Herbalife Ltd. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Segment Information

Segment Information

9 Months Ended

Sep. 30, 2018

6. Segment Information

The Company is a nutrition company that sells a wide range of weight management, targeted nutrition, energy, sports & fitness, and outer nutrition products. The Company’s products are manufactured by the Company in its Changsha, Hunan, China extraction facility; Suzhou, China facility; Nanjing, China facility; Lake Forest, California facility; and Winston-Salem, North Carolina facility, as well as by third-party providers, and then are sold to Members who consume and sell Herbalife products to retail consumers or other Members. Revenues reflect sales of products by the Company to its Members and are categorized based on geographic location.

As of September 30, 2018, the Company sold products in 94 countries throughout the world and was organized and managed by six geographic regions: North America, Mexico, South & Central America, EMEA, Asia Pacific, and China. The Company defines its operating segments as those geographical operations. The Company aggregates its operating segments, excluding China, into a reporting segment, or the Primary Reporting Segment, as management believes that the Company’s operating segments have similar operating characteristics and similar long term operating performance. In making this determination, management believes that the operating segments are similar in the nature of the products sold, the product acquisition process, the types of customers to whom products are sold, the methods used to distribute the products, the nature of the regulatory environment, and their economic characteristics. China has been identified as a separate reporting segment as it does not meet the criteria for aggregation. The Company reviews its net sales and contribution margin by operating segment, and reviews its assets and capital expenditures on a consolidated basis and not by operating segment. Therefore, net sales and contribution margin are presented by reportable segment and assets and capital expenditures by segment are not presented.

The operating information for the two reportable segments is as follows:

	Three Months Ended						Nine Months Ended
	September 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017
	(in millions)
Net sales:
Primary Reporting Segment	$	976.3		$	875.6		$	2,939.7		$	2,666.4
China		266.5			209.8			765.5			668.0
Total net sales	$	1,242.8		$	1,085.4		$	3,705.2		$	3,334.4
Contribution margin(1):
Primary Reporting Segment	$	431.2		$	375.9		$	1,286.2		$	1,155.7
China(2)		249.5			184.0			694.5			595.8
Total contribution margin	$	680.7		$	559.9		$	1,980.7		$	1,751.5
Selling, general, and administrative expenses(2)		499.4			445.2			1,469.7			1,327.0
Other operating income		(6.0	)		(4.6	)		(23.9	)		(43.5	)
Interest expense, net		39.9			38.4			124.1			106.5
Other expense, net		30.9			—			60.0			—
Income before income taxes		116.5			80.9			350.8			361.5
Income taxes		45.3			26.4			103.1			84.2
Net income	$	71.2		$	54.5		$	247.7		$	277.3

(1)	Contribution margin consists of net sales less cost of sales and Royalty overrides. For the China segment, contribution margin does not include service fees to China independent service providers.

(2)

Service fees to China independent service providers totaling $135.7 million and $99.5 million for the three months ended September 30, 2018 and 2017, respectively, and $398.3 million and $316.9 million for the nine months ended September 30, 2018 and 2017, respectively, are included in selling, general, and administrative expenses.

The following table sets forth net sales by geographic area:

	Three Months Ended				Nine Months Ended
	September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017
	(in millions)
Net sales:
United States	$	234.5	$	193.5	$	716.4	$	631.3
China		266.5		209.8		765.5		668.0
Mexico		121.2		114.3		353.4		334.7
Others		620.6		567.8		1,869.9		1,700.4
Total net sales	$	1,242.8	$	1,085.4	$	3,705.2	$	3,334.4