Item 1.
Financial Statements
HERBALIFE LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
|
|
(In thousands, except share and
par value amounts)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
773,517
|
|
|
$
|
972,974
|
|
Receivables, net of allowance for doubtful accounts of $2,013 (2014) and $2,211 (2013)
|
|
|
103,782
|
|
|
|
100,326
|
|
Inventories
|
|
|
343,447
|
|
|
|
351,201
|
|
Prepaid expenses and other current assets
|
|
|
206,654
|
|
|
|
148,774
|
|
Deferred income taxes
|
|
|
67,389
|
|
|
|
69,845
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,494,789
|
|
|
|
1,643,120
|
|
|
|
|
|
|
|
|
|
|
Property, at cost, net of accumulated depreciation and amortization of $368,796 (2014) and $327,864 (2013)
|
|
|
363,165
|
|
|
|
318,860
|
|
Deferred compensation plan assets
|
|
|
27,597
|
|
|
|
26,821
|
|
Deferred financing costs, net
|
|
|
25,677
|
|
|
|
4,896
|
|
Other assets
|
|
|
108,358
|
|
|
|
63,713
|
|
Marketing related intangibles and other intangible assets, net
|
|
|
310,608
|
|
|
|
310,801
|
|
Goodwill
|
|
|
105,490
|
|
|
|
105,490
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,435,684
|
|
|
$
|
2,473,701
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS (DEFICIT) EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
97,065
|
|
|
$
|
82,665
|
|
Royalty overrides
|
|
|
253,261
|
|
|
|
266,952
|
|
Accrued compensation
|
|
|
89,358
|
|
|
|
111,905
|
|
Accrued expenses
|
|
|
287,516
|
|
|
|
267,501
|
|
Current portion of long-term debt
|
|
|
93,751
|
|
|
|
81,250
|
|
Advance sales deposits
|
|
|
88,071
|
|
|
|
68,079
|
|
Income taxes payable
|
|
|
33,344
|
|
|
|
43,826
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
942,366
|
|
|
|
922,178
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
1,744,236
|
|
|
|
850,019
|
|
Deferred compensation plan liability
|
|
|
41,795
|
|
|
|
37,226
|
|
Deferred income taxes
|
|
|
59,952
|
|
|
|
66,026
|
|
Other non-current liabilities
|
|
|
51,403
|
|
|
|
46,806
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,839,752
|
|
|
|
1,922,255
|
|
|
|
|
|
|
|
|
|
|
CONTINGENCIES
|
|
|
|
|
|
|
|
|
SHAREHOLDERS (DEFICIT) EQUITY:
|
|
|
|
|
|
|
|
|
Common shares, $0.001 par value; 1.0 billion shares authorized; 91.8 million (2014) and 101.1 million (2013) shares
outstanding
|
|
|
92
|
|
|
|
101
|
|
Paid-in-capital in excess of par value
|
|
|
398,436
|
|
|
|
323,860
|
|
Accumulated other comprehensive loss
|
|
|
(22,657
|
)
|
|
|
(19,794
|
)
|
(Accumulated deficit) retained earnings
|
|
|
(779,939
|
)
|
|
|
247,279
|
|
|
|
|
|
|
|
|
|
|
Total shareholders (deficit) equity
|
|
|
(404,068
|
)
|
|
|
551,446
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders (deficit) equity
|
|
$
|
2,435,684
|
|
|
$
|
2,473,701
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to unaudited condensed consolidated financial statements.
3
HERBALIFE LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
2014
|
|
|
June 30,
2013
|
|
|
June 30,
2014
|
|
|
June 30,
2013
|
|
|
|
(In thousands, except per share amounts)
|
|
Product sales
|
|
$
|
1,201,338
|
|
|
$
|
1,055,036
|
|
|
$
|
2,357,472
|
|
|
$
|
2,006,619
|
|
Shipping & handling revenues
|
|
|
104,862
|
|
|
|
164,203
|
|
|
|
211,377
|
|
|
|
336,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
1,306,200
|
|
|
|
1,219,239
|
|
|
|
2,568,849
|
|
|
|
2,342,886
|
|
Cost of sales
|
|
|
257,221
|
|
|
|
247,224
|
|
|
|
508,386
|
|
|
|
473,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,048,979
|
|
|
|
972,015
|
|
|
|
2,060,463
|
|
|
|
1,869,685
|
|
Royalty overrides
|
|
|
390,774
|
|
|
|
379,551
|
|
|
|
772,593
|
|
|
|
743,580
|
|
Selling, general & administrative expenses
|
|
|
461,917
|
|
|
|
400,107
|
|
|
|
963,979
|
|
|
|
764,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
196,288
|
|
|
|
192,357
|
|
|
|
323,891
|
|
|
|
361,278
|
|
Interest expense, net
|
|
|
21,406
|
|
|
|
5,559
|
|
|
|
36,367
|
|
|
|
10,932
|
|
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
3,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
174,882
|
|
|
|
186,798
|
|
|
|
284,363
|
|
|
|
350,346
|
|
Income taxes
|
|
|
55,350
|
|
|
|
43,636
|
|
|
|
90,203
|
|
|
|
88,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
119,532
|
|
|
$
|
143,162
|
|
|
$
|
194,160
|
|
|
$
|
262,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
Basic
|
|
$
|
1.39
|
|
|
$
|
1.39
|
|
|
$
|
2.14
|
|
|
$
|
2.53
|
|
Diluted
|
|
$
|
1.31
|
|
|
$
|
1.34
|
|
|
$
|
2.02
|
|
|
$
|
2.44
|
|
Weighted average shares outstanding:
|
|
|
|
|
Basic
|
|
|
86,113
|
|
|
|
102,993
|
|
|
|
90,732
|
|
|
|
103,551
|
|
Diluted
|
|
|
91,172
|
|
|
|
107,083
|
|
|
|
95,934
|
|
|
|
107,589
|
|
Dividends declared per share
|
|
|
|
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
|
$
|
0.60
|
|
See the accompanying notes to unaudited condensed consolidated financial statements.
4
HERBALIFE LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
2014
|
|
|
June 30,
2013
|
|
|
June 30,
2014
|
|
|
June 30,
2013
|
|
|
|
(In thousands)
|
|
Net income
|
|
$
|
119,532
|
|
|
$
|
143,162
|
|
|
$
|
194,160
|
|
|
$
|
262,035
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment, net of income taxes of $1,615 and $(1,506) for the three months ended June 30, 2014 and
2013, respectively, and $1,542 and $(1,811) for the six months ended June 30, 2014 and 2013, respectively
|
|
|
2,366
|
|
|
|
(9,247
|
)
|
|
|
182
|
|
|
|
(17,931
|
)
|
Unrealized (loss) gain on derivatives, net of income taxes of $(210) and $2,211 for the three months ended June 30, 2014 and 2013,
respectively, and $(314) and $1,704 for the six months ended June 30, 2014 and 2013, respectively
|
|
|
(2,763
|
)
|
|
|
6,675
|
|
|
|
(3,178
|
)
|
|
|
5,343
|
|
Unrealized gain on available-for-sale investments, net of income taxes of $121 and $70 for the three and six months ended June 30,
2014, respectively
|
|
|
225
|
|
|
|
|
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss
|
|
|
(172
|
)
|
|
|
(2,572
|
)
|
|
|
(2,863
|
)
|
|
|
(12,588
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
119,360
|
|
|
$
|
140,590
|
|
|
$
|
191,297
|
|
|
$
|
249,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to unaudited condensed consolidated financial statements.
5
HERBALIFE LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
2014
|
|
|
June 30,
2013
|
|
|
|
(In thousands)
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
194,160
|
|
|
$
|
262,035
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
44,776
|
|
|
|
42,310
|
|
Excess tax benefits from share-based payment arrangements
|
|
|
(6,693
|
)
|
|
|
(15
|
)
|
Share-based compensation expenses
|
|
|
23,398
|
|
|
|
15,253
|
|
Non-cash interest expense
|
|
|
19,021
|
|
|
|
1,295
|
|
Deferred income taxes
|
|
|
(7,838
|
)
|
|
|
(7,939
|
)
|
Inventory write-downs
|
|
|
12,373
|
|
|
|
10,448
|
|
Unrealized foreign exchange transaction loss (gain)
|
|
|
2,532
|
|
|
|
(44
|
)
|
Foreign exchange loss relating to Venezuela
|
|
|
86,108
|
|
|
|
15,116
|
|
Other
|
|
|
3,717
|
|
|
|
(674
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(1,163
|
)
|
|
|
(312
|
)
|
Inventories
|
|
|
(2,409
|
)
|
|
|
(14,094
|
)
|
Prepaid expenses and other current assets
|
|
|
(50,669
|
)
|
|
|
(13,150
|
)
|
Other assets
|
|
|
(4,642
|
)
|
|
|
(534
|
)
|
Accounts payable
|
|
|
13,038
|
|
|
|
4,586
|
|
Royalty overrides
|
|
|
(12,113
|
)
|
|
|
(2,051
|
)
|
Accrued expenses and accrued compensation
|
|
|
16,661
|
|
|
|
43,761
|
|
Advance sales deposits
|
|
|
20,915
|
|
|
|
4,481
|
|
Income taxes
|
|
|
(8,158
|
)
|
|
|
(12,546
|
)
|
Deferred compensation plan liability
|
|
|
4,569
|
|
|
|
3,527
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
347,583
|
|
|
|
351,453
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(105,482
|
)
|
|
|
(56,048
|
)
|
Proceeds from sale of property, plant and equipment
|
|
|
11
|
|
|
|
33
|
|
Investments in Venezuelan bonds
|
|
|
(7,588
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
(113,059
|
)
|
|
|
(56,015
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(30,400
|
)
|
|
|
(61,823
|
)
|
Dividends received
|
|
|
3,416
|
|
|
|
|
|
Payments for Capped Call Transactions
|
|
|
(123,825
|
)
|
|
|
|
|
Borrowings from senior secured credit facility and other debt
|
|
|
|
|
|
|
513,227
|
|
Proceeds from senior convertible notes
|
|
|
1,150,000
|
|
|
|
|
|
Principal payments on senior secured credit facility and other debt
|
|
|
(37,500
|
)
|
|
|
(38,250
|
)
|
Issuance costs relating to long-term debt and senior convertible notes
|
|
|
(28,927
|
)
|
|
|
|
|
Share repurchases
|
|
|
(1,277,929
|
)
|
|
|
(165,726
|
)
|
Excess tax benefits from share-based payment arrangements
|
|
|
6,693
|
|
|
|
15
|
|
Proceeds from exercise of stock options and sale of stock under employee stock purchase plan
|
|
|
2,039
|
|
|
|
971
|
|
|
|
|
|
|
|
|
|
|
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
|
|
|
(336,433
|
)
|
|
|
248,414
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
|
|
(97,548
|
)
|
|
|
(27,683
|
)
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
(199,457
|
)
|
|
|
516,169
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
972,974
|
|
|
|
333,534
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
773,517
|
|
|
$
|
849,703
|
|
|
|
|
|
|
|
|
|
|
CASH PAID DURING THE PERIOD
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
14,417
|
|
|
$
|
12,004
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
109,337
|
|
|
$
|
117,120
|
|
|
|
|
|
|
|
|
|
|
NON CASH ACTIVITIES
|
|
|
|
|
|
|
|
|
Accrued capital expenditures
|
|
$
|
13,090
|
|
|
$
|
8,040
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to unaudited condensed consolidated financial statements.
6
HERBALIFE LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 global nutrition company that sells weight management products, nutritional supplements, energy, sports & fitness products and personal care products. As of
June 30, 2014, the Company sold its products to and through a network of 3.9 million independent members, or Members, which included 0.2 million in China. In China, the Company 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. Significant Accounting Policies
Basis of Presentation
The unaudited condensed interim financial information of the Company has been prepared in accordance with Article 10 of the Securities and
Exchange Commissions, or the SEC, Regulation S-X. Accordingly, as permitted by Article 10 of the SECs Regulation S-X, it does not include all of the information required by generally accepted accounting principles in the U.S., or U.S.
GAAP, for complete financial statements. The condensed consolidated balance sheet at December 31, 2013 was derived from the audited financial statements at that date and does not include all the disclosures required by U.S. GAAP, as permitted
by Article 10 of the SECs Regulation S-X. The Companys unaudited condensed consolidated financial statements as of June 30, 2014, and for the three and six months ended June 30, 2014 and 2013, include Herbalife and all of its
direct and indirect subsidiaries. In the opinion of management, the accompanying financial information contains all adjustments, consisting of normal recurring adjustments, necessary to present fairly the Companys unaudited condensed
consolidated financial statements as of June 30, 2014, and for the three and six months ended June 30, 2014 and 2013. These unaudited condensed consolidated financial statements should be read in conjunction with the Companys Annual
Report on Form 10-K for the year ended December 31, 2013, or the 2013 10-K. Operating results for the three and six months ended June 30, 2014, are not necessarily indicative of the results that may be expected for the year ending
December 31, 2014.
New Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-08,
Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.
This ASU changes the threshold for a disposal to
qualify as a discontinued operation. To be considered a discontinued operation a disposal now must represent a strategic shift that has or will have a major effect on an entitys operations and financial results. This ASU also requires new
disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. This update will be applied prospectively and is effective for annual periods, and interim periods within those years,
beginning after December 15, 2014. Early adoption is permitted provided the disposal was not previously disclosed. The adoption of this guidance will not have a material impact on the Companys consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
. The new revenue
recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is effective for annual periods beginning after December 15, 2016 and shall be applied either
retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-12,
CompensationStock Compensation (Topic 718): Accounting for Share-Based Payments
When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force)
. This ASU clarifies that a performance target that affects vesting and
that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for
such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved
and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. This ASU is effective for
7
annual periods, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted. This ASU may be applied either (a) prospectively to all
awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or
modified awards thereafter. The adoption of this guidance will not have a material impact on the Companys consolidated financial statements.
Reclassifications
Certain
reclassifications were made to the prior period statement of cash flows, within cash flows from operating activities, to conform to current period presentation. These reclassifications did not impact the prior period total net cash provided by (used
in) operating activities, investing activities and financing activities, nor did it impact the Companys accompanying condensed consolidated balance sheets and related condensed consolidated statements of income and comprehensive income.
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. The application and approval process continues to be delayed and the Companys ability to timely obtain U.S. dollars using the official exchange rate mechanisms described below remains uncertain. In recent
instances, the Company has been unsuccessful in obtaining U.S. dollars at these official rates and it remains uncertain whether the Companys future anticipated applications will be approved. The current operating environment in Venezuela also
continues to be challenging for the Companys Venezuela business, with high inflation in the country, government restrictions on foreign exchange and pricing controls, and the possibility of the government announcing further devaluations to its
currency. These foreign exchange controls in Venezuela limit Herbalife Venezuelas ability to repatriate earnings and settle the Companys intercompany obligations at any official rate which is causing its Bolivar denominated cash and cash
equivalents to accumulate in Venezuela.
In February 2013, the Venezuela government announced that it devalued its Bolivar currency and
eliminated the SITME regulated system. The SITME 5.3 Bolivars per U.S. dollar rate was eliminated and the CADIVI rate was devalued from 4.3 Bolivars to 6.3 Bolivars per U.S. dollar. This CADIVI rate was 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 condensed consolidated statement of income for the six months ended June 30, 2013, as a result of remeasuring the
Companys Bolivar denominated monetary assets and liabilities at the CADIVI rate of 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. During the fourth quarter of 2013, the Company received an approval through the SICAD mechanism for a bid of approximately
6.8 million Bolivars, or approximately $1.1 million U.S. dollars remeasured using the CADIVI rate, for a distribution of approximately $0.6 million in U.S. dollars, which resulted in a foreign exchange loss of approximately $0.5 million during
the fourth quarter of 2013, or an effective exchange rate of 11.3 Bolivars per U.S. dollar.
During the first quarter of 2014, the
Venezuelan government announced the establishment of CENCOEX which replaced the previous foreign exchange commission, CADIVI. Also, during the first quarter of 2014, additional activities, such as processing of dividend payments, which were
previously administered by CADIVI, are now required to be processed at the SICAD auction rate, or SICAD I rate. During March 2014, the government introduced an additional exchange mechanism known as SICAD II. During March 2014, the Company submitted
a SICAD II bid to exchange its 5.3 million Bolivars for $0.1 million U.S. dollars which was approved and resulted in the Company recognizing a $0.7 million U.S. dollar foreign exchange loss at an effective exchange rate of approximately 56.2
Bolivars per U.S. dollar. The Company continues to evaluate the viability of this SICAD II mechanism and its public availability and accessibility to the Company in future periods. The SICAD II mechanism is still in its early stages and there is
limited information being published around this mechanism so it is currently difficult to determine how the SICAD II mechanism functions and if there are any volume constraints around this mechanism.
Based on the events above and the Companys facts and circumstances, the Company remeasured its financial statements at the SICAD I rate
of 10.7 Bolivars per U.S. dollar at March 31, 2014. As a result of using the less favorable SICAD I rate for remeasurement, during the three months ended March 31, 2014 the Companys cash and cash equivalents were reduced by
approximately $96.0 million, and the Company recognized $86.1 million of foreign exchange losses in selling, general & administrative expenses within its condensed consolidated statement of income. The Company continues to use the SICAD I
rate for remeasurement which was 10.6 Bolivars per U.S. dollar at June 30, 2014.
As of June 30, 2014, if the Company had used
the SICAD II rate of approximately 50 Bolivars per U.S. dollar to remeasure its net monetary assets and liabilities denominated in Bolivars, the Company would have incurred an additional approximate foreign exchange loss of $109.5 million during the
three and six months ended June 30, 2014, and its Herbalife Venezuela cash and cash equivalents would have been further reduced by approximately $120.2 million at June 30, 2014.
8
Due to the evolving foreign exchange control environment in Venezuela, it is possible that the
Companys ability to access certain foreign exchange mechanisms, including the SICAD I and SICAD II exchange mechanisms, could change in future periods which may have an impact on what rate the Company uses in the future to remeasure Herbalife
Venezuelas net monetary Bolivar denominated assets and liabilities. The Company is closely monitoring the SICAD I and SICAD II exchange mechanisms as they continue to evolve.
As of June 30, 2014, the Companys net monetary assets and liabilities denominated in Bolivars were approximately $138.9 million,
and included approximately $152.6 million in Bolivar denominated cash and cash equivalents. These Bolivar denominated assets and liabilities were remeasured at the SICAD I rate. These remeasured amounts, including cash and cash equivalents, being
reported on the Companys condensed consolidated balance sheet using the published official SICAD I rate may not accurately represent the amount of U.S. dollars that the Company could ultimately realize. Herbalife Venezuelas net sales
represented approximately 4% of the Companys consolidated net sales for both the six months ended June 30, 2014 and 2013, and its total assets represented approximately 7% and 10% of the Companys consolidated total assets as of
June 30, 2014 and December 31, 2013, respectively. As of June 30, 2014 and December 31, 2013, the majority of Herbalife Venezuelas total assets consisted of Bolivar denominated cash and cash equivalents.
Investments in Bolivar-Denominated Bonds
During the three and six months ended June 30, 2014, the Company invested in additional Bolivar denominated bonds with a purchase price of
45.1 million and 65.4 million Bolivars, respectively, or approximately $4.3 million and $7.6 million, respectively. 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 is 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 the three months and six months ended June 30, 2014, the Company did not sell any of
its bonds.
The Companys investments in Bolivar denominated bonds as of June 30, 2014 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Costs
|
|
|
Gross
Unrealized
Gain
|
|
|
Gross
Unrealized
Loss
|
|
|
Net
Unrealized
Gain
|
|
|
Market
Value
|
|
|
|
|
|
|
(In thousands)
|
|
Investments in Venezuelan bonds
|
|
$
|
8,453
|
|
|
$
|
411
|
|
|
$
|
(64
|
)
|
|
$
|
347
|
|
|
$
|
8,800
|
|
The Company evaluates securities for other-than-temporary impairment on a quarterly basis. The impairment
evaluation considers numerous factors, and their relative significance varies depending on the situation. Factors considered include the length of time and extent to which the market value has been less than cost; the financial condition and
near-term prospects of the issuer of the securities; when applicable, the foreign exchange rates that are available to the Company; and the intent and ability of the Company to retain the security in order to allow for an anticipated recovery in
fair value. If, based upon the analysis, it is determined that the impairment is other-than-temporary, the security is written-down to fair value, and a loss is recognized in other expense, net in the Companys condensed consolidated income
statement. Other-than-temporary impairments relating to available-for-sale securities for the three months ended March 31, 2014 was $3.2 million which was primarily due to the less favorable SICAD I rate being used to determine the U.S. dollar
equivalent fair value of these Bolivar denominated bonds as opposed to the previous CADIVI rate. There were no other-than-temporary impairments related to available-for-sale securities during the three months ended June 30, 2014.
The amortized cost and estimated fair value of these bonds as of June 30, 2014 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
|
|
|
8,453
|
|
|
|
8,800
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
8,453
|
|
|
$
|
8,800
|
|
|
|
|
|
|
|
|
|
|
9
Expected disposal dates may be less than the contractual dates as indicated in the table above.
See the Companys 2013 10-K for further information on Herbalife Venezuela and Venezuelas highly inflationary economy.
3. Inventories
Inventories consist primarily of finished goods available for resale. Inventories are stated at lower of cost (primarily on
the first-in, first-out basis) or market. The following are the major classes of inventory:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
|
|
(In millions)
|
|
Raw materials
|
|
$
|
42.2
|
|
|
$
|
23.1
|
|
Work in process
|
|
|
4.5
|
|
|
|
2.8
|
|
Finished goods
|
|
|
296.7
|
|
|
|
325.3
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
343.4
|
|
|
$
|
351.2
|
|
|
|
|
|
|
|
|
|
|
4. Long-Term Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
|
|
(In millions)
|
|
Borrowings under the senior secured credit facility
|
|
$
|
893.8
|
|
|
$
|
931.3
|
|
Convertible senior notes, carrying value of liability component
|
|
|
944.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,838.0
|
|
|
|
931.3
|
|
Less: current portion
|
|
|
93.8
|
|
|
|
81.3
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
1,744.2
|
|
|
$
|
850.0
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Credit Facility
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 its prior senior secured credit facility, or 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.
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.
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.
10
In February 2014, in connection with issuing the $1.15 billion Convertible Notes described below,
the Company 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 issuance of the Convertible Notes and the capped call and prepaid forward share repurchase transactions described in greater detail in Note 10,
Shareholders (Deficit) Equity
. The amendment also increased by
0.50% the highest applicable margin payable by Herbalife in the event that Herbalifes consolidated total leverage ratio is equal to or exceeds 2.50 to 1.00 and increased the permitted consolidated total leverage ratio of Herbalife under the
Credit Facility. The Company incurred approximately $2.3 million of debt issuance costs in connection with the amendment. 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 Credit Facility. On June 30, 2014 and December 31, 2013, the weighted average interest rate for borrowings under the Credit Facility, including borrowings under the Term Loan, was 3.01% and 2.17%,
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 June 30, 2014, and December 31, 2013, the Company was compliant with its debt covenants under the Credit Facility.
During the three months ended March 31, 2014, the Company repaid a total amount of $18.8 million under the Credit Facility. During
the three months ended June 30, 2014, the Company repaid a total amount of $18.8 million under the Credit Facility. As of June 30, 2014, and December 31, 2013, the U.S. dollar amount outstanding under the Credit Facility was $893.8
million and $931.3 million, respectively. Of the $893.8 million U.S. dollar amount outstanding under the Credit Facility as of June 30, 2014, $393.8 million was outstanding on the Term Loan and $500.0 million was outstanding on the revolving
credit facility. 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. There
were no outstanding foreign currency borrowings as of June 30, 2014 and December 31, 2013 under the Credit Facility.
The fair
value of the outstanding borrowings on the Companys revolving credit facility and Term Loan approximated their carrying values as of June 30, 2014, due to their variable interest rates which reprice frequently and represent floating
market rates. The fair value of the outstanding borrowings on the Companys revolving credit facility and Term Loan are determined by utilizing Level 2 inputs as defined in Note 12,
Fair Value Measurements
, such as observable market
interest rates and yield curves.
Convertible Senior Notes
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. Holders of the Convertible Notes may convert their notes at their option under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending
March 31, 2014, if the last reported sale price of the Companys common shares for at least 20 trading days (whether or not consecutive) in a period of 30 consecutive trading days ending on, and including, the last trading day of the
immediately preceding calendar quarter exceeds 130% of the conversion price for the Convertible Notes on each applicable trading day; (ii) during the five business-day period immediately after any five consecutive trading day period, which we
refer to as the measurement period, in which the trading price per $1,000 principal amount of Convertible Notes for each trading day of that measurement period was less than 98% of the product of the last reported sale price of the Companys
common shares and the conversion rate for the Convertible Notes for each such day; or (iii) upon the occurrence of specified corporate events. On and after May 15, 2019, holders may convert their Convertible Notes at any time, regardless
of the foregoing circumstances. 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).
The Company incurred approximately $26.6 million of issuance costs during the first quarter of 2014 relating to the issuance of the
Convertible Notes. Of the $26.6 million issuance costs incurred, $21.5 million and $5.1 million were recorded to deferred financing costs and additional paid-in capital, respectively, in proportion to the allocation of the proceeds of the
Convertible Notes. The $21.5 million recorded to deferred financing costs on the Companys consolidated balance sheet is being amortized over the contractual term of the Convertible Notes using the effective interest method.
During February 2014, the $1.15 billion proceeds received from the issuance of the Convertible Notes were initially allocated between
long-term debt, or liability component, and additional paid-in-capital, or equity component, within the Companys condensed
11
consolidated balance sheet at $930.9 million and $219.1 million, respectively. The liability component was measured using the nonconvertible debt interest rate. The carrying amount of the equity
component representing the conversion option was determined by deducting the fair value of the liability component from the face value of the Convertible Notes as a whole. Since the Company must still settle these Convertible Notes at face value at
or prior to maturity, this liability component will be accreted up to its face value resulting in additional non-cash interest expense being recognized within the Companys consolidated statements of income while the Convertible Notes remain
outstanding. The effective interest rate on the Convertible Notes is approximately 6.2% per annum. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
As of June 30, 2014, the outstanding principal on the Convertible Notes was $1.15 billion, the unamortized debt discount was $205.8
million, and the carrying amount of the liability component was $944.2 million, which was recorded to long-term debt within the Companys condensed consolidated balance sheet as reflected in the table above within this Note. As of June 30,
2014, the fair value of the liability component relating to the Convertible Notes was approximately $911.3 million. At June 30, 2014, the Company determined the fair value of the liability component of the Convertible Notes by reviewing market
data that was available for publicly traded, senior, unsecured nonconvertible corporate bonds issued by companies with similar credit ratings. Assumptions used in the estimate represent what market participants would use in pricing the
liability component, including market interest rates, credit standing, and yield curves, all of which are defined as Level 2 observable inputs. The Company also used a lattice model, which primarily included Level 2 inputs such as stock price,
volatility, debt yield and dividend yield rates when applicable, and Level 3 inputs, such as the price of the Convertible Notes at June 30, 2014. Since the Convertible Notes are not publicly traded, the price of the Convertible Notes
at June 30, 2014, was obtained from third party sources; these third party sources used Level 3 inputs, including private transactions, bid and offer prices, and other market adjustments in order to determine the price of the Convertible Notes
at June 30, 2014. This valuation approach was similar to the approach the Company used to determine the initial fair value of the liability component of the Convertible Notes on the February 7, 2014, issuance date except that the price of
the Convertible Notes on the February 7, 2014, issuance date would not be considered a Level 3 input as the Convertible Notes price paid by the market participants on the issuance date was an observable input.
In conjunction with the issuance of the Convertible Notes, during February 2014, the Company paid approximately $685.8 million to enter into
prepaid forward share repurchase transactions, or the Forward Transactions, with certain financial institutions, and paid approximately $123.8 million to enter into capped call transactions with respect to its common shares, or the Capped Call
Transactions, with certain financial institutions. See Note 10,
Shareholders (Deficit) Equity
, for additional discussion on the Forward Transactions and Capped Call Transactions entered into in conjunction with the issuance of these
Convertible Notes.
During the three and six months ended June 30, 2014, the Company recognized $15.2 million and $24.0 million,
respectively, of interest expense relating to the Convertible Notes, which included $8.5 million and $13.3 million, respectively, relating to non-cash interest expense relating to the debt discount and $0.9 million and $1.4 million, respectively,
relating to amortization of deferred financing costs. The Companys total interest expense, including the Credit Facility, was $24.2 million and $7.5 million for the three months ended June 30, 2014 and 2013, respectively, and $41.9
million and $14.3 million for the six months ended June 30, 2014 and 2013, respectively, which was recognized within its condensed consolidated statement of income.
As of June 30, 2014, the aggregate annual maturities of the Credit Facility were expected to be $43.8 million for the remainder of 2014,
$100.0 million for 2015, and $750.0 million for 2016. The $1.15 billion Convertible Notes are due 2019.
5. 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 foods, 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
12
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 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 $23 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. In addition, the Mexican Tax Administration Service has requested additional information in response to Company filings for VAT refunds. 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 Mexican Tax Administration Service
has requested information related to the Companys 2010 year. This information has been provided.
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
$3.9 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. On March 6, 2014, the Company was notified of a
similar audit of the 2011 year. 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 $7.3 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 is scheduled for September 23, 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.
13
Bostick, et al., v. Herbalife Intl of Am., Inc., et al.
On April 8, 2013,
Herbalife Ltd. and certain of its subsidiaries were named as defendants in a suit filed in the U.S. District Court for the Central District of California, challenging Herbalifes marketing practices and business structure under California laws
prohibiting endless chain schemes, unfair and deceptive business practices, and false advertising, as well as federal RICO statutes. On July 7, 2014, the complaint was amended to add additional plaintiffs. The plaintiffs seek
damages in an unspecified amount. The federal RICO claim was dismissed and a class has not been certified to date. The remaining claims are proceeding, and a trial has been set to commence on April 21, 2015. The Company is currently unable
to estimate the range of reasonably possible losses that could result from an unfavorable outcome given the early procedural stage of the matter, the inherent difficulty in predicting the outcome of these types of matters, including in particular
the outcome of trials, and the additional levels of judicial review available to the Company in the event of an adverse trial verdict. The Company believes it has numerous defenses to the suit, and intends to vigorously defend against the claims.
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.
6. Segment Information
The Company is a nutrition company that sells a wide range of weight management products, nutritional supplements, energy,
sports & fitness products 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, Lake Forest, California
facility, and in its Winston-Salem, North Carolina 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.
As of June 30, 2014, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
2014
|
|
|
June 30,
2013
|
|
|
June 30,
2014
|
|
|
June 30,
2013
|
|
|
|
(In millions)
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Reporting Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
245.0
|
|
|
$
|
241.7
|
|
|
$
|
487.3
|
|
|
$
|
457.9
|
|
Mexico
|
|
|
148.6
|
|
|
|
145.6
|
|
|
|
291.3
|
|
|
|
278.5
|
|
South Korea
|
|
|
117.9
|
|
|
|
112.0
|
|
|
|
216.9
|
|
|
|
222.0
|
|
Others
|
|
|
624.6
|
|
|
|
601.9
|
|
|
|
1,267.4
|
|
|
|
1,197.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Primary Reporting Segment
|
|
|
1,136.1
|
|
|
|
1,101.2
|
|
|
|
2,262.9
|
|
|
|
2,156.3
|
|
China
|
|
|
170.1
|
|
|
|
118.0
|
|
|
|
305.9
|
|
|
|
186.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales
|
|
$
|
1,306.2
|
|
|
$
|
1,219.2
|
|
|
$
|
2,568.8
|
|
|
$
|
2,342.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution Margin(1)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Reporting Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
101.9
|
|
|
$
|
99.5
|
|
|
$
|
205.8
|
|
|
$
|
194.2
|
|
Mexico
|
|
|
64.1
|
|
|
|
64.0
|
|
|
|
125.5
|
|
|
|
122.6
|
|
South Korea
|
|
|
62.9
|
|
|
|
56.4
|
|
|
|
118.3
|
|
|
|
111.6
|
|
Others
|
|
|
277.0
|
|
|
|
266.8
|
|
|
|
561.7
|
|
|
|
531.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Primary Reporting Segment
|
|
|
505.9
|
|
|
|
486.7
|
|
|
|
1,011.3
|
|
|
|
959.7
|
|
China
|
|
|
152.3
|
|
|
|
105.8
|
|
|
|
276.7
|
|
|
|
166.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contribution Margin
|
|
$
|
658.2
|
|
|
$
|
592.5
|
|
|
$
|
1,288.0
|
|
|
$
|
1,126.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses(2)
|
|
|
461.9
|
|
|
|
400.1
|
|
|
|
964.0
|
|
|
|
764.8
|
|
Interest expense, net
|
|
|
21.4
|
|
|
|
5.6
|
|
|
|
36.4
|
|
|
|
10.9
|
|
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
174.9
|
|
|
|
186.8
|
|
|
|
284.4
|
|
|
|
350.3
|
|
Income taxes
|
|
|
55.4
|
|
|
|
43.6
|
|
|
|
90.2
|
|
|
|
88.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
119.5
|
|
|
$
|
143.2
|
|
|
$
|
194.2
|
|
|
$
|
262.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
2014
|
|
|
June 30,
2013
|
|
|
June 30,
2014
|
|
|
June 30,
2013
|
|
|
|
(In millions)
|
|
Net sales by product line:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weight Management
|
|
|
843.5
|
|
|
$
|
778.2
|
|
|
$
|
1,651.1
|
|
|
$
|
1,489.8
|
|
Targeted Nutrition
|
|
|
286.1
|
|
|
|
277.5
|
|
|
|
570.1
|
|
|
|
534.4
|
|
Energy, Sports and Fitness
|
|
|
68.9
|
|
|
|
65.1
|
|
|
|
135.6
|
|
|
|
123.4
|
|
Outer Nutrition
|
|
|
47.0
|
|
|
|
37.8
|
|
|
|
86.7
|
|
|
|
76.0
|
|
Literature, promotional and other(3)
|
|
|
60.7
|
|
|
|
60.6
|
|
|
|
125.3
|
|
|
|
119.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales
|
|
$
|
1,306.2
|
|
|
$
|
1,219.2
|
|
|
$
|
2,568.8
|
|
|
$
|
2,342.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales by geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
250.6
|
|
|
$
|
247.5
|
|
|
$
|
498.4
|
|
|
$
|
469.0
|
|
Mexico
|
|
|
148.6
|
|
|
|
145.6
|
|
|
|
291.3
|
|
|
|
278.5
|
|
South and Central America
|
|
|
203.3
|
|
|
|
222.5
|
|
|
|
448.0
|
|
|
|
441.9
|
|
EMEA
|
|
|
227.3
|
|
|
|
186.4
|
|
|
|
438.5
|
|
|
|
355.9
|
|
Asia Pacific
|
|
|
306.3
|
|
|
|
299.2
|
|
|
|
586.7
|
|
|
|
611.0
|
|
China
|
|
|
170.1
|
|
|
|
118.0
|
|
|
|
305.9
|
|
|
|
186.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales
|
|
$
|
1,306.2
|
|
|
$
|
1,219.2
|
|
|
$
|
2,568.8
|
|
|
$
|
2,342.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Contribution margin consists of net sales less cost of sales and royalty overrides.
|
(2)
|
Service fees to China independent service providers totaling $80.8 million and $53.2 million for the three months ended June 30, 2014 and 2013, respectively, and totaling $142.5 million and $84.7 million for
the six months ended June 30, 2014 and 2013, 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 June 30, 2014 and December 31, 2013, total assets for the Companys Primary Reporting Segment were $2,158.1 million
and $2,253.7 million, respectively. Total assets for the China segment were $277.6 million and $220.0 million as of June 30, 2014 and December 31, 2013, respectively. As of both June 30, 2014 and December 31, 2013,
goodwill allocated to the Companys reporting units included in the Companys Primary Reporting Segment was $102.4 million. Goodwill allocated to the China segment was $3.1 million as of both June 30, 2014 and December 31, 2013.
7. Share-Based Compensation
The Company has share-based compensation plans, which are more fully described in Note 9,
Share-Based Compensation
,
to the Consolidated Financial Statements in the 2013 10-K. During the six months ended June 30, 2014, the Company granted stock awards subject to service conditions and to service and performance conditions, consisting of stock appreciation
rights, or SARs, and stock units with vesting terms fully described in the 2013 10-K.
For the three months ended June 30, 2014 and
2013, share-based compensation expense amounted to $12.4 million and $7.4 million, respectively. For the six months ended June 30, 2014 and 2013, share-based compensation expense amounted to $23.4 million and $15.3 million, respectively. As of
June 30, 2014, the total unrecognized compensation cost related to all non-vested stock awards was $74.7 million and the related weighted-average period over which it is expected to be recognized is approximately 1.7 years.
The following tables summarize the activity under all share-based compensation plans for the six months ended June 30, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2013(2) (3) (4)
|
|
|
12,143
|
|
|
$
|
33.24
|
|
|
|
5.3 years
|
|
|
$
|
552.9
|
|
Granted
|
|
|
1,509
|
|
|
$
|
60.13
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(757
|
)
|
|
$
|
20.04
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(53
|
)
|
|
$
|
59.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2014(2) (3) (4)
|
|
|
12,842
|
|
|
$
|
37.07
|
|
|
|
5.4 years
|
|
|
$
|
369.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2014(2)
|
|
|
8,311
|
|
|
$
|
25.61
|
|
|
|
4.0 years
|
|
|
$
|
327.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
(1)
|
The intrinsic value is the amount by which the current market value of the underlying stock exceeds the exercise price of the stock awards.
|
(2)
|
Includes 1.5 million market condition SARs.
|
(3)
|
Includes 0.9 million market and performance condition SARs.
|
(4)
|
Includes 0.4 million and 1.0 million performance condition SARs as of December 31, 2013 and June 30, 2014, respectively. The Company granted 0.6 million performance condition awards during the three
months ended June 30, 2014.
|
The weighted-average grant date fair value of SARs granted during the three months ended
June 30, 2014 and 2013 was $25.99 and $12.68, respectively. The weighted-average grant date fair value of SARs granted during the six months ended June 30, 2014 and 2013 was $26.02 and $11.85, respectively. The total intrinsic value of
stock options and SARs exercised during the three months ended June 30, 2014 was $20.1 million. There were no exercises of stock options and SARs during the three months ended June 30, 2013. The total intrinsic value of stock options and
SARs exercised during the six months ended June 30, 2014 and 2013 was $35.0 million and $0.3 million, respectively.
|
|
|
|
|
|
|
|
|
Incentive Plan and Independent Directors Stock Units
|
|
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
|
(In thousands)
|
|
|
|
|
Outstanding and nonvested December 31, 2013
|
|
|
144.5
|
|
|
$
|
14.36
|
|
Granted
|
|
|
28.1
|
|
|
$
|
59.98
|
|
Vested
|
|
|
(130.9
|
)
|
|
$
|
8.91
|
|
Forfeited
|
|
|
(4.1
|
)
|
|
$
|
38.58
|
|
|
|
|
|
|
|
|
|
|
Outstanding and nonvested at June 30, 2014
|
|
|
37.6
|
|
|
$
|
64.89
|
|
|
|
|
|
|
|
|
|
|
The total vesting date fair value of stock units which vested during the three months ended June 30, 2014
and 2013, was $0.3 million and $2.5 million, respectively. The total vesting date fair value of stock units which vested during the six months ended June 30, 2014 and 2013, was $8.5 million and $6.8 million, respectively.
The Company recognizes excess tax benefits associated with share-based compensation to shareholders (deficit) 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 June 30, 2014 and December 31, 2013, the Company had $18.2 million and $15.4 million,
respectively, of unrealized excess tax benefits.
8. Income Taxes
Income taxes were $55.4 million and $90.2 million for the three and six months ended June 30, 2014, respectively,
as compared to $43.6 million and $88.3 million for the same periods in 2013. The effective income tax rate was 31.6% and 31.7% for the three and six months ended June 30, 2014, respectively, as compared to 23.4% and 25.2% for the same periods
in 2013. The increase in the effective tax rate for the three and six months ended June 30, 2014, as compared to the same periods in 2013, was primarily due to the inability to fully realize a tax benefit relating to Herbalife Ltd.s
interest expense and Herbalife Venezuelas foreign exchange losses, the impact of changes in the geographic mix of the Companys income, and a decrease in net benefits from discrete events, principally related to favorable tax audit
settlements in the comparative 2013 periods.
As of June 30, 2014, the total amount of unrecognized tax benefits, including related
interest and penalties was $40.4 million. If the total amount of unrecognized tax benefits was recognized, $32.9 million of unrecognized tax benefits, $4.5 million of interest and $1.0 million of penalties would impact the effective tax rate.
The Company believes that it is reasonably possible that the amount of unrecognized tax benefits could decrease by up to approximately $9.9
million within the next twelve months. Of this possible decrease, $6.4 million would be due to the settlement of audits or resolution of administrative or judicial proceedings. The remaining possible decrease of $3.5 million would be due to the
expiration of statute of limitations in various jurisdictions.
9. 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 June 30, 2014.
16
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 condensed 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 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 (deficit) equity, and are recognized in cost of sales in the condensed
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
(deficit) equity, and are recognized in selling, general and administrative expenses in the condensed consolidated statement of income during the period when the hedged item and underlying transaction affect earnings.
As of June 30, 2014 and December 31, 2013, the aggregate notional amounts of all foreign currency contracts outstanding designated
as cash flow hedges were approximately $251.7 million and $244.7 million, respectively. At June 30, 2014, these outstanding contracts were expected to mature over the next twelve months. The Companys derivative financial instruments are
recorded on the condensed consolidated balance sheet at fair value based on third-party quotes. As of June 30, 2014, the Company recorded assets at fair value of $0.9 million and liabilities at fair value of $4.6 million relating to all
outstanding foreign currency contracts designated as cash-flow hedges. 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. The Company assesses hedge effectiveness and measures hedge ineffectiveness at least quarterly. During the three and six months ended June 30, 2014, and 2013, the ineffective portion relating
to these hedges was immaterial and the hedges remained effective as of June 30, 2014, and December 31, 2013.
As of
June 30, 2014 and December 31, 2013, 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 two and
three months as of June 30, 2014 and December 31, 2013, respectively. There were no foreign currency option contracts outstanding as of June 30, 2014 and December 31, 2013. As of June 30, 2014, the Company had aggregate
notional amounts of approximately $569.1 million of foreign currency contracts, inclusive of freestanding contracts and contracts designated as cash flow hedges.
Gains and Losses on Derivative Instruments
The following table summarizes gains (losses) relating to derivative instruments recorded in other comprehensive income (loss) during the three
and six months ended June 30, 2014 and 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized
in Other Comprehensive Loss
|
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30, 2014
|
|
|
June 30, 2013
|
|
|
June 30, 2014
|
|
|
June 30, 2013
|
|
|
|
(In millions)
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts relating to inventory and intercompany management fee hedges
|
|
$
|
(1.8
|
)
|
|
$
|
7.1
|
|
|
$
|
(2.0
|
)
|
|
$
|
3.0
|
|
17
The following table summarizes gains (losses) relating to derivative instruments recorded to
income during the three and six months ended June 30, 2014 and 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain
(Loss)
Recognized in Income
|
|
Amount of Gain (Loss)
Recognized in Income
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
|
June 30, 2014
|
|
|
June 30, 2013
|
|
|
June 30, 2014
|
|
|
June 30, 2013
|
|
|
|
|
|
(In millions)
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts relating to inventory hedges and intercompany management fee hedges(1)
|
|
Selling, general and
administrative expenses
|
|
$
|
(1.0
|
)
|
|
$
|
(1.5
|
)
|
|
$
|
(2.6
|
)
|
|
$
|
(2.6
|
)
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
|
Selling, general and
administrative expenses
|
|
$
|
(4.7
|
)
|
|
$
|
3.5
|
|
|
$
|
(7.6
|
)
|
|
$
|
(5.2
|
)
|
(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
recorded 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 three and six months ended June 30, 2014 and 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain
(Loss)
Reclassified
from Accumulated
Other Comprehensive
Loss into Income
(Effective
Portion)
|
|
Amount of Gain (Loss) Reclassified
from Accumulated
Other Comprehensive
Loss into Income
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
|
June 30, 2014
|
|
|
June 30, 2013
|
|
|
June 30, 2014
|
|
|
June 30, 2013
|
|
|
|
|
|
(In millions)
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts relating to inventory hedges
|
|
Cost of sales
|
|
$
|
1.2
|
|
|
$
|
(0.8
|
)
|
|
$
|
1.5
|
|
|
$
|
(2.1
|
)
|
Foreign exchange currency contracts relating to intercompany management fee hedges
|
|
Selling, general and
administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.1
|
)
|
Interest rate swaps
|
|
Interest expense, net
|
|
|
|
|
|
$
|
(0.9
|
)
|
|
|
|
|
|
$
|
(1.8
|
)
|
The Company reports its derivatives at fair value as either assets or liabilities within its condensed
consolidated balance sheet. See Note 12,
Fair Value Measurements
, for information on derivative fair values and their condensed consolidated balance sheet location as of June 30, 2014, and December 31, 2013.
10. Shareholders (Deficit) Equity
Changes in shareholders (deficit) equity for the six months ended June 30, 2014 were as follows (in thousands):
|
|
|
|
|
Total shareholders equity as of December 31, 2013
|
|
$
|
551,446
|
|
Net income
|
|
|
194,160
|
|
Issuance of common shares from exercise of stock options, SARs, restricted stock grants, and employee stock purchase plan
|
|
|
2,039
|
|
Excess tax benefit from exercise of stock options, SARs and restricted stock grants
|
|
|
6,693
|
|
Additional capital from share-based compensation
|
|
|
23,398
|
|
Repurchases of common shares, including Forward Transactions
|
|
|
(1,277,929
|
)
|
Allocation to additional paid-in capital due to issuance of the Convertible Notes and Forward Transactions.
|
|
|
249,797
|
|
Reduction in additional paid-in capital from the Capped Call Transactions
|
|
|
(123,825
|
)
|
Dividends paid and received, net
|
|
|
(26,984
|
)
|
Foreign currency translation adjustment, net of income taxes
|
|
|
182
|
|
Unrealized loss on derivatives, net of income taxes
|
|
|
(3,178
|
)
|
Unrealized gain on available-for-sale investments, net of income taxes
|
|
|
133
|
|
|
|
|
|
|
Total shareholders deficit as of June 30, 2014
|
|
$
|
(404,068
|
)
|
|
|
|
|
|
18
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.
On February 18, 2014, the Company announced that its board of directors approved a cash dividend of
$0.30 per common share in an aggregate amount of $30.4 million that was paid to shareholders on March 18, 2014. On April 28, 2014, the Company announced that its board of directors approved terminating the Companys quarterly cash
dividend and instead utilizing the cash to repurchase additional common shares as discussed below. There were no dividends declared and paid during the three months ended June 30, 2014. The aggregate total amount of dividends declared and paid
during the three months ended June 30, 2013 was $30.9 million. The aggregate amount of dividends declared and paid during the six months ended June 30, 2014 and 2013 were $30.4 million and $61.8 million, respectively.
During the six months ended June 30, 2014, the Company received $3.4 million of dividends primarily relating to the Forward Transactions
described below which was recorded directly to its (accumulated deficit) retained earnings. The Company did not receive any dividends during the three months ended June 30, 2014.
Share Repurchases
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. 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. 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.
In conjunction with the issuance of
the Convertible Notes during February 2014, the Company paid approximately $685.8 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 Transactions early. The Forward Transactions were 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 the Forward Transactions, the Companys total shareholders (deficit) equity within its consolidated balance sheet was reduced by approximately $685.8 million during the first quarter of 2014, with amounts
of $653.9 million and $31.9 million being allocated between (accumulated deficit) retained earnings and additional paid-in-capital, respectively, within total shareholders (deficit) equity. Also, upon executing the Forward Transactions, the
Company recorded $35.8 million in non-cash issuance costs to other assets and a corresponding amount to additional paid-in-capital within its condensed consolidated balance sheet, reflecting the fair value of the Forward Transactions. These non-cash
issuance costs will be amortized to interest expense over the contractual term of the Forward Transactions. For the three and six months ended June 30, 2014, the Company recognized $1.6 million and $2.6 million, respectively, of non-cash
interest expense within its consolidated statement of income relating to amortization of these non-cash issuance costs.
On May 6,
2014, the Company entered into an agreement with Merrill Lynch International to repurchase $266.0 million of its common shares, or the Repurchase Agreement, which expired on June 30, 2014. Under the terms of the Repurchase Agreement, the
Company paid $266.0 million on May 7, 2014, and received an aggregate 4.3 million of its common shares under the Repurchase Agreement during May and June 2014. The total number of common shares repurchased under the Repurchase Agreement
was determined generally upon a discounted volume-weighted average share price of the Companys common shares over the course of the Repurchase Agreement.
During the three months ended March 31, 2014, the Company effectively repurchased approximately 9.9 million of its common shares
through the Forward Transactions at an aggregate cost of approximately $685.8 million or an average cost of $69.02 per share and they are treated as retired shares for basic and diluted EPS purposes although they remain legally outstanding. During
the three months ended June 30, 2014, the Company repurchased approximately 9.8 million of its common shares through open market purchases and under the Repurchase Agreement, at an aggregate cost of approximately $581.3 million or an
average cost of $59.41 per share. As of June 30, 2014, the remaining authorized capacity under the Companys share repurchase program was $232.9 million inclusive of reductions for the Forward Transactions.
19
The Company reflects the aggregate purchase price of its common shares repurchased as a reduction
to shareholders (deficit) equity. The Company allocated the purchase price of the repurchased shares to (accumulated deficit) 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 Companys share repurchase program described above.
Capped Call Transactions
In
connection with the issuance of Convertible Notes, the Company paid approximately $123.8 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,
initially set at $86.28 per common share, with such reduction of potential dilution subject to a cap based on the cap price initially set at $120.79 per common share. The strike price and cap price are subject to certain adjustments under the terms
of the Capped Call Transactions. Therefore, as a result of executing the Capped Call Transactions, the Company in effect will only be exposed to potential net dilution once the market price of its common shares exceeds the adjusted cap price. As a
result of the Capped Call Transactions, the Companys additional paid-in capital within shareholders (deficit) equity on its consolidated balance sheet was reduced by $123.8 million during the first quarter of 2014.
Accumulated Other Comprehensive Income (Loss)
The following table summarizes changes in accumulated other comprehensive income (loss) during the three months ended June 30, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Accumulated Other Comprehensive
Income (Loss) by Component
Three Months Ended June 30, 2014
|
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Unrealized
Gain (Loss) on
Derivatives
|
|
|
Unrealized Gain
(Loss) on
Available-For-
Sale Investments
|
|
|
Total
|
|
|
|
(In millions)
|
|
Beginning Balance
|
|
$
|
(27.8
|
)
|
|
$
|
5.3
|
|
|
$
|
|
|
|
$
|
(22.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications, net of tax
|
|
|
2.4
|
|
|
|
(1.6
|
)
|
|
|
0.2
|
|
|
|
1.0
|
|
Amounts reclassified from accumulated other comprehensive income (loss) to income, net of tax(1)
|
|
|
|
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss), net of reclassifications
|
|
|
2.4
|
|
|
|
(2.8
|
)
|
|
|
0.2
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(25.4
|
)
|
|
$
|
2.5
|
|
|
$
|
0.2
|
|
|
$
|
(22.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
See Note 2,
Significant Accounting Policies
, and Note 9,
Derivative Instruments and Hedging Activities
, for information regarding the location in the condensed consolidated statements of income of gains
(losses) reclassified from accumulated other comprehensive income (loss) into income during the three and six months ended June 30, 2014.
|
Other comprehensive income (loss) before reclassifications was net of tax expense of $1.6 million, tax benefit of $0.2 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 three months ended June 30, 2014.
20
The following table summarizes changes in accumulated other comprehensive income (loss) during
the six months ended June 30, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Accumulated Other Comprehensive
Income (Loss) by Component
Six Months Ended June 30, 2014
|
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Unrealized
Gain (Loss) on
Derivatives
|
|
|
Unrealized Gain
(Loss) on
Available-For-
Sale Investments
|
|
|
Total
|
|
|
|
(In millions)
|
|
Beginning Balance
|
|
$
|
(25.6
|
)
|
|
$
|
5.7
|
|
|
$
|
0.1
|
|
|
$
|
(19.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications, net of tax
|
|
|
0.2
|
|
|
|
(1.7
|
)
|
|
|
(1.9
|
)
|
|
|
(3.4
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss) to income, net of tax(1)
|
|
|
|
|
|
|
(1.5
|
)
|
|
|
2.0
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss), net of reclassifications
|
|
|
0.2
|
|
|
|
(3.2
|
)
|
|
|
0.1
|
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(25.4
|
)
|
|
$
|
2.5
|
|
|
$
|
0.2
|
|
|
$
|
(22.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
See Note 2,
Significant Accounting Policies
, and Note 9,
Derivative Instruments and Hedging Activities
, for information regarding the location in the condensed consolidated statements of income of gains
(losses) reclassified from accumulated other comprehensive income (loss) into income during the three and six months ended June 30, 2014.
|
Other comprehensive income (loss) before reclassifications was net of tax expense of $1.5 million, tax benefits of $0.3 million, and tax
benefits of $0.9 million for foreign currency translation adjustments, unrealized gain (loss) on derivatives, and unrealized gain (loss) on available-for-sale investments, respectively, for the six months ended June 30, 2014. Amounts
reclassified from accumulated other comprehensive income (loss) to income was net of tax expense of $1.0 million for unrealized gain (loss) on available-for-sale investments for the six months ended June 30, 2014.
The following table summarizes changes in accumulated other comprehensive income (loss) during the three months ended June 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Accumulated Other Comprehensive
Income (Loss) by Component
Three Months Ended June 30, 2013
|
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Unrealized
Gain (Loss) on
Derivatives
|
|
|
Total
|
|
|
|
(In millions)
|
|
Beginning Balance
|
|
$
|
(37.5
|
)
|
|
$
|
(4.2
|
)
|
|
$
|
(41.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications, net of tax
|
|
|
(9.2
|
)
|
|
|
4.8
|
|
|
|
(4.4
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss) to income, net of tax(1)
|
|
|
|
|
|
|
1.8
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss), net of reclassifications
|
|
|
(9.2
|
)
|
|
|
6.6
|
|
|
|
(2.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(46.7
|
)
|
|
$
|
2.4
|
|
|
$
|
(44.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
See Note 9,
Derivative Instruments and Hedging Activities
, for information regarding the location in the condensed consolidated statements of income of gains (losses) reclassified from accumulated other
comprehensive income (loss) into income during the three and six months ended June 30, 2013.
|
Other comprehensive
income (loss) before reclassifications was net of tax benefits of $1.5 million and tax expense of $2.2 million for foreign currency translation adjustments and unrealized gain (loss) on derivatives, respectively, for the three months ended
June 30, 2013.
21
The following table summarizes changes in accumulated other comprehensive income (loss) during
the six months ended June 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Accumulated Other Comprehensive
Income (Loss) by Component
Six Months Ended June 30, 2013
|
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Unrealized
Gain (Loss) on
Derivatives
|
|
|
Total
|
|
|
|
(In millions)
|
|
Beginning Balance
|
|
$
|
(28.8
|
)
|
|
$
|
(2.9
|
)
|
|
$
|
(31.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications, net of tax
|
|
|
(17.9
|
)
|
|
|
2.0
|
|
|
|
(15.9
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss) to income, net of tax(1)
|
|
|
|
|
|
|
3.3
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss), net of reclassifications
|
|
|
(17.9
|
)
|
|
|
5.3
|
|
|
|
(12.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(46.7
|
)
|
|
$
|
2.4
|
|
|
$
|
(44.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
See Note 9,
Derivative Instruments and Hedging Activities
, for information regarding the location in the condensed consolidated statements of income of gains (losses) reclassified from accumulated other
comprehensive income (loss) into income during the three and six months ended June 30, 2013.
|
Other comprehensive
income (loss) before reclassifications was net of tax benefits of $1.8 million and tax expense of $1.0 million for foreign currency translation adjustments and unrealized gain (loss) on derivatives, respectively, for the six months ended
June 30, 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 six months ended June 30, 2013.
11. Earnings Per Share
Basic earnings per share represents net income 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended June 30,
|
|
|
For the Six Months
Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
(in thousands)
|
|
Weighted average shares used in basic computations
|
|
|
86,113
|
|
|
|
102,993
|
|
|
|
90,732
|
|
|
|
103,551
|
|
Dilutive effect of exercise of equity grants outstanding
|
|
|
5,059
|
|
|
|
4,090
|
|
|
|
5,202
|
|
|
|
4,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in diluted computations
|
|
|
91,172
|
|
|
|
107,083
|
|
|
|
95,934
|
|
|
|
107,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were an aggregate of 3.5 million of equity grants that were outstanding during both the three and
six months ended June 30, 2014, and an aggregate of 4.1 million of equity grants that were outstanding during both the three and six months ended June 30, 2013, consisting of stock options, SARs, and stock units, but were not included
in the computation of diluted earnings per share because their effect would be anti-dilutive or the market condition for the award had not been satisfied.
Since the Company will settle the principal amount of its Convertible Notes in cash and settle the conversion feature for the amount above the
conversion price in common shares, or the conversion spread, the Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted earnings per share, if applicable. The conversion spread will
have a dilutive impact on diluted earnings per share when the average market price of the Companys common shares for a given period exceeds the initial conversion price of $86.28 per share. For the three and six months ended June 30,
2014, the Convertible Notes have been excluded from the computation of diluted earnings per share as the effect would be anti-dilutive since the conversion price of the Convertible Notes exceeded the average market price of the Companys common
shares for the three and six months ended June 30, 2014. The initial conversion rate and conversion price is described further in Note 4,
Long-Term Debt
.
22
The Capped Call Transactions executed in connection with the issuance of the Convertible Notes
are excluded from the calculation of diluted earnings per share because their impact is always anti-dilutive.
12. Fair Value Measurements
The Company applies the provisions of the FASB Accounting Standards Codification, or 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.
The Company measures certain assets and liabilities at fair value as discussed throughout the notes to its
consolidated financial statements. Foreign exchange currency contracts are valued using standard calculations and models primarily based on inputs such as observable forward rates, spot rates and foreign currency exchange rates 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 June 30, 2014 and December 31, 2013:
Fair Value Measurements at Reporting Date
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Balance
Sheet
Location
|
|
Significant
Other
Observable
Inputs
(Level 2)
Fair Value at
June 30,
2014
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
Fair Value at
December 31,
2013
|
|
|
|
|
|
(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
|
|
$
|
0.9
|
|
|
$
|
5.7
|
|
Derivatives not designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
|
Prepaid expenses and other
current assets
|
|
$
|
1.5
|
|
|
$
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.4
|
|
|
$
|
8.0
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts relating to inventory and intercompany management fee hedges
|
|
Accrued expenses
|
|
$
|
4.6
|
|
|
$
|
4.4
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
|
Accrued expenses
|
|
$
|
2.2
|
|
|
$
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6.8
|
|
|
$
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
23
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
, to the Companys 2013 10-K for a further
description of its deferred compensation plan assets.
The following tables summarize the offsetting of the fair values of the
Companys derivative assets and derivative liabilities for presentation in the Companys condensed consolidated balance sheet at June 30, 2014 and December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
|
$
|
2.4
|
|
|
$
|
(2.2
|
)
|
|
$
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2.4
|
|
|
$
|
(2.2
|
)
|
|
$
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
|
$
|
8.0
|
|
|
$
|
(3.0
|
)
|
|
$
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8.0
|
|
|
$
|
(3.0
|
)
|
|
$
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
|
$
|
6.8
|
|
|
$
|
(2.2
|
)
|
|
$
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6.8
|
|
|
$
|
(2.2
|
)
|
|
$
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
|
$
|
5.1
|
|
|
$
|
(3.0
|
)
|
|
$
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5.1
|
|
|
$
|
(3.0
|
)
|
|
$
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2014, and December 31, 2013, all of the Companys derivatives were subject to master netting arrangements and no
collateralization was required for the Companys derivative assets and derivative liabilities.
13. 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 events. The Company
recognizes the related expenses as a part of selling, general & administrative expenses within its consolidated statement of income. For the three months ended June 30, 2014 and 2013, the Company recorded approximately $8.0 million and
$8.1 million, respectively, and for the six months ended June 30, 2014 and 2013, the Company recorded approximately $12.3 million and $17.6 million, respectively, of professional fees and other expenses related to this matter.
Of the approximately $8.0 million and $8.1 million in expenses incurred during the three months ended June 30, 2014 and 2013,
respectively, discussed above, approximately $1.3 million and $1.5 million, respectively, were recognized for advisory retainer fees. Of the approximately $12.3 million and $17.6 million in expenses incurred during the six months ended June 30,
2014 and 2013, respectively, discussed above, approximately $2.6 million and $3.0 million, respectively, were recognized for advisory retainer fees. The minimum guaranteed retainer fees were approximately $2.0 million as of June 30, 2014 and
the expense recognition of these fees could accelerate based on certain conditions.
24
The Company also had a cash settlement liability award, or the Liability Award, outstanding as of
June 30, 2014 and 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 three months ended June 30, 2014 and 2013, relating to the Liability Award was approximately $0.3
million and $0.3 million, respectively, and is included in the approximately $8.0 million and $8.1 million amounts described above. The benefit and expense recognized during the six months ended June 30, 2014 and 2013, relating to the Liability
Award was approximately $0.2 million and $1.3 million, respectively, and is included in the approximately $12.3 million and $17.6 million amounts described above. The remaining unrecognized expense relating to the Liability Award was approximately
$2.0 million as of June 30, 2014, 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.
25
Item 2.
Managements Discussion and Analysis of
Financial Condition and Results of Operations
Overview
We are a global nutrition company that sells weight management products, nutritional supplements, energy, sports & fitness products
and personal care products. As of June 30, 2014, we sold our products to and through a network of 3.9 million independent members, or Members, which included approximately 0.2 million in China. In China, we sell our products through
retail stores, sales representatives, sales officers, and independent service providers. Other than in China, we are in the process of making the terminology change from distributors to Members, since most of them are
discount customers. We refer to Members that distribute our products and achieve certain qualification requirements as sales leaders.
We pursue our mission of changing peoples lives by providing high quality, science-based products to Members and their
customers who seek a healthy lifestyle and we also offer a financially rewarding business opportunity to those Members who seek part time or full time income. We believe the global obesity epidemic has made our quality products more relevant and the
effectiveness of our distribution network, coupled with geographic expansion, have been the primary reasons for our success throughout our 34-year operating history. As of June 30, 2014, we sold our products in 91 countries.
Our products are grouped in four principal categories: weight management; targeted nutrition; energy, sports & fitness; and outer
nutrition, along with literature and promotional items. Our products are often sold through a series of related products and literature designed to simplify weight management and nutrition for consumers and maximize our Members cross-selling
opportunities.
Industry-wide factors that affect us and our competitors include the global obesity epidemic and the aging of the
worldwide population, which are driving demand for weight management, nutrition and wellness-related products along with the global increase in under employment and unemployment which can affect the recruitment and retention of Members seeking part
time or full time income opportunities.
While we continue to monitor the current global financial environment, we remain focused on the
opportunities and challenges in retailing of our products, recruiting and retaining Members, improving Member productivity, opening new markets, further penetrating existing markets, globalizing successful Distributor Methods of Operation, or DMOs,
such as Nutrition Clubs and Weight Loss Challenges, introducing new products and globalizing existing products, developing niche market segments and further investing in our infrastructure. Management also continues to monitor the Venezuelan market
and especially the limited ability to repatriate cash.
We report revenue from our six regions:
|
|
|
South and Central America;
|
|
|
|
EMEA, which consists of Europe, the Middle East and Africa;
|
|
|
|
Asia Pacific (excluding China); and
|
Volume Points by Geographic Region
A key non-financial measure we focus on is Volume Points on a Royalty Basis, or Volume Points, which is essentially our weighted average
measure of product sales volume. Volume Points, which are unaffected by exchange rates or price changes, are used by management as a proxy for sales trends because in general, an increase in Volume Points in a particular geographic region or country
indicates an increase in our local currency net sales while a decrease in Volume Points in a particular geographic region or country indicates a decrease in our local currency net sales.
We assign a Volume Point value to a product when it is first introduced into a market and the value is unaffected by subsequent exchange rate
and price changes. The specific number of Volume Points assigned to a product, and generally consistent across all markets, is based on a Volume Point to suggested retail price ratio for similar products. If a product is available in different
quantities, the various sizes will have different Volume Point values. In general, once assigned, a Volume Point value is consistent in each region and country and does not change from year to year. The reason Volume Points are used in the manner
described above is that we use Volume Points for Member qualification and recognition purposes and therefore we attempt to keep Volume Points for a similar or like product consistent on a global basis. However, because Volume Points are a function
of value rather than product type or size, they are not a reliable measure for product mix. As an example, an increase in Volume Points in a specific country or region could mean a significant increase in sales of less expensive products or a
marginal increase in sales of more expensive products.
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
% Change
|
|
|
2014
|
|
|
2013
|
|
|
% Change
|
|
|
|
(Volume Points in millions)
|
|
North America
|
|
|
335.8
|
|
|
|
339.9
|
|
|
|
(1.2
|
)%
|
|
|
672.2
|
|
|
|
648.9
|
|
|
|
3.6
|
%
|
Mexico
|
|
|
231.3
|
|
|
|
219.9
|
|
|
|
5.2
|
%
|
|
|
451.6
|
|
|
|
426.2
|
|
|
|
6.0
|
%
|
South & Central America
|
|
|
206.3
|
|
|
|
222.6
|
|
|
|
(7.3
|
)%
|
|
|
434.1
|
|
|
|
442.4
|
|
|
|
(1.9
|
)%
|
EMEA
|
|
|
218.8
|
|
|
|
179.3
|
|
|
|
22.0
|
%
|
|
|
421.0
|
|
|
|
340.6
|
|
|
|
23.6
|
%
|
Asia Pacific (excluding China)
|
|
|
320.2
|
|
|
|
316.9
|
|
|
|
1.0
|
%
|
|
|
622.4
|
|
|
|
636.9
|
|
|
|
(2.3
|
)%
|
China
|
|
|
118.5
|
|
|
|
85.9
|
|
|
|
38.0
|
%
|
|
|
209.5
|
|
|
|
133.5
|
|
|
|
57.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
|
|
|
1,430.9
|
|
|
|
1,364.5
|
|
|
|
4.9
|
%
|
|
|
2,810.8
|
|
|
|
2,628.5
|
|
|
|
6.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Active Sales Leaders by Geographic Region
With the continued expansion of daily consumption DMOs in our different markets and our objective to improve Member retention, we believe the
Average Active Sales Leader is a useful metric. It represents the monthly average number of sales leaders that place an order, including orders of non-sales leader Members in their downline sales organization, during a given period. We rely on this
metric as an indication of the engagement level of sales leaders in a given region. Changes in the Average Active Sales Leader metric may be indicative of potential for changes in annual retention levels and future sales growth.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
% Change
|
|
|
2014
|
|
|
2013
|
|
|
% Change
|
|
North America
|
|
|
75,772
|
|
|
|
72,282
|
|
|
|
4.8
|
%
|
|
|
75,007
|
|
|
|
70,317
|
|
|
|
6.7
|
%
|
Mexico
|
|
|
64,656
|
|
|
|
62,940
|
|
|
|
2.7
|
%
|
|
|
64,112
|
|
|
|
61,578
|
|
|
|
4.1
|
%
|
South & Central America
|
|
|
62,172
|
|
|
|
54,614
|
|
|
|
13.8
|
%
|
|
|
62,017
|
|
|
|
53,332
|
|
|
|
16.3
|
%
|
EMEA
|
|
|
56,692
|
|
|
|
48,008
|
|
|
|
18.1
|
%
|
|
|
55,403
|
|
|
|
47,051
|
|
|
|
17.8
|
%
|
Asia Pacific (excluding China)
|
|
|
74,916
|
|
|
|
70,802
|
|
|
|
5.8
|
%
|
|
|
73,271
|
|
|
|
69,746
|
|
|
|
5.1
|
%
|
China
|
|
|
18,703
|
|
|
|
14,070
|
|
|
|
32.9
|
%
|
|
|
17,676
|
|
|
|
12,967
|
|
|
|
36.3
|
%
|
Worldwide(1)
|
|
|
340,644
|
|
|
|
311,503
|
|
|
|
9.4
|
%
|
|
|
335,273
|
|
|
|
304,210
|
|
|
|
10.2
|
%
|
(1)
|
Worldwide average active sales leaders may not equal the sum of the average active sales leaders in each region due to the calculation being an average of sales leaders active in a period, not a summation, and the fact
that some sales leaders are active in more than one region but are counted only once in the worldwide amount.
|
Number of Sales Leaders
and Retention Rates by Geographic Region as of Re-qualification Period
Our compensation system requires each sales leader to
re-qualify for such status each year, prior to February, in order to maintain their 50% discount on products and be eligible to receive royalty payments. In February of each year, we demote from the rank of sales leader those Members who did not
satisfy the re-qualification requirements during the preceding twelve months. The re-qualification requirement does not apply to new sales leaders (i.e. those who became sales leaders subsequent to the January re-qualification of the prior year).
For the latest twelve month re-qualification period ending January 31, 2014, approximately 51.8% of our sales leaders, excluding China and temporarily Venezuela, re-qualified. We chose not to require Venezuelan sales leaders to re-qualify for
the latest twelve month re-qualification period ending January 31, 2014, due to product supply limitation that may have prevented some sales leaders from re-qualifying. However, had we demoted those Venezuelan sales leaders that did not meet
our re-qualifying criteria, our overall retention rate would have been slightly higher than 51.8%.
|
|
|
|
|
|
|
|
|
Sales Leaders Statistics (Excluding China)
|
|
2014
|
|
|
2013
|
|
|
|
(In thousands)
|
|
January 1 total sales leaders
|
|
|
625.8
|
|
|
|
583.1
|
|
January & February new sales leaders
|
|
|
33.0
|
|
|
|
37.1
|
|
Demoted sales leaders (did not re-qualify)
|
|
|
(201.2
|
)
|
|
|
(182.8
|
)
|
Other sales leaders (resigned, etc)
|
|
|
(1.5
|
)
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
End of February total sales leaders
|
|
|
456.1
|
|
|
|
436.1
|
|
|
|
|
|
|
|
|
|
|
27
The statistics below further highlight the calculation for retention.
|
|
|
|
|
|
|
|
|
Sales Leaders Retention (Excluding China)
|
|
2014
|
|
|
2013
|
|
|
|
(In thousands)
|
|
Sales leaders needed to re-qualify
|
|
|
417.7
|
|
|
|
379.6
|
|
Demoted sales leaders (did not re-qualify)
|
|
|
(201.2
|
)
|
|
|
(182.8
|
)
|
|
|
|
|
|
|
|
|
|
Total re-qualified
|
|
|
216.5
|
|
|
|
196.8
|
|
|
|
|
|
|
|
|
|
|
Retention rate
|
|
|
51.8
|
%
|
|
|
51.8
|
%
|
|
|
|
|
|
|
|
|
|
The table below reflects the number of sales leaders as of the end of February of the year indicated
(subsequent to the annual re-qualification date) and sales leader retention rate by year and by region.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Sales Leaders
|
|
|
Sales Leaders Retention Rate
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
North America
|
|
|
86,129
|
|
|
|
86,469
|
|
|
|
55.1
|
%
|
|
|
54.7
|
%
|
Mexico
|
|
|
78,818
|
|
|
|
78,453
|
|
|
|
54.2
|
%
|
|
|
57.6
|
%
|
South & Central America
|
|
|
102,152
|
|
|
|
79,351
|
|
|
|
54.9
|
%
|
|
|
53.6
|
%
|
EMEA
|
|
|
62,723
|
|
|
|
57,071
|
|
|
|
67.7
|
%
|
|
|
60.7
|
%
|
Asia Pacific (excluding China)
|
|
|
126,229
|
|
|
|
134,714
|
|
|
|
39.9
|
%
|
|
|
40.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales Leaders
|
|
|
456,051
|
|
|
|
436,058
|
|
|
|
51.8
|
%
|
|
|
51.8
|
%
|
China
|
|
|
30,037
|
|
|
|
30,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide Total Sales Leaders
|
|
|
486,088
|
|
|
|
466,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales leaders purchase most of our products for resale to other Members and retail consumers. The number of
sales leaders by geographic region as of the quarterly reporting dates will normally be higher than the number of sales leaders by geographic region as of the re-qualification period because sales leaders who do not re-qualify during the relevant
twelve-month period will be removed from the rank of sales leader the following February. Comparisons of sales leader totals on a year-to-year basis are indicators of our recruitment and retention efforts in different geographic regions.
We provide Members with products, support materials, training, special events and a competitive compensation program. If a Member wants to
pursue the Herbalife business opportunity, the Member is responsible for growing his or her business and personally pays for the sales activities related to attracting new customers and recruiting Members. Activities may include hosting events such
as Herbalife Opportunity Meetings or Success Training Seminars; advertising Herbalifes products; purchasing and using promotional materials such as t-shirts, buttons and caps; utilizing and paying for direct mail and print material such as
brochures, flyers, catalogs, business cards, posters and banners and telephone book listings; purchasing inventory for sale or use as samples; and training and mentoring customers and recruits on how to use Herbalife products and/or pursue the
Herbalife business opportunity.
Presentation
Retail sales
represent the suggested retail price of products we sell to our Members and is the gross sales amount reflected
on our invoices. This is not the price paid to us by our Members. Our Members purchase product from us at a discount from the suggested retail price. We refer to these discounts as
Distributor Allowance,
and we
refer to retail sales less distributor allowances as
Product Sales
.
Total distributor allowances for the three months
ended June 30, 2014 and 2013 were 41.9% and 44.3% of Retail Sales, respectively. Total distributor allowances for the six months ended June 30, 2014 and 2013 were 42.2% and 44.9% of Retail Sales, respectively. Distributor allowances
as a percentage of retail sales may vary by country depending upon regulatory restrictions that limit or otherwise restrict distributor allowances. We also offer reduced distributor allowances with respect to certain products worldwide. Each
Members level of discount is determined by qualification based on volume of purchases. In cases where a Member has qualified for less than the maximum discount, the remaining discount, which we also refer to as a wholesale commission, is
received by their sponsoring Members. Therefore, product sales are recognized net of product returns and distributor allowances.
Net Sales
equal product sales plus
shipping and handling revenues
, and generally represents what we
collect.
28
During 2013 we simplified our pricing structure for most markets, increasing suggested retail
prices and reducing total shipping and handling fees, eliminating a packaging and handling line item from our invoices to Members, with no impact on total Member cost. In conjunction, the method for Distributor Allowances and
Marketing Plan payouts now generally utilizes 90% to 95% of suggested retail price, depending on the product and market, to which we apply discounts of up to 50% for Distributor Allowances and payout rates of up to 15% for royalty overrides, up to
7% for production bonuses, and approximately 1% for the Mark Hughes bonus. Consequently, the revision to our pricing structure did not have a meaningful impact on the amounts of Distributor Allowance or payouts under our Marketing Plan and did not
materially impact our consolidated Net Sales and profitability.
We do not have visibility into all of the sales from our Members to their
customers, but such a figure would differ from our reported retail sales by factors including (a) the amount of product purchased by our Members for their own personal consumption and (b) prices charged by our Members to their
customers other than our suggested retail prices. We discuss retail sales because of its fundamental role in our systems, internal controls and operations, and its correlation to Member discounts and Royalty Overrides. In addition, it is used as the
basis for certain information included in daily and monthly reports reviewed by our management. However, such a measure is not in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. Retail sales should not be considered in
isolation from, nor as a substitute for, net sales and other consolidated income or cash flow statement data prepared in accordance with U.S. GAAP, or as a measure of profitability or liquidity. A reconciliation of retail sales to net sales is
presented below under
Results of Operations.
Our international operations have provided and will continue to provide a
significant portion of our total net sales. As a result, total net sales will continue to be affected by fluctuations in the U.S. dollar against foreign currencies. In order to provide a framework for assessing how our underlying businesses
performed excluding the effect of foreign currency fluctuations, in addition to comparing the percent change in net sales from one period to another in U.S. dollars, we also compare the percent change in net sales from one period to another
period using
net sales in local currency
. Net sales in local currency is not a U.S. GAAP financial measure. Net sales in local currency removes from net sales in U.S. dollars the impact of changes in exchange rates between the
U.S. dollar and the functional currencies of our foreign subsidiaries, by translating the current period net sales into U.S. dollars using the same foreign currency exchange rates that were used to translate the net sales for the previous comparable
period. We believe presenting net sales in local currency is useful to investors because it allows a meaningful comparison of net sales of our foreign operations from period to period. However, net sales in local currency measures should not be
considered in isolation or as an alternative to net sales in U.S. dollar measures that reflect current period exchange rates, or to other financial measures calculated and presented in accordance with U.S. GAAP.
Our
gross profit
consists of net sales less
cost of sales,
which represents our manufacturing costs, the
price we pay to our raw material suppliers and manufacturers of our products as well as shipping and handling costs including duties, tariffs, and similar expenses.
While all Members can potentially profit from their activities by reselling our products for amounts greater than the prices they pay us,
Members that develop, retain, and manage other Members can earn additional compensation for those activities, which we refer to as
Royalty overrides.
Royalty overrides are our most significant operating expense and consist of:
|
|
|
royalty overrides and production bonuses;
|
|
|
|
the Mark Hughes bonus payable to some of our most senior Members; and
|
|
|
|
other discretionary incentive cash bonuses to qualifying Members.
|
During the three months
ended June 30, 2014 and 2013, total Royalty overrides were 29.9% and 31.1% of our net sales, respectively. During the six months ended June 30, 2014 and 2013, total Royalty overrides were 30.1% and 31.7% of our net sales, respectively.
Royalty overrides are compensation to Members for the development, retention and improved productivity of their sales organizations and are paid to several levels of Members on each sale. Royalty overrides are compensation for services rendered to
the Company and as such are recorded as an operating expense.
Due to restrictions on direct selling in China, our independent service
providers in China are compensated with service fees instead of the distributor allowances and royalty overrides utilized in our traditional marketing program. Compensation to China independent service providers is included in selling, general and
administrative expenses.
Because of local country regulatory constraints, we may be required to modify our Member incentive plans as
described above. We also pay reduced royalty overrides with respect to certain products worldwide. Consequently, the total royalty override percentage may vary over time and from the percentages noted above.
Our
contribution margins
consist of net sales less cost of sales and royalty overrides.
29
Selling, general and administrative expenses
represent our operating expenses,
which include labor and benefits, sales events, professional fees, travel and entertainment, Member promotions, occupancy costs, communication costs, bank fees, depreciation and amortization, foreign exchange gains and losses and other miscellaneous
operating expenses.
Most of our sales to Members outside the United States are made in the respective local currencies. In preparing our
financial statements, we translate revenues into U.S. dollars using average exchange rates. Additionally, the majority of our purchases from our suppliers generally are made in U.S. dollars. Consequently, a strengthening of the U.S. dollar versus a
foreign currency can have a negative impact on our reported sales and contribution margins and can generate foreign currency losses on intercompany transactions. Foreign currency exchange rates can fluctuate significantly. From time to time, we
enter into foreign exchange forward and option contracts to partially mitigate our foreign currency exchange risk as discussed in further detail in Part I, Item 3
Quantitative and Qualitative Disclosures about Market Risk
.
Summary Financial Results
Net sales for
the three and six months ended June 30, 2014 were $1,306.2 million and $2,568.8 million, respectively. Net sales increased $87.0 million, or 7.1%, and $226.0 million, or 9.6%, for the three and six months ended June 30,
2014, respectively, as compared to the same periods in 2013. In local currency, including the remeasurement impact of Venezuelas Bolivar denominated net sales, net sales for the three and six months ended June 30, 2014 increased 10.8% and
13.9%, respectively, as compared to the same periods in 2013. The increase in net sales in both periods was primarily due to the continued successful adoption and operation of daily consumption DMOs; increased Member engagement and an increase in
average active sales leaders; branding activities and increased Member recruiting.
Net income for the three and six months ended
June 30, 2014 was $119.5 million, or $1.31 per diluted share, and $194.2 million, or $2.02 per diluted share, respectively. Net income decreased $23.6 million, or 16.5%, and $67.9 million, or 25.9%, for the three and six
months ended June 30, 2014, respectively, as compared to the same periods in 2013. The decrease for the three and six months ended June 30, 2014 was primarily due to the higher selling, general and administrative expenses to support the
growth of our business and the foreign exchange loss related to the remeasurement of our Venezuela Bolivar-denominated assets and liabilities described below, and higher interest expense, partially offset by higher contribution margin driven by the
sales growth discussed above.
Net income for the three months ended June 30, 2014 included an $8.0 million pre-tax unfavorable
impact ($5.6 million post-tax) related to legal, advisory services and other expenses for the Companys response to allegations and other negative information put forward in the marketplace by a hedge fund manager which started in late 2012
(See
Selling, General and Administrative Expenses
below for further discussion); a $5.1 million pre-tax unfavorable impact ($3.1 million post-tax) from expenses related to the Federal Trade Commissions (FTC) inquiry; a $10.1 million
unfavorable impact of non-cash interest expense related to the Convertible Notes and the Forward Transactions (See
Liquidity and Capital Resources Convertible Senior Notes
below for further discussion), a $0.2 million pre-tax
unfavorable impact ($2.6 million post-tax) foreign exchange loss related to Venezuela, and a $0.4 million unfavorable impact related to expenses incurred for the recovery of costs associated with the re-audit. Net income for the six months
ended June 30, 2014 included an $89.5 million pre-tax unfavorable impact ($69.2 million post-tax), comprised of an $86.3 million foreign exchange loss related to the remeasurement of Venezuela Bolivar-denominated assets and
liabilities at the SICAD I rate and a $3.2 million impairment loss on Venezuela bonds during the first quarter of 2014 (See
Liquidity and Capital Resources Venezuela
below for further discussion of currency exchange rate
issues in Venezuela and
Other Expense, net
below for further discussion of Venezuela bonds); a $12.3 million pre-tax unfavorable impact ($8.9 million post-tax) related to legal, advisory services and other expenses for the Companys
response to allegations and other negative information put forward in the marketplace by a hedge fund manager which started in late 2012 (See
Selling, General and Administrative Expenses
below for further discussion); a $6.0 million pre-tax
unfavorable impact ($3.8 million post-tax) from expenses related to the Federal Trade Commissions (FTC) inquiry; a $15.9 million unfavorable impact of non-cash interest expense related to the Convertible Notes and the Forward
Transactions, and a $0.4 million unfavorable impact related to expenses incurred for the recovery of costs associated with the re-audit. The income tax impact of the expenses discussed above is based on forecasted items affecting the
Companys 2014 full year effective tax rate. Adjustments to forecasted items unrelated to these expenses, as well as impacts related to interim reporting, will have an effect on the income tax impact of these items in subsequent periods.
Net income for the three and six months ended June 30, 2013 included approximately $8.1 million and $17.6 million pre-tax
unfavorable impact ($7.1 million and $15.1 million, respectively, post-tax) related to legal and advisory services and other expenses for the Companys response to allegations and other negative information put forward in the marketplace by a
hedge fund manager which started in late 2012 and approximately $3.5 million pre-tax unfavorable impact ($2.7 million post-tax) related to professional fees for the re-audit of the Companys 2010 to 2012 financial statements. Net income for the
six months ended June 30, 2013 also included a $15.1 million pre-tax unfavorable impact ($8.3 million post-tax) related to the Venezuela Bolivar devaluation (See
Liquidity and Capital Resources Working Capital and Operating Activities
below for further discussion of currency exchange rate issues in Venezuela).
30
Results of Operations
Our results of operations for the periods below are not necessarily indicative of results of operations for the full year or future periods,
which depend upon numerous factors, including our ability to recruit new Members and retain existing Members, open new markets, further penetrate existing markets, introduce new products and programs that will help our Members increase their retail
efforts and develop niche market segments.
The following table sets forth selected results of our operations expressed as a percentage of
net sales for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
2014
|
|
|
June 30,
2013
|
|
|
June 30,
2014
|
|
|
June 30,
2013
|
|
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
19.7
|
|
|
|
20.3
|
|
|
|
19.8
|
|
|
|
20.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
80.3
|
|
|
|
79.7
|
|
|
|
80.2
|
|
|
|
79.8
|
|
Royalty overrides(1)
|
|
|
29.9
|
|
|
|
31.1
|
|
|
|
30.1
|
|
|
|
31.7
|
|
Selling, general and administrative expenses(1)(2)
|
|
|
35.4
|
|
|
|
32.8
|
|
|
|
37.5
|
|
|
|
32.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
15.0
|
|
|
|
15.8
|
|
|
|
12.6
|
|
|
|
15.5
|
|
Interest expense, net
|
|
|
1.6
|
|
|
|
0.5
|
|
|
|
1.4
|
|
|
|
0.5
|
|
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
13.4
|
|
|
|
15.3
|
|
|
|
11.1
|
|
|
|
15.0
|
|
Income taxes
|
|
|
4.2
|
|
|
|
3.6
|
|
|
|
3.5
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
9.2
|
%
|
|
|
11.7
|
%
|
|
|
7.6
|
%
|
|
|
11.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Service fees to our independent service providers in China are included in selling, general and administrative expenses while Member compensation for all other countries is included in royalty overrides.
|
(2)
|
During the six months ended June 30, 2014, selling, general and administrative expenses as a percentage of net sales was significantly higher than in the six months ended June 30, 2013, primarily due to the
foreign exchange losses relating to our Venezuela business as discussed further below.
|
Net Sales
The following chart reconciles retail sales to net sales:
Sales by Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
Retail
Sales(1)
|
|
|
Distributor
Allowance
|
|
|
Product
Sales
|
|
|
Shipping &
Handling
Revenues(1)
|
|
|
Net
Sales
|
|
|
Retail
Sales(1)
|
|
|
Distributor
Allowance
|
|
|
Product
Sales
|
|
|
Shipping &
Handling
Revenues(1)
|
|
|
Net
Sales
|
|
|
Change in
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
416.5
|
|
|
$
|
(189.6
|
)
|
|
$
|
226.9
|
|
|
$
|
23.7
|
|
|
$
|
250.6
|
|
|
$
|
407.7
|
|
|
$
|
(187.4
|
)
|
|
$
|
220.3
|
|
|
$
|
27.2
|
|
|
$
|
247.5
|
|
|
|
1.3
|
%
|
Mexico
|
|
|
257.4
|
|
|
|
(118.0
|
)
|
|
|
139.4
|
|
|
|
9.2
|
|
|
|
148.6
|
|
|
|
235.6
|
|
|
|
(115.2
|
)
|
|
|
120.4
|
|
|
|
25.2
|
|
|
|
145.6
|
|
|
|
2.1
|
%
|
South & Central America
|
|
|
327.4
|
|
|
|
(153.1
|
)
|
|
|
174.3
|
|
|
|
29.0
|
|
|
|
203.3
|
|
|
|
349.3
|
|
|
|
(165.8
|
)
|
|
|
183.5
|
|
|
|
39.0
|
|
|
|
222.5
|
|
|
|
(8.6
|
)%
|
EMEA
|
|
|
390.3
|
|
|
|
(176.6
|
)
|
|
|
213.7
|
|
|
|
13.6
|
|
|
|
227.3
|
|
|
|
299.8
|
|
|
|
(143.5
|
)
|
|
|
156.3
|
|
|
|
30.1
|
|
|
|
186.4
|
|
|
|
21.9
|
%
|
Asia Pacific
|
|
|
482.7
|
|
|
|
(205.2
|
)
|
|
|
277.5
|
|
|
|
28.8
|
|
|
|
306.3
|
|
|
|
459.9
|
|
|
|
(203.4
|
)
|
|
|
256.5
|
|
|
|
42.7
|
|
|
|
299.2
|
|
|
|
2.4
|
%
|
China
|
|
|
193.7
|
|
|
|
(24.2
|
)
|
|
|
169.5
|
|
|
|
0.6
|
|
|
|
170.1
|
|
|
|
140.3
|
|
|
|
(22.3
|
)
|
|
|
118.0
|
|
|
|
|
|
|
|
118.0
|
|
|
|
44.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
|
|
$
|
2,068.0
|
|
|
$
|
(866.7
|
)
|
|
$
|
1,201.3
|
|
|
$
|
104.9
|
|
|
$
|
1,306.2
|
|
|
$
|
1,892.6
|
|
|
$
|
(837.6
|
)
|
|
$
|
1,055.0
|
|
|
$
|
164.2
|
|
|
$
|
1,219.2
|
|
|
|
7.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
Retail
Sales(1)
|
|
|
Distributor
Allowance
|
|
|
Product
Sales
|
|
|
Shipping &
Handling
Revenues(1)
|
|
|
Net
Sales
|
|
|
Retail
Sales(1)
|
|
|
Distributor
Allowance
|
|
|
Product
Sales
|
|
|
Shipping &
Handling
Revenues(1)
|
|
|
Net
Sales
|
|
|
Change in
Net Sales
|
|
|
|
(In millions)
|
|
North America
|
|
$
|
828.3
|
|
|
$
|
(376.9
|
)
|
|
$
|
451.4
|
|
|
$
|
47.0
|
|
|
$
|
498.4
|
|
|
$
|
757.7
|
|
|
$
|
(354.1
|
)
|
|
$
|
403.6
|
|
|
$
|
65.4
|
|
|
$
|
469.0
|
|
|
|
6.3
|
%
|
Mexico
|
|
|
503.1
|
|
|
|
(229.8
|
)
|
|
|
273.3
|
|
|
|
18.0
|
|
|
|
291.3
|
|
|
|
450.6
|
|
|
|
(220.3
|
)
|
|
|
230.3
|
|
|
|
48.2
|
|
|
|
278.5
|
|
|
|
4.6
|
%
|
South & Central America
|
|
|
713.2
|
|
|
|
(330.2
|
)
|
|
|
383.0
|
|
|
|
65.0
|
|
|
|
448.0
|
|
|
|
692.6
|
|
|
|
(327.3
|
)
|
|
|
365.3
|
|
|
|
76.6
|
|
|
|
441.9
|
|
|
|
1.4
|
%
|
EMEA
|
|
|
753.8
|
|
|
|
(341.1
|
)
|
|
|
412.7
|
|
|
|
25.8
|
|
|
|
438.5
|
|
|
|
574.5
|
|
|
|
(276.0
|
)
|
|
|
298.5
|
|
|
|
57.4
|
|
|
|
355.9
|
|
|
|
23.2
|
%
|
Asia Pacific
|
|
|
928.8
|
|
|
|
(396.8
|
)
|
|
|
532.0
|
|
|
|
54.7
|
|
|
|
586.7
|
|
|
|
946.3
|
|
|
|
(423.8
|
)
|
|
|
522.5
|
|
|
|
88.5
|
|
|
|
611.0
|
|
|
|
(4.0
|
)%
|
China
|
|
|
349.3
|
|
|
|
(44.3
|
)
|
|
|
305.0
|
|
|
|
0.9
|
|
|
|
305.9
|
|
|
|
220.0
|
|
|
|
(33.6
|
)
|
|
|
186.4
|
|
|
|
0.2
|
|
|
|
186.6
|
|
|
|
63.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
|
|
$
|
4,076.5
|
|
|
$
|
(1,719.1
|
)
|
|
$
|
2,357.4
|
|
|
$
|
211.4
|
|
|
$
|
2,568.8
|
|
|
$
|
3,641.7
|
|
|
$
|
(1,635.1
|
)
|
|
$
|
2,006.6
|
|
|
$
|
336.3
|
|
|
$
|
2,342.9
|
|
|
|
9.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
During 2013 we simplified our pricing structure for most markets by increasing suggested retail prices and reducing total shipping and handling revenues by a similar amount, eliminating a packaging and
handling line item from our invoices to Members. These changes did not materially impact our consolidated Net Sales and profitability.
|
Changes in net sales are directly associated with the retailing of our products, recruiting and retention of our Member force, the quality and
completeness of our product offerings that the Member force has to sell and the number of countries in which we operate. Managements role, both in-country and at the region and corporate level, is to provide Members with a competitive and
broad product line, encourage strong teamwork and Member leadership and offer leading edge business tools and technology services to make doing business with Herbalife simple. Management uses the Member marketing program coupled with educational and
motivational tools and promotions to encourage Members to increase retailing, retention, and recruiting, which in turn affect net sales. Such tools include Company sponsored sales events such as Extravaganzas, Leadership Development Weekends and
World Team Schools where large groups of Members gather, thus allowing them to network with other Members, learn retailing, retention, and recruiting techniques from our leading Members and become more familiar with how to market and sell our
products and business opportunities. Accordingly, management believes that these development and motivation programs increase the productivity of the sales leader network. The expenses for such programs are included in selling, general and
administrative expenses. Sales are driven by several factors, including the number and productivity of Members, including sales leaders, who continually build, educate and motivate their respective distribution and sales organizations. We also use
event and non-event product promotions to motivate Members to increase retailing, retention and recruiting activities. These promotions have prizes ranging from qualifying for events to product prizes and vacations. The costs of these promotions are
included in selling, general and administrative expenses.
The factors described above have helped Members increase their business, which
in turn helps drive Volume Point growth in our business, and thus, net sales growth. The discussion below of net sales by geographic region further details some of the specific drivers of growth of our business and causes of sales fluctuations
during the three and six months ended June 30, 2014 as compared to the same periods in 2013, as well as the unique growth or contraction factors specific to certain geographic regions or significant countries within a region during these
periods. We believe that the correct business foundation, coupled with ongoing training and promotional initiatives, is required to increase retailing of our products and recruiting and retention of Members. The correct business foundation includes
strong country management that works closely with the Member leadership, actively engaged and unified Member leadership, a broad product line that appeals to local consumer needs, a favorable regulatory environment, a scalable and stable technology
platform and an attractive Member marketing plan. Initiatives, such as Success Training Seminars, Leadership Development Weekends, Promotional Events and regional Extravaganzas are integral components of developing a highly motivated and educated
Member sales organization that will work toward increasing the recruitment and retention of Members.
We anticipate that our strategy will
continue to include creating and maintaining growth within existing markets while expanding into new markets. In addition, new ideas and DMOs are being generated in many of our markets and are globalized where applicable through the combined efforts
of Members, country, regional and corporate management. While we support a number of different DMOs, one of the most popular DMOs is the daily consumption DMO. Under our traditional DMO, a Member typically sells to its customers on a somewhat
infrequent basis (e.g., monthly) which provides fewer opportunities for interaction with their customers. Under a daily consumption DMO, a Member interacts with its customers on a more frequent basis which enables the Member to better educate and
advise customers about nutrition and the proper use of the products and helps promote daily usage as well, thereby helping the Member grow his or her business. Specific examples of DMOs include the Club concept in Mexico, Premium Herbalife
Opportunity Meetings in Korea, the Healthy Breakfast concept in Russia, and the Internet/Sampling and Weight Loss Challenge in the U.S. Managements strategy is to review the applicability of expanding successful country initiatives throughout
a region, and where appropriate, financially support the globalization of these initiatives.
32
North America
The North America region reported net sales of $250.6 million and $498.4 million for the three and six months ended June 30, 2014,
respectively. Net sales increased $3.1 million, or 1.3%, and $29.4 million, or 6.3%, for the three and six months ended June 30, 2014, respectively, as compared to the same periods in 2013. In local currency, net sales increased 1.3% and 6.4%
for the three and six months ended June 30, 2014, respectively, as compared to the same periods in 2013. The overall increase in net sales in the region was a result of net sales growth in the U.S. of $3.3 million, or 1.4%, and $29.4 million,
or 6.4%, for the three and six months ended June 30, 2014, as compared to the same periods in 2013. The increase in net sales in the US was driven by a price increase of 3% in March, which offset a slight decline volume point sales.
In the U.S. we continue to see the success of our Members converting their business strategy toward a combination of daily consumption and a
health active lifestyle. Sales for the second quarter versus the prior year period reflect in part the short-term negative impact of the ongoing shift toward Sales Leader qualification via purchases of 5,000 volume points over 12
months, offset by a price increase for the U.S. initiated late in the first quarter. The company just completed its new simplified training materials that will launch through an 18-city tour in the third quarter.
Average active sales leaders in the region increased 4.8% and 6.7% for the three and six months ended June 30, 2014, respectively, as
compared to the same periods in 2013. Average active sales leaders in the U.S. increased 4.9% and 6.8% for the three and six months ended June 30, 2014, respectively, as compared to the same periods in 2013.
Mexico
The Mexico region reported
net sales of $148.6 million and $291.3 million for the three and six months ended June 30, 2014, respectively. Net sales for the three and six months ended June 30, 2014 increased $3.0 million, or 2.1%, and $12.8 million, or 4.6%,
respectively, as compared to the same periods in 2013. In local currency, net sales for the three and six months ended June 30, 2014 increased 6.5% and 9.3%, respectively, as compared to the same periods in 2013. The fluctuation of foreign
currency rates had an unfavorable impact of $6.4 million and $13.1 million on net sales for the three and six months ended June 30, 2014, respectively.
The growth in net sales is primarily the result of several factors including a series of 1% price increases in October 2013, December
2013, February 2014, and April 2014, increased Member engagement, and the continued success of the Nutrition Club DMO. Another growth driver in Mexico has been the ongoing transition from home clubs to commercial clubs by many Members, which
are generally able to generate higher volumes of sales through the servicing of more customers and longer operating hours. Also, Herbalife has been expanding the number of access points for Members to obtain product easily and quickly. Most
significantly twelve new sales centers have been opened over the past twelve months bringing the total to 43, but we have also increased the number of local retailers in which Members can pick up product, and introduced several
Herbamobile vehicles.
Average active sales leaders in Mexico increased 2.7% and 4.1% for the three and six months ended
June 30, 2014, respectively, as compared to the same periods in 2013.
South and Central America
The South and Central America region reported net sales of $203.3 million and $448.0 million for the three and six months ended June 30,
2014, respectively. Net sales decreased $19.2 million, or 8.6%, and increased $6.1 million, or 1.4%, for the three and six months ended June 30, 2014, respectively, as compared to the same periods in 2013. In local currency, including the
remeasurement impact of Venezuelas Bolivar denominated net sales, net sales increased 7.6% and 16.8% for the three and six months ended June 30, 2014, respectively, as compared to the same periods in 2013. The fluctuation of foreign
currency rates had a $35.8 million and $68.2 million unfavorable impact on net sales for the three and six months ended June 30, 2014, respectively. The decrease in net sales for the three months ended June 30, 2014, as compared to the
same period in 2013, was primarily driven by Venezuela. The increase in net sales for the six months ended June 30, 2014, as compared to the same period in 2013, was primarily driven by increases in the majority of countries in the region,
partially offset by a decline in Venezuela. The growth for the six month period was primarily driven by the adoption and expansion of daily consumption DMOs throughout the region.
In Brazil, the regions largest market, net sales decreased $7.4 million, or 8.1%, and $1.5 million, or
0.8%, for the three and six months ended June 30, 2014, respectively, as compared to the same periods in 2013. In local currency, net sales decreased 0.6% and increased 12.9% for the three and six months ended June 30, 2014, respectively,
as compared to the same periods in 2013. The fluctuation of foreign currency rates had a $6.9 million and $26.1 million unfavorable impact on net sales in Brazil for the three and six months ended June 30, 2014, respectively. The increase in
local currency net sales for the six month period ended June 30, 2014 continues to be driven by the successful adoption of Nutrition Clubs and other daily consumption DMOs. We believe the slight decline in local currency net sales for the three
month period ended June 30, 2014 was due in part to decreases for certain Member sales organizations, as well as the hosting of only one Extravaganza in Brazil during the second quarter of 2014 compared to 3 regional Extravaganzas during the
same period in 2013 and, to a lesser extent, an economic slowdown as a result of Brazil hosting the World Cup event which began in mid-June and impacted the attendance at nutrition clubs.
Net sales in Venezuela decreased $12.5 million, or 24.8%, and $9.8 million, or 9.6%, for the three and six months ended June 30, 2014,
respectively, as compared to the same periods in 2013. The sales decrease was primarily due to order size limitations and local political and economic challenges in Venezuela. These decreases were partially offset by cumulative price increases in
2013 of 123%. These price increases were implemented to better align product prices with the economic conditions of the market. During January 2014, an additional price increase was planned but not allowed after a review by local governmental
agencies. As of March 31, 2014, we began remeasuring our net sales in Venezuela using the SICAD I rate instead of the previous CADIVI rate of 6.3 Venezuelan Bolivars per U.S. dollar. Use of the SICAD I and previous CADIVI rates instead of the
more favorable official rates in
33
2013 had $22.9 million and $27.2 million unfavorable impacts on net sales in Venezuela for the three and six months ended June 30, 2014, respectively. In July 2014, Herbalife Venezuela
increased its prices on certain products in response to a recent announcement by the Venezuelan government regarding calculating Bolivar denominated duties on U.S. dollar shipments using a default SICAD II rate if shipments are not settled using the
SICAD I or CENCOEX exchange rates. We continue to monitor and assess our product pricing in Venezuela. See
Liquidity and Capital Resources Working Capital and Operating Activities
below for further discussion of currency exchange
rate issues in Venezuela and our evaluation of several options to reduce our economic exposure to this market.
Average active sales
leaders in the region increased 13.8% and 16.3% for the three and six months ended June 30, 2014, respectively, as compared to the same periods in 2013.
EMEA
The EMEA region reported net
sales of $227.3 million and $438.5 million for the three and six months ended June 30, 2014, respectively. Net sales increased $40.9 million, or 21.9%, and $82.6 million, or 23.2%, for the three and six months ended June 30, 2014,
respectively, as compared to the same periods in 2013. In local currency, net sales increased 21.4% and 23.7% for the three and six months ended June 30, 2014, respectively, as compared to the same periods in 2013. The fluctuation of foreign
currency rates had a favorable impact of $1.1 million and an unfavorable impact of $1.9 million on net sales for the three and six months ended June 30, 2014, respectively. The increase in net sales for the three and six months ended
June 30, 2014 was primarily driven by increases in Russia, the United Kingdom, Spain, and Italy.
Net sales in Russia increased $9.3
million, or 29.8%, and $15.1 million, or 25.5%, for the three and six months ended June 30, 2014, respectively, as compared to the same periods in 2013. In local currency, net sales increased 43.3% and 41.3% for the three and six months ended
June 30, 2014, respectively, as compared to the same periods in 2013. The fluctuation of foreign currency rates had a $4.2 million and $9.4 million unfavorable impact on net sales in Russia for the three and six months ended June 30, 2014,
respectively. The increase in Russia was driven by the ongoing adoption of the Commercial Nutrition Club, additional sales centers which have increased access to our products and improving brand image including the sponsorship of FC Spartak Moscow
football club.
Net sales in Italy increased $8.8 million, or 30.2%, and $16.4 million, or 29.9%, for the three and six months ended
June 30, 2014, respectively, as compared to the same periods in 2013. In local currency, net sales increased 24.0% and 24.5% for the three and six months ended June 30, 2014, respectively, as compared to the same periods in 2013. The
fluctuation of foreign currency rates had a $1.8 million and $3.0 million favorable impact on net sales in Italy for the three and six months ended June 30, 2014, respectively. Italy has now had five consecutive quarters of positive
year-over-year sales growth. Management believes this is a strong indication that the market is embracing the daily consumption DMO.
Net
sales in Spain increased $7.2 million, or 42.0%, and $14.3 million, or 45.9%, for the three and six months ended June 30, 2014, respectively, as compared to the same periods in 2013. In local currency, net sales in Spain increased 35.3% and
39.8% for the three and six months ended June 30, 2014, respectively, as compared to the same periods in 2013. The fluctuation of foreign currency rates had a $1.1 million and $1.9 million favorable impact on net sales in Spain for the three
and six months ended June 30, 2014, respectively. The increase in Spain was mainly due to the positive effect of increased Member engagement and retention as well as a focus on regionalization and city by city promotions.
Net sales in the United Kingdom increased $4.9 million, or 32.8%, and $12.9 million, or 50.4%, for the three and six months ended
June 30, 2014, respectively, as compared to the same periods in 2013. In local currency, net sales in the United Kingdom increased 21.3% and 39.2% for the three and six months ended June 30, 2014, respectively, as compared to the same
periods in 2013. The fluctuation of foreign currency rates had a $1.7 million and $2.9 million favorable impact on net sales in the United Kingdom for the three and six months ended June 30, 2014, respectively. The increase in the United
Kingdom was primarily due to the successful adoption of Nutrition Clubs and Weight Loss Challenge DMO.
Average active sales leaders in
the region increased 18.1% and 17.8% for the three and six months ended June 30, 2014, respectively, as compared to the same periods in 2013.
Asia Pacific
The Asia Pacific
region, which excludes China, reported net sales of $306.3 million and $586.7 million for the three and six months ended June 30, 2014, respectively. Net sales increased $7.1 million, or 2.4%, and decreased $24.3 million, or 4.0%, for the three
and six months ended June 30, 2014, respectively, as compared to the same periods in 2013. In local currency, net sales increased 2.9% and decreased 1.2% for the three and six months ended June 30, 2014, respectively, as compared to the
same periods in 2013. The fluctuation of foreign currency rates had an unfavorable impact of $1.5 million and $17.2 million on net sales for the three and six months ended June 30, 2014, respectively. The increase in net sales for the three
months ended June 30, 2014 was driven primarily by increases in India, South Korea, Philippines, Australia, and Hong Kong and was partially offset by declines in Malaysia, Taiwan, and Indonesia. The decrease in net sales for the six months
ended June 30, 2014 was driven primarily by declines in Malaysia, South Korea, Indonesia, and Taiwan and was partially offset by increases in India, Philippines, and Australia. Eleven countries within the region participated in the launch of a
new SKIN product line of personal care products during the second quarter of 2014. Four countries India, Indonesia, Thailand, and Vietnam will launch the SKIN product line later this year.
34
Net sales in South Korea increased $5.9 million, or 5.3%, and decreased $5.1 million, or 2.3%,
for the three and six months ended June 30, 2014, respectively, as compared to the same periods in 2013. In local currency, net sales decreased 3.5% and 7.4% for the three and six months ended June 30, 2014, respectively, as compared to
the same periods in 2013. The fluctuation of foreign currency rates had a favorable impact on net sales of $9.8 million and $11.4 million for the three and six months ended June 30, 2014, respectively. South Korea continues to be impacted by a
modest slowdown in the number of Nutrition Clubs openings as well as a decline in productivity in certain Nutrition Clubs compared to the prior year period. We believe that several actions we took starting in the fourth quarter of 2013 have
mitigated these issues and created a platform for stable growth going forward. In addition, net sales for the second quarter of 2014 benefited from the launch of the new SKIN product line of personal care products.
Net sales in India increased $7.7 million, or 24.0%, and $7.1 million, or 9.8%, for the three and six months ended June 30, 2014,
respectively, as compared to the same periods in 2013. In local currency, net sales increased 33.2% and 21.5% for the three and six months ended June 30, 2014, respectively, as compared to the same periods in 2013. The fluctuation of foreign
currency rates had an unfavorable impact on net sales of $2.9 million and $8.4 million for the three and six months ended June 30, 2014, respectively. The increase in net sales for the three and six months ended June 30, 2014 was primarily
driven by increased product access and the successful adoption of the daily consumption DMOs, especially the Nutrition Club.
Net sales in
Taiwan decreased $4.4 million, or 11.5%, and $12.1 million, or 15.4%, for the three and six months ended June 30, 2014, respectively, as compared to the same periods in 2013. In local currency, net sales decreased 10.7% and 13.8% for the three
and six months ended June 30, 2014, respectively, as compared to the same periods in 2013. The fluctuation of foreign currency rates had an unfavorable impact on net sales of $0.3 million and $1.2 million for the three and six months ended
June 30, 2014, respectively. In November 2013 Taiwan instituted a first order limitation rule which limits the amount of product a new Member may order after initially signing up. The benefit of the first order limitation rule is that it
creates a more stable ordering base but does have a modest negative impact when first implemented. Partially offsetting this impact was the benefit from the launch of a new SKIN product line of personal care products during the second quarter of
2014.
Net sales in Indonesia decreased $6.0 million, or 16.0%, and $8.4 million, or 11.9%, for the three and six months ended
June 30, 2014, respectively, as compared to the same periods in 2013. In local currency, net sales decreased 0.6% and increased 5.7% for the three and six months ended June 30, 2014, respectively, as compared to the same periods in 2013.
The fluctuation of foreign currency rates had an unfavorable impact on net sales of $5.8 million and $12.4 million for the three and six months ended June 30, 2014, respectively. The primary catalyst driving the local currency net sales
increase in Indonesia for the six months ended June 30, 2014 was the growth in Nutrition Clubs.
Net sales in Malaysia decreased $9.7
million, or 37.3%, and $27.1 million, or 42.9%, for the three and six months ended June 30, 2014, respectively, as compared to the same periods in 2013. In local currency, net sales decreased 33.8% and 39.2% for the three and six months ended
June 30, 2014, respectively, as compared to the same periods in 2013. The fluctuation of foreign currency rates had an unfavorable impact on net sales of $0.9 million and $2.3 million for the three and six months ended June 30, 2014,
respectively. A new competitor who entered Malaysia in October of 2013 led by a former Herbalife executive continues to have an impact on our business in the market. While the impact was particularly strong during the third and fourth quarters of
2013, it has remained an issue throughout the first half of this year. Although we are beginning to see some positive signs that the impact is decreasing and the business is stabilizing, it is likely that the market is not expected to improve in
2014. In addition, during 2012 we saw tremendous growth in Nutrition Home Clubs and some of these clubs suffered from a lack of proper training and have declined in number and activity levels as a result. We are working with Member leadership in
Malaysia to address these training issues. We believe that the underlying DMOs currently used by Members in the country (Nutrition Clubs, Road Shows, and Mega Herbalife Opportunity Meetings) provide for a solid base of growth going forward.
Average active sales leaders in the region increased 5.8% and 5.1% for the three and six months ended June 30, 2014, respectively, as
compared to the same periods in 2013.
China
Net sales in China were $170.1 million and $305.9 million for the three and six months ended June 30, 2014, respectively. Net sales
increased $52.1 million, or 44.2%, and $119.3 million, or 63.9%, for the three and six months ended June 30, 2014, respectively, as compared to the same periods in 2013. In local currency, net sales increased 45.7% and 63.7% for the three and
six months ended June 30, 2014, respectively, as compared to the same periods in 2013. The fluctuation of foreign currency rates had an unfavorable impact of $2.2 million and a favorable impact of $0.4 million on net sales for the three and six
months ended June 30, 2014, respectively.
The increase in net sales was driven by the continuing adoption and acculturation of daily
consumption DMOs. In addition, sales have benefited from Member acceptance of a trial Preferred Customer program which was launched during 2013 as well as on-line ordering.
Average active sales leaders in China increased 32.9% and 36.3% for the three and six months ended June 30, 2014, respectively, as
compared to the same periods in 2013. We believe that the increase in the number of average active sales leaders in China is indicative of the market transitioning to daily consumption DMOs.
35
As of June 30, 2014, we were operating in 66 retail stores in 29 provinces in China. As of
June 30, 2014, we had direct selling licenses to 25 out of the 29 provinces in which we were operating. We continue to seek additional provincial licenses where appropriate.
Sales by Product Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
Retail
Sales
|
|
|
Distributor
Allowance
|
|
|
Product
Sales
|
|
|
Shipping &
Handling
Revenues
|
|
|
Net
Sales
|
|
|
Retail
Sales
|
|
|
Distributor
Allowance
|
|
|
Product
Sales
|
|
|
Shipping &
Handling
Revenues
|
|
|
Net
Sales
|
|
|
% Change in
Net Sales
|
|
|
|
(In millions)
|
|
Weight Management
|
|
$
|
1,362.5
|
|
|
$
|
(588.2
|
)
|
|
$
|
774.3
|
|
|
$
|
69.2
|
|
|
$
|
843.5
|
|
|
$
|
1,235.1
|
|
|
$
|
(564.3
|
)
|
|
$
|
670.8
|
|
|
$
|
107.4
|
|
|
$
|
778.2
|
|
|
|
8.4
|
%
|
Targeted Nutrition
|
|
|
462.3
|
|
|
|
(199.6
|
)
|
|
|
262.7
|
|
|
|
23.4
|
|
|
|
286.1
|
|
|
|
440.7
|
|
|
|
(201.3
|
)
|
|
|
239.4
|
|
|
|
38.1
|
|
|
|
277.5
|
|
|
|
3.1
|
%
|
Energy, Sports and Fitness
|
|
|
111.2
|
|
|
|
(47.9
|
)
|
|
|
63.3
|
|
|
|
5.6
|
|
|
|
68.9
|
|
|
|
103.3
|
|
|
|
(47.2
|
)
|
|
|
56.1
|
|
|
|
9.0
|
|
|
|
65.1
|
|
|
|
5.8
|
%
|
Outer Nutrition
|
|
|
75.9
|
|
|
|
(32.8
|
)
|
|
|
43.1
|
|
|
|
3.9
|
|
|
|
47.0
|
|
|
|
60.0
|
|
|
|
(27.4
|
)
|
|
|
32.6
|
|
|
|
5.2
|
|
|
|
37.8
|
|
|
|
24.3
|
%
|
Literature, Promotional and Other(1)
|
|
|
56.1
|
|
|
|
1.8
|
|
|
|
57.9
|
|
|
|
2.8
|
|
|
|
60.7
|
|
|
|
53.5
|
|
|
|
2.6
|
|
|
|
56.1
|
|
|
|
4.5
|
|
|
|
60.6
|
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,068.0
|
|
|
$
|
(866.7
|
)
|
|
$
|
1,201.3
|
|
|
$
|
104.9
|
|
|
$
|
1,306.2
|
|
|
$
|
1,892.6
|
|
|
$
|
(837.6
|
)
|
|
$
|
1,055.0
|
|
|
$
|
164.2
|
|
|
$
|
1,219.2
|
|
|
|
7.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
Retail
Sales
|
|
|
Distributor
Allowance
|
|
|
Product
Sales
|
|
|
Shipping &
Handling
Revenues
|
|
|
Net
Sales
|
|
|
Retail
Sales
|
|
|
Distributor
Allowance
|
|
|
Product
Sales
|
|
|
Shipping &
Handling
Revenues
|
|
|
Net
Sales
|
|
|
% Change in
Net Sales
|
|
|
|
(In millions)
|
|
Weight Management
|
|
$
|
2,676.0
|
|
|
$
|
(1,163.7
|
)
|
|
$
|
1,512.3
|
|
|
$
|
138.8
|
|
|
$
|
1,651.1
|
|
|
$
|
2,370.1
|
|
|
$
|
(1,099.2
|
)
|
|
$
|
1,270.9
|
|
|
$
|
218.9
|
|
|
$
|
1,489.8
|
|
|
|
10.8
|
%
|
Targeted Nutrition
|
|
|
924.1
|
|
|
|
(401.9
|
)
|
|
|
522.2
|
|
|
|
47.9
|
|
|
|
570.1
|
|
|
|
850.2
|
|
|
|
(394.3
|
)
|
|
|
455.9
|
|
|
|
78.5
|
|
|
|
534.4
|
|
|
|
6.7
|
%
|
Energy, Sports and Fitness
|
|
|
219.7
|
|
|
|
(95.5
|
)
|
|
|
124.2
|
|
|
|
11.4
|
|
|
|
135.6
|
|
|
|
196.3
|
|
|
|
(91.0
|
)
|
|
|
105.3
|
|
|
|
18.1
|
|
|
|
123.4
|
|
|
|
9.9
|
%
|
Outer Nutrition
|
|
|
140.5
|
|
|
|
(61.1
|
)
|
|
|
79.4
|
|
|
|
7.3
|
|
|
|
86.7
|
|
|
|
120.9
|
|
|
|
(56.1
|
)
|
|
|
64.8
|
|
|
|
11.2
|
|
|
|
76.0
|
|
|
|
14.1
|
%
|
Literature, Promotional and Other(1)
|
|
|
116.2
|
|
|
|
3.1
|
|
|
|
119.3
|
|
|
|
6.0
|
|
|
|
125.3
|
|
|
|
104.2
|
|
|
|
5.5
|
|
|
|
109.7
|
|
|
|
9.6
|
|
|
|
119.3
|
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,076.5
|
|
|
$
|
(1,719.1
|
)
|
|
$
|
2,357.4
|
|
|
$
|
211.4
|
|
|
$
|
2,568.8
|
|
|
$
|
3,641.7
|
|
|
$
|
(1,635.1
|
)
|
|
$
|
2,006.6
|
|
|
$
|
336.3
|
|
|
$
|
2,342.9
|
|
|
|
9.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Product buy backs and returns in all product categories are included in literature, promotional and other category
|
Net sales for all product categories increased for the three and six months ended June 30, 2014 as compared to the same periods in 2013.
The growth factors described in the above discussions of the individual geographic regions apply generally to all product categories.
Gross Profit
Gross profit was $1,049.0 million and $2,060.5 million for the three and six months ended June 30, 2014, respectively, as
compared to $972.0 million and $1,869.7 million for the same periods in 2013. As a percentage of net sales, gross profit for the three and six months ended June 30, 2014 increased to 80.3% and 80.2%, respectively, as compared to 79.7% and 79.8%
for the same periods in 2013, or a favorable net increase of 60 and 40 basis points, respectively. The net 60 basis point increase for the three months ended June 30, 2014 as compared to the same period in 2013, was primarily due to the
favorable impact of country mix, price increases and lower inventory write-downs partially offset by the unfavorable impact of foreign currency fluctuations and higher other costs. The net 40 basis point increase for the six months ended
June 30, 2014 as compared to the same period in 2013 was primarily due to the favorable impact of country mix and price increases partially offset by higher other costs.
Royalty Overrides
Royalty overrides were
$390.8 million and $772.6 million for the three and six months ended June 30, 2014, respectively, as compared to $379.6 million and $743.6 million for the same periods in 2013. Royalty overrides as a percentage of net sales was 29.9% and 30.1%
for the three and six months ended June 30, 2014, respectively, as compared to 31.1% and 31.7% for the same periods in 2013. Generally, this ratio varies slightly from period to period due to changes in the mix of products and countries because
full royalty overrides are not paid on certain products and in certain countries. Compensation to our independent service providers in China is included in selling, general and administrative expenses as opposed to royalty overrides where it is
included for all other Members under our worldwide marketing plan. We anticipate fluctuations in royalty overrides as a percentage of net sales reflecting the growth prospect of our China business relative to that of our worldwide business.
36
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $461.9 million and $964.0 million for the three and six months ended June 30, 2014,
respectively, as compared to $400.1 million and $764.8 million for the same periods in 2013. Selling, general and administrative expenses as a percentage of net sales were 35.4% and 37.5% for the three and six months ended June 30, 2014,
respectively, as compared to 32.8% and 32.6% for and the same periods in 2013.
The increase in selling, general and administrative
expenses for the three months ended June 30, 2014 included higher variable expenses related to sales growth including $27.6 million in higher expenses related to China independent service providers; $7.0 million in higher advertising and
sponsorship costs; $10.2 million in higher salaries, bonuses and benefits; and $5.1 million in expenses associated with the Federal Trade Commissions (FTC) inquiry, partially offset by $3.5 million in expenses incurred during the
comparative 2013 period related to the re-audit of the 2010-2012 financial statements.
The increase in selling, general and
administrative expenses for the six months ended June 30, 2014 included $72.7 million in higher net foreign exchange loss primarily due to an $86.3 million net foreign exchange loss in 2014 related to the remeasurement of the Companys
Bolivar-denominated monetary assets and liabilities as compared to the $15.1 million net foreign exchange loss during the same period in 2013 related to the Venezuela Bolivar devaluation (See
Liquidity and Capital Resources Working Capital
and Operating Activities
, for further discussion of currency exchange rate issues in Venezuela); higher variable expenses related to sales growth including $57.8 million in higher expenses related to China independent service providers; $11.2
million in higher advertising and sponsorship costs; $22.9 million in higher salaries, bonuses and benefits; and $6.0 million in expenses associated with the FTC inquiry, partially offset by $3.5 million in expenses incurred during the
comparative 2013 period related to the re-audit of the 2010-2012 financial statements.
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 our common shares, leading to intense public scrutiny and significant stock
price volatility. We have engaged legal and advisory services firms to assist with responding to the allegations and to perform other related services in connection to these events. For the three months ended June 30, 2014 and 2013, we recorded
approximately $8.0 million and $8.1 million, respectively, of expenses related to this matter, which includes approximately $7.2 million and $7.1 million, respectively, of legal, advisory and other professional service fees. For the six months ended
June 30, 2014 and 2013, we recorded approximately $12.3 million and $17.6 million, respectively, of expenses related to this matter, which includes approximately $11.2 million and $15.5 million, respectively, of legal, advisory and other
professional service fees. We expect to continue to incur expenses related to this matter over the next several periods and the expenses are expected to vary from period to period.
Net Interest Expense
Net interest
expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
2014
|
|
|
June 30,
2013
|
|
|
June 30,
2014
|
|
|
June 30,
2013
|
|
|
|
(Dollars in millions)
|
|
Interest expense
|
|
|
24.2
|
|
|
|
7.5
|
|
|
|
41.9
|
|
|
|
14.3
|
|
Interest income
|
|
|
(2.8
|
)
|
|
|
(2.0
|
)
|
|
|
(5.5
|
)
|
|
|
(3.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest expense
|
|
$
|
21.4
|
|
|
$
|
5.5
|
|
|
$
|
36.4
|
|
|
$
|
10.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in net interest expense for the three and six months ended June 30, 2014, as compared to the
same periods in 2013, was primarily due to higher weighted average interest rates on our senior secured credit facility and our issuance of $1.15 billion senior convertible notes in February 2014, including both cash and non-cash interest expense,
discussed in
Liquidity and Capital Resources
below.
Other expense, net
The $3.2 million increase in the other expense, net, for the six months ended June 30, 2014, as compared to the same period in 2013, was
due to the other than temporary impairment loss recognized on our investments in Bolivar-denominated bonds. This impairment loss was primarily due to using the less favorable SICAD I rate to remeasure our Bolivar-denominated investments as opposed
to the previous CADIVI rate.
37
Income Taxes
Income taxes were $55.4 million and $90.2 million for the three and six months ended June 30, 2014, respectively, as compared to $43.6
million and $88.3 million for the same periods in 2013. The effective income tax rate was 31.6% and 31.7% for the three and six months ended June 30, 2014, respectively, as compared to 23.4% and 25.2% for the same periods in 2013. The increase
in the effective tax rate for the three and six months ended June 30, 2014, as compared to the same periods in 2013, was primarily due to the inability to fully realize a tax benefit relating to Herbalife Ltd.s interest expense and
Herbalife Venezuelas foreign exchange losses, the impact of changes in the geographic mix of our income, and a decrease in net benefits from discrete events, principally related to favorable tax audit settlements in the comparative 2013
periods.
Liquidity and Capital Resources
We have historically met our working capital and capital expenditure requirements, including funding for expansion of operations, through net
cash flows provided by operating activities. Variations in sales of our products directly affect the availability of funds. There are no material contractual restrictions on our ability to transfer and remit funds among our international affiliated
companies. However, there are foreign currency restrictions in certain countries, such as Venezuela as discussed below, which could reduce our ability to timely obtain U.S. dollars. Even with these restrictions, we believe we will have sufficient
resources, including cash flow from operating activities, to meet debt service obligations in a timely manner and be able to continue to meet our objectives.
Our existing debt has not resulted from the need to fund our normal operations, but instead has resulted primarily from our previous and
ongoing share repurchase program. Since inception in 2007, total share repurchases amounted to approximately $3.1 billion. While a significant net sales decline could potentially affect the availability of funds, many of our largest expenses are
variable in nature, which we believe protects our funding in all but a dramatic net sales downturn. Our $773.5 million cash and cash equivalents and our senior secured credit facility, which includes $194.6 million of undrawn capacity as of
June 30, 2014, in addition to cash flow from operations, can be used to support general corporate purposes, including, our future share repurchases, dividends, and strategic investment opportunities.
We also have a cash pooling arrangement with a financial institution for cash management purposes. This cash pooling arrangement allows
certain of our participating subsidiaries to withdraw cash from this financial institution based upon our aggregate cash deposits held by subsidiaries who participate in the cash pooling arrangement. We did not owe any amounts to this financial
institution under the pooling arrangement as of June 30, 2014 and December 31, 2013.
For the six months ended June 30,
2014, we generated $347.6 million of operating cash flow, as compared to $351.5 million for the same period in 2013. The decrease in cash generated from operations was primarily due to changes in working capital and lower net income offset by
the higher non-cash interest and charges, which included the foreign exchange loss relating to Venezuela. The change in working capital included the higher payments to renew an annual insurance policy which increased prepaid expenses and other
current assets balance, and the higher payment of the Mark Hughes bonus to members which reduced the royalty override balances.
Capital
expenditures, including capital leases and accrued capital expenditures, for the six months ended June 30, 2014 and 2013 were $89.3 million and $56.2 million, respectively. The majority of these expenditures represented investments in
manufacturing facilities domestically and internationally, management information systems, initiatives to develop web-based Member tools, and the expansion of our warehouse and sales centers. We expect to incur total capital expenditures of
approximately $175 million to $195 million for the full year of 2014, which includes capital expenditures associated with the Winston-Salem, North Carolina facility that was acquired during December 2012 and has begun production.
In March 2014, Herbalife hosted its annual global Herbalife Summit event in Hawaii, U.S., where President Team members from around the world
met and shared best practices, conducted leadership training and Herbalife management awarded Members $71.6 million of Mark Hughes bonus payments related to their 2013 performance. In March 2013, Herbalife management awarded Members $61.7 million of
Mark Hughes bonus payments related to 2012 performance.
Senior Secured Credit Facility
On March 9, 2011, we 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 our prior senior secured credit facility. The Credit Facility has a five year maturity and expires on March 9, 2016. Based on our 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. We, based on our consolidated leverage ratio, pay a commitment fee between 0.25% and 0.50% per annum on the unused portion of the Credit Facility. The
Credit Facility also permits us to borrow limited amounts in Mexican Peso and Euro currencies based on variable rates.
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On July 26, 2012, we 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 our current revolving credit facility. The Term Loan matures on March 9, 2016. We will make regular
scheduled payments for the Term Loan consisting of both principal and interest components. Based on our 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 our revolving credit facility.
In February 2014, in
connection with issuing the Convertible Notes described below, we amended the Credit Facility. Pursuant to this amendment, we 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 issuance of the Convertible Notes and the capped call and prepaid forward share repurchase transactions described in greater detail below. The amendment also increased by 0.50% the
highest applicable margin payable by us in the event that our consolidated total leverage ratio is equal to or exceeds 2.50 to 1.00 and increased our permitted consolidated total leverage ratio under the Credit Facility. We incurred approximately
$2.3 million of debt issuance costs in connection with the amendment. The debt issuance costs are recorded as deferred financing costs on our consolidated balance sheet and will be amortized over the life of the Credit Facility. On June 30,
2014 and December 31, 2013, the weighted average interest rate for borrowings under the Credit Facility, including borrowings under the Term Loan, was 3.01% and 2.17%, respectively.
The Credit Facility requires us to comply with a leverage ratio and a coverage ratio. In addition, the Credit Facility contains customary
covenants, including covenants that limit or restrict our ability to incur liens, incur indebtedness, make investments, dispose of assets, make certain restricted payments, pay dividends, repurchase our common shares, merge or consolidate and enter
into certain transactions with affiliates. As of June 30, 2014 and December 31, 2013, we were compliant with our debt covenants under the Credit Facility.
During the three months ended March 31, 2014, we repaid a total amount of $18.8 million under the Credit Facility. During the three
months ended June 30, 2014, we repaid a total amount of $18.8 million under the Credit Facility. Our cash and cash equivalents provided by our borrowings provide us with greater flexibility to execute strategic initiatives and to be
opportunistically responsive to future events. As of June 30, 2014 and December 31, 2013, the U.S. dollar amount outstanding under the Credit Facility was $893.8 million and $931.3 million, respectively. Of the $893.8 million U.S. dollar
amount outstanding under the Credit Facility as of June 30, 2014, $393.8 million was outstanding on the Term Loan and $500.0 million was outstanding on the revolving credit facility. 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. There were no outstanding foreign currency borrowings as of June 30, 2014 and
December 31, 2013 under the Credit Facility.
We use our revolving credit facility to manage normal variations in cash created by
significant cash items such as taxes, share repurchases, capital expenditures and other large cash flow items. Our revolving credit facility provides us with the ability to access significant funds on a timely basis. We repay outstanding
balances from cash from operations.
Convertible Senior Notes
During February 2014, we issued $1.15 billion aggregate principal amount of convertible senior notes, or the 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. We may not redeem the Convertible Notes prior to their stated maturity date. Holders of our Convertible Notes may convert their notes at their option under the following circumstances: (i) during any calendar quarter
commencing after the calendar quarter ending March 31, 2014, if the last reported sale price of our common shares for at least 20 trading days (whether or not consecutive) in a period of 30 consecutive trading days ending on, and including, the
last trading day of the immediately preceding calendar quarter exceeds 130% of the conversion price for the Convertible Notes on each applicable trading day; (ii) during the five business-day period immediately after any five consecutive
trading day period, which we refer to as the measurement period, in which the trading price per $1,000 principal amount of Convertible Notes for each trading day of that measurement period was less than 98% of the product of the last reported sale
price of our common shares and the conversion rate for the Convertible Notes for each such day; or (iii) upon the occurrence of specified corporate events. On and after May 15, 2019, holders may convert their Convertible Notes at any time,
regardless of the foregoing circumstances. Upon conversion, the Convertible Notes will be settled in cash and, if applicable, our 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). We incurred approximately $26.6 million of issuance costs during the first
quarter of 2014 relating to the issuance of our Convertible Notes. During February 2014, the Company also executed capped call and prepaid forward share repurchase transactions as discussed further below. The primary purpose of the issuance of the
Convertible Notes was for share repurchase purposes. See Note 4,
Long-Term Debt
, to the Condensed Consolidated Financial Statements for a further discussion on the Convertible Notes.
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Off-Balance Sheet Arrangements
At June 30, 2014 and December 31, 2013, we had no material off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of
Regulation S-K.
Dividends
The declaration of future dividends is subject to the discretion of our board of directors and will depend upon various factors, including our
earnings, financial condition, Herbalife Ltd.s available distributable reserves under Cayman Islands law, restrictions imposed by the Credit Facility and the terms of any other indebtedness that may be outstanding, cash requirements, future
prospects and other factors deemed relevant by our board of directors. 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.
On February 18, 2014, we announced that our board of directors approved a cash dividend of $0.30 per common share in an
aggregate amount of $30.4 million that was paid to shareholders on March 18, 2014.On April 28, 2014, we announced that our board of directors approved terminating our quarterly cash dividend and instead utilizing the cash to repurchase
additional common shares as discussed below. There were no dividends declared and paid during the three months ended June 30, 2014. The aggregate total amount of dividends declared and paid during the three months ended June 30, 2013 was
$30.9 million. The aggregate amount of dividends declared and paid during the six months ended June 30, 2014 and 2013 were $30.4 million and $61.8 million, respectively.
During the six months ended June 30, 2014, we received $3.4 million of dividends primarily relating to the Forward Transactions described
below which was recorded directly to our (accumulated deficit) retained earnings. We did not receive any dividends during the three months ended June 30, 2014.
Share Repurchases
On
July 30, 2012, we announced that our board of directors authorized a new $1 billion share repurchase program that will expire on June 30, 2017. On February 3, 2014, we announced that our board of directors authorized an increase in
the existing share repurchase authorization to an available balance of $1.5 billion. This share repurchase program allows us to repurchase our common shares, at such times and prices as determined by our management as market conditions warrant, and
to the extent Herbalife Ltd.s distributable reserves are available under Cayman Islands law. The Credit Facility permits us to repurchase our 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.
In conjunction with the issuance of the Convertible Notes during February 2014, we paid
approximately $685.8 million to enter into prepaid forward share repurchase transactions, or the Forward Transactions, with certain financial institutions, or Forward Counterparties, pursuant to which we 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 our Forward Transactions early. The Forward
Transactions were 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 the Forward
Transactions, our total shareholders (deficit) equity within our consolidated balance sheet was reduced by approximately $685.8 million during the first quarter of 2014.
On May 6, 2014, we entered into an agreement with Merrill Lynch International to repurchase $266.0 million of our common shares, or the
Repurchase Agreement. Under the terms of the Repurchase Agreement, we paid $266.0 million on May 7, 2014 and the agreement expired on June 30, 2014. We received an aggregate 4.3 million of our common shares under the Repurchase
Agreement during May and June 2014. The total number of common shares repurchased under the Repurchase Agreement was determined generally upon a discounted volume-weighted average share price of our common shares over the course of the Repurchase
Agreement.
During the three months ended March 31, 2014, we effectively repurchased approximately 9.9 million of our common
shares through the Forward Transactions at an aggregate cost of approximately $685.8 million or an average cost of $69.02 per share. The 9.9 million common shares effectively purchased as a result of the Forward Transactions are treated as
retired for basic and diluted EPS purposes although they remain legally outstanding. During the three months ended June 30, 2014, we repurchased approximately 9.8 million of our common shares through open market purchases and under the
Repurchase Agreement, at an aggregate cost of approximately $581.3 million or an average cost of $59.41 per share. As of June 30, 2014, the remaining authorized capacity under our share repurchase program was $232.9 million inclusive of
reductions for the Forward Transactions.
Capped Call Transactions
In connection with the issuance of Convertible Notes, we paid approximately $123.8 million to enter into capped call transactions with respect
to our common shares, or the Capped Call Transactions, with certain financial institutions. The Capped Call
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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, initially set at $86.28 per common share, with such reduction of potential dilution subject to a cap based on the cap price initially set at $120.79 per common share. The strike price and cap price are subject
to certain adjustments under the terms of the Capped Call Transactions. Therefore, as a result of executing the Capped Call Transactions, we in effect will only be exposed to potential net dilution once the market price of our common shares exceeds
the adjusted cap price. As a result of the Capped Call Transactions, our total shareholders (deficit) equity within our consolidated balance sheet was reduced by $123.8 million during the first quarter of 2014.
Working Capital and Operating Activities
As of June 30, 2014 and December 31, 2013, we had positive working capital of $552.4 million and $720.9 million, respectively, or a
decrease of $168.5 million. This decrease was primarily related to the decrease in our cash and cash equivalents, increases in accrued expenses and advanced sales deposits, partially offset by increases in prepaid expense and prepaid income tax, and
decreases in accrued royalty and accrued compensation.
We expect that cash and funds provided from operations and available borrowings
under the Credit Facility will provide sufficient working capital to operate our business, to make expected capital expenditures and to meet foreseeable liquidity requirements, including payment of amounts outstanding under the Credit Facility, for
the next twelve months and thereafter.
The majority of our purchases from suppliers are generally made in U.S. dollars, while sales to
our Members generally are made in local currencies. Consequently, strengthening of the U.S. dollar versus a foreign currency can have a negative impact on net sales and contribution margins and can generate transaction losses on intercompany
transactions. For discussion of our foreign exchange contracts and other hedging arrangements, see Part I, Item 3
Quantitative and Qualitative Disclosures about Market Risk
.
Venezuela
Currency
Restrictions
Currency restrictions enacted by the Venezuelan government have become more restrictive and have impacted the ability
of our subsidiary in Venezuela, Herbalife Venezuela, to timely obtain U.S. dollars in exchange for Venezuelan Bolivars, or Bolivars, at the official foreign exchange rate. The application and approval process continues to be delayed and our
ability to timely obtain U.S. dollars using the official exchange rate mechanisms described below remains uncertain. In recent instances, we have been unsuccessful in obtaining U.S. dollars at these official rates and it remains uncertain
whether our future anticipated applications will be approved. The current operating environment in Venezuela also continues to be challenging for Herbalife Venezuela, with high inflation in the country, government restrictions on foreign exchange
and pricing controls, and the possibility of the government announcing further devaluations to its currency. These foreign exchange controls in Venezuela limit Herbalife Venezuelas ability to repatriate earnings and settle its obligations at
any official rate which is causing its Bolivar denominated cash and cash equivalents to accumulate in Venezuela. See Note 2,
Significant Accounting Policies,
to the Condensed Consolidated Financial Statements for discussion on how the
currency restrictions in Venezuela have impacted Herbalife Venezuelas operations.
We plan to utilize the official rates to the
extent allowable under current restrictions in order to exchange Bolivars for U.S. dollars. We also plan to access government, PDVSA bond offerings, and alternative legal exchange mechanisms when they are made available. As discussed above,
these alternative legal exchange mechanisms or less favorable official exchange mechanisms, such as SICAD II, could cause us to recognize significant foreign exchange losses if they are less favorable than the SICAD I rate, which could also result
in our Bolivar denominated cash and cash equivalents reported on our consolidated balance sheet being significantly reduced. To illustrate our sensitivity to potential future changes in the official rate, using unfavorable alternative legal exchange
mechanisms or using the SICAD II mechanism to exchange Bolivars to U.S. dollars, if the exchange rate was approximately 50 Bolivars per U.S. dollar and this unfavorable exchange rate was used to convert our Bolivar denominated cash and
cash equivalents as of June 30, 2014, our $152.6 million in Bolivar denominated cash and cash equivalents as of June 30, 2014, would be reduced by $120.2 million and we would incur $109.5 million of foreign exchange losses. If
this unfavorable rate is used to remeasure Herbalife Venezuelas financial statements in future periods and the extent to which we can increase local prices is restricted, this could negatively impact our future operating income and have an
adverse impact to our Venezuelan business. This less favorable exchange rate is not necessarily representative of exchange rates which could be available to us for future exchanges and approximates the SICAD II rate that was published as of
June 30, 2014. Our ability to access the official SICAD I and SICAD II exchange rates could impact what exchange rates will be used for remeasurement purposes in future periods. We continue to assess and monitor the current economic and
political environment in Venezuela.
Consolidation of Herbalife Venezuela
We plan to continue our operation in Venezuela and to import products into Venezuela despite the foreign currency constraints that exist in the
country. We are evaluating several options to limit our financial exposure from currency restrictions and devaluations
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in our Venezuela operation while we continue to support our Members and their consumers. These options include, but may not be limited to, sourcing products locally and reducing product
importation, operating hour limitations, potential order size limitations, and limiting Member promotions and events to local Bolivar-denominated expenses. 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, we continue to control Herbalife Venezuela and its operations. Therefore, we continue to consolidate Herbalife Venezuela in our consolidated financial
statements.
Herbalife Venezuelas net sales represented approximately 4% of our consolidated net sales for both the six months ended
June 30, 2014 and 2013, and its total assets represented approximately 7% and 10% of our consolidated total assets as of June 30, 2014 and December 31, 2013, respectively. As of June 30, 2014 and December 31, 2013, the
majority of its total assets consisted of Bolivar denominated cash and cash equivalents.
See the 2013 10-K for further information on
Herbalife Venezuela and Venezuelas highly inflationary economy.
Contingencies
See Note 5,
Contingencies
, to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report
on Form 10-Q, for information on our contingencies as of June 30, 2014.
Critical Accounting Policies
U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. We regularly evaluate our estimates and assumptions related to revenue recognition, allowance for product
returns, inventory, goodwill and purchased intangible asset valuations, deferred income tax asset valuation allowances, uncertain tax positions, tax contingencies, and other loss contingencies. We base our estimates and assumptions on current facts,
historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue,
costs and expenses. Actual results could differ from those estimates. We consider the following policies to be most critical in understanding the judgments that are involved in preparing the financial statements and the uncertainties that could
impact our operating results, financial condition and cash flows.
We are a nutrition company that sells a wide range of weight management
products, nutritional supplements, energy, sports & fitness products and personal care products. Our products are manufactured by third party providers and by us in our Changsha, Hunan, China extraction facility, Suzhou, China facility,
Lake Forest, California facility, and in our Winston-Salem, North Carolina facility, and then are sold to Members who consume and sell Herbalife products to retail consumers or other Members. As of June 30, 2014, we sold products in 91
countries throughout the world and we are organized and managed by geographic region. We aggregate our operating segments into one reporting segment, except China, as management believes that our operating segments have similar operating
characteristics and similar long term operating performance. In making this determination, management believes that the operating segments are similar in the nature of the products sold, the product acquisition process, the types of customers to
whom products are sold, the methods used to distribute the products, and the nature of the regulatory environment.
We generally recognize
revenue upon delivery and when both the title and risk and rewards pass to the Member or importer, or as products are sold in our retail stores in China or through our independent service providers in China. Net sales include product sales and
shipping and handling revenues. Product sales are recognized net of product returns, and discounts referred to as distributor allowances. We generally receive the net sales price in cash or through credit card payments at the point of
sale. Related royalty overrides are recorded when revenue is recognized.
Allowances for product returns, primarily in connection with our
buyback program, are provided at the time the sale is recorded. This accrual is based upon historical return rates for each country and the relevant return pattern, which reflects anticipated returns to be received over a period of up to 12 months
following the original sale. Historically, product returns and buybacks have not been significant. Product returns and buybacks were approximately 0.1% of product sales for the three and six months ended June 30, 2014, as compared to 0.2% and
0.3% for the same periods in 2013.
We adjust our inventories to lower of cost or market. Additionally we adjust the carrying value of our
inventory based on assumptions regarding future demand for our products and market conditions. If future demand and market conditions are less favorable than managements assumptions, additional inventory write-downs could be required.
Likewise, favorable future demand and market conditions could positively impact future operating results if previously written down inventories are sold. We have obsolete and slow moving inventories which have been adjusted downward $40.1 million
and $32.4 million to present them at their lower of cost or market in our consolidated balance sheets as of June 30, 2014 and December 31, 2013, respectively.
42
Goodwill and marketing related intangible assets not subject to amortization are tested annually
for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the assets fair value. As
discussed below, for goodwill impairment testing, we have the option to perform a qualitative assessment of whether it is more likely than not that a reporting units fair value is less than its carrying amount before applying the two-step
goodwill impairment test. If we conclude it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then there is no need to perform the two-step impairment test. Currently, we do not use this
qualitative assessment option but we could in the future elect to use this option. For our marketing related intangible assets a similar qualitative option is also currently available. However, we currently use a discounted cash flow model, or the
income approach, under the relief-from-royalty method to determine the fair value of our marketing related intangible assets in order to confirm there is no impairment required. For our marketing related intangible assets, if we do not use this
qualitative assessment option, we could still in the future elect to use this option.
In order to estimate the fair value of goodwill, we
also primarily use an income approach. The determination of impairment is made at the reporting unit level and consists of two steps. First, we determine the fair value of a reporting unit and compare it to its carrying amount. The determination of
the fair value of the reporting units requires us to make significant estimates and assumptions. These estimates and assumptions include estimates of future revenues and expense growth rates, capital expenditures and the depreciation and
amortization related to these capital expenditures, discount rates, and other inputs. Due to the inherent uncertainty involved in making these estimates, actual future results could differ. Changes in assumptions regarding future results or
other underlying assumptions could have a significant impact on the fair value of the reporting unit. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount
of the reporting units goodwill and other intangibles over the implied fair value as determined in Step 2 of the goodwill impairment test. Also, if during Step 1 of a goodwill impairment test we determine we have reporting units with zero or
negative carrying amounts, then we perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. During Step 2 of a goodwill impairment test, the implied fair value of goodwill is determined in a
similar manner as how the amount of goodwill recognized in a business combination is determined, in accordance with the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 805,
Business
Combinations
. We would assign the fair value of a reporting unit to all of the assets and liabilities of that reporting unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the
price paid to acquire the reporting unit. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. As of both June 30, 2014 and December 31, 2013, we
had goodwill of approximately $105.5 million and marketing related intangible assets of approximately $310.0 million. No marketing related intangibles or goodwill impairment was recorded during the three and six months ended June 30, 2014 and
2013, as their estimated fair value significantly exceeded their carrying amounts.
Contingencies are accounted for in accordance with the
FASB ASC Topic 450,
Contingencies,
or ASC 450. ASC 450 requires that we record an estimated loss from a loss contingency when information available prior to issuance of our financial statements indicates that it is probable that an asset has
been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. We also disclose material contingencies when we believe a loss is not probable but reasonably possible as
required by ASC 450. Accounting for contingencies such as legal and non-income tax matters requires us to use judgment related to both the likelihood of a loss and the estimate of the amount or range of loss. Many of these legal and tax
contingencies can take years to be resolved. Generally, as the time period increases over which the uncertainties are resolved, the likelihood of changes to the estimate of the ultimate outcome increases.
Deferred income tax assets have been established for net operating loss and interest carryforwards of certain foreign subsidiaries and have
been reduced by a valuation allowance to reflect them at amounts estimated to be ultimately realized. Although realization is not assured, we believe it is more likely than not that the net carrying value will be realized. The amount of the
carryforwards that is considered realizable, however, could change if estimates of future taxable income are adjusted. In the ordinary course of our business, there are many transactions and calculations where the tax law and ultimate tax
determination is uncertain. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate prior to the completion and filing of tax returns
for such periods. These estimates involve complex issues and require us to make judgments about the likely application of the tax law to our situation, as well as with respect to other matters, such as anticipating the positions that we will take on
tax returns prior to us actually preparing the returns and the outcomes of disputes with tax authorities. The ultimate resolution of these issues may take extended periods of time due to examinations by tax authorities and statutes of limitations.
In addition, changes in our business, including acquisitions, changes in our international corporate structure, changes in the geographic location of business functions or assets, changes in the geographic mix and amount of income, as well as
changes in our agreements with tax authorities, valuation allowances, applicable accounting rules, applicable tax laws and regulations, rulings and interpretations thereof, developments in tax audit and other matters, and variations in the estimated
and actual level of annual pre-tax income can affect the overall effective income tax rate.
43
We account for uncertain tax positions in accordance with the FASB ASC Topic 740,
Income
Taxes,
or ASC 740, which provides guidance on the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, we must recognize the tax benefit from an
uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from
such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.
We account for foreign currency transactions in accordance with the FASB ASC Topic 830,
Foreign Currency Matters
. In a majority of the
countries where we operate, the functional currency is the local currency. Our foreign subsidiaries asset and liability accounts are translated for consolidated financial reporting purposes into U.S. dollar amounts at period-end exchange
rates. Revenue and expense accounts are translated at the average rates during the year. Our foreign exchange translation adjustments are included in accumulated other comprehensive loss on our accompanying consolidated balance sheets. Foreign
currency transaction gains and losses and foreign currency remeasurements are generally included in selling, general and administrative expenses in the accompanying consolidated statements of income.
New Accounting Pronouncements
See
discussion under Note 2,
Significant Accounting Policies,
to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q, for information on new accounting pronouncements.