HERBALIFE LTD. - Annual Report: 2020 (Form 10-K)

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of  (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

 

Indicate by check mark whether registrant is a shell company (as defined in of the Exchange Act).    Yes  ☐    No  ☒

Portions of the registrant’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission no later than 120 days after the end of the Registrant’s fiscal year ended December 31, 2020, are incorporated by reference in Part III of this Annual Report on

We sell high-quality, science-backed products in the categories of weight management; targeted nutrition; energy, sports, and fitness; outer nutrition; and literature, promotional, and other in 95 markets globally as of December 31, 2020. In addition to the effectiveness of personalized selling through a direct-selling business model, we believe the primary drivers for our success throughout our operating history have been enhanced consumer awareness and demand for our products due to global trends such as the obesity epidemic, increasing interest in a fit and active lifestyle, living healthier, and the rise of entrepreneurship.

Our Nutrition Advisory Board and Dieticians Advisory Board are comprised of leading experts around the world in the fields of nutrition and health who educate our Members on the principles of nutrition, physical activity, diet, and healthy lifestyle. We rely on the scientific contributions from members of our Nutrition Advisory Board and our scientific team to continually upgrade existing products or introduce new products as new scientific studies become available and are accepted by regulatory authorities around the world.

For additional information regarding competition, see the risk factors titled “” and “” in Part I, Item 1A, , of this Annual Report on Form 10-K.

Our products are sold and distributed through a global direct selling business model which individuals may join to become a Member of our network marketing program. As a global nutrition company, we believe that the personalized service inherent in the direct-selling business model is ideally suited to marketing and selling our nutrition products. Sales of nutrition products are reinforced by the ongoing personal contact, coaching, behavior motivation, education, and the creation of supportive communities. These are the services that are offered by our Members to their customers. This frequent, personal contact can enhance consumers’ nutritional and health education as well as motivate healthy behavioral changes in consumers to begin and maintain an active lifestyle through wellness and weight management programs. In addition, our Members consume our products themselves, and, therefore, can provide first-hand testimonials of the use and effectiveness of our products and programs to their customers. The personalized experience of our Members has served as a very powerful sales tool for our products.

We believe our Members are the most important differentiator as we go to market with our nutrition products, because of the direct contact they have with their customers, along with the education, training and community support services that we believe help improve the nutrition habits of consumers. People become Herbalife Members for a number of reasons. Many first start out as consumers of our products who want to lose weight or improve their nutrition, and are customers of our Members. Some later join Herbalife and become Members themselves, which makes them eligible to purchase products directly from us, simply to receive a discounted price on products for them and their families. Some Members are interested in the entrepreneurial opportunity to earn compensation based on their own skills and hard work and join Herbalife to earn part-time or full-time income.

Many of our entrepreneurial Members identify and test new marketing efforts and programs developed by other Members and disseminate successful techniques to their sales organizations. For example, Members in Mexico developed businesses that became known as “Nutrition Clubs,” marketing techniques that improved the productivity and efficiency of our Members as well as the affordability of our weight loss products for their customers. Rather than buying several retail products, these businesses allow consumers to purchase and consume our products each day (a Member marketing technique we refer to as “daily consumption”), while continuing to benefit from the support and interaction with the Member as well as socializing with other customers in a designated location. Other programs to drive daily consumption, whether for weight management or for improved physical fitness, include Member-conducted weight loss contests, or Weight Loss Challenges, fitness programs, or Fit Camps, and Wellness Evaluations. We refer to successful Member marketing techniques that we disseminate throughout our Member network, such as Nutrition Clubs, Weight Loss Challenges, and Fit Camps, as Daily Methods of Operations, or DMOs.

We believe that personal and professional development is key to our Members’ success and, therefore, we and our sales leader Members have meetings and events to support this important objective. We and our Member leadership conduct and virtual training sessions on local, regional, and global levels attended by thousands of Members to provide updates on product education, sales and marketing training, and instruction on available tools. These events are opportunities to showcase and disseminate our Members’ evolving best marketing practices and DMOs from around the world and to introduce new or upgraded products. A variety of training and development tools are also available through online and mobile platforms.

We assign point values, known as Volume Points, to each of our products to determine a Member’s sales achievement level. See Part II, Item 7, , for a further description of Volume Points. To become a sales leader, or qualify for a higher level, Members must achieve specified Volume Point thresholds of product sales or earn certain amounts of royalty overrides during specified time periods and generally must once each year. Qualification criteria can vary somewhat by market. We have qualification methods of up to 12 months to encourage a more gradual qualification. We believe a gradual qualification approach is important to the success and retention of new sales leaders and benefits the business in the long term as it allows new Members to obtain product and customer experience as well as additional training and education on Herbalife products, daily consumption based DMOs, and the business opportunity prior to becoming a sales leader.

Our compensation system requires each sales leader to for such status each year, prior to February, in order to maintain their 50% discount on products and be eligible to receive royalty payments. In February of each year, we demote from the rank of sales leader those Members who did not satisfy the requirements during the preceding twelve months. The requirement does not apply to new sales leaders (i.e. those who became sales leaders subsequent to the January of the prior year). Volume Points are the basis for sales leader qualification. Typically, a Member accumulates Volume Points for a given sale at the time the Member pays for the product. However, effective beginning in May 2017, a Member does not receive Volume Point credit for a transaction in the United States until that product is sold to a customer at a profit and it is documented in compliance with the Consent Order entered into with the Federal Trade Commission.

As of December 31, 2020, prior to our February process, approximately 783,000 of our Members have attained the level of Sales Leader, of which approximately 676,000 have attained this level in the 94 markets globally where we use our worldwide Marketing Plan and 107,000 independent service providers operating under our China Marketing Plan.

The table below reflects the number of sales leaders as of the end of February of the year indicated (subsequent to the annual process) and sales leader retention rate by year and by region:

The number of sales leaders as of December 31 will exceed the number immediately subsequent to the preceding period because sales leaders qualify throughout the year but sales leaders who do not are removed from the rank of sales leader the following February.

For the latest twelve-month period ending January 2021, approximately 67.9% of our sales leaders, excluding China, versus 66.5% for the twelve-month period ended January 2020. For each of these years, certain markets have utilized a lower threshold, and these figures include the effect of the lower threshold. Excluding the impact of the lower re-qualification thresholds, the retention rates for 2021 and 2020 would have been 62.9% and 62.3%, respectively. Separately, with revised business requirements in place for U.S. and U.S. Territories, as described in below, we now utilize a equalization factor for U.S. Members to better align their thresholds with Members in other countries, and retention results for each of the years presented include the effect of the equalization factor. We believe this factor preserves retention rate comparability across markets. Also, for each of the years presented, the retention results exclude certain markets for which, due to local operating conditions, sales leaders were not required to requalify; such exclusions are not material to our retention results.

We believe the sales leader retention rate of 67.9% for the year ended January 2021 is the result of efforts we have made to improve the sustainability of sales leaders’ businesses, such as encouraging Members to obtain experience retailing Herbalife products before becoming a sales leader. As our business operations evolve, including the segmentation of our Member base in certain markets and changes in sales leader thresholds for other markets, management continues to evaluate the importance of sales leader retention rate information.

Many Members today also rely on the use of technology to support their businesses. With the increasing use of technology in our everyday lives and the increased Member activity on our online and mobile tools, we have also enhanced our product access and distribution network to support higher volumes of online or mobile orders. Placing orders through these media also allows Members and their customers to select home or business delivery options. We continue to adapt our access points to accommodate the increase in online or mobile ordering activity. We have also implemented information technology systems to support Members and their increasing demand to be more connected to Herbalife, their business, and their consumers. These systems include our Internet-based marketing and Member services platform with tools such as HN MyClub, Engage, HNconnect, BizWorks, MyHerbalife, GoHerbalife, and Herbalife.com. Additionally, we support a growing suite of tools to assist our Members with the ordering, tracking and their customer relationship management. These tools allow our Members to manage their business and communicate with their customers more efficiently and effectively.

We analyze our finished products for label claims and microbiological purity, thereby verifying product safety and shelf life. For our self-manufactured products, we do substantially all of our testing at our modern quality control laboratories in the U.S. and China. We have major quality control labs in Southern California; Winston-Salem, North Carolina; Suzhou, China; Nanjing, China; and our Worldwide Quality Center of Excellence in Changsha, China. All HIM quality control labs contain modern analytical equipment and are backed by the expertise in testing and methods development of our scientists. In our U.S. HIM facilities, which produce products for the U.S. and most of our international markets, we operate and test to the regulations established by the U.S. Food and Drug Administration, or FDA, and strict Current Good Manufacturing Practice regulations, or CGMPs, for food, acidified food, and dietary supplements.

Marketing foods and supplement products on the basis of sound science means using ingredients in the exact composition and quantity as demonstrated to be effective in the relevant scientific literature. Use of these ingredients for their well-established purposes is by definition not novel, and for that reason, most food uses of these ingredients are not subject to patent protection. Notwithstanding the absence of patent protection, we do own proprietary formulations for substantially all of our weight management products and dietary and nutritional supplements. We take care in protecting the intellectual property rights of our proprietary formulas by restricting access to our formulas within the Company to those persons or departments that require access to them to perform their functions, and by requiring our finished goods suppliers and consultants to execute supply and agreements that contractually protect our intellectual property rights. Disclosure of these formulas, in redacted form, is also necessary to obtain product registrations in many countries. We also make efforts to protect certain unique formulations under patent law. We strive to protect all new product developments as the confidential trade secrets of the Company and its inventor employees.

We use the umbrella trademarks , , and the design worldwide, and protect several other trademarks and trade names related to our products and operations, such as and . Our trademark registrations are issued through the United States Patent and Trademark Office, or

Our direct-selling business model enables us to grow our business with moderate investment in infrastructure and fixed costs. We incur no direct incremental cost to add a new Member in our existing markets, and our Member compensation varies directly with product sales. In addition, our Members also bear a portion of our consumer marketing expenses, and our sales leaders sponsor and coordinate Member recruiting and most meeting and training initiatives. Additionally, our infrastructure features scalable production and distribution of our products as a result of having our own manufacturing facilities and numerous third-party manufacturing relationships, as well as our global footprint of and third-party distribution centers.

An important part of our seed to feed strategy is having an efficient infrastructure to deliver products to our Members and their customers. As the shift in consumption patterns continues to reflect an increasing daily consumption focus, one focus of this strategy is to provide more product access points closer to our Members and their customers. We have both Company-operated and outsourced distribution points ranging from our “hub” distribution centers in Los Angeles, Memphis, and Venray, Netherlands, to distribution centers in major countries, to small pickup locations spread throughout the world. We also expect to continue to improve our distribution channels relating to home delivery as we expect to see continued increased demands for our products being shipped to our Members in certain of our larger markets. In addition to these distribution points, we partner with certain retail locations to provide Member pickup points in areas which are not well serviced by our distribution points. We have also identified a number of methods and approaches that better support Members by providing access points closer to where they do business and by improving product delivery efficiency through our distribution channels. Specific methods vary by markets and consider local Member needs and available resources. In aggregate, we have over 1,700 distribution points and partner retail locations around the world. In addition to our distribution points, we contract third locations where we can ship to and Members can pick up ordered products.

In both our United States and foreign markets, we are affected by extensive laws, governmental regulations, administrative determinations and guidance, court decisions and similar constraints that regulate the conduct of our business. Such laws, regulations and other constraints exist at the federal, state or local levels in the United States and at all levels of government in foreign jurisdictions, and include regulations pertaining to: (1) the formulation, manufacturing, packaging, labeling, distribution, importation, sale, and storage of our products; (2) product claims and advertising, including direct claims and advertising by us, as well as claims and advertising by Members, for which we may be held responsible; (3) our network marketing program; (4) transfer pricing and similar regulations that affect the level of U.S. and foreign taxable income and customs duties; (5) taxation of our Members (which in some instances may impose an obligation on us to collect the taxes and maintain appropriate records); (6) our international operations, such as import/export, currency exchange, repatriation and anti-bribery regulations; (7) antitrust issues; and (8) privacy and data protection. See Part I, Item 1A, , of this Annual Report on for additional information.

In the United States, the formulation, manufacturing, packaging, holding, labeling, promotion, advertising, distribution, and sale of our products are subject to regulation by various federal governmental agencies, including (1) the Food and Drug Administration, or FDA, (2) the Federal Trade Commission, or FTC, (3) the Consumer Product Safety Commission, or CPSC, (4) the United States Department of Agriculture, or USDA, (5) the Environmental Protection Agency, or EPA, (6) the United States Postal Service, (7) United States Customs and Border Patrol, and (8) the Drug Enforcement Administration. Our activities also are regulated by various agencies of the states, localities, and foreign countries in which our products are manufactured, distributed, or sold. The FDA, in particular, regulates the formulation, manufacture, and labeling of or OTC, drugs, conventional foods, dietary supplements, and cosmetics such as those distributed by us. The majority of the products marketed by us in the United States are classified as conventional foods or dietary supplements under the Federal Food, Drug and Cosmetic Act, or FFDCA. Internationally, the majority of products marketed by us are classified as foods, health supplements, or food supplements.

The U.S. Dietary Supplement Health and Education Act of 1994, or DSHEA, revised the provisions of FFDCA concerning the composition and labeling of dietary supplements. Under DSHEA, dietary supplement labeling may display structure/function claims that the manufacturer can substantiate, which are claims that the products affect the structure or function of the body, without prior FDA approval, but with notification to the FDA. They may not bear any claim that they can prevent, treat, cure, mitigate or diagnose disease (a drug claim). Apart from DSHEA, the agency permits companies to use full and qualified health claims for food and supplement products containing specific ingredients that meet stated requirements.

Regulations applicable to network marketing organizations generally are directed at ensuring that product sales ultimately are made to consumers and that advancement within the organization is based on sales of the organization’s products rather than investments in the organization or other sales related criteria. When required by law, we obtain regulatory approval of our network marketing program or, when this approval is not required, the favorable opinion of local counsel as to regulatory compliance.

The terms of the Consent Order do not change our going to market through direct selling by independent distributors, and compensating those distributors based upon the product they and their sales organization sell. We have implemented new and enhanced procedures required by the terms of the Consent Order and will continue to do so. We continue to monitor the impact of the Consent Order and our board of directors established the Implementation Oversight Committee in connection with the Consent Order, and more recently, our Audit Committee assumed oversight of continued compliance with the Consent Order. The Implementation Oversight Committee had met regularly with management to oversee our compliance with the terms of the Consent Order. While we currently do not expect the Consent Order to have a long-term and material adverse impact on our business and our Member base, our business and our Member base, particularly in the U.S., have been in the past, and may in the future, be negatively impacted as we and they adjust to the changes. However, the terms of the Consent Order and the ongoing costs of compliance may adversely affect our business operations, our results of operations and our financial condition. See Part I, Item 1A, , of this Annual Report on for a discussion of risks related to the settlement with the FTC.

We also are subject to the risk of private party challenges to the legality of our network marketing program both in the United States and internationally. For example, in , 79 F.3d 776 (9th Cir. 1996), the network marketing program of Omnitrition International, Inc., or Omnitrition, was challenged in a class action by Omnitrition distributors who alleged that it was operating an illegal “pyramid scheme” in violation of federal and state laws. We believe that our network marketing program satisfies federal and other applicable state statutes and case law.

The pandemic has increased the resources required to keep our employees safe and healthy and we are making what we believe are the necessary investments to achieve this goal. In response to the pandemic, we have taken several actions, including supporting our employees to work from home when possible, implementing safety measures in all our facilities, and offering incremental compensation to certain of our employees. We believe our proactive efforts have been successful in supporting our business growth despite the obstacles and challenges presented by

We are dependent on our third-party independent distributors to sell and promote our products to consumers. We frequently interact and work directly with our sales leader distributors to explore ways to support our mission and our third-party independent members’ businesses, and their customers’ personal goals of living a healthier and more active lifestyle. See the section above for sales leader and requalification metrics and further discussion on our sales leaders.

Our Internet website address is and our investor relations website is We make available free of charge on our website our Annual Reports on Quarterly Reports on Current Reports on proxy statements, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practical after we file such material with, or furnish it to, the Securities and Exchange Commission, or SEC. The SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at We also make available free of charge on our investor relations website at our Principles of Corporate Governance, our Corporate Code of Business Conduct and Ethics, and the Charters of our Audit Committee, Nominating and Corporate Governance Committee, Compensation Committee, and ESG Committee of our Board of Directors. Unless expressly noted, the information on our website, including our investor relations website, or any other website is not incorporated by reference in this Annual Report on and should not be considered part of this Annual Report on or any other filing we make with the SEC.

We believe the pandemic could have an adverse impact on the pipeline of new Members and our Member turnover rate, and may impact our future net sales. See the and sections in Part II, Item 7, , of this Annual Report on for further discussion of the impacts of the pandemic on our business and results of operations. For additional information regarding sales leader retention rates, see Part I, Item 1, , of this Annual Report on

We are subject to extensive federal, state, local, and foreign laws, rules, and regulations that regulate our business, products, direct sales channel, and network marketing plan. See the section of Part I, Item 1, , of this Annual Report on for additional information. While we have implemented policies and procedures designed to govern Member conduct and to protect the goodwill associated with Herbalife Nutrition, it can be difficult to enforce these policies and procedures because of our large number of Members and their status as independent contractors and because our policies and procedures differ by jurisdiction as a result of varying local legal requirements. In addition, although we train our Members and attempt to monitor our Members’ marketing materials, we cannot ensure that our Members will comply with applicable legal requirements or our policies and procedures or that such marketing materials or other Member practices comply with applicable laws, rules, and regulations. It is possible that a court could hold us liable for the actions of our Members, which could materially harm our business, financial condition, and operating results.

Adverse publicity relating to us has had, and could again have, a negative effect on our ability to attract, motivate, and retain Members, and on our share price. For example, the resulting adverse publicity from the 1986 permanent injunction entered in California caused a rapid, substantial loss of Members in the United States and a corresponding reduction in sales beginning in 1985. See also the risk factor titled “” We expect that adverse publicity will, from time to time, continue to negatively impact our business in particular markets and may adversely affect our share price.

Our business is subject to rapidly changing consumer trends and preferences and product introductions, especially with respect to our nutrition products. Our continued success depends in part on our ability to anticipate and respond to these changes and introductions, and we may not respond or develop new products or product enhancements in a cost-effective, timely, or commercially appropriate manner, or at all, particularly while the pandemic persists. The success of our new product offerings and enhancements depends on a number of factors, including our ability to:

We depend on the ability of our business to run smoothly, including the ability of Members to engage in their selling and business building activities and the ability of our inventories and products to move reasonably unimpeded around the world. Any material disruption caused by unforeseen or catastrophic events, such as (i) natural disasters or severe weather conditions, including fires, floods, hurricanes, volcanic eruptions, and earthquakes; (ii) power loss or shortages; (iii) telecommunications or information technology infrastructure failures; (iv) acts or threats of war, terrorism, or other armed hostilities; (v) outbreaks of contagious diseases, epidemics, and pandemics; (vi) cybersecurity incidents, including intentional or inadvertent exposure of content perceived to be sensitive data; (vii) employee misconduct or error; and/or (viii) other actions by third parties and other similar disruptions, could adversely affect our ability to conduct business and our Members’ selling activities. For example, our operations in Mexico were impacted by flooding in September 2017, when severe weather conditions damaged or otherwise destroyed inventory stored at one of our facilities. Furthermore, our headquarters and one of our distribution facilities and manufacturing facilities are located in Southern California, an area susceptible to fires and earthquakes. Although the events in Mexico did not have a material negative impact on our Mexico operations, we cannot make assurances that any future catastrophic events will not adversely affect our ability to operate our business or our financial condition and operating results. In addition, catastrophic events may result in significant cancellations of Member orders; contribute to a general decrease in local, regional, or global economic activity; directly impact our marketing, manufacturing, financial, or logistics functions; impair our ability to meet Member demands; harm our reputation; and expose us to significant liability, losses, and legal proceedings, any of which could materially and adversely affect our business, financial condition, and operating results.

In March 2020, the World Health Organization declared the outbreak a global pandemic. The pandemic has significantly impacted health and economic conditions globally, and has adversely affected the Company’s business and that of its Members in certain of the Company’s markets and may continue to so impact those markets or others in the future. Government, agency, and other regulatory recommendations, guidelines, mandates, and actions to address public health concerns, including restrictions on movement, public gatherings, and travel and restrictions on, or in certain cases outright prohibitions of, companies’ ability to conduct normal business operations, have and may continue to adversely affect our business. Although we have been classified as an essential business in most jurisdictions where we operate, there is no guarantee that this classification will not change. We may also be forced to or voluntarily elect to limit or cease operations in one or more markets for other reasons, such as the health and safety of our employees or because of disruptions in the

operation of our supply chain and sources of supply. For example, it is possible that closures of our manufacturing facilities could impact our distribution centers and our ability to manufacture and deliver products to our Members. In general, our inventory of products continues to be adequate to meet demand, but we do expect our supply chain and our ability to source and/or manufacture products will be negatively impacted if the negative effects of the pandemic continue for a prolonged period of time or worsen. The pandemic has had an adverse impact on Members’ product access in some markets, which may, and in some cases will, continue until conditions improve. Our Members’ businesses are also subject to many of the same risks and uncertainties related to the pandemic, as well as other pandemic-related risks and uncertainties that may not directly impact our operations, any of which could adversely affect demand for our products. For example, limitations on public gatherings has restricted our Members’ ability to hold meetings with their existing customers and to attract new customers. Significant limitations on cash transactions could also have an adverse effect on sales of products in certain markets.

The pandemic is also adversely affecting the economies and financial markets of many countries, causing a significant deceleration of economic activity. This slowdown has reduced production, decreased demand for a broad variety of goods and services, diminished trade levels and led to widespread corporate downsizing, causing a sharp increase in unemployment. We have also seen significant disruption of and extreme volatility in the global capital markets, which could increase the cost of, or entirely restrict access to, capital.

Considerable uncertainty still surrounds the pandemic, its potential effects and the extent and effectiveness of government responses to the pandemic. If the pandemic is not contained, or if effective vaccines are not made available and utilized quickly enough, the adverse impacts of the pandemic could worsen, impacting all segments of the global economy, and result in a significant recession or worse. However, the unprecedented and sweeping nature of the pandemic makes it extremely difficult to predict how our business and operations will be affected in the long run. Accordingly, our ability to conduct our business in the manner previously done or planned for the future could be materially and adversely affected, and any of the foregoing risks, or other cascading effects of the pandemic that are not currently foreseeable, could materially and adversely affect our business, financial condition, and operating results. See the and sections in Part II, Item 7, , of this Annual Report on for further discussion of the impacts of the pandemic on our business and operating results.

other destructive software, and social engineering schemes, could compromise the confidentiality, availability, and integrity of our information technology infrastructure as well as those of the third parties with which we interact. These attacks may come from external sources, such as governments or hackers, or may originate internally from an employee or a third party with which we interact. We have been the target of, and may be the target of in the future, malicious cyber-attacks, although to date none of these attacks have had a meaningful adverse impact on our business, financial condition, or operating results. Additionally, in response to the pandemic, many of our employees have been encouraged to work remotely, which may increase our exposure to significant systems interruptions, cybersecurity attacks, and otherwise compromise the integrity and reliability of our information technology infrastructure and our internal controls.

Any significant interruption of production at any of our manufacturing facilities or third-party contract manufacturers may materially harm our business, financial condition, and operating results. For example, natural disasters, including earthquakes, fires, hurricanes, or floods, technical issues, work stoppages, or other unforeseen or catastrophic events, that result in significant interruption of production at any of our facilities or third-party contract manufacturers could impede our ability to conduct business. While we have business continuity programs for our manufacturing facilities which contemplate and plan for such events, if we were to experience such an event resulting in the temporary, partial, or complete shutdown of one of these manufacturing facilities, we could be required to transfer manufacturing to a surviving facility and/or third-party contract manufacturers if permissible. When permissible, converting or transferring manufacturing could be expensive and time-consuming, result in delays in our production or shipping, reduce our net sales, damage our relationship with Members, and damage our reputation, any of which could harm our business, financial condition, and operating results. Additionally, we cannot assure you that our third-party contract manufacturers will continue to reliably supply products to us at the levels of quality, or the quantities, we require, and in compliance with applicable laws, including the FDA’s CGMP regulations. Our product supply contracts generally have three-year terms. Except for force majeure events, such as natural disasters and other acts of God, and by Herbalife Nutrition, our contract manufacturers generally cannot unilaterally terminate these contracts. These contracts can generally be extended by us at the end of the relevant time-period and we have exercised this right in the past. Globally, we have over 50 contract manufacturers, with Fine Foods (Italy) being a major supplier for meal replacements, protein powders and nutritional supplements. Our contract manufacturers are also located in the United States, India, Brazil, South Korea, Taiwan, Germany, and the Netherlands. If any of our contract manufacturers were to become unable or unwilling to continue to provide us with products in required volumes and at suitable quality levels, we would be required to identify and obtain replacement manufacturing sources. There is no assurance that we would be able to obtain acceptable alternative manufacturing sources on a cost-effective or timely basis, or at all. An extended interruption in the supply of our products, including any interruptions that may arise as a result of the

As a result of the pandemic, we and our contract manufacturers have experienced some delays in receiving and delivering certain ingredients and packaging components. While these delays have not materially impacted our supply levels, there is no guarantee that there will be sufficient global supply for us or our contract manufacturers to manufacture our products at sufficient levels to meet demand or at the levels. We are actively monitoring the pandemic and its potential impact on our supply chain and operations. Given the uncertainties surrounding including the severity of the disease, the duration and extent of the outbreak, and actions taken or to be taken by governmental authorities and the resulting impacts from those responses to our third-party contract manufacturers, we cannot guarantee that we will have a sufficient and reliable supply of ingredients from our third-party vendors or products from our contract manufacturers. Additionally, while we are not presently aware of any current liquidity issues with our suppliers or contract manufacturers, we cannot assure you that they will not experience financial hardship as a result of the pandemic or otherwise, which could impact their ability to meet our needs.

From time to time, we receive inquiries from regulators and third parties requesting information concerning our products. We fully cooperate with these inquiries including, when requested, by the submission of detailed technical documents addressing product composition, manufacturing, process control, quality assurance, and contaminant testing. We are confident in the safety of our products when used as directed. However, there can be no assurance that regulators, including in countries where we plan to commence or expand operations, will not take actions that may adversely affect our business and our sales, including preventing or delaying entry into markets or the introduction of new products or requiring the reformulation or the temporary or permanent withdrawal of certain of our existing products from their markets. Any such regulatory action, regardless of whether it results in a final determination adverse to us, could create negative publicity, with detrimental effects on the motivation and recruitment of Members and, consequently, on sales. For example, the Chinese government carried out a review, or the Review, in 2019 to investigate the unlawful promotion and sales of health products, which resulted in negative media attention to the health products industry and materially and adversely impacted our business in China in 2019 as Members significantly reduced activities and sales meetings

during and following the Review. Additionally, in response to the pandemic, the FTC has increased its scrutiny of claims being made by companies and issued hundreds of warning letters to, and initiated enforcement actions against, companies making health claims related to the ability of their products to treat, cure, or prevent or business opportunity claims related to

Our network marketing program, like the compensation practices of other direct-selling organizations, is subject to a number of federal, state, and foreign regulations administered by the FTC and other federal, state, and foreign agencies. Regulations applicable to network marketing organizations generally are directed at preventing fraudulent or deceptive schemes, sometimes referred to as “pyramid” or “chain sales” schemes, by ensuring that product sales ultimately are made to consumers and that advancement within an organization is based on genuine demands and sales of the organization’s products rather than investments in the organization or other sales-related criteria. For example, in certain foreign countries, compensation to distributors in the direct-selling industry may be limited to a certain percentage of sales.

As previously disclosed, in July 2016, we entered into the Consent Order with the FTC. As part of the Consent Order, we agreed to make a payment of $200 million and to implement, and continue to enhance, certain procedures in the United States. We also agreed, among other things, to (i) be subject to certain audits by an independent compliance auditor, or the ICA, for a period of seven years; (ii) requirements regarding compliance certification and record creation and maintenance; (iii) a prohibition on misrepresentations and misleading claims made by us or our Members regarding the income potential of participants in our network marketing program and misleading depictions of lavish lifestyles; and (iv) restrictions on distributors’ ability to open Nutrition Clubs in the United States. The FTC and ICA have the right to inspect Company records and request additional compliance reports for purposes of conducting audits pursuant to the Consent Order. The terms of the Consent Order are described in greater detail in our Current Report on filed on July 15, 2016.

Our business requires the collection, transmission, and retention of large volumes of confidential and proprietary information, including personally identifiable information of our Members, customers, leads, vendors, and employees in various information technology systems that we maintain and in those maintained by third parties with which we interact. Anyone who is able to circumvent our security measures or those of our third-party service providers could misappropriate such confidential or proprietary information, including that of third parties such as our Members, cause interruption in our operations, damage our information technology infrastructure or otherwise damage our business. We may need to expend significant resources to protect against security breaches or to address problems caused by such breaches. Any actual security breaches could result in legal and financial exposure, including litigation and other potential liability, and a loss of confidence in our security measures, which could have a material adverse effect on our business, financial condition, and operating results and our reputation as a brand, business partner, and employer. In addition, employee error or malfeasance or other errors in the storage, use, or transmission of any such information could result in disclosure to third parties. If this should occur, we could incur significant expenses addressing such problems. Since we collect and store Member, customer, and vendor information, including credit card banking information, these risks are heightened. In addition, our role as a credit card merchant may also put us at a greater risk of being targeted by hackers and requires us to comply with certain regulatory requirements. See also the risk factor titled “”

Our ingestible products include vitamins, minerals, botanicals, and other ingredients and are classified as foods or dietary supplements and are not subject to regulatory approval in the United States. Our products could contain contaminated substances, and some of our products contain ingredients that do not have long histories of human consumption or use. Although we rely upon published and unpublished safety information, including clinical studies on ingredients used in our products, and conduct limited clinical studies on some key products, unknown adverse reactions resulting from human consumption or use of these ingredients could occur. We have been, and may again be, subjected to various product liability claims, including claims that the products contain contaminants, include inadequate instructions as to their uses, and include inadequate warnings concerning side effects and interactions with other substances. It is possible that widespread product liability claims could increase our costs and materially adversely affect our business, financial condition, and operating results. Even claims without merit could subject us to adverse publicity and require us to incur significant legal fees. Moreover, product liability claims may increase our costs through higher insurance premiums and deductibles, and may make it more difficult to secure adequate insurance coverage in the future. In addition, our product liability insurance may not cover all product liability claims, which may require us to pay substantial monetary damages. Finally, even if our insurance covers a claim, given the level of self-insured retentions that we have accepted under our current product liability insurance policies, which is $12.5 million, in certain cases we may be subject to the full amount of liability associated with any claims, which could be substantial.

Monitoring infringement or misappropriation of intellectual property can be difficult and expensive, and we may not be able to detect every infringement or misappropriation of our proprietary rights or to prevent third parties from infringing upon or misappropriating our proprietary rights or from independently developing products that are competitive with, equivalent to, or superior to our products. Even if we do detect infringement or misappropriation of our proprietary rights, litigation to enforce these rights could cause us to divert financial and other resources away from our business operations and may result in the impairment or loss of all or portions of our proprietary rights. Further, the laws of some foreign countries do not protect our intellectual property to the same extent as do the laws of the United States. For example, there is limited protection of intellectual property available under Chinese law. Accordingly, we face an increased risk in China that unauthorized parties may attempt to copy or otherwise obtain or use our trademarks, copyrights, product formulations or other intellectual property. Further, because Chinese commercial law is relatively undeveloped, we may have limited legal recourse in the event we encounter significant difficulties with intellectual property theft or infringement. As a result, we cannot assure you that we will be able to adequately protect our intellectual property in any jurisdictions. The loss or infringement of our trademarks or tradenames or other proprietary rights could impair the goodwill associated with our brands and harm our reputation, which could materially harm our business, financial condition, and operating results.

Third parties may claim that products or marks that we have independently developed or which bear certain of our trademarks infringe upon their intellectual property rights and there can be no assurance that one or more of our products or marks will not be found to infringe upon third-party intellectual property rights in the future and we may need to settle disputes on terms that are unfavorable to us, or we may be subject to an unfavorable judgment. Defending these and other intellectual property infringement claims can be time-consuming and costly and require the attention of management. The terms of any settlement or judgment may require us to pay substantial amounts to the other party or cease, or seek a license to continue, using products or marks found to be in violation of third-party intellectual property rights. A license may not be available on reasonable terms, or at all, and we may be required to develop alternative products or marks or discontinue use of such products or marks. Any development efforts could require significant effort and expense. Any of the foregoing could have a material adverse effect on our business, financial condition, and operating results.

Our Members are subject to certain taxation, and in some instances, we are required to collect taxes from our Members, such as value-added tax, or VAT, and social contributions, and to maintain appropriate records. In addition, if local laws, rules, and regulations or their interpretation change to require us to treat our Members as employees, or if our Members are deemed by regulatory authorities to be our employees rather than independent contractors, in any such jurisdictions we may be held responsible for additional compensation, social security or similar contributions, withholding, and related taxes, and workers’ compensation insurance, plus any related assessments and penalties, which could materially harm our financial condition and operating results. Our Members could face similar risks with respect to other Members in their sales organizations who may claim they are employees of that Member rather than independent contractors or independent business owners, which could impact their sales operations or lead them to cease their participation in our network marketing program. For example, California passed legislation, taking effect January 1, 2020, which seeks to expand the classification of employees. Other states may propose similar legislation or interpret existing laws, rules, and regulations to expand the classification of employees. Although the California legislation provides an exemption for direct sellers, there can be no assurance that other jurisdictions will provide such an exemption or that judicial or regulatory authorities will not assert interpretations that would mandate that we change our classification. See Note 7, , to the Consolidated Financial Statements included in Part IV, Item 15, , of this Annual Report on for a more specific discussion of contingencies related to the activities of our Members.

Our operations in some jurisdictions also may be adversely affected by political, economic, legal, regulatory, and social conditions, or instability, as well as by economic and political tensions between governments. For example, tariffs enacted by the United States and other foreign governments, such as China or Mexico, that apply to our products or our ingredients may have an adverse impact on the costs and future sales of our products, particularly if we deem it necessary to increase product prices. In addition, our compliance with anti-bribery laws, rules, and regulations may conflict with local customs and practices in certain of the jurisdictions in which we operate. See the risk factor titled “”

Our ability to staff and manage our international operations could also be affected by laws and regulations related to immigration. For example, current and future tightening of U.S. immigration controls may adversely affect the residence status of employees in our U.S. locations or our ability to hire new employees in such locations and may adversely affect the ability of Members from entering the United States.

If the United States Internal Revenue Service, or the IRS, or the taxing authorities of any other jurisdiction were to successfully challenge our transfer pricing practices or our positions regarding the payment of income taxes, customs duties, value added taxes, withholding taxes, and sales and use and other taxes, we could become subject to higher taxes and may increase product prices in certain jurisdictions accordingly. The imposition of new taxes, even pass-through taxes such as VAT could result in increased product prices in certain jurisdictions. Any increases in prices could adversely affect product demand and therefore could have a negative impact on our business, financial condition, and operating results. From time to time, we are a party to various regulatory proceedings related to compliance with applicable tax regulations, including audits, examinations, and investigations. We are currently subject to ongoing audits that are at various levels of review, assessment, or appeal in a number of jurisdictions involving issues of transfer pricing, income taxes, customs duties, value added taxes, withholding taxes, and sales and use and other taxes. In some circumstances, additional taxes, interest, and penalties have been assessed. We have reserved in our consolidated financial statements an amount that we believe represents the most likely outcome of the resolution of these audits, but if we are incorrect in our assessment we may have to pay additional amounts, which could potentially be material. Ultimate resolution of these ongoing audits may take several years, and the outcome is uncertain. See Note 7, , to the Consolidated Financial Statements included in Part IV, Item 15, , of this Annual Report on for further information on contingencies relating to tax matters.

In addition, any change in applicable tax laws, rules, treaties, or regulations, or their interpretation, could result in a higher effective tax rate on our worldwide earnings. For example, The Organisation for Economic and Development has released guidance covering various international tax standards as part of its “base erosion and profit shifting,” or BEPS, initiative. The anticipated implementation of BEPS by jurisdictions in which we operate could result in changes to tax laws, rules, and regulations, including with respect to transfer pricing, that could materially increase our effective tax rate. No assurances can be given that future legislative, regulatory, or judicial developments will not result in an increase in the amount of taxes payable by us. If any such developments occur, our business, financial condition, and operating results could be materially and adversely affected.

China has published regulations governing direct selling, prohibiting pyramid promotional schemes, regulating and a number of related administrative methods and proclamations have been issued. To operate under these regulations, we created and introduced a modified business model specific to China based on our understanding of how Chinese regulators interpret and enforce these regulations, our own interpretation of applicable regulations and the enforcement thereof, and our understanding of the practices of other licensed direct-selling organizations in China.

In China, we sell our products to and through independent service providers and sales representatives, to preferred customers and other customers, as well as through Company-operated retail platforms when necessary. We also have a social business in China, which enables our sales representatives who are also individual promoters and independent service providers to promote our products and provide services to our customers in China through virtual online stores. Our independent service providers must meet requirements to operate their own business under Chinese law, which prohibits fraudulent or misleading claims and engaging in any pyramid sales schemes, as well as our policies. In China, our independent service providers receive compensation for marketing, sales support, and other services instead of the Member allowances and royalty overrides utilized in our network marketing plan outside China. The service hours and related fees eligible to be earned by the independent service providers are based on a number of factors, including the sales generated through them and through others to whom they may provide marketing, sales support and other services, the quality of their service, and other factors. Total compensation available to our independent service providers in China can generally be comparable to the total compensation available to other sales leaders globally. The Company does this by performing an analysis in our worldwide system to estimate the potential compensation available to the service providers, which can generally be comparable to that of sales leaders in other countries. After adjusting such amounts for other factors and dividing by each service provider’s hourly rate, we then notify each independent service provider the maximum hours of work for which they are eligible to be compensated in the given month. In order for a service provider to be paid, the Company requires each service provider to invoice the Company for their services and submit a timesheet of such services and, upon the Company’s request, service providers may be required to submit additional supporting documents for the Company’s further verification. These and other business model features in China are not common to the business model we employ elsewhere in the world, and we expect our business model in China will continue to incorporate some or all of these features, and any failure of this model or our business to comply with Chinese law could materially and negatively impact our business, financial condition, and operating results.

the perception that such dilution could occur may cause our share price to decline. Because the conversion rate of the 2024 Convertible Notes adjusts upward upon the occurrence of certain events, existing shareholders may experience further dilution if any or all of the 2024 Convertible Notes are converted into common shares and the currently effective adjusted conversion rate is further adjusted. For more information regarding the conversion features of our 2024 Convertible Notes, including the events that allow for early conversion and the current conversion rate, see Note 5, , to the Consolidated Financial Statements included in Part IV, Item 15, , of this Annual Report on

The Companies Act contains provisions to facilitate mergers and consolidations between Cayman Islands companies and Islands companies (provided that is facilitated by the laws of such other jurisdiction). These provisions, contained within Part XVI of the Companies Act, are broadly similar to the merger provisions provided for under Delaware law.

If a U.S. shareholder owns 10% or more of our common shares, it may be subject to increased U.S. federal income taxation under the “controlled foreign corporation,” or CFC, rules. A corporation will be classified as a CFC for any particular taxable year, if U.S. persons (including individuals and entities) who own (directly, indirectly, or constructively) 10% or more of the voting power or value of shares, or 10% U.S. Shareholders, own, in the aggregate, more than 50% of the total combined voting power or value of the shares. In determining whether a shareholder is treated as a 10% U.S. Shareholder, the voting power of the shares and any special voting rights, such as to appoint directors, may also be taken into account. In addition, certain constructive ownership rules apply, which attribute share ownership among certain family members and certain entities and their owners. Such constructive ownership rules may also attribute share ownership to persons that are entitled to acquire shares pursuant to an option, such as the holders of our 2024 Convertible Notes.

As a result of certain changes to the CFC constructive ownership rules introduced by the Tax Cuts and Jobs Act of 2017, or U.S. Tax Reform, one or more of our corporate subsidiaries that were not previously classified as CFCs are now classified as CFCs, including on a retroactive basis. For 10% U.S. Shareholders, this may result in adverse tax consequences. Generally, 10% U.S. Shareholders of a CFC are required to include currently in gross income their respective shares of (i) the CFC’s “Subpart F income” (e.g. items of passive

income and certain income resulting from inter-company sales and services), (ii) the CFC’s earnings (that have not been subject to tax under the Subpart F rules) to the extent the CFC holds certain U.S. property, and (iii) the CFC’s global intangible income pursuant to the U.S. Tax Reform. Such 10% U.S. Shareholders are subject to current U.S. federal income tax with respect to the foregoing income items, even if the CFC has not made an actual distribution to such shareholders.

While we do not believe that Herbalife Nutrition Ltd. is classified as a CFC, such entity and one or more of our corporate subsidiaries not already classified as CFCs could become classified as CFCs either as a result of (i) additional changes to tax laws, rules, or regulations, including future pronouncements or other guidance from the IRS or (ii) an increase in the percentage ownership of our common shares by shareholders who hold, or in the future may hold, 10% or more of our common shares, whether as a result of future share acquisitions, the impact of any share repurchases we may undertake, or otherwise.

Further, under U.S. Tax Reform, a tax is imposed upon our 10% U.S. Shareholders on certain historic accumulated, undistributed foreign earnings of CFCs and other “specified foreign corporations,” which earnings have not been previously subject to tax at the 10% U.S. Shareholder level. A specified foreign corporation is any CFC or other corporation that has at least one U.S. corporate shareholder that is a 10% U.S. Shareholder. Herbalife Nutrition Ltd. believes that it may be classified as a specified foreign corporation and that one or more of our corporate subsidiaries may be classified as specified foreign corporations.

We own a manufacturing facility in Winston-Salem, North Carolina. The manufacturing facility contains approximately 800,000 square feet of manufacturing and office space. See Item 1, for further discussion of the manufacturing facility purchased in Winston-Salem, North Carolina.

The information set forth under Note 7, , to the Consolidated Financial Statements included in Part IV, Item 15, , of this Annual Report on is incorporated herein by reference.

On October 30, 2018, our board of directors authorized a new five-year $1.5 billion share repurchase program that will expire on October 30, 2023, which replaced our prior share repurchase authorization that was set to expire on February 21, 2020 and had approximately $113.3 million of remaining authorized capacity when it was replaced. This share repurchase program allows us, which includes an indirect wholly-owned subsidiary of Herbalife Nutrition Ltd., to repurchase our common shares at such times and prices as determined by management, as market conditions warrant, and to the extent Herbalife Nutrition Ltd.’s distributable reserves are available under Cayman Islands law. The 2018 Credit Facility permits us to repurchase our common shares as long as no default or event of default exists and other conditions, such as specified consolidated leverage ratios, are met. As of December 31, 2020, the remaining authorized capacity under our $1.5 billion share repurchase program was approximately $607.9 million. See Note 15, , to the Consolidated Financial Statements included in Part IV, Item 15, , of this Annual Report on Form 10-K for more information regarding share repurchases and the new share repurchase authorization.

The following is a summary of our repurchases of common shares during the three months ended December 31, 2020. For further information on our share repurchases during the year ended December 31, 2020, see Note 8, , to the Consolidated Financial Statements included in Part IV, Item 15, , of this Annual Report on

The following table sets forth certain of our historical financial data. We have derived the selected historical consolidated financial data for the years ended December 31, 2020, 2019, 2018, 2017, and 2016 from our consolidated financial statements and the related notes. Not all periods shown below are discussed in this Annual Report on The selected consolidated historical financial data set forth below are not necessarily indicative of the results of future operations and should be read in conjunction with the discussion under Part II, Item 7, , and the historical consolidated financial statements and accompanying notes included elsewhere in this Annual Report on

Risk FactorsSelected Financial Data

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

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

Our business and operations have been affected by the pandemic in manners and degrees that vary by market and we expect that the effects will extend beyond 2020. For the health and safety of our employees, our Members, and their customers, we implemented temporary access restrictions at many of our physical business locations and locations where Members conduct their business activities, some of which measures continue. Generally, we have been able to satisfy current levels of demand. While demand for our nutritional products continues to be at or above levels and pandemic constraints have been lessened in most markets by the designation of our nutritional business as “essential” or other similar characterization, our operations have been and continue to be disrupted. The most significant impacts we have seen, depending on market, include:

Although we believe that our responsive measures have been effective in limiting the adverse impact of the pandemic on most markets, the ongoing impact of the pandemic will affect our business, financial condition, and results of operations in future quarters, including their comparability to prior periods. Given the unpredictable, unprecedented, and fluid nature of the pandemic and its economic consequences, we are unable to predict the duration and extent to which the pandemic and its related impacts will impact our business, financial condition, and results of operations. A more detailed discussion of the pandemic’s impact on net sales for 2020 and its expected impact in future periods, as well as the impacts specific to each geographic region, are discussed further in the section below. See Part I, Item 1A, , of this Annual Report on for a further discussion of risks related to the pandemic.

A key measure we focus on is Volume Points on a Royalty Basis, or Volume Points, which is essentially our weighted-average measure of product sales volume. Volume Points, which are unaffected by exchange rates or price changes, are used by management as a proxy for sales trends because in general, excluding the impact of price changes, an increase in Volume Points in a particular geographic region or country indicates an increase in our local currency net sales while a decrease in Volume Points in a particular geographic

region or country indicates a decrease in our local currency net sales. The criteria we use to determine how and when we recognize Volume Points are not identical to our revenue recognition policies under U.S. GAAP. Unlike net sales, which are generally recognized when the product is delivered and when control passes to the Member, as discussed in greater detail in Note 2, , to the Consolidated Financial Statements included in Part IV, Item 15, , of this Annual Report on we recognize Volume Points when a Member pays for the order, which is generally prior to the product being delivered. Further, the periods in which Volume Points are tracked can vary slightly from the fiscal periods for which we report our results under U.S. GAAP. Therefore, there can be timing differences between the product orders for which net sales are recognized and for which Volume Points are recognized within a given period. However, historically these timing differences generally have been immaterial in the context of using changes in Volume Points as a proxy to explain volume-driven changes in net sales.

Volume Points increased 14.1% for 2020, including a mixed impact of pandemic conditions across our markets, after having increased 3.0% for 2019. Although pandemic conditions had adverse operational impacts across all markets, we believe our Members in certain markets where we have seen increased net sales and Volume Point growth are more focused on their business, particularly the North America region and certain EMEA markets. Despite our expectation of Volume Point growth in 2021, it is not certain that we will be able to sustain the same rate of Volume Point growth in 2021 compared to that of 2020.

We believe North America’s Volume Point increase for 2020, which was well above the increase for the prior year, reflects the continuing success and expansion of our Distributors as supported by our product line expansion and technological tools, as well as targeted communications and promotions. We believe Mexico’s slight decrease for the year, after a somewhat larger decrease for the prior year, reflects continuing difficult economic conditions for the market, offset somewhat in the second half of the year by our program of promotions to encourage Member sponsorship and activity. After some years of declines, the South and Central America region saw an increase in Volume Points for 2020 despite pandemic-related continuing declines in several markets including Brazil, as we believe efforts to build more sustainable business for our Members through a focus on daily product consumption and retailing take hold in certain markets in the region. EMEA saw increased Volume Point growth for the year versus 2019, a result we believe of customer-oriented efforts including Member training, brand awareness, and product line expansion, as well as strong business momentum including new Member recruitment. The Asia Pacific region saw Volume Point increases for the year, continuing favorable long-term trends seen in the region, although the growth rate was below that seen in 2019 due to the adverse impact of pandemic conditions in the region, especially in India and South Korea. China achieved Volume Point increases for the year, compared to a decline for 2019 which was weakened by disruption from the Chinese government’s review, concluded in April 2019, of the health product industry. China saw year-over-year Volume Point declines in the latter part of the year. Across most markets, we expect pandemic conditions to continue to impact Volume Point results; however, we are unable to predict the duration or magnitude of these effects. Results and more regional or country-specific impacts of the pandemic are discussed further below in the applicable sections of .

“” represents product sales to our Members, net of , and inclusive of any shipping and handling revenues, as described further below.

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

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

Our international operations have provided and will continue to provide a significant portion of our total net sales. As a result, total net sales will continue to be affected by fluctuations in the U.S. dollar against foreign currencies. In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency fluctuations, in addition to comparing the percent change in net sales from one period to another in U.S. dollars, we also compare the percent change in net sales from one period to another period using “.” Net sales in local currency is not a U.S. GAAP financial measure. Net

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

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

Our “” consist of net sales less cost of sales and Royalty overrides.

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

Our “” consists of government grant income related to China and the finalization of insurance recoveries in connection with the flooding at one of our warehouses in Mexico during September 2017.

Our consists of income and expenses such as gains or losses on extinguishment of debt and gains or losses due to subsequent changes in the fair value of the contractual contingent value right, or CVR, provided for each share tendered in the October 2017 modified Dutch auction tender offer. See Note 8, , to the Consolidated Financial Statements included in Part IV, Item 15, , of this Annual Report on for further information on the CVR.

Most of our sales to Members outside the United States are made in the respective local currencies. In preparing our financial statements, we translate revenues into U.S. dollars using average exchange rates. Additionally, the majority of our purchases from our suppliers generally are made in U.S. dollars. Consequently, a strengthening of the U.S. dollar versus a foreign currency can have a negative impact on our reported sales and contribution margins and can generate foreign currency losses on intercompany transactions. Foreign currency exchange rates can fluctuate significantly. From time to time, we enter into foreign currency derivatives to partially mitigate our foreign currency exchange risk as discussed in further detail in Part II, Item 7A, , of this Annual Report on

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

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

As discussed further by market in the below, the Company has responded to pandemic conditions by adapting how it communicates with, services, and transacts with our Members and our Members have similarly adapted their DMOs and other activities. These responsive actions have varied by region and by market due to the differing market- and regional-specific impacts of the pandemic and the conditions and challenges unique to a particular market or region independent of the impacts of the pandemic.

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

Net sales were $5,541.8 million for the year ended December 31, 2020. Net sales increased $664.7 million, or 13.6% ($664.6 million, or 13.6% excluding Venezuela), for the year ended December 31, 2020 as compared to the same period in 2019. In local currency, net sales increased 17.5% (16.6% excluding Venezuela) for the year ended December 31, 2020 as compared to the same period in 2019. The 13.6% increase in net sales for the year ended December 31, 2020 was primarily driven by an increase in sales volume, as indicated by a 14.1% increase in Volume Points, and a 3.6% favorable impact of price increases (2.7% favorable impact excluding Venezuela), partially offset by a 3.8% unfavorable impact of fluctuations in foreign currency rates (2.9% unfavorable impact excluding Venezuela). As described in the section below, despite our expectation of net sales growth in 2021, it is not certain that we will sustain the same rate of net sales growth in 2021 compared to that of 2020.

Net income was $372.6 million, or $2.77 per diluted share, for the year ended December 31, 2020. Net income increased $61.6 million, or 19.8%, for the year ended December 31, 2020 as compared to the same period in 2019. The increase in net income for the year ended December 31, 2020 was mainly due to $230.2 million higher contribution margin driven by higher net sales and $8.2 million lower interest expense, net; partially offset by $134.7 million higher selling, general, and administrative expenses primarily driven by $84.1 million in higher labor and benefits costs and $43.1 million in higher expenses relating to the SEC and DOJ investigations relating to the FCPA matter in China (See Note 7, , to the Consolidated Financial Statements included in Part IV, Item 15, , of this Annual Report on $17.0 million lower China government grant income; and a $15.7 million unfavorable impact from other expense (income), net relating to CVR revaluations in 2019 as described below.

Net income for the year ended December 31, 2020 included a $85.9 million unfavorable impact ($85.4 million from expenses related to regulatory inquiries and a legal accrual, which includes $83.1 million of expenses relating to the SEC and DOJ investigations relating to the FCPA matter in China; a $21.8 million unfavorable impact of interest expense related to the 2024 Convertible Notes (See Note 5, , to the Consolidated Financial Statements included in Part IV, Item 15, , of this Annual Report on a $21.2 million unfavorable impact ($19.2 million from expenses related to the pandemic, and such expenses are expected to continue in future periods; and a $0.5 million unfavorable impact ($0.4 million of debt issuance costs related to the amendment of our 2018 Credit Facility.

Net income for the year ended December 31, 2019 included a $75.5 million unfavorable impact ($74.1 million from expenses related to regulatory inquiries, the SEC investigation relating to our

disclosures regarding our marketing plan in China (See Note 7, , to the Consolidated Financial Statements included in Part IV, Item 15, , of this Annual Report on and the SEC and DOJ investigations relating to the FCPA matter in China; a $38.2 million unfavorable impact of interest expense related to the 2019 Convertible Notes, 2024 Convertible Notes, and the Forward Transactions (See Note 5, , to the Consolidated Financial Statements included in Part IV, Item 15, , of this Annual Report on a $19.0 million unfavorable impact ($17.2 million of an accrual for Mexico VAT assessments; a $1.2 million unfavorable impact ($0.9 million of debt issuance costs related to the amendment of our 2018 Term Loan B; a $15.7 million favorable impact of gain on the revaluation of the CVR (See Note 8, , to the Consolidated Financial Statements included in Part IV, Item 15, , of this Annual Report on and a $6.0 million favorable impact ($5.9 million related to the finalization of insurance recoveries in connection with the flooding at one of our warehouses in Mexico during September 2017, which damaged certain of our inventory stored within the warehouse (See Note 7, , to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, or the

We aggregate our operating segments, excluding China, into a reporting segment, or the Primary Reporting Segment. The Primary Reporting Segment includes the North America, Mexico, South and Central America, EMEA, and Asia Pacific regions. China has been identified as a separate reporting segment as it does not meet the criteria for aggregation. See Note 10, , to the Consolidated Financial Statements included in Part IV, Item 15, , of this Annual Report on for further discussion of our reporting segments. See below for discussions of net sales and contribution margin by our reporting segments.

For a discussion of China’s net sales for the year ended December 31, 2020 as compared to the same period in 2019, see the China section of below.

The Primary Reporting Segment reported contribution margin of $1,983.6 million, or 41.9% of net sales, for the year ended December 31, 2020, representing an increase of $190.0 million, or 10.6% ($189.3 million, or 10.5% excluding Venezuela), as compared to the same period in 2019. The 10.6% increase in contribution margin for the year ended December 31, 2020 was primarily the result of a 14.9% favorable impact of volume increases and a 6.5% favorable impact of price increases (4.9% favorable impact excluding Venezuela); partially offset by a 5.9% unfavorable impact of fluctuations in foreign currency exchange rates (4.2% unfavorable impact excluding Venezuela) and a 3.2% unfavorable impact of other cost changes related to self-manufacturing and sourcing and increased freight costs from orders shifting toward home delivery versus Member

In response to pandemic conditions, product distribution to our Members was altered to allow online and orders only; our two major U.S. distribution centers were shipping product only, with no permitted; and our sales centers were for only, with no orders taken as of yet; however, our Members’ ability to obtain product has not materially decreased. Late in the third quarter, our Memphis distribution center began allowing orders; however, we continue to not allow orders at any of our sales centers. Members’ Nutrition Clubs, which represent a major DMO for the region, are operating in some areas as points for product only versus their more traditional consumption approach. Nutrition Club sales volume increased versus the prior year, including the impact of home deliveries from Nutrition Clubs to their customers, an approach that has seen increased use as a response to the pandemic. Our Member training and promotion events, such as our Success Training Seminars and our Leadership Development Weekends, have shifted to a “virtual” online approach. Promotional activities aimed at our Members continue, though prizes that have involved travel to events have shifted to cash and other awards.

As evidenced by continuing Volume Point growth for the region, we believe that our responsive efforts to pandemic conditions have been effective to date and we believe that pandemic conditions may have been a contributing factor in the motivation and focus of our Members. Certain modified practices by us and our Members may prove to be lasting improvements, such as an increased focus on customer-direct orders, and events and trainings that are offered virtually as well as

We believe the Volume Point decrease for the year reflects difficult economic conditions in the region and a consequent slowing of our business momentum for the market prior to the third quarter. Sales volume weakness was offset somewhat by additional promotions offered as a response to pandemic conditions. Despite the pandemic conditions, nearly all product access points in Mexico, both Company-operated and third party, have remained open, although in some areas Nutrition Clubs are operating under restrictions such as for product only.

The South and Central America region reported net sales of $366.4 million for the year ended December 31, 2020. Net sales decreased $12.6 million, or 3.3% ($12.8 million, or 3.4% excluding Venezuela), for the year ended December 31, 2020 as compared to the same period in 2019. In local currency, net sales increased 20.8% (9.1% excluding Venezuela) for the year ended December 31, 2020 as compared to the same period in 2019. The 3.3% decrease in net sales for the year ended December 31, 2020 was due to a 24.1% unfavorable impact of fluctuations in foreign currency exchange rates (12.5% unfavorable impact excluding Venezuela), partially offset by a 16.9% favorable impact of price increases (5.6% favorable impact excluding Venezuela) and an increase in sales volume, as indicated by a 3.6% increase in Volume Points. The region saw a sales volume increase for the year versus the prior year led by Colombia and Chile, as markets adapted to pandemic conditions and efforts to build more sustainable business for our Members through a focus on daily product consumption and retailing take hold in certain markets in the region. The region is seeing success leveraging social media, utilizing cash prize promotions, and using the weight loss challenge DMO. pandemic conditions, however, have impacted the region adversely, and significantly so for certain markets in the region including Brazil, Peru, Ecuador, and Bolivia. Pandemic impacts have varied by market across the region and have been intermittent, but have included product shipping delays and widespread suspension of product access points and Members’ Nutrition Clubs, requiring reliance on shipping product to Members’ and customers’ homes.

Net sales in Brazil were $84.2 million for the year ended December 31, 2020. Net sales decreased $27.0 million, or 24.3%, for the year ended December 31, 2020 as compared to the same period in 2019. In local currency, net sales decreased 2.5% for the year ended December 31, 2020 as compared to the same period in 2019. The fluctuation of foreign currency exchange rates had an unfavorable impact of $24.3 million on net sales for the year ended December 31, 2020. In May 2019, we segmented our Member base in the market into distributors and preferred members; we are leveraging this segmentation for communication and promotion purposes, and have made preferred members a strategic focus in order to drive a larger base of new customers. We have expanded our product line to meet consumer demands in new product segments. However, pandemic conditions have constrained our business in Brazil since March 2020. Although most Members’ Nutrition Clubs are now permitted to be open, broader pandemic conditions in the country have adversely impacted sales volumes for this important DMO for the market. Home delivery is operating and is the primary

distribution channel for the market, though the majority of other product access points are now open for We believe a price increase announced in December 2020 and effective in January 2021 had a favorable impact on sales volumes late in 2020 and may be an adverse factor for sales volumes for the first quarter of 2021.

Net sales in Peru were $61.7 million for the year ended December 31, 2020. Net sales decreased $2.5 million, or 4.0%, for the year ended December 31, 2020 as compared to the same period in 2019. In local currency, net sales increased 0.6% for the year ended December 31, 2020 as compared to the same period in 2019. The fluctuation of foreign currency exchange rates had an unfavorable impact of $2.9 million on net sales for the year ended December 31, 2020. Sales volumes that were above the volumes for the prior year through declined significantly from that time through most of the second quarter due to pandemic conditions. We are taking orders by Internet and phone and shipping product to Member homes; during October 2020, our sales centers began to open for product as well as home delivery. Members’ Nutrition Clubs were also modified for home delivery only or are open for partial operation. We believe these adaptations to pandemic conditions, as well as Members’ success leveraging social media and using the weight loss challenge DMO, contributed to strengthened business momentum during the second half of the year and a slight sales volume increase for the year versus the prior year.

Due to pandemic conditions, our sales centers and other product access points in many markets within the region are currently closed or open for limited operations only, leaving shipping for home delivery as the primary distribution channel while these conditions persist. Members are turning further to social media to carry out their sales and oversight activities. These adaptations have been successful in limiting the adverse impact of the pandemic and we believe that pandemic conditions may have been a contributing factor in the motivation and focus of our Members in certain markets of the region.

Net sales in Spain were $172.0 million for the year ended December 31, 2020. Net sales increased $35.6 million, or 26.1%, for the year ended December 31, 2020 as compared to the same period in 2019. In local currency, net sales increased 23.3% for the year ended December 31, 2020 as compared to the same period in 2019. The fluctuation of foreign currency exchange rates had a favorable impact of $3.8 million on net sales for the year ended December 31, 2020. In recent years, Spain has seen sales volume increases as it benefited from programs of promotions and sponsorships, as well as enhanced technology tools, that have raised brand awareness through healthy active lifestyle and contributed to broad-based success across Member sales organizations in the market. In response to pandemic conditions, we have temporarily shifted our operations to primarily online activities to mitigate the negative impacts of being unable to conduct meetings, trainings, and selling activities. Home delivery continues to be our prevailing distribution channel and has not seen significant disruption. After the first quarter of 2020 saw a small sales volume decline, subsequent quarters have seen significant volume increases as our Members appear to have adapted to pandemic conditions, such as leveraging online tools to reach their customers, and business momentum has increased.

Net sales in Russia were $147.2 million for the year ended December 31, 2020. Net sales increased $7.2 million, or 5.1%, for the year ended December 31, 2020 as compared to the same period in 2019. In local currency, net sales increased 17.1% for the year ended December 31, 2020 as compared to the same period in 2019. The fluctuation of foreign currency exchange rates had an unfavorable impact of $16.9 million on net sales for the year ended December 31, 2020. Russia achieved sales volume increases for the year versus the prior year despite some pandemic disruption commencing late in the first quarter. Our sales centers are now reopened for product although we continue to support home delivery for the market. Due to pandemic conditions, Nutrition Clubs are operating primarily online in the market and remain a key DMO, supported by new products, training, and promotion for all levels of Membership. Product access expansion in the market has enabled growth in smaller cities. During the third quarter of 2020, we introduced Member segmentation to the market by adding a preferred customer program option for new Members. Russia had an approximate 5% price increase in September 2020.

The Asia Pacific region, which excludes China, reported net sales of $1,347.7 million for the year ended December 31, 2020. Net sales increased $98.7 million, or 7.9%, for the year ended December 31, 2020 as compared to the same period in 2019. In local currency, net sales increased 9.2% for the year ended December 31, 2020 as compared to the same period in 2019. The 7.9% increase in net sales for the year ended December 31, 2020 was primarily due to an increase in sales volume, as indicated by an 8.0% increase in Volume Points, and a 2.0% favorable impact of price increases, partially offset by a 1.3% unfavorable impact of fluctuations in foreign currency exchange rates. Volume Point and net sales increases in recent years for most markets in the region are a result, we believe, of a customer-focused business and daily consumption DMOs, including Nutrition Clubs, as well as product line and access point expansion. However, pandemic conditions, such as closed sales centers and Members’ Nutrition Clubs and an increased reliance on home delivery for product distribution, had an adverse impact on results at times throughout the year, most significantly for India, South Korea, and Indonesia. The region has adapted to pandemic conditions to varying degrees by market, and many markets achieved sales volume increases for the year compared to the prior year. Volume increases were led by Vietnam and India, and ongoing pandemic conditions contributed to volume decreases for South Korea and Indonesia.

of product, though home delivery volumes continue to exceed levels. Disruption to our collections and expenditures of cash have eased, though we continue to move transactions to electronic collection and payment for operating efficiency purposes and for Member convenience.

Net sales in Vietnam were $212.6 million for the year ended December 31, 2020. Net sales increased $49.5 million, or 30.3%, for the year ended December 31, 2020 as compared to the same period in 2019. In local currency, net sales increased 30.3% for the year ended December 31, 2020 as compared to the same period in 2019. The fluctuation of foreign currency exchange rates did not have a material impact on net sales for the year ended December 31, 2020. Vietnam continues to have strong momentum, having adapted to increased direct-selling regulatory requirements and as sales leadership continues to focus on sustainable, consumption-oriented business practices. pandemic-related operating constraints that we saw in the second quarter have eased somewhat and we and our Members have adapted to constraints by moving events, trainings, and product ordering online. Further changes to direct-selling regulations in the market are expected to be proposed for late 2021 implementation. We continue to assess and monitor these preliminary draft regulations.

Net sales in Indonesia were $181.2 million for the year ended December 31, 2020. Net sales decreased $2.3 million, or 1.3%, for the year ended December 31, 2020 as compared to the same period in 2019. In local currency, net sales increased 1.3% for the year ended December 31, 2020 as compared to the same period in 2019. The fluctuation of foreign currency exchange rates had an unfavorable impact of $4.7 million on net sales for the year ended December 31, 2020. Although Indonesia has increased sales volumes in recent years by focusing on a customer-based business and daily consumption through Nutrition Clubs and training activities, supported by increased product access, pandemic conditions have had an adverse impact on our operations and results. Our sales centers have continued to operate via online ordering, home delivery, and which were already established methods for the market. Many Members’ Nutrition Clubs, the major DMO for the market, have experienced pandemic-related constraints on their activities. Our responsive measures include online training and promotions targeted to sales leaders, leader Members, and their customers as appropriate.

Net sales in South Korea were $129.0 million for the year ended December 31, 2020. Net sales decreased $14.6 million, or 10.2%, for the year ended December 31, 2020 as compared to the same period in 2019. In local currency, net sales decreased 9.0% for the year ended December 31, 2020 as compared to the same period in 2019. The fluctuation of foreign currency exchange rates had an unfavorable impact of $1.7 million on net sales for the year ended December 31, 2020. South Korea achieved Volume Point and net sales growth for 2019 after several years of transitionary impact from Marketing Plan changes that led to contraction in our business in the market, and this growth continued in the early part of 2020. Pandemic conditions, however, including the suspension of our training facilities and our Members’ Nutrition Clubs and restrictions on gatherings, have affected the market since and we believe contributed to sales volume declines for the year versus the prior year. Nutrition Clubs have been open intermittently and on a limited basis, sales and training activities continue online, and delivery of product continues.

The volume growth for the year versus the prior year, despite some disruption due to the viral outbreak, was partially attributable to comparison to a weakened 2019. During 2019, our China net sales were negatively impacted by the Chinese government’s review, or Review, of the health products industry, which concluded in April 2019. The Review, combined with negative media coverage about the Review, impacted our business as Members significantly reduced activities and sales meetings during and following the Review. These activities and sales meetings are important to our business as they are a central channel for attracting and retaining customers, providing personal and professional development for our Members, and promoting our products. While our Members had begun conducting meetings again toward the end of 2019 and the first quarter of 2020, the pandemic resulted in travel restrictions and other temporary measures which commenced early in the first quarter and also negatively impacted our business, including renewed sales meeting restrictions and Nutrition Club closures. We and our Members have been able to partially mitigate the impact of these restrictions through 2020 by taking many sales and promotional activities online, including sales meetings. By April 2020, though subject to additional changes in conditions, China operations had largely resumed on an adapted basis. Manufacturing plants and distribution centers are open and operating normally, as well as Nutrition Clubs, subject to certain social distancing measures. Some sales meetings have begun to be held again, based on location and size and subject to government approval, though sales meetings also continue to be successfully held online. The market still has not returned to the same levels of sales meetings that existed prior to the Review; however, meetings are supplemented by online meetings.

Focus areas for China have included expanding our platform to, for example, provide the ability for our China Members to service their customers via personalized sites, and for their retail customers to purchase products directly from the Company. We have also expanded our product line for the China market, launched social media-based marketing campaigns, and continued to conduct sales promotions in the region.

The decrease in gross profit as a percentage of net sales for the year ended December 31, 2020 as compared to the same period in 2019 included unfavorable cost changes of 64 basis points relating to increased freight costs due to orders shifting toward home delivery versus Member the unfavorable impact of foreign currency fluctuations of 44 basis points (unfavorable impact of 27 basis points excluding Venezuela), unfavorable cost changes related to self-manufacturing and sourcing of 30 basis points, which includes decreased costs related to Mexico tariffs, unfavorable changes in country mix of 16 basis points, the unfavorable impact of higher inventory write-downs of 15 basis points, and unfavorable other cost changes of 11 basis points, partially offset by the favorable impact of retail price increases of 68 basis points (favorable impact of 52 basis points excluding Venezuela). The net unfavorable impact of foreign currency fluctuations and retail price increases in Venezuela for the year ended December 31, 2020 as compared to the same period in 2019 was 1 basis point.

The increase in selling, general, and administrative expenses for the year ended December 31, 2020 as compared to the same period in 2019 was driven by $84.1 million in higher labor and benefits costs primarily driven by headcount increases to support our sales growth; $43.1 million in higher expenses relating to the SEC and DOJ investigations relating to the FCPA matter in China (See Note 7, , to the Consolidated Financial Statements included in Part IV, Item 15, , of this Annual Report on $35.1 million in higher service fees for China independent service providers due to higher sales in China; and $12.8 million in higher foreign exchange losses; partially offset by $24.4 million in lower Member event and promotion costs, mostly resulting from cancellations of events and promotions due to the pandemic; $19.0 million of expenses relating to the SEC investigation relating to our disclosures regarding our marketing plan in China in 2019 (See Note 7, , to the Consolidated Financial

Statements included in Part IV, Item 15, , of this Annual Report on and $17.4 million in lower travel and entertainment costs resulting from travel restrictions due to the pandemic.

The $14.5 million of other operating income for the year ended December 31, 2020 consisted of $14.5 million of government grant income for China (See Note 2, , to the Consolidated Financial Statements included in Part IV, Item 15, , of this Annual Report on

The $37.5 million of other operating income for the year ended December 31, 2019 consisted of $31.5 million of government grant income for China and $6.0 million related to the finalization of insurance recoveries in connection with the flooding at one of our warehouses in Mexico during September 2017, which damaged certain of our inventory stored within the warehouse (See Note 7, , to the Consolidated Financial Statements included in Part IV, Item 15, , of the

We did not recognize any other expense (income), net for the year ended December 31, 2020. The $15.7 million of other income, net for the year ended December 31, 2019 consisted of a $15.7 million gain on the revaluation of the CVR (See Note 8, , to the Consolidated Financial Statements included in Part IV, Item 15, , of this Annual Report on

transfer and remit funds among our international affiliated companies. However, there are foreign currency restrictions in certain countries which could reduce our ability to timely obtain U.S. dollars. Even with these restrictions and the impacts of the pandemic, we believe we will have sufficient resources, including cash flow from operating activities and access to capital markets, to meet debt service obligations in a timely manner and be able to continue to meet our objectives.

For the year ended December 31, 2020, we generated $628.6 million of operating cash flow as compared to $457.5 million for the same period in 2019. The increase in our operating cash flow was the result of $102.4 million of favorable changes in operating assets and liabilities and $68.7 million of higher net income excluding items disclosed within our consolidated statement of cash flows. The $102.4 million change in operating assets and liabilities was primarily the result of favorable changes in royalty overrides and other current liabilities, which included favorable changes in accrued compensation and income taxes payable; partially offset by unfavorable changes in prepaid expenses and other current assets. The $68.7 million of higher net income excluding items was primarily driven by higher contribution margin driven by higher net sales ( above for further discussion), partially offset by higher selling, general, and administrative expenses primarily from higher labor and benefits costs and higher expenses relating to the SEC and DOJ investigations relating to the FCPA matter in China.

Capital expenditures, including accrued capital expenditures, for the years ended December 31, 2020 and 2019 were $116.8 million and $110.2 million, respectively. The majority of these expenditures represented investments in management information systems, including initiatives to develop Member tools. We expect to incur total capital expenditures of approximately $175 million to $225 million for the full year of 2021.

In March 2020, our annual global Herbalife Honors event, where sales leaders from around the world meet and share best practices and conduct leadership training, was canceled due to the pandemic. Our management awarded Members $71.3 million of Mark Hughes bonus payments related to their 2019 performance. In March 2019, our management awarded Members $70.7 million of Mark Hughes bonus payments related to their 2018 performance.

On August 16, 2018, we entered into a $1.25 billion senior secured credit facility, or the 2018 Credit Facility, consisting of a $250.0 million term loan A, or the 2018 Term Loan A, a $750.0 million term loan B, or the 2018 Term Loan B, and a $250.0 million revolving credit facility, or the 2018 Revolving Credit Facility, with a syndicate of financial institutions as lenders. Prior to the amendment described below, the 2018 Term Loan A and 2018 Revolving Credit Facility both were to mature on August 16, 2023. The 2018 Term Loan B matures upon the earlier of: (i) August 18, 2025, or (ii) December 15, 2023 if the outstanding principal on the 2024 Convertible Notes, as defined below, exceeds $350.0 million and we exceed certain leverage ratios as of that date. All obligations under the 2018 Credit Facility are unconditionally guaranteed by certain direct and indirect wholly-owned subsidiaries of Herbalife Nutrition Ltd. and secured by the equity interests of certain of Herbalife Nutrition Ltd.’s subsidiaries and substantially all of the assets of the domestic loan parties. Also on August 16, 2018, we issued $400 million aggregate principal amount of senior unsecured notes, or 2026 Notes as described below, and used the proceeds from the 2018 Credit Facility and the 2026 Notes to repay in full the $1,178.1 million outstanding under the 2017 Credit Facility. For accounting purposes, pursuant to FASB ASC Topic 470, , or ASC 470, these transactions were accounted for as an extinguishment of the 2017 Credit Facility. We recognized a loss on extinguishment of $35.4 million as a result, which was recorded in other expense (income), net within our consolidated statement of income for the year ended December 31, 2018.

See Note 5, , to the Consolidated Financial Statements included in Part IV, Item 15, , of this Annual Report on for a further discussion on the 2018 Credit Facility.

In August 2019, we repaid a total amount of $675.0 million to repay in full amounts outstanding on the 2019 Convertible Notes upon maturity, as well as $6.7 million of accrued interest. See Note 5, , to the Consolidated Financial Statements included in Part IV, Item 15, , of this Annual Report on for a further discussion on our 2019 Convertible Notes.

and September 15 of each year, beginning on September 15, 2018. Unless redeemed, repurchased or converted in accordance with their terms prior to such date, the 2024 Convertible Notes mature on March 15, 2024. The primary purpose of the issuance of the 2024 Convertible Notes was to repurchase a portion of the 2019 Convertible Notes. See Note 5, , to the Consolidated Financial Statements included in Part IV, Item 15, , of this Annual Report on for a further discussion on our 2024 Convertible Notes.

In May 2020, we issued $600.0 million aggregate principal amount of senior notes due 2025, or the 2025 Notes. The 2025 Notes are senior unsecured obligations which rank effectively subordinate to any of our existing and future secured indebtedness, including amounts outstanding under the 2018 Credit Facility, to the extent of the value of the assets securing such indebtedness. The 2025 Notes pay interest at a rate of 7.875% per annum payable semiannually in arrears on March 1 and September 1 of each year, beginning on March 1, 2021. The 2025 Notes mature on September 1, 2025, unless redeemed or repurchased in accordance with their terms prior to such date. The primary purpose of the issuance of the 2025 Notes was for general corporate purposes, including share repurchases and other capital investment projects. See Note 5, , to the Consolidated Financial Statements included in Part IV, Item 15, , of this Annual Report on for a further discussion on our 2025 Notes.

In August 2018, we issued $400.0 million aggregate principal amount of senior notes due 2026, or the 2026 Notes. The 2026 Notes are senior unsecured obligations which rank effectively subordinate to any of our existing and future secured indebtedness, including amounts outstanding under the 2018 Credit Facility, to the extent of the value of the assets securing such indebtedness. The 2026 Notes pay interest at a rate of 7.250% per annum payable semiannually in arrears on February 15 and August 15 of each year, beginning on February 15, 2019. The 2026 Notes mature on August 15, 2026, unless redeemed or repurchased in accordance with their terms prior to such date. The primary purpose of the issuance of the 2026 Notes was to refinance a portion of our 2017 Credit Facility. See Note 5, , to the Consolidated Financial Statements included in Part IV, Item 15, , of this Annual Report on for a further discussion on our 2026 Notes.