HLF Herbalife Ltd

Herbalife Ltd. (NYSE:HLF) today reported that third quarter net sales increased 14.7 percent to $688.4 million. The net sales reflect volume point growth of 13.5 percent and an increase in Average Active Sales Leaders of 11.8 percent, both compared to the third quarter of 2009. Excluding the impact from adjusting items in the third quarter1, net income was $72.5 million, or $1.17 per diluted share, representing increases of 34.1 percent and 37.6 percent respectively compared to $54.1 million or $0.85 per diluted share in the third quarter of 2009. These 2010 third quarter adjusted results exclude an income tax benefit of $3.2 million, or $0.05 benefit to diluted EPS resulting from an international income tax audit settlement.

For the quarter ended September 30, 2010, the company reported net income of $75.7 million or $1.22 per diluted share compared to $57.9 million and $0.91 per diluted share in the third quarter of 2009, primarily reflecting the benefit of higher net sales, improved margins and a lower effective tax rate, partially offset by the impact of foreign currency fluctuations.

For the quarter ended September 30, 2010, the company generated cash flows from operations of $97.3 million, paid dividends of $14.9 million, invested $18.3 million in capital expenditures and repurchased $24.9 million in common shares as part of the company’s $1 billion share repurchase authorization program. The company’s net debt balance at the end of the third quarter was $15.6 million, reflecting an improvement of $83.9 million from December 31, 2009.

“Our distributors are driving momentum around the world by attracting and retaining long-term customers for our nutrition products, which builds successful and sustainable businesses,” said Chairman and Chief Executive Officer Michael O. Johnson. “We are pleased by the broad and ongoing strength of our results this quarter, with all six of our regions experiencing volume growth and year-over-year improvement in active sales leaders.”

During the third quarter the company hosted approximately 35,600 distributors at Extravaganzas in Ukraine, Italy, Sweden and Mexico.

Third Quarter 2010 Regional Key Metrics2, 3

 

Regional and Emerging/Established Market Breakdowns

      Regional 3Q'10 Volume Points

(Mil)

  % Chg

(Y/Y)

  3Q'10 Avg Active Sales Leaders   3Q'10

Average Active Sales Leaders

% Chg (Y/Y)

North America 225.4 8.6 % 51,095 13.7 % Asia Pacific 191.8 29.4 % 37,291 26.7 % EMEA 114.3 4.5 % 33,625 3.0 % Mexico 146.2 15.7 % 39,521 11.4 % South & Central America 107.3 5.0 % 29,548 3.9 % China 39.4   22.0 %   7,548   19.7 % Worldwide Total 824.4 13.5 % 191,072 11.8 %           3Q'10 Volume Points

(Mil)

  % Chg

(Y/Y)

  3Q'10 Avg Active Sales Leaders   3Q'10

Average Active Sales Leaders

% Chg (Y/Y)

Emerging Markets

431.6

14.8 % 107,271 11.6 %   Established Markets 392.8 12.2 % 91,238 12.5 %

Updated 2010 Guidance

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

Fourth Quarter 2010 - The company’s fourth quarter 2010 diluted earnings per share guidance range is $1.07 to $1.11 on volume point growth of 11.0 percent to 13.0 percent 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 30.0 percent to 31.0 percent. The company’s fourth quarter 2010 capital expenditures are expected to be in the range of $23.0 million to $33.0 million.

Fiscal 2010 - Excluding the impact from adjusting item4 the company’s new full-year diluted earnings per share guidance is $4.54 to $4.58 on volume point growth of 12.5 percent to 13.5 percent and a net sales increase of 16.5 percent to 17.0 percent compared to 2009, respectively, along with an effective tax rate range of 28.0 percent to 29.0 percent. Full-year 2010 capital expenditures are expected to be in the range of $65.0 million to $75.0 million.

2011 Guidance

Based on current business trends, FX rates as of the end of September, 2010, and the company’s outlook for future performance, the company is initiating guidance for 2011 with a diluted earnings per share guidance range of $5.00 to $5.25 on a volume point growth of 8.0 to 10.0 percent and a net sales growth of 11.0 percent to 13.0 percent compared to the same period in 2010 and an effective tax rate range of 29.0 percent to 30.0 percent. The company’s guidance for capital spending in 2011 is in the range of $80 million to $90 million.

Third Quarter Earnings Conference Call

Herbalife's senior management team will host an investor conference call Tuesday, November 2, 2010 at 8 a.m. ET (5 a.m. PT) to discuss its recent financial results and provide an update on current business trends preceding its annual analyst day to discuss its recent financial results and provide an update on current business trends.

The dial-in number for this presentation for domestic callers is (866) 903-5314 and (706) 634-5671 for international callers (conference ID 82534647). Live audio of the presentation 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 presentation in MP3 format or by dialing (800) 642-1687 (domestic callers) or (706) 645-9291 (international callers) and entering Encore ID 66642385. The webcast of the presentation 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 2.0 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.

1 See Schedule B – “Reconciliation of Non-GAAP Financial Measures” for more detail.

2 “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.

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

4 FY’10 guidance excludes the impact from the first quarter implementation of highly inflationary accounting in Venezuela and a third quarter tax benefit from international income tax audit settlement.

RESULTS OF OPERATIONS:

Herbalife Ltd. Consolidated Statements of Income (In thousands, except per share data) (Unaudited)                 Quarter Ended Nine Months Ended   9/30/2010     9/30/2009   9/30/2010     9/30/2009   North America $ 155,532 $ 140,829 $ 473,228 $ 402,294 Mexico 83,498 68,290 236,265 193,881 South and Central America 95,030 93,035 269,156 253,702 EMEA 121,221 123,334 387,598 373,222 Asia Pacific 181,555 129,240 494,418 357,723 China   51,595   45,490   135,205   112,884 Worldwide net sales 688,431 600,218 1,995,870 1,693,706 Cost of Sales   133,265   131,777   410,298 (1 )   356,619 Gross Profit 555,166 468,441 1,585,572 1,337,087 Royalty Overrides 224,061 194,639 656,160 556,921 SGA   230,150   195,968   648,143 (1 )   568,220 Operating Income 100,955 77,834 281,269 211,946 Interest Expense - net   2,192   1,037   6,291   4,087 Income before income taxes 98,763 76,797 274,978 207,859 Income Taxes   23,024   18,902   65,435 (1 )   60,169 Net Income $ 75,739 $ 57,895 $ 209,543 $ 147,690   Basic Shares 59,221 61,234 59,643 61,467 Diluted Shares 61,946 63,397 62,250 63,049   Basic EPS $ 1.28 $ 0.95 $ 3.51 $ 2.40 Diluted EPS $ 1.22 $ 0.91 $ 3.37 $ 2.34   Dividends declared per share $ 0.25 $ 0.20 $ 0.65 $ 0.60  

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)   Sep 30,   Dec 31,   2010     2009     ASSETS Current Assets: Cash & cash equivalents $ 193,490 $ 150,801 Receivables, net 91,394 76,958 Inventories 183,144 145,962 Prepaid expenses and other current assets 97,716 101,181 Deferred income taxes   56,237     38,600   Total Current Assets 621,981 513,502   Property and equipment, net 169,308 178,009 Deferred compensation plan assets 17,781 17,410 Deferred financing cost, net 1,124 1,498 Other assets 24,271 21,306 Marketing related intangibles and other intangible assets, net 310,992 311,782 Goodwill   102,899     102,543   Total Assets $ 1,248,356   $ 1,146,050       LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 50,068 $ 37,330 Royalty Overrides 149,215 144,689 Accrued compensation 67,318 65,043 Accrued expenses 122,453 107,943 Current portion of long term debt 3,232 12,402 Advance sales deposits 54,637 22,261 Income taxes payable   16,602     40,298   Total Current Liabilities 463,525 429,966   Non-current liabilities Long-term debt, net of current portion 205,894 237,931 Deferred compensation 18,827 16,629 Deferred income taxes 76,045 77,613 Other non-current liabilities   23,476     24,600   Total Liabilities 787,767 786,739   Contingencies   Shareholders' equity: Common shares 118 120 Additional paid in capital 247,189 222,882 Accumulated other comprehensive loss (24,636 ) (23,396 ) Retained earnings   237,918     159,705   Total Shareholders' Equity   460,589     359,311       Total Liabilities and Shareholders' Equity $ 1,248,356   $ 1,146,050     Herbalife Ltd. Consolidated Statements of Cash Flows (In thousands) (Unaudited)         Nine Months Ended   9/30/2010     9/30/2009       CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 209,543 $ 147,690 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 51,755 45,646 (Excess) Deficiency in tax benefits from share-based payment arrangements (9,959 ) 759 Share-based compensation expenses 16,870 15,100 Amortization of discount and deferred financing costs 374 367 Deferred income taxes (16,989 ) (3,098 ) Unrealized foreign exchange transaction (gain) loss (7,536 ) 6,763 Foreign exchange loss from adoption of highly inflationary accounting in Venezuela 15,131 — Other 2,911 233 Changes in operating assets and liabilities: Receivables (13,965 ) (9,265 ) Inventories (32,921 ) 10,451 Prepaid expenses and other current assets 5,744 (5,724 ) Other assets (2,328 ) 354 Accounts payable 12,852 (4,851 ) Royalty overrides 3,601 9,525 Accrued expenses and accrued compensation 11,622 5,870 Advance sales deposits 32,399 21,011 Income taxes payable (13,568 ) (15,529 ) Deferred compensation plan liability   2,198     1,992   NET CASH PROVIDED BY OPERATING ACTIVITIES   267,734     227,294   CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property (42,199 ) (41,776 ) Proceeds from sale of property 64 93 Acquisition of business — (10,000 ) Deferred compensation plan assets   (371 )   (1,321 ) NET CASH USED IN INVESTING ACTIVITIES   (42,506 )   (53,004 ) CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid (38,934 ) (36,727 ) Borrowings from long-term debt 338,000 138,974 Principal payments on long-term debt (379,465 ) (180,540 ) Share repurchases (106,163 ) (33,630 ) Excess (Deficiency in) tax benefits from share-based payment arrangements 9,959 (759 ) Proceeds from exercise of stock options and sale of stock under employee stock purchase plan   11,521     2,209   NET CASH USED IN FINANCING ACTIVITIES   (165,082 )   (110,473 ) EFFECT OF EXCHANGE RATE CHANGES ON CASH   (17,457 )   737   NET CHANGE IN CASH AND CASH EQUIVALENTS $ 42,689 $ 64,554 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   150,801     150,847   CASH AND CASH EQUIVALENTS, END OF PERIOD $ 193,490   $ 215,401   CASH PAID DURING THE PERIOD Interest paid $ 7,195   $ 8,443   Income taxes paid, net $ 84,120   $ 77,397   NON CASH ACTIVITIES Assets acquired under capital leases and other long-term debt $ 524   $ 339    

Herbalife Ltd

Volume Points by Region

(Unaudited, In thousands)

  Three Months Ended September 30, 2010   2009   % Change     North America 225,379 207,612 8.6 % Asia Pacific (excluding China) 191,824 148,184 29.4 % EMEA 114,274 109,429 4.4 % Mexico 146,236 126,375 15.7 % South & Central America 107,286 102,166 5.0 % China 39,364 32,270 22.0 % Worldwide 824,363 726,036 13.5 %  

SUPPLEMENTAL INFORMATION

SCHEDULE A: FINANCIAL GUIDANCE

2010 Guidance For the Three Months and Twelve Months Ending December 31, 2010   Three Months Ending       Twelve Months Ending December 31, 2010 December 31, 2010 Low   High Low   High     Volume point growth vs 2009 11.0 %   13.0 %  

12.5

%  

13.5

% Net sales growth vs 2009 13.0 % 15.0 %

16.5

%

17.0

% EPS 1 $

1.07

$

1.11

$

4.54

$

4.58

Cap Ex ($ millions) $ 23.0 $ 33.0 $ 65.0 $ 75.0 Effective Tax Rate 1 30.0 % 31.0 % 28.0 % 29.0 %   2011 Guidance For the Twelve Months Ending December 31, 2011   Twelve Months Ending December 31, 2011

Low

High

  Volume point growth vs 2010 8.0 % 10.0 % Net sales growth vs 2010

11.0

%

13.0

% EPS 1 $

5.00

$

5.25

Cap Ex ($ millions) $ 80.0 $ 90.0 Effective Tax Rate 1 29.0 % 30.0 %  

1 FY’10 guidance excludes the impact from the first quarter implementation of highly inflationary accounting in Venezuela and a tax benefit from international income tax audit settlement.

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 9/30/2010 Reported   Adjusting Adjusted (GAAP) Items (Non-GAAP) Net Sales $ 688,431 $ 688,431 Cost of Sales   133,265     133,265 Gross Profit 555,166 555,166 Royalty Overrides 224,061 224,061 SGA   230,150     230,150 Operating Income 100,955 100,955 Interest Expense - net   2,192     2,192 Income before income taxes 98,763 98,763 Income Taxes   23,024   3,228   (1 )   26,252 Net Income $ 75,739 $ (3,228 ) $ 72,511   Diluted EPS $ 1.22 $ (0.05 ) $ 1.17             1 Tax benefit from an international income tax audit settlement   Herbalife Ltd. Supplemental Schedule Non-GAAP Financial Measures (In thousands, except per share data) (Unaudited)             Nine Months Ended 9/30/2010 Reported   Adjusting   Adjusted (GAAP) Items (Non-GAAP) Net Sales $ 1,995,870 $ 1,995,870 Cost of Sales   410,298 $ (12,715 ) (1 )   397,583 Gross Profit 1,585,572 12,715 1,598,287 Royalty Overrides 656,160 656,160 SGA   648,143   (11,390 ) (2 )   636,753 Operating Income 281,269 24,105 305,374 Interest Expense - net   6,291     6,291 Income before income taxes 274,978 24,105 299,083 Income Taxes   65,435   17,680   (3 )   83,115 Net Income $ 209,543 $ 6,425   $ 215,968   Diluted EPS $ 3.37 $ 0.10   $ 3.47                 1 Incremental U.S. dollar costs of 2009 imports in Venezuela 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 Includes $14,452 favorable income taxes related to Venezuela becoming highly inflationary economy and $3,228 tax benefit from an international income tax audit settlement   Herbalife Ltd. Supplemental Schedule Non-GAAP Financial Measures (In thousands, except per share data) (Unaudited)             Quarter Ended 9/30/2009 Reported   Adjusting   Adjusted (GAAP) Items (Non-GAAP) Net Sales $ 600,218 $ 600,218 Cost of Sales   131,777     131,777 Gross Profit 468,441 468,441 Royalty Overrides 194,639 194,639 SGA   195,968 $ (707 ) (1 )   195,261 Operating Income 77,834 707 78,541 Interest Expense - net   1,037     1,037 Income before income taxes 76,797 707 77,504 Income Taxes   18,902   4,529   (2 )   23,431 Net Income $ 57,895 $ (3,822 ) $ 54,073   Diluted EPS $ 0.91 $ (0.06 ) $ 0.85               1 Related to restructuring charge 2 Includes $4,852 tax benefit from expiration of certain statutes of limitation, tax charge of $537 from an international income tax audit settlement and $214 tax impact of restructuring charges   Herbalife Ltd. Supplemental Schedule Non-GAAP Financial Measures (In thousands, except per share data) (Unaudited)           Nine Months Ended 9/30/2009 Reported   Adjusting Adjusted (GAAP) Items (Non-GAAP) Net Sales $ 1,693,706 $ 1,693,706 Cost of Sales   356,619     356,619 Gross Profit 1,337,087 1,337,087 Royalty Overrides 556,921 556,921 SGA   568,220 $ (2,111 ) (1 )   566,109   Operating Income 211,946 2,111 214,057 Interest Expense - net   4,087     4,087 Income before income taxes 207,859 2,111 209,970 Income Taxes   60,169   4,437   (2 )   64,606 Net Income $ 147,690 $ (2,326 ) $ 145,364   Diluted EPS $ 2.34 $ (0.04 ) $ 2.31 (3 )                   1 Includes $1,297 restructuring charges and $814 expense from an international income tax audit settlement 2 Includes $4,852 tax benefit from expiration of certain statutes of limitation, tax charge of $814 from an international income tax audit settlement and $399 tax impact of restructuring charges 3 Amounts may not total due to rounding.     9/30/2010     12/31/2009   Total debt (current and long-term portion) $ 209,126 $ 250,333 Less: Cash and cash equivalents   193,490   150,801 Net debt $ 15,636   $ 99,532