HERBALIFE LTD. (HLF) FY 2023 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Part I, Item 1A, Risk Factors, and our consolidated financial statements and related notes, each included elsewhere in this Annual Report on Form 10-K.

This section of this Annual Report on Form 10-K generally discusses 2023 and 2022 items and year-over-year comparisons between 2023 and 2022. Discussions of 2021 items and year-over-year comparisons between 2022 and 2021 that are not included in this Annual Report on Form 10-K can be found in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2022, or the 2022 10-K.

Overview

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

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

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

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

We sell our products in five geographic regions:

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North America;

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Latin America, which consists of Mexico and South and Central America;

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EMEA, which consists of Europe, the Middle East, and Africa;

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Asia Pacific (excluding China); and

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China.

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

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Certain Factors Impacting Results

Global inflationary pressures, other macroeconomic factors such as foreign exchange rate fluctuations and geopolitical conflicts can impact our financial condition, results of operations and liquidity. Many regions were seeing significant inflation, mainly during 2022, which impacted both our cost structures and our pricing. Effective June 2022 we instituted a 10% price increase to address rising inflation in most of our geographic markets across all product lines, most remaining markets instituted a similar increase effective during the third quarter of 2022. During 2023, we also continued to institute more localized price increases to address region or market-specific conditions. We continue to examine our cost structure and assess additional potential incremental pricing actions in response to ongoing inflationary pressures.

The war in Ukraine has also impacted our results there as well as in Russia and certain neighboring markets; we do not have any manufacturing operations in Russia and Ukraine and our combined total assets in Russia and Ukraine, which primarily consists of short-term assets, was less than 1% of our consolidated total assets as of December 31, 2023.

The outbreak and subsequent global spread of the coronavirus disease 2019, or COVID-19, has impacted economic activity worldwide. Measures implemented by public health organizations and governmental bodies have now largely eased across most markets where we operate but have continued intermittently for certain markets and could resume more broadly as conditions evolve. Since the initial onset, our business and operations were affected by the pandemic in manners and degrees that varied by market. The most significant impacts we have seen included supply chain challenges, including increased costs in freight, labor, and certain raw materials, and constrained ability to deliver product to Members and/or have Members pick product up from our access points; restrictions or outright prohibitions on in-person training and promotional meetings and events for Members; and constrained ability of Members to have face-to-face contact with their customers, including at Nutrition Clubs. We and our Members responded to the pandemic and its impacts on our business and theirs by adapting operations and taking measures to mitigate those impacts. The most significant measures, including those that have continued even as pandemic conditions have eased, were adapting product access to the varying market-specific challenges, including shifting to more home product delivery from Member pick-up; shifting to online or phone orders only from in-person ordering; enhancing our training and promotion of technological tools offered to support Members’ online operations; and Members continuing to or increasing the ways they leverage the Internet and social media for customer contact.

Given the unpredictable and fluid nature of these factors, we are unable to predict the extent to which they will adversely impact our business, financial condition, and results of operations, including the impact they may have on our geographic regions and individual markets. See “Financial Results for the Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022” and “Sales by Geographic Region” for more specific discussion of these and other factors. See Part I, Item 1A, Risk Factors, of this Annual Report on Form 10-K for a further discussion of risks related to these matters.

Volume Points by Geographic Region

A key non-financial measure we focus on is Volume Points on a Royalty Basis, or Volume Points, which is essentially our weighted-average measure of product sales volume. Volume Points, which are unaffected by exchange rates or price changes, are used by management as a proxy for sales trends because in general, excluding the impact of price changes, an increase in Volume Points in a particular geographic region or country indicates an increase in our local currency net sales while a decrease in Volume Points in a particular geographic region or country indicates a decrease in our local currency net sales. The criteria we use to determine how and when we recognize Volume Points are not identical to our revenue recognition policies under U.S. GAAP. Unlike net sales, which are generally recognized when the product is delivered and when control passes to the Member, as discussed in greater detail in Note 2, Basis of Presentation, to the Consolidated Financial Statements included in Part IV, Item 15, Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K, 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.

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

Volume Points decreased 9.1% for 2023, after having decreased 10.1% for 2022 and we continue to see fewer new Members across many of our markets. As presented in the table above, the North America and Latin America volume point percentage declines are comparable between 2023 and 2022; for EMEA and China, the volume point percentage declines were lesser in 2023 than in 2022; and for Asia-Pacific, we experienced a slight volume decline in 2023 as opposed to a volume growth in 2022.

North America’s Volume Point decrease in 2023, continues to reflect fewer new Members and we believe, Members continue to work to re-establish and evolve pre-pandemic face-to-face approaches for their businesses and general inflationary pressures continue to be a challenge. Latin America’s Volume Point decreases for 2023 versus 2022 are due, we believe, to the cumulative adverse impact of difficult economic conditions including inflationary impacts on Members’ operations, and political and social instability in certain markets. EMEA’s Volume Point lesser decrease for 2023 compared to 2022 reflects fewer new Members as, we believe, Members work to re-establish and evolve pre-pandemic face-to-face approaches for their businesses. EMEA results were also negatively impacted by inflationary pressure on customer demand, as well as political and economic uncertainty across certain markets in the region. The Asia Pacific region saw a small year-over-year Volume Point decline versus growth for the 2022 period. Although the India market, the largest in the region, once again achieved growth, the growth was less than the prior year and was more than offset by declines elsewhere in the region, particularly Vietnam, Indonesia, Malaysia and Korea. Such decline can be attributable in part, we believe, to weak economic climate and inflationary pressure that have led to a decline in customer demand. We also saw fewer new Members as Members transition back to traditional face-to-face approaches. China saw continuing but lesser Volume Point decreases for 2023. This trend reflects, we believe, our Members continue to adjust their business approaches to a confluence of factors, including changes we have made for our business and external conditions. Also, a surge of COVID cases late in 2022 and COVID related lock-downs had an adverse effect on our results and business recovery during the first quarter of 2023.

Presentation

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

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

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

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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.

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

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

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

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royalty overrides and production bonuses;

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the Mark Hughes bonus payable to some of our most senior Members; and

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other discretionary incentive bonuses to qualifying Members.

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

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

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

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

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

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

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

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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, Quantitative and Qualitative Disclosures about Market Risk, of this Annual Report on Form 10-K.

Results of Operations

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

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

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

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

Management’s role, in-country and at the region and corporate level, is to provide Members with a competitive, broad, and innovative product line, offer leading-edge business tools and technology services, and encourage strong teamwork and Member leadership to make doing business with Herbalife simple. We continue to provide our Members with enhanced technology tools for ordering, business performance, and customer retailing to make it easier for them to do business with us and to optimize their customers’ experiences. Management uses the Marketing Plan, which reflects the rules for our global network marketing organization that specify the qualification requirements and general compensation structure for Members, coupled with educational and motivational programs and promotions to encourage Members to increase retailing, retention, and recruiting, which in turn affect net sales. Such programs include sales events such as Extravaganzas, Leadership Development Weekends and World Team Schools where large groups of Members network with other Members, learn retailing, retention, and recruiting techniques from our leading Members, and become more familiar with how to market and sell our products and business opportunities. Accordingly, management believes that these development and motivation programs increase the productivity of the sales leader network. The expenses for such programs are included in selling, general, and administrative expenses. We also use event and non-event product promotions to motivate Members to increase retailing, retention, and recruiting activities. These promotions have prizes ranging from qualifying for events to product prizes and vacations. In a number of markets, we have segmented 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 use Member data to similarly categorize Members for communication and promotion efforts.

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

The factors described above help Members increase their business, which in turn helps drive Volume Point growth in our business, and thus, net sales growth. The discussion below of net sales details some of the specific drivers of changes in our business and causes of sales fluctuations during the year ended December 31, 2023 as compared to the same period in 2022, as well as the unique growth or contraction factors specific to certain geographic regions or significant markets within a region during these periods. Net sales fluctuations, both Company-wide and within a particular geographic region or market, are primarily the result of changes in volume, changes in prices, or changes in foreign currency translation rates. The discussion of changes in net sales quantifies the impact of those drivers that are quantifiable such as changes in foreign currency translation rates, and cites the estimated impact of any significant price changes. The remaining drivers, which management believes are the primary drivers of changes in volume, are typically qualitative factors whose impact cannot be quantified. We use Volume Points as an indication for changes in sales volume.

Global inflationary pressures, supply chain challenges and other non-pandemic factors such as geopolitical conflict may impact both our cost structures and our pricing, with potential sales volume impact. Lingering impacts from the COVID-19 pandemic may also continue 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 these factors, we are unable to predict the extent to which they will adversely impact our business, financial condition, and results of operations, including the impact it may have on our regions and individual markets. We continue to examine our cost structure and assess potential incremental pricing actions in response to ongoing inflationary pressures which could impact our net sales and sales volumes. See the Sales by Geographic Region below for a more detailed discussion of each geographic region and individual market.

Financial Results for the Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022

Net sales were $5,062.4 million for the year ended December 31, 2023. Net sales decreased $142.0 million, or 2.7%, for the year ended December 31, 2023 as compared to the same period in 2022. In local currency, net sales decreased 1.6% for the year ended December 31, 2023 as compared to the same period in 2022. The 2.7% decrease in net sales for the year ended December 31, 2023 was primarily driven by a decrease in sales volume, as indicated by a 9.1% decrease in Volume Points, a 1.1% unfavorable impact of fluctuations in foreign currency exchange rates, and a 0.7% unfavorable impact of country sales mix, partially offset by an 8.5% favorable impact of price increases.

Net income was $142.2 million, or $1.42 per diluted share, for the year ended December 31, 2023. Net income decreased $179.1 million, or 55.7%, for the year ended December 31, 2023 as compared to the same period in 2022. The decrease in net income for the year ended December 31, 2023 was mainly due to $128.5 million lower contribution margin driven by lower net sales, $55.6 million higher selling, general, and administrative expenses and $21.2 million higher net interest expense; partially offset by $42.7 million lower income taxes.

Net income for the year ended December 31, 2023 included a $54.2 million pre-tax unfavorable impact ($43.6 million post-tax) of Transformation Program expenses, primarily relating to employee retention and separation costs; a $32.1 million pre-tax unfavorable impact ($29.5 million post-tax) of expenses relating to our new Digital Technology Program focused on enhancing and rebuilding our Member facing technology platform and web-based Member tools; an $8.6 million pre-tax unfavorable impact ($7.5 million post-tax) related to the Korea customs duty settlement (See Note 7, Contingencies, to the Consolidated Financial Statements included in Part IV, Item 15, Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K for further discussion); and a $1.0 million favorable impact ($1.0 million post-tax) on the extinguishment of a portion of the 2024 Convertible Notes (See Note 5, Long-Term Debt, to the Consolidated Financial Statements included in Part IV, Item 15, Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K for further discussion).

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Net income for the year ended December 31, 2022 included a $12.8 million favorable impact on the extinguishment of a portion of the 2024 Convertible Notes (See Note 5, Long-Term Debt, to the Consolidated Financial Statements included in Part IV, Item 15, Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K); a $12.1 million pre-tax unfavorable impact ($10.5 million post-tax) of Transformation Program expenses, primarily relating to professional fees; an $11.9 million pre-tax unfavorable impact ($11.3 million post-tax) of expenses relating to our new Digital Technology Program focused on enhancing and rebuilding our Member facing technology platform and web-based Member tools; a $5.5 million pre-tax unfavorable impact ($4.4 million post-tax) relating to the Russia-Ukraine conflict, primarily from sales centers termination and other related costs in Russia; and a $4.4 million pre-tax unfavorable impact ($3.6 million post-tax) from expenses related to the COVID-19 pandemic.

Reporting Segment Results

We aggregate our operating segments, excluding China, into a reporting segment, or the Primary Reporting Segment. The Primary Reporting Segment includes the North America, Latin 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, Segment Information, to the Consolidated Financial Statements included in Part IV, Item 15, Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K for further discussion of our reporting segments. See below for discussions of net sales and contribution margin by our reporting segments.

Net Sales by Reporting Segment

The Primary Reporting Segment reported net sales of $4,735.0 million for the year ended December 31, 2023, representing a decrease of $78.4 million, or 1.6%, as compared to the same period in 2022. In local currency, net sales decreased 0.7% for the year ended December 31, 2023 as compared to the same period in 2022. The 1.6% decrease in net sales for the year ended December 31, 2023 was primarily due to a decrease in sales volume, as indicated by a 9.1% decrease in Volume Points, a 0.9% unfavorable impact of fluctuations in foreign currency exchange rates, and a 0.5% unfavorable impact of country sales mix, partially offset by an 8.9% favorable impact of price increases.

For a discussion of China’s net sales for the year ended December 31, 2023 as compared to the same period in 2022, see the China section of Sales by Geographic Region below.

Contribution Margin by Reporting Segment

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

The Primary Reporting Segment reported contribution margin of $1,937.8 million, or 40.9% of net sales, for the year ended December 31, 2023, representing a decrease of $67.5 million, or 3.4%, as compared to the same period in 2022. The 3.4% decrease in contribution margin for the year ended December 31, 2023 was primarily the result of a 9.1% unfavorable impact of volume decreases, a 2.4% unfavorable impact of foreign currency fluctuations, a 5.4% unfavorable impact of cost changes related to self-manufacturing and sourcing primarily related to increased raw material and manufacturing labor costs and increased allocated overhead costs due to lower production volume, and a 2.0% unfavorable impact of sales mix, partially offset by a 14.6% favorable impact of price increases.

China reported contribution margin of $274.4 million for the year ended December 31, 2023, representing a decrease of $61.0 million, or 18.2%, as compared to the same period in 2022. The 18.2% decrease in contribution margin for the year ended December 31, 2023 was primarily the result of a 9.1% unfavorable impact of volume decreases, a 5.3% unfavorable impact of foreign currency fluctuations, and a 3.6% unfavorable impact of sales mix, partially offset by 3.0% favorable impact of price increases.

Sales by Geographic Region

Net sales by geographic region were as follows:

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North America

The North America region reported net sales of $1,131.4 million for the year ended December 31, 2023. Net sales decreased $130.8 million, or 10.4%, for the year ended December 31, 2023 as compared to the same period in 2022. In local currency, net sales decreased 10.3% for the year ended December 31, 2023 as compared to the same period in 2022. The 10.4% decrease in net sales for the year ended December 31, 2023 was primarily due to a decrease in sales volume, as indicated by a 18.8% decrease in Volume Points, partially offset by a 7.7% favorable impact of price increases and a 0.7% favorable impact of country sales mix.

Net sales in the U.S. were $1,100.5 million for the year ended December 31, 2023. Net sales decreased $125.0 million, or 10.2%, for the year ended December 31, 2023 as compared to the same period in 2022.

Sales volumes declined for 2023 versus 2022. Emerging from pandemic conditions, we have fewer new Members in the region as Members work to re-establish and evolve traditional face-to-face approaches for their businesses. Inflationary pressures, although improving during the second half of 2023, have also challenged some areas of customer demand. We are supporting Members with increased numbers of in-person events, new product launches, targeted communications and sales incentives, as well as modernizing our technological tools in order to enhance our Members’ ability to market and sell our products and promote business opportunities. The region implemented 3.5% price increases during March 2023 and September 2023.

Latin America

The Latin America region reported net sales of $820.9 million for the year ended December 31, 2023. Net sales increased $35.1 million, or 4.5%, for the year ended December 31, 2023 as compared to the same periods in 2022. In local currency, net sales decreased 0.5% for the year ended December 31, 2023 as compared to the same periods in 2022. The 4.5% increase in net sales for the year ended December 31, 2023 was primarily due to a 10.2% favorable impact of price increases, a 5.0% favorable impact of fluctuations in foreign currency exchange rates and a 1.9% favorable impact of country sales mix, partially offset by a decrease in sales volume, as indicated by a 12.7% decrease in Volume Points.

Net sales in Mexico were $525.0 million for the year ended December 31, 2023. Net sales increased $50.4 million, or 10.6% for the year ended December 31, 2023 as compared to the same periods in 2022. In local currency, net sales decreased 2.5% for the year ended December 31, 2023 as compared to the same periods in 2022. The fluctuation of foreign currency exchange rates had a favorable impact of $62.3 million for the year ended December 31, 2023. A volume decline was seen for 2023 versus the prior year, attributable we believe to the cumulative impact of several years of declines in new Members and Sales Leaders and, the market has continued to face difficult economic conditions. We believe, inflationary conditions, which continued during the first half of 2023, have also created challenges for Members’ Nutrition Club operations, which continue to be an important DMO in the market. We are supporting Members with promotions that encourage volume, even at lower levels, for newer Members. During the second half of 2023, we experienced importation delays in Mexico as a result of the government delaying timely approval of importation permits which impacted certain of our inventory supply, which we believe adversely affected net sales towards the end of the year. To minimize the risk of disruption to our Mexico market, we continue to work closely with the Mexican government and have seen gradual improvements as additional importation permits were received. The market saw a 2% price increase during June 2023 and a 5% price increase during January 2023.

Other markets across the region also saw volume declines for the year ended December 31, 2023 versus the 2022 periods. The region has seen difficult economic conditions as well as market-specific factors including political and social instability. Inflationary pressures, improving but remained elevated, and foreign exchange rate fluctuations in certain markets in the region have challenged our Members’ operations and customer demand. The sales volume declines in markets other than Mexico was greatest for Chile, Colombia, Brazil, and Peru. Promotional efforts within the region include increasing in-person activities, supporting on a market-by-market basis the Nutrition Club DMO, utilizing segmented promotions and sales incentives, and launching new products. The majority of the markets in the region instituted price increases to address market-specific conditions during the year ended December 31, 2023.

EMEA

The EMEA region reported net sales of $1,068.8 million for the year ended December 31, 2023. Net sales decreased $9.7 million, or 0.9% for the year ended December 31, 2023 as compared to the same periods in 2022. In local currency, net sales increased 0.8% for the year ended December 31, 2023 as compared to the same periods in 2022. The 0.9% decrease in net sales for the year ended December 31, 2023 was primarily due to a decrease in sales volume, as indicated by a 9.6% decrease in Volume Points, and an 1.7% unfavorable impact of fluctuations in foreign currency exchange rates, partially offset by a 10.9% favorable impact of price increases. The EMEA region has no single market that accounts for a significant portion of our consolidated net sales.

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Volumes declined, to a lesser extent, across most EMEA markets during the year ended December 31, 2023 as compared to the 2022 period. Economic conditions across the region, including inflation in certain markets, weakened consumer confidence, and foreign exchange rate fluctuations, as well as political uncertainty in certain markets appear to be further hindering business recovery. The volume declines across the EMEA markets for the year ended December 31, 2023 as compared to the 2022 comparative periods were led by Russia and Spain, partially offset by increases in Kazakhstan. Our Russia entity had significant volume declines during the year ended December 31, 2023 compared to the prior year comparative period, due to the suspension of product shipments to our Russia entity where its inventory has been fully depleted as of September 30, 2023; therefore our Russia entity will not have any product sales in future periods while its inventory remains fully depleted. As a result, Russian Members purchasing products in Kazakhstan, among other neighboring markets, has led to an increase in volume in Kazakhstan.

Focus areas for Herbalife and our Members in the region include branding and promotions, supporting increased numbers of in-person events, launching new products, strengthening the Nutrition Club DMO in certain markets, and other promotional initiatives to incentivize sales. The majority of the markets in the region instituted price increases to address market-specific conditions during the year ended December 31, 2023.

Asia Pacific

The Asia Pacific region, which excludes China, reported net sales of $1,713.9 million for the year ended December 31, 2023. Net sales increased $27.0 million, or 1.6%, for the year ended December 31, 2023 as compared to the same period in 2022. In local currency, net sales increased 5.3% for the year ended December 31, 2023 as compared to the same period in 2022. The 1.6% increase in net sales for the year ended December 31, 2023 was primarily due to an 8.0% favorable impact of price increases, partially offset by a 3.7% unfavorable impact of fluctuations in foreign currency exchange rates, a 2.1% unfavorable impact of sales mix, and a decrease in sales volume, as indicated by a 0.2% decrease in Volume Points.

Net sales in India were $796.6 million for the year ended December 31, 2023. Net sales increased $119.5 million, or 17.6%, for the year ended December 31, 2023 as compared to the same period in 2022. In local currency, net sales increased 23.5% for the year ended December 31, 2023 as compared to the same period in 2022. The fluctuation of foreign currency exchange rates had an unfavorable impact of $39.8 million on net sales for the year ended December 31, 2023. Sales volumes have increased in India in recent years as we continue to promote our brand, such as through sports sponsorships, increase the number of in-person events, launch new products, strengthen the Preferred Customer program in the market, and make it easier for our Members to do business, such as by improving product access points and payment methods. The India market implemented a 4.5% price increase in November 2023.

Net sales in Vietnam were $279.0 million for the year ended December 31, 2023. Net sales decreased $19.9 million, or 6.7%, for the year ended December 31, 2023 as compared to the same period in 2022. In local currency, net sales decreased 4.9% for the year ended December 31, 2023 as compared to the same period in 2022. The fluctuation of foreign currency exchange rates had an unfavorable impact of $5.2 million on net sales for the year ended December 31, 2023. Vietnam saw a sales volume decline for 2023 versus 2022. Members’ Nutrition Club operations continue to be an important DMO in the market which management continues to support and monitor, and we believe, macroeconomic conditions in the market continue to create challenges. The market implemented a 3% price increase in March 2023. Further, changes to direct-selling regulations in the market were approved by local government in April 2023; we continue to work closely with Vietnam government and monitor these regulations and any impact they may have on our business in Vietnam.

Across most of the region’s other markets sales volume was down for the year ended December 31, 2023 as compared to the 2022 periods, most significantly for Indonesia, Malaysia and South Korea. Emerging from pandemic conditions, we are seeing lower levels of member retention and new Members for some markets as Members transition back to traditional face-to-face approaches from pandemic-driven virtual methods, and as Members’ Nutrition Club operations recover from pandemic disruption and inflationary pressure in certain markets that have also challenged some areas of customer demand. Our efforts in the region include promotional initiatives to incentivize sales, launching new products, and expanding successful country initiatives throughout the region. The majority of the markets in the region instituted price increases to address market-specific conditions during the twelve months ended December 31, 2023.

China

The China region reported net sales of $327.4 million for the year ended December 31, 2023. Net sales decreased $63.6 million, or 16.3%, for the year ended December 31, 2023 as compared to the same period in 2022. In local currency, net sales decreased 11.8% for the year ended December 31, 2023 as compared to the same period in 2022. The 16.3% decrease in net sales for the year ended December 31, 2023 was primarily due to a decrease in sales volume, as indicated by a 9.1% decrease in Volume Points, a 4.5% unfavorable impact of fluctuations in foreign currency exchange rates, and a 3.1% unfavorable impact of sales mix, partially offset by a 2.6% favorable impact of price increases.

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Sales volume declines of recent years for the China market continued, but lessened, in the year ended December 31, 2023 versus the 2022 periods, a continuing result, we believe, of our Members being challenged to adjust their business approaches to a confluence of factors. These factors include increases we made during 2020 and 2021 to the requirements for sales representatives to be eligible to apply to be an independent service provider. In addition, the frequency and attendance of our and our Members’ in-person training and sales meetings, which are important to the business as they are a central channel for attracting and retaining customers, providing personal and professional development for our Members, and promoting our products, are improving but continue to be below pre-pandemic levels. These meeting declines were initially driven by government regulatory constraints and subsequently by the constraints of COVID pandemic conditions. Steps to adjust to these changing conditions have included some Members establishing daily consumption-oriented Nutrition Clubs such as in other regions of the world, however in the near term these efforts have diverted from traditional business approaches. Also, a surge of COVID cases late in 2022 had an adverse effect on our results and business during the first quarter of 2023. China had no price increases during the twelve months ended December 31, 2023.

Focus areas for China include enhancing our digital capabilities and offerings, such as improving the integration of our technological tools to make it easier for our Members to do business, returning to face-to-face business approaches, encouraging a customer-based approach through DMOs such as weight management challenges, and supporting Members’ establishment of daily consumption-oriented Nutrition Clubs. We have expanded our product line for the China market and continue to conduct sales promotions in the region.

Sales by Product Category

Net sales by product category were as follows:

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

Net sales for the majority of product categories decreased for the year ended December 31, 2023 as compared to the same period in 2022. The trends and business factors described in the above discussions of the individual geographic regions apply generally to all product categories.

Gross Profit

Gross profit was $3,871.4 million and $4,030.8 million for the years ended December 31, 2023 and 2022, respectively. Gross profit as a percentage of net sales was 76.5% and 77.4% for the years ended December 31, 2023 and 2022, respectively, or an unfavorable net decrease of 98 basis points.

The decrease in gross profit as a percentage of net sales for the year ended December 31, 2023 as compared to the same period in 2022 included unfavorable cost changes related to self-manufacturing and sourcing of 218 basis points primarily related to increased raw material, manufacturing labor, and increased allocated overhead costs due to lower production volume; the unfavorable impact of foreign currency fluctuations of 70 basis points; unfavorable changes in sales mix of 51 basis points; and unfavorable other cost changes of 3 basis points; partially offset by the favorable impact of price increases of 220 basis points; the favorable impact of lower inventory write-downs of 16 basis points; and the favorable impact of cost changes of 8 basis points relating to lower outbound freight costs.

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

Royalty Overrides

Royalty overrides were $1,659.2 million and $1,690.1 million for the years ended December 31, 2023 and 2022, respectively. Royalty overrides as a percentage of net sales were 32.8% and 32.4% for the years ended December 31, 2023 and 2022, respectively.

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The increase in royalty overrides as a percentage of net sales for the year ended December 31, 2023 as compared to the same period in 2022 was primarily due to lower net sales in China as a proportion of our total worldwide net sales. The majority of service fees to our independent service providers in China are included in selling, general, and administrative expenses while Member compensation for all other countries is included in Royalty overrides.

Generally, Royalty overrides as a percentage of net sales may vary from period to period due to changes in the mix of products and countries because full royalty overrides are not paid on certain products and in certain countries.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses were $1,866.0 million and $1,810.4 million for the years ended December 31, 2023 and 2022, respectively. Selling, general, and administrative expenses as a percentage of net sales were 36.9% and 34.8% for the years ended December 31, 2023 and 2022, respectively.

The increase in selling, general, and administrative expenses for the year ended December 31, 2023 as compared to the same period in 2022 was driven by $46.2 million in higher labor and benefits costs, $26.5 million in higher professional fees primarily from expenses related to the Digital Technology Program, $10.6 million in higher non-income tax expense primarily from the Korea customs duty settlement, $9.1 million in higher foreign exchange losses, partially offset by $31.2 million in lower service fees for China independent service providers due to lower sales in China, and $13.4 million of favorable impact of changes in market value of deferred compensation assets. The increase in labor and benefit costs includes higher employee retention and separation costs related to the Transformation Program, unfavorable impact of changes in market value of deferred compensation liabilities, and savings on labor cost resulting from the Transformation Program.

See Note 14, Transformation Program, to the Consolidated Financial Statements included in Part IV, Item 15, Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K for a further discussion on our Transformation Program.

Other Operating Income

The $10.2 million of other operating income for the year ended December 31, 2023 consisted of $10.2 million of government grant income for China (See Note 2, Basis of Presentation, to the Consolidated Financial Statements included in Part IV, Item 15, Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K).

The $14.9 million of other operating income for the year ended December 31, 2022 consisted of $14.9 million of government grant income for China.

Interest Expense, Net

Interest expense, net is as follows:

The increase in interest expense, net for the year ended December 31, 2023 as compared to the same periods in 2022 was primarily due to an increase in our weighted-average interest rate, partially offset by a decrease in our overall weighted-average borrowings.

Other (Income) Expense, Net

The $1.0 million of other income, net for the year ended December 31, 2023 consisted of a gain on the extinguishment of a portion of the 2024 Convertible Notes (See Note 5, Long-Term Debt, to the Consolidated Financial Statements included in Part IV, Item 15, Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K).

The $12.8 million of other income, net for the year ended December 31, 2022 consisted of a gain on the extinguishment of a portion of the 2024 Convertible Notes.

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Income Taxes

Income taxes were $60.8 million and $103.5 million for the years ended December 31, 2023 and 2022, respectively. The effective income tax rate was 30.0% and 24.4% for the years ended December 31, 2023 and 2022, respectively. The increase in the effective tax rate for the year ended December 31, 2023 as compared to the same period in 2022 was primarily due to changes in the geographic mix of our income, partially offset by an increase in net tax benefits from discrete events.

Liquidity and Capital Resources

We have historically met our short- and long-term working capital and capital expenditure requirements, including funding for expansion of operations, through net cash flows provided by operating activities. Variations in sales of our products directly affect the availability of funds. There are no material contractual restrictions on our ability to transfer and remit funds among our international affiliated companies. However, there are foreign currency restrictions in certain countries which could reduce our ability to timely obtain U.S. dollars. Even with these restrictions and the impacts of the COVID-19 pandemic and the current inflationary environment, we believe we will have sufficient resources, including cash flow from operating activities and longer-term access to capital markets, to meet debt service obligations in a timely manner and be able to continue to meet our objectives.

Historically, our debt has not resulted from the need to fund our normal operations, but instead has resulted primarily from our share repurchase programs. Since inception in 2007, total share repurchases amounted to approximately $6.5 billion. While a significant net sales decline could potentially affect the availability of funds, many of our largest expenses are variable in nature, which we believe protects our funding in all but a dramatic net sales downturn. Our $575.2 million cash and cash equivalents as of December 31, 2023 and our senior secured credit facility, in addition to cash flow from operations, can be used to support general corporate purposes, including any future share repurchases, debt repayments, dividends, and strategic investment opportunities.

We have a cash pooling arrangement with a financial institution for cash management purposes. This cash pooling arrangement allows certain of our participating subsidiaries to withdraw cash from this financial institution based upon our aggregate cash deposits held by subsidiaries who participate in the cash pooling arrangement. We did not owe any amounts to this financial institution under the pooling arrangement as of December 31, 2023 and 2022.

For the year ended December 31, 2023, we generated $357.5 million of operating cash flow as compared to $352.5 million for the same period in 2022. The increase in our operating cash flow was the result of $170.8 million of favorable changes in operating assets and liabilities, partially offset by $165.8 million of lower net income excluding non-cash and reconciling items disclosed within our consolidated statement of cash flows. The $170.8 million of favorable changes in operating assets and liabilities was primarily the result of favorable changes in inventories, and other current liabilities primarily from favorable changes in accrued compensation; partially offset by unfavorable changes in Other primarily from capitalized implementation costs of cloud-based hosting arrangements and unrecognized tax benefits. The favorable changes in accrued compensation was primarily from lower employee bonus payments in 2023. The $165.8 million of lower net income excluding non-cash and reconciling items was primarily driven by lower contribution margin driven by lower net sales (See Financial Results for the Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022 above for further discussion), higher selling, general and administrative expenses, and higher interest expense.

Capital expenditures, including accrued capital expenditures, for the years ended December 31, 2023 and 2022 were $140.1 million and $164.1 million, respectively. The majority of these expenditures during the twelve months ended December 31, 2023 represented investments in management information systems, including initiatives to develop enhanced Member tools which includes our $400 million multi-year Digital Technology Program that is focused on enhancing and rebuilding our Member facing technology platform and web-based Member tools to provide enhanced digital capabilities and experiences to our Members, which we also refer to as Herbalife One. We expect to continue our investments in these areas and expect to incur total capital expenditures of approximately $ 145 million to $195 million for the full year 2024, which includes Herbalife One. Based on our estimates, we expect our total future capital expenditures to remain elevated during 2024 and 2025 as a result of Herbalife One, where we have incurred approximately half of the expected implementation costs relating to Herbalife One as of December 31, 2023. In addition, based on the Herbalife One implementation costs incurred thus far, we expect to begin recognizing non-cash amortization expenses of approximately $30 million within our 2024 consolidated statement of income; thereafter, we expect to recognize similar amounts of non-cash amortization expenses which could vary depending on the total actual future Herbalife One related expenditures and the associated timing of future technology being available for deployment. The capital expenditures relating to Herbalife One, are separate to the Transformation Program described further below.

In March 2023, we hosted our annual global Herbalife Honors event where sales leaders from around the world met, shared best practices, and conducted leadership training, and our management awarded Members $77.9 million of Mark Hughes bonus payments related to their 2022 performance. In April 2022, our management awarded Members $85.7 million of Mark Hughes bonus payments related to their 2021 performance.

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In 2021, we initiated a global transformation program to optimize global processes for future growth, or the Transformation Program. The Transformation Program involves the investment in certain new technologies and the realignment of infrastructure and the locations of certain functions to better support distributors and customers. The Transformation Program is expected to deliver annual savings of at least $115 million with approximately $70 million of savings realized in 2023 and approximately $115 million of savings expected to be realized in 2024 and thereafter. We also expect to incur total pre-tax expenses of at least $95 million to realize these annual run-rate savings. We have already incurred total pre-tax expenses of approximately $79.2 million through December 31, 2023, of which $54.2 million, $12.1 million and $12.9 million, were recognized in selling, general, and administrative expenses within our consolidated statements of income during the years ended December 31, 2023, 2022 and 2021, respectively. In addition, we expect a total of $20 million to $25 million of related capital expenditures through 2024, primarily relating to technology, to support the Transformation Program. Since the Transformation Program is still ongoing and expected to be completed in 2024, these estimated amounts are preliminary and based on Management’s estimates and actual results could differ from such estimates.

Senior Secured Credit Facility

On August 16, 2018, we entered into a $1.25 billion senior secured credit facility, or the 2018 Credit Facility, consisting of a $250.0 million term loan A, or the 2018 Term Loan A, a $750.0 million term loan B, or the 2018 Term Loan B, and a $250.0 million revolving credit facility, or the 2018 Revolving Credit Facility, with a syndicate of financial institutions as lenders. The 2018 Term Loan B matures upon the earlier of: (i) August 18, 2025, or (ii) December 15, 2023 if the outstanding principal on the 2024 Convertible Notes, as defined below, exceeds $350.0 million and we exceed certain leverage ratios as of that date. As described further below, the outstanding principal on the 2024 Convertible Notes was less than $350.0 million as of December 31, 2023. All obligations under the 2018 Credit Facility are unconditionally guaranteed by certain direct and indirect wholly-owned subsidiaries of Herbalife Ltd. and secured by the equity interests of certain of Herbalife Ltd.’s subsidiaries and substantially all of the assets of the domestic loan parties. Also on August 16, 2018, we issued $400.0 million aggregate principal amount of senior unsecured notes, or the 2026 Notes as described below, and used the proceeds from the 2018 Credit Facility and the 2026 Notes to repay in full the $1,178.1 million outstanding under our prior senior secured credit facility.

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

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

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

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

During the second quarter of 2023, we amended the 2018 Credit Facility which, among other things, increased the leverage ratio covenant under both the 2018 Term Loan A and 2018 Revolving Credit Facility. In addition, the 2018 Credit Facility was also amended to transition from LIBOR to the Secured Overnight Financing Rate, or SOFR, in connection with the discontinuation of LIBOR as of June 30, 2023. Following the transition, borrowings utilizing SOFR under the 2018 Credit Facility began using the “Adjusted Term SOFR”, which is the rate per annum equal to Term SOFR plus a rate adjustment based on interest periods of one month, three months, six months and twelve months tenors equaling to approximately 0.11%, 0.26%, 0.43% and 0.72%, respectively. We incurred approximately $1.1 million of debt issuance costs in connection with these amendments. For accounting purposes, pursuant to ASC 470, these transactions were accounted for as modifications of the 2018 Credit Facility. Of the $1.1 million of debt issuance costs, approximately $1.0 million was recorded on our consolidated balance sheet and is being amortized over the life of the 2018 Credit Facility using the effective-interest method, and approximately $0.1 million was recognized in interest expense within our consolidated statement of income during the second quarter of 2023.

The 2018 Credit Facility requires us to comply with a leverage ratio. The 2018 Credit Facility also contains affirmative and negative covenants customary for financings of this type, including, among other things, limitations or prohibitions on repurchasing common shares, declaring and paying dividends and other distributions, redeeming and repurchasing certain other indebtedness, loans and investments, additional indebtedness, liens, mergers, asset sales and transactions with affiliates. In addition, the 2018 Credit Facility contains customary events of default. As of December 31, 2023 and 2022, we were in compliance with our debt covenants under the 2018 Credit Facility.

The 2018 Term Loan A and 2018 Term Loan B are payable in consecutive quarterly installments which began on December 31, 2018. Interest is due at least quarterly on amounts outstanding under the 2018 Credit Facility. In addition, beginning in 2020, we may be required to make mandatory prepayments towards the 2018 Term Loan B based on our consolidated leverage ratio and annual excess cash flows as defined under the terms of the 2018 Credit Facility. We are also permitted to make voluntary prepayments. Amounts outstanding under the 2018 Term Loan A and 2018 Term Loan B may be voluntarily prepaid without premium or penalty, subject to customary breakage fees in connection with the prepayment of a eurocurrency loan. These prepayments, if any, will be applied against remaining quarterly installments owed under the 2018 Term Loan A and 2018 Term Loan B in order of maturity with the remaining principal due upon maturity, unless directed otherwise by us. Pursuant to the terms of the excess cash flow clause, and based on the 2023 excess cash flow calculation and consolidated leverage ratio as of December 31, 2023, as described and defined under the terms of the 2018 Credit Facility, we will be expecting to make a $66.1 million mandatory prepayment towards the 2018 Term Loan B during the first quarter of 2024.

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During the year ended December 31, 2023, we borrowed an aggregate amount of $199.0 million under the 2018 Credit Facility, all of which was under the 2018 Revolving Credit Facility, and repaid a total amount of $288.0 million on amounts outstanding under the 2018 Credit Facility, which included $259.0 million of repayments on amounts outstanding under the 2018 Revolving Credit Facility. During the year ended December 31, 2022, we borrowed an aggregate amount of $564.0 million under the 2018 Credit Facility, all of which was under the 2018 Revolving Credit Facility, and repaid a total amount of $683.0 million on amounts outstanding under the 2018 Credit Facility, which included $654.0 million of repayments on amounts outstanding under the 2018 Revolving Credit Facility. As of December 31, 2023 and 2022, the U.S. dollar amount outstanding under the 2018 Credit Facility was $886.7 million and $975.7 million, respectively. Of the $886.7 million outstanding under the 2018 Credit Facility as of December 31, 2023, $236.1 million was outstanding under the 2018 Term Loan A and $650.6 million was outstanding under the 2018 Term Loan B. Although, there were no borrowings outstanding under the 2018 Revolving Credit Facility as of December 31, 2023, the remaining available borrowing capacity, which was reduced by the issued but undrawn letters of credit against our 2018 Revolving Credit Facility, was approximately $285 million as of December 31, 2023. Of the $975.7 million outstanding under the 2018 Credit Facility as of December 31, 2022, $257.6 million was outstanding under the 2018 Term Loan A, $658.1 million was outstanding under the 2018 Term Loan B, and $60.0 million was outstanding under the 2018 Revolving Credit Facility. There were no outstanding foreign currency borrowings under the 2018 Credit Facility as of December 31, 2023 and 2022. As of December 31, 2023 and 2022, the weighted-average interest rate for borrowings under the 2018 Credit Facility was 7.62% and 4.08%, respectively. We are currently assessing our options to refinance our 2018 Credit Facility.

See Note 5, Long-Term Debt, to the Consolidated Financial Statements included in Part IV, Item 15, Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K for a further discussion on our 2018 Credit Facility.

Convertible Senior Notes due 2024

In March 2018, we issued $550.0 million aggregate principal amount of convertible senior notes due 2024, or the 2024 Convertible Notes. The 2024 Convertible Notes are senior unsecured obligations which rank effectively subordinate to any of our existing and future secured indebtedness, including amounts outstanding under the 2018 Credit Facility, to the extent of the value of the assets securing such indebtedness. The 2024 Convertible Notes pay interest at a rate of 2.625% per annum payable semiannually in arrears on March 15 and September 15 of each year, beginning on September 15, 2018. Unless redeemed, repurchased or converted in accordance with their terms prior to such date, the 2024 Convertible Notes mature on March 15, 2024. From time to time, we may also repurchase certain amounts of our 2024 Convertible Notes in the open market or privately negotiated transactions depending upon the market conditions, the interest rate environment, and upcoming maturity dates. The primary purpose of the issuance of the 2024 Convertible Notes was to repurchase a portion of the 2019 Convertible Notes.

In December 2021, we made an irrevocable election under the indenture governing the 2024 Convertible Notes to require the principal portion of the 2024 Convertible Notes to be settled in cash and any excess in shares or cash.

In December 2022, we issued $277.5 million aggregate principal of new convertible senior notes due 2028 as described below, and subsequently used the proceeds, to repurchase $287.5 million of our existing 2024 Convertible Notes from a limited number of holders in privately negotiated transactions for an aggregate purchase price of $274.9 million, which included $1.7 million of accrued interest. In August 2023, we repurchased $65.5 million of our existing 2024 Convertible Notes through open market purchases for an aggregate purchase price of $65.1 million, which included $0.8 million of accrued interest. As of December 31, 2023, the remaining outstanding principal on the 2024 Convertible Notes was $197.0 million.

See Note 5, Long-Term Debt, to the Consolidated Financial Statements included in Part IV, Item 15, Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K for a further discussion on our 2024 Convertible Notes.

Convertible Senior Notes due 2028

In December 2022, we issued $277.5 million aggregate principal amount of convertible senior notes due 2028, or the 2028 Convertible Notes. The 2028 Convertible Notes are senior unsecured obligations which rank effectively subordinate to any of our existing and future secured indebtedness, including amounts outstanding under the 2018 Credit Facility, to the extent of the value of the assets securing such indebtedness. The 2028 Convertible Notes pay interest at a rate of 4.25% per annum payable semiannually in arrears on June 15 and December 15 of each year, beginning on June 15, 2023. Unless redeemed, repurchased or converted in accordance with their terms prior to such date, the 2028 Convertible Notes mature on June 15, 2028. The primary purpose of the issuance of the 2028 Convertible Notes was to repurchase a portion of the 2024 Convertible Notes. See Note 5, Long-Term Debt, to the Consolidated Financial Statements included in Part IV, Item 15, Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K for a further discussion on our 2028 Convertible Notes.

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Senior Notes due 2025

In May 2020, we issued $600.0 million aggregate principal amount of senior notes due 2025, or the 2025 Notes. The 2025 Notes are senior unsecured obligations which rank effectively subordinate to any of our existing and future secured indebtedness, including amounts outstanding under the 2018 Credit Facility, to the extent of the value of the assets securing such indebtedness. The 2025 Notes pay interest at a rate of 7.875% per annum payable semiannually in arrears on March 1 and September 1 of each year, beginning on March 1, 2021. The 2025 Notes mature on September 1, 2025, unless redeemed or repurchased in accordance with their terms prior to such date. The primary purpose of the issuance of the 2025 Notes was for general corporate purposes, including share repurchases and other capital investment projects. See Note 5, Long-Term Debt, to the Consolidated Financial Statements included in Part IV, Item 15, Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K for a further discussion on our 2025 Notes.

Senior Notes due 2029

In May 2021, we issued $600.0 million aggregate principal amount of senior notes due 2029, or the 2029 Notes. The 2029 Notes are senior unsecured obligations which rank effectively subordinate to any of our existing and future secured indebtedness, including amounts outstanding under the 2018 Credit Facility, to the extent of the value of the assets securing such indebtedness. The 2029 Notes pay interest at a rate of 4.875% per annum payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2021. The 2029 Notes mature on June 1, 2029, unless redeemed or repurchased in accordance with their terms prior to such date. The primary purpose of the issuance of the 2029 Notes was to repurchase the 2026 Notes as well as for general corporate purposes, which may include shares repurchases and other capital investment projects. See Note 5, Long-Term Debt, to the Consolidated Financial Statements included in Part IV, Item 15, Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K for a further discussion on our 2029 Notes.

Contractual Obligations

Our inventory purchase commitments are generally short-term in nature and have ordinary commercial terms. For those noncancelable inventory purchase agreements which are long-term in nature and with terms in excess of one year, as of December 31, 2023, we have approximately $79 million of noncancelable inventory purchase commitments relating to 2024 and expect approximately $75 million relating to 2025. Our leases generally consist of long-term operating leases, which are payable monthly and relate to our office space, warehouses, distribution centers, manufacturing centers, and equipment.

For a further discussion on our debt and operating lease commitments as of December 31, 2023, see the sections above as well as Note 4, Leases and Note 5, Long-Term Debt, to the Consolidated Financial Statements included in Part IV, Item 15, Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K.

Cash and Cash Equivalents

The majority of our foreign subsidiaries designate their local currencies as their functional currencies. As of December 31, 2023, the total amount of our foreign subsidiary cash and cash equivalents was $390.4 million, of which $37.9 million was held in U.S. dollars. As of December 31, 2023, the total amount of cash and cash equivalents held by Herbalife Ltd. and its U.S. entities, inclusive of U.S. territories, was $184.8 million.

For earnings not considered to be indefinitely reinvested, deferred taxes have been provided. For earnings considered to be indefinitely reinvested, deferred taxes have not been provided. Should we make a determination to remit the cash and cash equivalents from our foreign subsidiaries that are considered indefinitely reinvested to Herbalife Ltd. for the purpose of repatriation of undistributed earnings, we would need to accrue and pay taxes. As of December 31, 2023, Herbalife Ltd. had approximately $2.9 billion of permanently reinvested unremitted earnings relating to its operating subsidiaries. As of December 31, 2023, we do not have any plans to repatriate these unremitted earnings to Herbalife Ltd.; therefore, we do not have any liquidity concerns relating to these unremitted earnings and related cash and cash equivalents. See Note 12, Income Taxes, to the Consolidated Financial Statements included in Part IV, Item 15, Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K for additional discussion on our unremitted earnings.

Off-Balance Sheet Arrangements

As of December 31, 2023 and 2022, we had no material off-balance sheet arrangements except for those described in Note 5, Long-Term Debt, and Note 7, Contingencies, to the Consolidated Financial Statements included in Part IV, Item 15, Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K.

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Dividends

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

Share Repurchases

On February 9, 2021, our board of directors authorized a three-year $1.5 billion share repurchase program which had approximately $985.5 million of remaining authorized capacity prior to the share repurchase program expiring on February 9, 2024. This share repurchase program allowed us, which included an indirect wholly-owned subsidiary of Herbalife Ltd., to repurchase our common shares at such times and prices as determined by management, as market conditions warranted, and to the extent Herbalife Ltd.’s distributable reserves were 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.

During the year ended December 31, 2023, we did not repurchase any of our common shares through open-market purchases. During the year ended December 31, 2022, we repurchased approximately 3.7 million of our common shares through open-market purchases at an aggregate cost of approximately $131.8 million, or an average cost of $35.73 per share, and subsequently retired these shares.

As of December 31, 2021, we held approximately 10.0 million of treasury shares for U.S. GAAP purposes. These treasury shares increased our shareholders’ deficit and were reflected at cost within our accompanying consolidated balance sheet as of December 31, 2021. Although these shares were owned by an indirect wholly-owned subsidiary of ours and remained legally outstanding, they were reflected as treasury shares under U.S. GAAP and therefore reduced the number of common shares outstanding within our consolidated financial statements and the weighted-average number of common shares outstanding used in calculating earnings per share. The common shares of Herbalife Ltd. held by the indirect wholly-owned subsidiary, however, remained outstanding on the books and records of our transfer agent and therefore still carried voting and other share rights related to ownership of our common shares, which could be exercised. So long as it was consistent with applicable laws, such shares were voted by such subsidiary in the same manner, and to the maximum extent possible in the same proportion, as all other votes cast with respect to any matter properly submitted to a vote of Herbalife Ltd.’s shareholders. In August 2022, we retired these 10.0 million treasury shares and as a result the amount of our treasury shares reflected at cost within our consolidated balance sheet decreased by $328.9 million as of December 31, 2022, compared to December 31, 2021. We also allocated the excess of the original repurchase price of these common shares over the par value of the shares acquired between shareholders deficit and additional paid-in capital. As a result of the retirement of our treasury shares these approximately 10.0 million shares no longer remained legally outstanding.

See Note 8, Shareholders’ Deficit, to the Consolidated Financial Statements included in Part IV, Item 15, Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K for a further discussion on our share repurchases.

Working Capital and Operating Activities

As of December 31, 2023 and 2022, we had working capital of $121.7 million and $379.5 million, respectively, or a decrease of $257.8 million. The decrease was primarily due to a decrease in inventories, and increases in the current portion of long-term debt primarily relating to our 2024 Convertible Notes, which mature in less than one year and a mandatory prepayment towards the 2018 Term Loan B we are expecting to make during the first quarter of 2024, and increases in other current liabilities; partially offset by increases in cash and cash equivalents and prepaid expenses and other current assets.

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

The majority of our purchases from suppliers are generally made in U.S. dollars, while sales to our Members generally are made in local currencies. Consequently, strengthening of the U.S. dollar versus a foreign currency can have a negative impact on net sales and contribution margins and can generate transaction gains or losses on intercompany transactions. For discussion of our foreign exchange contracts and other hedging arrangements, see Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of this Annual Report on Form 10-K.

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Contingencies

See Note 7, Contingencies, to the Consolidated Financial Statements included in Part IV, Item 15, Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K for information on our contingencies as of December 31, 2023.

Critical Accounting Policies and Estimates

U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. We regularly evaluate our estimates and assumptions related to revenue recognition, allowance for product returns, inventory, goodwill and purchased intangible asset valuations, deferred income tax asset valuation allowances, uncertain tax positions, tax contingencies, and other loss contingencies. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses. Actual results could differ from those estimates. We consider the following policies to be most critical in understanding the judgments that are involved in preparing the financial statements and the uncertainties that could impact our operating results, financial condition and cash flows.

We are a nutrition company that sells a wide range of weight management; targeted nutrition; energy, sports, and fitness; and outer nutrition products. Our products are manufactured by us in our Changsha, Hunan, China extraction facility; Suzhou, China facility; Nanjing, China facility; Lake Forest, California facility; and Winston-Salem, North Carolina facility; and by third-party providers, and then are sold to Members who consume and sell Herbalife products to retail consumers or other Members. As of December 31, 2023, we sold products in 95 markets throughout the world and we are organized and managed by geographic region. We aggregate our operating segments into one reporting segment, except China, as management believes that our operating segments have similar operating characteristics and similar long-term operating performance. In making this determination, management believes that the operating segments are similar in the nature of the products sold, the product acquisition process, the types of customers to whom products are sold, the methods used to distribute the products, the nature of the regulatory environment, and their economic characteristics.

We generally recognize revenue upon delivery when control passes to the Member. Product sales are recognized net of product returns, and discounts referred to as “distributor allowances.” We generally receive the net sales price in cash or through credit card payments at the point of sale. Royalty overrides are generally recorded when revenue is recognized. See Note 2, Basis of Presentation, to the Consolidated Financial Statements included in Part IV, Item 15, Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K for a further discussion of distributor compensation in the U.S.

Allowances for product returns, primarily in connection with our buyback program, are provided at the time the sale is recorded. This accrual is based upon historical return rates for each country and the relevant return pattern, which reflects anticipated returns to be received over a period of up to 12 months following the original sale. Historically, product returns and buybacks have not been significant. Product returns and buybacks were approximately 0.1% of net sales for both of the years ended December 31, 2023 and 2022.

We adjust our inventories to lower of cost and net realizable value. Additionally, we adjust the carrying value of our inventory based on assumptions regarding future demand for our products and market conditions. If future demand and market conditions are less favorable than management’s assumptions, additional inventory write-downs could be required. Likewise, favorable future demand and market conditions could positively impact future operating results if previously written down inventories are sold. We have obsolete and slow moving inventories which have been adjusted downward $24.2 million and $31.5 million to present them at their lower of cost and net realizable value in our consolidated balance sheets as of December 31, 2023 and 2022, respectively.

Goodwill and marketing-related intangible assets not subject to amortization are tested annually for impairment and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired.

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Under the quantitative method for impairment testing of goodwill, which is done at the reporting unit level, we primarily use an income approach in order to determine the fair value of a reporting unit and compare it to its carrying amount. The determination of the fair value of the reporting units requires us to make significant estimates and assumptions. These estimates and assumptions include estimates of future revenues and expense growth rates, capital expenditures and the depreciation and amortization related to these capital expenditures, discount rates, and other inputs. Due to the inherent uncertainty involved in making these estimates, actual future results could differ. Changes in assumptions regarding future results or other underlying assumptions could have a significant impact on the fair value of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit over its fair value. During fiscal year 2023, we performed a quantitative assessment and determined that the fair value of each reporting unit was significantly greater than its respective carrying value.

Under the quantitative method for impairment testing of our marketing-related intangible assets, we use a discounted cash flow model, or the income approach, under the relief-from-royalty method to determine the fair value of our marketing-related intangible assets in order to confirm there is no impairment required. An impairment loss is recognized to the extent that the carrying amount of the assets exceeds their fair value. During fiscal year 2023, we performed a quantitative assessment of our marketing-related intangible assets and determined that the fair value of the assets was significantly greater than their carrying value.

As of December 31, 2023 and 2022, we had goodwill of approximately $95.4 million and $93.2 million, respectively. The increase in goodwill during the year ended December 31, 2023 was due to foreign currency translation adjustments. As of both December 31, 2023 and 2022, we had marketing-related intangible assets of approximately $310.0 million. No goodwill or marketing-related intangibles impairment was recorded during the years ended December 31, 2023 and 2022. See Note 2, Basis of Presentation, to the Consolidated Financial Statements included in Part IV, Item 15, Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K for a further discussion.

Contingencies are accounted for in accordance with FASB ASC Topic 450, Contingencies, or ASC 450. ASC 450 requires that we record an estimated loss from a loss contingency when information available prior to issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. We also disclose material contingencies when we believe a loss is not probable but reasonably possible as required by ASC 450. Accounting for contingencies such as legal and non-income tax matters requires us to use judgment related to both the likelihood of a loss and the estimate of the amount or range of loss. Many of these legal and tax contingencies can take years to be resolved. Generally, as the time period increases over which the uncertainties are resolved, the likelihood of changes to the estimate of the ultimate outcome increases.

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate prior to the completion and filing of tax returns for such periods. These estimates involve complex issues and require us to make judgments about the likely application of the tax law to our situation, as well as with respect to other matters, such as anticipating the positions that we will take on tax returns prior to us actually preparing the returns and the outcomes of disputes with tax authorities. The ultimate resolution of these issues may take extended periods of time due to examinations by tax authorities and statutes of limitations. In addition, changes in our business, including acquisitions, changes in our international corporate structure, changes in the geographic location of business functions or assets, changes in the geographic mix and amount of income, as well as changes in our agreements with tax authorities, valuation allowances, applicable accounting rules, applicable tax laws and regulations, rulings and interpretations thereof, developments in tax audit and other matters, and variations in the estimated and actual level of annual pre-tax income can affect the overall effective income tax rate.

We evaluate the realizability of our deferred tax assets by assessing the valuation allowance and by adjusting the amount of such allowance, if necessary. Although realization is not assured, we believe it is more likely than not that the net carrying value will be realized. The amount of the carryforwards that is considered realizable, however, could change if estimates of future taxable income are adjusted. The ability to forecast income over multiple years at a jurisdictional level is subject to uncertainty especially when our assessment of valuation allowances factor in longer term income forecasts. The impact of increasing or decreasing the valuation allowance could be material to our consolidated financial statements. See Note 12, Income Taxes, to the Consolidated Financial Statements included in Part IV, Item 15, Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K for additional information on our net deferred tax assets and valuation allowances.

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

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Our policy is to account for global intangible low-taxed income as a period cost if and when incurred.

We account for foreign currency transactions in accordance with FASB ASC Topic 830, Foreign Currency Matters. In a majority of the countries where we operate, the functional currency is the local currency. Our foreign subsidiaries’ asset and liability accounts are translated for consolidated financial reporting purposes into U.S. dollar amounts at period-end exchange rates. Revenue and expense accounts are translated at the average rates during the year. Our foreign currency translation adjustments are included in accumulated other comprehensive loss on our accompanying consolidated balance sheets. Foreign currency transaction gains and losses and foreign currency remeasurements are generally included in selling, general, and administrative expenses in the accompanying consolidated statements of income.

New Accounting Pronouncements

See discussion under Note 2, Basis of Presentation, to the Consolidated Financial Statements included in Part IV, Item 15, Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K for information on new accounting pronouncements.