benefits paid general assets company except company contributed “rabbi trust” whose assets used pay benefits company remains solvent reached company’s creditors company becomes insolvent value assets “rabbi trust” 131 million 176 million december 31 2005 2006 respectively 7 transactions related parties 2004 whitney acquired 50 percent indirect ownership interest shuster laboratories inc shuster provider product testing formula development herbalife year ended december 31 2005 total purchases shuster 32000 year ended december 31 2006 purchases shuster 2004 whitney acquired 50 percent indirect ownership interest tba entertainment tba provider creative services herbalife year ended december 31 2005 payment 57 million made tba services relating 25th anniversary extravaganza majority reimbursements extravaganza expenses paid third parties year ended december 31 2006 payments tba 14 million 2004 golden gate acquired 47 percent ownership interest leiner health products inc leiner nutritional manufacturer supplier certain herbalife products year ended december 31 2005 total purchases leiner 01 million year ended december 31 2006 purchases leiner january 2005 whitney together affiliates acquired 77 percent ownership interest stauber performance ingredients stauber valueadded distributor bulk specialty nutraceutical ingredients years ended december 31 2005 december 31 2006 total purchases stauber 18 million 025 million respectively herbalife ltd notes consolidated financial statements continued 8 contingencies company time engaged routine litigation company regularly reviews pending litigation matters involved establishes reserves deemed appropriate management litigation matters probable loss estimate made herbalife international certain independent distributors named defendants purported class action lawsuit filed february 17 2005 superior court california county san francisco served herbalife international march 14 2005 minton v herbalife international et al case transferred los angeles county superior court plaintiff challenging marketing practices certain herbalife international independent distributors herbalife international various state laws prohibiting “endless chain schemes” insufficient disclosure assisted marketing plans unfair deceptive business practices fraud deceit plaintiff alleges freedom group system operated certain independent distributors herbalife international products places much emphasis recruiting encourages excessively large purchases product promotional materials distributors plaintiff also alleges freedom group pressured distributors disseminate misleading promotional materials plaintiff seeks hold herbalife international vicariously liable actions independent distributors seeking damages injunctive relief company believes meritorious defenses suit herbalife international certain distributors named defendants class action lawsuit filed july 16 2003 circuit court ohio county state west virginia mey v herbalife international inc et al complaint alleges certain telemarketing practices certain herbalife international distributors violate telephone consumer protection act tcpa seeks hold herbalife international vicariously liable practices distributors specifically plaintiffs’ complaint alleges several herbalife international’s distributors used prerecorded telephone messages contact prospective customers violation tcpa’s prohibition practices herbalife international’s distributors independent contractors distributors fact violated tcpa also violated herbalife’s policies require distributors comply applicable federal state local laws company believes meritorious defenses suit marketer dietary nutritional supplements products ingested consumers applied bodies company currently subjected various product liability claims effects claims date material company reasonably possible range exposure currently existing claims material company believes meritorious defenses allegations contained lawsuits company currently maintains product liability insurance annual deductible 10 million certain company’s subsidiaries subject tax audits governmental authorities respective countries certain tax audits governmental authorities proposing significant amounts additional taxes related interest penalties due company tax advisors believe substantial defenses allegations additional taxes owed company vigorously contesting additional proposed taxes related charges matters may take several years resolve company cannot sure ultimate resolution however opinion management adverse outcomes likely result material adverse effect financial condition operating results opinion based belief losses suffered excess amounts reserved would material company meritorious defenses although company reserved amount company believes represents likely outcome resolution disputes company incorrect assessment company may record additional expenses herbalife ltd notes consolidated financial statements continued 9 shareholders’ equity total undeclared unpaid cumulative dividends preferred shares 328 million december 31 2003 march 8 2004 preferred shares redeemed original issue price 1831 million addition dividends 385 million converted common shares onetoone basis declaration future dividends subject discretion company’s board directors depend upon various factors including earnings financial condition restrictions imposed credit agreement cash requirements future prospects factors deemed relevant board directors new credit facility permits payments dividends long default event default exists amount dividends paid exceed sum 3000 million plus fifty percent cumulative consolidated net income first quarter 2007 last day quarter recently ended prior date dividend december 2004 company authorized 75 million preference shares 0002 par value authorized preference shares unissued preference shares may issued time one series voting powers full limited without voting powers designations preferences relative participating optional special rights qualifications limitations restrictions december 2004 company completed ipo offered common shares part series recapitalization transactions connection ipo see note 1 company 686 million 699 million 716 million common shares outstanding december 31 2004 2005 2006 respectively company six stockbased compensation plans wh holdings cayman islands ltd stock incentive plan management plan wh holdings cayman islands ltd independent directors stock incentive plan independent directors plan herbalife ltd 2004 incentive plan 2004 stock incentive plan 2005 stock incentive plan 2005 stock incentive plan herbalife ltd executive incentive plan executive incentive plan herbalife ltd independent directors deferred compensation stock unit plan independent director stock unit plan management plan provides grant options purchase common shares herbalife members company’s management independent directors plan provides grant options purchase common shares herbalife company’s independent directors 2004 stock incentive plan intended replace management plan independent directors plan adoption thereof additional awards made either management plan independent directors plan however shares remaining available issuance plans absorbed became available issuance 2004 stock incentive plan 2005 stock incentive plan authorizes issuance 4000000 common shares pursuant awards plus shares remain available issuance 2004 stock incentive plan time adoption 2005 stock incentive plan terms 2005 stock incentive plan substantially similar terms 2004 stock incentive plan purpose executive incentive plan govern award payment annual bonuses certain company executives purpose independent directors stock unit plan facilitate equity ownership company independent directors award stock units allow deferral independent directors compensation realized connection stock units company’s stock compensation awards outstanding december 31 2006 include stock options stock appreciation rights sars stock units prior january 1 2006 company applied intrinsic value method outlined accounting principles board apb opinion 25 accounting stock issued employees apb 25 related interpretations accounting sharebased awards made plans intrinsic value method compensation expense recorded date grant extent current market price underlying stock exceeds exercise price january 1 2006 company adopted sfas 123r statement replaces sfas 123 supersedes apb 25 sfas 123r requires sharebased compensation recognized expense financial statements cost measured based fair value awards herbalife ltd notes consolidated financial statements continued granted company adopted sfas 123r using modified prospective transition method requires recognition compensation expense prospective basis accordingly prior period financial statements restated transition method stockbased compensation cost 2006 includes compensation cost sharebased awards granted prior yet vested january 1 2006 based grant date fair value estimated accordance original provisions sfas 123 b compensation cost sharebased awards granted subsequent january 1 2006 based grantdate fair value estimated accordance provisions sfas 123r sfas 123r also requires company estimate forfeitures calculating expense relating sharebased compensation opposed recognizing forfeitures expense reduction occur adjustment apply estimated forfeitures previously recognized sharebased compensation considered immaterial classified cumulative effect change accounting principle company records compensation expense requisite service period equal vesting period awards granted prior january 1 2006 compensation expense recognized gradedvesting basis vesting term awards granted january 1 2006 compensation expense recognized straightline basis vesting term twelve months ended december 31 2006 stockbased compensation expense 113 million included selling general administrative expenses well related income tax benefits 42 million recognized earnings december 31 2006 total unrecognized compensation cost related nonvested stock awards 310 million related weightedaverage period expected recognized approximately 23 years result adoption sfas 123r company’s net income year ended december 31 2006 55 million lower would company’s previous accounting method sharebased compensation basic net earnings per common share year ended december 31 2006 negatively impacted change accounting method 008 per share negative impact diluted net earnings per common share year ended december 31 2006 007 per share prior company’s adoption sfas 123r benefits tax deductions excess recognized compensation costs reported operating cash inflows sfas 123r requires excess tax benefits recorded financing cash inflow rather reduction taxes paid year ended december 31 2006 excess tax benefits 202 million generated option exercises prior company’s initial public offering december 2004 company accounted stock options minimum value method sfas 123 pro forma expense disclosure sfas 123r applied awards prospectively company continuing recognize compensation expense awards apb opinion 25 based solely difference fair value stock price exercise price date grant herbalife ltd notes consolidated financial statements continued following table illustrates effect net income loss earnings loss per share company applied fair value recognition provision sfas 123 options granted company’s stockbased compensation plans years ended december 31 2004 december 31 2005 respectively purposes pro forma disclosure value options estimated using blackscholesmerton optionpricing model amortized expense using graded vesting schedule forfeitures recognized occur company’s stockbased compensation plans provide grants stock options stock appreciation rights restricted stock units stock options typically vest quarterly fiveyear period beginning grant date certain stock option grants vest period less five years sars vest quarterly fiveyear period beginning grant date contractual term stock options sars ten years stock unit awards 2005 incentive plan incentive plan stock units vest annually three year period equal contractual term stock unit awards independent directors stock unit plan independent director stock units vest 25 rate april 15 july 15 october 15 calendar year award granted january 15 calendar year following year award granted unless otherwise determined time grant value stock unit shall equal one common share herbalife fair value award estimated date grant using blackscholesmerton optionpricing model based assumptions following tables expected term award based simplified method calculates expected term using average vesting term contractual term stated staff accounting bulletin 107 limited historical data groups employees determined similar historical exercise patterns valuation purposes expected volatility stock awards primarily based upon historical volatility company’s common shares due limited period public trading data common stock also validated volatility rates peer group companies risk free interest rate based implied yield us treasury zerocoupon issue remaining term equal expected term award dividend yield reflects company paid herbalife ltd notes consolidated financial statements continued cash dividends since inception following table summarizes weighted average assumptions used calculation fair market value years ended december 31 2005 2006 following tables summarize activity stockbased compensation plans year ended december 31 2006 1 intrinsic value amount current market value underlying stock exceeds exercise price stock award weightedaverage grant date fair value stock awards granted 2006 1844 total intrinsic value stock awards exercised year ended december 31 2006 555 million herbalife ltd notes consolidated financial statements continued following table summarizes information regarding option groups outstanding december 31 2006 10 segment information company network marketing company sells wide range weight management products nutritional supplements personal care products within one industry segment defined sfas 131 disclosures segments enterprise related information company’s products manufactured third party providers sold independent distributors sell herbalife products retail consumers distributors company sells products 63 countries throughout world organized managed geographic region first quarter 2003 company elected aggregate operating segments one reporting segment management believes company’s operating segments similar operating characteristics similar long term operating performance making determination management believes operating segments similar nature products sold product acquisition process types customers products sold methods used distribute products nature regulatory environment revenues reflect sales products distributors based distributors’ geographic location july 2006 company changed geographic units four seven units part company’s ongoing realignment growth efforts changes intended create growth opportunities distributors support faster decision making across organization reducing number layers management improve sharing ideas tools accelerate growth high potential markets historical information presented related company’s geographic units reclassified conform current geographic presentation company’s reporting segment’s operating information sales product line follows herbalife ltd notes consolidated financial statements continued herbalife ltd notes consolidated financial statements continued 1 operating margin consists net sales less cost sales royalty overrides 2 product buybacks returns product categories included literature promotional category 3 consists us canada jamaica dominican republic 4 includes new zealand australia excludes brazil 5 consists europe middle east africa 6 consists china hong kong taiwan 7 consists japan korea december 31 2006 net property located us foreign countries 796 million 257 million respectively december 31 2005 net property located us foreign countries 470 million 179 million respectively december 31 2006 deferred tax assets related us foreign countries 525 million 219 million respectively december 31 2005 deferred tax assets related us foreign countries 152 million 312 million respectively 11 derivative instruments hedging activities company engages interest rate hedging strategy hedged transactions forecasted interest payments company’s variable rate term loan hedged risk variability forecasted interest rate cash flows hedging strategy involves purchase interest rate swaps outstanding cash flow hedges interest rate exposures december 31 2005 december 31 2006 maximum length time company hedging exposures approximately three years interest rate swap outstanding december 31 2005 accounted shortcut method defined sfas 133 assumes hedge perfectively effective consequently changes fair value derivative deferred recorded comprehensive income oci related forecasted transaction herbalife ltd notes consolidated financial statements continued recognized consolidated statements income estimated net amount existing gains expected reclassified earnings next 12 months 01 million july 21 2006 interest rate swap originally entered february 21 2005 terminated due debt refinancing interest income approximately 08 million recorded company’s consolidated statements income quarter ended september 30 2006 new credit facility company obligated enter interest rate hedge 25 aggregate principal amount term loan minimum three years august 23 2006 company entered new interest rate swap agreement provides company pay interest threeyear period fixed rate 676 various notional amounts receiving interest period libor rate notional principal amounts swap designated cash flow hedge libor interest rate movements new term loan company formally assesses inception least quarterly thereafter whether derivatives used hedging transactions highly effective offsetting changes cash flows hedged item december 31 2006 hedge relationship qualified effective hedge sfas 133 consequently changes fair value derivative deferred recorded oci related forecasted transaction recognized consolidated statements income estimated amount existing loss expected reclassified earnings next 12 months related cash flow hedge 04 million company also designates certain derivatives free standing derivatives hedge accounting apply changes fair market value derivatives recorded company’s consolidated statements income company purchases average rate put options give company right obligation sell foreign currency specified exchange rate strike rate contracts provide protection event foreign currency weakens beyond strike rate contracts used protect changes functional currency equivalent value intercompany third party nonfunctional currency payables receivables fair value option contracts based thirdparty bank quotes december 31 2006 company outstanding option contracts following table provides information details company’s option contracts december 31 2005 company also uses foreign currency forward contracts give company obligation buy sell foreign currency specified time rate foreign exchange forward contracts utilized hedge advances subsidiaries objective contracts neutralize impact foreign currency movements subsidiary’s operating results herbalife ltd notes consolidated financial statements continued tables describe forward contracts outstanding dates indicated fair value forward contracts based thirdparty bank quotes herbalife ltd notes consolidated financial statements continued foreign subsidiaries excluding operating hyperinflationary environments designate local currencies functional currency year end total amount cash held foreign subsidiaries 1140 million 44 million maintained invested us dollars interest rate swaps used hedge interest rate exposure variable interest rate term loan fair value interest rate swaps based thirdparty bank quotes table describes interest rate swaps outstanding december 2005 company entered short term interest rate cap agreement designated hedge accounting provide protection event three month libor rate increase beyond 475 interest rate cap agreement expired first quarter 2006 12 income taxes components income taxes millions income taxes follows millions herbalife ltd notes consolidated financial statements continued tax effects temporary differences gave rise deferred income tax assets liabilities follows millions december 31 2006 company’s deferred income tax assets foreign net operating loss carryforwards certain foreign subsidiaries 61 million various deferred tax assets reduced valuation allowance 62 million tax benefits recognized future reduction valuation allowance 01 million benefits allocated reduce goodwill foreign tax loss carryforwards 61 million expire varying amounts 2006 indefinitely foreign tax realization tax loss carryforwards dependent generating sufficient taxable income prior expiration carryforwards although realization assured management believes likely net carrying value tax carryforwards realized amount income tax carryforwards considered realizable however could reduced estimates future taxable income carryforward period reduced income taxes payable reduced fourth quarter 2006 140 million related 118 million reclass certain preacquisition liabilities goodwill adjustment income tax expense 22 million herbalife ltd notes consolidated financial statements continued applicable statutory rate cayman islands zero herbalife ltd years ended december 31 2006 2005 2004 purposes reconciliation provision income taxes statutory effective tax rate notional us 35 rate applied follows 13 restructuring reserve july 2006 company initiated realignment employee base part realignment growth plan company recorded 30 million professional fees severance related costs preparation stages plan third quarter 2006 company recorded severance related costs 75 million included selling general administrative expenses related realignment fourth quarter 2006 company expects complete realignment 2007 estimates corresponding severance related cost 2007 approximately 10 million following table summarizes components reserve fiscal 2006 14 subsequent event february 2 2007 company’s board directors received proposal whitney v lp affiliates acquire company’s outstanding common shares 3800 per share cash whitney affiliates currently aggregate approximately 270 company’s outstanding common shares company’s board directors established special committee consisting solely independent directors review proposal assurance company enter transaction based information set forth forms 4 filed february 8 12 2007 form 13 ga filed february 14 2007 golden gate affiliated funds company believes february 7 2007 golden gate affiliated funds longer beneficially company’s common shares herbalife ltd notes consolidated financial statements continued 15 quarterly information unaudited signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereto duly authorized herbalife ltd richard goudis richard goudis chief financial officer dated february 26 2007 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicateditem 15 exhibits financial statement schedules following documents filed part annual report form 10k incorporated herein reference 1 financial statements following financial statements herbalife ltd filed part annual report form 10k pages indicated 2 financial statement schedules omitted required information inapplicable information presented consolidated financial statements related notes 3 exhibits listed exhibit index immediately filed part annual report form 10k incorporated reference herein exhibit index exhibit number description reference 77 third amendment dated november 30 2007 form credit agreement dated july 21 2006 among herbalife international inc herbalife ltd wh intermediate holdings ltd hbl ltd wh luxembourg holdings sárl herbalife international luxembourg sárl hlf luxembourg holdings sárl wh capital corporation wh luxembourg intermediate holdings sárl hv holdings ltd herbalife distribution ltd herbalife luxembourg distribution sárl subsidiary guarantors party thereto favor merrill lynch capital corporation collateral agent 78 herbalife ltd employee stock purchase plan 79 fourth amendment dated february 21 2008 form credit agreement dated july 21 2006 among herbalife international inc herbalife ltd wh intermediate holdings ltd hbl ltd wh luxembourg holdings sárl herbalife international luxembourg sárl hlf luxembourg holdings sárl wh capital corporation wh luxembourg intermediate holdings sárl hv holdings ltd herbalife distribution ltd herbalife luxembourg distribution sárl subsidiary guarantors party thereto favor merrill lynch capital corporation collateral agent 1 subsidiaries registrant 1 consent kpmg llp independent registered public accounting firm 1 rule 13a14a certification chief executive officer 2 rule 13a14a certification chief financial officer 1 section 1350 certification chief executive officer 2 section 1350 certification chief financial officer filed herewith management contract compensatory plan arrangement previously filed october 1 2004 exhibit company’s registration statement form s1 file 333119485 incorporated herein reference b previously filed november 9 2004 exhibit amendment 2 company’s registration statement form s1 file 333119485 incorporated herein reference c previously filed december 2 2004 exhibit amendment 4 company’s registration statement form s1 file 333119485 incorporated herein reference previously filed december 14 2004 exhibit amendment 5 company’s registration statement form s1 file 333119485 incorporated herein reference e previously filed february 17 2005 exhibit company’s registration statement form s8 file 333122871 incorporated herein reference f previously filed may 13 2005 exhibit company’s current report form 8k incorporated herein reference g previously filed june 14 2005 exhibit company’s current report form 8k incorporated herein reference h previously filed september 23 2005 exhibit company’s current report form 8k incorporated herein reference previously filed august 3 2005 exhibit company’s current report form 10q quarter ended june 30 2005 incorporated herein reference j previously filed february 28 2006 exhibit company’s annual report form 10k year ended december 31 2005 incorporated herein reference k previously filed march 29 2006 exhibit company’s current report form 8k incorporated herein reference l previously filed march 29 2006 exhibit company’s current report form 8k incorporated herein reference previously filed march 30 2006 exhibit company’s current report form 8k incorporated herein reference n previously filed march 31 2006 exhibit company’s current report form 8k incorporated herein reference previously filed december 20 2007 exhibit company’s current report form 8k incorporated herein reference p previously filed may 5 2006 exhibit company’s current report form 8k incorporated herein reference q previously filed november 13 2006 exhibit company’s quarterly report form 10q quarter ended september 30 2006 incorporated reference r previously filed october 12 2006 exhibit company’s current report form 8k incorporated herein reference previously filed october 26 2006 exhibit company’s current report form 8k incorporated herein reference previously filed may 1 2007 exhibit company’s quarterly report form 10q quarter ended march 31 2007 incorporated herein reference u previously filed may 29 2007 exhibit company’s current report form 8k incorporated herein reference v previously filed november 6 2007 exhibit company’s quarterly report form 10q quarter ended september 30 2007 incorporated reference report independent registered public accounting firm board directors shareholders herbalife ltd audited accompanying consolidated balance sheets herbalife ltd subsidiaries “company” december 31 2007 2006 related consolidated statements income changes shareholders’ equity comprehensive income cash flows years threeyear period ended december 31 2007 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position herbalife ltd subsidiaries december 31 2007 2006 results operations cash flows years threeyear period ended december 31 2007 conformity us generally accepted accounting principles discussed note 9 consolidated financial statements effective january 1 2006 company adopted provisions statement financial accounting standards 123r sharebased payment discussed note 12 consolidated financial statements effective january 1 2007 company adopted provisions financial accounting standards board interpretation 48 accounting uncertainty income taxes also audited accordance standards public company accounting oversight board united states herbalife ltd’s internal control financial reporting december 31 2007 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso report dated february 26 2008 expressed unqualified opinion effectiveness company’s internal control financial reporting kpmg llp los angeles california february 26 2008 herbalife ltd consolidated balance sheets see accompanying notes consolidated financial statements herbalife ltd consolidated statements income see accompanying notes consolidated financial statements herbalife ltd consolidated statements changes shareholders’ equity comprehensive income see accompanying notes consolidated financial statements herbalife ltd consolidated statements cash flows see accompanying notes consolidated financial statements herbalife ltd notes consolidated financial statements 1 organization herbalife ltd together subsidiaries “company” leading global network marketing company sells weight management nutritional supplement energy fitness products personal care products network 17 million independent distributors except china company currently sells products retail stores employed sales force company reports revenue five geographic regions north america consists us canada jamaica mexico central america consists mexico costa rica el salvador panama dominican republic south america includes brazil emea consists europe middle east africa asia pacific consists asia new zealand australia herbalife ltd cayman islands exempted limited liability company herbalife incorporated april 4 2002 direct indirect whollyowned subsidiaries wh intermediate holdings ltd cayman islands company wh luxembourg holdings sàrl luxembourg unipersonal limited liability company wh luxembourg cm sàrl luxembourg unipersonal limited liability company wh acquisition corp nevada corporation formed behalf whitney co llc whitney golden gate private equity inc golden gate order acquire herbalife international inc nevada corporation subsidiaries herbalife international july 31 2002 acquisition december 31 2007 whitney golden gate beneficially common shares company ipo recapitalization december 16 2004 herbalife completed initial public offering common shares ipo part series recapitalization transactions including • tender offer 1598 million herbalife international’s outstanding 1134 senior subordinated notes due 2010 1134 notes • replacement herbalife international’s existing 2050 million senior credit facility new 2250 million senior credit facility • payment 1398 million special cash dividend preipo shareholders herbalife • amendment herbalife’s memorandum articles association 1 effect 12 reverse stock split herbalife’s common shares 2 increase herbalife’s authorized common shares 500 million shares 3 increase herbalife’s authorized preference shares 75 million shares took effect december 1 2004 planned continuation ipo recapitalization herbalife exercised contract provision december 2004 redeem 40 1100 million principal value excluding premium 105 million company’s 912 notes due 2011 912 notes required notice period redemption completed february 4 2005 redemption premium 105 million writeoff deferred financing fees 37 million associated redemption included interest expense first quarter 2005 connection ipo recapitalization company incurred 247 million fees expenses 198 million associated ipo included equity 49 million associated establishment credit facility included deferred financing costs credit facility fully repaid third quarter 2006 associated deferred financing costs written see note 4 notes consolidated financial statements discussion company’s former current credit facilities herbalife ltd notes consolidated financial statements continued secondary offering december 19 2005 herbalife completed secondary public offering 13 million common shares held certain existing shareholders selling shareholders received net proceeds sale common shares offering accordingly herbalife receive proceeds sale common shares 2 basis presentation company’s consolidated financial statements refer herbalife subsidiaries common shares earnings per share data successor give effect 12 reverse stock split took effect december 1 2004 company also officially changed name wh holdings cayman islands ltd herbalife ltd effective december 1 2004 new accounting pronouncements december 2007 financial accounting standards board fasb issued statement financial accounting standards sfas 141 revised 2007 business combinations sfas 141r replaces fasb statement 141 sfas 141r establishes principles requirements acquirer recognizes measures financial statements identifiable assets acquired liabilities assumed non controlling interest acquiree goodwill acquired sfas 141r also modifies recognition preacquisition contingencies environmental legal issues restructuring plans acquired research development value purchase accounting statement 141r amends sfas 109 accounting income taxes require acquirer recognize changes amount deferred tax benefits recognizable business combination either income continuing operations period combination directly contributed capital depending circumstances sfas 141r also establishes disclosure requirements enable users evaluate nature financial effects business combination sfas 141r effective beginning entity’s fiscal year begins december 15 2008 company currently evaluating potential impact adoption sfas 141r company’s consolidated financial statements may 2 2007 fasb issued fasb staff position fin 481 definition settlement fasb interpretation 48 fsp fin 481 amends fasb interpretation 48 accounting uncertainty income taxes fin 48 provide guidance enterprise determine whether tax position effectively settled purpose recognizing previously unrecognized tax benefits fsp fin 481 tax position considered effectively settled taxing authority completed examination plans enterprise appeal taxing authority’s examination possibility taxing authority would reexamine tax position future remote fsp fin 481 effective retroactively january 1 2007 adoption fsp fin 481 material impact company’s consolidated financial statements april 2007 fasb issued fasb staff position fin 391 amendment fasb interpretation 39 fsp fin 391 fsp fin 391 modifies fin 39 offsetting amounts related certain contracts permits companies offset cash collateral receivables payables net derivative positions certain circumstances fsp fin 391 effective fiscal years beginning november 15 2007 early adoption permitted company believes adoption fsp fin 391 material effect consolidated financial statements february 2007 fasb issued sfas 159 fair value option financial assets financial liabilities sfas 159 permits entities choose measure many financial instruments certain items fair value sfas 159 also establishes presentation disclosure requirements designed facilitate comparisons entities choose different measurement attributes similar types assets liabilities sfas 159 applies reporting periods beginning november 15 2007 company believes adoption sfas 159 material impact company’s consolidated financial statements herbalife ltd notes consolidated financial statements continued september 2006 fasb issued sfas 157 fair value measurement sfas 157 defines fair value establishes framework measuring fair value accordance gaap expands disclosures fair value measurements provisions sfas 157 effective fiscal years beginning november 15 2007 february 2008 fasb issued fsp fas 1571 fsp fas 1572 fsp 1571 amends sfas 157 exclude sfas 13 accounting leases related interpretive accounting pronouncements address leasing transactions fsp fas 1572 delay effective date sfas 157 nonfinancial assets nonfinancial liabilities except recognized disclosed fair value financial statements recurring basis least annually fsp fas 1572 partially defers effective date sfas 157 fiscal years beginning november 15 2008 interim periods within fiscal years items within scope fsp 1572 effective fiscal 2008 company adopt sfas 157 except applies nonfinancial assets nonfinancial liabilities noted fsp fas 1572 company believes adoption sfas 157 material impact company’s consolidated financial statements reclassifications certain reclassifications made prior period financial statements conform current period presentation significant accounting policies consolidation policy consolidated financial statements include accounts company subsidiaries significant intercompany transactions accounts eliminated foreign currency translation substantially countries company operates functional currency local currency foreign subsidiaries’ asset liability accounts translated consolidated financial reporting purposes us dollar amounts yearend exchange rates revenue expense accounts translated average rates year foreign exchange translation adjustments included accumulated comprehensive income loss accompanying consolidated balance sheets transaction gains losses include cost forward exchange option contracts related settlement gains losses included selling general administrative expenses accompanying consolidated statement income company recorded transaction gain 07 million year ended december 31 2005 transaction losses 23 million 124 million years ended december 31 2006 2007 respectively forward exchange contracts option contracts interest rate swap company enters forward exchange contracts option contracts managing foreign exchange risk sales distributors purchase commitments denominated foreign currencies intercompany transactions bank loans company also enters interest rate swaps managing interest rate risk variable rate term loan company use contracts trading purposes accordance sfas 133 accounting derivative instruments hedging activities company designates certain derivative instruments cash flow hedges formally documents hedge relationships including identification hedging instruments hedged items well risk management objectives strategies undertaking hedge transaction time derivative contract executed company assesses effectiveness hedge inception ongoing basis determines whether hedge highly perfectly effective offsetting changes cash flows hedged item company records effective portion changes estimated fair value accumulated comprehensive income loss subsequently reclassifies related amount accumulated comprehensive herbalife ltd notes consolidated financial statements continued income loss earnings hedging relationship terminated determined derivative ceased highly effective hedge company discontinue hedge accounting transaction derivatives designated hedges changes estimated fair value recognized consolidated statements income cash equivalents company considers highly liquid investments purchased maturity three months less cash equivalents cash equivalents comprised primarily money market accounts foreign domestic bank accounts reduce credit risk company monitors credit standing financial institutions hold company’s cash equivalents accounts receivable accounts receivable consist principally receivables credit card companies arising sale product company’s distributors receivables importers utilized limited number countries sell products distributors due geographic dispersion credit card receivables collection risk considered significant although receivables importers significant company performs ongoing credit evaluations importers maintains allowance potential credit losses company believes provides adequate allowances receivables distributors fair value financial instruments company estimated fair value financial instruments using following methods assumptions • carrying amounts cash equivalents receivables accounts payable approximate fair value due shortterm maturities instruments • marketable securities based quoted market prices instruments • foreign exchange contracts based exchange rates period end • fair value option forward contracts based dealer quotes • book values company’s variable rate debt instruments considered approximate fair values interest rates instruments approximate current rates offered company • fair values fixed rate borrowings determined based recent market trade values disclosed note 4 consolidated financial statements inventories stated lower cost firstin firstout basis market company reserves obsolete slow moving inventory totaling 114 million 120 million december 31 2006 2007 respectively deferred financing costs deferred financing costs represent fees expenses related borrowing company’s longterm debt amortized term related debt herbalife ltd notes consolidated financial statements continued longlived assets depreciation furniture fixtures equipment includes computer hardware software computed straightline basis estimated useful lives related assets range three five years leasehold improvements amortized straightline basis life related asset term lease whichever shorter depreciation furniture fixtures equipment leasehold improvements totaled 214 million 273 million 333 million years ended december 31 2005 2006 2007 respectively longlived assets reviewed impairment based undiscounted cash flows whenever events changes circumstances indicate carrying amount assets may recoverable measurement impairment loss based estimated fair market value asset goodwill intangible assets indefinite lives evaluated annual basis impairment frequently events changes circumstances indicate asset might impaired intangible assets finite lives amortized expected lives three years distributor network five years product formulas two years product certifications annual amortization expense intangibles 140 million 31 million 18 million years ended december 31 2005 2006 2007 respectively december 31 2007 intangibles finite lives fully amortized december 31 2006 2007 goodwill balance 1132 million 1115 million respectively 17 million decrease due primarily effect settlement international tax audit related preacquisition period realization preacquisition net operating losses income taxes income tax expense includes income taxes payable current year change deferred income tax assets liabilities future tax consequences events recognized company’s financial statements income tax returns valuation allowance recognized reduce carrying value deferred income tax assets believed likely component deferred income tax assets realized july 2006 fasb issued fin 48 fin 48 clarifies accounting reporting uncertainties income taxes recognized enterprise’s financial statements interpretation prescribes comprehensive model financial statement recognition measurement presentation disclosure uncertain tax positions taken expected taken income tax returns company adopted fin 48 beginning fiscal year 2007 material impact company’s consolidated financial statements see note 12 notes consolidated financial statements discussion income taxes royalty overrides independent distributor may earn commissions called royalty overrides production bonuses based retail volume commissions based retail sales volume certain members independent sales force sponsored distributor addition commissions recorded products shipped nonus royalty checks aged variety reasons beyond certainty paid taken back income management calculated period certainty three years worldwide comprehensive income comprehensive income consists net earnings unrealized gains losses investments foreign currency translation adjustments effective portion unrealized gains losses derivatives comprehensive income presented consolidated statements shareholders’ equity comprehensive income herbalife ltd notes consolidated financial statements continued components accumulated comprehensive income consisted following thousands operating leases company leases physical properties operating leases certain lease agreements generally include rent holidays tenant improvement allowances company recognizes rent holiday periods straightline basis lease term beginning company right leased space company also records tenant improvement allowances rent holidays deferred rent liabilities amortizes deferred rent terms lease rent research development company’s research development performed inhouse staff outside consultants periods presented research development costs expensed incurred material earnings per share basic earnings per share represents net income period common shares outstanding divided weighted average number common shares outstanding period diluted earnings per share represents net income divided weighted average number shares outstanding inclusive effect dilutive securities outstanding stock options warrants following share amounts used compute basic diluted earnings per share period thousands options purchase 14 million 03 million 10 million common shares prices ranging 2300 2945 3660 4016 3986 4546 outstanding 2005 2006 2007 respectively included computation diluted earnings per share option exercise prices greater average market price common share therefore options would antidilutive revenue recognition revenue recognized products shipped title passes independent distributor importer sales recognized net sales basis reflects product returns net discounts referred “distributor allowances” amounts billed freight handling costs freight handling costs paid company included cost sales company generally receives net sales price cash credit card payments point sale company currently presents sales taxes collected customers net basis related royalty overrides allowances product returns recorded merchandise shipped herbalife ltd notes consolidated financial statements continued allowances product returns primarily connection company’s buyback program provided time product shipped accrual based upon historic return rates country relevant return pattern reflects anticipated returns received period 12 months following original sale accounting stock options prior january 1 2006 company applied intrinsic value method outlined accounting principles board apb opinion 25 accounting stock issued employees apb 25 related interpretations accounting sharebased awards made plans intrinsic value method compensation expense recorded date grant extent current market price underlying stock exceeds exercise price allowed sfas 123 accounting stock based compensation sfas 123 company adopted disclosure requirements sfas 123 following table illustrates effect net income earnings per share applying fair value recognition provision sfas 123 options granted company’s stockbased compensation plans year ended december 31 2005 purposes pro forma disclosure value options estimated using blackscholesmerton optionpricing model assuming risk free interest rate 40 expected option life 63 years volatility 3275 dividend yield 0 fair value options amortized expense using graded vesting schedule forfeitures recognized occur january 1 2006 company adopted sfas 123r sharebased payment sfas 123r statement replaces sfas 123 supersedes apb 25 sfas 123r requires sharebased compensation recognized expense financial statements cost measured based fair value awards granted company used modified prospective transition method requires recognition compensation expense prospective basis accordingly prior period financial statements restated use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates herbalife ltd notes consolidated financial statements continued 3 inventories consist primarily finished goods available resale categorized follows millions inventories presented net reserves obsolete slow moving inventory 114 million 120 million december 31 2006 2007 respectively 4 longterm debt longterm debt consists following millions net interest expense 439 million 395 million 106 million years ended december 31 2005 2006 2007 respectively july 21 2006 company entered 3000 million senior secured credit facility comprised 2000 million term loan 1000 million revolving credit facility syndicate financial institutions lenders replaced 2250 million senior secured credit facility originally entered december 21 2004 term loan bears interest libor plus margin 15 base rate plus margin 050 matures july 21 2013 revolving credit facility bears interest libor plus margin 125 base rate plus margin 025 available july 21 2012 december 31 2006 2007 average interest rate senior secured credit facility 685 626 respectively company incurred approximately 23 million debt issuance costs connection entering new credit facility july 2006 amortized term new credit facility company repaid amounts outstanding prior senior secured credit facility amounting 796 million consequently company expensed 17 million unamortized deferred financing costs related credit facility also july 2006 company redeemed outstanding 01 million aggregate principal amount 1134 notes august 23 2006 company borrowed 2000 million pursuant term loan new credit facility fund redemption 912 notes total redemption price 912 notes 1878 million consisted 1650 million aggregate principal amount 166 million purchase premium 62 million accrued interest redemption premium 166 million writeoff unamortized deferred financing herbalife ltd notes consolidated financial statements continued costs discounts 46 million associated 912 notes included interest expense third quarter 2006 september 2006 company prepaid 200 million new term loan borrowings resulting 01 million additional interest expense writeoff unamortized deferred financing costs march 2007 company made another prepayment 295 million expensed approximately 02 million related unamortized deferred financing costs december 31 2007 company obligated pay approximately 04 million term loan every quarter june 30 2013 remaining principal july 21 2013 december 31 2007 amount outstanding term loan 1484 million second quarter 2007 company borrowed aggregate amount 1000 million revolving credit facility fund stock repurchase program june 2007 company repaid 400 million amounts outstanding facility september 2007 company lenders amended credit agreement increasing amount current revolving credit facility aggregate principal amount 1500 million finance increase stock repurchase program see note 9 notes consolidated financial statements discussion share repurchase program third quarter 2007 company borrowed additional amount 487 million repaid 300 million amounts outstanding facility october 2007 company repaid 150 million revolving credit facility december 2007 company borrowed additional amount 1450 million december 31 2007 amount outstanding revolving credit facility 2087 million annual scheduled principal payments longterm debt 47 million 40 million 25 million 22 million 2109 million years ended december 31 2008 2009 2010 2011 2012 1409 million thereafter course conducting regular operations certain vendors may require letters credit issued order secure insurance policies goods purchased december 31 2007 company outstanding letters credit 5 lease obligations company warehouse office furniture fixtures equipment leases expire various dates 2016 lease agreements company also obligated pay property taxes insurance maintenance costs certain leases contain renewal options future minimum rental commitments noncancelable operating leases capital leases december 31 2007 follows millions rental expense years ended december 31 2005 2006 2007 256 million 344 million 365 million respectively herbalife ltd notes consolidated financial statements continued property capital leases included property accompanying consolidated balance sheets follows millions 6 employee compensation plans company maintains profit sharing plan pursuant sections 401a k internal revenue code 1986 amended code plan available substantially employees meet length service requirements employees may elect contribute 2 17 compensation company make matching contributions amount equal one dollar deferred earnings exceed 3 participants earnings participants partially vested company contributions one year fully vested five years company contributed 14 million 16 million 17 million years ended december 31 2005 2006 2007 respectively company nonqualified deferred compensation plans select groups management plan senior executive plan deferred compensation plans allow eligible employees elect annually defer 50 base annual salary 100 annual bonus calendar year annual deferral amount company makes matching contributions behalf participant senior executive plan senior executive plan provides amount matching contributions determined company discretion 2007 matching contribution 3 participant’s base salary participant either nonqualified deferred compensation plans discussed times fully vested nonforfeitable interest year’s contribution including interest credited thereto company matching contributions applicable connection participant’s election defer annual deferral amount participant may also elect receive shortterm payout equal annual deferral amount plus interest amount payable two years first day year annual deferral amount actually deferred total deferred compensation expense two nonqualified deferred compensation plans net participant contributions 09 million 18 million 17 million years ended december 31 2005 2006 2007 respectively total longterm deferred compensation liability two deferred compensation plans 182 million 202 million december 31 2006 2007 respectively deferred compensation plans unfunded benefits paid general assets company except company contributed “rabbi trust” whose assets used pay benefits company remains solvent reached company’s creditors company becomes insolvent value assets “rabbi trust” 176 million 193 million december 31 2006 2007 respectively 7 transactions related parties golden gate whitney ceased beneficial owners common shares company first quarter second quarter 2007 respectively prior whitney golden gate direct indirect ownership four companies provided products services company total purchases goods services companies amounted 76 million 17 million 08 million years ended december 31 2005 2006 2007 respectively herbalife ltd notes consolidated financial statements continued 8 contingencies company time engaged routine litigation company regularly reviews pending litigation matters involved establishes reserves deemed appropriate management litigation matters probable loss estimate made herbalife international certain independent distributors named defendants purported class action lawsuit filed february 17 2005 superior court california county san francisco served herbalife international march 14 2005 minton v herbalife international et al case transferred los angeles county superior court plaintiff challenging marketing practices certain herbalife international independent distributors herbalife international various state laws prohibiting “endless chain schemes” insufficient disclosure assisted marketing plans unfair deceptive business practices fraud deceit plaintiff alleges freedom group system operated certain independent distributors herbalife international products places much emphasis recruiting encourages excessively large purchases product promotional materials distributors plaintiff also alleges freedom group pressured distributors disseminate misleading promotional materials plaintiff seeks hold herbalife international vicariously liable actions independent distributors seeking damages injunctive relief january 24 2007 superior court denied class certification claims except claim california law prohibiting “endless chain schemes” claim granted california class certification provided class counsel able substitute plaintiff california resident claims typical class company believes meritorious defenses suit herbalife international certain distributors defendants class action lawsuit filed july 16 2003 circuit court ohio county state west virginia mey v herbalife international inc et al complaint alleged certain telemarketing practices certain herbalife international distributors violated telephone consumer protection act tcpa sought hold herbalife international vicariously liable practices independent distributors specifically plaintiffs’ complaint alleged several herbalife international’s distributors used prerecorded telephone messages faxes contact prospective customers violation tcpa’s prohibition practices without way acknowledging liability wrongdoing company independent distributors company defendants reached binding settlement plaintiffs terms settlement defendants collectively paid 7 million fund distributed qualifying class members relevant amount paid company previously fully reserved company’s financial statements settlement received final approval court january 2008 marketer dietary nutritional supplements products ingested consumers applied bodies company currently subjected various product liability claims effects claims date material company reasonably possible range exposure currently existing claims material company believes meritorious defenses allegations contained lawsuits company currently maintains product liability insurance annual deductible 10 million certain company’s subsidiaries subject tax audits governmental authorities respective countries certain tax audits governmental authorities proposing significant amounts additional taxes related interest penalties due company tax advisors believe substantial defenses allegations additional taxes owed company vigorously contesting additional proposed taxes related charges matters may take several years resolve company cannot sure ultimate resolution however opinion management adverse outcomes likely result material adverse effect financial condition operating results opinion based belief losses suffered excess amounts reserved would material company meritorious defenses although herbalife ltd notes consolidated financial statements continued company reserved amount company believes represents likely outcome resolution disputes company incorrect assessment company may record additional expenses 9 shareholders’ equity company 699 million 716 million 644 million common shares outstanding december 31 2005 2006 2007 respectively dividends declaration future dividends subject discretion company’s board directors depend upon various factors including earnings financial condition restrictions imposed credit agreement cash requirements future prospects factors deemed relevant board directors senior credit facility entered july 21 2006 amended november 2007 permits payments dividends long default event default exists sum amounts paid respect dividends share repurchases exceed sum 4500 million plus seventy five percent cumulative consolidated net income first quarter 2007 last day quarter recently ended prior date dividend dividends declared paid fiscal years 2005 2006 second quarter 2007 company’s board directors adopted regular quarterly cash dividend program april 18 2007 company’s board directors authorized 020 per common share cash dividend 144 million aggregate first quarter 2007 paid may 15 2007 shareholders record april 30 2007 august 6 2007 company’s board directors authorized 020 per common share cash dividend 135 million aggregate second quarter 2007 paid september 14 2007 shareholders record august 31 2007 october 30 2007 company’s board directors authorized 020 per common share cash dividend 136 million aggregate third quarter 2007 paid december 14 2007 shareholders record november 30 2007 share repurchases april 18 2007 company’s board directors authorized repurchase 300 million company’s common shares next two years times prices determined company management market conditions warrant quarter ended june 30 2007 company repurchased approximately 35 million common shares open market purchases aggregate cost 1388 million average cost 3965 per share august 23 2007 company’s board directors approved increase 150 million previously authorized share repurchase program raising total value company common shares authorized repurchased 450 million quarter ended september 30 2007 company repurchased approximately 17 million common shares open market purchases aggregate cost 651 million average cost 3923 per share quarter ended december 31 2007 company repurchased approximately 39 million common shares open market purchases aggregate cost 1618 million average cost 4156 per share fiscal year 2007 aggregate purchase price common shares company repurchased reflected reduction shareholders’ equity company allocated purchase price repurchased shares reduction retained earnings common stock additional paidin capital equity compensation plans company five stockbased compensation plans wh holdings cayman islands ltd stock incentive plan management plan wh holdings cayman islands ltd independent directors stock incentive plan independent directors plan herbalife ltd 2004 stock incentive plan 2004 stock incentive plan herbalife ltd notes consolidated financial statements continued herbalife ltd 2005 stock incentive plan 2005 stock incentive plan herbalife ltd independent directors deferred compensation stock unit plan independent director stock unit plan management plan provides grant options purchase common shares herbalife members company’s management independent directors plan provides grant options purchase common shares herbalife company’s independent directors 2004 stock incentive plan replaced management plan independent directors plan adoption thereof additional awards made either management plan independent directors plan however shares remaining available issuance plans absorbed became available issuance 2004 stock incentive plan terms 2005 stock incentive plan substantially similar terms 2004 stock incentive plan 2005 stock incentive plan authorizes issuance 4000000 common shares pursuant awards plus shares remained available issuance 2004 stock incentive plan time adoption 2005 stock incentive plan purpose independent directors stock unit plan facilitate equity ownership company independent directors award stock units allow deferral independent directors compensation realized connection stock units company’s stock compensation awards outstanding december 31 2007 include stock options stock appreciation rights sars stock units prior january 1 2006 company applied intrinsic value method outlined apb 25 related interpretations accounting sharebased awards made company’s stockbased compensation plans intrinsic value method compensation expense recorded date grant extent current market price underlying stock exceeds exercise price january 1 2006 company adopted sfas 123r sharebased payment sfas 123r statement replaces sfas 123 supersedes apb 25 sfas 123r requires sharebased compensation recognized expense financial statements cost measured based fair value awards granted company adopted sfas 123r using modified prospective transition method requires recognition compensation expense prospective basis transition method stockbased compensation cost year 2006 included compensation cost sharebased awards granted prior yet vested january 1 2006 based grant date fair value estimated accordance original provisions sfas 123 b compensation cost sharebased awards granted subsequent january 1 2006 based grantdate fair value estimated accordance provisions sfas 123r sfas 123r also requires company estimate forfeitures calculating expense relating sharebased compensation opposed recognizing forfeitures expense reduction occur adjustment apply estimated forfeitures previously recognized sharebased compensation considered immaterial classified cumulative effect change accounting principle company records compensation expense requisite service period equal vesting period awards granted prior january 1 2006 compensation expense recognized gradedvesting basis vesting term awards granted january 1 2006 compensation expense recognized straightline basis vesting term stockbased compensation expense included selling general administrative expenses consolidated statements income years ended december 31 2006 2007 stockbased compensation expenses amounted 113 million 134 million respectively related income tax benefits recognized earnings amounted 42 million 50 million respectively december 31 2007 total unrecognized compensation cost related nonvested stock awards 364 million related weightedaverage period expected recognized approximately 18 years ended december 31 2006 2007 excess tax benefits 202 million 207 million respectively generated option exercises company’s stockbased compensation plans provide grants stock options sars stock units collectively referred herein awards stock options typically vest quarterly fiveyear period beginning grant date certain stock option grants vest period less five years certain sars herbalife ltd notes consolidated financial statements continued vest quarterly fiveyear period beginning grant date sars vest annually threeyear period contractual term stock options sars ten years stock unit awards 2005 incentive plan incentive plan stock units vest annually three year period equal contractual term stock units awarded independent directors stock unit plan independent director stock units vest rate 25 january 15 april 15 july 15 october 15 unless otherwise determined time grant value stock unit shall equal one common share herbalife fair value award estimated date grant using blackscholesmerton optionpricing model based assumptions following tables expected term award based simple average vesting period life award limited historical data groups employees determined similar historical exercise patterns valuation purposes expected volatility stock awards primarily based upon historical volatility company’s common shares due limited period public trading data common shares also validated volatility rates peer group companies risk free interest rate based implied yield us treasury zerocoupon issue remaining term equal expected term award dividend yield reflects company historically paid regular cash dividends inception first quarter 2007 dividends paid predecessor company 2002 prior special dividends paid 2004 connection ipo excluded calculation commencing second quarter 2007 board directors approved regular quarterly dividend program second third fourth quarter 2007 company declared 020 per share cash dividend however guarantee board directors terminate quarterly dividend program following table summarizes weighted average assumptions used calculation fair market value years ended december 31 2006 2007 1 stock options granted 2007 following tables summarize activity stockbased compensation plans year ended december 31 2007 1 intrinsic value amount current market value underlying stock exceeds exercise price stock award herbalife ltd notes consolidated financial statements continued weightedaverage grant date fair value stock awards granted 2006 2007 1844 1954 respectively total intrinsic value stock awards exercised years ended december 31 2006 2007 555 million 601 million respectively following table summarizes information regarding option groups outstanding december 31 2007 employee stock purchase plan 2007 company adopted qualified employee stock purchase plan espp implemented first quarter 2008 connection adoption espp company reserved issuance total one million common shares terms espp rights purchase common shares may granted eligible qualified employees subject certain restrictions espp enables company’s eligible employees payroll withholdings purchase restricted number common shares 85 fair market value common share purchase date purchases made calendar quarter schedule 10 segment information company network marketing company sells wide range weight management products nutritional supplements personal care products within one industry segment defined sfas 131 disclosures segments enterprise related information company’s products manufactured third party providers sold independent distributors sell herbalife products retail consumers distributors company sells products 65 countries throughout world organized managed geographic regions company aggregates operating segments one reporting segment management believes company’s operating segments similar operating characteristics similar long term operating performance making determination management believes operating segments similar nature herbalife ltd notes consolidated financial statements continued products sold product acquisition process types customers products sold methods used distribute products nature regulatory environment revenues reflect sales products distributors based distributors’ geographic location late 2007 company changed geographic regions seven five regions part company’s ongoing realignment growth plan changes intended create growth opportunities distributors support faster decision making across organization reducing number layers management improve sharing ideas tools accelerate growth high potential markets historical information presented related company’s geographic regions reclassified conform current geographic presentation company’s reporting segment’s operating information sales product line follows herbalife ltd notes consolidated financial statements continued 1 operating margin consists net sales less cost sales royalty overrides 2 product buybacks returns product categories included literature promotional category 3 consists us canada jamaica 4 includes mexico costa rica panama dominican republic el salvador 5 consists europe middle east africa 6 consists asia new zealand australia december 31 2007 net property located us foreign countries 929 million 281 million respectively december 31 2006 net property located us foreign countries 796 million 257 million respectively herbalife ltd notes consolidated financial statements continued december 31 2007 deferred tax assets related us foreign countries 267 million 461 million respectively december 31 2006 deferred tax assets related us foreign countries 525 million 219 million respectively 11 derivative instruments hedging activities interest rate risk management company engages interest rate hedging strategy hedged transactions forecasted interest payments company’s variable rate term loan hedged risk variability forecasted interest rate cash flows hedging strategy involves purchase interest rate swaps outstanding cash flow hedges interest rate exposures december 31 2007 maximum length time company hedging exposures approximately two years july 21 2006 interest rate swap originally entered february 21 2005 terminated due debt refinancing interest income approximately 08 million recorded company’s consolidated statement income quarter ended september 30 2006 current credit facility company obligated enter interest rate hedge 25 aggregate principal amount term loan minimum three years august 23 2006 company entered new interest rate swap agreement provides company pay interest threeyear period fixed rate 526 various notional amounts receiving interest period libor rate notional principal amounts swap designated cash flow hedge variability libor interest rate new term loan libor plus 150 thereby fixing effective rate notional amounts 676 company formally assesses inception least quarterly thereafter whether derivatives used hedging transactions effective offsetting changes cash flows hedged item december 31 2006 2007 hedge relationship qualified effective hedge sfas 133 accounting derivative instruments hedging activities consequently changes fair value derivative deferred recorded comprehensive income related forecasted transaction recognized consolidated statements income fair value interest rate swap agreement based thirdparty bank quotes december 31 2006 2007 recorded interest rate swap liability fair value 04 million 14 million respectively offsetting amount recorded comprehensive income december 31 2007 estimated amount existing loss related cash flow hedges expected reclassified earnings next 12 months 07 million interest rate swap used hedge interest rate exposure variable interest rate term loan fair value interest rate swap based thirdparty bank quotes table describes interest rate swap outstanding december 31 2007 foreign currency instruments company also designates certain derivatives foreign currency forward contracts foreign currency options freestanding derivatives hedge accounting apply changes fair market value derivatives included selling general administrative expenses company’s consolidated statements income company purchases average rate put options well forward extra contracts combination foreign forward exchange contract option partially mitigate impact foreign currency weakens beyond strike rate company also uses foreign currency forward ratio forward contracts hedge foreigncurrencydenominated intercompany transactions fair values option herbalife ltd notes consolidated financial statements continued forward contracts based thirdparty bank quotes company’s foreign exchange forward contracts maturity less one year majority maturing within 31 days less december 31 2007 december 31 2006 2007 company outstanding options table describe forward contracts outstanding dates indicated herbalife ltd notes consolidated financial statements continued foreign subsidiaries excluding operating hyperinflationary environments designate local currencies functional currency year end total amount cash held foreign subsidiaries 1548 million 84 million maintained invested us dollars 12 income taxes components income taxes follows millions herbalife ltd notes consolidated financial statements continued income taxes follows millions dollars significant categories temporary differences gave rise deferred tax assets liabilities follows tax effected millions company recognizes valuation allowances deferred tax assets reported based weight evidence likely deferred tax assets realized company believes majority deferred tax assets realized reversal certain significant taxable temporary differences anticipated future taxable income operations herbalife ltd notes consolidated financial statements continued december 31 2007 company’s deferred tax assets consisted primarily foreign tax loss carryforwards deferred expenses reduced valuation allowances 17 million foreign tax loss carryforwards 39 million expire varying amounts 2008 indefinitely tax benefits recognized future reduction valuation allowance 07 million benefits would allocated goodwill december 31 2007 company approximately 80 million unremitted earnings permanently reinvested foreign subsidiaries earnings remitted result would net us tax benefit company approximately 2 million accordingly deferred taxes provided unremitted earnings applicable statutory income tax rate cayman islands zero herbalife ltd years reported purposes reconciliation provision income taxes statutory rate provision income taxes effective tax rate notional 35 tax rate applied follows millions dollars january 1 2007 company adopted provisions fin 48 company’s adoption standard material impact retained earnings december 31 2007 total amount unrecognized tax benefits including related interest penalties 503 million unrecognized tax benefits relate uncertainties international transfer pricing issues deductibility certain operating expenses various jurisdictions anticipated settlements foreign tax audits expiration statute limitations several jurisdictions total amount unrecognized tax benefits recognized 329 million unrecognized tax benefits 80 million interest 31 million penalties would impact effective tax rate 63 million unrecognized tax benefits would impact goodwill company accounts interest penalties generated tax contingencies component income tax expense year ended december 31 2007 company recorded interest penalties related uncertain tax positions 1 million 04 million respectively december 31 2007 total accrued interest penalties 8 million 31 million respectively herbalife ltd notes consolidated financial statements continued following changes occurred amount unrecognized tax benefits including related interest penalties year millions unrecognized tax benefits including related interest penalties increased 82 million 2007 12 million increase occurred result foreign exchange fluctuations accounted decrease comprehensive income company believes reasonably possible amount unrecognized tax benefits could decrease approximately 15 million within next twelve months due expiration statute limitations settlements audits resolution administrative judicial proceedings approximately 5 million possible reduction would increase goodwill company’s tax filings generally subject examination major tax jurisdictions years ending december 31 2003 13 restructuring reserve july 2006 company initiated realignment employee base part first phase realignment growth plan company recorded 105 million 18 million professional fees severance related costs years ended december 31 2006 2007 respectively amounts included selling general administrative expenses fourth quarter 2007 company initiated second phase realignment growth plan incurred approximately 40 million professional fees severance related costs company expects complete realignment growth plan 2008 estimates corresponding severance related cost incurred 2008 approximately 40 million 60 million following table summarizes components reserve december 31 2006 2007 millions herbalife ltd notes consolidated financial statements continued 14 subsequent event january 28 2008 company issued press release announcing mr peter maslen class iii member board directors communicated decision retire board directors effective close business january 23 2008 company also announced board directors elected mr hal gaba fill vacancy created mr maslen’s retirement effective close business january 23 2008 january 31 2008 company’s board directors approved quarterly cash dividend 020 per common share fourth quarter shareholders record effective february 29 2008 payable march 14 2008 15 quarterly information unaudited signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereto duly authorized herbalife ltd richard goudis richard goudis chief financial officer dated february 26 2008 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicateditem 15 exhibits financial statement schedules following documents filed part annual report form 10k incorporated herein reference 1 financial statements following financial statements herbalife ltd filed part annual report form 10k pages indicated 2 financial statement schedules omitted required information inapplicable information presented consolidated financial statements related notes 3 exhibits listed exhibit index immediately filed part annual report form 10k incorporated reference herein exhibit index filed herewith management contract compensatory plan arrangement previously filed october 1 2004 exhibit company’s registration statement form s1 file 333119485 incorporated herein reference b previously filed november 9 2004 exhibit amendment 2 company’s registration statement form s1 file 333119485 incorporated herein reference c previously filed december 2 2004 exhibit amendment 4 company’s registration statement form s1 file 333119485 incorporated herein reference previously filed december 14 2004 exhibit amendment 5 company’s registration statement form s1 file 333119485 incorporated herein reference e previously filed february 17 2005 exhibit company’s registration statement form s8 file 333122871 incorporated herein reference f previously filed may 13 2005 exhibit company’s current report form 8k incorporated herein reference g previously filed june 14 2005 exhibit company’s current report form 8k incorporated herein reference h previously filed september 23 2005 exhibit company’s current report form 8k incorporated herein reference previously filed february 28 2006 exhibit company’s annual report form 10k year ended december 31 2005 incorporated herein reference j previously filed november 22 2005 exhibit company’s registration statement form s8 file 129885 k previously filed march 29 2006 exhibit company’s current report form 8k incorporated herein reference l previously filed march 29 2006 exhibit company’s current report form 8k incorporated herein reference previously filed march 30 2006 exhibit company’s current report form 8k incorporated herein reference n previously filed march 31 2006 exhibit company’s current report form 8k incorporated herein reference previously filed december 20 2007 exhibit company’s current report form 8k incorporated herein reference p previously filed november 13 2006 exhibit company’s quarterly report form 10q quarter ended september 30 2006 incorporated reference q previously filed october 12 2006 exhibit company’s current report form 8k incorporated herein reference r previously filed october 26 2006 exhibit company’s current report form 8k incorporated herein reference previously filed may 29 2007 exhibit company’s current report form 8k incorporated herein reference previously filed november 6 2007 exhibit company’s quarterly report form 10q quarter ended september 30 2007 incorporated reference u previously filed february 26 2008 exhibit company’s annual report form 10k year ended december 31 2007 incorporated herein reference v previously filed april 7 2008 exhibit company’s current report form 8k incorporated herein reference w previously filed april 9 2008 exhibit company’s current report form 8k incorporated herein reference x previously filed november 3 2008 exhibit company’s quarterly report form 10q quarter ended september 30 2008 incorporated reference report independent registered public accounting firm board directors shareholders herbalife ltd audited accompanying consolidated balance sheets herbalife ltd subsidiaries “company” december 31 2008 2007 related consolidated statements income changes shareholders’ equity comprehensive income cash flows years threeyear period ended december 31 2008 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position herbalife ltd subsidiaries december 31 2008 2007 results operations cash flows years threeyear period ended december 31 2008 conformity us generally accepted accounting principles discussed note 2 consolidated financial statements effective january 1 2006 company changed method accounting sharebased compensation due adoption provisions statement financial accounting standards “sfas” 123r sharebased payment discussed note 2 consolidated financial statements effective january 1 2007 company changed method accounting uncertainty income taxes due adoption provisions financial accounting standards board “fasb” interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 discussed note 2 consolidated financial statements effective january 1 2008 company adopted provisions sfas 157 fair value measurements also audited accordance standards public company accounting oversight board united states herbalife ltd subsidiaries’ internal control financial reporting december 31 2008 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated february 24 2009 expressed unqualified opinion effectiveness company’s internal control financial reporting kpmg llp los angeles california february 24 2009 herbalife ltd consolidated balance sheets see accompanying notes consolidated financial statements herbalife ltd consolidated statements income see accompanying notes consolidated financial statements herbalife ltd consolidated statements changes shareholders’ equity comprehensive income see accompanying notes consolidated financial statements herbalife ltd consolidated statements cash flows see accompanying notes consolidated financial statements herbalife ltd notes consolidated financial statements 1 organization herbalife ltd cayman islands exempted limited liability company herbalife incorporated april 4 2002 herbalife ltd together subsidiaries “company” leading global network marketing company sells weight management nutritional supplement energy sports fitness products personal care products network 19 million independent distributors except china company currently sells products retail stores employed sales force company reports revenue six geographic regions north america consists us canada jamaica mexico central america consists mexico costa rica el salvador panama dominican republic honduras nicaragua guatemala south america includes brazil emea consists europe middle east africa asia pacific excluding china consists asia new zealand australia china 2 basis presentation company’s consolidated financial statements refer herbalife subsidiaries new accounting pronouncements march 2008 financial accounting standards board fasb issued statement financial accounting standards sfas 161 disclosures derivative instruments hedging activities amendment fasb statement 133 sfas 161 sfas 161 expands disclosure requirements derivative instruments hedging activities sfas 161 specifically requires entities provide enhanced disclosures addressing following entity uses derivative instruments b derivative instruments related hedged items accounted sfas 133 accounting derivative instruments hedging activities sfas 133 related interpretations c derivative instruments related hedged items affect entity’s financial position financial performance cash flows sfas 161 effective fiscal years interim periods beginning november 15 2008 company believes adoption sfas 161 material impact consolidated financial statements february 2008 fasb issued fasb staff position fas 1572 fsp fas 1572 fsp fas 1572 delay effective date sfas 157 fair value measurements sfas 157 nonfinancial assets nonfinancial liabilities except recognized disclosed fair value financial statements recurring basis least annually fsp fas 1572 partially defers effective date sfas 157 fiscal years beginning november 15 2008 interim periods within fiscal years items within scope fsp 1572 company believes adoption fas 157 nonfinancial assets nonfinancial liabilities material impact consolidated financial statements december 2007 fasb issued sfas 141 revised 2007 business combinations sfas 141r replaces sfas 141 business combinations sfas 141r establishes principles requirements acquirer recognizes measures financial statements identifiable assets acquired liabilities assumed non controlling interest acquiree goodwill acquired sfas 141r also modifies recognition preacquisition contingencies environmental legal issues restructuring plans acquired research development value purchase accounting sfas 141r amends sfas 109 accounting income taxes require acquirer recognize changes amount deferred tax benefits recognizable business combination either income continuing operations period combination directly contributed capital depending circumstances sfas 141r also establishes disclosure requirements enable users evaluate nature financial effects business combination sfas 141r effective fiscal years beginning december 15 2008 company believes adoption sfas 141r material impact consolidated financial statements herbalife ltd notes consolidated financial statements continued reclassifications certain reclassifications made prior period financial statements conform current period presentation significant accounting policies consolidation policy consolidated financial statements include accounts herbalife ltd subsidiaries significant intercompany transactions accounts eliminated foreign currency translation substantially countries company operates functional currency local currency foreign subsidiaries’ asset liability accounts translated consolidated financial reporting purposes us dollar amounts yearend exchange rates revenue expense accounts translated average rates year foreign exchange translation adjustments included accumulated comprehensive income loss accompanying consolidated balance sheets transaction gains losses include cost forward exchange option contracts related settlement gains losses included selling general administrative expenses accompanying consolidated statement income company recorded transaction losses 57 million 124 million 23 million years ended december 31 2008 2007 2006 respectively forward exchange contracts option contracts interest rate swaps company enters forward exchange contracts option contracts managing foreign exchange risk sales distributors purchase commitments denominated foreign currencies intercompany transactions bank loans company also enters interest rate swaps managing interest rate risk variable rate term loan company use contracts trading purposes accordance sfas 133 company designates certain derivative instruments cash flow hedges formally documents hedge relationships including identification hedging instruments hedged items well risk management objectives strategies undertaking hedge transaction time derivative contract executed company assesses effectiveness hedge inception ongoing basis determines whether hedge highly perfectly effective offsetting changes cash flows hedged item company records effective portion changes estimated fair value accumulated comprehensive income loss subsequently reclassifies related amount accumulated comprehensive income loss earnings hedging relationship terminated determined derivative ceased highly effective hedge company discontinue hedge accounting transaction derivatives designated hedges changes estimated fair value recognized consolidated statements income cash equivalents company considers highly liquid investments purchased maturity three months less cash equivalents cash equivalents comprised primarily money market accounts foreign domestic bank accounts reduce credit risk company monitors credit standing financial institutions hold company’s cash equivalents herbalife ltd notes consolidated financial statements continued accounts receivable accounts receivable consist principally receivables credit card companies arising sale product company’s distributors receivables importers utilized limited number countries sell products distributors due geographic dispersion credit card receivables collection risk considered significant although receivables importers significant company performs ongoing credit evaluations importers maintains allowance potential credit losses company believes provides adequate allowances receivables distributors fair value financial instruments effective january 1 2008 company adopted sfas 157 except applies nonfinancial assets nonfinancial liabilities subject fsp 1572 sfas 157 clarifies definition fair value prescribes methods measuring fair value establishes fair value hierarchy based inputs used measure fair value expands disclosures fair value measurements disclosed note 14 fair value measurements company properly measured disclosed financial instruments company estimated fair value financial instruments using following methods assumptions • carrying amounts cash equivalents receivables accounts payable approximate fair value due shortterm maturities instruments • marketable securities based quoted market prices instruments • foreign exchange contracts based exchange rates period end • fair value option forward contracts based dealer quotes • book values company’s variable rate debt instruments considered approximate fair values interest rates instruments approximate current rates offered company • fair values fixed rate borrowings determined based recent market trade values disclosed note 4 longterm debt notes consolidated financial statements inventories stated lower cost firstin firstout basis market company reserves obsolete slow moving inventory totaling 116 million 120 million december 31 2008 2007 respectively deferred financing costs deferred financing costs represent fees expenses related borrowing company’s longterm debt amortized term related debt longlived assets depreciation furniture fixtures equipment includes computer hardware software computed straightline basis estimated useful lives related assets range three five years leasehold improvements amortized straightline basis life related asset term lease whichever shorter depreciation furniture fixtures equipment leasehold improvements totaled 487 million 333 million 273 million years ended december 31 2008 2007 2006 respectively herbalife ltd notes consolidated financial statements continued longlived assets reviewed impairment based undiscounted cash flows whenever events changes circumstances indicate carrying amount assets may recoverable measurement impairment loss based estimated fair value asset goodwill intangible assets indefinite lives evaluated annual basis impairment frequently events changes circumstances indicate asset might impaired intangible assets finite lives amortized expected lives three years distributor network five years product formulas two years product certifications annual amortization expense intangibles 18 million 31 million years ended december 31 2007 2006 respectively december 31 2007 intangibles finite lives fully amortized december 31 2008 2007 goodwill balance 1107 million 1115 million respectively 08 million decrease due primarily effect settlement international tax audit related preacquisition period income taxes income tax expense includes income taxes payable current year change deferred income tax assets liabilities future tax consequences events recognized company’s financial statements income tax returns valuation allowance recognized reduce carrying value deferred income tax assets believed likely component deferred income tax assets realized july 2006 fasb issued fasb interpretation number 48 fin 48 fin 48 clarifies accounting reporting uncertainties income taxes recognized enterprise’s financial statements interpretation prescribes comprehensive model financial statement recognition measurement presentation disclosure uncertain tax positions taken expected taken income tax returns company adopted fin 48 beginning fiscal year 2007 material impact company’s consolidated financial statements see note 12 income taxes discussion income taxes royalty overrides independent distributor may earn commissions called royalty overrides production bonuses based retail volume commissions based retail sales volume certain members independent sales force sponsored distributor addition commissions recorded products shipped nonus royalty checks aged variety reasons beyond certainty paid taken back income management calculated period certainty three years worldwide comprehensive income comprehensive income consists net earnings unrealized gains losses investments foreign currency translation adjustments effective portion unrealized gains losses derivatives comprehensive income presented consolidated statements shareholders’ equity comprehensive income components accumulated comprehensive loss consisted following thousands herbalife ltd notes consolidated financial statements continued operating leases company leases physical properties operating leases certain lease agreements generally include rent holidays tenant improvement allowances company recognizes rent holiday periods straightline basis lease term beginning company right leased space company also records tenant improvement allowances rent holidays deferred rent liabilities amortizes deferred rent terms lease rent research development company’s research development performed inhouse staff outside consultants periods presented research development costs expensed incurred material earnings per share basic earnings per share represents net income period common shares outstanding divided weighted average number common shares outstanding period diluted earnings per share represents net income divided weighted average number shares outstanding inclusive effect dilutive securities outstanding equitybased compensation awards warrants following share amounts used compute basic diluted earnings per share period thousands awards purchase 23 million 10 million 03 million common shares prices ranging 3854 4864 3986 4546 3660 4016 outstanding 2008 2007 2006 respectively included computation diluted earnings per share award exercise prices greater average market price common share therefore awards would antidilutive revenue recognition revenue recognized products shipped title passes independent distributor importer sales recognized net sales basis reflects product returns net discounts referred “distributor allowances” amounts billed freight handling costs freight handling costs paid company included cost sales company generally receives net sales price cash credit card payments point sale company currently presents sales taxes collected customers net basis related royalty overrides allowances product returns recorded merchandise shipped allowances product returns primarily connection company’s buyback program provided time product shipped accrual based upon historic return rates country relevant return pattern reflects anticipated returns received period 12 months following original sale sharebased payments prior january 1 2006 company applied intrinsic value method outlined accounting principles board apb opinion 25 accounting stock issued employees apb 25 related interpretations herbalife ltd notes consolidated financial statements continued accounting sharebased awards made plans intrinsic value method compensation expense recorded date grant extent current market price underlying stock exceeds exercise price january 1 2006 company adopted sfas 123r sharebased payment sfas 123r statement replaces sfas 123 supersedes apb 25 sfas 123r requires sharebased compensation recognized expense financial statements cost measured based fair value awards granted company used modified prospective transition method requires recognition compensation expense prospective basis accordingly prior period financial statements restated use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates 3 inventories consist primarily finished goods available resale categorized follows millions inventories presented net reserves obsolete slow moving inventory 116 million 120 million december 31 2008 2007 respectively 4 longterm debt longterm debt consists following millions interest expense 201 million 164 million 444 million years ended december 31 2008 2007 2006 respectively herbalife ltd notes consolidated financial statements continued july 21 2006 company entered 3000 million senior secured credit facility comprised 2000 million term loan 1000 million revolving credit facility syndicate financial institutions lenders replaced 2250 million senior secured credit facility originally entered december 21 2004 term loan bears interest libor plus margin 15 base rate plus margin 050 matures july 21 2013 revolving credit facility bears interest libor plus margin 125 base rate plus margin 025 available july 21 2012 december 31 2008 2007 weighted average interest rate senior secured credit facility 304 626 respectively senior secured credit facility requires company comply leverage ratio interest coverage ratio addition senior secured credit facility contains customary covenants including covenants limit restrict company’s ability incur liens incur indebtedness make investments dispose assets make certain restricted payments merge consolidate enter certain transactions affiliates company incurred approximately 23 million debt issuance costs connection entering new senior secured credit facility july 2006 amortized term new senior secured credit facility company repaid amounts outstanding prior senior secured credit facility amounting 796 million consequently company expensed 17 million unamortized deferred financing costs related credit facility august 23 2006 company borrowed 2000 million pursuant term loan new senior secured credit facility fund redemption 912 notes due 2011 912 notes total redemption price 912 notes 1878 million consisted 1650 million aggregate principal amount 166 million purchase premium 62 million accrued interest redemption premium 166 million writeoff unamortized deferred financing costs discounts 46 million associated 912 notes included interest expense third quarter 2006 september 2006 company prepaid 200 million new term loan borrowings resulting 01 million additional interest expense writeoff unamortized deferred financing costs march 2007 company made another prepayment 295 million expensed approximately 02 million related unamortized deferred financing costs december 31 2008 company obligated pay approximately 04 million term loan every quarter june 30 2013 remaining principal july 21 2013 december 31 2008 2007 amounts outstanding term loan 1468 million 1484 million respectively second quarter 2007 company borrowed aggregate amount 1000 million revolving credit facility fund stock repurchase program june 2007 company repaid 400 million amounts outstanding facility september 2007 company lenders amended credit agreement increasing amount current revolving credit facility aggregate principal amount 1500 million finance increase stock repurchase program see note 9 shareholders’ equity discussion share repurchase program third quarter 2007 company borrowed additional amount 487 million repaid 300 million amounts outstanding facility october 2007 company repaid 150 million revolving credit facility december 2007 company borrowed additional amount 1450 million first quarter 2008 company paid 300 million revolving credit facility may 2008 company borrowed additional 400 million revolving credit facility fund share repurchase program june 2008 paid 280 million revolving credit facility third quarter 2008 company paid 450 million revolving credit facility september 2008 company borrowed aggregate amount 100 million revolving credit facility fourth quarter 2008 company borrowed additional 680 million revolving credit facility fund share repurchase program paid 460 million revolving credit facility december 31 2008 2007 amounts outstanding revolving credit facility 1777 million 2087 million respectively herbalife ltd notes consolidated financial statements continued annual scheduled principal payments longterm debt 151 million 123 million 32 million 1801 million 1409 million years ended december 31 2009 2010 2011 2012 2013 respectively course conducting regular business operations certain vendors government agencies may require letters credit issued december 31 2008 company 28 million issued undrawn letters credit 5 lease obligations company warehouse office furniture fixtures equipment leases expire various dates 2019 lease agreements company also obligated pay property taxes insurance maintenance costs certain leases contain renewal options future minimum rental commitments noncancelable operating leases capital leases december 31 2008 follows millions rental expense years ended december 31 2008 2007 2006 408 million 365 million 344 million respectively property capital leases included property accompanying consolidated balance sheets follows millions 6 employee compensation plans company maintains profit sharing plan pursuant sections 401a k internal revenue code 1986 amended code plan available substantially employees meet length service requirements employees may elect contribute 2 17 compensation company make matching contributions amount equal one dollar deferred earnings exceed 3 participants’ earnings participants partially vested company contributions one year fully vested five years company contributed 20 million 17 million 16 million years ended december 31 2008 2007 2006 respectively herbalife ltd notes consolidated financial statements continued 2008 company amended profit sharing plan effective january 1 2009 starting january 1 2009 employees may elect contribute 75 compensation however contributions limited maximum annual amount set periodically code company make matching contributions amount equal one dollar deferred earnings first 1 make matching contributions amount equal 50 one dollar subsequent 5 deferred earnings contributions become fully vested two years company nonqualified deferred compensation plans select groups management herbalife management deferred compensation plan herbalife senior executive deferred compensation plan deferred compensation plans allow eligible employees elect annually defer 50 base annual salary 100 annual bonus calendar year annual deferral amount company makes matching contributions behalf participant senior executive deferred compensation plan senior executive deferred compensation plan provides amount matching contributions determined company discretion 2008 matching contribution 3 participant’s base salary participant either nonqualified deferred compensation plans discussed times fully vested nonforfeitable interest year’s contribution including interest credited thereto company matching contributions applicable connection participant’s election defer annual deferral amount participant may also elect receive shortterm payout equal annual deferral amount plus interest amount payable two years first day year annual deferral amount actually deferred total deferred compensation two nonqualified deferred compensation plans net participant contributions benefit 45 million year ended december 31 2008 expense 17 million 18 million years ended december 31 2007 2006 respectively total longterm deferred compensation liability two deferred compensation plans 140 million 202 million december 31 2008 2007 respectively deferred compensation plans unfunded benefits paid general assets company except company contributed “rabbi trust” whose assets used pay benefits company remains solvent reached company’s creditors company becomes insolvent value assets “rabbi trust” 158 million 193 million december 31 2008 2007 respectively 7 transactions related parties golden gate private equity inc whitney co llc affiliates former controlling shareholders company ceased affiliates company first quarter second quarter 2007 respectively prior whitney golden gate direct indirect ownership four companies provided products services company total purchases goods services companies amounted 08 million 17 million years ended december 31 2007 2006 respectively 8 contingencies company time engaged routine litigation company regularly reviews pending litigation matters involved establishes reserves deemed appropriate management litigation matters probable loss estimate made marketer dietary nutritional supplements products ingested consumers applied bodies company currently subjected various product liability claims effects claims date material company reasonably possible range exposure currently existing claims material company believes meritorious defenses allegations contained lawsuits company currently maintains product liability insurance annual deductible 10 million herbalife ltd notes consolidated financial statements continued certain company’s subsidiaries subject tax audits governmental authorities respective countries certain tax audits governmental authorities proposing significant amounts additional taxes related interest penalties due company tax advisors believe substantial defenses allegations additional taxes owed company vigorously contesting additional proposed taxes related charges matters may take several years resolve company cannot sure ultimate resolution however opinion management adverse outcomes likely result material adverse effect company’s financial condition operating results opinion based belief losses suffered excess amounts reserved would material company meritorious defenses although company reserved amount company believes represents likely outcome resolution disputes company incorrect assessment company may record additional expenses 9 shareholders’ equity company 614 million 644 million 716 million common shares outstanding december 31 2008 2007 2006 respectively december 2004 company authorized 75 million preference shares 0002 par value 75 million authorized preference shares remain unissued december 31 2008 preference shares may issued time one series voting powers full limited without voting powers designations preferences relative participating optional special rights qualifications limitations restrictions determined company’s board directors dividends declaration future dividends subject discretion company’s board directors depend upon various factors including earnings financial condition restrictions imposed credit agreement cash requirements future prospects factors deemed relevant board directors senior credit facility entered july 21 2006 amended permits payments dividends long default event default exists sum amounts paid respect dividends share repurchases exceed sum 4500 million plus seventy five percent cumulative consolidated net income first quarter 2007 last day quarter recently ended prior date dividend dividends declared paid fiscal year 2006 second quarter 2007 company’s board directors adopted regular quarterly cash dividend program april 18 august 6 october 30 2007 company’s board directors authorized 020 per common share cash dividend aggregate amount dividends paid declared fiscal year ended december 31 2007 approximately 415 million fiscal year 2008 company’s board directors authorized 020 per common share cash dividend january 31 may 1 august 5 october 30 2008 aggregate amount dividends paid declared fiscal year ended december 31 2008 approximately 507 million share repurchases april 18 2007 company’s board directors authorized repurchase 300 million company’s common shares next two years times prices determined company management market conditions warrant august 23 2007 company’s board directors approved increase 150 million previously authorized share repurchase program raising total value company common shares authorized repurchased 450 million year ended december 31 2007 company repurchased approximately 91 million common shares open market purchases aggregate cost 3658 million average cost 4042 per share herbalife ltd notes consolidated financial statements continued may 20 2008 company’s board directors approved additional increase 150 million share repurchase program raising total value company common shares authorized repurchased 600 million year ended december 31 2008 company repurchased approximately 46 million common shares open market purchases aggregate cost 1370 million average cost 2960 per share december 31 2008 since inception share repurchase program company repurchased approximately 137 million common shares aggregate cost 5028 million average cost 3676 per share fiscal years 2008 2007 aggregate purchase price common shares company repurchased reflected reduction shareholders’ equity company allocated purchase price repurchased shares reduction retained earnings common stock additional paidin capital equity compensation plans company five stockbased compensation plans wh holdings cayman islands ltd stock incentive plan management plan wh holdings cayman islands ltd independent directors stock incentive plan independent directors plan herbalife ltd 2004 stock incentive plan 2004 stock incentive plan herbalife ltd 2005 stock incentive plan 2005 stock incentive plan herbalife ltd independent directors deferred compensation stock unit plan independent director stock unit plan management plan provides grant options purchase common shares herbalife members company’s management independent directors plan provides grant options purchase common shares herbalife company’s independent directors 2004 stock incentive plan replaced management plan independent directors plan adoption thereof additional awards made either management plan independent directors plan however shares remaining available issuance plans absorbed became available issuance 2004 stock incentive plan terms 2005 stock incentive plan substantially similar terms 2004 stock incentive plan 2005 stock incentive plan authorizes issuance 4000000 common shares pursuant awards plus shares remained available issuance 2004 stock incentive plan time adoption 2005 stock incentive plan purpose independent directors stock unit plan facilitate equity ownership company independent directors award stock units allow deferral independent directors compensation realized connection stock units company’s stockbased compensation plans provide grants stock options stock appreciation rights sars stock units collectively referred herein awards stock options typically vest quarterly fiveyear period beginning grant date certain stock option grants vest period less five years certain sars vest quarterly fiveyear period beginning grant date sars vest annually threeyear period contractual term stock options sars ten years stock unit awards 2005 incentive plan incentive plan stock units vest annually three year period equal contractual term stock units awarded independent directors stock unit plan independent director stock units vest rate 25 january 15 april 15 july 15 october 15 january 2009 company amended independent directors plan comply newly issued internal revenue code section 457a eliminate deferral election move sars stock units march 2008 company granted stock unit awards chairman chief executive officer vest fouryear period rate 30 first three years 10 fourth year awards subject market conditions market condition awards continued service company service condition awards granted company either market condition awards service condition awards unless otherwise determined time grant value stock unit shall equal one common share herbalife company’s stock compensation awards outstanding december 31 2008 include stock options sars stock units herbalife ltd notes consolidated financial statements continued march 2008 company granted sars market conditions chairman chief executive officer fully vest end four years subject continued employment date achievement certain conditions related market value company’s common shares market conditions include targets stock price appreciation 10 15 compound annual growth rate january 1 2006 company adopted sfas 123r statement replaces sfas 123 supersedes apb 25 sfas 123r requires sharebased compensation recognized expense financial statements cost measured based fair value awards granted company adopted sfas 123r using modified prospective transition method requires recognition compensation expense prospective basis company records compensation expense requisite service period equal vesting period awards granted january 1 2006 compensation expense recognized straightline basis vesting term stockbased compensation expense included selling general administrative expenses consolidated statements income years ended december 31 2008 2007 2006 stockbased compensation expenses relating service condition awards amounted 159 million 134 million 113 million respectively year ended december 31 2008 stockbased compensation expenses relating market condition awards amounted 19 million years ended december 31 2008 2007 2006 related income tax benefits recognized earnings awards amounted 67 million 50 million 42 million respectively december 31 2008 total unrecognized compensation cost related nonvested service condition stock awards 344 million related weightedaverage period expected recognized approximately 21 years december 31 2008 total unrecognized compensation cost related nonvested market condition stock awards 92 million related weightedaverage period expected recognized approximately 32 years ended december 31 2008 2007 2006 excess tax benefits 153 million 207 million 202 million respectively generated exercises awards fair value service condition market condition award estimated date grant using blackscholesmerton optionpricing model monte carlo lattice model respectively expected term award based simple average vesting period life award limited historical data groups employees determined similar historical exercise patterns valuation purposes expected volatility award primarily based upon historical volatility company’s common shares due limited period public trading data common shares also validated volatility rates peer group companies risk free interest rate based implied yield us treasury zerocoupon issue remaining term equal expected term award dividend yield reflects company historically paid regular cash dividends inception first quarter 2007 dividends paid predecessor company 2002 prior special dividends paid 2004 connection initial public offering company’s common shares excluded calculation commencing second quarter 2007 board directors approved regular quarterly dividend program second third fourth quarter 2007 quarter 2008 company declared 020 per share cash dividend however guarantee board directors terminate quarterly dividend program herbalife ltd notes consolidated financial statements continued stock option awards granted years ended december 31 2008 2007 following table summarizes weighted average assumptions used calculation fair value service condition awards years ended december 31 2008 2007 2006 market condition awards granted years ended december 31 2007 2006 market condition awards granted year ended december 31 2008 following table summarizes weighted average assumptions used calculation fair value following tables summarize activity stockbased compensation plans includes stock awards year ended december 31 2008 1 intrinsic value amount current market value underlying stock exceeds exercise price stock award 2 includes 08 million market condition awards outstanding december 31 2008 herbalife ltd notes consolidated financial statements continued weightedaverage grant date fair value service condition awards granted years ended december 31 2008 2007 2006 2358 1954 1844 respectively weightedaverage grant date fair value market condition awards granted year ended december 31 2008 1459 total intrinsic value service condition awards exercised years ended december 31 2008 2007 2006 458 million 601 million 555 million respectively market condition awards exercised years ended december 31 2008 2007 2006 market condition awards granted years ended december 31 2007 2006 following table summarizes information regarding option groups outstanding december 31 2008 employee stock purchase plan 2007 company adopted qualified employee stock purchase plan espp implemented first quarter 2008 connection adoption espp company reserved issuance total 1 million common shares terms espp rights purchase common shares may granted eligible qualified employees subject certain restrictions espp enables company’s eligible employees payroll withholdings purchase limited number common shares 85 fair market value common share purchase date purchases made quarterly basis 10 segment information company network marketing company sells wide range weight management products nutritional supplements personal care products within one industry segment defined sfas 131 disclosures segments enterprise related information company’s products manufactured herbalife ltd notes consolidated financial statements continued third party providers sold independent distributors sell herbalife products retail consumers distributors company sells products 70 countries throughout world organized managed geographic regions company aggregates operating segments excluding china one reporting segment management believes company’s operating segments similar operating characteristics similar long term operating performance making determination management believes operating segments similar nature products sold product acquisition process types customers products sold methods used distribute products nature regulatory environment china identified separate reportable segment meet criteria aggregation revenues reflect sales products distributors based distributors’ geographic location late 2008 company changed geographic regions five six regions part company’s restructuring program changes geographic regions intended create growth opportunities distributors support faster decision making across organization reducing number layers management improve sharing ideas tools accelerate growth high potential markets historical information presented related company’s geographic regions reclassified conform current geographic presentation operating information company’s reporting segment china sales product line follows herbalife ltd notes consolidated financial statements continued 1 operating margin consists net sales less cost sales royalty overrides 2 product buybacks returns product categories included literature promotional category 3 consists us canada jamaica herbalife ltd notes consolidated financial statements continued 4 consists mexico costa rica panama dominican republic el salvador honduras nicaragua guatemala 5 consists europe middle east africa 6 consists asia excluding china new zealand australia december 31 2008 2007 total assets company’s reporting segment excluding china 10743 million 10418 million respectively total assets china 470 million 254 million december 31 2008 2007 respectively december 31 2008 net property located us foreign countries 1466 million 289 million respectively december 31 2007 net property located us foreign countries 929 million 281 million respectively december 31 2008 deferred tax assets related us foreign countries 406 million 314 million respectively december 31 2007 deferred tax assets related us foreign countries 267 million 461 million respectively 11 derivative instruments hedging activities interest rate risk management company engages interest rate hedging strategy hedged transactions forecasted interest payments company’s variable rate term loan hedged risk variability forecasted interest rate cash flows hedging strategy involves purchase interest rate swaps outstanding cash flow hedges interest rate exposures december 31 2008 maximum length time company hedging exposures approximately nine months july 21 2006 interest rate swap originally entered february 21 2005 terminated due debt refinancing interest income approximately 08 million recorded company’s consolidated statement income quarter ended september 30 2006 current credit facility company obligated enter interest rate hedge 25 aggregate principal amount term loan minimum three years august 23 2006 company entered new interest rate swap agreement provides company pay interest threeyear period fixed rate 526 various notional amounts receiving interest period libor rate notional principal amounts swap designated cash flow hedge variability libor interest rate new term loan libor plus 150 thereby fixing company’s effective rate notional amounts 676 company formally assesses inception least quarterly thereafter whether derivatives used hedging transactions effective offsetting changes cash flows hedged item december 31 2008 2007 hedge relationship qualified effective hedge sfas 133 consequently changes fair value derivative deferred recorded comprehensive income related forecasted transaction recognized consolidated statements income fair value interest rate swap agreement based thirdparty bank quotes december 31 2008 2007 company recorded interest rate swap liability fair value 10 million 14 million respectively offsetting amount recorded comprehensive income december 31 2008 estimated amount existing loss related cash flow hedges expected reclassified earnings next nine months 10 million herbalife ltd notes consolidated financial statements continued interest rate swap used hedge interest rate exposure variable interest rate term loan fair value interest rate swap based thirdparty bank quotes table describes interest rate swap outstanding december 31 2008 foreign currency instruments company designates certain derivatives foreign currency forward option contracts freestanding derivatives hedge accounting apply changes fair market value derivatives included selling general administrative expenses company’s consolidated statements income company uses foreign currency forward contracts hedge foreigncurrencydenominated intercompany transactions partially mitigate impact foreign currency fluctuations company also uses foreign currency option contracts partially mitigate impact foreign currency fluctuations fair value forward option contracts based thirdparty bank quotes december 31 2008 company’s outstanding foreign exchange forward option contracts mature within one year majority maturing within 90 days year ended december 31 2008 company also purchased 450 million forward contracts order hedge forecasted inventory purchases designated cashflow hedges subject foreign currency exposures company elected apply hedge accounting rules required sfas 133 hedges contracts allow company sell euros exchange us dollars specified contract rates december 31 2008 approximately 450 million contracts outstanding expected mature next 12 months company’s derivative financial instruments recorded consolidated balance sheet fair value based quoted market rates forward contracts used hedge forecasted inventory purchases specific months changes fair value forward contracts excluding forward points designated cashflow hedges recorded component accumulated comprehensive earnings within stockholders’ equity recognized cost goods sold period approximates time hedged inventory sold december 31 2008 company recorded liability fair value 01 million offsetting amounts recorded comprehensive income relating outstanding contracts company assesses hedge effectiveness measures hedge ineffectiveness least quarterly period ended december 31 2008 ineffective portion recorded company’s consolidated statements income relating hedges immaterial hedges remained effective december 31 2008 herbalife ltd notes consolidated financial statements continued table describes foreign currency forward contracts outstanding december 31 2008 2007 herbalife ltd notes consolidated financial statements continued company foreign currency option contracts outstanding december 31 2007 following table provides information details company’s foreign currency option contracts outstanding december 31 2008 company’s foreign subsidiaries designate local currencies functional currency december 31 2008 2007 total amount cash held foreign subsidiaries 1420 million 1548 million respectively 97 million 84 million respectively maintained invested us dollars herbalife ltd notes consolidated financial statements continued 12 income taxes components income taxes follows millions income taxes follows millions dollars herbalife ltd notes consolidated financial statements continued significant categories temporary differences gave rise deferred tax assets liabilities follows tax effected millions company recognizes valuation allowances deferred tax assets reported based weight evidence likely deferred tax assets realized company believes majority deferred tax assets realized reversal certain significant taxable temporary differences anticipated future taxable income operations december 31 2008 company’s deferred tax assets consisted primarily foreign tax loss carryforwards deferred expenses reduced valuation allowances 122 million foreign tax loss carryforwards 57 million expire varying amounts 2009 indefinitely december 31 2008 company approximately 542 million unremitted earnings permanently reinvested foreign subsidiaries accordingly deferred taxes provided unremitted earnings remitted result would net us tax cost company approximately 25 million year ended december 31 2008 company benefited terms tax holiday people’s republic china tax holiday commenced january 1 2008 terminate december 31 2012 terms holiday company subject zero tax rate china 2008 2009 years concessionary tax rate china remaining years included holiday period applicable statutory income tax rate cayman islands zero herbalife ltd years reported purposes reconciliation provision income taxes statutory rate herbalife ltd notes consolidated financial statements continued provision income taxes effective tax rate notional 35 tax rate applied follows millions dollars december 31 2008 total amount unrecognized tax benefits including related interest penalties 528 million unrecognized tax benefits primarily relate uncertainties international transfer pricing issues deductibility certain operating expenses various jurisdictions anticipated settlements foreign tax audits expiration statute limitations several jurisdictions total amount unrecognized tax benefits recognized 353 million unrecognized tax benefits 85 million interest 33 million penalties would impact effective tax rate 57 million unrecognized tax benefits would impact goodwill company accounts interest penalties generated tax contingencies component income tax expense year ended december 31 2008 company recorded interest penalties related uncertain tax positions 05 million 01 million respectively december 31 2008 total accrued interest penalties 85 million 33 million respectively following changes occurred amount unrecognized tax benefits including related interest penalties year ended december 31 2008 millions unrecognized tax benefits including related interest penalties increased 25 million year including benefit foreign currency fluctuations approximately 26 million 26 million benefit attributable foreign currency fluctuations accounted increase comprehensive income company believes reasonably possible amount unrecognized tax benefits could decrease approximately 20 million within next twelve months possible decrease 12 million would due settlement audits resolution administrative judicial proceedings remaining possible decrease 8 million would due expiration statute limitations various jurisdictions herbalife ltd notes consolidated financial statements continued december 31 2008 company’s tax filings generally subject examination major tax jurisdictions years ending december 31 2004 13 restructuring reserve july 2006 company initiated realignment employee base part first phase realignment growth plan company recorded 18 million 105 million professional fees severance related costs years ended december 31 2007 2006 respectively relating first phase realignment growth plan amounts included selling general administrative expenses paid december 31 2008 fourth quarter 2007 company initiated second phase realignment growth plan company recorded 19 million 40 million professional fees severance related costs years ended december 31 2008 2007 respectively relating second phase realignment growth plan amounts paid december 31 2008 fourth quarter 2008 company initiated restructuring program incurred approximately 48 million professional fees severance related costs company expects complete restructuring program 2009 following table summarizes components reserve december 31 2008 2007 2006 millions 14 fair value measurements september 2006 fasb issued sfas 157 defines fair value establishes framework measuring fair value accordance generally accepted accounting principles us expands disclosures fair value measurements provisions sfas 157 effective fiscal years beginning november 15 2007 february 2008 fasb issued fasb staff position fas 1571 fsp fas 1571 fsp 1571 amends sfas 157 exclude sfas 13 accounting leases related interpretive accounting pronouncements address leasing transactions january 1 2008 company adopted provisions sfas 157 related financial assets liabilities except applies nonfinancial assets nonfinancial liabilities noted fsp fas 1572 adoption material impact company’s consolidated financial statements herbalife ltd notes consolidated financial statements continued sfas 157 defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date exit price sfas 157 establishes fair value hierarchy prioritizes inputs used measuring fair value three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities reporting entity ability access measurement date level 2 inputs include quoted prices similar assets liabilities active markets quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability inputs derived principally corroborated observable market data correlation means level 3 inputs unobservable inputs asset liability company measures certain assets liabilities fair value discussed throughout notes consolidated financial statements assets liabilities recurring measurements measured fair value shown fair value measurements reporting date using january 2008 company adopted sfas 159 fair value option financial assets financial liabilities sfas 159 permits entities choose measure many financial instruments certain items fair value sfas 159 also establishes presentation disclosure requirements designed facilitate comparisons entities choose different measurement attributes similar types assets liabilities sfas 159 impact company’s consolidated financial statements company elect adopt fair value option financial assets liabilities 15 subsequent event february 20 2009 company’s board directors approved quarterly cash dividend 020 per common share fourth quarter shareholders record effective march 3 2009 payable march 17 2009 herbalife ltd notes consolidated financial statements continued 16 quarterly information unaudited signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereto duly authorized herbalife ltd richard goudis richard goudis chief financial officer dated february 24 2009 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicateditem 15 exhibits financial statement schedules following documents filed part annual report form 10k incorporated herein reference 1 financial statements following financial statements herbalife ltd filed part annual report form 10k pages indicated 2 financial statement schedules omitted required information inapplicable material information presented consolidated financial statements related notes 3 exhibits listed exhibit index immediately filed part annual report form 10k incorporated reference herein exhibit index exhibit number description reference 31 form amended restated memorandum articles association herbalife ltd 41 form share certificate 101 form indemnity agreement herbalife international inc certain officers directors herbalife international inc 102 herbalife international america inc’s senior executive deferred compensation plan effective january 1 1996 amended 103 herbalife international america inc’s management deferred compensation plan effective january 1 1996 amended 104 master trust agreement herbalife international america inc imperial trust company inc effective january 1 1996 105 herbalife international inc 401k profit sharing plan trust amended 106 notice distributors regarding amendment agreements distributorship dated july 18 2002 herbalife international inc herbalife distributor 107 indemnity agreement dated july 31 2002 among wh holdings cayman islands ltd wh acquisition corp whitney co llc whitney v lp whitney strategic partners v lp ggc administration llc golden gate private equity inc ccg investments bvi lp ccg associatesai llc ccg investment fundai lp ccg av llcseries c ccg av llcseries c ccg av llcseries e ccg associatesqp llc wh investments ltd filed herewith furnished filed herewith management contract compensatory plan arrangement previously filed october 1 2004 exhibit company’s registration statement form s1 file 333119485 incorporated herein reference b previously filed november 9 2004 exhibit amendment 2 company’s registration statement form s1 file 333119485 incorporated herein reference c previously filed december 2 2004 exhibit amendment 4 company’s registration statement form s1 file 333119485 incorporated herein reference previously filed december 14 2004 exhibit amendment 5 company’s registration statement form s1 file 333119485 incorporated herein reference e previously filed february 17 2005 exhibit company’s registration statement form s8 file 333122871 incorporated herein reference f previously filed april 30 2010 exhibit company’s current report form 8k incorporated herein reference g previously filed june 1 2007 exhibit company’s current report form 8k incorporated herein reference h previously filed february 26 2008 exhibit company’s annual report form 10k year ended december 31 2007 incorporated herein reference previously filed april 7 2008 exhibit company’s current report form 8k incorporated herein reference j previously filed may 4 2009 exhibit company’s quarterly report form 10q quarter ended march 31 2009 incorporated reference k previously filed may 3 2010 exhibit company’s quarterly report form 10q quarter ended march 31 2010 incorporated reference l previously filed june 17 2010 exhibit company’s current report form 8k incorporated herein reference previously filed august 2 2010 exhibit company’s quarterly report form 10q quarter ended june 30 2010 incorporated reference n previously filed august 3 2010 exhibit company’s current report form 8k incorporated herein reference previously filed december 29 2010 exhibit company’s current report form 8k incorporated herein reference p previously filed march 1 2011 exhibit company’s current report form 8k incorporated herein reference q previously filed may 2 2011 exhibit company’s quarterly report form 10q quarter ended march 31 2011 incorporated reference r previously filed april 29 2011 exhibit company’s current report form 8k incorporated herein reference previously filed august 10 2011 exhibit company’s amendment 1 current report form 8ka incorporated herein reference report independent registered public accounting firm board directors stockholders herbalife ltd audited accompanying consolidated balance sheets herbalife ltd subsidiaries “company” december 31 2011 2010 related consolidated statements income changes shareholders’ equity comprehensive income cash flows years threeyear period ended december 31 2011 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position herbalife ltd subsidiaries december 31 2011 2010 results operations cash flows years threeyear period ended december 31 2011 conformity us generally accepted accounting principles discussed note 2 consolidated financial statements 2011 company changed method accounting excess tax benefits recognized result exercise employee stock options stock appreciation rights sharebased equity grants taxlaw ordering method withandwithout method also audited accordance standards public company accounting oversight board united states internal control financial reporting herbalife ltd subsidiaries december 31 2011 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated february 21 2012 expressed unqualified opinion effectiveness company’s internal control financial reporting kpmg llp los angeles california february 21 2012 herbalife ltd consolidated balance sheets see accompanying notes consolidated financial statements herbalife ltd consolidated statements income see accompanying notes consolidated financial statements herbalife ltd consolidated statements changes shareholders’ equity comprehensive income see accompanying notes consolidated financial statements herbalife ltd consolidated statements cash flows see accompanying notes consolidated financial statements herbalife ltd notes consolidated financial statements 1 organization herbalife ltd cayman islands exempt limited liability company herbalife incorporated april 4 2002 herbalife ltd together subsidiaries “company” leading global network marketing company sells weight management nutritional supplements energy sports fitness products personal care products network approximately 27 million independent distributors except china company currently sells products retail stores sales representatives sales officers independent service providers company reports revenue six geographic regions north america mexico south central america emea consists europe middle east africa asia pacific excluding china 2 basis presentation company’s consolidated financial statements refer herbalife subsidiaries april 28 2011 company’s shareholders approved twoforone stock split stock split company’s common shares one additional common share distributed company’s shareholders around may 17 2011 common share held may 10 2011 references financial statements notes number shares per share amounts retrospectively adjusted periods presented reflect stock split new accounting pronouncements september 2011 financial accounting standards board fasb issued accounting standards update asu 201108 testing goodwill impairment asu permits entity make qualitative assessment whether likely reporting unit’s fair value less carrying amount applying twostep goodwill impairment test entity concludes likely fair value reporting unit less carrying amount need perform twostep impairment test asu effective annual interim goodwill impairment tests performed fiscal years beginning december 15 2011 early adoption permitted adoption asu material impact company’s consolidated financial statements intended simplify assessment goodwill impairment june 2011 fasb issued asu 201105 comprehensive income topic 220 presentation comprehensive income asu require companies present components net comprehensive income either one two consecutive financial statements eliminates option present comprehensive income statement changes shareholders’ equity december 2011 fasb issued amendments defer certain presentation requirements asu amendments defer requirement companies would required present reclassification adjustments component accumulated comprehensive income net income comprehensive income face financial statements asu effective fiscal years interim periods within years beginning december 15 2011 adoption asu impacts presentation company’s consolidated financial statements materially impact consolidated financial statements may 2011 fasb issued asu 201104 fair value measurement topic 820 amendments achieve common fair value measurement disclosure requirements us gaap ifrss asu expands existing disclosure requirements fair value measurements provides additional information measure fair value company required apply asu prospectively interim annual periods beginning december 15 2011 adoption guidance material impact company’s consolidated financial statements herbalife ltd notes consolidated financial statements continued significant accounting policies consolidation policy consolidated financial statements include accounts herbalife ltd subsidiaries significant intercompany transactions accounts eliminated business combinations august 2009 company purchased certain assets micelle laboratories inc lake forest california contract manufacturer food nutritional supplements company purchased assets order strengthen global manufacturing capabilities purchase price material company’s consolidated financial statements accounting purposes acquisition micelle acquisition recorded business combination pursuant fasb accounting standards codification asc 805 business combinations foreign currency translation transactions majority countries company operates functional currency local currency company’s foreign subsidiaries’ asset liability accounts translated consolidated financial reporting purposes us dollar amounts yearend exchange rates revenue expense accounts translated average rates year foreign exchange translation adjustments included accumulated comprehensive loss accompanying consolidated balance sheets foreign currency transaction gains losses include cost foreign currency derivative contracts related settlement gains losses excluding certain foreign currency derivatives designated cash flow hedges discussed note 11 derivative instruments hedging activities included selling general administrative expenses accompanying consolidated statements income company recorded net foreign currency transaction losses 114 million 73 million 77 million years ended december 31 2011 2010 2009 respectively includes foreign exchange impact relating company’s venezuelan subsidiary herbalife venezuela herbalife venezuela’s foreign currency financial statement impact discussed within note forward exchange contracts option contracts interest rate swaps company enters foreign currency derivative instruments forward exchange contracts option contracts managing foreign exchange risk sales distributors purchase commitments denominated foreign currencies intercompany transactions bank loans company also enters interest rate swaps managing interest rate risk variable rate credit facility company use contracts trading purposes accordance fasb asc topic 815 derivatives hedging asc 815 company designates certain derivative instruments cash flow hedges formally documents hedge relationships including identification hedging instruments hedged items well risk management objectives strategies undertaking hedge transaction time derivative contract executed company assesses effectiveness hedge inception ongoing basis determines whether hedge highly perfectly effective offsetting changes cash flows hedged item company records effective portion changes estimated fair value accumulated comprehensive income loss subsequently reclassifies related amount accumulated comprehensive income loss earnings hedged item underlying transaction impacts earnings determined derivative herbalife ltd notes consolidated financial statements continued ceased highly effective hedge company discontinue hedge accounting transaction derivatives designated hedges changes estimated fair value recognized consolidated statements income cash equivalents company considers highly liquid investments purchased maturity three months less cash equivalents cash equivalents comprised primarily foreign domestic bank accounts reduce credit risk company monitors credit standing financial institutions hold company’s cash equivalents 2011 company entered cash pooling arrangement financial institution cash management purposes cash pooling arrangement allows certain company’s participating foreign locations withdraw cash financial institution extent aggregate cash deposits held participating locations available financial institution extent participating location individual basis overdraft position overdrafts recorded liabilities reflected financing activities company’s consolidated balance sheet consolidated statement cash flows respectively december 31 2011 company owe amounts financial institution accounts receivable accounts receivable consist principally receivables credit card companies arising sale products company’s distributors receivables importers utilized limited number countries sell products distributors due geographic dispersion credit card receivables collection risk considered significant receivables credit card companies 651 million 514 million december 31 2011 2010 respectively substantially receivables credit card companies current december 31 2011 2010 although receivables importers significant company performs ongoing credit evaluations importers maintains allowance potential credit losses company considers customer creditworthiness past current transaction history customer contractual terms current economic industry trends changes customer payment terms determining whether collectibility reasonably assured whether record allowances receivables financial condition company’s customers deteriorates adversely affects ability make payments additional allowances recorded company believes provides adequate allowances receivables distributors importers material consolidated financial statements december 31 2011 majority company’s total outstanding accounts receivable current fair value financial instruments company applies provisions fasb authoritative guidance applies nonfinancial assets nonfinancial liabilities fasb authoritative guidance clarifies definition fair value prescribes methods measuring fair value establishes fair value hierarchy based inputs used measure fair value expands disclosures fair value measurements disclosed note 13 fair value measurements company properly measured disclosed financial instruments company estimated fair value financial instruments using following methods assumptions • carrying amounts cash equivalents receivables accounts payable approximate fair value due shortterm maturities instruments herbalife ltd notes consolidated financial statements continued • fair value option forward contracts based dealer quotes • carrying values company’s variable rate debt instruments considered approximate fair values interest rates instruments approximate current rates offered company inventories stated lower cost primarily firstin firstout basis market deferred financing costs deferred financing costs represent fees expenses related borrowing company’s longterm debt amortized term related debt longlived assets depreciation furniture fixtures equipment includes computer hardware software computed straightline basis estimated useful lives related assets range three ten years leasehold improvements amortized straightline basis life related asset term lease whichever shorter depreciation furniture fixtures equipment amortization leasehold improvements recorded selling general administrative expenses totaled 689 million 677 million 622 million years ended december 31 2011 2010 2009 respectively longlived assets reviewed impairment based undiscounted cash flows whenever events changes circumstances indicate carrying amount assets may recoverable measurement impairment loss based estimated fair value asset goodwill marketing related intangible assets indefinite lives evaluated annual basis impairment frequently events changes circumstances indicate asset might impaired years ended december 31 2011 2010 2009 goodwill marketing related intangible asset impairments december 31 2011 2010 2009 marketing related intangible asset balance 3100 million december 31 2011 2010 2009 goodwill balance 1055 million 1029 million 1025 million respectively 26 million increase goodwill 2011 2010 primarily due acquisition ichange network inc privately held software company purchase price material company’s consolidated financial statements 04 million increase goodwill 2010 2009 primarily due effect adjustment fair value inventory acquired micelle acquisition intangible assets finite lives amortized expected lives expected fully amortized next five years december 31 2011 company’s intangible assets finite lives increased 17 million net 06 million amortization due ichange network acquisition december 31 2010 company’s intangible assets finite lives decreased 08 million december 31 2009 company’s intangible assets finite lives increased 17 million net 02 million amortization due micelle acquisition annual amortization expense finite life intangibles 06 million 09 million 02 million years ended december 31 2011 2010 2009 respectively december 31 2011 annual expected amortization expense follows 2012 06 million 2013 04 million 2014 03 million 2015 03 million 2016 01 million herbalife ltd notes consolidated financial statements continued income taxes income tax expense includes income taxes payable current year change deferred income tax assets liabilities future tax consequences events recognized company’s financial statements income tax returns valuation allowance recognized reduce carrying value deferred income tax assets believed likely component deferred income tax assets realized company accounts uncertainty income taxes accordance fasb authoritative guidance clarifies accounting reporting uncertainties income taxes recognized enterprise’s financial statements guidance prescribes comprehensive model financial statement recognition measurement presentation disclosure uncertain tax positions taken expected taken income tax returns see note 12 income taxes discussion income taxes second quarter 2011 company changed method accounting excess tax benefits recognized result exercise employee stock options stock appreciation rights sars sharebased equity grants taxlawordering method withandwithout method tax law ordering method deduction sharebased compensation applied income tax liabilities credits applied foreign tax credits withandwithout method applies deduction sharebased compensation taxable income credits applied taxable income extent allowable subject applicable limitations withandwithout method separately determines impact tax benefit sharebased compensation considering tax effects related company’s ongoing operations benefit recorded deductions sharebased compensation reduces income taxes payable increases income taxes refund receivable company believes withandwithout method preferable method determining benefit applicable sharebased compensation better reflects company’s ongoing operations change accounting method primarily impacts allocation income taxes tax benefits continuing operations deferred tax items additional paid capital financial reporting purposes impact ultimate amount income tax reported company’s income tax returns impact company’s income taxes payable included within accompanying consolidated balance sheet change accounting principle impact consolidated financial statements related fiscal years prior 2010 change accounting principle applied periods presented following tables summarize impact change company’s consolidated financial statements consolidated balance sheet herbalife ltd notes consolidated financial statements continued consolidated statements income 1 basic diluted earnings per share previously reported year ended december 31 2010 also adjusted reflect stock split common share amounts used compute basic diluted earnings per share 1 basic diluted weighted shares outstanding previously reported year ended december 31 2010 adjusted reflect stock split consolidated statement changes shareholders’ equity comprehensive income herbalife ltd notes consolidated financial statements continued consolidated statement cash flows company changed prior tax law ordering method accounting excess tax benefits second quarter fiscal year 2011 income taxes net income earnings per share would reflected noted consolidated statements income royalty overrides independent distributor may earn commissions called royalty overrides production bonuses based retail volume commissions based retail sales volume certain members independent sales force sponsored distributor addition commissions recorded products shipped revenue recognized nonus royalty checks aged variety reasons beyond certainty paid taken back income management estimated period certainty three years worldwide comprehensive income comprehensive income consists net earnings foreign currency translation adjustments effective portion unrealized gains losses derivatives comprehensive income presented consolidated statements shareholders’ equity comprehensive income herbalife ltd notes consolidated financial statements continued components accumulated comprehensive income loss consisted following thousands operating leases company leases physical properties operating leases certain lease agreements generally include rent holidays tenant improvement allowances company recognizes rent holiday periods straightline basis lease term beginning company right leased space company also records tenant improvement allowances rent holidays deferred rent liabilities amortizes deferred rent terms lease rent research development company’s research development performed inhouse staff outside consultants periods presented research development costs expensed incurred material earnings per share basic earnings per share represents net income period common shares outstanding divided weighted average number common shares outstanding period diluted earnings per share represents net income divided weighted average number common shares outstanding inclusive effect dilutive securities outstanding stock options sars stock units warrants following common share amounts used compute basic diluted earnings per share period thousands 1 december 31 2011 company 05 million warrants outstanding exercise price 775 expire december 1 2014 aggregate 21 million 15 million 56 million equity grants consisting stock options sars stock units outstanding years ended december 31 2011 2010 2009 respectively included computation diluted earnings per share effect would antidilutive herbalife ltd notes consolidated financial statements continued revenue recognition revenue recognized products shipped title risk loss passes independent distributor importer sales recognized net sales basis reflects product returns net discounts referred “distributor allowances” amounts billed shipping handling costs shipping handling costs paid company included cost sales company generally receives net sales price cash credit card payments point sale company currently presents sales taxes collected customers net basis related royalty overrides recorded revenue recognized allowances product returns primarily connection company’s buyback program provided time sale recorded accrual based upon historical return rates country relevant return pattern reflects anticipated returns received period 12 months following original sale sharebased payments company accounts sharebased compensation accordance fasb authoritative guidance requires measurement sharebased compensation expense sharebased payment awards made employees service company measures sharebased compensation cost grant date based fair value award recognizes expense straightline basis employee’s requisite service period use estimates preparation financial statements conformity us gaap requires management make estimates assumptions estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates company evaluates estimates assumptions ongoing basis using historical experience factors including current economic environment company believes reasonable circumstances company adjusts estimates assumptions facts circumstances dictate illiquid credit markets volatile equity foreign currency combined increase uncertainty inherent estimates assumptions future events effects cannot determined precision actual results could differ estimates changes estimates resulting continuing changes economic environment reflected financial statements future periods currency restrictions venezuela currency restrictions enacted venezuelan government 2003 become restrictive impacted ability company’s subsidiary venezuela herbalife venezuela obtain us dollars exchange venezuelan bolivars official foreign exchange rates venezuelan government foreign exchange commission cadivi application approval processes intermittently delayed timing ability obtain us dollars official exchange rates remains uncertain certain instances company made appropriate applications cadivi approval obtain us dollars herbalife venezuela pay imported products annual dividend official exchange rate alternative exchange mechanism company also participated certain bond offerings venezuelan government petróleos de venezuela sa pdvsa venezuelan stateowned petroleum company effectively purchased bonds bolivars sold herbalife ltd notes consolidated financial statements continued bonds us dollars instances company also used alternative legal exchange mechanisms currency exchanges legal parallel market mechanism discussed discontinued may 2010 june 2010 venezuelan government introduced additional regulations new regulated system sitme controlled central bank venezuela sitme provides mechanism exchange bolivars us dollars purchase sale us dollar denominated bonds issued venezuela however sitme available certain limited circumstances specifically sitme used product purchases available matters payment dividends also sitme used amounts 50000 per day 350000 per month generally available extent applicant exchanged received us dollars via cadivi process within previous 90 days although venezuela important market company’s south central america region herbalife venezuela’s net sales represented less 2 4 company’s consolidated net sales years ended december 31 2011 2010 2009 respectively total assets represented less 3 company’s consolidated total assets december 31 2011 2010 prehighly inflationary economy venezuela herbalife venezuela’s cash equivalents december 31 2009 fourth quarter 2009 due currency restrictions obtaining us dollars official currency exchange rate order mitigate company’s currency exchange risk venezuela herbalife venezuela entered series parallel market transactions exchanged 1050 million bolivars approximately 195 million us dollars average rate approximately 54 bolivars per us dollar also fourth quarter 2009 herbalife venezuela settled 136 million us dollar denominated noncadivi registered intercompany shipment payables initially recorded subsequently remeasured parallel market exchange rate settlement intercompany shipment payables result net foreign exchange gains losses recorded accompanying consolidated statement income year ended december 31 2009 incremental costs 188 million related importation products venezuela unfavorable parallel market exchange rate recorded costs sales company’s consolidated statement income year ended december 31 2009 december 31 2009 herbalife venezuela’s 59 million us dollar cash equivalents residing us dollar bank account remeasured bolivars parallel market exchange rate approximately 59 bolivars per us dollar remeasured cash equivalents translated official rate 215 bolivars per us dollar reported 158 million company’s consolidated balance sheet december 31 2009 based company’s specific facts circumstances us gaap required company use dividend remittance rate official exchange rate translation purposes parallel market exchange rate applicable rate particular transaction could settled certain remeasurement purposes due difference remeasurement rate translation rate cash equivalents relating herbalife venezuela reported company’s consolidated balance sheet december 31 2009 99 million greater us dollar amount residing herbalife venezuela’s us dollar bank account therefore necessarily reflect true purchasing power reported us dollar cash equivalents december 31 2009 herbalife venezuela reported cash equivalents approximately 342 million 158 million denominated us dollars 184 million denominated bolivars cash equivalents translated consolidated financial statements official exchange rate applicable dividend remittance herbalife ltd notes consolidated financial statements continued highly inflationary economy accounting venezuela’s inflation rate measured using blended national consumer price index consumer price index rate exceeded threeyear cumulative inflation rate 100 december 31 2009 accordingly effective january 1 2010 venezuela considered highly inflationary economy pursuant highly inflationary basis accounting us gaap herbalife venezuela changed functional currency bolivar us dollar subsequent movements bolivar us dollar exchange rate impact company’s consolidated earnings prior january 1 2010 bolivar functional currency movements bolivar us dollar recorded component equity comprehensive income pursuant highly inflationary accounting rules company longer translates herbalife venezuela’s financial statements functional currency us dollar based relevant facts circumstances applicable times highly inflationary basis accounting company used parallel market exchange rate remeasurement purposes parallel market discontinued may 2010 january 1 2010 connection determination venezuela highly inflationary economy company remeasured herbalife venezuela’s opening balance sheet’s monetary assets liabilities parallel market rate recorded nontax deductible foreign exchange loss 151 million charge included 99 million foreign exchange loss related herbalife venezuela’s us dollar cash equivalents remeasured parallel market rate translated official rate december 31 2009 also herbalife venezuela’s 342 million cash equivalents reported company’s consolidated balance sheet december 31 2009 included us dollar denominated cash reduced approximately 125 million january 1 2010 however nonmonetary assets inventory reported company’s consolidated balance sheet december 31 2009 remained historical cost subsequent venezuela becoming highly inflationary economy therefore incremental costs related company’s 2009 imported products recorded parallel market exchange rate negatively impacted company’s consolidated statement income year ended december 31 2010 approximately 127 million products sold first quarter 2010 amount tax deductible see note 12 income taxes additional discussion income tax impact related venezuela becoming highly inflationary economy official exchange rate devaluations venezuela 2011 2010 early january 2010 venezuela announced official exchange rate devaluation bolivar official rate 43 bolivars per us dollar nonessential items 26 bolivars per us dollar essential items company’s imports fall classifications 2010 company used parallel market exchange rate remeasurement purposes parallel market discontinued may 2010 used sitme rate thereafter us dollars obtained cadivi official rate positive impact company’s consolidated net earnings specifically company recorded 58 million foreign exchange gains selling general administrative expenses within company’s consolidated statement income year ended december 31 2010 result receiving us dollars approved cadivi official exchange rate majority herbalife venezuela’s 2010 importations registered cadivi official exchange rates available pay us imports december 31 2010 herbalife venezuela also outstanding intercompany dividend payable company 25 million declared december 2008 registered cadivi still remains outstanding december 31 2011 also december 31 2010 herbalife venezuela outstanding intercompany shipment payable balances 26 million primarily relating 2010 registered cadivi pending cadivi’s approval december 31 2011 01 million outstanding intercompany shipment payable balances registered cadivi pending approval herbalife ltd notes consolidated financial statements continued late december 2010 venezuela announced cadivi official exchange rate 26 bolivars per us dollar would eliminated cadivi official exchange 43 bolivars per us dollar used essential items nonessential items beginning january 2011 devaluation material impact company’s consolidated financial statements december 31 2011 2010 company used sitme rate 53 bolivars per us dollar remeasurement purposes remeasurement herbalife venezuela’s monetary assets liabilities december 31 2011 2010 second quarter 2010 company recorded 40 million pretax 26 million posttax net foreign exchange gain selling general administrative expenses within company’s consolidated statement income result remeasuring bolivar denominated monetary assets liabilities june 30 2010 sitme rate 53 bolivars per us dollar opposed last parallel market rate prior closure parallel market may 2010 83 bolivars per us dollar herbalife venezuela’s cash equivalents primarily denominated bolivars increased 52 million result using sitme rate opposed last quoted parallel market rate second quarter 2010 third quarter 2010 thereafter company continued use sitme rate 53 bolivars per us dollar remeasure bolivar denominated transactions december 31 2010 majority herbalife venezuela’s net monetary bolivar denominated assets liabilities approximated 194 million included bolivar denominated cash equivalents approximating 246 million remeasured sitme rate 2011 company accessed sitme market order exchange bolivars us dollars less frequent instances company also accessed alternative legal exchange mechanisms exchange bolivars us dollars less favorable rates sitme rate resulted company recognizing 12 million losses selling general administration expenses included within consolidated statement income year ended december 31 2011 february 2011 herbalife venezuela purchased us dollar denominated bonds face value 20 million us dollars bond offering pdvsa 86 million bolivars immediately sold bonds 15 million us dollars resulting average effective conversion rate 57 bolivars per us dollar 86 million bolivars previously remeasured regulated system rate sitme rate 53 bolivars per us dollar recorded cash equivalents 163 million company’s consolidated balance sheet december 31 2010 bolivar us dollar conversion resulted company recording net pretax loss 13 million us dollars first quarter 2011 included consolidated statement income year ended december 31 2011 company unsuccessful accessing subsequent pdvsa bond offerings frequency future bond offerings unknown company continues remeasure bolivars published sitme rate given limited availability alternative exchange mechanisms uncertainty effective exchange rate alternative exchange mechanisms december 31 2011 herbalife venezuela’s net monetary assets liabilities denominated bolivars approximately 268 million included approximately 348 million bolivar denominated cash equivalents majority bolivar denominated assets liabilities remeasured sitme rate december 31 2011 company continues monitor new exchange mechanism restrictions sitme assurance company able exchange bolivars us dollars timely basis therefore remeasured amounts including cash equivalents reported company’s consolidated balance sheet using sitme rate may accurately represent amount us dollars company could ultimately realize herbalife ltd notes consolidated financial statements continued consolidation herbalife venezuela company plans continue operation venezuela import products venezuela despite foreign currency constraints exist country herbalife venezuela continue apply legal exchange mechanisms convert bolivars us dollars despite currency exchange restrictions venezuela company continues control herbalife venezuela operations mere existence exchange restrictions discussed create presumption lack exchangeability otherthantemporary create presumption entity deconsolidate venezuelan operations therefore company continues consolidate herbalife venezuela consolidated financial statements us gaap purposes majority herbalife venezuela’s bolivar denominated assets liabilities currently remeasured sitme rate 3 inventories consist primarily finished goods available resale categorized follows millions following major classes inventory millions 4 longterm debt longterm debt consists following millions herbalife ltd notes consolidated financial statements continued july 21 2006 company entered 3000 million senior secured credit facility prior credit facility comprised 2000 million term loan 1000 million revolving credit facility syndicate financial institutions lenders september 2007 company lenders amended credit agreement increasing amount revolving credit facility aggregate principal amount 1500 million 2500 million primarily finance increase company’s share repurchase program see note 8 shareholders’ equity discussion share repurchase program share repurchase amounts years ended december 31 2011 2010 2009 term loan bore interest libor plus margin 15 base rate plus margin 050 revolving credit facility bore interest libor plus margin 125 base rate plus margin 025 march 9 2011 company entered 7000 million senior secured revolving credit facility new credit facility syndicate financial institutions lenders terminated prior credit facility new credit facility five year maturity expires march 9 2016 march 2011 us dollar borrowings new credit facility incurred interest base rate plus margin 075 libor plus margin 175 march 2011 based company’s consolidated leverage ratio us dollar borrowings new credit facility bear interest either libor plus applicable margin 150 250 base rate plus applicable margin 050 150 company based consolidated leverage ratio pays commitment fee 025 050 per annum unused portion new credit facility new credit facility also permits company borrow limited amounts mexican peso euro currencies based variable rates base rate new credit facility represents highest federal funds rate plus 050 onemonth libor plus 100 prime rate offered bank america march 2011 company used 1960 million us dollar borrowings new credit facility repay amounts outstanding prior credit facility company incurred approximately 57 million debt issuance costs connection new credit facility debt issuance costs recorded deferred financing costs company’s consolidated balance sheet amortized term new credit facility december 31 2011 2010 weighted average interest rate borrowings new credit facility prior credit facility 189 175 respectively new credit facility requires company comply leverage ratio interest coverage ratio addition new credit facility contains customary covenants including covenants limit restrict company’s ability incur liens incur indebtedness make investments dispose assets make certain restricted payments pay dividends repurchase common shares merge consolidate enter certain transactions affiliates prior credit facility also required company comply leverage ratio interest coverage ratio prior credit facility also contained customary covenants including covenants limited restricted company’s ability incur liens incur indebtedness make investments dispose assets make certain restricted payments merge consolidate enter certain transactions affiliates december 31 2011 2010 company compliant debt covenants new credit facility prior credit facility respectively 2011 company borrowed 8597 million 540 million new credit facility prior credit facility respectively paid total 6577 million 2289 million new credit facility prior credit facility respectively 2010 company borrowed aggregate amount 4270 million paid total amount 4870 million prior credit facility 2009 company borrowed aggregate amount 2120 million paid total amount 2987 million prior credit facility december 31 2011 us dollar amount outstanding new credit facility 2020 million outstanding foreign currency borrowings december 31 2011 new credit facility december 31 2010 amounts outstanding prior credit facility consisting term loan revolving credit facility 1439 million 310 million respectively herbalife ltd notes consolidated financial statements continued annual scheduled principal payments company’s new credit facility borrowings new credit facility must repaid prior termination march 2016 interest expense 99 million 97 million 96 million years ended december 31 2011 2010 2009 respectively interest expense year ended december 31 2011 included 09 million writeoff unamortized deferred financing costs resulting extinguishment prior credit facility discussed 5 lease obligations company warehouse office furniture fixtures equipment leases expire various dates 2021 lease agreements company also obligated pay property taxes insurance maintenance costs certain leases contain renewal options future minimum rental commitments noncancelable operating leases capital leases december 31 2011 follows millions rental expense years ended december 31 2011 2010 2009 492 million 435 million 397 million respectively property plant equipment capital leases included property plant equipment accompanying consolidated balance sheets follows millions 6 employee compensation plans company maintains profit sharing plan pursuant sections 401a k internal revenue code 1986 amended code plan available substantially employees meet length service requirements prior january 1 2009 employees could elect contribute 2 17 compensation company would make matching contributions amount equal one dollar herbalife ltd notes consolidated financial statements continued dollar deferred earnings exceed 3 participants’ earnings participants partially vested company contributions one year fully vested five years effective january 1 2009 company amended profit sharing plan starting january 1 2009 employees may elect contribute 75 compensation however contributions limited maximum annual amount set periodically code company make matching contributions amount equal one dollar deferred earnings first 1 make matching contributions amount equal 50 one dollar subsequent 5 deferred earnings contributions become fully vested two years company contributed 25 million 23 million 22 million profit sharing plan years ended december 31 2011 2010 2009 respectively company nonqualified deferred compensation plans select groups management herbalife management deferred compensation plan herbalife senior executive deferred compensation plan deferred compensation plans allow eligible employees elect annually defer 75 base annual salary 100 annual bonus calendar year annual deferral amount company makes matching contributions behalf participant senior executive deferred compensation plan senior executive deferred compensation plan provides amount matching contributions determined company discretion 2009 matching contribution 3 participant’s base salary 2010 2011 company’s matching contribution 35 aligns 401k retirement plan match participant either nonqualified deferred compensation plans discussed times fully vested nonforfeitable interest year’s contribution including interest credited thereto company matching contributions applicable connection participant’s election defer annual deferral amount participant may also elect receive shortterm payout equal annual deferral amount plus interest amount payable two years first day year annual deferral amount actually deferred total expense two nonqualified deferred compensation plans net participant contributions 02 million 21 million 26 million years ended december 31 2011 2010 2009 respectively total longterm deferred compensation liability two deferred compensation plans 237 million 202 million december 31 2011 2010 respectively deferred compensation plans unfunded benefits paid general assets company except company contributed “rabbi trust” whose assets used pay benefits company remains solvent reached company’s creditors company becomes insolvent value assets “rabbi trust” 205 million 185 million december 31 2011 2010 respectively 7 contingencies company time engaged routine litigation company regularly reviews pending litigation matters involved establishes reserves deemed appropriate management litigation matters probable loss estimate made marketer dietary nutritional supplements products ingested consumers applied bodies company currently subjected various product liability claims effects claims date material company reasonably possible range exposure currently existing claims material company believes meritorious defenses allegations contained lawsuits company currently maintains product liability insurance annual deductible 10 million herbalife ltd notes consolidated financial statements continued certain company’s subsidiaries subject tax audits governmental authorities respective countries certain tax audits governmental authorities proposing significant amounts additional taxes related interest penalties due company tax advisors believe substantial defenses allegations additional taxes owed company vigorously contesting additional proposed taxes related charges may 7 2010 company received assessment mexican tax administration service amount equivalent approximately 82 million translated period ended spot rate various items majority value added tax vat allegedly owed certain company’s products imported mexico years 2005 2006 assessment subject interest inflationary adjustments july 8 2010 company initiated formal administrative appeal process may 13 2011 mexican tax administration service issued resolution company’s administrative appeal resolution nullified assessment since mexican tax administration service review tax audit findings reissue original assessment company commenced litigation tax court mexico august 2011 dispute assertions made mexican tax administration service case company expects receive response litigation mexican tax administration december 2011 mexican tax administration commenced tax audit one company’s mexican subsidiaries period january september 2007 tax audit initial stages prior nullification assessment relating 2005 2006 years company entered agreements certain insurance companies allow potential issuance surety bonds support appeal assessment surety bonds issued would affect availability company’s new credit facility arrangements insurance companies remain place event assessment reissued company recognized loss company based analysis guidance advisors believe loss would probable assessment reissued additional assessment issued company currently unable reasonably estimate possible loss range loss could result unfavorable outcome assessment reissued additional assessments issued periods company believes meritorious defenses assessment reissued would meritorious defenses additional assessment issued company received assessment spanish tax authority amount equivalent approximately 42 million translated period ended spot rate withholding taxes interest penalties related payments spanish distributors 20032004 period company appealed assessment national appellate court audiencia nacional company believes meritorious defenses company recognized loss company believe loss probable company currently unable reasonably estimate possible loss range loss could result unfavorable outcome additional assessments periods issued decision case anticipated first half fiscal year 2012 company received tax assessment september 2009 federal revenue office brazil amount equivalent approximately 46 million us dollars translated period ended spot rate related withholdingcontributions based payments company’s distributors 2004 company appealed tax assessment administrative council tax appeals 2nd level administrative appeal believes meritorious defenses recognized loss company believe loss probable company currently unable reasonably estimate amount loss may result unfavorable outcome additional assessments periods issued matters may take several years resolve company believes meritorious defenses cannot sure ultimate resolution although company reserved amounts certain matters company believes represent likely outcome resolution related disputes company incorrect assessment company may record additional expenses becomes probable increased potential liability warranted herbalife ltd notes consolidated financial statements continued 8 shareholders’ equity company 1158 million 1178 million 1205 million common shares outstanding december 31 2011 2010 2009 respectively december 2004 company authorized 75 million preference shares 0002 par value 75 million authorized preference shares remained unissued december 31 2011 adjusted result stock split preference shares remain unaffected stock split discussed preference shares may issued time one series voting powers full limited without voting powers designations preferences relative participating optional special rights qualifications limitations restrictions determined company’s board directors stock split april 28 2011 company’s shareholders approved 2for1 split company’s common shares one additional common share distributed company’s shareholders around may 17 2011 common share held may 10 2011 common shares subject outstanding equity awards warrants well number common shares reserved issuance company’s sharebased compensation plans adjusted proportionately dividends declaration future dividends subject discretion company’s board directors depend upon various factors including earnings financial condition restrictions imposed new credit facility terms indebtedness may outstanding cash requirements future prospects factors deemed relevant board directors new credit facility entered march 9 2011 permits payments dividends long default event default exists consolidated leverage ratio specified new credit facility exceeded second quarter 2007 company’s board directors adopted regular quarterly cash dividend program company’s board directors authorized 010 per common share cash dividend quarter adoption program second quarter 2010 august 2 2010 company announced board directors approved increase quarterly cash dividend 013 per common share increase 003 per common share prior quarters may 2 2011 company announced board directors approved increase quarterly cash dividend 020 per common share increase 007 per common share prior quarters aggregate amount dividends paid declared fiscal years ended december 31 2011 2010 2009 approximately 855 million 537 million 487 million respectively share repurchases april 17 2009 company’s share repurchase program adopted april 18 2007 expired pursuant terms april 30 2009 company announced board directors authorized new program company repurchase 300 million herbalife common shares following two years times prices determined company’s management market conditions warrant may 3 2010 company’s board directors approved increase share repurchase authorization 300 million 1 billion addition company’s board directors approved extension expiration date share repurchase program april 2011 december 2014 new credit facility permits company repurchase common shares long default event default exists consolidated leverage ratio specified new credit facility exceeded december 31 2011 remaining authorized capacity company’s share repurchase program approximately 4779 million herbalife ltd notes consolidated financial statements continued year ended december 31 2011 company repurchased 55 million common shares open market purchases aggregate cost approximately 2988 million average cost 5427 per share year ended december 31 2010 company repurchased 57 million common shares open market purchases aggregate cost approximately 1501 million average cost 2613 per share year ended december 31 2009 company repurchased 40 million common shares open market purchases aggregate cost approximately 732 million average cost 1830 per share aggregate purchase price common shares repurchased reflected reduction shareholders’ equity company allocated purchase price repurchased shares reduction retained earnings common shares additional paidincapital number shares issued upon vesting exercise certain restricted stock units sars granted pursuant company’s sharebased compensation plans net minimum statutory withholding requirements company pays behalf employees although shares withheld issued treated common share repurchases company’s consolidated financial statements reduce number shares would issued upon vesting shares count authorized capacity company’s share repurchase program described 9 sharebased compensation company five sharebased compensation plans wh holdings cayman islands ltd stock incentive plan management plan wh holdings cayman islands ltd independent directors stock incentive plan independent directors plan herbalife ltd 2004 stock incentive plan 2004 stock incentive plan amended restated herbalife ltd 2005 stock incentive plan 2005 stock incentive plan amended restated herbalife ltd independent directors deferred compensation stock unit plan independent director stock unit plan management plan provided grant options purchase common shares herbalife members company’s management independent directors plan provided grant options purchase common shares herbalife company’s independent directors 2004 stock incentive plan replaced management plan independent directors plan adoption thereof additional awards made either management plan independent directors plan however shares remaining available issuance plans absorbed became available issuance 2004 stock incentive plan 2005 stock incentive plan replaced 2004 stock incentive plan adoption thereof additional awards made 2004 stock incentive plan terms 2005 stock incentive plan substantially similar terms 2004 stock incentive plan 2005 stock incentive plan authorizes issuance 14400000 common shares pursuant awards granted plan plus shares remained available issuance 2004 stock incentive plan time adoption 2005 stock incentive plan purpose independent directors stock unit plan facilitate equity ownership company independent directors award stock units december 31 2011 aggregate approximately 51 million common shares remain available future issuance 2005 stock incentive plan independent directors stock unit plan company’s sharebased compensation plans provide grants stock options sars stock units collectively referred herein awards stock options typically vest quarterly fiveyear period less beginning grant date certain sars vest quarterly fiveyear period beginning grant date sars vest annually threeyear period contractual term service condition stock options sars generally ten years stock unit awards 2005 incentive plan incentive plan stock units vest annually three year period equal contractual term stock units awarded herbalife ltd notes consolidated financial statements continued independent directors stock unit plan independent director stock units vest rate 25 january 15 april 15 july 15 october 15 january 2009 company moved granting sars instead stock units independent directors march 2008 company granted stock unit awards chairman chief executive officer vest fouryear period rate 30 first three years 10 fourth year february 2009 company granted stock units sars certain employees subject continued service onethird vest third anniversary date grant onethird vest fourth anniversary date grant remaining onethird vest fifth anniversary date grant 2010 company granted stock units certain key employees subject continued service one half vest first anniversary date grant remaining half vest second anniversary date grant awards subject following market service conditions market condition awards market service performance conditions market performance condition awards subject continued service company service condition awards granted company market condition awards market performance condition awards service condition awards unless otherwise determined time grant value stock unit shall equal one common share herbalife company’s stock compensation awards outstanding december 31 2011 include stock options sars stock units march 2008 company granted market condition sars chairman chief executive officer fully vest end four years subject continued employment date achievement certain conditions related market value company’s common shares market conditions include targets stock price appreciation 10 15 compound annual growth rate fair value sars determined date grant using monte carlo lattice model august 2011 company granted market performance condition sars chairman chief executive officer awards vest december 31 2014 subject continued employment date company’s stock price appreciating exceeding targeted price company’s achievement certain volume point performance targets fair value sars determined date grant using monte carlo lattice model company records compensation expense requisite service period equal vesting period awards granted january 1 2006 compensation expense recognized straightline basis vesting term stockbased compensation expense included selling general administrative expenses consolidated statements income years ended december 31 2011 2010 2009 sharebased compensation expense relating service condition awards amounted 192 million 200 million 184 million respectively years ended december 31 2011 2010 2009 sharebased compensation expense relating market condition awards amounted 29 million 30 million 27 million respectively year ended december 31 2011 sharebased compensation expense relating market performance condition awards amounted 14 million years ended december 31 2011 2010 2009 related income tax benefits recognized earnings awards amounted 75 million 74 million 79 million respectively december 31 2011 total unrecognized compensation cost related nonvested service condition stock awards 341 million related weightedaverage period expected recognized approximately 15 years december 31 2011 total unrecognized compensation cost related nonvested market condition awards 07 million related weightedaverage period expected recognized approximately 02 years december 31 2011 total unrecognized compensation cost related nonvested market performance condition awards 117 million related weightedaverage period expected recognized approximately 30 years herbalife ltd notes consolidated financial statements continued years ended december 31 2011 2010 2009 excess tax benefits 275 million 80 million 36 million respectively generated recognized exercises awards stock units valued market value date grant fair value service condition sars estimated date grant using blackscholesmerton optionpricing model fair value market condition sars estimated date grant using monte carlo lattice model historically expected term sars stock options based simple average vesting period life award simplified method fourth quarter 2011 company began calculating expected term sars based historical data historical information available groups employees determined similar historical exercise patterns valuation purposes expected volatility sars stock options based upon historical volatility company’s common shares also validated volatility rates peer group companies risk free interest rate based implied yield us treasury zerocoupon issue remaining term equal expected term sars stock options expected dividend yield assumption based company’s historical expected amount dividend payouts stock options granted years ended december 31 2011 2010 2009 following table summarizes weighted average assumptions used calculation fair value service condition awards years ended december 31 2011 2010 2009 market condition awards market performance condition awards granted years ended december 31 2010 2009 market performance condition awards granted year ended december 31 2011 following table summarizes weighted average assumptions used calculation fair value herbalife ltd notes consolidated financial statements continued following tables summarize activity sharebased compensation plans includes stock awards year ended december 31 2011 1 intrinsic value amount current market value underlying stock exceeds exercise price stock award 2 includes 15 million market condition sars outstanding december 31 2010 3 includes 09 million market performance condition sars granted company’s chairman chief executive officer 4 includes 15 million market condition sars 09 million market performance condition sars outstanding december 31 2011 weightedaverage grant date fair value service condition sars granted years ended december 31 2011 2010 2009 2123 932 204 respectively weightedaverage grant date fair value market performance condition sars granted year ended december 31 2011 1737 total intrinsic value service condition stock options sars exercised years ended december 31 2011 2010 2009 1338 million 638 million 164 million respectively market condition market condition performance condition sars exercised years ended december 31 2011 2010 2009 total vesting date fair value stock units vested years ended december 31 2011 2010 2009 198 million 103 million 43 million respectively second quarter 2011 company changed method accounting excess tax benefits recognized result exercise employee stock options sars sharebased equity grants taxlawordering method withandwithout method change accounting principle applied applicable periods presented see note 2 basis presentation information change accounting principle herbalife ltd notes consolidated financial statements continued employee stock purchase plan 2007 company adopted qualified employee stock purchase plan espp implemented first quarter 2008 connection adoption espp company reserved issuance total 2 million common shares december 31 2011 approximately 19 million common shares remain available future issuance terms espp rights purchase common shares may granted eligible qualified employees subject certain restrictions espp enables company’s eligible employees payroll withholdings purchase limited number common shares 85 fair market value common share purchase date purchases made quarterly basis 10 segment information company network marketing company sells wide range weight management products nutritional supplements personal care products within one industry segment defined fasb asc topic 280 segment reporting company’s products manufactured third party providers company suzhou china facility lake forest california facility sold independent distributors sell herbalife products retail consumers distributors revenues reflect sales products company distributors categorized based geographic location herbalife ltd notes consolidated financial statements continued december 31 2011 company sells products 79 countries throughout world organized managed geographic regions company aggregates operating segments excluding china one reporting segment primary reporting segment management believes company’s operating segments similar operating characteristics similar long term operating performance making determination management believes operating segments similar nature products sold product acquisition process types customers products sold methods used distribute products nature regulatory environment china identified separate reporting segment meet criteria aggregation operating information primary reporting segment china sales product line followsthe following table broken two xbrl tagging herbalife ltd notes consolidated financial statements continued 1 contribution margin consists net sales less cost sales royalty overrides see part ii item 7 management’s discussion analysis financial condition results operations annual report form 10k description net sales cost sales royalty overrides 2 compensation china sales employees service fees china independent service providers totaling 968 million 873 million 791 million years ended december 31 2011 2010 2009 respectively included selling general administrative expenses distributor compensation countries included contribution margin 3 product buybacks returns product categories included literature promotional category december 31 2011 2010 total assets company’s primary reporting segment 13574 million 11621 million respectively total assets china segment 888 million 701 million december 31 2011 2010 respectively herbalife ltd notes consolidated financial statements continued december 31 2011 2010 goodwill allocated company’s reporting units included company’s primary reporting segment 1024 million 998 million respectively goodwill allocated china segment 31 million december 31 2011 2010 december 31 2011 net property plant equipment located us foreign countries 1442 million 495 million respectively december 31 2010 net property plant equipment located us foreign countries 1411 million 363 million respectively december 31 2011 deferred tax assets related us foreign countries 654 million 468 million respectively december 31 2010 deferred tax assets related us foreign countries 729 million 348 million respectively majority company’s foreign subsidiaries designate local currencies functional currency december 31 2011 2010 total amount cash held foreign subsidiaries reported company’s consolidated balance sheet 2460 million 1882 million respectively 92 million 58 million respectively maintained invested us dollars 11 derivative instruments hedging activities interest rate risk management company engages interest rate hedging strategy hedged transactions forecasted interest payments company’s new credit facility hedged risk variability forecasted interest rate cash flows hedging strategy involves purchase interest rate swaps outstanding cash flow hedges interest rate exposures december 31 2011 maximum length time company hedging certain exposures approximately one year seven months august 2009 company entered four interest rate swap agreements effective date december 31 2009 agreements collectively provide company pay interest less fouryear period weighted average fixed rate 278 notional amounts aggregating 1400 million receiving interest period one month libor rate notional amounts agreements expire july 2013 swaps inception designated cash flow hedges variability libor interest rate company’s term loan prior credit facility variability libor interest rate replacement debt company’s term loan prior credit facility terminated march 2011 refinanced new credit facility discussed note 4 longterm debt company’s swaps remain effective continue designated cash flow hedges variability certain libor interest rate borrowings new credit facility libor plus 150 250 fixing company’s weighted average effective rate notional amounts 428 528 hedge ineffectiveness recorded result refinancing event company assesses hedge effectiveness measures hedge ineffectiveness least quarterly years ended december 31 2011 2010 ineffective portion relating hedges immaterial hedges remained effective december 31 2011 consequently changes fair value derivatives deferred recorded comprehensive income loss related forecasted transactions recognized consolidated statements income fair value interest rate swap agreements based thirdparty bank quotes december 31 2011 december 31 2010 company recorded interest rate swaps liabilities fair value 51 million 66 million respectively herbalife ltd notes consolidated financial statements continued table describes interest rate swaps aggregate fair value liabilities outstanding december 31 2011 2010 foreign currency instruments company also designates certain foreign currency derivatives certain foreign currency forward option contracts freestanding derivatives hedge accounting apply changes fair market value freestanding derivatives included selling general administrative expenses company’s consolidated statements income company uses foreign currency forward contracts hedge foreigncurrencydenominated intercompany transactions partially mitigate impact foreign currency fluctuations company also uses foreign currency option contracts partially mitigate impact foreign currency fluctuations fair value forward option contracts based thirdparty bank quotes company’s foreign currency derivative contracts generally executed monthly basis company designates cashflow hedges foreign currency forward contracts entered hedge forecasted inventory purchases intercompany management fees subject foreign currency exposures forward contracts used hedge forecasted inventory purchases specific months changes fair value forward contracts excluding forward points designated cashflow hedges recorded component accumulated comprehensive income loss within shareholders’ equity recognized cost sales consolidated statement income period approximates time hedged inventory sold company also hedges forecasted intercompany management fees specific months contracts allow company sell euros exchange us dollars specified contract rates changes fair value forward contracts designated cash flow hedges recorded component accumulated comprehensive income loss within shareholders’ equity recognized selling general administrative expenses consolidated statement income period hedged item underlying transaction affect earnings december 31 2011 2010 aggregate notional amounts foreign currency contracts outstanding designated cash flow hedges approximately 644 million 321 million respectively december 31 2011 outstanding contracts expected mature next fifteen months company’s derivative financial instruments recorded consolidated balance sheet fair value based thirdparty bank quotes december 31 2011 company recorded assets fair value 44 million relating outstanding foreign currency contracts designated cashflow hedges december 31 2010 company recorded assets fair value 06 million liabilities fair value 08 million relating outstanding foreign currency contracts designated cashflow hedges company assesses hedge effectiveness measures hedge ineffectiveness least quarterly years ended december 31 2011 2010 ineffective portion relating hedges immaterial hedges remained effective december 31 2011 december 31 2011 2010 majority company’s outstanding foreign currency forward contracts maturity dates less fifteen months twelve months respectively majority freestanding derivatives expiring within one month three months respectively foreign currency option contracts outstanding december 31 2011 2010 herbalife ltd notes consolidated financial statements continued table describes foreign currency forward contracts outstanding december 31 2011 2010 herbalife ltd notes consolidated financial statements continued following tables summarize derivative activity year ended december 31 2011 2010 relating company’s derivatives herbalife ltd notes consolidated financial statements continued gains losses derivative instruments following table summarizes gains losses relating derivative instruments recorded comprehensive income loss years ended december 31 2011 2010 2009 december 31 2011 estimated amount existing net gains related cash flow hedges recorded accumulated comprehensive income loss expected reclassified earnings next twelve months 13 million following table summarizes gains losses relating derivative instruments recorded income years ended december 31 2011 2010 2009 1 foreign exchange contracts designated hedging instruments amounts recognized income loss represent amounts excluded assessment hedge effectiveness ineffective amounts reported derivatives designated hedging instruments herbalife ltd notes consolidated financial statements continued following table summarizes gains losses relating derivative instruments reclassified accumulated comprehensive loss income years ended december 31 2011 2010 2009 company reports derivatives fair value either assets liabilities within consolidated balance sheet see note 13 fair value measurements information derivative fair values consolidated balance sheet location december 31 2011 december 31 2010 herbalife ltd notes consolidated financial statements continued 12 income taxes components income taxes follows millions income taxes follows millions company recognizes excess tax benefits associated sharebased compensation shareholders’ equity realized assessing whether excess tax benefits relating sharebased compensation realized company follows withandwithout approach adopted second quarter 2011 approach excess tax benefits related sharebased compensation deemed realized utilization tax benefits available company also subject applicable limitations december 31 2011 2010 company 206 million 87 million respectively unrealized excess tax benefits 206 million excess tax benefits december 31 2011 116 million relate foreign tax credits generated carried forward us federal income tax returns unused tax credit carryforwards 56 million expire 2020 60 million expire 2021 see note 2 basis presentation discussion company’s change method accounting taxlawordering method withandwithout approach venezuela experienced cumulative inflation least 100 three year period ended december 31 2009 therefore january 1 2010 bolivar hyperinflationary us federal income tax purposes result herbalife venezuela considered dual incorporated entity required account operations using dollar approximate separate transactions method accounting dastm transitional impact dastm resulted deferred income tax benefit approximately 145 million recorded first quarter 2010 included within company’s consolidated statement income year ended december 31 2010 see note 2 basis presentation discussion herbalife venezuela’s highly inflationary economy herbalife ltd notes consolidated financial statements continued significant categories temporary differences gave rise deferred tax assets liabilities follows tax effected millions net operating loss carryforwards subsidiaries 2011 2010 28 million 57 million respectively unused net operating losses 09 million expire 2012 2020 19 million carried forward indefinitely deferred interest carryforwards subsidiaries 2011 2010 2056 million 1184 million respectively carried forward indefinitely company recognizes valuation allowances deferred tax assets reported based weight evidence likely deferred tax assets realized december 31 2011 december 31 2010 company held valuation allowances net deferred tax assets certain subsidiaries primarily related deferred interest expense carryforwards amount 2083 million 1242 million respectively change company’s valuation allowance 2011 841 million related 881 million additions charged income tax expense reduced 21 million reductions recognized income tax benefits 19 million currency translation adjustments recognized within comprehensive income change company’s valuation allowance 2010 2009 646 million 474 million respectively primarily related additions charged income tax expense december 31 2011 company’s us consolidated group approximately 822 million unremitted earnings permanently reinvested substantially foreign subsidiaries addition december 31 2011 herbalife ltd approximately 18 billion permanently reinvested unremitted earnings relating operating subsidiaries since unremitted earnings permanently reinvested herbalife ltd notes consolidated financial statements continued deferred taxes provided unremitted earnings practicable determine amount unrecognized deferred taxes respect unremitted earnings deferred taxes accrued earnings considered indefinitely reinvested deferred tax liability unremitted foreign earnings december 31 2011 2010 87 million 60 million respectively applicable statutory income tax rate cayman islands zero herbalife ltd years reported purposes reconciliation provision income taxes statutory rate provision income taxes effective tax rate notional 35 tax rate applied follows millions years ended december 31 2011 2010 2009 company benefited terms tax holiday people’s republic china tax holiday commenced january 1 2008 conclude december 31 2012 terms holiday company subject zero tax rate china 2008 2009 11 tax rate 2010 12 tax rate 2011 subject 125 tax rate 2012 december 31 2011 total amount unrecognized tax benefits including related interest penalties 390 million total amount unrecognized tax benefits recognized 321 million unrecognized tax benefits 55 million interest 11 million penalties would impact effective tax rate december 31 2010 total amount unrecognized tax benefits including related interest penalties 385 million total amount unrecognized tax benefits recognized 316 million unrecognized tax benefits 56 million interest 13 million penalties would impact effective tax rate company accounts interest penalties generated tax contingencies component income tax expense year ended december 31 2011 company recorded increase interest expense reversal penalties expense related uncertain tax positions 01 million 01 million respectively years ended december 31 2010 december 31 2009 company recorded reversal interest penalties expense related uncertain tax positions 29 million 19 million respectively december 31 2011 total accrued interest penalties 55 million 11 million respectively december 31 2010 total accrued interest penalties 56 million 13 million respectively herbalife ltd notes consolidated financial statements continued following changes occurred amount unrecognized tax benefits years ended december 31 2011 2010 2009 millions amount income taxes company pays subject ongoing audits taxing jurisdictions around world company’s estimate potential outcome uncertain tax position subject management’s assessment relevant risks facts circumstances existing time company believes adequately provided matters however company’s future results may include favorable unfavorable adjustments estimates period audits resolved may impact company’s effective tax rate december 31 2011 company’s tax filings generally subject examination major tax jurisdictions years ending december 31 2007 company believes reasonably possible amount unrecognized tax benefits could decrease approximately 261 million within next twelve months possible decrease 226 million would due settlement audits resolution administrative judicial proceedings remaining possible decrease 35 million would due expiration statute limitations various jurisdictions 13 fair value measurements company applies provisions fasb asc topic 820 fair value measurements disclosures asc 820 financial nonfinancial assets liabilities asc 820 defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date asc 820 establishes fair value hierarchy prioritizes inputs used measuring fair value three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities reporting entity ability access measurement date level 2 inputs include quoted prices similar assets liabilities active markets quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability inputs derived principally corroborated observable market data correlation means level 3 inputs unobservable inputs asset liability herbalife ltd notes consolidated financial statements continued company measures certain assets liabilities fair value discussed throughout notes consolidated financial statements foreign exchange currency contracts interest rate swaps valued using standard calculations models foreign exchange currency contracts valued primarily based inputs observable forward rates spot rates foreign currency exchange rates reporting period ended date interest rate swaps valued primarily based inputs libor swap yield curves reporting period ended date assets liabilities recurring measurements measured fair value consisted level 2 derivatives shown gross values december 31 2011 december 31 2010 fair value measurements reporting date using 14 subsequent events february 21 2012 company announced board directors approved quarterly cash dividend 030 per common share shareholders record march 7 2012 payable march 22 2012 herbalife ltd notes consolidated financial statements continued 15 quarterly information unaudited quarterly net income basic earnings per share diluted earnings per share presented table reflect change accounting principle stock split discussed note 2 basis presentation 1 net income basic earnings per share diluted earnings per share three months ended march 31 2011 previously reported 876 million 074 per share 071 per share respectively adjusted stock split 2 net income basic earnings per share diluted earnings per share three months ended march 31 2010 affected change accounting principle noted 3 net income basic earnings per share diluted earnings per share three months ended december 31 2010 previously reported 810 million 069 per share 065 per share respectively adjusted stock split signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereto duly authorized herbalife ltd john desimone john desimone chief financial officer dated february 21 2012 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicateditem 15 exhibits financial statement schedules following documents filed part annual report form 10k incorporated herein reference 1 financial statements following financial statements herbalife ltd filed part annual report form 10k pages indicated 2 financial statement schedules omitted required information inapplicable material information presented consolidated financial statements related notes 3 exhibits listed exhibit index immediately filed part annual report form 10k incorporated reference herein exhibit index exhibit number description reference 31 form amended restated memorandum articles association herbalife ltd 41 form share certificate 101 form indemnity agreement herbalife international inc certain officers directors herbalife international inc 102 herbalife international america inc’s senior executive deferred compensation plan effective january 1 1996 amended 103 herbalife international america inc’s management deferred compensation plan effective january 1 1996 amended 104 master trust agreement herbalife international america inc imperial trust company inc effective january 1 1996 105 herbalife international inc 401k profit sharing plan trust amended 106 notice distributors regarding amendment agreements distributorship dated july 18 2002 herbalife international inc herbalife distributor 107 indemnity agreement dated july 31 2002 among wh holdings cayman islands ltd wh acquisition corp whitney co llc whitney v lp whitney strategic partners v lp ggc administration llc golden gate private equity inc ccg investments bvi lp ccg associatesai llc ccg investment fundai lp ccg av llcseries c ccg av llcseries c ccg av llcseries e ccg associatesqp llc wh investments ltd filed herewith management contract compensatory plan arrangement previously filed october 1 2004 exhibit company’s registration statement form s1 file 333119485 incorporated herein reference b previously filed november 9 2004 exhibit amendment 2 company’s registration statement form s1 file 333119485 incorporated herein reference c previously filed december 2 2004 exhibit amendment 4 company’s registration statement form s1 file 333119485 incorporated herein reference previously filed december 14 2004 exhibit amendment 5 company’s registration statement form s1 file 333119485 incorporated herein reference e previously filed february 17 2005 exhibit company’s registration statement form s8 file 333122871 incorporated herein reference f previously filed april 30 2010 exhibit company’s current report form 8k incorporated herein reference g previously filed february 26 2008 exhibit company’s annual report form 10k year ended december 31 2007 incorporated herein reference h previously filed april 7 2008 exhibit company’s current report form 8k incorporated herein reference previously filed may 4 2009 exhibit company’s quarterly report form 10q quarter ended march 31 2009 incorporated reference j previously filed may 3 2010 exhibit company’s quarterly report form 10q quarter ended march 31 2010 incorporated reference k previously filed june 17 2010 exhibit company’s current report form 8k incorporated herein reference l previously filed august 2 2010 exhibit company’s quarterly report form 10q quarter ended june 30 2010 incorporated reference previously filed august 3 2010 exhibit company’s current report form 8k incorporated herein reference n previously filed december 29 2010 exhibit company’s current report form 8k incorporated herein reference previously filed march 1 2011 exhibit company’s current report form 8k incorporated herein reference p previously filed may 2 2011 exhibit company’s quarterly report form 10q quarter ended march 31 2011 incorporated reference q previously filed april 29 2011 exhibit company’s current report form 8k incorporated herein reference r previously filed august 10 2011 exhibit company’s current report form 8k incorporated herein reference previously filed july 30 2012 exhibit company’s quarterly report form 10q quarter ended june 30 2012 incorporated herein reference report independent registered public accounting firm board directors stockholders herbalife ltd audited accompanying consolidated balance sheets herbalife ltd subsidiaries “company” december 31 2012 2011 related consolidated statements income comprehensive income changes stockholders’ equity cash flows years threeyear period ended december 31 2012 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position herbalife ltd subsidiaries december 31 2012 2011 results operations cash flows years threeyear period ended december 31 2012 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states internal control financial reporting herbalife ltd december 31 2012 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated february 19 2013 expressed unqualified opinion effectiveness company’s internal control financial reporting kpmg llp los angeles california february 19 2013 herbalife ltd subsidiaries consolidated balance sheets see accompanying notes consolidated financial statements herbalife ltd subsidiaries consolidated statements income see accompanying notes consolidated financial statements herbalife ltd subsidiaries consolidated statements comprehensive income see accompanying notes consolidated financial statements herbalife ltd subsidiaries consolidated statements changes shareholders’ equity see accompanying notes consolidated financial statements herbalife ltd subsidiaries consolidated statements cash flows see accompanying notes consolidated financial statements herbalife ltd subsidiaries notes consolidated financial statements 1 organization herbalife ltd cayman islands exempt limited liability company herbalife incorporated april 4 2002 herbalife ltd together subsidiaries “company” leading global nutrition company sells weight management products nutritional supplements energy sports fitness products personal care products utilizing network marketing distribution december 31 2012 company sold products network 32 million independent distributors included 02 million china company currently sells products retail stores sales representatives sales officers independent service providers company reports revenue six geographic regions north america mexico south central america emea consists europe middle east africa asia pacific excluding china 2 basis presentation company’s consolidated financial statements refer herbalife subsidiaries new accounting pronouncements july 2012 financial accounting standards board fasb issued accounting standards update asu 201202 intangibles goodwill topic 350 testing indefinitelived intangible assets impairment asu allows entity first assess qualitative factors determine whether necessary perform quantitative impairment test indefinitelived intangible assets organization elects perform qualitative assessment required perform quantitative impairment test indefinitelived intangible asset likely asset impaired asu applies public private notforprofit organizations effective annual interim impairment tests performed fiscal years beginning september 15 2012 early adoption permitted including annual interim impairment tests performed date july 27 2012 public entity’s financial statements recent annual interim period yet issued nonpublic entities yet made available issuance adoption asu material impact company’s consolidated financial statements intended simplify impairment assessment indefinitelived intangible assets january 2013 fasb issued asu 201301 balance sheet topic 210 clarifying scope disclosures offsetting assets liabilities provides clarification relating scope asu 201111 balance sheet topic 210 disclosure offsetting assets liabilities effective fiscal years beginning january 1 2013 asu 201111 requires entity include additional disclosures financial instruments transactions eligible offset statement financial position well financial instruments subject master netting agreement similar arrangement asu 201301 added scope clarification asu 201111 applies derivatives including bifurcated embedded derivatives repurchase agreements reverse repurchase agreements securities borrowing securities lending transactions either offset subject enforceable master netting arrangement similar agreement pronouncement may increase company’s disclosures including disclosures derivatives described note 11 derivative instruments hedging activities material effect company’s operating results financial position asu effective fiscal years beginning january 1 2013 including interim periods within fiscal years significant accounting policies consolidation policy consolidated financial statements include accounts herbalife ltd subsidiaries significant intercompany transactions accounts eliminated herbalife ltd subsidiaries notes consolidated financial statements continued foreign currency translation transactions majority countries company operates functional currency local currency company’s foreign subsidiaries’ asset liability accounts translated consolidated financial reporting purposes us dollar amounts yearend exchange rates revenue expense accounts translated average rates year foreign exchange translation adjustments included accumulated comprehensive loss accompanying consolidated balance sheets foreign currency transaction gains losses include cost foreign currency derivative contracts related settlement gains losses excluding certain foreign currency derivatives designated cash flow hedges discussed note 11 derivative instruments hedging activities included selling general administrative expenses accompanying consolidated statements income company recorded net foreign currency transaction losses 167 million 114 million 73 million years ended december 31 2012 2011 2010 respectively includes foreign exchange impact relating company’s venezuelan subsidiary herbalife venezuela herbalife venezuela’s foreign currency financial statement impact discussed within note forward exchange contracts option contracts interest rate swaps company enters foreign currency derivative instruments forward exchange contracts option contracts managing foreign exchange risk sales distributors purchase commitments denominated foreign currencies intercompany transactions bank loans company also enters interest rate swaps managing interest rate risk variable rate credit facility company use contracts trading purposes accordance fasb accounting standards codification asc topic 815 derivatives hedging asc 815 company designates certain derivative instruments cash flow hedges formally documents hedge relationships including identification hedging instruments hedged items well risk management objectives strategies undertaking hedge transaction time derivative contract executed company assesses effectiveness hedge inception ongoing basis determines whether hedge highly perfectly effective offsetting changes cash flows hedged item company records effective portion changes estimated fair value accumulated comprehensive income loss subsequently reclassifies related amount accumulated comprehensive income loss earnings hedged item underlying transaction impacts earnings determined derivative ceased highly effective hedge company discontinue hedge accounting transaction derivatives designated hedges changes estimated fair value recognized consolidated statements income cash equivalents company considers highly liquid investments purchased maturity three months less cash equivalents cash equivalents comprised primarily foreign domestic bank accounts reduce credit risk company monitors credit standing financial institutions hold company’s cash equivalents 2011 company entered cash pooling arrangement financial institution cash management purposes cash pooling arrangement allows certain company’s participating foreign locations withdraw cash financial institution extent aggregate cash deposits held participating locations available financial institution extent participating location individual basis overdraft position overdrafts recorded liabilities reflected financing activities company’s consolidated balance sheet consolidated statement cash flows respectively december 31 2012 december 31 2011 company owe amounts financial institution herbalife ltd subsidiaries notes consolidated financial statements continued december 31 2012 2011 company’s subsidiary venezuela herbalife venezuela 992 million 348 million respectively bolivar denominated cash equivalents please see remeasurement herbalife venezuela’s monetary assets liabilities description herbalife venezuela’s cash equivalents balances accounts receivable accounts receivable consist principally receivables credit card companies arising sale products company’s distributors receivables importers utilized limited number countries sell products distributors company believes concentration collection risk related credit card receivables diminished due geographic dispersion receivables credit card companies 811 million 651 million december 31 2012 2011 respectively substantially receivables credit card companies current december 31 2012 2011 although receivables importers significant company performs ongoing credit evaluations importers maintains allowance potential credit losses company considers customer creditworthiness past current transaction history customer contractual terms current economic industry trends changes customer payment terms determining whether collectability reasonably assured whether record allowances receivables financial condition company’s customers deteriorates adversely affects ability make payments additional allowances recorded company believes provides adequate allowances receivables distributors importers material consolidated financial statements december 31 2012 2011 majority company’s total outstanding accounts receivable current fair value financial instruments company applies provisions fasb authoritative guidance applies nonfinancial assets nonfinancial liabilities fasb authoritative guidance clarifies definition fair value prescribes methods measuring fair value establishes fair value hierarchy based inputs used measure fair value expands disclosures fair value measurements disclosed note 13 fair value measurements company properly measured disclosed financial instruments company estimated fair value financial instruments using following methods assumptions • carrying amounts cash equivalents receivables accounts payable approximate fair value due shortterm maturities instruments • fair value option forward contracts based dealer quotes • carrying values company’s variable rate debt instruments considered approximate fair values interest rates instruments approximate current rates offered company inventories stated lower cost primarily firstin firstout basis market deferred financing costs deferred financing costs represent fees expenses related borrowing company’s longterm debt amortized term related debt using interest method herbalife ltd subsidiaries notes consolidated financial statements continued longlived assets december 2012 company purchased approximate 800000 square foot facility winstonsalem north carolina approximately 222 million december 31 2012 company allocated 188 million 34 million buildings land respectively based relative fair values december 31 2012 amounts reflected property plant equipment company’s accompanying consolidated balance sheet depreciation furniture fixtures equipment includes computer hardware software computed straightline basis estimated useful lives related assets range three ten years leasehold improvements amortized straightline basis life related asset term lease whichever shorter buildings depreciated 40 years land depreciated depreciation amortization expenses recorded selling general administrative expenses totaled 709 million 689 million 677 million years ended december 31 2012 2011 2010 respectively longlived assets reviewed impairment based undiscounted cash flows whenever events changes circumstances indicate carrying amount assets may recoverable measurement impairment loss based estimated fair value asset goodwill marketing related intangible assets indefinite lives evaluated annual basis impairment frequently events changes circumstances indicate asset might impaired years ended december 31 2012 2011 2010 goodwill marketing related intangible asset impairments december 31 2012 2011 2010 marketing related intangible asset balance 3100 million december 31 2012 2011 2010 goodwill balance 1055 million 1055 million 1029 million respectively 26 million increase goodwill 2011 2010 primarily due acquisition ichange network inc privately held software company purchase price material company’s consolidated financial statements intangible assets finite lives amortized expected lives expected fully amortized next four years december 31 2012 company’s intangible assets finite lives decreased 11 million december 31 2011 company’s intangible assets finite lives increased 17 million net 06 million amortization due ichange network acquisition december 31 2010 company’s intangible assets finite lives decreased 08 million annual amortization expense finite life intangibles 06 million 06 million 09 million years ended december 31 2012 2011 2010 respectively december 31 2012 annual expected amortization expense follows 2013 04 million 2014 03 million 2015 03 million 2016 01 million income taxes income tax expense includes income taxes payable current year change deferred income tax assets liabilities future tax consequences events recognized company’s financial statements income tax returns valuation allowance recognized reduce carrying value deferred income tax assets believed likely component deferred income tax assets realized company accounts uncertainty income taxes accordance fasb authoritative guidance clarifies accounting reporting uncertainties income taxes recognized enterprise’s financial statements guidance prescribes comprehensive model financial statement recognition measurement presentation disclosure uncertain tax positions taken expected taken income tax returns see note 12 income taxes description income taxes herbalife ltd subsidiaries notes consolidated financial statements continued royalty overrides independent distributor may earn commissions called royalty overrides include production bonuses based retail sales volume royalty overrides based retail sales volume certain distributors sponsored directly indirectly distributor royalty overrides recorded products delivered revenue recognized royalty overrides compensation distributors services rendered including development retention improved productivity sales organizations royalty overrides classified operating expense nonus royalty override checks aged variety reasons beyond certainty paid taken back income management estimated period certainty three years worldwide comprehensive income comprehensive income consists net earnings foreign currency translation adjustments effective portion unrealized gains losses derivatives components accumulated comprehensive income loss consisted following thousands operating leases company leases physical properties operating leases certain lease agreements generally include rent holidays tenant improvement allowances company recognizes rent holiday periods straightline basis lease term beginning company right leased space company also records tenant improvement allowances rent holidays deferred rent liabilities amortizes deferred rent terms lease rent expense research development company’s research development performed inhouse staff outside consultants periods presented research development costs expensed incurred material professional fees company expenses professional fees including legal fees incurred professional fees included selling general administrative expenses company’s consolidated statements income advertising costs including company sponsorships expensed incurred amounted approximately 423 million 384 million 307 million years ended december 31 2012 2011 2010 respectively expenses included selling general administrative expenses accompanying consolidated statements income herbalife ltd subsidiaries notes consolidated financial statements continued earnings per share basic earnings per share represents net income period common shares outstanding divided weighted average number common shares outstanding period diluted earnings per share represents net income divided weighted average number common shares outstanding inclusive effect dilutive securities outstanding stock options sars stock units warrants following common share amounts used compute basic diluted earnings per share period thousands aggregate 40 million 21 million 15 million equity grants consisting stock options sars stock units outstanding years ended december 31 2012 2011 2010 respectively included computation diluted earnings per share effect would antidilutive revenue recognition company generally recognizes revenue upon delivery title risk rewards pass independent distributor importer products sold retail stores china company’s independent service providers china product sales recognized net product returns discounts referred “distributor allowances” net sales include product sales shipping handling revenues shipping handling costs paid company included cost sales company generally receives net sales price cash credit card payments point sale company currently presents sales taxes collected customers net basis allowances product returns primarily connection company’s buyback program provided time sale recorded accrual based upon historical return rates country relevant return pattern reflects anticipated returns received period 12 months following original sale sharebased payments company accounts sharebased compensation accordance fasb authoritative guidance requires measurement sharebased compensation expense sharebased payment awards made employees service company measures sharebased compensation cost grant date based fair value award recognizes expense straightline basis employee’s requisite service period use estimates preparation financial statements conformity us gaap requires management make estimates assumptions estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts herbalife ltd subsidiaries notes consolidated financial statements continued revenues expenses reporting period actual results could differ estimates company evaluates estimates assumptions ongoing basis using historical experience factors including current economic environment company believes reasonable circumstances company adjusts estimates assumptions facts circumstances dictate illiquid credit markets volatile equity foreign currency combined increase uncertainty inherent estimates assumptions future events effects cannot determined precision actual results could differ estimates changes estimates resulting continuing changes economic environment reflected financial statements future periods currency restrictions venezuela currency restrictions enacted venezuelan government become restrictive impacted ability company’s subsidiary venezuela herbalife venezuela timely obtain us dollars exchange venezuelan bolivars official foreign exchange rates venezuelan government foreign exchange commission cadivi application approval process continue delayed company’s ability timely obtain us dollars official exchange rates remains uncertain june 2010 venezuelan government introduced additional regulations new regulated system sitme controlled central bank venezuela sitme provides mechanism exchange bolivars us dollars purchase sale us dollar denominated bonds issued venezuela however sitme available certain limited circumstances specifically sitme used product purchases available matters payment dividends also sitme used amounts 50000 per day 350000 per month generally available extent applicant exchanged received us dollars via cadivi process within previous 90 days effective january 1 2012 additional laws enacted required companies register registry users system transactions securities foreign currency rusitme prior transacting sitme regulated system controlled central bank venezuela alternative exchange mechanism company also participated certain bond offerings venezuelan government petróleos de venezuela sa pdvsa venezuelan stateowned petroleum company effectively purchased bonds bolivars sold bonds us dollars instances company also used alternative legal exchange mechanisms currency exchanges highly inflationary economy accounting venezuela’s inflation rate measured using blended national consumer price index consumer price index rate exceeded threeyear cumulative inflation rate 100 december 31 2009 accordingly effective january 1 2010 venezuela considered highly inflationary economy pursuant highly inflationary basis accounting us gaap herbalife venezuela changed functional currency bolivar us dollar subsequent movements bolivar us dollar exchange rate impact company’s consolidated earnings prior january 1 2010 bolivar functional currency movements bolivar us dollar recorded component equity comprehensive income pursuant highly inflationary accounting rules company longer translates herbalife venezuela’s financial statements functional currency us dollar based relevant facts circumstances applicable times highly inflationary basis accounting company used parallel market exchange rate remeasurement purposes parallel market discontinued may 2010 january 1 2010 connection determination venezuela herbalife ltd subsidiaries notes consolidated financial statements continued highly inflationary economy company remeasured herbalife venezuela’s opening balance sheet’s monetary assets liabilities parallel market rate recorded nontax deductible foreign exchange loss 151 million nonmonetary assets inventory reported company’s consolidated balance sheet december 31 2009 remained historical cost subsequent venezuela becoming highly inflationary economy therefore incremental costs related company’s 2009 imported products recorded parallel market exchange rate negatively impacted company’s consolidated statement income year ended december 31 2010 approximately 127 million products sold first quarter 2010 amount tax deductible see note 12 income taxes additional discussion income tax impact related venezuela becoming highly inflationary economy official exchange rate devaluations venezuela early january 2010 venezuela announced official exchange rate devaluation bolivar official rate 43 bolivars per us dollar nonessential items 26 bolivars per us dollar essential items company’s imports use fall classifications 2010 company used parallel market exchange rate remeasurement purposes parallel market discontinued may 2010 used sitme rate thereafter us dollars obtained cadivi official rate positive impact company’s consolidated net earnings majority herbalife venezuela’s 2010 importations registered cadivi official exchange rates available pay us imports late december 2010 venezuela announced cadivi official exchange rate 26 bolivars per us dollar would eliminated cadivi official exchange 43 bolivars per us dollar used essential items nonessential items beginning january 2011 devaluation material impact company’s consolidated financial statements since sitme rate used remeasurement purposes remeasurement herbalife venezuela’s monetary assets liabilities company recorded 58 million foreign exchange gains selling general administrative expenses within company’s consolidated statement income year ended december 31 2010 result receiving us dollars approved cadivi favorable official exchange rate compared less favorable parallel market sitme rates second quarter 2010 company also recorded 40 million pretax 26 million posttax net foreign exchange gain selling general administrative expenses within company’s consolidated statement income result remeasuring bolivar denominated monetary assets liabilities june 30 2010 sitme rate 53 bolivars per us dollar opposed last parallel market rate prior closure parallel market may 2010 83 bolivars per us dollar third quarter 2010 thereafter company continued use sitme rate 53 bolivars per us dollar remeasure bolivar denominated transactions february 2011 herbalife venezuela purchased us dollar denominated bonds face value 20 million us dollars bond offering pdvsa 86 million bolivars immediately sold bonds 15 million us dollars resulting average effective conversion rate 57 bolivars per us dollar bolivar us dollar conversion resulted company recording net pretax loss 13 million us dollars first quarter 2011 included consolidated statement income year ended december 31 2011 company unsuccessful accessing subsequent pdvsa bond offerings frequency future bond offerings unknown 2011 company also accessed sitme market order exchange bolivars us dollars less frequent instances company also accessed alternative legal exchange mechanisms exchange bolivars us dollars less favorable rates sitme rate resulted company recognizing 12 million losses selling general administration expenses included within consolidated statement income year ended december 31 2011 herbalife ltd subsidiaries notes consolidated financial statements continued year ended december 31 2012 company continued accessing sitme market order exchange bolivars us dollars daily monthly restrictions continues instances company recognized aggregate 48 million foreign exchange losses result exchanging bolivars us dollars using alternative legal exchange mechanisms approximately 43 less favorable 53 bolivars per us dollar published sitme rate year ended december 31 2012 company exchanged 592 million bolivars 64 million us dollars using alternative legal exchange mechanisms company continues remeasure bolivars published sitme rate given limited availability alternative exchange mechanisms uncertainty effective exchange rate alternative exchange mechanisms december 31 2012 december 31 2011 herbalife venezuela’s net monetary assets liabilities denominated bolivars approximately 829 million 268 million respectively included approximately 992 million 348 million respectively bolivar denominated cash equivalents remeasured amounts including cash equivalents reported company’s consolidated balance sheet using published sitme rate 53 bolivars per us dollar may accurately represent amount us dollars company could ultimately realize company continues monitor exchange mechanisms restrictions sitme assess monitor current economic political environment venezuela assurance company able exchange bolivars us dollars timely basis particular exchange rate consolidation herbalife venezuela company plans continue operation venezuela import products venezuela despite foreign currency constraints described herbalife venezuela continue apply legal exchange mechanisms convert bolivars us dollars despite currency exchange restrictions venezuela company continues control herbalife venezuela operations mere existence exchange restrictions discussed create presumption lack exchangeability otherthantemporary create presumption entity deconsolidate venezuelan operations therefore company continues consolidate herbalife venezuela consolidated financial statements us gaap purposes majority herbalife venezuela’s bolivar denominated assets liabilities currently remeasured sitme rate although venezuela important market company’s south central america region herbalife venezuela’s net sales represented approximately 4 2 company’s consolidated net sales years ended december 31 2012 2011 2010 respectively total assets represented approximately 7 3 company’s consolidated total assets december 31 2012 2011 respectively see note 14 subsequent events discussion herbalife venezuela 3 inventories consist primarily finished goods available resale categorized follows millions herbalife ltd subsidiaries notes consolidated financial statements continued following major classes inventory millions 4 longterm debt longterm debt consists following millions july 21 2006 company entered 3000 million senior secured credit facility prior credit facility comprised 2000 million term loan 1000 million revolving credit facility syndicate financial institutions lenders september 2007 company lenders amended credit agreement increasing amount revolving credit facility aggregate principal amount 1500 million 2500 million primarily finance increase company’s share repurchase program see note 8 shareholders’ equity discussion share repurchase program share repurchase amounts years ended december 31 2012 2011 2010 term loan bore interest libor plus margin 15 base rate plus margin 050 revolving credit facility bore interest libor plus margin 125 base rate plus margin 025 march 9 2011 company entered 7000 million senior secured revolving credit facility credit facility syndicate financial institutions lenders terminated prior credit facility credit facility five year maturity expires march 9 2016 based company’s consolidated leverage ratio us dollar borrowings credit facility bear interest either libor plus applicable margin 150 250 base rate plus applicable margin 050 150 base rate credit facility represents highest federal funds rate plus 050 onemonth libor plus 100 prime rate offered bank america company based consolidated leverage ratio pays commitment fee 025 050 per annum unused portion credit facility credit facility also permits company borrow limited amounts mexican peso euro currencies based variable rates march 2011 company used 1960 million us dollar borrowings credit facility repay amounts outstanding prior credit facility company incurred approximately 57 million debt issuance costs connection credit facility debt issuance costs recorded deferred herbalife ltd subsidiaries notes consolidated financial statements continued financing costs company’s consolidated balance sheet amortized term credit facility july 26 2012 company amended credit facility include 5000 million term loan syndicate financial institutions lenders term loan term loan part credit facility addition company’s current revolving credit facility term loan matures march 9 2016 company make regular scheduled payments term loan consisting principal interest components based company’s consolidated leverage ratio term loan bears interest either libor plus applicable margin 150 250 base rate plus applicable margin 050 150 terms company’s revolving credit facility july 2012 company used 5000 million borrowings term loan pay amounts outstanding company’s revolving credit facility company incurred approximately 45 million debt issuance costs connection term loan debt issuance costs recorded deferred financing costs company’s consolidated balance sheet amortized life term loan december 31 2012 2011 weighted average interest rate borrowings credit facility included borrowings term loan december 31 2012 196 189 respectively credit facility requires company comply leverage ratio coverage ratio addition credit facility contains customary covenants including covenants limit restrict company’s ability incur liens incur indebtedness make investments dispose assets make certain restricted payments pay dividends repurchase common shares merge consolidate enter certain transactions affiliates december 31 2012 2011 company compliant debt covenants credit facility fair value company’s credit facility including term loan approximated carrying value december 31 2012 due variable interest rate reprices frequently represents floating market rates fair value credit facility determined utilizing level 2 inputs defined note 13 fair value measurements observable market interest rates yield curves 2012 company borrowed aggregate amount 14280 million paid total amount 11425 million credit facility 2011 company borrowed 8597 million 540 million credit facility prior credit facility respectively paid total 6577 million 2289 million credit facility prior credit facility respectively 2010 company borrowed aggregate amount 4270 million paid total amount 4870 million prior credit facility december 31 2012 december 31 2011 us dollar amount outstanding credit facility 4875 million 2020 million respectively 4875 million us dollar amount outstanding credit facility december 31 2012 4875 million outstanding term loan amounts outstanding revolving credit facility outstanding foreign currency borrowings december 31 2012 december 31 2011 credit facility december 31 2012 aggregate annual maturities credit facility expected 563 million 2013 812 million 2014 1000 million 2015 2500 million 2016 interest expense 167 million 99 million 97 million years ended december 31 2012 2011 2010 respectively interest expense year ended december 31 2011 included 09 million writeoff unamortized deferred financing costs resulting extinguishment prior credit facility discussed herbalife ltd subsidiaries notes consolidated financial statements continued 5 lease obligations company warehouse office furniture fixtures equipment leases expire various dates 2023 lease agreements company also obligated pay property taxes insurance maintenance costs certain leases contain renewal options future minimum rental commitments noncancelable operating leases capital leases december 31 2012 follows millions rental expense years ended december 31 2012 2011 2010 525 million 492 million 435 million respectively property plant equipment capital leases included property plant equipment accompanying consolidated balance sheets follows millions 6 employee compensation plans company maintains profit sharing plan pursuant sections 401a k internal revenue code 1986 amended code plan available substantially employees meet length service requirements prior january 1 2009 employees could elect contribute 2 17 compensation company would make matching contributions amount equal one dollar deferred earnings exceed 3 participants’ earnings participants partially vested company contributions one year fully vested five years effective january 1 2009 company amended profit sharing plan starting january 1 2009 employees may elect contribute 75 compensation however contributions limited maximum annual amount set periodically code company make matching contributions amount equal one dollar deferred earnings first 1 make matching contributions amount equal 50 one dollar subsequent 5 deferred earnings contributions become fully vested two herbalife ltd subsidiaries notes consolidated financial statements continued years company contributed 27 million 25 million 23 million profit sharing plan years ended december 31 2012 2011 2010 respectively company nonqualified deferred compensation plans select groups management herbalife management deferred compensation plan herbalife senior executive deferred compensation plan deferred compensation plans allow eligible employees elect annually defer 75 base annual salary 100 annual bonus calendar year annual deferral amount company makes matching contributions behalf participant senior executive deferred compensation plan senior executive deferred compensation plan provides amount matching contributions determined company discretion 2012 2011 2010 company’s matching contribution 35 aligns 401k retirement plan match participant either nonqualified deferred compensation plans discussed times fully vested nonforfeitable interest year’s contribution including interest credited thereto company matching contributions applicable connection participant’s election defer annual deferral amount participant may also elect receive shortterm payout equal annual deferral amount plus interest amount payable two years first day year annual deferral amount actually deferred total expense two nonqualified deferred compensation plans excluding participant contributions 29 million 02 million 21 million years ended december 31 2012 2011 2010 respectively total longterm deferred compensation liability two deferred compensation plans 295 million 237 million december 31 2012 2011 respectively deferred compensation plans unfunded benefits paid general assets company except company contributed “rabbi trust” whose assets used pay benefits company remains solvent reached company’s creditors company becomes insolvent value assets “rabbi trust” 243 million 205 million december 31 2012 2011 respectively company employees international countries covered various deferred compensation plans administered based upon legal requirements countries established company’s compensation expenses relating plans 72 million 49 million 34 million years ended december 31 2012 2011 2010 respectively 7 contingencies company time engaged routine litigation company regularly reviews pending litigation matters involved establishes reserves deemed appropriate management litigation matters probable loss estimate made marketer dietary nutritional supplements products ingested consumers applied bodies company currently subjected various product liability claims effects claims date material company reasonably possible range exposure currently existing claims material company believes meritorious defenses allegations contained lawsuits company currently maintains product liability insurance annual deductible 10 million certain company’s subsidiaries subject tax audits governmental authorities respective countries certain tax audits governmental authorities proposing significant amounts additional taxes related interest penalties due company tax advisors believe herbalife ltd subsidiaries notes consolidated financial statements continued substantial defenses allegations additional taxes owed company vigorously contesting additional proposed taxes related charges may 7 2010 company received assessment mexican tax administration service amount equivalent approximately 88 million translated period ended spot rate various items majority value added tax vat allegedly owed certain company’s products imported mexico years 2005 2006 assessment subject interest inflationary adjustments july 8 2010 company initiated formal administrative appeal process may 13 2011 mexican tax administration service issued resolution company’s administrative appeal resolution nullified assessment since mexican tax administration service review tax audit findings reissue original assessment company commenced litigation tax court mexico august 2011 dispute assertions made mexican tax administration service case mexican tax administration service filed response received company april 2012 response challenged assertions company made august 2011 filing mexican tax administration service commenced audits company’s mexican subsidiaries period january september 2007 2011 year october 19 2012 mexican tax administration service issued preliminary audit report january september 2007 period primarily focused vat allegations final audit report january september 2007 period issued december 11 2012 substantially similar preliminary report company yet received assessment related final audit report mexican tax authority generally issues assessment within six months final audit report prior nullification assessment relating 2005 2006 years company entered agreements certain insurance companies allow potential issuance surety bonds support appeal assessment surety bonds issued would affect availability company’s credit facility arrangements insurance companies remain place event assessment reissued company recognized loss company based analysis guidance advisors believe loss would probable assessment reissued additional assessment issued company currently unable reasonably estimate possible loss range loss could result unfavorable outcome assessment reissued additional assessments issued periods company believes meritorious defenses assessment reissued would meritorious defenses additional assessment issued company received assessment spanish tax authority amount equivalent approximately 42 million translated period ended spot rate withholding taxes interest penalties related payments spanish distributors 20032004 period company appealed assessment national appellate court audiencia nacional based ruling national appellate court substantially assessment nullified company began withholding taxes payments spanish distributors 2012 year spanish tax authority raises issue later years company believes meritorious defenses company recognized loss company believe loss probable company currently unable reasonably estimate possible loss range loss could result unfavorable outcome additional assessments periods issued company received tax assessment september 2009 federal revenue office brazil amount equivalent approximately 42 million us dollars translated period ended spot rate related withholdingcontributions based payments company’s distributors 2004 company appealed tax assessment administrative council tax appeals 2nd level administrative appeal believes meritorious defenses recognized loss company believe loss probable company currently unable reasonably estimate amount loss may result unfavorable outcome additional assessments periods issued herbalife ltd subsidiaries notes consolidated financial statements continued company received order rome labor court behalf social security authority march 1 2012 pay amount equivalent approximately 71 million us dollars translated period ended spot rate social contributions interest penalties related payments italian distributors 2002 2005 company filed writ rome labor court appealing order social security authority filed response brief hearing july 12 2012 social security authority announced intention withdraw claim well order pay assessment hearing matter originally scheduled october 23 2012 postponed rescheduled matters may take several years resolve company believes meritorious defenses cannot sure ultimate resolution although company reserved amounts certain matters company believes represent likely outcome resolution related disputes company incorrect assessment company may record additional expenses becomes probable increased potential liability warranted 8 shareholders’ equity company 1069 million 1158 million 1178 million common shares outstanding december 31 2012 2011 2010 respectively december 2004 company authorized 75 million preference shares 0002 par value 75 million authorized preference shares remained unissued december 31 2012 preference shares may issued time one series voting powers full limited without voting powers designations preferences relative participating optional special rights qualifications limitations restrictions determined company’s board directors dividends declaration future dividends subject discretion company’s board directors depend upon various factors including earnings financial condition herbalife ltd’s available distributable reserves cayman islands law restrictions imposed credit facility terms indebtedness may outstanding cash requirements future prospects factors deemed relevant board directors credit facility permits payments dividends long default event default exists consolidated leverage ratio specified credit facility exceeded second quarter 2007 company’s board directors adopted regular quarterly cash dividend program company’s board directors authorized 010 per common share cash dividend quarter adoption program second quarter 2010 august 2 2010 company announced board directors approved increase quarterly cash dividend 013 per common share increase 003 per common share prior quarters may 2 2011 company announced board directors approved increase quarterly cash dividend 020 per common share increase 007 per common share prior quarters february 21 2012 company announced board directors approved increase quarterly cash dividend 030 per common share increase 010 per common share prior quarters aggregate amount dividends paid declared fiscal years ended december 31 2012 2011 2010 approximately 1351 million 855 million 537 million respectively share repurchases april 17 2009 company’s share repurchase program adopted april 18 2007 expired pursuant terms april 30 2009 company announced board directors authorized new program herbalife ltd subsidiaries notes consolidated financial statements continued company repurchase 300 million herbalife common shares following two years times prices determined company’s management market conditions warrant may 3 2010 company’s board directors approved increase share repurchase program 300 million 1 billion addition company’s board directors approved extension expiration date share repurchase program april 2011 december 2014 may 2 2012 company entered agreement merrill lynch international repurchase 4279 million common shares remaining authorized capacity share repurchase program time terms repurchase agreement company paid 4279 million may 4 2012 agreement expired july 27 2012 company received 53 million 39 million common shares repurchase agreement june 2012 july 2012 respectively total number common shares repurchased agreement determined generally upon discounted volumeweighted average share price company’s common shares course agreement july 27 2012 company completed share repurchase program upon final delivery common shares repurchased repurchase agreement july 30 2012 company announced board directors authorized new 1 billion share repurchase program expire june 30 2017 share repurchase program allows company repurchase common shares times prices determined company’s management market conditions warrant extent herbalife ltd’s distributable reserves available cayman islands law credit facility permits company repurchase common shares long default event default exists consolidated leverage ratio specified credit facility exceeded december 31 2012 remaining authorized capacity share repurchase program 9500 million year ended december 31 2012 company repurchased 110 million common shares open market purchases aggregate cost approximately 5278 million average cost 4778 per share year ended december 31 2011 company repurchased 55 million common shares open market purchases aggregate cost approximately 2988 million average cost 5427 per share year ended december 31 2010 company repurchased 57 million common shares open market purchases aggregate cost approximately 1501 million average cost 2613 per share company reflects aggregate purchase price common shares repurchased reduction shareholders’ equity company allocated purchase price repurchased shares reduction retained earnings common shares additional paidincapital number shares issued upon vesting exercise certain restricted stock units sars granted pursuant company’s sharebased compensation plans net minimum statutory withholding requirements company pays behalf employees although shares withheld issued treated common share repurchases company’s consolidated financial statements reduce number shares would issued upon vesting shares count authorized capacity share repurchase program described 9 sharebased compensation company five sharebased compensation plans wh holdings cayman islands ltd stock incentive plan management plan wh holdings cayman islands ltd independent directors stock incentive plan independent directors plan herbalife ltd 2004 stock incentive plan 2004 stock incentive plan amended restated herbalife ltd 2005 stock incentive plan 2005 stock incentive plan amended restated herbalife ltd independent directors deferred compensation herbalife ltd subsidiaries notes consolidated financial statements continued stock unit plan independent director stock unit plan management plan provided grant options purchase common shares herbalife members company’s management independent directors plan provided grant options purchase common shares herbalife company’s independent directors 2004 stock incentive plan replaced management plan independent directors plan adoption thereof additional awards made either management plan independent directors plan however shares remaining available issuance plans absorbed became available issuance 2004 stock incentive plan 2005 stock incentive plan replaced 2004 stock incentive plan adoption thereof additional awards made 2004 stock incentive plan terms 2005 stock incentive plan substantially similar terms 2004 stock incentive plan 2005 stock incentive plan authorizes issuance 14400000 common shares pursuant awards granted plan plus shares remained available issuance 2004 stock incentive plan time adoption 2005 stock incentive plan purpose independent directors stock unit plan facilitate equity ownership company independent directors award stock units december 31 2012 aggregate approximately 31 million common shares remain available future issuance 2005 stock incentive plan independent directors stock unit plan company’s sharebased compensation plans provide grants stock options sars stock units collectively referred herein awards stock options typically vest quarterly fiveyear period less beginning grant date certain sars vest quarterly fiveyear period beginning grant date sars vest annually threeyear period contractual term service condition stock options sars generally ten years stock unit awards 2005 incentive plan incentive plan stock units vest annually three year period equal contractual term stock units awarded independent directors stock unit plan independent director stock units vest rate 25 january 15 april 15 july 15 october 15 january 2009 company moved granting sars instead stock units independent directors march 2008 company granted stock unit awards chairman chief executive officer vest fouryear period rate 30 first three years 10 fourth year february 2009 company granted stock units sars certain employees subject continued service onethird vest third anniversary date grant onethird vest fourth anniversary date grant remaining onethird vest fifth anniversary date grant 2010 company granted stock units certain key employees subject continued service one half vest first anniversary date grant remaining half vest second anniversary date grant awards subject following market service conditions market condition awards market service performance conditions market performance condition awards subject continued service company service condition awards granted company market condition awards market performance condition awards service condition awards unless otherwise determined time grant value stock unit shall equal one common share herbalife company’s stock compensation awards outstanding december 31 2012 include stock options sars stock units march 2008 company granted sars market conditions chairman chief executive officer fully vested 2012 sars vested end four years subject continued employment date achievement certain conditions related market value company’s common shares market conditions included targets stock price appreciation 10 15 compound annual growth rate fair value sars determined date grant using monte carlo lattice model herbalife ltd subsidiaries notes consolidated financial statements continued august 2011 company granted sars market performance conditions chairman chief executive officer awards vest december 31 2014 subject continued employment date company’s stock price appreciating exceeding targeted price company’s achievement certain volume point performance targets fair value sars determined date grant using monte carlo lattice model company records compensation expense requisite service period equal vesting period awards granted january 1 2006 compensation expense recognized straightline basis vesting term stockbased compensation expense included selling general administrative expenses consolidated statements income years ended december 31 2012 2011 2010 sharebased compensation expense relating service condition awards amounted 227 million 192 million 200 million respectively years ended december 31 2012 2011 2010 sharebased compensation expense relating market condition awards amounted 07 million 29 million 30 million respectively year ended december 31 2012 2011 sharebased compensation expense relating market performance condition awards amounted 46 million 14 million respectively years ended december 31 2012 2011 2010 related income tax benefits recognized earnings awards amounted 95 million 75 million 74 million respectively december 31 2012 total unrecognized compensation cost related nonvested service condition stock awards 412 million related weightedaverage period expected recognized approximately 14 years december 31 2012 total unrecognized compensation cost related nonvested market performance condition awards 90 million related weightedaverage period expected recognized approximately 20 years ended december 31 2012 2011 2010 excess tax benefits 297 million 275 million 80 million respectively generated recognized exercises awards stock units valued market value date grant fair value service condition sars estimated date grant using blackscholesmerton optionpricing model fair value sars market conditions estimated date grant using monte carlo lattice model historically expected term sars stock options based simple average vesting period life award simplified method fourth quarter 2011 company began calculating expected term sars based historical data historical information available groups employees determined similar historical exercise patterns valuation purposes expected volatility sars stock options based upon historical volatility company’s common shares also validated volatility rates peer group companies risk free interest rate based implied yield us treasury zerocoupon issue remaining term equal expected term sars stock options expected dividend yield assumption based company’s historical expected amount dividend payouts stock options granted years ended december 31 2012 2011 2010 following table summarizes weighted average assumptions used calculation fair value service condition awards years ended december 31 2012 2011 2010 herbalife ltd subsidiaries notes consolidated financial statements continued market condition awards market performance condition awards granted years ended december 31 2012 2010 market performance condition awards granted year ended december 31 2011 following table summarizes weighted average assumptions used calculation fair value following tables summarize activity sharebased compensation plans includes stock awards year ended december 31 2012 1 intrinsic value amount current market value underlying stock exceeds exercise price stock award 2 includes 09 million sars market performance conditions 3 includes 15 million sars market conditions weightedaverage grant date fair value service condition sars granted years ended december 31 2012 2011 2010 1536 2123 932 respectively weightedaverage grant date fair value sars market performance conditions granted year ended december 31 2011 1737 total intrinsic value service condition stock options sars exercised years ended december 31 2012 2011 2010 986 million 1338 million 638 million respectively market condition market condition performance condition sars exercised years ended december 31 2012 2011 2010 herbalife ltd subsidiaries notes consolidated financial statements continued total vesting date fair value stock units vested years ended december 31 2012 2011 2010 243 million 198 million 103 million respectively employee stock purchase plan 2007 company adopted qualified employee stock purchase plan espp implemented first quarter 2008 connection adoption espp company reserved issuance total 2 million common shares december 31 2012 approximately 18 million common shares remain available future issuance terms espp rights purchase common shares may granted eligible qualified employees subject certain restrictions espp enables company’s eligible employees payroll withholdings purchase limited number common shares 85 fair market value common share purchase date purchases made quarterly basis 10 segment information company nutrition company sells wide range weight management products nutritional supplements personal care products within one industry segment defined fasb asc topic 280 segment reporting company’s products manufactured third party providers company suzhou china facility lake forest california facility sold independent distributors consume sell herbalife products retail consumers distributors revenues reflect sales products company distributors categorized based geographic location herbalife ltd subsidiaries notes consolidated financial statements continued december 31 2012 company sold products 88 countries throughout world organized managed geographic regions company aggregates operating segments excluding china one reporting segment primary reporting segment management believes company’s operating segments similar operating characteristics similar long term operating performance making determination management believes operating segments similar nature products sold product acquisition process types customers products sold methods used distribute products nature regulatory environment china identified separate reporting segment meet criteria aggregation operating information primary reporting segment china sales product line follows herbalife ltd subsidiaries notes consolidated financial statements continued 1 contribution margin consists net sales less cost sales royalty overrides see part ii item 7 management’s discussion analysis financial condition results operations annual report form 10k description net sales cost sales royalty overrides 2 compensation china sales employees service fees china independent service providers totaling 1235 million 968 million 873 million years ended december 31 2012 2011 2010 respectively included selling general administrative expenses distributor compensation countries included contribution margin 3 product buybacks returns product categories included literature promotional category december 31 2012 2011 total assets company’s primary reporting segment 15870 million 13574 million respectively total assets china segment 1169 million 888 million december 31 2012 2011 respectively december 31 2012 2011 goodwill allocated company’s reporting units included company’s primary reporting segment 1024 million periods goodwill allocated china segment 31 million december 31 2012 2011 december 31 2012 net property plant equipment located us foreign countries 1709 million 719 million respectively december 31 2011 net property plant equipment located us foreign countries 1442 million 495 million respectively december 31 2012 deferred tax assets related us foreign countries 684 million 514 million respectively december 31 2011 deferred tax assets related us foreign countries 654 million 468 million respectively majority company’s foreign subsidiaries designate local currencies functional currency december 31 2012 2011 total amount cash held foreign subsidiaries reported company’s consolidated balance sheet 3213 million 2460 million respectively 69 million 92 million respectively maintained invested us dollars herbalife ltd subsidiaries notes consolidated financial statements continued 11 derivative instruments hedging activities interest rate risk management company engages interest rate hedging strategy hedged transactions forecasted interest payments company’s credit facility hedged risk variability forecasted interest rate cash flows hedging strategy involves purchase interest rate swaps outstanding cash flow hedges interest rate exposures december 31 2012 maximum length time company hedging certain exposures approximately seven months august 2009 company entered four interest rate swap agreements effective date december 31 2009 agreements collectively provide company pay interest less fouryear period weighted average fixed rate 278 notional amounts aggregating 1400 million receiving interest period one month libor rate notional amounts agreements expire july 2013 swaps inception designated cash flow hedges variability libor interest rate company’s term loan prior credit facility variability libor interest rate replacement debt company’s term loan prior credit facility terminated march 2011 refinanced credit facility discussed note 4 longterm debt company’s swaps remain effective continue designated cash flow hedges variability certain libor interest rate borrowings credit facility libor plus 150 250 fixing company’s weighted average effective rate notional amounts 428 528 hedge ineffectiveness recorded result refinancing event company assesses hedge effectiveness measures hedge ineffectiveness least quarterly years ended december 31 2012 2011 ineffective portion relating hedges immaterial hedges remained effective december 31 2012 december 31 2011 consequently changes fair value derivatives deferred recorded comprehensive income loss related forecasted transactions recognized consolidated statements income fair value interest rate swap agreements based thirdparty quotes december 31 2012 2011 company recorded interest rate swaps liabilities fair value 20 million 51 million respectively table describes interest rate swaps aggregate fair value liabilities outstanding december 31 2012 2011 foreign currency instruments company also designates certain foreign currency derivatives certain foreign currency forward option contracts freestanding derivatives hedge accounting apply changes fair market value freestanding derivatives included selling general administrative expenses company’s consolidated statements income company uses foreign currency forward contracts hedge foreigncurrencydenominated intercompany transactions partially mitigate impact foreign currency fluctuations company also uses foreign currency option contracts partially mitigate impact foreign currency fluctuations fair value forward option contracts based thirdparty bank quotes company’s foreign currency derivative contracts generally executed monthly basis herbalife ltd subsidiaries notes consolidated financial statements continued company designates cashflow hedges foreign currency forward contracts entered hedge forecasted inventory purchases intercompany management fees subject foreign currency exposures forward contracts used hedge forecasted inventory purchases specific months changes fair value forward contracts excluding forward points designated cashflow hedges recorded component accumulated comprehensive income loss within shareholders’ equity recognized cost sales consolidated statement income period approximates time hedged inventory sold company also hedges forecasted intercompany management fees specific months contracts allow company sell euros exchange us dollars specified contract rates changes fair value forward contracts designated cash flow hedges recorded component accumulated comprehensive income loss within shareholders’ equity recognized selling general administrative expenses consolidated statement income period hedged item underlying transaction affect earnings december 31 2012 2011 aggregate notional amounts foreign currency contracts outstanding designated cash flow hedges approximately 2569 million 644 million respectively december 31 2012 outstanding contracts expected mature next twelve months company’s derivative financial instruments recorded consolidated balance sheet fair value based thirdparty quotes december 31 2012 company recorded assets fair value 05 million liabilities fair value 33 million relating outstanding foreign currency contracts designated cashflow hedges december 31 2011 company recorded assets fair value 44 million relating outstanding foreign currency contracts designated cashflow hedges company assesses hedge effectiveness measures hedge ineffectiveness least quarterly years ended december 31 2012 2011 ineffective portion relating hedges immaterial hedges remained effective december 31 2012 december 31 2011 december 31 2012 2011 majority company’s outstanding foreign currency forward contracts maturity dates less twelve months fifteen months respectively majority freestanding derivatives expiring within one month december 31 2012 2011 foreign currency option contracts outstanding december 31 2012 2011 herbalife ltd subsidiaries notes consolidated financial statements continued table describes foreign currency forward contracts outstanding december 31 2012 2011 herbalife ltd subsidiaries notes consolidated financial statements continued following tables summarize derivative activity year ended december 31 2012 2011 2010 relating company’s derivatives herbalife ltd subsidiaries notes consolidated financial statements continued gains losses derivative instruments following table summarizes gains losses relating derivative instruments recorded comprehensive income loss years ended december 31 2012 2011 2010 december 31 2012 estimated amount existing net losses related cash flow hedges recorded accumulated comprehensive income loss expected reclassified earnings next twelve months 53 million following table summarizes gains losses relating derivative instruments recorded income years ended december 31 2012 2011 2010 1 foreign exchange contracts designated hedging instruments amounts recognized income loss represent amounts excluded assessment hedge effectiveness ineffective amounts reported derivatives designated hedging instruments herbalife ltd subsidiaries notes consolidated financial statements continued following table summarizes gains losses relating derivative instruments reclassified accumulated comprehensive loss income years ended december 31 2012 2011 2010 company reports derivatives fair value either assets liabilities within consolidated balance sheet see note 13 fair value measurements information derivative fair values consolidated balance sheet location december 31 2012 december 31 2011 12 income taxes components income taxes follows millions income taxes follows millions herbalife ltd subsidiaries notes consolidated financial statements continued company recognizes excess tax benefits associated sharebased compensation shareholders’ equity realized assessing whether excess tax benefits relating sharebased compensation realized company follows withandwithout approach excess tax benefits related sharebased compensation deemed realized utilization tax benefits available company also subject applicable limitations december 31 2012 2011 company 259 million 206 million respectively unrealized excess tax benefits 259 million excess tax benefits december 31 2012 177 million relates foreign tax credits generated carried forward us federal income tax returns unused tax credit carryforwards 63 million expire 2020 46 million expire 2021 68 million expire 2022 venezuela experienced cumulative inflation least 100 three year period ended december 31 2009 therefore january 1 2010 bolivar hyperinflationary us federal income tax purposes result herbalife venezuela considered dual incorporated entity required account operations using dollar approximate separate transactions method accounting dastm transitional impact dastm resulted deferred income tax benefit approximately 145 million recorded first quarter 2010 included within company’s consolidated statement income year ended december 31 2010 see note 2 basis presentation discussion herbalife venezuela’s highly inflationary economy significant categories temporary differences gave rise deferred tax assets liabilities follows tax effected millions net operating loss carryforwards subsidiaries 2012 2011 220 million 28 million respectively unused net operating losses tax credits 26 million expire 2013 2022 194 million carried forward indefinitely deferred interest carryforwards subsidiaries 2012 2011 1869 million 2056 million respectively carried forward indefinitely herbalife ltd subsidiaries notes consolidated financial statements continued company recognizes valuation allowances deferred tax assets reported based weight evidence likely deferred tax assets realized december 31 2012 december 31 2011 company held valuation allowances net deferred tax assets certain subsidiaries primarily related deferred interest expense carryforwards net operating loss carryforwards amount 2093 million 2083 million respectively change company’s valuation allowance 2012 10 million related 04 million net additions charged income tax expense 06 million currency translation adjustments recognized within comprehensive income change company’s valuation allowance 2011 841 million related 860 million net additions charged income tax expense reduced 19 million currency translation adjustments recognized within comprehensive income change company’s valuation allowance 2010 646 million primarily related net additions charged income tax expense december 31 2012 company’s us consolidated group approximately 664 million unremitted earnings permanently reinvested certain foreign subsidiaries addition december 31 2012 herbalife ltd approximately 16 billion permanently reinvested unremitted earnings relating operating subsidiaries since unremitted earnings permanently reinvested deferred taxes provided unremitted earnings practicable determine amount unrecognized deferred taxes respect unremitted earnings deferred taxes accrued earnings considered indefinitely reinvested deferred tax liability unremitted foreign earnings december 31 2012 2011 139 million 87 million respectively applicable statutory income tax rate cayman islands zero herbalife ltd years reported purposes reconciliation provision income taxes statutory rate provision income taxes effective tax rate notional 35 tax rate applied follows millions years ended december 31 2012 2011 2010 company benefited terms tax holiday people’s republic china tax holiday commenced january 1 2008 concluded december 31 2012 terms holiday company subject 11 tax rate 2010 12 tax rate 2011 125 tax rate 2012 company subject statutory tax rate 25 2013 december 31 2012 total amount unrecognized tax benefits including related interest penalties 471 million total amount unrecognized tax benefits recognized 382 million unrecognized tax benefits 57 million interest 17 million penalties would impact effective tax rate december 31 2011 total amount unrecognized tax benefits including related interest penalties herbalife ltd subsidiaries notes consolidated financial statements continued 390 million total amount unrecognized tax benefits recognized 321 million unrecognized tax benefits 55 million interest 11 million penalties would impact effective tax rate company accounts interest penalties generated tax contingencies component income tax expense year ended december 31 2012 company recorded increase interest penalty expense related uncertain tax positions 02 million 06 million respectively year ended december 31 2011 company recorded increase interest expense reversal penalty expense related uncertain tax positions 01 million 01 million respectively year ended december 31 2010 company recorded reversal interest penalty expense related uncertain tax positions 29 million december 31 2012 total amount interest penalties related unrecognized tax benefits 57 million 17 million respectively december 31 2011 total amount interest penalties related unrecognized tax benefits 55 million 11 million respectively following changes occurred amount unrecognized tax benefits years ended december 31 2012 2011 2010 millions amount income taxes company pays subject ongoing audits taxing jurisdictions around world company’s estimate potential outcome uncertain tax position subject management’s assessment relevant risks facts circumstances existing time company believes adequately provided matters however company’s future results may include favorable unfavorable adjustments estimates period audits resolved may impact company’s effective tax rate december 31 2012 company’s tax filings generally subject examination major tax jurisdictions years ending december 31 2008 company believes reasonably possible amount unrecognized tax benefits could decrease approximately 279 million within next twelve months possible decrease 260 million would due settlement audits resolution administrative judicial proceedings remaining possible decrease 19 million would due expiration statute limitations various jurisdictions herbalife ltd subsidiaries notes consolidated financial statements continued 13 fair value measurements company applies provisions fasb asc topic 820 fair value measurements disclosures asc 820 financial nonfinancial assets liabilities asc 820 defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date asc 820 establishes fair value hierarchy prioritizes inputs used measuring fair value three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities reporting entity ability access measurement date level 2 inputs include quoted prices similar assets liabilities active markets quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability inputs derived principally corroborated observable market data correlation means level 3 inputs unobservable inputs asset liability herbalife ltd subsidiaries notes consolidated financial statements continued company measures certain assets liabilities fair value discussed throughout notes consolidated financial statements foreign exchange currency contracts interest rate swaps valued using standard calculations models foreign exchange currency contracts valued primarily based inputs observable forward rates spot rates foreign currency exchange rates reporting period ended date interest rate swaps valued primarily based inputs libor swap yield curves reporting period ended date assets liabilities recurring measurements measured fair value consisted level 2 derivatives shown gross values december 31 2012 december 31 2011 fair value measurements reporting date using 14 subsequent events february 19 2013 company announced board directors approved quarterly cash dividend 030 per common share shareholders record march 5 2013 payable march 19 2013 subsequent yearended december 31 2012 borrowings company’s revolving credit facility excluding term loan portion increased 5000 million approximately 1952 million unused available credit february 19 2013 borrowed monies primarily used common share repurchases company’s share repurchase program described february 19 2013 herbalife ltd subsidiaries notes consolidated financial statements continued company approximately 9875 million total borrowings outstanding credit facility including term loan revolving credit facility january february 2013 company repurchased approximately 40 million common shares open market purchases aggregate cost approximately 1624 million average cost 4061 per share february 2013 venezuela government announced devaluing bolivar currency announced current 53 sitme rate eliminated cadivi rate devalued 43 bolivars 63 bolivars per us dollar december 31 2012 herbalife venezuela’s net monetary assets liabilities denominated bolivars approximately 829 million included approximately 992 million bolivar denominated cash equivalents remeasured published sitme rate 53 bolivars per us dollar new 63 cadivi rate 16 less favorable previously published 53 sitme rate 2013 new 63 cadivi rate alternative unfavorable exchange rate used remeasurement purposes company record foreign exchange loss fiscal year 2013 consolidated statement income extent exchange rate less favorable previously published 53 sitme rate company’s bolivar denominated cash equivalents reduced accordingly company continues monitor current exchange restrictions venezuela assessing exchange rate use prospectively remeasurement purposes see note 2 basis presentation description currency restrictions venezuela 15 quarterly information unaudited signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereto duly authorized herbalife ltd john g desimone john g desimone chief financial officer dated february 19 2013 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicateditem 15 exhibits financial statement schedules following documents filed part annual report form 10k incorporated herein reference 1 financial statements following financial statements herbalife ltd filed part annual report form 10k pages indicated 2 financial statement schedules omitted required information inapplicable material information presented consolidated financial statements related notes 3 exhibits listed exhibit index immediately filed part annual report form 10k incorporated reference herein exhibit index filed herewith management contract compensatory plan arrangement previously filed october 1 2004 exhibit company’s registration statement form s1 file 333119485 incorporated herein reference b previously filed december 2 2004 exhibit amendment 4 company’s registration statement form s1 file 333119485 incorporated herein reference c previously filed december 14 2004 exhibit amendment 5 company’s registration statement form s1 file 333119485 incorporated herein reference previously filed february 17 2005 exhibit company’s registration statement form s8 file 333122871 incorporated herein reference e previously filed april 30 2010 exhibit company’s current report form 8k incorporated herein reference f previously filed may 3 2010 exhibit company’s quarterly report form 10q quarter ended march 31 2010 incorporated reference g previously filed june 17 2010 exhibit company’s current report form 8k incorporated herein reference h previously filed august 2 2010 exhibit company’s quarterly report form 10q quarter ended june 30 2010 incorporated reference previously filed december 29 2010 exhibit company’s current report form 8k incorporated herein reference j previously filed march 1 2011 exhibit company’s current report form 8k incorporated herein reference k previously filed may 2 2011 exhibit company’s quarterly report form 10q quarter ended march 31 2011 incorporated reference l previously filed april 29 2011 exhibit company’s current report form 8k incorporated herein reference previously filed august 10 2011 exhibit company’s current report form 8k incorporated herein reference n previously filed july 30 2012 exhibit company’s quarterly report form 10q quarter ended june 30 2012 incorporated herein reference previously filed april 29 2013 exhibit company’s quarterly report form 10q quarter ended march 31 2013 incorporated herein reference p previously filed october 28 2013 exhibit company’s quarterly report form 10q quarter ended september 30 2013 incorporated herein reference q previously filed february 7 2014 exhibit company’s current report form 8k incorporated herein reference r previously filed february 18 2014 exhibit company’s annual report form 10k year ended december 31 2013 incorporated reference previously filed march 24 2014 exhibit company’s current report form 8k incorporated herein reference previously filed may 8 2014 exhibit company’s registration statement form s8 file 333195798 incorporated herein reference u previously filed july 28 2014 exhibit company’s quarterly report form 10q quarter ended june 30 2014 incorporated herein reference report independent registered public accounting firm board directors shareholders herbalife ltd opinion accompanying consolidated balance sheets related consolidated statements income comprehensive income changes shareholders’ deficit equity cash flows present fairly material respects financial position herbalife ltd subsidiaries december 31 2014 december 31 2013 results operations cash flows three years period ended december 31 2014 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2014 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions financial statements company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp los angeles california february 26 2015 herbalife ltd subsidiaries consolidated balance sheets see accompanying notes consolidated financial statements herbalife ltd subsidiaries consolidated statements income see accompanying notes consolidated financial statements herbalife ltd subsidiaries consolidated statements comprehensive income see accompanying notes consolidated financial statements herbalife ltd subsidiaries consolidated statements changes shareholders’ deficit equity see accompanying notes consolidated financial statements herbalife ltd subsidiaries consolidated statements cash flows see accompanying notes consolidated financial statements herbalife ltd subsidiaries notes consolidated financial statements 1 organization herbalife ltd cayman islands exempt limited liability company herbalife incorporated april 4 2002 herbalife ltd together subsidiaries “company” global nutrition company sells weight management targeted nutrition energy sports fitness outer nutrition products december 31 2014 company sold products network 40 million independent members included 02 million china company sells products retail stores sales representatives sales officers independent service providers company reports revenue six geographic regions north america mexico south central america emea consists europe middle east africa asia pacific excluding china 2 basis presentation company’s consolidated financial statements refer herbalife subsidiaries new accounting pronouncements april 2014 financial accounting standards board fasb issued accounting standards update asu 201408 presentation financial statements topic 205 property plant equipment topic 360 reporting discontinued operations disclosures disposals components entity asu changes threshold disposal qualify discontinued operation considered discontinued operation disposal must represent strategic shift major effect entity’s operations financial results asu also requires new disclosures individually material disposal transactions meet definition discontinued operation update applied prospectively effective annual periods interim periods within years beginning december 15 2014 early adoption permitted provided disposal previously disclosed adoption guidance material impact company’s consolidated financial statements may 2014 fasb issued asu 201409 revenue contracts customers topic 606 new revenue recognition standard provides fivestep analysis transactions determine revenue recognized core principle company recognize revenue depict transfer promised goods services customers amount reflects consideration entity expects entitled exchange goods services asu effective annual periods beginning december 15 2016 shall applied either retrospectively period presented cumulativeeffect adjustment date adoption company evaluating potential impact adoption consolidated financial statements june 2014 fasb issued asu 201412 compensationstock compensation topic 718 accounting sharebased payments terms award provide performance target could achieved requisite service period consensus fasb emerging issues task force asu clarifies performance target affects vesting could achieved requisite service period treated performance condition reporting entity apply existing guidance topic 718 relates awards performance conditions affect vesting account awards performance target reflected estimating grantdate fair value award compensation cost recognized period becomes probable performance target achieved represent compensation cost attributable periods requisite service already rendered asu effective annual periods interim periods within years beginning december 15 2015 early adoption permitted asu may applied either prospectively awards granted modified effective date b retrospectively awards performance targets herbalife ltd subsidiaries notes consolidated financial statements continued outstanding beginning earliest annual period presented financial statements new modified awards thereafter adoption guidance material impact company’s consolidated financial statements august 2014 fasb issued asu 201415 presentation financial statements going concern subtopic 20540 purpose asu incorporate us generally accepted accounting principles us gaap management’s responsibility evaluate whether substantial doubt entity’s ability continue going concern within one year date financial statements issued within one year date financial statements available issued applicable provide related footnote disclosures update effective annual period ending december 15 2016 annual periods interim periods thereafter early application permitted adoption guidance material impact company’s consolidated financial statements january 2015 fasb issued asu 201501 income statementextraordinary unusual items subtopic 22520 simplifying income statement presentation eliminating concept extraordinary items asu part fasb’s initiative reduce complexity accounting standards asu eliminates us gaap concept extraordinary items previously required segregated results ordinary operations shown separately income statement net tax income continuing operations entities also required disclose applicable income taxes extraordinary item either present disclose earningspershare data applicable extraordinary item items considered unusual infrequent presented separately within income continuing operations income statement disclosed notes financial statements update effective fiscal years interim periods within fiscal years beginning december 15 2015 companies may apply asu prospectively may also apply amendments retrospectively prior periods presented financial statements early adoption permitted provided guidance applied beginning fiscal year adoption guidance material impact company’s consolidated financial statements reclassifications certain reclassifications made prior period statement cash flows within cash flows operating activities conform current period presentation reclassifications impact prior period total net cash provided used operating activities investing activities financing activities impact company’s accompanying consolidated balance sheets related consolidated statements income comprehensive income significant accounting policies consolidation policy consolidated financial statements include accounts herbalife ltd subsidiaries significant intercompany transactions accounts eliminated foreign currency translation transactions majority countries company operates functional currency local currency company’s foreign subsidiaries’ asset liability accounts translated consolidated financial reporting purposes us dollar amounts yearend exchange rates revenue expense accounts translated average rates year foreign exchange translation adjustments included accumulated com herbalife ltd subsidiaries notes consolidated financial statements continued prehensive loss accompanying consolidated balance sheets foreign currency transaction gains losses include cost foreign currency derivative contracts related settlement gains losses excluding certain foreign currency derivatives designated cash flow hedges discussed note 11 derivative instruments hedging activities included selling general administrative expenses accompanying consolidated statements income company recorded net foreign currency transaction losses 2190 million 379 million 167 million years ended december 31 2014 2013 2012 respectively includes foreign exchange impact relating company’s venezuelan subsidiary herbalife venezuela herbalife venezuela’s foreign currency financial statement impact discussed within note forward exchange contracts interest rate swaps company enters foreign currency derivatives primarily comprised foreign currency forward contracts managing foreign exchange risk sales members inventory purchases denominated foreign currencies intercompany transactions bank loans company also previously entered interest rate swaps managing interest rate risk variable rate credit facility company use contracts trading purposes accordance fasb accounting standards codification asc topic 815 derivatives hedging asc 815 company designates certain derivative instruments cash flow hedges formally documents hedge relationships including identification hedging instruments hedged items well risk management objectives strategies undertaking hedge transaction time derivative contract executed company assesses effectiveness hedge inception ongoing basis determines whether hedge highly perfectly effective offsetting changes cash flows hedged item company records effective portion changes estimated fair value accumulated comprehensive income loss subsequently reclassifies related amount accumulated comprehensive income loss earnings hedged item underlying transaction impacts earnings determined derivative ceased highly effective hedge company discontinue hedge accounting transaction derivatives designated hedges changes estimated fair value recognized consolidated statements income cash equivalents company considers highly liquid investments purchased maturity three months less cash equivalents cash equivalents comprised primarily foreign domestic bank accounts money market funds cash equivalents valued based level 1 inputs consist quoted prices active markets reduce credit risk company monitors credit standing financial institutions hold company’s cash equivalents company cash pooling arrangement financial institution cash management purposes cash pooling arrangement allows certain company’s participating subsidiaries withdraw cash financial institution based upon company’s aggregate cash deposits held subsidiaries participate cash pooling arrangement extent participating location individual basis overdraft position overdrafts recorded liabilities reflected financing activities company’s consolidated balance sheet consolidated statement cash flows respectively december 31 2014 december 31 2013 company owe amounts financial institution december 31 2014 2013 company’s subsidiary venezuela herbalife venezuela 364 million 2159 million respectively bolivar denominated cash equivalents please see herbalife ltd subsidiaries notes consolidated financial statements continued remeasurement herbalife venezuela’s monetary assets liabilities description herbalife venezuela’s cash equivalents balances accounts receivable accounts receivable consist principally receivables credit card companies arising sale products company’s members receivables importers utilized limited number countries sell products members company believes concentration collection risk related credit card receivables diminished due geographic dispersion receivables credit card companies 576 million 728 million december 31 2014 2013 respectively substantially receivables credit card companies current december 31 2014 2013 although receivables importers significant company performs ongoing credit evaluations importers maintains allowance potential credit losses company considers customer creditworthiness past current transaction history customer contractual terms current economic industry trends changes customer payment terms determining whether collectability reasonably assured whether record allowances receivables financial condition company’s customers deteriorates adversely affects ability make payments additional allowances recorded company believes provides adequate allowances receivables members importers material consolidated financial statements years ended december 31 2014 2013 2012 company recorded 22 million 21 million 29 million respectively baddebt expense related allowances company’s receivables december 31 2014 2013 company’s allowance doubtful accounts 19 million 22 million respectively december 31 2014 2013 majority company’s total outstanding accounts receivable current fair value financial instruments company applies provisions fasb authoritative guidance applies financial nonfinancial assets liabilities fasb authoritative guidance clarifies definition fair value prescribes methods measuring fair value establishes fair value hierarchy based inputs used measure fair value expands disclosures fair value measurements company estimated fair value financial instruments using following methods assumptions • carrying amounts cash equivalents receivables accounts payable approximate fair value due shortterm maturities instruments • fair value availableforsale investments based prices similar assets traded active markets observable yield curves • fair value option forward contracts based dealer quotes • company’s variable rate revolving credit facility recorded carrying value considered approximate fair value company’s convertible senior notes issued february 2014 convertible notes recorded carrying value fair value determined using two valuation methods company reviewed market data available publicly traded senior unsecured nonconvertible corporate bonds issued companies similar credit ratings assumptions used estimate represent market participants would use pricing liability component including market yields credit standing develop straight debt yield estimate company also used lattice model included inputs stock price convertible notes trading price volatility divi herbalife ltd subsidiaries notes consolidated financial statements continued dend yield december 31 2014 estimate straight debt yield company combined results two valuation methods determine fair value liability component convertible notes see note 4 longterm debt description inventories stated lower cost primarily firstin firstout basis market deferred financing costs deferred financing costs represent fees expenses related borrowing company’s longterm debt amortized term related debt using interest method total amortization expense related deferred financing costs 68 million 26 million 18 million years ended december 31 2014 2013 2012 respectively longlived assets december 31 2014 2013 company’s net property plant equipment consisted following millions december 2012 company purchased approximate 800000 square foot facility winstonsalem north carolina approximately 222 million december 31 2014 2013 company allocated 188 million 34 million buildings land respectively based relative fair values december 31 2014 2013 amounts reflected property plant equipment company’s accompanying consolidated balance sheet depreciation furniture fixtures equipment includes computer hardware software computed straightline basis estimated useful lives related assets range three ten years company capitalizes eligible costs acquire develop internaluse software incurred subsequent preliminary project stage computer hardware software majority comprised capitalized internaluse software costs 1588 million 1406 million december 31 2014 2013 respectively net accumulated depreciation leasehold improvements amortized straightline basis life related asset term lease whichever shorter buildings depreciated 40 years building improvements generally depreciated ten fifteen years land depreciated depreciation amortization expenses recorded selling general administrative expenses totaled 815 million 811 million 709 million years ended december 31 2014 2013 2012 respectively herbalife ltd subsidiaries notes consolidated financial statements continued longlived assets reviewed impairment based undiscounted cash flows whenever events changes circumstances indicate carrying amount assets may recoverable measurement impairment loss based estimated fair value asset goodwill marketing related intangible assets indefinite lives evaluated annual basis impairment frequently events changes circumstances indicate asset might impaired goodwill company uses discounted cash flow approach estimate fair value reporting unit fair value reporting unit less carrying value implied fair value goodwill must determined implied fair value goodwill less carrying value goodwill impairment amount recorded difference marketing related intangible assets company uses discounted cash flow model relieffromroyalty method order determine fair value fair value less carrying value impairment amount recorded difference years ended december 31 2014 2013 2012 additions goodwill marketing related intangible assets impairments goodwill marketing related intangible assets december 31 2014 2013 marketing related intangible asset balance 3100 million consisted company’s trademark trade name marketing franchise december 31 2014 2013 goodwill balance 1022 million 1055 million respectively decrease goodwill year ended december 31 2014 due cumulative translation adjustments intangible assets finite lives amortized expected lives expected fully amortized next two years december 31 2014 company’s intangible assets finite lives decreased 04 million december 31 2013 company’s intangible assets finite lives decreased 07 million annual amortization expense finite life intangibles 03 million 04 million 06 million years ended december 31 2014 2013 2012 respectively december 31 2014 annual expected amortization expense follows 2015 03 million 2016 01 million income taxes income tax expense includes income taxes payable current year change deferred income tax assets liabilities future tax consequences events recognized company’s financial statements income tax returns valuation allowance recognized reduce carrying value deferred income tax assets believed likely component deferred income tax assets realized company accounts uncertainty income taxes accordance fasb authoritative guidance clarifies accounting reporting uncertainties income taxes recognized enterprise’s financial statements guidance prescribes comprehensive model financial statement recognition measurement presentation disclosure uncertain tax positions taken expected taken income tax returns see note 12 income taxes description income taxes royalty overrides member may earn commissions called royalty overrides include production bonuses based retail sales volume royalty overrides based retail sales volume certain members sponsored directly indirectly member royalty overrides recorded products delivered revenue recognized royalty overrides compensation members services rendered including development retention improved productivity sales organizations royalty overrides classified operating expense nonus royalty override checks aged variety reasons beyond certainty paid taken back income management estimated period certainty three years worldwide herbalife ltd subsidiaries notes consolidated financial statements continued comprehensive income comprehensive income consists net income foreign currency translation adjustments effective portion unrealized gains losses derivatives unrealized gains losses availableforsale investments components accumulated comprehensive income loss consisted following million operating leases company leases physical properties operating leases certain lease agreements generally include rent holidays tenant improvement allowances company recognizes rent holiday periods straightline basis lease term beginning company right leased space company also records tenant improvement allowances rent holidays deferred rent liabilities amortizes deferred rent terms lease rent expense research development company’s research development performed inhouse staff outside consultants periods presented research development costs expensed incurred material government grants government grants recorded income legal right grant exists reasonable assurance grant proceeds received conditions government grants provided met company perfunctory obligations outstanding professional fees company expenses professional fees including legal fees incurred professional fees included selling general administrative expenses company’s consolidated statements income advertising costs including company sponsorships expensed incurred amounted approximately 697 million 579 million 423 million years ended december 31 2014 2013 2012 respectively expenses included selling general administrative expenses accompanying consolidated statements income earnings per share basic earnings per share represents net income period common shares outstanding divided weighted average number common shares outstanding period diluted earnings per share represents herbalife ltd subsidiaries notes consolidated financial statements continued net income divided weighted average number common shares outstanding inclusive effect dilutive securities outstanding stock options sars stock units following common share amounts used compute basic diluted earnings per share period millions aggregate 27 million 30 million 40 million equity grants consisting stock options sars stock units outstanding years ended december 31 2014 2013 2012 respectively included computation diluted earnings per share effect would antidilutive since company settle principal amount convertible notes cash settle conversion feature amount conversion price common shares conversion spread company uses treasury stock method calculating potential dilutive effect conversion spread diluted earnings per share applicable conversion spread dilutive impact diluted earnings per share average market price company’s common shares given period exceeds initial conversion price 8628 per share year ended december 31 2014 convertible notes excluded computation diluted earnings per share effect would antidilutive since conversion price convertible notes exceeded average market price company’s common shares year ended december 31 2014 initial conversion rate conversion price described note 4 longterm debt capped call transactions executed connection issuance convertible notes excluded calculation diluted earnings per share impact always antidilutive revenue recognition company generally recognizes revenue upon delivery title risk rewards pass member importer products sold retail stores china company’s independent service providers china product sales recognized net product returns discounts referred “distributor allowances” net sales include product sales shipping handling revenues shipping handling costs paid company included cost sales company generally receives net sales price cash credit card payments point sale company currently presents sales taxes collected customers net basis allowances product returns primarily connection company’s buyback program provided time sale recorded accrual based upon historical return rates country relevant return pattern reflects anticipated returns received period 12 months following original sale allowances product returns 43 million 47 million 39 million december 31 2014 2013 2012 respectively product returns 73 million 97 million 111 million years ended december 31 2014 2013 2012 respectively sharebased payments company accounts sharebased compensation accordance fasb authoritative guidance requires measurement sharebased compensation expense sharebased payment awards made herbalife ltd subsidiaries notes consolidated financial statements continued employees company measures sharebased compensation cost grant date based fair value award company recognizes sharebased compensation expense service condition awards straightline basis employee’s requisite service period company recognizes sharebased compensation expense performance condition awards vesting term using graded vesting method use estimates preparation financial statements conformity us gaap requires management make estimates assumptions estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates company evaluates estimates assumptions ongoing basis using historical experience factors including current economic environment company believes reasonable circumstances company adjusts estimates assumptions facts circumstances dictate illiquid credit markets volatile equity foreign currency combined increase uncertainty inherent estimates assumptions future events effects cannot determined precision actual results could differ estimates changes estimates resulting continuing changes economic environment reflected financial statements future periods currency restrictions venezuela herbalife venezuela company’s venezuelan subsidiary currently imports products venezuela foreign exchange controls country limit herbalife venezuela’s ability repatriate earnings settle intercompany obligations official rate result company’s bolivardenominated cash equivalents continued accumulate increasing potential impact currency devaluation current operating environment venezuela also continues challenging company’s venezuela business high inflation price controls risk government devalue bolivar june 2010 venezuelan government introduced additional regulations new regulated system sitme controlled central bank venezuela sitme provided mechanism exchange bolivars us dollars purchase sale us dollar denominated bonds issued venezuela however sitme available certain limited circumstances specifically sitme could used product purchases available matters payment dividends also sitme could used amounts 50000 per day 350000 per month generally available extent applicant exchanged received us dollars via cadivi process within previous 90 days effective january 1 2012 additional laws enacted required companies register registry users system transactions securities foreign currency rusitme prior transacting sitme regulated system controlled central bank venezuela february 2013 venezuela government announced devalued bolivar currency would eliminate sitme regulated system sitme 53 bolivars per us dollar rate eliminated cadivi rate devalued 43 bolivars 63 bolivars per us dollar march 2013 venezuelan government also announced introduction additional exchange mechanism sicad first quarter 2014 venezuelan government announced establishment cencoex replaced previous foreign exchange commission cadivi also first quarter 2014 government announced additional activities processing dividend payments previously administered cadivi required processed sicad rate march 2014 government introduced additional exchange mechanism known sicad ii herbalife ltd subsidiaries notes consolidated financial statements continued alternative exchange mechanism company also participated certain bond offerings venezuelan government petróleos de venezuela sa pdvsa venezuelan stateowned petroleum company effectively purchased bonds bolivars sold bonds us dollars instances company also used alternative legal exchange mechanisms currency exchanges highly inflationary economy accounting venezuela’s inflation rate measured using blended national consumer price index consumer price index rate exceeded threeyear cumulative inflation rate 100 december 31 2009 accordingly effective january 1 2010 venezuela considered highly inflationary economy pursuant highly inflationary basis accounting us gaap herbalife venezuela changed functional currency bolivar us dollar subsequent movements bolivar us dollar exchange rate impact company’s consolidated earnings prior january 1 2010 bolivar functional currency movements bolivar us dollar recorded component equity comprehensive income pursuant highly inflationary accounting rules company longer translates herbalife venezuela’s financial statements functional currency us dollar remeasurement herbalife venezuela’s monetary assets liabilities prior february 2013 company used sitme rate 53 bolivars per us dollar remeasure bolivar denominated transactions year ended december 31 2012 company accessed sitme market order exchange bolivars us dollars although daily monthly restrictions existed instances company recognized aggregate 48 million foreign exchange losses result exchanging bolivars us dollars using alternative legal exchange mechanisms approximately 43 less favorable 53 bolivars per us dollar published sitme rate year ended december 31 2012 company exchanged 592 million bolivars 64 million us dollars using alternative legal exchange mechanisms following venezuelan government’s devaluation bolivar us dollar elimination sitme regulated system february 2013 company used new cadivi rate 63 bolivars per us dollar remeasure bolivar denominated transactions new cadivi rate approximately 16 less favorable previously published 53 sitme rate company recognized approximately 151 million net foreign exchange losses within consolidated statement income first quarter 2013 result remeasuring company’s bolivar denominated monetary assets liabilities new cadivi rate 63 bolivars per us dollar majority foreign exchange losses related approximately 169 million devaluation herbalife venezuela’s bolivar denominated cash equivalents year ended december 31 2013 company also recognized 07 million foreign exchange losses result exchanging bolivars us dollars using alternative legal exchange mechanisms approximately 75 less favorable new cadivi rate year ended december 31 2013 company exchanged 56 million bolivars 02 million us dollars using alternative legal exchange mechanisms fourth quarter 2013 company received approval sicad mechanism exchange approximately 68 million bolivars approximately 11 million us dollars remeasured using cadivi rate distribution approximately 06 million us dollars resulting foreign exchange loss approximately 05 million effective exchange rate 113 bolivars per us dollar march 2014 company submitted sicad ii bid exchange 53 million bolivars 01 million us dollars approved resulted company recognizing 07 million us dollar herbalife ltd subsidiaries notes consolidated financial statements continued foreign exchange loss effective exchange rate approximately 562 bolivars per us dollar march 31 2014 limited information published around sicad ii mechanism difficult determine mechanism functioned mechanism volume constraints based events company’s facts circumstances time company remeasured financial statements sicad rate 107 bolivars per us dollar march 31 2014 result using less favorable sicad rate remeasurement three months ended march 31 2014 company’s cash equivalents reduced approximately 960 million company recognized 861 million foreign exchange losses selling general administrative expenses within consolidated statement income second third quarters 2014 company receive approvals us dollars using sicad ii mechanisms company recognized 02 million 171 million foreign exchange losses relating unfavorable changes sicad rate three months ended june 30 2014 three months ended september 30 2014 respectively october 2014 company exchanged bolivars small amount us dollars sicad ii rate company continued applying us dollars using sicad ii mechanism regular basis december 31 2014 conversely company’s ability convert bolivars us dollars sicad rate improved recent periods company confident improve future periods furthermore herbalife venezuela formally initiated local manufacturing efforts including execution local manufacturing agreement october 2014 time company successful implementing local contract manufacturing strategy expects reduce us dollardenominated product importations increase bolivardenominated purchases local venezuela manufacturers expected decrease future us dollar importations reduce company’s future potential eligibility access sicad mechanism accordingly september 30 2014 company remeasured financial statements sicad ii rate 500 bolivars per us dollar recognized 980 million additional foreign exchange losses result using less favorable sicad ii rate company’s cash equivalents consolidated balance sheet reduced approximately 1025 million company recognized 76 million inventory write downs cost sales 70 million long lived asset impairments selling general administrative expenses within consolidated statement income third quarter 2014 company remeasured financial statements using sicad ii rate 500 bolivars per us dollar december 31 2014 due evolving foreign exchange control environment venezuela possible company’s ability access certain foreign exchange mechanisms including sicad ii exchange mechanisms could change future periods may impact rate company uses remeasure herbalife venezuela’s bolivardenominated assets liabilities company uses sicad ii rate remeasurement purposes future periods future us dollars obtained favorable sicad mechanism could positive impact company’s consolidated net earnings addition devaluations sicad ii rate adoption less favorable official rates venezuelan government us dollars obtained less favorable alternative legal exchange mechanisms could negative impact company’s future consolidated net earnings demonstrate company used less favorable rate approximately 180 200 bolivars per us dollar remeasure bolivardenominated cash equivalents december 31 2014 herbalife venezuela’s cash equivalents would reduced approximately 263 million 273 million december 31 2014 company closely monitoring sicad ii exchange mechanisms continue evolve see note 15 subsequent events discussion subsequent events related venezuela december 31 2014 december 31 2013 herbalife venezuela’s net monetary assets liabilities denominated bolivars approximately 351 million 1869 million respectively included herbalife ltd subsidiaries notes consolidated financial statements continued approximately 364 million 2159 million respectively bolivar denominated cash equivalents noted bolivar denominated assets liabilities remeasured sicad ii rate december 31 2014 cadivi rate december 31 2013 remeasured amounts including cash equivalents reported company’s consolidated balance sheet using published sicad ii rate may accurately represent amount us dollars company ultimately realize company continues monitor exchange mechanisms restrictions imposed venezuelan government assess monitor current economic political environment venezuela assurance company able exchange bolivars us dollars timely basis investments bolivardenominated bonds fourth quarter 2013 company invested bolivar denominated bonds issued venezuelan government purchase price bonds approximately 255 million bolivars approximately 41 million using cadivi rate year ended december 31 2014 company invested additional bolivar denominated bonds purchase price 1446 million bolivars approximately 126 million using applicable bolivar us dollar exchange rates bonds purchased company classifies bonds longterm availableforsale investments carried fair value inclusive unrealized gains losses net discount accretion premium amortization fair value bonds determined using level 2 inputs include prices similar assets traded active markets venezuela observable yield curves net unrealized gains losses bonds included comprehensive income loss net applicable income taxes years ended december 31 2014 2013 company sell bonds company’s investments bonds december 31 2014 summarized follows company evaluates securities otherthantemporary impairment quarterly basis impairment evaluation considers numerous factors relative significance varies depending situation factors considered include length time extent market value less cost financial condition nearterm prospects issuer securities applicable foreign exchange rates available company intent ability company retain security order allow anticipated recovery fair value based upon analysis determined impairment otherthantemporary security writtendown fair value loss recognized expense net company’s consolidated income statement otherthantemporary impairments relating availableforsale securities year ended december 31 2014 130 million primarily due unfavorable foreign exchange rates otherthantemporary impairments relating availableforsale securities year ended december 31 2013 herbalife ltd subsidiaries notes consolidated financial statements continued amortized cost estimated fair value bonds december 31 2014 contractual maturity follows expected disposal dates may less contractual dates indicated table consolidation herbalife venezuela company continues operate venezuela increasing foreign currency constraints continue create significant challenges herbalife venezuela addition contract manufacturing strategy described strategies company implemented limit financial exposure currency restrictions devaluations venezuela operation continues support members consumers include operating hour limitations order size limitations limiting member promotions events local bolivardenominated expenses limiting importation products venezuela herbalife venezuela continue apply legal exchange mechanisms convert bolivars us dollars despite currency exchange restrictions venezuela company continues control herbalife venezuela operations therefore company continues consolidate herbalife venezuela consolidated financial statements herbalife venezuela’s net sales represented approximately 3 6 4 company’s consolidated net sales years ended december 31 2014 2013 2012 respectively total assets represented approximately 2 10 company’s consolidated total assets december 31 2014 2013 respectively 3 inventories consist primarily finished goods available resale categorized follows millions herbalife ltd subsidiaries notes consolidated financial statements continued following major classes inventory millions 4 longterm debt longterm debt consists following millions senior secured credit facility march 9 2011 company entered 7000 million senior secured revolving credit facility credit facility syndicate financial institutions lenders terminated prior senior secured credit facility prior credit facility credit facility five year maturity expires march 9 2016 based company’s consolidated leverage ratio us dollar borrowings credit facility bear interest either libor plus applicable margin 150 250 base rate plus applicable margin 050 150 base rate credit facility represents highest federal funds rate plus 050 onemonth libor plus 100 prime rate offered bank america company based consolidated leverage ratio pays commitment fee 025 050 per annum unused portion credit facility credit facility also permits company borrow limited amounts mexican peso euro currencies based variable rates obligations credit facility unconditionally guaranteed certain company’s subsidiaries secured substantially assets us subsidiaries company’s parent herbalife ltd march 2011 company used 1960 million us dollar borrowings credit facility repay amounts outstanding prior credit facility company incurred approximately 57 million debt issuance costs connection credit facility debt issuance costs recorded deferred financing costs company’s consolidated balance sheet amortized term credit facility july 26 2012 company amended credit facility include 5000 million term loan syndicate financial institutions lenders term loan term loan part credit facility addition company’s current revolving credit facility term loan matures march 9 2016 company make regular scheduled payments term loan consisting principal interest components based company’s consolidated leverage ratio term loan bears interest either libor herbalife ltd subsidiaries notes consolidated financial statements continued plus applicable margin 150 250 base rate plus applicable margin 050 150 terms company’s revolving credit facility july 2012 company used 5000 million borrowings term loan pay amounts outstanding company’s revolving credit facility company incurred approximately 45 million debt issuance costs connection term loan debt issuance costs recorded deferred financing costs company’s consolidated balance sheet amortized life term loan february 2014 connection issuing 115 billion convertible notes described company amended credit facility pursuant amendment company amended terms credit facility provide technical amendments indebtedness asset sale dividend covenants crossdefault event default accommodate issuance convertible notes capped call prepaid forward share repurchase transactions described greater detail note 8 shareholders’ deficit equity amendment also increased 050 highest applicable margin payable herbalife event herbalife’s consolidated total leverage ratio equal exceeds 250 100 increased permitted consolidated total leverage ratio herbalife credit facility company incurred approximately 23 million debt issuance costs connection amendment debt issuance costs recorded deferred financing costs company’s consolidated balance sheet amortized life credit facility december 31 2014 december 31 2013 weighted average interest rate borrowings credit facility including borrowings term loan 304 217 respectively credit facility requires company comply leverage ratio coverage ratio addition credit facility contains customary covenants including covenants limit restrict company’s ability incur liens incur indebtedness make investments dispose assets make certain restricted payments pay dividends repurchase common shares merge consolidate enter certain transactions affiliates december 31 2014 december 31 2013 company compliant debt covenants credit facility 2014 company borrowed aggregate amount 500 million paid total amount 1313 million credit facility 2013 company borrowed aggregate amount 7630 million paid total amount 3192 million credit facility 2012 company borrowed aggregate amount 14280 million paid total amount 11425 million credit facility december 31 2014 december 31 2013 us dollar amount outstanding credit facility 8500 million 9313 million respectively 8500 million us dollar amount outstanding credit facility december 31 2014 3500 million outstanding term loan 5000 million outstanding revolving credit facility 9313 million us dollar amount outstanding credit facility december 31 2013 4313 million outstanding term loan 5000 million outstanding revolving credit facility outstanding foreign currency borrowings december 31 2014 december 31 2013 credit facility fair value outstanding borrowings company’s revolving credit facility term loan approximated carrying values december 31 2014 due variable interest rates reprice frequently represent floating market rates fair value outstanding borrowings company’s revolving credit facility term loan determined utilizing level 2 inputs defined note 13 fair value measurements observable market interest rates yield curves convertible senior notes february 2014 company initially issued 1 billion aggregate principal amount convertible senior notes convertible notes private offering qualified institutional buyers pursuant rule 144a herbalife ltd subsidiaries notes consolidated financial statements continued securities act 1933 amended company granted option initial purchasers purchase additional 150 million aggregate principal amount convertible notes subsequently exercised full february 2014 resulting total issuance 115 billion aggregate principal amount convertible notes convertible notes senior unsecured obligations rank effectively subordinated existing future secured indebtedness including amounts outstanding credit facility extent value assets securing indebtedness convertible notes pay interest rate 200 per annum payable semiannually arrears february 15 august 15 year beginning august 15 2014 convertible notes mature august 15 2019 unless earlier repurchased converted company may redeem convertible notes prior stated maturity date holders convertible notes may convert notes option following circumstances calendar quarter commencing calendar quarter ending march 31 2014 last reported sale price company’s common shares least 20 trading days whether consecutive period 30 consecutive trading days ending including last trading day immediately preceding calendar quarter exceeds 130 conversion price convertible notes applicable trading day ii five businessday period immediately five consecutive trading day period measurement period trading price per 1000 principal amount convertible notes trading day measurement period less 98 product last reported sale price company’s common shares conversion rate convertible notes day iii upon occurrence specified corporate events may 15 2019 holders may convert convertible notes time regardless foregoing circumstances upon conversion convertible notes settled cash applicable company’s common shares based applicable conversion rate time convertible notes initial conversion rate 115908 common shares per 1000 principal amount convertible notes equal initial conversion price approximately 8628 per common share company incurred approximately 266 million issuance costs first quarter 2014 relating issuance convertible notes 266 million issuance costs incurred 215 million 51 million recorded deferred financing costs additional paidin capital respectively proportion allocation proceeds convertible notes 215 million recorded deferred financing costs company’s consolidated balance sheet amortized contractual term convertible notes using effective interest method february 2014 115 billion proceeds received issuance convertible notes initially allocated longterm debt liability component additional paidincapital equity component within company’s consolidated balance sheet 9309 million 2191 million respectively liability component measured using nonconvertible debt interest rate carrying amount equity component representing conversion option determined deducting fair value liability component face value convertible notes whole since company must still settle convertible notes face value prior maturity liability component accreted face value resulting additional noncash interest expense recognized within company’s consolidated statements income convertible notes remain outstanding effective interest rate convertible notes approximately 62 per annum equity component remeasured long continues meet conditions equity classification december 31 2014 outstanding principal convertible notes 115 billion unamortized debt discount 1883 million carrying amount liability component 9617 million recorded longterm debt within company’s consolidated balance sheet reflected table within note december 31 2014 fair value liability component relating convertible notes approximately 8028 million december 31 2014 company determined herbalife ltd subsidiaries notes consolidated financial statements continued fair value liability component convertible notes using two valuation methods company reviewed market data available publicly traded senior unsecured nonconvertible corporate bonds issued companies similar credit ratings assumptions used estimate represent market participants would use pricing liability component including market yields credit standing develop straight debt yield estimate company also used lattice model included inputs stock price convertible note trading price volatility dividend yield december 31 2014 estimate straight debt yield company combined results two valuation methods determine fair value liability component convertible notes inputs primarily considered level 2 level 3 inputs valuation approach similar approach company used determine initial fair value liability component convertible notes february 7 2014 issuance date conjunction issuance convertible notes february 2014 company paid approximately 6858 million enter prepaid forward share repurchase transactions forward transactions certain financial institutions paid approximately 1238 million enter capped call transactions respect common shares capped call transactions certain financial institutions see note 8 shareholders’ deficit equity additional discussion forward transactions capped call transactions entered conjunction issuance convertible notes year ended december 31 2014 company recognized 551 million interest expense relating convertible notes included 308 million relating noncash interest expense relating debt discount 33 million relating amortization deferred financing costs company’s total interest expense including credit facility 917 million 266 million 167 million years ended december 31 2014 2013 2012 respectively recognized within consolidated statement income december 31 2014 aggregate annual maturities credit facility expected 1000 million 2015 7500 million 2016 115 billion principal amount convertible notes due 2019 certain vendors government agencies may require letters credit similar guaranteeing arrangements issued executed december 31 2014 company 368 million issued undrawn letters credit similar arrangements included mexico vat related surety bonds described note 7 contingencies 5 lease obligations company warehouse office furniture fixtures equipment leases expire various dates 2025 lease agreements company also obligated pay property taxes insurance maintenance costs certain leases contain renewal options future minimum rental commitments noncancelable operating leases december 31 2014 follows millions herbalife ltd subsidiaries notes consolidated financial statements continued company recognizes rental expense straightline basis rental expense years ended december 31 2014 2013 2012 600 million 575 million 525 million respectively property plant equipment capital leases included property plant equipment accompanying consolidated balance sheets december 31 2014 december 31 2013 6 employee compensation plans company maintains profit sharing plan pursuant sections 401a k internal revenue code 1986 amended code plan available substantially employees meet length service requirements employees may elect contribute 75 compensation however contributions limited maximum annual amount set periodically code company make matching contributions amount equal one dollar deferred earnings first 1 make matching contributions amount equal 50 one dollar subsequent 5 deferred earnings contributions become fully vested two years company contributed 35 million 40 million 27 million profit sharing plan years ended december 31 2014 2013 2012 respectively company nonqualified deferred compensation plans select groups management herbalife management deferred compensation plan herbalife senior executive deferred compensation plan deferred compensation plans allow eligible employees elect annually defer 75 base annual salary 100 annual bonus calendar year annual deferral amount management deferred compensation plan senior executive deferred compensation plan provide amount matching contributions determined company discretion matching contribution 35 participant’s annual base salary excess irs annual compensation limit amount deferrals reduce 401k eligible pay irs limit participant either nonqualified deferred compensation plans discussed times fully vested nonforfeitable interest year’s contribution including interest credited thereto company matching contributions applicable connection participant’s election defer annual deferral amount participant may also elect receive shortterm payout equal annual deferral amount plus interest amount payable five years first day year annual deferral amount actually deferred total expense two nonqualified deferred compensation plans excluding participant contributions 17 million 40 million 29 million years ended december 31 2014 2013 2012 respectively total longterm deferred compensation liability two deferred compensation plans 429 million 372 million december 31 2014 2013 respectively deferred compensation plans unfunded benefits paid general assets company except company contributed “rabbi trust” whose assets used pay benefits company remains solvent reached company’s creditors company becomes insolvent value assets “rabbi trust” 274 million 268 million december 31 2014 2013 respectively company employees international countries covered various deferred compensation plans administered based upon legal requirements countries established company’s compensation expenses relating plans 75 million 84 million 72 million years ended december 31 2014 2013 2012 respectively herbalife ltd subsidiaries notes consolidated financial statements continued 7 contingencies company time engaged routine litigation company regularly reviews pending litigation matters involved establishes reserves deemed appropriate management litigation matters probable loss estimate made marketer foods dietary nutritional supplements products ingested consumers applied bodies company currently subjected various product liability claims effects claims date material company reasonably possible range exposure currently existing claims material company believes meritorious defenses allegations contained lawsuits company currently maintains product liability insurance annual deductible 15 million certain company’s subsidiaries subject tax audits governmental authorities respective countries certain tax audits governmental authorities proposing significant amounts additional taxes related interest penalties due company tax advisors believe substantial defenses governmental allegations additional taxes owed company vigorously contesting additional proposed taxes related charges may 7 2010 company received assessment mexican tax administration service amount equivalent approximately 78 million translated december 31 2014 spot rate various items majority value added tax vat allegedly owed certain company’s products imported mexico years 2005 2006 assessment subject interest inflationary adjustments july 8 2010 company initiated formal administrative appeal process may 13 2011 mexican tax administration service issued resolution company’s administrative appeal resolution nullified assessment since mexican tax administration service review tax audit findings reissue original assessment company commenced litigation tax court mexico august 2011 dispute assertions made mexican tax administration service case company received notification february 6 2015 tax court mexico nullified substantially assessment mexican tax administration service may appeal decision prior nullification mexican tax administration service assessment relating 2005 2006 years company entered agreements certain insurance companies allow potential issuance surety bonds support appeal assessment surety bonds issued would affect availability company’s credit facility arrangements insurance companies remain place event assessment reissued mexican tax administration service commenced audits company’s mexican subsidiaries period january september 2007 may 10 2013 company received assessment approximately 20 million translated december 31 2014 spot rate related period july 11 2013 company filed administrative appeal disputing assessment addition mexican tax administration service requested additional information response company filings vat refunds september 22 2014 mexican tax administration service denied company’s administrative appeal company commenced litigation tax court mexico november 2014 dispute assertions made mexican tax administration service case company issued surety bond amount 216 million translated december 31 2014 spot rate insurance company guarantee payment tax assessment required company pursues appeal assessment litigation case currently ongoing company recognized loss company believe loss probable mexican tax administration service audited company’s mexican subsidiaries 2011 year audit focused importation vat issues june 25 2013 mexican tax administration service closed audit 2011 year without assessment herbalife ltd subsidiaries notes consolidated financial statements continued company recognized loss respect mexican matters company based analysis guidance advisors believe loss probable company currently unable reasonably estimate possible loss range loss could result unfavorable outcome assessment reissued additional assessments issued periods company believes meritorious defenses assessment reissued would meritorious defenses additional assessment issued mexican tax administration service requested information related company’s 2010 year information provided addition mexican tax administration service requested information related company’s 2012 year information provided mexican tax administration service may request additional information audit additional periods mexican tax administration service delayed processing vat refunds companies operating mexico company believes process mexico subsidiary receive vat refunds may delayed december 31 2014 company 511 million mexico vat related assets within assets consolidated balance sheet company recognized losses related vat related assets company believe loss probable august 2 2007 company received assessment spanish tax authority amount equivalent approximately 39 million translated december 31 2014 spot rate withholding taxes interest penalties related payments spanish members 20032004 periods february 22 2011 company appealed assessment national appellate court audiencia nacional based ruling national appellate court substantially assessment nullified company began withholding taxes payments spanish members 2012 year spanish tax authority raises issue later years company believes meritorious defenses company recognized loss company believe loss probable company currently unable reasonably estimate possible loss range loss could result unfavorable outcome additional assessments periods issued company received tax assessment september 2009 federal revenue office brazil amount equivalent approximately 32 million translated december 31 2014 spot rate related withholdingcontributions based payments company’s members 2004 december 28 2010 company appealed tax assessment administrative council tax appeals 2nd level administrative appeal company believes meritorious defenses recognized loss company believe loss probable march 6 2014 company notified similar audit 2011 year audit ongoing company currently unable reasonably estimate amount loss may result unfavorable outcome additional assessments periods issued company’s brazilian subsidiary pays icmsst taxes product purchases similar vat company believes able utilize recover icmsst credits future december 31 2014 company 157 million brazil icmsst related assets within assets consolidated balance sheet december 31 2014 company recognized losses related icmsst related assets company believe loss probable company received order rome labor court behalf social security authority march 1 2012 pay amount equivalent approximately 65 million translated december 31 2014 spot rate social contributions interest penalties related payments italian members 2002 2005 december 2014 rome labor court dismissed case company social security administration appeal court’s decision within term set law therefore decision became final binding company recognized loss company believe loss probable herbalife ltd subsidiaries notes consolidated financial statements continued company received tax assessment august 2014 one indian vat authorities amount equivalent approximately 61 million translated december 31 2014 spot rate related vat years ended march 31 2011 march 31 2012 company received reduced assessment october 2014 13 million translated december 31 2014 spot rate company initiated administrative tax appeal believes meritorious defenses company recognized loss believe loss probable korea customs service currently auditing importation activities herbalife korea periods 2010 later assessment issued company would likely required pay amount requested order appeal assessment based company’s analysis guidance advisors company believe loss probable company currently unable reasonably estimate possible loss range loss bostick et al v herbalife int’l inc et al april 8 2013 herbalife ltd certain subsidiaries named defendants suit filed us district court central district california challenging herbalife’s marketing practices business structure california laws prohibiting “endless chain schemes” unfair deceptive business practices false advertising well federal rico statutes july 7 2014 complaint amended add additional plaintiffs seek damages unspecified amount federal rico claim dismissed company continues believe suit without merit without way admitting liability wrongdoing company plaintiffs reached settlement terms settlement company would pay 15 million fund distributed qualified claimants ii accept maximum amount 25 million product returns qualified claimants court granted preliminary approval settlement december 2 2014 conditionally certified class final approval hearing set may 11 2015 december 31 2014 amounts adequately reserved company’s financial statements company transferred 15 million escrow account included prepaid expenses current assets within consolidated balance sheet december 31 2014 herbalife ltd securities litigation formerly captioned awad v herbalife ltd et al april 14 2014 herbalife ltd certain officers named defendants purported stockholder class action filed us district court central district california asserting claims securities exchange act 1934 complaint alleged company certain officers made material misstatements concerning company’s finances business practices contended company operating pyramid scheme initial complaint sought represent class investors purchased shares company’s common stock may 4 2010 april 11 2014 july 30 2014 court approved appointment different shareholders lead plaintiffs approved selection counsel september 18 2014 lead plaintiffs filed amended class action complaint violation federal securities laws company certain officers amended complaint brings claims unspecified damages securities exchange act 1934 amended alleges defendants made material misstatements “fundamentally misrepresented nature scope legality company’s business operations consumers investors alike” alleges company one “the sophisticated pyramid schemes history” lead plaintiffs seek represent class persons entities purchased shares company’s common stock february 23 2011 july 29 2014 defendants’ motion dismiss claims amended complaint filed november 3 2014 hearing set march 9 2015 company intends vigorously defend purported class action suit company recognized loss believe loss probable company currently unable reasonably estimate possible loss range loss us federal trade commission civil investigative demand previously disclosed company received us federal trade commission ftc civil investigative demand cid relating ftc’s herbalife ltd subsidiaries notes consolidated financial statements continued confidential investigation whether company complied federal law advertising marketing sale business opportunities pursuant cid supplemented ftc requested company documents information time period commencing january 1 2009 present company cooperating investigation cannot predict eventual scope duration outcome investigation time since late 2012 short seller made continues make allegations regarding company network marketing program company believes allegations without merit vigorously defending claims including proactively reaching regulatory agencies governmental authorities allegations company received may receive additional regulatory governmental inquiries example company previously disclosed inquiries ftc sec governmental authorities company believes governmental regulatory inquiry investigation becomes material disclosed individually consistent policies company cooperated continue fully cooperate governmental regulatory inquiries investigations matters may take several years resolve company believes meritorious defenses cannot sure ultimate resolution although company may reserve amounts certain matters company believes represent likely outcome resolution related disputes company incorrect assessment company may record additional expenses becomes probable increased potential liability warranted 8 shareholders’ deficit equity company 922 million 1011 million 1069 million common shares outstanding december 31 2014 2013 2012 respectively december 2004 company authorized 75 million preference shares 0002 par value 75 million authorized preference shares remained unissued december 31 2014 preference shares may issued time one series voting powers full limited without voting powers designations preferences relative participating optional special rights qualifications limitations restrictions determined company’s board directors dividends declaration future dividends subject discretion company’s board directors depend upon various factors including earnings financial condition herbalife ltd’s available distributable reserves cayman islands law restrictions imposed credit facility terms indebtedness may outstanding cash requirements future prospects factors deemed relevant board directors credit facility permits payments dividends long default event default exists consolidated leverage ratio specified credit facility exceeded second quarter 2007 company’s board directors adopted regular quarterly cash dividend program company’s board directors authorized 010 per common share cash dividend quarter adoption program second quarter 2010 august 2 2010 company announced board directors approved increase quarterly cash dividend 013 per common share increase 003 per common share prior quarters may 2 2011 company announced board directors approved increase quarterly cash dividend 020 per common share increase 007 per common share prior quarters february 21 2012 company announced board directors approved increase quarterly cash dividend 030 per common share increase 010 per common share prior quarters april 28 2014 company announced board direc herbalife ltd subsidiaries notes consolidated financial statements continued tors approved terminating quarterly cash dividend instead utilizing cash repurchase additional common shares aggregate amount dividends paid declared fiscal years ended december 31 2014 2013 2012 approximately 304 million 1231 million 1351 million respectively year ended december 31 2014 company received 34 million dividends primarily relating forward transactions described recorded directly accumulated deficit retained earnings share repurchases april 30 2009 company announced board directors authorized program company repurchase 300 million herbalife common shares following two years times prices determined company’s management market conditions warrant may 3 2010 company’s board directors approved increase share repurchase program 300 million 1 billion addition company’s board directors approved extension expiration date share repurchase program april 2011 december 2014 may 2 2012 company entered agreement merrill lynch international repurchase 4279 million common shares remaining authorized capacity share repurchase program time terms repurchase agreement company paid 4279 million may 4 2012 agreement expired july 27 2012 company received 53 million 39 million common shares repurchase agreement june 2012 july 2012 respectively total number common shares repurchased agreement determined generally upon discounted volumeweighted average share price company’s common shares course agreement july 27 2012 company completed share repurchase program upon final delivery common shares repurchased repurchase agreement july 30 2012 company announced board directors authorized new 1 billion share repurchase program expire june 30 2017 february 3 2014 company announced board directors authorized increase existing share repurchase authorization available balance 15 billion share repurchase program allows company repurchase common shares times prices determined company’s management market conditions warrant extent herbalife ltd’s distributable reserves available cayman islands law credit facility permits company repurchase common shares long default event default exists consolidated leverage ratio specified credit facility exceeded conjunction issuance convertible notes february 2014 company paid approximately 6858 million enter prepaid forward share repurchase transactions forward transactions certain financial institutions forward counterparties pursuant company purchased approximately 99 million common shares settlement around august 15 2019 maturity date convertible notes subject ability forward counterparty elect settle portion forward transactions early forward transactions generally expected facilitate privately negotiated derivative transactions forward counterparties holders convertible notes including swaps relating common shares holders convertible notes establish short positions relating common shares otherwise hedge investments convertible notes concurrently shortly pricing convertible notes result forward transactions company’s total shareholders’ deficit equity within consolidated balance sheet reduced approximately 6858 million first quarter 2014 amounts 6539 million 319 million allocated accumulated deficit retained earnings additional paidincapital respectively within total shareholders’ herbalife ltd subsidiaries notes consolidated financial statements continued deficit equity also upon executing forward transactions company recorded 358 million noncash issuance costs assets corresponding amount additional paidincapital within consolidated balance sheet reflecting fair value forward transactions noncash issuance costs amortized interest expense contractual term forward transactions year ended december 31 2014 company recognized 58 million noncash interest expense within consolidated statement income relating amortization noncash issuance costs may 6 2014 company entered agreement merrill lynch international repurchase 2660 million common shares repurchase agreement expired june 30 2014 terms repurchase agreement company paid 2660 million may 7 2014 received aggregate 43 million common shares repurchase agreement may june 2014 total number common shares repurchased repurchase agreement determined generally upon discounted volumeweighted average share price company’s common shares course repurchase agreement year ended december 31 2014 company repurchased 197 million common shares open market purchases repurchase agreement forward transactions aggregate cost approximately 12671 million average cost 6425 per share approximate 99 million common shares effectively repurchased forward transactions treated retired shares basic diluted eps purposes although remain legally outstanding year ended december 31 2013 company repurchased 61 million common shares open market purchases aggregate cost approximately 2974 million average cost 4908 per share year ended december 31 2012 company repurchased 110 million common shares open market purchases aggregate cost approximately 5278 million average cost 4778 per share december 31 2014 remaining authorized capacity company’s share repurchase program 2329 million inclusive reductions forward transactions company reflects aggregate purchase price common shares repurchased reduction shareholders’ deficit equity company allocated purchase price repurchased shares accumulated deficit retained earnings common shares additional paidincapital number shares issued upon vesting exercise certain restricted stock units sars granted pursuant company’s sharebased compensation plans net minimum statutory withholding requirements company pays behalf employees although shares withheld issued treated common share repurchases company’s consolidated financial statements reduce number shares would issued upon vesting shares count authorized capacity company’s share repurchase program described capped call transactions connection issuance convertible notes company paid approximately 1238 million enter capped call transactions respect common shares capped call transactions certain financial institutions capped call transactions expected generally reduce potential dilution upon conversion convertible notes event market price common shares greater strike price capped call transactions initially set 8628 per common share reduction potential dilution subject cap based cap price initially set 12079 per common share strike price cap price subject certain adjustments terms capped call transactions therefore result executing capped call transactions company effect exposed potential net dilution market price common shares exceeds adjusted cap price result capped call transactions company’s additional paidin capital within shareholders’ deficit equity consolidated balance sheet reduced 1238 million first quarter 2014 herbalife ltd subsidiaries notes consolidated financial statements continued accumulated comprehensive income loss following table summarizes changes accumulated comprehensive income loss years ended december 31 2014 2013 1 see note 2 basis presentation note 11 derivative instruments hedging activities information regarding location consolidated statements income gains losses reclassified accumulated comprehensive income loss income years ended december 31 2014 2013 comprehensive income loss reclassifications net tax benefits 73 million tax expense 06 million tax expense 46 million foreign currency translation adjustments unrealized gain loss derivatives unrealized gain loss availableforsale investments respectively year ended december 31 2014 amounts reclassified accumulated comprehensive income loss income net tax benefits 45 million unrealized gain loss availableforsale investments year ended december 31 2014 comprehensive income loss reclassifications net tax benefits 43 million tax expense 10 million tax expense 01 million foreign currency translation adjustments unrealized gain loss derivatives unrealized gain loss availableforsale investments respectively year ended december 31 2013 amounts reclassified accumulated comprehensive income loss income net tax expense 07 million unrealized gain loss derivatives year ended december 31 2013 9 sharebased compensation company six sharebased compensation plans wh holdings cayman islands ltd stock incentive plan management plan wh holdings cayman islands ltd independent directors stock incentive plan independent directors plan herbalife ltd 2004 stock incentive plan 2004 stock incentive plan amended restated herbalife ltd 2005 stock incentive plan 2005 stock herbalife ltd subsidiaries notes consolidated financial statements continued incentive plan herbalife ltd 2014 stock incentive plan 2014 stock incentive plan amended restated herbalife ltd independent directors deferred compensation stock unit plan independent director stock unit plan management plan provided grant options purchase common shares herbalife members company’s management independent directors plan provided grant options purchase common shares herbalife company’s independent directors 2004 stock incentive plan replaced management plan independent directors plan adoption thereof additional awards made either management plan independent directors plan however shares remaining available issuance plans absorbed became available issuance 2004 stock incentive plan 2005 stock incentive plan replaced 2004 stock incentive plan adoption thereof additional awards made 2004 stock incentive plan however shares remaining available issuance 2004 stock incentive plan absorbed became available issuance 2005 stock incentive plan 2014 stock incentive plan replaced 2005 stock incentive plan adoption thereof additional awards made 2005 stock incentive plan terms 2014 stock incentive plan substantially similar terms 2005 stock incentive plan 2014 stock incentive plan authorizes issuance 5000000 common shares pursuant awards granted plan plus shares remained available issuance 2005 stock incentive plan time adoption 2014 stock incentive plan purpose independent directors stock unit plan facilitate equity ownership company independent directors award stock units december 31 2014 aggregate approximately 62 million common shares remain available future issuance 2014 stock incentive plan independent directors stock unit plan company’s sharebased compensation plans provide grants stock options sars stock units collectively referred herein awards previously stock options generally vested quarterly fiveyear period less beginning grant date certain sars vest quarterly fiveyear period beginning grant date sars vest annually threeyear period contractual term service condition stock options sars generally ten years stock unit awards 2014 incentive plan incentive plan stock units vest annually three year period equal contractual term stock units awarded independent directors stock unit plan independent director stock units vest rate 25 january 15 april 15 july 15 october 15 march 2008 company granted stock unit awards chairman chief executive officer vest fouryear period rate 30 first three years 10 fourth year february 2009 company granted stock units sars certain employees subject continued service onethird vest third anniversary date grant onethird vest fourth anniversary date grant remaining onethird vest fifth anniversary date grant 2010 company granted stock units certain key employees subject continued service one half vest first anniversary date grant remaining half vest second anniversary date grant awards subject following market service conditions market condition awards performance service conditions performance condition awards market service performance conditions market performance condition awards subject continued service company service condition awards granted company market condition awards performance condition awards market performance condition awards service condition awards unless otherwise determined time grant value stock unit shall equal one common share herbalife company’s stock compensation awards outstanding december 31 2014 include stock options sars stock units march 2008 company granted sars market conditions chairman chief executive officer fully vested 2012 sars vested end four years subject continued herbalife ltd subsidiaries notes consolidated financial statements continued employment date achievement certain conditions related market value company’s common shares market conditions included targets stock price appreciation 10 15 compound annual growth rate fair value sars determined date grant using monte carlo lattice model august 2011 company granted sars market performance conditions chairman chief executive officer awards vest december 31 2014 subject continued employment date company’s stock price appreciating exceeding targeted price company’s achievement certain volume point performance targets fair value sars determined date grant using monte carlo lattice model december 31 2014 chairman chief executive office remained employee company met specified volume point performance targets requisite service performance conditions met impact sharebased compensation expense recorded date connection sars remained company’s consolidated financial statements december 31 2014 however price company’s common shares exceed target price applicable sars vest longer considered outstanding december 31 2014 years ended december 31 2014 2013 company granted sars certain employees performance conditions awards vest 20 first succeeding year 20 second succeeding year 60 third succeeding year subject achievement certain sales leader retention metrics fair value sars determined date grant using blackscholesmerton option pricing model compensation expense grants recognized vesting term using graded vesting method stockbased compensation expense included selling general administrative expenses consolidated statements income years ended december 31 2014 2013 2012 sharebased compensation expense relating service condition awards amounted 279 million 246 million 227 million respectively year ended december 31 2012 sharebased compensation expense relating market condition awards amounted 07 million sharebased compensation expense related market condition awards recognized years ended december 31 2014 2013 market condition awards vested prior 2013 years ended december 31 2014 2013 sharebased compensation expense relating performance condition awards amounted 133 million 03 million respectively year ended december 31 2014 2013 2012 sharebased compensation expense relating market performance condition awards amounted 45 million 45 million 46 million respectively years ended december 31 2014 2013 2012 related income tax benefits recognized earnings awards amounted 166 million 104 million 95 million respectively december 31 2014 total unrecognized compensation cost related nonvested service condition stock awards 360 million related weightedaverage period expected recognized approximately 14 years december 31 2014 total unrecognized compensation cost related nonvested performance condition awards 168 million related weightedaverage period expected recognized approximately 17 years ended december 31 2014 2013 2012 excess tax benefits 104 million 156 million 297 million respectively generated recognized exercises awards stock units valued market value date grant fair value service condition sars performance condition sars estimated date grant using blackscholesmerton optionpricing model fair value sars market conditions market performance conditions estimated herbalife ltd subsidiaries notes consolidated financial statements continued date grant using monte carlo lattice model company calculates expected term sars based historical data historical information available groups employees determined similar historical exercise patterns valuation purposes expected volatility sars based upon historical volatility company’s common shares also validated volatility rates peer group companies risk free interest rate based implied yield us treasury zerocoupon issue remaining term equal expected term sars expected dividend yield assumption based company’s historical expected amount dividend payouts stock options granted years ended december 31 2014 2013 2012 sars granted independent directors year ended december 31 2014 following table summarizes weighted average assumptions used calculation fair value service condition awards years ended december 31 2014 2013 2012 performance condition awards granted year ended december 31 2012 performance condition awards granted years ended december 31 2014 2013 following table summarizes weighted average assumptions used calculation fair value market condition awards market performance condition awards granted years ended december 31 2014 2013 2012 herbalife ltd subsidiaries notes consolidated financial statements continued following tables summarize activity sharebased compensation plans includes stock awards year ended december 31 2014 1 intrinsic value amount current market value underlying stock exceeds exercise price stock award 2 includes 09 million sars market performance conditions 3 includes 15 million sars market conditions 4 includes 04 million 10 million performance condition sars december 31 2013 december 31 2014 respectively 5 includes 01 million performance condition sars 6 includes 09 million sars market performance conditions longer outstanding ever become exercisable due market condition ultimately met sharebased compensation expense related market performance condition sars reversed result market condition met since performance service conditions met weightedaverage grant date fair value service condition sars granted years ended december 31 2014 2013 2012 2524 3057 1536 respectively weightedaverage grant date fair value sars performance conditions granted years ended december 31 2014 2013 2598 3304 respectively total intrinsic value service condition stock options sars exercised years ended december 31 2014 2013 2012 636 million 161 million 986 million respectively market condition performance condition market performance condition sars exercised years ended december 31 2014 2013 2012 total vesting date fair value stock units vested years ended december 31 2014 2013 2012 90 million 73 million 243 million respectively herbalife ltd subsidiaries notes consolidated financial statements continued employee stock purchase plan 2007 company adopted qualified employee stock purchase plan espp implemented first quarter 2008 connection adoption espp company reserved issuance total 2 million common shares december 31 2014 approximately 18 million common shares remain available future issuance terms espp rights purchase common shares may granted eligible qualified employees subject certain restrictions espp enables company’s eligible employees payroll withholdings purchase limited number common shares 85 fair market value common share purchase date purchases made quarterly basis 10 segment information company nutrition company sells wide range weight management targeted nutrition energy sports fitness outer nutrition products company’s products manufactured third party providers company changsha hunan china extraction facility suzhou china facility lake forest california facility winstonsalem north carolina facility sold members consume sell herbalife products retail consumers members revenues reflect sales products company members categorized based geographic location december 31 2014 company sold products 91 countries throughout world organized managed geographic regions company aggregates operating segments excluding china one reporting segment primary reporting segment management believes company’s operating segments similar operating characteristics similar long term operating performance making determination management believes operating segments similar nature products sold product acquisition process types customers products sold methods used distribute products nature regulatory environment economic characteristics china identified separate reporting segment meet criteria aggregation operating information primary reporting segment china sales product line follows herbalife ltd subsidiaries notes consolidated financial statements continued herbalife ltd subsidiaries notes consolidated financial statements continued 1 contribution margin consists net sales less cost sales royalty overrides 2 service fees china independent service providers totaling 3127 million 2156 million 1235 million years ended december 31 2014 2013 2012 respectively included selling general administrative expenses member compensation countries included contribution margin 3 product buybacks returns product categories included literature promotional category 4 net sales contribution margin 2013 within primary reporting segment information revised correct misclassification result united states net sales contribution margin increased 60 million 27 million respectively others net sales contribution margin decreased amounts december 31 2014 2013 total assets company’s primary reporting segment 20662 million 22537 million respectively total assets china segment 3087 million 2200 million december 31 2014 2013 respectively december 31 2014 2013 goodwill allocated company’s reporting units included company’s primary reporting segment 988 million 1024 million respectively goodwill allocated china segment 34 million 31 million december 31 2014 2013 respectively december 31 2014 net property plant equipment located us foreign countries 2898 million 769 million respectively december 31 2013 net property plant equipment located us foreign countries 2360 million 829 million respectively december 31 2014 deferred tax assets related us foreign countries 1543 million 636 million respectively december 31 2013 deferred tax assets related us foreign countries 691 million 587 million respectively majority company’s foreign subsidiaries designate local currencies functional currency december 31 2014 2013 total amount cash held foreign subsidiaries reported company’s consolidated balance sheet 4408 million 5674 million respectively 83 million 68 million respectively maintained invested us dollars december 31 2014 2013 total amount cash equivalents held company’s parent us entities 2046 million 4056 million respectively 11 derivative instruments hedging activities interest rate risk management company previously engaged interest rate hedging strategy hedged transactions forecasted interest payments credit facility hedged risk variability forecasted interest rate cash flows hedging strategy involved purchase interest rate swaps interest rate swaps expired july 2013 company entered new interest swap arrangements december 31 2014 foreign currency instruments company also designates certain foreign currency derivatives primarily comprised foreign currency forward contracts freestanding derivatives hedge accounting apply changes fair herbalife ltd subsidiaries notes consolidated financial statements continued market value freestanding derivatives included selling general administrative expenses company’s consolidated statements income company uses freestanding foreign currency derivatives hedge foreigncurrencydenominated intercompany transactions partially mitigate impact foreign currency fluctuations fair value freestanding foreign currency derivatives based thirdparty quotes company’s foreign currency derivative contracts generally executed monthly basis company designates cashflow hedges foreign currency forward contracts enters hedge forecasted inventory purchases intercompany management fees subject foreign currency exposures forward contracts used hedge forecasted inventory purchases specific months changes fair value forward contracts excluding forward points designated cashflow hedges recorded component accumulated comprehensive income loss within shareholders’ deficit equity recognized cost sales consolidated statement income period approximates time hedged inventory sold company also hedges forecasted intercompany management fees specific months contracts allow company sell euros exchange us dollars specified contract rates changes fair value forward contracts designated cash flow hedges recorded component accumulated comprehensive income loss within shareholders’ deficit equity recognized selling general administrative expenses consolidated statement income period hedged item underlying transaction affect earnings december 31 2014 december 31 2013 aggregate notional amounts foreign currency contracts outstanding designated cash flow hedges approximately 2253 million 2447 million respectively december 31 2014 outstanding contracts expected mature next twelve months company’s derivative financial instruments recorded consolidated balance sheet fair value based thirdparty quotes december 31 2014 company recorded assets fair value 123 million liabilities fair value 16 million relating outstanding foreign currency contracts designated cashflow hedges december 31 2013 company recorded assets fair value 57 million liabilities fair value 44 million relating outstanding foreign currency contracts designated cashflow hedges company assesses hedge effectiveness measures hedge ineffectiveness least quarterly years ended december 31 2014 2013 ineffective portion relating hedges immaterial hedges remained effective december 31 2014 december 31 2013 december 31 2014 december 31 2013 majority company’s outstanding foreign currency forward contracts maturity dates less twelve months majority freestanding derivatives expiring within two three months december 31 2014 december 31 2013 respectively herbalife ltd subsidiaries notes consolidated financial statements continued table describes foreign currency forward contracts outstanding december 31 2014 december 31 2013 herbalife ltd subsidiaries notes consolidated financial statements continued following tables summarize derivative activity years ended december 31 2014 2013 2012 relating company’s derivatives gains losses derivative instruments following table summarizes gains losses relating derivative instruments recorded comprehensive income loss years ended december 31 2014 2013 2012 december 31 2014 estimated amount existing net gains related cash flow hedges recorded accumulated comprehensive income loss expected reclassified earnings next twelve months 135 million following table summarizes gains losses relating derivative instruments recorded income years ended december 31 2014 2013 2012 1 foreign exchange contracts designated hedging instruments amounts recognized income loss primarily represent amounts excluded assessment hedge effectiveness material ineffective amounts reported derivatives designated hedging instruments herbalife ltd subsidiaries notes consolidated financial statements continued following table summarizes gains losses relating derivative instruments reclassified accumulated comprehensive loss income years ended december 31 2014 2013 2012 company reports derivatives fair value either assets liabilities within consolidated balance sheet see note 13 fair value measurements information derivative fair values consolidated balance sheet location december 31 2014 2013 12 income taxes components income taxes follows millions income taxes follows millions herbalife ltd subsidiaries notes consolidated financial statements continued company recognizes excess tax benefits associated sharebased compensation shareholders’ deficit equity realized assessing whether excess tax benefits relating sharebased compensation realized company follows withandwithout approach excess tax benefits related sharebased compensation deemed realized utilization tax benefits available company also subject applicable limitations december 31 2014 2013 company 236 million 154 million respectively unrealized excess tax benefits 236 million excess tax benefits december 31 2014 relates foreign tax credits generated carried forward us federal income tax returns unused tax credit carryforwards 48 million expire 2021 130 million expire 2022 58 million expire 2024 significant categories temporary differences gave rise deferred tax assets liabilities follows tax effected millions tax loss credit carryforwards certain foreign subsidiaries 2014 2013 887 million 292 million respectively unused tax loss credit carryforwards certain foreign subsidiaries 714 million expire 2015 2024 173 million carried forward indefinitely domestic foreign tax credit carryforwards 2014 512 million unused domestic foreign tax credit carryforwards expire 2024 deferred interest carryforwards subsidiaries 2014 2013 2408 million 2187 million respectively carried forward indefinitely company recognizes valuation allowances deferred tax assets reported based weight evidence likely deferred tax assets realized december 31 2014 2013 company held valuation allowances net deferred tax assets certain herbalife ltd subsidiaries notes consolidated financial statements continued subsidiaries primarily related deferred interest expense carryforwards tax loss carryforwards amount 3300 million 2476 million respectively change company’s valuation allowance 2014 824 million related 857 million net additions charged income tax expense primarily relating increases venezuelan tax loss carryforwards deferred interest expense carryforwards reduced 33 million currency translation adjustments recognized within comprehensive income change company’s valuation allowance 2013 383 million related 367 million net additions charged income tax expense primarily relating increases deferred interest expense carryforwards 16 million currency translation adjustments recognized within comprehensive income change company’s valuation allowance 2012 412 million related 402 million net additions charged income tax expense primarily relating increases deferred interest expense carryforwards 10 million currency translation adjustments recognized within comprehensive income december 31 2014 company’s us consolidated group approximately 1049 million unremitted earnings permanently reinvested relating certain foreign subsidiaries addition december 31 2014 herbalife ltd approximately 23 billion permanently reinvested unremitted earnings relating operating subsidiaries since unremitted earnings permanently reinvested deferred taxes provided unremitted earnings practicable determine amount unrecognized deferred taxes respect unremitted earnings company remit unremitted earnings would subject income tax remittances deferred taxes accrued earnings considered indefinitely reinvested deferred tax unremitted foreign earnings december 31 2014 2013 deferred tax asset 10 million deferred tax liability 07 million respectively applicable statutory income tax rate cayman islands zero herbalife ltd years reported purposes reconciliation provision income taxes statutory rate provision income taxes effective tax rate notional 35 tax rate applied follows millions year ended december 31 2012 company benefited terms tax holiday people’s republic china tax holiday commenced january 1 2008 concluded december 31 2012 terms holiday company subject 11 tax rate 2010 12 tax rate 2011 125 tax rate 2012 company subject statutory tax rate 25 2014 2013 december 31 2014 total amount unrecognized tax benefits including related interest penalties 472 million total amount unrecognized tax benefits recognized 380 million unrecognized tax benefits 55 million interest 11 million penalties would impact effective tax herbalife ltd subsidiaries notes consolidated financial statements continued rate december 31 2013 total amount unrecognized tax benefits including related interest penalties 346 million total amount unrecognized tax benefits recognized 284 million unrecognized tax benefits 37 million interest 08 million penalties would impact effective tax rate company accounts interest penalties generated tax contingencies component income tax expense year ended december 31 2014 company recorded increase interest penalty expense related uncertain tax positions 19 million 03 million respectively year ended december 31 2013 company recorded reversal interest penalty expense related uncertain tax positions 16 million 07 million respectively year ended december 31 2012 company recorded increase interest penalty expense related uncertain tax positions 02 million 06 million respectively december 31 2014 total amount interest penalties related unrecognized tax benefits recognized statement financial position 55 million 11 million respectively december 31 2013 total amount interest penalties related unrecognized tax benefits recognized statement financial position 37 million 08 million respectively following changes occurred amount unrecognized tax benefits years ended december 31 2014 2013 2012 millions amount income taxes company pays subject ongoing audits taxing jurisdictions around world company’s estimate potential outcome uncertain tax position subject management’s assessment relevant risks facts circumstances existing time company believes adequately provided matters however company’s future results may include favorable unfavorable adjustments estimates period audits resolved may impact company’s effective tax rate december 31 2014 company’s tax filings generally subject examination major tax jurisdictions years ending december 31 2010 company believes reasonably possible amount unrecognized tax benefits could decrease approximately 102 million within next twelve months possible decrease 59 million would due settlement audits resolution administrative judicial proceedings herbalife ltd subsidiaries notes consolidated financial statements continued remaining possible decrease 43 million would due expiration statute limitations various jurisdictions 13 fair value measurements company applies provisions asc topic 820 fair value measurements disclosures asc 820 financial nonfinancial assets liabilities asc 820 defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date asc 820 establishes fair value hierarchy prioritizes inputs used measuring fair value three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities reporting entity ability access measurement date level 2 inputs include quoted prices similar assets liabilities active markets quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability inputs derived principally corroborated observable market data correlation means level 3 inputs unobservable inputs asset liability company measures certain assets liabilities fair value discussed throughout notes consolidated financial statements foreign exchange currency contracts valued using standard calculations models primarily based inputs observable forward rates spot rates foreign currency exchange rates reporting period ended date company’s derivative assets liabilities measured fair value consisted level 2 inputs amounts shown gross values december 31 2014 december 31 2013 fair value measurements reporting date using herbalife ltd subsidiaries notes consolidated financial statements continued company’s deferred compensation plan assets consist company owned life insurance policies recorded cash surrender value required included fair value table see note 6 employee compensation plans description deferred compensation plan assets following tables summarize offsetting fair values company’s derivative assets derivative liabilities presentation company’s consolidated balance sheet december 31 2014 december 31 2013 herbalife ltd subsidiaries notes consolidated financial statements continued company offsets derivative assets derivative liabilities consolidated balance sheet extent maintains master netting arrangements related financial institutions december 31 2014 december 31 2013 company’s derivatives subject master netting arrangements collateralization required company’s derivative assets derivative liabilities 14 professional fees expenses late 2012 hedge fund manager publicly raised allegations regarding legality company’s network marketing program announced hedge fund manager taken significant short position regarding company’s common shares leading intense public scrutiny significant stock price volatility company believes hedge fund manager’s allegations inaccurate misleading company engaged legal advisory firms assist responding allegations perform related services connection recent events company recognizes related expenses part selling general administrative expenses within consolidated statement income years ended december 31 2014 2013 company recorded approximately 251 million 291 million respectively professional fees expenses related matter approximately 251 million 291 million expenses incurred years ended december 31 2014 2013 respectively discussed approximately 52 million 60 million respectively recognized advisory retainer fees company also party recently terminated agreement contains cash settlement liability award liability award tied company’s stock price vests certain conditions met relating matter fair value liability award revalued quarter settlement company recognize adjust expense expected requisite service period years ended december 31 2014 2013 company recognized benefit 17 million expense 35 million respectively relating liability award included approximately 251 million 291 million expense amounts described december 31 2014 fair value liability award 18 million recognized accrued expenses within company’s consolidated balance sheet 15 subsequent events february 2015 venezuelan government announced introduction modified threetier exchange control system consists cencoex sicad third new mechanism called marginal currency system simadi sicad ii exchange mechanism longer operate february 12 2015 simadi exchange mechanism opened rate 170 bolivars per us dollar published venezuelan government simadi expected operate free currency exchange market herbalife ltd subsidiaries notes consolidated financial statements continued company currently evaluating monitoring development new threetier exchange control system determine appropriate exchange rate remeasurement purposes first quarter 2015 assuming company switches sicad ii rate simadi rate remeasurement purposes first quarter 2015 expects initially incur approximately 35 million foreign exchange losses asset impairment charges simadi rate adopted first quarter 2015 amount foreign exchange losses charges recognized first quarter 2015 determined based company’s latest available facts circumstances march 31 2015 company continue monitor new threetier exchange control system assess financial impact could company’s consolidated financial statements operations venezuela 16 quarterly information unaudited 1 december 31 2014 company revised estimate employee bonus accrual change estimate result company meeting projected targets change estimate resulted cumulative adjustment increased company’s operating income pretax amount 166 million increased company’s 2014 fourth quarter net income 120 million net tax signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereto duly authorized herbalife ltd john g desimone john g desimone chief financial officer dated february 26 2015 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicateditem 15 exhibits financial statement schedules following documents filed part annual report form 10k incorporated herein reference 1 financial statements following financial statements herbalife ltd filed part annual report form 10k pages indicated page herbalife ltd subsidiaries report independent registered public accounting firm consolidated balance sheets december 31 2015 2014 consolidated statements income years ended december 31 2015 2014 2013 consolidated statements comprehensive income years ended december 31 2015 2014 2013 consolidated statements changes shareholders’ deficit equity years ended december 31 2015 2014 2013 consolidated statements cash flows years ended december 31 2015 2014 2013 notes consolidated financial statements 2 financial statement schedules omitted required information inapplicable material information presented consolidated financial statements related notes 3 exhibits listed exhibit index immediately filed part annual report form 10k incorporated reference herein exhibit index exhibit number description reference 31 form amended restated memorandum articles association herbalife ltd n 41 form share certificate c 42 indenture herbalife ltd union bank na trustee dated february 7 2014 governing 200 convertible senior notes due 2019 j 43 form global note 200 convertible senior note due 2019 included exhibit 42 hereto j 101 herbalife international america inc’s senior executive deferred compensation plan effective january 1 1996 amended 102 herbalife international america inc’s management deferred compensation plan effective january 1 1996 amended 103 herbalife international inc 401k profit sharing plan trust amended 104 notice distributors regarding amendment agreements distributorship dated july 18 2002 herbalife international inc herbalife distributor 105 side letter agreement dated april 3 2003 among wh holdings cayman islands ltd michael johnson shareholders listed therein 106 form indemnification agreement herbalife ltd directors certain officers herbalife ltd b 107 amended restated herbalife ltd 2005 stock incentive plan n 108 form herbalife ltd 2005 stock incentive plan stock unit award agreement e 109 form herbalife ltd 2005 stock incentive plan stock appreciation right award agreement e 1010 form herbalife ltd 2005 stock incentive plan stock appreciation right award agreement applicable michael johnson e 1011 form herbalife ltd 2005 stock incentive plan stock appreciation right award agreement applicable richard p goudis e 1012 form herbalife ltd 2005 stock incentive plan stock appreciation right award agreement applicable michael johnson g 1013 form herbalife ltd 2005 stock incentive plan stock appreciation right award agreement applicable richard goudis g 1014 form herbalife ltd 2005 stock incentive plan stock unit award agreement g 1015 form herbalife ltd 2005 stock incentive plan stock appreciation right award agreement g 1016 herbalife ltd employee stock purchase plan h 1017 employment agreement dated march 27 2008 michael johnson herbalife international america inc h 1018 stock appreciation right award agreement herbalife ltd michael johnson dated march 27 2008 h 1019 stock appreciation right award agreement herbalife ltd michael johnson dated march 27 2008 h 1020 amendment herbalife international inc 401k profit sharing plan trust 1021 form independent directors stock appreciation right award agreement n exhibit number description reference 1022 herbalife ltd amended restated independent directors deferred compensation stock unit plan n 1023 amended restated employment agreement richard p goudis herbalife international america inc dated january 1 2010 1024 first amendment amended restated employment agreement richard p goudis herbalife international america inc dated december 28 2010 1025 amended restated nonmanagement directors compensation plan 1026 form herbalife ltd 2005 stock incentive plan nonemployee directors stock appreciation right award agreement 1027 severance agreement john desimone herbalife international america inc dated february 23 2011 1028 amended restated severance agreement dated february 23 2011 desmond walsh herbalife international america inc 1029 credit agreement dated march 9 2011 among herbalife international inc “hii” herbalife ltd herbalife international luxembourg sarl certain subsidiaries hii guarantors lenders time party thereto bank america na administrative agent swing line lender lc issuer e 1030 first amendment dated july 26 2012 credit agreement dated march 9 2011 among herbalife international inc “hii” herbalife ltd herbalife international luxembourg sarl certain subsidiaries hii guarantors lenders time party thereto bank america na administrative agent swing line lender lc issuer g 1031 amendment amended restated herbalife ltd 2005 stock incentive plan f 1032 second amendment dated february 3 2014 credit agreement dated march 9 2011 among herbalife international inc “hii” herbalife ltd herbalife international luxembourg sarl certain subsidiaries hii guarantors lenders time party thereto bank america na administrative agent swing line lender lc issuer 1033 form forward share repurchase confirmation j 1034 form base capped call confirmation j 1035 form additional capped call confirmation j 1036 form herbalife ltd 2005 stock incentive plan performance condition stock appreciation right award agreement j 1037 amended restated support agreement dated march 23 2014 among herbalife ltd carl c icahn partners master fund lp icahn offshore lp icahn partners lp icahn onshore lp beckton corp hopper investments llc barberry corp high river limited partnership icahn capital lp iph gp llc icahn enterprises holdings lp icahn enterprises gp inc k 1038 herbalife ltd 2014 stock incentive plan l 1039 confirmation merrill lynch international herbalife ltd dated may 6 2014 1040 third amendment credit agreement dated may 4 2015 among herbalife ltd herbalife international inc herbalife international luxembourg sarl guarantors part thereto lenders time party thereto bank america na administrative agent swing line lender lc issuer n 1041 herbalife ltd executive incentive plan p 211 subsidiaries registrant exhibit number description reference 231 consent pricewaterhousecoopers llp independent registered public accounting firm 311 rule 13a14a certification chief executive officer 312 rule 13a14a certification chief financial officer 321 section 1350 certification chief executive officer 322 section 1350 certification chief financial officer 101ins xbrl instance document 101sch xbrl taxonomy extension schema document 101cal xbrl taxonomy extension calculation linkbase document 101def xbrl taxonomy extension definition linkbase document 101lab xbrl taxonomy extension label linkbase document 101pre xbrl taxonomy extension presentation linkbase document filed herewith management contract compensatory plan arrangement previously filed october 1 2004 exhibit company’s registration statement form s1 file 333119485 incorporated herein reference b previously filed december 2 2004 exhibit amendment 4 company’s registration statement form s1 file 333119485 incorporated herein reference c previously filed december 14 2004 exhibit amendment 5 company’s registration statement form s1 file 333119485 incorporated herein reference previously filed march 1 2011 exhibit company’s current report form 8k incorporated herein reference e previously filed may 2 2011 exhibit company’s quarterly report form 10q quarter ended march 31 2011 incorporated reference f previously filed april 29 2011 exhibit company’s current report form 8k incorporated herein reference g previously filed july 30 2012 exhibit company’s quarterly report form 10q quarter ended june 30 2012 incorporated herein reference h previously filed april 29 2013 exhibit company’s quarterly report form 10q quarter ended march 31 2013 incorporated herein reference previously filed february 7 2014 exhibit company’s current report form 8k incorporated herein reference j previously filed february 18 2014 exhibit company’s annual report form 10k year ended december 31 2013 incorporated reference k previously filed march 24 2014 exhibit company’s current report form 8k incorporated herein reference l previously filed may 8 2014 exhibit company’s registration statement form s8 file 333195798 incorporated herein reference previously filed july 28 2014 exhibit company’s quarterly report form 10q quarter ended june 30 2014 incorporated herein reference n previously filed may 5 2015 exhibit company’s quarterly report form 10q quarter ended march 31 2015 incorporated herein reference previously filed august 5 2015 exhibit company’s quarterly report form 10q quarter ended june 30 2015 incorporated herein reference p previously filed march 17 2011 appendix c company’s definitive proxy statement schedule 14a incorporated herein reference report independent registered public accounting firm board directors shareholders herbalife ltd opinion accompanying consolidated balance sheets related consolidated statements income comprehensive income changes shareholders’ deficit equity cash flows present fairly material respects financial position herbalife ltd subsidiaries december 31 2015 december 31 2014 results operations cash flows three years period ended december 31 2015 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2015 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions financial statements company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp los angeles california february 25 2016 herbalife ltd subsidiaries consolidated balance sheets see accompanying notes consolidated financial statements herbalife ltd subsidiaries consolidated statements income see accompanying notes consolidated financial statements herbalife ltd subsidiaries consolidated statements comprehensive income see accompanying notes consolidated financial statements herbalife ltd subsidiaries consolidated statements changes shareholders’ deficit equity see accompanying notes consolidated financial statements herbalife ltd subsidiaries consolidated statements cash flows see accompanying notes consolidated financial statements herbalife ltd subsidiaries notes consolidated financial statements 1 organization herbalife ltd cayman islands exempt limited liability company herbalife incorporated april 4 2002 herbalife ltd together subsidiaries “company” global nutrition company sells weight management targeted nutrition energy sports fitness outer nutrition products december 31 2015 company sold products network 40 million independent members included 03 million china company sells products retail stores sales representatives sales officers independent service providers company reports revenue six geographic regions north america mexico south central america emea consists europe middle east africa asia pacific excluding china 2 basis presentation company’s consolidated financial statements refer herbalife subsidiaries new accounting pronouncements may 2014 financial accounting standards board fasb issued accounting standards update asu 201409 revenue contracts customers topic 606 new revenue recognition standard provides fivestep analysis transactions determine revenue recognized core principle company recognize revenue depict transfer promised goods services customers amount reflects consideration entity expects entitled exchange goods services august 2015 fasb issued asu 201514 revenue contracts customers topic 606 deferral effective date defers effective date asu 201409 entities one year annual reporting periods beginning december 15 2017 asu shall applied either retrospectively period presented cumulativeeffect adjustment date adoption early adoption permitted original effective date december 15 2016 company evaluating potential impact adoption guidance consolidated financial statements june 2014 fasb issued asu 201412 compensationstock compensation topic 718 accounting sharebased payments terms award provide performance target could achieved requisite service period consensus fasb emerging issues task force asu clarifies performance target affects vesting could achieved requisite service period treated performance condition reporting entity apply existing guidance topic 718 relates awards performance conditions affect vesting account awards performance target reflected estimating grantdate fair value award compensation cost recognized period becomes probable performance target achieved represent compensation cost attributable periods requisite service already rendered asu effective annual periods interim periods within years beginning december 15 2015 early adoption permitted asu may applied either prospectively awards granted modified effective date b retrospectively awards performance targets outstanding beginning earliest annual period presented financial statements new modified awards thereafter adoption guidance material impact company’s consolidated financial statements august 2014 fasb issued asu 201415 presentation financial statements going concern subtopic 20540 purpose asu incorporate us generally accepted accounting principles us gaap management’s responsibility evaluate whether substantial doubt entity’s ability continue going concern within one year date financial statements issued within one year date financial statements available issued applicable provide related footnote disclosures update effective annual period ending december 15 2016 annual periods interim periods thereafter early application permitted adoption guidance material impact company’s consolidated financial statements herbalife ltd subsidiaries notes consolidated financial statements continued january 2015 fasb issued asu 201501 income statementextraordinary unusual items subtopic 22520 simplifying income statement presentation eliminating concept extraordinary items asu part fasb’s initiative reduce complexity accounting standards asu eliminates us gaap concept extraordinary items previously required segregated results ordinary operations shown separately income statement net tax income continuing operations entities also required disclose applicable income taxes extraordinary item either present disclose earningspershare data applicable extraordinary item items considered unusual infrequent presented separately within income continuing operations income statement disclosed notes financial statements update effective fiscal years interim periods within fiscal years beginning december 15 2015 companies may apply asu prospectively may also apply amendments retrospectively prior periods presented financial statements early adoption permitted provided guidance applied beginning fiscal year adoption guidance material impact company’s consolidated financial statements february 2015 fasb issued asu 201502 consolidation topic 810 amendments consolidation analysis asu changes analysis reporting entities must perform determine certain types legal entities consolidated specifically asu focuses 1 variable interest entity vie evaluation limited partnerships similar legal entities 2 eliminating presumption general partners consolidate limited partnership 3 consolidation analysis reporting entities involved vies 4 scope exceptions consolidation guidance reporting entities interests legal entities required comply operate accordance requirements similar rule 2a7 investment company act 1940 registered money market funds update effective fiscal years interim periods within fiscal years beginning december 15 2015 early adoption permitted including adoption interim period asu adopted interim period adjustments reflected beginning fiscal year includes interim period asu may applied using modified retrospective approach recording cumulativeeffect adjustment beginning fiscal year adoption reporting entity also may apply amendments retrospectively adoption guidance material impact company’s consolidated financial statements april 2015 fasb issued asu 201503 interestimputation interest subtopic 83530 simplifying presentation debt issuance costs asu requires debt issuance costs related recognized debt liability presented balance sheet direct deduction carrying amount debt liability consistent debt discounts current us gaap debt issuance costs recognized deferred charge asset recognition measurement guidance debt issuance costs affected amendments asu august 2015 fasb issued asu 201515 interestimputation interest subtopic 83530 presentation subsequent measurement debt issuance costs associated lineofcredit arrangements asu clarifies presentation subsequent measurement debt issuance costs associated lines credit costs may presented asset amortized ratably term line credit arrangement updates effective fiscal years interim periods within fiscal years beginning december 15 2015 early adoption permitted financial statements previously issued reporting entity apply amendments retrospectively wherein balance sheet individual period presented adjusted reflect periodspecific effects applying asu company early adopted asu 201503 december 31 2015 applied provisions retrospectively periods presented adoption asu 201503 resulted reclassification 199 million unamortized debt issuance costs previously recorded asset recorded deduction carrying value company’s convertible senior notes term loan december 31 2014 see note 4 longterm debt information reclassification adoption asu 201503 impact company’s consolidated financial statements april 2015 fasb issued asu 201505 intangiblesgoodwill internaluse software subtopic 35040 customer’s accounting fees paid cloud computing arrangement asu adds explicit guidance us gaap regarding customer’s accounting fees paid cloud computing arrangement asu provides guidance customers whether cloud computing arrangement includes software license cloud computing arrangement includes software license customer account software license element arrangement consistent acquisition software licenses cloud computing arrangement include software license customer account arrangement service contract update effective fiscal years interim periods within fiscal years beginning december 15 2015 early adoption permitted reporting entity apply amendments either 1 prospectively arrangements entered materially modified effective date 2 retrospectively adoption guidance material impact company’s consolidated financial statements herbalife ltd subsidiaries notes consolidated financial statements continued may 2015 fasb issued asu 201507 fair value measurement topic 820 disclosures investment certain entities calculate net asset value per share equivalent asu applies reporting entities elect measure fair value investment using net asset value nav per share equivalent practical expedient asu removes requirement categorize within fair value hierarchy investments fair value measured using nav per share practical expedient amendments also remove requirement make certain disclosures investments eligible measured fair value using nav per share practical expedient rather disclosures limited investments entity elected measure fair value using practical expedient amendments asu effective reporting periods beginning december 15 2015 early adoption permitted entities apply amendments update retrospectively periods presented adoption guidance material impact company’s consolidated financial statements july 2015 fasb issued asu 201511 inventory topic 330 simplifying measurement inventory asu apply inventory measured using lastin firstout lifo retail inventory method amendments apply inventory includes inventory measured using firstin firstout fifo average cost asu eliminates us gaap requirement measure inventory lower cost market previous requirement could replacement cost net realizable value net realizable value less approximately normal profit margin entities within scope update required measure inventory lower cost net realizable value net realizable value estimated selling prices ordinary course business less reasonably predictable costs completion disposal transportation subsequent measurement unchanged inventory using lifo retail inventory method amendments update effective fiscal years beginning december 15 2016 early adoption permitted applied prospectively adoption guidance material impact company’s consolidated financial statements november 2015 fasb issued asu 201517 income taxes topic 740 balance sheet classification deferred taxes asu simplifies presentation deferred taxes requiring deferred tax assets liabilities presented noncurrent balance sheet asu 201517 effective annual reporting periods interim periods therein beginning december 15 2016 early adoption permitted amendments may applied either prospectively deferred tax liabilities assets retrospectively periods presented company evaluating potential impact adoption consolidated financial statements january 2016 fasb issued asu 201601 financial instruments overall subtopic 82510 recognition measurement financial assets financial liabilities updated guidance enhances reporting model financial instruments modifying entities measure recognize equity investments present changes fair value financial liabilities simplifying disclosure guidance financial instruments amendments update effective fiscal years beginning december 15 2017 amendments update applied prospectively company evaluating potential impact adoption consolidated financial statements significant accounting policies consolidation policy consolidated financial statements include accounts herbalife ltd subsidiaries significant intercompany transactions accounts eliminated foreign currency translation transactions majority countries company operates functional currency local currency company’s foreign subsidiaries’ asset liability accounts translated consolidated financial reporting purposes us dollar amounts yearend exchange rates revenue expense accounts translated average rates year foreign exchange translation adjustments included accumulated comprehensive loss accompanying consolidated balance sheets foreign currency transaction gains losses include cost foreign currency derivative contracts related settlement gains losses excluding certain foreign currency derivatives designated cash flow hedges discussed note 11 derivative instruments hedging activities included selling general administrative expenses accompanying consolidated statements income company recorded net foreign currency transaction losses 347 million 2190 million 379 million years ended december 31 2015 2014 2013 respectively includes foreign exchange impact relating company’s venezuelan subsidiary herbalife venezuela herbalife venezuela’s foreign currency financial statement impact discussed within note herbalife ltd subsidiaries notes consolidated financial statements continued forward exchange contracts interest rate swaps company enters foreign currency derivatives primarily comprised foreign currency forward contracts managing foreign exchange risk sales members inventory purchases denominated foreign currencies intercompany transactions bank loans company also previously entered interest rate swaps managing interest rate risk variable rate credit facility company use contracts trading purposes accordance fasb accounting standards codification asc topic 815 derivatives hedging asc 815 company designates certain derivative instruments cash flow hedges formally documents hedge relationships including identification hedging instruments hedged items well risk management objectives strategies undertaking hedge transaction time derivative contract executed company assesses effectiveness hedge inception ongoing basis determines whether hedge highly perfectly effective offsetting changes cash flows hedged item company records effective portion changes estimated fair value accumulated comprehensive income loss subsequently reclassifies related amount accumulated comprehensive income loss earnings hedged item underlying transaction impacts earnings determined derivative ceased highly effective hedge company discontinue hedge accounting transaction derivatives designated hedges changes estimated fair value recognized consolidated statements income cash equivalents company considers highly liquid investments purchased maturity three months less cash equivalents cash equivalents comprised primarily foreign domestic bank accounts money market funds cash equivalents valued based level 1 inputs consist quoted prices active markets reduce credit risk company monitors credit standing financial institutions hold company’s cash equivalents company cash pooling arrangement financial institution cash management purposes cash pooling arrangement allows certain company’s participating subsidiaries withdraw cash financial institution based upon company’s aggregate cash deposits held subsidiaries participate cash pooling arrangement extent participating location individual basis overdraft position overdrafts recorded liabilities reflected financing activities company’s consolidated balance sheet consolidated statement cash flows respectively december 31 2015 december 31 2014 company owe amounts financial institution december 31 2015 2014 company’s subsidiary venezuela herbalife venezuela 77 million 364 million respectively bolivar denominated cash equivalents please see remeasurement herbalife venezuela’s monetary assets liabilities description herbalife venezuela’s cash equivalents balances accounts receivable accounts receivable consist principally receivables credit card companies arising sale products company’s members receivables importers utilized limited number countries sell products members company believes concentration collection risk related credit card receivables diminished due geographic dispersion receivables credit card companies 493 million 576 million december 31 2015 2014 respectively substantially receivables credit card companies current december 31 2015 2014 although receivables importers significant company performs ongoing credit evaluations importers maintains allowance potential credit losses company considers customer creditworthiness past current transaction history customer contractual terms current economic industry trends changes customer payment terms determining whether collectability reasonably assured whether record allowances receivables financial condition company’s customers deteriorates adversely affects ability make payments additional allowances recorded company believes provides adequate allowances receivables members importers material consolidated financial statements years ended december 31 2015 2014 2013 company recorded 37 million 22 million 21 million respectively baddebt expense related allowances company’s receivables december 31 2015 2014 company’s allowance doubtful accounts 15 million 19 million respectively december 31 2015 2014 majority company’s total outstanding accounts receivable current herbalife ltd subsidiaries notes consolidated financial statements continued fair value financial instruments company applies provisions fasb authoritative guidance applies financial nonfinancial assets liabilities fasb authoritative guidance clarifies definition fair value prescribes methods measuring fair value establishes fair value hierarchy based inputs used measure fair value expands disclosures fair value measurements company estimated fair value financial instruments using following methods assumptions · carrying amounts cash equivalents receivables accounts payable approximate fair value due shortterm maturities instruments · fair value availableforsale investments based prices similar assets traded active markets observable yield curves · fair value option forward contracts based dealer quotes · company’s variable rate revolving credit facility recorded carrying value considered approximate fair value company’s convertible senior notes issued february 2014 convertible notes recorded carrying value fair value determined using two valuation methods company reviewed market data available publicly traded senior unsecured nonconvertible corporate bonds issued companies similar credit ratings assumptions used estimate represent market participants would use pricing liability component including market yields credit standing develop straight debt yield estimate company also used lattice model included inputs stock price convertible notes trading price volatility dividend yield december 31 2015 estimate straight debt yield company combined results two valuation methods determine fair value liability component convertible notes see note 4 longterm debt description inventories stated lower cost primarily firstin firstout basis market debt issuance costs debt issuance costs represent fees expenses related borrowing company’s longterm debt amortized term related debt using effective interest method debt issuance costs except company’s revolving credit facility recorded reduction debt contraliability within company’s consolidated balance sheet total amortization expense related debt issuance costs 85 million 68 million 26 million years ended december 31 2015 2014 2013 respectively december 31 2015 2014 company’s remaining unamortized debt issuance cost 198 million 220 million respectively longlived assets december 31 2015 2014 company’s net property plant equipment consisted following millions herbalife ltd subsidiaries notes consolidated financial statements continued 1 yearend 2015 company determined property plant equipment cost accumulated depreciation december 31 2014 previously reported understated approximately 90 million understatements offset one another impact company’s net property plant equipment balances consolidated balance sheets december 31 2014 2013 impact company’s operating results cash flows years ended december 31 2014 2013 2012 including interim periods within years property plant equipment cost accumulated depreciation december 31 2014 table revised correct immaterial impact offsetting understatements comparative purposes december 2012 company purchased approximate 800000 square foot facility winstonsalem north carolina approximately 222 million december 31 2015 2014 company allocated 188 million 34 million buildings land respectively based relative fair values december 31 2015 2014 amounts reflected property plant equipment company’s accompanying consolidated balance sheet depreciation furniture fixtures equipment includes computer hardware software computed straightline basis estimated useful lives related assets range three ten years company capitalizes eligible costs acquire develop internaluse software incurred subsequent preliminary project stage computer hardware software majority comprised capitalized internaluse software costs 1402 million 1588 million december 31 2015 2014 respectively net accumulated depreciation leasehold improvements amortized straightline basis life related asset term lease whichever shorter buildings depreciated 40 years building improvements generally depreciated ten fifteen years land depreciated depreciation amortization expenses recorded selling general administrative expenses totaled 825 million 815 million 811 million years ended december 31 2015 2014 2013 respectively longlived assets reviewed impairment based undiscounted cash flows whenever events changes circumstances indicate carrying amount assets may recoverable measurement impairment loss based estimated fair value asset goodwill marketing related intangible assets indefinite lives evaluated annual basis impairment frequently events changes circumstances indicate asset might impaired goodwill company uses discounted cash flow approach estimate fair value reporting unit fair value reporting unit less carrying value implied fair value goodwill must determined implied fair value goodwill less carrying value goodwill impairment amount recorded difference marketing related intangible assets company uses discounted cash flow model relieffromroyalty method order determine fair value fair value less carrying value impairment amount recorded difference years ended december 31 2015 2014 2013 additions goodwill marketing related intangible assets impairments goodwill marketing related intangible assets december 31 2015 2014 marketing related intangible asset balance 3100 million consisted company’s trademark trade name marketing franchise december 31 2015 2014 goodwill balance 918 million 1022 million respectively decrease goodwill year ended december 31 2015 due cumulative translation adjustments income taxes income tax expense includes income taxes payable current year change deferred income tax assets liabilities future tax consequences events recognized company’s financial statements income tax returns valuation allowance recognized reduce carrying value deferred income tax assets believed likely component deferred income tax assets realized company accounts uncertainty income taxes accordance fasb authoritative guidance clarifies accounting reporting uncertainties income taxes recognized enterprise’s financial statements guidance prescribes comprehensive model financial statement recognition measurement presentation disclosure uncertain tax positions taken expected taken income tax returns see note 12 income taxes description income taxes herbalife ltd subsidiaries notes consolidated financial statements continued royalty overrides member may earn commissions called royalty overrides include production bonuses based retail sales volume royalty overrides based retail sales volume certain members sponsored directly indirectly member royalty overrides recorded products delivered revenue recognized royalty overrides compensation members services rendered including development retention improved productivity sales organizations royalty overrides classified operating expense nonus royalty override checks aged variety reasons beyond certainty paid taken back income management estimated period certainty three years worldwide comprehensive income comprehensive income consists net income foreign currency translation adjustments effective portion unrealized gains losses derivatives unrealized gains losses availableforsale investments components accumulated comprehensive income loss consisted following millions operating leases company leases physical properties operating leases certain lease agreements generally include rent holidays tenant improvement allowances company recognizes rent holiday periods straightline basis lease term beginning company right leased space company also records tenant improvement allowances rent holidays deferred rent liabilities amortizes deferred rent terms lease rent expense research development company’s research development performed inhouse staff outside consultants periods presented research development costs expensed incurred material government grants government grants recorded income legal right grant exists reasonable assurance grant proceeds received conditions government grants provided met years ended december 31 2015 2014 2013 company recognized grant income approximately 79 million 15 million 02 million respectively selling general administrative expenses within consolidated statements income professional fees company expenses professional fees including legal fees incurred professional fees included selling general administrative expenses company’s consolidated statements income advertising costs including company sponsorships expensed incurred amounted approximately 661 million 697 million 579 million years ended december 31 2015 2014 2013 respectively expenses included selling general administrative expenses accompanying consolidated statements income herbalife ltd subsidiaries notes consolidated financial statements continued earnings per share basic earnings per share represents net income period common shares outstanding divided weighted average number common shares outstanding period diluted earnings per share represents net income divided weighted average number common shares outstanding inclusive effect dilutive securities outstanding stock options sars stock units following common share amounts used compute basic diluted earnings per share period millions aggregate 54 million 27 million 30 million equity grants consisting stock options sars stock units outstanding years ended december 31 2015 2014 2013 respectively included computation diluted earnings per share effect would antidilutive performance condition award satisfied since company settle principal amount convertible notes cash settle conversion feature amount conversion price common shares conversion spread company uses treasury stock method calculating potential dilutive effect conversion spread diluted earnings per share applicable conversion spread dilutive impact diluted earnings per share average market price company’s common shares given period exceeds initial conversion price 8628 per share years ended december 31 2015 2014 convertible notes excluded computation diluted earnings per share effect would antidilutive since conversion price convertible notes exceeded average market price company’s common shares years ended december 31 2015 2014 initial conversion rate conversion price described note 4 longterm debt capped call transactions executed connection issuance convertible notes excluded calculation diluted earnings per share impact always antidilutive revenue recognition company generally recognizes revenue upon delivery title risk rewards pass member importer products sold retail stores china company’s independent service providers china product sales recognized net product returns discounts referred “distributor allowances” net sales include product sales shipping handling revenues shipping handling costs paid company included cost sales company generally receives net sales price cash credit card payments point sale company currently presents sales taxes collected customers net basis allowances product returns primarily connection company’s buyback program provided time sale recorded accrual based upon historical return rates country relevant return pattern reflects anticipated returns received period 12 months following original sale allowances product returns 39 million 43 million 47 million december 31 2015 2014 2013 respectively product returns 50 million 73 million 97 million years ended december 31 2015 2014 2013 respectively noncash investing financing activities years ended december 31 2015 2014 2013 company recorded 123 million 123 million 296 million respectively noncash capital expenditures addition year ended december 31 2015 company recorded 150 million noncash release deposits escrow used reduce company’s accrued expense liability herbalife ltd subsidiaries notes consolidated financial statements continued year ended december 31 2015 company recorded 173 million noncash borrowings used finance software maintenance see note 8 shareholders’ deficit equity information company’s noncash financing activities related prepaid forward share repurchases transaction sharebased payments company accounts sharebased compensation accordance fasb authoritative guidance requires measurement sharebased compensation expense sharebased payment awards made employees company measures sharebased compensation cost grant date based fair value award company recognizes sharebased compensation expense service condition awards straightline basis employee’s requisite service period company recognizes sharebased compensation expense performance condition awards vesting term using graded vesting method use estimates preparation financial statements conformity us gaap requires management make estimates assumptions estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates company evaluates estimates assumptions ongoing basis using historical experience factors including current economic environment company believes reasonable circumstances company adjusts estimates assumptions facts circumstances dictate illiquid credit markets volatile equity foreign currency combined increase uncertainty inherent estimates assumptions future events effects cannot determined precision actual results could differ estimates changes estimates resulting continuing changes economic environment reflected financial statements future periods currency restrictions venezuela herbalife venezuela company’s venezuelan subsidiary imported products venezuela recently company began importing raw materials venezuela local contract manufacturer produce certain key products foreign exchange controls country limit herbalife venezuela’s ability repatriate earnings settle intercompany obligations official rate result company’s bolivardenominated cash equivalents continued accumulate increasing potential impact currency devaluation current operating environment venezuela also continues challenging company’s venezuela business high inflation pricing limitations importation delays risk government devalue bolivar june 2010 venezuelan government introduced additional regulations new regulated system sitme controlled central bank venezuela sitme provided mechanism exchange bolivars us dollars purchase sale us dollar denominated bonds issued venezuela however sitme available certain limited circumstances specifically sitme could used product purchases available matters payment dividends also sitme could used amounts 50000 per day 350000 per month generally available extent applicant exchanged received us dollars via cadivi process within previous 90 days effective january 1 2012 additional laws enacted required companies register registry users system transactions securities foreign currency rusitme prior transacting sitme regulated system controlled central bank venezuela february 2013 venezuela government announced devalued bolivar currency would eliminate sitme regulated system sitme 53 bolivars per us dollar rate eliminated cadivi rate devalued 43 bolivars 63 bolivars per us dollar herbalife ltd subsidiaries notes consolidated financial statements continued march 2013 venezuelan government also announced introduction additional exchange mechanism sicad first quarter 2014 venezuelan government announced establishment cencoex replaced previous foreign exchange commission cadivi also first quarter 2014 government announced additional activities processing dividend payments previously administered cadivi required processed sicad rate march 2014 government introduced additional exchange mechanism known sicad ii february 2015 venezuelan government announced introduction modified threetier exchange control system consists cencoex sicad third new mechanism called marginal currency system simadi sicad ii exchange mechanism terminated alternative exchange mechanism company also participated certain bond offerings venezuelan government petróleos de venezuela sa pdvsa venezuelan stateowned petroleum company effectively purchased bonds bolivars sold bonds us dollars instances company also used alternative legal exchange mechanisms currency exchanges highly inflationary economy accounting venezuela’s inflation rate measured using blended national consumer price index consumer price index rate exceeded threeyear cumulative inflation rate 100 december 31 2009 accordingly effective january 1 2010 venezuela considered highly inflationary economy pursuant highly inflationary basis accounting us gaap herbalife venezuela changed functional currency bolivar us dollar subsequent movements bolivar us dollar exchange rate impact company’s consolidated earnings prior january 1 2010 bolivar functional currency movements bolivar us dollar recorded component equity comprehensive income pursuant highly inflationary accounting rules company longer translates herbalife venezuela’s financial statements functional currency us dollar remeasurement herbalife venezuela’s monetary assets liabilities prior february 2013 company used sitme rate 53 bolivars per us dollar remeasure bolivar denominated transactions year ended december 31 2012 company accessed sitme market order exchange bolivars us dollars although daily monthly restrictions existed instances company recognized aggregate 48 million foreign exchange losses result exchanging bolivars us dollars using alternative legal exchange mechanisms approximately 43 less favorable 53 bolivars per us dollar published sitme rate year ended december 31 2012 company exchanged 592 million bolivars 64 million us dollars using alternative legal exchange mechanisms following venezuelan government’s devaluation bolivar us dollar elimination sitme regulated system february 2013 company used new cadivi rate 63 bolivars per us dollar remeasure bolivar denominated transactions new cadivi rate approximately 16 less favorable previously published 53 sitme rate company recognized approximately 151 million net foreign exchange losses within consolidated statement income first quarter 2013 result remeasuring company’s bolivar denominated monetary assets liabilities new cadivi rate 63 bolivars per us dollar majority foreign exchange losses related approximately 169 million devaluation herbalife venezuela’s bolivar denominated cash equivalents year ended december 31 2013 company also recognized 07 million foreign exchange losses result exchanging bolivars us dollars using alternative legal exchange mechanisms approximately 75 less favorable new cadivi rate year ended december 31 2013 company exchanged 56 million bolivars 02 million us dollars using alternative legal exchange mechanisms fourth quarter 2013 company received approval sicad mechanism exchange approximately 68 million bolivars approximately 11 million us dollars remeasured using cadivi rate distribution approximately 06 million us dollars resulting foreign exchange loss approximately 05 million effective exchange rate 113 bolivars per us dollar march 2014 company submitted sicad ii bid exchange 53 million bolivars 01 million us dollars approved resulted company recognizing 07 million us dollar foreign exchange loss effective exchange rate approximately 562 bolivars per us dollar march 31 2014 limited information published around sicad ii mechanism difficult determine mechanism functioned mechanism volume constraints herbalife ltd subsidiaries notes consolidated financial statements continued based events company’s facts circumstances time company remeasured financial statements sicad rate 107 bolivars per us dollar march 31 2014 result using less favorable sicad rate remeasurement three months ended march 31 2014 company’s cash equivalents reduced approximately 960 million company recognized 861 million foreign exchange losses selling general administrative expenses within consolidated statement income second third quarters 2014 company receive approvals exchange bolivars us dollars using sicad ii mechanisms company recognized 02 million 171 million foreign exchange losses relating unfavorable changes sicad rate three months ended june 30 2014 three months ended september 30 2014 respectively october 2014 company exchanged bolivars small amount us dollars sicad ii rate company continued applying us dollars using sicad ii mechanism regular basis december 31 2014 conversely company’s ability convert bolivars us dollars sicad rate improve accordingly september 30 2014 company remeasured financial statements sicad ii rate 500 bolivars per us dollar recognized 980 million additional foreign exchange losses result using less favorable sicad ii rate company’s cash equivalents consolidated balance sheet reduced approximately 1025 million company recognized 76 million inventory write downs cost sales 70 million long lived asset impairments selling general administrative expenses within consolidated statement income third quarter 2014 company remeasured financial statements using sicad ii rate 500 bolivars per us dollar december 31 2014 march 31 2015 company used simadi exchange rate remeasure venezuelan subsidiary’s financial statements year ended december 31 2015 company recognized 329 million foreign exchange losses selling general administrative expenses 20 million inventory write downs cost sales within consolidated statement income company continues use simadi exchange rate remeasurement 1987 bolivars per us dollar december 31 2015 year ended december 31 2015 company also entered transactions effectively convert 15 billion bolivars 18 million us dollars due financing nature transactions company recognized loss 56 million interest expense within statement income due evolving foreign exchange control environment venezuela possible company’s ability access certain foreign exchange mechanisms including simadi rate could change future periods may impact rate company uses remeasure herbalife venezuela’s bolivardenominated assets liabilities company continues using simadi rate remeasurement purposes future periods future us dollars obtained sicad favorable mechanisms could positive impact company’s consolidated net earnings addition devaluations simadi rate adoption less favorable official rates venezuelan government us dollars obtained less favorable alternative legal exchange mechanisms could negative impact company’s future consolidated net earnings company closely monitoring cencoex sicad simadi exchange mechanisms continue evolve december 31 2015 december 31 2014 herbalife venezuela’s net monetary assets liabilities denominated bolivars approximately 67 million 351 million respectively included approximately 77 million 364 million respectively bolivar denominated cash equivalents noted bolivar denominated assets liabilities remeasured simadi rate december 31 2015 sicad ii rate december 31 2014 remeasured amounts including cash equivalents reported company’s consolidated balance sheet using published simadi rate may accurately represent amount us dollars company ultimately realize company continues monitor exchange mechanisms restrictions imposed venezuelan government assess monitor current economic political environment venezuela assurance company able exchange bolivars us dollars timely basis february 2016 government announced reduce threetier system exchange rates two tiers eliminating sicad exchange mechanism cencoex simadi exchange mechanisms continue government also announced simadi exchange mechanism improved floating system company closely monitoring exchange mechanisms continue evolve devaluation simadi exchange rate future periods company could incur foreign exchange losses related charges 2016 fiscal year herbalife ltd subsidiaries notes consolidated financial statements continued consolidation herbalife venezuela company continues operate venezuela increasing foreign currency constraints continue create significant challenges herbalife venezuela october 2014 herbalife venezuela executed contract venezuelan contract manufacturer locally manufacture products sold herbalife venezuela bolivars company expects local contract manufacturer begin manufacturing products herbalife venezuela first half 2016 ongoing transition local manufacturing products attempt create selfsustaining economically viable business model operate venezuela however company’s local contract manufacturing effort dependent ability convert bolivars us dollars pay raw materials sourced venezuela strategies company implemented limit financial exposure currency restrictions devaluations venezuela operation continues support members consumers include operating hour limitations order size limitations limiting member promotions events local bolivardenominated expenses limiting importation products venezuela herbalife venezuela continue apply legal exchange mechanisms convert bolivars us dollars despite currency exchange restrictions venezuela company continues control herbalife venezuela operations therefore company continues consolidate herbalife venezuela consolidated financial statements herbalife venezuela’s net sales represented less 1 approximately 3 6 company’s consolidated net sales years ended december 31 2015 2014 2013 respectively total assets represented less 1 approximately 2 company’s consolidated total assets december 31 2015 2014 respectively investments bolivardenominated bonds fourth quarter 2013 company began investing bolivar denominated bonds issued venezuelan government company classifies bonds longterm availableforsale investments carried fair value inclusive unrealized gains losses net discount accretion premium amortization fair value bonds determined using level 2 inputs include prices similar assets traded active markets venezuela observable yield curves net unrealized gains losses bonds included comprehensive income loss net applicable income taxes december 31 2015 2014 amortized cost company’s venezuelan bonds 12 million 34 million respectively bonds market value 11 million 37 million respectively years ended december 31 2015 2014 2013 company sell bonds company evaluates securities otherthantemporary impairment quarterly basis otherthantemporary impairments relating availableforsale securities years ended december 31 2015 2014 23 million 130 million respectively recognized expense net company’s consolidated income statement otherthantemporary impairments primarily due unfavorable foreign exchange rates otherthantemporary impairments relating availableforsale securities year ended december 31 2013 3 inventories consist primarily finished goods available resale categorized follows millions herbalife ltd subsidiaries notes consolidated financial statements continued following major classes inventory millions 4 longterm debt longterm debt consists following millions 1 company adopted asu 201503 fourth quarter 2015 reclassified 182 million 17 million deferred financing costs net longterm debt net current portion resulting deduction carrying value company’s senior convertible notes term loan respectively within december 31 2014 consolidated balance sheet see note 2 basis presentation information senior secured credit facility march 9 2011 company entered 7000 million senior secured revolving credit facility credit facility syndicate financial institutions lenders terminated prior senior secured credit facility prior credit facility march 2011 company used 1960 million us dollar borrowings credit facility repay amounts outstanding prior credit facility company incurred approximately 57 million debt issuance costs connection credit facility debt issuance costs recorded company’s consolidated balance sheet amortized term credit facility july 26 2012 company amended credit facility include 5000 million term loan syndicate financial institutions lenders term loan term loan part credit facility addition company’s current revolving credit facility term loan matures march 9 2016 company make regular scheduled payments term loan consisting principal interest components july 2012 company used 5000 million borrowings term loan pay amounts outstanding company’s revolving credit facility company incurred approximately 45 million debt issuance costs connection term loan debt issuance costs recorded company’s consolidated balance sheet amortized life term loan herbalife ltd subsidiaries notes consolidated financial statements continued february 2014 connection issuing 115 billion convertible notes described company amended credit facility pursuant amendment company amended terms credit facility provide technical amendments indebtedness asset sale dividend covenants crossdefault event default accommodate issuance convertible notes capped call prepaid forward share repurchase transactions described greater detail note 8 shareholders’ deficit equity amendment also increased 050 highest applicable margin payable herbalife event herbalife’s consolidated total leverage ratio equal exceeds 250 100 increased permitted consolidated total leverage ratio herbalife credit facility company incurred approximately 23 million debt issuance costs connection amendment debt issuance costs recorded company’s consolidated balance sheet amortized life credit facility may 4 2015 company amended credit facility extend maturity date revolving credit facility one year march 9 2017 term loan mature march 9 2016 pursuant amendment upon execution company made prepayments approximately 203 million 509 million term loan revolving credit facility respectively additionally company’s 700 million borrowing capacity revolving credit facility reduced approximately 2359 million upon execution amendment reduced approximately 391 million september 30 2015 bringing total available borrowing capacity revolving credit facility 4250 million december 31 2015 march 9 2016 interest rates company’s borrowings credit facility effectively remain unchanged except minimum applicable margin increased 050 libor minimum floor 025 based company’s consolidated leverage ratio us dollar borrowings credit facility bear interest either libor plus applicable margin 200 300 base rate plus applicable margin 100 200 base rate credit facility represents highest federal funds rate plus 050 onemonth libor plus 100 prime rate offered bank america company based consolidated leverage ratio pays commitment fee 040 050 per annum unused portion credit facility credit facility also permits company borrow limited amounts mexican peso euro currencies based variable rates obligations credit facility unconditionally guaranteed certain company’s subsidiaries secured substantially assets us subsidiaries parent company herbalife ltd certain assets certain foreign subsidiaries herbalife ltd march 9 2016 applicable interest rates company’s borrowings credit facility increase 200 borrowings credit facility bear interest either libor plus applicable margin 400 500 base rate plus applicable margin 300 400 company incurred approximately 62 million debt issuance costs connection amendment debt issuance costs recorded company’s consolidated balance sheet amortized life revolving credit facility credit facility requires company comply leverage ratio coverage ratio addition credit facility contains customary covenants including covenants limit restrict company’s ability incur liens incur indebtedness make investments dispose assets make certain restricted payments pay dividends repurchase common shares merge consolidate enter certain transactions affiliates credit facility restricts company’s ability pay dividends repurchase common shares maximum 2330 million maturity every one dollar share repurchase dividend paid revolving credit facility’s borrowing capacity permanently decreased two dollars credit facility also provides grant security interest certain additional assets company subsidiaries company also required maintain minimum balance 2000 million consolidated cash equivalents december 31 2015 december 31 2014 company compliant debt covenants credit facility december 31 2015 december 31 2014 weighted average interest rate borrowings credit facility including borrowings term loan 278 304 respectively 2015 company make borrowings paid total amount 2103 million credit facility 2014 company borrowed aggregate amount 500 million paid total amount 1313 million credit facility 2013 company borrowed aggregate amount 7630 million paid total amount 3192 million credit facility december 31 2015 december 31 2014 us dollar amount outstanding credit facility 6397 million 8500 million respectively 6397 million us dollar amount outstanding credit facility december 31 2015 2297 million outstanding term loan 4100 million outstanding revolving credit facility 8500 million us dollar amount outstanding credit facility december 31 2014 3500 million outstanding term loan 5000 million outstanding revolving credit facility outstanding foreign currency borrowings december 31 2015 december 31 2014 credit facility herbalife ltd subsidiaries notes consolidated financial statements continued fair value outstanding borrowings company’s revolving credit facility term loan approximated carrying values december 31 2015 2014 due variable interest rates reprice frequently represent floating market rates fair value outstanding borrowings company’s revolving credit facility term loan determined utilizing level 2 inputs defined note 13 fair value measurements observable market interest rates yield curves convertible senior notes february 2014 company initially issued 1 billion aggregate principal amount convertible senior notes convertible notes private offering qualified institutional buyers pursuant rule 144a securities act 1933 amended company granted option initial purchasers purchase additional 150 million aggregate principal amount convertible notes subsequently exercised full february 2014 resulting total issuance 115 billion aggregate principal amount convertible notes convertible notes senior unsecured obligations rank effectively subordinated existing future secured indebtedness including amounts outstanding credit facility extent value assets securing indebtedness convertible notes pay interest rate 200 per annum payable semiannually arrears february 15 august 15 year beginning august 15 2014 convertible notes mature august 15 2019 unless earlier repurchased converted company may redeem convertible notes prior stated maturity date holders convertible notes may convert notes option following circumstances calendar quarter commencing calendar quarter ending march 31 2014 last reported sale price company’s common shares least 20 trading days whether consecutive period 30 consecutive trading days ending including last trading day immediately preceding calendar quarter exceeds 130 conversion price convertible notes applicable trading day ii five businessday period immediately five consecutive trading day period measurement period trading price per 1000 principal amount convertible notes trading day measurement period less 98 product last reported sale price company’s common shares conversion rate convertible notes day iii upon occurrence specified corporate events may 15 2019 holders may convert convertible notes time regardless foregoing circumstances upon conversion convertible notes settled cash applicable company’s common shares based applicable conversion rate time convertible notes initial conversion rate 115908 common shares per 1000 principal amount convertible notes equal initial conversion price approximately 8628 per common share company incurred approximately 266 million issuance costs first quarter 2014 relating issuance convertible notes 266 million issuance costs incurred 215 million 51 million recorded debt issuance costs additional paidin capital respectively proportion allocation proceeds convertible notes 215 million debt issuance costs recorded company’s consolidated balance sheet amortized contractual term convertible notes using effective interest method february 2014 115 billion proceeds received issuance convertible notes initially allocated longterm debt liability component additional paidincapital equity component within company’s consolidated balance sheet 9309 million 2191 million respectively liability component measured using nonconvertible debt interest rate carrying amount equity component representing conversion option determined deducting fair value liability component face value convertible notes whole since company must still settle convertible notes face value prior maturity liability component accreted face value resulting additional noncash interest expense recognized within company’s consolidated statements income convertible notes remain outstanding effective interest rate convertible notes approximately 62 per annum equity component remeasured long continues meet conditions equity classification herbalife ltd subsidiaries notes consolidated financial statements continued december 31 2015 outstanding principal convertible notes 115 billion unamortized debt discount debt issuance costs 1676 million carrying amount liability component 9825 million recorded longterm debt within company’s consolidated balance sheet reflected table within note december 31 2015 fair value liability component relating convertible notes approximately 7959 million december 31 2014 outstanding principal convertible notes 115 billion unamortized debt discount debt issuance costs 2065 million carrying amount liability component 9435 million recorded longterm debt within company’s consolidated balance sheet reflected table within note december 31 2014 fair value liability component relating convertible notes approximately 8028 million december 31 2015 2014 company determined fair value liability component convertible notes using two valuation methods company reviewed market data available publicly traded senior unsecured nonconvertible corporate bonds issued companies similar credit ratings assumptions used estimate represent market participants would use pricing liability component including market yields credit standing develop straight debt yield estimate company also used lattice model included inputs stock price convertible note trading price volatility dividend yield estimate straight debt yield company combined results two valuation methods determine fair value liability component convertible notes inputs primarily considered level 2 level 3 inputs valuation approach similar approach company used determine initial fair value liability component convertible notes february 7 2014 issuance date conjunction issuance convertible notes february 2014 company paid approximately 6858 million enter prepaid forward share repurchase transactions forward transactions certain financial institutions paid approximately 1238 million enter capped call transactions respect common shares capped call transactions certain financial institutions see note 8 shareholders’ deficit equity additional discussion forward transactions capped call transactions entered conjunction issuance convertible notes year ended december 31 2015 company recognized 617 million interest expense relating convertible notes included 357 million relating noncash interest expense relating debt discount 32 million relating amortization deferred financing costs company’s total interest expense including credit facility 1005 million 917 million 266 million years ended december 31 2015 2014 2013 respectively recognized within consolidated statement income december 31 2015 aggregate annual maturities credit facility expected 2297 million 2016 4100 million 2017 115 billion principal amount convertible notes due 2019 certain vendors government agencies may require letters credit similar guaranteeing arrangements issued executed december 31 2015 company 453 million issued undrawn letters credit similar arrangements included mexico vat related surety bonds described note 7 contingencies 5 lease obligations company warehouse office furniture fixtures equipment leases expire various dates 2025 lease agreements company also obligated pay property taxes insurance maintenance costs certain leases contain renewal options future minimum rental commitments noncancelable operating leases december 31 2015 follows millions herbalife ltd subsidiaries notes consolidated financial statements continued company recognizes rental expense straightline basis rental expense years ended december 31 2015 2014 2013 580 million 600 million 575 million respectively material property plant equipment capital leases included property plant equipment accompanying consolidated balance sheets december 31 2015 december 31 2014 6 employee compensation plans united states company maintains profit sharing plan pursuant sections 401a k internal revenue code 1986 amended code plan available substantially employees meet length service requirements company’s contribution expense relating profit sharing plan 43 million 35 million 40 million years ended december 31 2015 2014 2013 respectively company employees international countries covered various deferred compensation plans administered based upon legal requirements countries established company’s compensation expenses relating plans 55 million 75 million 84 million years ended december 31 2015 2014 2013 respectively company nonqualified deferred compensation plans select groups management herbalife management deferred compensation plan herbalife senior executive deferred compensation plan matching contribution 35 participant’s annual base salary excess irs annual compensation limit amount deferrals reduce 401k eligible pay irs limit participant either nonqualified deferred compensation plans discussed times fully vested nonforfeitable interest year’s contribution including interest credited thereto company matching contributions applicable connection participant’s election defer annual deferral amount participant may also elect receive shortterm payout equal annual deferral amount plus interest amount payable five years first day year annual deferral amount actually deferred total expense two nonqualified deferred compensation plans excluding participant contributions 01 million 17 million 40 million years ended december 31 2015 2014 2013 respectively total longterm deferred compensation liability two deferred compensation plans 436 million 429 million december 31 2015 2014 respectively deferred compensation plans unfunded benefits paid general assets company except company contributed “rabbi trust” whose assets used pay benefits company remains solvent reached company’s creditors company becomes insolvent value assets “rabbi trust” 293 million 274 million december 31 2015 2014 respectively 7 contingencies company time engaged routine litigation company regularly reviews pending litigation matters involved establishes reserves deemed appropriate management litigation matters probable loss estimate made marketer foods dietary nutritional supplements products ingested consumers applied bodies company currently subjected various product liability claims effects claims date material company reasonably possible range exposure currently existing claims material company believes meritorious defenses allegations contained lawsuits company currently maintains product liability insurance annual deductible 15 million herbalife ltd subsidiaries notes consolidated financial statements continued certain company’s subsidiaries subject tax audits governmental authorities respective countries certain tax audits governmental authorities proposing significant amounts additional taxes related interest penalties due company tax advisors believe substantial defenses governmental allegations significant additional taxes owed company vigorously contesting additional proposed taxes related charges may 7 2010 company received assessment mexican tax administration service amount equivalent approximately 66 million translated december 31 2015 spot rate various items majority vat allegedly owed certain company’s products imported mexico years 2005 2006 assessment subject interest inflationary adjustments july 8 2010 company initiated formal administrative appeal process may 13 2011 mexican tax administration service issued resolution company’s administrative appeal resolution nullified assessment since mexican tax administration service review tax audit findings reissue original assessment company commenced litigation tax court mexico august 2011 dispute assertions made mexican tax administration service case company received notification february 6 2015 tax court mexico nullified substantially assessment march 18 2015 mexican tax administration service filed appeal verdict circuit court august 27 2015 circuit court remanded case back tax court mexico reconsider portion procedural decision adverse mexican tax administration company believes meritorious defenses assessment reissued company recognized loss company believe loss probable mexican tax administration service commenced audits company’s mexican subsidiaries period january september 2007 may 10 2013 company received assessment approximately 169 million translated december 31 2015 spot rate related period july 11 2013 company filed administrative appeal disputing assessment addition mexican tax administration service requested additional information response company filings vat refunds september 22 2014 mexican tax administration service denied company’s administrative appeal company commenced litigation tax court mexico november 2014 dispute assertions made mexican tax administration service case company issued surety bond amount 184 million translated december 31 2015 spot rate insurance company guarantee payment tax assessment required company pursues appeal assessment litigation case currently ongoing company recognized loss company believe loss probable mexican tax administration service audited company’s mexican subsidiaries 2011 year audit focused importation vat issues june 25 2013 mexican tax administration service closed audit 2011 year without assessment mexican customs service challenged customs classification codes used company certain importations change customs classification codes would require payment additional vat taxes importations company believes customs classification codes used importation products correct company received draft assessments approximately 14 million translated december 31 2015 spot rate discussing draft assessments mexican tax administration company expects challenge assessments received products subject dispute since reformulated avoid potential additional assessments related future importations product company recognized loss company believe loss probable mexican tax administration service delayed processing vat refunds companies operating mexico company believes process mexico subsidiary receive vat refunds may delayed march 2015 company commenced litigation tax court mexico reclaim vat refund pertaining specifically july 2013 period december 31 2015 company 571 million mexico vat related assets 484 million within noncurrent assets 87 million within prepaid expenses current assets consolidated balance sheet amount relates vat payments made various periods company believes amounts recoverable refund may applied certain future tax liabilities company recognized losses related vat related assets company believe loss probable march 26 2015 office president mexico issued decree relating application vat nutritional supplements company continues believe application vat law mexico correct december 31 2015 company recognized losses company based current analysis guidance advisors believe loss probable company continues evaluate monitor situation develops including whether make changes operations mexico herbalife ltd subsidiaries notes consolidated financial statements continued company recognized loss respect mexican matters company based analysis guidance advisors believe loss probable company currently unable reasonably estimate possible loss range loss could result unfavorable outcome assessment reissued additional assessments issued periods company believes meritorious defenses assessment reissued would meritorious defenses additional assessment issued mexican tax administration service requested information related company’s 2010 year information provided addition mexican tax administration service requested information related company’s 2012 year information provided mexican tax administration service may request additional information audit additional periods company received tax assessment september 2009 federal revenue office brazil amount equivalent approximately 20 million translated december 31 2015 spot rate related withholdingcontributions based payments company’s members 2004 december 28 2010 company appealed tax assessment administrative council tax appeals 2nd level administrative appeal company believes meritorious defenses recognized loss company believe loss probable march 6 2014 company notified similar audit 2011 year january 2016 company received tax assessment amount equivalent approximately 45 million translated december 31 2015 spot rate related contributions based payments company’s members 2011 company accrued loss majority assessment company believe loss probable company currently unable reasonably estimate amount loss may result unfavorable outcome additional assessments periods issued company’s brazilian subsidiary pays icmsst taxes product purchases similar vat company believes able utilize recover icmsst credits future company 147 million translated december 31 2015 spot rate brazil icmsst related assets within assets consolidated balance sheet december 31 2015 company recognized losses related icmsst related assets company believe loss probable company examination several brazilian states related icms icmsst taxation including audit state sao paulo related 2013 2014 tax years examinations resulted assessments underpaid tax company appealed fourth quarter 2015 company filed appeals state judicial courts three assessments company issued surety bonds aggregate amount 89 million translated december 31 2015 spot rate insurance company guarantee payment tax assessments required company pursues appeals addition company received several tax assessments aggregate amount 7 million translated december 31 2015 spot rate several brazilian states surety bonds issued litigation cases currently ongoing company recognized loss company believe loss probable company received various tax assessments multiple states india multiple years indian vat authorities amount equivalent approximately 36 million translated december 31 2015 spot rate assessments underpaid vat company litigating cases tax administrative level tax tribunal levels believes meritorious defenses company recognized loss believe loss probable korea customs service currently auditing importation activities herbalife korea period 2011 2013 comprises eight quarterly periods january 12 2016 company received tax assessment 36 million translated december 31 2015 spot rate covering period january 12 2011 april 11 2011 representing first quarterly period company paid assessment january 26 2016 company disagrees assertions made assessment well calculation methodology used assessment plans file appeals assessment well appeals calculation methodology used korea customs service could issue assessment additional quarterly assessments remainder audit period similar basis assessment received date use alternative basis considering appeals company intends file company recognized loss company believe loss probable unable reasonably estimate amount loss could result unfavorable outcome herbalife ltd subsidiaries notes consolidated financial statements continued bostick et al v herbalife int’l inc et al april 8 2013 herbalife ltd certain subsidiaries named defendants suit filed us district court central district california challenging herbalife’s marketing practices business structure california laws prohibiting “endless chain schemes” unfair deceptive business practices false advertising well federal rico statutes july 7 2014 complaint amended add additional plaintiffs sought damages unspecified amount federal rico claim dismissed company continues believe suit without merit without way admitting liability wrongdoing company plaintiffs reached settlement terms settlement company would pay 15 million fund distributed qualified claimants ii accept maximum amount 25 million product returns qualified claimants court granted preliminary approval settlement december 2 2014 conditionally certified class court granted final approval settlement may 14 2015 final judgment entered june 19 2015 amounts adequately reserved company’s financial statements settlement class consists approximately 15 million persons members united states period april 1 2009 including december 2 2014 objectors’ motion reconsideration final judgment approving settlement denied court august 18 2015 appeal filed judgment final settlement amounts sufficient cover claims herbalife ltd securities litigation formerly captioned awad v herbalife ltd et al april 14 2014 herbalife ltd certain officers named defendants purported stockholder class action filed us district court central district california asserting claims securities exchange act 1934 complaint alleged company certain officers made material misstatements concerning company’s finances business practices contended company operating pyramid scheme initial complaint sought represent class investors purchased shares company’s common stock may 4 2010 april 11 2014 july 30 2014 court approved appointment different shareholders lead plaintiffs approved selection counsel september 18 2014 lead plaintiffs filed amended class action complaint violation federal securities laws company certain officers amended complaint brings claims unspecified damages securities exchange act 1934 amended alleges defendants made material misstatements “fundamentally misrepresented nature scope legality company’s business operations consumers investors alike” alleges company one “the sophisticated pyramid schemes history” lead plaintiffs seek represent class persons entities purchased shares company’s common stock february 23 2011 july 29 2014 march 16 2015 court granted defendants’ motion dismiss claims amended complaint leave file amended complaint dismissed one shareholders lead plaintiff may 8 2015 lead plaintiff filed second amended complaint violation federal securities laws company one officers july 28 2015 court granted defendants’ motion dismiss second amended complaint leave file amended complaint august 27 2015 august 27 2015 lead plaintiff filed third amended complaint violation federal securities laws company one officers november 23 2015 court granted defendants’ motion dismiss third amended complaint prejudice appeal filed judgment final us federal trade commission civil investigative demand previously disclosed company received us federal trade commission ftc civil investigative demand cid relating ftc’s confidential investigation whether company complied federal law advertising marketing sale business opportunities pursuant cid supplemented ftc requested company documents information time period commencing january 1 2009 present company currently discussions ftc regarding potential resolution matters possible range outcomes include filing ftc contested civil complaint discussions leading settlement could include monetary payment relief closure matters without action company cooperating investigation time difficult predict timing likely outcome matters moreover assurances given outcome matters material adverse impact company’s business operations financial condition results operations present time company unable estimate range potential loss relating matters herbalife ltd subsidiaries notes consolidated financial statements continued since late 2012 short seller made continues make allegations regarding company network marketing program company believes allegations without merit vigorously defending claims including proactively reaching governmental authorities company believes manipulative activity respect securities allegations company others received may receive additional regulatory governmental inquiries example company previously disclosed inquiries ftc securities exchange commission governmental authorities department justice sought information company certain members others regarding allegations made business practices company members future governmental authorities may determine seek information company persons relating allegations company believes governmental regulatory inquiry investigation becomes material disclosed individually consistent policies company cooperated continue fully cooperate governmental regulatory inquiries investigations matters may take several years resolve company believes meritorious defenses cannot sure ultimate resolution although company may reserve amounts certain matters company believes represent likely outcome resolution related disputes company incorrect assessment company may record additional expenses becomes probable increased potential liability warranted 8 shareholders’ deficit equity company 927 million 922 million 1011 million common shares outstanding december 31 2015 2014 2013 respectively december 2004 company authorized 75 million preference shares 0002 par value 75 million authorized preference shares remained unissued december 31 2015 preference shares may issued time one series voting powers full limited without voting powers designations preferences relative participating optional special rights qualifications limitations restrictions determined company’s board directors dividends declaration future dividends subject discretion company’s board directors depend upon various factors including earnings financial condition herbalife ltd’s available distributable reserves cayman islands law restrictions imposed credit facility terms indebtedness may outstanding cash requirements future prospects factors deemed relevant board directors credit facility permits payments dividends specified cap long default event default exists consolidated leverage ratio specified credit facility exceeded see note 4 longterm debt information restrictions concerning company’s ability declare dividends second quarter 2007 company’s board directors adopted regular quarterly cash dividend program company’s board directors authorized 010 per common share cash dividend quarter adoption program second quarter 2010 august 2 2010 company announced board directors approved increase quarterly cash dividend 013 per common share increase 003 per common share prior quarters may 2 2011 company announced board directors approved increase quarterly cash dividend 020 per common share increase 007 per common share prior quarters february 21 2012 company announced board directors approved increase quarterly cash dividend 030 per common share increase 010 per common share prior quarters april 28 2014 company announced board directors approved terminating quarterly cash dividend instead utilizing cash repurchase additional common shares aggregate amount dividends paid declared fiscal years ended december 31 2014 2013 approximately 304 million 1231 million respectively company pay declare dividends fiscal year ended december 31 2015 year ended december 31 2014 company received 34 million dividends primarily relating forward transactions described recorded directly accumulated deficit retained earnings company receive dividends year ended december 31 2015 share repurchases july 30 2012 company announced board directors authorized new 1 billion share repurchase program expire june 30 2017 february 3 2014 company announced board directors authorized increase existing share repurchase authorization available balance 15 billion share repurchase program allows company herbalife ltd subsidiaries notes consolidated financial statements continued repurchase common shares times prices determined company’s management market conditions warrant extent herbalife ltd’s distributable reserves available cayman islands law credit facility permits company repurchase common shares specified cap long default event default exists consolidated leverage ratio specified credit facility exceeded see note 4 longterm debt information restrictions concerning company’s ability repurchase common shares conjunction issuance convertible notes february 2014 company paid approximately 6858 million enter prepaid forward share repurchase transactions forward transactions certain financial institutions forward counterparties pursuant company purchased approximately 99 million common shares settlement around august 15 2019 maturity date convertible notes subject ability forward counterparty elect settle portion forward transactions early forward transactions generally expected facilitate privately negotiated derivative transactions forward counterparties holders convertible notes including swaps relating common shares holders convertible notes establish short positions relating common shares otherwise hedge investments convertible notes concurrently shortly pricing convertible notes result forward transactions company’s total shareholders’ deficit equity within consolidated balance sheet reduced approximately 6858 million first quarter 2014 amounts 6539 million 319 million allocated accumulated deficit retained earnings additional paidincapital respectively within total shareholders’ deficit equity also upon executing forward transactions company recorded fair value 358 million noncash issuance costs assets corresponding amount additional paidincapital within consolidated balance sheet noncash issuance costs amortized interest expense contractual term forward transactions years ended december 31 2015 2014 company recognized 65 million 58 million respectively noncash interest expense within consolidated statement income relating amortization noncash issuance costs may 6 2014 company entered agreement merrill lynch international repurchase 2660 million common shares repurchase agreement expired june 30 2014 terms repurchase agreement company paid 2660 million may 7 2014 received aggregate 43 million common shares repurchase agreement may june 2014 total number common shares repurchased repurchase agreement determined generally upon discounted volumeweighted average share price company’s common shares course repurchase agreement company repurchase common shares open market year ended december 31 2015 year ended december 31 2014 company repurchased 197 million common shares open market purchases repurchase agreement forward transactions aggregate cost approximately 12671 million average cost 6425 per share approximate 99 million common shares effectively repurchased forward transactions treated retired shares basic diluted eps purposes although remain legally outstanding year ended december 31 2013 company repurchased 61 million common shares open market purchases aggregate cost approximately 2974 million average cost 4908 per share december 31 2015 remaining authorized capacity company’s share repurchase program 2329 million inclusive reductions forward transactions company reflects aggregate purchase price common shares repurchased reduction increase shareholders’ deficit equity company allocated purchase price repurchased shares accumulated deficit retained earnings common shares additional paidincapital number shares issued upon vesting exercise certain restricted stock units sars granted pursuant company’s sharebased compensation plans net minimum statutory withholding requirements company pays behalf employees although shares withheld issued treated common share repurchases company’s consolidated financial statements reduce number shares would issued upon vesting shares count authorized capacity company’s share repurchase program described capped call transactions connection issuance convertible notes company paid approximately 1238 million enter capped call transactions respect common shares capped call transactions certain financial institutions capped call transactions expected generally reduce potential dilution upon conversion convertible notes event market price common shares greater strike price capped call transactions initially set 8628 per common share reduction potential dilution subject cap based cap price initially set 12079 per common share herbalife ltd subsidiaries notes consolidated financial statements continued strike price cap price subject certain adjustments terms capped call transactions therefore result executing capped call transactions company effect exposed potential net dilution market price common shares exceeds adjusted cap price result capped call transactions company’s additional paidin capital within shareholders’ deficit equity consolidated balance sheet reduced 1238 million first quarter 2014 accumulated comprehensive income loss following table summarizes changes accumulated comprehensive income loss years ended december 31 2015 2014 2013 1 see note 2 basis presentation note 11 derivative instruments hedging activities information regarding location consolidated statements income gains losses reclassified accumulated comprehensive income loss income years ended december 31 2015 2014 2013 comprehensive income loss reclassifications net tax benefits 72 million 06 million 09 million foreign currency translation adjustments unrealized gain loss derivatives unrealized gain loss availableforsale investments respectively year ended december 31 2015 amounts reclassified accumulated comprehensive income loss income net tax expense 08 million unrealized gain loss availableforsale investments year ended december 31 2015 comprehensive income loss reclassifications net tax benefits 73 million tax expense 06 million tax expense 46 million foreign currency translation adjustments unrealized gain loss derivatives unrealized gain loss availableforsale investments respectively year ended december 31 2014 amounts reclassified accumulated comprehensive income loss income net tax benefits 45 million unrealized gain loss availableforsale investments year ended december 31 2014 herbalife ltd subsidiaries notes consolidated financial statements continued comprehensive income loss reclassifications net tax benefits 43 million tax expense 10 million tax expense 01 million foreign currency translation adjustments unrealized gain loss derivatives unrealized gain loss availableforsale investments respectively year ended december 31 2013 amounts reclassified accumulated comprehensive income loss income net tax expense 07 million unrealized gain loss derivatives year ended december 31 2013 9 sharebased compensation company four sharebased compensation plans amended restated herbalife ltd 2005 stock incentive plan 2005 stock incentive plan herbalife ltd 2014 stock incentive plan 2014 stock incentive plan amended restated herbalife ltd independent directors deferred compensation stock unit plan independent director stock unit plan amended restated nonmanagement directors compensation plan nonmanagement directors plan 2014 stock incentive plan replaced 2005 stock incentive plan adoption thereof additional awards made 2005 stock incentive plan terms 2014 stock incentive plan substantially similar terms 2005 stock incentive plan 2014 stock incentive plan authorizes issuance 5000000 common shares pursuant awards granted plan plus shares remained available issuance 2005 stock incentive plan time adoption 2014 stock incentive plan purpose independent directors stock unit plan nonmanagement directors plan facilitate equity ownership company directors equity awards december 31 2015 aggregate approximately 29 million common shares remain available future issuance 2014 stock incentive plan company’s sharebased compensation plans provide grants stock options stock appreciation rights sars stock units collectively referred herein awards previously stock options generally vested quarterly fiveyear period less beginning grant date certain sars vest quarterly fiveyear period beginning grant date sars vest annually threeyear period contractual term service condition stock options sars generally ten years stock unit awards 2014 stock incentive plan incentive plan stock units vest annually three year period stock units awarded directors generally vest one year period awards subject following market service conditions market condition awards performance service conditions performance condition awards market service performance conditions market performance condition awards subject continued service company service condition awards granted company market condition awards performance condition awards market performance condition awards service condition awards unless otherwise determined time grant value stock unit shall equal one common share herbalife company’s stock compensation awards outstanding december 31 2015 include sars stock units august 2011 company granted sars market performance conditions chairman chief executive officer awards vest december 31 2014 subject continued employment date company’s stock price appreciating exceeding targeted price company’s achievement certain volume point performance targets fair value sars determined date grant using monte carlo lattice model end december 31 2014 chairman chief executive office remained employee company met specified volume point performance targets requisite service performance conditions met impact sharebased compensation expense recorded connection sars remained company’s consolidated financial statements however price company’s common shares exceed target price applicable sars vest longer considered outstanding years ended december 31 2015 2014 2013 company granted sars performance conditions certain employees awards vest 20 first succeeding year 20 second succeeding year 60 third succeeding year subject achievement certain sales leader retention metrics fair value sars determined date grant using blackscholesmerton option pricing model compensation expense grants recognized vesting term using graded vesting method years ended december 31 2015 2014 2013 company granted sars service conditions certain employees fair value sars determined date grant using blackscholesmerton option pricing model compensation expense grants recognized vesting term using straight line method herbalife ltd subsidiaries notes consolidated financial statements continued stockbased compensation expense included selling general administrative expenses consolidated statements income years ended december 31 2015 2014 2013 sharebased compensation expense relating service condition awards amounted 268 million 279 million 246 million respectively year ended december 31 2015 sharebased compensation expense relating market condition awards amounted 03 million sharebased compensation expense relating market condition awards recognized years ended december 31 2014 2013 years ended december 31 2015 2014 2013 sharebased compensation expense relating performance condition awards amounted 178 million 133 million 03 million respectively sharebased compensation expense related market performance condition awards recognized year ended december 31 2015 years ended december 31 2014 2013 sharebased compensation expense relating market performance condition awards amounted 45 million years ended december 31 2015 2014 2013 related income tax benefits recognized earnings awards amounted 166 million 166 million 104 million respectively december 31 2015 total unrecognized compensation cost related nonvested service condition stock awards 320 million related weightedaverage period expected recognized approximately 13 years december 31 2015 total unrecognized compensation cost related nonvested performance condition awards 185 million related weightedaverage period expected recognized approximately 16 years december 31 2015 total unrecognized compensation cost related nonvested market condition stock awards 09 million related weightedaverage period expected recognized approximately 22 years stock units valued market value date grant fair value service condition sars performance condition sars estimated date grant using blackscholesmerton optionpricing model fair value sars market conditions market performance conditions estimated date grant using monte carlo lattice model company calculates expected term sars based historical data historical information available groups employees determined similar historical exercise patterns valuation purposes expected volatility sars based upon historical volatility company’s common shares also validated volatility rates peer group companies risk free interest rate based implied yield us treasury zerocoupon issue remaining term equal expected term sars expected dividend yield assumption based company’s historical expected amount dividend payouts stock options granted years ended december 31 2015 2014 2013 sars granted independent directors years ended december 31 2015 2014 following table summarizes weighted average assumptions used calculation fair value service condition awards years ended december 31 2015 2014 2013 herbalife ltd subsidiaries notes consolidated financial statements continued following table summarizes weighted average assumptions used calculation fair value performance condition awards granted years ended december 31 2015 2014 2013 following tables summarize activity sharebased compensation plans includes stock awards year ended december 31 2015 1 intrinsic value amount current market value underlying stock exceeds exercise price stock award 2 includes 15 million 01 million market condition sars december 31 2014 2015 respectively 3 includes 10 million 25 million performance condition sars december 31 2014 2015 respectively 4 includes 03 million performance condition sars weightedaverage grant date fair value service condition sars granted years ended december 31 2015 2014 2013 1257 2524 3057 respectively weightedaverage grant date fair value sars performance conditions granted years ended december 31 2015 2014 2013 1365 2598 3304 respectively weightedaverage grant date fair value sars market conditions granted year ended december 31 2015 987 total intrinsic value service condition stock options sars exercised years ended december 31 2015 2014 2013 255 million 636 million 161 million respectively total intrinsic value market condition sars exercised year ended december 31 2015 114 million market condition sars exercised years ended december 31 2014 2013 performance condition market performance condition sars exercised years ended december 31 2015 2014 2013 herbalife ltd subsidiaries notes consolidated financial statements continued following table summarizes activities stock units primarily relating directors company year ended december 31 2015 total vesting date fair value stock units vested years ended december 31 2015 2014 2013 13 million 90 million 73 million respectively employee stock purchase plan 2007 company adopted qualified employee stock purchase plan espp implemented first quarter 2008 connection adoption espp company reserved issuance total 2 million common shares december 31 2015 approximately 17 million common shares remain available future issuance terms espp rights purchase common shares may granted eligible qualified employees subject certain restrictions espp enables company’s eligible employees payroll withholdings purchase limited number common shares 85 fair market value common share purchase date purchases made quarterly basis 10 segment information company nutrition company sells wide range weight management targeted nutrition energy sports fitness outer nutrition products company’s products manufactured third party providers company changsha hunan china extraction facility suzhou china facility lake forest california facility winstonsalem north carolina facility sold members consume sell herbalife products retail consumers members revenues reflect sales products company members categorized based geographic location herbalife ltd subsidiaries notes consolidated financial statements continued december 31 2015 company sold products 93 countries throughout world organized managed six geographic regions north america mexico south central america emea europe middle east africa asia pacific china company defines operating segments geographical operations company aggregates operating segments excluding china reporting segment primary reporting segment management believes company’s operating segments similar operating characteristics similar long term operating performance making determination management believes operating segments similar nature products sold product acquisition process types customers products sold methods used distribute products nature regulatory environment economic characteristics china identified separate reporting segment meet criteria aggregation company reviews net sales contribution margin operating segment reviews assets capital expenditures consolidated basis operating segment therefore net sales contribution margin presented reportable segment assets capital expenditures segment presented operating information two reportable segments sales product line follows 1 contribution margin consists net sales less cost sales royalty overrides herbalife ltd subsidiaries notes consolidated financial statements continued 2 service fees china independent service providers totaling 4035 million 3127 million 2156 million years ended december 31 2015 2014 2013 respectively included selling general administrative expenses member compensation countries included contribution margin 3 product buybacks returns product categories included literature promotional category december 31 2015 2014 goodwill allocated company’s reporting units included company’s primary reporting segment 885 million 988 million respectively goodwill allocated china segment 33 million 34 million december 31 2015 2014 respectively following table sets forth property plant equipment deferred tax assets geographic area majority company’s foreign subsidiaries designate local currencies functional currency december 31 2015 2014 total amount cash held foreign subsidiaries reported company’s consolidated balance sheet 3105 million 4408 million respectively 191 million 83 million respectively maintained invested us dollars december 31 2015 2014 total amount cash equivalents held company’s parent us entities 5793 million 2046 million respectively 11 derivative instruments hedging activities interest rate risk management company previously engaged interest rate hedging strategy hedged transactions forecasted interest payments credit facility hedged risk variability forecasted interest rate cash flows hedging strategy involved purchase interest rate swaps interest rate swaps expired july 2013 company entered new interest swap arrangements december 31 2015 foreign currency instruments company also designates certain foreign currency derivatives primarily comprised foreign currency forward contracts freestanding derivatives hedge accounting apply changes fair market value freestanding derivatives included selling general administrative expenses company’s consolidated statements income company uses freestanding foreign currency derivatives hedge foreigncurrencydenominated intercompany transactions partially mitigate impact foreign currency fluctuations fair value freestanding foreign currency derivatives based thirdparty quotes company’s foreign currency derivative contracts generally executed monthly basis herbalife ltd subsidiaries notes consolidated financial statements continued company designates cashflow hedges foreign currency forward contracts enters hedge forecasted inventory purchases intercompany management fees subject foreign currency exposures forward contracts used hedge forecasted inventory purchases specific months changes fair value forward contracts excluding forward points designated cashflow hedges recorded component accumulated comprehensive income loss within shareholders’ deficit equity recognized cost sales consolidated statement income period approximates time hedged inventory sold company also hedges forecasted intercompany management fees specific months contracts allow company sell euros exchange us dollars specified contract rates changes fair value forward contracts designated cash flow hedges recorded component accumulated comprehensive income loss within shareholders’ deficit equity recognized selling general administrative expenses consolidated statement income period hedged item underlying transaction affect earnings december 31 2015 december 31 2014 aggregate notional amounts foreign currency contracts outstanding designated cash flow hedges approximately 1128 million 2253 million respectively december 31 2015 outstanding contracts maturity dates less twelve months company’s derivative financial instruments recorded consolidated balance sheet fair value based thirdparty quotes december 31 2015 company recorded assets fair value 42 million liabilities fair value 05 million relating outstanding foreign currency contracts designated cashflow hedges december 31 2014 company recorded assets fair value 123 million liabilities fair value 16 million relating outstanding foreign currency contracts designated cashflow hedges company assesses hedge effectiveness measures hedge ineffectiveness least quarterly years ended december 31 2015 2014 ineffective portion relating hedges immaterial hedges remained effective december 31 2015 december 31 2014 december 31 2015 december 31 2014 majority company’s outstanding foreign currency forward contracts maturity dates less twelve months majority freestanding derivatives expiring within two months december 31 2015 december 31 2014 herbalife ltd subsidiaries notes consolidated financial statements continued table describes foreign currency forward contracts outstanding december 31 2015 december 31 2014 herbalife ltd subsidiaries notes consolidated financial statements continued following tables summarize derivative activity years ended december 31 2015 2014 2013 relating company’s derivatives gains losses derivative instruments following table summarizes gains losses relating derivative instruments recorded comprehensive income loss years ended december 31 2015 2014 2013 december 31 2015 estimated amount existing net gains related cash flow hedges recorded accumulated comprehensive income loss expected reclassified earnings next twelve months 130 million herbalife ltd subsidiaries notes consolidated financial statements continued following table summarizes gains losses relating derivative instruments recorded income years ended december 31 2015 2014 2013 1 foreign exchange contracts designated hedging instruments amounts recognized income loss primarily represent amounts excluded assessment hedge effectiveness years ended december 31 2014 2013 year ended december 31 2015 13 million benefit related hedge ineffectiveness partially offset 09 million expense related amounts excluded assessment hedge effectiveness recognized income loss following table summarizes gains losses relating derivative instruments reclassified accumulated comprehensive loss income years ended december 31 2015 2014 2013 company reports derivatives fair value either assets liabilities within consolidated balance sheet see note 13 fair value measurements information derivative fair values consolidated balance sheet location december 31 2015 2014 herbalife ltd subsidiaries notes consolidated financial statements continued 12 income taxes components income taxes follows millions income taxes follows millions herbalife ltd subsidiaries notes consolidated financial statements continued company recognizes excess tax benefits associated sharebased compensation shareholders’ deficit equity realized assessing whether excess tax benefits relating sharebased compensation realized company follows withandwithout approach excess tax benefits related sharebased compensation deemed realized utilization tax benefits available company also subject applicable limitations december 31 2015 2014 company 254 million 236 million respectively unrealized excess tax benefits 254 million excess tax benefits december 31 2015 relates foreign tax credits generated carried forward us federal income tax returns unused tax credit carryforwards expire 2021 2025 significant categories temporary differences gave rise deferred tax assets liabilities follows tax effected millions 1 year ended december 31 2015 company utilized 2408 million deferred tax asset balance relating intercompany deferred interest expense december 31 2014 reduced valuation allowance amount result taxable distribution intercompany asset herbalife subsidiaries occurred third quarter 2015 net impact company’s consolidated balance sheet consolidated statement income consolidated statement cash flows tax loss credit carryforwards certain foreign subsidiaries 2015 2014 1214 million 887 million respectively unused tax loss credit carryforwards certain foreign subsidiaries 1002 million expire 2016 2025 212 million carried forward indefinitely domestic foreign tax credit carryforwards 2015 2014 767 million 512 million respectively unused domestic foreign tax credit carryforwards expire 2024 2025 herbalife ltd subsidiaries notes consolidated financial statements continued company recognizes valuation allowances deferred tax assets reported based weight evidence likely deferred tax assets realized december 31 2015 2014 company held valuation allowances net deferred tax assets certain subsidiaries primarily related tax loss carryforwards amount 1213 million deferred interest expense tax loss carryforwards 3300 million respectively change company’s valuation allowance 2015 2087 million primarily due 2056 million net reductions charged income tax expense primarily related utilization deferred tax asset balance related intercompany deferred interest expense partially offset increases venezuelan tax loss carryforwards 31 million currency translation adjustments recognized within comprehensive income change company’s valuation allowance 2014 824 million related 857 million net additions charged income tax expense primarily relating increases venezuelan tax loss carryforwards deferred interest expense carryforwards reduced 33 million currency translation adjustments recognized within comprehensive income change company’s valuation allowance 2013 383 million related 367 million net additions charged income tax expense primarily relating increases deferred interest expense carryforwards 16 million currency translation adjustments recognized within comprehensive income december 31 2015 company’s us consolidated group approximately 1206 million unremitted earnings permanently reinvested relating certain foreign subsidiaries addition december 31 2015 herbalife ltd approximately 23 billion permanently reinvested unremitted earnings relating operating subsidiaries since unremitted earnings permanently reinvested deferred taxes provided unremitted earnings practicable determine amount unrecognized deferred taxes respect unremitted earnings company remit unremitted earnings would subject income tax remittances deferred taxes accrued earnings considered indefinitely reinvested deferred tax unremitted foreign earnings december 31 2015 2014 deferred tax asset 64 million 10 million respectively applicable statutory income tax rate cayman islands zero herbalife ltd years reported purposes reconciliation provision income taxes statutory rate provision income taxes effective tax rate notional 35 tax rate applied follows december 31 2015 total amount unrecognized tax benefits including related interest penalties 580 million total amount unrecognized tax benefits recognized 441 million unrecognized tax benefits 71 million interest 15 million penalties would impact effective tax rate december 31 2014 total amount unrecognized tax benefits including related interest penalties 472 million total amount unrecognized tax benefits recognized 380 million unrecognized tax benefits 55 million interest 11 million penalties would impact effective tax rate herbalife ltd subsidiaries notes consolidated financial statements continued company accounts interest penalties generated tax contingencies component income tax expense year ended december 31 2015 company recorded increase interest penalty expense related uncertain tax positions 20 million 06 million respectively year ended december 31 2014 company recorded increase interest penalty expense related uncertain tax positions 19 million 03 million respectively year ended december 31 2013 company recorded reversal interest penalty expense related uncertain tax positions 16 million 07 million respectively december 31 2015 total amount interest penalties related unrecognized tax benefits recognized statement financial position 71 million 15 million respectively december 31 2014 total amount interest penalties related unrecognized tax benefits recognized statement financial position 55 million 11 million respectively following changes occurred amount unrecognized tax benefits years ended december 31 2015 2014 2013 millions amount income taxes company pays subject ongoing audits taxing jurisdictions around world company’s estimate potential outcome uncertain tax position subject management’s assessment relevant risks facts circumstances existing time company believes adequately provided matters however company’s future results may include favorable unfavorable adjustments estimates period audits resolved may impact company’s effective tax rate december 31 2015 company’s tax filings generally subject examination major tax jurisdictions years ending december 31 2010 company believes reasonably possible amount unrecognized tax benefits could decrease approximately 131 million within next twelve months possible decrease 54 million would due settlement audits resolution administrative judicial proceedings remaining possible decrease 77 million would due expiration statute limitations various jurisdictions 13 fair value measurements company applies provisions asc topic 820 fair value measurements disclosures asc 820 financial nonfinancial assets liabilities asc 820 defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date asc 820 establishes fair value hierarchy prioritizes inputs used measuring fair value three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities reporting entity ability access measurement date level 2 inputs include quoted prices similar assets liabilities active markets quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability inputs derived principally corroborated observable market data correlation means level 3 inputs unobservable inputs asset liability herbalife ltd subsidiaries notes consolidated financial statements continued company measures certain assets liabilities fair value discussed throughout notes consolidated financial statements foreign exchange currency contracts valued using standard calculations models primarily based inputs observable forward rates spot rates foreign currency exchange rates reporting period ended date company’s derivative assets liabilities measured fair value consisted level 2 inputs amounts shown gross values december 31 2015 december 31 2014 fair value measurements reporting date using company’s deferred compensation plan assets consist company owned life insurance policies recorded cash surrender value required included fair value table see note 6 employee compensation plans description deferred compensation plan assets herbalife ltd subsidiaries notes consolidated financial statements continued following tables summarize offsetting fair values company’s derivative assets derivative liabilities presentation company’s consolidated balance sheet december 31 2015 december 31 2014 company offsets derivative assets derivative liabilities consolidated balance sheet extent maintains master netting arrangements related financial institutions december 31 2015 december 31 2014 company’s derivatives subject master netting arrangements collateralization required company’s derivative assets derivative liabilities 14 professional fees expenses late 2012 hedge fund manager publicly raised allegations regarding legality company’s network marketing program announced hedge fund manager taken significant short position regarding company’s common shares leading intense public scrutiny significant stock price volatility company believes hedge fund manager’s allegations inaccurate misleading company engaged legal advisory firms assist responding allegations perform related services connection recent events company recognizes related expenses part selling general administrative expenses within consolidated statement income years ended december 31 2015 2014 2013 company recorded approximately 187 million 251 million 291 million respectively professional fees expenses related matter herbalife ltd subsidiaries notes consolidated financial statements continued 15 quarterly information unaudited 1 december 31 2014 company revised estimate employee bonus accrual change estimate result company meeting projected targets change estimate resulted cumulative adjustment increased company’s operating income pretax amount 166 million increased company’s 2014 fourth quarter net income 120 million net tax signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized herbalife ltd john g desimone john g desimone chief financial officer dated february 25 2016 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated signature title date michael johnson chief executive officer director chairman board principal executive officer february 25 2016 michael johnson john g desimone chief financial officer principal financial officer february 25 2016 john g desimone bosco chiu senior vice president principal accounting officer principal accounting officer february 25 2016 bosco chiu richard p bermingham director february 25 2016 richard p bermingham pedro cardoso director february 25 2016 pedro cardoso richard h carmona director february 25 2016 richard h carmona jonathan christodoro director february 25 2016 jonathan christodoro keith cozza director february 25 2016 keith cozza jeffrey dunn director february 25 2016 jeffrey dunn hunter c gary director february 25 2016 hunter c gary jesse lynn director february 25 2016 jesse lynn michael montelongo director february 25 2016 michael montelongo james l nelson director february 25 2016 james l nelson maria otero director february 25 2016 maria otero john tartol director february 25 2016 john tartolitem 15 exhibits financial statement schedules following documents filed part annual report form 10k incorporated herein reference 1 financial statements following financial statements herbalife ltd filed part annual report form 10k pages indicated page herbalife ltd subsidiaries report independent registered public accounting firm consolidated balance sheets december 31 2016 2015 consolidated statements income years ended december 31 2016 2015 2014 consolidated statements comprehensive income years ended december 31 2016 2015 2014 consolidated statements changes shareholders’ deficit equity years ended december 31 2016 2015 2014 consolidated statements cash flows years ended december 31 2016 2015 2014 notes consolidated financial statements 2 financial statement schedules omitted required information inapplicable material information presented consolidated financial statements related notes 3 exhibits listed exhibit index immediately filed part annual report form 10k incorporated reference herein exhibit index exhibit number description reference 31 form amended restated memorandum articles association herbalife ltd 41 form share certificate c 42 indenture herbalife ltd union bank na trustee dated february 7 2014 governing 200 convertible senior notes due 2019 g 43 form global note 200 convertible senior note due 2019 included exhibit 42 hereto g 101 herbalife international america inc’s senior executive deferred compensation plan effective january 1 1996 amended 102 herbalife international america inc’s management deferred compensation plan effective january 1 1996 amended 103 herbalife international inc 401k profit sharing plan trust amended 104 notice distributors regarding amendment agreements distributorship dated july 18 2002 herbalife international inc herbalife distributor 105 side letter agreement dated april 3 2003 among wh holdings cayman islands ltd michael johnson shareholders listed therein 106 form indemnification agreement herbalife ltd directors certain officers herbalife ltd b 107 amended restated herbalife ltd 2005 stock incentive plan 108 form herbalife ltd 2005 stock incentive plan stock unit award agreement l 109 form herbalife ltd 2005 stock incentive plan stock appreciation right award agreement l 1010 form herbalife ltd 2005 stock incentive plan stock appreciation right award agreement applicable michael johnson l 1011 form herbalife ltd 2005 stock incentive plan stock appreciation right award agreement applicable richard p goudis l 1012 form herbalife ltd 2005 stock incentive plan stock appreciation right award agreement applicable michael johnson 1013 form herbalife ltd 2005 stock incentive plan stock appreciation right award agreement applicable richard goudis 1014 form herbalife ltd 2005 stock incentive plan stock unit award agreement 1015 form herbalife ltd 2005 stock incentive plan stock appreciation right award agreement 1016 herbalife ltd employee stock purchase plan e 1017 employment agreement dated march 27 2008 michael johnson herbalife international america inc e exhibit number description reference 1018 stock appreciation right award agreement herbalife ltd michael johnson dated march 27 2008 e 1019 stock appreciation right award agreement herbalife ltd michael johnson dated march 27 2008 e 1020 amendment herbalife international inc 401k profit sharing plan trust h 1021 form independent directors stock appreciation right award agreement 1022 herbalife ltd amended restated independent directors deferred compensation stock unit plan 1023 amended restated employment agreement richard p goudis herbalife international america inc dated january 1 2010 j 1024 first amendment amended restated employment agreement richard p goudis herbalife international america inc dated december 28 2010 k 1025 amended restated nonmanagement directors compensation plan j 1026 form herbalife ltd 2005 stock incentive plan nonemployee directors stock appreciation right award agreement j 1027 severance agreement john desimone herbalife international america inc dated february 23 2011 l 1028 amended restated severance agreement dated february 23 2011 desmond walsh herbalife international america inc l 1029 credit agreement dated march 9 2011 among herbalife international inc “hii” herbalife ltd herbalife international luxembourg sarl certain subsidiaries hii guarantors lenders time party thereto bank america na administrative agent swing line lender lc issuer l 1030 first amendment dated july 26 2012 credit agreement dated march 9 2011 among herbalife international inc “hii” herbalife ltd herbalife international luxembourg sarl certain subsidiaries hii guarantors lenders time party thereto bank america na administrative agent swing line lender lc issuer 1031 amendment amended restated herbalife ltd 2005 stock incentive plan l 1032 second amendment dated february 3 2014 credit agreement dated march 9 2011 among herbalife international inc “hii” herbalife ltd herbalife international luxembourg sarl certain subsidiaries hii guarantors lenders time party thereto bank america na administrative agent swing line lender lc issuer f 1033 form forward share repurchase confirmation g 1034 form base capped call confirmation g 1035 form additional capped call confirmation g 1036 form herbalife ltd 2005 stock incentive plan performance condition stock appreciation right award agreement g 1037 amended restated herbalife ltd 2014 stock incentive plan l exhibit number description reference 1038 confirmation merrill lynch international herbalife ltd dated may 6 2014 h 1039 third amendment credit agreement dated may 4 2015 among herbalife ltd herbalife international inc herbalife international luxembourg sarl guarantors part thereto lenders time party thereto bank america na administrative agent swing line lender lc issuer 1040 herbalife ltd executive incentive plan l 1041 stipulation entry order permanent injunction monetary judgment 1042 second amended restated support agreement dated july 15 2016 among herbalife ltd carl c icahn partners master fund lp icahn offshore lp icahn partners lp icahn onshore lp beckton corp hopper investments llc barberry corp high river limited partnership icahn capital lp iph gp llc icahn enterprises holdings lp icahn enterprises gp inc 1043 amended restated employment agreement richard p goudis herbalife international america inc dated november 1 2016 1044 letter agreement michael johnson herbalife international america inc dated november 1 2016 1045 herbalife international america inc executive officer severance plan 1046 credit agreement dated february 15 2017 among hlf financing sà rl hlf financing us llc herbalife ltd herbalife international luxembourg sà rl herbalife international inc several banks financial institutions entities time party thereto credit suisse ag cayman islands branch term administrative agent collateral agent coöperatieve rabobank ua new york branch issuing bank revolver administrative agent 211 subsidiaries registrant 231 consent pricewaterhousecoopers llp independent registered public accounting firm 311 rule 13a14a certification chief executive officer 312 rule 13a14a certification chief financial officer 321 section 1350 certification chief executive officer 322 section 1350 certification chief financial officer 101ins xbrl instance document 101sch xbrl taxonomy extension schema document 101cal xbrl taxonomy extension calculation linkbase document 101def xbrl taxonomy extension definition linkbase document 101lab xbrl taxonomy extension label linkbase document 101pre xbrl taxonomy extension presentation linkbase document filed herewith management contract compensatory plan arrangement previously filed october 1 2004 exhibit company’s registration statement form s1 file 333119485 incorporated herein reference b previously filed december 2 2004 exhibit amendment 4 company’s registration statement form s1 file 333119485 incorporated herein reference c previously filed december 14 2004 exhibit amendment 5 company’s registration statement form s1 file 333119485 incorporated herein reference previously filed july 30 2012 exhibit company’s quarterly report form 10q quarter ended june 30 2012 incorporated herein reference e previously filed april 29 2013 exhibit company’s quarterly report form 10q quarter ended march 31 2013 incorporated herein reference f previously filed february 7 2014 exhibit company’s current report form 8k incorporated herein reference g previously filed february 18 2014 exhibit company’s annual report form 10k year ended december 31 2013 incorporated reference h previously filed july 28 2014 exhibit company’s quarterly report form 10q quarter ended june 30 2014 incorporated herein reference previously filed may 5 2015 exhibit company’s quarterly report form 10q quarter ended march 31 2015 incorporated herein reference j previously filed august 5 2015 exhibit company’s quarterly report form 10q quarter ended june 30 2015 incorporated herein reference k previously filed february 25 2016 exhibit company’s annual report form 10k year ended december 31 2015 incorporated herein reference l previously filed may 5 2016 exhibit company’s quarterly report form 10q quarter ended march 31 2016 incorporated herein reference previously filed july 15 2016 exhibit company’s current report form 8k incorporated herein reference report independent registered public accounting firm board directors shareholders herbalife ltd opinion accompanying consolidated balance sheets related consolidated statements income comprehensive income changes shareholders’ deficit equity cash flows present fairly material respects financial position herbalife ltd subsidiaries december 31 2016 december 31 2015 results operations cash flows three years period ended december 31 2016 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2016 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions financial statements company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 2 consolidated financial statements company changed manner accounts deferred tax assets deferred tax liabilities 2016 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp los angeles california february 23 2017 herbalife ltd subsidiaries consolidated balance sheets see accompanying notes consolidated financial statements herbalife ltd subsidiaries consolidated statements income see accompanying notes consolidated financial statements herbalife ltd subsidiaries consolidated statements comprehensive income see accompanying notes consolidated financial statements herbalife ltd subsidiaries consolidated statements changes shareholders’ deficit equity see accompanying notes consolidated financial statements herbalife ltd subsidiaries consolidated statements cash flows see accompanying notes consolidated financial statements herbalife ltd subsidiaries notes consolidated financial statements 1 organization herbalife ltd cayman islands exempt limited liability company incorporated april 4 2002 herbalife ltd together subsidiaries “company” “herbalife” global nutrition company sells weight management targeted nutrition energy sports fitness outer nutrition products network independent members china company sells products independent service providers sales representatives sales officers customers preferred customers well companyoperated retail stores necessary company reports revenue six geographic regions north america mexico south central america emea consists europe middle east africa asia pacific excluding china 2 basis presentation company’s consolidated financial statements refer herbalife ltd subsidiaries new accounting pronouncements may 2014 financial accounting standards board fasb issued accounting standards update asu 201409 revenue contracts customers topic 606 new revenue recognition standard provides fivestep analysis contracts determine revenue recognized core principle company recognize revenue depict transfer promised goods services customers amount reflects consideration entity expects entitled exchange goods services august 2015 fasb issued asu 201514 revenue contracts customers topic 606 deferral effective date deferred effective date asu 201409 entities one year annual reporting periods beginning december 15 2017 march 2016 fasb issued asu 201608 revenue contracts customers topic 606 principal versus agent considerations reporting revenue versus net clarifies implementation guidance principal versus agent considerations new revenue recognition standard asu 201608 clarifies entity identify unit accounting ie specified good service principal versus agent evaluation apply control principle certain types arrangements april 2016 fasb issued asu 201610 revenue contracts customers topic 606 identifying performance obligations licensing clarifies implementation guidance entity identify performance obligations contracts customers account licensing arrangements customers may 2016 fasb issued asu 201612 narrowscope improvements practical expedients improve guidance assessing collectability presentation sales taxes noncash consideration contract modifications completed contracts transition amendments series updates shall applied either retrospectively period presented cumulativeeffect adjustment date adoption early adoption permitted original effective date december 15 2016 company continues assess impact adoption series updates consolidated financial statements company completed accounting assessments related new standard yet determined financial impact december 31 2016 company analyzing worldwide business revenue streams payments members determine timing recognition income statement classification company expects update disclosure future periods analysis complete august 2014 fasb issued asu 201415 presentation financial statements going concern subtopic 20540 purpose asu incorporate us gaap management’s responsibility evaluate whether substantial doubt entity’s ability continue going concern within one year date financial statements issued within one year date financial statements available issued applicable provide related footnote disclosures update effective annual period ending december 15 2016 annual periods interim periods thereafter early application permitted adoption guidance material impact company’s consolidated financial statements july 2015 fasb issued asu 201511 inventory topic 330 simplifying measurement inventory asu apply inventory measured using lastin firstout lifo retail inventory method amendments apply inventory includes inventory measured using firstin firstout fifo average cost asu eliminates us gaap requirement measure inventory lower cost market previous requirement could replacement cost net realizable value net realizable value less approximately normal profit margin entities within scope update required measure inventory lower cost net realizable value net realizable value estimated selling prices ordinary course business less reasonably predictable costs completion disposal transportation subsequent measurement unchanged inventory using lifo retail inventory method amendments update effective fiscal years beginning december 15 2016 early adoption permitted applied prospectively company early adopted asu 201511 january 1 2016 adoption guidance material impact company’s consolidated financial statements november 2015 fasb issued asu 201517 income taxes topic 740 balance sheet classification deferred taxes asu simplifies presentation deferred taxes requiring deferred tax assets liabilities presented noncurrent balance sheet asu 201517 effective annual reporting periods interim periods therein beginning december 15 2016 early adoption permitted amendments may applied either prospectively deferred tax liabilities assets retrospectively periods presented company early adopted asu 201517 october 1 2016 prospective adoption guidance resulted classification deferred tax assets deferred tax liabilities noncurrent company’s consolidated balance sheet december 31 2016 prior periods reclassified january 2016 fasb issued asu 201601 financial instruments overall subtopic 82510 recognition measurement financial assets financial liabilities updated guidance enhances reporting model financial instruments modifying entities measure recognize equity investments present changes fair value financial liabilities simplifying disclosure guidance financial instruments amendments update effective fiscal years beginning december 15 2017 amendments update applied prospectively company evaluating potential impact adoption consolidated financial statements february 2016 fasb issued asu 201602 leases topic 842 updated guidance requires lessees recognize lease liability rightofuse asset measured present value future minimum lease payments lease commencement date recognition measurement presentation expenses depend classification finance operating lease amendments also require certain quantitative qualitative disclosures asu 201602 effective interim annual reporting periods beginning december 15 2018 early adoption permitted modified retrospective approach must applied leases existing entered beginning earliest comparative period presented financial statements company evaluating potential impact adoption consolidated financial statements however increases assets liabilities expected march 2016 fasb issued asu 201604 liabilities extinguishments liabilities subtopic 40520 recognition breakage certain prepaid storedvalue products asu requires entities sell prepaid storedvalue products redeemable goods services cash thirdparty merchants recognize breakage ie value ultimately redeemed consumer way consistent recognized new revenue recognition standard current us gaap diversity practice entities account breakage results consumer redeem entire product balance asu clarifies entity’s liability prepaid storedvalue products within scope meets definition financial liability amendments update effective reporting periods beginning december 15 2017 early adoption permitted amendment may applied using either modified retrospective approach full retrospective approach company evaluating potential impact adoption consolidated financial statements march 2016 fasb issued asu 201605 derivatives hedging topic 815 effect derivative contract novations existing hedge accounting relationships asu provides guidance clarifying novation derivative contract ie change counterparty hedge accounting relationship require dedesignation hedge accounting relationship hedge accounting criteria met including expectation hedge highly effective creditworthiness new counterpart derivative contract considered hedging relationship continue uninterrupted amendments update effective reporting periods beginning december 15 2016 early adoption permitted entities may adopt guidance prospectively use modified retrospective approach adoption guidance material impact company’s consolidated financial statements march 2016 fasb issued asu 201606 derivatives hedging topic 815 contingent put call options debt instruments asu clarifies requirements assessing whether contingent put call options accelerate payment principal debt instruments clearly closely related ie entity required assess whether economic characteristics risks embedded put call options clearly closely related debt hosts accordance fourstep decision sequence fasb accounting standards codification asc 815 derivatives hedging entity longer assess whether event triggers ability exercise put call option related interest rates credit risk entity amendments update effective reporting periods beginning december 15 2016 early adoption permitted entities required apply guidance existing debt instruments using modified retrospective transition method period adoption guidance material impact company’s consolidated financial statements march 2016 fasb issued asu 201609 compensation stock compensation topic 718 improvements employee sharebased payment accounting asu intended simplify various aspects related sharebased payments accounted presented financial statements including income tax effects sharebased payments accounting forfeitures guidance require recognizing company’s excess tax benefits sharebased compensation arrangements tax provision instead equity current guidance addition amounts classified operating activity statement cash flows rather financing activity amendments update effective reporting periods beginning december 15 2016 early adoption permitted adoption guidance result excess tax benefits deficiencies related exercise sharebased compensation awards employees included determination company’s income tax provision could significantly impact company’s consolidated net income future periods december 31 2016 company unable quantify expected financial impact future periods consolidated net income adoption guidance also increase number shares used calculation fully diluted earnings per share due reduction assumed proceeds treasury stock method would also impact company determines earnings per share calculation company plans adopt update first quarter 2017 upon adoption company also recognize 296 million unrecognized excess tax benefits described note 12 income taxes deferred tax assets consolidated balance sheet june 2016 fasb issued asu 201613 financial instrument credit losses topic 326 measurement credit losses financial instruments asu changes impairment model financial assets requiring use expected loss model requires entities estimate lifetime expected credit loss financial assets measured amortized cost credit losses recorded allowance offset amortized cost financial asset resulting net presentation amount expected collected financial asset addition credit losses relating availableforsale debt securities recorded allowance credit losses rather direct writedown security amendments update effective reporting periods beginning december 15 2019 early adoption permitted reporting periods beginning december 15 2018 company evaluating potential impact adoption consolidated financial statements august 2016 fasb issued asu 201615 statement cash flows topic 230 classification certain cash receipts cash payments asu provides clarification eight specific cash flow issues regarding presentation classification statement cash flows objective reducing existing diversity practice amendments update effective reporting periods beginning december 15 2017 early adoption permitted company evaluating potential impact adoption consolidated financial statements october 2016 fasb issued asu 201616 income taxes topic 740 intraentity transfers assets inventory asu requires entities recognize income tax consequences intraentity transfer asset inventory transfer occurs amendments update change gaap pretax effects intraentity asset transfer topic 810 consolidation intraentity transfer inventory amendments update effective reporting periods beginning december 15 2017 early adoption permitted company evaluating potential impact adoption consolidated financial statements october 2016 fasb issued asu 201617 consolidation topic 810 interests held related parties common control asu changes single decision maker consider indirect interests performing primary beneficiary analysis variable interest entity vie model amendments update require single decision maker consider indirect interest held related party common control proportionate basis entirety previously required amendments update change characteristics primary beneficiary vie model amendments asu effective reporting periods beginning december 15 2016 early adoption permitted adoption guidance material impact company’s consolidated financial statements november 2016 fasb issued asu 201618 statement cash flows topic 230 restricted cash asu requires restricted cash restricted cash equivalents included cash equivalents reconciling beginningofperiod endofperiod amounts shown statements cash flows amendments asu effective reporting periods beginning december 15 2017 early adoption permitted company evaluating potential impact adoption consolidated financial statements january 2017 fasb issued asu 201704 intangibles goodwill topic 350 simplifying test goodwill impairment asu simplifies test goodwill impairment removing step 2 goodwill impairment test companies perform goodwill impairment test comparing fair value reporting unit carrying amount recognizing impairment charge amount carrying amount exceeds reporting unit’s fair value exceed total amount goodwill allocated reporting unit entity still option perform qualitative assessment reporting unit determine quantitative impairment test necessary amendments asu effective goodwill impairment tests fiscal years beginning december 15 2019 early adoption permitted goodwill impairment tests performed january 1 2017 company evaluating potential impact adoption consolidated financial statements significant accounting policies consolidation policy consolidated financial statements include accounts herbalife ltd subsidiaries significant intercompany transactions accounts eliminated foreign currency translation transactions majority countries company operates functional currency local currency company’s foreign subsidiaries’ asset liability accounts translated consolidated financial reporting purposes us dollar amounts yearend exchange rates revenue expense accounts translated average rates year foreign exchange translation adjustments included accumulated comprehensive loss accompanying consolidated balance sheets foreign currency transaction gains losses include cost foreign currency derivative contracts related settlement gains losses excluding certain foreign currency derivatives designated cash flow hedges discussed note 11 derivative instruments hedging activities included selling general administrative expenses accompanying consolidated statements income company recorded net foreign currency transaction losses 114 million 347 million 2190 million years ended december 31 2016 2015 2014 respectively includes foreign exchange impact relating company’s venezuelan subsidiary herbalife venezuela herbalife venezuela’s foreign currency financial statement impact discussed within note forward exchange contracts interest rate swaps company enters foreign currency derivatives primarily comprised foreign currency forward contracts managing foreign exchange risk sales members inventory purchases denominated foreign currencies intercompany transactions loans company also previously entered interest rate swaps managing interest rate risk variable rate credit facility company use contracts trading purposes accordance fasb accounting standards codification asc topic 815 derivatives hedging asc 815 company designates certain derivative instruments cash flow hedges formally documents hedge relationships including identification hedging instruments hedged items well risk management objectives strategies undertaking hedge transaction time derivative contract executed company assesses effectiveness hedge inception ongoing basis determines whether hedge highly perfectly effective offsetting changes cash flows hedged item company records effective portion changes estimated fair value accumulated comprehensive income loss subsequently reclassifies related amount accumulated comprehensive income loss earnings hedged item underlying transaction impacts earnings determined derivative ceased highly effective hedge company discontinue hedge accounting transaction derivatives designated hedges changes estimated fair value recognized consolidated statements income cash equivalents company considers highly liquid investments purchased maturity three months less cash equivalents cash equivalents comprised primarily foreign domestic bank accounts money market funds cash equivalents valued based level 1 inputs consist quoted prices active markets reduce credit risk company monitors credit standing financial institutions hold company’s cash equivalents company cash pooling arrangement financial institution cash management purposes cash pooling arrangement allows certain company’s participating subsidiaries withdraw cash financial institution based upon company’s aggregate cash deposits held subsidiaries participate cash pooling arrangement extent participating location individual basis overdraft position overdrafts recorded liabilities reflected financing activities company’s consolidated balance sheets consolidated statement cash flows respectively december 31 2016 december 31 2015 company owe amounts financial institution accounts receivable accounts receivable consist principally receivables credit card companies arising sale products company’s members receivables importers utilized limited number countries sell products members company believes concentration collection risk related credit card receivables diminished due geographic dispersion receivables credit card companies 518 million 493 million december 31 2016 2015 respectively substantially receivables credit card companies current december 31 2016 2015 although receivables importers significant company performs ongoing credit evaluations importers maintains allowance potential credit losses company considers customer creditworthiness past current transaction history customer contractual terms current economic industry trends changes customer payment terms determining whether collectability reasonably assured whether record allowances receivables financial condition company’s customers deteriorates adversely affects ability make payments additional allowances recorded company believes provides adequate allowances receivables members importers material consolidated financial statements years ended december 31 2016 2015 2014 company recorded 10 million 37 million 22 million respectively baddebt expense related allowances company’s receivables december 31 2016 2015 company’s allowance doubtful accounts 13 million 15 million respectively december 31 2016 2015 majority company’s total outstanding accounts receivable current fair value financial instruments company applies provisions fasb authoritative guidance applies financial nonfinancial assets liabilities fasb authoritative guidance clarifies definition fair value prescribes methods measuring fair value establishes fair value hierarchy based inputs used measure fair value expands disclosures fair value measurements company estimated fair value financial instruments using following methods assumptions • carrying amounts cash equivalents receivables accounts payable approximate fair value due shortterm maturities instruments • fair value availableforsale investments based prices similar assets traded active markets observable yield curves • fair value option forward contracts based dealer quotes • company’s variable rate revolving credit facility recorded carrying value considered approximate fair value company’s convertible senior notes issued february 2014 convertible notes recorded carrying value fair value determined using two valuation methods company reviewed market data available publicly traded senior unsecured nonconvertible corporate bonds issued companies similar credit ratings assumptions used estimate represent market participants would use pricing liability component including market yields credit standing develop straight debt yield estimate company also used lattice model included inputs stock price convertible notes trading price volatility dividend yield december 31 2016 estimate straight debt yield company combined results two valuation methods determine fair value liability component convertible notes see note 4 longterm debt description inventories stated lower cost primarily firstin firstout basis net realizable value debt issuance costs debt issuance costs represent fees expenses related borrowing company’s longterm debt amortized term related debt using effective interest method debt issuance costs except company’s revolving credit facility recorded reduction debt contraliability within company’s consolidated balance sheets total amortization expense related debt issuance costs 79 million 85 million 68 million years ended december 31 2016 2015 2014 respectively december 31 2016 2015 company’s remaining unamortized debt issuance cost 119 million 198 million respectively longlived assets december 31 2016 2015 company’s net property plant equipment consisted following millions december 2012 company purchased approximate 800000 square foot facility winstonsalem north carolina approximately 222 million company allocated 188 million 34 million buildings land respectively based relative fair values april 2016 company purchased one office buildings torrance california previously leased approximately 296 million company allocated 169 million 116 million net deferred rent liability 11 million buildings land respectively based relative fair values december 31 2016 2015 amounts reflected property plant equipment company’s accompanying consolidated balance sheets depreciation furniture fixtures equipment includes computer hardware software computed straightline basis estimated useful lives related assets range three ten years company capitalizes eligible costs acquire develop internaluse software incurred subsequent preliminary project stage computer hardware software majority comprised capitalized internaluse software costs 1457 million 1402 million december 31 2016 2015 respectively net accumulated depreciation leasehold improvements amortized straightline basis life related asset term lease whichever shorter buildings depreciated 40 years building improvements generally depreciated ten fifteen years land depreciated depreciation amortization expenses recorded selling general administrative expenses totaled 807 million 825 million 815 million years ended december 31 2016 2015 2014 respectively longlived assets reviewed impairment based undiscounted cash flows whenever events changes circumstances indicate carrying amount assets may recoverable measurement impairment loss based estimated fair value asset goodwill marketing related intangible assets indefinite lives evaluated annual basis impairment frequently events changes circumstances indicate asset might impaired goodwill company uses discounted cash flow approach estimate fair value reporting unit fair value reporting unit less carrying value implied fair value goodwill must determined implied fair value goodwill less carrying value goodwill impairment amount recorded difference marketing related intangible assets company uses discounted cash flow model relieffromroyalty method order determine fair value fair value less carrying value impairment amount recorded difference years ended december 31 2016 2015 2014 additions goodwill marketing related intangible assets impairments goodwill marketing related intangible assets december 31 2016 2015 marketing related intangible asset balance 3100 million consisted company’s trademark trade name marketing franchise december 31 2016 2015 goodwill balance 899 million 918 million respectively decreases goodwill years ended december 31 2016 2015 due cumulative translation adjustments assets company’s accompanying consolidated balance sheets include longterm deferred tax assets 1552 million 78 million december 31 2016 2015 respectively noted note 2 basis presentation company adopted asu 201517 applied provisions prospectively resulted classification deferred tax assets noncurrent company’s consolidated balance sheet december 31 2016 current portion deferred tax assets december 31 2015 reclassified noncurrent income taxes income tax expense includes income taxes payable current year change deferred income tax assets liabilities future tax consequences events recognized company’s financial statements income tax returns valuation allowance recognized reduce carrying value deferred income tax assets believed likely component deferred income tax assets realized company accounts uncertainty income taxes accordance fasb authoritative guidance clarifies accounting reporting uncertainties income taxes recognized enterprise’s financial statements guidance prescribes comprehensive model financial statement recognition measurement presentation disclosure uncertain tax positions taken expected taken income tax returns see note 12 income taxes description income taxes royalty overrides certain members may earn commissions called royalty overrides include production bonuses based retail sales volume royalty overrides based retail sales volume certain members sponsored directly indirectly member royalty overrides recorded products delivered revenue recognized royalty overrides compensation members services rendered including development retention improved productivity sales organizations royalty overrides classified operating expense nonus royalty override checks aged variety reasons beyond certainty paid taken back income management estimated period certainty three years worldwide comprehensive income comprehensive income consists net income foreign currency translation adjustments effective portion unrealized gains losses derivatives unrealized gains losses availableforsale investments components accumulated comprehensive income loss consisted following millions operating leases company leases physical properties operating leases certain lease agreements generally include rent holidays tenant improvement allowances company recognizes rent holiday periods straightline basis lease term beginning company right leased space company also records tenant improvement allowances rent holidays deferred rent liabilities amortizes deferred rent terms lease rent expense research development company’s research development performed inhouse staff outside consultants periods presented research development costs expensed incurred material operating income encourage local investment operations governments various china provinces conduct grant programs company applied received several grants china government grants recorded income legal right grant exists reasonable assurance grant proceeds received substantive conditions grants provided met year ended december 31 2016 company recognized government grant income approximately 342 million operating income within consolidated statements income related regional headquarters distribution centers within china conform current period presentation year ended december 31 2015 65 million government grant income china reclassified selling general administrative expenses operating income within consolidated statements income company recognize grant income year ended december 31 2014 company intends continue applying government grants china programs available however assurance company receive grants future periods october 30 2016 arbitration tribunal awarded company approximately 297 million connection reaudit company’s 2010 2012 financial statements resignation kpmg company’s independent registered public accounting firm amount recognized operating income within company’s consolidated financial statements year ended december 31 2016 professional fees company expenses professional fees including legal fees incurred professional fees included selling general administrative expenses company’s consolidated statements income advertising costs including company sponsorships expensed incurred amounted approximately 648 million 661 million 697 million years ended december 31 2016 2015 2014 respectively expenses included selling general administrative expenses accompanying consolidated statements income earnings per share basic earnings per share represents net income period common shares outstanding divided weighted average number common shares outstanding period diluted earnings per share represents net income divided weighted average number common shares outstanding inclusive effect dilutive securities outstanding stock options sars stock units following common share amounts used compute basic diluted earnings per share period millions aggregate 45 million 54 million 27 million equity grants consisting stock options sars stock units outstanding years ended december 31 2016 2015 2014 respectively included computation diluted earnings per share effect would antidilutive performance condition award satisfied since company settle principal amount convertible notes cash settle conversion feature amount conversion price common shares conversion spread company uses treasury stock method calculating potential dilutive effect conversion spread diluted earnings per share applicable conversion spread dilutive impact diluted earnings per share average market price company’s common shares given period exceeds initial conversion price 8628 per share years ended december 31 2016 2015 2014 convertible notes excluded computation diluted earnings per share effect would antidilutive since conversion price convertible notes exceeded average market price company’s common shares years ended december 31 2016 2015 2014 initial conversion rate conversion price described note 4 longterm debt capped call transactions executed connection issuance convertible notes excluded calculation diluted earnings per share impact always antidilutive revenue recognition company generally recognizes revenue upon delivery title risk rewards pass member importer products sold china independent service providers sales representatives sales officers customers preferred customers well companyoperated retail stores necessary product sales recognized net product returns discounts referred “distributor allowances” net sales include product sales shipping handling revenues shipping handling costs paid company included cost sales company generally receives net sales price cash credit card payments point sale company currently presents sales taxes collected customers net basis allowances product returns primarily connection company’s buyback program provided time sale recorded accrual based upon historical return rates country relevant return pattern reflects anticipated returns received period 12 months following original sale allowances product returns 39 million 39 million 43 million december 31 2016 2015 2014 respectively product returns 45 million 50 million 73 million years ended december 31 2016 2015 2014 respectively noncash investing financing activities years ended december 31 2016 2015 2014 company recorded 127 million 123 million 123 million respectively noncash capital expenditures addition year ended december 31 2015 company recorded 150 million noncash release deposits escrow used reduce company’s accrued expense liability years ended december 31 2016 2015 company recorded 208 million 173 million noncash borrowings used finance software maintenance additionally see note 8 shareholders’ deficit equity information company’s noncash financing activities related prepaid forward share repurchases transaction sharebased payments company accounts sharebased compensation accordance fasb authoritative guidance requires measurement sharebased compensation expense sharebased payment awards made employees company measures sharebased compensation cost grant date based fair value award company recognizes sharebased compensation expense service condition awards straightline basis employee’s requisite service period company recognizes sharebased compensation expense performance condition awards vesting term using graded vesting method use estimates preparation financial statements conformity us gaap requires management make estimates assumptions estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates company evaluates estimates assumptions ongoing basis using historical experience factors including current economic environment company believes reasonable circumstances company adjusts estimates assumptions facts circumstances dictate illiquid credit markets volatile equity foreign currency combined increase uncertainty inherent estimates assumptions future events effects cannot determined precision actual results could differ estimates changes estimates resulting continuing changes economic environment reflected financial statements future periods venezuela adverse operating environment venezuela continues challenging company’s venezuela business high inflation pricing limitations importation restrictions foreign exchange restrictions foreign exchange controls venezuela continue limit herbalife venezuela’s ability repatriate earnings settle intercompany shipment obligations official rate result continued significantly limit herbalife venezuela’s ability acquire us dollar denominated raw materials finished good inventory despite currency exchange restrictions company continues control herbalife venezuela operations therefore company continues consolidate herbalife venezuela consolidated financial statements venezuela’s inflation rate measured using blended national consumer price index consumer price index rate exceeded threeyear cumulative inflation rate 100 december 31 2009 accordingly effective january 1 2010 venezuela considered highly inflationary economy pursuant highly inflationary basis accounting us gaap herbalife venezuela changed functional currency bolivar us dollar company longer translates herbalife venezuela’s financial statements functional currency us dollar years ended december 31 2016 2015 2014 company recognized foreign exchange losses related charges 72 million 428 million 2290 million within consolidated statements income related venezuelan operations respectively herbalife venezuela’s net sales represented less 1 years ended december 31 2016 2015 approximately 3 company’s consolidated net sales year ended december 31 2014 total assets represented less 1 company’s consolidated total assets december 31 2016 2015 december 31 2016 2015 herbalife venezuela’s cash equivalents primarily consisted bolivardenominated cash approximately 08 million 77 million respectively 3 inventories following major classes inventory millions 4 longterm debt longterm debt consists following millions 1 february 15 2017 company entered new credit facility repaid 4100 million outstanding balance senior secured credit facility described note 15 subsequent events accordance asc topic 470 debt company classified 4100 million outstanding balance senior secured credit facility due march 2017 longterm debt december 31 2016 senior secured credit facility march 9 2011 company entered 7000 million senior secured revolving credit facility credit facility syndicate financial institutions lenders terminated prior senior secured credit facility prior credit facility march 2011 company used 1960 million us dollar borrowings credit facility repay amounts outstanding prior credit facility company incurred approximately 57 million debt issuance costs connection credit facility debt issuance costs recorded company’s consolidated balance sheets amortized term credit facility july 26 2012 company amended credit facility include 5000 million term loan syndicate financial institutions lenders term loan term loan part credit facility addition company’s current revolving credit facility july 2012 company used 5000 million borrowings term loan pay amounts outstanding company’s revolving credit facility company incurred approximately 45 million debt issuance costs connection term loan debt issuance costs recorded company’s consolidated balance sheets amortized life term loan term loan matured march 9 2016 repaid full february 2014 connection issuing 115 billion convertible notes described company amended credit facility pursuant amendment company amended terms credit facility provide technical amendments indebtedness asset sale dividend covenants crossdefault event default accommodate issuance convertible senior notes described capped call prepaid forward share repurchase transactions described greater detail note 8 shareholders’ deficit equity amendment also increased 050 highest applicable margin payable herbalife event herbalife’s consolidated total leverage ratio equal exceeds 250 100 increased permitted consolidated total leverage ratio herbalife credit facility company incurred approximately 23 million debt issuance costs connection amendment debt issuance costs recorded company’s consolidated balance sheets amortized life credit facility may 4 2015 company amended credit facility extend maturity date revolving credit facility one year march 9 2017 pursuant amendment upon execution company made prepayments approximately 203 million 509 million term loan revolving credit facility respectively additionally company’s 700 million borrowing capacity revolving credit facility reduced approximately 2359 million upon execution amendment reduced approximately 391 million september 30 2015 total available borrowing capacity revolving credit facility 4250 million december 31 2016 prior march 9 2016 interest rates company’s borrowings credit facility remained effectively unchanged except minimum applicable margin increased 050 libor subject minimum floor 025 march 9 2016 applicable interest rates company’s borrowings credit facility increased 200 borrowings credit facility bear interest either libor plus applicable margin 400 500 base rate plus applicable margin 300 400 based company’s consolidated leverage ratio company incurred approximately 62 million debt issuance costs connection amendment debt issuance costs recorded company’s consolidated balance sheets amortized life revolving credit facility base rate credit facility represents highest federal funds rate plus 050 onemonth libor plus 100 prime rate offered bank america company based consolidated leverage ratio pays commitment fee 040 050 per annum unused portion credit facility credit facility also permits company borrow limited amounts mexican peso euro currencies based variable rates obligations credit facility unconditionally guaranteed certain company’s subsidiaries secured substantially assets us subsidiaries parent company herbalife ltd certain assets certain foreign subsidiaries herbalife ltd credit facility requires company comply leverage ratio coverage ratio addition credit facility contains customary covenants including covenants limit restrict company’s ability incur liens incur indebtedness make investments dispose assets make certain restricted payments pay dividends repurchase common shares merge consolidate enter certain transactions affiliates credit facility restricts company’s ability pay dividends repurchase common shares maximum 2330 million maturity every one dollar share repurchase dividend paid revolving credit facility’s borrowing capacity permanently decreased two dollars credit facility also provides grant security interest certain additional assets company subsidiaries company also required maintain minimum balance 2000 million consolidated cash equivalents december 31 2016 2015 company compliant debt covenants credit facility december 31 2016 december 31 2015 weightedaverage interest rate borrowings credit facility 429 278 respectively 2016 company borrowed aggregate amount 2000 million paid total amount 4297 million credit facility 2015 company make borrowings paid total amount 2103 million credit facility 2014 company borrowed aggregate amount 500 million paid total amount 1313 million credit facility december 31 2016 us dollar amount outstanding revolving credit facility 4100 million december 31 2015 us dollar amount outstanding credit facility 6397 million consisted 2297 million outstanding term loan 4100 million outstanding revolving credit facility outstanding foreign currency borrowings december 31 2016 december 31 2015 credit facility fair value outstanding borrowings company’s revolving credit facility term loan approximated carrying values december 31 2016 2015 due variable interest rates reprice frequently represent floating market rates fair value outstanding borrowings company’s revolving credit facility term loan determined utilizing level 2 inputs defined note 13 fair value measurements observable market interest rates yield curves convertible senior notes february 2014 company initially issued 1 billion aggregate principal amount convertible senior notes convertible notes private offering qualified institutional buyers pursuant rule 144a securities act 1933 amended company granted option initial purchasers purchase additional 150 million aggregate principal amount convertible notes subsequently exercised full february 2014 resulting total issuance 115 billion aggregate principal amount convertible notes convertible notes senior unsecured obligations rank effectively subordinated existing future secured indebtedness including amounts outstanding credit facility extent value assets securing indebtedness convertible notes pay interest rate 200 per annum payable semiannually arrears february 15 august 15 year beginning august 15 2014 convertible notes mature august 15 2019 unless earlier repurchased converted company may redeem convertible notes prior stated maturity date holders convertible notes may convert notes option following circumstances calendar quarter commencing calendar quarter ending march 31 2014 last reported sale price company’s common shares least 20 trading days whether consecutive period 30 consecutive trading days ending including last trading day immediately preceding calendar quarter exceeds 130 conversion price convertible notes applicable trading day ii five businessday period immediately five consecutive trading day period measurement period trading price per 1000 principal amount convertible notes trading day measurement period less 98 product last reported sale price company’s common shares conversion rate convertible notes day iii upon occurrence specified corporate events may 15 2019 holders may convert convertible notes time regardless foregoing circumstances upon conversion convertible notes settled cash applicable company’s common shares based applicable conversion rate time convertible notes initial conversion rate 115908 common shares per 1000 principal amount convertible notes equal initial conversion price approximately 8628 per common share company incurred approximately 266 million issuance costs first quarter 2014 relating issuance convertible notes 266 million issuance costs incurred 215 million 51 million recorded debt issuance costs additional paidin capital respectively proportion allocation proceeds convertible notes 215 million debt issuance costs recorded company’s consolidated balance sheet amortized contractual term convertible notes using effective interest method february 2014 115 billion proceeds received issuance convertible notes initially allocated longterm debt liability component additional paidincapital equity component within company’s consolidated balance sheet 9309 million 2191 million respectively liability component measured using nonconvertible debt interest rate carrying amount equity component representing conversion option determined deducting fair value liability component face value convertible notes whole since company must still settle convertible notes face value prior maturity liability component accreted face value resulting additional noncash interest expense recognized within company’s consolidated statements income convertible notes remain outstanding effective interest rate convertible notes approximately 62 per annum equity component remeasured long continues meet conditions equity classification december 31 2016 outstanding principal convertible notes 115 billion unamortized debt discount debt issuance costs 1252 million carrying amount liability component 10248 million recorded longterm debt within company’s consolidated balance sheet reflected table within note december 31 2015 outstanding principal convertible notes 115 billion unamortized debt discount debt issuance costs 1676 million carrying amount liability component 9825 million recorded longterm debt within company’s consolidated balance sheet reflected table within note december 31 2016 fair value liability component relating convertible notes approximately 9613 million december 31 2015 fair value liability component relating convertible notes approximately 7959 million december 31 2016 2015 company determined fair value liability component convertible notes using two valuation methods company reviewed market data available publicly traded senior unsecured nonconvertible corporate bonds issued companies similar credit ratings assumptions used estimate represent market participants would use pricing liability component including market yields credit standing develop straight debt yield estimate company also used lattice model included inputs stock price convertible note trading price volatility dividend yield estimate straight debt yield company combined results two valuation methods determine fair value liability component convertible notes inputs primarily considered level 2 level 3 inputs valuation approach similar approach company used determine initial fair value liability component convertible notes february 7 2014 issuance date conjunction issuance convertible notes february 2014 company paid approximately 6858 million enter prepaid forward share repurchase transactions forward transactions certain financial institutions paid approximately 1238 million enter capped call transactions respect common shares capped call transactions certain financial institutions see note 8 shareholders’ deficit equity additional discussion forward transactions capped call transactions entered conjunction issuance convertible notes years ended december 31 2016 2015 2014 company recognized 653 million 617 million 551 million interest expense relating convertible notes respectively included 386 million 357 million 308 million relating noncash interest expense relating debt discount respectively 38 million 32 million 33 million relating amortization deferred financing costs respectively company’s total interest expense including credit facility 993 million 1005 million 917 million years ended december 31 2016 2015 2014 respectively recognized within consolidated statement income december 31 2016 annual scheduled principal payments debt 4195 million 29 million 11504 million 03 million years ended december 31 2017 2018 2019 2020 respectively certain vendors government agencies may require letters credit similar guaranteeing arrangements issued executed december 31 2016 company 367 million issued undrawn letters credit similar arrangements included mexico vat related surety bonds described note 7 contingencies 5 lease obligations company warehouse office furniture fixtures equipment leases expire various dates 2025 lease agreements company also obligated pay property taxes insurance maintenance costs certain leases contain renewal options future minimum rental commitments noncancelable operating leases december 31 2016 follows millions company recognizes rental expense straightline basis rental expense years ended december 31 2016 2015 2014 534 million 580 million 600 million respectively material property plant equipment capital leases included property plant equipment accompanying consolidated balance sheets december 31 2016 december 31 2015 6 employee compensation plans united states company maintains profit sharing plan pursuant sections 401a k internal revenue code 1986 amended code plan available substantially employees meet length service requirements company’s contribution expense relating profit sharing plan 48 million 43 million 35 million years ended december 31 2016 2015 2014 respectively company employees international countries covered various deferred compensation plans administered based upon legal requirements countries established company’s compensation expenses relating plans 58 million 55 million 75 million years ended december 31 2016 2015 2014 respectively company nonqualified deferred compensation plans select groups management herbalife management deferred compensation plan herbalife senior executive deferred compensation plan matching contribution 35 participant’s annual base salary excess qualified plan annual compensation limit amount deferrals reduce 401k eligible pay irs limit participant either nonqualified deferred compensation plans discussed times fully vested nonforfeitable interest year’s contribution including interest credited thereto company matching contributions applicable connection participant’s election defer annual deferral amount participant may also elect receive shortterm payout equal annual deferral amount plus interest amount payable five years first day year annual deferral amount actually deferred total expense two nonqualified deferred compensation plans excluding participant contributions 36 million 01 million 17 million years ended december 31 2016 2015 2014 respectively total longterm deferred compensation liability two deferred compensation plans 500 million 436 million december 31 2016 2015 respectively deferred compensation plans unfunded benefits paid general assets company except company contributed “rabbi trust” whose assets used pay benefits company remains solvent reached company’s creditors company becomes insolvent value assets “rabbi trust” 306 million 293 million december 31 2016 2015 respectively 7 contingencies company time engaged routine litigation company regularly reviews pending litigation matters involved establishes reserves deemed appropriate management litigation matters probable loss estimate made tax matters may 7 2010 company received assessment mexican tax administration service amount equivalent approximately 56 million translated december 31 2016 spot rate various items majority vat allegedly owed certain company’s products imported mexico years 2005 2006 assessment subject interest inflationary adjustments july 8 2010 company initiated formal administrative appeal process may 13 2011 mexican tax administration service issued resolution company’s administrative appeal resolution nullified assessment since mexican tax administration service review tax audit findings reissue original assessment company commenced litigation tax court mexico august 2011 dispute assertions made mexican tax administration service case company received notification february 6 2015 tax court mexico nullified substantially assessment march 18 2015 mexican tax administration service filed appeal verdict circuit court august 27 2015 circuit court remanded case back tax court mexico reconsider portion procedural decision adverse mexican tax administration service company received notification march 18 2016 tax court mexico nullified portion assessment upheld portion original assessment august 25 2016 company filed appeal decision litigation appeal ongoing company believes meritorious defenses assessment reissued company recognized loss company believe loss probable mexican tax administration service commenced audits company’s mexican subsidiaries period january september 2007 may 10 2013 company received assessment approximately 142 million translated december 31 2016 spot rate related period july 11 2013 company filed administrative appeal disputing assessment september 22 2014 mexican tax administration service denied company’s administrative appeal company commenced litigation tax court mexico november 2014 dispute assertions made mexican tax administration service case company issued surety bond amount 158 million translated december 31 2016 spot rate insurance company guarantee payment tax assessment required company pursues appeal assessment litigation case currently ongoing company recognized loss company believe loss probable mexican customs service challenged customs classification codes used company certain importations change customs classification codes would require payment additional vat taxes importations company believes customs classification codes used importation products correct generally prevailed cases administrative appeal company expects challenge assessments received products subject dispute since reformulated avoid potential additional assessments related future importations product mexican tax administration service delayed processing vat refunds companies operating mexico company believes process mexico subsidiary receive vat refunds may delayed march 2015 company commenced litigation tax court mexico reclaim vat refund pertaining specifically july 2013 period july 2016 company withdrew vat refund claim elected apply immaterial amount certain future tax liabilities december 31 2016 company 440 million mexico vat related assets 355 million within noncurrent assets 85 million within prepaid expenses current assets consolidated balance sheet amount relates vat payments made various periods company believes amounts recoverable refund may applied certain future tax liabilities company recognized losses related vat related assets company believe loss probable march 26 2015 office president mexico issued decree relating application vat nutritional supplements company continues believe application vat law mexico correct december 31 2016 company recognized losses company based current analysis guidance advisors believe loss probable company continues evaluate monitor situation develops including whether make changes operations mexico company recognized loss respect mexican matters company based analysis guidance advisors believe loss probable company currently unable reasonably estimate possible loss range loss could result unfavorable outcome assessment reissued additional assessments issued periods company believes meritorious defenses assessment reissued would meritorious defenses additional assessment issued previously disclosed mexican tax administration service requested information related company’s 2010 year information provided tax administration service completed income tax audit related 2010 year tax administration service discussing preliminary findings company possible company could receive final assessment tax administration service discussions completed company believes recognized appropriate amount income tax expense respect mexican operations 2010 year company believes meritorious defenses formal assessment issued tax administration service company currently unable reasonably estimate amount loss may result unfavorable outcome formal assessment issued tax administration service company received tax assessment september 2009 federal revenue office brazil amount equivalent approximately 22 million translated december 31 2016 spot rate related withholdingcontributions based payments company’s members 2004 december 28 2010 company appealed tax assessment administrative council tax appeals 2nd level administrative appeal company believes meritorious defenses recognized loss company believe loss probable march 6 2014 company notified similar audit 2011 year january 2016 company received tax assessment amount equivalent approximately 54 million translated december 31 2016 spot rate related contributions based payments company’s members 2011 company accrued loss majority assessment company believe loss probable company filed first level administrative appeal assessment february 23 2016 company currently unable reasonably estimate amount loss may result unfavorable outcome additional assessments periods issued company’s brazilian subsidiary pays icmsst taxes product purchases similar vat company believes able utilize recover icmsst credits future company 160 million translated december 31 2016 spot rate brazil icmsst related assets within assets consolidated balance sheet company examination several brazilian states related icms icmsst taxation examinations resulted assessments underpaid tax company appealed state sao paulo audited company 2013 2014 tax years july 2016 state sao paulo company received assessment aggregate amount approximately 494 million translated december 31 2016 spot rate relating various icms issues 2013 tax year possible company could receive similar assessment 2014 tax year august 2016 company filed first level administrative appeal denied february 2017 company plans file appeals company recognized loss company believe loss probable company also received assessments states brazil fourth quarter 2015 company filed appeals state judicial courts three assessments relating states brazil company issued surety bonds aggregate amount 108 million translated december 31 2016 spot rate insurance company guarantee payment three tax assessments required company pursues appeals addition company received several icms tax assessments aggregate amount 94 million translated december 31 2016 spot rate several brazilian states surety bonds issued litigation cases currently ongoing company recognized loss company believe loss probable company received various tax assessments multiple states india multiple years indian vat authorities amount equivalent approximately 51 million translated december 31 2016 spot rate assessments underpaid vat company litigating cases tax administrative level tax tribunal levels believes meritorious defenses company recognized loss believe loss probable korea customs service audited importation activities herbalife korea period january 2011 may 2013 total assessment audit period 297 million translated december 31 2016 spot rate company paid assessment recognized payments within assets consolidated balance sheet company lodged first level administrative appeal denied october 21 2016 january 31 2017 company filed appeal national tax tribunal korea company disagrees assertions made assessments well calculation methodology used assessments company recognized loss company believe loss probable course 2016 company received various questions greek social security agency december 29 2016 greek social security agency issued assessment approximately 21 million translated december 31 2016 spot rate respect social security contributions member earnings 2006 year social security issues statute limitations open 2007 later years greece company could receive similar assessments covering years company disputes allegations raised assessment intends timely appeal assessment company recognized loss believe loss probable us federal trade commission consent order previously disclosed company received us federal trade commission ftc civil investigative demand cid relating ftc’s confidential investigation whether company complied federal law advertising marketing sale business opportunities july 15 2016 company ftc entered proposed stipulation entry order permanent injunction monetary judgment consent order consent order lodged us district court central district california july 15 2016 became effective july 25 2016 effective date upon final approval court consent order resolved ftc’s multiyear investigation company pursuant consent order company neither admitted denied ftc’s allegations except court jurisdiction matter company agreed make wholly owned subsidiary herbalife international america inc 200 million payment ftc within seven days entry consent order 200 million settlement amount recognized selling general administrative expenses within company’s consolidated statements income year ended december 31 2016 paid july 2016 additionally pursuant consent order company agreed implement certain new procedures enhance certain existing procedures us company 10 months effective date implement among requirements consent order requires company categorize existing future members us either “preferred members” simply consumers wish purchase products household use “distributors” members wish resell products build sales organization although required may 2017 october 2016 initiated process allowing existing members us affirmatively elect classified either preferred members independent distributors company also agreed compensate distributors us retail sales within downline organization include purchases preferred members purchases distributor personal consumption within allowable limits sales product distributor customers consent order also imposes restrictions distributors’ ability open nutrition clubs united states consent order subjects company certain audits independent compliance auditor period seven years imposes requirements company regarding compliance certification record creation maintenance prohibits company affiliates distributors making misrepresentations misleading claims regarding among things income lavish lifestyles ftc independent compliance auditor right inspect company records request additional compliance reports purposes conducting audits pursuant consent order september 2016 company ftc mutually selected affiliated monitors inc serve independent compliance auditor company intends monitor impact consent order regularly company currently expect settlement longterm materially adverse impact business member base company’s business member base particularly united states may negatively impacted company member base adjust changes company unable comply consent order could result material adverse impact company’s results operations financial condition matters marketer foods dietary nutritional supplements products ingested consumers applied bodies company currently subjected various product liability claims effects claims date material company currently maintains product liability insurance annual deductible 15 million sec department justice requested company documents information relating company’s anticorruption compliance china company conducting review company cooperating government cannot predict eventual scope duration outcome matter time since late 2012 short seller made continues make allegations regarding company network marketing program company believes allegations without merit vigorously defending claims including proactively reaching governmental authorities company believes manipulative activity respect securities allegations company others received may receive additional regulatory governmental inquiries example company previously disclosed inquiries ftc securities exchange commission governmental authorities future governmental authorities may determine seek information company persons relating allegations company believes governmental regulatory inquiry investigation becomes material disclosed individually consistent policies company cooperated continue fully cooperate governmental regulatory inquiries investigations matters described note may take several years resolve company believes meritorious defenses cannot sure ultimate resolution although company may reserve amounts certain matters company believes represent likely outcome resolution related disputes company incorrect assessment company may record additional expenses becomes probable increased potential liability warranted 8 shareholders’ deficit equity company 931 million 927 million 922 million common shares outstanding december 31 2016 2015 2014 respectively december 2004 company authorized 75 million preference shares 0002 par value 75 million authorized preference shares remained unissued december 31 2016 preference shares may issued time one series voting powers full limited without voting powers designations preferences relative participating optional special rights qualifications limitations restrictions determined company’s board directors dividends declaration future dividends subject discretion company’s board directors depend upon various factors including earnings financial condition herbalife ltd’s available distributable reserves cayman islands law restrictions imposed credit facility terms indebtedness may outstanding cash requirements future prospects factors deemed relevant board directors credit facility permits payments dividends specified cap long default event default exists consolidated leverage ratio specified credit facility exceeded see note 4 longterm debt information restrictions concerning company’s ability declare dividends april 28 2014 company announced board directors approved terminating quarterly cash dividend instead utilizing cash repurchase additional common shares aggregate amount dividends paid declared fiscal year ended december 31 2014 approximately 304 million company pay declare dividends fiscal years ended december 31 2016 2015 year ended december 31 2014 company received 34 million dividends primarily relating forward transactions described recorded directly accumulated deficit retained earnings company receive dividends years ended december 31 2016 2015 share repurchases july 30 2012 company announced board directors authorized new 1 billion share repurchase program expire june 30 2017 february 3 2014 company announced board directors authorized increase existing share repurchase authorization available balance 15 billion share repurchase program allows company repurchase common shares times prices determined company’s management market conditions warrant extent herbalife ltd’s distributable reserves available cayman islands law credit facility permits company repurchase common shares specified cap long default event default exists consolidated leverage ratio specified credit facility exceeded see note 4 longterm debt information restrictions concerning company’s ability repurchase common shares note 15 subsequent events consolidated financial statements information company’s new senior secured credit facility company’s new share repurchase program conjunction issuance convertible notes february 2014 company paid approximately 6858 million enter prepaid forward share repurchase transactions forward transactions certain financial institutions forward counterparties pursuant company purchased approximately 99 million common shares settlement around august 15 2019 maturity date convertible notes subject ability forward counterparty elect settle portion forward transactions early forward transactions generally expected facilitate privately negotiated derivative transactions forward counterparties holders convertible notes including swaps relating common shares holders convertible notes establish short positions relating common shares otherwise hedge investments convertible notes concurrently shortly pricing convertible notes result forward transactions company’s total shareholders’ deficit equity within consolidated balance sheet reduced approximately 6858 million first quarter 2014 amounts 6539 million 319 million allocated accumulated deficit retained earnings additional paidincapital respectively within total shareholders’ deficit equity also upon executing forward transactions company recorded fair value 358 million noncash issuance costs assets corresponding amount additional paidincapital within consolidated balance sheet noncash issuance costs amortized interest expense contractual term forward transactions years ended december 31 2016 2015 2014 company recognized 65 million 65 million 58 million respectively noncash interest expense within consolidated statement income relating amortization noncash issuance costs may 6 2014 company entered agreement merrill lynch international repurchase 2660 million common shares repurchase agreement expired june 30 2014 terms repurchase agreement company paid 2660 million may 7 2014 received aggregate 43 million common shares repurchase agreement may june 2014 total number common shares repurchased repurchase agreement determined generally upon discounted volumeweighted average share price company’s common shares course repurchase agreement company repurchase common shares open market years ended december 31 2016 2015 year ended december 31 2014 company repurchased 197 million common shares open market purchases repurchase agreement forward transactions aggregate cost approximately 12671 million average cost 6425 per share approximate 99 million common shares effectively repurchased forward transactions treated retired shares basic diluted eps purposes although remain legally outstanding years ended december 31 2016 2015 2014 company also withheld shares vested rsus exercised sars relating sharebased compensation plans treated share repurchases company’s consolidated financial statements discussed december 31 2016 remaining authorized capacity company’s share repurchase program 2329 million inclusive reductions forward transactions company reflects aggregate purchase price common shares repurchased reduction increase shareholders’ deficit equity company allocated purchase price repurchased shares accumulated deficit retained earnings common shares additional paidincapital number shares issued upon vesting exercise certain restricted stock units sars granted pursuant company’s sharebased compensation plans net minimum statutory withholding requirements company pays behalf employees although shares withheld issued treated common share repurchases company’s consolidated financial statements reduce number shares would issued upon vesting shares count authorized capacity company’s share repurchase program described capped call transactions connection issuance convertible notes company paid approximately 1238 million enter capped call transactions respect common shares capped call transactions certain financial institutions capped call transactions expected generally reduce potential dilution upon conversion convertible notes event market price common shares greater strike price capped call transactions initially set 8628 per common share reduction potential dilution subject cap based cap price initially set 12079 per common share strike price cap price subject certain adjustments terms capped call transactions therefore result executing capped call transactions company effect exposed potential net dilution market price common shares exceeds adjusted cap price result capped call transactions company’s additional paidin capital within shareholders’ deficit equity consolidated balance sheet reduced 1238 million first quarter 2014 accumulated comprehensive income loss following table summarizes changes accumulated comprehensive income loss years ended december 31 2016 2015 2014 1 see note 2 basis presentation note 11 derivative instruments hedging activities information regarding location consolidated statements income gains losses reclassified accumulated comprehensive income loss income years ended december 31 2016 2015 2014 comprehensive income loss reclassifications net tax expense 52 million tax benefits 03 million foreign currency translation adjustments unrealized gain loss derivatives respectively year ended december 31 2016 amounts reclassified accumulated comprehensive income loss income net tax expense 01 million unrealized gain loss availableforsale investments year ended december 31 2016 comprehensive income loss reclassifications net tax benefits 72 million 06 million 09 million foreign currency translation adjustments unrealized gain loss derivatives unrealized gain loss availableforsale investments respectively year ended december 31 2015 amounts reclassified accumulated comprehensive income loss income net tax expense 08 million unrealized gain loss availableforsale investments year ended december 31 2015 comprehensive income loss reclassifications net tax benefits 73 million tax expense 06 million tax expense 46 million foreign currency translation adjustments unrealized gain loss derivatives unrealized gain loss availableforsale investments respectively year ended december 31 2014 amounts reclassified accumulated comprehensive income loss income net tax benefits 45 million unrealized gain loss availableforsale investments year ended december 31 2014 9 sharebased compensation company four sharebased compensation plans amended restated herbalife ltd 2005 stock incentive plan 2005 stock incentive plan amended restated herbalife ltd 2014 stock incentive plan 2014 stock incentive plan amended restated herbalife ltd independent directors deferred compensation stock unit plan independent director stock unit plan amended restated nonmanagement directors compensation plan nonmanagement directors plan 2014 stock incentive plan replaced 2005 stock incentive plan adoption thereof additional awards made 2005 stock incentive plan terms 2014 stock incentive plan substantially similar terms 2005 stock incentive plan 2014 stock incentive plan authorizes issuance 8700000 common shares pursuant awards granted plan plus shares remained available issuance 2005 stock incentive plan april 29 2014 purpose independent directors stock unit plan nonmanagement directors plan facilitate equity ownership company directors equity awards december 31 2016 aggregate approximately 55 million common shares remain available future issuance 2014 stock incentive plan company’s sharebased compensation plans provide grants stock options stock appreciation rights sars stock units collectively referred herein awards previously stock options generally vested quarterly fiveyear period less beginning grant date certain sars vest quarterly fiveyear period beginning grant date sars vest annually threeyear period contractual term service condition stock options sars generally ten years stock unit awards 2014 stock incentive plan incentive plan stock units vest annually three year period stock units awarded directors generally vest one year period awards subject following market service conditions market condition awards performance service conditions performance condition awards market service performance conditions market performance condition awards subject continued service company service condition awards granted company market condition awards performance condition awards market performance condition awards service condition awards unless otherwise determined time grant value stock unit shall equal one common share herbalife company’s stock compensation awards outstanding december 31 2016 include sars stock units august 2011 company granted sars market performance conditions chairman chief executive officer awards vest december 31 2014 subject continued employment date company’s stock price appreciating exceeding targeted price company’s achievement certain volume point performance targets fair value sars determined date grant using monte carlo lattice model end december 31 2014 chairman chief executive office remained employee company met specified volume point performance targets requisite service performance conditions met impact sharebased compensation expense recorded connection sars remained company’s consolidated financial statements however price company’s common shares exceed target price applicable sars vest longer considered outstanding years ended december 31 2016 2015 2014 company granted sars performance conditions certain employees awards vest 20 first succeeding year 20 second succeeding year 60 third succeeding year subject achievement certain sales leader retention metrics fair value sars determined date grant using blackscholesmerton option pricing model compensation expense grants recognized vesting term using graded vesting method years ended december 31 2016 2015 2014 company granted sars service conditions certain employees fair value sars determined date grant using blackscholesmerton option pricing model compensation expense grants recognized vesting term using straight line method stockbased compensation expense included selling general administrative expenses consolidated statements income years ended december 31 2016 2015 2014 sharebased compensation expense relating service condition awards amounted 239 million 268 million 279 million respectively years ended december 31 2016 2015 sharebased compensation expense relating market condition awards amounted 04 million 03 million respectively sharebased compensation expense relating market condition awards recognized year ended december 31 2014 years ended december 31 2016 2015 2014 sharebased compensation expense relating performance condition awards amounted 159 million 178 million 133 million respectively sharebased compensation expense related market performance condition awards recognized years ended december 31 2016 2015 year ended december 31 2014 sharebased compensation expense relating market performance condition awards amounted 45 million years ended december 31 2016 2015 2014 related income tax benefits recognized earnings awards amounted 148 million 166 million 166 million respectively december 31 2016 total unrecognized compensation cost related nonvested service condition stock awards 310 million related weightedaverage period expected recognized approximately 18 years december 31 2016 total unrecognized compensation cost related nonvested performance condition awards 171 million related weightedaverage period expected recognized approximately 16 years december 31 2016 total unrecognized compensation cost related nonvested market condition stock awards 05 million related weightedaverage period expected recognized approximately 12 years stock units valued market value date grant fair value service condition sars performance condition sars estimated date grant using blackscholesmerton optionpricing model fair value sars market conditions market performance conditions estimated date grant using monte carlo lattice model company calculates expected term sars based historical data groups employees determined similar historical exercise patterns valuation purposes expected volatility sars based upon historical volatility company’s common shares also validated volatility rates peer group companies risk free interest rate based implied yield us treasury zerocoupon issue remaining term equal expected term sars expected dividend yield assumption based company’s historical expected amount dividend payouts stock options granted years ended december 31 2016 2015 2014 sars granted independent directors years ended december 31 2016 2015 2014 following table summarizes weighted average assumptions used calculation fair value service condition awards years ended december 31 2016 2015 2014 following table summarizes weighted average assumptions used calculation fair value performance condition awards granted years ended december 31 2016 2015 2014 following tables summarize activity sharebased compensation plans includes stock awards year ended december 31 2016 1 intrinsic value amount current market value underlying stock exceeds exercise price stock award 2 includes 01 million 01 million market condition sars december 31 2016 2015 respectively 3 includes 29 million 25 million performance condition sars december 31 2016 2015 respectively 4 includes 09 million performance condition sars weightedaverage grant date fair value service condition sars granted years ended december 31 2016 2015 2014 2933 1257 2524 respectively weightedaverage grant date fair value sars performance conditions granted years ended december 31 2016 2015 2014 2969 1365 2598 respectively weightedaverage grant date fair value sars market conditions granted year ended december 31 2015 987 total intrinsic value service condition stock options sars exercised years ended december 31 2016 2015 2014 323 million 255 million 636 million respectively total intrinsic value performance condition sars exercised year ended december 31 2016 07 million total intrinsic value market condition sars exercised year ended december 31 2015 114 million market condition sars exercised years ended december 31 2016 2014 following table summarizes activities stock units primarily relating directors company year ended december 31 2016 total vesting date fair value stock units vested years ended december 31 2016 2015 2014 21 million 13 million 90 million respectively employee stock purchase plan 2007 company adopted qualified employee stock purchase plan espp implemented first quarter 2008 connection adoption espp company reserved issuance total 2 million common shares december 31 2016 approximately 17 million common shares remain available future issuance terms espp rights purchase common shares may granted eligible qualified employees subject certain restrictions espp enables company’s eligible employees payroll withholdings purchase limited number common shares 85 fair market value common share purchase date purchases made quarterly basis 10 segment information company nutrition company sells wide range weight management targeted nutrition energy sports fitness outer nutrition products company’s products manufactured third party providers company changsha hunan china extraction facility suzhou china facility nanjiing china facility lake forest california facility winstonsalem north carolina facility sold members consume sell herbalife products retail consumers members revenues reflect sales products company members categorized based geographic location december 31 2016 company sold products 94 countries throughout world organized managed six geographic regions north america mexico south central america emea europe middle east africa asia pacific china company defines operating segments geographical operations company aggregates operating segments excluding china reporting segment primary reporting segment management believes company’s operating segments similar operating characteristics similar long term operating performance making determination management believes operating segments similar nature products sold product acquisition process types customers products sold methods used distribute products nature regulatory environment economic characteristics china identified separate reporting segment meet criteria aggregation company reviews net sales contribution margin operating segment reviews assets capital expenditures consolidated basis operating segment therefore net sales contribution margin presented reportable segment assets capital expenditures segment presented operating information two reportable segments sales product line follows 1 contribution margin consists net sales less cost sales royalty overrides china segment contribution margin include service fees china independent service providers 2 service fees china independent service providers totaling 4071 million 4035 million 3127 million years ended december 31 2016 2015 2014 respectively included selling general administrative expenses 3 product buybacks returns product categories included literature promotional category december 31 2016 2015 goodwill allocated company’s reporting units included company’s primary reporting segment 868 million 885 million respectively goodwill allocated china segment 31 million 33 million december 31 2016 2015 respectively following table sets forth property plant equipment deferred tax assets geographic area majority company’s foreign subsidiaries designate local currencies functional currency december 31 2016 2015 total amount cash held foreign subsidiaries reported company’s consolidated balance sheets 3162 million 3105 million respectively 282 million 191 million respectively maintained invested us dollars december 31 2016 2015 total amount cash equivalents held company’s parent us entities inclusive us territories 5278 million 5793 million respectively 11 derivative instruments hedging activities foreign currency instruments company designates certain foreign currency derivatives primarily comprised foreign currency forward contracts freestanding derivatives hedge accounting apply changes fair market value freestanding derivatives included selling general administrative expenses company’s consolidated statements income company uses freestanding foreign currency derivatives hedge foreigncurrencydenominated intercompany transactions partially mitigate impact foreign currency fluctuations fair value freestanding foreign currency derivatives based thirdparty quotes company’s foreign currency derivative contracts generally executed monthly basis company designates cashflow hedges foreign currency forward contracts enters hedge forecasted inventory purchases intercompany management fees subject foreign currency exposures forward contracts used hedge forecasted inventory purchases specific months changes fair value forward contracts excluding forward points designated cashflow hedges recorded component accumulated comprehensive income loss within shareholders’ deficit equity recognized cost sales consolidated statement income period approximates time hedged inventory sold company also hedges forecasted intercompany management fees specific months contracts allow company sell euros exchange us dollars specified contract rates changes fair value forward contracts designated cash flow hedges recorded component accumulated comprehensive income loss within shareholders’ deficit equity recognized selling general administrative expenses consolidated statement income period hedged item underlying transaction affect earnings december 31 2016 december 31 2015 aggregate notional amounts foreign currency contracts outstanding designated cash flow hedges approximately 900 million 1128 million respectively december 31 2016 outstanding contracts maturity dates less fifteen months company’s derivative financial instruments recorded consolidated balance sheets fair value based thirdparty quotes december 31 2016 company recorded assets fair value 46 million relating outstanding foreign currency contracts designated cashflow hedges december 31 2015 company recorded assets fair value 42 million liabilities fair value 05 million relating outstanding foreign currency contracts designated cashflow hedges company assesses hedge effectiveness measures hedge ineffectiveness least quarterly years ended december 31 2016 2015 ineffective portion relating hedges immaterial hedges remained effective december 31 2016 december 31 2015 december 31 2016 december 31 2015 majority company’s outstanding foreign currency forward contracts maturity dates less twelve months majority freestanding derivatives expiring within one month two months december 31 2016 december 31 2015 respectively table describes foreign currency forward contracts outstanding december 31 2016 december 31 2015 following tables summarize derivative activity years ended december 31 2016 2015 2014 relating company’s derivatives gains losses derivative instruments following table summarizes gains losses relating derivative instruments recorded comprehensive loss years ended december 31 2016 2015 2014 december 31 2016 estimated amount existing net gains related cash flow hedges recorded accumulated comprehensive loss expected reclassified earnings next twelve months 57 million following table summarizes gains losses relating derivative instruments recorded income years ended december 31 2016 2015 2014 1 foreign exchange contracts designated hedging instruments amounts recognized income primarily represent amounts excluded assessment hedge effectiveness years ended december 31 2016 2014 year ended december 31 2015 13 million benefit related hedge ineffectiveness partially offset 09 million expense related amounts excluded assessment hedge effectiveness recognized income loss following table summarizes gains losses relating derivative instruments reclassified accumulated comprehensive loss income years ended december 31 2016 2015 2014 company reports derivatives fair value either assets liabilities within consolidated balance sheets see note 13 fair value measurements information derivative fair values consolidated balance sheets location december 31 2016 2015 12 income taxes components income taxes follows millions income taxes follows millions company recognizes excess tax benefits associated sharebased compensation shareholders’ deficit equity realized assessing whether excess tax benefits relating sharebased compensation realized company follows withandwithout approach excess tax benefits related sharebased compensation deemed realized utilization tax benefits available company also subject applicable limitations december 31 2016 2015 company 296 million 254 million respectively unrealized excess tax benefits 296 million excess tax benefits december 31 2016 relates foreign tax credits generated carried forward us federal income tax returns unused tax credit carryforwards expire 2021 2026 significant categories temporary differences gave rise deferred tax assets liabilities follows tax effected millions tax loss credit carryforwards certain foreign subsidiaries 2016 2015 1151 million 1214 million respectively unused tax loss credit carryforwards certain foreign subsidiaries 815 million expire 2017 2026 336 million carried forward indefinitely domestic foreign tax credit carryforwards 2016 2015 996 million 767 million respectively unused domestic foreign tax credit carryforwards begin expire 2024 domestic research development tax credit carryforward 2016 22 million unused domestic research development tax credit carryforwards expire 2036 state tax loss carryforwards 2016 08 million unused state tax loss carryforwards expire 2021 2036 company’s net deferred tax asset year increase primarily related increase 229 million excess foreign tax credits increase mostly result deduction settlement payment made federal trade commission us foreign tax credit purposes resulted overall domestic loss limited company’s ability claim foreign tax credits future taxable years domestic source income generated 50 income reclassified foreign source income allowed increase company’s foreign tax credit limitation thereby enabling use additional foreign tax credits although certain company believes utilization foreign tax credits carryforward 996 million december 31 2016 likely company history foreign tax credits expiring addition company expects 257 million foreign tax credits resulting overall domestic loss utilized discussed also company believes anticipated taxable income needed potential implementation tax planning strategies acceleration foreign source income prevent foreign tax credit carryforwards expiring company recognizes valuation allowances deferred tax assets reported based weight evidence likely deferred tax assets realized december 31 2016 2015 company held valuation allowances net deferred tax assets certain subsidiaries primarily related tax loss carryforwards amount 1154 million tax loss carryforwards 1213 million respectively change company’s valuation allowance 2016 59 million related 56 million net reductions charged income tax expense 03 million currency translation adjustments recognized within comprehensive income change company’s valuation allowance 2015 2087 million related 2056 million net reductions charged income tax expense primarily related utilization deferred tax asset balance related intercompany deferred interest expense partially offset increases venezuelan tax loss carryforwards 31 million currency translation adjustments recognized within comprehensive income change company’s valuation allowance 2014 824 million related 857 million net additions charged income tax expense primarily relating increases venezuelan tax loss carryforwards deferred interest expense carryforwards reduced 33 million currency translation adjustments recognized within comprehensive income december 31 2016 company’s us consolidated group approximately 1319 million unremitted earnings permanently reinvested relating certain foreign subsidiaries addition december 31 2016 herbalife ltd approximately 25 billion permanently reinvested unremitted earnings relating operating subsidiaries since unremitted earnings permanently reinvested deferred taxes provided unremitted earnings practicable determine amount unrecognized deferred taxes respect unremitted earnings company remit unremitted earnings would subject income tax remittances deferred taxes accrued earnings considered indefinitely reinvested deferred tax unremitted foreign earnings december 31 2016 2015 deferred tax liability 55 million deferred tax asset 64 million respectively applicable statutory income tax rate cayman islands zero herbalife ltd years reported purposes reconciliation provision income taxes statutory rate provision income taxes effective tax rate notional 35 tax rate applied follows december 31 2016 total amount unrecognized tax benefits including related interest penalties 620 million total amount unrecognized tax benefits recognized 448 million unrecognized tax benefits 94 million interest 21 million penalties would impact effective tax rate december 31 2015 total amount unrecognized tax benefits including related interest penalties 580 million total amount unrecognized tax benefits recognized 441 million unrecognized tax benefits 71 million interest 15 million penalties would impact effective tax rate company accounts interest penalties generated tax contingencies component income tax expense year ended december 31 2016 company recorded increase interest penalty expense related uncertain tax positions 27 million 07 million respectively year ended december 31 2015 company recorded increase interest penalty expense related uncertain tax positions 20 million 06 million respectively year ended december 31 2014 company recorded increase interest penalty expense related uncertain tax positions 19 million 03 million respectively december 31 2016 total amount interest penalties related unrecognized tax benefits recognized statement financial position 94 million 21 million respectively december 31 2015 total amount interest penalties related unrecognized tax benefits recognized statement financial position 71 million 15 million respectively december 31 2014 total amount interest penalties related unrecognized tax benefits recognized statement financial position 55 million 11 million respectively following changes occurred amount unrecognized tax benefits years ended december 31 2016 2015 2014 millions amount income taxes company pays subject ongoing audits taxing jurisdictions around world company’s estimate potential outcome uncertain tax position subject management’s assessment relevant risks facts circumstances existing time company believes adequately provided matters however company’s future results may include favorable unfavorable adjustments estimates period audits resolved may impact company’s effective tax rate december 31 2016 company’s tax filings generally subject examination major tax jurisdictions years ending december 31 2009 company believes reasonably possible amount unrecognized tax benefits could decrease approximately 110 million within next twelve months possible decrease 55 million would due settlement audits resolution administrative judicial proceedings remaining possible decrease 55 million would due expiration statute limitations various jurisdictions 13 fair value measurements company applies provisions asc topic 820 fair value measurements disclosures asc 820 financial nonfinancial assets liabilities asc 820 defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date asc 820 establishes fair value hierarchy prioritizes inputs used measuring fair value three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities reporting entity ability access measurement date level 2 inputs include quoted prices similar assets liabilities active markets quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability inputs derived principally corroborated observable market data correlation means level 3 inputs unobservable inputs asset liability company measures certain assets liabilities fair value discussed throughout notes consolidated financial statements foreign exchange currency contracts valued using standard calculations models primarily based inputs observable forward rates spot rates foreign currency exchange rates reporting period ended date company’s derivative assets liabilities measured fair value consisted level 2 inputs amounts shown gross values december 31 2016 december 31 2015 fair value measurements reporting date using company’s deferred compensation plan assets consist company owned life insurance policies recorded cash surrender value required included fair value table see note 6 employee compensation plans description deferred compensation plan assets following tables summarize offsetting fair values company’s derivative assets derivative liabilities presentation company’s consolidated balance sheets december 31 2016 december 31 2015 company offsets derivative assets derivative liabilities consolidated balance sheets extent maintains master netting arrangements related financial institutions december 31 2016 december 31 2015 company’s derivatives subject master netting arrangements collateralization required company’s derivative assets derivative liabilities 14 professional fees expenses late 2012 hedge fund manager publicly raised allegations regarding legality company’s network marketing program announced hedge fund manager taken significant short position regarding company’s common shares leading intense public scrutiny significant stock price volatility company believes hedge fund manager’s allegations inaccurate misleading company engaged legal advisory firms assist responding allegations perform related services connection recent events company recognizes related expenses part selling general administrative expenses within consolidated statement income years ended december 31 2016 2015 2014 company recorded approximately 121 million 187 million 251 million respectively professional fees expenses related matter 15 subsequent events february 15 2017 company entered 14500 million senior secured credit facility new credit facility consisting term loan facility initial aggregate principal amount 13000 million revolving facility initial aggregate principal amount 1500 million syndicate financial institutions lenders term loan facility issued lenders 2 discount 260 million company estimates debt issuance cost connection new credit facility approximately 23 million company also repaid 4100 million outstanding balance prior credit facility disclosed note 4 longterm debt terminated revolving facility matures february 15 2022 term loan facility matures february 15 2023 new credit facility permits company borrow us dollars subject certain limitations euros borrowings term loan facility bear interest either eurocurrency rate plus margin 550 base rate plus margin 450 depending herbalife’s total leverage ratio borrowings revolving facility bear interest either eurocurrency rate plus margin either 450 475 base rate plus margin either 350 375 initially bear interest eurocurrency rate plus margin 475 base rate plus margin 375 base rate represents highest federal funds rate plus 050 onemonth adjusted libor plus 100 prime rate set credit suisse base rate floor 175 eurocurrency rate based adjusted libor floor 075 company pay commitment fee revolving facility 050 per annum undrawn portion revolving facility new credit facility contains affirmative negative financial covenants customary financings type including among things limitations prohibitions declaring paying dividends distributions redeeming repurchasing certain indebtedness loans investments additional indebtedness liens mergers asset sales transactions affiliates addition new credit facility contains customary events default february 21 2017 company’s board directors approved new threeyear 15 billion share repurchase program 16 quarterly information unaudited item 16 form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized herbalife ltd john g desimone john g desimone chief financial officer dated february 23 2017 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated signature title date michael johnson chief executive officer director chairman board principal executive officer february 23 2017 michael johnson john g desimone chief financial officer principal financial officer february 23 2017 john g desimone bosco chiu senior vice president principal accounting officer principal accounting officer february 23 2017 bosco chiu richard p bermingham director february 23 2017 richard p bermingham pedro cardoso director february 23 2017 pedro cardoso richard h carmona director february 23 2017 richard h carmona jonathan christodoro director february 23 2017 jonathan christodoro keith cozza director february 23 2017 keith cozza jeffrey dunn director february 23 2017 jeffrey dunn hunter c gary director february 23 2017 hunter c gary jesse lynn director february 23 2017 jesse lynn michael montelongo director february 23 2017 michael montelongo james l nelson director february 23 2017 james l nelson maria otero director february 23 2017 maria otero john tartol director february 23 2017 john tartolitem 15 exhibits financial statement schedules following documents filed part annual report form 10k incorporated herein reference 1 financial statements following financial statements herbalife ltd filed part annual report form 10k pages indicated page herbalife ltd subsidiaries report independent registered public accounting firm consolidated balance sheets december 31 2017 2016 consolidated statements income years ended december 31 2017 2016 2015 consolidated statements comprehensive income years ended december 31 2017 2016 2015 consolidated statements changes shareholders’ deficit equity years ended december 31 2017 2016 2015 consolidated statements cash flows years ended december 31 2017 2016 2015 notes consolidated financial statements 2 financial statement schedules omitted required information inapplicable material information presented consolidated financial statements related notes 3 exhibits listed exhibit index immediately filed part annual report form 10k incorporated reference herein exhibit index exhibit number description reference 31 form amended restated memorandum articles association herbalife ltd h 41 form share certificate c 42 indenture herbalife ltd union bank na trustee dated february 7 2014 governing 200 convertible senior notes due 2019 f 43 form global note 200 convertible senior note due 2019 included exhibit 42 hereto f 101 herbalife international america inc’s senior executive deferred compensation plan effective january 1 1996 amended 102 herbalife international america inc’s management deferred compensation plan effective january 1 1996 amended 103 herbalife international inc 401k profit sharing plan trust amended 104 notice distributors regarding amendment agreements distributorship dated july 18 2002 herbalife international inc herbalife distributor 105 side letter agreement dated april 3 2003 among wh holdings cayman islands ltd michael johnson shareholders listed therein 106 form indemnification agreement herbalife ltd directors certain officers herbalife ltd b 107 amended restated herbalife ltd 2005 stock incentive plan h 108 form herbalife ltd 2005 stock incentive plan stock unit award agreement j 109 form herbalife ltd 2005 stock incentive plan stock appreciation right award agreement j 1010 form herbalife ltd 2005 stock incentive plan stock appreciation right award agreement applicable michael johnson j 1011 form herbalife ltd 2005 stock incentive plan stock appreciation right award agreement applicable richard p goudis j 1012 form herbalife ltd 2005 stock incentive plan stock appreciation right award agreement applicable michael johnson 1013 form herbalife ltd 2005 stock incentive plan stock appreciation right award agreement applicable richard p goudis 1014 form herbalife ltd 2005 stock incentive plan stock unit award agreement 1015 form herbalife ltd 2005 stock incentive plan stock appreciation right award agreement 1016 herbalife ltd employee stock purchase plan 1017 amendment herbalife international inc 401k profit sharing plan trust g 1018 form independent directors stock appreciation right award agreement h exhibit number description reference 1019 herbalife ltd amended restated independent directors deferred compensation stock unit plan h 1020 amended restated nonmanagement directors compensation plan 1021 form herbalife ltd 2005 stock incentive plan nonemployee directors stock appreciation right award agreement 1022 severance agreement john desimone herbalife international america inc dated february 23 2011 j 1023 amended restated severance agreement dated february 23 2011 desmond walsh herbalife international america inc j 1024 credit agreement dated march 9 2011 among herbalife international inc herbalife ltd herbalife international luxembourg sarl certain subsidiaries hii guarantors lenders time party thereto bank america na administrative agent swing line lender lc issuer j 1025 first amendment dated july 26 2012 credit agreement dated march 9 2011 among herbalife international inc herbalife ltd herbalife international luxembourg sarl certain subsidiaries hii guarantors lenders time party thereto bank america na administrative agent swing line lender lc issuer 1026 amendment amended restated herbalife ltd 2005 stock incentive plan j 1027 second amendment dated february 3 2014 credit agreement dated march 9 2011 among herbalife international inc herbalife ltd herbalife international luxembourg sarl certain subsidiaries hii guarantors lenders time party thereto bank america na administrative agent swing line lender lc issuer e 1028 form forward share repurchase confirmation f 1029 form base capped call confirmation f 1030 form additional capped call confirmation f 1031 form herbalife ltd 2005 stock incentive plan performance condition stock appreciation right award agreement f 1032 amended restated herbalife ltd 2014 stock incentive plan j 1033 confirmation merrill lynch international herbalife ltd dated may 6 2014 g 1034 third amendment credit agreement dated may 4 2015 among herbalife ltd herbalife international inc herbalife international luxembourg sarl guarantors part thereto lenders time party thereto bank america na administrative agent swing line lender lc issuer h 1035 herbalife ltd executive incentive plan j 1036 stipulation entry order permanent injunction monetary judgment k exhibit number description reference 1037 second amended restated support agreement dated july 15 2016 among herbalife ltd carl c icahn partners master fund lp icahn offshore lp icahn partners lp icahn onshore lp beckton corp hopper investments llc barberry corp high river limited partnership icahn capital lp iph gp llc icahn enterprises holdings lp icahn enterprises gp inc k 1038 amended restated employment agreement richard p goudis herbalife international america inc dated november 1 2016 l 1039 letter agreement michael johnson herbalife international america inc dated november 1 2016 l 1040 herbalife international america inc executive officer severance plan l 1041 credit agreement dated february 15 2017 among hlf financing sà rl hlf financing us llc herbalife ltd herbalife international luxembourg sà rl herbalife international inc several banks financial institutions entities time party thereto credit suisse ag cayman islands branch term administrative agent collateral agent coöperatieve rabobank ua new york branch issuing bank revolver administrative agent l 1042 stock unit award agreement performancevesting herbalife ltd richard p goudis dated june 6 2017 1043 agreement among herbalife ltd carl c icahn controlled affiliates dated august 21 2017 n 1044 contingent value rights agreement herbalife ltd computershare trust company na administrative agent dated october 11 2017 1045 employment agreement dated march 27 2008 michael johnson herbalife international america inc 1046 form herbalife ltd 2014 stock incentive plan stock unit award agreement 1047 form herbalife ltd 2014 stock incentive plan stock appreciation right award agreement 1048 form herbalife ltd 2014 stock incentive plan lead director stock unit award agreement 1049 form herbalife ltd 2014 stock incentive plan independent directors stock unit award agreement 1050 form herbalife ltd 2014 stock incentive plan performance based stock appreciation right award agreement 1051 form herbalife ltd 2014 stock incentive plan restricted cash unit award agreement 211 subsidiaries registrant 231 consent pricewaterhousecoopers llp independent registered public accounting firm 311 rule 13a14a certification chief executive officer 312 rule 13a14a certification chief financial officer 321 section 1350 certification chief executive officer 322 section 1350 certification chief financial officer exhibit number description reference 101ins xbrl instance document 101sch xbrl taxonomy extension schema document 101cal xbrl taxonomy extension calculation linkbase document 101def xbrl taxonomy extension definition linkbase document 101lab xbrl taxonomy extension label linkbase document 101pre xbrl taxonomy extension presentation linkbase document filed herewith management contract compensatory plan arrangement previously filed october 1 2004 exhibit company’s registration statement form s1 file 333119485 incorporated herein reference b previously filed december 2 2004 exhibit amendment 4 company’s registration statement form s1 file 333119485 incorporated herein reference c previously filed december 14 2004 exhibit amendment 5 company’s registration statement form s1 file 333119485 incorporated herein reference previously filed april 29 2013 exhibit company’s quarterly report form 10q quarter ended march 31 2013 incorporated herein reference e previously filed february 7 2014 exhibit company’s current report form 8k incorporated herein reference f previously filed february 18 2014 exhibit company’s annual report form 10k year ended december 31 2013 incorporated reference g previously filed july 28 2014 exhibit company’s quarterly report form 10q quarter ended june 30 2014 incorporated herein reference h previously filed may 5 2015 exhibit company’s quarterly report form 10q quarter ended march 31 2015 incorporated herein reference previously filed august 5 2015 exhibit company’s quarterly report form 10q quarter ended june 30 2015 incorporated herein reference j previously filed may 5 2016 exhibit company’s quarterly report form 10q quarter ended march 31 2016 incorporated herein reference k previously filed july 15 2016 exhibit company’s current report form 8k incorporated herein reference l previously filed february 23 2017 exhibit company’s annual report form 10k year ended december 31 2016 incorporated herein reference previously filed august 1 2017 exhibit company’s quarterly report form 10q quarter ended june 30 2017 incorporated herein reference n previously filed august 21 2017 exhibit company’s tender offer statement schedule incorporated herein reference previously filed october 11 2017 exhibit company’s amendment 6 tender offer statement schedule incorporated herein reference report independent registered public accounting firm board directors shareholders herbalife ltd opinions financial statements internal control financial reporting audited accompanying consolidated balance sheets herbalife ltd subsidiaries december 31 2017 december 31 2016 related consolidated statements income comprehensive income changes shareholders’ deficit equity cash flows three years period ended december 31 2017 including related notes collectively referred “consolidated financial statements” also audited companys internal control financial reporting december 31 2017 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso opinion consolidated financial statements referred present fairly material respects financial position company december 31 2017 december 31 2016 results operations cash flows three years period ended december 31 2017 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2017 based criteria established internal control integrated framework 2013 issued coso change accounting principle discussed note 2 consolidated financial statements company changed manner accounts unrealized excess tax benefits 2017 basis opinions companys management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions company’s consolidated financial statements companys internal control financial reporting based audits public accounting firm registered public company accounting oversight board united states pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audits obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud whether effective internal control financial reporting maintained material respects audits consolidated financial statements included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp los angeles california february 22 2018 served company’s auditor since 2013 herbalife ltd subsidiaries consolidated balance sheets see accompanying notes consolidated financial statements herbalife ltd subsidiaries consolidated statements income see accompanying notes consolidated financial statements herbalife ltd subsidiaries consolidated statements comprehensive income see accompanying notes consolidated financial statements herbalife ltd subsidiaries consolidated statements changes shareholders’ deficit equity see accompanying notes consolidated financial statements herbalife ltd subsidiaries consolidated statements cash flows see accompanying notes consolidated financial statements herbalife ltd subsidiaries notes consolidated financial statements 1 organization herbalife ltd cayman islands exempted company limited liability incorporated april 4 2002 herbalife ltd together subsidiaries “company” “herbalife” global nutrition company sells weight management targeted nutrition energy sports fitness outer nutrition products network independent members china company sells products independent service providers sales representatives sales officers customers preferred customers well companyoperated retail stores necessary company reports revenue six geographic regions north america mexico south central america emea consists europe middle east africa asia pacific excluding china 2 basis presentation company’s consolidated financial statements refer herbalife ltd subsidiaries recently adopted pronouncements march 2016 financial accounting standards board fasb issued accounting standards update asu 201609 compensation stock compensation topic 718 improvements employee sharebased payment accounting asu intended simplify various aspects related sharebased payments accounted presented financial statements including income tax effects sharebased payments accounting forfeitures amendments update became effective company’s reporting period beginning january 1 2017 guidance requires company recognize excess tax benefits sharebased compensation arrangements tax provision instead shareholders’ deficit equity previous guidance year ended december 31 2017 company recorded 311 million excess tax benefits tax provision addition amounts required classified operating activity company’s statement cash flows rather financing activity company elected present cash flow statement using prospective transition method prior periods adjusted addition company made accounting policy election continue estimate number forfeitures expected occur adoption guidance also increased company’s number shares used calculation fully diluted earnings per share due reduction assumed proceeds treasury stock method also impacts company determines earnings per share calculation upon adoption guidance january 1 2017 company also recognized 296 million unrealized excess tax benefits deferred tax assets consolidated balance sheet corresponding increase retained earnings march 2016 fasb issued asu 201606 derivatives hedging topic 815 contingent put call options debt instruments asu clarified requirements assessing whether contingent put call options accelerate payment principal debt instruments clearly closely related ie entity required assess whether economic characteristics risks embedded put call options clearly closely related debt hosts accordance fourstep decision sequence fasb accounting standards codification asc 815 derivatives hedging entity longer assess whether event triggers ability exercise put call option related interest rates credit risk entity first quarter 2017 company adopted applied standard applicable financial instruments adoption guidance financial impact company’s consolidated financial statements march 2016 fasb issued asu 201605 derivatives hedging topic 815 effect derivative contract novations existing hedge accounting relationships asu provides guidance clarifying novation derivative contract ie change counterparty hedge accounting relationship require dedesignation hedge accounting relationship hedge accounting criteria met including expectation hedge highly effective creditworthiness new counterpart derivative contract considered hedging relationship continue uninterrupted adoption guidance first quarter 2017 financial impact company’s consolidated financial statements new accounting pronouncements may 2014 fasb issued asu 201409 revenue contracts customers topic 606 new revenue recognition standard provides fivestep analysis contracts determine revenue recognized core principle entity recognize revenue depict transfer promised goods services customers amount reflects consideration entity expects entitled exchange goods services august 2015 fasb deferred effective date asu 201409 entities one year annual reporting periods beginning december 15 2017 fasb issued several updates subsequently including implementation guidance principal versus agent considerations entity account licensing arrangements customers improve guidance assessing collectability presentation sales taxes noncash consideration contract modifications completed contracts transition amendments series updates shall applied either retrospectively period presented cumulativeeffect adjustment date adoption company plans adopt topic 606 date initial application january 1 2018 using modified retrospective method applied contracts existing january 1 2018 results reporting periods beginning january 1 2018 presented topic 606 prior period amounts adjusted reported accordance topic 605 financial statement impact adoption new standard expected material summary company’s analysis topic 606 company generally continue recognize revenue product delivered members china independent service providers third party importers utilized certain countries sales historically material company continue recognize revenue based company’s estimate service provider third party importer sells products company deemed principal party product sales topic 606 due additional selling operating requirements relating pricing products conducting business physical locations selling marketing activities required service providers third party importers timing difference relating company recognizing revenues third party entities sell products compared company delivers products material impact company’s consolidated net sales periods presented company’s members excluding china independent service providers may receive distributor allowances comprised discounts rebates wholesale commission payments company pursuant topic 606 distributor allowances resulting company’s sales products members continue recorded net sales distributor allowances represent discounts suggested retail price company compensates sales leader members royalty overrides services rendered relating development retention management sales organizations royalty overrides payable based achieved sales volume royalty overrides continue classified operating expense reflecting services provided company compensates china independent service providers third party importers utilized certain countries providing marketing selling customer support services topic 606 company principal party product sales described service fees payable china independent service providers compensation received third party importers services provide recorded within selling general administrative expenses currently topic 605 service fees payable china independent service providers similarly recognized within selling general administrative expenses topic 606 however topic 605 compensation received third party importers services provide represents discount provided recorded reduction net sales differs treatment topic 606 described change accounting treatment topic 606 compensation services provided company’s third party importers impact company’s consolidated net income material company’s consolidated net sales fiscal years presented company also reviewed united states business changes required made pursuant ftc consent order company concluded material financial impact topic 606 company continue recognize revenues delivers products united states members distributor allowances inclusive discounts wholesale commissions continue recorded reduction net sales royalty overrides continue classified operating expense topic 606 shipping handling services relating product sales recognized fulfillment activities company’s performance obligation transfer products therefore recorded within net sales part product sales considered separate revenues topic 606 shipping handling costs paid company currently included cost sales costs continue recorded cost sales topic 606 january 2016 fasb issued asu 201601 financial instruments overall subtopic 82510 recognition measurement financial assets financial liabilities updated guidance enhances reporting model financial instruments modifying entities measure recognize equity investments present changes fair value financial liabilities simplifying disclosure guidance financial instruments amendments update effective fiscal years beginning december 15 2017 amendments update applied prospectively adoption guidance material impact company’s consolidated financial statements february 2016 fasb issued asu 201602 leases topic 842 subsequently issued additional updates topic 842 updated guidance requires lessees recognize lease liability rightofuse asset measured present value future minimum lease payments lease commencement date recognition measurement presentation expenses depend classification finance operating lease amendments also require certain quantitative qualitative disclosures asu 201602 effective interim annual reporting periods beginning december 15 2018 early adoption permitted modified retrospective approach must applied leases existing entered beginning earliest comparative period presented financial statements company evaluating potential impact adoption consolidated financial statements however increases assets liabilities expected march 2016 fasb issued asu 201604 liabilities extinguishments liabilities subtopic 40520 recognition breakage certain prepaid storedvalue products asu requires entities sell prepaid storedvalue products redeemable goods services cash thirdparty merchants recognize breakage ie value ultimately redeemed consumer way consistent recognized new revenue recognition standard current us gaap diversity practice entities account breakage results consumer redeem entire product balance asu clarifies entity’s liability prepaid storedvalue products within scope meets definition financial liability amendments update effective reporting periods beginning december 15 2017 early adoption permitted amendment may applied using either modified retrospective approach full retrospective approach adoption guidance material impact company’s consolidated financial statements june 2016 fasb issued asu 201613 financial instrument credit losses topic 326 measurement credit losses financial instruments asu changes impairment model financial assets requiring use expected loss model requires entities estimate lifetime expected credit loss financial assets measured amortized cost credit losses recorded allowance offset amortized cost financial asset resulting net presentation amount expected collected financial asset addition credit losses relating availableforsale debt securities recorded allowance credit losses rather direct writedown security amendments update effective reporting periods beginning december 15 2019 early adoption permitted reporting periods beginning december 15 2018 company evaluating potential impact adoption consolidated financial statements august 2016 fasb issued asu 201615 statement cash flows topic 230 classification certain cash receipts cash payments asu provides clarification eight specific cash flow issues regarding presentation classification statement cash flows objective reducing existing diversity practice amendments update effective reporting periods beginning december 15 2017 early adoption permitted amendments update applied retrospectively adoption guidance material impact company’s consolidated financial statements october 2016 fasb issued asu 201616 income taxes topic 740 intraentity transfers assets inventory asu requires entities recognize income tax consequences intraentity transfer asset inventory transfer occurs amendments update change us gaap pretax effects intraentity asset transfer topic 810 consolidation intraentity transfer inventory amendments update effective reporting periods beginning december 15 2017 early adoption permitted adoption guidance material impact company’s consolidated financial statements november 2016 fasb issued asu 201618 statement cash flows topic 230 restricted cash asu requires restricted cash restricted cash equivalents included cash equivalents reconciling beginningofperiod endofperiod amounts shown statements cash flows amendments update effective reporting periods beginning december 15 2017 early adoption permitted must applied retrospectively adoption guidance material impact company’s consolidated financial statements result change presentation restricted cash restricted cash equivalents company’s consolidated statement cash flows january 2017 fasb issued asu 201704 intangibles goodwill topic 350 simplifying test goodwill impairment asu simplifies test goodwill impairment removing step 2 goodwill impairment test companies perform goodwill impairment test comparing fair value reporting unit carrying amount recognizing impairment charge amount carrying amount exceeds reporting unit’s fair value exceed total amount goodwill allocated reporting unit entity still option perform qualitative assessment reporting unit determine quantitative impairment test necessary amendments update effective goodwill impairment tests fiscal years beginning december 15 2019 early adoption permitted goodwill impairment tests performed january 1 2017 company evaluating potential impact adoption consolidated financial statements may 2017 fasb issued asu 201709 compensation stock compensation topic 718 scope modification accounting asu provides additional guidance company apply modification accounting change either terms conditions sharebased payment award specifically company apply modification accounting fair value vesting conditions classification award remains immediately modification amendments update must applied prospective basis effective reporting periods beginning december 15 2017 early adoption permitted adoption guidance material impact company’s consolidated financial statements august 2017 fasb issued asu 201712 derivatives hedging targeted improvements accounting hedging activities asu improves financial reporting hedging relationships better portray economic results entitys risk management activities financial statements makes certain targeted improvements simplify application existing hedge accounting guidance amendments update effective reporting periods beginning december 15 2018 early adoption permitted company evaluating potential impact adoption consolidated financial statements reclassifications order improve simplify company’s financial statements following reclassifications made certain reclassifications made prior period consolidated balance sheets consolidated statements comprehensive income consolidated statements cash flows conform current period presentation see note 14 detail certain balance sheet accounts information certain balance sheet items combined financial statement presentation reclassifications company also combined shipping handling revenues product sales single net sales caption order conform current period presentation permitted regulation sx shipping handling revenues related product sales 2274 million 2442 million 2825 million years ended december 31 2017 2016 2015 respectively represent less 7 company’s consolidated net sales years significant accounting policies consolidation policy consolidated financial statements include accounts herbalife ltd subsidiaries significant intercompany transactions accounts eliminated foreign currency translation transactions majority countries company operates functional currency local currency company’s foreign subsidiaries’ asset liability accounts translated consolidated financial reporting purposes us dollar amounts yearend exchange rates revenue expense accounts translated average rates year foreign exchange translation adjustments included accumulated comprehensive loss accompanying consolidated balance sheets foreign currency transaction gains losses include cost foreign currency derivative contracts related settlement gains losses excluding certain foreign currency derivatives designated cash flow hedges discussed note 11 derivative instruments hedging activities included selling general administrative expenses accompanying consolidated statements income company recorded net foreign currency transaction losses 137 million 114 million 347 million years ended december 31 2017 2016 2015 respectively includes foreign exchange impact relating company’s venezuelan subsidiary herbalife venezuela forward exchange contracts company enters foreign currency derivatives primarily comprised foreign currency forward contracts managing foreign exchange risk sales members inventory purchases denominated foreign currencies intercompany transactions loans company use contracts trading purposes accordance fasb asc topic 815 derivatives hedging company designates certain derivative instruments cash flow hedges formally documents hedge relationships including identification hedging instruments hedged items well risk management objectives strategies undertaking hedge transaction time derivative contract executed company assesses effectiveness hedge inception ongoing basis determines whether hedge highly perfectly effective offsetting changes cash flows hedged item company records effective portion changes estimated fair value accumulated comprehensive income loss subsequently reclassifies related amount accumulated comprehensive income loss earnings hedged item underlying transaction impacts earnings determined derivative ceased highly effective hedge company discontinue hedge accounting transaction derivatives designated hedges changes estimated fair value recognized consolidated statements income cash equivalents company considers highly liquid investments purchased maturity three months less cash equivalents cash equivalents comprised primarily foreign domestic bank accounts money market funds cash equivalents valued based level 1 inputs consist quoted prices active markets reduce credit risk company monitors credit standing financial institutions hold company’s cash equivalents company cash pooling arrangement financial institution cash management purposes cash pooling arrangement allows certain company’s participating subsidiaries withdraw cash financial institution based upon company’s aggregate cash deposits held subsidiaries participate cash pooling arrangement extent participating location individual basis overdraft position overdrafts recorded liabilities reflected financing activities company’s consolidated balance sheets consolidated statement cash flows respectively december 31 2017 december 31 2016 company owe amounts financial institution accounts receivable accounts receivable consist principally receivables credit card companies arising sale products company’s members receivables importers utilized limited number countries sell products members company believes concentration collection risk related credit card receivables diminished due geographic dispersion receivables credit card companies 681 million 518 million december 31 2017 2016 respectively substantially receivables credit card companies current december 31 2017 2016 although receivables importers significant company performs ongoing credit evaluations importers maintains allowance potential credit losses company considers customer creditworthiness past current transaction history customer contractual terms current economic industry trends changes customer payment terms determining whether collectability reasonably assured whether record allowances receivables financial condition company’s customers deteriorates adversely affects ability make payments additional allowances recorded company believes provides adequate allowances receivables members importers material consolidated financial statements years ended december 31 2017 2016 2015 company recorded 09 million 10 million 37 million respectively baddebt expense related allowances company’s receivables december 31 2017 2016 company’s allowance doubtful accounts 12 million 13 million respectively december 31 2017 2016 majority company’s total outstanding accounts receivable current fair value financial instruments company applies provisions fasb authoritative guidance applies financial nonfinancial assets liabilities fasb authoritative guidance clarifies definition fair value prescribes methods measuring fair value establishes fair value hierarchy based inputs used measure fair value expands disclosures fair value measurements company estimated fair value financial instruments using following methods assumptions • carrying amounts cash equivalents receivables accounts payable approximate fair value due shortterm maturities instruments • fair value availableforsale investments based prices similar assets traded active markets observable yield curves • fair value option forward contracts based dealer quotes • company’s variable rate revolving credit facility recorded carrying value considered approximate fair value • fair value outstanding borrowings company’s term loan senior secured credit facility determined utilizing overthecounter market quotes • company’s convertible senior notes issued february 2014 convertible notes recorded carrying value fair value determined using two valuation methods company reviewed market data available publicly traded senior unsecured nonconvertible corporate bonds issued companies similar credit ratings assumptions used estimate represent market participants would use pricing liability component including market yields credit standing develop straight debt yield estimate company also used lattice model included inputs stock price convertible notes trading price volatility dividend yield december 31 2017 estimate straight debt yield company combined results two valuation methods determine fair value liability component convertible notes see note 4 longterm debt description • fair value cvr provided participants connection modified dutch auction tender offer completed october 2017 based lattice model includes inputs underlying stock price strike price time expiration dividend yield see note 8 shareholders’ deficit equity description tender offer cvr inventories stated lower cost primarily firstin firstout basis net realizable value debt issuance costs debt issuance costs represent fees expenses related borrowing company’s longterm debt amortized term related debt using effective interest method debt issuance costs except company’s revolving credit facility recorded reduction debt contraliability within company’s consolidated balance sheets total amortization expense related debt issuance costs 84 million 79 million 85 million years ended december 31 2017 2016 2015 respectively december 31 2017 2016 company’s remaining unamortized debt issuance cost 262 million 119 million respectively longlived assets december 31 2017 2016 company’s net property plant equipment consisted following millions december 2012 company purchased approximate 800000 square foot facility winstonsalem north carolina approximately 222 million company allocated 188 million 34 million buildings land respectively based relative fair values april 2016 company purchased one office buildings torrance california previously leased approximately 296 million company allocated 169 million 116 million net deferred rent liability 11 million buildings land respectively based relative fair values december 31 2017 2016 amounts reflected property plant equipment company’s accompanying consolidated balance sheets depreciation furniture fixtures equipment includes computer hardware software computed straightline basis estimated useful lives related assets range three ten years company capitalizes eligible costs acquire develop internaluse software incurred subsequent preliminary project stage computer hardware software majority comprised capitalized internaluse software costs 1573 million 1457 million december 31 2017 2016 respectively net accumulated depreciation leasehold improvements amortized straightline basis life related asset term lease whichever shorter buildings depreciated 40 years building improvements generally depreciated ten fifteen years land depreciated depreciation amortization expenses recorded selling general administrative expenses totaled 801 million 807 million 825 million years ended december 31 2017 2016 2015 respectively longlived assets reviewed impairment based undiscounted cash flows whenever events changes circumstances indicate carrying amount assets may recoverable measurement impairment loss based estimated fair value asset goodwill marketing related intangible assets indefinite lives evaluated annual basis impairment frequently events changes circumstances indicate asset might impaired goodwill company uses discounted cash flow approach estimate fair value reporting unit fair value reporting unit less carrying value implied fair value goodwill must determined implied fair value goodwill less carrying value goodwill impairment amount recorded difference marketing related intangible assets company uses discounted cash flow model relieffromroyalty method order determine fair value fair value less carrying value impairment amount recorded difference years ended december 31 2017 2016 2015 additions goodwill marketing related intangible assets impairments goodwill marketing related intangible assets december 31 2017 2016 marketingrelated intangible asset balance 3100 million consisted company’s trademark trade name marketing franchise december 31 2017 2016 goodwill balance 969 million 899 million respectively increase goodwill year ended december 31 2017 due cumulative translation adjustments assets company’s accompanying consolidated balance sheets include deferred tax assets 775 million 1552 million december 31 2017 2016 respectively see note 14 detail certain balance sheet accounts description assets income taxes income tax expense includes income taxes payable current year change deferred income tax assets liabilities future tax consequences events recognized company’s financial statements income tax returns valuation allowance recognized reduce carrying value deferred income tax assets believed likely component deferred income tax assets realized company accounts uncertainty income taxes accordance fasb authoritative guidance clarifies accounting reporting uncertainties income taxes recognized enterprise’s financial statements guidance prescribes comprehensive model financial statement recognition measurement presentation disclosure uncertain tax positions taken expected taken income tax returns december 22 2017 us enacted 2017 tax cuts jobs act contains several key tax provisions affect company including limited onetime mandatory transition tax accumulated foreign earnings changes sourcing calculation foreign income reduction corporate income tax rate 21 effective january 1 2018 company required recognize effect tax law changes period enactment determining transition tax remeasuring us deferred tax assets liabilities well reassessing net realizability deferred tax assets liabilities december 2017 sec staff issued staff accounting bulletin 118 income tax accounting implications tax cuts jobs act allows company record provisional amounts measurement period extend beyond one year enactment date see note 12 income taxes description income taxes impact us tax reform royalty overrides certain members may earn commissions called royalty overrides include production bonuses based retail sales volume royalty overrides based retail sales volume certain members sponsored directly indirectly member royalty overrides recorded products delivered revenue recognized royalty overrides compensation members services rendered including development retention improved productivity sales organizations royalty overrides classified operating expense nonus royalty override checks aged variety reasons beyond certainty paid taken back income management estimated period certainty three years worldwide distributor compensation us distributor compensation including royalty overrides capped company meet annual requirement described consent order discussed detail note 7 contingencies periodic basis company evaluates requirement achieved year end determine cap distributor compensation required determines appropriate amount distributor compensation expense may vary reporting period december 31 2017 company believes cap distributor compensation applicable year ended december 31 2017 comprehensive income comprehensive income consists net income foreign currency translation adjustments effective portion unrealized gains losses derivatives unrealized gains losses availableforsale investments see note 8 shareholders’ deficit equity description detail components accumulated comprehensive loss operating leases company leases physical properties operating leases certain lease agreements generally include rent holidays tenant improvement allowances company recognizes rent holiday periods straightline basis lease term beginning company right leased space company also records tenant improvement allowances rent holidays deferred rent liabilities amortizes deferred rent terms lease rent expense research development company’s research development performed inhouse staff outside consultants periods presented research development costs expensed incurred material operating income encourage local investment operations governments various china provinces conduct grant programs company applied received several grants china government grants recorded income legal right grant exists reasonable assurance grant proceeds received substantive conditions grants provided met years ended december 31 2017 2016 2015 company recognized government grant income approximately 508 million 342 million 65 million respectively operating income within consolidated statements income related regional headquarters distribution centers within china company intends continue applying government grants china programs available however assurance company receive grants future periods october 30 2016 arbitration tribunal awarded company approximately 297 million connection reaudit company’s 2010 2012 financial statements resignation kpmg company’s independent registered public accounting firm amount recognized operating income within company’s consolidated financial statements year ended december 31 2016 professional fees company expenses professional fees including legal fees incurred professional fees included selling general administrative expenses company’s consolidated statements income advertising costs including company sponsorships expensed incurred amounted approximately 557 million 648 million 661 million years ended december 31 2017 2016 2015 respectively expenses included selling general administrative expenses accompanying consolidated statements income earnings per share basic earnings per share represents net income period common shares outstanding divided weighted average number common shares outstanding period diluted earnings per share represents net income divided weighted average number common shares outstanding inclusive effect dilutive securities outstanding stock options stock appreciation rights sars stock units following common share amounts used compute basic diluted earnings per share period millions aggregate 34 million 45 million 54 million equity grants consisting stock options sars stock units outstanding years ended december 31 2017 2016 2015 respectively included computation diluted earnings per share effect would antidilutive performance condition award satisfied since company settle principal amount convertible notes cash settle conversion feature amount conversion price common shares conversion spread company uses treasury stock method calculating potential dilutive effect conversion spread diluted earnings per share applicable conversion spread dilutive impact diluted earnings per share average market price company’s common shares given period exceeds initial conversion price 8628 per share years ended december 31 2017 2016 2015 convertible notes excluded computation diluted earnings per share effect would antidilutive since conversion price convertible notes exceeded average market price company’s common shares years ended december 31 2017 2016 2015 initial conversion rate conversion price described note 4 longterm debt capped call transactions executed connection issuance convertible notes excluded calculation diluted earnings per share impact always antidilutive additionally forward transactions executed connection issuance convertible notes treated retired shares basic diluted eps purposes although remain legally outstanding see note 4 longterm debt additional discussion regarding capped call transactions forward transactions revenue recognition company generally recognizes revenue upon delivery title risk rewards pass member importer products sold china independent service providers sales representatives sales officers customers preferred customers well companyoperated retail stores necessary see note 10 segment information regarding net sales geographic area product sales recognized net product returns discounts referred “distributor allowances” net sales include product sales related shipping handling revenues shipping handling revenues related product sales 2274 million 2442 million 2825 million years ended december 31 2017 2016 2015 respectively shipping handling costs paid company included cost sales company generally receives net sales price cash credit card payments point sale company currently presents sales taxes collected customers net basis allowances product returns primarily connection company’s buyback program provided time sale recorded accrual based upon historical return rates country relevant return pattern reflects anticipated returns received period 12 months following original sale allowances product returns 39 million 39 million 39 million december 31 2017 2016 2015 respectively product returns 44 million 45 million 50 million years ended december 31 2017 2016 2015 respectively noncash investing financing activities years ended december 31 2017 2016 2015 company recorded 101 million 127 million 123 million respectively noncash capital expenditures addition year ended december 31 2015 company recorded 150 million noncash release deposits escrow used reduce company’s accrued expense liability years ended december 31 2017 2016 2015 company recorded 23 million 208 million 173 million noncash borrowings used finance software maintenance additionally see note 8 shareholders’ deficit equity information company’s noncash financing activities related nontransferable contractual contingent value right cvr connection company’s modified dutch auction tender offer well share repurchases payment made subsequent year end sharebased payments company accounts sharebased compensation accordance fasb authoritative guidance requires measurement sharebased compensation expense sharebased payment awards made employees company measures sharebased compensation cost grant date based fair value award company recognizes sharebased compensation expense service condition awards straightline basis employee’s requisite service period company recognizes sharebased compensation expense performance condition awards vesting term using graded vesting method use estimates preparation financial statements conformity us gaap requires management make estimates assumptions estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates company evaluates estimates assumptions ongoing basis using historical experience factors including current economic environment company believes reasonable circumstances company adjusts estimates assumptions facts circumstances dictate illiquid credit markets volatile equity foreign currency combined increase uncertainty inherent estimates assumptions future events effects cannot determined precision actual results could differ estimates changes estimates resulting continuing changes economic environment reflected financial statements future periods 3 inventories following major classes inventory millions 4 longterm debt longterm debt consists following senior secured credit facility may 4 2015 company amended prior senior secured credit facility prior credit facility extend maturity date revolving credit facility prior revolving credit facility one year march 9 2017 pursuant amendment upon execution company made prepayments approximately 203 million 509 million 500 million term loan prior credit facility prior term loan prior revolving credit facility respectively additionally company’s 700 million borrowing capacity prior revolving credit facility reduced approximately 2359 million upon execution amendment reduced approximately 391 million september 30 2015 prior term loan matured march 9 2016 repaid full total available borrowing capacity prior revolving credit facility 4250 million december 31 2016 prior march 9 2016 interest rates company’s borrowings prior credit facility remained effectively unchanged except minimum applicable margin increased 050 libor subject minimum floor 025 march 9 2016 applicable interest rates company’s borrowings prior credit facility increased 200 borrowings prior credit facility began bearing interest either libor plus applicable margin 400 500 base rate plus applicable margin 300 400 based company’s consolidated leverage ratio company incurred approximately 62 million debt issuance costs connection amendment debt issuance costs recorded company’s consolidated balance sheet amortized life prior revolving credit facility february 15 2017 company entered new 14500 million senior secured credit facility credit facility consisting 13000 million term loan b term loan 1500 million revolving credit facility revolving credit facility syndicate financial institutions lenders revolving credit facility matures february 15 2022 term loan matures february 15 2023 however outstanding principal convertible notes defined exceeds 2500 million company exceeds certain leverage ratios february 14 2019 revolving credit facility mature date addition outstanding principal convertible notes defined exceeds 2500 million company exceeds certain leverage ratios may 16 2019 term loan mature date credit facility secured certain assets herbalife ltd certain subsidiaries term loan issued lenders 2 discount 260 million connection credit facility company also repaid 4100 million outstanding balance prior revolving credit facility company incurred approximately 226 million debt issuance costs connection credit facility debt issuance costs discount recorded company’s consolidated balance sheet amortized life credit facility using effective interest method borrowings term loan bear interest either eurocurrency rate plus margin 550 base rate plus margin 450 prior august 15 2017 borrowings revolving credit facility bore interest eurocurrency rate plus margin 475 base rate plus margin 375 august 15 2017 borrowings revolving credit facility depending herbalife’s consolidated leverage ratio bear interest either eurocurrency rate plus margin either 450 475 base rate plus margin either 350 375 base rate represents highest federal funds rate plus 050 onemonth adjusted libor plus 100 prime rate set credit suisse subject floor 175 eurocurrency rate based adjusted libor subject floor 075 company required pay commitment fee revolving facility 050 per annum undrawn portion revolving credit facility interest due least quarterly amounts outstanding credit facility credit facility requires company comply leverage ratio addition credit facility contains customary events default covenants including covenants limit restrict company’s ability incur liens incur indebtedness make investments dispose assets make certain restricted payments pay dividends repurchase common shares merge consolidate enter certain transactions affiliates company also required maintain minimum balance 2000 million consolidated cash equivalents december 31 2017 december 31 2016 company compliance debt covenants credit facility prior credit facility respectively term loan payable consecutive quarterly installments aggregate principal amount 244 million began june 30 2017 addition company may required make mandatory prepayments towards term loan based company’s consolidated leverage ratio annual excess cash flows defined terms credit facility company also permitted make voluntary prepayments applied remaining quarterly installments owed term loan order maturity remaining principal due upon maturity company currently expect make mandatory prepayment toward term loan based 2017 excess cash flow calculation defined terms credit facility december 31 2017 december 31 2016 weighted average interest rate borrowings credit facility prior credit facility 679 429 respectively year ended december 31 2017 company repaid total amount 4831 million including 4100 million repay full amounts outstanding prior revolving credit facility year ended december 31 2016 company borrowed aggregate amount 2000 million paid total amount 4297 million prior credit facility december 31 2017 us dollar amount outstanding term loan 12269 million borrowings outstanding revolving credit facility december 31 2017 december 31 2016 us dollar amount outstanding prior revolving credit facility 4100 million outstanding foreign currency borrowings december 31 2017 2016 credit facility prior credit facility respectively year ended december 31 2017 company recognized 822 million interest expense relating term loan included 42 million relating noncash interest expense relating debt discount 28 million relating amortization debt issuance costs fair value outstanding borrowings term loan determined utilizing overthecounter market quotes considered level 2 inputs described note 13 fair value measurements december 31 2017 carrying amount term loan 11902 million fair value approximately 12261 million amounts outstanding revolving credit facility december 31 2017 fair value outstanding borrowings company’s prior revolving credit facility approximated carrying value december 31 2016 due variable interest rate reprices frequently represents floating market rates fair value outstanding borrowings prior revolving credit facility determined utilizing level 2 inputs described note 13 fair value measurements observable market interest rates yield curves convertible senior notes february 2014 company initially issued 1 billion aggregate principal amount convertible senior notes convertible notes private offering qualified institutional buyers pursuant rule 144a securities act 1933 amended company granted option initial purchasers purchase additional 150 million aggregate principal amount convertible notes subsequently exercised full february 2014 resulting total issuance 115 billion aggregate principal amount convertible notes convertible notes senior unsecured obligations rank effectively subordinate company’s existing future secured indebtedness including amounts outstanding credit facility extent value assets securing indebtedness convertible notes pay interest rate 200 per annum payable semiannually arrears february 15 august 15 year beginning august 15 2014 convertible notes mature august 15 2019 unless earlier repurchased converted company may redeem convertible notes prior stated maturity date holders convertible notes may convert notes option following circumstances calendar quarter commencing calendar quarter ending march 31 2014 last reported sale price company’s common shares least 20 trading days whether consecutive period 30 consecutive trading days ending including last trading day immediately preceding calendar quarter exceeds 130 conversion price convertible notes applicable trading day ii five businessday period immediately five consecutive trading day period measurement period trading price per 1000 principal amount convertible notes trading day measurement period less 98 product last reported sale price company’s common shares conversion rate convertible notes day iii upon occurrence specified corporate events may 15 2019 holders may convert convertible notes time regardless foregoing circumstances upon conversion convertible notes settled cash applicable company’s common shares based applicable conversion rate time convertible notes initial conversion rate 115908 common shares per 1000 principal amount convertible notes equal initial conversion price approximately 8628 per common share company incurred approximately 266 million issuance costs first quarter 2014 relating issuance convertible notes 266 million issuance costs incurred 215 million 51 million recorded debt issuance costs additional paidin capital respectively proportion allocation proceeds convertible notes 215 million debt issuance cost recorded company’s consolidated balance sheet amortized contractual term convertible notes using effective interest method february 2014 115 billion proceeds received issuance convertible notes initially allocated longterm debt liability component additional paidincapital equity component within company’s consolidated balance sheet 9309 million 2191 million respectively liability component measured using nonconvertible debt interest rate carrying amount equity component representing conversion option determined deducting fair value liability component face value convertible notes whole since company must still settle convertible notes face value prior maturity liability component accreted face value resulting additional noncash interest expense recognized within company’s consolidated statements income convertible notes remain outstanding effective interest rate convertible notes approximately 62 per annum equity component remeasured long continues meet conditions equity classification december 31 2017 outstanding principal convertible notes 115 billion unamortized debt discount debt issuance cost 800 million carrying amount liability component 10700 million recorded longterm debt within company’s consolidated balance sheet reflected table within note december 31 2016 outstanding principal convertible notes 115 billion unamortized debt discount debt issuance costs 1252 million carrying amount liability component 10248 million recorded longterm debt within company’s balance sheet reflected table within note fair value liability component relating convertible notes approximately 10660 million 9613 million december 31 2017 2016 respectively december 31 2017 2016 company determined fair value liability component convertible notes using two valuation methods company reviewed market data available publicly traded senior unsecured nonconvertible corporate bonds issued companies similar credit ratings assumptions used estimate represent market participants would use pricing liability component including market yields credit standing develop straight debt yield estimate company also used lattice model included inputs stock price convertible note trading price volatility dividend yield estimate straight debt yield company combined results two valuation methods determine fair value liability component convertible notes inputs primarily considered level 2 level 3 inputs valuation approach similar approach company used determine initial fair value liability component convertible notes february 7 2014 issuance date conjunction issuance convertible notes february 2014 company paid approximately 6858 million enter prepaid forward share repurchase transactions forward transactions certain financial institutions paid approximately 1238 million enter capped call transactions respect common shares capped call transactions certain financial institutions see note 8 shareholders’ deficit equity additional discussion forward transactions capped call transactions entered conjunction issuance convertible notes years ended december 31 2017 2016 2015 company recognized 682 million 653 million 617 million interest expense relating convertible notes respectively included 412 million 386 million 357 million relating noncash interest expense relating debt discount respectively 40 million 38 million 32 million relating amortization debt issuance costs respectively total debt company’s total interest expense including credit facility 1608 million 993 million 1005 million years ended december 31 2017 2016 2015 respectively recognized within consolidated statement income december 31 2017 annual scheduled principal payments debt follows millions certain vendors government agencies may require letters credit similar guaranteeing arrangements issued executed december 31 2017 company 408 million issued undrawn letters credit similar arrangements included mexico value added tax vat related surety bonds described note 7 contingencies 5 lease obligations company warehouse office furniture fixtures equipment leases expire various dates 2033 lease agreements company also obligated pay property taxes insurance maintenance costs certain leases contain renewal options future minimum rental commitments noncancelable operating leases december 31 2017 follows millions company recognizes rental expense straightline basis rental expense years ended december 31 2017 2016 2015 562 million 534 million 580 million respectively material property plant equipment capital leases included property plant equipment accompanying consolidated balance sheets december 31 2017 december 31 2016 6 employee compensation plans united states company maintains profit sharing plan pursuant sections 401a k internal revenue code 1986 amended code plan available substantially employees meet length service requirements company’s contribution expense relating profit sharing plan 48 million 48 million 43 million years ended december 31 2017 2016 2015 respectively company employees international countries covered various deferred compensation plans administered based upon legal requirements countries established company’s compensation expenses relating plans 64 million 58 million 55 million years ended december 31 2017 2016 2015 respectively company nonqualified deferred compensation plans select groups management herbalife management deferred compensation plan herbalife senior executive deferred compensation plan matching contribution 35 participant’s annual base salary excess qualified plan annual compensation limit amount deferrals reduce 401k eligible pay irs limit participant either nonqualified deferred compensation plans discussed times fully vested nonforfeitable interest year’s contribution including interest credited thereto company matching contributions applicable connection participant’s election defer annual deferral amount participant may also elect receive shortterm payout equal annual deferral amount plus interest amount payable five years first day year annual deferral amount actually deferred total expense two nonqualified deferred compensation plans excluding participant contributions 67 million 36 million 01 million years ended december 31 2017 2016 2015 respectively total longterm deferred compensation liability two deferred compensation plans 581 million 500 million december 31 2017 2016 respectively included noncurrent liabilities within company’s consolidated balance sheets deferred compensation plans unfunded benefits paid general assets company except company contributed “rabbi trust” whose assets used pay benefits company remains solvent reached company’s creditors company becomes insolvent value assets “rabbi trust” 336 million 306 million december 31 2017 2016 respectively included assets within company’s consolidated balance sheets 7 contingencies company time engaged routine litigation company regularly reviews pending litigation matters involved establishes reserves deemed appropriate management litigation matters probable loss estimate made matters described note may take several years resolve company believes meritorious defenses cannot sure ultimate resolution although company may reserve amounts certain matters company believes represent likely outcome resolution related disputes company incorrect assessment company may record additional expenses becomes probable increased potential liability warranted tax matters may 7 2010 company received assessment mexican tax administration service amount equivalent approximately 583 million translated december 31 2017 spot rate various items majority vat allegedly owed certain company’s products imported mexico years 2005 2006 assessment subject interest inflationary adjustments july 8 2010 company initiated formal administrative appeal process may 13 2011 mexican tax administration service issued resolution company’s administrative appeal resolution nullified assessment since mexican tax administration service review tax audit findings reissue original assessment company commenced litigation tax court mexico august 2011 dispute assertions made mexican tax administration service case company received notification february 6 2015 tax court mexico nullified substantially assessment march 18 2015 mexican tax administration service filed appeal verdict circuit court august 27 2015 circuit court remanded case back tax court mexico reconsider portion procedural decision adverse mexican tax administration service company received notification march 18 2016 tax court mexico nullified portion assessment upheld portion original assessment august 25 2016 company filed appeal decision circuit court april 6 2017 circuit court issued verdict company prevailing lesser issues tax administration service prevailing core issue may 11 2017 company filed appeal supreme court mexico june 14 2017 supreme court mexico agreed hear appeal company believes meritorious defenses assessment reissued company recognized loss company believe loss probable mexican tax administration service commenced audits company’s mexican subsidiaries period january september 2007 may 10 2013 company received assessment approximately 149 million translated december 31 2017 spot rate related period assessment subject interest inflationary adjustments july 11 2013 company filed administrative appeal disputing assessment september 22 2014 mexican tax administration service denied company’s administrative appeal company commenced litigation tax court mexico november 2014 dispute assertions made mexican tax administration service case january 16 2018 tax court mexico issued verdict upholding assessment issued mexican tax administration service company intends file timely appeal case circuit court appeals litigation case currently ongoing company recognized loss company believe loss probable company issued surety bond amount 176 million translated december 31 2017 spot rate insurance company guarantee payment tax assessment required company pursues appeal assessment surety bond remained effective december 31 2017 mexican tax administration service delayed processing vat refunds companies operating mexico company believes process mexico subsidiary receive vat refunds may delayed december 31 2017 company 412 million mexico vat related assets 353 million within noncurrent assets 59 million within prepaid expenses current assets consolidated balance sheet amount relates vat payments made various periods company believes amounts recoverable refund may applied certain future tax liabilities company recognized losses related vat related assets company believe loss probable march 26 2015 office president mexico issued decree relating application vat nutritional supplements company continues believe application vat law mexico correct december 31 2017 company recognized losses company based current analysis guidance advisors believe loss probable company continues evaluate monitor situation develops including whether make changes operations mexico company recognized loss respect mexican matters company based analysis guidance advisors believe loss probable company currently unable reasonably estimate possible loss range loss could result unfavorable outcome assessment reissued additional assessments issued periods company believes meritorious defenses assessment reissued would meritorious defenses additional assessment issued previously disclosed mexican tax administration service requested information related company’s 2010 year information provided tax administration service completed income tax audit related 2010 year audit resulted insignificant assessment company paid company plan appeal case company received tax assessment september 2009 federal revenue office brazil amount equivalent approximately 21 million translated december 31 2017 spot rate related withholdingcontributions based payments company’s members 2004 december 28 2010 company appealed tax assessment administrative council tax appeals 2nd level administrative appeal company believes meritorious defenses recognized loss company believe loss probable march 6 2014 company notified similar audit 2011 year january 2016 company received tax assessment amount equivalent approximately 53 million translated december 31 2017 spot rate related contributions based payments company’s members 2011 company filed first level administrative appeal assessment february 23 2016 subsequently denied march 13 2017 company appealed tax assessment administrative council tax appeals 2nd level administrative appeal company accrued loss majority assessment company believe loss probable company currently unable reasonably estimate amount loss may result unfavorable outcome additional assessments periods issued company’s brazilian subsidiary pays icmsst taxes product purchases similar vat december 31 2017 company 117 million brazil icmsst 44 million within noncurrent assets 73 million within prepaid expenses current assets consolidated balance sheet company believes able utilize recover icmsst credits future company examination several brazilian states related icms icmsst taxation examinations resulted assessments underpaid tax company appealed state sao paulo audited company 2013 2014 tax years july 2016 state sao paulo company received assessment aggregate amount approximately 485 million translated december 31 2017 spot rate relating various icms issues 2013 tax year august 2016 company filed first level administrative appeal denied february 2017 company filed appeal march 9 2017 august 2017 state sao paulo company received assessment aggregate amount approximately 180 million translated december 31 2017 spot rate relating various icms issues 2014 tax year september 2017 company filed first level administrative appeal 2014 tax year company recognized loss company believe loss probable company also received icms tax assessments brazil fourth quarter 2015 company filed appeals state judicial courts three assessments company issued surety bonds aggregate amount 131 million translated december 31 2017 spot rate guarantee payment tax assessments required company pursues appeals addition company received several icms tax assessments aggregate amount 73 million translated december 31 2017 spot rate several brazilian states surety bonds issued litigation cases currently ongoing company recognized loss company believe loss probable company received various tax assessments multiple states india multiple years indian vat authorities amount equivalent approximately 83 million translated december 31 2017 spot rate assessments underpaid vat company litigating cases tax administrative level tax tribunal levels believes meritorious defenses company recognized loss believe loss probable korea customs service audited importation activities herbalife korea period january 2011 may 2013 total assessment audit period 332 million translated december 31 2017 spot rate company paid assessment recognized payments within assets consolidated balance sheet company lodged first level administrative appeal denied october 21 2016 january 31 2017 company filed appeal national tax tribunal korea company disagrees assertions made assessments well calculation methodology used assessments company recognized loss company believe loss probable course 2016 company received various questions greek social security agency december 29 2016 greek social security agency issued assessment approximately 24 million translated december 31 2017 spot rate respect social security contributions member earnings 2006 year social security issues statute limitations open 2007 later years greece company could receive similar assessments covering years company disputes allegations raised assessment filed administrative appeal assessment greek social security agency november 14 2017 administrative review committee greek social security agency notified company remanded case back social security agency auditors instruction reconsider case since majority assessment seemed unfounded company recognized loss believe loss probable us federal trade commission consent order july 15 2016 company federal trade commission ftc entered proposed stipulation entry order permanent injunction monetary judgment consent order consent order lodged us district court central district california july 15 2016 became effective july 25 2016 effective date consent order resolved ftc’s multiyear investigation company pursuant consent order company neither admitted denied ftc’s allegations except court jurisdiction matter company made wholly owned subsidiary herbalife international america inc 200 million payment ftc additionally company agreed implement certain new procedures enhance certain existing procedures us company 10 months effective date implement among requirements consent order requires company categorize existing future members us either “preferred members” simply consumers wish purchase products household use “distributors” members wish resell products build sales organization company also agreed compensate distributors eligible us sales within downline organization include purchases preferred members purchases distributor personal consumption within allowable limits sales product distributor customers consent order also imposes restrictions distributor’s ability open nutrition clubs united states consent order subjects company certain audits independent compliance auditor period seven years imposes requirements company regarding compliance certification record creation maintenance prohibits company affiliates distributors making misrepresentations misleading claims regarding among things income lavish lifestyles ftc independent compliance auditor right inspect company records request additional compliance reports purposes conducting audits pursuant consent order september 2016 company ftc mutually selected affiliated monitors inc serve independent compliance auditor company continues monitor impact consent order company currently expect settlement longterm materially adverse impact business member base company’s business member base particularly united states may negatively impacted company member base adjust changes company unable comply consent order could result material adverse impact company’s results operations financial condition matters marketer foods dietary nutritional supplements products ingested consumers applied bodies company currently subjected various product liability claims effects claims date material company currently maintains product liability insurance annual deductible 125 million sec department justice requested company documents information relating company’s anticorruption compliance china company conducting review company cooperating government cannot predict eventual scope duration outcome matters time since late 2012 short seller made continues make allegations regarding company network marketing program company believes allegations without merit vigorously defended claims including proactively reaching governmental authorities company believes manipulative activity respect securities allegations company others received may receive additional regulatory governmental inquiries example company previously disclosed inquiries ftc sec governmental authorities future governmental authorities may determine seek information company persons relating allegations company believes governmental regulatory inquiry investigation becomes material disclosed individually consistent policies company cooperated continue fully cooperate governmental regulatory inquiries investigations september 18 2017 company certain subsidiaries members named defendants purported class action lawsuit titled rodgers et al v herbalife ltd et al filed us district court southern district florida alleges violations florida’s deceptive unfair trade practices statute federal racketeer influenced corrupt organizations statutes unjust enrichment negligent misrepresentation plaintiffs seek damages unspecified amount company believes lawsuit without merit vigorously defend claims lawsuit september 2017 one company’s warehouses located mexico sustained flooding damaged certain inventory stored within warehouse company maintains insurance coverage third party carriers affected property december 31 2017 company recorded loss relating damaged inventory recognized equal offsetting receivable insurance recoveries event material negative impact mexico operations company’s consolidated financial statements 8 shareholders’ deficit equity company 823 million 931 million 927 million common shares outstanding december 31 2017 2016 2015 respectively december 2004 company authorized 75 million preference shares 0002 par value 75 million authorized preference shares remained unissued december 31 2017 preference shares may issued time one series voting powers full limited without voting powers designations preferences relative participating optional special rights qualifications limitations restrictions determined company’s board directors dividends april 28 2014 company announced board directors approved terminating quarterly cash dividend instead utilizing cash repurchase additional common shares declaration future dividends subject discretion company’s board directors depend upon various factors including earnings financial condition herbalife ltd’s available distributable reserves cayman islands law restrictions imposed credit facility terms indebtedness may outstanding cash requirements future prospects factors deemed relevant board directors company pay declare dividends fiscal years ended december 31 2017 2016 2015 share repurchases february 21 2017 company’s board directors authorized new threeyear 15 billion share repurchase program expire february 21 2020 replaced company’s prior share repurchase authorization set expire june 30 2017 december 31 2016 approximately 233 million remaining authorized capacity share repurchase program allows company includes indirect wholly owned subsidiary herbalife ltd repurchase company’s common shares times prices determined company’s management market conditions warrant extent herbalife ltd’s distributable reserves available cayman islands law credit facility permits company repurchase common shares long default event default exists conditions specified consolidated leverage ratios met conjunction issuance convertible notes february 2014 company paid approximately 6858 million enter prepaid forward share repurchase transactions forward transactions certain financial institutions forward counterparties pursuant company purchased approximately 99 million common shares average cost 6902 per share settlement around august 15 2019 maturity date convertible notes subject ability forward counterparty elect settle portion forward transactions early forward transactions generally expected facilitate privately negotiated derivative transactions forward counterparties holders convertible notes including swaps relating common shares holders convertible notes establish short positions relating common shares otherwise hedge investments convertible notes concurrently shortly pricing convertible notes result forward transactions company’s total shareholders’ deficit equity within consolidated balance sheet reduced approximately 6858 million first quarter 2014 amounts 6539 million 319 million allocated accumulated deficit retained earnings additional paidin capital respectively within total shareholders’ deficit equity also upon executing forward transactions company recorded fair value 358 million noncash issuance costs assets corresponding amount additional paidin capital within consolidated balance sheet noncash issuance costs amortized interest expense contractual term forward transactions years ended december 31 2017 2016 2015 company recognized 65 million noncash interest expense within consolidated statement income relating amortization noncash issuance costs year ended december 31 2017 indirect wholly owned subsidiary company purchased approximately 50 million herbalife ltd’s common shares open market purchases aggregate cost approximately 3286 million average cost 6561 per share repurchases reduced company’s total shareholders’ equity reflected cost within company’s accompanying consolidated balance sheet although shares owned indirect wholly owned subsidiary company reflected treasury shares us gaap therefore reduce number common shares outstanding within company’s consolidated financial statements weightedaverage number common shares outstanding used calculating earnings per share common shares herbalife ltd held indirect wholly owned subsidiary however remain outstanding books records company’s transfer agent therefore still carry voting share rights related ownership company’s common shares may exercised long consistent applicable laws shares voted subsidiary manner maximum extent possible proportion votes cast respect matter properly submitted vote herbalife ltd’s shareholders december 31 2017 company held approximately 50 million treasury shares us gaap purposes october 2017 company’s parent completed modified dutch auction tender offer subsequently paid cash repurchase retire total approximately 67 million common shares aggregate cost approximately 4578 million 6800 per share total company repurchased 117 million common shares aggregate cost approximately 7864 million average cost 6698 per share year ended december 31 2017 company repurchase common shares open market years ended december 31 2016 2015 december 31 2017 remaining authorized capacity company’s 15 billion share repurchase program 7136 million connection tender offer company incurred 16 million transaction costs also provided nontransferable contractual cvr share tendered allowing participants tender offer receive contingent cash payment event herbalife acquired goingprivate transaction defined cvr agreement within two years commencement tender offer initial fair value cvr 73 million recorded liability fourth quarter corresponding decrease shareholders’ equity determining initial fair value cvr company used lattice model included inputs underlying stock price strike price time expiration dividend yield subsequent changes fair value cvr liability using similar valuation approach initial fair value determination recognized within companys consolidated balance sheet corresponding gains losses recognized nonoperating expense income within companys consolidated statements income reporting period cvr expires august 2019 terminated due goingprivate transaction december 31 2017 fair value cvr 69 million approximate 99 million common shares effectively repurchased forward transactions treated retired shares basic diluted eps purposes although remain legally outstanding years ended december 31 2017 2016 2015 company also withheld shares vested restricted stock units exercised sars relating sharebased compensation plans treated share repurchases company’s consolidated financial statements discussed company reflects aggregate purchase price common shares repurchased reduction increase shareholders’ deficit equity company allocated purchase price repurchased shares accumulated deficit retained earnings common shares additional paidin capital exception treasury shares recorded separately company’s consolidated balance sheets number shares issued upon vesting exercise certain restricted stock units sars granted pursuant company’s sharebased compensation plans net minimum statutory withholding requirements company pays behalf employees although shares withheld issued treated common share repurchases company’s consolidated financial statements reduce number shares would issued upon vesting shares count authorized capacity company’s share repurchase program described years ended december 31 2017 2016 2015 company’s share repurchases inclusive transaction costs issuance cvr 7953 million none respectively company’s share repurchase programs 604 million 132 million 166 million respectively due shares withheld tax purposes related company’s sharebased compensation plans years ended december 31 2017 2016 2015 company’s total share repurchases including shares withheld tax purposes 8557 million 132 million 166 million respectively recorded reduction shareholders’ equity within company’s consolidated balance sheet december 31 2017 company recorded 8442 million total share repurchases within financing activities consolidated statement cash flows year ended december 31 2017 excludes 73 million initial fair value cvr 42 million share repurchases payment made subsequent year end therefore reflected liability within company’s consolidated balance sheet december 31 2017 capped call transactions connection issuance convertible notes company paid approximately 1238 million enter capped call transactions respect common shares capped call transactions certain financial institutions capped call transactions expected generally reduce potential dilution upon conversion convertible notes event market price common shares greater strike price capped call transactions initially set 8628 per common share reduction potential dilution subject cap based cap price initially set 12079 per common share strike price cap price subject certain adjustments terms capped call transactions therefore result executing capped call transactions company effect exposed potential net dilution market price common shares exceeds adjusted cap price result capped call transactions company’s additional paidin capital within shareholders’ deficit equity consolidated balance sheet reduced 1238 million first quarter 2014 accumulated comprehensive income loss following table summarizes changes accumulated comprehensive income loss years ended december 31 2017 2016 2015 1 see note 2 basis presentation note 11 derivative instruments hedging activities information regarding location consolidated statements income gains losses reclassified accumulated comprehensive income loss income years ended december 31 2017 2016 2015 comprehensive income loss reclassifications net tax expense 57 million foreign currency translation adjustments year ended december 31 2017 comprehensive income loss reclassifications net tax expense 52 million tax benefits 03 million foreign currency translation adjustments unrealized gain loss derivatives respectively year ended december 31 2016 amounts reclassified accumulated comprehensive income loss income net tax expense 01 million unrealized gain loss availableforsale investments year ended december 31 2016 comprehensive income loss reclassifications net tax benefits 72 million 06 million 09 million foreign currency translation adjustments unrealized gain loss derivatives unrealized gain loss availableforsale investments respectively year ended december 31 2015 amounts reclassified accumulated comprehensive income loss income net tax expense 08 million unrealized gain loss availableforsale investments year ended december 31 2015 9 sharebased compensation company four sharebased compensation plans amended restated herbalife ltd 2005 stock incentive plan 2005 stock incentive plan amended restated herbalife ltd 2014 stock incentive plan 2014 stock incentive plan amended restated herbalife ltd independent directors deferred compensation stock unit plan independent director stock unit plan amended restated nonmanagement directors compensation plan nonmanagement directors plan 2014 stock incentive plan replaced 2005 stock incentive plan adoption thereof additional awards made 2005 stock incentive plan terms 2014 stock incentive plan substantially similar terms 2005 stock incentive plan 2014 stock incentive plan authorizes issuance 8700000 common shares pursuant awards granted plan plus shares remained available issuance 2005 stock incentive plan april 29 2014 purpose independent directors stock unit plan nonmanagement directors plan facilitate equity ownership company directors equity awards december 31 2017 aggregate approximately 42 million common shares remain available future issuance 2014 stock incentive plan company’s sharebased compensation plans provide grants stock options stock appreciation rights sars stock unit awards collectively referred herein awards previously stock options generally vested quarterly fiveyear period less beginning grant date certain sars generally vest annually threeyear period contractual term stock options sars generally ten years certain stock unit awards 2014 stock incentive plan vest annually three year period certain stock unit awards subject service performance conditions vest passage performance period determined compensation committee company’s board directors stock unit awards granted directors generally vest oneyear period awards subject following market service conditions market condition awards performance service conditions performance condition awards market service performance conditions market performance condition awards subject continued service company service condition awards granted company market condition awards performance condition awards market performance condition awards service condition awards unless otherwise determined time grant upon vesting stock unit award represents right receive one common share company’s stock compensation awards outstanding december 31 2017 include sars stock unit awards years ended december 31 2017 2016 2015 company granted sars performance conditions certain employees awards generally vest 20 first succeeding year 20 second succeeding year 60 third succeeding year subject achievement certain sales leader retention metrics fair value sars determined date grant using blackscholesmerton option pricing model compensation expense grants recognized vesting term using graded vesting method years ended december 31 2017 2016 2015 company granted sars service conditions certain employees fair value sars determined date grant using blackscholesmerton option pricing model compensation expense grants recognized vesting term using straight line method year ended december 31 2017 company granted performance stock unit awards certain executives vest december 31 2019 subject continued employment date achievement certain performance conditions performance conditions include targets volume points adjusted earnings interest taxes adjusted earnings per share performance stock unit awards vest 0 200 target award based achievement performance conditions year ended december 31 2017 company granted stock unit awards service conditions directors certain employees sharebased compensation expense included selling general administrative expenses consolidated statements income years ended december 31 2017 2016 2015 sharebased compensation expense relating service condition awards amounted 244 million 239 million 268 million respectively years ended december 31 2017 2016 2015 sharebased compensation expense relating market condition awards amounted 13 million 04 million 03 million respectively years ended december 31 2017 2016 2015 sharebased compensation expense relating performance condition awards amounted 164 million 159 million 178 million respectively sharebased compensation expense related market performance condition awards recognized years ended december 31 2017 2016 2015 years ended december 31 2017 2016 2015 related income tax benefits recognized earnings awards amounted 94 million 148 million 166 million respectively december 31 2017 total unrecognized compensation cost related nonvested service condition stock awards 292 million related weightedaverage period expected recognized approximately 14 years december 31 2017 total unrecognized compensation cost related nonvested performance condition awards 151 million related weightedaverage period expected recognized approximately 17 years december 31 2017 total unrecognized compensation cost related nonvested market condition stock awards less 01 million related weightedaverage period expected recognized approximately 02 years stock unit awards valued market value date grant fair value service condition sars performance condition sars estimated date grant using blackscholesmerton optionpricing model fair value sars market conditions market performance conditions estimated date grant using monte carlo lattice model company calculates expected term sars based historical data groups employees determined similar historical exercise patterns valuation purposes expected volatility sars based upon historical volatility company’s common shares also validated volatility rates peer group companies risk free interest rate based implied yield us treasury zerocoupon issue remaining term equal expected term sars expected dividend yield assumption based company’s historical expected amount dividend payouts stock options granted years ended december 31 2017 2016 2015 sars granted independent directors years ended december 31 2017 2016 2015 following table summarizes weighted average assumptions used calculation fair value service condition awards years ended december 31 2017 2016 2015 following table summarizes weighted average assumptions used calculation fair value performance condition awards granted years ended december 31 2017 2016 2015 following tables summarize activity sharebased compensation plans includes stock awards year ended december 31 2017 1 intrinsic value amount current market value underlying stock exceeds exercise price stock award 2 includes 01 million 01 million market condition sars december 31 2017 2016 respectively 3 includes 31 million 29 million performance condition sars december 31 2017 2016 respectively 4 includes 15 million performance condition sars weightedaverage grant date fair value service condition sars granted years ended december 31 2017 2016 2015 2864 2933 1257 respectively weightedaverage grant date fair value sars performance conditions granted years ended december 31 2017 2016 2015 2832 2969 1365 respectively total intrinsic value service condition stock options sars exercised years ended december 31 2017 2016 2015 1228 million 323 million 255 million respectively total intrinsic value performance condition sars exercised years ended december 31 2017 2016 31 million 07 million respectively total intrinsic value market condition sars exercised year ended december 31 2015 114 million market condition sars exercised years ended december 31 2017 2016 following table summarizes activities stock units primarily relating directors company year ended december 31 2017 1 includes 134388 performance based stock unit awards represents maximum amount vest total vesting date fair value stock units vested years ended december 31 2017 2016 2015 20 million 21 million 13 million respectively employee stock purchase plan 2007 company adopted qualified employee stock purchase plan espp implemented first quarter 2008 connection adoption espp company reserved issuance total 2 million common shares december 31 2017 approximately 17 million common shares remain available future issuance terms espp rights purchase common shares may granted eligible qualified employees subject certain restrictions espp enables company’s eligible employees payroll withholdings purchase limited number common shares 85 fair market value common share purchase date purchases made quarterly basis 10 segment information company nutrition company sells wide range weight management targeted nutrition energy sports fitness outer nutrition products company’s products manufactured company changsha hunan china extraction facility suzhou china facility nanjing china facility lake forest california facility winstonsalem north carolina facility third party providers sold members consume sell herbalife products retail consumers members revenues reflect sales products company members categorized based geographic location december 31 2017 company sold products 94 countries throughout world organized managed six geographic regions north america mexico south central america emea europe middle east africa asia pacific china company defines operating segments geographical operations company aggregates operating segments excluding china reporting segment primary reporting segment management believes company’s operating segments similar operating characteristics similar long term operating performance making determination management believes operating segments similar nature products sold product acquisition process types customers products sold methods used distribute products nature regulatory environment economic characteristics china identified separate reporting segment meet criteria aggregation company reviews net sales contribution margin operating segment reviews assets capital expenditures consolidated basis operating segment therefore net sales contribution margin presented reportable segment assets capital expenditures segment presented operating information two reportable segments sales product line follows 1 contribution margin consists net sales less cost sales royalty overrides china segment contribution margin include service fees china independent service providers 2 service fees china independent service providers totaling 4195 million 4071 million 4035 million years ended december 31 2017 2016 2015 respectively included selling general administrative expenses 3 product buy backs returns product categories included literature promotional category december 31 2017 2016 goodwill allocated company’s reporting units included company’s primary reporting segment 936 million 868 million respectively goodwill allocated china segment 33 million 31 million december 31 2017 2016 respectively following table sets forth property plant equipment deferred tax assets geographic area majority company’s foreign subsidiaries designate local currencies functional currency december 31 2017 2016 total amount cash held foreign subsidiaries reported company’s consolidated balance sheets 11335 million 3162 million respectively 6333 million 282 million respectively maintained invested us dollars december 31 2017 2016 total amount cash equivalents held company’s parent us entities inclusive us territories 1453 million 5278 million respectively 11 derivative instruments hedging activities foreign currency instruments company designates certain foreign currency derivatives primarily comprised foreign currency forward contracts freestanding derivatives hedge accounting apply changes fair market value freestanding derivatives included selling general administrative expenses company’s consolidated statements income company uses freestanding foreign currency derivatives hedge foreigncurrencydenominated intercompany transactions partially mitigate impact foreign currency fluctuations fair value freestanding foreign currency derivatives based thirdparty quotes company’s foreign currency derivative contracts generally executed monthly basis company designates cashflow hedges foreign currency forward contracts enters hedge forecasted inventory purchases intercompany management fees subject foreign currency exposures forward contracts used hedge forecasted inventory purchases specific months changes fair value forward contracts excluding forward points designated cashflow hedges recorded component accumulated comprehensive income loss within shareholders’ deficit equity recognized cost sales consolidated statement income period approximates time hedged inventory sold company also hedges forecasted intercompany management fees specific months contracts allow company sell euros exchange us dollars specified contract rates changes fair value forward contracts designated cash flow hedges recorded component accumulated comprehensive income loss within shareholders’ deficit equity recognized selling general administrative expenses consolidated statement income period hedged item underlying transaction affect earnings december 31 2017 december 31 2016 aggregate notional amounts foreign currency contracts outstanding designated cash flow hedges approximately 1049 million 900 million respectively december 31 2017 outstanding contracts expected mature next fifteen months company’s derivative financial instruments recorded consolidated balance sheets fair value based thirdparty quotes december 31 2017 company recorded assets fair value 29 million liabilities fair value 40 million relating outstanding foreign currency contracts designated cashflow hedges december 31 2016 company recorded assets fair value 46 million relating outstanding foreign currency contracts designated cashflow hedges company assesses hedge effectiveness measures hedge ineffectiveness least quarterly years ended december 31 2017 2016 ineffective portion relating hedges immaterial hedges remained effective december 31 2017 december 31 2016 december 31 2017 december 31 2016 majority company’s outstanding foreign currency forward contracts maturity dates less twelve months majority freestanding derivatives expiring within one month december 31 2017 december 31 2016 table describes foreign currency forward contracts outstanding december 31 2017 december 31 2016 following tables summarize derivative activity years ended december 31 2017 2016 2015 relating company’s derivatives gains losses derivative instruments following table summarizes gains losses relating derivative instruments recorded comprehensive loss years ended december 31 2017 2016 2015 december 31 2017 estimated amount existing net gains related cash flow hedges recorded accumulated comprehensive loss expected reclassified earnings next twelve months 03 million following table summarizes gains losses relating derivative instruments recorded income years ended december 31 2017 2016 2015 1 foreign exchange contracts designated hedging instruments amounts recognized income primarily represent amounts excluded assessment hedge effectiveness years ended december 31 2017 2016 year ended december 31 2015 13 million benefit related hedge ineffectiveness partially offset 09 million expense related amounts excluded assessment hedge effectiveness recognized income loss following table summarizes gains losses relating derivative instruments reclassified accumulated comprehensive loss income years ended december 31 2017 2016 2015 company reports derivatives fair value either assets liabilities within consolidated balance sheets see note 13 fair value measurements information derivative fair values consolidated balance sheets location december 31 2017 2016 12 income taxes components income taxes follows millions income taxes follows millions significant categories temporary differences gave rise deferred tax assets liabilities follows tax effected millions tax loss credit carryforwards certain foreign subsidiaries 2017 2016 1376 million 1151 million respectively unused tax loss credit carryforwards certain foreign subsidiaries 707 million expire 2018 2027 669 million carried forward indefinitely us foreign tax credit carryforwards 2017 2016 1862 million 996 million respectively unused us foreign tax credit carryforwards begin expire 2020 domestic research development tax credit carryforward 2017 48 million unused domestic research development tax credit carryforwards expire 2037 state tax loss carryforwards 2017 04 million unused state tax loss carryforwards expire 2022 2037 december 22 2017 us enacted tax cuts jobs act also commonly referred “us tax reform” significantly changes us corporate income tax laws among things reducing us corporate income tax rate 21 starting 2018 creating modified territorial tax system onetime mandatory tax previously deferred foreign earnings us subsidiaries result act company recorded provisional net expense 1533 million fourth quarter 2017 amount included tax expense predominantly consists three components 1634 million charge caused establishment valuation allowance deferred tax assets due act’s changes sourcing calculation foreign income thereby limited expected utilization foreign tax credit carryforwards ii 55 million benefit resulting remeasurement company’s net deferred tax liabilities us based new lower corporate income tax rate iii nonrecurring benefit 46 million related additional foreign tax credits result impact onetime mandatory repatriation previously unremitted earnings certain nonus subsidiaries owned either directly indirectly us parent us foreign tax credit purposes company incurred overall domestic losses 2017 2016 limited company’s ability claim foreign tax credits future taxable years domestic source income generated less 50 income reclassified foreign source income allowed increase company’s foreign tax credit limitation thereby enabling use additional foreign tax credits company believes likely 314 million foreign tax credits resulting overall domestic loss utilized based company’s current interpretation act described company continues analyze act related information accordingly company may record additional provisional amounts adjustments future periods although 1533 million provisional net expense represents company believes reasonable estimate impact income tax effects act company’s consolidated financial statements december 31 2017 considered provisional items include limited foreign tax credits associated valuation allowance limitations executive compensation onetime tax previously unremitted foreign earnings us subsidiaries additionally company continues analyze information regulatory guidance accordingly company may record additional provisional amounts adjustments provisional amounts future periods adjustments provisional amounts reported component tax expense reporting period adjustments determined later fourth quarter 2018 company recognizes valuation allowances deferred tax assets reported based weight evidence likely deferred tax assets realized december 31 2017 2016 company held valuation allowances net deferred tax assets certain subsidiaries primarily related tax loss carryforwards us foreign tax credits amount 2994 million tax loss carryforwards 1154 million respectively change company’s valuation allowance 2017 1840 million related 1837 million net additions charged income tax expense primarily related valuation allowance established us foreign tax credits described 03 million currency translation adjustments recognized within comprehensive income change company’s valuation allowance 2016 59 million related 56 million net reductions charged income tax expense 03 million currency translation adjustments recognized within comprehensive income change company’s valuation allowance 2015 2087 million related 2056 million net reductions charged income tax expense primarily related utilization deferred tax asset balance related intercompany deferred interest expense partially offset increases venezuelan tax loss carryforwards 31 million currency translation adjustments recognized within comprehensive income december 31 2017 company’s us consolidated group approximately 979 million unremitted earnings permanently reinvested relating certain foreign subsidiaries addition december 31 2017 herbalife ltd approximately 24 billion permanently reinvested unremitted earnings relating operating subsidiaries since herbalife ltd’s unremitted earnings permanently reinvested deferred taxes provided unremitted earnings practicable determine amount unrecognized deferred taxes respect unremitted earnings company remit unremitted earnings would subject income tax remittances deferred taxes accrued earnings considered indefinitely reinvested deferred tax unremitted foreign earnings december 31 2017 2016 deferred tax liability 291 million net valuation allowance 55 million respectively applicable statutory income tax rate cayman islands zero herbalife ltd years reported purposes reconciliation provision income taxes statutory rate provision income taxes effective tax rate notional 35 tax rate applied follows december 31 2017 total amount unrecognized tax benefits including related interest penalties 620 million total amount unrecognized tax benefits recognized 444 million unrecognized tax benefits 99 million interest 15 million penalties would impact effective tax rate december 31 2016 total amount unrecognized tax benefits including related interest penalties 620 million total amount unrecognized tax benefits recognized 448 million unrecognized tax benefits 94 million interest 21 million penalties would impact effective tax rate company accounts interest penalties generated tax contingencies component income tax expense year ended december 31 2017 company recorded decrease interest penalty expense related uncertain tax positions less 01 million 08 million respectively year ended december 31 2016 company recorded increase interest penalty expense related uncertain tax positions 27 million 07 million respectively year ended december 31 2015 company recorded increase interest penalty expense related uncertain tax positions 20 million 06 million respectively december 31 2017 total amount interest penalties related unrecognized tax benefits recognized statement financial position 99 million 15 million respectively december 31 2016 total amount interest penalties related unrecognized tax benefits recognized statement financial position 94 million 21 million respectively december 31 2015 total amount interest penalties related unrecognized tax benefits recognized statement financial position 71 million 15 million respectively following changes occurred amount unrecognized tax benefits years ended december 31 2017 2016 2015 millions amount income taxes company pays subject ongoing audits taxing jurisdictions around world company’s estimate potential outcome uncertain tax position subject management’s assessment relevant risks facts circumstances existing time company believes adequately provided matters however company’s future results may include favorable unfavorable adjustments estimates period audits resolved may impact company’s effective tax rate december 31 2017 company’s tax filings generally subject examination major tax jurisdictions years ending december 31 2012 company believes reasonably possible amount unrecognized tax benefits could decrease approximately 70 million within next twelve months possible decrease 07 million would due settlement audits resolution administrative judicial proceedings remaining possible decrease 63 million would due expiration statute limitations various jurisdictions 13 fair value measurements company applies provisions asc topic 820 fair value measurements disclosures asc 820 financial nonfinancial assets liabilities asc 820 defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date asc 820 establishes fair value hierarchy prioritizes inputs used measuring fair value three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities reporting entity ability access measurement date level 2 inputs include quoted prices similar assets liabilities active markets quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability inputs derived principally corroborated observable market data correlation means level 3 inputs unobservable inputs asset liability company measures certain assets liabilities fair value discussed throughout notes consolidated financial statements foreign exchange currency contracts valued using standard calculations models primarily based inputs observable forward rates spot rates foreign currency exchange rates reporting period ended date company’s derivative assets liabilities measured fair value consisted level 2 inputs amounts shown gross values december 31 2017 december 31 2016 fair value measurements reporting date using company’s deferred compensation plan assets consist company owned life insurance policies recorded cash surrender value required included fair value table see note 6 employee compensation plans description deferred compensation plan assets company’s cvr liability measured fair value would categorized within level 3 fair value hierarchy asc 820 see note 8 shareholders’ deficit equity description cvr liability following tables summarize offsetting fair values company’s derivative assets derivative liabilities presentation company’s consolidated balance sheets december 31 2017 december 31 2016 company offsets derivative assets derivative liabilities consolidated balance sheets extent maintains master netting arrangements related financial institutions december 31 2017 december 31 2016 company’s derivatives subject master netting arrangements collateralization required company’s derivative assets derivative liabilities 14 detail certain balance sheet accounts assets company’s accompanying consolidated balance sheets includes deferred compensation plan assets 336 million 306 million deferred tax assets 775 million 1552 million december 31 2017 2016 respectively current liabilities current liabilities consist following noncurrent liabilities noncurrent liabilities company’s accompanying consolidated balance sheets includes deferred compensation plan liabilities 581 million 500 million deferred income tax liabilities 78 million 153 million december 31 2017 2016 respectively see note 6 employee compensation plans consolidated financial statements description company’s deferred compensation plan assets liabilities 15 subsequent events january 2018 indirect wholly owned subsidiary company repurchased 4200 company’s common shares aggregate consideration approximately 03 million open market purchases company’s 15 billion share repurchase program repurchases effected pursuant rule 10b51 trading plans see note 8 shareholders’ deficit equity discussion common shares repurchased company’s indirect wholly owned subsidiary treated us gaap 16 quarterly information unaudited 1 includes impact us tax reform enacted fourth quarter 2017 described note 12 income taxes item 16 form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized herbalife ltd john g desimone john g desimone chief financial officer dated february 22 2018 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated signature title date richard p goudis chief executive officer principal executive officer february 22 2018 richard p goudis john g desimone chief financial officer principal financial officer february 22 2018 john g desimone bosco chiu senior vice president principal accounting officer principal accounting officer february 22 2018 bosco chiu richard p bermingham director february 22 2018 richard p bermingham pedro cardoso director february 22 2018 pedro cardoso richard h carmona director february 22 2018 richard h carmona jonathan christodoro director february 22 2018 jonathan christodoro keith cozza director february 22 2018 keith cozza jeffrey dunn director february 22 2018 jeffrey dunn hunter c gary director february 22 2018 hunter c gary michael johnson director executive chairman february 22 2018 michael johnson jesse lynn director february 22 2018 jesse lynn michael montelongo director february 22 2018 michael montelongo james l nelson director february 22 2018 james l nelson maria otero director february 22 2018 maria otero john tartol director february 22 2018 john tartolitem 15 exhibits financial statement schedules following documents filed part annual report form 10k incorporated herein reference 1 financial statements following financial statements herbalife nutrition ltd filed part annual report form 10k pages indicated 2 financial statement schedules omitted required information inapplicable material information presented consolidated financial statements related notes 3 exhibits listed exhibit index immediately filed part annual report form 10k incorporated reference herein exhibit index filed herewith management contract compensatory plan arrangement previously filed october 1 2004 exhibit company’s registration statement form s1 file 333119485 incorporated herein reference b previously filed december 2 2004 exhibit amendment 4 company’s registration statement form s1 file 333119485 incorporated herein reference c previously filed december 14 2004 exhibit amendment 5 company’s registration statement form s1 file 333119485 incorporated herein reference previously filed july 28 2014 exhibit company’s quarterly report form 10q quarter ended june 30 2014 incorporated herein reference e previously filed may 5 2015 exhibit company’s quarterly report form 10q quarter ended march 31 2015 incorporated herein reference f previously filed august 5 2015 exhibit company’s quarterly report form 10q quarter ended june 30 2015 incorporated herein reference g previously filed may 5 2016 exhibit company’s quarterly report form 10q quarter ended march 31 2016 incorporated herein reference h previously filed july 15 2016 exhibit company’s current report form 8k incorporated herein reference previously filed february 23 2017 exhibit company’s annual report form 10k year ended december 31 2016 incorporated herein reference j previously filed august 1 2017 exhibit company’s quarterly report form 10q quarter ended june 30 2017 incorporated herein reference k previously filed august 21 2017 exhibit company’s tender offer statement schedule incorporated herein reference l previously filed october 11 2017 exhibit company’s amendment 6 tender offer statement schedule incorporated herein reference previously filed february 22 2018 exhibit company’s annual report form 10k year ended december 31 2017 incorporated herein reference n previously filed march 29 2018 exhibit company’s current report form 8k incorporated herein reference previously filed may 3 2018 exhibit company’s quarterly report form 10q quarter ended march 31 2018 incorporated herein reference p previously filed august 1 2018 exhibit company’s quarterly report form 10q quarter ended june 30 2018 incorporated herein reference q previously filed august 22 2018 exhibit company’s current report form 8k incorporated herein reference report independent registered public accounting firm board directors shareholders herbalife nutrition ltd opinions financial statements internal control financial reporting audited accompanying consolidated balance sheets herbalife nutrition ltd subsidiaries “company” december 31 2018 december 31 2017 related consolidated statements income comprehensive income changes shareholders’ deficit equity cash flows three years period ended december 31 2018 including related notes collectively referred “consolidated financial statements” also audited companys internal control financial reporting december 31 2018 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso opinion consolidated financial statements referred present fairly material respects financial position company december 31 2018 december 31 2017 results operations cash flows three years period ended december 31 2018 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2018 based criteria established internal control integrated framework 2013 issued coso change accounting principle discussed note 2 consolidated financial statements company changed manner accounts revenues contracts customers 2018 manner accounts unrealized excess tax benefits 2017 basis opinions companys management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions company’s consolidated financial statements companys internal control financial reporting based audits public accounting firm registered public company accounting oversight board united states pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audits obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud whether effective internal control financial reporting maintained material respects audits consolidated financial statements included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp los angeles california february 19 2019 served company’s auditor since 2013 herbalife nutrition ltd subsidiaries consolidated balance sheets see accompanying notes consolidated financial statements herbalife nutrition ltd subsidiaries consolidated statements income see accompanying notes consolidated financial statements herbalife nutrition ltd subsidiaries consolidated statements comprehensive income see accompanying notes consolidated financial statements herbalife nutrition ltd subsidiaries consolidated statements changes shareholders’ deficit equity see accompanying notes consolidated financial statements herbalife nutrition ltd subsidiaries consolidated statements cash flows see accompanying notes consolidated financial statements herbalife nutrition ltd subsidiaries notes consolidated financial statements 1 organization herbalife nutrition ltd formerly herbalife ltd cayman islands exempted company limited liability incorporated april 4 2002 herbalife nutrition ltd together subsidiaries “company” “herbalife” global nutrition company sells weight management targeted nutrition energy sports fitness outer nutrition products network independent members china company sells products independent service providers sales representatives sales officers customers preferred customers well companyoperated retail platforms necessary company sells products six geographic regions north america mexico south central america emea consists europe middle east africa asia pacific excluding china 2 basis presentation company’s consolidated financial statements refer herbalife nutrition ltd subsidiaries april 24 2018 company’s shareholders approved twoforone stock split company’s common shares may 14 2018 shareholders record received one additional share held may 7 2018 share per share amounts herein restated reflect stock split recently adopted pronouncements may 2014 financial accounting standards board fasb issued accounting standards update asu 201409 revenue contracts customers topic 606 new revenue recognition standard provides fivestep analysis contracts determine revenue recognized core principle entity recognize revenue depict transfer promised goods services customers amount reflects consideration entity expects entitled exchange goods services august 2015 fasb deferred effective date asu 201409 entities one year annual reporting periods beginning december 15 2017 fasb issued several updates subsequently including implementation guidance principal versus agent considerations entity account licensing arrangements customers improve guidance assessing collectability presentation sales taxes noncash consideration contract modifications completed contracts transition amendments series updates shall applied either retrospectively period presented cumulativeeffect adjustment date adoption company adopted fasb accounting standards codification asc topic 606 revenue contracts customers asc 606 date initial application january 1 2018 using modified retrospective method applied contracts existing january 1 2018 results reporting periods beginning january 1 2018 thereafter presented asc 606 prior period amounts adjusted continue reported accordance fasb asc topic 605 revenue recognition asc 605 company recorded net reduction 23 million beginning retained earnings january 1 2018 due cumulative impact adopting asc 606 resulting revenue recognition timing differences related transfer control products sold certain company’s thirdparty importers material cumulative impact opening balance sheet accounts material additionally certain thirdparty importer fees changed classification reduction revenue selling general administrative expense asc 606 information transitional impact adopting asc 606 see section entitled “revenue recognition” january 2016 fasb issued asu 201601 financial instruments overall subtopic 82510 recognition measurement financial assets financial liabilities updated guidance enhances reporting model financial instruments modifying entities measure recognize equity investments present changes fair value financial liabilities simplifying disclosure guidance financial instruments adoption guidance first quarter 2018 material impact company’s consolidated financial statements march 2016 fasb issued asu 201604 liabilities extinguishments liabilities subtopic 40520 recognition breakage certain prepaid storedvalue products asu requires entities sell prepaid storedvalue products redeemable goods services cash thirdparty merchants recognize breakage ie value ultimately redeemed consumer way consistent recognized new revenue recognition standard prior us gaap diversity practice entities accounted breakage resulted consumer redeem entire product balance asu clarifies entity’s liability prepaid storedvalue products within scope meets definition financial liability adoption guidance first quarter 2018 material impact company’s consolidated financial statements august 2016 fasb issued asu 201615 statement cash flows topic 230 classification certain cash receipts cash payments asu provides clarification eight specific cash flow issues regarding presentation classification statement cash flows objective reducing existing diversity practice adoption guidance first quarter 2018 material impact company’s consolidated financial statements october 2016 fasb issued asu 201616 income taxes topic 740 intraentity transfers assets inventory asu requires entities recognize income tax consequences intraentity transfer asset inventory transfer occurs amendments update change us gaap pretax effects intraentity asset transfer topic 810 consolidation intraentity transfer inventory adoption guidance first quarter 2018 material impact company’s consolidated financial statements november 2016 fasb issued asu 201618 statement cash flows topic 230 restricted cash asu requires restricted cash restricted cash equivalents included cash equivalents reconciling beginningofperiod endofperiod amounts shown statements cash flows adoption guidance first quarter 2018 resulted change presentation restricted cash restricted cash equivalents company’s consolidated statements cash flows periods presented change adoption guidance material impact company’s consolidated financial statements may 2017 fasb issued asu 201709 compensation stock compensation topic 718 scope modification accounting asu provides additional guidance company apply modification accounting change either terms conditions sharebased payment award specifically company apply modification accounting fair value vesting conditions classification award remains immediately modification adoption guidance first quarter 2018 material impact company’s consolidated financial statements new accounting pronouncements february 2016 fasb issued asu 201602 leases topic 842 subsequently issued additional updates topic 842 updated guidance requires lessees recognize lease liability rightofuse asset measured present value future minimum lease payments lease commencement date recognition measurement presentation expenses depend classification finance operating lease amendments also require certain quantitative qualitative disclosures asu 201602 effective interim annual reporting periods beginning december 15 2018 early adoption permitted currently issued update requires entities recognize measure leases beginning earliest period presented using modified retrospective approach allows entities initially apply new lease standard adoption date recognize cumulativeeffect adjustment opening balance retained earnings period adoption company performed comprehensive review order determine changes required support adoption new standard first quarter 2019 company complete implementation processes policies support new lease accounting reporting requirements company plans adopt new standard adoption date application date january 1 2019 recognize cumulativeeffect adjustment opening balance retained earnings period adoption based lease portfolio january 1 2019 company preliminarily estimates impact adopting asu 201602 increase total assets total liabilities range 150 million 200 million company anticipate adoption guidance material impact consolidated statements income company continues finalize implementation new processes assessment impact adoption consolidated financial statements therefore preliminary estimated impacts disclosed change final impact known adoption completed first quarter 2019 june 2016 fasb issued asu 201613 financial instrument credit losses topic 326 measurement credit losses financial instruments asu changes impairment model financial assets requiring use expected loss model requires entities estimate lifetime expected credit loss financial assets measured amortized cost credit losses recorded allowance offset amortized cost financial asset resulting net presentation amount expected collected financial asset addition credit losses relating availableforsale debt securities recorded allowance credit losses rather direct writedown security amendments update effective reporting periods beginning december 15 2019 early adoption permitted reporting periods beginning december 15 2018 company evaluating potential impact adoption consolidated financial statements january 2017 fasb issued asu 201704 intangibles goodwill topic 350 simplifying test goodwill impairment asu simplifies test goodwill impairment removing step 2 goodwill impairment test companies perform goodwill impairment test comparing fair value reporting unit carrying amount recognizing impairment charge amount carrying amount exceeds reporting unit’s fair value exceed total amount goodwill allocated reporting unit entity still option perform qualitative assessment reporting unit determine quantitative impairment test necessary amendments update effective goodwill impairment tests fiscal years beginning december 15 2019 early adoption permitted goodwill impairment tests performed january 1 2017 company evaluating potential impact adoption consolidated financial statements august 2017 fasb issued asu 201712 derivatives hedging targeted improvements accounting hedging activities asu improves financial reporting hedging relationships better portray economic results entity’s risk management activities financial statements makes certain targeted improvements simplify application existing hedge accounting guidance amendments update effective reporting periods beginning december 15 2018 early adoption permitted adoption guidance material impact company’s consolidated financial statements february 2018 fasb issued asu 201802 income statement reporting comprehensive income topic 220 asu allows reclassification accumulated comprehensive income retained earnings tax effects items within accumulated comprehensive income stranded tax effects resulting tax cuts jobs act requires certain disclosures stranded tax effects amendments update effective reporting periods beginning december 15 2018 early adoption permitted adoption guidance material impact company’s consolidated financial statements company elect reclassify income tax effects tax cuts jobs act accumulated comprehensive income retained earnings june 2018 fasb issued asu 201807 compensation stock compensation topic 718 improvements nonemployee sharebased payment accounting asu expands scope topic 718 include sharebased payment transactions acquiring goods services nonemployees amendments update effective reporting periods beginning december 15 2018 early adoption permitted adoption guidance material impact company’s consolidated financial statements august 2018 fasb issued asu 201813 fair value measurement topic 820 disclosure framework changes disclosure requirements fair value measurement asu modifies disclosure requirements fair value measurements topic 820 based consideration costs benefits promote appropriate exercise discretion entities considering fair value measurement disclosures clarify materiality appropriate consideration entities auditors evaluating disclosure requirements amendments update effective reporting periods beginning december 15 2019 early adoption permitted company evaluating potential impact adoption consolidated financial statements august 2018 fasb issued asu 201814 compensation retirement benefits defined benefit plans general subtopic 71520 disclosure framework changes disclosure requirements defined benefit plans asu removes disclosures longer considered cost beneficial clarifies specific requirements disclosures adds disclosure requirements identified relevant amendments update effective reporting periods beginning december 15 2020 early adoption permitted company evaluating potential impact adoption consolidated financial statements august 2018 fasb issued asu 201815 intangibles goodwill internaluse software subtopic 35040 customer’s accounting implementation costs incurred cloud computing arrangement service contract asu clarifies accounting implementation costs hosting arrangement service contract aligns accounting regardless whether arrangement conveys license hosted software amendments update effective reporting periods beginning december 15 2019 early adoption permitted company evaluating potential impact adoption consolidated financial statements significant accounting policies consolidation policy consolidated financial statements include accounts herbalife nutrition ltd subsidiaries significant intercompany transactions accounts eliminated foreign currency translation transactions majority countries company operates functional currency local currency company’s foreign subsidiaries’ asset liability accounts translated consolidated financial reporting purposes us dollar amounts yearend exchange rates revenue expense accounts translated average rates year foreign exchange translation adjustments included accumulated comprehensive loss accompanying consolidated balance sheets foreign currency transaction gains losses include cost foreign currency derivative contracts related settlement gains losses excluding certain foreign currency derivatives designated cash flow hedges discussed note 11 derivative instruments hedging activities included selling general administrative expenses within accompanying consolidated statements income company recorded net foreign currency transaction losses 173 million 137 million 114 million years ended december 31 2018 2017 2016 respectively forward exchange contracts company enters foreign currency derivatives primarily comprised foreign currency forward contracts managing foreign exchange risk sales members inventory purchases denominated foreign currencies intercompany transactions loans company use contracts trading purposes accordance fasb asc topic 815 derivatives hedging asc 815 company designates certain derivative instruments cash flow hedges formally documents hedge relationships including identification hedging instruments hedged items well risk management objectives strategies undertaking hedge transaction time derivative contract executed company assesses effectiveness hedge inception ongoing basis determines whether hedge highly perfectly effective offsetting changes cash flows hedged item company records effective portion changes estimated fair value accumulated comprehensive loss subsequently reclassifies related amount accumulated comprehensive loss earnings hedged item underlying transaction impacts earnings determined derivative ceased highly effective hedge company discontinue hedge accounting transaction derivatives designated hedges changes estimated fair value recognized consolidated statements income cash equivalents company considers highly liquid investments purchased maturity three months less cash equivalents cash equivalents comprised primarily foreign domestic bank accounts money market funds cash equivalents valued based level 1 inputs consist quoted prices active markets reduce credit risk company monitors credit standing financial institutions hold company’s cash equivalents company cash pooling arrangement financial institution cash management purposes cash pooling arrangement allows certain company’s participating subsidiaries withdraw cash financial institution based upon company’s aggregate cash deposits held subsidiaries participate cash pooling arrangement extent participating location individual basis overdraft position overdrafts recorded liabilities reflected financing activities company’s consolidated balance sheets consolidated statement cash flows respectively december 31 2018 2017 company owe amounts financial institution accounts receivable accounts receivable consist principally receivables credit card companies arising sale products company’s members receivables importers utilized limited number countries sell products members company believes concentration collection risk related credit card receivables diminished due geographic dispersion receivables credit card companies 527 million 681 million december 31 2018 2017 respectively substantially receivables credit card companies current december 31 2018 2017 company’s receivables importers company performs ongoing credit evaluations importers maintains allowance potential credit losses company considers customer creditworthiness past current transaction history customer contractual terms current economic industry trends changes customer payment terms determining whether collectability reasonably assured whether record allowances receivables financial condition company’s customers deteriorates adversely affects ability make payments additional allowances recorded company believes provides adequate allowances receivables members importers material consolidated financial statements years ended december 31 2018 2017 2016 company recorded 12 million 09 million 10 million respectively baddebt expense related allowances company’s receivables december 31 2018 2017 company’s allowance doubtful accounts 15 million 12 million respectively december 31 2018 2017 majority company’s total outstanding accounts receivable current fair value financial instruments company applies provisions fasb authoritative guidance applies financial nonfinancial assets liabilities fasb authoritative guidance clarifies definition fair value prescribes methods measuring fair value establishes fair value hierarchy based inputs used measure fair value expands disclosures fair value measurements company estimated fair value financial instruments using following methods assumptions • carrying amounts cash equivalents receivables accounts payable approximate fair value due shortterm maturities instruments • fair value option forward contracts based dealer quotes • company’s variable rate revolving credit facility recorded carrying value considered approximate fair value • outstanding borrowings company’s term loan senior secured credit facility recorded carrying value fair value determined utilizing overthecounter market quotes similar instruments • outstanding borrowings company’s term loan b senior secured credit facility recorded carrying value fair value determined utilizing overthecounter market quotes • company’s convertible senior notes issued february 2014 2019 convertible notes convertible senior notes issued march 2018 2024 convertible notes recorded carrying value fair values determined using two valuation methods described note 4 longterm debt • company’s senior notes issued august 2018 2026 notes recorded carrying value fair value determined utilizing overthecounter market quotes yield curves • fair value nontransferable contractual contingent value right cvr provided participants connection modified dutch auction tender offer completed october 2017 based lattice model includes inputs underlying stock price strike price time expiration dividend yield well probability goingprivate transaction see note 8 shareholders’ deficit description tender offer cvr inventories stated lower cost primarily firstin firstout basis net realizable value debt issuance costs debt issuance costs represent fees expenses related borrowing company’s longterm debt amortized term related debt using effective interest method debt issuance costs except company’s revolving credit facility recorded reduction debt contraliability within company’s consolidated balance sheets total amortization expense related debt issuance costs 73 million 84 million 79 million years ended december 31 2018 2017 2016 respectively december 31 2018 2017 company’s remaining unamortized debt issuance costs 265 million 262 million respectively longlived assets december 31 2018 2017 company’s net property plant equipment consisted following december 2012 company purchased approximate 800000 square foot facility winstonsalem north carolina approximately 222 million company allocated 188 million 34 million buildings land respectively based relative fair values april 2016 company purchased one office buildings torrance california previously leased approximately 296 million company allocated 169 million 116 million net deferred rent liability 11 million buildings land respectively based relative fair values december 31 2018 2017 amounts reflected property plant equipment within company’s accompanying consolidated balance sheets depreciation furniture fixtures equipment including computer hardware software computed straightline basis estimated useful lives related assets range three ten years company capitalizes eligible costs acquire develop internaluse software incurred subsequent preliminary project stage computer hardware software majority comprised capitalized internaluse software costs 1632 million 1573 million december 31 2018 2017 respectively net accumulated depreciation leasehold improvements amortized straightline basis life related asset term lease whichever shorter buildings depreciated 40 years building improvements generally depreciated ten fifteen years land depreciated depreciation amortization expenses recorded selling general administrative expenses totaled 808 million 801 million 807 million years ended december 31 2018 2017 2016 respectively longlived assets reviewed impairment based undiscounted cash flows whenever events changes circumstances indicate carrying amount assets may recoverable measurement impairment loss based estimated fair value asset goodwill marketingrelated intangible assets indefinite lives evaluated annual basis impairment frequently events changes circumstances indicate asset might impaired goodwill company performed qualitative assessment fourth quarter 2018 determined likely fair value reporting unit less respective carrying value determined likely fair value reporting unit less carrying amount qualitative assessment performed company would perform twostep goodwill impairment test required would use discounted cash flow approach estimate fair value reporting unit fair value reporting unit less carrying value implied fair value goodwill must determined implied fair value goodwill less carrying value goodwill impairment amount recorded difference marketingrelated intangible assets company performed qualitative assessment fourth quarter 2018 determined likely fair value assets less carrying value determined likely fair value assets less carrying amount qualitative assessment performed company would perform quantitative impairment test required would use discounted cash flow model relieffromroyalty method order determine fair value fair value less carrying value impairment amount recorded difference years ended december 31 2018 2017 2016 additions goodwill marketingrelated intangible assets impairments goodwill marketingrelated intangible assets december 31 2018 2017 marketingrelated intangible asset balance 3100 million consisted company’s trademark trade name marketing franchise december 31 2018 2017 goodwill balance 929 million 969 million respectively decrease goodwill year ended december 31 2018 due cumulative translation adjustments restricted cash following table provides reconciliation cash equivalents restricted cash reported within company’s consolidated balance sheets sum total amounts shown company’s consolidated statements cash flows majority company’s consolidated restricted cash held certain foreign entities consists cash deposits required due business operating requirements jurisdictions income taxes income tax expense includes income taxes payable current year change deferred income tax assets liabilities future tax consequences events recognized company’s financial statements income tax returns valuation allowance recognized reduce carrying value deferred income tax assets believed likely component deferred income tax assets realized company accounts uncertainty income taxes accordance fasb authoritative guidance clarifies accounting reporting uncertainties income taxes recognized enterprise’s financial statements guidance prescribes comprehensive model financial statement recognition measurement presentation disclosure uncertain tax positions taken expected taken income tax returns december 22 2017 us enacted 2017 tax cuts jobs act contained several key tax provisions affected company including limited onetime mandatory transition tax accumulated foreign earnings changes sourcing calculation foreign income reduction corporate income tax rate 21 effective january 1 2018 company required recognize effect tax law changes period enactment determining transition tax remeasuring us deferred tax assets liabilities well reassessing net realizability deferred tax assets liabilities december 2017 sec staff issued staff accounting bulletin 118 income tax accounting implications tax cuts jobs act allowed company record provisional amounts measurement period extend beyond one year enactment date see note 12 income taxes description income taxes impact us tax reform company made accounting policy election account global intangible lowtaxed income period cost incurred royalty overrides certain members may earn commissions called royalty overrides include production bonuses based retail sales volume royalty overrides based retail sales volume certain members sponsored directly indirectly member royalty overrides recorded products delivered revenue recognized royalty overrides compensation members services rendered including development retention improved productivity sales organizations royalty overrides classified operating expense nonus royalty override checks aged variety reasons beyond certainty paid taken back income management estimated period certainty three years worldwide distributor compensation us distributor compensation including royalty overrides capped company meet annual requirement described consent order discussed detail note 7 contingencies periodic basis company evaluates requirement achieved yearend determine cap distributor compensation required determines appropriate amount distributor compensation expense may vary reporting period company determined cap distributor compensation applicable year ended december 31 2018 annual requirement met comprehensive income comprehensive income consists net income foreign currency translation adjustments effective portion unrealized gains losses derivatives unrealized gains losses availableforsale investments see note 8 shareholders’ deficit description detail components accumulated comprehensive loss operating leases company leases physical properties operating leases certain lease agreements generally include rent holidays tenant improvement allowances company recognizes rent holiday periods straightline basis lease term beginning company right leased space company also records tenant improvement allowances rent holidays deferred rent liabilities amortizes deferred rent terms lease rent expense research development company’s research development performed inhouse staff outside consultants periods presented research development costs expensed incurred material operating income encourage local investment operations governments various china provinces conduct grant programs company applied received several grants china government grants recorded income legal right grant exists reasonable assurance grant proceeds received substantive conditions grants provided met generally substantive conditions company maintaining operations paying certain taxes relevant province obtaining government approval completing annual application process company believes continuing obligation respect funds general requirement used business china company recognized government grant income approximately 298 million 508 million 342 million years ended december 31 2018 2017 2016 respectively operating income within consolidated statements income related regional headquarters distribution centers within china company intends continue applying government grants china programs available however assurance company receive grants future periods october 30 2016 arbitration tribunal awarded company approximately 297 million connection reaudit company’s 2010 2012 financial statements resignation kpmg company’s independent registered public accounting firm amount recognized operating income within company’s consolidated statement income year ended december 31 2016 professional fees company expenses professional fees including legal fees incurred professional fees included selling general administrative expenses within company’s consolidated statements income advertising costs including company sponsorships expensed incurred amounted approximately 411 million 557 million 648 million years ended december 31 2018 2017 2016 respectively expenses included selling general administrative expenses within company’s consolidated statements income earnings per share basic earnings per share represents net income divided weightedaverage number common shares outstanding period diluted earnings per share represents net income divided weightedaverage number common shares outstanding inclusive effect dilutive securities outstanding stock appreciation rights sars stock units convertible notes following common share amounts used compute basic diluted earnings per share period aggregate 14 million 69 million 91 million equity grants consisting sars stock units outstanding years ended december 31 2018 2017 2016 respectively included computation diluted earnings per share effect would antidilutive performance condition award satisfied since company settle principal amount 2019 convertible notes cash settle conversion feature amount conversion price common shares conversion spread company uses treasury stock method calculating potential dilutive effect conversion spread diluted earnings per share applicable conversion spread dilutive impact diluted earnings per share average market price company’s common shares given period exceeds conversion price 2019 convertible notes dilutive impact year ended december 31 2018 disclosed table years ended december 31 2017 2016 2019 convertible notes excluded computation diluted earnings per share effect would antidilutive since conversion price 2019 convertible notes exceeded average market price company’s common shares years ended december 31 2017 2016 initial conversion rate conversion price 2019 convertible notes described note 4 longterm debt 2024 convertible notes company intent ability settle principal amount cash intends settle conversion feature amount conversion price conversion spread common shares company uses treasury stock method calculating potential dilutive effect conversion spread diluted earnings per share applicable conversion spread dilutive impact diluted earnings per share average market price company’s common shares given period exceeds conversion price 2024 convertible notes year ended december 31 2018 2024 convertible notes excluded computation diluted earnings per share effect would antidilutive since conversion price 2024 convertible notes exceeded average market price company’s common shares year ended december 31 2018 initial conversion rate conversion price 2024 convertible notes described note 4 longterm debt capped call transactions executed connection issuance 2019 convertible notes excluded calculation diluted earnings per share impact always antidilutive additionally prepaid forward share repurchase transactions executed connection issuance 2019 convertible notes treated retired shares basic diluted eps purposes see note 8 shareholders’ deficit additional discussion regarding capped call transactions forward transactions see note 8 shareholders’ deficit discussion common shares repurchased company’s indirect whollyowned subsidiary treated us gaap revenue recognition result applying asc 606 impact company’s consolidated balance sheet december 31 2018 follows result applying asc 606 impact company’s consolidated statement income year ended december 31 2018 follows result applying asc 606 impact company’s consolidated statement cash flows december 31 2018 material company’s net sales consist product sales general companys performance obligation transfer products members company generally recognizes revenue product delivered members china independent service providers thirdparty importers utilized certain countries sales historically material company recognizes revenue based company’s estimate service provider thirdparty importer sells products company deemed principal party product sales asc 606 due additional selling operating requirements relating pricing products conducting business physical locations selling marketing activities required service providers thirdparty importers timing difference relating company recognizing revenues thirdparty entities sell products compared company delivers products material impact company’s consolidated net sales periods presented company’s members excluding china independent service providers may receive distributor allowances comprised discounts rebates wholesale commission payments company distributor allowances resulting company’s sales products members recorded net sales distributor allowances represent discounts suggested retail price company compensates sales leader members royalty overrides services rendered relating development retention management sales organizations royalty overrides payable based achieved sales volume royalty overrides classified operating expense reflecting services provided company compensates china independent service providers thirdparty importers utilized certain countries providing marketing selling customer support services asc 606 company principal party product sales described service fees payable china independent service providers compensation received thirdparty importers services provide recorded selling general administrative expenses within company’s consolidated statements income periods presented asc 605 service fees payable china independent service providers similarly recognized selling general administrative expenses within company’s consolidated statements income asc 606 however asc 605 compensation received thirdparty importers services provide represents discount provided recorded reduction net sales differs treatment asc 606 described change accounting treatment asc 606 compensation services provided company’s thirdparty importers impact company’s consolidated net income material company’s consolidated net sales periods presented company recognizes revenue delivers products united states members distributor allowances inclusive discounts wholesale commissions recorded reduction net sales royalty overrides classified operating expense shipping handling services relating product sales recognized fulfillment activities company’s performance obligation transfer products therefore recorded within net sales part product sales considered separate revenues asc 606 shipping handling revenues related product sales 2480 million 2274 million 2442 million years ended december 31 2018 2017 2016 respectively represent less 6 company’s consolidated net sales years shipping handling costs paid company included cost sales company presents sales taxes collected customers net basis company generally receives net sales price cash credit card payments point sale company records advance sales deposits payment received revenue yet recognized majority company’s markets advance sales deposits generally recorded income product delivered members additionally advance sales deposits also include deferred revenues due timing revenue recognition products sold china independent service providers estimated deferral period advance sales deposits generally within one week year ended december 31 2018 company recognized substantially revenues included within advance sales deposits december 31 2017 remaining balance material december 31 2018 advance sales deposits included current liabilities company’s consolidated balance sheets see note 14 detail certain balance sheet accounts information general member returns product company timely basis may obtain replacement product company returned products addition general company maintains buyback program pursuant repurchase products sold member decided leave business allowances product returns primarily connection company’s buyback program provided time sale recorded accrual based upon historical return rates country relevant return pattern reflects anticipated returns received period 12 months following original sale allowances product returns 49 million 39 million december 31 2018 2017 respectively company’s products grouped five principal categories weight management targeted nutrition energy sports fitness outer nutrition literature promotional items however effect economic factors nature amount timing uncertainty revenue recognition cash flows similar among five product categories company defines operating segments six geographic regions effect economic factors nature amount timing uncertainty revenue recognition cash flows similar among regions company’s primary reporting segment see note 10 segment information company’s reportable segments company’s presentation disaggregated revenue reportable segment noncash investing financing activities years ended december 31 2018 2017 2016 company recorded 102 million 101 million 127 million respectively noncash capital expenditures year ended december 31 2018 company record noncash borrowings used finance software maintenance years ended december 31 2017 2016 company recorded 23 million 208 million respectively noncash borrowings used finance software maintenance additionally see note 8 shareholders’ deficit information company’s noncash financing activities related cvr provided participants october 2017 modified dutch auction tender offer well share repurchases payment made subsequent year end sharebased payments company accounts sharebased compensation accordance fasb authoritative guidance requires measurement sharebased compensation expense sharebased payment awards made employees company measures sharebased compensation cost grant date based fair value award company recognizes sharebased compensation expense service condition awards straightline basis employee’s requisite service period company recognizes sharebased compensation expense performance condition awards vesting term using graded vesting method use estimates preparation financial statements conformity us gaap requires management make estimates assumptions estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates company evaluates estimates assumptions ongoing basis using historical experience factors including current economic environment company believes reasonable circumstances company adjusts estimates assumptions facts circumstances dictate illiquid credit markets volatile equity foreign currency combined increase uncertainty inherent estimates assumptions future events effects cannot determined precision actual results could differ estimates changes estimates resulting continuing changes economic environment reflected financial statements future periods 3 inventories following major classes inventory 4 longterm debt longterm debt consists following senior secured credit facility march 9 2011 company entered senior secured credit facility 2011 credit facility initially consisted 7000 million revolving credit facility 2011 revolving credit facility syndicate financial institutions lenders 2011 credit facility subsequently amended july 26 2012 include 5000 million term loan 2011 term loan syndicate financial institutions lenders may 4 2015 company amended 2011 credit facility extend maturity date 2011 revolving credit facility one year march 9 2017 2011 term loan matured march 9 2016 2297 million outstanding repaid full prior termination 2011 term loan recently bore interest either libor plus applicable margin 200 300 base rate plus applicable margin 100 200 based company’s consolidated leverage ratio company terminated 2011 revolving credit facility february 15 2017 4100 million outstanding repaid full prior termination 2011 revolving credit facility recently bore interest either libor plus applicable margin 400 500 base rate plus applicable margin 300 400 based company’s consolidated leverage ratio february 15 2017 company entered 14500 million senior secured credit facility 2017 credit facility consisting 13000 million term loan b 2017 term loan b 1500 million revolving credit facility 2017 revolving credit facility syndicate financial institutions lenders 2017 revolving credit facility mature february 15 2022 2017 term loan b mature february 15 2023 2017 credit facility amended effective march 16 2018 make certain technical amendments connection offering 2024 convertible notes defined company terminated 2017 credit facility august 16 2018 11781 million outstanding repaid full prior termination 2017 term loan b recently bore interest either eurocurrency rate plus margin 550 base rate plus margin 450 2017 revolving credit facility recently bore interest either eurocurrency rate plus margin either 450 475 base rate plus margin either 350 375 based company’s consolidated leverage ratio eurocurrency rate based adjusted libor subject floor 075 base rate represented highest federal funds rate plus 050 onemonth adjusted libor plus 100 prime rate set credit suisse subject floor 175 2017 term loan b issued lenders 2 discount 260 million company incurred approximately 226 million debt issuance costs connection 2017 credit facility debt issuance costs discount recorded company’s consolidated balance sheet amortized life 2017 credit facility using effectiveinterest method company wrote remaining unamortized debt issuance costs discount related 2017 credit facility upon termination included loss extinguishment described august 16 2018 company entered new 125 billion senior secured credit facility 2018 credit facility consisting 2500 million term loan 2018 term loan 7500 million term loan b 2018 term loan b 2500 million revolving credit facility 2018 revolving credit facility 2018 term loan 2018 revolving credit facility mature august 16 2023 2018 term loan b matures august 18 2025 however 2018 term loan 2018 revolving credit facility mature february 14 2019 outstanding principal 2019 convertible notes defined exceeds 3500 million company exceeds certain leverage ratios date addition 2018 term loan b mature either may 16 2019 outstanding principal 2019 convertible notes defined exceeds 3500 million company exceeds certain leverage ratios date ii december 15 2023 outstanding principal 2024 convertible notes defined exceeds 3500 million company exceeds certain leverage ratios date company exceed certain leverage ratios february 14 2019 2018 term loan 2018 revolving credit facility continue mature august 16 2023 obligations 2018 credit facility unconditionally guaranteed certain direct indirect whollyowned subsidiaries herbalife nutrition ltd secured equity interests certain herbalife nutrition ltd’s subsidiaries substantially assets domestic loan parties also august 16 2018 company issued 400 million aggregate principal amount senior unsecured notes 2026 notes described used proceeds 2018 credit facility 2026 notes repay full 11781 million outstanding 2017 credit facility accounting purposes pursuant fasb asc topic 470 debt asc 470 transactions accounted extinguishment 2017 credit facility company recognized loss extinguishment 354 million result recorded expense income net within company’s consolidated statement income year ended december 31 2018 term loan b issued lenders 025 discount 19 million company incurred approximately 117 million debt issuance costs connection 2018 credit facility discount debt issuance costs recorded company’s consolidated balance sheet amortized life 2018 credit facility using effectiveinterest method borrowings 2018 term loan 2018 revolving credit facility bear interest either eurocurrency rate plus margin 300 base rate plus margin 200 borrowings 2018 term loan b bear interest either eurocurrency rate plus margin 325 base rate plus margin 225 eurocurrency rate based adjusted libor base rate represents highest federal funds rate plus 050 onemonth adjusted libor plus 100 prime rate quoted wall street journal subject floor 100 company required pay commitment fee 2018 revolving credit facility 050 per annum undrawn portion 2018 revolving credit facility interest due least quarterly amounts outstanding 2018 credit facility 2018 credit facility requires company comply leverage ratio 2018 credit facility also contains affirmative negative covenants customary financings type including among things limitations prohibitions repurchasing common shares declaring paying dividends distributions redeeming repurchasing certain indebtedness loans investments additional indebtedness liens mergers asset sales transactions affiliates addition 2018 credit facility contains customary events default december 31 2018 2017 company compliance debt covenants 2018 credit facility 2017 credit facility respectively 2018 term loan 2018 term loan b payable consecutive quarterly installments began december 31 2018 addition beginning 2020 company may required make mandatory prepayments towards 2018 term loan b based company’s consolidated leverage ratio annual excess cash flows defined terms 2018 credit facility company also permitted make voluntary prepayments prior february 16 2019 amounts voluntarily prepaid 2018 term loan 2018 term loan b incur prepayment premium 1 thereafter amounts outstanding 2018 term loan 2018 term loan b may voluntarily prepaid without premium penalty subject customary breakage fees connection prepayment eurocurrency loan prepayments applied remaining quarterly installments owed 2018 term loan 2018 term loan b order maturity remaining principal due upon maturity unless directed otherwise company december 31 2018 2017 weightedaverage interest rate borrowings 2018 credit facility 2017 credit facility 680 679 respectively year ended december 31 2018 company borrowed aggregate amount 10000 million 2018 credit facility repaid total amount 12319 million including 50 million amounts outstanding 2018 credit facility 12269 million repay full amounts outstanding 2017 credit facility year ended december 31 2017 company borrowed aggregate amount 13000 million 2017 credit facility repaid total amount 4831 million including 731 million amounts outstanding 2017 credit facility 4100 million repay full amounts outstanding 2011 credit facility year ended december 31 2016 company borrowed aggregate amount 2000 million repaid total amount 4297 million amounts outstanding 2011 credit facility december 31 2018 2017 us dollar amount outstanding 2018 credit facility 2017 credit facility 9950 million 12269 million respectively 9950 million outstanding 2018 credit facility december 31 2018 2469 million outstanding 2018 term loan 7481 million outstanding 2018 term loan b 12269 million outstanding 2017 credit facility december 31 2017 12269 million outstanding 2017 term loan b borrowings outstanding 2018 revolving credit facility 2017 revolving credit facility december 31 2018 2017 respectively outstanding foreign currency borrowings december 31 2018 2017 2018 credit facility 2017 credit facility respectively year ended december 31 2018 company recognized 836 million interest expense relating 2018 credit facility 2017 credit facility included 29 million relating noncash interest expense relating debt discount 32 million relating amortization debt issuance costs year ended december 31 2017 company recognized 870 million interest expense relating 2017 credit facility 2011 credit facility included 42 million relating noncash interest expense relating debt discount 44 million relating amortization debt issuance costs year ended december 31 2016 company recognized 241 million interest expense relating 2011 credit facility included 41 million relating amortization debt issuance costs fair value outstanding borrowings 2018 term loan determined utilizing overthecounter market quotes similar instruments considered level 2 inputs described note 12 fair value measurements december 31 2018 carrying value 2018 term loan 2454 million fair value approximately 2407 million fair values outstanding borrowings 2018 term loan b 2017 term loan b determined utilizing overthecounter market quotes considered level 2 inputs described note 12 fair value measurements december 31 2018 2017 carrying amount 2018 term loan b 2017 term loan b 7382 million 11902 million respectively fair value approximately 7293 million 12261 million respectively convertible senior notes due 2019 february 2014 company initially issued 1 billion aggregate principal amount convertible senior notes 2019 convertible notes private offering qualified institutional buyers pursuant rule 144a securities act 1933 amended company granted option initial purchasers purchase additional 150 million aggregate principal amount 2019 convertible notes subsequently exercised full february 2014 resulting total issuance 115 billion aggregate principal amount 2019 convertible notes 2019 convertible notes senior unsecured obligations rank effectively subordinate company’s existing future secured indebtedness including amounts outstanding 2018 credit facility extent value assets securing indebtedness 2019 convertible notes pay interest rate 200 per annum payable semiannually arrears february 15 august 15 year beginning august 15 2014 2019 convertible notes mature august 15 2019 unless earlier repurchased converted company may redeem 2019 convertible notes prior stated maturity date holders 2019 convertible notes may convert notes option following circumstances calendar quarter commencing calendar quarter ending march 31 2014 last reported sale price company’s common shares least 20 trading days whether consecutive period 30 consecutive trading days ending including last trading day immediately preceding calendar quarter exceeds 130 conversion price 2019 convertible notes applicable trading day ii five businessday period immediately five consecutive trading day period measurement period trading price per 1000 principal amount 2019 convertible notes trading day measurement period less 98 product last reported sale price company’s common shares conversion rate 2019 convertible notes day iii upon occurrence specified corporate events may 15 2019 holders may convert 2019 convertible notes time regardless foregoing circumstances upon conversion 2019 convertible notes settled cash applicable company’s common shares based applicable conversion rate time 2019 convertible notes initial conversion rate 231816 common shares per 1000 principal amount 2019 convertible notes initial conversion price approximately 4314 per common share based retroactive adjustment due company’s twoforone stock split described note 2 basis presentation conversion rate subject adjustment upon occurrence certain events 232245 common shares per 1000 principal amount 2019 convertible notes conversion price approximately 4306 per common share december 31 2018 december 31 2018 ifconverted value 2019 convertible notes exceeded outstanding principal amount 2491 million since closing price companys common shares 5895 compared conversion price 4306 company entered capped call transactions respect common shares expected generally reduce potential dilution upon conversion 2019 convertible notes event market price common shares greater strike price capped call transactions see note 8 shareholders’ deficit additional discussion capped call transactions fourth quarter 2018 last reported sale price company’s common shares exceeded 130 conversion price 2019 convertible notes least 20 trading days period 30 consecutive trading days ending including last trading day quarter 2019 convertible notes convertible holders’ option first quarter 2019 company reclassify difference aggregate principal amount carrying value 2019 convertible notes approximately 186 million additional paidin capital temporary equity consolidated balance sheet january 1 2019 company incurred approximately 266 million issuance costs first quarter 2014 relating issuance 2019 convertible notes 266 million issuance costs incurred 215 million 51 million recorded debt issuance costs additional paidin capital respectively proportion allocation proceeds 2019 convertible notes 215 million debt issuance costs recorded company’s consolidated balance sheet amortized contractual term 2019 convertible notes using effectiveinterest method february 2014 115 billion aggregate principal amount 2019 convertible notes initially allocated longterm debt liability component additional paidin capital equity component within company’s consolidated balance sheet 9309 million 2191 million respectively liability component measured using nonconvertible debt interest rate carrying amount equity component representing conversion option determined deducting fair value liability component face value 2019 convertible notes whole since company must still settle 2019 convertible notes face value prior maturity liability component accreted face value resulting additional noncash interest expense recognized within company’s consolidated statements income 2019 convertible notes remain outstanding effectiveinterest rate 2019 convertible notes approximately 62 per annum equity component remeasured long continues meet conditions equity classification march 2018 company issued 550 million aggregate principal amount new convertible senior notes due 2024 convertible notes described subsequently used proceeds along cash hand repurchase 4750 million existing 2019 convertible notes limited number holders privately negotiated transactions aggregate purchase price 5835 million included 10 million accrued interest accounting purposes pursuant asc 470 debt transactions accounted extinguishment 2019 convertible notes issuance new 2024 convertible notes company allocated purchase price fair value liability component equity component 2019 convertible notes 4594 million 1230 million respectively result company recognized 4464 million reduction longterm debt representing carrying value liability component 1230 million reduction additional paidin capital representing equity component repurchased 2019 convertible notes 131 million difference fair value carrying value liability component repurchased 2019 convertible notes recognized loss extinguishment debt result transaction recorded expense income net within company’s consolidated statement income accounting impact new 2024 convertible notes described detail december 31 2018 remaining outstanding principal 2019 convertible notes 6750 million unamortized debt discount debt issuance costs 186 million carrying amount liability component 6564 million recorded current portion longterm debt within company’s consolidated balance sheet december 31 2017 outstanding principal 2019 convertible notes 115 billion unamortized debt discount debt issuance costs 800 million carrying amount liability component 10700 million recorded longterm debt within company’s consolidated balance sheet fair value liability component relating 2019 convertible notes approximately 6621 million 10660 million december 31 2018 2017 respectively years ended december 31 2018 2017 2016 company recognized 485 million 682 million 653 million respectively interest expense relating 2019 convertible notes included 298 million 412 million 386 million respectively relating noncash interest expense relating debt discount 29 million 40 million 38 million respectively relating amortization debt issuance costs conjunction issuance 2019 convertible notes february 2014 company paid approximately 6858 million enter prepaid forward share repurchase transactions forward transactions certain financial institutions paid approximately 1238 million enter capped call transactions respect common shares capped call transactions certain financial institutions subsequently conjunction repurchase portion 2019 convertible notes march 2018 company entered agreements option counterparties capped call transactions terminate portion existing transactions see note 8 shareholders’ deficit additional discussion forward transactions capped call transactions entered conjunction issuance 2019 convertible notes convertible senior notes due 2024 march 2018 company issued 550 million aggregate principal amount convertible senior notes 2024 convertible notes private offering qualified institutional buyers pursuant rule 144a securities act 1933 amended 2024 convertible notes senior unsecured obligations rank effectively subordinate company’s existing future secured indebtedness including amounts outstanding 2018 credit facility extent value assets securing indebtedness 2024 convertible notes pay interest rate 2625 per annum payable semiannually arrears march 15 september 15 year beginning september 15 2018 2024 convertible notes mature march 15 2024 unless redeemed repurchased converted accordance terms prior date holders 2024 convertible notes may convert notes option following circumstances calendar quarter commencing calendar quarter ending june 30 2018 last reported sale price company’s common shares least 20 trading days whether consecutive period 30 consecutive trading days ending including last trading day immediately preceding calendar quarter exceeds 130 conversion price 2024 convertible notes applicable trading day ii five businessday period immediately five consecutive trading day period measurement period trading price per 1000 principal amount 2024 convertible notes trading day measurement period less 98 product last reported sale price company’s common shares conversion rate 2024 convertible notes day iii company calls 2024 convertible notes redemption iv upon occurrence specified corporate events december 15 2023 holders may convert 2024 convertible notes time regardless foregoing circumstances upon conversion 2024 convertible notes settled company’s election cash company’s common shares combination thereof based applicable conversion rate time 2024 convertible notes initial conversion rate 160056 common shares per 1000 principal amount 2024 convertible notes initial conversion price approximately 6248 per common share based retroactive adjustment due company’s twoforone stock split described note 2 basis presentation conversion rate subject adjustment upon occurrence certain events 160352 common shares per 1000 principal amount 2024 convertible notes conversion price approximately 6236 per common share december 31 2018 company incurred approximately 129 million issuance costs first quarter 2018 relating issuance 2024 convertible notes 129 million issuance costs incurred 96 million 33 million recorded debt issuance costs additional paidin capital respectively proportion allocation proceeds 2024 convertible notes 96 million debt issuance costs recorded additional debt discount company’s consolidated balance sheet amortized contractual term 2024 convertible notes using effectiveinterest method march 2018 550 million aggregate principal amount 2024 convertible notes initially allocated longterm debt liability component additional paidincapital equity component within company’s consolidated balance sheet 4101 million 1399 million respectively liability component measured using nonconvertible debt interest rate carrying amount equity component representing conversion option determined deducting fair value liability component face value 2024 convertible notes whole since company must still settle 2024 convertible notes face value prior maturity liability component accreted face value resulting additional noncash interest expense recognized within company’s consolidated statements income 2024 convertible notes remain outstanding effectiveinterest rate 2024 convertible notes approximately 84 per annum equity component remeasured long continues meet conditions equity classification december 31 2018 outstanding principal 2024 convertible notes 5500 million unamortized debt discount debt issuance costs 1340 million carrying amount liability component 4160 million recorded longterm debt within company’s consolidated balance sheet fair value liability component relating 2024 convertible notes approximately 4481 million december 31 2018 year ended december 31 2018 company recognized 266 million interest expense relating 2024 convertible notes included 145 million relating noncash interest expense relating debt discount 10 million relating amortization debt issuance costs senior notes due 2026 august 2018 company issued 400 million aggregate principal amount senior notes 2026 notes private offering united states qualified institutional buyers pursuant rule 144a securities act 1933 amended outside united states pursuant regulation securities act 1933 amended 2026 notes senior unsecured obligations rank effectively subordinate company’s existing future secured indebtedness including amounts outstanding 2018 credit facility extent value assets securing indebtedness 2026 notes pay interest rate 7250 per annum payable semiannually arrears february 15 august 15 year beginning february 15 2019 2026 notes mature august 15 2026 time prior august 15 2021 company may redeem part 2026 notes redemption price equal 100 principal amount plus “make whole” premium redemption date accrued unpaid interest redemption date addition time prior august 15 2021 company may redeem 40 aggregate principal amount 2026 notes proceeds one equity offerings redemption price equal 107250 plus accrued unpaid interest furthermore time august 15 2021 company may redeem part 2026 notes following redemption prices expressed percentages principal amount plus accrued unpaid interest thereon redemption date redeemed twelvemonth period beginning august 15 years indicated 2026 notes contain customary negative covenants including among things limitations prohibitions restricted payments incurrence additional indebtedness liens mergers asset sales transactions affiliates addition 2026 notes contain customary events default company incurred approximately 54 million issuance costs third quarter 2018 relating issuance 2026 notes 54 million debt issuance costs recorded debt discount company’s consolidated balance sheet amortized contractual term 2026 notes using effectiveinterest method december 31 2018 outstanding principal 2026 notes 4000 million unamortized debt issuance costs 52 million carrying amount 3948 million recorded longterm debt within company’s consolidated balance sheet fair value 2026 notes approximately 3946 million december 31 2018 determined utilizing overthecounter market quotes yield curves considered level 2 inputs defined note 13 fair value measurements year ended december 31 2018 company recognized 111 million interest expense relating 2026 notes included 02 million relating amortization debt issuance costs valuation 2019 convertible notes 2024 convertible notes level 2 level 3 inputs order determine initial value 2019 convertible notes 2024 convertible notes company determined fair value liability component 2019 convertible notes 2024 convertible notes using two valuation methods company reviewed market data available publicly traded senior unsecured nonconvertible corporate bonds issued companies similar credit ratings assumptions used estimate represent market participants would use pricing liability component including market yields credit standing develop straight debt yield estimate company also used lattice model included inputs stock price convertible note trading price volatility dividend yield estimate straight debt yield company combined results two valuation methods determine fair value liability component 2019 convertible notes 2024 convertible notes inputs primarily considered level 2 level 3 inputs company used similar valuation approaches determine subsequent fair value liability component disclosure purposes includes using lattice model 1 reviewing market data relating 2026 notes comparable yield curves determine straight debt yield estimate 2 reviewing market data relating publicly traded senior unsecured nonconvertible corporate bonds issued companies similar credit ratings order determine straight debt yield estimate total debt company’s total interest expense 1810 million 1608 million 993 million years ended december 31 2018 2017 2016 respectively recognized within consolidated statements income december 31 2018 annual scheduled principal payments debt follows certain vendors government agencies may require letters credit similar guaranteeing arrangements issued executed december 31 2018 company 382 million issued undrawn letters credit similar arrangements included mexico value added tax vat related surety bonds described note 7 contingencies 5 lease obligations company warehouse office furniture fixtures equipment leases expire various dates 2033 lease agreements company also obligated pay property taxes insurance maintenance costs certain leases contain renewal options future minimum rental commitments noncancelable operating leases december 31 2018 follows company recognizes rental expense straightline basis rental expense included selling general administrative expenses within company’s consolidated statements income 611 million 562 million 534 million years ended december 31 2018 2017 2016 respectively material property plant equipment capital leases included property plant equipment accompanying consolidated balance sheets december 31 2018 2017 6 employee compensation plans united states company maintains profit sharing plan pursuant sections 401a k internal revenue code 1986 amended code plan available substantially employees meet length service requirements company’s contribution expense relating profit sharing plan 57 million 48 million 48 million years ended december 31 2018 2017 2016 respectively company employees international countries covered various deferred compensation plans administered based upon legal requirements countries established company’s compensation expenses relating plans 66 million 64 million 58 million years ended december 31 2018 2017 2016 respectively company nonqualified deferred compensation plans select groups management herbalife management deferred compensation plan herbalife senior executive deferred compensation plan matching contribution 35 participant’s annual base salary excess qualified plan annual compensation limit amount deferrals reduce 401k eligible pay irs limit participant either nonqualified deferred compensation plans discussed times fully vested nonforfeitable interest year’s contribution including interest credited thereto company matching contributions applicable connection participant’s election defer annual deferral amount participant may also elect receive shortterm payout equal annual deferral amount plus interest amount payable five years first day year annual deferral amount actually deferred total two nonqualified deferred compensation plans excluding participant contributions benefit 27 million year ended december 31 2018 expense 67 million 36 million years ended december 31 2017 2016 respectively total longterm deferred compensation liability two deferred compensation plans 513 million 581 million december 31 2018 2017 respectively included noncurrent liabilities within company’s consolidated balance sheets deferred compensation plans unfunded benefits paid general assets company except company contributed “rabbi trust” whose assets used pay benefits company remains solvent reached company’s creditors company becomes insolvent value assets “rabbi trust” 312 million 336 million december 31 2018 2017 respectively included assets within company’s consolidated balance sheets 7 contingencies company time engaged routine litigation company regularly reviews pending litigation matters involved establishes reserves deemed appropriate management litigation matters probable loss estimate made matters described note may take several years resolve company believes meritorious defenses cannot sure ultimate resolution although company may reserve amounts certain matters company believes represent likely outcome resolution related disputes company incorrect assessment company may record additional expenses becomes probable increased potential liability warranted tax matters may 7 2010 company received assessment mexican tax administration service amount equivalent approximately 583 million translated december 31 2018 spot rate various items majority vat allegedly owed certain company’s products imported mexico years 2005 2006 assessment subject interest inflationary adjustments july 8 2010 company initiated formal administrative appeal process may 13 2011 mexican tax administration service issued resolution company’s administrative appeal resolution nullified assessment since mexican tax administration service review tax audit findings reissue original assessment company commenced litigation tax court mexico august 2011 dispute assertions made mexican tax administration service case company received notification february 6 2015 tax court mexico nullified substantially assessment march 18 2015 mexican tax administration service filed appeal verdict circuit court august 27 2015 circuit court remanded case back tax court mexico reconsider portion procedural decision adverse mexican tax administration service company received notification march 18 2016 tax court mexico nullified portion assessment upheld portion original assessment august 25 2016 company filed appeal decision circuit court april 6 2017 circuit court issued verdict company prevailing lesser issues tax administration service prevailing core issue may 11 2017 company filed appeal supreme court mexico june 14 2017 supreme court mexico agreed hear appeal december 14 2018 supreme court mexico held public hearing decision adopted favor company revoking previous court rulings remanding case back trial court assessment could nullified remand process administered federal tax court concluded favor company nullifying vat excise tax assessment fiscal years 2005 2006 company recognized loss case concluded company’s favor mexican tax administration service commenced audits company’s mexican subsidiaries period january september 2007 may 10 2013 company received assessment approximately 149 million translated december 31 2018 spot rate related period assessment subject interest inflationary adjustments july 11 2013 company filed administrative appeal disputing assessment september 22 2014 mexican tax administration service denied company’s administrative appeal company commenced litigation tax court mexico november 2014 dispute assertions made mexican tax administration service case january 16 2018 tax court mexico issued verdict upholding assessment issued mexican tax administration service april 16 2018 company filed appeal verdict litigation ongoing company recognized loss company believe loss probable company issued surety bond amount 184 million translated december 31 2018 spot rate insurance company guarantee payment tax assessment required company pursues appeal assessment surety bond remained effective december 31 2018 mexican tax administration service delayed processing vat refunds companies operating mexico company believes process mexico subsidiary receive vat refunds may delayed december 31 2018 company 331 million mexico vat related assets 243 million within noncurrent assets 88 million within prepaid expenses current assets consolidated balance sheet amount relates vat payments made various periods company believes amounts recoverable refund may applied certain future tax liabilities effective january 1 2019 tax reform law changed rules concerning possible use vat assets specifically providing vat balances generated december 31 2018 balances could offset taxes vat obligations currently due company recognized losses related vat related assets company believe loss probable respect mexican matters company currently unable reasonably estimate possible loss range loss could result unfavorable outcome assessment reissued additional assessments issued periods company believes meritorious defenses assessment reissued would meritorious defenses additional assessment issued company received tax assessment september 2009 federal revenue office brazil related withholdingcontributions based payments company’s members 2004 march 6 2014 company notified similar audit 2011 year january 2016 company received tax assessment related contributions based payments company’s members 2011 company received favorable decision administrative council tax appeals 2004 2011 cases september 2018 october 31 2018 november 19 2018 government filed appeals relating 2004 2011 cases combined total 64 million translated december 31 2018 spot rate company accrued loss majority assessments company believe loss probable company currently unable reasonably estimate amount loss may result unfavorable outcome additional assessments periods issued company examination several brazilian states related icms icmsst taxation examinations resulted assessments underpaid tax company appealed state são paulo audited company 2013 2014 tax years july 2016 state são paulo company received assessment aggregate amount approximately 415 million translated december 31 2018 spot rate relating various icms issues 2013 tax year august 2016 company filed firstlevel administrative appeal denied february 2017 company filed appeal march 9 2017 march 20 2018 court held hearing verdict currently pending august 2017 state são paulo company received assessment aggregate amount approximately 154 million translated december 31 2018 spot rate relating various icms issues 2014 tax year september 2017 company filed firstlevel administrative appeal 2014 tax year september 2018 state rio de janeiro company received assessment aggregate amount approximately 91 million translated december 31 2018 spot rate relating various icmsst issues 2016 2017 tax years november 8 2018 company filed firstlevel administrative appeal company also received icms tax assessments brazil fourth quarter 2015 company filed appeals state judicial courts three assessments company issued surety bonds aggregate amount 112 million translated december 31 2018 spot rate guarantee payment tax assessments required company pursues appeals addition company received several icms tax assessments aggregate amount 63 million translated december 31 2018 spot rate several brazilian states surety bonds issued litigation cases currently ongoing company recognized loss company believe loss probable company received various tax assessments multiple states india multiple years indian vat authorities amount equivalent approximately 90 million translated december 31 2018 spot rate assessments underpaid vat company litigating cases tax administrative level tax tribunal levels believes meritorious defenses company recognized loss believe loss probable korea customs service audited importation activities herbalife korea period january 2011 may 2013 total assessment audit period 318 million translated december 31 2018 spot rate company paid assessment recognized payments within assets consolidated balance sheet company lodged firstlevel administrative appeal denied october 21 2016 january 31 2017 company filed appeal national tax tribunal korea november 2018 company received unfavorable decision national tax tribunal korea february 2019 company submitted appeal seoul administrative court company disagrees assertions made assessments well calculation methodology used assessments company recognized loss company believe loss probable course 2016 company received various questions greek social security agency december 29 2016 greek social security agency issued assessment respect social security contributions member earnings 2006 year social security issues statute limitations open 2007 later years greece despite assessment amount immaterial company could receive similar assessments covering years company continues litigate assessment company recognized loss believe loss probable company currently unable reasonably estimate amount loss may result unfavorable outcome additional assessments periods issued italian tax authorities audited company periods 2014 2015 company responded various points relating income tax nonincome tax matters initially raised tax authorities date italian tax authorities discussing certain preliminary findings company possible company could receive final assessment italian authorities discussions company believes adequately accrued income tax matters known date regards nonincome tax matters company recognized loss believe loss probable company believes meritorious defenses formal assessment issued italian tax authorities company currently unable reasonably estimate amount loss may result unfavorable outcome formal assessment issued italian tax authorities march 2018 chinese customs service began audit company’s chinese importations covering periods 2015 2017 company responded initial questions customs service audit ongoing company currently unable determine outcome audit reasonably estimate amount loss assessment issued us federal trade commission consent order july 15 2016 company federal trade commission ftc entered proposed stipulation entry order permanent injunction monetary judgment consent order consent order lodged us district court central district california july 15 2016 became effective july 25 2016 effective date consent order resolved ftc’s multiyear investigation company pursuant consent order company neither admitted denied ftc’s allegations except court jurisdiction matter company made whollyowned subsidiary herbalife international america inc 200 million payment ftc additionally company implemented continues enhance certain existing procedures us among requirements consent order requires company categorize existing future members us either “preferred members” simply consumers wish purchase products household use “distributors” members wish resell products build sales organization company also agreed compensate distributors eligible us sales within downline organization include purchases preferred members purchases distributor personal consumption within allowable limits sales product distributor customers consent order also imposes restrictions distributor’s ability open nutrition clubs united states consent order subjects company certain audits independent compliance auditor period seven years imposes requirements company regarding compliance certification record creation maintenance prohibits company affiliates distributors making misrepresentations misleading claims regarding among things income lavish lifestyles ftc independent compliance auditor right inspect company records request additional compliance reports purposes conducting audits pursuant consent order september 2016 company ftc mutually selected affiliated monitors inc serve independent compliance auditor company continues monitor impact consent order company currently expect settlement longterm materially adverse impact business member base company’s business member base particularly united states may negatively impacted company unable comply consent order could result material adverse impact company’s results operations financial condition matters marketer foods dietary nutritional supplements products ingested consumers applied bodies company currently subjected various product liability claims effects claims date material company currently maintains product liability insurance annual deductible 125 million previously disclosed sec department justice “doj” conducting investigation company’s compliance foreign corrupt practices act “fcpa” china mainly focused company’s china external affairs expenditures relating china business activities adequacy compliance company’s internal controls relating expenditures investigation proceeding government continuing request documents information relating matters company conducting review taken remedial improvement measures based upon review including limited replacement number employees enhancements company policies procedures china company continuing cooperate engage discussions sec doj although likely outcome could include resolution government action company cannot predict eventual scope duration outcome government investigation time including potential monetary payments injunctions relief results may materially adverse company financial condition results operations present time company unable reasonably estimate amount loss relating matter sec also requested company documents information relating company’s disclosures regarding marketing plan china company believes sec investigation nearing conclusion although likely outcome could include resolution enforcement action company cannot predict eventual scope duration outcome investigation time possible range outcomes includes discussions leading settlement could include monetary payment relief filing sec civil complaint administrative action closure matter without action present time company unable reasonably estimate amount loss relating matter september 18 2017 company certain subsidiaries members named defendants purported class action lawsuit titled rodgers et al v herbalife ltd et al filed us district court southern district florida alleges violations florida’s deceptive unfair trade practices statute federal racketeer influenced corrupt organizations statutes unjust enrichment negligent misrepresentation august 23 2018 court issued order transferring action us district court central district california four putative class plaintiffs ordering remaining four plaintiffs arbitration thereby terminating company defendants florida action plaintiffs seek damages unspecified amount company believes lawsuit without merit vigorously defend claims lawsuit september 2017 one company’s warehouses located mexico sustained flooding damaged certain inventory stored within warehouse company maintains insurance coverage thirdparty carriers affected property december 31 2018 company recorded loss relating damaged inventory recognized combined equal offsetting receivable cash relating insurance recoveries event material negative impact company’s mexico operations consolidated financial statements 8 shareholders’ deficit company 1428 million 1647 million 1863 million common shares outstanding december 31 2018 2017 2016 respectively december 2004 company authorized 75 million preference shares 0002 par value 75 million authorized preference shares remained unissued december 31 2018 preference shares may issued time one series voting powers full limited without voting powers designations preferences relative participating optional special rights qualifications limitations restrictions determined company’s board directors dividends april 28 2014 company announced board directors approved terminating quarterly cash dividend instead utilizing cash repurchase additional common shares declaration future dividends subject discretion company’s board directors depend upon various factors including earnings financial condition herbalife nutrition ltd’s available distributable reserves cayman islands law restrictions imposed 2018 credit facility terms indebtedness may outstanding cash requirements future prospects factors deemed relevant board directors company pay declare dividends fiscal years ended december 31 2018 2017 2016 share repurchases october 30 2018 company’s board directors authorized new fiveyear 15 billion share repurchase program expire october 30 2023 replaced company’s prior share repurchase authorization set expire february 21 2020 approximately 1133 million remaining authorized capacity replaced share repurchase program allows company includes indirect whollyowned subsidiary herbalife nutrition ltd repurchase company’s common shares times prices determined management market conditions warrant extent herbalife nutrition ltd’s distributable reserves available cayman islands law 2018 credit facility permits company repurchase common shares long default event default exists conditions specified consolidated leverage ratios met december 31 2018 remaining authorized capacity company’s 15 billion share repurchase program 15 billion conjunction issuance 2019 convertible notes february 2014 company paid approximately 6858 million enter forward transactions certain financial institutions forward counterparties pursuant company purchased approximately 199 million common shares average cost 3451 per share settlement around august 15 2019 maturity date 2019 convertible notes subject ability forward counterparty elect settle portion forward transactions early forward transactions generally expected facilitate privately negotiated derivative transactions forward counterparties holders 2019 convertible notes including swaps relating common shares holders 2019 convertible notes establish short positions relating common shares otherwise hedge investments 2019 convertible notes concurrently shortly pricing 2019 convertible notes approximate 199 million common shares effectively repurchased forward transactions treated retired shares basic diluted eps purposes year ended december 31 2018 forward counterparties delivered approximately 139 million shares company subsequently retired company result company expensed 43 million unamortized noncash issuance costs relating shares included noncash interest expense amount disclosed december 31 2018 approximately 60 million shares still remained legally outstanding result forward transactions company’s total shareholders’ deficit within consolidated balance sheet increased approximately 6858 million first quarter 2014 amounts 6539 million 319 million allocated accumulated deficit additional paidin capital respectively within total shareholders’ deficit also upon executing forward transactions company recorded fair value 358 million noncash issuance costs assets corresponding amount additional paidin capital within consolidated balance sheet noncash issuance costs amortized interest expense contractual term forward transactions years ended december 31 2018 2017 2016 company recognized 92 million 65 million 65 million respectively noncash interest expense within consolidated statements income relating amortization noncash issuance costs year ended december 31 2018 indirect whollyowned subsidiary company purchased 8400 herbalife nutrition ltd’s common shares openmarket purchases aggregate cost approximately 03 million average cost 3390 per share year ended december 31 2017 indirect whollyowned subsidiary company purchased approximately 100 million herbalife nutrition ltd’s common shares openmarket purchases aggregate cost approximately 3286 million average cost 3281 per share repurchases increased company’s total shareholders’ deficit reflected cost within company’s accompanying consolidated balance sheets although shares owned indirect whollyowned subsidiary company remain legally outstanding reflected treasury shares us gaap therefore reduce number common shares outstanding within company’s consolidated financial statements weightedaverage number common shares outstanding used calculating earnings per share common shares herbalife nutrition ltd held indirect whollyowned subsidiary however remain outstanding books records company’s transfer agent therefore still carry voting share rights related ownership company’s common shares may exercised long consistent applicable laws shares voted subsidiary manner maximum extent possible proportion votes cast respect matter properly submitted vote herbalife nutrition ltd’s shareholders december 31 2018 2017 company held approximately 100 million treasury shares us gaap purposes may 2018 company completed modified dutch auction tender offer subsequently paid cash repurchase retire total approximately 114 million common shares aggregate cost approximately 6000 million 5250 per share october 2017 company completed modified dutch auction tender offer subsequently paid cash repurchase retire total approximately 135 million common shares aggregate cost approximately 4578 million 3400 per share total company repurchased 114 million 235 million common shares aggregate cost approximately 6003 million 7864 million average cost 5249 3349 per share years ended december 31 2018 2017 respectively company repurchase common shares open market year ended december 31 2016 connection company’s october 2017 modified dutch auction tender offer company incurred 16 million transaction costs also provided nontransferable contractual cvr share tendered allowing participants tender offer receive contingent cash payment event herbalife acquired goingprivate transaction defined cvr agreement within two years commencement tender offer initial fair value cvr 73 million recorded liability fourth quarter 2017 corresponding decrease shareholders’ equity determining initial fair value cvr company used lattice model included inputs underlying stock price strike price time expiration dividend yield subsequent changes fair value cvr liability using similar valuation approach initial fair value determination recognized within companys consolidated balance sheet corresponding gains losses recognized expense income net within companys consolidated statements income reporting period cvr expires august 2019 terminated due goingprivate transaction also incorporated valuation cvr goingprivate probability input considered level 3 input fair value hierarchy increase decrease input could significantly impacted fair value cvr reporting date subsequent increase decrease input inputs described subsequent valuations could significantly impact fair value cvr company recognized 88 million loss expense income net within consolidated statement income year ended december 31 2018 due change fair value cvr primarily driven increase market price company’s common shares partially offset decrease probability goingprivate transaction result shortening term cvr expires pursuant terms company recognized 04 million gain expense income net within consolidated statement income year ended december 31 2017 due change fair value cvr december 31 2018 2017 fair value cvr 157 million 69 million respectively number shares issued upon vesting exercise certain restricted stock units sars granted pursuant company’s sharebased compensation plans net statutory withholding requirements company pays behalf employees although shares withheld issued treated common share repurchases company’s consolidated financial statements reduce number shares would issued upon vesting shares count authorized capacity company’s share repurchase program described years ended december 31 2018 2017 2016 company withheld shares vested restricted stock units exercised sars relating sharebased compensation plans company reflects aggregate purchase price common shares repurchased increase shareholders’ deficit company generally allocated purchase price repurchased shares accumulated deficit common shares additional paidin capital exception treasury shares recorded separately company’s consolidated balance sheets years ended december 31 2018 2017 2016 company’s share repurchases inclusive transaction costs issuance cvr 6007 million 7953 million none respectively company’s share repurchase programs 1454 million 604 million 132 million respectively due shares withheld tax purposes related company’s sharebased compensation plans years ended december 31 2018 2017 2016 company’s total share repurchases including shares withheld tax purposes 7461 million 8557 million 132 million respectively recorded increase shareholders’ deficit within company’s consolidated balance sheets company recorded 7503 million total share repurchases within financing activities consolidated statement cash flows year ended december 31 2018 includes 42 million share repurchases reflected increase shareholders’ deficit within company’s consolidated balance sheet december 31 2017 subsequently paid year ended december 31 2018 company recorded 8442 million total share repurchases within financing activities consolidated statement cash flows year ended december 31 2017 excludes 42 million share repurchases payment made subsequent year end therefore reflected liability within company’s consolidated balance sheet december 31 2017 73 million initial fair value cvr capped call transactions february 2014 connection issuance 2019 convertible notes company paid approximately 1238 million enter capped call transactions certain financial institutions capped call transactions expected generally reduce potential dilution upon conversion 2019 convertible notes event market price common shares greater strike price capped call transactions initially set 4314 per common share based retroactive adjustment due company’s twoforone stock split described note 2 basis presentation reduction potential dilution subject cap based cap price initially set 6039 per common share based retroactive adjustment due company’s twoforone stock split described note 2 basis presentation strike price cap price subject certain adjustments terms capped call transactions therefore result executing capped call transactions company effect exposed potential net dilution market price common shares exceeds adjusted cap price december 31 2018 weightedaverage adjusted cap price approximately 5430 per common share result capped call transactions company’s additional paidin capital within shareholders’ deficit consolidated balance sheet reduced 1238 million first quarter 2014 march 2018 connection company’s repurchase portion 2019 convertible notes company entered partial settlement agreements option counterparties capped call transactions terminate portion existing transactions case notional amount corresponding aggregate principal amount 2019 convertible notes repurchased result terminating portion capped call transactions favorable position company received 559 million cash recognized offsetting increase additional paidin capital december 31 2018 accumulated comprehensive loss following table summarizes changes accumulated comprehensive loss component years ended december 31 2018 2017 2016 1 see note 2 basis presentation note 11 derivative instruments hedging activities information regarding location consolidated statements income gains losses reclassified accumulated comprehensive loss income years ended december 31 2018 2017 2016 comprehensive income loss reclassifications net tax benefit 27 million foreign currency translation adjustments year ended december 31 2018 comprehensive income loss reclassifications net tax expense 57 million foreign currency translation adjustments year ended december 31 2017 comprehensive income loss reclassifications net tax expense 52 million tax benefit 03 million foreign currency translation adjustments unrealized gain loss derivatives respectively year ended december 31 2016 amounts reclassified accumulated comprehensive loss income net tax expense 01 million unrealized gain loss availableforsale investments year ended december 31 2016 9 sharebased compensation company four sharebased compensation plans amended restated herbalife ltd 2005 stock incentive plan 2005 stock incentive plan amended restated herbalife ltd 2014 stock incentive plan 2014 stock incentive plan amended restated herbalife ltd independent directors deferred compensation stock unit plan independent director stock unit plan amended restated nonmanagement directors compensation plan nonmanagement directors plan 2014 stock incentive plan replaced 2005 stock incentive plan adoption thereof additional awards made 2005 stock incentive plan terms 2014 stock incentive plan substantially similar terms 2005 stock incentive plan 2014 stock incentive plan authorizes issuance 17400000 common shares pursuant awards granted plan plus shares remained available issuance 2005 stock incentive plan april 29 2014 purpose independent directors stock unit plan nonmanagement directors plan facilitate equity ownership company directors equity awards december 31 2018 aggregate approximately 63 million common shares remain available future issuance 2014 stock incentive plan company’s sharebased compensation plans generally provide grants stock options sars stock unit awards collectively referred herein awards certain sars generally vest annually threeyear period contractual term stock options sars generally ten years certain stock unit awards 2014 stock incentive plan vest annually three year period certain stock unit awards subject service performance conditions vest passage performance period determined compensation committee company’s board directors stock unit awards granted directors generally vest oneyear period awards subject following market service conditions market condition awards performance service conditions performance condition awards market service performance conditions market performance condition awards subject continued service company service condition awards granted company market condition awards performance condition awards service condition awards unless otherwise determined time grant upon vesting stock unit award represents right receive one common share stock unit awards company issues new shares net shares withheld tax purposes vested sars company issues new shares based intrinsic value exercised net shares withheld tax purposes company’s stock compensation awards outstanding december 31 2018 include sars stock unit awards sars performance conditions granted year ended december 31 2018 years ended december 31 2017 2016 company granted sars performance conditions certain employees awards generally vest 20 first succeeding year 20 second succeeding year 60 third succeeding year subject achievement certain sales leader retention metrics fair value sars determined date grant using blackscholesmerton option pricing model compensation expense grants recognized vesting term using graded vesting method sars service conditions granted year ended december 31 2018 years ended december 31 2017 2016 company granted sars service conditions certain employees fair value sars determined date grant using blackscholesmerton option pricing model compensation expense grants recognized vesting term using straight line method years ended december 31 2018 2017 company granted performance stock unit awards certain executives vest december 31 2020 december 31 2019 respectively subject continued employment date achievement certain performance conditions performance conditions include targets local currency net sales volume points adjusted earnings interest taxes adjusted earnings per share performance stock unit awards vest 0 200 target award based achievement performance conditions years ended december 31 2018 2017 company granted stock unit awards service conditions directors certain employees sharebased compensation expense included selling general administrative expenses within company’s consolidated statements income company’s policy estimate number forfeitures expected occur years ended december 31 2018 2017 2016 sharebased compensation expense relating service condition awards amounted 262 million 244 million 239 million respectively years ended december 31 2018 2017 2016 sharebased compensation expense relating market condition awards amounted less 01 million 13 million 04 million respectively years ended december 31 2018 2017 2016 sharebased compensation expense relating performance condition awards amounted 92 million 164 million 159 million respectively years ended december 31 2018 2017 2016 related income tax benefits recognized earnings awards amounted 81 million 94 million 148 million respectively excess tax benefits sharebased compensation arrangements totaled 531 million 311 million 04 million years ended december 31 2018 2017 2016 respectively december 31 2018 total unrecognized compensation cost related nonvested service condition stock awards 380 million related weightedaverage period expected recognized approximately 13 years december 31 2018 total unrecognized compensation cost related nonvested performance condition awards 112 million related weightedaverage period expected recognized approximately 16 years stock unit awards valued market value date grant fair value service condition sars performance condition sars estimated date grant using blackscholesmerton optionpricing model fair value sars market conditions market performance conditions estimated date grant using monte carlo lattice model company calculates expected term sars based historical data groups employees determined similar historical exercise patterns valuation purposes expected volatility sars based upon historical volatility company’s common shares also validated volatility rates peer group companies risk free interest rate based implied yield us treasury zerocoupon issue remaining term equal expected term sars expected dividend yield assumption based company’s historical expected amount dividend payouts sars granted year ended december 31 2018 sars granted independent directors years ended december 31 2017 2016 following table summarizes weightedaverage assumptions used calculation fair value service condition sars awards years ended december 31 2017 2016 following table summarizes weightedaverage assumptions used calculation fair value performance condition sars awards granted years ended december 31 2017 2016 following table summarizes activities sars sharebased compensation plans year ended december 31 2018 1 intrinsic value amount current market value underlying stock exceeds exercise price stock awards 2 includes less 01 million 02 million market condition sars december 31 2018 2017 respectively 3 includes 31 million 62 million performance condition sars december 31 2018 2017 respectively 4 includes 02 million market condition 30 million performance condition sars 5 includes 01 million performance condition sars 6 includes less 01 million market condition 18 million performance condition sars weightedaverage grant date fair value service condition sars granted years ended december 31 2017 2016 1432 1467 respectively weightedaverage grant date fair value sars performance conditions granted years ended december 31 2017 2016 1416 1485 respectively total intrinsic value service condition sars exercised years ended december 31 2018 2017 2016 2110 million 1228 million 323 million respectively total intrinsic value performance condition sars exercised years ended december 31 2018 2017 2016 950 million 31 million 07 million respectively total intrinsic value market condition sars exercised year ended december 31 2018 78 million market condition sars exercised years ended december 31 2017 2016 following table summarizes activities stock units sharebased compensation plans year ended december 31 2018 1 includes 708836 268776 performance based stock unit awards december 31 2018 2017 respectively represents maximum amount vest 2 includes 440060 performancebased stock unit awards represents maximum amount vest 3 includes 261297 performancebased stock unit awards total vesting date fair value stock units vested years ended december 31 2018 2017 2016 22 million 20 million 21 million respectively employee stock purchase plan 2007 company adopted qualified employee stock purchase plan espp implemented first quarter 2008 connection adoption espp company reserved issuance total 4 million common shares december 31 2018 approximately 33 million common shares remain available future issuance terms espp rights purchase common shares may granted eligible qualified employees subject certain restrictions espp enables company’s eligible employees payroll withholdings purchase limited number common shares 85 fair market value common share purchase date purchases made quarterly basis 10 segment information company nutrition company sells wide range weight management targeted nutrition energy sports fitness outer nutrition products company’s products manufactured company changsha hunan china extraction facility suzhou china facility nanjing china facility lake forest california facility winstonsalem north carolina facility well thirdparty providers sold members consume sell herbalife products retail consumers members revenues reflect sales products company members categorized based geographic location december 31 2018 company sold products 94 countries throughout world organized managed six geographic regions north america mexico south central america emea asia pacific china company defines operating segments geographical operations company aggregates operating segments excluding china reporting segment primary reporting segment management believes company’s operating segments similar operating characteristics similar long term operating performance making determination management believes operating segments similar nature products sold product acquisition process types customers products sold methods used distribute products nature regulatory environment economic characteristics china identified separate reporting segment meet criteria aggregation company reviews net sales contribution margin operating segment reviews assets capital expenditures consolidated basis operating segment therefore net sales contribution margin presented reportable segment assets capital expenditures segment presented operating information two reportable segments sales product line sales geographic area follows 1 contribution margin consists net sales less cost sales royalty overrides china segment contribution margin include service fees china independent service providers 2 service fees china independent service providers totaling 5232 million 4195 million 4071 million years ended december 31 2018 2017 2016 respectively included selling general administrative expenses 3 product buy backs returns product categories included literature promotional category december 31 2018 2017 goodwill allocated company’s reporting units included company’s primary reporting segment 898 million 936 million respectively goodwill allocated china segment 31 million 33 million december 31 2018 2017 respectively following table sets forth property plant equipment deferred tax assets geographic area majority company’s foreign subsidiaries designate local currencies functional currency december 31 2018 2017 total amount cash held foreign subsidiaries reported company’s consolidated balance sheets 8703 million 11335 million respectively 3094 million 6333 million respectively maintained invested us dollars december 31 2018 2017 total amount cash equivalents held herbalife nutrition ltd us entities inclusive us territories 3286 million 1453 million respectively 11 derivative instruments hedging activities foreign currency instruments company designates certain foreign currency derivatives primarily comprised foreign currency forward contracts freestanding derivatives hedge accounting apply changes fair market value freestanding derivatives included selling general administrative expenses company’s consolidated statements income company primarily uses freestanding foreign currency derivatives hedge foreign currencydenominated intercompany transactions partially mitigate impact foreign currency fluctuations fair value freestanding foreign currency derivatives based thirdparty quotes company’s foreign currency derivative contracts generally executed monthly basis company designates cashflow hedges foreign currency forward contracts enters hedge forecasted inventory purchases intercompany management fees subject foreign currency exposures forward contracts used hedge forecasted inventory purchases specific months changes fair value forward contracts excluding forward points designated cashflow hedges recorded component accumulated comprehensive loss within shareholders’ deficit recognized cost sales consolidated statement income period approximates time hedged inventory sold company also hedges forecasted intercompany management fees specific months contracts allow company sell euros exchange us dollars specified contract rates changes fair value forward contracts designated cash flow hedges recorded component accumulated comprehensive loss within shareholders’ deficit recognized selling general administrative expenses within company’s consolidated statement income period hedged item underlying transaction affect earnings december 31 2018 2017 aggregate notional amounts foreign currency contracts outstanding designated cash flow hedges approximately 438 million 1049 million respectively december 31 2018 outstanding contracts expected mature next eleven months company’s derivative financial instruments recorded consolidated balance sheets fair value based thirdparty quotes december 31 2018 company recorded assets fair value 05 million liabilities fair value 07 million relating outstanding foreign currency contracts designated cashflow hedges december 31 2017 company recorded assets fair value 29 million liabilities fair value 40 million relating outstanding foreign currency contracts designated cashflow hedges company assesses hedge effectiveness measures hedge ineffectiveness least quarterly years ended december 31 2018 2017 2016 ineffective portion relating hedges immaterial hedges remained effective december 31 2018 2017 december 31 2018 2017 majority company’s outstanding foreign currency forward contracts maturity dates less twelve months majority freestanding derivatives expiring within one month december 31 2018 2017 tables provide information details foreign currency forward contracts outstanding december 31 2018 2017 following tables summarize derivative activity years ended december 31 2018 2017 2016 relating company’s derivatives gains losses derivative instruments following table summarizes gains losses relating derivative instruments recorded comprehensive loss years ended december 31 2018 2017 2016 december 31 2018 estimated amount existing net gains related cash flow hedges recorded accumulated comprehensive loss expected reclassified earnings next twelve months 18 million following table summarizes gains losses relating derivative instruments recorded income years ended december 31 2018 2017 2016 1 foreign exchange contracts designated hedging instruments amounts recognized income primarily represent amounts excluded assessment hedge effectiveness years ended december 31 2018 2017 2016 following table summarizes gains losses relating derivative instruments reclassified accumulated comprehensive loss income years ended december 31 2018 2017 2016 company reports derivatives fair value either assets liabilities within consolidated balance sheets see note 13 fair value measurements information derivative fair values consolidated balance sheet locations december 31 2018 2017 12 income taxes components income taxes follows income taxes follows significant categories temporary differences gave rise deferred tax assets liabilities follows tax loss credit carryforwards certain foreign subsidiaries 2018 2017 1681 million 1376 million respectively unused tax loss credit carryforwards certain foreign subsidiaries 716 million expire 2019 2028 965 million carried forward indefinitely us foreign tax credit carryforwards 2018 2017 2110 million 1862 million respectively included tax loss domestic tax credit carryforwards table unused us foreign tax credit carryforwards expire 2020 2028 domestic research development tax credit carryforwards 2018 2017 73 million 48 million unused domestic research development tax credit carryforwards expire 2037 deferred interest expense carried forward indefinitely state tax loss carryforwards 2018 2017 22 million 04 million unused state tax loss carryforwards expire 2022 2038 december 22 2017 us enacted tax cuts jobs act also commonly referred “us tax reform” significantly changes us corporate income tax laws among things reducing us corporate income tax rate 21 starting 2018 creating modified territorial tax system onetime mandatory tax previously deferred foreign earnings us subsidiaries fourth quarter 2017 accordance sec staff accounting bulletin “sab” 118 income tax accounting implications tax cuts jobs act “sab 118” company recorded provisional net expense 1533 million amount included tax expense predominantly consists three components 1634 million charge caused establishment valuation allowance deferred tax assets due act’s changes sourcing calculation foreign income thereby limited expected utilization foreign tax credit carryforwards ii 55 million benefit resulting remeasurement company’s net deferred tax liabilities us based new lower corporate income tax rate iii nonrecurring benefit 46 million related additional foreign tax credits result impact onetime mandatory repatriation previously unremitted earnings certain nonus subsidiaries owned either directly indirectly us parent although 1533 million provisional net expense represented company believed reasonable estimate impact income tax effects act company’s consolidated financial statements december 31 2017 considered provisional items include limited foreign tax credits associated valuation allowance limitations executive compensation onetime tax previously unremitted foreign earnings us subsidiaries company continued analyze regulatory guidance including proposed regulations relating foreign tax credits issued fourth quarter 2018 information including continued inability fully utilize foreign tax credits generated accordingly company recorded additional 295 million expense fourth quarter 2018 caused establishment valuation allowance deferred tax assets relating foreign tax credit carryforwards result company’s accounting ultimate tax effects act finalized sab 118 december 31 2018 company recognizes valuation allowances deferred tax assets reported based weight evidence likely deferred tax assets realized december 31 2018 2017 company held valuation allowances net deferred tax assets certain subsidiaries primarily related tax loss carryforwards us foreign tax credits amount 3829 million 2994 million respectively change company’s valuation allowance 2018 835 million related 837 million net additions charged income tax expense primarily related valuation allowance established us foreign tax credits described partially offset 02 million currency translation adjustments recognized within comprehensive income change company’s valuation allowance 2017 1840 million related 1837 million net additions charged income tax expense primarily related valuation allowance established us foreign tax credits described 03 million currency translation adjustments recognized within comprehensive income change company’s valuation allowance 2016 59 million related 56 million net reductions charged income tax expense 03 million currency translation adjustments recognized within comprehensive income december 31 2018 company’s us consolidated group approximately 1166 million unremitted earnings permanently reinvested relating certain foreign subsidiaries december 31 2018 herbalife nutrition ltd approximately 23 billion permanently reinvested unremitted earnings relating operating subsidiaries result company’s decision invest china growth impact investment fund approximately 1198 million unremitted earnings permanently reinvested december 31 2018 since herbalife nutrition ltd’s unremitted earnings permanently reinvested deferred taxes provided unremitted earnings practicable determine amount unrecognized deferred taxes respect unremitted earnings company remit unremitted earnings would subject income tax remittances deferred taxes accrued earnings considered indefinitely reinvested deferred tax unremitted foreign earnings december 31 2018 2017 deferred tax liability net valuation allowance 180 million 291 million respectively applicable statutory income tax rate cayman islands zero herbalife nutrition ltd years reported purposes reconciliation provision income taxes statutory rate provision income taxes effective tax rate notional 21 tax rate applied year ended december 31 2018 notional 35 tax rate applied years ended december 31 2017 2016 follows december 31 2018 total amount unrecognized tax benefits including related interest penalties 652 million total amount unrecognized tax benefits recognized 468 million unrecognized tax benefits 100 million interest 17 million penalties would impact effective tax rate december 31 2017 total amount unrecognized tax benefits including related interest penalties 620 million total amount unrecognized tax benefits recognized 444 million unrecognized tax benefits 99 million interest 15 million penalties would impact effective tax rate company accounts interest penalties generated tax contingencies component income tax expense year ended december 31 2018 company recorded increase interest penalty expense related uncertain tax positions 10 million 04 million respectively year ended december 31 2017 company recorded decrease interest penalty expense related uncertain tax positions less 01 million 08 million respectively year ended december 31 2016 company recorded increase interest penalty expense related uncertain tax positions 27 million 07 million respectively december 31 2018 total amount interest penalties related unrecognized tax benefits recognized consolidated balance sheet 100 million 17 million respectively december 31 2017 total amount interest penalties related unrecognized tax benefits recognized consolidated balance sheet 99 million 15 million respectively december 31 2016 total amount interest penalties related unrecognized tax benefits recognized consolidated balance sheet 94 million 21 million respectively following changes occurred amount unrecognized tax benefits years ended december 31 2018 2017 2016 amount income taxes company pays subject ongoing audits taxing jurisdictions around world company’s estimate potential outcome uncertain tax position subject management’s assessment relevant risks facts circumstances existing time company believes adequately provided matters however company’s future results may include favorable unfavorable adjustments estimates period audits resolved may impact company’s effective tax rate december 31 2018 company’s tax filings generally subject examination major tax jurisdictions years ending december 31 2013 company believes reasonably possible amount unrecognized tax benefits could decrease approximately 64 million within next twelve months possible decrease 04 million would due settlement audits resolution administrative judicial proceedings remaining possible decrease 60 million would due expiration statute limitations various jurisdictions 13 fair value measurements company applies provisions fasb asc topic 820 fair value measurements disclosures asc 820 financial nonfinancial assets liabilities asc 820 defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date asc 820 establishes fair value hierarchy prioritizes inputs used measuring fair value three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities reporting entity ability access measurement date level 2 inputs include quoted prices similar assets liabilities active markets quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability inputs derived principally corroborated observable market data correlation means level 3 inputs unobservable inputs asset liability company measures certain assets liabilities fair value discussed throughout notes consolidated financial statements foreign exchange currency contracts valued using standard calculations models primarily based inputs observable forward rates spot rates foreign currency exchange rates reporting period ended date company’s derivative assets liabilities measured fair value consisted level 2 inputs amounts shown gross values december 31 2018 2017 company’s cvr liability measured fair value consisted level 3 inputs see note 8 shareholders’ deficit description cvr liability following reconciliation cvr liability reported current liabilities within company’s consolidated balance sheet december 31 2018 1 unrealized gains losses related revaluation cvr recorded expense income net within company’s consolidated statements income company’s deferred compensation plan assets consist companyowned life insurance policies recorded cash surrender value required included fair value table see note 6 employee compensation plans description deferred compensation plan assets following tables summarize offsetting fair values company’s derivative assets derivative liabilities presentation company’s consolidated balance sheets december 31 2018 2017 company offsets derivative assets derivative liabilities consolidated balance sheets extent maintains master netting arrangements related financial institutions december 31 2018 2017 company’s derivatives subject master netting arrangements collateralization required company’s derivative assets derivative liabilities 14 detail certain balance sheet accounts assets company’s accompanying consolidated balance sheets include deferred compensation plan assets 312 million 336 million deferred tax assets 791 million 775 million december 31 2018 2017 respectively current liabilities current liabilities consist following noncurrent liabilities noncurrent liabilities company’s accompanying consolidated balance sheets include deferred compensation plan liabilities 513 million 581 million deferred income tax liabilities 75 million 78 million december 31 2018 2017 respectively see note 6 employee compensation plans description company’s deferred compensation plan assets liabilities 15 subsequent events january 8 2019 company announced resignation richard p goudis chief executive officer company effective january 8 2019 immediate temporary appointment michael johnson company’s executive chairman role chief executive officer connection mr goudis’ resignation herbalife international america inc whollyowned subsidiary company entered separation agreement general release mr goudis dated january 8 2019 equity awards issued mr goudis continued vest accordance existing terms january 8 2019 thereafter unvested equity awards forfeited vested unexercised stock appreciation rights shall expire accordance existing terms additionally company shall pay mr goudis remuneration amount 35 million contingent mr goudis’ continued compliance payment requirements specified separation agreement general release 16 quarterly information unaudited 1 fourth quarters 2018 2017 include impact us tax reform enacted fourth quarter 2017 described note 12 income taxes item 16 form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized herbalife nutrition ltd bosco chiu bosco chiu executive vice president chief financial officer dated february 19 2019 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date michael johnson chairman board chief executive officer principal executive officer director february 19 2019 michael johnson bosco chiu executive vice president chief financial officer principal financial officer principal accounting officer february 19 2019 bosco chiu richard h carmona director february 19 2019 richard h carmona jonathan christodoro director february 19 2019 jonathan christodoro jeffrey dunn director february 19 2019 jeffrey dunn hunter c gary director february 19 2019 hunter c gary nicholas graziano director february 19 2019 nicholas graziano alan lefevre director february 19 2019 alan lefevre jesse lynn director february 19 2019 jesse lynn juan miguel mendoza director february 19 2019 juan miguel mendoza michael montelongo director february 19 2019 michael montelongo james l nelson director february 19 2019 james l nelson maria otero director february 19 2019 maria otero margarita paláuhernández director february 19 2019 margarita paláuhernández john tartol director february 19 2019 john tartolitem 15 exhibits financial statement schedules following documents filed part annual report form 10k incorporated herein reference 1 financial statements following financial statements herbalife nutrition ltd filed part annual report form 10k pages indicated 2 financial statement schedules omitted required information inapplicable material information presented consolidated financial statements related notes 3 exhibits listed exhibit index immediately filed part annual report form 10k incorporated reference herein exhibit index exhibit number description reference 1032 employment agreement dated october 23 2019 among john g desimone herbalife international america inc herbalife nutrition ltd q 1033 first amendment credit agreement dated december 12 2019 among hlf financing sarl llc herbalife nutrition ltd herbalife international luxembourg sà rl herbalife international inc company’s subsidiaries party thereto subsidiary guarantors several banks financial institutions entities party thereto lenders jefferies finance llc administrative agent term loan b lenders collateral agent r 1034 second amendment credit agreement dated march 19 2020 among hlf financing sarl llc herbalife nutrition ltd herbalife international luxembourg sà rl herbalife international inc company’s subsidiaries party thereto subsidiary guarantors several banks financial institutions entities party thereto lenders coöperatieve rabobank ua new york branch administrative agent term loan lenders revolving credit lenders 1035 deferred prosecution agreement herbalife nutrition ltd united states department justice w 1036 order instituting ceaseanddesist proceedings pursuant section 21c securities exchange act 1934 making findings imposing ceaseanddesist order w 1037 letter agreement dated november 4 2020 respect second amended restated support agreement dated july 15 2016 among herbalife nutrition ltd carl c icahn partners lp icahn partners master fund lp icahn onshore lp icahn offshore lp icahn capital lp iph gp llc icahn enterprises holdings lp icahn enterprises gp inc beckton corp x 1038 purchase agreement dated january 3 2021 among herbalife nutrition ltd carl c icahn partners lp icahn partners master fund lp icahn onshore lp icahn offshore lp icahn capital lp iph gp llc beckton corp icahn enterprises holdings lp icahn enterprises gp inc 1039 third amendment credit agreement dated february 10 2021 among hlf financing sarl llc herbalife nutrition ltd herbalife international luxembourg sà rl herbalife international inc herbalife nutrition’s subsidiaries party thereto subsidiary guarantors several banks financial institutions entities party thereto lenders jefferies finance llc administrative agent term loan b lenders collateral agent z 211 subsidiaries registrant 231 consent pricewaterhousecoopers llp independent registered public accounting firm 311 rule 13a14a certification chief executive officer 312 rule 13a14a certification chief financial officer 321 section 1350 certification chief executive officer 322 section 1350 certification chief financial officer 101ins inline xbrl instance document instance document appear interactive data file xbrl tags embedded within inline xbrl document filed herewith furnished herewith management contract compensatory plan arrangement previously filed october 1 2004 exhibit company’s registration statement form s1 file 333119485 incorporated herein reference b previously filed december 2 2004 exhibit amendment 4 company’s registration statement form s1 file 333119485 incorporated herein reference c previously filed december 14 2004 exhibit amendment 5 company’s registration statement form s1 file 333119485 incorporated herein reference previously filed may 5 2015 exhibit company’s quarterly report form 10q quarter ended march 31 2015 incorporated herein reference e previously filed august 5 2015 exhibit company’s quarterly report form 10q quarter ended june 30 2015 incorporated herein reference f previously filed may 5 2016 exhibit company’s quarterly report form 10q quarter ended march 31 2016 incorporated herein reference g previously filed july 15 2016 exhibit company’s current report form 8k incorporated herein reference h previously filed february 23 2017 exhibit company’s annual report form 10k year ended december 31 2016 incorporated herein reference previously filed august 1 2017 exhibit company’s quarterly report form 10q quarter ended june 30 2017 incorporated herein reference j previously filed august 21 2017 exhibit company’s tender offer statement schedule incorporated herein reference k previously filed february 22 2018 exhibit company’s annual report form 10k year ended december 31 2017 incorporated herein reference l previously filed march 29 2018 exhibit company’s current report form 8k incorporated herein reference previously filed may 3 2018 exhibit company’s quarterly report form 10q quarter ended march 31 2018 incorporated herein reference n previously filed august 22 2018 exhibit company’s current report form 8k incorporated herein reference previously filed february 19 2019 exhibit company’s annual report form 10k year ended december 31 2018 incorporated herein reference p previously filed august 1 2019 exhibit company’s quarterly report form 10q quarter ended june 30 2019 incorporated herein reference q previously filed october 29 2019 exhibit company’s quarterly report form 10q quarter ended september 30 2019 incorporated herein reference r previously filed december 12 2019 exhibit company’s current report form 8k incorporated herein reference previously filed february 18 2020 exhibit company’s annual report form 10k year ended december 31 2019 previously filed march 19 2020 exhibit company’s current report form 8k incorporated herein reference u previously filed may 7 2020 exhibit company’s quarterly report form 10q quarter ended march 31 2020 incorporated herein reference v previously filed may 29 2020 exhibit company’s current report form 8k incorporated herein reference w previously filed november 5 2020 exhibit company’s quarterly report form 10q quarter ended september 30 2020 incorporated herein reference x previously filed november 5 2020 exhibit company’s current report form 8k incorporated herein reference previously filed january 4 2021 exhibit company’s current report form 8k incorporated herein reference z previously filed february 11 2021 exhibit company’s current report form 8k incorporated herein reference report independent registered public accounting firm board directors shareholders herbalife nutrition ltd opinions financial statements internal control financial reporting audited accompanying consolidated balance sheets herbalife nutrition ltd subsidiaries “company” december 31 2020 2019 related consolidated statements income comprehensive income changes shareholders’ deficit cash flows three years period ended december 31 2020 including related notes collectively referred “consolidated financial statements” also audited company’s internal control financial reporting december 31 2020 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso opinion consolidated financial statements referred present fairly material respects financial position company december 31 2020 2019 results operations cash flows three years period ended december 31 2020 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2020 based criteria established internal control integrated framework 2013 issued coso basis opinions company’s management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions company’s consolidated financial statements company’s internal control financial reporting based audits public accounting firm registered public company accounting oversight board united states pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audits obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud whether effective internal control financial reporting maintained material respects audits consolidated financial statements included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate critical audit matters critical audit matter communicated matter arising current period audit consolidated financial statements communicated required communicated audit committee relates accounts disclosures material consolidated financial statements ii involved especially challenging subjective complex judgments communication critical audit matters alter way opinion consolidated financial statements taken whole communicating critical audit matter providing separate opinion critical audit matter accounts disclosures relates loss contingencies described note 7 consolidated financial statements company time engaged routine litigation disclosed management estimated loss contingency recorded information available prior issuance company’s financial statements indicates probable asset impaired liability incurred date financial statements amount loss reasonably estimated management also discloses material contingencies believe loss probable reasonably possible management regularly reviews pending litigation matters involved establishes reserves litigation matters probable loss estimate made accounting contingencies legal nonincome tax matters requires management use judgment related likelihood loss estimate amount range loss principal considerations determination performing procedures relating loss contingencies critical audit matter significant judgment management assessing likelihood loss incurred determining whether reasonable estimate loss range loss matter made turn led high degree auditor judgment effort evaluating management’s assessment loss contingencies associated legal nonincome tax matters addition audit effort involved use professionals specialized skill knowledge assist performing procedures evaluating audit evidence obtained procedures addressing matter involved performing procedures evaluating audit evidence connection forming overall opinion consolidated financial statements procedures included testing effectiveness controls relating management’s evaluation loss contingencies associated legal nonincome tax matters including controls determining whether loss probable whether amount loss reasonably estimated well financial statement disclosures procedures also included among others obtaining evaluating letters audit inquiry company’s external legal counsel evaluating reasonableness management’s assessment regarding whether unfavorable outcome reasonably possible probable reasonably estimable evaluating sufficiency company’s contingency disclosures professionals specialized skill knowledge used assist evaluation completeness measurement certain contingencies evaluation whether positions taken management reasonable assessing audit evidence obtained pricewaterhousecoopers llp los angeles california february 17 2021 served company’s auditor since 2013 herbalife nutrition ltd subsidiaries consolidated balance sheets see accompanying notes consolidated financial statements herbalife nutrition ltd subsidiaries consolidated statements income see accompanying notes consolidated financial statements herbalife nutrition ltd subsidiaries consolidated statements comprehensive income see accompanying notes consolidated financial statements herbalife nutrition ltd subsidiaries consolidated statements changes shareholders’ deficit see accompanying notes consolidated financial statements herbalife nutrition ltd subsidiaries consolidated statements cash flows see accompanying notes consolidated financial statements herbalife nutrition ltd subsidiaries notes consolidated financial statements 1 organization herbalife nutrition ltd cayman islands exempted company limited liability incorporated april 4 2002 herbalife nutrition ltd together subsidiaries “company” “herbalife” global nutrition company sells weight management targeted nutrition energy sports fitness outer nutrition products network independent members china company sells products independent service providers sales representatives customers preferred customers well companyoperated retail platforms necessary company sells products six geographic regions north america mexico south central america emea consists europe middle east africa asia pacific excluding china 2 basis presentation company’s consolidated financial statements refer herbalife nutrition ltd subsidiaries recently adopted pronouncements june 2016 financial accounting standards board fasb issued accounting standards update asu 201613 financial instruments credit losses topic 326 measurement credit losses financial instruments asu changes impairment model financial assets requiring use expected loss model requires entities estimate lifetime expected credit loss financial assets measured amortized cost credit losses recorded allowance offset amortized cost financial asset resulting net presentation amount expected collected financial asset addition credit losses relating availableforsale debt securities recorded allowance credit losses rather direct writedown security amendments update effective reporting periods beginning december 15 2019 early adoption permitted reporting periods beginning december 15 2018 adoption guidance first quarter 2020 material impact company’s consolidated financial statements january 2017 fasb issued asu 201704 intangibles goodwill topic 350 simplifying test goodwill impairment asu simplifies test goodwill impairment removing step 2 goodwill impairment test companies perform goodwill impairment test comparing fair value reporting unit carrying amount recognizing impairment charge amount carrying amount exceeds reporting unit’s fair value exceed total amount goodwill allocated reporting unit entity still option perform qualitative assessment reporting unit determine quantitative impairment test necessary amendments update effective goodwill impairment tests fiscal years beginning december 15 2019 early adoption permitted goodwill impairment tests performed january 1 2017 adoption guidance first quarter 2020 material impact company’s consolidated financial statements august 2018 fasb issued asu 201813 fair value measurement topic 820 disclosure framework changes disclosure requirements fair value measurement asu modifies disclosure requirements fair value measurements topic 820 based consideration costs benefits promote appropriate exercise discretion entities considering fair value measurement disclosures clarify materiality appropriate consideration entities auditors evaluating disclosure requirements amendments update effective reporting periods beginning december 15 2019 early adoption permitted adoption guidance first quarter 2020 material impact company’s consolidated financial statements august 2018 fasb issued asu 201815 intangibles goodwill internaluse software subtopic 35040 customer’s accounting implementation costs incurred cloud computing arrangement service contract asu clarifies accounting implementation costs hosting arrangement service contract aligns accounting regardless whether arrangement conveys license hosted software amendments update effective reporting periods beginning december 15 2019 early adoption permitted company adopted guidance initial application date january 1 2020 prospective application implementation costs incurred january 1 2020 adoption guidance first quarter 2020 material impact company’s consolidated financial statements november 2019 fasb issued asu 201908 compensationstock compensation topic 718 revenue contracts customers topic 606 codification improvementssharebased consideration payable customer asu clarifies accounting measuring sharebased payment awards granted customer amendments update effective reporting periods beginning december 15 2019 early adoption permitted adoption guidance first quarter 2020 material impact company’s consolidated financial statements march 2020 fasb issued asu 202004 reference rate reform topic 848 facilitation effects reference rate reform financial reporting asu provides optional guidance limited period time ease potential burden accounting recognizing effects reference rate reform financial reporting amendments update effective march 12 2020 december 31 2022 adoption guidance first quarter 2020 material impact company’s consolidated financial statements new accounting pronouncements august 2018 fasb issued asu 201814 compensation retirement benefits defined benefit plans general subtopic 71520 disclosure framework changes disclosure requirements defined benefit plans asu removes disclosures longer considered cost beneficial clarifies specific requirements disclosures adds disclosure requirements identified relevant amendments update effective reporting periods beginning december 15 2020 early adoption permitted adoption guidance material impact company’s consolidated financial statements december 2019 fasb issued asu 201912 income taxes topic 740 simplifying accounting income taxes asu simplifies accounting income taxes eliminating exceptions general approach asc topic 740 income taxes clarifies certain aspects existing guidance promote consistent application among things amendments update effective reporting periods beginning december 15 2020 early adoption permitted adoption guidance material impact company’s consolidated financial statements august 2020 fasb issued asu 202006 debt conversion options subtopic 47020 derivatives hedging contracts entity’s equity subtopic 81540 accounting convertible instruments contracts entity’s equity asu simplifies accounting convertible instruments eliminating certain accounting models resulting fewer embedded conversion features separately recognized host contract also amends guidance derivatives scope exception contracts entity’s equity reduce formoversubstancebased accounting conclusions additionally amendments asu affect diluted eps calculation convertible instruments require effect potential share settlement included diluted eps calculation convertible instrument may settled cash shares ifconverted method opposed treasury stock method would required calculate diluted eps types convertible instruments amendments update effective reporting periods beginning december 15 2021 early adoption permitted company evaluating potential impact adoption consolidated financial statements significant accounting policies consolidation policy consolidated financial statements include accounts herbalife nutrition ltd subsidiaries significant intercompany transactions accounts eliminated foreign currency translation transactions majority countries company operates functional currency local currency company’s foreign subsidiaries’ asset liability accounts translated consolidated financial reporting purposes us dollar amounts yearend exchange rates revenue expense accounts translated average rates year foreign exchange translation adjustments included accumulated comprehensive loss accompanying consolidated balance sheets foreign currency transaction gains losses include cost foreign currency derivative contracts related settlement gains losses excluding certain foreign currency derivatives designated cash flow hedges discussed note 11 derivative instruments hedging activities included selling general administrative expenses within accompanying consolidated statements income company recorded net foreign currency transaction losses 148 million 20 million 173 million years ended december 31 2020 2019 2018 respectively forward exchange contracts option contracts interest rate swaps company enters foreign currency derivatives primarily comprised foreign currency forward contracts option contracts managing foreign exchange risk sales members inventory purchases denominated foreign currencies intercompany transactions loans company also enters interest rate swaps managing interest rate risk variable rate senior secured credit facility company use contracts trading purposes accordance fasb asc topic 815 derivatives hedging asc 815 company designates certain derivative instruments cash flow hedges formally documents hedge relationships including identification hedging instruments hedged items well risk management objectives strategies undertaking hedge transaction time derivative contract executed company assesses effectiveness hedge inception ongoing basis determines whether hedge highly perfectly effective offsetting changes cash flows hedged item company records changes estimated fair value accumulated comprehensive loss subsequently reclassifies related amount accumulated comprehensive loss earnings hedged item underlying transaction impacts earnings determined derivative ceased highly effective hedge company discontinue hedge accounting transaction derivatives designated hedges changes estimated fair value recognized consolidated statements income cash equivalents company considers highly liquid investments purchased maturity three months less cash equivalents cash equivalents comprised primarily domestic foreign bank accounts money market funds cash equivalents valued based level 1 inputs consist quoted prices active markets reduce credit risk company monitors credit standing financial institutions hold company’s cash equivalents company cash pooling arrangement financial institution cash management purposes cash pooling arrangement allows certain company’s participating subsidiaries withdraw cash financial institution based upon company’s aggregate cash deposits held subsidiaries participate cash pooling arrangement extent participating location individual basis overdraft position overdrafts recorded liabilities reflected financing activities company’s consolidated balance sheets consolidated statements cash flows respectively company owe amounts financial institution december 31 2020 2019 accounts receivable accounts receivable consist principally receivables credit card companies arising sale products company’s members receivables importers utilized limited number countries sell products members company believes concentration collection risk related credit card receivables reduced due geographic dispersion credit card receivables 652 million 560 million december 31 2020 2019 respectively substantially credit card receivables current december 31 2020 2019 company’s receivables importers company performs ongoing credit evaluations importers maintains allowance potential credit losses company considers customer creditworthiness past current transaction history customer contractual terms current economic industry trends changes customer payment terms determining whether collectability reasonably assured whether record allowances receivables financial condition company’s customers deteriorates adversely affects ability make payments additional allowances recorded company believes provides adequate allowances receivables members importers material consolidated financial statements company recorded 17 million 30 million 12 million years ended december 31 2020 2019 2018 respectively baddebt expense related allowances company’s receivables december 31 2020 2019 company’s allowance doubtful accounts 33 million 25 million respectively december 31 2020 2019 majority company’s total outstanding accounts receivable current fair value financial instruments company applies provisions fasb authoritative guidance applies financial nonfinancial assets liabilities fasb authoritative guidance clarifies definition fair value prescribes methods measuring fair value establishes fair value hierarchy based inputs used measure fair value expands disclosures fair value measurements company estimated fair value financial instruments using following methods assumptions • carrying amounts cash equivalents receivables accounts payable approximate fair value due shortterm maturities instruments • fair value option forward contracts based dealer quotes • company’s variablerate revolving credit facility recorded carrying value considered approximate fair value • outstanding borrowings company’s term loan senior secured credit facility recorded carrying value fair value determined utilizing overthecounter market quotes similar instruments • outstanding borrowings company’s term loan b senior secured credit facility recorded carrying value fair value determined utilizing overthecounter market quotes • company’s convertible senior notes recorded carrying value fair value determined using two valuation methods described note 5 longterm debt • company’s senior notes issued august 2018 2026 notes senior notes issued may 2020 2025 notes recorded carrying value fair values determined utilizing overthecounter market quotes yield curves inventories stated lower cost primarily firstin firstout basis net realizable value debt issuance costs debt issuance costs represent fees expenses related borrowing company’s longterm debt generally amortized term related debt using effective interest method debt issuance costs except related company’s revolving credit facility recorded reduction debt contraliability within company’s consolidated balance sheets total amortization expense related debt issuance costs 46 million 53 million 73 million years ended december 31 2020 2019 2018 respectively december 31 2020 2019 company’s remaining unamortized debt issuance costs 254 million 212 million respectively longlived assets december 31 2020 2019 company’s net property plant equipment consisted following december 2012 company purchased approximate 800000 square foot facility winstonsalem north carolina approximately 222 million company allocated 188 million 34 million buildings land respectively based relative fair values april 2016 company purchased one office buildings torrance california previously leased approximately 296 million company allocated 169 million 116 million net deferred rent liability 11 million buildings land respectively based relative fair values december 31 2020 2019 amounts reflected property plant equipment within company’s accompanying consolidated balance sheets depreciation furniture fixtures equipment including computer hardware softw computed straightline basis estimated useful lives related assets range three ten years company capitalizes eligible costs acquire develop internaluse software incurred subsequent preliminary project stage computer hardware software majority comprised capitalized internaluse software costs 1887 million 1774 million december 31 2020 2019 respectively net accumulated depreciation leasehold improvements amortized straightline basis life related asset term lease whichever shorter buildings depreciated 40 years building improvements generally depreciated ten fifteen years land depreciated depreciation amortization expenses recorded selling general administrative expenses totaled 809 million 788 million 808 million years ended december 31 2020 2019 2018 respectively longlived assets reviewed impairment based undiscounted cash flows whenever events changes circumstances indicate carrying amount assets may recoverable measurement impairment loss based estimated fair value asset goodwill marketingrelated intangible assets indefinite lives evaluated annual basis impairment frequently events changes circumstances indicate asset might impaired goodwill company performed qualitative assessment fourth quarter 2020 determined likely fair value reporting unit less respective carrying value determined likely fair value reporting unit less carrying amount qualitative assessment performed company would perform quantitative goodwill impairment test required would use discounted cash flow approach estimate fair value reporting unit fair value reporting unit less carrying value goodwill impairment amount recorded difference marketingrelated intangible assets company performed qualitative assessment fourth quarter 2020 determined likely fair value assets less carrying value determined likely fair value assets less carrying amount qualitative assessment performed company would perform quantitative impairment test required would use discounted cash flow model relieffromroyalty method order determine fair value fair value less carrying value impairment amount recorded difference years ended december 31 2020 2019 2018 additions impairments marketingrelated intangible assets december 31 2020 2019 marketingrelated intangible asset balance 3100 million consisted company’s trademark trade name marketing franchise year ended december 31 2020 goodwill increased 90 million 70 million due immaterial acquisition 20 million due foreign currency translation adjustments year ended december 31 2020 impairment goodwill years ended december 31 2019 2018 additions impairments goodwill december 31 2020 2019 goodwill balance 1005 million 915 million respectively cash paid immaterial acquisition 2020 reflected cash flows investing activities within company’s consolidated statements cash flows restricted cash following table provides reconciliation cash equivalents restricted cash reported within company’s consolidated balance sheets sum total amounts shown company’s consolidated statements cash flows majority company’s consolidated restricted cash held certain foreign entities consists cash deposits required due business operating requirements jurisdictions income taxes income tax expense includes income taxes payable current year change deferred income tax assets liabilities future tax consequences events recognized company’s financial statements income tax returns valuation allowance recognized reduce carrying value deferred income tax assets believed likely component deferred income tax assets realized company accounts uncertainty income taxes accordance fasb authoritative guidance clarifies accounting reporting uncertainties income taxes recognized enterprise’s financial statements guidance prescribes comprehensive model financial statement recognition measurement presentation disclosure uncertain tax positions taken expected taken income tax returns december 22 2017 us enacted tax cuts jobs act 2017 contained several key tax provisions affected company including limited onetime mandatory transition tax accumulated foreign earnings changes sourcing calculation foreign income reduction corporate income tax rate 21 effective january 1 2018 company required recognize effect tax law changes period enactment determining transition tax remeasuring us deferred tax assets liabilities well reassessing net realizability deferred tax assets liabilities december 2017 sec staff issued staff accounting bulletin 118 income tax accounting implications tax cuts jobs act allowed company record provisional amounts measurement period extend beyond one year enactment date see note 12 income taxes description income taxes impact us tax reform company made accounting policy election account global intangible lowtaxed income period cost incurred royalty overrides certain members may earn commissions called royalty overrides include production bonuses based retail sales volume royalty overrides based retail sales volume certain members sponsored directly indirectly member royalty overrides recorded products delivered revenue recognized royalty overrides compensation members services rendered including development retention improved productivity sales organizations royalty overrides classified operating expense nonus royalty override checks aged variety reasons beyond certainty paid taken back income management estimated period certainty three years worldwide distributor compensation us distributor compensation including royalty overrides capped company meet annual requirement described consent order discussed detail note 7 contingencies periodic basis company evaluates requirement achieved yearend determine cap distributor compensation required determines appropriate amount distributor compensation expense may vary reporting period company determined cap distributor compensation applicable year ended december 31 2020 annual requirement met comprehensive income comprehensive income consists net income foreign currency translation adjustments unrealized gains losses derivatives see note 8 shareholders’ deficit description detail components accumulated comprehensive loss operating leases company leases physical properties operating leases company recognizes rent expense straightline basis operating leases certain lease agreements generally include rent holidays tenant improvement allowances prior january 1 2019 company recognized rent holiday periods straightline basis lease term beginning company right leased space company also recorded tenant improvement allowances rent holidays deferred rent liabilities amortized deferred rent terms lease rent expense prior january 1 2019 company recognize operating leases balance sheet beginning january 1 2019 company recognizes right use asset lease liability within consolidated balance sheets operating leases terms greater twelve months initial measurement lease liability measured present value lease payments yet paid discounted generally using company’s incremental borrowing rate commencement date leases initial term twelve months less recorded company’s consolidated balance sheets company separate nonlease components lease components research development company’s research development performed inhouse staff outside consultants periods presented research development costs expensed incurred material operating income encourage local investment operations governments various china provinces conduct grant programs company applied received several grants china government grants recorded income legal right grant exists reasonable assurance grant proceeds received substantive conditions grants provided met generally substantive conditions company maintaining operations paying certain taxes relevant province obtaining government approval completing annual application process company believes continuing obligation respect funds general requirement used business china company recognized government grant income related regional headquarters distribution centers within china approximately 145 million 315 million 298 million years ended december 31 2020 2019 2018 respectively operating income within consolidated statements income company intends continue applying government grants china programs available however assurance company receive grants future periods year ended december 31 2019 company also recognized 60 million operating income within consolidated statement income related finalization insurance recoveries connection flooding one warehouses mexico september 2017 damaged certain company’s inventory stored within warehouse see note 7 contingencies consolidated financial statements included company’s annual report form 10k year ended december 31 2018 discussion expense income net year ended december 31 2020 company recognize expense income net year ended december 31 2019 company recognized gain 157 million revaluation nontransferable contractual contingent value right cvr provided share tendered october 2017 modified dutch auction tender offer see note 8 shareholders’ deficit expense income net within consolidated statements income year ended december 31 2018 company recognized loss 88 million revaluation cvr 131 million loss extinguishment 4750 million aggregate principal amount 2019 convertible notes see note 5 longterm debt 354 million loss extinguishment company’s 2017 senior secured credit facility see note 5 longterm debt expense income net within consolidated statements income noncash expenses included noncash adjustments net income company’s cash flows operating activities within consolidated statements cash flows professional fees company expenses professional fees including legal fees incurred professional fees included selling general administrative expenses within company’s consolidated statements income advertising costs including company sponsorships expensed incurred amounted approximately 390 million 414 million 411 million years ended december 31 2020 2019 2018 respectively expenses included selling general administrative expenses within company’s consolidated statements income earnings per share basic earnings per share represents net income divided weightedaverage number common shares outstanding period diluted earnings per share represents net income divided weightedaverage number common shares outstanding inclusive effect dilutive securities outstanding stock appreciation rights sars stock units convertible notes following common share amounts used compute basic diluted earnings per share period aggregate 08 million 08 million 14 million equity grants consisting sars stock units outstanding years ended december 31 2020 2019 2018 respectively included computation diluted earnings per share effect would antidilutive performance condition award satisfied since company required settle principal amount 2019 convertible notes cash settle conversion feature amount conversion price common shares conversion spread company used treasury stock method calculating potential dilutive effect conversion spread diluted earnings per share applicable conversion spread would dilutive impact diluted earnings per share average market price company’s common shares given period exceeded conversion price 2019 convertible notes dilutive impacts years ended december 31 2019 2018 disclosed table initial conversion rate conversion price 2019 convertible notes described note 5 longterm debt 2024 convertible notes company intent ability settle principal amount cash intends settle conversion feature amount conversion price conversion spread common shares company uses treasury stock method calculating potential dilutive effect conversion spread diluted earnings per share applicable conversion spread dilutive impact diluted earnings per share average market price company’s common shares given period exceeds conversion price 2024 convertible notes years ended december 31 2020 2019 2018 2024 convertible notes excluded computation diluted earnings per share effect would antidilutive since conversion price 2024 convertible notes exceeded average market price company’s common shares years ended december 31 2020 2019 2018 initial conversion rate conversion price 2024 convertible notes described note 5 longterm debt capped call transactions executed connection issuance 2019 convertible notes capped call transactions excluded calculation diluted earnings per share impact always antidilutive additionally prepaid forward share repurchase transactions executed connection issuance 2019 convertible notes forward transactions treated retired shares basic diluted eps purposes case periods transactions effect august 15 2019 remaining capped call transactions expired unexercised shares retired forward transactions see note 8 shareholders’ deficit additional discussion regarding capped call transactions forward transactions see note 8 shareholders’ deficit discussion common shares repurchased company’s indirect whollyowned subsidiary treated us gaap revenue recognition company’s net sales consist product sales general company’s performance obligation transfer products members company generally recognizes revenue product delivered members china independent service providers thirdparty importers utilized certain countries sales historically material company recognizes revenue based company’s estimate service provider thirdparty importer sells products company deemed principal party product sales due additional selling operating requirements relating pricing products conducting business physical locations selling marketing activities required service providers thirdparty importers company’s members excluding china independent service providers may receive distributor allowances comprised discounts rebates wholesale commission payments company distributor allowances resulting company’s sales products members recorded net sales distributor allowances represent discounts suggested retail price company compensates sales leader members royalty overrides services rendered relating development retention management sales organizations royalty overrides payable based achieved sales volume royalty overrides classified operating expense reflecting services provided company compensates china independent service providers thirdparty importers utilized certain countries providing marketing selling customer support services company principal party product sales described service fees payable china independent service providers compensation received thirdparty importers services provide represents discount provided recorded selling general administrative expenses within company’s consolidated statements income company recognizes revenue delivers products united states members distributor allowances inclusive discounts wholesale commissions recorded reduction net sales royalty overrides classified operating expense shipping handling services relating product sales recognized fulfillment activities company’s performance obligation transfer products therefore recorded within net sales part product sales considered separate revenues shipping handling costs paid company included cost sales company presents sales taxes collected customers net basis company generally receives net sales price cash credit card payments point sale company records advance sales deposits payment received revenue yet recognized majority company’s markets advance sales deposits generally recorded income product delivered members additionally advance sales deposits also include deferred revenues due timing revenue recognition products sold china independent service providers estimated deferral period advance sales deposits generally within one week year ended december 31 2020 company recognized substantially revenues included within advance sales deposits december 31 2019 remaining balance material december 31 2020 advance sales deposits included current liabilities company’s consolidated balance sheets see note 14 detail certain balance sheet accounts information general member returns product company timely basis may obtain replacement product company returned products addition general company maintains buyback program pursuant repurchase products sold member decided leave business allowances product returns primarily connection company’s buyback program provided time sale recorded accrual based upon historical return rates country relevant return pattern reflects anticipated returns received period 12 months following original sale allowances product returns 37 million 47 million december 31 2020 2019 respectively company’s products grouped five principal categories weight management targeted nutrition energy sports fitness outer nutrition literature promotional items however effect economic factors nature amount timing uncertainty revenue recognition cash flows similar among five product categories company defines operating segments six geographic regions effect economic factors nature amount timing uncertainty revenue recognition cash flows similar among geographic regions within company’s primary reporting segment see note 10 segment information company’s reportable segments company’s presentation disaggregated revenue reportable segment noncash investing financing activities years ended december 31 2020 2019 2018 company recorded 180 million 141 million 102 million respectively noncash capital expenditures year ended december 31 2020 company record noncash borrowings used finance software maintenance year ended december 31 2019 company recorded 59 million noncash borrowings used finance software maintenance year ended december 31 2018 company record noncash borrowings used finance software maintenance additionally see note 8 shareholders’ deficit information company’s noncash financing activities related cvr well share repurchases payment made subsequent year end sharebased payments company accounts sharebased compensation accordance fasb authoritative guidance requires measurement sharebased compensation expense sharebased payment awards made employees company measures sharebased compensation cost grant date based fair value award company recognizes sharebased compensation expense service condition awards straightline basis employee’s requisite service period company recognizes sharebased compensation expense performance condition awards vesting term using graded vesting method use estimates preparation financial statements conformity us gaap requires management make estimates assumptions estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates company evaluates estimates assumptions ongoing basis using historical experience factors including current economic environment company believes reasonable circumstances company adjusts estimates assumptions facts circumstances dictate illiquid credit markets volatile equity foreign currency combined increase uncertainty inherent estimates assumptions future events effects cannot determined precision actual results could differ estimates changes estimates resulting continuing changes economic environment reflected financial statements future periods covid19 pandemic march 2020 world health organization characterized outbreak coronavirus disease 2019 covid19 pandemic response spread covid19 certain government agencies company mandated various measures recommended others protect public company’s employees disrupted certain areas company’s business including limited distribution selling activities despite pandemic negative impact certain company’s markets company’s consolidated net sales higher year ended december 31 2020 compared period 2019 cash equivalents december 31 2020 increased compared december 31 2019 ultimate extent magnitude impact covid19 known could material adverse impact company’s business future financial condition results operations management continues actively monitor impact covid19 generally company’s consolidated financial statements presented herein reflect latest estimates assumptions made management affect reported amounts assets liabilities related disclosures date consolidated financial statements reported amounts revenue expenses reporting periods presented company believes used reasonable estimates assumptions assess fair values goodwill marketingrelated intangible assets longlived assets assessment annual effective tax rate valuation deferred income taxes allowance doubtful accounts reviewing historical forwardlooking information company determined impairments required relating goodwill marketingrelated intangible assets longlived assets year ended december 31 2020 3 inventories following major classes inventory 4 leases generally company leases certain office space warehouses distribution centers manufacturing centers equipment contract contains lease contract conveys right control use identified property plant equipment identified asset period time exchange consideration company also rents subleases certain real estate third parties sublease income material years ended december 31 2020 2019 2018 general company’s leases include one options renew renewal terms generally vary one ten years exercise lease renewal options generally company’s sole discretion certain leases also include options purchase leased property depreciable life assets leasehold improvements limited expected lease term unless transfer title purchase option reasonably certain exercise company’s lease agreements contain material residual value guarantees material restrictive covenants leases initial term twelve months less recorded company’s consolidated balance sheets company separate nonlease components lease components company’s lease assets liabilities recognized within consolidated balance sheets follows 1 finance lease assets recorded net accumulated amortization 17 million 13 million december 31 2020 2019 respectively lease cost recognized straightline basis lease term components lease cost follows 1 includes shortterm leases variable lease costs 110 million 12 million respectively year ended december 31 2020 112 million 22 million respectively year ended december 31 2019 variable lease costs include items real estate taxes common area maintenance changes based index rate included calculation rightofuse assets recognized incurred 2 amount includes 602 million 623 million recorded selling general administrative expenses within company’s consolidated statements income years ended december 31 2020 2019 respectively 36 million 34 million capitalized part cost another asset includes inventories years ended december 31 2020 2019 respectively year ended december 31 2018 company recognized rental expense 611 million selling general administrative expenses within company’s consolidated statement income pursuant fasb asc topic 840 leases december 31 2020 annual scheduled lease payments follows 1 operating lease payments exclude 237 million legally binding minimum lease payments leases signed yet commenced general majority company’s material leases renewal options included calculation rightofuse assets lease liabilities company believe reasonably certain renewal options exercised periodically company assesses leases determine whether reasonably certain renewal options exercised majority company’s leases real estate general individual lease contracts provide information rate implicit lease company able determine rate implicit leases instead generally uses incremental borrowing rate determine present value lease liabilities determining incremental borrowing rate company reviewed terms leases senior secured credit facility swap rates factors weightedaverage remaining lease term weightedaverage discount rate used calculate present value lease liabilities follows supplemental cash flow information related leases follows 5 longterm debt longterm debt consists following senior secured credit facility february 15 2017 company entered 14500 million senior secured credit facility 2017 credit facility consisting 13000 million term loan b 2017 term loan b 1500 million revolving credit facility 2017 revolving credit facility syndicate financial institutions lenders 2017 revolving credit facility mature february 15 2022 2017 term loan b mature february 15 2023 2017 credit facility amended effective march 16 2018 make certain technical amendments connection offering 2024 convertible notes defined company terminated 2017 credit facility august 16 2018 11781 million outstanding repaid full prior termination 2017 term loan b recently bore interest either eurocurrency rate plus margin 550 base rate plus margin 450 2017 revolving credit facility recently bore interest either eurocurrency rate plus margin either 450 475 base rate plus margin either 350 375 based company’s consolidated leverage ratio eurocurrency rate based adjusted libor subject floor 075 base rate represented highest federal funds rate plus 050 onemonth adjusted libor plus 100 prime rate set credit suisse subject floor 175 2017 term loan b issued lenders 2 discount 260 million company incurred approximately 226 million debt issuance costs connection 2017 credit facility debt issuance costs discount recorded company’s consolidated balance sheet amortized life 2017 credit facility using effectiveinterest method company wrote remaining unamortized debt issuance costs discount related 2017 credit facility upon termination included loss extinguishment described august 16 2018 company entered 125 billion senior secured credit facility 2018 credit facility consisting 2500 million term loan 2018 term loan 7500 million term loan b 2018 term loan b 2500 million revolving credit facility 2018 revolving credit facility syndicate financial institutions lenders prior amendment described 2018 term loan 2018 revolving credit facility mature august 16 2023 2018 term loan b matures upon earlier august 18 2025 ii december 15 2023 outstanding principal 2024 convertible notes defined exceeds 3500 million company exceeds certain leverage ratios date obligations 2018 credit facility unconditionally guaranteed certain direct indirect whollyowned subsidiaries herbalife nutrition ltd secured equity interests certain herbalife nutrition ltd’s subsidiaries substantially assets domestic loan parties also august 16 2018 company issued 400 million aggregate principal amount senior unsecured notes 2026 notes described used proceeds 2018 credit facility 2026 notes repay full 11781 million outstanding 2017 credit facility accounting purposes pursuant asc 470 transactions accounted extinguishment 2017 credit facility company recognized loss extinguishment 354 million result recorded expense income net within company’s consolidated statement income year ended december 31 2018 term loan b issued lenders 025 discount 19 million company incurred approximately 117 million debt issuance costs connection 2018 credit facility discount debt issuance costs recorded company’s consolidated balance sheet amortized life 2018 credit facility using effectiveinterest method december 12 2019 company amended 2018 credit facility among things reduced interest rate borrowings 2018 term loan b either eurocurrency rate plus margin 325 base rate plus margin 225 either eurocurrency rate plus margin 275 base rate plus margin 175 company incurred approximately 12 million debt issuance costs connection amendment accounting purposes pursuant asc 470 transaction accounted modification 2018 credit facility debt issuance costs recognized interest expense within company’s consolidated statement income year ended december 31 2019 march 19 2020 company amended 2018 credit facility among things extended maturity 2018 term loan 2018 revolving credit facility earlier march 19 2025 ii september 15 2023 outstanding principal 2024 convertible notes defined exceeds 3500 million company exceeds certain leverage ratios date increased borrowings 2018 term loan 2344 million total 2648 million increased total available borrowing capacity 2018 revolving credit facility 2500 million 2825 million reduced interest rate borrowings 2018 term loan 2018 revolving credit facility either eurocurrency rate plus margin 300 base rate plus margin 200 either eurocurrency rate plus margin 250 base rate plus margin 150 company incurred approximately 16 million debt issuance costs connection amendment accounting purposes pursuant asc 470 transaction accounted modification 2018 credit facility 16 million debt issuance costs approximately 11 million recorded company’s consolidated balance sheet amortized life 2018 credit facility using effectiveinterest method approximately 05 million recognized interest expense within company’s consolidated statement income year ended december 31 2020 2018 credit facility borrowings 2018 term loan 2018 revolving credit facility bear interest either eurocurrency rate plus margin 250 base rate plus margin 150 borrowings 2018 term loan b bear interest either eurocurrency rate plus margin 275 base rate plus margin 175 eurocurrency rate based adjusted libor subject floor 000 base rate represents highest federal funds rate plus 050 onemonth adjusted libor plus 100 prime rate quoted wall street journal subject floor 100 company required pay commitment fee 2018 revolving credit facility 035 per annum undrawn portion 2018 revolving credit facility interest due least quarterly amounts outstanding 2018 credit facility 2018 credit facility requires company comply leverage ratio 2018 credit facility also contains affirmative negative covenants customary financings type including among things limitations prohibitions repurchasing common shares declaring paying dividends distributions redeeming repurchasing certain indebtedness loans investments additional indebtedness liens mergers asset sales transactions affiliates addition 2018 credit facility contains customary events default december 31 2020 2019 company compliance debt covenants 2018 credit facility 2018 term loan 2018 term loan b payable consecutive quarterly installments began december 31 2018 addition beginning 2020 company may required make mandatory prepayments towards 2018 term loan b based company’s consolidated leverage ratio annual excess cash flows defined terms 2018 credit facility company also permitted make voluntary prepayments amounts outstanding 2018 term loan may voluntarily prepaid without premium penalty subject customary breakage fees connection prepayment eurocurrency loan amended 2018 credit facility amounts outstanding 2018 term loan b may voluntarily prepaid without premium penalty subject customary breakage fees connection prepayment eurocurrency loan prepayments applied remaining quarterly installments owed 2018 term loan 2018 term loan b order maturity remaining principal due upon maturity unless directed otherwise company based 2020 consolidated leverage ratio excess cash flow calculation defined terms 2018 credit facility company required make mandatory prepayment 2021 toward 2018 term loan b december 31 2020 2019 weightedaverage interest rate borrowings 2018 credit facility 339 552 respectively year ended december 31 2020 company borrowed aggregate amount 304 million 2018 credit facility repaid total amount 207 million amounts outstanding 2018 credit facility year ended december 31 2019 company repaid total amount 200 million amounts outstanding 2018 credit facility year ended december 31 2018 company borrowed aggregate amount 10000 million 2018 credit facility repaid total amount 12319 million including 50 million amounts outstanding 2018 credit facility 12269 million repay full amounts outstanding 2017 credit facility december 31 2020 2019 us dollar amount outstanding 2018 credit facility 9847 million 9750 million respectively 9847 million outstanding 2018 credit facility december 31 2020 2516 million outstanding 2018 term loan 7331 million outstanding 2018 term loan b 9750 million outstanding 2018 credit facility december 31 2019 2344 million outstanding 2018 term loan 7406 million outstanding 2018 term loan b borrowings outstanding 2018 revolving credit facility december 31 2020 2019 outstanding foreign currency borrowings 2018 credit facility december 31 2020 2019 year ended december 31 2020 company recognized 372 million interest expense relating 2018 credit facility included 03 million relating noncash interest expense relating debt discount 18 million relating amortization debt issuance costs year ended december 31 2019 company recognized 589 million interest expense relating 2018 credit facility included 02 million relating noncash interest expense relating debt discount 17 million relating amortization debt issuance costs year ended december 31 2018 company recognized 836 million interest expense relating 2018 credit facility 2017 credit facility included 29 million relating noncash interest expense relating debt discount 32 million relating amortization debt issuance costs fair value outstanding borrowings 2018 term loan determined utilizing overthecounter market quotes similar instruments considered level 2 inputs described note 13 fair value measurements december 31 2020 2019 carrying value 2018 term loan 2505 million 2332 million respectively fair value approximately 2519 million 2357 million respectively fair value outstanding borrowings 2018 term loan b determined utilizing overthecounter market quotes considered level 2 inputs described note 13 fair value measurements december 31 2020 2019 carrying amount 2018 term loan b 7260 million 7321 million respectively fair value approximately 7340 million 7448 million respectively convertible senior notes due 2019 february 2014 company initially issued 1 billion aggregate principal amount convertible senior notes 2019 convertible notes private offering qualified institutional buyers pursuant rule 144a securities act 1933 amended company granted option initial purchasers purchase additional 150 million aggregate principal amount 2019 convertible notes subsequently exercised full february 2014 resulting total issuance 115 billion aggregate principal amount 2019 convertible notes 2019 convertible notes senior unsecured obligations ranked effectively subordinate company’s existing future secured indebtedness including amounts outstanding 2018 credit facility extent value assets securing indebtedness 2019 convertible notes paid interest rate 200 per annum payable semiannually arrears february 15 august 15 year beginning august 15 2014 unless earlier repurchased converted 2019 convertible notes matured august 15 2019 company could redeem 2019 convertible notes prior stated maturity date upon conversion 2019 convertible notes settled cash applicable company’s common shares based applicable conversion rate time 2019 convertible notes initial conversion rate 231816 common shares per 1000 principal amount 2019 convertible notes initial conversion price approximately 4314 per common share company incurred approximately 266 million issuance costs first quarter 2014 relating issuance 2019 convertible notes 266 million issuance costs incurred 215 million 51 million recorded debt issuance costs additional paidin capital respectively proportion allocation proceeds 2019 convertible notes 215 million debt issuance costs recorded company’s consolidated balance sheet amortized contractual term 2019 convertible notes using effectiveinterest method february 2014 115 billion aggregate principal amount 2019 convertible notes initially allocated longterm debt liability component additional paidin capital equity component within company’s consolidated balance sheet 9309 million 2191 million respectively liability component measured using nonconvertible debt interest rate carrying amount equity component representing conversion option determined deducting fair value liability component face value 2019 convertible notes whole since company required settle 2019 convertible notes face value prior maturity liability component accreted face value resulting additional noncash interest expense recognized within company’s consolidated statements income 2019 convertible notes remained outstanding effectiveinterest rate 2019 convertible notes approximately 62 per annum equity component remeasured long continued meet conditions equity classification march 2018 company issued 550 million aggregate principal amount new convertible senior notes due 2024 convertible notes described subsequently used proceeds along cash hand repurchase 4750 million existing 2019 convertible notes limited number holders privately negotiated transactions aggregate purchase price 5835 million included 10 million accrued interest accounting purposes pursuant asc 470 transactions accounted extinguishment 2019 convertible notes issuance new 2024 convertible notes company allocated purchase price fair value liability component equity component 2019 convertible notes 4594 million 1230 million respectively result company recognized 4464 million reduction longterm debt representing carrying value liability component 1230 million reduction additional paidin capital representing equity component repurchased 2019 convertible notes 131 million difference fair value carrying value liability component repurchased 2019 convertible notes recognized loss extinguishment debt result transaction recorded expense income net within company’s consolidated statement income year ended december 31 2018 accounting impact 2024 convertible notes described detail august 15 2019 convertible notes matured company repaid 6750 million outstanding principal cash well 67 million accrued interest years ended december 31 2019 2018 company recognized 270 million 485 million respectively interest expense relating 2019 convertible notes included 170 million 298 million respectively relating noncash interest expense relating debt discount 17 million 29 million respectively relating amortization debt issuance costs conjunction issuance 2019 convertible notes february 2014 company paid approximately 6858 million enter prepaid forward share repurchase transactions forward transactions certain financial institutions paid approximately 1238 million enter capped call transactions respect common shares capped call transactions certain financial institutions subsequently conjunction repurchase portion 2019 convertible notes march 2018 company entered agreements option counterparties capped call transactions terminate portion existing transactions see note 8 shareholders’ deficit additional discussion forward transactions capped call transactions entered conjunction issuance 2019 convertible notes convertible senior notes due 2024 march 2018 company issued 550 million aggregate principal amount convertible senior notes 2024 convertible notes private offering qualified institutional buyers pursuant rule 144a securities act 1933 amended 2024 convertible notes senior unsecured obligations rank effectively subordinate company’s existing future secured indebtedness including amounts outstanding 2018 credit facility extent value assets securing indebtedness 2024 convertible notes pay interest rate 2625 per annum payable semiannually arrears march 15 september 15 year beginning september 15 2018 unless redeemed repurchased converted accordance terms prior date 2024 convertible notes mature march 15 2024 holders 2024 convertible notes may convert notes option following circumstances calendar quarter commencing calendar quarter ending june 30 2018 last reported sale price company’s common shares least 20 trading days whether consecutive period 30 consecutive trading days ending including last trading day immediately preceding calendar quarter exceeds 130 conversion price 2024 convertible notes applicable trading day ii five businessday period immediately five consecutive trading day period measurement period trading price per 1000 principal amount 2024 convertible notes trading day measurement period less 98 product last reported sale price company’s common shares conversion rate 2024 convertible notes day iii company calls 2024 convertible notes redemption iv upon occurrence specified corporate events december 15 2023 holders may convert 2024 convertible notes time regardless foregoing circumstances upon conversion 2024 convertible notes settled company’s election cash company’s common shares combination thereof based applicable conversion rate time 2024 convertible notes initial conversion rate 160056 common shares per 1000 principal amount 2024 convertible notes initial conversion price approximately 6248 per common share conversion rate subject adjustment upon occurrence certain events 160352 common shares per 1000 principal amount 2024 convertible notes conversion price approximately 6236 per common share december 31 2020 company incurred approximately 129 million issuance costs first quarter 2018 relating issuance 2024 convertible notes 129 million issuance costs incurred 96 million 33 million recorded debt issuance costs additional paidin capital respectively proportion allocation proceeds 2024 convertible notes 96 million debt issuance costs recorded additional debt discount company’s consolidated balance sheet amortized contractual term 2024 convertible notes using effectiveinterest method march 2018 550 million aggregate principal amount 2024 convertible notes initially allocated longterm debt liability component additional paidincapital equity component within company’s consolidated balance sheet 4101 million 1399 million respectively liability component measured using nonconvertible debt interest rate carrying amount equity component representing conversion option determined deducting fair value liability component face value 2024 convertible notes whole since company must still settle 2024 convertible notes face value prior maturity liability component accreted face value resulting additional noncash interest expense recognized within company’s consolidated statements income 2024 convertible notes remain outstanding effectiveinterest rate 2024 convertible notes approximately 84 per annum equity component remeasured long continues meet conditions equity classification december 31 2020 outstanding principal 2024 convertible notes 5500 million unamortized debt discount debt issuance costs 894 million carrying amount liability component 4606 million recorded longterm debt within company’s consolidated balance sheet december 31 2019 outstanding principal 2024 convertible notes 5500 million unamortized debt discount debt issuance costs 1126 million carrying amount liability component 4374 million recorded longterm debt within company’s consolidated balance sheet fair value liability component relating 2024 convertible notes approximately 5418 million 5086 million december 31 2020 2019 respectively years ended december 31 2020 2019 2018 company recognized 377 million 358 million 266 million respectively interest expense relating 2024 convertible notes included 218 million 200 million 145 million respectively relating noncash interest expense relating debt discount 15 million 14 million 10 million respectively relating amortization debt issuance costs senior notes due 2025 may 2020 company issued 600 million aggregate principal amount senior notes 2025 notes private offering united states qualified institutional buyers pursuant rule 144a securities act 1933 amended outside united states pursuant regulation securities act 1933 amended 2025 notes senior unsecured obligations rank effectively subordinate company’s existing future secured indebtedness including amounts outstanding 2018 credit facility extent value assets securing indebtedness 2025 notes pay interest rate 7875 per annum payable semiannually arrears march 1 september 1 year beginning march 1 2021 2025 notes mature september 1 2025 time prior september 1 2022 company may redeem part 2025 notes redemption price equal 100 principal amount plus “make whole” premium redemption date accrued unpaid interest redemption date addition time prior september 1 2022 company may redeem 40 aggregate principal amount 2025 notes proceeds one equity offerings redemption price equal 107875 plus accrued unpaid interest furthermore time september 1 2022 company may redeem part 2025 notes following redemption prices expressed percentages principal amount plus accrued unpaid interest thereon redemption date redeemed twelvemonth period beginning september 1 years indicated 2025 notes contain customary negative covenants including among things limitations prohibitions restricted payments incurrence additional indebtedness liens mergers asset sales transactions affiliates addition 2025 notes contain customary events default company incurred approximately 79 million issuance costs second quarter 2020 relating issuance 2025 notes 79 million debt issuance costs recorded debt discount company’s consolidated balance sheet amortized contractual term 2025 notes using effectiveinterest method december 31 2020 outstanding principal 2025 notes 6000 million unamortized debt issuance costs 71 million carrying amount 5929 million recorded longterm debt within company’s consolidated balance sheet fair value 2025 notes approximately 6563 million december 31 2020 determined utilizing overthecounter market quotes yield curves considered level 2 inputs defined note 13 fair value measurements year ended december 31 2020 company recognized 285 million interest expense relating 2025 notes included 07 million relating amortization debt issuance costs senior notes due 2026 august 2018 company issued 400 million aggregate principal amount senior notes 2026 notes private offering united states qualified institutional buyers pursuant rule 144a securities act 1933 amended outside united states pursuant regulation securities act 1933 amended 2026 notes senior unsecured obligations rank effectively subordinate company’s existing future secured indebtedness including amounts outstanding 2018 credit facility extent value assets securing indebtedness 2026 notes pay interest rate 7250 per annum payable semiannually arrears february 15 august 15 year beginning february 15 2019 2026 notes mature august 15 2026 time prior august 15 2021 company may redeem part 2026 notes redemption price equal 100 principal amount plus “make whole” premium redemption date accrued unpaid interest redemption date addition time prior august 15 2021 company may redeem 40 aggregate principal amount 2026 notes proceeds one equity offerings redemption price equal 107250 plus accrued unpaid interest furthermore time august 15 2021 company may redeem part 2026 notes following redemption prices expressed percentages principal amount plus accrued unpaid interest thereon redemption date redeemed twelvemonth period beginning august 15 years indicated 2026 notes contain customary negative covenants including among things limitations prohibitions restricted payments incurrence additional indebtedness liens mergers asset sales transactions affiliates addition 2026 notes contain customary events default company incurred approximately 54 million issuance costs third quarter 2018 relating issuance 2026 notes 54 million debt issuance costs recorded debt discount company’s consolidated balance sheet amortized contractual term 2026 notes using effectiveinterest method december 31 2020 outstanding principal 2026 notes 4000 million unamortized debt issuance costs 41 million carrying amount 3959 million recorded longterm debt within company’s consolidated balance sheet december 31 2019 outstanding principal 2026 notes 4000 million unamortized debt issuance costs 47 million carrying amount 3953 million recorded longterm debt within company’s consolidated balance sheet fair value 2026 notes approximately 4250 million 4241 million december 31 2020 2019 respectively determined utilizing overthecounter market quotes yield curves considered level 2 inputs defined note 13 fair value measurements years ended december 31 2020 2019 2018 company recognized 296 million 295 million 111 million respectively interest expense relating 2026 notes included 06 million 05 million 02 million respectively relating amortization debt issuance costs valuation 2019 convertible notes 2024 convertible notes level 2 level 3 inputs order determine initial value 2019 convertible notes 2024 convertible notes company determined fair value liability component 2019 convertible notes 2024 convertible notes using two valuation methods company reviewed market data available publicly traded senior unsecured nonconvertible corporate bonds issued companies similar credit ratings assumptions used estimate represent market participants would use pricing liability component including market yields credit standing develop straight debt yield estimate company also used lattice model included inputs stock price convertible note trading price volatility dividend yield estimate straight debt yield company combined results two valuation methods determine fair value liability component 2019 convertible notes 2024 convertible notes inputs primarily considered level 2 level 3 inputs company used similar valuation approaches determine subsequent fair value liability component disclosure purposes includes using lattice model 1 reviewing market data relating 2025 notes 2026 notes comparable yield curves determine straight debt yield estimate 2 reviewing market data relating publicly traded senior unsecured nonconvertible corporate bonds issued companies similar credit ratings order determine straight debt yield estimate total debt company’s total interest expense 1330 million 1530 million 1810 million years ended december 31 2020 2019 2018 respectively recognized within consolidated statements income december 31 2020 annual scheduled principal payments debt follows certain vendors government agencies may require letters credit similar guaranteeing arrangements issued executed december 31 2020 company 419 million issued undrawn letters credit similar arrangements included mexico value added tax vat related letter credit described note 7 contingencies 6 employee compensation plans united states company maintains profit sharing plan pursuant sections 401a k internal revenue code 1986 amended code plan available substantially employees meet length service requirements company’s contribution expense relating profit sharing plan 66 million 52 million 57 million years ended december 31 2020 2019 2018 respectively company employees international countries covered various deferred compensation plans administered based upon legal requirements countries established company’s compensation expenses relating plans 88 million 76 million 66 million years ended december 31 2020 2019 2018 respectively company nonqualified deferred compensation plans select groups management herbalife management deferred compensation plan herbalife senior executive deferred compensation plan matching contribution 35 participant’s annual base salary excess qualified plan annual compensation limit amount deferrals reduce 401keligible pay irs limit participant either nonqualified deferred compensation plans discussed times fully vested nonforfeitable interest year’s contribution including interest credited thereto company matching contributions applicable connection participant’s election defer annual deferral amount participant may also elect receive shortterm payout equal annual deferral amount plus interest amount payable five years first day year annual deferral amount actually deferred total two nonqualified deferred compensation plans excluding participant contributions expense 95 million 94 million years ended december 31 2020 2019 respectively benefit 27 million year ended december 31 2018 total longterm deferred compensation liability two deferred compensation plans 723 million 624 million december 31 2020 2019 respectively included noncurrent liabilities within company’s consolidated balance sheets deferred compensation plans unfunded benefits paid general assets company except company contributed “rabbi trust” whose assets used pay benefits company remains solvent reached company’s creditors company becomes insolvent value assets “rabbi trust” 438 million 389 million december 31 2020 2019 respectively included assets within company’s consolidated balance sheets 7 contingencies company time engaged routine litigation company regularly reviews pending litigation matters involved establishes reserves deemed appropriate management litigation matters probable loss estimate made matters described note may take several years resolve company believes meritorious defenses cannot sure ultimate resolution although company may reserve amounts certain matters company believes represent likely outcome resolution related disputes company incorrect assessment company may record additional expenses becomes probable increased potential liability warranted tax matters mexican tax administration service commenced audits company’s mexican subsidiaries period january september 2007 may 10 2013 company received assessment related period assessment subject interest inflationary adjustments july 11 2013 company filed administrative appeal disputing assessment september 22 2014 mexican tax administration service denied company’s administrative appeal company commenced litigation tax court mexico november 2014 dispute assertions made mexican tax administration service case january 16 2018 tax court mexico issued verdict upholding assessment issued mexican tax administration service april 16 2018 company filed appeal verdict july 2019 circuit court issued written verdict upholding assessment judgment tax court mexico august 12 2019 company filed appeal supreme court mexico october 16 2019 supreme court mexico refused hear company’s appeal october 21 2019 company filed petition supreme court mexico asking reconsider previous decision april 29 2020 supreme court mexico declined company’s second petition adverse verdicts lower courts became final company pay assessed amount due course company previously recognized loss 190 million selling general administrative expenses within company’s consolidated statement income year ended december 31 2019 corresponding accrued liability within consolidated balance sheet december 31 2020 company issued undrawn letter credit bank guarantee payment tax assessment required letter credit continued remain effective december 31 2020 mexican tax administration service delayed processing vat refunds companies operating mexico company believes process mexico subsidiary receive vat refunds may delayed december 31 2020 company 242 million mexico vatrelated assets 183 million recognized assets 59 million recognized prepaid expenses current assets within consolidated balance sheet amount relates vat payments made various periods company believes amounts recoverable refund may applied certain future tax liabilities effective january 1 2019 tax reform law changed rules concerning possible use vat assets specifically providing vat balances generated december 31 2018 balances could offset taxes vat obligations currently due company recognized losses related vatrelated assets company believe loss probable company received tax assessments multiple years federal revenue office brazil related withholdingcontributions based payments company’s members aggregate combined amount assessments equivalent approximately 106 million translated december 31 2020 spot rate company currently litigating assessments tax administrative level company accrued loss majority assessments company believe loss probable company currently unable reasonably estimate amount loss may result unfavorable outcome additional assessments periods issued company examination several brazilian states related icms icmsst taxation examinations resulted assessments underpaid tax company appealed state são paulo audited company 2013 2014 tax years july 2016 state são paulo company received assessment aggregate amount approximately 310 million translated december 31 2020 spot rate relating various icms issues 2013 tax year august 2016 company filed firstlevel administrative appeal denied february 2017 company filed appeal march 9 2017 march 20 2018 court held hearing verdict issued june 2019 remanding case back firstlevel administrative court august 2017 state são paulo company received assessment aggregate amount approximately 115 million translated december 31 2020 spot rate relating various icms issues 2014 tax year september 2017 company filed firstlevel administrative appeal 2014 tax year firstlevel administrative appeal denied company filed appeal secondlevel administrative court december 2018 verdict issued april 2019 remanding case back firstlevel administrative court september 2018 state rio de janeiro company received assessment aggregate amount approximately 68 million translated december 31 2020 spot rate relating various icmsst issues 2016 2017 tax years november 8 2018 company filed firstlevel administrative appeal subsequently denied april 5 2019 company appealed tax assessment administrative council tax appeals secondlevel administrative appeal company also received icms tax assessments brazil fourth quarter 2015 company filed appeals state judicial courts three assessments company issued surety bonds aggregate amount 97 million translated december 31 2020 spot rate guarantee payment tax assessments required company pursues appeals addition company received several icms tax assessments aggregate amount 56 million translated december 31 2020 spot rate several brazilian states surety bonds issued litigation cases currently ongoing company also received inquiries brazilian tax authorities relating various tax matters company recognized loss relating cases assessments matters company believe loss probable company received various tax assessments multiple jurisdictions india multiple years indian vat service tax authorities amount equivalent approximately 154 million translated december 31 2020 spot rate assessments underpaid vat ability claim input service tax credits company litigating cases tax administrative level tax tribunal levels believes meritorious defenses company recognized loss believe loss probable addition company indian income tax transfer pricing audit fiscal year ended march 31 2017 income tax audit continuing company received transfer pricing assessment approximately 135 million translated december 31 2020 spot rate assessment subject interest penalties adjustments company believes meritorious defenses appropriately accrued amounts relating matter korea customs service audited importation activities herbalife korea period january 2011 may 2013 total assessment audit period 326 million translated december 31 2020 spot rate company paid assessment recognized payments assets within consolidated balance sheet december 31 2020 company lodged firstlevel administrative appeal denied october 21 2016 january 31 2017 company filed appeal national tax tribunal korea november 2018 company received unfavorable decision national tax tribunal korea february 2019 company submitted appeal seoul administrative court february 17 2021 seoul administrative court verbally announced verdict favor company awaiting formal written verdict court korea customs service audited importation activities herbalife korea period may 2013 december 2013 total assessment audit period 107 million translated december 31 2020 spot rate company paid assessment recognized payment assets within consolidated balance sheet december 31 2020 july 2019 company filed appeal national tax tribunal korea customs service audited importation activities herbalife korea period january 2014 december 2014 total assessment audit period 165 million translated december 31 2020 spot rate company paid assessment september 2020 recognized payment assets within consolidated balance sheet december 31 2020 december 2020 company filed appeal national tax tribunal korea company disagrees assertions made assessments well calculation methodology used assessments company recognized loss company believe loss probable course 2016 company received various questions greek social security agency december 29 2016 greek social security agency issued assessment respect social security contributions member earnings 2006 year social security issues statute limitations open 2007 later years greece despite assessment amount immaterial company could receive similar assessments covering years company continues litigate assessment company recognized loss believe loss probable company currently unable reasonably estimate amount loss may result unfavorable outcome additional assessments periods issued italian tax authorities audited company periods 2014 2015 company responded various points relating income tax nonincome tax matters raised tax authorities december 2019 company reached agreement italian tax authorities issues related 2014 audit paid immaterial amount december 2019 regard 2015 audit company reached agreement italian tax authorities issues paid immaterial amount first quarter 2020 audit closed march 2018 chinese customs service began audit company’s chinese importations initially covering periods 2015 2017 subsequently expanded audit company responded initial questions customs service audit ongoing company believes accrued appropriate amounts present time company unable reasonably estimate amount potential loss excess amount already accrued relating matters us federal trade commission consent order july 15 2016 company federal trade commission ftc entered proposed stipulation entry order permanent injunction monetary judgment consent order consent order lodged us district court central district california july 15 2016 became effective july 25 2016 effective date consent order resolved ftc’s multiyear investigation company pursuant consent order company neither admitted denied ftc’s allegations except court jurisdiction matter company made whollyowned subsidiary herbalife international america inc 200 million payment ftc additionally company implemented continues enhance certain existing procedures us among requirements consent order requires company categorize existing future members us either “preferred members” simply consumers wish purchase products household use “distributors” members wish resell products build sales organization company also agreed compensate distributors eligible us sales within downline organization include purchases preferred members purchases distributor personal consumption within allowable limits sales product distributor customers consent order also imposes restrictions distributor’s ability open nutrition clubs united states consent order subjects company certain audits independent compliance auditor period seven years imposes requirements company regarding compliance certification record creation maintenance prohibits company affiliates distributors making misrepresentations misleading claims regarding among things income lavish lifestyles ftc independent compliance auditor right inspect company records request additional compliance reports purposes conducting audits pursuant consent order september 2016 company ftc mutually selected affiliated monitors inc serve independent compliance auditor company continues monitor impact consent order company currently expect settlement longterm materially adverse impact business member base company’s business member base particularly united states may negatively impacted company unable comply consent order could result material adverse impact company’s results operations financial condition matters marketer foods dietary nutritional supplements products ingested consumers applied bodies company currently subjected various product liability claims effects claims date material company currently maintains product liability insurance annual deductible 125 million previously disclosed sec department justice doj conducted investigations company’s compliance foreign corrupt practices act fcpa china also previously disclosed company conducted review implemented remedial improvement measures based upon review including replacement certain employees enhancements company policies procedures china company cooperated sec doj reached separate resolutions august 28 2020 sec accepted offer settlement issued administrative order finding company violated books records internal controls provisions fcpa addition august 28 2020 company doj separately entered courtapproved deferred prosecution agreement dpa doj deferred criminal prosecution company period three years related conspiracy violate books records provisions fcpa among things company required undertake compliance selfreporting obligations three year terms agreements sec doj company remains compliance dpa threeyear term deferred charge company dismissed prejudice addition company paid sec doj aggregate penalties disgorgement prejudgment interest approximately 123 million september 2020 83 million 40 million recognized selling general administrative expenses within company’s consolidated statements income years ended december 31 2020 2019 respectively related matter failure comply agreements resulting government action could result material adverse impact company’s business financial condition operating results previously disclosed sec also requested company documents information relating company’s disclosures regarding marketing plan china september 27 2019 company sec entered settlement resolving matter pursuant administrative order settling matter company neither admitted denied sec’s allegations except sec’s jurisdiction company agreed cease desist committing causing violations future violations sections 17a2 17a3 securities act section 13a exchange act rules 12b20 13a1 13a13 thereunder pay 20 million civil penalty 20 million settlement amount previously recorded accrued liability within company’s consolidated balance sheet june 30 2019 paid october 2019 september 18 2017 company certain subsidiaries members named defendants purported class action lawsuit titled rodgers et al v herbalife ltd et al filed us district court southern district florida alleges violations florida’s deceptive unfair trade practices statute federal racketeer influenced corrupt organizations statutes unjust enrichment negligent misrepresentation august 23 2018 court issued order transferring action us district court central district california four putative class plaintiffs ordering remaining four plaintiffs arbitration thereby terminating company defendants florida action plaintiffs seek damages unspecified amount company believes lawsuit without merit vigorously defend claims lawsuit company currently unable reasonably estimate amount loss may result unfavorable outcome 8 shareholders’ deficit company 1201 million 1374 million 1428 million common shares outstanding december 31 2020 2019 2018 respectively december 2004 company authorized 75 million preference shares 0002 par value 75 million authorized preference shares remained unissued december 31 2020 preference shares may issued time one series voting powers full limited without voting powers designations preferences relative participating optional special rights qualifications limitations restrictions determined company’s board directors dividends company declared paid cash dividends since 2014 declaration future dividends subject discretion company’s board directors depend upon various factors including earnings financial condition herbalife nutrition ltd’s available distributable reserves cayman islands law restrictions imposed 2018 credit facility terms indebtedness may outstanding cash requirements future prospects factors deemed relevant board directors november 4 2020 company’s board directors declared pro rata distribution stock purchase warrants company’s shareholders one warrant every four common shares held warrant would entitled holder purchase herbalife nutrition common share exercise price 6750 per share company would option net share settle warrants exercised future november 10 2020 company’s board directors announced considering additional feedback shareholders company longer move forward intended distribution warrants share repurchases october 30 2018 company’s board directors authorized new fiveyear 15 billion share repurchase program expire october 30 2023 replaced company’s prior share repurchase authorization set expire february 21 2020 approximately 1133 million remaining authorized capacity replaced share repurchase program allows company includes indirect whollyowned subsidiary herbalife nutrition ltd repurchase company’s common shares times prices determined management market conditions warrant extent herbalife nutrition ltd’s distributable reserves available cayman islands law 2018 credit facility permits company repurchase common shares long default event default exists conditions specified consolidated leverage ratios met december 31 2020 remaining authorized capacity company’s 15 billion share repurchase program 6079 million conjunction issuance 2019 convertible notes february 2014 company paid approximately 6858 million enter forward transactions certain financial institutions forward counterparties pursuant company purchased approximately 199 million common shares average cost 3451 per share settlement around august 15 2019 maturity date 2019 convertible notes subject ability forward counterparty elect settle portion forward transactions early forward transactions generally expected facilitate privately negotiated derivative transactions forward counterparties holders 2019 convertible notes including swaps relating common shares holders 2019 convertible notes establish short positions relating common shares otherwise hedge investments 2019 convertible notes concurrently shortly pricing 2019 convertible notes approximate 199 million common shares effectively repurchased forward transactions treated retired shares basic diluted eps purposes years ended december 31 2019 2018 forward counterparties delivered approximately 60 million 139 million shares respectively company subsequently retired company december 31 2019 forward counterparties delivered approximate 199 million common shares effectively repurchased forward transactions shares remained legally outstanding result forward transactions company’s total shareholders’ equity within consolidated balance sheet reduced approximately 6858 million first quarter 2014 amounts 6539 million 319 million allocated retained earnings additional paidin capital respectively within total shareholders’ equity also upon executing forward transactions company recorded fair value 358 million noncash issuance costs assets corresponding amount additional paidin capital within consolidated balance sheet noncash issuance costs amortized interest expense contractual term forward transactions years ended december 31 2019 2018 company recognized 12 million 92 million respectively noncash interest expense relating amortization noncash issuance costs within consolidated statements income august 2020 company completed modified dutch auction tender offer subsequently paid cash repurchase retire total approximately 154 million common shares aggregate cost approximately 7500 million 4875 per share addition year ended december 31 2020 company repurchased approximately 30 million common shares openmarket purchases aggregate cost approximately 1421 million average cost 4740 per share subsequently retired shares year ended december 31 2019 company repurchase common shares openmarket purchases may 2018 company completed modified dutch auction tender offer subsequently paid cash repurchase retire total approximately 114 million common shares aggregate cost approximately 6000 million 5250 per share addition year ended december 31 2018 indirect whollyowned subsidiary company purchased 8400 herbalife nutrition ltd’s common shares openmarket purchases aggregate cost approximately 03 million average cost 3390 per share december 31 2020 2019 company held approximately 100 million treasury shares us gaap purposes treasury shares increased company’s total shareholders’ deficit reflected cost within company’s accompanying consolidated balance sheets although shares owned indirect whollyowned subsidiary company remain legally outstanding reflected treasury shares us gaap therefore reduce number common shares outstanding within company’s consolidated financial statements weightedaverage number common shares outstanding used calculating earnings per share common shares herbalife nutrition ltd held indirect whollyowned subsidiary however remain outstanding books records company’s transfer agent therefore still carry voting share rights related ownership company’s common shares may exercised long consistent applicable laws shares voted subsidiary manner maximum extent possible proportion votes cast respect matter properly submitted vote herbalife nutrition ltd’s shareholders connection company’s october 2017 modified dutch auction tender offer company incurred 16 million transaction costs also provided nontransferable contractual cvr share tendered allowing participants tender offer receive contingent cash payment event herbalife acquired goingprivate transaction defined cvr agreement within two years commencement tender offer initial fair value cvr 73 million recorded liability fourth quarter 2017 corresponding decrease shareholders’ equity determining initial fair value cvr company used lattice model included inputs underlying stock price strike price time expiration dividend yield subsequent changes fair value cvr liability using similar valuation approach initial fair value determination recognized within company’s consolidated balance sheets corresponding gains losses recognized expense income net within company’s consolidated statements income reporting period cvr expired august 2019 terminated due goingprivate transaction also incorporated valuation cvr goingprivate probability input considered level 3 input fair value hierarchy increase decrease input could significantly impacted fair value cvr reporting date cvr expired without value august 21 2019 twoyear anniversary august 21 2017 date company commenced related modified dutch auction tender offer year ended december 31 2019 company recognized 157 million gain expense income net within consolidated statement income due change fair value cvr driven expiration august 2019 year ended december 31 2018 company recognized 88 million loss expense income net within consolidated statement income due change fair value cvr primarily driven increase market price company’s common shares partially offset decrease probability goingprivate transaction result shortening term cvr expired pursuant terms number shares issued upon vesting exercise certain restricted stock units sars granted pursuant company’s sharebased compensation plans net statutory withholding requirements company pays behalf employees although shares withheld issued treated common share repurchases company’s consolidated financial statements reduce number shares would issued upon vesting shares count authorized capacity company’s share repurchase program described years ended december 31 2020 2019 2018 company withheld shares vested restricted stock units exercised sars relating sharebased compensation plans company reflects aggregate purchase price common shares repurchased increase shareholders’ deficit company generally allocated purchase price repurchased shares accumulated deficit common shares additional paidin capital exception treasury shares recorded separately company’s consolidated balance sheets years ended december 31 2020 2019 2018 company’s share repurchases inclusive transaction costs 8939 million zero 6007 million respectively company’s share repurchase programs include openmarket purchases tender offers described 296 million 167 million 1454 million respectively due shares withheld tax purposes related company’s sharebased compensation plans years ended december 31 2020 2019 2018 company’s total share repurchases including shares withheld tax purposes 9235 million 167 million 7461 million respectively recorded increase shareholders’ deficit within company’s consolidated balance sheets company recorded 7503 million total share repurchases within financing activities consolidated statement cash flows year ended december 31 2018 includes 42 million share repurchases reflected increase shareholders’ deficit within company’s consolidated balance sheet december 31 2017 subsequently paid year ended december 31 2018 capped call transactions february 2014 connection issuance 2019 convertible notes company paid approximately 1238 million enter capped call transactions certain financial institutions capped call transactions expected generally reduce potential dilution upon conversion 2019 convertible notes event market price common shares greater strike price capped call transactions initially set 4314 per common share reduction potential dilution subject cap based cap price initially set 6039 per common share strike price cap price subject certain adjustments terms capped call transactions therefore result executing capped call transactions company effect exposed potential net dilution market price common shares exceeded adjusted cap price result capped call transactions company’s additional paidin capital within shareholders’ deficit consolidated balance sheet reduced 1238 million first quarter 2014 march 2018 connection company’s repurchase portion 2019 convertible notes company entered partial settlement agreements option counterparties capped call transactions terminate portion existing transactions case notional amount corresponding aggregate principal amount 2019 convertible notes repurchased result terminating portion capped call transactions favorable position company received 559 million cash recognized offsetting increase additional paidin capital 2018 august 15 2019 convertible notes matured remaining capped call transactions expired unexercised expiration capped call transactions impact company’s consolidated financial statements accumulated comprehensive loss following table summarizes changes accumulated comprehensive loss component years ended december 31 2020 2019 2018 1 see note 2 basis presentation note 11 derivative instruments hedging activities information regarding location consolidated statements income gains losses reclassified accumulated comprehensive loss income years ended december 31 2020 2019 2018 comprehensive loss reclassifications net tax benefit 20 million 06 million foreign currency translation adjustments unrealized gain loss derivatives respectively year ended december 31 2020 amounts reclassified accumulated comprehensive loss income net tax expense 02 million unrealized gain loss derivatives year ended december 31 2020 comprehensive loss reclassifications net tax expense 01 million foreign currency translation adjustments year ended december 31 2019 comprehensive loss reclassifications net tax benefit 27 million foreign currency translation adjustments year ended december 31 2018 9 sharebased compensation company following sharebased compensation plans amended restated herbalife ltd 2005 stock incentive plan 2005 stock incentive plan amended restated herbalife ltd 2014 stock incentive plan 2014 stock incentive plan additionally company amended restated nonmanagement directors compensation plan nonmanagement directors plan purpose facilitate equity ownership company directors equity awards 2005 stock incentive plan grants made april 30 2014 stock incentive plan 2014 stock incentive plan replaced 2005 stock incentive plan adoption thereof additional awards made 2005 stock incentive plan terms 2014 stock incentive plan substantially similar terms 2005 stock incentive plan 2014 stock incentive plan authorizes issuance 174 million common shares pursuant awards granted plan plus shares remained available issuance 2005 stock incentive plan april 29 2014 december 31 2020 aggregate approximately 23 million common shares remain available future issuance 2014 stock incentive plan company’s sharebased compensation plans generally provide grants stock options sars stock unit awards collectively referred herein awards certain sars generally vest annually threeyear period contractual term stock options sars generally ten years certain stock unit awards 2014 stock incentive plan vest annually threeyear period certain stock unit awards subject service performance conditions vest passage performance period determined compensation committee company’s board directors stock unit awards granted directors generally vest oneyear period awards subject following market service conditions market condition awards performance service conditions performance condition awards market service performance conditions market performance condition awards subject continued service company service condition awards granted company market condition awards performance condition awards service condition awards unless otherwise determined time grant upon vesting stock unit award represents right receive one common share stock unit awards company issues new shares net shares withheld tax purposes vested sars company issues new shares based intrinsic value exercised net shares withheld tax purposes company’s stock compensation awards outstanding december 31 2020 included sars stock unit awards sars performance conditions generally vest 20 first succeeding year 20 second succeeding year 60 third succeeding year subject achievement certain sales leader retention metrics fair value sars determined date grant using blackscholesmerton option pricing model compensation expense grants recognized vesting term using graded vesting method company grant sars performance conditions years ended december 31 2020 2019 2018 fair value sars service conditions determined date grant using blackscholesmerton option pricing model compensation expense grants recognized vesting term using straight line method company grant sars service conditions years ended december 31 2020 2019 2018 years ended december 31 2020 2019 2018 company granted performance stock unit awards certain executives vest december 31 2022 december 31 2021 december 31 2020 respectively subject continued employment date achievement certain performance conditions generally performance conditions include targets local currency net sales volume points adjusted earnings interest taxes andor adjusted earnings per share performance stock unit awards vest 0 200 target award based achievement performance conditions years ended december 31 2020 2019 2018 company granted stock unit awards service conditions directors certain employees generally vest annually oneyear threeyear period respectively sharebased compensation expense included selling general administrative expenses within company’s consolidated statements income company’s policy estimate number forfeitures expected occur sharebased compensation expense relating service condition awards amounted 383 million 318 million 262 million years ended december 31 2020 2019 2018 respectively sharebased compensation expense relating market condition awards amounted zero less 01 million years ended december 31 2020 2019 2018 respectively sharebased compensation expense relating performance condition awards amounted 127 million 68 million 92 million years ended december 31 2020 2019 2018 respectively related income tax benefits recognized earnings awards amounted 96 million 83 million 81 million years ended december 31 2020 2019 2018 respectively excess tax benefits sharebased compensation arrangements totaled 31 million 58 million 531 million years ended december 31 2020 2019 2018 respectively december 31 2020 total unrecognized compensation cost related nonvested service condition stock awards 550 million related weightedaverage period expected recognized approximately 13 years december 31 2020 total unrecognized compensation cost related nonvested performance condition awards 183 million related weightedaverage period expected recognized approximately 18 years stock unit awards valued market value date grant fair value service condition sars performance condition sars estimated date grant using blackscholesmerton optionpricing model fair value sars market conditions market performance conditions estimated date grant using monte carlo lattice model company calculates expected term sars based historical data groups employees determined similar historical exercise patterns valuation purposes expected volatility sars based upon historical volatility company’s common shares also validated volatility rates peer group companies risk free interest rate based implied yield us treasury zerocoupon issue remaining term equal expected term sars expected dividend yield assumption based company’s historical expected amount dividend payouts sars granted years ended december 31 2020 2019 2018 following table summarizes activities sars company’s sharebased compensation plans year ended december 31 2020 1 intrinsic value amount current market value underlying stock exceeds exercise price stock awards 2 includes less 01 million market condition sars december 31 2020 2019 3 includes 11 million 29 million performance condition sars december 31 2020 2019 respectively 4 includes 18 million performance condition sars 5 includes less 01 million market condition 11 million performance condition sars total intrinsic value service condition sars exercised years ended december 31 2020 2019 2018 280 million 337 million 2110 million respectively total intrinsic value performance condition sars exercised years ended december 31 2020 2019 2018 288 million 01 million 950 million respectively total intrinsic value market condition sars exercised years ended december 31 2020 2019 2018 zero 78 million following table summarizes activities stock units company’s sharebased compensation plans year ended december 31 2020 1 includes 712596 475430 performance based stock unit awards december 31 2020 2019 respectively represents maximum amount vest 2 includes 504908 performancebased stock unit awards 3 includes 228996 performancebased stock unit awards 4 includes 38746 performancebased stock unit awards 5 includes 561280 performancebased stock unit awards total vesting date fair value stock units vested years ended december 31 2020 2019 2018 230 million 130 million 22 million respectively employee stock purchase plan 2007 company adopted qualified employee stock purchase plan espp implemented first quarter 2008 connection adoption espp company reserved issuance total 40 million common shares december 31 2020 approximately 31 million common shares remain available future issuance terms espp rights purchase common shares may granted eligible qualified employees subject certain restrictions espp enables company’s eligible employees payroll withholdings purchase limited number common shares 85 fair market value common share purchase date purchases made quarterly basis 10 segment information company nutrition company sells wide range weight management targeted nutrition energy sports fitness outer nutrition products company’s products manufactured company changsha hunan china extraction facility suzhou china facility nanjing china facility lake forest california facility winstonsalem north carolina facility well thirdparty providers sold members consume sell herbalife products retail consumers members revenues reflect sales products company members categorized based geographic location december 31 2020 company sold products 95 markets throughout world organized managed six geographic regions north america mexico south central america emea asia pacific china company defines operating segments geographical operations company aggregates operating segments excluding china reporting segment primary reporting segment management believes company’s operating segments similar operating characteristics similar longterm operating performance making determination management believes operating segments similar nature products sold product acquisition process types customers products sold methods used distribute products nature regulatory environment economic characteristics china identified separate reporting segment meet criteria aggregation company reviews net sales contribution margin operating segment reviews assets capital expenditures consolidated basis operating segment therefore net sales contribution margin presented reportable segment assets capital expenditures segment presented operating information two reportable segments sales product line sales geographic area follows 1 contribution margin consists net sales less cost sales royalty overrides china segment contribution margin include service fees china independent service providers 2 service fees china independent service providers totaling 4540 million 4189 million 5232 million years ended december 31 2020 2019 2018 respectively included selling general administrative expenses 3 product buybacks returns product categories included literature promotional category december 31 2020 2019 goodwill allocated company’s reporting units included company’s primary reporting segment 972 million 884 million respectively goodwill allocated china segment 33 million 31 million respectively following table sets forth property plant equipment deferred tax assets geographic area 11 derivative instruments hedging activities interest rate risk management company engages interest rate hedging strategy hedged transactions forecasted interest payments company’s 2018 credit facility based variable rates first quarter 2020 company entered various interest rate swap agreements effective dates ranging february 2020 march 2020 agreements collectively provide company pay interest weightedaverage fixed rate 098 aggregate notional amounts 1000 million 2018 credit facility respective expiration dates ranging february 2022 march 2023 receiving interest based libor notional amounts periods inception swap agreements designated cash flow hedges variability certain liborbased borrowings 2018 credit facility effectively fixing interest rate notional amounts weightedaverage effective rate 348 hedge relationships qualified effective fasb asc topic 815 derivatives hedging asc 815 consequently changes fair value interest rate swaps recorded component accumulated comprehensive loss within shareholders’ deficit recognized interest expense within company’s consolidated statement income period hedged item underlying transaction affect earnings fair values interest rate swap agreements based thirdparty bank quotes december 31 2020 company recorded liabilities fair value 10 million relating interest rate swap agreements foreign currency instruments company designates certain foreign currency derivatives primarily comprised foreign currency forward contracts option contracts freestanding derivatives hedge accounting apply changes fair market value freestanding derivatives included selling general administrative expenses within company’s consolidated statements income company primarily uses freestanding foreign currency derivatives hedge foreign currencydenominated intercompany transactions partially mitigate impact foreign currency fluctuations fair value freestanding foreign currency derivatives based thirdparty quotes company’s foreign currency derivative contracts generally executed monthly basis company designates cash flow hedges foreign currency forward contracts enters hedge forecasted inventory purchases intercompany management fees subject foreign currency exposures forward contracts used hedge forecasted inventory purchases specific months changes fair value forward contracts designated cash flow hedges excluding forward points recorded component accumulated comprehensive loss within shareholders’ deficit recognized cost sales within company’s consolidated statement income period approximates time hedged inventory sold company also hedges forecasted intercompany management fees specific months contracts allow company sell euros exchange us dollars specified contract rates changes fair value forward contracts designated cash flow hedges excluding forward points recorded component accumulated comprehensive loss within shareholders’ deficit recognized selling general administrative expenses within company’s consolidated statement income period hedged item underlying transaction affect earnings company elected record changes fair value amounts excluded assessment effectiveness currently earnings december 31 2020 2019 aggregate notional amounts foreign currency contracts outstanding designated cash flow hedges approximately 564 million 664 million respectively december 31 2020 outstanding contracts expected mature next fifteen months company’s derivative financial instruments recorded consolidated balance sheets fair value based thirdparty quotes december 31 2020 company recorded liabilities fair value 39 million relating outstanding foreign currency contracts designated cash flow hedges december 31 2019 company recorded assets fair value 01 million liabilities fair value 19 million relating outstanding foreign currency contracts designated cash flow hedges company assesses hedge effectiveness least quarterly hedges remained effective december 31 2020 2019 december 31 2020 2019 majority company’s outstanding foreign currency forward contracts maturity dates less twelve months majority freestanding derivatives expiring within one month tables provide information details foreign currency forward contracts outstanding december 31 2020 2019 following tables summarize derivative activity years ended december 31 2020 2019 2018 relating company’s derivatives gains losses derivative instruments following table summarizes gains losses relating derivative instruments recorded comprehensive loss years ended december 31 2020 2019 2018 december 31 2020 estimated amount existing net losses related cash flow hedges recorded accumulated comprehensive loss expected reclassified earnings next twelve months 39 million effect cash flow hedging relationships company’s consolidated statements income years ended december 31 2020 2019 2018 follows 1 result adopting asu 201712 first quarter 2019 years ended december 31 2020 2019 company recognized gains losses excluded assessment effectiveness foreign exchange currency contracts relating inventory hedges cost sales within consolidated statements income prior adoption asu 201712 year ended december 31 2018 company recognized gains losses excluded assessment effectiveness foreign exchange currency contracts relating inventory hedges selling general administrative expenses within consolidated statement income following table summarizes gains losses recorded income relating derivative instruments designated hedging instruments december 31 2020 2019 2018 company reports derivatives fair value either assets liabilities within consolidated balance sheets see note 13 fair value measurements information derivative fair values consolidated balance sheet locations december 31 2020 2019 12 income taxes components income taxes follows income taxes follows significant categories temporary differences gave rise deferred tax assets liabilities follows tax loss credit carryforwards certain foreign subsidiaries 2020 2019 1283 million 1036 million respectively unused tax loss credit carryforwards certain foreign subsidiaries 1027 million expire 2021 2037 256 million carried forward indefinitely us foreign tax credit carryforwards 2020 2019 2021 million 2089 million respectively included tax loss domestic tax credit carryforwards table unused us foreign tax credit carryforwards expire 2023 2030 domestic research development tax credit carryforwards 2020 2019 90 million 84 million respectively unused domestic research development tax credit carryforwards begin expiring 2036 deferred interest expense carried forward indefinitely state tax loss carryforwards 2020 fully utilized 2019 09 million december 22 2017 us enacted tax cuts jobs act 2017 act also commonly referred “us tax reform” significantly changes us corporate income tax laws among things reducing us corporate income tax rate 21 starting 2018 creating modified territorial tax system onetime mandatory tax previously deferred foreign earnings us subsidiaries fourth quarter 2017 accordance sec staff accounting bulletin “sab” 118 income tax accounting implications tax cuts jobs act “sab 118” company recorded provisional net expense 1533 million amount included tax expense predominantly consists three components 1634 million charge caused establishment valuation allowance deferred tax assets due act’s changes sourcing calculation foreign income thereby limited expected utilization foreign tax credit carryforwards ii 55 million benefit resulting remeasurement company’s net deferred tax liabilities us based new lower corporate income tax rate iii nonrecurring benefit 46 million related additional foreign tax credits result impact onetime mandatory repatriation previously unremitted earnings certain nonus subsidiaries owned either directly indirectly us parent although 1533 million provisional net expense represented company believed reasonable estimate impact income tax effects act company’s consolidated financial statements december 31 2017 considered provisional items include limited foreign tax credits associated valuation allowance limitations executive compensation onetime tax previously unremitted foreign earnings us subsidiaries company continued analyze regulatory guidance including proposed regulations relating foreign tax credits issued fourth quarter 2018 information including continued inability fully utilize foreign tax credits generated accordingly company recorded additional 295 million expense fourth quarter 2018 caused establishment valuation allowance deferred tax assets relating foreign tax credit carryforwards result company’s accounting ultimate tax effects act finalized sab 118 december 31 2018 company recognizes valuation allowances deferred tax assets reported based weight evidence likely deferred tax assets realized december 31 2020 2019 company held valuation allowances net deferred tax assets certain subsidiaries primarily related tax loss carryforwards us foreign tax credits amount 3908 million 3303 million respectively change company’s valuation allowance 2020 605 million primarily attributable foreign deferred interest expense tax loss carryforwards change company’s valuation allowance 2019 112 million primarily attributable foreign deferred interest expense tax loss carryforwards change company’s valuation allowance 2018 525 million primarily related valuation allowance established us foreign tax credits described december 31 2020 company’s us consolidated group approximately 1477 million unremitted earnings permanently reinvested relating certain foreign subsidiaries december 31 2020 herbalife nutrition ltd approximately 26 billion permanently reinvested unremitted earnings relating operating subsidiaries result company’s decision invest china growth impact investment program approximately 1139 million unremitted earnings permanently reinvested december 31 2020 since herbalife nutrition ltd’s unremitted earnings permanently reinvested deferred taxes provided unremitted earnings practicable determine amount unrecognized deferred taxes respect unremitted earnings company remit unremitted earnings would subject income tax remittances deferred taxes accrued earnings considered indefinitely reinvested deferred tax unremitted foreign earnings december 31 2020 2019 deferred tax liability 223 million 282 million respectively applicable statutory income tax rate cayman islands zero herbalife nutrition ltd years reported purposes reconciliation provision income taxes statutory rate provision income taxes effective tax rate notional 21 tax rate applied years ended december 31 2020 2019 2018 follows december 31 2020 total amount unrecognized tax benefits including related interest penalties 659 million total amount unrecognized tax benefits recognized 469 million unrecognized tax benefits 114 million interest 18 million penalties would impact effective tax rate december 31 2019 total amount unrecognized tax benefits including related interest penalties 599 million total amount unrecognized tax benefits recognized 403 million unrecognized tax benefits 91 million interest 19 million penalties would impact effective tax rate company accounts interest penalties generated tax contingencies component income tax expense year ended december 31 2020 company recorded increase interest expense related uncertain tax positions 24 million decrease penalty expense related uncertain tax positions 01 million year ended december 31 2019 company recorded decrease interest expense related uncertain tax positions 07 million increase penalty expense related uncertain tax positions 02 million year ended december 31 2018 company recorded increase interest penalty expense related uncertain tax positions 10 million 04 million respectively december 31 2020 total amount interest penalties related unrecognized tax benefits recognized consolidated balance sheet 114 million 18 million respectively december 31 2019 total amount interest penalties related unrecognized tax benefits recognized consolidated balance sheet 91 million 19 million respectively december 31 2018 total amount interest penalties related unrecognized tax benefits recognized consolidated balance sheet 100 million 17 million respectively following changes occurred amount unrecognized tax benefits years ended december 31 2020 2019 2018 amount income taxes company pays subject ongoing audits taxing jurisdictions around world company’s estimate potential outcome uncertain tax position subject management’s assessment relevant risks facts circumstances existing time company believes adequately provided matters however company’s future results may include favorable unfavorable adjustments estimates period audits resolved may impact company’s effective tax rate december 31 2020 company’s tax filings generally subject examination major tax jurisdictions years ending december 31 2015 company believes reasonably possible amount unrecognized tax benefits could decrease approximately 106 million within next twelve months possible decrease 57 million would due settlement audits resolution administrative judicial proceedings remaining possible decrease 49 million would due expiration statute limitations various jurisdictions 13 fair value measurements company applies provisions fasb asc topic 820 fair value measurements disclosures asc 820 financial nonfinancial assets liabilities asc 820 defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date asc 820 establishes fair value hierarchy prioritizes inputs used measuring fair value three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities reporting entity ability access measurement date level 2 inputs include quoted prices similar assets liabilities active markets quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability inputs derived principally corroborated observable market data correlation means level 3 inputs unobservable inputs asset liability company measures certain assets liabilities fair value discussed throughout notes consolidated financial statements foreign exchange currency contracts interest rate swaps valued using standard calculations models foreign exchange currency contracts valued primarily based inputs observable forward rates spot rates foreign currency exchange rates reporting period ended date interest rate swaps valued primarily based inputs libor swap yield curves reporting period ended date company’s derivative assets liabilities measured fair value consisted level 2 inputs amounts shown gross values december 31 2020 2019 company’s deferred compensation plan assets consist companyowned life insurance policies recorded cash surrender value required included fair value table see note 6 employee compensation plans description deferred compensation plan assets following tables summarize offsetting fair values company’s derivative assets derivative liabilities presentation company’s consolidated balance sheets december 31 2020 2019 company offsets derivative assets derivative liabilities consolidated balance sheets extent maintains master netting arrangements related financial institutions december 31 2020 2019 company’s derivatives subject master netting arrangements collateralization required company’s derivative assets derivative liabilities 14 detail certain balance sheet accounts assets company’s accompanying consolidated balance sheets included deferred compensation plan assets 438 million 389 million deferred tax assets 960 million 793 million december 31 2020 2019 respectively current liabilities current liabilities consisted following noncurrent liabilities noncurrent liabilities company’s accompanying consolidated balance sheets included deferred compensation plan liabilities 723 million 624 million deferred income tax liabilities 393 million 214 million december 31 2020 2019 respectively see note 6 employee compensation plans description company’s deferred compensation plan assets liabilities 15 subsequent events january 3 2021 company entered stock purchase agreement mr carl c icahn certain affiliates collectively “icahn parties” pursuant company agreed purchase certain icahn parties aggregate 12486993 common shares company price per share 4805 closing price share new york stock exchange december 31 2020 last trading day prior execution purchase agreement aggregate purchase price approximately 600 million company funded transaction cash hand approximately 150 million borrowings revolving credit facility transaction closed january 7 2021 february 9 2021 company’s board directors authorized new threeyear 15 billion share repurchase program expire february 9 2024 replaced company’s prior share repurchase authorization set expire october 30 2023 share repurchase program allows company includes indirect whollyowned subsidiary herbalife nutrition ltd repurchase company’s common shares times prices determined management market conditions warrant extent herbalife nutrition ltd’s distributable reserves available cayman islands law 2018 credit facility permits company repurchase common shares long default event default exists conditions specified consolidated leverage ratios met february 10 2021 company amended 2018 credit facility among things reduced interest rate borrowings 2018 term loan b either eurocurrency rate plus margin 275 base rate plus margin 175 either eurocurrency rate plus margin 250 base rate plus margin 150 maturity date remains unchanged outstanding borrowings 2018 term loan b still remain due accordance provisions 2018 credit facility described note 5 long term debt 16 quarterly information unaudited 1 fourth quarter 2019 includes net favorable adjustment unrecognized tax benefit liability 114 million primarily attributable transfer pricing matters various foreign jurisdictions legal accrual 40 million relating sec doj investigations relating fcpa matter china described note 7 contingencies item 16 form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized herbalife nutrition ltd alexander amezquita alexander amezquita chief financial officer dated february 17 2021 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicateditem 15 exhibits financial statement schedules following documents filed part annual report form 10k incorporated herein reference 1 financial statements following financial statements herbalife ltd filed part annual report form 10k pages indicated 2 financial statement schedules omitted required information inapplicable material information presented consolidated financial statements related notes 3 exhibits listed exhibit index immediately filed part annual report form 10k incorporated reference herein exhibit index exhibit number description reference 53 second amendment dated september 17 2007 form credit agreement dated july 21 2006 among herbalife international inc herbalife ltd wh intermediate holdings ltd hbl ltd wh luxembourg holdings sárl herbalife international luxembourg sárl hlf luxembourg holdings sárl wh capital corporation wh luxembourg intermediate holdings sárl hv holdings ltd herbalife distribution ltd herbalife luxembourg distribution sárl subsidiary guarantors party thereto favor merrill lynch capital corporation collateral agent 54 third amendment dated november 30 2007 form credit agreement dated july 21 2006 among herbalife international inc herbalife ltd wh intermediate holdings ltd hbl ltd wh luxembourg holdings sárl herbalife international luxembourg sárl hlf luxembourg holdings sárl wh capital corporation wh luxembourg intermediate holdings sárl hv holdings ltd herbalife distribution ltd herbalife luxembourg distribution sárl subsidiary guarantors party thereto favor merrill lynch capital corporation collateral agent p 55 herbalife ltd employee stock purchase plan p 56 fourth amendment dated february 21 2008 form credit agreement dated july 21 2006 among herbalife international inc herbalife ltd wh intermediate holdings ltd hbl ltd wh luxembourg holdings sárl herbalife international luxembourg sárl hlf luxembourg holdings sárl wh capital corporation wh luxembourg intermediate holdings sárl hv holdings ltd herbalife distribution ltd herbalife luxembourg distribution sárl subsidiary guarantors party thereto favor merrill lynch capital corporation collateral agent p 57 employment agreement dated march 27 2008 michael johnson herbalife international america inc q 58 stock unit award agreement herbalife ltd michael johnson dated march 27 2008 q 59 stock appreciation right award agreement herbalife ltd michael johnson dated march 27 2008 q 60 stock appreciation right award agreement herbalife ltd michael johnson dated march 27 2008 q 61 fifth amendment dated september 25 2008 form credit agreement dated july 21 2006 among herbalife international inc herbalife ltd wh intermediate holdings ltd hbl ltd wh luxembourg holdings sárl herbalife international luxembourg sárl hlf luxembourg holdings sárl wh capital corporation wh luxembourg intermediate holdings sárl hv holdings ltd herbalife distribution ltd herbalife luxembourg distribution sárl subsidiary guarantors party thereto favor merrill lynch capital corporation collateral agent r 62 amendment herbalife international inc 401k profit sharing plan trust 63 form independent directors stock appreciation right award agreement 64 herbalife ltd amended restated independent directors deferred compensation stock unit plan 65 amended restated employment agreement richard p goudis herbalife international america inc dated january 1 2010 u 66 severance agreement desmond walsh herbalife international america inc dated january 1 2010 u 67 form herbalife ltd 2005 stock incentive plan stock unit award agreement v 68 amended restated nonmanagement directors compensation plan v 69 amendment form nonemployee directors stock appreciation right award agreement v 70 amended restated employment agreement brett chapman herbalife international america inc dated june 1 2010 w filed herewith management contract compensatory plan arrangement furnished filed previously filed october 1 2004 exhibit company’s registration statement form s1 file 333119485 incorporated herein reference b previously filed november 9 2004 exhibit amendment 2 company’s registration statement form s1 file 333119485 incorporated herein reference c previously filed december 2 2004 exhibit amendment 4 company’s registration statement form s1 file 333119485 incorporated herein reference previously filed december 14 2004 exhibit amendment 5 company’s registration statement form s1 file 333119485 incorporated herein reference e previously filed february 17 2005 exhibit company’s registration statement form s8 file 333122871 incorporated herein reference f previously filed february 28 2006 exhibit company’s annual report form 10k year ended december 31 2005 incorporated herein reference g previously filed april 30 2010 exhibit company’s current report form 8k incorporated herein reference h previously filed march 29 2006 exhibit company’s current report form 8k incorporated herein reference previously filed march 29 2006 exhibit company’s current report form 8k incorporated herein reference j previously filed march 31 2006 exhibit company’s current report form 8k incorporated herein reference k previously filed november 13 2006 exhibit company’s quarterly report form 10q quarter ended september 30 2006 incorporated reference l previously filed october 12 2006 exhibit company’s current report form 8k incorporated herein reference previously filed october 26 2006 exhibit company’s current report form 8k incorporated herein reference n previously filed may 29 2007 exhibit company’s current report form 8k incorporated herein reference previously filed november 6 2007 exhibit company’s quarterly report form 10q quarter ended september 30 2007 incorporated reference p previously filed february 26 2008 exhibit company’s annual report form 10k year ended december 31 2007 incorporated herein reference q previously filed april 7 2008 exhibit company’s current report form 8k incorporated herein reference r previously filed november 3 2008 exhibit company’s quarterly report form 10q quarter ended september 30 2008 incorporated reference previously filed may 4 2009 exhibit company’s quarterly report form 10q quarter ended march 31 2009 incorporated reference previously filed may 3 2010 exhibit company’s quarterly report form 10q quarter ended march 31 2010 incorporated reference u previously filed june 17 2010 exhibit company’s current report form 8k incorporated herein reference v previously filed august 2 2010 exhibit company’s quarterly report form 10q quarter ended june 30 2010 incorporated reference w previously filed august 3 2010 exhibit company’s current report form 8k incorporated herein reference x previously filed december 29 2010 exhibit company’s current report form 8k incorporated herein reference report independent registered public accounting firm board directors stockholders herbalife ltd audited accompanying consolidated balance sheets herbalife ltd subsidiaries “company” december 31 2010 2009 related consolidated statements income changes shareholders’ equity comprehensive income cash flows years threeyear period ended december 31 2010 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position herbalife ltd subsidiaries december 31 2010 2009 results operations cash flows years threeyear period ended december 31 2010 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states herbalife ltd subsidiaries’ internal control financial reporting december 31 2010 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated february 22 2011 expressed unqualified opinion effectiveness company’s internal control financial reporting kpmg llp los angeles california february 22 2011 herbalife ltd consolidated balance sheets see accompanying notes consolidated financial statements herbalife ltd consolidated statements income see accompanying notes consolidated financial statements herbalife ltd consolidated statements changes shareholders’ equity comprehensive income see accompanying notes consolidated financial statements herbalife ltd consolidated statements cash flows see accompanying notes consolidated financial statements herbalife ltd notes consolidated financial statements 1 organization herbalife ltd cayman islands exempt limited liability company herbalife incorporated april 4 2002 herbalife ltd together subsidiaries “company” leading global network marketing company sells weight management nutritional supplements energy sports fitness products personal care products network approximately 21 million independent distributors except china company currently sells products retail stores sales representatives sales employees licensed business providers company reports revenue six geographic regions north america consists us canada jamaica mexico south central america emea consists europe middle east africa asia pacific excluding china consists asia new zealand australia china 2 basis presentation company’s consolidated financial statements refer herbalife subsidiaries new accounting pronouncements december 2010 financial accounting standards board fasb issued accounting standards update asu 201028 intangiblesgoodwill topic 350 perform step 2 goodwill impairment test reporting units zero negative carrying amounts consensus fasb emerging issues task force asu 201028 asu 201028 provides amendments accounting standards codification asc topic 350 intangibles goodwill pursuant asu 201028 entity step 1 goodwill impairment test determines reporting units zero negative carrying amounts exist perform step 2 goodwill impairment test likely goodwill impairment exists determining whether likely goodwill impairment exists entity consider whether adverse qualitative factors indicating impairment may exist qualitative factors consistent existing guidance examples asc topic 350 requires goodwill reporting unit tested impairment annual tests event occurs circumstances change would likely reduce fair value reporting unit carrying amount result goodwill impairments may reported sooner often compared current practice asu 201028 effective fiscal years interim periods within years beginning december 15 2010 early adoption permitted company expect adoption asu 201028 material impact company’s consolidated financial statements significant accounting policies june 2009 fasb issued fasb accounting standards codification single source authoritative nongovernmental us generally accepted accounting principles gaap rules interpretive releases sec authority federal securities laws also sources authoritative gaap sec reporting companies codification changes referencing financial standards became effective interim annual periods ending september 15 2009 existing nonsec accounting standards superseded described codification nonsec accounting literature included codification nonauthoritative adoption codification significant impact company’s consolidated financial statements references standards issued prior codification replaced description applicable fasb authoritative guidance updated accounting standard codification number consolidation policy consolidated financial statements include accounts herbalife ltd subsidiaries significant intercompany transactions accounts eliminated herbalife ltd notes consolidated financial statements continued business combinations december 2007 fasb issued authoritative guidance relating business combinations established principles requirements acquirer recognizes measures financial statements identifiable assets acquired liabilities assumed non controlling interest acquiree goodwill acquired guidance also modifies recognition preacquisition contingencies environmental legal issues restructuring plans acquired research development value purchase accounting guidance requires acquirer recognize changes amount deferred tax benefits recognizable business combination either income continuing operations period combination directly contributed capital depending circumstances guidance also establishes disclosure requirements enable users evaluate nature financial effects business combination company adopted guidance january 1 2009 material impact consolidated financial statements august 2009 company purchased certain assets micelle laboratories inc lake forest california contract manufacturer food nutritional supplements company purchased assets order strengthen global manufacturing capabilities purchase price material company’s consolidated financial statements accounting purposes acquisition micelle acquisition recorded business combination pursuant fasb asc 805 business combinations foreign currency translation transactions majority countries company operates functional currency local currency company’s foreign subsidiaries’ asset liability accounts translated consolidated financial reporting purposes us dollar amounts yearend exchange rates revenue expense accounts translated average rates year foreign exchange translation adjustments included accumulated comprehensive loss accompanying consolidated balance sheets foreign currency transaction gains losses include cost foreign currency derivative contracts related settlement gains losses excluding certain foreign currency derivatives designated cash flow hedges discussed note 11 derivative instruments hedging activities included selling general administrative expenses accompanying consolidated statements income company recorded net foreign currency transaction losses 73 million 77 million 57 million years ended december 31 2010 2009 2008 respectively includes foreign exchange impact relating company’s venezuelan subsidiary herbalife venezuela herbalife venezuela’s foreign currency financial statement impact discussed within note forward exchange contracts option contracts interest rate swaps company enters foreign currency derivative instruments forward exchange contracts option contracts managing foreign exchange risk sales distributors purchase commitments denominated foreign currencies intercompany transactions bank loans company also enters interest rate swaps managing interest rate risk variable rate term loan company use contracts trading purposes accordance fasb asc topic 815 derivatives hedging asc 815 company designates certain derivative instruments cash flow hedges formally documents hedge relationships including identification hedging instruments hedged items well risk management objectives strategies undertaking hedge transaction time derivative contract executed company assesses effectiveness hedge inception ongoing basis determines whether hedge highly perfectly effective offsetting changes cash flows hedged item company records effective portion changes estimated fair value accumulated comprehensive income loss subsequently reclassifies related amount accumulated comprehensive income loss earnings hedged item underlying transaction impacts earnings determined derivative ceased highly effective hedge company discontinue hedge accounting transaction derivatives designated hedges changes estimated fair value recognized consolidated statements income herbalife ltd notes consolidated financial statements continued january 1 2009 company adopted fasb authoritative guidance requires additional financial statement disclosures derivative instruments required asc 815 adoption financial impact company’s consolidated financial statements required additional financial statement disclosures derivative instruments company applied requirements standard prospective basis disclosed note 11 derivative instruments hedging activities accordingly disclosures related annual periods prior date adoption presented cash equivalents company considers highly liquid investments purchased maturity three months less cash equivalents cash equivalents comprised primarily money market accounts foreign domestic bank accounts reduce credit risk company monitors credit standing financial institutions hold company’s cash equivalents may 2010 fasb issued asu 201019 foreign currency issues multiple foreign currency exchange rates asu 201019 codifies sec staff announcement made march 18 2010 emerging issues task force meeting asu 201019 provides sec staff’s view certain foreign currency issues relating investments venezuela asu 201019 became effective march 18 2010 company adopted guidance fiscal year 2009 due difference foreign currency remeasurement rate translation rate relating herbalife venezuela cash equivalents reported company’s consolidated balance sheet december 31 2009 99 million greater us dollar amount residing herbalife venezuela’s us dollar bank account therefore necessarily reflect true purchasing power us dollar cash equivalents herbalife venezuela’s financial statement impact relating company’s reported consolidated cash equivalents foreign exchange transactions discussed within note accounts receivable accounts receivable consist principally receivables credit card companies arising sale products company’s distributors receivables importers utilized limited number countries sell products distributors due geographic dispersion credit card receivables collection risk considered significant receivables credit card companies 514 million 434 million december 31 2010 2009 respectively substantially receivables credit card companies current december 31 2010 2009 although receivables importers significant company performs ongoing credit evaluations importers maintains allowance potential credit losses company considers customer creditworthiness past current transaction history customer contractual terms current economic industry trends changes customer payment terms determining whether collectibility reasonably assured whether record allowances receivables financial condition company’s customers deteriorates adversely affects ability make payments additional allowances recorded company believes provides adequate allowances receivables distributors importers material consolidated financial statements december 31 2010 majority company’s total outstanding accounts receivable current fair value financial instruments effective january 1 2008 company adopted fasb authoritative guidance applies nonfinancial assets nonfinancial liabilities fasb authoritative guidance clarifies definition fair value prescribes methods measuring fair value establishes fair value hierarchy based inputs used measure fair value expands disclosures fair value measurements disclosed note 14 fair value measurements company properly measured disclosed financial instruments herbalife ltd notes consolidated financial statements continued company estimated fair value financial instruments using following methods assumptions • carrying amounts cash equivalents receivables accounts payable approximate fair value due shortterm maturities instruments • fair value option forward contracts based dealer quotes • carrying values company’s variable rate debt instruments considered approximate fair values interest rates instruments approximate current rates offered company inventories stated lower cost firstin firstout basis market company reserves obsolete slow moving inventory totaling 94 million 93 million december 31 2010 2009 respectively deferred financing costs deferred financing costs represent fees expenses related borrowing company’s longterm debt amortized effective interest method term related debt longlived assets depreciation furniture fixtures equipment includes computer hardware software computed straightline basis estimated useful lives related assets range three ten years leasehold improvements amortized straightline basis life related asset term lease whichever shorter depreciation furniture fixtures equipment amortization leasehold improvements totaled 677 million 622 million 487 million years ended december 31 2010 2009 2008 respectively longlived assets reviewed impairment based undiscounted cash flows whenever events changes circumstances indicate carrying amount assets may recoverable measurement impairment loss based estimated fair value asset goodwill marketing related intangible assets indefinite lives evaluated annual basis impairment frequently events changes circumstances indicate asset might impaired years ended december 31 2010 2009 2008 goodwill marketing related intangible asset impairments december 31 2010 2009 2008 marketing related intangible asset balance 3100 million december 31 2010 2009 2008 goodwill balance 1029 million 1025 million 1107 million respectively 04 million increase goodwill 2010 2009 primarily due effect adjustment fair value inventory acquired micelle acquisition 82 million net decrease goodwill 2009 2008 primarily due 121 million decrease related change deferred tax liability partially offset 39 million increase related micelle acquisition intangible assets finite lives amortized expected lives two years product certifications three years distributor network noncompete agreements five years product formulas seven years customer relationships december 31 2008 intangible assets finite lives fully amortized fiscal year 2009 company’s intangible assets finite lives increased 17 million net 02 million amortization due micelle acquisition december 31 2010 company’s intangible assets finite lives decreased 08 million annual amortization expense finite life intangibles 09 million 02 million zero years ended december 31 2010 2009 2008 respectively december 31 2010 annual expected amortization expense follows 2011 04 million 2012 02 million 2013 01 million 2014 01 million herbalife ltd notes consolidated financial statements continued income taxes income tax expense includes income taxes payable current year change deferred income tax assets liabilities future tax consequences events recognized company’s financial statements income tax returns valuation allowance recognized reduce carrying value deferred income tax assets believed likely component deferred income tax assets realized company accounts uncertainty income taxes accordance fasb authoritative guidance clarifies accounting reporting uncertainties income taxes recognized enterprise’s financial statements guidance prescribes comprehensive model financial statement recognition measurement presentation disclosure uncertain tax positions taken expected taken income tax returns see note 12 income taxes discussion income taxes royalty overrides independent distributor may earn commissions called royalty overrides production bonuses based retail volume commissions based retail sales volume certain members independent sales force sponsored distributor addition commissions recorded products shipped revenue recognized nonus royalty checks aged variety reasons beyond certainty paid taken back income management estimated period certainty three years worldwide comprehensive income comprehensive income consists net earnings foreign currency translation adjustments effective portion unrealized gains losses derivatives comprehensive income presented consolidated statements shareholders’ equity comprehensive income components accumulated comprehensive income loss consisted following thousands operating leases company leases physical properties operating leases certain lease agreements generally include rent holidays tenant improvement allowances company recognizes rent holiday periods straightline basis lease term beginning company right leased space company also records tenant improvement allowances rent holidays deferred rent liabilities amortizes deferred rent terms lease rent research development company’s research development performed inhouse staff outside consultants periods presented research development costs expensed incurred material herbalife ltd notes consolidated financial statements continued earnings per share basic earnings per share represents net income period common shares outstanding divided weighted average number common shares outstanding period diluted earnings per share represents net income divided weighted average number common shares outstanding inclusive effect dilutive securities outstanding stock options stock appreciation rights stock units warrants following common share amounts used compute basic diluted earnings per share period thousands 1 december 31 2010 company 05 million warrants outstanding exercise price 1550 expire december 1 2014 aggregate 08 million 28 million 23 million equity grants consisting stock options stock appreciation rights stock units outstanding years ended december 31 2010 2009 2008 respectively included computation diluted earnings per share effect would antidilutive revenue recognition revenue recognized products shipped title risk loss passes independent distributor importer sales recognized net sales basis reflects product returns net discounts referred “distributor allowances” amounts billed shipping handling costs shipping handling costs paid company included cost sales company generally receives net sales price cash credit card payments point sale company currently presents sales taxes collected customers net basis related royalty overrides recorded revenue recognized allowances product returns primarily connection company’s buyback program provided time sale recorded accrual based upon historical return rates country relevant return pattern reflects anticipated returns received period 12 months following original sale sharebased payments company accounts sharebased compensation accordance fasb authoritative guidance requires measurement sharebased compensation expense sharebased payment awards made employees service company measures sharebased compensation cost grant date based fair value award recognizes expense straightline basis employee’s requisite service period use estimates preparation financial statements conformity us gaap requires management make estimates assumptions estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates company herbalife ltd notes consolidated financial statements continued evaluates estimates assumptions ongoing basis using historical experience factors including current economic environment company believes reasonable circumstances company adjusts estimates assumptions facts circumstances dictate illiquid credit markets volatile equity foreign currency combined increase uncertainty inherent estimates assumptions future events effects cannot determined precision actual results could differ estimates changes estimates resulting continuing changes economic environment reflected financial statements future periods currency restrictions venezuela currency restrictions enacted venezuelan government 2003 become restrictive impacted ability company’s subsidiary venezuela herbalife venezuela obtain us dollars exchange venezuelan bolivars official foreign exchange rates venezuelan government foreign exchange commission cadivi application approval processes intermittently delayed timing ability obtain us dollars official exchange rates remains uncertain certain instances company made appropriate applications cadivi approval obtain us dollars herbalife venezuela pay imported products annual dividend official exchange rate alternative exchange mechanism company also participated certain bond offerings venezuelan government petróleos de venezuela sa pdvsa venezuelan stateowned petroleum company effectively purchased bonds bolivars sold bonds us dollars instances company used legal parallel market mechanism currency exchanges less favorable parallel market discontinued may 2010 june 2010 venezuelan government introduced additional regulations new regulated system sitme controlled central bank venezuela sitme provides mechanism exchange bolivars us dollars purchase sale us dollar denominated bonds issued venezuela however sitme available certain limited circumstances specifically sitme used product purchases available matters payment dividends also sitme used amounts 50000 per day 350000 per month generally available extent applicant exchanged received us dollars via cadivi process within previous 90 days although venezuela important market company’s south central america region herbalife venezuela’s net sales represented less 2 4 company’s consolidated net sales years ended december 31 2010 2009 2008 respectively total assets represented less 3 6 company’s consolidated total assets december 31 2010 2009 respectively prehighly inflationary economy venezuela herbalife venezuela’s cash equivalents december 31 2009 fourth quarter 2009 due currency restrictions obtaining us dollars official currency exchange rate order mitigate company’s currency exchange risk venezuela herbalife venezuela entered series parallel market transactions exchanged 1050 million bolivars approximately 195 million us dollars average rate approximately 54 bolivars per us dollar also fourth quarter 2009 herbalife venezuela settled 136 million us dollar denominated noncadivi registered intercompany shipment payables initially recorded subsequently remeasured parallel market exchange rate therefore settlement intercompany shipment payables result net foreign exchange gains losses recorded accompanying consolidated statement income year ended december 31 2009 incremental costs 188 million related importation products venezuela unfavorable parallel market exchange rate recorded costs sales company’s consolidated statement income year ended december 31 2009 herbalife ltd notes consolidated financial statements continued december 31 2009 herbalife venezuela’s 59 million us dollar cash equivalents residing us dollar bank account remeasured bolivars parallel market exchange rate approximately 59 bolivars per us dollar remeasured cash equivalents translated official rate 215 bolivars per us dollar reported 158 million company’s consolidated balance sheet december 31 2009 based company’s specific facts circumstances us gaap required company use dividend remittance rate official exchange rate translation purposes parallel market exchange rate applicable rate particular transaction could settled certain remeasurement purposes due difference remeasurement rate translation rate cash equivalents relating herbalife venezuela reported company’s consolidated balance sheet december 31 2009 99 million greater us dollar amount residing herbalife venezuela’s us dollar bank account therefore necessarily reflect true purchasing power reported us dollar cash equivalents december 31 2009 herbalife venezuela reported cash equivalents approximately 342 million 158 million denominated us dollars 184 million denominated bolivars cash equivalents translated consolidated financial statements official exchange rate applicable dividend remittance highly inflationary economy accounting venezuela’s inflation rate measured using blended national consumer price index consumer price index rate exceeded threeyear cumulative inflation rate 100 december 31 2009 accordingly effective january 1 2010 venezuela considered highly inflationary economy pursuant highly inflationary basis accounting us gaap herbalife venezuela changed functional currency bolivar us dollar subsequent movements bolivar us dollar exchange rate impact company’s consolidated earnings prior january 1 2010 bolivar functional currency movements bolivar us dollar recorded component equity comprehensive income pursuant highly inflationary accounting rules company longer required translate herbalife venezuela’s financial statements since functional currency us dollar based relevant facts circumstances applicable times highly inflationary basis accounting company used parallel market exchange rate remeasurement purposes parallel market discontinued may 2010 january 1 2010 connection determination venezuela highly inflationary economy company remeasured herbalife venezuela’s opening balance sheet’s monetary assets liabilities parallel market rate resulted company recording nontax deductible foreign exchange loss 151 million charge included 99 million foreign exchange loss relating herbalife venezuela’s us dollar cash equivalents remeasured parallel market rate translated official rate december 31 2009 also herbalife venezuela’s 342 million cash equivalents reported company’s consolidated balance sheet december 31 2009 included us dollar denominated cash reduced approximately 125 million january 1 2010 however nonmonetary assets inventory reported company’s consolidated balance sheet december 31 2009 remained historical cost subsequent venezuela becoming highly inflationary economy therefore incremental costs related company’s 2009 imported products recorded parallel market exchange rate negatively impacted company’s consolidated statement income year ended december 31 2010 approximately 127 million products sold first quarter 2010 amount tax deductible see note 12 income taxes additional discussion income tax impact related venezuela becoming highly inflationary economy official exchange rate devaluations venezuela 2010 early january 2010 venezuela announced official exchange rate devaluation bolivar official rate 43 bolivars per us dollar nonessential items 26 bolivars per us dollar essential items company’s imports fall classifications 2010 company used parallel market herbalife ltd notes consolidated financial statements continued exchange rate remeasurement purposes parallel market discontinued may 2010 used sitme rate thereafter us dollars obtained cadivi official rate positive impact company’s consolidated net earnings specifically company recorded 58 million foreign exchange gains selling general administrative expenses within company’s consolidated statement income year ended december 31 2010 result receiving us dollars approved cadivi official exchange rate majority herbalife venezuela’s 2010 importations registered cadivi official exchange rates available pay us imports december 31 2010 herbalife venezuela also outstanding intercompany dividend payable company 25 million declared december 2008 registered cadivi request obtain us dollars official rate settle outstanding intercompany dividend payable pending cadivi’s approval also december 31 2010 herbalife venezuela outstanding intercompany shipment payable balances 26 million primarily relating 2010 registered cadivi pending cadivi’s approval late december 2010 venezuela announced cadivi official exchange rate 26 bolivars per us dollar eliminated cadivi official exchange 43 bolivars per us dollar used essential items nonessential items beginning january 2011 devaluation material impact company’s consolidated financial statements december 31 2010 company used sitme rate 53 bolivars per us dollar remeasurement purposes remeasurement herbalife venezuela’s monetary assets liabilities second quarter 2010 company recorded 40 million pretax 26 million posttax net foreign exchange gain selling general administrative expenses within company’s consolidated statement income result remeasuring bolivar denominated monetary assets liabilities june 30 2010 sitme rate 53 bolivars per us dollar opposed last parallel market rate prior closure parallel market may 2010 83 bolivars per us dollar herbalife venezuela’s cash equivalents primarily denominated bolivars increased 52 million result using sitme rate opposed last quoted parallel market rate second quarter 2010 third quarter 2010 thereafter company continued use sitme rate 53 bolivars per us dollar remeasure bolivar denominated transactions december 31 2010 herbalife venezuela’s net monetary bolivar denominated assets liabilities approximated 194 million included bolivar denominated cash equivalents approximating 246 million remeasured new regulated rate sitme except 25 million intercompany dividend remeasured cadivi official rate company continues monitor new exchange mechanism restrictions sitme assurance company able exchange bolivars us dollars timely basis therefore remeasured amounts including cash equivalents reported company’s consolidated balance sheet using sitme rate may accurately represent amount us dollars company could ultimately realize consolidation herbalife venezuela company plans continue operation venezuela import products venezuela despite foreign currency constraints exist country herbalife venezuela continue apply legal exchange mechanisms convert bolivars us dollars despite currency exchange restrictions venezuela company continues control herbalife venezuela operations mere existence exchange restrictions discussed create presumption lack exchangeability otherthantemporary create presumption entity deconsolidate venezuelan operations therefore company continues consolidate herbalife venezuela consolidated financial herbalife ltd notes consolidated financial statements continued statements us gaap purposes substantially herbalife venezuela’s bolivar denominated assets liabilities currently remeasured sitme rate see note 15 subsequent events information herbalife venezuela 3 inventories consist primarily finished goods available resale categorized follows millions following major classes inventory millions total inventories presented net reserves obsolete slow moving inventory 94 million 93 million december 31 2010 2009 respectively 4 longterm debt longterm debt consists following millions interest expense 97 million 96 million 201 million years ended december 31 2010 2009 2008 respectively july 21 2006 company entered 3000 million senior secured credit facility comprised 2000 million term loan 1000 million revolving credit facility syndicate financial institutions lenders september 2007 company lenders amended credit agreement increasing amount revolving credit facility aggregate principal amount 1500 million 2500 million primarily finance increase share repurchase program see note 8 shareholders’ equity discussion share repurchase program share repurchase amounts years ended december 31 2010 2009 herbalife ltd notes consolidated financial statements continued 2008 term loan bears interest libor plus margin 15 base rate plus margin 050 matures july 21 2013 revolving credit facility bears interest libor plus margin 125 base rate plus margin 025 available july 21 2012 december 31 2010 december 31 2009 weighted average interest rate senior secured credit facility 175 166 respectively company incurred approximately 23 million debt issuance costs connection entering senior secured credit facility july 2006 amortized term senior secured credit facility fair value company’s senior secured credit facility approximates carrying value senior secured credit facility requires company comply leverage ratio interest coverage ratio addition senior secured credit facility contains customary covenants including covenants limit restrict company’s ability incur liens incur indebtedness make investments dispose assets make certain restricted payments merge consolidate enter certain transactions affiliates december 31 2010 2009 company compliant debt covenants december 31 2010 company obligated pay approximately 04 million term loan every quarter june 30 2013 remaining principal july 21 2013 december 31 2010 2009 amounts outstanding term loan 1439 million 1454 million respectively 2010 company borrowed aggregate amount 4270 million paid total amount 4870 million revolving credit facility 2009 company borrowed aggregate amount 2120 million paid total amount 2987 million revolving credit facility 2008 company borrowed aggregate amount 1180 million paid total amount 1490 million revolving credit facility december 31 2010 2009 amounts outstanding revolving credit facility 310 million 910 million respectively annual scheduled principal payments company’s senior credit facility 15 million 325 million 1409 million years ended december 31 2011 2012 2013 respectively see note 5 lease obligations payments due capital leases operating leases 5 lease obligations company warehouse office furniture fixtures equipment leases expire various dates 2020 lease agreements company also obligated pay property taxes insurance maintenance costs certain leases contain renewal options future minimum rental commitments noncancelable operating leases capital leases december 31 2010 follows millions rental expense years ended december 31 2010 2009 2008 435 million 397 million 408 million respectively herbalife ltd notes consolidated financial statements continued property plant equipment capital leases included property plant equipment accompanying consolidated balance sheets follows millions 6 employee compensation plans company maintains profit sharing plan pursuant sections 401a k internal revenue code 1986 amended code plan available substantially employees meet length service requirements prior january 1 2009 employees could elect contribute 2 17 compensation company would make matching contributions amount equal one dollar deferred earnings exceed 3 participants’ earnings participants partially vested company contributions one year fully vested five years effective january 1 2009 company amended profit sharing plan starting january 1 2009 employees may elect contribute 75 compensation however contributions limited maximum annual amount set periodically code company make matching contributions amount equal one dollar deferred earnings first 1 make matching contributions amount equal 50 one dollar subsequent 5 deferred earnings contributions become fully vested two years company contributed 23 million 22 million 20 million profit sharing plan years ended december 31 2010 2009 2008 respectively company nonqualified deferred compensation plans select groups management herbalife management deferred compensation plan herbalife senior executive deferred compensation plan deferred compensation plans allow eligible employees elect annually defer 75 base annual salary 100 annual bonus calendar year annual deferral amount company makes matching contributions behalf participant senior executive deferred compensation plan senior executive deferred compensation plan provides amount matching contributions determined company discretion 2009 2008 matching contribution 3 participant’s base salary 2010 company’s matching contribution increased 35 align 401k retirement plan match participant either nonqualified deferred compensation plans discussed times fully vested nonforfeitable interest year’s contribution including interest credited thereto company matching contributions applicable connection participant’s election defer annual deferral amount participant may also elect receive shortterm payout equal annual deferral amount plus interest amount payable two years first day year annual deferral amount actually deferred total deferred compensation two nonqualified deferred compensation plans net participant contributions expense 21 million 26 million years ended december 31 2010 2009 respectively benefit 45 million year ended december 31 2008 total longterm deferred compensation liability two deferred compensation plans 202 million 166 million december 31 2010 2009 respectively deferred compensation plans unfunded benefits paid general assets company except company contributed “rabbi trust” whose assets used pay benefits company remains solvent reached company’s creditors company becomes insolvent value assets “rabbi trust” 185 million 174 million december 31 2010 2009 respectively herbalife ltd notes consolidated financial statements continued 7 contingencies company time engaged routine litigation company regularly reviews pending litigation matters involved establishes reserves deemed appropriate management litigation matters probable loss estimate made marketer dietary nutritional supplements products ingested consumers applied bodies company currently subjected various product liability claims effects claims date material company reasonably possible range exposure currently existing claims material company believes meritorious defenses allegations contained lawsuits company currently maintains product liability insurance annual deductible 10 million april 16 2007 herbalife international america inc filed complaint united states district court central district california certain former herbalife distributors left company join competitor complaint alleged breach contract misappropriation trade secrets intentional interference prospective economic advantage intentional interference contract unfair competition constructive trust fraud seeks monetary damages attorney’s fees injunctive relief herbalife international america inc v robert e ford et al court entered preliminary injunction defendants enjoining use andor misappropriation company’s trade secrets december 11 2007 defendants appealed court’s entry preliminary injunction us court appeals ninth circuit court affirmed relevant part preliminary injunction december 3 2007 defendants filed counterclaim alleging company engaged unfair deceptive business practices intentional negligent interference prospective economic advantage false advertising company endless chain scheme violation california law seeking restitution contract rescission injunction sides engaged discovery filed cross motions summary judgment august 25 2009 court granted partial summary judgment herbalife defendants’ claims except claim company endless chain scheme applicable law question fact determined trial court denied defendants’ motion summary judgment herbalife’s claims misappropriation trade secrets breach contract may 5 2010 district court granted summary judgment herbalife defendants’ endless chainscheme counterclaim herbalife voluntarily dismissed remaining claims may 14 2010 district court issued final judgment dismissing parties’ claims june 10 2010 defendants appealed judgment june 21 2010 herbalife crossappealed company believes merit appeal prevail upon appeal well defendant’s appeal certain company’s subsidiaries subject tax audits governmental authorities respective countries certain tax audits governmental authorities proposing significant amounts additional taxes related interest penalties due company tax advisors believe substantial defenses allegations additional taxes owed company vigorously contesting additional proposed taxes related charges may 7 2010 company received administrative assessment mexican tax administration service amount equivalent approximately 93 million translated period ended spot rate various items majority value added tax allegedly owed certain company’s products imported mexico years 2005 2006 assessment subject interest inflationary adjustments july 8 2010 company initiated formal administrative appeal process connection appeal assessment company may required post bonds assessed amount therefore july 2010 company entered agreements certain insurance companies allow potential issuance surety bonds support appeal assessment surety bonds issued would affect availability company’s existing credit facility company record provision company based analysis guidance advisors believe loss probable company currently unable reasonably estimate possible loss range loss could result unfavorable outcome respect assessment additional assessments herbalife ltd notes consolidated financial statements continued may issued periods company believes meritorious defenses vigorously pursuing appeal final resolution matter could take several years matters may take several years resolve company believes meritorious defenses cannot sure ultimate resolution although company reserved amounts certain matters company believes represent likely outcome resolution related disputes company incorrect assessment company may record additional expenses becomes probable increased potential liability warranted 8 shareholders’ equity company 589 million 602 million 614 million common shares outstanding december 31 2010 2009 2008 respectively december 2004 company authorized 75 million preference shares 0002 par value 75 million authorized preference shares remained unissued december 31 2010 preference shares may issued time one series voting powers full limited without voting powers designations preferences relative participating optional special rights qualifications limitations restrictions determined company’s board directors dividends declaration future dividends subject discretion company’s board directors depend upon various factors including earnings financial condition restrictions imposed credit agreement cash requirements future prospects factors deemed relevant board directors senior credit facility entered july 21 2006 amended permits payments dividends long default event default exists sum amounts paid respect dividends share repurchases exceed sum 4500 million plus 75 cumulative consolidated net income first quarter 2007 last day quarter recently ended prior date dividend second quarter 2007 company’s board directors adopted regular quarterly cash dividend program company’s board directors authorized 020 per common share cash dividend quarter adoption program second quarter 2010 august 2 2010 company’s board directors approved increase quarterly cash dividend 025 per common share increase 005 per common share prior quarters aggregate amount dividends paid declared fiscal years ended december 31 2010 2009 2008 approximately 537 million 487 million 507 million respectively share repurchases april 18 2007 company’s board directors authorized repurchase 300 million company’s common shares next two years times prices determined company management market conditions warrant august 23 2007 company’s board directors approved increase 150 million previously authorized share repurchase program raising total value company common shares authorized repurchased 450 million may 20 2008 company’s board directors approved additional increase 150 million share repurchase program raising total value company common shares authorized repurchased 600 million april 17 2009 company’s share repurchase program adopted april 18 2007 expired pursuant terms april 30 2009 company announced board directors authorized new program company repurchase 300 million herbalife common shares next two years times prices determined company’s management market conditions warrant may 3 2010 company’s board directors approved increase share repurchase authorization 300 million 1 billion addition company’s board directors approved extension expiration date share repurchase herbalife ltd notes consolidated financial statements continued program april 2011 december 2014 december 31 2010 remaining authorized capacity company’s share repurchase program approximately 7767 million year ended december 31 2010 company repurchased 29 million common shares open market purchases aggregate cost approximately 1501 million average cost 5225 per share year ended december 31 2009 company repurchased 20 million common shares open market purchases aggregate cost approximately 732 million average cost 3660 per share year ended december 31 2008 company repurchased approximately 46 million common shares open market purchases aggregate cost 1370 million average cost 2960 per share aggregate purchase price common shares repurchased reflected reduction shareholders’ equity company allocated purchase price repurchased shares reduction retained earnings common shares additional paidincapital number shares issued upon vesting exercise certain restricted stock units stock appreciation rights granted pursuant company’s sharebased compensation plans net minimum statutory withholding requirements company pays behalf employees although shares withheld issued treated common share repurchases accounting purposes reduce number shares would issued upon vesting 9 sharebased compensation company five sharebased compensation plans wh holdings cayman islands ltd stock incentive plan management plan wh holdings cayman islands ltd independent directors stock incentive plan independent directors plan herbalife ltd 2004 stock incentive plan 2004 stock incentive plan amended restated herbalife ltd 2005 stock incentive plan 2005 stock incentive plan amended restated herbalife ltd independent directors deferred compensation stock unit plan independent director stock unit plan management plan provides grant options purchase common shares herbalife members company’s management independent directors plan provides grant options purchase common shares herbalife company’s independent directors 2004 stock incentive plan replaced management plan independent directors plan adoption thereof additional awards made either management plan independent directors plan however shares remaining available issuance plans absorbed became available issuance 2004 stock incentive plan terms 2005 stock incentive plan substantially similar terms 2004 stock incentive plan 2005 stock incentive plan authorizes issuance 4000000 common shares pursuant awards granted plan plus shares remained available issuance 2004 stock incentive plan time adoption 2005 stock incentive plan purpose independent directors stock unit plan facilitate equity ownership company independent directors award stock units december 31 2010 aggregate approximately 09 million common shares remain available future issuance sharebased compensation plans company’s sharebased compensation plans provide grants stock options stock appreciation rights sars stock units collectively referred herein awards stock options typically vest quarterly fiveyear period beginning grant date certain stock option grants vest period less five years certain sars vest quarterly fiveyear period beginning grant date sars vest annually threeyear period contractual term stock options sars ten years stock unit awards 2005 incentive plan incentive plan stock units vest annually three year period equal contractual term stock units awarded independent directors stock unit plan independent director stock units vest rate 25 january 15 april 15 july 15 october 15 january 2009 company amended independent directors plan comply newly issued code section 457a eliminate deferral election move sars stock units march 2008 company granted stock unit awards chairman chief executive officer vest fouryear period rate 30 first three years 10 herbalife ltd notes consolidated financial statements continued fourth year february 2009 company granted stock units sars certain employees subject continued service onethird vest third anniversary date grant onethird vest fourth anniversary date grant remaining onethird vest fifth anniversary date grant 2010 company granted stock units certain key employees subject continued service one half vest first anniversary date grant remaining half vest second anniversary date grant awards subject market service conditions market condition awards continued service company service condition awards granted company either market condition awards service condition awards unless otherwise determined time grant value stock unit shall equal one common share herbalife company’s stock compensation awards outstanding december 31 2010 include stock options sars stock units march 2008 company granted sars market conditions chairman chief executive officer fully vest end four years subject continued employment date achievement certain conditions related market value company’s common shares market conditions include targets stock price appreciation 10 15 compound annual growth rate company records compensation expense requisite service period equal vesting period awards granted january 1 2006 compensation expense recognized straightline basis vesting term stockbased compensation expense included selling general administrative expenses consolidated statements income years ended december 31 2010 2009 2008 sharebased compensation expense relating service condition awards amounted 200 million 184 million 159 million respectively years ended december 31 2010 2009 2008 sharebased compensation expense relating market condition awards amounted 30 million 27 million 19 million respectively years ended december 31 2010 2009 2008 related income tax benefits recognized earnings awards amounted 74 million 79 million 67 million respectively december 31 2010 total unrecognized compensation cost related nonvested service condition stock awards 259 million related weightedaverage period expected recognized approximately 15 years december 31 2010 total unrecognized compensation cost related nonvested market condition stock awards 35 million related weightedaverage period expected recognized approximately 12 years ended december 31 2010 2009 2008 excess tax benefits 167 million 36 million 153 million respectively generated exercises awards stock units valued market value date grant fair value sars stock options estimated date grant using blackscholesmerton optionpricing model monte carlo lattice model respectively expected term sars stock options based simple average vesting period life award simplified method limited historical data groups employees determined similar historical exercise patterns valuation purposes expected volatility sars stock options based upon historical volatility company’s common shares also validated volatility rates peer group companies risk free interest rate based implied yield us treasury zerocoupon issue remaining term equal expected term sars stock options expected dividend yield assumption based company’s historical expected amount dividend payouts herbalife ltd notes consolidated financial statements continued stock options granted years ended december 31 2010 2009 2008 following table summarizes weighted average assumptions used calculation fair value service condition awards years ended december 31 2010 2009 2008 market condition awards granted years ended december 31 2010 2009 market condition awards granted year ended december 31 2008 following table summarizes weighted average assumptions used calculation fair value following tables summarize activity sharebased compensation plans includes stock awards year ended december 31 2010 1 intrinsic value amount current market value underlying stock exceeds exercise price stock award 2 includes 08 million market condition awards outstanding december 31 2010 herbalife ltd notes consolidated financial statements continued weightedaverage grant date fair value service condition awards granted years ended december 31 2010 2009 2008 2188 642 2358 respectively weightedaverage grant date fair value market condition awards granted year ended december 31 2008 1459 total intrinsic value service condition awards exercised years ended december 31 2010 2009 2008 638 million 164 million 458 million respectively market condition awards exercised years ended december 31 2010 2009 2008 employee stock purchase plan 2007 company adopted qualified employee stock purchase plan espp implemented first quarter 2008 connection adoption espp company reserved issuance total 1 million common shares december 31 2010 approximately 09 million common shares remain available future issuance terms espp rights purchase common shares may granted eligible qualified employees subject certain restrictions espp enables company’s eligible employees payroll withholdings purchase limited number common shares 85 fair market value common share purchase date purchases made quarterly basis 10 segment information company network marketing company sells wide range weight management products nutritional supplements personal care products within one industry segment defined fasb asc topic 280 segment reporting company’s products manufactured third party providers company suzhou china facility manufacturing facility located lake forest california sold independent distributors sell herbalife products retail consumers distributors revenues reflect sales products distributors based distributors’ geographic location company sells products 74 countries throughout world organized managed geographic regions company aggregates operating segments excluding china one reporting segment primary reporting segment management believes company’s operating segments similar operating characteristics similar long term operating performance making determination management believes operating segments similar nature products sold product acquisition process types customers products sold methods used distribute products nature regulatory environment china identified separate reporting segment meet criteria herbalife ltd notes consolidated financial statements continued aggregation operating information primary reporting segment china sales product line follows herbalife ltd notes consolidated financial statements continued 1 operating margin consists net sales less cost sales royalty overrides 2 third quarter 2010 company changed method allocation certain costs business segments historical information presented reclassified conform current presentation change effect company’s consolidated statements income 3 compensation china sales employees service fees china licensed business providers totaling 873 million 791 million 703 million years ended december 31 2010 2009 2008 respectively included selling general administrative expenses distributor compensation countries included royalty overrides 4 product buybacks returns product categories included literature promotional category 5 consists us canada jamaica 6 consists europe middle east africa 7 consists asia excluding china new zealand australia december 31 2010 2009 total assets company’s primary reporting segment 11621 million 10971 million respectively total assets china segment 701 million 490 million december 31 2010 2009 respectively december 31 2010 2009 goodwill allocated company’s reporting units included company’s primary reporting segment 998 million 994 million respectively goodwill allocated china segment 31 million december 31 2010 2009 december 31 2010 net property plant equipment located us foreign countries 1411 million 363 million respectively december 31 2009 net property plant equipment located us foreign countries 1453 million 327 million respectively herbalife ltd notes consolidated financial statements continued december 31 2010 deferred tax assets related us foreign countries 658 million 348 million respectively december 31 2009 deferred tax assets related us foreign countries 435 million 338 million respectively company’s foreign subsidiaries designate local currencies functional currency december 31 2010 2009 total amount cash held foreign subsidiaries reported company’s consolidated balance sheet 1882 million 1496 million respectively 58 million 119 million respectively maintained invested us dollars see note 2 basis presentation discussion herbalife venezuela’s cash equivalents 11 derivative instruments hedging activities interest rate risk management company engages interest rate hedging strategy hedged transactions forecasted interest payments company’s variable rate term loan hedged risk variability forecasted interest rate cash flows hedging strategy involves purchase interest rate swaps outstanding cash flow hedges interest rate exposures december 31 2010 maximum length time company hedging certain exposures less three years senior secured credit facility company obligated enter interest rate hedges 25 aggregate principal amount term loan minimum three years august 23 2006 company entered interest rate swap agreement provided company pay interest threeyear period fixed rate 526 initial notional principal amount 1800 million receiving interest period libor rate notional principal amount notional amount scheduled reduced 200 million second third fourth quarters year commencing january 1 2007 throughout term swap designated cash flow hedge variability libor interest rate company’s term loan libor plus 150 thereby fixing company’s effective rate notional amounts 676 september 2009 interest swap expired consequently settled december 31 2009 amounts remaining comprehensive income relating expired interest swap value june 26 2009 company entered interest rate swap agreement effective date june 30 2009 expired september 30 2009 swap notional amount 20 million company paid three month libor received one month libor plus 0185 december 31 2009 interest rate swap agreement expired outstanding amounts settled company elected apply hedge accounting interest rate swap august 2009 company entered four interest rate swap agreements effective date december 31 2009 agreements collectively provide company pay interest less fouryear period weighted average fixed rate 278 notional amounts aggregating 1400 million receiving interest period one month libor rate notional amounts agreements expire july 2013 swaps designated cash flow hedges variability libor interest rate company’s term loan libor plus 150 thereby fixing company’s weighted average effective rate notional amounts 428 company formally assesses inception least quarterly thereafter whether derivatives used hedging transactions effective offsetting changes cash flows hedged item december 31 2010 hedge relationships qualified effective hedges fasb asc topic 815 derivatives hedging asc 815 consequently changes fair value derivatives deferred recorded comprehensive income loss related forecasted transactions recognized consolidated statements income fair value interest rate swap agreements based thirdparty bank quotes december 31 2010 december 31 2009 company recorded interest rate swaps liabilities fair value 66 million 26 million respectively herbalife ltd notes consolidated financial statements continued table describes interest rate swaps aggregate fair value liabilities outstanding december 31 2010 2009 foreign currency instruments company also designates certain foreign currency derivatives certain foreign currency forward option contracts freestanding derivatives hedge accounting apply changes fair market value derivatives included selling general administrative expenses company’s consolidated statements income company uses foreign currency forward contracts hedge foreigncurrencydenominated intercompany transactions partially mitigate impact foreign currency fluctuations company also uses foreign currency option contracts partially mitigate impact foreign currency fluctuations fair value forward option contracts based thirdparty bank quotes company also purchases foreign currency forward contracts order hedge forecasted inventory purchases intercompany management fees designated cashflow hedges subject foreign currency exposures company applied hedge accounting rules required asc 815 hedges contracts allow company sell euros exchange us dollars specified contract rates december 31 2010 2009 aggregate notional amounts contracts outstanding approximately 321 million 668 million respectively december 31 2010 outstanding contracts expected mature next twelve months company’s derivative financial instruments recorded consolidated balance sheet fair value based thirdparty bank quotes forward contracts used hedge forecasted inventory purchases specific months changes fair value forward contracts excluding forward points designated cashflow hedges recorded component accumulated comprehensive income loss within shareholders’ equity recognized cost sales consolidated statement income period approximates time hedged inventory sold company also hedges forecasted intercompany management fees specific months changes fair value forward contracts designated cash flow hedges recorded component accumulated comprehensive income loss within shareholders’ equity recognized selling general administrative expenses consolidated statement income period hedged item underlying transaction affect earnings december 31 2010 company recorded assets fair value 06 million liabilities fair value 08 million relating outstanding foreign currency contracts designated cashflow hedges december 31 2009 company recorded assets fair value 23 million relating outstanding foreign currency contracts designated cashflow hedges company assesses hedge effectiveness measures hedge ineffectiveness least quarterly years ended december 31 2010 2009 ineffective portion relating hedges immaterial hedges remained effective december 31 2010 2009 december 31 2010 2009 majority company’s outstanding foreign currency forward contracts maturity dates less one year majority freestanding derivatives expiring within three months foreign currency option contracts outstanding december 31 2010 2009 herbalife ltd notes consolidated financial statements continued table describes foreign currency forward contracts outstanding december 31 2010 2009 herbalife ltd notes consolidated financial statements continued herbalife ltd notes consolidated financial statements continued following tables summarize derivative activity year ended december 31 2010 2009 relating company’s derivatives gains losses derivative instruments following table summarizes gains losses relating derivative instruments recorded comprehensive income loss year ended december 31 2010 2009 december 31 2010 estimated amount existing net losses related cash flow hedges recorded accumulated comprehensive income loss expected reclassified earnings next twelve months 46 million following table summarizes gains losses relating derivative instruments recorded income year ended december 31 2010 2009 1 foreign exchange contracts designated hedging instruments amounts recognized income loss represent amounts excluded assessment hedge effectiveness ineffective amounts reported derivatives designated hedging instruments herbalife ltd notes consolidated financial statements continued following table summarizes gains losses relating derivative instruments reclassified accumulated comprehensive loss income year ended december 31 2010 2009 company reports derivatives fair value either assets liabilities within consolidated balance sheet see note 14 fair value measurements information derivative fair values consolidated balance sheet location december 31 2010 december 31 2009 12 income taxes components income taxes follows millions income taxes follows millions us dollars herbalife ltd notes consolidated financial statements continued venezuela experienced cumulative inflation least 100 three year period ended december 31 2009 therefore january 1 2010 bolivar hyperinflationary us federal income tax purposes result herbalife venezuela considered dual incorporated entity required account operations using dollar approximate separate transactions method accounting dastm transitional impact dastm resulted deferred income tax benefit approximately 145 million recorded first quarter 2010 included within company’s consolidated statement income year ended december 31 2010 see note 2 basis presentation discussion herbalife venezuela’s highly inflationary economy significant categories temporary differences gave rise deferred tax assets liabilities follows tax effected millions company recognizes valuation allowances deferred tax assets reported based weight evidence likely deferred tax assets realized company believes majority deferred tax assets realized reversal certain significant taxable temporary differences anticipated future taxable income operations december 31 2010 company’s deferred tax assets consisted primarily foreign tax loss carryforwards deferred expenses reduced valuation allowances 1287 million december 31 2009 company’s deferred tax assets consisted primarily foreign tax loss carryforwards deferred expenses reduced valuation allowances 596 million foreign tax loss carryforwards 42 million expire varying amounts 2011 indefinitely december 31 2010 company’s us consolidated group approximately 735 million unremitted earnings permanently reinvested substantially foreign subsidiaries addition december 31 2010 herbalife ltd approximately 14 billion permanently reinvested unremitted herbalife ltd notes consolidated financial statements continued earnings relating operating subsidiaries since unremitted earnings permanently reinvested deferred taxes provided unremitted earnings practicable determine amount unrecognized deferred taxes respect unremitted earnings applicable statutory income tax rate cayman islands zero herbalife ltd years reported purposes reconciliation provision income taxes statutory rate provision income taxes effective tax rate notional 35 tax rate applied follows millions dollars years ended december 31 2010 2009 2008 company benefited terms tax holiday people’s republic china tax holiday commenced january 1 2008 conclude december 31 2012 terms holiday company subject zero tax rate china 2008 2009 subject graduated tax rate 11 2010 tax rate gradually increase years 20112012 maximum 25 december 31 2010 total amount unrecognized tax benefits including related interest penalties 385 million unrecognized tax benefits primarily relate uncertainties international transfer pricing issues deductibility certain operating expenses various jurisdictions anticipated settlements foreign tax audits expiration statute limitations several jurisdictions total amount unrecognized tax benefits recognized 316 million unrecognized tax benefits 56 million interest 13 million penalties would impact effective tax rate company accounts interest penalties generated tax contingencies component income tax expense year ended december 31 2010 company recorded reversal interest penalties expense related uncertain tax positions 19 million 10 million respectively december 31 2010 total accrued interest penalties 56 million 13 million respectively herbalife ltd notes consolidated financial statements continued following changes occurred amount unrecognized tax benefits including related interest penalties years ended december 31 2010 2009 2008 millions unrecognized tax benefits including related interest penalties decreased 108 million year ended december 31 2010 partially offset increase 02 million due foreign currency fluctuations 02 million benefit attributable foreign currency fluctuations accounted decrease comprehensive income company believes reasonably possible amount unrecognized tax benefits could decrease approximately 81 million within next twelve months possible decrease 20 million would due settlement audits resolution administrative judicial proceedings remaining possible decrease 61 million would due expiration statute limitations various jurisdictions december 31 2010 company’s tax filings subject examination us federal jurisdiction various state jurisdictions years ending december 31 2006 company’s tax filings also subject examination significant foreign jurisdictions years ending december 31 2006 13 restructuring reserve fourth quarter 2007 company initiated second phase realignment growth plan company recorded 19 million 40 million professional fees severance related costs years ended december 31 2008 2007 respectively relating second phase realignment growth plan december 31 2010 amounts outstanding related charges fourth quarter 2008 company initiated restructuring program incurred approximately 48 million professional fees severance related costs year ended december 31 2008 year ended december 31 2009 company recorded additional 13 million professional fees severance related costs relating restructuring program december 31 2010 amounts outstanding related charges amounts related realignment growth plan restructuring program included selling general administrative expenses balances outstanding december 31 2010 relating programs following table summarizes components company’s restructuring reserve herbalife ltd notes consolidated financial statements continued december 31 2010 2009 2008 expenses incurred years ended december 31 2010 2009 2008 millions 14 fair value measurements company applies provisions fasb asc topic 820 fair value measurements disclosures asc 820 financial nonfinancial assets liabilities asc 820 defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date asc 820 establishes fair value hierarchy prioritizes inputs used measuring fair value three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities reporting entity ability access measurement date level 2 inputs include quoted prices similar assets liabilities active markets quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability inputs derived principally corroborated observable market data correlation means level 3 inputs unobservable inputs asset liability herbalife ltd notes consolidated financial statements continued company measures certain assets liabilities fair value discussed throughout notes consolidated financial statements foreign exchange currency contracts interest rate swaps valued using standard calculations models foreign exchange currency contracts valued primarily based inputs observable forward rates spot rates foreign currency exchange rates reporting period ended date interest rate swaps valued primarily based inputs libor swap yield curves reporting period ended date assets liabilities recurring measurements measured fair value consisted level 2 derivatives shown gross values december 31 2010 december 31 2009 fair value measurements reporting date using 15 subsequent events february 18 2011 company’s board directors approved twoforone split company’s common shares subject approval company’s shareholders company’s upcoming annual general meeting shareholders held april 28 2011 approved company’s shareholders one additional common share herbalife ltd notes consolidated financial statements continued distributed company’s shareholders around may 17 2011 common share held may 10 2011 stock split effective unless approved company’s shareholders meeting february 22 2011 company announced board directors approved quarterly cash dividend 025 per common share fourth quarter 2010 shareholders record close business march 8 2011 payable march 22 2011 february 2011 herbalife venezuela purchased us dollar denominated bonds face value 20 million us dollars pdvsa bond offering 86 million bolivars immediately sold bonds us dollars expected average effective rate 57 bolivars per us dollar 86 million bolivars remeasured sitme rate 53 bolivars per us dollar recorded cash equivalents 163 million company’s consolidated balance sheet december 31 2010 company expects receive approximately 15 million us dollars late february early march 2011 result conversion final settlement conversion expected result company recording net pretax loss approximately 13 million us dollars 2011 consolidated statement income reflected company’s consolidated financial statements march 31 2011 quarter ending march 31 2011 16 quarterly information unaudited signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereto duly authorized herbalife ltd john desimone john desimone chief financial officer dated february 22 2011 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicateditem 15 exhibits financial statement schedules following documents filed part annual report form 10k incorporated herein reference 1 financial statements following financial statements herbalife ltd filed part annual report form 10k pages indicated 2 financial statement schedules omitted required information inapplicable material information presented consolidated financial statements related notes 3 exhibits listed exhibit index immediately filed part annual report form 10k incorporated reference herein exhibit index exhibit number description reference 101lab xbrl taxonomy extension label linkbase document 101pre xbrl taxonomy extension presentation linkbase document filed herewith management contract compensatory plan arrangement previously filed october 1 2004 exhibit company’s registration statement form s1 file 333119485 incorporated herein reference b previously filed december 2 2004 exhibit amendment 4 company’s registration statement form s1 file 333119485 incorporated herein reference c previously filed december 14 2004 exhibit amendment 5 company’s registration statement form s1 file 333119485 incorporated herein reference previously filed february 17 2005 exhibit company’s registration statement form s8 file 333122871 incorporated herein reference e previously filed april 30 2010 exhibit company’s current report form 8k incorporated herein reference f previously filed may 4 2009 exhibit company’s quarterly report form 10q quarter ended march 31 2009 incorporated reference g previously filed may 3 2010 exhibit company’s quarterly report form 10q quarter ended march 31 2010 incorporated reference h previously filed june 17 2010 exhibit company’s current report form 8k incorporated herein reference previously filed august 2 2010 exhibit company’s quarterly report form 10q quarter ended june 30 2010 incorporated reference j previously filed august 3 2010 exhibit company’s current report form 8k incorporated herein reference k previously filed december 29 2010 exhibit company’s current report form 8k incorporated herein reference l previously filed march 1 2011 exhibit company’s current report form 8k incorporated herein reference previously filed may 2 2011 exhibit company’s quarterly report form 10q quarter ended march 31 2011 incorporated reference n previously filed april 29 2011 exhibit company’s current report form 8k incorporated herein reference previously filed august 10 2011 exhibit company’s current report form 8k incorporated herein reference p previously filed july 30 2012 exhibit company’s quarterly report form 10q quarter ended june 30 2012 incorporated herein reference q previously filed march 1 2013 exhibit company’s current report form 8k incorporated herein reference r previously filed april 29 2013 exhibit company’s quarterly report form 10q quarter ended march 31 2013 incorporated herein reference previously filed october 28 2013 exhibit company’s quarterly report form 10q quarter ended september 30 2013 incorporated herein reference previously filed february 7 2014 exhibit company’s current report form 8k incorporated herein reference report independent registered public accounting firm board directors shareholders herbalife ltd opinion accompanying consolidated balance sheets related consolidated statements income comprehensive income changes shareholders’ equity cash flows present fairly material respects financial position herbalife ltd subsidiaries december 31 2013 december 31 2012 results operations cash flows three years period ended december 31 2013 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2013 based criteria established internal control integrated framework 1992 issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions financial statements company’s internal control financial reporting based audits integrated audits 2013 2012 conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp los angeles california february 18 2014 herbalife ltd subsidiaries consolidated balance sheets see accompanying notes consolidated financial statements herbalife ltd subsidiaries consolidated statements income see accompanying notes consolidated financial statements herbalife ltd subsidiaries consolidated statements comprehensive income see accompanying notes consolidated financial statements herbalife ltd subsidiaries consolidated statements changes shareholders’ equity see accompanying notes consolidated financial statements herbalife ltd subsidiaries consolidated statements cash flows see accompanying notes consolidated financial statements herbalife ltd subsidiaries notes consolidated financial statements 1 organization herbalife ltd cayman islands exempt limited liability company herbalife incorporated april 4 2002 herbalife ltd together subsidiaries “company” leading global nutrition company sells weight management products nutritional supplements energy sports fitness products personal care products utilizing network marketing distribution december 31 2013 company sold products network 37 million members included 02 million china company currently sells products retail stores sales representatives sales officers independent service providers company reports revenue six geographic regions north america mexico south central america emea consists europe middle east africa asia pacific excluding china 2 basis presentation company’s consolidated financial statements refer herbalife subsidiaries new accounting pronouncements february 2013 financial accounting standards board fasb issued accounting standards update asu 201304 liabilities topic 405 obligations resulting joint several liability arrangements total amount obligation fixed reporting date consensus fasb emerging issues task force asu addresses recognition measurement disclosure certain obligations resulting joint several arrangements including debt arrangements contractual obligations settled litigation judicial rulings asu effective public entities fiscal years interim periods within years beginning december 15 2013 adoption guidance material impact company’s consolidated financial statements march 2013 fasb issued asu 201305 foreign currency matters topic 830 parent’s accounting cumulative translation adjustment upon derecognition certain subsidiaries groups assets within foreign entity investment foreign entity consensus fasb emerging issues task force asu addresses accounting cumulative translation adjustment parent either sells part investment foreign entity longer holds controlling financial interest subsidiary group assets nonprofit activity business within foreign entity asu effective prospectively fiscal years interim periods within years beginning december 15 2013 adoption guidance material impact company’s consolidated financial statements july 2013 fasb issued asu 201311 income taxes topic 740 presentation unrecognized tax benefit net operating loss carryforward similar tax loss tax credit carryforward exists consensus emerging issues task force asu addresses unrecognized tax benefits presented reductions deferred tax assets net operating loss carryforwards financial statements asu effective prospectively fiscal years interim periods within years beginning december 15 2013 early adoption retrospective application permitted adoption guidance material impact company’s consolidated financial statements aligns current presentation significant accounting policies consolidation policy consolidated financial statements include accounts herbalife ltd subsidiaries significant intercompany transactions accounts eliminated herbalife ltd subsidiaries notes consolidated financial statements continued foreign currency translation transactions majority countries company operates functional currency local currency company’s foreign subsidiaries’ asset liability accounts translated consolidated financial reporting purposes us dollar amounts yearend exchange rates revenue expense accounts translated average rates year foreign exchange translation adjustments included accumulated comprehensive loss accompanying consolidated balance sheets foreign currency transaction gains losses include cost foreign currency derivative contracts related settlement gains losses excluding certain foreign currency derivatives designated cash flow hedges discussed note 11 derivative instruments hedging activities included selling general administrative expenses accompanying consolidated statements income company recorded net foreign currency transaction losses 379 million 167 million 114 million years ended december 31 2013 2012 2011 respectively includes foreign exchange impact relating company’s venezuelan subsidiary herbalife venezuela herbalife venezuela’s foreign currency financial statement impact discussed within note forward exchange contracts option contracts interest rate swaps company enters foreign currency derivative instruments forward exchange contracts option contracts managing foreign exchange risk sales members purchase commitments denominated foreign currencies intercompany transactions bank loans company also enters interest rate swaps managing interest rate risk variable rate credit facility company use contracts trading purposes accordance fasb accounting standards codification asc topic 815 derivatives hedging asc 815 company designates certain derivative instruments cash flow hedges formally documents hedge relationships including identification hedging instruments hedged items well risk management objectives strategies undertaking hedge transaction time derivative contract executed company assesses effectiveness hedge inception ongoing basis determines whether hedge highly perfectly effective offsetting changes cash flows hedged item company records effective portion changes estimated fair value accumulated comprehensive income loss subsequently reclassifies related amount accumulated comprehensive income loss earnings hedged item underlying transaction impacts earnings determined derivative ceased highly effective hedge company discontinue hedge accounting transaction derivatives designated hedges changes estimated fair value recognized consolidated statements income cash equivalents company considers highly liquid investments purchased maturity three months less cash equivalents cash equivalents comprised primarily foreign domestic bank accounts money market funds cash equivalents valued based level 1 inputs consist quoted prices active markets reduce credit risk company monitors credit standing financial institutions hold company’s cash equivalents 2011 company entered cash pooling arrangement financial institution cash management purposes cash pooling arrangement allows certain company’s participating foreign locations withdraw cash financial institution extent aggregate cash deposits held participating locations available financial institution extent participating location individual basis overdraft position overdrafts recorded liabilities reflected financing herbalife ltd subsidiaries notes consolidated financial statements continued activities company’s consolidated balance sheet consolidated statement cash flows respectively december 31 2013 december 31 2012 company owe amounts financial institution december 31 2013 2012 company’s subsidiary venezuela herbalife venezuela 2159 million 992 million respectively bolivar denominated cash equivalents please see remeasurement herbalife venezuela’s monetary assets liabilities description herbalife venezuela’s cash equivalents balances accounts receivable accounts receivable consist principally receivables credit card companies arising sale products company’s members receivables importers utilized limited number countries sell products members company believes concentration collection risk related credit card receivables diminished due geographic dispersion receivables credit card companies 728 million 811 million december 31 2013 2012 respectively substantially receivables credit card companies current december 31 2013 2012 although receivables importers significant company performs ongoing credit evaluations importers maintains allowance potential credit losses company considers customer creditworthiness past current transaction history customer contractual terms current economic industry trends changes customer payment terms determining whether collectability reasonably assured whether record allowances receivables financial condition company’s customers deteriorates adversely affects ability make payments additional allowances recorded company believes provides adequate allowances receivables members importers material consolidated financial statements years ended december 31 2013 2012 2011 company recorded 21 million 29 million 26 million respectively baddebt expense related allowances company’s receivables december 31 2013 2012 majority company’s total outstanding accounts receivable current fair value financial instruments company applies provisions fasb authoritative guidance applies financial nonfinancial assets liabilities fasb authoritative guidance clarifies definition fair value prescribes methods measuring fair value establishes fair value hierarchy based inputs used measure fair value expands disclosures fair value measurements company estimated fair value financial instruments using following methods assumptions • carrying amounts cash equivalents receivables accounts payable approximate fair value due shortterm maturities instruments • fair value availableforsale investments based prices similar assets traded active markets observable yield curves • fair value option forward contracts based dealer quotes • company’s variable rate debt instruments recorded carrying value considered approximate fair values see note 4 longterm debt description inventories stated lower cost primarily firstin firstout basis market herbalife ltd subsidiaries notes consolidated financial statements continued deferred financing costs deferred financing costs represent fees expenses related borrowing company’s longterm debt amortized term related debt using interest method longlived assets december 2012 company purchased approximate 800000 square foot facility winstonsalem north carolina approximately 222 million december 31 2013 2012 company allocated 188 million 34 million buildings land respectively based relative fair values december 31 2013 2012 amounts reflected property plant equipment company’s accompanying consolidated balance sheet depreciation furniture fixtures equipment includes computer hardware software computed straightline basis estimated useful lives related assets range three ten years company capitalizes eligible costs acquire develop internaluse software incurred subsequent preliminary project stage computer hardware software majority comprised capitalized internaluse software costs 1406 million 1315 million december 31 2013 2012 respectively net accumulated depreciation leasehold improvements amortized straightline basis life related asset term lease whichever shorter buildings depreciated 40 years building improvements generally depreciated ten fifteen years land depreciated depreciation amortization expenses recorded selling general administrative expenses totaled 811 million 709 million 689 million years ended december 31 2013 2012 2011 respectively longlived assets reviewed impairment based undiscounted cash flows whenever events changes circumstances indicate carrying amount assets may recoverable measurement impairment loss based estimated fair value asset goodwill marketing related intangible assets indefinite lives evaluated annual basis impairment frequently events changes circumstances indicate asset might impaired goodwill company uses discounted cash flow approach estimate fair value reporting unit fair value reporting unit less carrying value implied fair value goodwill must determined implied fair value goodwill less carrying value goodwill impairment amount recorded difference marketing related intangible assets company uses discounted cash flow model relieffromroyalty method order determine fair value fair value less carrying value impairment amount recorded difference years ended december 31 2013 2012 2011 goodwill marketing related intangible asset impairments december 31 2013 2012 2011 marketing related intangible asset balance 3100 million consisted company’s trademark trade name marketing franchise december 31 2013 2012 2011 goodwill balance 1055 million intangible assets finite lives amortized expected lives expected fully amortized next three years december 31 2013 company’s intangible assets finite lives decreased 07 million december 31 2012 company’s intangible assets finite lives decreased 11 million december 31 2011 company’s intangible assets finite lives increased 17 million net 06 million amortization due ichange network acquisition annual amortization expense finite life intangibles 04 million 06 million 06 million years ended december 31 2013 2012 2011 respectively december 31 2013 annual expected amortization expense follows 2014 03 million 2015 03 million 2016 01 million herbalife ltd subsidiaries notes consolidated financial statements continued income taxes income tax expense includes income taxes payable current year change deferred income tax assets liabilities future tax consequences events recognized company’s financial statements income tax returns valuation allowance recognized reduce carrying value deferred income tax assets believed likely component deferred income tax assets realized company accounts uncertainty income taxes accordance fasb authoritative guidance clarifies accounting reporting uncertainties income taxes recognized enterprise’s financial statements guidance prescribes comprehensive model financial statement recognition measurement presentation disclosure uncertain tax positions taken expected taken income tax returns see note 12 income taxes description income taxes royalty overrides member may earn commissions called royalty overrides include production bonuses based retail sales volume royalty overrides based retail sales volume certain members sponsored directly indirectly member royalty overrides recorded products delivered revenue recognized royalty overrides compensation members services rendered including development retention improved productivity sales organizations royalty overrides classified operating expense nonus royalty override checks aged variety reasons beyond certainty paid taken back income management estimated period certainty three years worldwide comprehensive income comprehensive income consists net income foreign currency translation adjustments effective portion unrealized gains losses derivatives unrealized gains losses availableforsale investments components accumulated comprehensive income loss consisted following thousands operating leases company leases physical properties operating leases certain lease agreements generally include rent holidays tenant improvement allowances company recognizes rent holiday periods straightline basis lease term beginning company right leased space company also records tenant improvement allowances rent holidays deferred rent liabilities amortizes deferred rent terms lease rent expense herbalife ltd subsidiaries notes consolidated financial statements continued research development company’s research development performed inhouse staff outside consultants periods presented research development costs expensed incurred material professional fees company expenses professional fees including legal fees incurred professional fees included selling general administrative expenses company’s consolidated statements income advertising costs including company sponsorships expensed incurred amounted approximately 579 million 423 million 384 million years ended december 31 2013 2012 2011 respectively expenses included selling general administrative expenses accompanying consolidated statements income earnings per share basic earnings per share represents net income period common shares outstanding divided weighted average number common shares outstanding period diluted earnings per share represents net income divided weighted average number common shares outstanding inclusive effect dilutive securities outstanding stock options sars stock units warrants following common share amounts used compute basic diluted earnings per share period thousands aggregate 30 million 40 million 21 million equity grants consisting stock options sars stock units outstanding years ended december 31 2013 2012 2011 respectively included computation diluted earnings per share effect would antidilutive revenue recognition company generally recognizes revenue upon delivery title risk rewards pass member importer products sold retail stores china company’s independent service providers china product sales recognized net product returns discounts referred “distributor allowances” net sales include product sales shipping handling revenues shipping handling costs paid company included cost sales company generally receives net sales price cash credit card payments point sale company currently presents herbalife ltd subsidiaries notes consolidated financial statements continued sales taxes collected customers net basis allowances product returns primarily connection company’s buyback program provided time sale recorded accrual based upon historical return rates country relevant return pattern reflects anticipated returns received period 12 months following original sale allowances product returns 47 million 39 million 28 million december 31 2013 2012 2011 respectively product returns 97 million 111 million 104 million years ended december 31 2013 2012 2011 respectively sharebased payments company accounts sharebased compensation accordance fasb authoritative guidance requires measurement sharebased compensation expense sharebased payment awards made employees service company measures sharebased compensation cost grant date based fair value award recognizes expense straightline basis employee’s requisite service period use estimates preparation financial statements conformity us gaap requires management make estimates assumptions estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates company evaluates estimates assumptions ongoing basis using historical experience factors including current economic environment company believes reasonable circumstances company adjusts estimates assumptions facts circumstances dictate illiquid credit markets volatile equity foreign currency combined increase uncertainty inherent estimates assumptions future events effects cannot determined precision actual results could differ estimates changes estimates resulting continuing changes economic environment reflected financial statements future periods currency restrictions venezuela currency restrictions enacted venezuelan government become restrictive impacted ability company’s subsidiary venezuela herbalife venezuela timely obtain us dollars exchange venezuelan bolivars official foreign exchange rate venezuelan government application approval process continue delayed company’s ability timely obtain us dollars official exchange rate remains uncertain recent instances company unsuccessful obtaining us dollars official rate remains uncertain whether company’s current pending applications future anticipated applications approved june 2010 venezuelan government introduced additional regulations new regulated system sitme controlled central bank venezuela sitme provided mechanism exchange bolivars us dollars purchase sale us dollar denominated bonds issued venezuela however sitme available certain limited circumstances specifically sitme could used product purchases available matters payment dividends also sitme could used amounts 50000 per day 350000 per month generally available extent applicant exchanged received us dollars via cadivi process within previous 90 days effective january 1 2012 additional laws enacted required companies register registry users system transactions securities foreign currency rusitme prior transacting sitme regulated system controlled central bank venezuela herbalife ltd subsidiaries notes consolidated financial statements continued february 2013 venezuela government announced devalued bolivar currency eliminate sitme regulated system sitme 53 bolivars per us dollar rate eliminated cadivi rate devalued 43 bolivars 63 bolivars per us dollar march 2013 venezuelan government also announced introduce additional complimentary exchange mechanism known sicad currently unknown whether herbalife venezuela able timely access new exchange mechanism company currently assessing monitoring restrictions exchange rates relating alternative mechanism alternative exchange mechanism company also participated certain bond offerings venezuelan government petróleos de venezuela sa pdvsa venezuelan stateowned petroleum company effectively purchased bonds bolivars sold bonds us dollars instances company also used alternative legal exchange mechanisms currency exchanges highly inflationary economy accounting venezuela’s inflation rate measured using blended national consumer price index consumer price index rate exceeded threeyear cumulative inflation rate 100 december 31 2009 accordingly effective january 1 2010 venezuela considered highly inflationary economy pursuant highly inflationary basis accounting us gaap herbalife venezuela changed functional currency bolivar us dollar subsequent movements bolivar us dollar exchange rate impact company’s consolidated earnings prior january 1 2010 bolivar functional currency movements bolivar us dollar recorded component equity comprehensive income pursuant highly inflationary accounting rules company longer translates herbalife venezuela’s financial statements functional currency us dollar remeasurement herbalife venezuela’s monetary assets liabilities prior february 2013 company used sitme rate 53 bolivars per us dollar remeasure bolivar denominated transactions february 2011 herbalife venezuela purchased us dollar denominated bonds face value 20 million us dollars bond offering pdvsa 86 million bolivars immediately sold bonds 15 million us dollars resulting average effective conversion rate 57 bolivars per us dollar bolivar us dollar conversion resulted company recording net pretax loss 13 million us dollars first quarter 2011 included consolidated statement income year ended december 31 2011 company unsuccessful accessing subsequent pdvsa bond offerings frequency future bond offerings unknown 2011 company also accessed sitme market order exchange bolivars us dollars less frequent instances company also accessed alternative legal exchange mechanisms exchange bolivars us dollars less favorable rates sitme rate resulted company recognizing 12 million losses selling general administration expenses included within consolidated statement income year ended december 31 2011 year ended december 31 2012 company continued accessing sitme market order exchange bolivars us dollars daily monthly restrictions continued instances company recognized aggregate 48 million foreign exchange losses result exchanging bolivars us dollars using alternative legal exchange mechanisms approximately 43 less favorable 53 bolivars per us dollar published sitme rate year ended december 31 2012 company exchanged 592 million bolivars 64 million us dollars using alternative legal exchange mechanisms herbalife ltd subsidiaries notes consolidated financial statements continued following venezuelan government’s devaluation bolivar us dollar elimination sitme regulated system february 2013 company uses new cadivi rate 63 bolivars per us dollar remeasure bolivar denominated transactions new cadivi rate approximately 16 less favorable previously published 53 sitme rate company recognized approximately 151 million net foreign exchange losses within consolidated statement income first quarter 2013 result remeasuring company’s bolivar denominated monetary assets liabilities new cadivi rate 63 bolivars per us dollar majority foreign exchange losses related approximately 169 million devaluation herbalife venezuela’s bolivar denominated cash equivalents year ended december 31 2013 company also recognized 07 million foreign exchange losses result exchanging bolivars us dollars using alternative legal exchange mechanisms approximately 75 less favorable new cadivi rate year ended december 31 2013 company exchanged 56 million bolivars 02 million us dollars using alternative legal exchange mechanisms fourth quarter 2013 company also submitted bid approximately 68 million bolivars approximately 11 million us dollars remeasured using cadivi rate sicad mechanism company received notification central bank venezuela bid approved company receive distribution approximately 06 million us dollars resulting foreign exchange loss approximately 05 million effective exchange rate 113 bolivars per us dollar december 31 2013 company received us dollars related approved bid december 31 2013 december 31 2012 herbalife venezuela’s net monetary assets liabilities denominated bolivars approximately 1869 million 829 million respectively included approximately 2159 million 992 million respectively bolivar denominated cash equivalents noted bolivar denominated assets liabilities remeasured cadivi rate december 31 2013 sitme rate december 31 2012 company remeasures bolivars official published cadivi rate december 31 2013 given limited availability alternative exchange mechanisms uncertainty effective exchange rate alternative exchange mechanisms remeasured amounts including cash equivalents reported company’s consolidated balance sheet using published cadivi rate may accurately represent amount us dollars company could ultimately realize company continues monitor exchange mechanisms restrictions imposed venezuelan government assess monitor current economic political environment venezuela assurance company able exchange bolivars us dollars timely basis investments bolivardenominated bonds fourth quarter 2013 company invested bolivar denominated bonds issued venezuelan government purchase price bonds approximately 255 million bolivars approximately 41 million using cadivi rate company classifies bonds longterm availableforsale investments carried fair value inclusive unrealized gains losses net discount accretion premium amortization fair value bonds determined using level 2 inputs include prices similar assets traded active markets venezuela observable yield curves net unrealized gains losses bonds included comprehensive income loss net applicable income taxes 2013 company sell bonds herbalife ltd subsidiaries notes consolidated financial statements continued company’s investments bonds december 31 2013 summarized follows december 31 2013 events developments would indicate value bonds impaired bonds gross unrealized losses december 31 2013 amortized cost estimated fair value bonds december 31 2013 contractual maturity follows expected disposal dates may less contractual dates indicated table consolidation herbalife venezuela company plans continue operation venezuela import products venezuela despite foreign currency constraints described herbalife venezuela continue apply legal exchange mechanisms convert bolivars us dollars despite currency exchange restrictions venezuela company continues control herbalife venezuela operations mere existence exchange restrictions discussed create presumption lack exchangeability otherthantemporary create presumption entity deconsolidate venezuelan operations therefore company continues consolidate herbalife venezuela consolidated financial statements us gaap purposes although venezuela important market company’s south central america region herbalife venezuela’s net sales represented approximately 6 4 2 company’s consolidated net sales years ended december 31 2013 2012 2011 respectively total assets represented approximately 10 7 company’s consolidated total assets december 31 2013 2012 respectively 3 inventories consist primarily finished goods available resale categorized follows millions herbalife ltd subsidiaries notes consolidated financial statements continued following major classes inventory millions 4 longterm debt longterm debt consists following millions july 21 2006 company entered 3000 million senior secured credit facility prior credit facility comprised 2000 million term loan 1000 million revolving credit facility syndicate financial institutions lenders september 2007 company lenders amended credit agreement increasing amount revolving credit facility aggregate principal amount 1500 million 2500 million primarily finance increase company’s share repurchase program see note 8 shareholders’ equity discussion share repurchase program share repurchase amounts years ended december 31 2013 2012 2011 term loan bore interest libor plus margin 15 base rate plus margin 050 revolving credit facility bore interest libor plus margin 125 base rate plus margin 025 march 9 2011 company entered 7000 million senior secured revolving credit facility credit facility syndicate financial institutions lenders terminated prior credit facility credit facility five year maturity expires march 9 2016 based company’s consolidated leverage ratio us dollar borrowings credit facility bear interest either libor plus applicable margin 150 250 base rate plus applicable margin 050 150 base rate credit facility represents highest federal funds rate plus 050 onemonth libor plus 100 prime rate offered bank america company based consolidated leverage ratio pays commitment fee 025 050 per annum unused portion credit facility credit facility also permits company borrow limited amounts mexican peso euro currencies based variable rates obligations credit facility unconditionally guaranteed certain company’s subsidiaries secured substantially assets us subsidiaries company’s parent herbalife ltd march 2011 company used 1960 million us dollar borrowings credit facility repay amounts outstanding prior credit facility company incurred approximately 57 million debt issuance costs connection credit facility debt issuance costs recorded deferred financing costs company’s consolidated balance sheet amortized term credit facility herbalife ltd subsidiaries notes consolidated financial statements continued july 26 2012 company amended credit facility include 5000 million term loan syndicate financial institutions lenders term loan term loan part credit facility addition company’s current revolving credit facility term loan matures march 9 2016 company make regular scheduled payments term loan consisting principal interest components based company’s consolidated leverage ratio term loan bears interest either libor plus applicable margin 150 250 base rate plus applicable margin 050 150 terms company’s revolving credit facility july 2012 company used 5000 million borrowings term loan pay amounts outstanding company’s revolving credit facility company incurred approximately 45 million debt issuance costs connection term loan debt issuance costs recorded deferred financing costs company’s consolidated balance sheet amortized life term loan december 31 2013 december 31 2012 weighted average interest rate borrowings credit facility including borrowings term loan 217 196 respectively credit facility requires company comply leverage ratio coverage ratio addition credit facility contains customary covenants including covenants limit restrict company’s ability incur liens incur indebtedness make investments dispose assets make certain restricted payments pay dividends repurchase common shares merge consolidate enter certain transactions affiliates december 31 2013 2012 company compliant debt covenants credit facility fair value company’s credit facility including term loan approximated carrying value december 31 2013 due variable interest rate reprices frequently represents floating market rates fair value credit facility determined utilizing level 2 inputs defined note 13 fair value measurements observable market interest rates yield curves 2013 company borrowed aggregate amount 7630 million paid total amount 3192 million credit facility 2012 company borrowed aggregate amount 14280 million paid total amount 11425 million credit facility 2011 company borrowed 8597 million 540 million credit facility prior credit facility respectively paid total 6577 million 2289 million credit facility prior credit facility respectively december 31 2013 december 31 2012 us dollar amount outstanding credit facility 9313 million 4875 million respectively 9313 million us dollar amount outstanding credit facility december 31 2013 4313 million outstanding term loan 5000 million outstanding revolving credit facility 4875 million us dollar amount outstanding credit facility december 31 2012 4875 million outstanding term loan amounts outstanding revolving credit facility outstanding foreign currency borrowings december 31 2013 december 31 2012 credit facility december 31 2013 aggregate annual maturities credit facility expected 813 million 2014 1000 million 2015 7500 million 2016 interest expense 266 million 167 million 99 million years ended december 31 2013 2012 2011 respectively interest expense year ended december 31 2011 included 09 million writeoff unamortized deferred financing costs resulting extinguishment prior credit facility discussed 5 lease obligations company warehouse office furniture fixtures equipment leases expire various dates 2023 lease agreements company also obligated pay property taxes insurance maintenance costs herbalife ltd subsidiaries notes consolidated financial statements continued certain leases contain renewal options material future minimum rental commitments noncancelable capital leases december 31 2013 future minimum rental commitments noncancelable operating leases december 31 2013 follows millions rental expense years ended december 31 2013 2012 2011 575 million 525 million 492 million respectively property plant equipment capital leases included property plant equipment accompanying consolidated balance sheets follows millions 6 employee compensation plans company maintains profit sharing plan pursuant sections 401a k internal revenue code 1986 amended code plan available substantially employees meet length service requirements prior january 1 2009 employees could elect contribute 2 17 compensation company would make matching contributions amount equal one dollar deferred earnings exceed 3 participants’ earnings participants partially vested company contributions one year fully vested five years effective january 1 2009 company amended profit sharing plan starting january 1 2009 employees may elect contribute 75 compensation however contributions limited maximum annual amount set periodically code company make matching contributions amount equal one dollar deferred earnings first 1 make matching contributions amount equal 50 one dollar subsequent 5 deferred earnings contributions become fully vested two years company contributed 40 million 27 million 25 million profit sharing plan years ended december 31 2013 2012 2011 respectively company nonqualified deferred compensation plans select groups management herbalife management deferred compensation plan herbalife senior executive deferred compensation plan deferred compensation plans allow eligible employees elect annually defer 75 base annual salary 100 annual bonus calendar year annual deferral amount company makes matching contributions behalf participant senior executive deferred compensation plan senior executive deferred compensation plan provides amount matching contributions determined company discretion 2013 2012 2011 company’s matching contribution 35 aligns 401k retirement plan match herbalife ltd subsidiaries notes consolidated financial statements continued participant either nonqualified deferred compensation plans discussed times fully vested nonforfeitable interest year’s contribution including interest credited thereto company matching contributions applicable connection participant’s election defer annual deferral amount participant may also elect receive shortterm payout equal annual deferral amount plus interest amount payable two years first day year annual deferral amount actually deferred total expense two nonqualified deferred compensation plans excluding participant contributions 40 million 29 million 02 million years ended december 31 2013 2012 2011 respectively total longterm deferred compensation liability two deferred compensation plans 372 million 295 million december 31 2013 2012 respectively deferred compensation plans unfunded benefits paid general assets company except company contributed “rabbi trust” whose assets used pay benefits company remains solvent reached company’s creditors company becomes insolvent value assets “rabbi trust” 268 million 243 million december 31 2013 2012 respectively company employees international countries covered various deferred compensation plans administered based upon legal requirements countries established company’s compensation expenses relating plans 84 million 72 million 49 million years ended december 31 2013 2012 2011 respectively 7 contingencies company time engaged routine litigation company regularly reviews pending litigation matters involved establishes reserves deemed appropriate management litigation matters probable loss estimate made marketer dietary nutritional supplements products ingested consumers applied bodies company currently subjected various product liability claims effects claims date material company reasonably possible range exposure currently existing claims material company believes meritorious defenses allegations contained lawsuits company currently maintains product liability insurance annual deductible 10 million certain company’s subsidiaries subject tax audits governmental authorities respective countries certain tax audits governmental authorities proposing significant amounts additional taxes related interest penalties due company tax advisors believe substantial defenses governmental allegations additional taxes owed company vigorously contesting additional proposed taxes related charges may 7 2010 company received assessment mexican tax administration service amount equivalent approximately 88 million translated period ended spot rate various items majority value added tax vat allegedly owed certain company’s products imported mexico years 2005 2006 assessment subject interest inflationary adjustments july 8 2010 company initiated formal administrative appeal process may 13 2011 mexican tax administration service issued resolution company’s administrative appeal resolution nullified assessment since mexican tax administration service review tax audit findings reissue original assessment company commenced litigation tax court mexico august 2011 dispute assertions made mexican tax administration service case mexican tax administration service herbalife ltd subsidiaries notes consolidated financial statements continued filed response received company april 2012 response challenged assertions company made august 2011 filing litigation case currently ongoing prior nullification mexican tax administration service assessment relating 2005 2006 years company entered agreements certain insurance companies allow potential issuance surety bonds support appeal assessment surety bonds issued would affect availability company’s credit facility arrangements insurance companies remain place event assessment reissued mexican tax administration service commenced audits company’s mexican subsidiaries period january september 2007 may 10 2013 company received assessment approximately 22 million translated period ended spot rate related period july 11 2013 company filed administrative appeal disputing assessment company recognized loss company believe loss probable mexican tax administration service audited company’s mexican subsidiaries 2011 year audit focused importation vat issues june 25 2013 mexican tax administration service closed audit 2011 year without assessment company recognized loss respect mexican matters company based analysis guidance advisors believe loss probable company currently unable reasonably estimate possible loss range loss could result unfavorable outcome assessment reissued additional assessments issued periods company believes meritorious defenses assessment reissued would meritorious defenses additional assessment issued company received assessment spanish tax authority amount equivalent approximately 44 million translated period ended spot rate withholding taxes interest penalties related payments spanish members 20032004 periods company appealed assessment national appellate court audiencia nacional based ruling national appellate court substantially assessment nullified company began withholding taxes payments spanish members 2012 year spanish tax authority raises issue later years company believes meritorious defenses company recognized loss company believe loss probable company currently unable reasonably estimate possible loss range loss could result unfavorable outcome additional assessments periods issued company received tax assessment september 2009 federal revenue office brazil amount equivalent approximately 36 million us dollars translated period ended spot rate related withholdingcontributions based payments company’s members 2004 company appealed tax assessment administrative council tax appeals 2nd level administrative appeal believes meritorious defenses recognized loss company believe loss probable company currently unable reasonably estimate amount loss may result unfavorable outcome additional assessments periods issued company received order rome labor court behalf social security authority march 1 2012 pay amount equivalent approximately 74 million us dollars translated period ended spot rate social contributions interest penalties related payments italian members 2002 2005 company filed writ rome labor court appealing order social security authority filed response brief hearing july 12 2012 social security authority announced intention withdraw claim well order pay assessment hearing matter herbalife ltd subsidiaries notes consolidated financial statements continued originally scheduled october 23 2012 postponed rescheduled june 26 2014 company recognized loss company believe loss probable korea customs service currently auditing importation activities herbalife korea 2009 2013 period assessment issued company would required pay amount requested order appeal assessment based company’s analysis guidance advisors company believe loss probable company currently unable reasonably estimate possible loss range loss matters may take several years resolve company believes meritorious defenses cannot sure ultimate resolution although company may reserve amounts certain matters company believes represent likely outcome resolution related disputes company incorrect assessment company may record additional expenses becomes probable increased potential liability warranted 8 shareholders’ equity company 1011 million 1069 million 1158 million common shares outstanding december 31 2013 2012 2011 respectively december 2004 company authorized 75 million preference shares 0002 par value 75 million authorized preference shares remained unissued december 31 2013 preference shares may issued time one series voting powers full limited without voting powers designations preferences relative participating optional special rights qualifications limitations restrictions determined company’s board directors dividends declaration future dividends subject discretion company’s board directors depend upon various factors including earnings financial condition herbalife ltd’s available distributable reserves cayman islands law restrictions imposed credit facility terms indebtedness may outstanding cash requirements future prospects factors deemed relevant board directors credit facility permits payments dividends long default event default exists consolidated leverage ratio specified credit facility exceeded second quarter 2007 company’s board directors adopted regular quarterly cash dividend program company’s board directors authorized 010 per common share cash dividend quarter adoption program second quarter 2010 august 2 2010 company announced board directors approved increase quarterly cash dividend 013 per common share increase 003 per common share prior quarters may 2 2011 company announced board directors approved increase quarterly cash dividend 020 per common share increase 007 per common share prior quarters february 21 2012 company announced board directors approved increase quarterly cash dividend 030 per common share increase 010 per common share prior quarters aggregate amount dividends paid declared fiscal years ended december 31 2013 2012 2011 approximately 1231 million 1351 million 855 million respectively share repurchases april 17 2009 company’s share repurchase program adopted april 18 2007 expired pursuant terms april 30 2009 company announced board directors authorized new program herbalife ltd subsidiaries notes consolidated financial statements continued company repurchase 300 million herbalife common shares following two years times prices determined company’s management market conditions warrant may 3 2010 company’s board directors approved increase share repurchase program 300 million 1 billion addition company’s board directors approved extension expiration date share repurchase program april 2011 december 2014 may 2 2012 company entered agreement merrill lynch international repurchase 4279 million common shares remaining authorized capacity share repurchase program time terms repurchase agreement company paid 4279 million may 4 2012 agreement expired july 27 2012 company received 53 million 39 million common shares repurchase agreement june 2012 july 2012 respectively total number common shares repurchased agreement determined generally upon discounted volumeweighted average share price company’s common shares course agreement july 27 2012 company completed share repurchase program upon final delivery common shares repurchased repurchase agreement july 30 2012 company announced board directors authorized new 1 billion share repurchase program expire june 30 2017 share repurchase program allows company repurchase common shares times prices determined company’s management market conditions warrant extent herbalife ltd’s distributable reserves available cayman islands law credit facility permits company repurchase common shares long default event default exists consolidated leverage ratio specified credit facility exceeded december 31 2013 remaining authorized capacity share repurchase program 6526 million year ended december 31 2013 company repurchased 61 million common shares open market purchases aggregate cost approximately 2974 million average cost 4908 per share year ended december 31 2012 company repurchased 110 million common shares open market purchases aggregate cost approximately 5278 million average cost 4778 per share year ended december 31 2011 company repurchased 55 million common shares open market purchases aggregate cost approximately 2988 million average cost 5427 per share company reflects aggregate purchase price common shares repurchased reduction shareholders’ equity company allocated purchase price repurchased shares reduction retained earnings common shares additional paidincapital number shares issued upon vesting exercise certain restricted stock units sars granted pursuant company’s sharebased compensation plans net minimum statutory withholding requirements company pays behalf employees although shares withheld issued treated common share repurchases company’s consolidated financial statements reduce number shares would issued upon vesting shares count authorized capacity share repurchase program described herbalife ltd subsidiaries notes consolidated financial statements continued accumulated comprehensive income loss following table summarizes changes accumulated comprehensive income loss year ended december 31 2013 1 see note 11 derivative instruments hedging activities information regarding location consolidated statements income gains losses reclassified accumulated comprehensive income loss income year ended december 31 2013 comprehensive income loss reclassifications net tax benefits 43 million tax expense 10 million tax expense 01 million foreign currency translation adjustments unrealized gain loss derivatives unrealized gain loss availableforsale investments respectively year ended december 31 2013 amounts reclassified accumulated comprehensive income loss income net tax expense 07 million unrealized gain loss derivatives year ended december 31 2013 9 sharebased compensation company five sharebased compensation plans wh holdings cayman islands ltd stock incentive plan management plan wh holdings cayman islands ltd independent directors stock incentive plan independent directors plan herbalife ltd 2004 stock incentive plan 2004 stock incentive plan amended restated herbalife ltd 2005 stock incentive plan 2005 stock incentive plan amended restated herbalife ltd independent directors deferred compensation stock unit plan independent director stock unit plan management plan provided grant options purchase common shares herbalife members company’s management independent directors plan provided grant options purchase common shares herbalife company’s independent directors 2004 stock incentive plan replaced management plan independent directors plan adoption thereof additional awards made either management plan independent directors plan however shares remaining available issuance plans absorbed became available issuance 2004 stock incentive plan 2005 stock incentive plan replaced 2004 stock incentive plan adoption thereof additional awards made 2004 stock incentive plan terms 2005 stock incentive plan substantially similar terms 2004 stock incentive plan 2005 stock incentive plan authorizes issuance 14400000 common shares pursuant awards granted plan plus shares remained available herbalife ltd subsidiaries notes consolidated financial statements continued issuance 2004 stock incentive plan time adoption 2005 stock incentive plan purpose independent directors stock unit plan facilitate equity ownership company independent directors award stock units december 31 2013 aggregate approximately 19 million common shares remain available future issuance 2005 stock incentive plan independent directors stock unit plan company’s sharebased compensation plans provide grants stock options sars stock units collectively referred herein awards stock options typically vest quarterly fiveyear period less beginning grant date certain sars vest quarterly fiveyear period beginning grant date sars vest annually threeyear period contractual term service condition stock options sars generally ten years stock unit awards 2005 incentive plan incentive plan stock units vest annually three year period equal contractual term stock units awarded independent directors stock unit plan independent director stock units vest rate 25 january 15 april 15 july 15 october 15 january 2009 company moved granting sars instead stock units independent directors march 2008 company granted stock unit awards chairman chief executive officer vest fouryear period rate 30 first three years 10 fourth year february 2009 company granted stock units sars certain employees subject continued service onethird vest third anniversary date grant onethird vest fourth anniversary date grant remaining onethird vest fifth anniversary date grant 2010 company granted stock units certain key employees subject continued service one half vest first anniversary date grant remaining half vest second anniversary date grant awards subject following market service conditions market condition awards performance service conditions performance condition awards market service performance conditions market performance condition awards subject continued service company service condition awards granted company market condition awards performance condition awards market performance condition awards service condition awards unless otherwise determined time grant value stock unit shall equal one common share herbalife company’s stock compensation awards outstanding december 31 2013 include stock options sars stock units march 2008 company granted sars market conditions chairman chief executive officer fully vested 2012 sars vested end four years subject continued employment date achievement certain conditions related market value company’s common shares market conditions included targets stock price appreciation 10 15 compound annual growth rate fair value sars determined date grant using monte carlo lattice model august 2011 company granted sars market performance conditions chairman chief executive officer awards vest december 31 2014 subject continued employment date company’s stock price appreciating exceeding targeted price company’s achievement certain volume point performance targets fair value sars determined date grant using monte carlo lattice model december 2013 company granted sars certain employees performance conditions awards vest 20 june 2014 20 june 2015 60 june 2016 subject achievement certain sales leader retention metrics fair value sars determined date grant using blackscholesmerton option pricing model compensation expense grants recognized vesting term using graded vesting method company records compensation expense requisite service period equal vesting period awards granted january 1 2006 compensation expense recognized straightline herbalife ltd subsidiaries notes consolidated financial statements continued basis vesting term stockbased compensation expense included selling general administrative expenses consolidated statements income years ended december 31 2013 2012 2011 sharebased compensation expense relating service condition awards amounted 246 million 227 million 192 million respectively years ended december 31 2012 2011 sharebased compensation expense relating market condition awards amounted 07 million 29 million respectively sharebased compensation expense related market condition awards recognized year ended december 31 2013 market condition awards vested prior 2013 year ended december 31 2013 sharebased compensation expense relating performance condition awards amounted 03 million year ended december 31 2013 2012 2011 sharebased compensation expense relating market performance condition awards amounted 45 million 46 million 14 million respectively years ended december 31 2013 2012 2011 related income tax benefits recognized earnings awards amounted 104 million 95 million 75 million respectively december 31 2013 total unrecognized compensation cost related nonvested service condition stock awards 416 million related weightedaverage period expected recognized approximately 14 years december 31 2013 total unrecognized compensation cost related nonvested performance condition awards 127 million related weightedaverage period expected recognized approximately 17 years december 31 2013 total unrecognized compensation cost related nonvested market performance condition awards 45 million related weightedaverage period expected recognized approximately 10 year years ended december 31 2013 2012 2011 excess tax benefits 156 million 297 million 262 million respectively generated recognized exercises awards stock units valued market value date grant fair value service condition sars performance condition sars estimated date grant using blackscholesmerton optionpricing model fair value sars market conditions market performance conditions estimated date grant using monte carlo lattice model historically expected term sars stock options based simple average vesting period life award simplified method fourth quarter 2011 company began calculating expected term sars based historical data historical information available groups employees determined similar historical exercise patterns valuation purposes expected volatility sars stock options based upon historical volatility company’s common shares also validated volatility rates peer group companies risk free interest rate based implied yield us treasury zerocoupon issue remaining term equal expected term sars stock options expected dividend yield assumption based company’s historical expected amount dividend payouts stock options granted years ended december 31 2013 2012 2011 following table summarizes weighted average assumptions used calculation fair value service condition awards years ended december 31 2013 2012 2011 herbalife ltd subsidiaries notes consolidated financial statements continued performance condition awards granted years ended december 31 2012 2011 performance condition awards granted year ended december 31 2013 following table summarizes weighted average assumptions used calculation fair value market condition awards market performance condition awards granted years ended december 31 2013 2012 market performance condition awards granted year ended december 31 2011 following table summarizes weighted average assumptions used calculation fair value following tables summarize activity sharebased compensation plans includes stock awards year ended december 31 2013 1 intrinsic value amount current market value underlying stock exceeds exercise price stock award 2 includes 09 million sars market performance conditions 3 includes 15 million sars market conditions 4 includes 04 million sars performance conditions weightedaverage grant date fair value service condition sars granted years ended december 31 2013 2012 2011 3057 1536 2123 respectively weightedaverage grant date fair value sars performance conditions granted year ended december 31 2013 3304 weightedaverage grant date fair value sars market performance conditions granted herbalife ltd subsidiaries notes consolidated financial statements continued year ended december 31 2011 1737 total intrinsic value service condition stock options sars exercised years ended december 31 2013 2012 2011 161 million 986 million 1338 million respectively market condition performance condition market condition performance condition sars exercised years ended december 31 2013 2012 2011 total vesting date fair value stock units vested years ended december 31 2013 2012 2011 73 million 243 million 198 million respectively employee stock purchase plan 2007 company adopted qualified employee stock purchase plan espp implemented first quarter 2008 connection adoption espp company reserved issuance total 2 million common shares december 31 2013 approximately 18 million common shares remain available future issuance terms espp rights purchase common shares may granted eligible qualified employees subject certain restrictions espp enables company’s eligible employees payroll withholdings purchase limited number common shares 85 fair market value common share purchase date purchases made quarterly basis 10 segment information company nutrition company sells wide range weight management products nutritional supplements personal care products company’s products manufactured third party providers company changsha hunan china extraction facility suzhou china facility lake forest california facility sold members consume sell herbalife products retail consumers members revenues reflect sales products company members categorized based geographic location herbalife ltd subsidiaries notes consolidated financial statements continued december 31 2013 company sold products 91 countries throughout world organized managed geographic regions company aggregates operating segments excluding china one reporting segment primary reporting segment management believes company’s operating segments similar operating characteristics similar long term operating performance making determination management believes operating segments similar nature products sold product acquisition process types customers products sold methods used distribute products nature regulatory environment china identified separate reporting segment meet criteria aggregation operating information primary reporting segment china sales product line follows herbalife ltd subsidiaries notes consolidated financial statements continued 1 contribution margin consists net sales less cost sales royalty overrides 2 compensation china sales employees service fees china independent service providers totaling 2156 million 1235 million 968 million years ended december 31 2013 2012 2011 respectively included selling general administrative expenses member compensation countries included contribution margin 3 product buybacks returns product categories included literature promotional category december 31 2013 2012 total assets company’s primary reporting segment 22537 million 16072 million respectively total assets china segment 2200 million 1169 million december 31 2013 2012 respectively december 31 2013 2012 goodwill allocated company’s reporting units included company’s primary reporting segment 1024 million periods goodwill allocated china segment 31 million december 31 2013 2012 december 31 2013 net property plant equipment located us foreign countries 2360 million 829 million respectively december 31 2012 net property plant equipment located us foreign countries 1709 million 719 million respectively december 31 2013 deferred tax assets related us foreign countries 691 million 587 million respectively december 31 2012 deferred tax assets related us foreign countries 684 million 514 million respectively majority company’s foreign subsidiaries designate local currencies functional currency december 31 2013 2012 total amount cash held foreign subsidiaries reported company’s consolidated balance sheet 5674 million 3213 million respectively 68 million 69 million respectively maintained invested us dollars december 31 2013 2012 total amount cash equivalents held us entities 4056 million 122 million respectively herbalife ltd subsidiaries notes consolidated financial statements continued 11 derivative instruments hedging activities interest rate risk management company previously engaged interest rate hedging strategy hedged transactions forecasted interest payments credit facility hedged risk variability forecasted interest rate cash flows hedging strategy involved purchase interest rate swaps interest rate swaps expired july 2013 company entered new interest swap arrangements december 31 2013 august 2009 company entered four interest rate swap agreements effective date december 31 2009 agreements collectively provided company pay interest less fouryear period weighted average fixed rate 278 notional amounts aggregating 1400 million receiving interest period one month libor rate notional amounts discussed agreements expired july 2013 swaps inception designated cash flow hedges variability libor interest rate company’s term loan prior credit facility variability libor interest rate replacement debt company’s term loan prior credit facility terminated march 2011 refinanced credit facility discussed note 4 longterm debt expiration july 2013 company’s swaps effective designated cash flow hedges variability certain libor interest rate borrowings credit facility libor plus 150 250 fixing company’s weighted average effective rate notional amounts 428 528 hedge ineffectiveness recorded result refinancing event company assesses hedge effectiveness measures hedge ineffectiveness least quarterly years ended december 31 2013 2012 ineffective portion relating hedges immaterial hedges remained effective expiration july 2013 december 31 2012 consequently changes fair value derivatives deferred recorded comprehensive income loss related forecasted transactions recognized consolidated statements income fair value interest rate swap agreements based thirdparty quotes december 31 2012 company recorded interest rate swaps liabilities fair value 20 million amount recorded december 31 2013 interest rate swaps expired table describes interest rate swaps aggregate fair value liabilities outstanding december 31 2013 2012 foreign currency instruments company also designates certain foreign currency derivatives certain foreign currency forward option contracts freestanding derivatives hedge accounting apply changes fair market value freestanding derivatives included selling general administrative expenses company’s consolidated statements income company uses foreign currency forward contracts hedge foreigncurrencydenominated intercompany transactions partially mitigate impact foreign herbalife ltd subsidiaries notes consolidated financial statements continued currency fluctuations company also uses foreign currency option contracts partially mitigate impact foreign currency fluctuations fair value forward option contracts based thirdparty quotes company’s foreign currency derivative contracts generally executed monthly basis company designates cashflow hedges foreign currency forward contracts enters hedge forecasted inventory purchases intercompany management fees subject foreign currency exposures forward contracts used hedge forecasted inventory purchases specific months changes fair value forward contracts excluding forward points designated cashflow hedges recorded component accumulated comprehensive income loss within shareholders’ equity recognized cost sales consolidated statement income period approximates time hedged inventory sold company also hedges forecasted intercompany management fees specific months contracts allow company sell euros exchange us dollars specified contract rates changes fair value forward contracts designated cash flow hedges recorded component accumulated comprehensive income loss within shareholders’ equity recognized selling general administrative expenses consolidated statement income period hedged item underlying transaction affect earnings december 31 2013 2012 aggregate notional amounts foreign currency contracts outstanding designated cash flow hedges approximately 2447 million 2569 million respectively december 31 2013 outstanding contracts expected mature next twelve months company’s derivative financial instruments recorded consolidated balance sheet fair value based thirdparty quotes december 31 2013 company recorded assets fair value 57 million liabilities fair value 44 million relating outstanding foreign currency contracts designated cashflow hedges december 31 2012 company recorded assets fair value 05 million liabilities fair value 33 million relating outstanding foreign currency contracts designated cashflow hedges company assesses hedge effectiveness measures hedge ineffectiveness least quarterly years ended december 31 2013 2012 ineffective portion relating hedges immaterial hedges remained effective december 31 2013 2012 december 31 2013 2012 majority company’s outstanding foreign currency forward contracts maturity dates less twelve months majority freestanding derivatives expiring within three months one month respectively foreign currency option contracts outstanding december 31 2013 2012 herbalife ltd subsidiaries notes consolidated financial statements continued table describes foreign currency forward contracts outstanding december 31 2013 2012 herbalife ltd subsidiaries notes consolidated financial statements continued following tables summarize derivative activity years ended december 31 2013 2012 2011 relating company’s derivatives gains losses derivative instruments following table summarizes gains losses relating derivative instruments recorded comprehensive income loss years ended december 31 2013 2012 2011 herbalife ltd subsidiaries notes consolidated financial statements continued december 31 2013 estimated amount existing net gains related cash flow hedges recorded accumulated comprehensive income loss expected reclassified earnings next twelve months 31 million following table summarizes gains losses relating derivative instruments recorded income years ended december 31 2013 2012 2011 1 foreign exchange contracts designated hedging instruments amounts recognized income loss represent amounts excluded assessment hedge effectiveness ineffective amounts reported derivatives designated hedging instruments following table summarizes gains losses relating derivative instruments reclassified accumulated comprehensive loss income years ended december 31 2013 2012 2011 herbalife ltd subsidiaries notes consolidated financial statements continued company reports derivatives fair value either assets liabilities within consolidated balance sheet see note 13 fair value measurements information derivative fair values consolidated balance sheet location december 31 2013 2012 12 income taxes components income taxes follows millions income taxes follows millions company recognizes excess tax benefits associated sharebased compensation shareholders’ equity realized assessing whether excess tax benefits relating sharebased compensation realized company follows withandwithout approach excess tax benefits related sharebased compensation deemed realized utilization tax benefits available company also subject applicable limitations december 31 2013 2012 company 154 million 259 million respectively unrealized excess tax benefits reduction primarily relates utilization previously unrealized excess tax benefits 154 million excess tax benefits december 31 2013 relates foreign tax credits generated carried forward us federal income tax returns unused tax credit carryforwards 24 million expire 2021 130 million expire 2022 venezuela experienced cumulative inflation least 100 three year period ended december 31 2009 therefore january 1 2010 bolivar hyperinflationary us federal income tax purposes result herbalife venezuela considered dual incorporated entity required account operations using dollar approximate separate transactions method accounting dastm see note 2 basis presentation discussion herbalife venezuela’s highly inflationary economy herbalife ltd subsidiaries notes consolidated financial statements continued significant categories temporary differences gave rise deferred tax assets liabilities follows tax effected millions net operating loss carryforwards subsidiaries 2013 2012 292 million 220 million respectively unused net operating losses tax credits 36 million expire 2014 2023 256 million carried forward indefinitely deferred interest carryforwards subsidiaries 2013 2012 2187 million 1869 million respectively carried forward indefinitely company recognizes valuation allowances deferred tax assets reported based weight evidence likely deferred tax assets realized december 31 2013 2012 company held valuation allowances net deferred tax assets certain subsidiaries primarily related deferred interest expense carryforwards net operating loss carryforwards amount 2476 million 2093 million respectively change company’s valuation allowance 2013 383 million related 367 million net additions charged income tax expense 16 million currency translation adjustments recognized within comprehensive income change company’s valuation allowance 2012 412 million related 402 million net additions charged income tax expense 10 million currency translation adjustments recognized within comprehensive income change company’s valuation allowance 2011 295 million related 318 million net additions charged income tax expense reduced 23 million currency translation adjustments recognized within comprehensive income december 31 2013 company’s us consolidated group approximately 881 million unremitted earnings permanently reinvested certain foreign subsidiaries addition december 31 2013 herbalife ltd approximately 20 billion permanently reinvested unremitted earnings relating operating subsidiaries since unremitted earnings permanently reinvested deferred taxes provided unremitted earnings practicable determine amount herbalife ltd subsidiaries notes consolidated financial statements continued unrecognized deferred taxes respect unremitted earnings company remit unremitted earnings would subject income tax remittances deferred taxes accrued earnings considered indefinitely reinvested deferred tax liability unremitted foreign earnings december 31 2013 2012 07 million 139 million respectively applicable statutory income tax rate cayman islands zero herbalife ltd years reported purposes reconciliation provision income taxes statutory rate provision income taxes effective tax rate notional 35 tax rate applied follows millions years ended december 31 2012 2011 company benefited terms tax holiday people’s republic china tax holiday commenced january 1 2008 concluded december 31 2012 terms holiday company subject 11 tax rate 2010 12 tax rate 2011 125 tax rate 2012 company subject statutory tax rate 25 2013 december 31 2013 total amount unrecognized tax benefits including related interest penalties 346 million total amount unrecognized tax benefits recognized 284 million unrecognized tax benefits 37 million interest 08 million penalties would impact effective tax rate december 31 2012 total amount unrecognized tax benefits including related interest penalties 471 million total amount unrecognized tax benefits recognized 382 million unrecognized tax benefits 57 million interest 17 million penalties would impact effective tax rate company accounts interest penalties generated tax contingencies component income tax expense year ended december 31 2013 company recorded reversal interest penalty expense related uncertain tax positions 16 million 07 million respectively year ended december 31 2012 company recorded increase interest penalty expense related uncertain tax positions 02 million 06 million respectively year ended december 31 2011 company recorded increase interest expense reversal penalty expense related uncertain tax positions 01 million 01 million respectively december 31 2013 total amount interest penalties related unrecognized tax benefits recognized statement financial position 37 million 08 million respectively december 31 2012 total amount interest penalties related unrecognized tax benefits recognized statement financial position 57 million 17 million respectively herbalife ltd subsidiaries notes consolidated financial statements continued following changes occurred amount unrecognized tax benefits years ended december 31 2013 2012 2011 millions amount income taxes company pays subject ongoing audits taxing jurisdictions around world company’s estimate potential outcome uncertain tax position subject management’s assessment relevant risks facts circumstances existing time company believes adequately provided matters however company’s future results may include favorable unfavorable adjustments estimates period audits resolved may impact company’s effective tax rate december 31 2013 company’s tax filings generally subject examination major tax jurisdictions years ending december 31 2009 company believes reasonably possible amount unrecognized tax benefits could decrease approximately 107 million within next twelve months possible decrease 68 million would due settlement audits resolution administrative judicial proceedings remaining possible decrease 39 million would due expiration statute limitations various jurisdictions 13 fair value measurements company applies provisions fasb asc topic 820 fair value measurements disclosures asc 820 financial nonfinancial assets liabilities asc 820 defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date asc 820 establishes fair value hierarchy prioritizes inputs used measuring fair value three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities reporting entity ability access measurement date level 2 inputs include quoted prices similar assets liabilities active markets quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability inputs derived principally corroborated observable market data correlation means level 3 inputs unobservable inputs asset liability herbalife ltd subsidiaries notes consolidated financial statements continued company measures certain assets liabilities fair value discussed throughout notes consolidated financial statements foreign exchange currency contracts interest rate swaps valued using standard calculations models foreign exchange currency contracts valued primarily based inputs observable forward rates spot rates foreign currency exchange rates reporting period ended date interest rate swaps valued primarily based inputs libor swap yield curves reporting period ended date company’s derivative assets liabilities measured fair value consisted level 2 inputs amounts shown gross values december 31 2013 2012 fair value measurements reporting date using company’s deferred compensation plan assets consist company owned life insurance policies recorded cash surrender value required included fair value table see note 6 employee compensation plans description deferred compensation plan assets herbalife ltd subsidiaries notes consolidated financial statements continued following tables summarize offsetting fair values company’s derivative assets derivative liabilities presentation company’s consolidated balance sheet december 31 2013 2012 company offsets derivative assets derivative liabilities consolidated balance sheet extent maintains master netting arrangements related financial institutions december 31 2013 2012 company’s derivatives subject master netting arrangements collateralization required company’s derivative assets derivative liabilities 14 professional fees expenses late 2012 hedge fund manager publicly raised allegations regarding legality company’s network marketing program announced hedge fund manager taken significant short position regarding company’s common shares leading intense public scrutiny significant stock price volatility company believes hedge fund manager’s allegations inaccurate misleading company engaged legal advisory firms assist responding allegations perform related services connection recent events company recognizes related expenses part selling general administrative expenses within consolidated statement income year ended december 31 2013 company recorded approximately 291 million professional fees expenses related matter herbalife ltd subsidiaries notes consolidated financial statements continued approximately 291 million expenses incurred year ended december 31 2013 discussed approximately 60 million recognized advisory retainer fees minimum guaranteed retainer fees approximately 40 million december 31 2013 expense recognition fees could accelerate based certain conditions company also cash settlement liability award liability award outstanding december 31 2013 tied company’s stock price vests certain conditions met relating matter fair value liability award revalued quarter settlement company recognize adjust expense expected requisite service period expense recognized year ended december 31 2013 relating liability award approximately 35 million included approximately 291 million expense described remaining unrecognized expense relating liability award approximately 33 million december 31 2013 based fair value liability award date recognition unrecognized expense relating liability award could accelerate change based certain conditions 15 subsequent events february 3 2014 company announced board directors authorized increase existing share repurchase authorization available balance 15 billion company’s former share repurchase authorization 1 billion available balance 6526 million december 31 2013 february 18 2014 company announced board directors approved quarterly cash dividend 030 per common share shareholders record march 4 2014 payable march 18 2014 february 2014 company initially issued 1 billion aggregate principal amount convertible senior notes convertible notes private offering qualified institutional buyers pursuant rule 144a securities act 1933 amended company granted option initial purchasers purchase additional 150 million aggregate principal amount convertible notes subsequently exercised full february 2014 resulting total issuance 115 billion aggregate principal amount convertible notes convertible notes pay interest rate 200 per annum payable semiannually arrears february 15 august 15 year beginning august 15 2014 convertible notes mature august 15 2019 unless earlier repurchased converted company may redeem convertible notes prior stated maturity date convertible notes puttable note holders context defined fundamental change upon conversion convertible notes settled cash applicable company’s common shares based applicable conversion rate time convertible notes initial conversion rate 115908 common shares per 1000 principal amount convertible notes equal initial conversion price approximately 8628 per common share representing initial conversion premium approximately 25 last reported sale price 6902 per common share february 3 2014 company also expected incur approximately 26 million deferred financing costs result issuing convertible notes first quarter 2014 115 billion proceeds received issuance convertible notes must allocated total liabilities shareholders’ equity within company’s consolidated balance sheet due fact convertible notes may partially settled cash existing equity conversion feature within convertible notes permits company settle amounts conversion price common shares february 18 2014 115 billion allocation total liabilities shareholders’ equity finalized preliminarily expected majority 115 billion allocated total liabilities result required allocation liability component measured based fair value convertible notes discounted using nonconvertible debt interest rate therefore result discounted debt recognized within total liabilities herbalife ltd subsidiaries notes consolidated financial statements continued company’s consolidated balance sheet difference proceeds received convertible notes issuance discounted debt would allocated shareholders’ equity since company must still settle convertible notes face value prior maturity discounted debt accreted face value resulting additional noncash interest expense recognized subsequent periods within company’s consolidated statements income convertible notes remain outstanding connection issuance convertible notes company paid approximately 124 million enter capped call transactions respect common shares capped call transactions certain financial institutions capped call transactions expected generally reduce potential dilution upon conversion convertible notes event market price common shares greater strike price capped call transactions reduction potential dilution subject cap based cap price capped call transactions cap price capped call transactions initially 12079 per common share representing premium approximately 75 last reported sale price 6902 per common share february 3 2014 subject certain adjustments terms capped call transactions result transaction company’s additional paidin capital within shareholders’ equity consolidated balance sheet reduced 124 million first quarter 2014 addition company paid approximately 686 million enter prepaid forward share repurchase transactions forward transactions certain financial institutions forward counterparties pursuant company purchased approximately 99 million common shares settlement around august 15 2019 maturity date convertible notes subject ability forward counterparty elect settle portion forward transaction early forward transactions generally expected facilitate privately negotiated derivative transactions forward counterparties holders convertible notes including swaps relating common shares holders convertible notes establish short positions relating common shares otherwise hedge investments convertible notes concurrently shortly pricing convertible notes result transaction company’s total shareholders’ equity within consolidated balance sheet reduced approximately 686 million first quarter 2014 amounts allocated retained earnings additional paid capital within total shareholders’ equity company also record noncash deferred financing costs corresponding amount additional paid capital reflecting fair value forward transactions also executed facilitate issuance company’s convertible notes described february 18 2014 fair value finalized february 2014 connection executing convertible notes forward transactions capped call transactions company also amended credit facility pursuant amendment company amended terms credit facility provide technical amendments indebtedness asset sale dividend covenants crossdefault event default accommodate foregoing transactions amendment also increase 050 highest applicable margin payable herbalife event herbalife’s consolidated total leverage ratio exceeds 250 100 increase permitted consolidated total leverage ratio herbalife credit facility herbalife ltd subsidiaries notes consolidated financial statements continued 16 quarterly information unaudited signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereto duly authorized herbalife ltd john g desimone john g desimone chief financial officer dated february18 2014 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicateditem 15 exhibits financial statement schedules following documents filed part annual report form 10k incorporated herein reference 1 financial statements following financial statements herbalife nutrition ltd filed part annual report form 10k pages indicated 2 financial statement schedules omitted required information inapplicable material information presented consolidated financial statements related notes 3 exhibits listed exhibit index immediately filed part annual report form 10k incorporated reference herein exhibit index filed herewith management contract compensatory plan arrangement previously filed october 1 2004 exhibit company’s registration statement form s1 file 333119485 incorporated herein reference b previously filed december 2 2004 exhibit amendment 4 company’s registration statement form s1 file 333119485 incorporated herein reference c previously filed december 14 2004 exhibit amendment 5 company’s registration statement form s1 file 333119485 incorporated herein reference previously filed may 5 2015 exhibit company’s quarterly report form 10q quarter ended march 31 2015 incorporated herein reference e previously filed august 5 2015 exhibit company’s quarterly report form 10q quarter ended june 30 2015 incorporated herein reference f previously filed may 5 2016 exhibit company’s quarterly report form 10q quarter ended march 31 2016 incorporated herein reference g previously filed july 15 2016 exhibit company’s current report form 8k incorporated herein reference h previously filed february 23 2017 exhibit company’s annual report form 10k year ended december 31 2016 incorporated herein reference previously filed august 1 2017 exhibit company’s quarterly report form 10q quarter ended june 30 2017 incorporated herein reference j previously filed august 21 2017 exhibit company’s tender offer statement schedule incorporated herein reference k previously filed february 22 2018 exhibit company’s annual report form 10k year ended december 31 2017 incorporated herein reference l previously filed march 29 2018 exhibit company’s current report form 8k incorporated herein reference previously filed may 3 2018 exhibit company’s quarterly report form 10q quarter ended march 31 2018 incorporated herein reference n previously filed august 1 2018 exhibit company’s quarterly report form 10q quarter ended june 30 2018 incorporated herein reference previously filed august 22 2018 exhibit company’s current report form 8k incorporated herein reference p previously filed february 19 2019 exhibit company’s annual report form 10k year ended december 31 2018 incorporated herein reference q previously filed august 1 2019 exhibit company’s quarterly report form 10q quarter ended june 30 2019 incorporated herein reference r previously filed october 29 2019 exhibit company’s quarterly report form 10q quarter ended september 30 2019 incorporated herein reference previously filed december 12 2019 exhibit company’s current report form 8k incorporated herein reference report independent registered public accounting firm board directors shareholders herbalife nutrition ltd opinions financial statements internal control financial reporting audited accompanying consolidated balance sheets herbalife nutrition ltd subsidiaries “company” december 31 2019 2018 related consolidated statements income comprehensive income changes shareholders’ deficit equity cash flows three years period ended december 31 2019 including related notes collectively referred “consolidated financial statements” also audited companys internal control financial reporting december 31 2019 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso opinion consolidated financial statements referred present fairly material respects financial position company december 31 2019 2018 results operations cash flows three years period ended december 31 2019 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2019 based criteria established internal control integrated framework 2013 issued coso change accounting principle discussed note 2 consolidated financial statements company changed manner accounts leases 2019 manner accounts revenue contracts customers 2018 basis opinions companys management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions company’s consolidated financial statements companys internal control financial reporting based audits public accounting firm registered public company accounting oversight board united states pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audits obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud whether effective internal control financial reporting maintained material respects audits consolidated financial statements included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate critical audit matters critical audit matter communicated matter arising current period audit consolidated financial statements communicated required communicated audit committee relates accounts disclosures material consolidated financial statements ii involved especially challenging subjective complex judgments communication critical audit matters alter way opinion consolidated financial statements taken whole communicating critical audit matter providing separate opinion critical audit matter accounts disclosures relates loss contingencies described note 7 consolidated financial statements company time engaged routine litigation disclosed management estimated loss contingency recorded information available prior issuance company’s financial statements indicates probable asset impaired liability incurred date financial statements amount loss reasonably estimated management also discloses material contingencies believe loss probable reasonably possible management regularly reviews pending litigation matters involved establishes reserves litigation matters probable loss estimate made accounting contingencies legal nonincome tax matters requires management use judgment related likelihood loss estimate amount range loss principal considerations determination performing procedures relating loss contingencies critical audit matter significant judgment management assessing likelihood loss incurred determining whether reasonable estimate loss range loss matter made turn led high degree auditor judgment effort evaluating management’s assessment loss contingencies associated legal nonincome tax matters addition audit effort involved use professionals specialized skill knowledge assist performing procedures evaluating audit evidence obtained procedures addressing matter involved performing procedures evaluating audit evidence connection forming overall opinion consolidated financial statements procedures included testing effectiveness controls relating management’s evaluation loss contingencies associated legal nonincome tax matters including controls determining whether loss probable whether amount loss reasonably estimated well financial statement disclosures procedures also included among others obtaining evaluating letters audit inquiry company’s external legal counsel evaluating reasonableness management’s assessment regarding whether unfavorable outcome reasonably possible probable reasonably estimable evaluating sufficiency company’s contingency disclosures professionals specialized skill knowledge used assist evaluation completeness measurement certain contingencies evaluation whether positions taken management reasonable assessing audit evidence obtained pricewaterhousecoopers llp los angeles california february 18 2020 served company’s auditor since 2013 herbalife nutrition ltd subsidiaries consolidated balance sheets see accompanying notes consolidated financial statements herbalife nutrition ltd subsidiaries consolidated statements income see accompanying notes consolidated financial statements herbalife nutrition ltd subsidiaries consolidated statements comprehensive income see accompanying notes consolidated financial statements herbalife nutrition ltd subsidiaries consolidated statements changes shareholders’ deficit equity see accompanying notes consolidated financial statements herbalife nutrition ltd subsidiaries consolidated statements cash flows see accompanying notes consolidated financial statements herbalife nutrition ltd subsidiaries notes consolidated financial statements 1 organization herbalife nutrition ltd cayman islands exempted company limited liability incorporated april 4 2002 herbalife nutrition ltd together subsidiaries “company” “herbalife” global nutrition company sells weight management targeted nutrition energy sports fitness outer nutrition products network independent members china company sells products independent service providers sales representatives sales officers customers preferred customers well companyoperated retail platforms necessary company sells products six geographic regions north america mexico south central america emea consists europe middle east africa asia pacific excluding china 2 basis presentation company’s consolidated financial statements refer herbalife nutrition ltd subsidiaries recently adopted pronouncements february 2016 financial accounting standards board fasb issued accounting standards update asu 201602 leases topic 842 subsequently issued additional updates accounting standards codification asc topic 842 asc 842 updated guidance requires lessees recognize lease liability rightofuse asset measured present value lease payments yet paid lease commencement date amendments also require certain quantitative qualitative disclosures asu 201602 effective interim annual reporting periods beginning december 15 2018 early adoption permitted update requires entities recognize measure leases beginning earliest period presented using modified retrospective approach allows entities initially apply new lease standard adoption date recognize cumulativeeffect adjustment opening balance retained earnings period adoption company adopted asc 842 adoption date initial application date january 1 2019 adoption method prior period amounts adjusted company elected apply package practical expedients allows entities reassess whether expired existing contracts contain leases reassess classification existing leases reassess initial direct costs existing leases additionally company apply hindsight determination lease term assessing impairment rightofuse assets existing leases result company make adjustments beginning retained earnings part company’s updated lease accounting policies leases initial term twelve months less recorded balance sheet additionally company elected account lease nonlease components single lease component measurement lease liabilities rightofuse assets january 1 2019 company recorded total operating lease liabilities 1891 million total operating lease rightofuse assets 1769 million net certain deferred rent liabilities prepaid rent impact company’s consolidated statements cash flows see note 4 leases additional information august 2017 fasb issued asu 201712 derivatives hedging targeted improvements accounting hedging activities asu improves financial reporting hedging relationships better portray economic results entity’s risk management activities financial statements makes certain targeted improvements simplify application existing hedge accounting guidance company elected record changes fair value amounts excluded assessment effectiveness currently earnings adoption guidance first quarter 2019 material impact company’s consolidated financial statements february 2018 fasb issued asu 201802 income statement reporting comprehensive income topic 220 asu allows reclassification accumulated comprehensive income retained earnings tax effects items within accumulated comprehensive income stranded tax effects resulting tax cuts jobs act 2017 requires certain disclosures stranded tax effects company elected reclassify income tax effects tax cuts jobs act 2017 accumulated comprehensive income retained earnings adoption guidance first quarter 2019 material impact company’s consolidated financial statements june 2018 fasb issued asu 201807 compensation stock compensation topic 718 improvements nonemployee sharebased payment accounting asu expands scope topic 718 include sharebased payment transactions acquiring goods services nonemployees adoption guidance first quarter 2019 material impact company’s consolidated financial statements november 2018 sec release 3310532 disclosure update simplification amended simplified certain disclosure requirements including requirement present analysis changes shareholders’ equity interim periods became effective company implemented requirements first quarter 2019 new accounting pronouncements june 2016 fasb issued asu 201613 financial instruments credit losses topic 326 measurement credit losses financial instruments asu changes impairment model financial assets requiring use expected loss model requires entities estimate lifetime expected credit loss financial assets measured amortized cost credit losses recorded allowance offset amortized cost financial asset resulting net presentation amount expected collected financial asset addition credit losses relating availableforsale debt securities recorded allowance credit losses rather direct writedown security amendments update effective reporting periods beginning december 15 2019 early adoption permitted reporting periods beginning december 15 2018 company evaluating potential impact adoption consolidated financial statements preliminarily believes adoption guidance material impact company’s consolidated financial statements january 2017 fasb issued asu 201704 intangibles goodwill topic 350 simplifying test goodwill impairment asu simplifies test goodwill impairment removing step 2 goodwill impairment test companies perform goodwill impairment test comparing fair value reporting unit carrying amount recognizing impairment charge amount carrying amount exceeds reporting unit’s fair value exceed total amount goodwill allocated reporting unit entity still option perform qualitative assessment reporting unit determine quantitative impairment test necessary amendments update effective goodwill impairment tests fiscal years beginning december 15 2019 early adoption permitted goodwill impairment tests performed january 1 2017 adoption guidance material impact company’s consolidated financial statements august 2018 fasb issued asu 201813 fair value measurement topic 820 disclosure framework changes disclosure requirements fair value measurement asu modifies disclosure requirements fair value measurements topic 820 based consideration costs benefits promote appropriate exercise discretion entities considering fair value measurement disclosures clarify materiality appropriate consideration entities auditors evaluating disclosure requirements amendments update effective reporting periods beginning december 15 2019 early adoption permitted adoption guidance material impact company’s consolidated financial statements august 2018 fasb issued asu 201814 compensation retirement benefits defined benefit plans general subtopic 71520 disclosure framework changes disclosure requirements defined benefit plans asu removes disclosures longer considered cost beneficial clarifies specific requirements disclosures adds disclosure requirements identified relevant amendments update effective reporting periods beginning december 15 2020 early adoption permitted company evaluating potential impact adoption consolidated financial statements august 2018 fasb issued asu 201815 intangibles goodwill internaluse software subtopic 35040 customer’s accounting implementation costs incurred cloud computing arrangement service contract asu clarifies accounting implementation costs hosting arrangement service contract aligns accounting regardless whether arrangement conveys license hosted software amendments update effective reporting periods beginning december 15 2019 early adoption permitted company evaluating potential impact adoption consolidated financial statements preliminarily believes adoption guidance material impact company’s consolidated financial statements november 2019 fasb issued asu 201908 compensationstock compensation topic 718 revenue contracts customers topic 606 codification improvementssharebased consideration payable customer asu clarifies accounting measuring sharebased payment awards granted customer amendments update effective reporting periods beginning december 15 2019 early adoption permitted adoption guidance material impact company’s consolidated financial statements december 2019 fasb issued asu 201912 income taxes topic 740 simplifying accounting income taxes asu simplifies accounting income taxes eliminating exceptions general approach asc topic 740 income taxes clarifies certain aspects existing guidance promote consistent application among things amendments update effective reporting periods beginning december 15 2020 early adoption permitted company evaluating potential impact adoption consolidated financial statements significant accounting policies consolidation policy consolidated financial statements include accounts herbalife nutrition ltd subsidiaries significant intercompany transactions accounts eliminated foreign currency translation transactions majority countries company operates functional currency local currency company’s foreign subsidiaries’ asset liability accounts translated consolidated financial reporting purposes us dollar amounts yearend exchange rates revenue expense accounts translated average rates year foreign exchange translation adjustments included accumulated comprehensive loss accompanying consolidated balance sheets foreign currency transaction gains losses include cost foreign currency derivative contracts related settlement gains losses excluding certain foreign currency derivatives designated cash flow hedges discussed note 11 derivative instruments hedging activities included selling general administrative expenses within accompanying consolidated statements income company recorded net foreign currency transaction losses 20 million 173 million 137 million years ended december 31 2019 2018 2017 respectively forward exchange contracts company enters foreign currency derivatives primarily comprised foreign currency forward contracts managing foreign exchange risk sales members inventory purchases denominated foreign currencies intercompany transactions loans company use contracts trading purposes accordance fasb asc topic 815 derivatives hedging asc 815 company designates certain derivative instruments cash flow hedges formally documents hedge relationships including identification hedging instruments hedged items well risk management objectives strategies undertaking hedge transaction time derivative contract executed company assesses effectiveness hedge inception ongoing basis determines whether hedge highly perfectly effective offsetting changes cash flows hedged item company records effective portion changes estimated fair value accumulated comprehensive loss subsequently reclassifies related amount accumulated comprehensive loss earnings hedged item underlying transaction impacts earnings determined derivative ceased highly effective hedge company discontinue hedge accounting transaction derivatives designated hedges changes estimated fair value recognized consolidated statements income cash equivalents company considers highly liquid investments purchased maturity three months less cash equivalents cash equivalents comprised primarily domestic foreign bank accounts money market funds cash equivalents valued based level 1 inputs consist quoted prices active markets reduce credit risk company monitors credit standing financial institutions hold company’s cash equivalents company cash pooling arrangement financial institution cash management purposes cash pooling arrangement allows certain company’s participating subsidiaries withdraw cash financial institution based upon company’s aggregate cash deposits held subsidiaries participate cash pooling arrangement extent participating location individual basis overdraft position overdrafts recorded liabilities reflected financing activities company’s consolidated balance sheets consolidated statements cash flows respectively company owe amounts financial institution december 31 2019 2018 accounts receivable accounts receivable consist principally receivables credit card companies arising sale products company’s members receivables importers utilized limited number countries sell products members company believes concentration collection risk related credit card receivables reduced due geographic dispersion credit card receivables 560 million 527 million december 31 2019 2018 respectively substantially credit card receivables current december 31 2019 2018 company’s receivables importers company performs ongoing credit evaluations importers maintains allowance potential credit losses company considers customer creditworthiness past current transaction history customer contractual terms current economic industry trends changes customer payment terms determining whether collectability reasonably assured whether record allowances receivables financial condition company’s customers deteriorates adversely affects ability make payments additional allowances recorded company believes provides adequate allowances receivables members importers material consolidated financial statements company recorded 30 million 12 million 09 million years ended december 31 2019 2018 2017 respectively baddebt expense related allowances company’s receivables december 31 2019 2018 company’s allowance doubtful accounts 25 million 15 million respectively december 31 2019 2018 majority company’s total outstanding accounts receivable current fair value financial instruments company applies provisions fasb authoritative guidance applies financial nonfinancial assets liabilities fasb authoritative guidance clarifies definition fair value prescribes methods measuring fair value establishes fair value hierarchy based inputs used measure fair value expands disclosures fair value measurements company estimated fair value financial instruments using following methods assumptions • carrying amounts cash equivalents receivables accounts payable approximate fair value due shortterm maturities instruments • fair value option forward contracts based dealer quotes • company’s variable rate revolving credit facility recorded carrying value considered approximate fair value • outstanding borrowings company’s term loan senior secured credit facility recorded carrying value fair value determined utilizing overthecounter market quotes similar instruments • outstanding borrowings company’s term loan b senior secured credit facility recorded carrying value fair value determined utilizing overthecounter market quotes • company’s convertible senior notes recorded carrying value fair value determined using two valuation methods described note 5 longterm debt • company’s senior notes issued august 2018 2026 notes recorded carrying value fair value determined utilizing overthecounter market quotes yield curves inventories stated lower cost primarily firstin firstout basis net realizable value debt issuance costs debt issuance costs represent fees expenses related borrowing company’s longterm debt generally amortized term related debt using effective interest method debt issuance costs except related company’s revolving credit facility recorded reduction debt contraliability within company’s consolidated balance sheets total amortization expense related debt issuance costs 53 million 73 million 84 million years ended december 31 2019 2018 2017 respectively december 31 2019 2018 company’s remaining unamortized debt issuance costs 212 million 265 million respectively longlived assets december 31 2019 2018 company’s net property plant equipment consisted following december 2012 company purchased approximate 800000 square foot facility winstonsalem north carolina approximately 222 million company allocated 188 million 34 million buildings land respectively based relative fair values april 2016 company purchased one office buildings torrance california previously leased approximately 296 million company allocated 169 million 116 million net deferred rent liability 11 million buildings land respectively based relative fair values december 31 2019 2018 amounts reflected property plant equipment within company’s accompanying consolidated balance sheets depreciation furniture fixtures equipment including computer hardware software computed straightline basis estimated useful lives related assets range three ten years company capitalizes eligible costs acquire develop internaluse software incurred subsequent preliminary project stage computer hardware software majority comprised capitalized internaluse software costs 1774 million 1632 million december 31 2019 2018 respectively net accumulated depreciation leasehold improvements amortized straightline basis life related asset term lease whichever shorter buildings depreciated 40 years building improvements generally depreciated ten fifteen years land depreciated depreciation amortization expenses recorded selling general administrative expenses totaled 788 million 808 million 801 million years ended december 31 2019 2018 2017 respectively longlived assets reviewed impairment based undiscounted cash flows whenever events changes circumstances indicate carrying amount assets may recoverable measurement impairment loss based estimated fair value asset goodwill marketingrelated intangible assets indefinite lives evaluated annual basis impairment frequently events changes circumstances indicate asset might impaired goodwill company performed qualitative assessment fourth quarter 2019 determined likely fair value reporting unit less respective carrying value determined likely fair value reporting unit less carrying amount qualitative assessment performed company would perform twostep goodwill impairment test required would use discounted cash flow approach estimate fair value reporting unit fair value reporting unit less carrying value implied fair value goodwill must determined implied fair value goodwill less carrying value goodwill impairment amount recorded difference marketingrelated intangible assets company performed qualitative assessment fourth quarter 2019 determined likely fair value assets less carrying value determined likely fair value assets less carrying amount qualitative assessment performed company would perform quantitative impairment test required would use discounted cash flow model relieffromroyalty method order determine fair value fair value less carrying value impairment amount recorded difference years ended december 31 2019 2018 2017 additions goodwill marketingrelated intangible assets impairments goodwill marketingrelated intangible assets december 31 2019 2018 marketingrelated intangible asset balance 3100 million consisted company’s trademark trade name marketing franchise december 31 2019 2018 goodwill balance 915 million 929 million respectively decrease goodwill year ended december 31 2019 due cumulative translation adjustments restricted cash following table provides reconciliation cash equivalents restricted cash reported within company’s consolidated balance sheets sum total amounts shown company’s consolidated statements cash flows majority company’s consolidated restricted cash held certain foreign entities consists cash deposits required due business operating requirements jurisdictions income taxes income tax expense includes income taxes payable current year change deferred income tax assets liabilities future tax consequences events recognized company’s financial statements income tax returns valuation allowance recognized reduce carrying value deferred income tax assets believed likely component deferred income tax assets realized company accounts uncertainty income taxes accordance fasb authoritative guidance clarifies accounting reporting uncertainties income taxes recognized enterprise’s financial statements guidance prescribes comprehensive model financial statement recognition measurement presentation disclosure uncertain tax positions taken expected taken income tax returns december 22 2017 us enacted tax cuts jobs act 2017 contained several key tax provisions affected company including limited onetime mandatory transition tax accumulated foreign earnings changes sourcing calculation foreign income reduction corporate income tax rate 21 effective january 1 2018 company required recognize effect tax law changes period enactment determining transition tax remeasuring us deferred tax assets liabilities well reassessing net realizability deferred tax assets liabilities december 2017 sec staff issued staff accounting bulletin 118 income tax accounting implications tax cuts jobs act allowed company record provisional amounts measurement period extend beyond one year enactment date see note 12 income taxes description income taxes impact us tax reform company made accounting policy election account global intangible lowtaxed income period cost incurred royalty overrides certain members may earn commissions called royalty overrides include production bonuses based retail sales volume royalty overrides based retail sales volume certain members sponsored directly indirectly member royalty overrides recorded products delivered revenue recognized royalty overrides compensation members services rendered including development retention improved productivity sales organizations royalty overrides classified operating expense nonus royalty override checks aged variety reasons beyond certainty paid taken back income management estimated period certainty three years worldwide distributor compensation us distributor compensation including royalty overrides capped company meet annual requirement described consent order discussed detail note 7 contingencies periodic basis company evaluates requirement achieved yearend determine cap distributor compensation required determines appropriate amount distributor compensation expense may vary reporting period company determined cap distributor compensation applicable year ended december 31 2019 annual requirement met comprehensive income comprehensive income consists net income foreign currency translation adjustments unrealized gains losses derivatives see note 8 shareholders’ deficit description detail components accumulated comprehensive loss operating leases company leases physical properties operating leases company recognizes rent expense straightline basis operating leases certain lease agreements generally include rent holidays tenant improvement allowances prior january 1 2019 company recognized rent holiday periods straightline basis lease term beginning company right leased space company also recorded tenant improvement allowances rent holidays deferred rent liabilities amortized deferred rent terms lease rent expense prior january 1 2019 company recognize operating leases balance sheet beginning january 1 2019 company recognizes right use asset lease liability within consolidated balance sheets operating leases terms greater twelve months initial measurement lease liability measured present value lease payments yet paid discounted generally using company’s incremental borrowing rate commencement date leases initial term twelve months less recorded company’s consolidated balance sheets company separate nonlease components lease components research development company’s research development performed inhouse staff outside consultants periods presented research development costs expensed incurred material operating income encourage local investment operations governments various china provinces conduct grant programs company applied received several grants china government grants recorded income legal right grant exists reasonable assurance grant proceeds received substantive conditions grants provided met generally substantive conditions company maintaining operations paying certain taxes relevant province obtaining government approval completing annual application process company believes continuing obligation respect funds general requirement used business china company recognized government grant income related regional headquarters distribution centers within china approximately 315 million 298 million 508 million years ended december 31 2019 2018 2017 respectively operating income within consolidated statements income company intends continue applying government grants china programs available however assurance company receive grants future periods year ended december 31 2019 company also recognized 60 million operating income within consolidated statement income related finalization insurance recoveries connection flooding one warehouses mexico september 2017 damaged certain company’s inventory stored within warehouse see note 7 contingencies consolidated financial statements included company’s annual report form 10k year ended december 31 2018 discussion income expense net year ended december 31 2019 company recognized gain 157 million revaluation cvr provided share tendered october 2017 modified dutch auction tender offer see note 8 shareholders’ deficit income expense net within consolidated statements income year ended december 31 2018 company recognized loss 88 million revaluation cvr 131 million loss extinguishment 4750 million aggregate principal amount 2019 convertible notes see note 5 longterm debt 354 million loss extinguishment company’s 2017 senior secured credit facility see note 5 longterm debt income expense net within consolidated statements income year ended december 31 2017 company recognized gain 04 million revaluation cvr income expense net within consolidated statements income noncash expenses included noncash adjustments net income company’s cash flows operating activities within consolidated statements cash flows professional fees company expenses professional fees including legal fees incurred professional fees included selling general administrative expenses within company’s consolidated statements income advertising costs including company sponsorships expensed incurred amounted approximately 414 million 411 million 557 million years ended december 31 2019 2018 2017 respectively expenses included selling general administrative expenses within company’s consolidated statements income earnings per share basic earnings per share represents net income divided weightedaverage number common shares outstanding period diluted earnings per share represents net income divided weightedaverage number common shares outstanding inclusive effect dilutive securities outstanding stock appreciation rights sars stock units convertible notes following common share amounts used compute basic diluted earnings per share period aggregate 08 million 14 million 69 million equity grants consisting sars stock units outstanding years ended december 31 2019 2018 2017 respectively included computation diluted earnings per share effect would antidilutive performance condition award satisfied since company required settle principal amount 2019 convertible notes cash settle conversion feature amount conversion price common shares conversion spread company uses treasury stock method calculating potential dilutive effect conversion spread diluted earnings per share applicable conversion spread dilutive impact diluted earnings per share average market price company’s common shares given period exceeds conversion price 2019 convertible notes dilutive impacts years ended december 31 2019 2018 disclosed table year ended december 31 2017 2019 convertible notes excluded computation diluted earnings per share effect would antidilutive since conversion price 2019 convertible notes exceeded average market price company’s common shares year ended december 31 2017 initial conversion rate conversion price 2019 convertible notes described note 5 longterm debt 2024 convertible notes company intent ability settle principal amount cash intends settle conversion feature amount conversion price conversion spread common shares company uses treasury stock method calculating potential dilutive effect conversion spread diluted earnings per share applicable conversion spread dilutive impact diluted earnings per share average market price company’s common shares given period exceeds conversion price 2024 convertible notes years ended december 31 2019 2018 2024 convertible notes excluded computation diluted earnings per share effect would antidilutive since conversion price 2024 convertible notes exceeded average market price company’s common shares years ended december 31 2019 2018 initial conversion rate conversion price 2024 convertible notes described note 5 longterm debt capped call transactions executed connection issuance 2019 convertible notes capped call transactions excluded calculation diluted earnings per share impact always antidilutive additionally prepaid forward share repurchase transactions executed connection issuance 2019 convertible notes forward transactions treated retired shares basic diluted eps purposes case periods transactions effect august 15 2019 remaining capped call transactions expired unexercised shares retired forward transactions see note 8 shareholders’ deficit additional discussion regarding capped call transactions forward transactions see note 8 shareholders’ deficit discussion common shares repurchased company’s indirect whollyowned subsidiary treated us gaap revenue recognition company adopted fasb asc topic 606 revenue contracts customers asc 606 date initial application january 1 2018 using modified retrospective method applied contracts existing january 1 2018 results reporting periods beginning january 1 2018 thereafter presented asc 606 prior period amounts adjusted continue reported accordance fasb asc topic 605 revenue recognition asc 605 adoption asc 606 material impact company’s consolidated net sales periods presented company’s net sales consist product sales general companys performance obligation transfer products members company generally recognizes revenue product delivered members china independent service providers thirdparty importers utilized certain countries sales historically material company recognizes revenue based company’s estimate service provider thirdparty importer sells products company deemed principal party product sales due additional selling operating requirements relating pricing products conducting business physical locations selling marketing activities required service providers thirdparty importers timing difference relating company recognizing revenues thirdparty entities sell products compared company delivers products material impact company’s consolidated net sales periods presented company’s members excluding china independent service providers may receive distributor allowances comprised discounts rebates wholesale commission payments company distributor allowances resulting company’s sales products members recorded net sales distributor allowances represent discounts suggested retail price company compensates sales leader members royalty overrides services rendered relating development retention management sales organizations royalty overrides payable based achieved sales volume royalty overrides classified operating expense reflecting services provided company compensates china independent service providers thirdparty importers utilized certain countries providing marketing selling customer support services asc 606 company principal party product sales described service fees payable china independent service providers compensation received thirdparty importers services provide recorded selling general administrative expenses within company’s consolidated statements income periods presented asc 605 service fees payable china independent service providers similarly recognized selling general administrative expenses within company’s consolidated statements income asc 606 however asc 605 compensation received thirdparty importers services provide represents discount provided recorded reduction net sales differs treatment asc 606 described change accounting treatment asc 606 compensation services provided company’s thirdparty importers impact company’s consolidated net income material company’s consolidated net sales periods presented company recognizes revenue delivers products united states members distributor allowances inclusive discounts wholesale commissions recorded reduction net sales royalty overrides classified operating expense shipping handling services relating product sales recognized fulfillment activities company’s performance obligation transfer products therefore recorded within net sales part product sales considered separate revenues shipping handling costs paid company included cost sales company presents sales taxes collected customers net basis company generally receives net sales price cash credit card payments point sale company records advance sales deposits payment received revenue yet recognized majority company’s markets advance sales deposits generally recorded income product delivered members additionally advance sales deposits also include deferred revenues due timing revenue recognition products sold china independent service providers estimated deferral period advance sales deposits generally within one week year ended december 31 2019 company recognized substantially revenues included within advance sales deposits december 31 2018 remaining balance material december 31 2019 advance sales deposits included current liabilities company’s consolidated balance sheets see note 14 detail certain balance sheet accounts information general member returns product company timely basis may obtain replacement product company returned products addition general company maintains buyback program pursuant repurchase products sold member decided leave business allowances product returns primarily connection company’s buyback program provided time sale recorded accrual based upon historical return rates country relevant return pattern reflects anticipated returns received period 12 months following original sale allowances product returns 47 million 49 million december 31 2019 2018 respectively company’s products grouped five principal categories weight management targeted nutrition energy sports fitness outer nutrition literature promotional items however effect economic factors nature amount timing uncertainty revenue recognition cash flows similar among five product categories company defines operating segments six geographic regions effect economic factors nature amount timing uncertainty revenue recognition cash flows similar among regions company’s primary reporting segment see note 10 segment information company’s reportable segments company’s presentation disaggregated revenue reportable segment noncash investing financing activities years ended december 31 2019 2018 2017 company recorded 141 million 102 million 101 million respectively noncash capital expenditures year ended december 31 2019 company recorded 59 million noncash borrowings used finance software maintenance year ended december 31 2018 company record noncash borrowings used finance software maintenance year ended december 31 2017 company recorded 23 million noncash borrowings used finance software maintenance additionally see note 8 shareholders’ deficit information company’s noncash financing activities related cvr provided participants october 2017 modified dutch auction tender offer well share repurchases payment made subsequent year end sharebased payments company accounts sharebased compensation accordance fasb authoritative guidance requires measurement sharebased compensation expense sharebased payment awards made employees company measures sharebased compensation cost grant date based fair value award company recognizes sharebased compensation expense service condition awards straightline basis employee’s requisite service period company recognizes sharebased compensation expense performance condition awards vesting term using graded vesting method use estimates preparation financial statements conformity us gaap requires management make estimates assumptions estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates company evaluates estimates assumptions ongoing basis using historical experience factors including current economic environment company believes reasonable circumstances company adjusts estimates assumptions facts circumstances dictate illiquid credit markets volatile equity foreign currency combined increase uncertainty inherent estimates assumptions future events effects cannot determined precision actual results could differ estimates changes estimates resulting continuing changes economic environment reflected financial statements future periods 3 inventories following major classes inventory 4 leases generally company leases certain office space warehouses distribution centers manufacturing centers equipment contract contains lease contract conveys right control use identified property plant equipment identified asset period time exchange consideration company also rents subleases certain real estate third parties sublease income material years ended december 31 2019 2018 2017 general company’s leases include one options renew renewal terms generally vary one ten years exercise lease renewal options generally company’s sole discretion certain leases also include options purchase leased property depreciable life assets leasehold improvements limited expected lease term unless transfer title purchase option reasonably certain exercise company’s lease agreements contain material residual value guarantees material restrictive covenants leases initial term twelve months less recorded company’s consolidated balance sheets company separate nonlease components lease components company’s lease assets liabilities recognized within consolidated balance sheets follows 1 finance lease assets recorded net accumulated amortization 13 million december 31 2019 lease cost recognized straightline basis lease term components lease cost follows 1 includes shortterm leases variable lease costs 112 million 22 million respectively year ended december 31 2019 variable lease costs include items real estate taxes common area maintenance changes based index rate included calculation rightofuse assets recognized incurred 2 amount includes 623 million recorded selling general administrative expenses within company’s consolidated statement income year ended december 31 2019 34 million capitalized part cost another asset includes inventories year ended december 31 2019 years ended december 31 2018 2017 company recognized rental expense 611 million 562 million respectively selling general administrative expenses within company’s consolidated statements income pursuant fasb asc topic 840 leases december 31 2019 annual scheduled lease payments follows 1 operating lease payments exclude 16 million legally binding minimum lease payments leases signed yet commenced general majority company’s material leases renewal options included calculation rightofuse assets lease liabilities company believe reasonably certain renewal options exercised periodically company assesses leases determine whether reasonably certain renewal options exercised december 31 2018 future minimum rental commitments noncancelable operating leases follows majority company’s leases real estate general individual lease contracts provide information rate implicit lease company able determine rate implicit leases instead generally uses incremental borrowing rate determine present value lease liabilities determining incremental borrowing rate company reviewed terms leases senior secured credit facility swap rates factors weightedaverage remaining lease term weightedaverage discount rate used calculate present value lease liabilities follows supplemental cash flow information related leases follows 5 longterm debt longterm debt consists following senior secured credit facility march 9 2011 company entered senior secured credit facility 2011 credit facility initially consisted 7000 million revolving credit facility 2011 revolving credit facility syndicate financial institutions lenders 2011 credit facility subsequently amended july 26 2012 include 5000 million term loan 2011 term loan syndicate financial institutions lenders may 4 2015 company amended 2011 credit facility extend maturity date 2011 revolving credit facility one year march 9 2017 2011 term loan matured march 9 2016 2297 million outstanding repaid full prior termination 2011 term loan recently bore interest either libor plus applicable margin 200 300 base rate plus applicable margin 100 200 based company’s consolidated leverage ratio company terminated 2011 revolving credit facility february 15 2017 4100 million outstanding repaid full prior termination 2011 revolving credit facility recently bore interest either libor plus applicable margin 400 500 base rate plus applicable margin 300 400 based company’s consolidated leverage ratio february 15 2017 company entered 14500 million senior secured credit facility 2017 credit facility consisting 13000 million term loan b 2017 term loan b 1500 million revolving credit facility 2017 revolving credit facility syndicate financial institutions lenders 2017 revolving credit facility mature february 15 2022 2017 term loan b mature february 15 2023 2017 credit facility amended effective march 16 2018 make certain technical amendments connection offering 2024 convertible notes defined company terminated 2017 credit facility august 16 2018 11781 million outstanding repaid full prior termination 2017 term loan b recently bore interest either eurocurrency rate plus margin 550 base rate plus margin 450 2017 revolving credit facility recently bore interest either eurocurrency rate plus margin either 450 475 base rate plus margin either 350 375 based company’s consolidated leverage ratio eurocurrency rate based adjusted libor subject floor 075 base rate represented highest federal funds rate plus 050 onemonth adjusted libor plus 100 prime rate set credit suisse subject floor 175 2017 term loan b issued lenders 2 discount 260 million company incurred approximately 226 million debt issuance costs connection 2017 credit facility debt issuance costs discount recorded company’s consolidated balance sheet amortized life 2017 credit facility using effectiveinterest method company wrote remaining unamortized debt issuance costs discount related 2017 credit facility upon termination included loss extinguishment described august 16 2018 company entered 125 billion senior secured credit facility 2018 credit facility consisting 2500 million term loan 2018 term loan 7500 million term loan b 2018 term loan b 2500 million revolving credit facility 2018 revolving credit facility syndicate financial institutions lenders 2018 term loan 2018 revolving credit facility mature august 16 2023 2018 term loan b matures upon earlier august 18 2025 ii december 15 2023 outstanding principal 2024 convertible notes defined exceeds 3500 million company exceeds certain leverage ratios december 15 2023 obligations 2018 credit facility unconditionally guaranteed certain direct indirect whollyowned subsidiaries herbalife nutrition ltd secured equity interests certain herbalife nutrition ltd’s subsidiaries substantially assets domestic loan parties also august 16 2018 company issued 400 million aggregate principal amount senior unsecured notes 2026 notes described used proceeds 2018 credit facility 2026 notes repay full 11781 million outstanding 2017 credit facility accounting purposes pursuant fasb asc topic 470 debt asc 470 transactions accounted extinguishment 2017 credit facility company recognized loss extinguishment 354 million result recorded income expense net within company’s consolidated statement income year ended december 31 2018 term loan b issued lenders 025 discount 19 million company incurred approximately 117 million debt issuance costs connection 2018 credit facility discount debt issuance costs recorded company’s consolidated balance sheet amortized life 2018 credit facility using effectiveinterest method december 12 2019 company amended 2018 credit facility among things reduced interest rate borrowings 2018 term loan b either eurocurrency rate plus margin 325 base rate plus margin 225 either eurocurrency rate plus margin 275 base rate plus margin 175 company incurred approximately 12 million debt issuance costs connection amendment accounting purposes pursuant asc 470 transaction accounted modification 2018 credit facility debt issuance costs recognized interest expense within company’s consolidated statement income year ended december 31 2019 borrowings 2018 term loan 2018 revolving credit facility bear interest either eurocurrency rate plus margin 300 base rate plus margin 200 borrowings 2018 term loan b bear interest either eurocurrency rate plus margin 275 base rate plus margin 175 eurocurrency rate based adjusted libor base rate represents highest federal funds rate plus 050 onemonth adjusted libor plus 100 prime rate quoted wall street journal subject floor 100 company required pay commitment fee 2018 revolving credit facility 050 per annum undrawn portion 2018 revolving credit facility interest due least quarterly amounts outstanding 2018 credit facility 2018 credit facility requires company comply leverage ratio 2018 credit facility also contains affirmative negative covenants customary financings type including among things limitations prohibitions repurchasing common shares declaring paying dividends distributions redeeming repurchasing certain indebtedness loans investments additional indebtedness liens mergers asset sales transactions affiliates addition 2018 credit facility contains customary events default december 31 2019 2018 company compliance debt covenants 2018 credit facility 2018 term loan 2018 term loan b payable consecutive quarterly installments began december 31 2018 addition beginning 2020 company may required make mandatory prepayments towards 2018 term loan b based company’s consolidated leverage ratio annual excess cash flows defined terms 2018 credit facility company also permitted make voluntary prepayments amounts outstanding 2018 term loan may voluntarily prepaid without premium penalty subject customary breakage fees connection prepayment eurocurrency loan amended 2018 credit facility amounts voluntarily prepaid 2018 term loan b june 12 2020 incur prepayment premium 1 thereafter amounts outstanding 2018 term loan b may voluntarily prepaid without premium penalty subject customary breakage fees connection prepayment eurocurrency loan prepayments applied remaining quarterly installments owed 2018 term loan 2018 term loan b order maturity remaining principal due upon maturity unless directed otherwise company expect make mandatory prepayment 2020 toward 2018 term loan b based 2019 consolidated leverage ratio excess cash flow calculation defined terms 2018 credit facility december 31 2019 2018 weightedaverage interest rate borrowings 2018 credit facility 552 680 respectively year ended december 31 2019 company repaid total amount 200 million amounts outstanding 2018 credit facility year ended december 31 2018 company borrowed aggregate amount 10000 million 2018 credit facility repaid total amount 12319 million including 50 million amounts outstanding 2018 credit facility 12269 million repay full amounts outstanding 2017 credit facility year ended december 31 2017 company borrowed aggregate amount 13000 million 2017 credit facility repaid total amount 4831 million including 731 million amounts outstanding 2017 credit facility 4100 million repay full amounts outstanding 2011 credit facility december 31 2019 2018 us dollar amount outstanding 2018 credit facility 9750 million 9950 million respectively 9750 million outstanding 2018 credit facility december 31 2019 2344 million outstanding 2018 term loan 7406 million outstanding 2018 term loan b 9950 million outstanding 2018 credit facility december 31 2018 2469 million outstanding 2018 term loan 7481 million outstanding 2018 term loan b borrowings outstanding 2018 revolving credit facility december 31 2019 2018 outstanding foreign currency borrowings 2018 credit facility december 31 2019 2018 year ended december 31 2019 company recognized 589 million interest expense relating 2018 credit facility included 02 million relating noncash interest expense relating debt discount 17 million relating amortization debt issuance costs year ended december 31 2018 company recognized 836 million interest expense relating 2018 credit facility 2017 credit facility included 29 million relating noncash interest expense relating debt discount 32 million relating amortization debt issuance costs year ended december 31 2017 company recognized 870 million interest expense relating 2017 credit facility 2011 credit facility included 42 million relating noncash interest expense relating debt discount 44 million relating amortization debt issuance costs fair value outstanding borrowings 2018 term loan determined utilizing overthecounter market quotes similar instruments considered level 2 inputs described note 12 fair value measurements december 31 2019 2018 carrying value 2018 term loan 2332 million 2454 million respectively fair value approximately 2357 million 2407 million respectively fair value outstanding borrowings 2018 term loan b determined utilizing overthecounter market quotes considered level 2 inputs described note 12 fair value measurements december 31 2019 2018 carrying amount 2018 term loan b 7321 million 7382 million respectively fair value approximately 7448 million 7293 million respectively convertible senior notes due 2019 february 2014 company initially issued 1 billion aggregate principal amount convertible senior notes 2019 convertible notes private offering qualified institutional buyers pursuant rule 144a securities act 1933 amended company granted option initial purchasers purchase additional 150 million aggregate principal amount 2019 convertible notes subsequently exercised full february 2014 resulting total issuance 115 billion aggregate principal amount 2019 convertible notes 2019 convertible notes senior unsecured obligations ranked effectively subordinate company’s existing future secured indebtedness including amounts outstanding 2018 credit facility extent value assets securing indebtedness 2019 convertible notes paid interest rate 200 per annum payable semiannually arrears february 15 august 15 year beginning august 15 2014 unless earlier repurchased converted 2019 convertible notes matured august 15 2019 company could redeem 2019 convertible notes prior stated maturity date upon conversion 2019 convertible notes settled cash applicable company’s common shares based applicable conversion rate time 2019 convertible notes initial conversion rate 231816 common shares per 1000 principal amount 2019 convertible notes initial conversion price approximately 4314 per common share company incurred approximately 266 million issuance costs first quarter 2014 relating issuance 2019 convertible notes 266 million issuance costs incurred 215 million 51 million recorded debt issuance costs additional paidin capital respectively proportion allocation proceeds 2019 convertible notes 215 million debt issuance costs recorded company’s consolidated balance sheet amortized contractual term 2019 convertible notes using effectiveinterest method february 2014 115 billion aggregate principal amount 2019 convertible notes initially allocated longterm debt liability component additional paidin capital equity component within company’s consolidated balance sheet 9309 million 2191 million respectively liability component measured using nonconvertible debt interest rate carrying amount equity component representing conversion option determined deducting fair value liability component face value 2019 convertible notes whole since company required settle 2019 convertible notes face value prior maturity liability component accreted face value resulting additional noncash interest expense recognized within company’s consolidated statements income 2019 convertible notes remained outstanding effectiveinterest rate 2019 convertible notes approximately 62 per annum equity component remeasured long continued meet conditions equity classification march 2018 company issued 550 million aggregate principal amount new convertible senior notes due 2024 convertible notes described subsequently used proceeds along cash hand repurchase 4750 million existing 2019 convertible notes limited number holders privately negotiated transactions aggregate purchase price 5835 million included 10 million accrued interest accounting purposes pursuant asc 470 debt transactions accounted extinguishment 2019 convertible notes issuance new 2024 convertible notes company allocated purchase price fair value liability component equity component 2019 convertible notes 4594 million 1230 million respectively result company recognized 4464 million reduction longterm debt representing carrying value liability component 1230 million reduction additional paidin capital representing equity component repurchased 2019 convertible notes 131 million difference fair value carrying value liability component repurchased 2019 convertible notes recognized loss extinguishment debt result transaction recorded income expense net within company’s consolidated statement income accounting impact new 2024 convertible notes described detail august 15 2019 convertible notes matured company repaid 6750 million outstanding principal cash well 67 million accrued interest december 31 2018 outstanding principal 2019 convertible notes 6750 million unamortized debt discount debt issuance costs 186 million carrying amount liability component 6564 million recorded current portion longterm debt within company’s consolidated balance sheet fair value liability component relating 2019 convertible notes approximately 6621 million december 31 2018 years ended december 31 2019 2018 2017 company recognized 270 million 485 million 682 million respectively interest expense relating 2019 convertible notes included 170 million 298 million 412 million respectively relating noncash interest expense relating debt discount 17 million 29 million 40 million respectively relating amortization debt issuance costs conjunction issuance 2019 convertible notes february 2014 company paid approximately 6858 million enter prepaid forward share repurchase transactions forward transactions certain financial institutions paid approximately 1238 million enter capped call transactions respect common shares capped call transactions certain financial institutions subsequently conjunction repurchase portion 2019 convertible notes march 2018 company entered agreements option counterparties capped call transactions terminate portion existing transactions see note 8 shareholders’ deficit additional discussion forward transactions capped call transactions entered conjunction issuance 2019 convertible notes convertible senior notes due 2024 march 2018 company issued 550 million aggregate principal amount convertible senior notes 2024 convertible notes private offering qualified institutional buyers pursuant rule 144a securities act 1933 amended 2024 convertible notes senior unsecured obligations rank effectively subordinate company’s existing future secured indebtedness including amounts outstanding 2018 credit facility extent value assets securing indebtedness 2024 convertible notes pay interest rate 2625 per annum payable semiannually arrears march 15 september 15 year beginning september 15 2018 unless redeemed repurchased converted accordance terms prior date 2024 convertible notes mature march 15 2024 holders 2024 convertible notes may convert notes option following circumstances calendar quarter commencing calendar quarter ending june 30 2018 last reported sale price company’s common shares least 20 trading days whether consecutive period 30 consecutive trading days ending including last trading day immediately preceding calendar quarter exceeds 130 conversion price 2024 convertible notes applicable trading day ii five businessday period immediately five consecutive trading day period measurement period trading price per 1000 principal amount 2024 convertible notes trading day measurement period less 98 product last reported sale price company’s common shares conversion rate 2024 convertible notes day iii company calls 2024 convertible notes redemption iv upon occurrence specified corporate events december 15 2023 holders may convert 2024 convertible notes time regardless foregoing circumstances upon conversion 2024 convertible notes settled company’s election cash company’s common shares combination thereof based applicable conversion rate time 2024 convertible notes initial conversion rate 160056 common shares per 1000 principal amount 2024 convertible notes initial conversion price approximately 6248 per common share conversion rate subject adjustment upon occurrence certain events 160352 common shares per 1000 principal amount 2024 convertible notes conversion price approximately 6236 per common share december 31 2019 company incurred approximately 129 million issuance costs first quarter 2018 relating issuance 2024 convertible notes 129 million issuance costs incurred 96 million 33 million recorded debt issuance costs additional paidin capital respectively proportion allocation proceeds 2024 convertible notes 96 million debt issuance costs recorded additional debt discount company’s consolidated balance sheet amortized contractual term 2024 convertible notes using effectiveinterest method march 2018 550 million aggregate principal amount 2024 convertible notes initially allocated longterm debt liability component additional paidincapital equity component within company’s consolidated balance sheet 4101 million 1399 million respectively liability component measured using nonconvertible debt interest rate carrying amount equity component representing conversion option determined deducting fair value liability component face value 2024 convertible notes whole since company must still settle 2024 convertible notes face value prior maturity liability component accreted face value resulting additional noncash interest expense recognized within company’s consolidated statements income 2024 convertible notes remain outstanding effectiveinterest rate 2024 convertible notes approximately 84 per annum equity component remeasured long continues meet conditions equity classification december 31 2019 outstanding principal 2024 convertible notes 5500 million unamortized debt discount debt issuance costs 1126 million carrying amount liability component 4374 million recorded longterm debt within company’s consolidated balance sheet december 31 2018 outstanding principal 2024 convertible notes 5500 million unamortized debt discount debt issuance costs 1340 million carrying amount liability component 4160 million recorded longterm debt within company’s consolidated balance sheet fair value liability component relating 2024 convertible notes approximately 5086 million 4481 million december 31 2019 2018 respectively years ended december 31 2019 2018 company recognized 358 million 266 million respectively interest expense relating 2024 convertible notes included 200 million 145 million respectively relating noncash interest expense relating debt discount 14 million 10 million respectively relating amortization debt issuance costs senior notes due 2026 august 2018 company issued 400 million aggregate principal amount senior notes 2026 notes private offering united states qualified institutional buyers pursuant rule 144a securities act 1933 amended outside united states pursuant regulation securities act 1933 amended 2026 notes senior unsecured obligations rank effectively subordinate company’s existing future secured indebtedness including amounts outstanding 2018 credit facility extent value assets securing indebtedness 2026 notes pay interest rate 7250 per annum payable semiannually arrears february 15 august 15 year beginning february 15 2019 2026 notes mature august 15 2026 time prior august 15 2021 company may redeem part 2026 notes redemption price equal 100 principal amount plus “make whole” premium redemption date accrued unpaid interest redemption date addition time prior august 15 2021 company may redeem 40 aggregate principal amount 2026 notes proceeds one equity offerings redemption price equal 107250 plus accrued unpaid interest furthermore time august 15 2021 company may redeem part 2026 notes following redemption prices expressed percentages principal amount plus accrued unpaid interest thereon redemption date redeemed twelvemonth period beginning august 15 years indicated 2026 notes contain customary negative covenants including among things limitations prohibitions restricted payments incurrence additional indebtedness liens mergers asset sales transactions affiliates addition 2026 notes contain customary events default company incurred approximately 54 million issuance costs third quarter 2018 relating issuance 2026 notes 54 million debt issuance costs recorded debt discount company’s consolidated balance sheet amortized contractual term 2026 notes using effectiveinterest method december 31 2019 outstanding principal 2026 notes 4000 million unamortized debt issuance costs 47 million carrying amount 3953 million recorded longterm debt within company’s consolidated balance sheet december 31 2018 outstanding principal 2026 notes 4000 million unamortized debt issuance costs 52 million carrying amount 3948 million recorded longterm debt within company’s consolidated balance sheet fair value 2026 notes approximately 4241 million 3946 million december 31 2019 2018 respectively determined utilizing overthecounter market quotes yield curves considered level 2 inputs defined note 13 fair value measurements years ended december 31 2019 2018 company recognized 295 million 111 million respectively interest expense relating 2026 notes included 05 million 02 million respectively relating amortization debt issuance costs valuation 2019 convertible notes 2024 convertible notes level 2 level 3 inputs order determine initial value 2019 convertible notes 2024 convertible notes company determined fair value liability component 2019 convertible notes 2024 convertible notes using two valuation methods company reviewed market data available publicly traded senior unsecured nonconvertible corporate bonds issued companies similar credit ratings assumptions used estimate represent market participants would use pricing liability component including market yields credit standing develop straight debt yield estimate company also used lattice model included inputs stock price convertible note trading price volatility dividend yield estimate straight debt yield company combined results two valuation methods determine fair value liability component 2019 convertible notes 2024 convertible notes inputs primarily considered level 2 level 3 inputs company used similar valuation approaches determine subsequent fair value liability component disclosure purposes includes using lattice model 1 reviewing market data relating 2026 notes comparable yield curves determine straight debt yield estimate 2 reviewing market data relating publicly traded senior unsecured nonconvertible corporate bonds issued companies similar credit ratings order determine straight debt yield estimate total debt company’s total interest expense 1530 million 1810 million 1608 million years ended december 31 2019 2018 2017 respectively recognized within consolidated statements income december 31 2019 annual scheduled principal payments debt follows certain vendors government agencies may require letters credit similar guaranteeing arrangements issued executed december 31 2019 company 419 million issued undrawn letters credit similar arrangements included mexico value added tax vat related letter credit described note 7 contingencies 6 employee compensation plans united states company maintains profit sharing plan pursuant sections 401a k internal revenue code 1986 amended code plan available substantially employees meet length service requirements company’s contribution expense relating profit sharing plan 52 million 57 million 48 million years ended december 31 2019 2018 2017 respectively company employees international countries covered various deferred compensation plans administered based upon legal requirements countries established company’s compensation expenses relating plans 76 million 66 million 64 million years ended december 31 2019 2018 2017 respectively company nonqualified deferred compensation plans select groups management herbalife management deferred compensation plan herbalife senior executive deferred compensation plan matching contribution 35 participant’s annual base salary excess qualified plan annual compensation limit amount deferrals reduce 401k eligible pay irs limit participant either nonqualified deferred compensation plans discussed times fully vested nonforfeitable interest year’s contribution including interest credited thereto company matching contributions applicable connection participant’s election defer annual deferral amount participant may also elect receive shortterm payout equal annual deferral amount plus interest amount payable five years first day year annual deferral amount actually deferred total two nonqualified deferred compensation plans excluding participant contributions expense 94 million year ended december 31 2019 benefit 27 million year ended december 31 2018 expense 67 million year ended december 31 2017 total longterm deferred compensation liability two deferred compensation plans 624 million 513 million december 31 2019 2018 respectively included noncurrent liabilities within company’s consolidated balance sheets deferred compensation plans unfunded benefits paid general assets company except company contributed “rabbi trust” whose assets used pay benefits company remains solvent reached company’s creditors company becomes insolvent value assets “rabbi trust” 389 million 312 million december 31 2019 2018 respectively included assets within company’s consolidated balance sheets 7 contingencies company time engaged routine litigation company regularly reviews pending litigation matters involved establishes reserves deemed appropriate management litigation matters probable loss estimate made matters described note may take several years resolve company believes meritorious defenses cannot sure ultimate resolution although company may reserve amounts certain matters company believes represent likely outcome resolution related disputes company incorrect assessment company may record additional expenses becomes probable increased potential liability warranted tax matters mexican tax administration service commenced audits company’s mexican subsidiaries period january september 2007 may 10 2013 company received assessment related period assessment subject interest inflationary adjustments july 11 2013 company filed administrative appeal disputing assessment september 22 2014 mexican tax administration service denied company’s administrative appeal company commenced litigation tax court mexico november 2014 dispute assertions made mexican tax administration service case january 16 2018 tax court mexico issued verdict upholding assessment issued mexican tax administration service april 16 2018 company filed appeal verdict july 2019 circuit court issued written verdict upholding assessment judgment tax court mexico august 12 2019 company filed appeal supreme court mexico october 16 2019 supreme court mexico refused hear company’s appeal october 21 2019 company filed petition supreme court mexico asking reconsider previous decision company recognized loss 190 million selling general administrative expenses within company’s consolidated statement income year ended december 31 2019 recorded corresponding accrued liability amount within consolidated balance sheet december 31 2019 company believes loss probable pertaining vatrelated assessment company issued undrawn letter credit bank guarantee payment tax assessment required letter credit continued remain effective december 31 2019 mexican tax administration service delayed processing vat refunds companies operating mexico company believes process mexico subsidiary receive vat refunds may delayed december 31 2019 company 280 million mexico vat related assets 167 million within assets 113 million within prepaid expenses current assets consolidated balance sheet amount relates vat payments made various periods company believes amounts recoverable refund may applied certain future tax liabilities effective january 1 2019 tax reform law changed rules concerning possible use vat assets specifically providing vat balances generated december 31 2018 balances could offset taxes vat obligations currently due company recognized losses related vat related assets company believe loss probable company received tax assessments multiple years federal revenue office brazil related withholdingcontributions based payments company’s members aggregate combined amount assessments equivalent approximately 141 million translated december 31 2019 spot rate company currently litigating assessments tax administrative level company accrued loss majority assessments company believe loss probable company currently unable reasonably estimate amount loss may result unfavorable outcome additional assessments periods issued company examination several brazilian states related icms icmsst taxation examinations resulted assessments underpaid tax company appealed state são paulo audited company 2013 2014 tax years july 2016 state são paulo company received assessment aggregate amount approximately 400 million translated december 31 2019 spot rate relating various icms issues 2013 tax year august 2016 company filed firstlevel administrative appeal denied february 2017 company filed appeal march 9 2017 march 20 2018 court held hearing verdict issued june 2019 remanding case back firstlevel administrative court august 2017 state são paulo company received assessment aggregate amount approximately 148 million translated december 31 2019 spot rate relating various icms issues 2014 tax year september 2017 company filed firstlevel administrative appeal 2014 tax year firstlevel administrative appeal denied company filed appeal secondlevel administrative court december 2018 verdict issued april 2019 remanding case back firstlevel administrative court september 2018 state rio de janeiro company received assessment aggregate amount approximately 88 million translated december 31 2019 spot rate relating various icmsst issues 2016 2017 tax years november 8 2018 company filed firstlevel administrative appeal subsequently denied april 5 2019 company appealed tax assessment administrative council tax appeals secondlevel administrative appeal company also received icms tax assessments brazil fourth quarter 2015 company filed appeals state judicial courts three assessments company issued surety bonds aggregate amount 124 million translated december 31 2019 spot rate guarantee payment tax assessments required company pursues appeals addition company received several icms tax assessments aggregate amount 74 million translated december 31 2019 spot rate several brazilian states surety bonds issued litigation cases currently ongoing company recognized loss company believe loss probable company received various tax assessments multiple states india multiple years indian vat authorities amount equivalent approximately 101 million translated december 31 2019 spot rate assessments underpaid vat company litigating cases tax administrative level tax tribunal levels believes meritorious defenses company recognized loss believe loss probable korea customs service audited importation activities herbalife korea period january 2011 may 2013 total assessment audit period 307 million translated december 31 2019 spot rate company paid assessment recognized payments within assets consolidated balance sheet december 31 2019 company lodged firstlevel administrative appeal denied october 21 2016 january 31 2017 company filed appeal national tax tribunal korea november 2018 company received unfavorable decision national tax tribunal korea february 2019 company submitted appeal seoul administrative court korea customs service audited importation activities herbalife korea period may 2013 december 2013 total assessment audit period 100 million translated december 31 2019 spot rate company paid assessment recognized payment within assets consolidated balance sheet december 31 2019 july 2019 company filed appeal national tax tribunal korea company disagrees assertions made assessments well calculation methodology used assessments company recognized loss company believe loss probable course 2016 company received various questions greek social security agency december 29 2016 greek social security agency issued assessment respect social security contributions member earnings 2006 year social security issues statute limitations open 2007 later years greece despite assessment amount immaterial company could receive similar assessments covering years company continues litigate assessment company recognized loss believe loss probable company currently unable reasonably estimate amount loss may result unfavorable outcome additional assessments periods issued italian tax authorities audited company periods 2014 2015 company responded various points relating income tax nonincome tax matters raised tax authorities december 2019 company reached agreement italian tax authorities issues related 2014 audit paid immaterial amount december 2019 company still fully settled potential additional liabilities tax authorities respect 2015 year regards income nonincome tax matters company believes accrued appropriate amounts relating 2015 year present time company unable reasonably estimate amount potential loss excess amount already accrued relating matters march 2018 chinese customs service began audit company’s chinese importations covering periods 2015 2017 company responded initial questions customs service audit ongoing company currently unable determine outcome audit reasonably estimate amount loss assessment issued us federal trade commission consent order july 15 2016 company federal trade commission ftc entered proposed stipulation entry order permanent injunction monetary judgment consent order consent order lodged us district court central district california july 15 2016 became effective july 25 2016 effective date consent order resolved ftc’s multiyear investigation company pursuant consent order company neither admitted denied ftc’s allegations except court jurisdiction matter company made whollyowned subsidiary herbalife international america inc 200 million payment ftc additionally company implemented continues enhance certain existing procedures us among requirements consent order requires company categorize existing future members us either “preferred members” simply consumers wish purchase products household use “distributors” members wish resell products build sales organization company also agreed compensate distributors eligible us sales within downline organization include purchases preferred members purchases distributor personal consumption within allowable limits sales product distributor customers consent order also imposes restrictions distributor’s ability open nutrition clubs united states consent order subjects company certain audits independent compliance auditor period seven years imposes requirements company regarding compliance certification record creation maintenance prohibits company affiliates distributors making misrepresentations misleading claims regarding among things income lavish lifestyles ftc independent compliance auditor right inspect company records request additional compliance reports purposes conducting audits pursuant consent order september 2016 company ftc mutually selected affiliated monitors inc serve independent compliance auditor company continues monitor impact consent order company currently expect settlement longterm materially adverse impact business member base company’s business member base particularly united states may negatively impacted company unable comply consent order could result material adverse impact company’s results operations financial condition matters marketer foods dietary nutritional supplements products ingested consumers applied bodies company currently subjected various product liability claims effects claims date material company currently maintains product liability insurance annual deductible 125 million previously disclosed sec department justice doj conducting investigations company’s compliance foreign corrupt practices act fcpa china mainly focused company’s china external affairs expenditures china business activities adequacy compliance company’s internal controls china accuracy company’s books records relating china operations company conducted review implemented remedial improvement measures based upon review including limited replacement number employees enhancements company policies procedures china company continuing cooperate sec doj continuing discuss possible resolution including settlement matters based discussions date required us gaap company recognized estimated aggregate accrued liability matters 40 million within consolidated balance sheet december 31 2019 however company cannot predict eventual scope duration outcome government investigations time including whether settlement reached amount potential monetary payments injunctive relief results may materially adverse company financial condition results operations present time company unable reasonably estimate provide assurance regarding amount potential loss excess amount accrued relating matters previously disclosed sec also requested company documents information relating company’s disclosures regarding marketing plan china september 27 2019 company sec entered settlement resolving matter pursuant administrative order settling matter company neither admitted denied sec’s allegations except sec’s jurisdiction company agreed cease desist committing causing violations future violations sections 17a2 17a3 securities act section 13a exchange act rules 12b20 13a1 13a13 thereunder pay 20 million civil penalty 20 million settlement amount previously recorded accrued liability within company’s condensed consolidated balance sheet june 30 2019 paid october 2019 september 18 2017 company certain subsidiaries members named defendants purported class action lawsuit titled rodgers et al v herbalife ltd et al filed us district court southern district florida alleges violations florida’s deceptive unfair trade practices statute federal racketeer influenced corrupt organizations statutes unjust enrichment negligent misrepresentation august 23 2018 court issued order transferring action us district court central district california four putative class plaintiffs ordering remaining four plaintiffs arbitration thereby terminating company defendants florida action plaintiffs seek damages unspecified amount company believes lawsuit without merit vigorously defend claims lawsuit 8 shareholders’ deficit company 1374 million 1428 million 1647 million common shares outstanding december 31 2019 2018 2017 respectively december 2004 company authorized 75 million preference shares 0002 par value 75 million authorized preference shares remained unissued december 31 2019 preference shares may issued time one series voting powers full limited without voting powers designations preferences relative participating optional special rights qualifications limitations restrictions determined company’s board directors dividends company declared paid cash dividends since 2014 declaration future dividends subject discretion company’s board directors depend upon various factors including earnings financial condition herbalife nutrition ltd’s available distributable reserves cayman islands law restrictions imposed 2018 credit facility terms indebtedness may outstanding cash requirements future prospects factors deemed relevant board directors share repurchases october 30 2018 company’s board directors authorized new fiveyear 15 billion share repurchase program expire october 30 2023 replaced company’s prior share repurchase authorization set expire february 21 2020 approximately 1133 million remaining authorized capacity replaced share repurchase program allows company includes indirect whollyowned subsidiary herbalife nutrition ltd repurchase company’s common shares times prices determined management market conditions warrant extent herbalife nutrition ltd’s distributable reserves available cayman islands law 2018 credit facility permits company repurchase common shares long default event default exists conditions specified consolidated leverage ratios met december 31 2019 remaining authorized capacity company’s 15 billion share repurchase program 15 billion conjunction issuance 2019 convertible notes february 2014 company paid approximately 6858 million enter forward transactions certain financial institutions forward counterparties pursuant company purchased approximately 199 million common shares average cost 3451 per share settlement around august 15 2019 maturity date 2019 convertible notes subject ability forward counterparty elect settle portion forward transactions early forward transactions generally expected facilitate privately negotiated derivative transactions forward counterparties holders 2019 convertible notes including swaps relating common shares holders 2019 convertible notes establish short positions relating common shares otherwise hedge investments 2019 convertible notes concurrently shortly pricing 2019 convertible notes approximate 199 million common shares effectively repurchased forward transactions treated retired shares basic diluted eps purposes years ended december 31 2019 2018 forward counterparties delivered approximately 60 million 139 million shares respectively company subsequently retired company december 31 2019 forward counterparties delivered approximate 199 million common shares effectively repurchased forward transactions shares remained legally outstanding result forward transactions company’s total shareholders’ equity within consolidated balance sheet reduced approximately 6858 million first quarter 2014 amounts 6539 million 319 million allocated retained earnings additional paidin capital respectively within total shareholders’ equity also upon executing forward transactions company recorded fair value 358 million noncash issuance costs assets corresponding amount additional paidin capital within consolidated balance sheet noncash issuance costs amortized interest expense contractual term forward transactions company recognized 12 million 92 million 65 million noncash interest expense relating amortization noncash issuance costs within consolidated statements income years ended december 31 2019 2018 2017 respectively year ended december 31 2019 company repurchase common shares openmarket purchases year ended december 31 2018 indirect whollyowned subsidiary company purchased 8400 herbalife nutrition ltd’s common shares openmarket purchases aggregate cost approximately 03 million average cost 3390 per share year ended december 31 2017 indirect whollyowned subsidiary company purchased approximately 100 million herbalife nutrition ltd’s common shares openmarket purchases aggregate cost approximately 3286 million average cost 3281 per share repurchases increased company’s total shareholders’ deficit reflected cost within company’s accompanying consolidated balance sheets although shares owned indirect whollyowned subsidiary company remain legally outstanding reflected treasury shares us gaap therefore reduce number common shares outstanding within company’s consolidated financial statements weightedaverage number common shares outstanding used calculating earnings per share common shares herbalife nutrition ltd held indirect whollyowned subsidiary however remain outstanding books records company’s transfer agent therefore still carry voting share rights related ownership company’s common shares may exercised long consistent applicable laws shares voted subsidiary manner maximum extent possible proportion votes cast respect matter properly submitted vote herbalife nutrition ltd’s shareholders december 31 2019 2018 company held approximately 100 million treasury shares us gaap purposes may 2018 company completed modified dutch auction tender offer subsequently paid cash repurchase retire total approximately 114 million common shares aggregate cost approximately 6000 million 5250 per share october 2017 company completed modified dutch auction tender offer subsequently paid cash repurchase retire total approximately 135 million common shares aggregate cost approximately 4578 million 3400 per share total company repurchased 114 million 235 million common shares aggregate cost approximately 6003 million 7864 million average cost 5249 3349 per share years ended december 31 2018 2017 respectively connection company’s october 2017 modified dutch auction tender offer company incurred 16 million transaction costs also provided nontransferable contractual cvr share tendered allowing participants tender offer receive contingent cash payment event herbalife acquired goingprivate transaction defined cvr agreement within two years commencement tender offer initial fair value cvr 73 million recorded liability fourth quarter 2017 corresponding decrease shareholders’ equity determining initial fair value cvr company used lattice model included inputs underlying stock price strike price time expiration dividend yield subsequent changes fair value cvr liability using similar valuation approach initial fair value determination recognized within companys consolidated balance sheets corresponding gains losses recognized income expense net within companys consolidated statements income reporting period cvr expired august 2019 terminated due goingprivate transaction also incorporated valuation cvr goingprivate probability input considered level 3 input fair value hierarchy increase decrease input could significantly impacted fair value cvr reporting date cvr expired without value august 21 2019 twoyear anniversary august 21 2017 date company commenced related modified dutch auction tender offer year ended december 31 2019 company recognized 157 million gain income expense net within consolidated statement income due change fair value cvr driven expiration august 2019 year ended december 31 2018 company recognized 88 million loss income expense net within consolidated statement income due change fair value cvr primarily driven increase market price company’s common shares partially offset decrease probability goingprivate transaction result shortening term cvr expired pursuant terms year ended december 31 2017 company recognized 04 million gain income expense net within consolidated statement income due change fair value cvr number shares issued upon vesting exercise certain restricted stock units sars granted pursuant company’s sharebased compensation plans net statutory withholding requirements company pays behalf employees although shares withheld issued treated common share repurchases company’s consolidated financial statements reduce number shares would issued upon vesting shares count authorized capacity company’s share repurchase program described years ended december 31 2019 2018 2017 company withheld shares vested restricted stock units exercised sars relating sharebased compensation plans company reflects aggregate purchase price common shares repurchased increase shareholders’ deficit company generally allocated purchase price repurchased shares accumulated deficit common shares additional paidin capital exception treasury shares recorded separately company’s consolidated balance sheets years ended december 31 2019 2018 2017 company’s share repurchases inclusive transaction costs issuance cvr zero 6007 million 7953 million respectively company’s share repurchase programs 167 million 1454 million 604 million respectively due shares withheld tax purposes related company’s sharebased compensation plans years ended december 31 2019 2018 2017 company’s total share repurchases including shares withheld tax purposes 167 million 7461 million 8557 million respectively recorded increase shareholders’ deficit within company’s consolidated balance sheets company recorded 7503 million total share repurchases within financing activities consolidated statement cash flows year ended december 31 2018 includes 42 million share repurchases reflected increase shareholders’ deficit within company’s consolidated balance sheet december 31 2017 subsequently paid year ended december 31 2018 company recorded 8442 million total share repurchases within financing activities consolidated statement cash flows year ended december 31 2017 excludes 42 million share repurchases payment made subsequent year end therefore reflected liability within company’s consolidated balance sheet december 31 2017 73 million initial fair value cvr capped call transactions february 2014 connection issuance 2019 convertible notes company paid approximately 1238 million enter capped call transactions certain financial institutions capped call transactions expected generally reduce potential dilution upon conversion 2019 convertible notes event market price common shares greater strike price capped call transactions initially set 4314 per common share reduction potential dilution subject cap based cap price initially set 6039 per common share strike price cap price subject certain adjustments terms capped call transactions therefore result executing capped call transactions company effect exposed potential net dilution market price common shares exceeded adjusted cap price result capped call transactions company’s additional paidin capital within shareholders’ deficit consolidated balance sheet reduced 1238 million first quarter 2014 march 2018 connection company’s repurchase portion 2019 convertible notes company entered partial settlement agreements option counterparties capped call transactions terminate portion existing transactions case notional amount corresponding aggregate principal amount 2019 convertible notes repurchased result terminating portion capped call transactions favorable position company received 559 million cash recognized offsetting increase additional paidin capital 2018 august 15 2019 convertible notes matured remaining capped call transactions expired unexercised expiration capped call transactions impact company’s consolidated financial statements accumulated comprehensive loss following table summarizes changes accumulated comprehensive loss component years ended december 31 2019 2018 2017 1 see note 2 basis presentation note 11 derivative instruments hedging activities information regarding location consolidated statements income gains losses reclassified accumulated comprehensive loss income years ended december 31 2019 2018 2017 comprehensive income loss reclassifications net tax expense 01 million foreign currency translation adjustments year ended december 31 2019 comprehensive income loss reclassifications net tax benefit 27 million foreign currency translation adjustments year ended december 31 2018 comprehensive income loss reclassifications net tax expense 57 million foreign currency translation adjustments year ended december 31 2017 9 sharebased compensation company following sharebased compensation plans amended restated herbalife ltd 2005 stock incentive plan 2005 stock incentive plan amended restated herbalife ltd 2014 stock incentive plan 2014 stock incentive plan additionally company amended restated nonmanagement directors compensation plan nonmanagement directors plan purpose facilitate equity ownership company directors equity awards 2005 stock incentive plan grants made april 30 2014 stock incentive plan 2014 stock incentive plan replaced 2005 stock incentive plan adoption thereof additional awards made 2005 stock incentive plan terms 2014 stock incentive plan substantially similar terms 2005 stock incentive plan 2014 stock incentive plan authorizes issuance 174 million common shares pursuant awards granted plan plus shares remained available issuance 2005 stock incentive plan april 29 2014 december 31 2019 aggregate approximately 57 million common shares remain available future issuance 2014 stock incentive plan company’s sharebased compensation plans generally provide grants stock options sars stock unit awards collectively referred herein awards certain sars generally vest annually threeyear period contractual term stock options sars generally ten years certain stock unit awards 2014 stock incentive plan vest annually three year period certain stock unit awards subject service performance conditions vest passage performance period determined compensation committee company’s board directors stock unit awards granted directors generally vest oneyear period awards subject following market service conditions market condition awards performance service conditions performance condition awards market service performance conditions market performance condition awards subject continued service company service condition awards granted company market condition awards performance condition awards service condition awards unless otherwise determined time grant upon vesting stock unit award represents right receive one common share stock unit awards company issues new shares net shares withheld tax purposes vested sars company issues new shares based intrinsic value exercised net shares withheld tax purposes company’s stock compensation awards outstanding december 31 2019 included sars stock unit awards company grant sars performance conditions years ended december 31 2019 2018 year ended december 31 2017 company granted sars performance conditions certain employees awards generally vest 20 first succeeding year 20 second succeeding year 60 third succeeding year subject achievement certain sales leader retention metrics fair value sars determined date grant using blackscholesmerton option pricing model compensation expense grants recognized vesting term using graded vesting method company grant sars service conditions years ended december 31 2019 2018 year ended december 31 2017 company granted sars service conditions certain employees fair value sars determined date grant using blackscholesmerton option pricing model compensation expense grants recognized vesting term using straight line method years ended december 31 2019 2018 2017 company granted performance stock unit awards certain executives vest december 31 2021 december 31 2020 december 31 2019 respectively subject continued employment date achievement certain performance conditions performance conditions include targets local currency net sales volume points adjusted earnings interest taxes adjusted earnings per share performance stock unit awards vest 0 200 target award based achievement performance conditions years ended december 31 2019 2018 2017 company granted stock unit awards service conditions directors certain employees sharebased compensation expense included selling general administrative expenses within company’s consolidated statements income company’s policy estimate number forfeitures expected occur sharebased compensation expense relating service condition awards amounted 318 million 262 million 244 million years ended december 31 2019 2018 2017 respectively sharebased compensation expense relating market condition awards year ended december 31 2019 sharebased compensation expense relating market condition awards amounted less 01 million 13 million years ended december 31 2018 2017 respectively sharebased compensation expense relating performance condition awards amounted 68 million 92 million 164 million years ended december 31 2019 2018 2017 respectively related income tax benefits recognized earnings awards amounted 83 million 81 million 94 million years ended december 31 2019 2018 2017 respectively excess tax benefits sharebased compensation arrangements totaled 58 million 531 million 311 million years ended december 31 2019 2018 2017 respectively december 31 2019 total unrecognized compensation cost related nonvested service condition stock awards 433 million related weightedaverage period expected recognized approximately 13 years december 31 2019 total unrecognized compensation cost related nonvested performance condition awards 56 million related weightedaverage period expected recognized approximately 14 years stock unit awards valued market value date grant fair value service condition sars performance condition sars estimated date grant using blackscholesmerton optionpricing model fair value sars market conditions market performance conditions estimated date grant using monte carlo lattice model company calculates expected term sars based historical data groups employees determined similar historical exercise patterns valuation purposes expected volatility sars based upon historical volatility company’s common shares also validated volatility rates peer group companies risk free interest rate based implied yield us treasury zerocoupon issue remaining term equal expected term sars expected dividend yield assumption based company’s historical expected amount dividend payouts sars granted years ended december 31 2019 2018 sars granted independent directors year ended december 31 2017 following table summarizes weightedaverage assumptions used calculation fair value service condition sars awards granted year ended december 31 2017 following table summarizes weightedaverage assumptions used calculation fair value performance condition sars awards granted year ended december 31 2017 following table summarizes activities sars sharebased compensation plans year ended december 31 2019 1 intrinsic value amount current market value underlying stock exceeds exercise price stock awards 2 includes less 01 million market condition sars december 31 2019 2018 3 includes 29 million 31 million performance condition sars december 31 2019 2018 respectively 4 includes less 01 million performance condition sars 5 includes 02 million performance condition sars 6 includes less 01 million market condition 24 million performance condition sars weightedaverage grant date fair value service condition sars granted year ended december 31 2017 1432 weightedaverage grant date fair value sars performance conditions granted year ended december 31 2017 1416 total intrinsic value service condition sars exercised years ended december 31 2019 2018 2017 337 million 2110 million 1228 million respectively total intrinsic value performance condition sars exercised years ended december 31 2019 2018 2017 01 million 950 million 31 million respectively market condition sars exercised year ended december 31 2019 2017 total intrinsic value market condition sars exercised year ended december 31 2018 78 million following table summarizes activities stock units sharebased compensation plans year ended december 31 2019 1 includes 475430 708836 performance based stock unit awards december 31 2019 2018 respectively represents maximum amount vest 2 includes 209182 performancebased stock unit awards represents maximum amount vest 3 includes 40297 performancebased stock unit awards 4 includes 402291 performancebased stock unit awards 45259 relate adjustments reflect actual performance 5 includes 240156 performancebased stock unit awards total vesting date fair value stock units vested years ended december 31 2019 2018 2017 130 million 22 million 20 million respectively employee stock purchase plan 2007 company adopted qualified employee stock purchase plan espp implemented first quarter 2008 connection adoption espp company reserved issuance total 40 million common shares december 31 2019 approximately 32 million common shares remain available future issuance terms espp rights purchase common shares may granted eligible qualified employees subject certain restrictions espp enables company’s eligible employees payroll withholdings purchase limited number common shares 85 fair market value common share purchase date purchases made quarterly basis 10 segment information company nutrition company sells wide range weight management targeted nutrition energy sports fitness outer nutrition products company’s products manufactured company changsha hunan china extraction facility suzhou china facility nanjing china facility lake forest california facility winstonsalem north carolina facility well thirdparty providers sold members consume sell herbalife products retail consumers members revenues reflect sales products company members categorized based geographic location december 31 2019 company sold products 94 countries throughout world organized managed six geographic regions north america mexico south central america emea asia pacific china company defines operating segments geographical operations company aggregates operating segments excluding china reporting segment primary reporting segment management believes company’s operating segments similar operating characteristics similar long term operating performance making determination management believes operating segments similar nature products sold product acquisition process types customers products sold methods used distribute products nature regulatory environment economic characteristics china identified separate reporting segment meet criteria aggregation company reviews net sales contribution margin operating segment reviews assets capital expenditures consolidated basis operating segment therefore net sales contribution margin presented reportable segment assets capital expenditures segment presented operating information two reportable segments sales product line sales geographic area follows 1 contribution margin consists net sales less cost sales royalty overrides china segment contribution margin include service fees china independent service providers 2 service fees china independent service providers totaling 4189 million 5232 million 4195 million years ended december 31 2019 2018 2017 respectively included selling general administrative expenses 3 product buybacks returns product categories included literature promotional category december 31 2019 2018 goodwill allocated company’s reporting units included company’s primary reporting segment 884 million 898 million respectively goodwill allocated china segment 31 million 31 million respectively following table sets forth property plant equipment deferred tax assets geographic area 11 derivative instruments hedging activities foreign currency instruments company designates certain foreign currency derivatives primarily comprised foreign currency forward contracts freestanding derivatives hedge accounting apply changes fair market value freestanding derivatives included selling general administrative expenses within company’s consolidated statements income company primarily uses freestanding foreign currency derivatives hedge foreign currencydenominated intercompany transactions partially mitigate impact foreign currency fluctuations fair value freestanding foreign currency derivatives based thirdparty quotes company’s foreign currency derivative contracts generally executed monthly basis company designates cash flow hedges foreign currency forward contracts enters hedge forecasted inventory purchases intercompany management fees subject foreign currency exposures forward contracts used hedge forecasted inventory purchases specific months changes fair value forward contracts designated cash flow hedges excluding forward points recorded component accumulated comprehensive loss within shareholders’ deficit recognized cost sales within company’s consolidated statement income period approximates time hedged inventory sold company also hedges forecasted intercompany management fees specific months contracts allow company sell euros exchange us dollars specified contract rates changes fair value forward contracts designated cash flow hedges excluding forward points recorded component accumulated comprehensive loss within shareholders’ deficit recognized selling general administrative expenses within company’s consolidated statement income period hedged item underlying transaction affect earnings company elected record changes fair value amounts excluded assessment effectiveness currently earnings december 31 2019 2018 aggregate notional amounts foreign currency contracts outstanding designated cash flow hedges approximately 664 million 438 million respectively december 31 2019 outstanding contracts expected mature next fifteen months company’s derivative financial instruments recorded consolidated balance sheets fair value based thirdparty quotes december 31 2019 company recorded assets fair value 01 million liabilities fair value 19 million relating outstanding foreign currency contracts designated cash flow hedges december 31 2018 company recorded assets fair value 05 million liabilities fair value 07 million relating outstanding foreign currency contracts designated cash flow hedges company assesses hedge effectiveness least quarterly hedges remained effective december 31 2019 2018 december 31 2019 2018 majority company’s outstanding foreign currency forward contracts maturity dates less twelve months majority freestanding derivatives expiring within one month tables provide information details foreign currency forward contracts outstanding december 31 2019 2018 following tables summarize derivative activity years ended december 31 2019 2018 2017 relating company’s derivatives gains losses derivative instruments following table summarizes gains losses relating derivative instruments recorded comprehensive loss years ended december 31 2019 2018 2017 december 31 2019 estimated amount existing net losses related cash flow hedges recorded accumulated comprehensive loss expected reclassified earnings next twelve months 09 million effect cash flow hedging relationships company’s consolidated statements income years ended december 31 2019 2018 2017 follows 1 result adopting asu 201712 first quarter 2019 year ended december 31 2019 company recognized gains losses excluded assessment effectiveness foreign exchange currency contracts relating inventory hedges cost sales within consolidated statements income prior adoption asu 201712 years ended december 31 2018 2017 company recognized gains losses excluded assessment effectiveness foreign exchange currency contracts relating inventory hedges selling general administrative expenses within consolidated statements income following table summarizes gains losses recorded income relating derivative instruments designated hedging instruments december 31 2019 2018 2017 company reports derivatives fair value either assets liabilities within consolidated balance sheets see note 13 fair value measurements information derivative fair values consolidated balance sheet locations december 31 2019 2018 12 income taxes components income taxes follows income taxes follows significant categories temporary differences gave rise deferred tax assets liabilities follows 1 deferred income tax assets relating tax loss credit carryforwards corresponding valuation allowance december 31 2018 reduced 638 million offsetting reductions net impact company’s consolidated balance sheets consolidated statements income consolidated statements cash flows see footnote 2 additional information tax loss credit carryforwards certain foreign subsidiaries 2019 2018 1036 million 1043 million respectively unused tax loss credit carryforwards certain foreign subsidiaries 765 million expire 2020 2036 271 million carried forward indefinitely us foreign tax credit carryforwards 2019 2018 2089 million 2110 million respectively included tax loss domestic tax credit carryforwards table unused us foreign tax credit carryforwards expire 2020 2029 domestic research development tax credit carryforwards 2019 2018 84 million 73 million unused domestic research development tax credit carryforwards begin expiring 2036 deferred interest expense carried forward indefinitely state tax loss carryforwards 2019 2018 09 million 22 million unused certain state tax loss carryforwards expire 2021 2038 remaining carried forward indefinitely december 22 2017 us enacted tax cuts jobs act 2017 act also commonly referred “us tax reform” significantly changes us corporate income tax laws among things reducing us corporate income tax rate 21 starting 2018 creating modified territorial tax system onetime mandatory tax previously deferred foreign earnings us subsidiaries fourth quarter 2017 accordance sec staff accounting bulletin “sab” 118 income tax accounting implications tax cuts jobs act “sab 118” company recorded provisional net expense 1533 million amount included tax expense predominantly consists three components 1634 million charge caused establishment valuation allowance deferred tax assets due act’s changes sourcing calculation foreign income thereby limited expected utilization foreign tax credit carryforwards ii 55 million benefit resulting remeasurement company’s net deferred tax liabilities us based new lower corporate income tax rate iii nonrecurring benefit 46 million related additional foreign tax credits result impact onetime mandatory repatriation previously unremitted earnings certain nonus subsidiaries owned either directly indirectly us parent although 1533 million provisional net expense represented company believed reasonable estimate impact income tax effects act company’s consolidated financial statements december 31 2017 considered provisional items include limited foreign tax credits associated valuation allowance limitations executive compensation onetime tax previously unremitted foreign earnings us subsidiaries company continued analyze regulatory guidance including proposed regulations relating foreign tax credits issued fourth quarter 2018 information including continued inability fully utilize foreign tax credits generated accordingly company recorded additional 295 million expense fourth quarter 2018 caused establishment valuation allowance deferred tax assets relating foreign tax credit carryforwards result company’s accounting ultimate tax effects act finalized sab 118 december 31 2018 company recognizes valuation allowances deferred tax assets reported based weight evidence likely deferred tax assets realized december 31 2019 2018 company held valuation allowances net deferred tax assets certain subsidiaries primarily related tax loss carryforwards us foreign tax credits amount 3303 million 3191 million respectively change company’s valuation allowance 2019 112 million primarily attributable foreign deferred interest expense tax loss carryforwards change company’s valuation allowance 2018 525 million primarily related valuation allowance established us foreign tax credits described change company’s valuation allowance 2017 1512 million primarily related valuation allowance established us foreign tax credits described december 31 2019 company’s us consolidated group approximately 1396 million unremitted earnings permanently reinvested relating certain foreign subsidiaries december 31 2019 herbalife nutrition ltd approximately 24 billion permanently reinvested unremitted earnings relating operating subsidiaries result company’s decision invest china growth impact investment program approximately 1119 million unremitted earnings permanently reinvested december 31 2019 since herbalife nutrition ltd’s unremitted earnings permanently reinvested deferred taxes provided unremitted earnings practicable determine amount unrecognized deferred taxes respect unremitted earnings company remit unremitted earnings would subject income tax remittances deferred taxes accrued earnings considered indefinitely reinvested deferred tax unremitted foreign earnings december 31 2019 2018 deferred tax liability net valuation allowance 282 million 180 million respectively applicable statutory income tax rate cayman islands zero herbalife nutrition ltd years reported purposes reconciliation provision income taxes statutory rate provision income taxes effective tax rate notional 21 tax rate applied years ended december 31 2019 2018 notional 35 tax rate applied year ended december 31 2017 follows 2 deferred income tax benefit offsetting valuation allowance expense reduced 310 million 328 million 2018 2017 respectively amounts net impact company’s 2018 2017 total income tax expense consolidated statements income december 31 2019 total amount unrecognized tax benefits including related interest penalties 599 million total amount unrecognized tax benefits recognized 403 million unrecognized tax benefits 91 million interest 19 million penalties would impact effective tax rate december 31 2018 total amount unrecognized tax benefits including related interest penalties 652 million total amount unrecognized tax benefits recognized 468 million unrecognized tax benefits 100 million interest 17 million penalties would impact effective tax rate company accounts interest penalties generated tax contingencies component income tax expense year ended december 31 2019 company recorded decrease interest expense related uncertain tax positions 07 million increase penalty expense related uncertain tax positions 02 million year ended december 31 2018 company recorded increase interest penalty expense related uncertain tax positions 10 million 04 million respectively year ended december 31 2017 company recorded decrease interest penalty expense related uncertain tax positions less 01 million 08 million respectively december 31 2019 total amount interest penalties related unrecognized tax benefits recognized consolidated balance sheet 91 million 19 million respectively december 31 2018 total amount interest penalties related unrecognized tax benefits recognized consolidated balance sheet 100 million 17 million respectively december 31 2017 total amount interest penalties related unrecognized tax benefits recognized consolidated balance sheet 99 million 15 million respectively following changes occurred amount unrecognized tax benefits years ended december 31 2019 2018 2017 amount income taxes company pays subject ongoing audits taxing jurisdictions around world company’s estimate potential outcome uncertain tax position subject management’s assessment relevant risks facts circumstances existing time company believes adequately provided matters however company’s future results may include favorable unfavorable adjustments estimates period audits resolved may impact company’s effective tax rate december 31 2019 company’s tax filings generally subject examination major tax jurisdictions years ending december 31 2014 company believes reasonably possible amount unrecognized tax benefits could decrease approximately 88 million within next twelve months possible decrease 19 million would due settlement audits resolution administrative judicial proceedings remaining possible decrease 69 million would due expiration statute limitations various jurisdictions 13 fair value measurements company applies provisions fasb asc topic 820 fair value measurements disclosures asc 820 financial nonfinancial assets liabilities asc 820 defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date asc 820 establishes fair value hierarchy prioritizes inputs used measuring fair value three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities reporting entity ability access measurement date level 2 inputs include quoted prices similar assets liabilities active markets quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability inputs derived principally corroborated observable market data correlation means level 3 inputs unobservable inputs asset liability company measures certain assets liabilities fair value discussed throughout notes consolidated financial statements foreign exchange currency contracts valued using standard calculations models primarily based inputs observable forward rates spot rates foreign currency exchange rates reporting period ended date company’s derivative assets liabilities measured fair value consisted level 2 inputs amounts shown gross values december 31 2019 2018 company’s cvr liability measured fair value consisted level 3 inputs see note 8 shareholders’ deficit description cvr liability following reconciliation cvr liability reported current liabilities within company’s consolidated balance sheet december 31 2019 1 unrealized gains losses related revaluation cvr recorded income expense net within company’s consolidated statements income company’s deferred compensation plan assets consist companyowned life insurance policies recorded cash surrender value required included fair value table see note 6 employee compensation plans description deferred compensation plan assets following tables summarize offsetting fair values company’s derivative assets derivative liabilities presentation company’s consolidated balance sheets december 31 2019 2018 company offsets derivative assets derivative liabilities consolidated balance sheets extent maintains master netting arrangements related financial institutions december 31 2019 2018 company’s derivatives subject master netting arrangements collateralization required company’s derivative assets derivative liabilities 14 detail certain balance sheet accounts assets company’s accompanying consolidated balance sheets included deferred compensation plan assets 389 million 312 million deferred tax assets 793 million 791 million december 31 2019 2018 respectively current liabilities current liabilities consisted following noncurrent liabilities noncurrent liabilities company’s accompanying consolidated balance sheets included deferred compensation plan liabilities 624 million 513 million deferred income tax liabilities 214 million 75 million december 31 2019 2018 respectively see note 6 employee compensation plans description company’s deferred compensation plan assets liabilities 15 quarterly information unaudited 1 fourth quarter 2019 includes net favorable adjustment unrecognized tax benefit liability 114 million primarily attributable transfer pricing matters various foreign jurisdictions legal accrual 40 million relating sec doj investigations relating fcpa matter china described note 7 contingencies fourth quarter 2018 includes unfavorable impact us tax reform enacted fourth quarter 2017 described note 12 income taxes item 16 form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized herbalife nutrition ltd bosco chiu bosco chiu executive vice president chief financial officer dated february 18 2020 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date michael johnson chairman board chief executive officer principal executive officer director february 18 2020 michael johnson bosco chiu executive vice president chief financial officer principal financial officer february 18 2020 bosco chiu jehangir irani senior vice president principal accounting officer principal accounting officer february 18 2020 jehangir “bobby” irani richard h carmona director february 18 2020 richard h carmona jonathan christodoro director february 18 2020 jonathan christodoro hunter c gary director february 18 2020 hunter c gary nicholas graziano director february 18 2020 nicholas graziano alan lefevre director february 18 2020 alan lefevre jesse lynn director february 18 2020 jesse lynn juan miguel mendoza director february 18 2020 juan miguel mendoza michael montelongo director february 18 2020 michael montelongo james l nelson director february 18 2020 james l nelson maria otero director february 18 2020 maria otero margarita paláuhernández director february 18 2020 margarita paláuhernández john tartol director february 18 2020 john tartolitem 15 exhibits financial statement schedules following documents filed part annual report form 10k incorporated herein reference 1 financial statements following financial statements herbalife ltd filed part annual report form 10k pages indicated 2 financial statement schedules omitted required information inapplicable information presented consolidated financial statements related notes 3 exhibits listed exhibit index immediately filed part annual report form 10k incorporated reference herein exhibit index exhibit number description reference 58 first amendment dated june 21 2007 form credit agreement dated july 21 2006 among herbalife international inc herbalife ltd wh intermediate holdings ltd hbl ltd wh luxembourg holdings sárl herbalife international luxembourg sárl hlf luxembourg holdings sárl wh capital corporation wh luxembourg intermediate holdings sárl hv holdings ltd herbalife distribution ltd herbalife luxembourg distribution sárl subsidiary guarantors party thereto favor merrill lynch capital corporation collateral agent q 59 second amendment dated september 17 2007 form credit agreement dated july 21 2006 among herbalife international inc herbalife ltd wh intermediate holdings ltd hbl ltd wh luxembourg holdings sárl herbalife international luxembourg sárl hlf luxembourg holdings sárl wh capital corporation wh luxembourg intermediate holdings sárl hv holdings ltd herbalife distribution ltd herbalife luxembourg distribution sárl subsidiary guarantors party thereto favor merrill lynch capital corporation collateral agent q 60 third amendment dated november 30 2007 form credit agreement dated july 21 2006 among herbalife international inc herbalife ltd wh intermediate holdings ltd hbl ltd wh luxembourg holdings sárl herbalife international luxembourg sárl hlf luxembourg holdings sárl wh capital corporation wh luxembourg intermediate holdings sárl hv holdings ltd herbalife distribution ltd herbalife luxembourg distribution sárl subsidiary guarantors party thereto favor merrill lynch capital corporation collateral agent r 61 herbalife ltd employee stock purchase plan r 62 fourth amendment dated february 21 2008 form credit agreement dated july 21 2006 among herbalife international inc herbalife ltd wh intermediate holdings ltd hbl ltd wh luxembourg holdings sárl herbalife international luxembourg sárl hlf luxembourg holdings sárl wh capital corporation wh luxembourg intermediate holdings sárl hv holdings ltd herbalife distribution ltd herbalife luxembourg distribution sárl subsidiary guarantors party thereto favor merrill lynch capital corporation collateral agent r 63 employment agreement dated march 27 2008 michael johnson herbalife international america inc 64 stock unit award agreement herbalife ltd michael johnson dated march 27 2008 65 stock appreciation right award agreement herbalife ltd michael johnson dated march 27 2008 66 stock appreciation right award agreement herbalife ltd michael johnson dated march 27 2008 67 amendment 1 employment agreement dated april 4 2008 gregory l probert herbalife international america inc 68 fifth amendment dated september 25 2008 form credit agreement dated july 21 2006 among herbalife international inc herbalife ltd wh intermediate holdings ltd hbl ltd wh luxembourg holdings sárl herbalife international luxembourg sárl hlf luxembourg holdings sárl wh capital corporation wh luxembourg intermediate holdings sárl hv holdings ltd herbalife distribution ltd herbalife luxembourg distribution sárl subsidiary guarantors party thereto favor merrill lynch capital corporation collateral agent u 69 amendment herbalife international inc 401k profit sharing plan trust v 70 amendment amended restated independent directors deferred compensation stock unit plan v 71 form independent directors stock appreciation right award agreement v 1 subsidiaries registrant filed herewith management contract compensatory plan arrangement previously filed october 1 2004 exhibit company’s registration statement form s1 file 333119485 incorporated herein reference b previously filed november 9 2004 exhibit amendment 2 company’s registration statement form s1 file 333119485 incorporated herein reference c previously filed december 2 2004 exhibit amendment 4 company’s registration statement form s1 file 333119485 incorporated herein reference previously filed december 14 2004 exhibit amendment 5 company’s registration statement form s1 file 333119485 incorporated herein reference e previously filed february 17 2005 exhibit company’s registration statement form s8 file 333122871 incorporated herein reference f previously filed june 14 2005 exhibit company’s current report form 8k incorporated herein reference g previously filed february 28 2006 exhibit company’s annual report form 10k year ended december 31 2005 incorporated herein reference h previously filed november 22 2005 exhibit company’s registration statement form s8 file 129885 previously filed march 29 2006 exhibit company’s current report form 8k incorporated herein reference j previously filed march 29 2006 exhibit company’s current report form 8k incorporated herein reference k previously filed march 30 2006 exhibit company’s current report form 8k incorporated herein reference l previously filed march 31 2006 exhibit company’s current report form 8k incorporated herein reference previously filed november 13 2006 exhibit company’s quarterly report form 10q quarter ended september 30 2006 incorporated reference n previously filed october 12 2006 exhibit company’s current report form 8k incorporated herein reference previously filed october 26 2006 exhibit company’s current report form 8k incorporated herein reference p previously filed may 29 2007 exhibit company’s current report form 8k incorporated herein reference q previously filed november 6 2007 exhibit company’s quarterly report form 10q quarter ended september 30 2007 incorporated reference r previously filed february 26 2008 exhibit company’s annual report form 10k year ended december 31 2007 incorporated herein reference previously filed april 7 2008 exhibit company’s current report form 8k incorporated herein reference previously filed april 9 2008 exhibit company’s current report form 8k incorporated herein reference u previously filed november 3 2008 exhibit company’s quarterly report form 10q quarter ended september 30 2008 incorporated reference v previously filed may 4 2009 exhibit company’s quarterly report form 10q quarter ended march 31 2009 incorporated reference report independent registered public accounting firm board directors stockholders herbalife ltd audited accompanying consolidated balance sheets herbalife ltd subsidiaries “company” december 31 2009 2008 related consolidated statements income stockholders’ equity comprehensive income cash flows years threeyear period ended december 31 2009 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position herbalife ltd subsidiaries december 31 2009 2008 results operations cash flows years threeyear period ended december 31 2009 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states herbalife ltd subsidiaries’ internal control financial reporting december 31 2009 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated february 23 2010 expressed unqualified opinion effectiveness company’s internal control financial reporting kpmg llp los angeles california february 23 2010 herbalife ltd consolidated balance sheets see accompanying notes consolidated financial statements herbalife ltd consolidated statements income see accompanying notes consolidated financial statements herbalife ltd consolidated statements changes shareholders’ equity comprehensive income see accompanying notes consolidated financial statements herbalife ltd consolidated statements cash flows see accompanying notes consolidated financial statements herbalife ltd notes consolidated financial statements 1 organization herbalife ltd cayman islands exempted limited liability company herbalife incorporated april 4 2002 herbalife ltd together subsidiaries “company” leading global network marketing company sells weight management nutritional supplement energy sports fitness products personal care products network approximately 20 million independent distributors except china company currently sells products retail stores sales representatives sales employees licensed business providers company reports revenue six geographic regions north america consists us canada jamaica mexico south central america emea consists europe middle east africa asia pacific excluding china consists asia new zealand australia china 2 basis presentation company’s consolidated financial statements refer herbalife subsidiaries new accounting pronouncements january 2010 financial accounting standards board fasb issued final accounting standards update 201006 improving disclosures fair value measurements asu 201006 asu 201006 sets forth additional requirements guidance regarding disclosures fair value measurements asu 201006 requires gross presentation activity within level 3 fair value measurement roll forward details transfers level 1 2 fair value measurements also clarifies two existing disclosure requirements accounting standards codification asc topic 820 fair value measurements disclosures asc 820 relating level disaggregation fair value measurements disclosures inputs valuation techniques asu 201006 effective fiscal years interim periods beginning december 15 2009 except level 3 roll forward effective fiscal years interim periods beginning december 15 2010 company assessing potential effect guidance consolidated financial statements june 2009 fasb issued guidance revise approach determine variable interest entity vie consolidated new consolidation model vie’s considers whether company power direct activities significantly impact vie’s economic performance shares significant risks rewards entity guidance vie’s requires companies continually reassess vie’s determine consolidation appropriate provide additional disclosures guidance effective company’s 2010 fiscal year company assessing potential effect guidance consolidated financial statements significant accounting policies june 2009 fasb issued fasb accounting standards codification single source authoritative nongovernmental us generally accepted accounting principles gaap rules interpretive releases sec authority federal securities laws also sources authoritative gaap sec reporting companies codification changes referencing financial standards became effective interim annual periods ending september 15 2009 existing nonsec accounting standards superseded described codification nonsec accounting literature included codification nonauthoritative adoption codification significant impact company’s consolidated financial statements references standards issued prior codification replaced description applicable fasb authoritative guidance updated accounting standard codification number herbalife ltd notes consolidated financial statements continued consolidation policy consolidated financial statements include accounts herbalife ltd subsidiaries significant intercompany transactions accounts eliminated december 2007 fasb issued authoritative guidance relating business combinations establishes principles requirements acquirer recognizes measures financial statements identifiable assets acquired liabilities assumed non controlling interest acquiree goodwill acquired guidance also modifies recognition preacquisition contingencies environmental legal issues restructuring plans acquired research development value purchase accounting guidance requires acquirer recognize changes amount deferred tax benefits recognizable business combination either income continuing operations period combination directly contributed capital depending circumstances guidance also establishes disclosure requirements enable users evaluate nature financial effects business combination company adopted guidance january 1 2009 material impact consolidated financial statements august 2009 company purchased certain assets micelle laboratories inc lake forest california contract manufacturer food nutritional supplements company purchased assets order strengthen global manufacturing capabilities purchase price material company’s consolidated financial statements accounting purposes acquisition micelle acquisition recorded business combination pursuant fasb asc 805 business combinations december 31 2009 company’s consolidated balance sheet december 31 2009 reflects preliminary amounts working capital adjustment relating micelle acquisition finalized preliminary amounts may adjusted subsequent quarters measurement period foreign currency translation substantially countries company operates functional currency local currency foreign subsidiaries’ asset liability accounts translated consolidated financial reporting purposes us dollar amounts yearend exchange rates revenue expense accounts translated average rates year foreign exchange translation adjustments included accumulated comprehensive loss accompanying consolidated balance sheets transaction gains losses include cost majority foreign currency forward option contracts related settlement gains losses included selling general administrative expenses accompanying consolidated statements income company recorded transaction losses 77 million 57 million 124 million years ended december 31 2009 2008 2007 respectively forward exchange contracts option contracts interest rate swaps company enters forward exchange contracts option contracts managing foreign exchange risk sales distributors purchase commitments denominated foreign currencies intercompany transactions bank loans company also enters interest rate swaps managing interest rate risk variable rate term loan company use contracts trading purposes accordance fasb asc topic 815 derivatives hedging asc 815 company designates certain derivative instruments cash flow hedges formally documents hedge relationships including identification hedging instruments hedged items well risk management objectives strategies undertaking hedge transaction time derivative contract executed company assesses effectiveness hedge inception ongoing basis determines whether hedge highly perfectly effective offsetting changes cash flows hedged item company records effective portion changes estimated fair value accumulated comprehensive income loss subsequently reclassifies related amount accumulated comprehensive income loss earnings herbalife ltd notes consolidated financial statements continued hedged item underlying transaction impacts earnings determined derivative ceased highly effective hedge company discontinue hedge accounting transaction derivatives designated hedges changes estimated fair value recognized consolidated statements income january 1 2009 company adopted fasb authoritative guidance requires additional financial statement disclosures derivative instruments required asc 815 adoption financial impact company’s consolidated financial statements required additional financial statement disclosures derivative instruments company applied requirements standard prospective basis disclosed note 11 derivative instruments hedging activities accordingly disclosures related annual periods prior date adoption presented cash equivalents company considers highly liquid investments purchased maturity three months less cash equivalents cash equivalents comprised primarily money market accounts foreign domestic bank accounts reduce credit risk company monitors credit standing financial institutions hold company’s cash equivalents currency restrictions enacted venezuelan government 2003 become restrictive impacted ability company’s subsidiary venezuela herbalife venezuela obtain us dollars official foreign exchange rate venezuelan government foreign exchange commission cadivi application approval processes intermittently delayed recent periods certain instances company made appropriate applications cadivi approval obtain us dollars pay imported products annual dividend official exchange rate represents exchange rate company expects settle cadivi registered balances therefore cadivi registered balances recorded remeasured official exchange rate december 31 2009 instances order timely provide products distributors company register certain products cadivi noncadivi registered instead used legal parallel market mechanism payment fourth quarter 2009 due currency restrictions obtaining us dollars official currency exchange rate order mitigate company’s currency exchange risk venezuela herbalife venezuela entered series parallel market transactions exchanged 1050 million bolivars approximately 195 million us dollars average rate approximately 54 bolivars per us dollar also fourth quarter 2009 herbalife venezuela settled 136 million us dollar denominated noncadivi registered intercompany shipment payables initially recorded subsequently remeasured parallel market exchange rate therefore settlement intercompany shipment payables result net foreign exchange gains losses recorded accompanying consolidated statement income year ended december 31 2009 incremental costs 188 million related importation products venezuela unfavorable parallel market exchange rate recorded costs sales company’s 2009 consolidated statement income see note 15 subsequent event information herbalife venezuela december 31 2009 herbalife venezuela’s 59 million us dollar cash equivalents residing us dollar bank account remeasured bolivars parallel market exchange rate approximately 59 bolivars per us dollar remeasured cash equivalents translated official rate 215 bolivars per us dollar reported 158 million company’s consolidated balance sheet december 31 2009 company’s specific facts circumstances us gaap requires company use dividend remittance rate official exchange rate translation purposes parallel market exchange rate applicable rate particular transaction could settled certain remeasurement purposes due difference remeasurement rate translation rate cash equivalents relating herbalife venezuela reported company’s consolidated balance sheet december 31 2009 99 million greater us dollar amount residing herbalife venezuela’s us dollar bank account therefore herbalife ltd notes consolidated financial statements continued necessarily reflect true purchasing power reported us dollar cash equivalents january 1 2010 company recorded 99 million pretax foreign exchange loss company’s 2010 consolidated statement income upon venezuela becoming highly inflationary economy effective january 1 2010 see note 15 subsequent event information venezuela becoming highly inflationary december 31 2009 herbalife venezuela reported cash equivalents approximately 342 million 158 million denominated us dollars 184 million denominated bolivars cash equivalents translated official exchange rate applicable dividend remittance year ended december 31 2009 herbalife venezuela’s net sales represented approximately 4 company’s consolidated worldwide net sales accounts receivable accounts receivable consist principally receivables credit card companies arising sale products company’s distributors receivables importers utilized limited number countries sell products distributors due geographic dispersion credit card receivables collection risk considered significant although receivables importers significant company performs ongoing credit evaluations importers maintains allowance potential credit losses company believes provides adequate allowances receivables distributors importers fair value financial instruments effective january 1 2008 company adopted fasb authoritative guidance applies nonfinancial assets nonfinancial liabilities fasb authoritative guidance clarifies definition fair value prescribes methods measuring fair value establishes fair value hierarchy based inputs used measure fair value expands disclosures fair value measurements disclosed note 14 fair value measurements company properly measured disclosed financial instruments company estimated fair value financial instruments using following methods assumptions • carrying amounts cash equivalents receivables accounts payable approximate fair value due shortterm maturities instruments • fair value option forward contracts based dealer quotes • carrying values company’s variable rate debt instruments considered approximate fair values interest rates instruments approximate current rates offered company inventories stated lower cost firstin firstout basis market company reserves obsolete slow moving inventory totaling 93 million 116 million december 31 2009 2008 respectively deferred financing costs deferred financing costs represent fees expenses related borrowing company’s longterm debt amortized term related debt herbalife ltd notes consolidated financial statements continued longlived assets depreciation furniture fixtures equipment includes computer hardware software computed straightline basis estimated useful lives related assets range three ten years leasehold improvements amortized straightline basis life related asset term lease whichever shorter depreciation furniture fixtures equipment leasehold improvements totaled 622 million 487 million 333 million years ended december 31 2009 2008 2007 respectively longlived assets reviewed impairment based undiscounted cash flows whenever events changes circumstances indicate carrying amount assets may recoverable measurement impairment loss based estimated fair value asset goodwill marketing related intangible assets indefinite lives evaluated annual basis impairment frequently events changes circumstances indicate asset might impaired years ended december 31 2009 2008 2007 goodwill marketing related intangible asset impairments december 31 2009 2008 2007 marketing related intangible asset balance 3100 million december 31 2009 2008 2007 goodwill balance 1025 million 1107 million 1115 million respectively 82 million net decrease goodwill 2009 2008 primarily due 121 million decrease relating change deferred tax liability partially offset 39 million increase related micelle acquisition 08 million decrease goodwill 2008 2007 primarily due effect settlement international tax audit related preacquisition period intangible assets finite lives amortized expected lives two years product certifications three years distributor network noncompete agreements five years product formulas seven years customer relationships december 31 2008 intangible assets finite lives fully amortized fiscal year 2009 company’s intangible assets finite lives increased 17 million net 02 million amortization due micelle acquisition annual amortization expense finite life intangibles 02 million zero 18 million years ended december 31 2009 2008 2007 respectively december 31 2009 annual expected amortization expense follows 2010 05 million 2011 05 million 2012 03 million 2013 02 million 2014 01 million thereafter 01 million income taxes income tax expense includes income taxes payable current year change deferred income tax assets liabilities future tax consequences events recognized company’s financial statements income tax returns valuation allowance recognized reduce carrying value deferred income tax assets believed likely component deferred income tax assets realized july 2006 fasb issued authoritative guidance clarifies accounting reporting uncertainties income taxes recognized enterprise’s financial statements interpretation prescribes comprehensive model financial statement recognition measurement presentation disclosure uncertain tax positions taken expected taken income tax returns company adopted fasb authoritative guidance beginning fiscal year 2007 material impact company’s consolidated financial statements see note 12 income taxes discussion income taxes royalty overrides independent distributor may earn commissions called royalty overrides production bonuses based retail volume commissions based retail sales volume certain members independent sales force sponsored distributor addition commissions recorded products shipped nonus royalty checks aged variety reasons beyond certainty paid taken back income management calculated period certainty three years worldwide herbalife ltd notes consolidated financial statements continued comprehensive income comprehensive income consists net earnings foreign currency translation adjustments effective portion unrealized gains losses derivatives comprehensive income presented consolidated statements shareholders’ equity comprehensive income components accumulated comprehensive loss consisted following thousands operating leases company leases physical properties operating leases certain lease agreements generally include rent holidays tenant improvement allowances company recognizes rent holiday periods straightline basis lease term beginning company right leased space company also records tenant improvement allowances rent holidays deferred rent liabilities amortizes deferred rent terms lease rent research development company’s research development performed inhouse staff outside consultants periods presented research development costs expensed incurred material earnings per share basic earnings per share represents net income period common shares outstanding divided weighted average number common shares outstanding period diluted earnings per share represents net income divided weighted average number common shares outstanding inclusive effect dilutive securities outstanding stock options stock appreciation rights stock units warrants following common share amounts used compute basic diluted earnings per share period thousands equity grants stock options stock appreciation rights stock units 28 million 23 million 10 million prices ranging 1982 4864 3854 4864 3986 4546 outstanding years ended december 31 2009 2008 2007 respectively included computation diluted earnings per share effect would antidilutive herbalife ltd notes consolidated financial statements continued revenue recognition revenue recognized products shipped title risk loss passes independent distributor importer sales recognized net sales basis reflects product returns net discounts referred “distributor allowances” amounts billed freight handling costs freight handling costs paid company included cost sales company generally receives net sales price cash credit card payments point sale company currently presents sales taxes collected customers net basis related royalty overrides allowances product returns recorded merchandise shipped allowances product returns primarily connection company’s buyback program provided time sale recorded accrual based upon historic return rates country relevant return pattern reflects anticipated returns received period 12 months following original sale sharebased payments company accounts sharebased compensation accordance fasb authoritative guidance requires measurement sharebased compensation expense sharebased payment awards made employees service company measures sharebased compensation cost grant date based fair value award recognizes expense straightline basis employee’s requisite service period use estimates preparation financial statements conformity us gaap requires management make estimates assumptions estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates company evaluates estimates assumptions ongoing basis using historical experience factors including current economic environment company believes reasonable circumstances company adjusts estimates assumptions facts circumstances dictate illiquid credit markets volatile equity foreign currency combined increase uncertainty inherent estimates assumptions future events effects cannot determined precision actual results could differ estimates changes estimates resulting continuing changes economic environment reflected financial statements future periods 3 inventories consist primarily finished goods available resale categorized follows millions total inventories presented net reserves obsolete slow moving inventory 93 million 116 million december 31 2009 2008 respectively herbalife ltd notes consolidated financial statements continued 4 longterm debt longterm debt consists following millions interest expense 97 million 201 million 164 million years ended december 31 2009 2008 2007 respectively july 21 2006 company entered 3000 million senior secured credit facility comprised 2000 million term loan 1000 million revolving credit facility syndicate financial institutions lenders september 2007 company lenders amended credit agreement increasing amount revolving credit facility aggregate principal amount 1500 million 2500 million primarily finance increase share repurchase program see note 8 shareholders’ equity discussion share repurchase program term loan bears interest libor plus margin 15 base rate plus margin 050 matures july 21 2013 revolving credit facility bears interest libor plus margin 125 base rate plus margin 025 available july 21 2012 december 31 2009 2008 weighted average interest rate senior secured credit facility 166 304 respectively company incurred approximately 23 million debt issuance costs connection entering senior secured credit facility july 2006 amortized term senior secured credit facility senior secured credit facility requires company comply leverage ratio interest coverage ratio addition senior secured credit facility contains customary covenants including covenants limit restrict company’s ability incur liens incur indebtedness make investments dispose assets make certain restricted payments merge consolidate enter certain transactions affiliates december 31 2009 2008 company compliant debt covenants december 31 2009 company obligated pay approximately 04 million term loan every quarter june 30 2013 remaining principal july 21 2013 december 31 2009 2008 amounts outstanding term loan 1454 million 1468 million respectively 2008 company borrowed aggregate amount 1180 million paid total amount 1490 million revolving credit facility 2009 company borrowed aggregate amount 2120 million paid total amount 2987 million revolving credit facility december 31 2009 2008 amounts outstanding revolving credit facility 910 million 1777 million respectively annual scheduled principal payments longterm debt 15 million 15 million 925 million 1409 million years ended december 31 2010 2011 2012 2013 respectively course conducting regular business operations certain vendors government agencies may require letters credit issued december 31 2009 2008 company aggregate 28 million issued undrawn letters credit herbalife ltd notes consolidated financial statements continued 5 lease obligations company warehouse office furniture fixtures equipment leases expire various dates 2020 lease agreements company also obligated pay property taxes insurance maintenance costs certain leases contain renewal options future minimum rental commitments noncancelable operating leases capital leases december 31 2009 follows millions rental expense years ended december 31 2009 2008 2007 397 million 408 million 365 million respectively property capital leases included property accompanying consolidated balance sheets follows millions 6 employee compensation plans company maintains profit sharing plan pursuant sections 401a k internal revenue code 1986 amended “the code” plan available substantially employees meet length service requirements prior january 1 2009 employees could elect contribute 2 17 compensation company would make matching contributions amount equal one dollar deferred earnings exceed 3 participants’ earnings participants partially vested company contributions one year fully vested five years effective january 1 2009 company amended profit sharing plan starting january 1 2009 employees may elect contribute 75 compensation however contributions limited maximum annual amount set periodically code company make matching contributions amount equal one dollar deferred earnings first 1 make matching contributions amount equal 50 one dollar subsequent 5 deferred earnings contributions become fully vested two years company contributed 22 million 20 million 17 million profit sharing plan years ended december 31 2009 2008 2007 respectively company nonqualified deferred compensation plans select groups management herbalife management deferred compensation plan herbalife senior executive deferred compensation plan herbalife ltd notes consolidated financial statements continued deferred compensation plans allow eligible employees elect annually defer 50 base annual salary 100 annual bonus calendar year “annual deferral amount” company makes matching contributions behalf participant senior executive deferred compensation plan senior executive deferred compensation plan provides amount matching contributions determined company discretion 2009 matching contribution 3 participant’s base salary participant either nonqualified deferred compensation plans discussed times fully vested nonforfeitable interest year’s contribution including interest credited thereto company matching contributions applicable connection participant’s election defer annual deferral amount participant may also elect receive shortterm payout equal annual deferral amount plus interest amount payable two years first day year annual deferral amount actually deferred total deferred compensation two nonqualified deferred compensation plans net participant contributions expense 26 million 17 million years ended december 31 2009 2007 respectively benefit 45 million year ended december 31 2008 total longterm deferred compensation liability two deferred compensation plans 166 million 140 million december 31 2009 2008 respectively deferred compensation plans unfunded benefits paid general assets company except company contributed “rabbi trust” whose assets used pay benefits company remains solvent reached company’s creditors company becomes insolvent value assets “rabbi trust” 174 million 158 million december 31 2009 2008 respectively 7 contingencies company time engaged routine litigation company regularly reviews pending litigation matters involved establishes reserves deemed appropriate management litigation matters probable loss estimate made marketer dietary nutritional supplements products ingested consumers applied bodies company currently subjected various product liability claims effects claims date material company reasonably possible range exposure currently existing claims material company believes meritorious defenses allegations contained lawsuits company currently maintains product liability insurance annual deductible 10 million april 16 2007 herbalife international america inc filed complaint united states district court central district california certain former herbalife distributors left company join competitor complaint alleged breach contract misappropriation trade secrets intentional interference prospective economic advantage intentional interference contract unfair competition constructive trust fraud seeks monetary damages attorney’s fees injunctive relief herbalife international america inc v robert e ford et al court entered preliminary injunction defendants enjoining use andor misappropriation company’s trade secrets december 11 2007 defendants appealed court’s entry preliminary injunction us court appeals ninth circuit court affirmed relevant part preliminary injunction december 3 2007 defendants filed counterclaim alleging company engaged unfair deceptive business practices intentional negligent interference prospective economic advantage false advertising company endless chain scheme violation california law seeking restitution contract rescission injunction sides engaged discovery filed cross motions summary judgment august 25 herbalife ltd notes consolidated financial statements continued 2009 court granted partial summary judgment herbalife defendants’ claims except claim company endless chain scheme applicable law question fact determined trial court denied defendants’ motion summary judgment herbalife’s claims misappropriation trade secrets breach contract december 4 2009 court ordered mediation occur february 8 2010 set schedule herbalife’s motion summary judgment dismiss sole remaining counterclaim defendants hearing scheduled march 9 2010 matters resolved date mediation occurred resolve issues date set trial company believes merit remaining claims relief meritorious defenses remaining counterclaim certain company’s subsidiaries subject tax audits governmental authorities respective countries certain tax audits governmental authorities proposing significant amounts additional taxes related interest penalties due company tax advisors believe substantial defenses allegations additional taxes owed company vigorously contesting additional proposed taxes related charges matters may take several years resolve company believes meritorious defenses cannot sure ultimate resolution although company reserved amount company believes represents likely outcome resolution disputes company incorrect assessment company may record additional expenses 8 shareholders’ equity company 602 million 614 million 644 million common shares outstanding december 31 2009 2008 2007 respectively december 2004 company authorized 75 million preference shares 0002 par value 75 million authorized preference shares remain unissued december 31 2009 preference shares may issued time one series voting powers full limited without voting powers designations preferences relative participating optional special rights qualifications limitations restrictions determined company’s board directors dividends declaration future dividends subject discretion company’s board directors depend upon various factors including earnings financial condition restrictions imposed credit agreement cash requirements future prospects factors deemed relevant board directors senior credit facility entered july 21 2006 amended permits payments dividends long default event default exists sum amounts paid respect dividends share repurchases exceed sum 4500 million plus seventy five percent cumulative consolidated net income first quarter 2007 last day quarter recently ended prior date dividend second quarter 2007 company’s board directors adopted regular quarterly cash dividend program since adoption program company’s board directors authorized 020 per common share cash dividend quarter aggregate amount dividends paid declared fiscal years ended december 31 2009 2008 2007 approximately 487 million 507 million 415 million respectively share repurchases april 18 2007 company’s board directors authorized repurchase 300 million company’s common shares next two years times prices determined company management market conditions warrant august 23 2007 company’s board directors approved increase 150 million previously authorized share repurchase program raising total value company herbalife ltd notes consolidated financial statements continued common shares authorized repurchased 450 million may 20 2008 company’s board directors approved additional increase 150 million share repurchase program raising total value company common shares authorized repurchased 600 million april 17 2009 company’s share repurchase program adopted april 18 2007 expired pursuant terms april 30 2009 company announced board directors authorized new program company repurchase 300 million herbalife common shares next two years times prices determined company’s management market conditions warrant december 31 2009 approximate dollar value shares could repurchased company’s share repurchase program approximately 2268 million year ended december 31 2009 company repurchased 20 million common shares open market purchases aggregate cost approximately 732 million average cost 3660 per share year ended december 31 2008 company repurchased approximately 46 million common shares open market purchases aggregate cost 1370 million average cost 2960 per share year ended december 31 2007 company repurchased approximately 91 million common shares open market purchases aggregate cost 3658 million average cost 4042 per share aggregate purchase price common shares company repurchased reflected reduction shareholders’ equity company allocated purchase price repurchased shares reduction retained earnings common stock additional paidin capital number shares issued upon vesting exercise certain restricted stock units stock appreciation rights granted pursuant company’s sharebased compensation plans net minimum statutory withholding requirements company pays behalf employees although shares withheld issued treated common share repurchases accounting purposes reduce number shares would issued upon vesting 9 sharebased compensation company five sharebased compensation plans wh holdings cayman islands ltd stock incentive plan management plan wh holdings cayman islands ltd independent directors stock incentive plan independent directors plan herbalife ltd 2004 stock incentive plan 2004 stock incentive plan herbalife ltd 2005 stock incentive plan 2005 stock incentive plan herbalife ltd independent directors deferred compensation stock unit plan independent director stock unit plan management plan provides grant options purchase common shares herbalife members company’s management independent directors plan provides grant options purchase common shares herbalife company’s independent directors 2004 stock incentive plan replaced management plan independent directors plan adoption thereof additional awards made either management plan independent directors plan however shares remaining available issuance plans absorbed became available issuance 2004 stock incentive plan terms 2005 stock incentive plan substantially similar terms 2004 stock incentive plan 2005 stock incentive plan authorizes issuance 4000000 common shares pursuant awards granted plan plus shares remained available issuance 2004 stock incentive plan time adoption 2005 stock incentive plan purpose independent directors stock unit plan facilitate equity ownership company independent directors award stock units december 31 2009 approximately 09 million common shares remain available future issuance company’s sharebased compensation plans provide grants stock options stock appreciation rights sars stock units collectively referred herein awards stock options typically vest quarterly fiveyear period beginning grant date certain stock option grants vest period less five years certain sars vest quarterly fiveyear period beginning grant date sars vest annually threeyear period contractual term stock options sars ten years stock unit awards 2005 incentive plan incentive plan stock units vest annually three year period equal herbalife ltd notes consolidated financial statements continued contractual term stock units awarded independent directors stock unit plan independent director stock units vest rate 25 january 15 april 15 july 15 october 15 january 2009 company amended independent directors plan comply newly issued internal revenue code section 457a eliminate deferral election move sars stock units march 2008 company granted stock unit awards chairman chief executive officer vest fouryear period rate 30 first three years 10 fourth year february 2009 company granted stock units stock appreciation rights subject continued service onethird vest third anniversary date grant onethird vest fourth anniversary date grant remaining onethird vest fifth anniversary date grant awards subject market conditions market condition awards continued service company service condition awards granted company either market condition awards service condition awards unless otherwise determined time grant value stock unit shall equal one common share herbalife company’s stock compensation awards outstanding december 31 2009 include stock options sars stock units march 2008 company granted sars market conditions chairman chief executive officer fully vest end four years subject continued employment date achievement certain conditions related market value company’s common shares market conditions include targets stock price appreciation 10 15 compound annual growth rate company records compensation expense requisite service period equal vesting period awards granted january 1 2006 compensation expense recognized straightline basis vesting term stockbased compensation expense included selling general administrative expenses consolidated statements income years ended december 31 2009 2008 2007 sharebased compensation expense relating service condition awards amounted 184 million 159 million 134 million respectively year ended december 31 2009 2008 sharebased compensation expense relating market condition awards amounted 27 million 19 million respectively years ended december 31 2009 2008 2007 related income tax benefits recognized earnings awards amounted 79 million 67 million 50 million respectively december 31 2009 total unrecognized compensation cost related nonvested service condition stock awards 239 million related weightedaverage period expected recognized approximately 14 years december 31 2009 total unrecognized compensation cost related nonvested market condition stock awards 65 million related weightedaverage period expected recognized approximately 22 years ended december 31 2009 2008 2007 excess tax benefits 36 million 153 million 207 million respectively generated exercises awards fair value service condition market condition award estimated date grant using blackscholesmerton optionpricing model monte carlo lattice model respectively expected term award based simple average vesting period life award simplified method limited historical data groups employees determined similar historical exercise patterns valuation purposes expected volatility award primarily based upon historical volatility company’s common shares also validated volatility rates peer group companies risk free interest rate based implied yield us treasury zerocoupon issue remaining term equal expected term award expected dividend yield assumption based company’s historical expected amount dividend payouts herbalife ltd notes consolidated financial statements continued stock option awards granted years ended december 31 2009 2008 2007 following table summarizes weighted average assumptions used calculation fair value service condition awards years ended december 31 2009 2008 2007 market condition awards granted years ended december 31 2009 2007 market condition awards granted year ended december 31 2008 following table summarizes weighted average assumptions used calculation fair value following tables summarize activity sharebased compensation plans includes stock awards year ended december 31 2009 1 intrinsic value amount current market value underlying stock exceeds exercise price stock award herbalife ltd notes consolidated financial statements continued 2 includes 08 million market condition awards outstanding december 31 2009 weightedaverage grant date fair value service condition awards granted years ended december 31 2009 2008 2007 642 2358 1954 respectively weightedaverage grant date fair value market condition awards granted year ended december 31 2008 1459 total intrinsic value service condition awards exercised years ended december 31 2009 2008 2007 164 million 458 million 601 million respectively market condition awards exercised years ended december 31 2009 2008 2007 employee stock purchase plan 2007 company adopted qualified employee stock purchase plan espp implemented first quarter 2008 connection adoption espp company reserved issuance total 1 million common shares december 31 2009 approximately 960807 common shares remain available future issuance terms espp rights purchase common shares may granted eligible qualified employees subject certain restrictions espp enables company’s eligible employees payroll withholdings purchase limited number common shares 85 fair market value common share purchase date purchases made quarterly basis 10 segment information company network marketing company sells wide range weight management products nutritional supplements personal care products within one industry segment defined fasb asc topic 280 segment reporting company’s products manufactured third party providers company’s suzhou china facility recently acquired manufacturing facility located lake forest california sold independent distributors sell herbalife products retail consumers distributors revenues reflect sales products distributors based distributors’ geographic location company sells products 72 countries throughout world organized managed geographic regions company aggregates operating segments excluding china one reporting segment primary reporting segment management believes company’s operating segments similar operating characteristics similar long term operating performance making determination management believes operating segments similar nature products sold product acquisition process types customers products sold methods used distribute products nature regulatory environment china identified separate reporting segment meet criteria aggregation first quarter 2009 company changed geographic regions part company’s restructuring program designating mexico region combining south america central america one region changes geographic regions implemented create growth opportunities distributors support faster decision making across organization reducing number layers herbalife ltd notes consolidated financial statements continued management improve sharing ideas tools accelerate growth company’s high potential markets historical information presented related company’s geographic regions reclassified conform current geographic presentation operating information primary reporting segment china sales product line follows herbalife ltd notes consolidated financial statements continued 1 operating margin consists net sales less cost sales royalty overrides 2 compensation china sales employees licensed business providers included selling general administrative expenses distributor compensation countries included royalty overrides 3 product buybacks returns product categories included literature promotional category 4 consists us canada jamaica 5 consists europe middle east africa 6 consists asia excluding china new zealand australia december 31 2009 2008 total assets company’s primary reporting segment 10971 million 10743 million respectively total assets china segment 490 million 470 million december 31 2009 2008 respectively december 31 2009 2008 goodwill allocated company’s primary reporting segment 990 million 1072 million respectively goodwill allocated china segment 35 million december 31 2009 2008 december 31 2009 net property located us foreign countries 1453 million 327 million respectively december 31 2008 net property located us foreign countries 1466 million 289 million respectively december 31 2009 deferred tax assets related us foreign countries 435 million 338 million respectively december 31 2008 deferred tax assets related us foreign countries 406 million 314 million respectively company’s foreign subsidiaries designate local currencies functional currency december 31 2009 2008 total amount cash held foreign subsidiaries reported company’s consolidated balance sheet 1496 million 1420 million respectively 119 million herbalife ltd notes consolidated financial statements continued 97 million respectively maintained invested us dollars see note 2 discussion herbalife venezuela’s us dollar cash equivalents 11 derivative instruments hedging activities interest rate risk management company engages interest rate hedging strategy hedged transactions forecasted interest payments company’s variable rate term loan hedged risk variability forecasted interest rate cash flows hedging strategy involves purchase interest rate swaps outstanding cash flow hedges interest rate exposures december 31 2009 maximum length time company hedging certain exposures less four years senior secured credit facility company obligated enter interest rate hedges 25 aggregate principal amount term loan minimum three years august 23 2006 company entered interest rate swap agreement provided company pay interest threeyear period fixed rate 526 initial notional principal amount 1800 million receiving interest period libor rate notional principal amount notional amount scheduled reduced 200 million second third fourth quarters year commencing january 1 2007 throughout term swap designated cash flow hedge variability libor interest rate new term loan libor plus 150 thereby fixing company’s effective rate notional amounts 676 september 2009 interest swap expired consequently settled december 31 2009 amounts remaining comprehensive income relating expired interest swap value june 26 2009 company entered interest rate swap agreement effective date june 30 2009 expired september 30 2009 swap notional amount 20 million company paid three month libor received one month libor plus 0185 december 31 2009 interest rate swap agreement expired outstanding amounts settled company elected apply hedge accounting interest rate swap august 2009 company entered four interest rate swap agreements effective date december 31 2009 agreements collectively provide company pay interest less fouryear period weighted average fixed rate 278 notional amounts aggregating 140 million receiving interest period one month libor rate notional amounts agreements expire july 2013 swaps designated cash flow hedges variability libor interest rate term loan libor plus 150 thereby fixing company’s weighted average effective rate notional amounts 428 company formally assesses inception least quarterly thereafter whether derivatives used hedging transactions effective offsetting changes cash flows hedged item december 31 2009 hedge relationships qualified effective hedges asc 815 consequently changes fair value derivatives deferred recorded comprehensive income loss related forecasted transactions recognized consolidated statements income herbalife ltd notes consolidated financial statements continued fair value interest rate swaps based thirdparty bank quotes table describes interest rate swaps fair value liabilities outstanding december 31 2009 2008 foreign currency instruments company also designates certain derivatives certain foreign currency forward option contracts freestanding derivatives hedge accounting apply changes fair market value derivatives included selling general administrative expenses company’s consolidated statements income company uses foreign currency forward contracts hedge foreigncurrencydenominated intercompany transactions partially mitigate impact foreign currency fluctuations company also uses foreign currency option contracts partially mitigate impact foreign currency fluctuations fair value forward option contracts based thirdparty bank quotes december 31 2009 substantially company’s outstanding foreign currency forward contracts maturity dates less one year majority freestanding derivatives expiring within three months foreign currency option contracts outstanding december 31 2009 company also purchases foreign currency forward contracts order hedge forecasted inventory purchases intercompany management fees designated cashflow hedges subject foreign currency exposures company applied hedge accounting rules required asc 815 hedges contracts allow company sell euros exchange us dollars specified contract rates december 31 2009 aggregate notional amounts contracts outstanding approximately 668 million expected mature next fourteen months company’s derivative financial instruments recorded consolidated balance sheet fair value based quoted market rates forecasted inventory purchases forward contracts used hedge forecasted inventory purchases specific months changes fair value forward contracts excluding forward points designated cashflow hedges recorded component accumulated comprehensive income loss within shareholders’ equity recognized cost sales consolidated statement income period approximates time hedged inventory sold company also hedges forecasted intercompany management fees specific months changes fair value us dollar forward contracts designated cash flow hedges recorded component accumulated comprehensive income loss within shareholders’ equity recognized selling general administrative expenses consolidated statement income period hedged item underlying transaction affect earnings december 31 2009 december 31 2008 company recorded asset liability fair value 23 million 01 million respectively relating outstanding foreign currency contracts designated cashflow hedges company assesses hedge effectiveness measures hedge ineffectiveness least quarterly year ended december 31 2009 ineffective portion relating hedges immaterial hedges remained effective december 31 2009 herbalife ltd notes consolidated financial statements continued table describes foreign currency forward contracts outstanding december 31 2009 2008 herbalife ltd notes consolidated financial statements continued company foreign currency option contracts outstanding december 31 2009 following table provides information details company’s foreign currency option contracts outstanding december 31 2008 following tables summarize derivative activity year ended december 31 2009 relating company’s derivatives gains losses derivative instruments following table summarizes gains losses relating derivative instruments recorded comprehensive income loss year ended december 31 2009 herbalife ltd notes consolidated financial statements continued december 31 2009 estimated amount existing net losses related cash flow hedges recorded accumulated comprehensive income loss expected reclassified earnings next twelve months 17 million following table summarizes gains losses relating derivative instruments recorded income year ended december 31 2009 1 foreign exchange contracts designated hedging instruments 03 million loss recognized income represents amounts excluded assessment hedge effectiveness ineffective amounts reported derivatives designated hedging instruments following table summarizes gains losses relating derivative instruments reclassified accumulated comprehensive loss income year ended december 31 2009 herbalife ltd notes consolidated financial statements continued following table presents gross fair value derivatives balance sheet location december 31 2009 12 income taxes components income taxes follows millions herbalife ltd notes consolidated financial statements continued income taxes follows millions dollars significant categories temporary differences gave rise deferred tax assets liabilities follows tax effected millions company recognizes valuation allowances deferred tax assets reported based weight evidence likely deferred tax assets realized company believes majority deferred tax assets realized reversal certain significant taxable temporary differences anticipated future taxable income operations herbalife ltd notes consolidated financial statements continued december 31 2009 company’s deferred tax assets consisted primarily foreign tax loss carryforwards deferred expenses reduced valuation allowances 596 million foreign tax loss carryforwards 61 million expire varying amounts 2010 indefinitely december 31 2009 company approximately 751 million unremitted earnings permanently reinvested foreign subsidiaries us addition company permanently reinvested unremitted earnings operating subsidiaries approximately 12 billion permanently reinvested deferred taxes provided unremitted earnings impractical determine amount unrecognized deferred taxes respect unremitted earnings year ended december 31 2009 company benefited terms tax holiday people’s republic china tax holiday commenced january 1 2008 terminate december 31 2012 terms holiday company subject zero tax rate china 2008 2009 years concessionary tax rate china remaining years included holiday period applicable statutory income tax rate cayman islands zero herbalife ltd years reported purposes reconciliation provision income taxes statutory rate provision income taxes effective tax rate notional 35 tax rate applied follows millions dollars december 31 2009 total amount unrecognized tax benefits including related interest penalties 491 million unrecognized tax benefits primarily relate uncertainties international transfer pricing issues deductibility certain operating expenses various jurisdictions anticipated settlements foreign tax audits expiration statute limitations several jurisdictions total amount unrecognized tax benefits recognized 393 million unrecognized tax benefits 74 million interest 24 million penalties would impact effective tax rate company accounts interest penalties generated tax contingencies component income tax expense year ended december 31 2009 company recorded reversal interest penalties expense related uncertain tax positions 10 million 09 million respectively december 31 2009 total accrued interest penalties 74 million 24 million respectively herbalife ltd notes consolidated financial statements continued following changes occurred amount unrecognized tax benefits including related interest penalties year ended december 31 2009 millions unrecognized tax benefits including related interest penalties decreased 51 million year partially offset increase 14 million due foreign currency fluctuations 14 million benefit attributable foreign currency fluctuations accounted decrease comprehensive income company believes reasonably possible amount unrecognized tax benefits could decrease approximately 149 million within next twelve months possible decrease 114 million would due settlement audits resolution administrative judicial proceedings remaining possible decrease 35 million would due expiration statute limitations various jurisdictions december 31 2009 company’s tax filings subject examination us federal jurisdiction various state jurisdictions years ending december 31 2005 company’s tax filings also subject examination significant foreign jurisdictions years ending december 31 2005 13 restructuring reserve july 2006 company initiated realignment employee base part first phase realignment growth plan company recorded 18 million professional fees severance related costs year ended december 31 2007 relating first phase realignment growth plan december 31 2009 amounts outstanding related charges fourth quarter 2007 company initiated second phase realignment growth plan company recorded 19 million 40 million professional fees severance related costs years ended december 31 2008 2007 respectively relating second phase realignment growth plan december 31 2009 amounts outstanding related charges fourth quarter 2008 company initiated restructuring program incurred approximately 48 million professional fees severance related costs year ended december 31 2009 company recorded 13 million professional fees severance related costs relating restructuring program amounts related realignment growth plan restructuring program included selling general administrative expenses following table summarizes components reserve herbalife ltd notes consolidated financial statements continued december 31 2009 2008 2007 expenses incurred years ended december 31 2009 2008 2007 millions 14 fair value measurements company applies provisions asc 820 financial nonfinancial assets liabilities asc 820 defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date asc 820 establishes fair value hierarchy prioritizes inputs used measuring fair value three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities reporting entity ability access measurement date level 2 inputs include quoted prices similar assets liabilities active markets quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability inputs derived principally corroborated observable market data correlation means level 3 inputs unobservable inputs asset liability herbalife ltd notes consolidated financial statements continued company measures certain assets liabilities fair value discussed throughout notes consolidated financial statements assets liabilities recurring measurements measured fair value shown fair value measurements reporting date using 15 subsequent event inflation venezuela continued increase beginning january 1 2010 venezuela considered highly inflationary economy accounting purposes economy deemed highly inflationary economy threeyear cumulative rate inflation exceeds 100 beginning january 1 2010 pursuant highly inflationary basis accounting herbalife venezuela changed functional currency bolivar us dollar required fasb authoritative guidance subsequent movements bolivar us dollar exchange rate impact company’s consolidated earnings addition bolivar denominated monetary assets liabilities remeasured end reporting period using currency exchange rate time foreign exchange gains losses recognized earnings time economy longer considered highly inflationary based company’s current facts circumstances beginning january 1 2010 company plans use parallel market exchange rate remeasurement purposes highly inflationary accounting rules company’s ability access official rate parallel market exchange rate impact exchange rates company use remeasurement purposes future periods herbalife ltd notes consolidated financial statements continued december 31 2009 prior determination venezuela highly inflationary economy certain us dollar balances remeasured functional bolivar currency using parallel market exchange rate bolivars translated us dollars using official rate january 1 2010 upon venezuela designated highly inflationary economy company record foreign exchange losses fiscal year 2010 consolidated statement income relating remeasurement herbalife venezuela’s monetary assets liabilities company plans use parallel market exchange rate remeasurement herbalife venezuela’s monetary assets liabilities opening balance sheet expects record charge 151 million pretax foreign currency losses fiscal year 2010 consolidated statement income includes 99 million pretax foreign currency exchange loss relating us dollar cash equivalents reported december 31 2009 discussed note 2 also herbalife venezuela’s 342 million cash equivalents reported consolidated balance sheet december 31 2009 includes us dollar denominated cash reduced approximately 125 million january 1 2010 assuming parallel market exchange rate used remeasurement however nonmonetary assets inventory reported company’s consolidated balance sheet december 31 2009 remain historical dollar cost subsequent venezuela becoming highly inflationary economy therefore incremental costs related imported products 2009 unfavorable parallel market exchange rate negatively impact company’s 2010 fiscal year consolidated statement income approximately 127 million pretax devalued based 2010 exchange rates expensed historical dollar costs products sold third parties also early january 2010 venezuela announced official rate devaluation bolivar official rate 430 bolivars per us dollar nonessential items 260 bolivars per us dollar essential items company’s imports expected fall classifications fiscal year 2010 company plans continue making applications cadivi order obtain us dollars official foreign exchange rate cadivi company uses unfavorable parallel market exchange rate remeasurement purposes us dollars obtained cadivi official rate could positive impact company’s consolidated net earnings company continues assess monitor current economic political environment venezuela february 19 2010 company’s board directors approved quarterly cash dividend 020 per common share fourth quarter 2009 shareholders record effective march 2 2010 payable march 16 2010 company performed evaluation subsequent events february 23 2010 date financial statements issued herbalife ltd notes consolidated financial statements continued 16 quarterly information unaudited signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereto duly authorized herbalife ltd john desimone john desimone chief financial officer dated february 23 2010 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated