News Column

Herbalife Ltd. Announces Second Quarter 2014 Results and Raises 2014 Earnings Guidance

July 28, 2014

  • Second quarter worldwide volume growth of 5 percent compared to the prior year period.
  • Adjusted1 EPS of $1.55 increased 10 percent compared to the prior year. Reported EPS of $1.31 primarily reflects the impact of the non-cash costs associated with the convert and other items.
  • Raising FY’14 adjusted diluted EPS guidance to a range of $6.17 to $6.32.
  • Repurchased $581 million or 9.8 million shares during the quarter.

    LOS ANGELES--(BUSINESS WIRE)-- Herbalife Ltd. (NYSE: HLF) today reported second quarter net sales of $1.3 billion, reflecting an increase of 7 percent compared to the same time period in 2013 on volume point growth of 5 percent. Adjusted1 net income for the quarter of $141.4 million, or $1.55 per diluted share, compares to 2013 second quarter adjusted net income of $150.7 million, or $1.41 per diluted share. On a reported basis, second quarter 2014 net income of $119.5 million, or $1.31 per diluted share compares to $143.2 million, or $1.34 per diluted share for the same period in 2013.

    “Herbalife has once again delivered strong results in sales and profitability while demonstrating our continued ability to enhance our earnings per share,” said Michael Johnson, Herbalife’s chairman and CEO. “Our performance is a testament to the enthusiasm our millions of consumers and members have for our products. Additionally, our independent members are successfully executing numerous growth strategies to further develop customer loyalty and encourage individuals across our network to lead healthier, nutritious lives. Our members are proud to be a part of a solution to global public health issues and we value the integral role they play in Herbalife’s mission.”

    For the quarter ended June 30, 2014 the company generated cash flow from operations of $156.9 million; invested $39.6 million in capital expenditures; and repurchased $581.3 million in common shares outstanding under our share repurchase program.

    Second Quarter 2014 Key Metrics2,3

    Regional Volume Point and Average Active Sales Leader Metrics

             
      Volume Points (Mil)   Average Active Sales Leaders
    Region   2Q'14   Yr/Yr % Chg   2Q'14   Yr/Yr % Chg
    North America 335.8   (1%) 75,772   5%
    Asia Pacific 320.2 1% 74,916 6%
    EMEA 218.8 22% 56,692 18%
    Mexico 231.3 5% 64,656 3%
    South & Central America 206.3 (7%) 62,172 14%
    China   118.5   38%   18,703   33%
    Worldwide Total   1,430.9   5%   340,644   9%
     


    Updated 2014 Guidance

    Forward guidance excludes the impact of expenses (primarily for legal and advisory services) relating to the company’s response to information put into the marketplace by a short seller, which the company believes to be inaccurate and misleading, expenses related to a FTC inquiry, and the impact of non-cash interest costs associated with the company’s Convertible Notes and the expenses incurred related to the effort to recover costs related to the reaudit that occurred last year. Forward guidance is based on the average daily exchange rates of the first two weeks of July. Included in the guidance is the use of the GAAP rate for Venezuela of 10.6 to 1 for the balance of the year and excludes the potential impact of future devaluation of the Venezuelan bolivar and future repatriation, if any, of existing cash balances in Venezuela.

    Based on current business trends the company’s third quarter fiscal 2014 and full year fiscal 2014 guidance is provided below.

      Three Months Ending   Twelve Months Ending

    September 30, 2014

    December 31, 2014

    Low

     

    High

    Low

     

    High

    Volume Point Growth vs 2013 5.5% 7.5% 6.0% 8.0%
    Net Sales Growth vs 2013 9.0% 11.0% 8.5% 10.5%
    Diluted EPS as adjusted $1.49$1.53$6.17$6.32
    Cap Ex ($ millions) $45.0$55.0$175.0$195.0
    Effective Tax Rate 27.0% 29.0% 27.5% 29.5%
     



    Share Repurchase Program Update

    During the second quarter, the company repurchased 9.8 million shares at an average cost of $59.41. There is currently $232.9 million remaining on the existing $1.5 billion share repurchase authorization.

    Second Quarter 2014 Earnings Conference Call

    Herbalife senior management will host an investor conference call to discuss its recent financial results and provide an update on current business trends on Tuesday, July 29, 2014 at 8 a.m. PT (11 a.m. ET).

    The dial-in number for this conference call for domestic callers is (877) 317-1296 and (706) 634-5671 for international callers (conference ID 66932104). Live audio of the conference call will be simultaneously webcast in the investor relations section of the company's website at http://ir.herbalife.com.

    An audio replay will be available following the completion of the conference call in MP3 format or by dialing(855) 859-2056 for domestic callers or (404) 537-3406 for international callers (conference ID 66932104). The webcast of the teleconference will be archived and available on Herbalife's website.

    About Herbalife Ltd.

    Herbalife Ltd. (NYSE:HLF) is a global nutrition company that sells weight-management, nutrition, and personal care products intended to support a healthy lifestyle. Herbalife products are sold in more than 90 countries through and to a network of independent members. The company supports the Herbalife Family Foundation and its Casa Herbalife program to help bring good nutrition to children. Herbalife's website contains a significant amount of information about Herbalife, including financial and other information for investors at http://ir.Herbalife.com. The company encourages investors to visit its website from time to time, as information is updated and new information is posted.

    _____________________

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

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

    3 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.

    FORWARD-LOOKING STATEMENTS

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

    • our relationship with, and our ability to influence the actions of, our Members;

    • improper action by our employees or Members in violation of applicable law;

    • adverse publicity associated with our products or network marketing organization, including our ability to comfort the marketplace and regulators regarding our compliance with applicable laws;

    • changing consumer preferences and demands;

    • our reliance upon, or the loss or departure of any member of, our senior management team which could negatively impact our Member relations and operating results;

    • the competitive nature of our business;

    • regulatory matters governing our products, including potential governmental or regulatory actions concerning the safety or efficacy of our products and network marketing program, including the direct selling market in which we operate;

    • legal challenges to our network marketing program;

    • risks associated with operating internationally and the effect of economic factors, including foreign exchange, inflation, disruptions or conflicts with our third party importers, pricing and currency devaluation risks, especially in countries such as Venezuela;

    • uncertainties relating to the application of transfer pricing, duties, value added taxes, and other tax regulations, and changes thereto;

    • uncertainties relating to interpretation and enforcement of legislation in China governing direct selling;

    • uncertainties relating to the interpretation, enforcement or amendment of legislation in India governing direct selling;

    • our inability to obtain the necessary licenses to expand our direct selling business in China;

    • adverse changes in the Chinese economy, Chinese legal system or Chinese governmental policies;

    • our dependence on increased penetration of existing markets;

    • contractual limitations on our ability to expand our business;

    • our reliance on our information technology infrastructure and outside manufacturers;

    • the sufficiency of trademarks and other intellectual property rights;

    • product concentration;

    • changes in tax laws, treaties or regulations, or their interpretation;

    • taxation relating to our Members;

    • product liability claims;

    • whether we will purchase any of our shares in the open markets or otherwise; and

    • share price volatility related to, among other things, speculative trading and certain traders shorting our common shares.

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

    RESULTS OF OPERATIONS:

                     
    Herbalife Ltd. and Subsidiaries
    Condensed Consolidated Statements of Income
    (In thousands, except per share amounts)
    (Unaudited)
                   
    Three Months Ended Six Months Ended

    6/30/2014

     

    6/30/2013

    6/30/2014

     

    6/30/2013

     
    North America $ 250,601 $ 247,564 $ 498,461 $ 469,037
    Mexico 148,658 145,638 291,321 278,527
    South and Central America 203,352 222,362 447,974 441,877
    EMEA 227,254 186,286 438,506 355,871
    Asia Pacific 306,307 299,240 586,687 610,986
    China   170,028   118,149   305,900   186,588
    Worldwide 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 and Administrative Expenses (1)   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 (1)   -   -   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
     
    Basic Shares 86,113 102,993 90,732 103,551
    Diluted Shares 91,172 107,083 95,934 107,589
     
    Basic EPS $ 1.39 $ 1.39 $ 2.14 $ 2.53
    Diluted EPS $ 1.31 $ 1.34 $ 2.02 $ 2.44
     
    Dividends declared per share $ - $ 0.30 $ 0.30 $ 0.60
                     
     

    (1) As discussed in Note 2 of the quarterly report on Form 10-Q for the quarter ended June 30, 2014, Selling, General and Administrative Expenses and Other Expense, net for the six months ended June 30, 2014 includes an $89.5 million pre-tax unfavorable impact related to the remeasurement of Venezuela Bolivar-denominated assets and liabilities at the SICAD I rate.

     


     
    Herbalife Ltd. and Subsidiaries
    Condensed Consolidated Balance Sheets
    (In thousands)
    (Unaudited)
     
      Jun 30,   Dec 31,

    2014

    2013

     
    ASSETS
    Current Assets:
    Cash & cash equivalents $ 773,517 $ 972,974
    Receivables, net 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, net 363,165 318,860
    Deferred compensation plan assets 27,597 26,821
    Deferred financing cost, 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' 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 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  
                     
     


             
    Herbalife Ltd. and Subsidiaries
    Condensed Consolidated Statements of Cash Flows
    (In thousands)

    (Unaudited)

     

           
    Six Months Ended

    6/30/2014

     

    6/30/2013

    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  
                     
     



    SUPPLEMENTAL INFORMATION

    SCHEDULE A: RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

    (unaudited and unreviewed), (Dollars in Thousand, Except Per Share Data)

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

    The following is a reconciliation of net income, presented and reported in accordance with U.S. generally accepted accounting principles, to net income adjusted for certain items:
                     
           
    Three Months Ended Six Months Ended
      6/30/2014   6/30/2013     6/30/2014   6/30/2013
    (in thousands)
     
    Net income, as reported $ 119,532 $ 143,162 $ 194,160 $ 262,035
    Remeasurement loss relating to Venezuela(1)(2) 2,558 (2,217 ) 69,160 8,307
    Expenses incurred responding to attacks on the Company's business model (1)(3) 5,609 7,125 8,916 15,104
    Expenses incurred for the re-audit of 2010 to 2012 financial statements (1)(4) - 2,661 - 2,661
    Expenses related to the FTC inquiry (1)(5) 3,095 - 3,765 -
    Expenses incurred for the recovery of costs associated with the re-audit (1) 411 - 411 -
    Non-cash interest expense and amortization of non-cash issuance costs (6)   10,166   -     16,009   -
    Net income, as adjusted $ 141,371 $ 150,731   $ 292,421 $ 288,107
                     
     
     
    The following is a reconciliation of diluted earnings per share, presented and reported in accordance with U.S. generally accepted accounting principles, to diluted earnings per share adjusted for certain items:
                     
     
    Three Months Ended Six Months Ended
      6/30/2014   6/30/2013     6/30/2014   6/30/2013
     
    Diluted earnings per share, as reported $ 1.31 $ 1.34 $ 2.02 $ 2.44
    Remeasurement loss relating to Venezuela(1)(2) 0.03 (0.02 ) 0.72 0.08
    Expenses incurred responding to attacks on the Company's business model (1)(3) 0.06 0.07 0.09 0.14
    Expenses incurred for the re-audit of 2010 to 2012 financial statements (1)(4) - 0.02 - 0.02
    Expenses related to the FTC inquiry (1)(5) 0.03 - 0.04 -
    Expenses incurred for the recovery of costs associated with the re-audit (1) - - - -
    Non-cash interest expense and amortization of non-cash issuance costs (6)   0.11   -     0.17   -

    Diluted earnings per share, as adjusted (7)

    $ 1.55 $ 1.41   $ 3.05 $ 2.68
                     
     
     
    (1) Based on interim income tax reporting rules, these expenses are not considered discrete items. As a result, the Company's full year effective tax rate is impacted by these items. When applying the full year effective tax rate to year-to-date income, the Company's year-to-date tax provision recorded with respect to these non-GAAP adjustments is different from the forecasted full-year tax provision impact of these items. As a consequence, adjustments to the year-to-date and quarterly tax impacts will be recorded as the adjusted full year effective tax rate is applied to income in subsequent periods. Additionally, adjustments to items unrelated to these non-GAAP adjustments may have an effect on the income tax impact of these non-GAAP adjustments in subsequent periods. The Company plans to update the income tax impact of these items in subsequent interim reporting periods.
    (2) Net of ($2,349) and $2,217 tax benefit for the three months ended June 30, 2014 and 2013, respectively; and net of $20,318 and $6,808 tax benefit for the six months ended June 30, 2014 and 2013, respectively.
    (3) Net of $2,371 and $953 tax benefit for the three months ended June 30, 2014 and 2013, respectively; and net of $3,366 and $2,468 tax benefit for the six months ended June 30, 2014 and 2013, respectively.
    (4) Net of $796 tax benefit for the three and six months ended June 30, 2013.
    (5) Net of $2,038 and $2,278 tax benefit for the three and six months ended June 30, 2014.
    (6) Relates to non-cash expense on our convertible notes and prepaid forward share repurchase contract
    (7) Amounts may not total due to rounding.
     



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

                   
        6/30/2014     12/31/2013  
     
    Total long-term debt (current and long-term portion) $ 1,837,987 $ 931,269
    Less: Cash and cash equivalents   773,517   972,974  
    Net debt   $ 1,064,470   $ (41,705 )





    Herbalife Ltd.

    Media Contact:

    Barbara Henderson

    SVP, Worldwide Corp. Comm.

    213.745.0517

    or

    Investor Contact:

    Amy Greene

    SVP, Investor Relations

    213.745.0474


    Source: Herbalife Ltd.


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