NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Herbalife Ltd., a Cayman Islands exempt limited liability company, or Herbalife, was incorporated on April 4,
2002. Herbalife Ltd. (and together with its subsidiaries, the Company) is a leading global nutrition company that sells weight management products, nutritional supplements, energy, sports & fitness products and personal care
products utilizing network marketing distribution. As of December 31, 2013, the Company sold its products to and through a network of 3.7 million Members, which included 0.2 million in China. In China, the Company currently sells its
products through retail stores, sales representatives, sales officers and independent service providers. The Company reports revenue in six geographic regions: North America; Mexico; South and Central America; EMEA, which consists of Europe, the
Middle East and Africa; Asia Pacific (excluding China); and China.
2. Basis of Presentation
The Companys consolidated financial statements refer to Herbalife and its subsidiaries.
New Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2013-04,
Liabilities (Topic 405): Obligations Resulting from Joint and Several
Liability Arrangements for which the Total Amount of the Obligation Is Fixed at the Reporting Date (a consensus of the FASB Emerging Issues Task Force).
This ASU addresses the recognition, measurement, and disclosure of certain obligations
resulting from joint and several arrangements including debt arrangements, other contractual obligations, and settled litigation and judicial rulings. The ASU is effective for public entities for fiscal years, and interim periods within those years,
beginning after December 15, 2013. The adoption of this guidance will not have a material impact on the Companys consolidated financial statements.
In March 2013, the FASB issued ASU No. 2013-05,
Foreign Currency Matters (Topic 830
):
Parents Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain
Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (a consensus of the FASB Emerging Issues Task Force).
This ASU addresses the accounting for the cumulative translation adjustment when a parent
either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. This ASU is effective
prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this guidance will not have a material impact on the Companys consolidated financial statements.
In July 2013, the FASB issued ASU No. 2013-11,
Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net
Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the Emerging Issues Task Force).
This ASU addresses when unrecognized tax benefits should be presented as reductions to deferred tax assets for
net operating loss carryforwards in the financial statements. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption and retrospective application is
permitted. The adoption of this guidance will not have a material impact on the Companys consolidated financial statements because it aligns with our current presentation.
Significant Accounting Policies
Consolidation Policy
The consolidated financial statements include the
accounts of Herbalife Ltd. and its subsidiaries. All significant intercompany transactions and accounts have been eliminated.
98
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Foreign Currency Translation and Transactions
In the majority of the countries that the Company operates, the functional currency is the local currency. The Companys foreign
subsidiaries asset and liability accounts are translated for consolidated financial reporting purposes into U.S. dollar amounts at year-end exchange rates. Revenue and expense accounts are translated at the average rates during the year.
Foreign exchange translation adjustments are included in accumulated other comprehensive loss on the accompanying consolidated balance sheets. Foreign currency transaction gains and losses, which include the cost of foreign currency derivative
contracts and the related settlement gains and losses but excluding certain foreign currency derivatives designated as cash flow hedges as discussed in Note 11,
Derivative Instruments and Hedging Activities
, are included in selling,
general and administrative expenses in the accompanying consolidated statements of income. The Company recorded net foreign currency transaction losses of $37.9 million, $16.7 million, and $11.4 million, for the years ended December 31, 2013,
2012, and 2011, respectively, which includes the foreign exchange impact relating to the Companys Venezuelan subsidiary, Herbalife Venezuela. Herbalife Venezuelas foreign currency financial statement impact is discussed further below
within this Note.
Forward Exchange Contracts, Option Contracts and Interest Rate Swaps
The Company enters into foreign currency derivative instruments such as forward exchange contracts and option contracts in managing its
foreign exchange risk on sales to Members, purchase commitments denominated in foreign currencies, and intercompany transactions and bank loans. The Company also enters into interest rate swaps in managing its interest rate risk on its variable rate
credit facility. The Company does not use the contracts for trading purposes.
In accordance with FASB Accounting Standards
Codification, or ASC, Topic 815,
Derivatives and Hedging
, or ASC 815, the Company designates certain of its derivative instruments as cash flow hedges and formally documents its hedge relationships, including identification of the
hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction, at the time the derivative contract is executed. The Company assesses the effectiveness of the hedge both at
inception and on an ongoing basis and determines whether the hedge is highly or perfectly effective in offsetting changes in cash flows of the hedged item. The Company records the effective portion of changes in the estimated fair value in
accumulated other comprehensive income (loss) and subsequently reclassifies the related amount of accumulated other comprehensive income (loss) to earnings when the hedged item and underlying transaction impacts earnings. If it is determined that a
derivative has ceased to be a highly effective hedge, the Company will discontinue hedge accounting for such transaction. For derivatives that are not designated as hedges, all changes in estimated fair value are recognized in the consolidated
statements of income.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Cash and
cash equivalents are comprised primarily of foreign and domestic bank accounts, and money market funds. These cash and cash equivalents are valued based on level 1 inputs which consist of quoted prices in active markets. To reduce its credit risk,
the Company monitors the credit standing of the financial institutions that hold the Companys cash and cash equivalents.
During 2011, the Company entered into a cash pooling arrangement with a financial institution for cash management purposes. This cash
pooling arrangement allows certain of the Companys participating foreign locations to withdraw cash from this financial institution to the extent aggregate cash deposits held by its participating locations are available at the financial
institution. To the extent any participating location on an individual basis is in an overdraft position, these overdrafts will be recorded as liabilities and reflected as financing
99
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
activities in the Companys consolidated balance sheet and consolidated statement of cash flows, respectively. As of December 31, 2013 and December 31, 2012, the Company did not
owe any amounts to this financial institution.
As of December 31, 2013 and 2012, the Companys subsidiary in
Venezuela, Herbalife Venezuela, had $215.9 million and $99.2 million, respectively, in Bolivar denominated cash and cash equivalents. Please see
Remeasurement of Herbalife Venezuelas Monetary Assets and Liabilities
below for a further
description of Herbalife Venezuelas cash and cash equivalents balances.
Accounts Receivable
Accounts receivable consist principally of receivables from credit card companies, arising from the sale of products to the Companys
Members, and receivables from importers, who are utilized in a limited number of countries to sell products to Members. The Company believes the concentration of its collection risk related to its credit card receivables is diminished due to the
geographic dispersion of its receivables. The receivables from credit card companies were $72.8 million and $81.1 million as of December 31, 2013 and 2012, respectively. Substantially all of the receivables from credit card companies were
current as of December 31, 2013 and 2012. Although receivables from importers can be significant, the Company performs ongoing credit evaluations of its importers and maintains an allowance for potential credit losses. The Company considers
customer credit-worthiness, past and current transaction history with the customer, contractual terms, current economic industry trends, and changes in customer payment terms when determining whether collectability is reasonably assured and whether
to record allowances for its receivables. If the financial condition of the Companys customers deteriorates and adversely affects their ability to make payments, additional allowances will be recorded. The Company believes that it provides
adequate allowances for receivables from its Members and importers which are not material to its consolidated financial statements. During the years ended December 31, 2013, 2012 and 2011, the Company recorded $2.1 million, $2.9 million, and
$2.6 million, respectively, in bad-debt expense related to allowances for the Companys receivables. As of December 31, 2013 and 2012, the majority of the Companys total outstanding accounts receivable were current.
Fair Value of Financial Instruments
The Company applies the provisions of FASB authoritative guidance as it applies to its financial and
non-financial
assets and liabilities. The FASB authoritative
guidance clarifies the definition of fair value, prescribes methods for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value, and expands disclosures about fair value measurements.
The Company has estimated the fair value of its financial instruments using the following methods and assumptions:
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|
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The carrying amounts of cash and cash equivalents, receivables and accounts payable approximate fair value due to the short-term maturities of these
instruments;
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|
The fair value of available-for-sale investments are based on prices of similar assets traded in active markets and observable yield curves;
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|
The fair value of option and forward contracts are based on dealer quotes; and
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|
|
The Companys variable rate debt instruments are recorded at carrying value and are considered to approximate their fair values. See Note 4,
Long-Term Debt
for a further description.
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Inventories
Inventories are stated at lower of cost (primarily on the first-in, first-out basis) or market.
100
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred Financing Costs
Deferred financing costs represent fees and expenses related to the borrowing of the Companys long-term debt and are amortized over
the term of the related debt using the interest method.
Long-Lived Assets
In December 2012, the Company purchased an approximate 800,000 square foot facility in Winston-Salem, North Carolina, for approximately
$22.2 million. As of December 31, 2013 and 2012, the Company allocated $18.8 million and $3.4 million between buildings and land respectively, based on their relative fair values. As of December 31, 2013 and 2012, these amounts
have been reflected in property, plant and equipment on the Companys accompanying consolidated balance sheet.
Depreciation of furniture, fixtures, and equipment (includes computer hardware and software) is computed on a straight-line basis over the
estimated useful lives of the related assets, which range from three to ten years. The Company capitalizes eligible costs to acquire or develop internal-use software that are incurred subsequent to the preliminary project stage. Computer hardware
and software, the majority of which is comprised of capitalized internal-use software costs, was $140.6 million and $131.5 million as of December 31, 2013 and 2012, respectively, net of accumulated depreciation. Leasehold improvements are
amortized on a straight-line basis over the life of the related asset or the term of the lease, whichever is shorter. Buildings are depreciated over 40 years. Building improvements are generally depreciated over ten to fifteen years. Land is not
depreciated. Depreciation and amortization expenses recorded to selling, general and administrative expenses totaled $81.1 million, $70.9 million, and $68.9 million, for the years ended December 31, 2013, 2012, and 2011, respectively.
Long-lived assets are reviewed for impairment, based on undiscounted cash flows, whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. Measurement of an impairment loss is based on the estimated fair value of the asset.
Goodwill and marketing related intangible assets with indefinite lives are evaluated on an annual basis for impairment or more frequently if events or changes in circumstances indicate that the asset
might be impaired. For goodwill, the Company uses a discounted cash flow approach to estimate the fair value of a reporting unit. If the fair value of the reporting unit is less than the carrying value then the implied fair value of the goodwill
must be determined. If the implied fair value of the goodwill is less than its carrying value then a goodwill impairment amount is recorded for the difference. For the marketing related intangible assets, the Company uses a discounted cash flow
model under the relief-from-royalty method in order to determine the fair value. If the fair value is less than its carrying value then an impairment amount is recorded for the difference. During the years ended December 31, 2013, 2012, and
2011, there were no goodwill or marketing related intangible asset impairments. At December 31, 2013, 2012, and 2011, the marketing related intangible asset balance was $310.0 million which consisted of the Companys trademark, trade
name, and marketing franchise. As of December 31, 2013, 2012, and 2011, the goodwill balance was $105.5 million.
Intangible assets with finite lives are amortized over their expected lives, and are expected to be fully amortized over the next three
years. As of December 31, 2013, the Companys intangible assets with finite lives decreased to $0.7 million. As of December 31, 2012, the Companys intangible assets with finite lives decreased to $1.1 million. As of
December 31, 2011, the Companys intangible assets with finite lives increased to $1.7 million, net of $0.6 million amortization, due to the iChange Network acquisition. The annual amortization expense for finite life intangibles was
$0.4 million, $0.6 million, and $0.6 million for the years ended December 31, 2013, 2012, and 2011, respectively. At December 31, 2013, the annual expected amortization expense is as follows: 2014 $0.3 million;
2015 $0.3 million; and 2016 $0.1 million.
101
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income Taxes
Income tax expense includes income taxes payable for the current year and the change in deferred income tax assets and liabilities for the
future tax consequences of events that have been recognized in the Companys financial statements or income tax returns. A valuation allowance is recognized to reduce the carrying value of deferred income tax assets if it is believed to be more
likely than not that a component of the deferred income tax assets will not be realized.
The Company accounts for uncertainty
in income taxes in accordance with FASB authoritative guidance which clarifies the accounting and reporting for uncertainties in income taxes recognized in an enterprises financial statements. This guidance prescribes a comprehensive model for
the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. See Note 12,
Income Taxes,
for a further description on income taxes.
Royalty Overrides
A Member may earn commissions, called royalty overrides which include production bonuses, based on retail sales volume. Royalty overrides are based on the retail sales volume of certain other Members who
are sponsored directly or indirectly by the Member. Royalty overrides are recorded when the products are delivered and revenue is recognized. The royalty overrides are compensation to Members for services rendered including the development,
retention and the improved productivity of their sales organizations. As such royalty overrides are classified as an operating expense. Non-U.S. royalty override checks that have aged, for a variety of reasons, beyond a certainty of being
paid, are taken back into income. Management has estimated this period of certainty to be three years worldwide.
Comprehensive Income
Comprehensive income consists of net income, foreign currency translation adjustments, the effective portion of the unrealized gains or losses on derivatives, and unrealized gains or losses on
available-for-sale investments.
Components of accumulated other comprehensive income (loss) consisted of the following (in
thousands):
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December 31,
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2013
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2012
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|
|
2011
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Foreign currency translation adjustment, net of tax
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$
|
(25,636
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)
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$
|
(28,788
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)
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$
|
(38,609
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)
|
Unrealized gain/(loss) on derivatives, net of tax
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5,747
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|
|
|
(2,907
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)
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|
800
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Unrealized gain on available-for-sale investments, net of tax
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95
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Total accumulated other comprehensive income (loss)
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$
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(19,794
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)
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$
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(31,695
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)
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$
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(37,809
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)
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Operating Leases
The Company leases most of its physical properties under operating leases. Certain lease agreements generally include rent holidays and tenant improvement allowances. The Company recognizes rent holiday
periods on a straight-line basis over the lease term beginning when the Company has the right to the leased space. The Company also records tenant improvement allowances and rent holidays as deferred rent liabilities and amortizes the deferred rent
over the terms of the lease to rent expense.
102
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Research and Development
The Companys research and development is performed by in-house staff and outside consultants. For all periods presented, research
and development costs were expensed as incurred and were not material.
Professional Fees
The Company expenses professional fees, including legal fees, as incurred. These professional fees are included in selling, general and
administrative expenses in the Companys consolidated statements of income.
Advertising
Advertising costs, including Company sponsorships, are expensed as incurred and amounted to approximately $57.9 million, $42.3
million, and $38.4 million for the years ended December 31, 2013, 2012, and 2011, respectively. These expenses are included in selling, general and administrative expenses in the accompanying consolidated statements of income.
Earnings Per Share
Basic earnings per share represents net income for the period common shares were outstanding, divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share
represents net income divided by the weighted average number of common shares outstanding, inclusive of the effect of dilutive securities such as outstanding stock options, SARs, stock units and warrants.
The following are the common share amounts used to compute the basic and diluted earnings per share for each period (in thousands):
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Year Ended December 31,
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2013
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2012
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2011
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|
Weighted average shares used in basic computations
|
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102,620
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|
|
|
112,359
|
|
|
|
117,540
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|
Dilutive effect of exercise of equity grants outstanding
|
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|
4,825
|
|
|
|
5,457
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|
|
|
7,046
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|
Dilutive effect of warrants
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40
|
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260
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|
|
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|
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|
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|
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Weighted average shares used in diluted computations
|
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|
107,445
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|
|
|
117,856
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124,846
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There were an aggregate of 3.0 million, 4.0 million, and 2.1 million of equity grants,
consisting of stock options, SARs, and stock units that were outstanding during the years ended December 31, 2013, 2012, and 2011, respectively, but were not included in the computation of diluted earnings per share because their effect would
be anti-dilutive.
Revenue Recognition
The Company generally recognizes revenue upon delivery and when both the title and risk and rewards pass to the Member or importer, or as products are sold in retail stores in China or through the
Companys independent service providers in China. Product sales are recognized net of product returns and discounts referred to as distributor allowances. Net sales include product sales and shipping and handling revenues. Shipping
and handling costs paid by the Company are included in cost of sales. The Company generally receives the net sales price in cash or through credit card payments at the point of sale. The Company currently presents
103
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
sales taxes collected from customers on a net basis. Allowances for product returns, primarily in connection with the Companys 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. Allowances for
product returns were $4.7 million, $3.9 million and $2.8 million as of December 31, 2013, 2012 and 2011, respectively. Product returns were $9.7 million, $11.1 million and $10.4 million during the years ended December 31, 2013, 2012
and 2011, respectively.
Share-Based Payments
The Company accounts for share-based compensation in accordance with FASB authoritative guidance which requires the measurement of share-based compensation expense for all share-based payment awards made
to employees for service. The Company measures share-based compensation cost at the grant date, based on the fair value of the award, and recognizes the expense on a straight-line basis over the employees requisite service period.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company
evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which the Company believes to be reasonable under the circumstances. The Company adjusts such
estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity, and foreign currency have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects
cannot be determined with precision, actual results could differ from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.
Currency Restrictions in Venezuela
Currency restrictions enacted by the Venezuelan government have become more restrictive and have impacted the ability of the Companys subsidiary in Venezuela, Herbalife Venezuela, to timely obtain
U.S. dollars in exchange for Venezuelan Bolivars, or Bolivars, at the official foreign exchange rate from the Venezuelan government. The application and approval process continue to be delayed and the Companys ability to timely obtain
U.S. dollars at the official exchange rate remains uncertain. In recent instances, the Company has been unsuccessful in obtaining U.S. dollars at the official rate and it remains uncertain whether the Companys current pending applications
and future anticipated applications will be approved.
In June 2010, the Venezuelan government introduced additional
regulations under a new regulated system, SITME, which was controlled by the Central Bank of Venezuela. SITME provided a mechanism to exchange Bolivars into U.S. dollars through the purchase and sale of U.S. dollar denominated bonds issued
in Venezuela. However, SITME was only available in certain limited circumstances. Specifically, SITME could only be used for product purchases and was not available for other matters such as the payment of dividends. Also, SITME could only be used
for amounts of up to $50,000 per day and $350,000 per month and was generally only available to the extent the applicant had not exchanged and received U.S. dollars via the CADIVI process within the previous 90 days. Effective
January 1, 2012, additional laws were enacted that required companies to register with the Registry of Users of the System of Transactions with Securities in Foreign Currency, or RUSITME, prior to transacting with the SITME, the regulated
system, which was controlled by the Central Bank of Venezuela.
104
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In February 2013, the Venezuela government announced that it devalued its Bolivar
currency and will eliminate the SITME regulated system. The SITME 5.3 Bolivars per U.S. dollar rate was eliminated and the CADIVI rate has been devalued from 4.3 Bolivars to 6.3 Bolivars per U.S. dollar. In March 2013, the Venezuelan government
also announced they will introduce an additional complimentary exchange mechanism known as SICAD. It is currently unknown whether Herbalife Venezuela will be able to timely access this new exchange mechanism and the Company is currently assessing
and monitoring the restrictions and exchange rates relating to this alternative mechanism.
As an alternative exchange
mechanism, the Company has also participated in certain bond offerings from the Venezuelan government and from Petróleos de Venezuela, S.A. or PDVSA, a Venezuelan state-owned petroleum company, where the Company effectively purchased bonds
with its Bolivars and then sold the bonds for U.S. dollars. In other instances, the Company has also used other alternative legal exchange mechanisms for currency exchanges.
Highly Inflationary Economy and Accounting in Venezuela
Venezuelas inflation rate as measured using the blended National Consumer Price Index and Consumer Price Index rate exceeded a three-year cumulative inflation rate of 100% as of December 31,
2009. Accordingly, effective January 1, 2010, Venezuela was considered a highly inflationary economy. Pursuant to the highly inflationary basis of accounting under U.S. GAAP, Herbalife Venezuela changed its functional currency from the
Bolivar to the U.S. dollar. Subsequent movements in the Bolivar to U.S. dollar exchange rate will impact the Companys consolidated earnings. Prior to January 1, 2010 when the Bolivar was the functional currency, movements in the
Bolivar to U.S. dollar were recorded as a component of equity through other comprehensive income. Pursuant to highly inflationary accounting rules, the Company no longer translates Herbalife Venezuelas financial statements as its
functional currency is the U.S. dollar.
Remeasurement of Herbalife Venezuelas Monetary Assets and Liabilities
Prior to February 2013, the Company used the SITME rate of 5.3 Bolivars per U.S. dollar to remeasure its Bolivar
denominated transactions. In February 2011, Herbalife Venezuela purchased U.S. dollar denominated bonds with a face value of $20 million U.S. dollars in a bond offering from PDVSA for 86 million Bolivars and then immediately sold the
bonds for $15 million U.S. dollars, resulting in an average effective conversion rate of 5.7 Bolivars per U.S. dollar. This Bolivar to U.S. dollar conversion resulted in the Company recording a net pre-tax loss of $1.3 million U.S. dollars
during the first quarter of 2011 which is included in its consolidated statement of income for the year ended December 31, 2011. The Company was unsuccessful in accessing any subsequent PDVSA bond offerings and the frequency of future bond
offerings is unknown. During 2011, the Company also accessed the SITME market in order to exchange its Bolivars to U.S. dollars. In less frequent instances, the Company has also accessed alternative legal exchange mechanisms, to exchange Bolivars
for U.S. dollars, at less favorable rates than the SITME rate, which resulted in the Company recognizing $1.2 million of losses in selling, general and administration expenses included within its consolidated statement of income for the year
ended December 31, 2011.
During the year ended December 31, 2012, the Company continued accessing the SITME market
in order to exchange its Bolivars to U.S. dollars and the daily and monthly restrictions continued. In other instances, the Company recognized an aggregate of $4.8 million of foreign exchange losses as a result of exchanging Bolivars for U.S.
dollars using alternative legal exchange mechanisms that were approximately 43% less favorable than the 5.3 Bolivars per U.S. dollar published SITME rate. During the year ended December 31, 2012, the Company exchanged 59.2 million Bolivars
for $6.4 million U.S. dollars using these alternative legal exchange mechanisms.
105
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Following the Venezuelan governments devaluation of the Bolivar against the U.S.
dollar and elimination of the SITME regulated system in February 2013, the Company uses the new CADIVI rate of 6.3 Bolivars per U.S. dollar to remeasure its Bolivar denominated transactions. This new CADIVI rate is approximately 16% less
favorable than the previously published 5.3 SITME rate. The Company recognized approximately $15.1 million of net foreign exchange losses within its consolidated statement of income during the first quarter of 2013, as a result of remeasuring the
Companys Bolivar denominated monetary assets and liabilities at this new CADIVI rate of 6.3 Bolivars per U.S. dollar. The majority of these foreign exchange losses related to the approximately $16.9 million devaluation of Herbalife
Venezuelas Bolivar denominated cash and cash equivalents. During the year ended December 31, 2013, the Company also recognized $0.7 million of foreign exchange losses as a result of exchanging Bolivars for U.S. dollars using alternative
legal exchange mechanisms that were approximately 75% less favorable than the new CADIVI rate. During the year ended December 31, 2013, the Company exchanged 5.6 million Bolivars for $0.2 million U.S. dollars using these alternative legal
exchange mechanisms. During the fourth quarter of 2013, the Company also submitted a bid of approximately 6.8 million Bolivars, or approximately $1.1 million U.S. dollars remeasured using the CADIVI rate, through the SICAD mechanism. The
Company received notification from the central bank of Venezuela that the bid was approved and the Company is to receive a distribution of approximately $0.6 million in U.S. dollars, resulting in a foreign exchange loss of approximately $0.5
million, or an effective exchange rate of 11.3 Bolivars per U.S. dollar. As of December 31, 2013, the Company has not received the U.S. dollars related to this approved bid.
As of December 31, 2013 and December 31, 2012, Herbalife Venezuelas net monetary assets and liabilities denominated in
Bolivars was approximately $186.9 million and $82.9 million, respectively, and included approximately $215.9 million and $99.2 million, respectively, in Bolivar denominated cash and cash equivalents. As noted above, these Bolivar denominated assets
and liabilities were remeasured at the CADIVI rate as of December 31, 2013 and at the SITME rate as of December 31, 2012. The Company remeasures its Bolivars at the official published CADIVI rate as of December 31, 2013 given the
limited availability of alternative exchange mechanisms and the uncertainty in the effective exchange rate for alternative exchange mechanisms. These remeasured amounts, including cash and cash equivalents, being reported on the Companys
consolidated balance sheet using the published CADIVI rate may not accurately represent the amount of U.S. dollars that the Company could ultimately realize. While the Company continues to monitor the exchange mechanisms and restrictions imposed by
the Venezuelan government, and assess and monitor the current economic and political environment in Venezuela, there is no assurance that the Company will be able to exchange Bolivars into U.S. dollars on a timely basis.
Investments in Bolivar-Denominated Bonds
During the fourth quarter of 2013, the Company invested in Bolivar denominated bonds, or bonds, issued by the Venezuelan government. The purchase price of the bonds was approximately 25.5 million
Bolivars, or approximately $4.1 million using the CADIVI rate. The Company classifies these bonds as long-term available-for-sale investments which are carried at fair value, inclusive of unrealized gains and losses, and net of discount accretion
and premium amortization. The fair value of these bonds are determined using Level 2 inputs which include prices of similar assets traded in active markets in Venezuela and observable yield curves. Net unrealized gains and losses on these bonds are
included in other comprehensive income (loss) and are net of applicable income taxes. During 2013, the Company did not sell any of its bonds.
106
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Companys investments in these bonds as of December 31, 2013 are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Costs
|
|
|
Gross
Unrealized
Gain
|
|
|
Gross
Unrealized
Loss
|
|
|
Net
Unrealized
Gain
|
|
|
Market
Value
|
|
|
|
(In thousands)
|
|
Investments in Venezuelan bonds
|
|
$
|
4,042
|
|
|
$
|
146
|
|
|
$
|
|
|
|
$
|
146
|
|
|
$
|
4,188
|
|
As of December 31, 2013, there have been no events or developments which would indicate the value of
these bonds have been impaired. There were no bonds with gross unrealized losses as of December 31, 2013.
The amortized
cost and estimated fair value of these bonds as of December 31, 2013 by contractual maturity are as follows:
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Estimated
Market Value
|
|
|
|
(In thousands)
|
|
Contractual Maturity
|
|
|
|
|
Due in 1 year or less
|
|
$
|
|
|
|
$
|
|
|
Due in 1-2 years
|
|
|
|
|
|
|
|
|
Due in 2-5 years
|
|
|
|
|
|
|
|
|
Due after 5 years
|
|
|
4,042
|
|
|
|
4,188
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
4,042
|
|
|
$
|
4,188
|
|
|
|
|
|
|
|
|
|
|
Expected disposal dates may be less than the contractual dates as indicated in the table above.
Consolidation of Herbalife Venezuela
The Company plans to continue its operation in Venezuela and to import products into Venezuela despite the foreign currency constraints described above. Herbalife Venezuela will continue to apply for
legal exchange mechanisms to convert its Bolivars to U.S. dollars. Despite the currency exchange restrictions in Venezuela, the Company continues to control Herbalife Venezuela and its operations. The mere existence of the exchange restrictions
discussed above does not in and of itself create a presumption that this lack of exchangeability is other-than-temporary, nor does it create a presumption that an entity should deconsolidate its Venezuelan operations. Therefore, the Company
continues to consolidate Herbalife Venezuela in its consolidated financial statements for U.S. GAAP purposes.
Although
Venezuela is an important market in the Companys South and Central America Region, Herbalife Venezuelas net sales represented approximately 6%, 4%, and 2% of the Companys consolidated net sales for the years ended December 31,
2013, 2012, and 2011, respectively, and its total assets represented approximately 10% and 7% of the Companys consolidated total assets as of December 31, 2013 and 2012, respectively.
3. Inventories
Inventories consist primarily of finished goods available for resale and can be categorized as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Weight Management, Targeted Nutrition and Energy, Sports and Fitness
|
|
$
|
307.2
|
|
|
$
|
303.8
|
|
Outer Nutrition
|
|
|
15.3
|
|
|
|
17.5
|
|
Literature, Promotional and Others
|
|
|
28.7
|
|
|
|
18.1
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
351.2
|
|
|
$
|
339.4
|
|
|
|
|
|
|
|
|
|
|
107
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following are the major classes of inventory (in millions):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Raw materials
|
|
$
|
23.1
|
|
|
$
|
19.6
|
|
Work in process
|
|
|
2.8
|
|
|
|
1.9
|
|
Finished goods
|
|
|
325.3
|
|
|
|
317.9
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
351.2
|
|
|
$
|
339.4
|
|
|
|
|
|
|
|
|
|
|
4. Long-Term Debt
Long-term debt consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Borrowings under the senior secured credit facility
|
|
$
|
931.3
|
|
|
$
|
487.5
|
|
Capital leases
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
931.3
|
|
|
|
487.6
|
|
Less: current portion
|
|
|
81.3
|
|
|
|
56.3
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
850.0
|
|
|
$
|
431.3
|
|
|
|
|
|
|
|
|
|
|
On July 21, 2006, the Company entered into a $300.0 million senior secured credit facility, or
the Prior Credit Facility, comprised of a $200.0 million term loan and a $100.0 million revolving credit facility, with a syndicate of financial institutions as lenders. In September 2007, the Company and its lenders amended the credit
agreement, increasing the amount of the revolving credit facility by an aggregate principal amount of $150.0 million to $250.0 million primarily to finance the increase in the Companys share repurchase program. See Note 8,
Shareholders Equity
, for further discussion of the share repurchase program and the share repurchase amounts during the years ended December 31, 2013, 2012, and 2011. The term loan bore interest at LIBOR plus a margin of 1.5%, or
the base rate plus a margin of 0.50%. The revolving credit facility bore interest at LIBOR plus a margin of 1.25%, or the base rate plus a margin of 0.25%.
On March 9, 2011, the Company entered into a $700.0 million senior secured revolving credit facility, or the Credit Facility, with a syndicate of financial institutions as lenders and terminated the
Prior Credit Facility. The Credit Facility has a five year maturity and expires on March 9, 2016. Based on the Companys consolidated leverage ratio, U.S. dollar borrowings under the Credit Facility bear interest at either LIBOR plus the
applicable margin between 1.50% and 2.50% or the base rate plus the applicable margin between 0.50% and 1.50%. The base rate under the Credit Facility represents the highest of the Federal Funds Rate plus 0.50%, one-month LIBOR plus 1.00%, and the
prime rate offered by Bank of America. The Company, based on its consolidated leverage ratio, pays a commitment fee between 0.25% and 0.50% per annum on the unused portion of the Credit Facility. The Credit Facility also permits the Company to
borrow limited amounts in Mexican Peso and Euro currencies based on variable rates. All obligations under the Credit Facility are unconditionally guaranteed by certain of the Companys subsidiaries and are secured by substantially all of the
assets of the U.S. subsidiaries of the Companys parent, Herbalife Ltd.
In March 2011, the Company used $196.0 million in
U.S. dollar borrowings under the Credit Facility to repay all amounts outstanding under the Prior Credit Facility. The Company incurred approximately $5.7 million of debt issuance costs in connection with the Credit Facility. These debt issuance
costs were recorded as deferred financing costs on the Companys consolidated balance sheet and are being amortized over the term of the Credit Facility.
108
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On July 26, 2012, the Company amended the Credit Facility to include a $500.0
million term loan with a syndicate of financial institutions as lenders, or the Term Loan. The Term Loan is a part of the Credit Facility and is in addition to the Companys current revolving credit facility. The Term Loan matures on
March 9, 2016. The Company will make regular scheduled payments for the Term Loan consisting of both principal and interest components. Based on the Companys consolidated leverage ratio, the Term Loan bears interest at either LIBOR plus
the applicable margin between 1.50% and 2.50% or the base rate plus the applicable margin between 0.50% and 1.50% which are the same terms as the Companys revolving credit facility.
In July 2012, the Company used all $500.0 million of the borrowings under the Term Loan to pay down amounts outstanding under the
Companys revolving credit facility. The Company incurred approximately $4.5 million of debt issuance costs in connection with the Term Loan. The debt issuance costs are recorded as deferred financing costs on the Companys consolidated
balance sheet and will be amortized over the life of the Term Loan. On December 31, 2013 and December 31, 2012, the weighted average interest rate for borrowings under the Credit Facility, including borrowings under the Term Loan, was
2.17% and 1.96%, respectively.
The Credit Facility requires the Company to comply with a leverage ratio and a coverage ratio.
In addition, the Credit Facility contains customary covenants, including covenants that limit or restrict the Companys ability to incur liens, incur indebtedness, make investments, dispose of assets, make certain restricted payments, pay
dividends, repurchase its common shares, merge or consolidate and enter into certain transactions with affiliates. As of December 31, 2013 and 2012, the Company was compliant with its debt covenants under the Credit Facility. The fair value of
the Companys Credit Facility, including the Term Loan, approximated its carrying value as of December 31, 2013, due to its variable interest rate which reprices frequently and represents floating market rates. The fair value of the Credit
Facility is determined by utilizing Level 2 inputs as defined in Note 13,
Fair Value Measurements
, such as observable market interest rates and yield curves.
During 2013, the Company borrowed an aggregate amount of $763.0 million and paid a total amount of $319.2 million under the Credit Facility. During 2012, the Company borrowed an aggregate amount
of $1,428.0 million and paid a total amount of $1,142.5 million under the Credit Facility. During 2011, the Company borrowed $859.7 million and $54.0 million under the Credit Facility and Prior Credit Facility, respectively, and paid a
total of $657.7 million and $228.9 million under the Credit Facility and Prior Credit Facility, respectively. As of December 31, 2013 and December 31, 2012, the U.S. dollar amount outstanding under the Credit Facility was $931.3 million
and $487.5 million, respectively. Of the $931.3 million U.S. dollar amount outstanding under the Credit Facility as of December 31, 2013, $431.3 million was outstanding on the Term Loan and $500.0 million was outstanding on the revolving credit
facility. Of the $487.5 million U.S. dollar amount outstanding under the Credit Facility as of December 31, 2012, $487.5 million was outstanding on the Term Loan and no amounts were outstanding on the revolving credit facility. There were no
outstanding foreign currency borrowings as of December 31, 2013 and December 31, 2012 under the Credit Facility.
As
of December 31, 2013, the aggregate annual maturities of the Credit Facility were expected to be $81.3 million for 2014, $100.0 million for 2015, and $750.0 million for 2016.
Interest expense was $26.6 million, $16.7 million, and $9.9 million, for the years ended December 31, 2013, 2012, and 2011,
respectively. Interest expense for the year ended December 31, 2011 included a $0.9 million write-off of unamortized deferred financing costs resulting from the extinguishment of the Prior Credit Facility, as discussed above.
5. Lease obligations
The Company has warehouse, office, furniture, fixtures and equipment leases, which expire at various dates through
2023. Under the lease agreements, the Company is also obligated to pay property taxes, insurance and maintenance costs.
109
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Certain leases contain renewal options. There were no material future minimum rental
commitments for non-cancelable capital leases at December 31, 2013. Future minimum rental commitments for non-cancelable operating leases at December 31, 2013, were as follows (in millions):
|
|
|
|
|
|
|
Operating
|
|
2014
|
|
$
|
54.0
|
|
2015
|
|
|
45.4
|
|
2016
|
|
|
30.0
|
|
2017
|
|
|
19.0
|
|
2018
|
|
|
14.7
|
|
Thereafter
|
|
|
16.6
|
|
|
|
|
|
|
Total
|
|
$
|
179.7
|
|
|
|
|
|
|
Rental expense for the years ended December 31, 2013, 2012, and 2011, was $57.5 million, $52.5
million, and $49.2 million, respectively.
Property, plant and equipment under capital leases are included in property, plant
and equipment on the accompanying consolidated balance sheets as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Equipment
|
|
|
|
|
|
$
|
7.7
|
|
Less: accumulated depreciation
|
|
|
|
|
|
|
(7.4
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
0.3
|
|
|
|
|
|
|
|
|
|
|
6. Employee Compensation Plans
The Company maintains a profit sharing plan pursuant to Sections 401(a) and (k) of the Internal Revenue Code
of 1986, as amended, or the Code. The plan is available to substantially all employees who meet the length of service requirements. Prior to January 1, 2009, employees could elect to contribute between 2% to 17% of their compensation, and the
Company would make matching contributions in an amount equal to one dollar for each dollar of deferred earnings not to exceed 3% of the participants earnings. Participants are partially vested in the Company contributions after one year and
fully vested after five years. Effective January 1, 2009, the Company amended its profit sharing plan. Starting January 1, 2009, employees may elect to contribute up to 75% of their compensation; however, contributions are limited to a
maximum annual amount as set periodically by the Code. The Company will make matching contributions in an amount equal to one dollar for each dollar of deferred earnings up to the first 1%, and then make matching contributions in an amount equal to
50% of one dollar for each dollar on the subsequent 5% of deferred earnings. The contributions become fully vested after two years. The Company contributed $4.0 million, $2.7 million, and $2.5 million, to its profit sharing plan during the years
ended December 31, 2013, 2012, and 2011, respectively.
The Company has non-qualified deferred compensation plans for
select groups of management: the Herbalife Management Deferred Compensation Plan and the Herbalife Senior Executive Deferred Compensation Plan. The deferred compensation plans allow eligible employees to elect annually to defer up to 75% of their
base annual salary and up to 100% of their annual bonus for each calendar year, or the Annual Deferral Amount. The Company makes matching contributions on behalf of each participant in the Senior Executive Deferred Compensation Plan. The Senior
Executive Deferred Compensation Plan provides that the amount of the matching contributions is to be determined by the Company at its discretion. In 2013, 2012, and 2011, the Companys matching contribution was 3.5% which aligns with the 401(k)
retirement plan match.
110
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Each participant in either of the non-qualified deferred compensation plans discussed
above has, at all times, a fully vested and non-forfeitable interest in each years contribution, including interest credited thereto, and in any Company matching contributions, if applicable. In connection with a participants election to
defer an Annual Deferral Amount, the participant may also elect to receive a short-term payout, equal to the Annual Deferral Amount plus interest. Such amount is payable in two or more years from the first day of the year in which the Annual
Deferral Amount is actually deferred.
The total expense for the two non-qualified deferred compensation plans, excluding
participant contributions, was $4.0 million, $2.9 million, and $0.2 million for the years ended December 31, 2013, 2012, and 2011, respectively. The total long-term deferred compensation liability under the two deferred compensation plans was
$37.2 million and $29.5 million at December 31, 2013 and 2012, respectively.
The deferred compensation plans are unfunded
and their benefits are paid from the general assets of the Company, except that the Company has contributed to a rabbi trust whose assets will be used to pay the benefits if the Company remains solvent, but can be reached by the
Companys creditors if the Company becomes insolvent. The value of the assets in the rabbi trust was $26.8 million and $24.3 million as of December 31, 2013 and 2012, respectively.
The Company has employees in international countries that are covered by various deferred compensation plans. These plans are administered
based upon the legal requirements in the countries in which they are established. The Companys compensation expenses relating to these plans were $8.4 million, $7.2 million, and $4.9 million for the years ended December 31, 2013,
2012, and 2011, respectively.
7. Contingencies
The Company is from time to time engaged in routine litigation. The Company regularly reviews all pending litigation
matters in which it is involved and establishes reserves deemed appropriate by management for these litigation matters when a probable loss estimate can be made.
As a marketer of dietary and nutritional supplements, and other products that are ingested by consumers or applied to their bodies, the Company has been and is currently subjected to various product
liability claims. The effects of these claims to date have not been material to the Company, and the reasonably possible range of exposure on currently existing claims is not material to the Company. The Company believes that it has meritorious
defenses to the allegations contained in the lawsuits. The Company currently maintains product liability insurance with an annual deductible of $10 million.
Certain of the Companys subsidiaries have been subject to tax audits by governmental authorities in their respective countries. In certain of these tax audits, governmental authorities are proposing
that significant amounts of additional taxes and related interest and penalties are due. The Company and its tax advisors believe that there are substantial defenses to governmental allegations that additional taxes are owed, and the Company is
vigorously contesting the additional proposed taxes and related charges. On May 7, 2010, the Company received an assessment from the Mexican Tax Administration Service in an amount equivalent to approximately $88 million, translated at the
period ended spot rate, for various items, the majority of which was Value Added Tax, or VAT, allegedly owed on certain of the Companys products imported into Mexico during the years 2005 and 2006. This assessment is subject to interest and
inflationary adjustments. On July 8, 2010, the Company initiated a formal administrative appeal process. On May 13, 2011, the Mexican Tax Administration Service issued a resolution on the Companys administrative appeal. The
resolution nullified the assessment. Since the Mexican Tax Administration Service can further review the tax audit findings and re-issue some or all of the original assessment, the Company commenced litigation in the Tax Court of Mexico in August
2011 to dispute the assertions made by the Mexican Tax Administration Service in the case. The Mexican Tax Administration Service
111
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
filed a response which was received by the Company in April 2012. The response challenged the assertions that the Company made in its August 2011 filing. Litigation in this case is currently
ongoing.
Prior to the nullification of the Mexican Tax Administration Service assessment relating to the 2005 and 2006 years
the Company entered into agreements with certain insurance companies to allow for the potential issuance of surety bonds in support of its appeal of the assessment. Such surety bonds, if issued, would not affect the availability of the
Companys Credit Facility. These arrangements with the insurance companies remain in place in the event that the assessment is re-issued.
The Mexican Tax Administration Service commenced audits of the Companys Mexican subsidiaries for the period from January to September 2007 and on May 10, 2013, the Company received an
assessment of approximately $22 million, translated at the period ended spot rate, related to that period. On July 11, 2013, the Company filed an administrative appeal disputing the assessment. The Company has not recognized a loss as the
Company does not believe a loss is probable.
The Mexican Tax Administration Service audited the Companys Mexican
subsidiaries for the 2011 year. The audit focused on importation and VAT issues. On June 25, 2013, the Mexican Tax Administration Service closed the audit of the 2011 year without any assessment.
The Company has not recognized a loss with respect to any of these Mexican matters as the Company, based on its analysis and guidance from
its advisors, does not believe a loss is probable. Further, the Company is currently unable to reasonably estimate a possible loss or range of loss that could result from an unfavorable outcome if the assessment was re-issued or any additional
assessments were to be issued for these or other periods. The Company believes that it has meritorious defenses if the assessment is re-issued or would have meritorious defenses if any additional assessment is issued.
The Company received an assessment from the Spanish Tax Authority in an amount equivalent to approximately $4.4 million translated at the
period ended spot rate, for withholding taxes, interest and penalties related to payments to Spanish Members for the 2003-2004 periods. The Company appealed the assessment to the National Appellate Court (Audiencia Nacional). Based on the
ruling of the National Appellate Court, substantially all of the assessment was nullified. The Company began withholding taxes on payments to Spanish Members for the 2012 year. If the Spanish Tax Authority raises the same issue in later years, the
Company believes that it has meritorious defenses. The Company has not recognized a loss as the Company does not believe a loss is probable. The Company is currently unable to reasonably estimate a possible loss or range of
loss that could result from an unfavorable outcome if additional assessments for other periods were to be issued.
The Company
received a tax assessment in September 2009, from the Federal Revenue Office of Brazil in an amount equivalent to approximately $3.6 million U.S. dollars, translated at the period ended spot rate, related to withholding/contributions based on
payments to the Companys Members during 2004. The Company has appealed this tax assessment to the Administrative Council of Tax Appeals (2nd level administrative appeal) as it believes it has meritorious defenses and it has
not recognized a loss as the Company does not believe a loss is probable. The Company is currently unable to reasonably estimate the amount of the loss that may result from an unfavorable outcome if additional assessments for
other periods were to be issued.
The Company received an order from a Rome Labor Court on behalf of the Social Security
Authority on March 1, 2012, to pay an amount equivalent to approximately $7.4 million U.S. dollars, translated at the period ended spot rate, for social contributions, interest and penalties related to payments to Italian Members from 2002
through 2005. The Company has filed a writ with the Rome Labor Court appealing the order and the Social Security Authority filed a response brief. At a hearing on July 12, 2012, the Social Security Authority announced its intention to withdraw
their claim as well as the order to pay the assessment. A hearing on this matter was
112
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
originally scheduled for October 23, 2012 but it has been postponed and is rescheduled for June 26, 2014. The Company has not recognized a loss as the Company does not believe a loss is
probable.
The Korea Customs Service is currently auditing the importation activities of Herbalife Korea for the
2009 - 2013
period. If an assessment is issued, the Company would be required to pay the amount requested in order to appeal the assessment. Based on the Companys analysis and guidance from its
advisors, the Company does not believe a loss is probable. Further, the Company is currently unable to reasonably estimate a possible loss or range of loss.
These matters may take several years to resolve. While the Company believes it has meritorious defenses, it cannot be sure of their ultimate resolution. Although the Company may reserve amounts for
certain matters that the Company believes represent the most likely outcome of the resolution of these related disputes, if the Company is incorrect in its assessment, the Company may have to record additional expenses, when it becomes probable that
an increased potential liability is warranted.
8. Shareholders Equity
The Company had 101.1 million, 106.9 million, and 115.8 million common shares outstanding at
December 31, 2013, 2012, and 2011, respectively. In December 2004, the Company authorized 7.5 million preference shares at $0.002 par value. The 7.5 million authorized preference shares remained unissued as of December 31,
2013. Preference shares may be issued from time to time in one or more series, each of such series to have such voting powers (full or limited or without voting powers), designations, preferences and relative, participating, optional or other
special rights and qualifications, limitations or restrictions as determined by the Companys board of directors.
Dividends
The declaration of future dividends is subject to the discretion of the Companys board of directors and will depend upon various factors, including its earnings, financial condition, Herbalife
Ltd.s available distributable reserves under Cayman Islands law, restrictions imposed by the Credit Facility and the terms of any other indebtedness that may be outstanding, cash requirements, future prospects and other factors deemed relevant
by its board of directors. The Credit Facility permits payments of dividends as long as no default or event of default exists and the consolidated leverage ratio specified in the Credit Facility is not exceeded.
During the second quarter of 2007, the Companys board of directors adopted a regular quarterly cash dividend program. The
Companys board of directors authorized a $0.10 per common share cash dividend each quarter from the adoption of the program through the second quarter of 2010. On August 2, 2010, the Company announced that its board of directors approved
an increase in the quarterly cash dividend to $0.13 per common share, an increase of $0.03 per common share from prior quarters. On May 2, 2011, the Company announced that its board of directors approved an increase in the quarterly cash
dividend to $0.20 per common share, an increase of $0.07 per common share from prior quarters. On February 21, 2012, the Company announced that its board of directors approved an increase in the quarterly cash dividend to $0.30 per common
share, an increase of $0.10 per common share from prior quarters. The aggregate amount of dividends paid and declared during the fiscal years ended December 31, 2013, 2012, and 2011 was approximately $123.1 million, $135.1 million, and
$85.5 million, respectively.
Share Repurchases
On April 17, 2009, the Companys share repurchase program adopted on April 18, 2007 expired pursuant to its terms. On
April 30, 2009, the Company announced that its board of directors authorized a new program for
113
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the Company to repurchase up to $300 million of Herbalife common shares during the following two years, at such times and prices as determined by the Companys management as market
conditions warrant. On May 3, 2010, the Companys board of directors approved an increase to this share repurchase program from $300 million to $1 billion. In addition, the Companys board of directors approved the extension
of the expiration date of this share repurchase program from April 2011 to December 2014.
On May 2, 2012, the Company
entered into an agreement with Merrill Lynch International to repurchase $427.9 million of its common shares, which was the remaining authorized capacity under this share repurchase program at that time. Under the terms of the repurchase agreement,
the Company paid $427.9 million on May 4, 2012 and the agreement expired on July 27, 2012. The Company received 5.3 million and 3.9 million of its common shares under the repurchase agreement during June 2012 and July 2012,
respectively. The total number of common shares repurchased under the agreement was determined generally upon a discounted volume-weighted average share price of the Companys common shares over the course of the agreement. On July 27,
2012, the Company completed this share repurchase program upon the final delivery of common shares repurchased under the repurchase agreement.
On July 30, 2012, the Company announced that its board of directors authorized a new $1 billion share repurchase program that will expire on June 30, 2017. This share repurchase program allows
the Company to repurchase its common shares, at such times and prices as determined by the Companys management as market conditions warrant, and to the extent Herbalife Ltd.s distributable reserves are available under Cayman Islands law.
The Credit Facility permits the Company to repurchase its common shares as long as no default or event of default exists and the consolidated leverage ratio specified in the Credit Facility is not exceeded. As of December 31, 2013, the
remaining authorized capacity under this share repurchase program was $652.6 million.
During the year ended December 31,
2013, the Company repurchased 6.1 million of its common shares through open market purchases at an aggregate cost of approximately $297.4 million, or an average cost of $49.08 per share. During the year ended December 31, 2012, the
Company repurchased 11.0 million of its common shares through open market purchases at an aggregate cost of approximately $527.8 million, or an average cost of $47.78 per share. During the year ended December 31, 2011, the Company
repurchased 5.5 million of its common shares through open market purchases at an aggregate cost of approximately $298.8 million, or an average cost of $54.27 per share.
The Company reflects the aggregate purchase price of the common shares repurchased as a reduction to shareholders equity. The
Company allocated the purchase price of the repurchased shares as a reduction to retained earnings, common shares and additional paid-in-capital.
The number of shares issued upon vesting or exercise for certain restricted stock units and SARs granted pursuant to the Companys share-based compensation plans is net of the minimum statutory
withholding requirements that the Company pays on behalf of its employees. Although shares withheld are not issued, they are treated as common share repurchases in the Companys consolidated financial statements, as they reduce the number of
shares that would have been issued upon vesting. These shares do not count against the authorized capacity under the share repurchase program described above.
114
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accumulated Other Comprehensive Income (Loss)
The following table summarizes changes in accumulated other comprehensive income (loss) during the year ended December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Accumulated Other Comprehensive
Income (Loss) by Component
Year Ended
December 31, 2013
|
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Unrealized
Gain (Loss) on
Derivatives
|
|
|
Unrealized Gain
(Loss) on
Available-For-
Sale Investments
|
|
|
Total
|
|
|
|
(In millions)
|
|
Beginning Balance
|
|
$
|
(28.8
|
)
|
|
$
|
(2.9
|
)
|
|
$
|
|
|
|
$
|
(31.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications, net of tax
|
|
|
3.2
|
|
|
|
2.4
|
|
|
|
0.1
|
|
|
|
5.7
|
|
Amounts reclassified from accumulated other comprehensive income (loss) to income,
net of tax(1)
|
|
|
|
|
|
|
6.2
|
|
|
|
|
|
|
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss), net of reclassifications
|
|
|
3.2
|
|
|
|
8.6
|
|
|
|
0.1
|
|
|
|
11.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(25.6
|
)
|
|
$
|
5.7
|
|
|
$
|
0.1
|
|
|
$
|
(19.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
See Note 11,
Derivative Instruments and Hedging Activities
, for information regarding the location in the consolidated statements of income of gains (losses)
reclassified from accumulated other comprehensive income (loss) into income during the year ended December 31, 2013.
|
Other comprehensive income (loss) before reclassifications was net of tax benefits of $4.3 million, tax expense of $1.0 million, and tax expense of $0.1 million for foreign currency translation
adjustments, unrealized gain (loss) on derivatives, and unrealized gain (loss) on available-for-sale investments, respectively, for the year ended December 31, 2013. Amounts reclassified from accumulated other comprehensive income (loss) to
income was net of tax expense of $0.7 million for unrealized gain (loss) on derivatives for the year ended December 31, 2013.
9. Share-Based Compensation
The Company has five share-based compensation plans, the WH Holdings (Cayman Islands) Ltd. Stock Incentive Plan, or the
Management Plan, the WH Holdings (Cayman Islands) Ltd. Independent Directors Stock Incentive Plan, or the Independent Directors Plan, the Herbalife Ltd. 2004 Stock Incentive Plan, or the 2004 Stock Incentive Plan, the Amended and Restated Herbalife
Ltd. 2005 Stock Incentive Plan, or the 2005 Stock Incentive Plan, and the Amended and Restated Herbalife Ltd. Independent Directors Deferred Compensation and Stock Unit Plan, or the Independent Director Stock Unit Plan. The Management Plan provided
for the grant of options to purchase common shares of Herbalife to members of the Companys management. The Independent Directors Plan provided for the grant of options to purchase common shares of Herbalife to the Companys independent
directors. The 2004 Stock Incentive Plan replaced the Management Plan and the Independent Directors Plan and after the adoption thereof, no additional awards were made under either the Management Plan or the Independent Directors Plan. However, the
shares remaining available for issuance under these plans were absorbed by and became available for issuance under the 2004 Stock Incentive Plan. The 2005 Stock Incentive Plan replaced the 2004 Stock Incentive Plan and after the adoption thereof, no
additional awards were made under the 2004 Stock Incentive Plan. The terms of the 2005 Stock Incentive Plan are substantially similar to the terms of the 2004 Stock Incentive Plan. The 2005 Stock Incentive Plan authorizes the issuance of
14,400,000 common shares pursuant to awards granted under the plan, plus any shares that remained available
115
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
for issuance under the 2004 Stock Incentive Plan at the time of the adoption of the 2005 Stock Incentive Plan. The purpose of the Independent Directors Stock Unit Plan is to facilitate equity
ownership in the Company by its independent directors through the award of stock units. At December 31, 2013, an aggregate of approximately 1.9 million common shares remain available for future issuance under the 2005 Stock Incentive Plan
and the Independent Directors Stock Unit Plan.
The Companys share-based compensation plans provide for grants of stock
options, SARs, and stock units, which are collectively referred to herein as awards. Stock options typically vest quarterly over a five-year period or less, beginning on the grant date. Certain SARs vest quarterly over a five-year period beginning
on the grant date. Other SARs vest annually over a three-year period. The contractual term of service condition stock options and SARs is generally ten years. Stock unit awards under the 2005 Incentive Plan, or Incentive Plan Stock Units, vest
annually over a three year period which is equal to the contractual term. Stock units awarded under the Independent Directors Stock Unit Plan, or Independent Director Stock Units, vest at a rate of 25% on each January 15, April 15,
July 15 and October 15. In January 2009, the Company moved to granting SARs instead of stock units for its independent directors. In March 2008, the Company granted stock unit awards to its Chairman and Chief Executive Officer, which vest
over a four-year period at a rate of 30% during each of the first three years and 10% during the fourth year. In February 2009, the Company granted stock units and SARs to certain employees subject to continued service, one-third of which vest on
the third anniversary of the date of grant, one-third of which vest on the fourth anniversary of the date of grant, and the remaining one-third of which vest on the fifth anniversary of the date of grant. In 2010, the Company granted other stock
units to certain key employees subject to continued service, one half of which vest on the first anniversary of the date of the grant, and the remaining half of which vest on the second anniversary of the date of the grant.
Awards can be subject to the following: market and service conditions, or market condition awards; performance and service conditions, or
performance condition awards; market, service and performance conditions, or market and performance condition awards; or be subject only to continued service with the Company, or service condition awards. All awards granted by the Company are market
condition awards, performance condition awards, market and performance condition awards, or service condition awards. Unless otherwise determined at the time of grant, the value of each stock unit shall be equal to one common share of Herbalife. The
Companys stock compensation awards outstanding as of December 31, 2013 include stock options, SARs, and stock units.
In March 2008, the Company granted SARs with market conditions to its Chairman and Chief Executive Officer, which fully vested during
2012. These SARs vested at the end of four years subject to his continued employment through that date and the achievement of certain conditions related to the market value of the Companys common shares. The market conditions included targets
for stock price appreciation of both a 10% and a 15% compound annual growth rate. The fair value of these SARs was determined on the date of the grant using the Monte Carlo lattice model.
In August 2011, the Company granted SARs with market and performance conditions to its Chairman and Chief Executive Officer. These
awards will vest on December 31, 2014, subject to his continued employment through that date, the Companys stock price appreciating and exceeding a targeted price, and the Companys achievement of certain volume point performance
targets. The fair value of these SARs was determined on the date of the grant using the Monte Carlo lattice model.
In December
2013, the Company granted SARs to certain employees with performance conditions. These awards vest 20% on June 2014, 20% on June 2015, and 60% on June 2016, subject to achievement of certain sales leader retention metrics. The fair value
of these SARs was determined on the date of grant using the Black-Scholes-Merton option pricing model. The compensation expense for these grants is recognized over the vesting term using the graded vesting method.
The Company records compensation expense over the requisite service period which is equal to the vesting period. For awards granted on or
after January 1, 2006, the compensation expense is recognized on a straight-line
116
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
basis over the vesting term. Stock-based compensation expense is included in selling, general and administrative expenses in the consolidated statements of income. For the years ended
December 31, 2013, 2012, and 2011, share-based compensation expense, relating to service condition awards, amounted to $24.6 million, $22.7 million, and $19.2 million, respectively. For the years ended December 31, 2012 and 2011,
share-based compensation expense, relating to market condition awards, amounted to $0.7 million and $2.9 million, respectively. No share-based compensation expense related to market condition awards was recognized in the year ended December 31,
2013, as all market condition awards had vested prior to 2013. For the year ended December 31, 2013, share-based compensation expense, relating to performance condition awards, amounted to $0.3 million. For the year ended December 31,
2013, 2012 and 2011, share-based compensation expense, relating to market and performance condition awards, amounted to $4.5 million, $4.6 million and $1.4 million, respectively. For the years ended December 31, 2013, 2012, and 2011, the
related income tax benefits recognized in earnings for all awards amounted to $10.4 million, $9.5 million, and $7.5 million, respectively.
As of December 31, 2013, the total unrecognized compensation cost related to non-vested service condition stock awards was $41.6 million and the related weighted-average period over which it is
expected to be recognized is approximately 1.4 years. As of December 31, 2013, the total unrecognized compensation cost related to non-vested performance condition awards was $12.7 million and the related weighted-average period over which
it is expected to be recognized is approximately 1.7 years. As of December 31, 2013, the total unrecognized compensation cost related to non-vested market and performance condition awards was $4.5 million and the related
weighted-average period over which it is expected to be recognized is approximately 1.0 year.
For the years ended
December 31, 2013, 2012, and 2011, excess tax benefits of $15.6 million, $29.7 million, and $26.2 million, respectively, were generated and recognized from exercises of awards.
Stock units are valued at the market value on the date of grant. The fair value of service condition SARs and performance condition SARs
are estimated on the date of grant using the Black-Scholes-Merton option-pricing model. The fair value of SARs with market conditions or with market and performance conditions are estimated on the date of grant using the Monte Carlo lattice model.
Historically, the expected term of the SARs and stock options was based on the simple average of the average vesting period and the life of the award, or the simplified method. During the fourth quarter of 2011, the Company began calculating the
expected term of its SARs based on historical data as more historical information was available. All groups of employees have been determined to have similar historical exercise patterns for valuation purposes. The expected volatility of the SARs
and stock options are based upon the historical volatility of the Companys common shares and it is also validated against the volatility rates of a peer group of companies. The risk free interest rate is based on the implied yield on a
U.S. Treasury zero-coupon issue with a remaining term equal to the expected term of the SARs and stock options. The expected dividend yield assumption is based on the Companys historical and expected amount of dividend payouts.
There were no stock options granted during the years ended December 31, 2013, 2012, and 2011. The following table
summarizes the weighted average assumptions used in the calculation of the fair value for service condition awards for the years ended December 31, 2013, 2012, and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs
|
|
|
Independent Directors SARs
|
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Expected volatility
|
|
|
50.8
|
%
|
|
|
48.4
|
%
|
|
|
46.6
|
%
|
|
|
45.2
|
%
|
|
|
52.1
|
%
|
|
|
49.4
|
%
|
Dividends yield
|
|
|
1.7
|
%
|
|
|
2.7
|
%
|
|
|
1.5
|
%
|
|
|
1.5
|
%
|
|
|
2.7
|
%
|
|
|
1.5
|
%
|
Expected term
|
|
|
5.5 years
|
|
|
|
5.3 years
|
|
|
|
6.2 years
|
|
|
|
3.6 years
|
|
|
|
3.8 years
|
|
|
|
3.8 years
|
|
Risk-free interest rate
|
|
|
1.5
|
%
|
|
|
0.7
|
%
|
|
|
1.9
|
%
|
|
|
0.7
|
%
|
|
|
0.4
|
%
|
|
|
1.0
|
%
|
117
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
There were no performance condition awards granted during the years ended
December 31, 2012 and 2011. For performance condition awards granted during the year ended December 31, 2013, the following table summarizes the weighted average assumptions used in the calculation of the fair value:
|
|
|
|
|
|
|
SARs
|
|
|
|
Year Ended
December 31,
2013
|
|
Expected volatility
|
|
|
50.9
|
%
|
Dividends yield
|
|
|
1.5
|
%
|
Expected term
|
|
|
5.5 years
|
|
Risk-free interest rate
|
|
|
1.6
|
%
|
There were no market condition awards or market and performance condition awards granted during the years
ended December 31, 2013 and 2012. For market and performance condition awards granted during the year ended December 31, 2011, the following table summarizes the weighted average assumptions used in the calculation of the fair value:
|
|
|
|
|
|
|
SARs
|
|
|
|
Year Ended
December 31,
2011
|
|
Expected volatility
|
|
|
44.0
|
%
|
Dividends yield
|
|
|
1.4
|
%
|
Expected term
|
|
|
5.2 years
|
|
Risk-free interest rate
|
|
|
1.2
|
%
|
The following tables summarize the activity under all share-based compensation plans, which includes all
stock awards, for the year ended December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options & SARs
|
|
Awards
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual Term
|
|
|
Aggregate
Intrinsic
Value(1)
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Outstanding at December 31, 2012(2) (3)
|
|
|
11,333
|
|
|
$
|
28.62
|
|
|
|
5.9 years
|
|
|
$
|
119.1
|
|
Granted(4)
|
|
|
1,176
|
|
|
$
|
76.40
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(305
|
)
|
|
$
|
25.76
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(61
|
)
|
|
$
|
44.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2013(2) (3) (4)
|
|
|
12,143
|
|
|
$
|
33.24
|
|
|
|
5.3 years
|
|
|
$
|
552.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2013(3)
|
|
|
7,327
|
|
|
$
|
20.84
|
|
|
|
3.8 years
|
|
|
$
|
424.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The intrinsic value is the amount by which the current market value of the underlying stock exceeds the exercise price of the stock award.
|
(2)
|
Includes 0.9 million SARs with market and performance conditions.
|
(3)
|
Includes 1.5 million SARs with market conditions.
|
(4)
|
Includes 0.4 million SARs with performance conditions.
|
The weighted-average grant date fair value of service condition SARs granted during the years ended December 31, 2013, 2012, and 2011 was $30.57, $15.36, and $21.23, respectively. The
weighted-average grant date fair value of SARs with performance conditions granted during the year ended December 31, 2013 was $33.04. The weighted-average grant date fair value of SARs with market and performance conditions granted
118
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
during the year ended December 31, 2011 was $17.37. The total intrinsic value of service condition stock options and SARs exercised during the years ended December 31, 2013, 2012, and
2011 was $16.1 million, $98.6 million, and $133.8 million, respectively. There were no market condition, performance condition, or market condition and performance condition SARs exercised during the years ended December 31, 2013, 2012, and
2011.
|
|
|
|
|
|
|
|
|
Incentive Plan and Independent Directors Stock Units
|
|
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
|
(In thousands)
|
|
|
|
|
Outstanding and nonvested at December 31, 2012
|
|
|
321.6
|
|
|
$
|
11.70
|
|
Granted
|
|
|
17.0
|
|
|
$
|
59.96
|
|
Vested
|
|
|
(193.7
|
)
|
|
$
|
13.88
|
|
Forfeited
|
|
|
(0.4
|
)
|
|
$
|
42.93
|
|
|
|
|
|
|
|
|
|
|
Outstanding and nonvested at December 31, 2013
|
|
|
144.5
|
|
|
$
|
14.36
|
|
|
|
|
|
|
|
|
|
|
The total vesting date fair value of stock units which vested during the years ended December 31,
2013, 2012, and 2011 was $7.3 million, $24.3 million, and $19.8 million, respectively.
Employee Stock Purchase
Plan
During 2007, the Company adopted a qualified employee stock purchase plan, or ESPP, which was implemented during
the first quarter of 2008. In connection with the adoption of the ESPP, the Company has reserved for issuance a total of 2 million common shares. At December 31, 2013, approximately 1.8 million common shares remain available for
future issuance. Under the terms of the ESPP, rights to purchase common shares may be granted to eligible qualified employees subject to certain restrictions. The ESPP enables the Companys eligible employees, through payroll withholdings, to
purchase a limited number of common shares at 85% of the fair market value of a common share at the purchase date. Purchases are made on a quarterly basis.
10. Segment Information
The Company is a nutrition company that sells a wide range of weight management products, nutritional supplements and
personal care products. The Companys products are manufactured by third party providers and by the Company in its Changsha, Hunan, China extraction facility, Suzhou, China facility and in its Lake Forest, California facility, 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.
119
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2013, the Company sold products in 91 countries throughout the
world and was organized and managed by geographic regions. The Company aggregates its operating segments, excluding China, into one reporting segment, or the Primary Reporting Segment, as management believes that the Companys 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, and the nature of the regulatory environment. China has been identified as a separate reporting segment as it does not meet the criteria for
aggregation. The operating information for the Primary Reporting Segment and China, and sales by product line are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
(In millions)
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Reporting Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
881.0
|
|
|
$
|
816.9
|
|
|
$
|
676.9
|
|
Mexico
|
|
|
562.4
|
|
|
|
496.1
|
|
|
|
436.9
|
|
South Korea
|
|
|
433.7
|
|
|
|
421.4
|
|
|
|
343.5
|
|
Others
|
|
|
2,476.6
|
|
|
|
2,059.4
|
|
|
|
1,786.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Primary Reporting Segment
|
|
|
4,353.7
|
|
|
|
3,793.8
|
|
|
|
3,243.7
|
|
China
|
|
|
471.6
|
|
|
|
278.5
|
|
|
|
210.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales
|
|
$
|
4,825.3
|
|
|
$
|
4,072.3
|
|
|
$
|
3,454.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution Margin(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Reporting Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
365.2
|
|
|
$
|
359.5
|
|
|
$
|
286.3
|
|
Mexico
|
|
|
251.7
|
|
|
|
205.6
|
|
|
|
191.1
|
|
South Korea
|
|
|
214.3
|
|
|
|
199.4
|
|
|
|
163.1
|
|
Others
|
|
|
1,110.5
|
|
|
|
906.5
|
|
|
|
810.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Primary Reporting Segment
|
|
|
1,941.7
|
|
|
|
1,671.0
|
|
|
|
1,450.5
|
|
China(2)
|
|
|
422.7
|
|
|
|
250.1
|
|
|
|
186.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contribution Margin
|
|
$
|
2,364.4
|
|
|
$
|
1,921.1
|
|
|
$
|
1,636.9
|
|
Selling, general and administrative expense (2)
|
|
|
1,629.1
|
|
|
|
1,259.7
|
|
|
|
1,074.6
|
|
Interest expense
|
|
|
26.6
|
|
|
|
16.7
|
|
|
|
9.9
|
|
Interest income
|
|
|
8.0
|
|
|
|
6.2
|
|
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
716.7
|
|
|
|
650.9
|
|
|
|
559.8
|
|
Income taxes
|
|
|
189.2
|
|
|
|
186.9
|
|
|
|
144.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
527.5
|
|
|
$
|
464.0
|
|
|
$
|
415.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
(In millions)
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
121.3
|
|
|
$
|
81.6
|
|
|
$
|
60.4
|
|
Mexico
|
|
|
2.4
|
|
|
|
2.8
|
|
|
|
3.5
|
|
South Korea
|
|
|
1.8
|
|
|
|
4.1
|
|
|
|
2.1
|
|
China
|
|
|
12.6
|
|
|
|
15.4
|
|
|
|
6.6
|
|
Others
|
|
|
24.4
|
|
|
|
18.9
|
|
|
|
18.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital Expenditures
|
|
$
|
162.5
|
|
|
$
|
122.8
|
|
|
$
|
90.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
(In millions)
|
|
Net sales by product line:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weight Management
|
|
$
|
3,063.7
|
|
|
$
|
2,554.9
|
|
|
$
|
2,158.7
|
|
Targeted Nutrition
|
|
|
1,109.9
|
|
|
|
944.8
|
|
|
|
789.6
|
|
Energy, Sports & Fitness
|
|
|
254.5
|
|
|
|
209.4
|
|
|
|
169.8
|
|
Outer Nutrition
|
|
|
157.2
|
|
|
|
146.3
|
|
|
|
147.8
|
|
Literature, Promotional and Other(3)
|
|
|
240.0
|
|
|
|
216.9
|
|
|
|
188.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales
|
|
$
|
4,825.3
|
|
|
$
|
4,072.3
|
|
|
$
|
3,454.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales by geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
908.0
|
|
|
$
|
841.2
|
|
|
$
|
698.6
|
|
Mexico
|
|
|
562.4
|
|
|
|
496.1
|
|
|
|
436.9
|
|
South & Central America
|
|
|
973.5
|
|
|
|
688.8
|
|
|
|
554.4
|
|
EMEA
|
|
|
735.2
|
|
|
|
627.8
|
|
|
|
615.2
|
|
Asia Pacific
|
|
|
1,174.6
|
|
|
|
1,139.9
|
|
|
|
938.6
|
|
China
|
|
|
471.6
|
|
|
|
278.5
|
|
|
|
210.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales
|
|
$
|
4,825.3
|
|
|
$
|
4,072.3
|
|
|
$
|
3,454.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Contribution margin consists of net sales less cost of sales and royalty overrides.
|
(2)
|
Compensation to China sales employees and service fees to China independent service providers totaling $215.6 million, $123.5 million, and $96.8 million for the years
ended December 31, 2013, 2012, and 2011, respectively, are included in selling, general and administrative expenses while Member compensation for all other countries is included in contribution margin.
|
(3)
|
Product buybacks and returns in all product categories are included in the literature, promotional and other category.
|
As of December 31, 2013 and 2012, total assets for the Companys Primary Reporting Segment were $2,253.7 million and $1,607.2
million, respectively. Total assets for the China segment were $220.0 million and $116.9 million as of December 31, 2013 and 2012, respectively.
As of December 31, 2013 and 2012, goodwill allocated to the Companys reporting units included in the Companys Primary Reporting Segment was $102.4 million for both periods. Goodwill
allocated to the China segment was $3.1 million as of December 31, 2013 and 2012.
As of December 31, 2013, the
net property, plant and equipment located in the U.S. and in all foreign countries was $236.0 million and $82.9 million, respectively. As of December 31, 2012, the net property, plant and equipment located in the U.S. and in all
foreign countries was $170.9 million and $71.9 million, respectively.
As of December 31, 2013, the deferred tax
assets related to the U.S. and all foreign countries was $69.1 million and $58.7 million, respectively. As of December 31, 2012, the deferred tax assets related to the U.S. and all foreign countries was $68.4 million
and $51.4 million, respectively.
The majority of the Companys foreign subsidiaries designate their local currencies
as their functional currency. As of December 31, 2013 and 2012, the total amount of cash held by foreign subsidiaries reported in the Companys consolidated balance sheet was $567.4 million and $321.3 million, respectively, of which $6.8
million and $6.9 million, respectively, was maintained or invested in U.S. dollars. At December 31, 2013 and 2012, the total amount of cash and cash equivalents held by U.S. entities was $405.6 million and $12.2 million, respectively.
121
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Derivative Instruments and Hedging Activities
Interest Rate Risk Management
The Company previously engaged in an interest rate hedging strategy for which the hedged transactions were the forecasted interest payments on the Credit Facility. The hedged risk was the variability of
forecasted interest rate cash flows, where the hedging strategy involved the purchase of interest rate swaps. These interest rate swaps expired in July 2013 and the Company has not entered into new interest swap arrangements as of December 31,
2013.
During August 2009, the Company entered into four interest rate swap agreements with an effective date of
December 31, 2009. The agreements collectively provided for the Company to pay interest for less than a four-year period at a weighted average fixed rate of 2.78% on notional amounts aggregating to $140.0 million while receiving interest
for the same period at the one month LIBOR rate on the same notional amounts. As discussed above, these agreements expired in July 2013. These swaps at inception were designated as cash flow hedges against the variability in the LIBOR interest rate
on the Companys term loan under the Prior Credit Facility or against the variability in the LIBOR interest rate on the replacement debt. The Companys term loan under the Prior Credit Facility was terminated in March 2011 and
refinanced with the Credit Facility as discussed further in Note 4,
Long-Term Debt
. Until their expiration in July 2013, the Companys swaps were effective and were designated as cash flow hedges against the variability in certain LIBOR
interest rate borrowings under the Credit Facility at LIBOR plus 1.50% to 2.50%, fixing the Companys weighted average effective rate on the notional amounts at 4.28% to 5.28%. There was no hedge ineffectiveness recorded as result of this
refinancing event.
The Company assesses hedge effectiveness and measures hedge ineffectiveness at least quarterly. During the
years ended December 31, 2013 and 2012, the ineffective portion relating to these hedges was immaterial and the hedges remained effective until their expiration in July 2013 and as of December 31, 2012. Consequently, all changes in the
fair value of the derivatives were deferred and recorded in other comprehensive income (loss) until the related forecasted transactions were recognized in the consolidated statements of income. The fair value of the interest rate swap
agreements were based on third-party quotes. At December 31, 2012, the Company recorded the interest rate swaps as liabilities at their fair value of $2.0 million. No amount was recorded as of December 31, 2013 because the interest
rate swaps had expired.
The table below describes the interest rate swaps in aggregate, and the fair value of the liabilities
that were outstanding as of December 31, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate
|
|
Aggregate
Notional
Amounts
|
|
|
Average
Swap
Rate
|
|
|
Aggregate
Fair
Value
|
|
|
Maturity
Dates
|
|
|
|
(In millions)
|
|
|
|
|
|
(In millions)
|
|
|
|
|
At December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
140.0
|
|
|
|
2.78
|
%
|
|
$
|
(2.0
|
)
|
|
|
July 2013
|
|
Foreign Currency Instruments
The Company also designates certain foreign currency derivatives, such as certain foreign currency forward and option contracts, as
freestanding derivatives for which hedge accounting does not apply. The changes in the fair market value of these freestanding derivatives are included in selling, general and administrative expenses in the Companys consolidated statements of
income. The Company uses foreign currency forward contracts to hedge foreign-currency-denominated intercompany transactions and to partially mitigate the impact of foreign
122
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
currency fluctuations. The Company also uses foreign currency option contracts to partially mitigate the impact of foreign currency fluctuations. The fair value of the forward and option
contracts are based on third-party quotes. The Companys foreign currency derivative contracts are generally executed on a monthly basis.
The Company designates as cash-flow hedges those foreign currency forward contracts it enters into to hedge forecasted inventory purchases and intercompany management fees that are subject to foreign
currency exposures. Forward contracts are used to hedge forecasted inventory purchases over specific months. Changes in the fair value of these forward contracts, excluding forward points, designated as cash-flow hedges are recorded as a component
of accumulated other comprehensive income (loss) within shareholders equity, and are recognized in cost of sales in the consolidated statement of income during the period which approximates the time the hedged inventory is sold. The
Company also hedges forecasted intercompany management fees over specific months. These contracts allow the Company to sell Euros in exchange for U.S. dollars at specified contract rates. Changes in the fair value of these forward contracts
designated as cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) within shareholders equity, and are recognized in selling, general and administrative expenses in the consolidated statement of
income during the period when the hedged item and underlying transaction affect earnings.
As of December 31, 2013 and
2012, the aggregate notional amounts of all foreign currency contracts outstanding designated as cash flow hedges were approximately $244.7 million and $256.9 million, respectively. At December 31, 2013, these outstanding contracts were
expected to mature over the next twelve months. The Companys derivative financial instruments are recorded on the consolidated balance sheet at fair value based on third-party quotes. As of December 31, 2013, the Company recorded assets
at fair value of $5.7 million and liabilities at fair value of $4.4 million relating to all outstanding foreign currency contracts designated as
cash-flow
hedges. As of December 31, 2012, the Company
recorded assets at fair value of $0.5 million and liabilities at fair value of $3.3 million relating to all outstanding foreign currency contracts designated as
cash-flow
hedges. The Company assesses
hedge effectiveness and measures hedge ineffectiveness at least quarterly. During the years ended December 31, 2013 and 2012, the ineffective portion relating to these hedges was immaterial and the hedges remained effective as of
December 31, 2013 and 2012.
As of both December 31, 2013 and 2012, the majority of the Companys outstanding
foreign currency forward contracts had maturity dates of less than twelve months, with the majority of freestanding derivatives expiring within three months and one month, respectively. There were no foreign currency option contracts outstanding as
of December 31, 2013 and 2012.
123
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below describes all foreign currency forward contracts that were outstanding
as of December 31, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency
|
|
Average
Contract Rate
|
|
|
Original
Notional Amount
|
|
|
Fair Value
Gain (Loss)
|
|
|
|
|
|
|
(In millions)
|
|
|
(In millions)
|
|
At December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy Australian dollar sell Euro
|
|
|
1.55
|
|
|
$
|
2.7
|
|
|
$
|
|
|
Buy Euro sell Australian dollar
|
|
|
1.52
|
|
|
|
4.5
|
|
|
|
0.1
|
|
Buy Euro sell Chilean peso
|
|
|
727.40
|
|
|
|
1.1
|
|
|
|
|
|
Buy Euro sell British pound
|
|
|
0.83
|
|
|
|
2.5
|
|
|
|
|
|
Buy Euro sell Indonesian rupiah
|
|
|
16,915.00
|
|
|
|
0.7
|
|
|
|
|
|
Buy Euro sell Mexican peso
|
|
|
17.51
|
|
|
|
150.3
|
|
|
|
4.9
|
|
Buy Euro sell Russian ruble
|
|
|
45.05
|
|
|
|
3.0
|
|
|
|
|
|
Buy Euro sell Singapore dollar
|
|
|
1.74
|
|
|
|
3.0
|
|
|
|
|
|
Buy Euro sell U.S. dollar
|
|
|
1.37
|
|
|
|
161.3
|
|
|
|
|
|
Buy British pound sell Euro
|
|
|
1.01
|
|
|
|
4.9
|
|
|
|
0.1
|
|
Buy Japanese yen sell U.S. dollar
|
|
|
104.71
|
|
|
|
2.9
|
|
|
|
|
|
Buy Malaysian ringgit sell U.S. dollar
|
|
|
3.30
|
|
|
|
5.3
|
|
|
|
|
|
Buy Singapore dollar sell Euro
|
|
|
1.71
|
|
|
|
2.0
|
|
|
|
|
|
Buy New Taiwan dollar sell U.S. dollar
|
|
|
29.54
|
|
|
|
14.9
|
|
|
|
(0.1
|
)
|
Buy U.S. dollar sell Brazilian real
|
|
|
2.35
|
|
|
|
12.8
|
|
|
|
0.6
|
|
Buy U.S. dollar sell Euro
|
|
|
1.34
|
|
|
|
171.8
|
|
|
|
(4.2
|
)
|
Buy U.S. dollar sell South Korean won
|
|
|
1,112.65
|
|
|
|
50.0
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total forward contracts
|
|
|
|
|
|
$
|
593.7
|
|
|
$
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency
|
|
Average
Contract Rate
|
|
|
Original
Notional Amount
|
|
|
Fair
Value
Gain
(Loss)
|
|
|
|
|
|
|
(In millions)
|
|
|
(In millions)
|
|
At December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy Brazilian real sell U.S. dollar
|
|
|
2.08
|
|
|
$
|
12.5
|
|
|
$
|
0.2
|
|
Buy Chinese yuan sell U.S. dollar
|
|
|
6.29
|
|
|
|
1.3
|
|
|
|
|
|
Buy Euro sell Argentine peso
|
|
|
6.66
|
|
|
|
3.0
|
|
|
|
|
|
Buy Euro sell Australian dollar
|
|
|
1.27
|
|
|
|
1.4
|
|
|
|
|
|
Buy Euro sell Chilean peso
|
|
|
633.00
|
|
|
|
1.5
|
|
|
|
|
|
Buy Euro sell Indonesian rupiah
|
|
|
12,935.00
|
|
|
|
9.7
|
|
|
|
|
|
Buy Euro sell Mexican peso
|
|
|
17.18
|
|
|
|
143.7
|
|
|
|
0.3
|
|
Buy Euro sell Malaysian ringgit
|
|
|
4.06
|
|
|
|
15.2
|
|
|
|
(0.1
|
)
|
Buy Euro sell Peruvian nuevo sol
|
|
|
3.41
|
|
|
|
2.0
|
|
|
|
|
|
Buy Euro sell U.S. dollar
|
|
|
1.33
|
|
|
|
82.1
|
|
|
|
(0.4
|
)
|
Buy British pound sell Euro
|
|
|
0.82
|
|
|
|
2.4
|
|
|
|
|
|
Buy Japanese yen sell U.S. dollar
|
|
|
85.88
|
|
|
|
9.3
|
|
|
|
(0.1
|
)
|
Buy South Korean won sell U.S. dollar
|
|
|
1,077.18
|
|
|
|
52.5
|
|
|
|
0.2
|
|
Buy Malaysian ringgit sell Euro
|
|
|
4.07
|
|
|
|
0.8
|
|
|
|
|
|
Buy Malaysian ringgit sell U.S. dollar
|
|
|
3.08
|
|
|
|
21.7
|
|
|
|
0.1
|
|
Buy U.S. dollar sell Brazilian real
|
|
|
2.05
|
|
|
|
12.6
|
|
|
|
|
|
Buy U.S. dollar sell Colombian peso
|
|
|
1,800.10
|
|
|
|
11.7
|
|
|
|
(0.2
|
)
|
Buy U.S. dollar sell Euro
|
|
|
1.30
|
|
|
|
174.4
|
|
|
|
(2.9
|
)
|
Buy U.S. dollar sell British pound
|
|
|
1.62
|
|
|
|
16.2
|
|
|
|
(0.1
|
)
|
Buy U.S. dollar sell South Korean won
|
|
|
1,089.08
|
|
|
|
6.3
|
|
|
|
(0.1
|
)
|
Buy U.S. dollar sell Mexican peso
|
|
|
13.12
|
|
|
|
25.4
|
|
|
|
(0.3
|
)
|
Buy U.S. dollar sell Philippine peso
|
|
|
40.99
|
|
|
|
2.9
|
|
|
|
|
|
Buy U.S. dollar sell New Taiwan dollar
|
|
|
28.98
|
|
|
|
0.8
|
|
|
|
|
|
Buy U.S. dollar sell South African rand
|
|
|
8.54
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total forward contracts
|
|
|
|
|
|
$
|
610.1
|
|
|
$
|
(3.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables summarize the derivative activity during the years ended December 31, 2013,
2012, and 2011 relating to all the Companys derivatives.
Gains and Losses on Derivative Instruments
The following table summarizes gains (losses) relating to derivative instruments recorded in other comprehensive
income (loss) during the years ended December 31, 2013, 2012, and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized
in Other Comprehensive Income (Loss)
For the Year
Ended
|
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
|
|
(In millions)
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts relating to inventory and intercompany management fee hedges
|
|
$
|
3.5
|
|
|
$
|
(3.3
|
)
|
|
$
|
4.1
|
|
Interest rate swaps
|
|
$
|
|
|
|
$
|
(0.6
|
)
|
|
$
|
(2.1
|
)
|
125
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2013, the estimated amount of existing net gains related to cash
flow hedges recorded in accumulated other comprehensive income (loss) that are expected to be reclassified into earnings over the next twelve months was $3.1 million.
The following table summarizes gains (losses) relating to derivative instruments recorded to income during the years ended December 31, 2013, 2012, and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
Recognized in Income
For the Year Ended
|
|
|
Location of Gain (Loss)
Recognized in Income
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
|
|
|
(In millions)
|
|
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts relating to inventory hedges and intercompany management fee hedges(1)
|
|
$
|
(5.2
|
)
|
|
$
|
(1.8
|
)
|
|
$
|
|
|
|
Selling, general and administrative expenses
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
|
$
|
6.4
|
|
|
$
|
(10.0
|
)
|
|
$
|
2.7
|
|
|
Selling, general and administrative expenses
|
(1)
|
For foreign exchange contracts designated as hedging instruments, the amounts recognized in income (loss) represent the amounts excluded from the assessment of hedge
effectiveness. There were no ineffective amounts reported for derivatives designated as hedging instruments.
|
The
following table summarizes gains (losses) relating to derivative instruments reclassified from accumulated other comprehensive loss into income during the years ended December 31, 2013, 2012, and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Reclassified
from Accumulated Other
Comprehensive Loss into
Income
|
|
|
Location of Gain
(Loss) Reclassified
from Accumulated Other
Comprehensive Loss
into
Income (effective portion)
|
|
For the Year Ended
|
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
|
|
|
(In millions)
|
|
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts relating to inventory hedges
|
|
$
|
(4.1
|
)
|
|
$
|
0.1
|
|
|
$
|
(0.3
|
)
|
|
Cost of sales
|
Foreign exchange currency contracts relating to intercompany management fee hedges
|
|
$
|
(0.7
|
)
|
|
$
|
4.5
|
|
|
$
|
(1.8
|
)
|
|
Selling, general and administrative expenses
|
Interest rate contracts
|
|
$
|
(2.0
|
)
|
|
$
|
(3.6
|
)
|
|
$
|
(3.6
|
)
|
|
Interest expense, net
|
126
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company reports its derivatives at fair value as either assets or liabilities within
its consolidated balance sheet. See Note 13,
Fair Value Measurements
, for information on derivative fair values and their consolidated balance sheet location as of December 31, 2013 and 2012.
12. Income Taxes
The components of income before income taxes are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Domestic
|
|
$
|
155.6
|
|
|
$
|
172.3
|
|
|
$
|
143.9
|
|
Foreign
|
|
|
561.1
|
|
|
|
478.6
|
|
|
|
415.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
716.7
|
|
|
$
|
650.9
|
|
|
$
|
559.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
$
|
138.1
|
|
|
$
|
104.0
|
|
|
$
|
103.3
|
|
Federal
|
|
|
68.8
|
|
|
|
82.1
|
|
|
|
55.3
|
|
State
|
|
|
7.2
|
|
|
|
8.6
|
|
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
214.1
|
|
|
|
194.7
|
|
|
|
166.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(16.3
|
)
|
|
|
(6.3
|
)
|
|
|
(11.8
|
)
|
Federal
|
|
|
(9.4
|
)
|
|
|
(2.7
|
)
|
|
|
(8.7
|
)
|
State
|
|
|
0.8
|
|
|
|
1.2
|
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24.9
|
)
|
|
|
(7.8
|
)
|
|
|
(21.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
189.2
|
|
|
$
|
186.9
|
|
|
$
|
144.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognizes excess tax benefits associated with share-based compensation to shareholders
equity only when realized. When assessing whether excess tax benefits relating to share-based compensation have been realized, the Company follows the with-and-without approach. Under this approach, excess tax benefits related to share-based
compensation are not deemed to be realized until after the utilization of all other tax benefits available to the Company, which are also subject to applicable limitations. As of December 31, 2013 and 2012, the Company had $15.4 million and
$25.9 million, respectively, of unrealized excess tax benefits. The reduction primarily relates to the utilization of previously unrealized excess tax benefits. The $15.4 million of excess tax benefits at December 31, 2013 relates to foreign
tax credits generated and carried forward on US federal income tax returns. If unused, tax credit carryforwards of $2.4 million will expire in 2021 and $13.0 million will expire in 2022.
Venezuela has experienced cumulative inflation of at least 100% during the three year period ended December 31, 2009. Therefore, as
of January 1, 2010 the Bolivar is hyperinflationary for U.S. federal income tax purposes. As a result, because Herbalife Venezuela is considered a dual incorporated entity, it is now required to account for its operations using the Dollar
Approximate Separate Transactions Method of accounting, or DASTM. See Note 2,
Basis of Presentation
, for a further discussion on Herbalife Venezuela and Venezuelas highly inflationary economy.
127
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The significant categories of temporary differences that gave rise to deferred tax
assets and liabilities are as follows (tax effected in millions):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Accruals not currently deductible
|
|
$
|
53.4
|
|
|
$
|
48.0
|
|
Tax loss carry forwards of certain foreign subsidiaries
|
|
|
29.2
|
|
|
|
22.0
|
|
Depreciation/amortization
|
|
|
3.5
|
|
|
|
13.5
|
|
Deferred compensation plan
|
|
|
47.4
|
|
|
|
35.6
|
|
Deferred interest expense
|
|
|
218.7
|
|
|
|
186.9
|
|
Accrued vacation
|
|
|
5.5
|
|
|
|
4.6
|
|
Inventory reserve
|
|
|
13.2
|
|
|
|
6.4
|
|
Hyperinflationary adjustment
|
|
|
|
|
|
|
3.5
|
|
Other
|
|
|
4.5
|
|
|
|
8.6
|
|
|
|
|
|
|
|
|
|
|
Gross deferred income tax assets
|
|
|
375.4
|
|
|
|
329.1
|
|
Less: valuation allowance
|
|
|
(247.6
|
)
|
|
|
(209.3
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
$
|
127.8
|
|
|
$
|
119.8
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
$
|
113.0
|
|
|
$
|
111.7
|
|
Unremitted foreign earnings
|
|
|
0.7
|
|
|
|
13.9
|
|
Other
|
|
|
4.5
|
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liabilities
|
|
$
|
118.2
|
|
|
$
|
130.1
|
|
|
|
|
|
|
|
|
|
|
Total net deferred tax assets (liabilities)
|
|
$
|
9.6
|
|
|
$
|
(10.3
|
)
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards of subsidiaries for 2013 and 2012 were $29.2 million and $22.0 million,
respectively. If unused, net operating losses and tax credits of $3.6 million will expire between 2014 and 2023 and $25.6 million can be carried forward indefinitely. Deferred interest carryforwards of subsidiaries for 2013 and 2012 were $218.7
million and $186.9 million, respectively, and can be carried forward indefinitely.
The Company recognizes valuation allowances
on deferred tax assets reported if, based on the weight of the evidence it is more likely than not that some or all of the deferred tax assets will not be realized. As of December 31, 2013 and 2012 the Company held valuation allowances against
net deferred tax assets of certain subsidiaries, primarily related to deferred interest expense carryforwards and net operating loss carryforwards, in the amount of $247.6 million and $209.3 million, respectively. The change in the Companys
valuation allowance during 2013 of $38.3 million was related to $36.7 million of net additions charged to income tax expense and $1.6 million of currency translation adjustments recognized within other comprehensive income. The change in the
Companys valuation allowance during 2012 of $41.2 million was related to $40.2 million of net additions charged to income tax expense and $1.0 million of currency translation adjustments recognized within other comprehensive income. The change
in the Companys valuation allowance during 2011 of $29.5 million was related to $31.8 million of net additions charged to income tax expense, reduced by $2.3 million of currency translation adjustments recognized within other comprehensive
income.
At December 31, 2013, the Companys U.S. consolidated group had approximately $88.1 million of
unremitted earnings that were permanently reinvested from certain foreign subsidiaries. In addition, at December 31, 2013, Herbalife Ltd. had approximately $2.0 billion of permanently reinvested unremitted earnings relating to its operating
subsidiaries. Since these unremitted earnings have been permanently reinvested, deferred taxes were not provided on these unremitted earnings. Further, it is not practicable to determine the amount of
128
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
unrecognized deferred taxes with respect to these unremitted earnings. If the Company were to remit these unremitted earnings then it would be subject to income tax on these remittances. Deferred
taxes have been accrued for earnings that are not considered indefinitely reinvested. The deferred tax liability on the unremitted foreign earnings as of December 31, 2013 and 2012 was $0.7 million and $13.9 million, respectively.
The applicable statutory income tax rate in the Cayman Islands was zero for Herbalife Ltd. for the years being reported. For purposes of
the reconciliation between the provision for income taxes at the statutory rate and the provision for income taxes at the effective tax rate, a notional 35% tax rate is applied as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
(In millions)
|
|
Tax expense at United States statutory rate
|
|
$
|
250.9
|
|
|
$
|
227.8
|
|
|
$
|
195.9
|
|
Increase (decrease) in tax resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Differences between U.S. and foreign tax rates on foreign income, including withholding taxes
|
|
|
(82.1
|
)
|
|
|
(97.9
|
)
|
|
|
(78.1
|
)
|
U.S. tax (benefit) on foreign income net of foreign tax credits
|
|
|
(4.7
|
)
|
|
|
1.8
|
|
|
|
(8.8
|
)
|
Increase (decrease) in valuation allowances
|
|
|
36.7
|
|
|
|
40.2
|
|
|
|
31.8
|
|
State taxes, net of federal benefit
|
|
|
5.7
|
|
|
|
7.3
|
|
|
|
5.2
|
|
Unrecognized tax benefits
|
|
|
(10.3
|
)
|
|
|
6.6
|
|
|
|
1.1
|
|
Other
|
|
|
(7.0
|
)
|
|
|
1.1
|
|
|
|
(2.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
189.2
|
|
|
$
|
186.9
|
|
|
$
|
144.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2012, and 2011, the Company benefited from the terms of a tax
holiday in the Peoples Republic of China. The tax holiday commenced on January 1, 2008 and concluded on December 31, 2012. Under the terms of the holiday, the Company was subject to an 11% tax rate in 2010, a 12% tax rate in 2011,
and a 12.5% tax rate in 2012. The Company was subject to the statutory tax rate of 25% in 2013.
As of December 31, 2013,
the total amount of unrecognized tax benefits, including related interest and penalties was $34.6 million. If the total amount of unrecognized tax benefits was recognized, $28.4 million of unrecognized tax benefits, $3.7 million of interest and $0.8
million of penalties would impact the effective tax rate. As of December 31, 2012, the total amount of unrecognized tax benefits, including related interest and penalties was $47.1 million. If the total amount of unrecognized tax benefits was
recognized, $38.2 million of unrecognized tax benefits, $5.7 million of interest and $1.7 million of penalties would impact the effective tax rate.
The Company accounts for the interest and penalties generated by tax contingencies as a component of income tax expense. During the year ended December 31, 2013, the Company recorded a reversal in
interest and penalty expense related to uncertain tax positions of $1.6 million and $0.7 million, respectively. During the year ended December 31, 2012, the Company recorded an increase in interest and penalty expense related to uncertain tax
positions of $0.2 million and $0.6 million, respectively. During the year ended December 31, 2011, the Company recorded an increase in interest expense and a reversal of penalty expense related to uncertain tax positions of $0.1 million and
$0.1 million, respectively. As of December 31, 2013, total amount of interest and penalties related to unrecognized tax benefits recognized in the statement of financial position were $3.7 million and $0.8 million respectively. As of
December 31, 2012, total amount of interest and penalties related to unrecognized tax benefits recognized in the statement of financial position were $5.7 million and $1.7 million respectively.
129
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following changes occurred in the amount of unrecognized tax benefits during the
years ended December 31, 2013, 2012, and 2011 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
2013
|
|
|
Year Ended
December 31,
2012
|
|
|
Year Ended
December 31,
2011
|
|
Beginning balance of unrecognized tax benefits
|
|
$
|
39.7
|
|
|
$
|
32.4
|
|
|
$
|
31.6
|
|
Additions for current year tax positions
|
|
|
10.3
|
|
|
|
7.8
|
|
|
|
5.5
|
|
Additions for prior year tax positions
|
|
|
4.1
|
|
|
|
4.5
|
|
|
|
2.0
|
|
Reductions for prior year tax positions
|
|
|
(3.9
|
)
|
|
|
(0.1
|
)
|
|
|
(0.9
|
)
|
Reductions for audit settlements
|
|
|
(10.0
|
)
|
|
|
(0.3
|
)
|
|
|
(0.7
|
)
|
Reductions for the expiration of statutes of limitation
|
|
|
(8.4
|
)
|
|
|
(4.9
|
)
|
|
|
(4.5
|
)
|
Changes due to foreign currency translation adjustments
|
|
|
(1.9
|
)
|
|
|
0.3
|
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance of unrecognized tax benefits (excluding interest and penalties)
|
|
$
|
29.9
|
|
|
$
|
39.7
|
|
|
$
|
32.4
|
|
Interest and penalties associated with unrecognized tax benefits
|
|
|
4.7
|
|
|
|
7.4
|
|
|
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance of unrecognized tax benefits (including interest and penalties)
|
|
$
|
34.6
|
|
|
$
|
47.1
|
|
|
$
|
39.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of income taxes the Company pays is subject to ongoing audits by taxing jurisdictions around
the world. The Companys estimate of the potential outcome of any uncertain tax position is subject to managements assessment of relevant risks, facts, and circumstances existing at that time. The Company believes that it has adequately
provided for these matters. However, the Companys future results may include favorable or unfavorable adjustments to its estimates in the period the audits are resolved, which may impact the Companys effective tax rate. As of
December 31, 2013, the Companys tax filings are generally subject to examination in major tax jurisdictions for years ending on or after December 31, 2009.
The Company believes that it is reasonably possible that the amount of unrecognized tax benefits could decrease by up to approximately $10.7 million within the next twelve months. Of this possible
decrease, $6.8 million would be due to the settlement of audits or resolution of administrative or judicial proceedings. The remaining possible decrease of $3.9 million would be due to the expiration of statute of limitations in various
jurisdictions.
13. Fair Value Measurements
The Company applies the provisions of FASB ASC Topic 820,
Fair Value Measurements and Disclosures
, or
ASC 820, for its financial and non-financial assets and liabilities. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. ASC 820 establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the
reporting entity has the ability to access at the measurement date.
Level 2 inputs include quoted prices
for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are
derived principally from or corroborated by observable market data by correlation or other means.
Level 3
inputs are unobservable inputs for the asset or liability.
130
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company measures certain assets and liabilities at fair value as discussed
throughout the notes to its consolidated financial statements. Foreign exchange currency contracts and interest rate swaps are valued using standard calculations and models. Foreign exchange currency contracts are valued primarily based on inputs
such as observable forward rates, spot rates and foreign currency exchange rates at the reporting period ended date. Interest rate swaps are valued primarily based on inputs such as LIBOR and swap yield curves at the reporting period ended date. The
Companys derivative assets and liabilities are measured at fair value and consisted of Level 2 inputs and their amounts are shown below at their gross values at December 31, 2013 and 2012:
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Balance Sheet Location
|
|
Significant
Other
Observable
Inputs
(Level 2)
Fair Value
at
December 31,
2013
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
Fair Value
at
December 31,
2012
|
|
|
|
|
|
(In millions)
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts relating to inventory and intercompany management fee hedges
|
|
Prepaid expenses and other current assets
|
|
$
|
5.7
|
|
|
$
|
0.5
|
|
Derivatives not designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
|
Prepaid expenses and other current assets
|
|
$
|
2.3
|
|
|
$
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8.0
|
|
|
$
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts relating to inventory and intercompany management fee hedges
|
|
Accrued expenses
|
|
$
|
4.4
|
|
|
$
|
3.3
|
|
Interest rate swaps
|
|
Accrued expenses
|
|
$
|
|
|
|
$
|
2.0
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
|
Accrued expenses
|
|
$
|
0.7
|
|
|
$
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5.1
|
|
|
$
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys deferred compensation plan assets consist of Company owned life insurance policies. As
these policies are recorded at their cash surrender value, they are not required to be included in the fair value table above. See Note 6,
Employee Compensation Plans
, for a further description of its deferred compensation plan assets.
131
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables summarize the offsetting of the fair values of the Companys
derivative assets and derivative liabilities for presentation in the Companys consolidated balance sheet at December 31, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting of Derivative Assets
|
|
|
|
Gross
Amounts of
Recognized
Assets
|
|
|
Gross
Amounts
Offset in the
Balance Sheet
|
|
|
Net Amounts
of Assets
Presented in
the Balance
Sheet
|
|
|
|
(In millions)
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
|
$
|
8.0
|
|
|
$
|
(3.0
|
)
|
|
$
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8.0
|
|
|
$
|
(3.0
|
)
|
|
$
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
|
$
|
1.2
|
|
|
$
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1.2
|
|
|
$
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting of Derivative Liabilities
|
|
|
|
Gross
Amounts of
Recognized
Liabilities
|
|
|
Gross
Amounts
Offset in the
Balance Sheet
|
|
|
Net Amounts
of Liabilities
Presented in
the Balance
Sheet
|
|
|
|
(In millions)
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
|
$
|
5.1
|
|
|
$
|
(3.0
|
)
|
|
$
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5.1
|
|
|
$
|
(3.0
|
)
|
|
$
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
|
$
|
4.6
|
|
|
$
|
(1.2
|
)
|
|
$
|
3.4
|
|
Interest rate swaps
|
|
|
2.0
|
|
|
|
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6.6
|
|
|
$
|
(1.2
|
)
|
|
$
|
5.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company offsets all of its derivative assets and derivative liabilities in its consolidated balance
sheet to the extent it maintains master netting arrangements with related financial institutions. As of December 31, 2013 and 2012, all of the Companys derivatives were subject to master netting arrangements and no collateralization was
required for the Companys derivative assets and derivative liabilities.
14. Professional Fees and Other Expenses
In late 2012, a hedge fund manager publicly raised allegations regarding the legality of the Companys network
marketing program and announced that the hedge fund manager had taken a significant short position regarding the Companys common shares, leading to intense public scrutiny and significant stock price volatility. The Company believes that the
hedge fund managers allegations are inaccurate and misleading. The Company has engaged legal and advisory firms to assist with responding to the allegations and to perform other related services in connection to these recent events. The
Company recognizes the related expenses as a part of selling, general & administrative expenses within its consolidated statement of income. For the year ended December 31, 2013, the Company recorded approximately $29.1 million of
professional fees and other expenses related to this matter.
132
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Of the approximately $29.1 million in expenses incurred during the year ended
December 31, 2013 discussed above, approximately $6.0 million was recognized for advisory retainer fees. The minimum guaranteed retainer fees were approximately $4.0 million as of December 31, 2013 and the expense recognition of these fees
could accelerate based on certain conditions.
The Company also had a cash settlement liability award, or the Liability Award,
outstanding as of December 31, 2013, which is tied to the Companys stock price and which only vests if certain conditions are met relating to the above matter. The fair value of the Liability Award will be revalued each quarter until
settlement and the Company will recognize and adjust the expense over the expected requisite service period. The expense recognized during the year ended December 31, 2013, relating to the Liability Award was approximately $3.5 million, and is
included in the approximately $29.1 million expense described above. The remaining unrecognized expense relating to the Liability Award was approximately $3.3 million as of December 31, 2013, based on the fair value of the Liability Award as of
that date. The recognition of the unrecognized expense relating to the Liability Award could accelerate and change based on certain conditions.
15. Subsequent Events
On February 3, 2014, the Company announced that its board of directors authorized an increase in the existing
share repurchase authorization to an available balance of $1.5 billion. The Companys former share repurchase authorization of $1 billion had an available balance of $652.6 million as of December 31, 2013.
On February 18, 2014, the Company announced that its board of directors approved a quarterly cash dividend of $0.30 per common share
to shareholders of record as of March 4, 2014, payable on March 18, 2014.
During February 2014, the Company
initially issued $1 billion aggregate principal amount of convertible senior notes, or Convertible Notes, in a private offering to qualified institutional buyers, pursuant to Rule 144A under the Securities Act of 1933, as amended. The Company
granted an option to the initial purchasers to purchase up to an additional $150 million aggregate principal amount of Convertible Notes which was subsequently exercised in full during February 2014, resulting in a total issuance of $1.15 billion
aggregate principal amount of Convertible Notes. The Convertible Notes pay interest at a rate of 2.00% per annum payable semiannually in arrears on February 15 and August 15 of each year, beginning on August 15, 2014. The
Convertible Notes mature on August 15, 2019, unless earlier repurchased or converted. The Company may not redeem the Convertible Notes prior to their stated maturity date. These Convertible Notes are not puttable by the note holders other than
in the context of a defined fundamental change. Upon conversion, the Convertible Notes will be settled in cash and, if applicable, the Companys common shares, based on the applicable conversion rate at such time. The Convertible Notes had an
initial conversion rate of 11.5908 common shares per $1,000 principal amount of the Convertible Notes (which is equal to an initial conversion price of approximately $86.28 per common share), representing an initial conversion premium of
approximately 25% above the last reported sale price of $69.02 per common share on February 3, 2014. The Company is also expected to incur approximately $26 million of deferred financing costs as a result of issuing these Convertible Notes.
During the first quarter of 2014, the $1.15 billion proceeds received from the issuance of the Convertible Notes must be
allocated between total liabilities and shareholders equity within the Companys consolidated balance sheet due to the fact the Convertible Notes may be partially settled in cash and that there is an existing equity conversion feature
within the Convertible Notes that permits the Company to settle any amounts above the conversion price with its common shares. As of February 18, 2014, the $1.15 billion allocation between total liabilities and shareholders equity had not
been finalized. Preliminarily, it is expected that a majority of the $1.15 billion will be allocated to total liabilities. As a result of this required allocation, the liability component will be measured based on the fair value of the Convertible
Notes which will be discounted using the nonconvertible debt interest rate; therefore, this will result in discounted debt being recognized within total liabilities
133
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
on the Companys consolidated balance sheet. The difference between the proceeds received from the Convertible Notes issuance and this discounted debt would then be allocated to
shareholders equity. Since the Company must still settle these Convertible Notes at face value at or prior to maturity, this discounted debt will be accreted up to its face value resulting in additional non-cash interest expense being
recognized in subsequent periods within the Companys consolidated statements of income while the Convertible Notes remain outstanding.
In connection with the issuance of Convertible Notes, the Company paid approximately $124 million to enter into capped call transactions with respect to its common shares, or the Capped Call Transactions,
with certain financial institutions. The Capped Call Transactions are expected generally to reduce the potential dilution upon conversion of the Convertible Notes in the event that the market price of the common shares is greater than the strike
price of the Capped Call Transactions, with such reduction of potential dilution subject to a cap based on the cap price of the Capped Call Transactions. The cap price of the Capped Call Transactions will initially be $120.79 per common share,
representing a premium of approximately 75% above the last reported sale price of $69.02 per common share on February 3, 2014, and is subject to certain adjustments under the terms of the Capped Call Transactions. As a result of this
transaction, the Companys additional paid-in capital within shareholders equity on its consolidated balance sheet was reduced by $124 million during the first quarter of 2014.
In addition, the Company paid approximately $686 million to enter into prepaid forward share repurchase transactions, or the Forward
Transactions, with certain financial institutions, or Forward Counterparties, pursuant to which the Company purchased approximately 9.9 million common shares for settlement on or around the August 15, 2019 maturity date for the Convertible
Notes, subject to the ability of each Forward Counterparty to elect to settle all or a portion of its Forward Transaction early. The Forward Transactions are generally expected to facilitate privately negotiated derivative transactions between the
Forward Counterparties and holders of the Convertible Notes, including swaps, relating to the common shares by which holders of the Convertible Notes establish short positions relating to the common shares and otherwise hedge their investments in
the Convertible Notes concurrently with, or shortly after, the pricing of the Convertible Notes. As a result of this transaction, the Companys total shareholders equity within its consolidated balance sheet was reduced by approximately
$686 million during the first quarter of 2014, with amounts being allocated between retained earnings and additional paid in capital within total shareholders equity. The Company will also record non-cash deferred financing costs and a
corresponding amount to additional paid in capital reflecting the fair value of the Forward Transactions as these transactions were also executed to facilitate the issuance of the Companys Convertible Notes as described above. As of
February 18, 2014, the fair value was not finalized.
In February 2014, in connection with executing the Convertible
Notes, Forward Transactions, and Capped Call Transactions, the Company also amended the Credit Facility. Pursuant to this amendment, the Company amended the terms of the Credit Facility to provide for technical amendments to the indebtedness, asset
sale and dividend covenants and the cross-default event of default to accommodate the foregoing transactions. The amendment will also increase by 0.50% the highest applicable margin payable by Herbalife in the event that Herbalifes
consolidated total leverage ratio exceeds 2.50 to 1.00 and increase the permitted consolidated total leverage ratio of Herbalife under the Credit Facility.
134
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Quarterly Information (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(In millions, except per share data)
|
|
First Quarter Ended March 31
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,123.6
|
|
|
$
|
964.2
|
|
Gross profit
|
|
|
897.7
|
|
|
|
768.0
|
|
Net income
|
|
|
118.9
|
|
|
|
107.9
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.14
|
|
|
$
|
0.93
|
|
Diluted
|
|
$
|
1.10
|
|
|
$
|
0.88
|
|
Second Quarter Ended June 30
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,219.2
|
|
|
$
|
1,031.9
|
|
Gross profit
|
|
|
972.0
|
|
|
|
828.2
|
|
Net income
|
|
|
143.2
|
|
|
|
132.0
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.39
|
|
|
$
|
1.13
|
|
Diluted
|
|
$
|
1.34
|
|
|
$
|
1.09
|
|
Third Quarter Ended September 30
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,213.5
|
|
|
$
|
1,016.9
|
|
Gross profit
|
|
|
975.1
|
|
|
|
815.3
|
|
Net income
|
|
|
142.0
|
|
|
|
111.9
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.39
|
|
|
$
|
1.03
|
|
Diluted
|
|
$
|
1.32
|
|
|
$
|
0.98
|
|
Fourth Quarter Ended December 31
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,268.9
|
|
|
$
|
1,059.3
|
|
Gross profit
|
|
|
1,017.1
|
|
|
|
848.2
|
|
Net income
|
|
|
123.5
|
|
|
|
112.2
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.22
|
|
|
$
|
1.04
|
|
Diluted
|
|
$
|
1.15
|
|
|
$
|
1.00
|
|
135