Herbalife Beats On Earnings And The Stock Is Soaring

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REUTERS/Brendan McDermid

Nutritional supplement-seller Herbalife beat second quarter earnings estimates.

For the second quarter, Herbalife posted adjusted EPS of $1.41 and sales of $1.22 billion.

On average, analysts were expecting Herbalife to post adjusted-EPS of $1.18 on sales of $1.162 billion, according to data compiled by Bloomberg. 

The stock is up in after-hours trading. It was last trading up over 3% in the late session.

Herbalife will hold an earnings conference call tomorrow morning. 

Herbalife, a multi-level marketing company, has been the focal point of an epic clash of hedge fund titans.

Back in December, Bill Ackman, who runs $12 billion Pershing Square Capital Management, publicly revealed that he's shorting $1 billion worth of Herbalife stock because he believes the company is a "pyramid scheme." 

Ackman's arch-nemesis billionaire investor Carl Icahn bought a massive stake in Herbalife. Icahn said he thinks Ackman will be the victim of the "mother of all short squeezes."

Here's the release: 

Herbalife Ltd. (HLF) today reported second quarter net sales of $1.2 billion, reflecting an increase of 18 percent compared to the same time period in 2012, on volume point growth of 14 percent. Adjusted1 net income for the quarter of $150.7 million, or $1.41 per diluted share, compares to the second quarter 2012 net income of $132.0 million and EPS of $1.09, respectively. On an as reported basis, second quarter 2013 EPS of $1.34 increased 23 percent compared to the $1.09 reported in the comparable quarter last year.

“We reported our fifteenth quarter in a row of double digit top-line growth, reflecting the success that our products and distribution model are having in markets around the world helping to mitigate the adverse effects of the obesity epidemic. The second quarter record results for volume point and net sales were driven by the ongoing engagement of our distributors and consumer demand for our weight loss and nutrition products worldwide,” said Michael O. Johnson, Herbalife’s chairman and CEO.

For the quarter ended June 30, 2013 the company generated cash flow from operations of $213.8 million, an increase of 56 percent compared to 2012; paid dividends of $30.9 million and invested $31.3 million in capital expenditures.

Second Quarter 2013 Key Metrics 2,3

Regional Volume Point and Average Active Sales Leader Metrics

    Volume Points (Mil)   Average Active Sales Leaders
Region   2Q'13   Yr/Yr % Chg   2Q'13   Yr/Yr % Chg
North America   339.9   11 %   72,282   10 %
Asia Pacific   316.9   1 %   70,802   15 %
EMEA   179.3   16 %   48,008   12 %
Mexico   219.9   8 %   62,940   13 %
South & Central America   222.6   33 %   54,614   30 %
China   85.9   49 %   14,070   18 %
Worldwide Total   1,364.5   14 %   311,503   15 %
                     

Updated 2013 Guidance

Guidance for fully diluted 2013 EPS is based on the average daily exchange rates of the first two weeks of July 2013. Our 2013 guidance continues to assume a Venezuelan exchange rate of 10 to 1 for the balance of the year, excludes the impact of the February devaluation of the bolivar as well as any potential future devaluation, and excludes the impact of any repatriation of existing cash balances in Venezuela. Guidance for the year also excludes the following which were recognized in the first half of the year: $15.1 million in expenses (post-tax), mostly legal and advisory services relating to the Company’s response to information put into the marketplace by a short seller which information the Company believes to be inaccurate and misleading, and $2.7 million in expenses (post-tax) incurred for the re-audit of 2010-2012 financial statements resulting from KPMG LLP’s resignation, as well as any additional expenses related to these matters that are expected to be incurred in the second half of the year.

Based on current business trends the company’s third quarter fiscal 2013 and full year fiscal 2013 guidance is provided below.

  Three Months Ending   Twelve Months Ending
 

September 30, 2013

 

December 31, 2013

  Low   High   Low   High
Volume Point Growth vs 2012   11.5 %     13.5 %     11.5 %     13.5 %
Net Sales Growth vs 2012   16.5 %     18.5 %     16.0 %     18.0 %
Diluted EPS as adjusted $ 1.09     $ 1.13     $ 4.83     $ 4.95  
Cap Ex ($ millions) $ 40.0     $ 50.0     $ 165.0     $ 185.0  
Effective Tax Rate   22.5 %     24.5 %     24.5 %    

26.5

%
                               

Announces Quarterly Dividend

The company reported today that its board of directors has approved a dividend of $0.30 per share to shareholders of record August 13, 2013, payable on August 27, 2013.

Second Quarter 2013 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 30, 2013 at 8 a.m. PST (11 a.m. EST).

The dial-in number for this conference call for domestic callers is (877) 317-1296 and (706) 634-5671 for international callers (conference ID 11550232). Live audio of the conference call will be simultaneously webcast in the investor relations section of the company's website athttp://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 11550232). The webcast of the teleconference will be archived and available on Herbalife's website.

About Herbalife Ltd.

Herbalife Ltd. (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 over 80 countries through and to a network of independent distributors. 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.

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:

• the resignation of our former independent registered public accounting firm, its withdrawal of its audit reports with respect to certain of our historical financial statements, and any difficulties PricewaterhouseCoopers, our successor accounting firm encounters in the re-audits of such relevant historical financial statements or any material modifications to such historical financial statements PricewaterhouseCoopers believes should be made as a result of such re-audits;

• any collateral impact resulting from the ongoing worldwide financial environment, including the availability of liquidity to us, our customers and our suppliers or the willingness of our customers to purchase products in a difficult economic environment;

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

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

• adverse publicity associated with our products or network marketing organization, 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 distributor relations and operating results;

• the competitive nature of our business;

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

• 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 distributors;

• 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.

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

2 Supplemental tables that include additional business metrics can be found athttp://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.

RESULTS OF OPERATIONS:

                     
Herbalife Ltd. and Subsidiaries
Condensed Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited and Unreviewed) (1)
                     
  Three Months Ended     Six Months Ended
  6/30/2013  

6/30/2012 (2)

 

 

6/30/2013    

6/30/2012 (2)

                     
North America $ 247,564   $ 224,661     $ 469,037   $ 435,372  
Mexico   145,638     119,449       278,527     236,558  
South and Central America   222,362     152,583       441,877     318,054  
EMEA   186,286     161,635       355,871     315,627  
Asia Pacific   299,240     296,548       610,986     556,496  
China   118,149     77,072       186,588     134,016  
Worldwide net sales   1,219,239     1,031,948       2,342,886     1,996,123  
Cost of Sales   247,224     203,737       473,201     399,881  
Gross Profit   972,015     828,211       1,869,685     1,596,242  
Royalty Overrides   379,551     335,195       743,580     652,728  
SGA   400,107     306,310       764,827     602,703  
Operating Income   192,357     186,706       361,278     340,811  
Interest Expense - net   5,559     3,169       10,932     4,542  
Income before income taxes   186,798     183,537       350,346     336,269  
Income Taxes   43,636     51,586       88,311     96,387  
Net Income   143,162     131,951       262,035     239,882  
                     
Basic Shares   102,993     116,557       103,551     116,376  
Diluted Shares   107,083     121,482       107,589     122,182  
                     
Basic EPS $ 1.39   $ 1.13     $ 2.53   $ 2.06  
Diluted EPS $ 1.34   $ 1.09     $ 2.44   $ 1.96  
                     
Dividends declared per share $ 0.30   $ 0.30     $ 0.60   $ 0.60  
                     
                     

(1) As a result of the resignation of KPMG, the unaudited interim financial information presented has not been reviewed by an outside independent accounting firm. See Note 2 of the quarterly report on Form 10-Q for the quarter ended June 30, 2013.

(2) As discussed in Note 2 of the quarterly report on Form 10-Q for the quarter ended June 30, 2013, prior year amounts have been revised for income tax errors that were considered not material, individually or in the aggregate, to any of the prior reporting periods.

 
       
Herbalife Ltd. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)

(Unaudited and Unreviewed) (1)

 
  Jun 30,   Dec 31,
  2013  

2012 (2)

       
ASSETS      
Current Assets:      
Cash & cash equivalents $ 849,703     $ 333,534  
Receivables, net   110,790       116,139  
Inventories   331,529       339,411  
Prepaid expenses and other current assets   160,444       145,624  
Deferred income taxes   51,499       49,339  
Total Current Assets   1,503,965       984,047  
       
Property, plant and equipment, net   255,206       242,886  
Deferred compensation plan assets   24,934       24,267  
Deferred financing cost, net   6,165       7,462  
Other assets   47,250       48,805  
Marketing related intangibles and other intangible assets, net   310,993       311,186  
Goodwill   105,490       105,490  
Total Assets $ 2,254,003     $ 1,724,143  
       
LIABILITIES AND SHAREHOLDERS' EQUITY      
Current Liabilities:      
Accounts payable $ 77,535     $ 75,209  
Royalty overrides   235,994       243,351  
Accrued compensation   82,113       95,220  
Accrued expenses   227,468       181,523  
Current portion of long term debt   68,819       56,302  
Advance sales deposits   51,574       49,432  
Income taxes payable   48,751       61,325  
Total Current Liabilities   792,254       762,362  
       
Non-current liabilities      
Long-term debt, net of current portion   893,767       431,305  
Deferred compensation plan liability   32,981       29,454  
Deferred income taxes   60,033       62,982  
Other non-current liabilities   41,349       42,557  
Total Liabilities   1,820,384       1,328,660  
       
Contingencies      
       
Shareholders' equity:      
Common shares   103       107  
Paid-in capital in excess of par value   305,742       303,975  
Accumulated other comprehensive loss   (44,283 )     (31,695 )
Retained earnings   172,057       123,096  
Total Shareholders' Equity   433,619       395,483  
       
Total Liabilities and Shareholders' Equity $ 2,254,003     $ 1,724,143  
       
       
(1) As a result of the resignation of KPMG, the unaudited interim financial information presented has not been reviewed by an outside independent accounting firm. See Note 2 of the quarterly report on Form 10-Q for the quarter ended June 30, 2013.
(2) As discussed in Note 2 of the quarterly report on Form 10-Q for the quarter ended June 30, 2013, prior year amounts have been revised for income tax errors that were considered not material, individually or in the aggregate, to any of the prior reporting periods.
 
             
Herbalife Ltd. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)

(Unaudited and Unreviewed)(1)

 

           
    Six Months Ended
      6/30/2013      

6/30/2012 (2)

 

CASH FLOWS FROM OPERATING ACTIVITIES            
Net income   $ 262,035     $ 239,882  
Adjustments to reconcile net income to net cash provided by            
operating activities:            
Depreciation and amortization     42,310       36,613  
Excess tax benefits from share-based payment arrangements     (15 )     (27,212 )
Share based compensation expenses     15,253       12,497  
Amortization of deferred financing costs     1,295       572  
Deferred income taxes     (7,939 )     (8,476 )
Unrealized foreign exchange transaction (gain) loss     (44 )     (4,909 )
Foreign exchange loss from Venezuela currency devaluation     15,116       -  
Other     (674 )     120  
Changes in operating assets and liabilities:            
Receivables     (312 )     (21,317 )
Inventories     (3,646 )     (14,476 )
Prepaid expenses and other current assets     (13,150 )     (9,367 )
Other assets     (534 )     (3,124 )
Accounts payable     4,586       22,948  
Royalty overrides     (2,051 )     7,932  
Accrued expenses and accrued compensation     43,761       (3,516 )
Advance sales deposits     4,481       5,199  
Income taxes     (12,546 )     20,661  
Deferred compensation plan liability     3,527       3,416  
NET CASH PROVIDED BY OPERATING ACTIVITIES     351,453       257,443  
CASH FLOWS FROM INVESTING ACTIVITIES            
Purchases of property, plant and equipment     (56,048 )     (39,719 )
Proceeds from sale of property, plant and equipment     33       43  
Deferred compensation plan assets     -       (2,609 )
NET CASH USED IN INVESTING ACTIVITIES     (56,015 )     (42,285 )
CASH FLOWS FROM FINANCING ACTIVITIES            
Dividends paid     (61,823 )     (70,310 )
Borrowings from long-term debt     513,227       806,560  
Principal payments on long-term debt     (38,250 )     (454,371 )
Share repurchases     (165,726 )     (505,636 )
Excess tax benefits from share-based payment arrangements     15       27,212  
Proceeds from exercise of stock options and sale of stock under            
employee stock purchase plan     971       10,356  
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES     248,414       (186,189 )
EFFECT OF EXCHANGE RATE CHANGES ON CASH     (27,683 )     (1,578 )
NET CHANGE IN CASH AND CASH EQUIVALENTS     516,169       27,391  
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD     333,534       258,775  
CASH AND CASH EQUIVALENTS, END OF PERIOD     849,703       286,166  
CASH PAID DURING THE YEAR            
Interest paid   $ 12,004     $ 5,884  
Income taxes paid   $ 117,120     $ 86,214  
             
(1) As a result of the resignation of KPMG, the unaudited interim financial information presented has not been reviewed by an outside independent accounting firm. See Note 2 of the quarterly report on Form 10-Q for the quarter ended June 30, 2013.
(2) As discussed in Note 2 of the quarterly report on Form 10-Q for the quarter ended June 30, 2013, prior year amounts have been revised for income tax errors that were considered not material, individually or in the aggregate, to any of the prior reporting periods.
 

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
    6/30/2013      

6/30/2012 (3)

 

    6/30/2013    

6/30/2012 (3)

 

  (in thousands)        
               
Net income, as reported $ 143,162     $ 131,951     $ 262,035   $ 239,882  
Venezuela devaluation impact (net of $2,217 and $6,808 tax benefit for the              
three and six months ended June 30, 2013, respectively) (1)(2)   (2,217 )     -       8,307     -  
Expenses incurred responding to attacks on the Company's business              
model (net of $953 and $2,468 tax benefit for the three and six months              
ended June 30, 2013, respectively)(1)   7,125       -       15,104     -  
Expenses incurred for the re-audit of 2010 to 2012 financial statements due to              
resignation of KPMG (net of $796 tax benefit for the three and six months              
ended June 30, 2013)(1)   2,661       -       2,661     -  
Net income, as adjusted $ 150,731     $ 131,951     $ 288,107   $ 239,882  
               
               
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
    6/30/2013      

6/30/2012 (3)

 

    6/30/2013    

6/30/2012 (3)

 

               
Diluted earnings per share, as reported $ 1.34     $ 1.09     $ 2.44   $ 1.96  
Venezuela devaluation impact (net of $2,217 and $6,808 tax benefit for the              
three and six months ended June 30, 2013, respectively) (1)   (0.02 )     -       0.08     -  
Expenses incurred responding to attacks on the Company's business              
model (net of $953 and $2,468 tax benefit for the three and six months              
ended June 30, 2013, respectively)(1)   0.07       -       0.14     -  
Expenses incurred for the re-audit of 2010 to 2012 financial statements due to              
resignation of KPMG (net of $796 tax benefit for the three and six months              
ended June 30, 2013)(1)   0.02       -       0.02     -  
Diluted earnings per share, as adjusted $ 1.41     $ 1.09     $ 2.68   $ 1.96  
               
               
(1) The income tax impact of the non-GAAP adjustments is based on forecasted items affecting the Company's 2013 full year GAAP effective tax rate. Adjustments to forecasted items unrelated to these non-GAAP adjustments may have an effect on the income tax impact of the non-GAAP adjustments in subsequent periods.
(2) The amount for the three months ended June 30, 2013 relates to the change in tax benefit, as explained in note 1, for the Venezuela devaluation that was recorded in the first quarter.
(3) As discussed in Note 2 of the quarterly report on Form 10-Q for the quarter ended June 30, 2013, prior year amounts have been revised for income tax errors that were considered not material, individually or in the aggregate, to any of the prior reporting periods.
 

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

           
        6/30/2013     12/31/2012
           
  Total long-term debt (current and long-term portion)   $ 962,586   $ 487,607
  Less: Cash and cash equivalents     849,703     333,534
  Net debt   $ 112,883   $ 154,073
               

 

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