HLF Herbalife Ltd

Herbalife Ltd. (NYSE:HLF) today reported second quarter net sales increased 20.5 percent to $688.8 million. The record revenue reflects volume point growth of 19.9 percent and an increase in Average Active Sales Leaders of 11.9 percent, both compared to the second quarter of 2009.

For the quarter ended June 30, 2010, the company reported net income of $81.9 million, or $1.32 per diluted share compared to $48.3 million or $0.77 per diluted share in the second quarter of 2009, primarily reflecting the contribution margin from higher volume combined with a lower effective tax rate, partially offset by the impact of foreign currency fluctuations.

For the quarter ended June 30, 2010, the company generated cash flow from operations of $83.0 million, paid dividends of $12.0 million, invested $12.3 million in capital expenditures and repurchased $51.2 million in common stock. The company’s net debt balance at the end of the second quarter was $73.1 million, reflecting an improvement of $26.4 million from December 31, 2009.

“This quarter our distributors have truly outdone themselves and delivered the three highest months of volume in our 30-year history, which far exceeded even our most optimistic expectations,” said Chairman and Chief Executive Officer Michael O. Johnson. “Not only was our growth broad-based, but some of the countries we have been operating in the longest like the United States, Mexico and Korea are each experiencing double-digit growth even though they have been open 30, 20 and 15 years respectively. These results demonstrate the opportunity in front of us as our distributors continue to build sustainable businesses with long-term customers.”

During the second quarter the company hosted approximately 43,000 people at Extravaganzas in Nanjing, China, Rio de Janiero, Brazil and Singapore.

Second Quarter 2010 Regional Key Metrics1, 2

Regional Breakdown            

 

2Q'10       2Q'10 Volume 2Q'10 Average Active

Region

Points % Chg Average Active Sales Leaders   (Mil)   (Y/Y)   Sales Leaders   % Chg (Y/Y) North America 242.8 21.1 % 49,120 15.0 % Asia Pacific 191.6 52.8 % 34,871 36.1 % EMEA 127.5 8.6 % 32,904 3.3 % Mexico 137.8 10.8 % 36,848 9.5 % South & Central America 96.2 (1.9 %) 27,173 0.7 % China 41.2   25.7 %   6,676   4.9 % Worldwide Total 837.1   19.9 %   180,132   11.9 %     Emerging and Established Market Breakdown        

 

2Q'10 2Q'10 Volume 2Q'10 Average Active

Region

Points % Chg Average Active Sales Leaders   (Mil)   (Y/Y)   Sales Leaders   % Chg (Y/Y)   Emerging Markets 417.9 16.2 % 100,349 11.3 % Established Markets 419.2   23.8 %   87,517   13.5 %  

Updated 2010 Guidance

Based on current business trends, the company’s third quarter 2010 and fiscal 2010 guidance is provided below.

Third Quarter - The company’s third quarter 2010 diluted earnings per share guidance range is $0.99 to $1.03 on volume point and net sales growth of 13.0 percent to 15.0 percent compared to the same period in 2009 and an effective tax rate range of 30.5 percent to 31.5 percent. The company’s third quarter 2010 capital expenditures are expected to be in the range of $20.0 million to $25.0 million.

Fiscal 2010 - The company’s new full-year diluted earnings per share guidance is $4.30 to $4.401 on volume point growth of 12.0 percent to 14.0 percent and a net sales increase of 15.0 percent to 17.0 percent compared to 2009, respectively, along with an effective tax rate range of 29.0 percent to 30.0 percent3. Full-year 2010 capital expenditures are expected to be in the range of $70.0 million to $80.0 million.

1 “Emerging” markets are being defined as those countries which the World Bank categorizes as having “low” or “medium” GDP per capita, while “Established” are those that the World Bank considers to have “high” GDP per capita.

2 Supplemental tables that include additional business metrics can be found at http://www.ir.herbalife.com

3 FY’10 guidance excludes the impact from the first quarter implementation of highly inflationary accounting in Venezuela.

Dividend Update

The company’s board of directors has authorized a 25 percent increase in the quarterly cash dividend from $0.20 to $0.25 per share to shareholders of record effective August 12, 2010, payable on August 26, 2010.

“The company’s first priority with cash flow generated from operations has always been to make investments in initiatives that enhance and support our distributors in growing their business,” said Chief Financial Officer John DeSimone. “With the company’s strong financial position and positive outlook, we believe we will be able to continue to make significant additional investments in our business while at the same time accelerating returns to shareholders through this increase in our cash dividend and the continued execution of our $1.0 billion share buyback authorization.“

Second Quarter Earnings Conference Call

Herbalife's senior management team will host an investor conference call Tuesday, August 3, 2010 at 8 a.m. PDT (11 a.m. EDT) to discuss its recent financial results and provide an update on current business trends.

The dial-in number for this conference call for domestic callers is 866-903-5314 and 706-634-5671 for international callers (conference ID 82531104). Live audio of the conference call will be simultaneously webcast in the investor relations section of the company's website at http://ir.herbalife.com.

An audio replay will be available following the completion of the conference call in MP3 format or by dialing 800-642-1687 for domestic callers or 706-645-9291 for international callers (playback ID 66642385). The webcast of the teleconference will be archived and available on Herbalife's website.

About Herbalife Ltd.

Herbalife Ltd. (NYSE:HLF) is a global network marketing company that sells weight-management, nutrition, and personal care products intended to support a healthy lifestyle. Herbalife products are sold in 73 countries through a network of approximately 2.1 million independent distributors. The company supports the Herbalife Family Foundation and its Casa Herbalife program to help bring good nutrition to children. Herbalife’s Web site contains a significant amount of information about Herbalife, including financial and other information for investors at http://ir.herbalife.com. The company encourages investors to visit its Web site from time to time, as information is updated and new information is posted.

Disclosure Regarding Forward-Looking Statements

FORWARD-LOOKING STATEMENTS

This document contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect” or “anticipate” and any other similar words.

Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, such as those disclosed or incorporated by reference in our filings with the Securities and Exchange Commission. Important factors that could cause our actual results, performance and achievements, or industry results to differ materially from estimates or projections contained in our forward-looking statements include, among others, the following:

• any collateral impact resulting from the ongoing worldwide financial “crisis,” including the availability of liquidity to us, our customers and our suppliers or the willingness of our customers to purchase products in a recessionary economic environment• our relationship with, and our ability to influence the actions of, our distributors;• improper action by our employees or distributors in violation of applicable law;• adverse publicity associated with our products or network marketing organization;• changing consumer preferences and demands;• our reliance upon, or the loss or departure of any member of, our senior management team which could negatively impact our distributor relations and operating results;• the competitive nature of our business;• regulatory matters governing our products, including potential governmental or regulatory actions concerning the safety or efficacy of our products, and network marketing program including the direct selling market in which we operate;• third party legal challenges to our network marketing program;• risks associated with operating internationally and the effect of economic factors, including foreign exchange, inflation, pricing and currency devaluation risks, especially in countries such as Venezuela;• uncertainties relating to the application of transfer pricing, duties, value added taxes, and other tax regulations, and changes thereto;• uncertainties relating to interpretation and enforcement of recently enacted legislation in China governing direct selling;• our inability to obtain the necessary licenses to expand our direct selling business in China;• adverse changes in the Chinese economy, Chinese legal system or Chinese governmental policies• our dependence on increased penetration of existing markets;• contractual limitations on our ability to expand our business;• our reliance on our information technology infrastructure and outside manufacturers;• the sufficiency of trademarks and other intellectual property rights;• product concentration;• changes in tax laws, treaties or regulations, or their interpretation;• taxation relating to our distributors;• product liability claims; and• whether we will purchase any of our shares in the open markets or otherwise.

We do not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as required by law.

RESULTS OF OPERATIONS:

Herbalife Ltd. Consolidated Statements of Income (In thousands, except per share data) (Unaudited)                   Quarter Ended Six Months Ended   6/30/2010   6/30/2009   6/30/2010   6/30/2009   North America $ 166,437 $ 138,389 $ 317,696 $ 261,464 Mexico 80,918 66,352 152,767 125,591 South and Central America 82,797 85,404 174,126 160,668 EMEA 135,553 126,575 266,377 249,888 Asia Pacific 171,850 114,539 312,863 228,483 China   51,251   40,546   83,610   67,394 Worldwide net sales 688,806 571,805 1,307,439 1,093,488 Cost of Sales   136,561   122,442   277,033

(1)

 

  224,842 Gross Profit 552,245 449,363 1,030,406 868,646 Royalty Overrides 224,780 186,750 432,099 362,282 SGA   211,110   190,794   417,993

(1)

 

  372,252 Operating Income 116,355 71,819 180,314 134,112 Interest Expense - net   2,146   1,338   4,099   3,050 Income before income taxes 114,209 70,481 176,215 131,062 Income Taxes   32,276   22,228   42,411

(1)

 

  41,267 Net Income $ 81,933 $ 48,253 $ 133,804 $ 89,795   Basic Shares 59,527 61,642 59,843 61,583 Diluted Shares 62,103 62,929 62,389 62,413   Basic EPS $ 1.38 $ 0.78 $ 2.24 $ 1.46 Diluted EPS $ 1.32 $ 0.77 $ 2.14 $ 1.44   Dividends declared per share $ 0.20 $ 0.20 $ 0.40 $ 0.40                   1 Includes impact of items related to adoption of highly-inflationary accounting in Venezuela that are further discussed in Schedule B – "Reconciliation of Non-GAAP Financial Measures”   Herbalife Ltd. Consolidated Balance Sheets (In thousands) (Unaudited)   Jun 30,   Dec 31,   2010     2009     ASSETS Current Assets: Cash & cash equivalents $ 170,218 $ 150,801 Receivables, net 85,411 76,958 Inventories 152,035 145,962 Prepaid expenses and other current assets 114,097 101,181 Deferred income taxes   53,546     38,600   Total Current Assets 575,307 513,502   Property and equipment, net 167,320 178,009 Deferred compensation plan assets 16,724 17,410 Deferred financing cost, net 1,250 1,498 Other assets 22,587 21,306 Marketing related intangibles and other intangible assets, net 311,091 311,782 Goodwill   102,899     102,543   Total Assets $ 1,197,178   $ 1,146,050     LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 48,318 $ 37,330 Royalty Overrides 141,017 144,689 Accrued compensation 52,100 65,043 Accrued expenses 117,090 107,943 Current portion of long term debt 3,071 12,402 Advance sales deposits 51,770 22,261 Income taxes payable   29,126     40,298   Total Current Liabilities 442,492 429,966   Non-current liabilities Long-term debt, net of current portion 240,280 237,931 Deferred compensation 17,358 16,629 Deferred income taxes 79,273 77,613 Other non-current liabilities   23,659     24,600   Total Liabilities 803,062 786,739   Contingencies   Shareholders' equity: Common shares 118 120 Additional paid in capital 232,735 222,882 Accumulated other comprehensive loss (39,126 ) (23,396 ) Retained earnings   200,389     159,705     Total Shareholders' Equity   394,116     359,311       Total Liabilities and Shareholders' Equity $ 1,197,178   $ 1,146,050     Herbalife Ltd. Consolidated Statements of Cash Flows (In thousands) (Unaudited)           Six Months Ended   6/30/2010     6/30/2009       CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 133,804 $ 89,795 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 34,403 29,686 (Excess) Deficiency in tax benefits from share-based payment arrangements (4,705 ) 982 Share-based compensation expenses 10,820 10,024 Amortization of discount and deferred financing costs 248 244 Deferred income taxes (15,053 ) (1,657 ) Unrealized foreign exchange transaction (gain) loss (12,345 ) 2,545 Foreign exchange loss from adoption of highly inflationary accounting in Venezuela 15,131 — Other 1,619 154 Changes in operating assets and liabilities: Receivables (11,616 ) (4,938 ) Inventories (12,172 ) 12,022 Prepaid expenses and other current assets (15,099 ) 971 Other assets (2,229 ) (679 ) Accounts payable 13,781 1,202 Royalty overrides 1,072 (3,622 ) Accrued expenses and accrued compensation 5,670 (19,587 ) Advance sales deposits 30,937 17,164 Income taxes payable (4,604 ) (12,599 ) Deferred compensation plan liability   729     557   NET CASH PROVIDED BY OPERATING ACTIVITIES   170,391     122,264   CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property (23,917 ) (26,801 ) Proceeds from sale of property 6 60 Deferred compensation plan assets   686     (252 ) NET CASH USED IN INVESTING ACTIVITIES   (23,225 )   (26,993 ) CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid (24,061 ) (24,617 ) Borrowings from long-term debt 229,000 59,000 Principal payments on long-term debt (235,715 ) (97,009 ) Share repurchases (79,220 ) (972 ) Excess (Deficiency in) tax benefits from share-based payment arrangements 4,705 (982 ) Proceeds from exercise of stock options and sale of stock under employee stock purchase plan   4,400     791   NET CASH USED IN FINANCING ACTIVITIES   (100,891 )   (63,789 ) EFFECT OF EXCHANGE RATE CHANGES ON CASH   (26,858 )   (893 ) NET CHANGE IN CASH AND CASH EQUIVALENTS 19,417 30,589 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   150,801     150,847   CASH AND CASH EQUIVALENTS, END OF PERIOD $ 170,218   $ 181,436   CASH PAID DURING THE PERIOD Interest paid $ 4,988   $ 6,560   Income taxes paid, net $ 58,718   $ 54,473   NON CASH ACTIVITIES Assets acquired under capital leases and other long-term debt $ —   $ 327     Herbalife Ltd Volume Points by Region (Unaudited, In thousands)       Three Months Ended June 30, 2010 2009 % Change     North America 242,819 200,457 21.1 % Asia Pacific (excluding China) 191,628 125,410 52.8 % EMEA 127,470 117,346 8.6 % Mexico 137,752 124,270 10.8 % South & Central America 96,155 97,968 (1.9 %) China 41,224 32,802 25.7 % Worldwide 837,048 698,253 19.9 %  

SUPPLEMENTAL INFORMATION

 

SCHEDULE A: FINANCIAL GUIDANCE

 

2010 Guidance

 

For the Three Months Ending September 30, 2010 and Twelve Months Ending December 31, 2010

    Three Months Ending Twelve Months Ending September 30, 2010 December 31, 2010 Low High Low High   Volume point growth vs 2009 13.0 % 15.0 % 12.0 % 14.0 % Net sales growth vs 2009 13.0 % 15.0 % 15.0 % 17.0 % EPS 1 $ 0.99 $ 1.03 $ 4.30 $ 4.40 Cap Ex ($ millions) $ 20.0 $ 25.0 $ 70.0 $ 80.0 Effective Tax Rate 1 30.5 % 31.5 % 29.0 % 30.0 %  

1 FY’10 guidance excludes the impact from the first quarter implementation of highly inflationary accounting in Venezuela.

 

SCHEDULE B: RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

(Unaudited), (Dollars in Thousands, Except Per Share Data)

In addition to its reported results, the Company has included in the tables below adjusted results that the Securities and Exchange Commission defines as “non-GAAP financial measures.” Management believes that such non-GAAP financial measures, when read in conjunction with the Company’s reported results, can provide useful supplemental information for investors analyzing period to period comparisons of the Company’s results.

The following is a reconciliation of net income and diluted earnings per share, presented and reported in accordance with U.S. generally accepted accounting principles, to net income adjusted for certain items:

Herbalife Ltd. Supplemental Schedule Non-GAAP Financial Measures (In thousands, except per share data) (Unaudited)           Quarter Ended 6/30/2010 Reported   Adjusting   Adjusted (GAAP) Items (Non-GAAP) Net Sales $ 688,806 $ 688,806 Cost of Sales   136,561     136,561 Gross Profit 552,245 552,245 Royalty Overrides 224,780 224,780 SGA   211,110     211,110 Operating Income 116,355 116,355 Interest Expense - net   2,146     2,146 Income before income taxes 114,209 114,209 Income Taxes   32,276     32,276 Net Income $ 81,933   $ 81,933   Diluted EPS $ 1.32   $ 1.32   Herbalife Ltd. Supplemental Schedule Non-GAAP Financial Measures (In thousands, except per share data) (Unaudited)          

Quarter Ended 6/30/2009

Reported   Adjusting   Adjusted (GAAP) Items (Non-GAAP) Net Sales $ 571,805 $ 571,805 Cost of Sales   122,442     122,442 Gross Profit 449,363 449,363 Royalty Overrides 186,750 186,750 SGA   190,794 $ (814 )

1

 

  189,980 Operating Income 71,819 814 72,633 Interest Expense - net   1,338     1,338 Income before income taxes 70,481 814 71,295 Income Taxes   22,228   (277 )

1

 

  21,951 Net Income $ 48,253 $ 1,091   $ 49,344   Diluted EPS $ 0.77 $ 0.02   $ 0.78

2

 

                 

1 Related to international income tax audit settlement

2 Amounts may not total due to rounding   Herbalife Ltd. Supplemental Schedule Non-GAAP Financial Measures (In thousands, except per share data) (Unaudited)           Six Months Ended 6/30/2010 Reported   Venezuela   Adjusted (GAAP) Items (Non-GAAP) Net Sales $ 1,307,439 $ 1,307,439 Cost of Sales   277,033 $ (12,715 )

1

 

  264,318 Gross Profit 1,030,406 12,715 1,043,121 Royalty Overrides 432,099 432,099 SGA   417,993   (11,390 )

2

 

  406,603 Operating Income 180,314 24,105 204,419 Interest Expense - net   4,099     4,099 Income before income taxes 176,215 24,105 200,320 Income Taxes   42,411   14,452  

3

 

  56,863 Net Income $ 133,804 $ 9,653   $ 143,457   Diluted EPS $ 2.14 $ 0.15   $ 2.30

4

 

 

1 Incremental U.S. dollar costs of 2009 imports which were recorded at the unfavorable parallel  market exchange rate and were not devalued based on 2010 exchange rates but rather recorded at their historical dollar costs as products were sold

 

2 Includes $15,131 foreign exchange loss related to remeasurement of Venezuela's monetary assets and liabilities resulting from adoption of highly inflationary accounting and $3,741 foreign exchange gain resulting from receipt of U.S. dollar approved by CADIVI at the official exchange rate relating to 2009 product importations which were previously registered with CADIVI

 

3  Favorable income taxes related to Venezuela becoming highly inflationary economy

4  Amounts may not total due to rounding

  Herbalife Ltd. Supplemental Schedule Non-GAAP Financial Measures (In thousands, except per share data) (Unaudited)           Six Months Ended 6/30/2009 Reported   Adjusting   Adjusted (GAAP) Items (Non-GAAP) Net Sales $ 1,093,488 $ 1,093,488 Cost of Sales   224,842     224,842 Gross Profit 868,646 868,646 Royalty Overrides 362,282 362,282 SGA   372,252 $ (1,404 )

1

 

  370,848 Operating Income 134,112 1,404 135,516 Interest Expense - net   3,050     3,050 Income before income taxes 131,062 1,404 132,466 Income Taxes   41,267   (92 )

1

 

  41,175 Net Income $ 89,795 $ 1,496   $ 91,291   Diluted EPS $ 1.44 $ 0.02   $ 1.46                 1 Related to restructuring charge of $590 with tax benefit of $185 and an international income tax audit settlement of $814 with tax charge of $277.

The following is a reconciliation of total long-term debt to net debt:

  6/30/2010     12/31/2009   Total long-term debt (current and long-term portion) $ 243,351 $ 250,333 Less: Cash and cash equivalents   170,218   150,801 Net debt $ 73,133   $ 99,532