Herbalife Ltd. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

9 Months Ended

Sep. 30, 2024

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities

9. Derivative Instruments and Hedging Activities

Foreign Currency Instruments

The Company designates certain foreign currency derivatives, primarily comprised of foreign currency forward contracts 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 within the Company’s condensed consolidated statements of income. The Company primarily uses freestanding foreign currency derivatives to hedge foreign currency-denominated intercompany transactions and to partially mitigate the impact of foreign currency fluctuations. The fair value of the freestanding foreign currency derivatives is based on third-party quotes. The Company’s 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 designated as cash flow hedges, excluding forward points, are recorded as a component of accumulated other comprehensive loss within shareholders’ deficit, and are recognized in cost of sales within the Company’s 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, excluding forward points, are recorded as a component of accumulated other comprehensive loss within shareholders’ deficit, and are recognized in selling, general, and administrative expenses within the Company’s condensed consolidated statement of income during the period when the hedged item and underlying transaction affect earnings. The Company has elected to record changes in the fair value of amounts excluded from the assessment of effectiveness currently in earnings.

As of September 30, 2024 and December 31, 2023, the aggregate notional amounts of all foreign currency contracts outstanding designated as cash flow hedges were approximately $74.5 million and $76.3 million, respectively. As of September 30, 2024, these outstanding contracts were expected to mature over the next fifteen months. The Company’s derivative financial instruments are recorded on the condensed consolidated balance sheets at fair value based on third-party quotes. As of September 30, 2024, the Company recorded assets at fair value of $7.2 million and liabilities at fair value of $0.3 million relating to all outstanding foreign currency contracts designated as cash flow hedges. As of December 31, 2023, the Company recorded assets at fair value of zero and liabilities at fair value of $3.3 million relating to all outstanding foreign currency contracts designated as cash flow hedges. The Company assesses hedge effectiveness at least quarterly and the hedges remained effective as of September 30, 2024 and December 31, 2023.

As of both September 30, 2024 and December 31, 2023, the majority of the Company’s outstanding foreign currency forward contracts related to freestanding derivatives had maturity dates of less than twelve months with the majority expiring within one month. As of September 30, 2024, the Company had aggregate notional amounts of approximately $582.8 million of foreign currency contracts, inclusive of freestanding contracts and contracts designated as cash flow hedges.

The following tables summarize the derivative activity during the three and nine months ended September 30, 2024 and 2023 relating to all the Company’s derivatives.

Gains and Losses on Derivative Instruments

The following table summarizes gains (losses) relating to derivative instruments recorded in other comprehensive income (loss) during the three and nine months ended September 30, 2024 and 2023:


	Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss)
	Three Months Ended					Nine Months Ended
	September 30, 2024		September 30, 2023			September 30, 2024		September 30, 2023
	(in millions)
Derivatives designated as hedging instruments:
Foreign exchange currency contracts relating to inventory and intercompany management fee hedges	$	8.2	$	(1.1	)	$	13.0	$	(8.0	)

As of September 30, 2024, the estimated amount of existing net gains related to cash flow hedges recorded in accumulated other comprehensive loss that are expected to be reclassified into earnings over the next twelve months was $12.2 million.

The effect of cash flow hedging relationships on the Company’s condensed consolidated statements of income for the three and nine months ended September 30, 2024 and 2023 was as follows:


	Location and Amount of (Loss) Gain Recognized in Income on Cash Flow Hedging Relationships
	Three Months Ended
	September 30, 2024								September 30, 2023
	Cost of sales			Selling, general, and administrative expenses			Interest expense, net		Cost of sales			Selling, general, and administrative expenses			Interest expense, net
	(in millions)
Total amounts presented in the condensed consolidated statements of income	$	268.7		$	444.0		$	56.5	$	303.2		$	455.3		$	38.5

Foreign exchange currency contracts relating to inventory hedges:
Amount of loss reclassified from accumulated other comprehensive loss to income		(0.7	)		—			—		(1.3	)		—			—
Amount of loss excluded from assessment of effectiveness recognized in income		(2.0	)		—			—		(1.4	)		—			—

Foreign exchange currency contracts relating to intercompany management fee hedges:
Amount of loss reclassified from accumulated other comprehensive loss to income		—			(0.1	)		—		—			(0.3	)		—
Amount of gain excluded from assessment of effectiveness recognized in income		—			0.2			—		—			0.1			—


	Location and Amount of (Loss) Gain Recognized in Income on Cash Flow Hedging Relationships
	Nine Months Ended
	September 30, 2024								September 30, 2023
	Cost of sales			Selling, general, and administrative expenses			Interest expense, net		Cost of sales			Selling, general, and administrative expenses			Interest expense, net
	(in millions)
Total amounts presented in the condensed consolidated statements of income	$	836.8		$	1,438.5		$	152.1	$	903.4		$	1,391.7		$	116.3

Foreign exchange currency contracts relating to inventory hedges:
Amount of loss reclassified from accumulated other comprehensive loss to income		(1.9	)		—			—		(5.6	)		—			—
Amount of loss excluded from assessment of effectiveness recognized in income		(4.0	)		—			—		(3.9	)		—			—

Foreign exchange currency contracts relating to intercompany management fee hedges:
Amount of loss reclassified from accumulated other comprehensive loss to income		—			(0.2	)		—		—			(0.5	)		—
Amount of gain excluded from assessment of effectiveness recognized in income		—			0.3			—		—			0.3			—

Interest rate swaps:
Amount of gain reclassified from accumulated other comprehensive loss to income		—			—			—		—			—			0.3
Amount of gain excluded from assessment of effectiveness recognized in income		—			—			—		—			—			—

The following table summarizes gains (losses) recorded to income relating to derivative instruments not designated as hedging instruments during the three and nine months ended September 30, 2024 and 2023:


	Amount of (Loss) Gain Recognized in Income
	Three Months Ended					Nine Months Ended
	September 30, 2024			September 30, 2023		September 30, 2024		September 30, 2023			Location of (Loss) Gain Recognized in Income
	(in millions)
Derivatives not designated as hedging instruments:
Foreign exchange currency contracts	$	(0.6	)	$	1.9	$	2.5	$	(3.1	)	Selling, general, and administrative expenses

The Company reports its derivatives at fair value as either assets or liabilities within its condensed consolidated balance sheets. See Note 12, Fair Value Measurements, for information on derivative fair values and their condensed consolidated balance sheets location as of September 30, 2024 and December 31, 2023.