2. Significant Accounting Policies

Basis of Presentation

The unaudited and unreviewed interim financial information of the Company has been prepared in accordance with Article 10 of the Securities and Exchange Commission’s, or the SEC, Regulation S-X. Accordingly, as permitted by Article 10 of the SEC’s 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, 2012 was derived from the previously audited financial statements at that date subject to revisions as discussed below, where, as previously disclosed, the Company’s former independent registered public accounting firm’s audit opinions have now been withdrawn, and does not include all the disclosures required by U.S. GAAP, as permitted by Article 10 of the SEC’s Regulation S-X. The Company’s unaudited and unreviewed condensed consolidated financial statements as of September 30, 2013, and for the three and nine months ended September 30, 2013 and 2012, 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 Company’s unaudited and unreviewed condensed consolidated financial statements as of September 30, 2013, and for the three and nine months ended September 30, 2013 and 2012. These unaudited and unreviewed condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, or the 2012 10-K. Operating results for the three and nine months ended September 30, 2013, are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

The unaudited interim financial information presented in this Quarterly Report on Form 10-Q has not been reviewed by an independent registered public accounting firm as the Company’s former independent registered public accounting firm resigned on April 8, 2013. See the Explanatory Note to this Quarterly Report on Form 10-Q for a further description. As a result, this Quarterly Report on Form 10-Q is considered deficient and the Company continues not to be timely or current in its filings under the Securities Exchange Act of 1934, as amended, or the Exchange Act. While this filing does not comply with the requirements of Regulation S-X, and should not be interpreted to be a substitute for the review that would normally occur by the Company’s independent registered public accounting firm, the Company’s Audit Committee and management believe that the interim financial information presented herein fairly present, in all material respects, the financial condition and results of operations of the Company as of the end of and for the referenced periods and may be relied upon. Except for the absence of this review of the unaudited interim financial information discussed above and the omission of the SOX 906 certification discussed in greater detail in the Explanatory Note, this Quarterly Report on Form 10-Q fully complies with the requirements of the Exchange Act and the Company believes it is prudent to file this Report with the SEC in spite of the current circumstances to provide the financial and other information set forth herein to its shareholders and other interested parties. Once PwC completes its re-audit of the Company’s financial statements for the fiscal years ended December 31, 2012, 2011 and 2010, and completes its SAS 100 review of this unaudited interim financial information and the unaudited financial information for applicable prior periods, the Company will file an amendment to this Quarterly Report on Form 10-Q as soon as practicable.

New Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for which the Total Amount of the Obligation Is Fixed at the Reporting Date (a consensus of the FASB Emerging Issues Task Force). This ASU addresses the recognition, measurement, and disclosure of certain obligations resulting from joint and several arrangements including debt arrangements, other contractual obligations, and settled litigation and judicial rulings. The ASU is effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.

 

In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (a consensus of the FASB Emerging Issues Task Force). This ASU addresses the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the Emerging Issues Task Force). This ASU addresses when unrecognized tax benefits should be presented as reductions to deferred tax assets for net operating loss carryforwards in the financial statements. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption and retrospective application is permitted. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.

Revision of Prior Period Financial Statements

During the quarter ended June 30, 2013, in connection with preparing the unaudited and unreviewed interim financial information presented in the Quarterly Report on Form 10-Q for that period, prior period errors were identified which affected the interim period ended June 30, 2013, and the annual periods ended December 31, 2012, 2011 and 2010, including the applicable interim periods. These income tax errors primarily relate to income tax expenses calculated on intercompany inventory transactions and the Company’s application of ASC 740-10-25-3(e) and ASC 810-10-45-8. As a result of its misapplication of these accounting standards, the Company’s income tax expenses and net income within its consolidated statement of income were misstated. There were also certain amounts within the Company’s other consolidated financial statements that were misstated. The Company has reflected the correction of these identified prior period errors in the periods in which they originated.

In evaluating whether the Company’s previously issued consolidated financial statements were materially misstated, the Company considered the guidance in ASC Topic 250, Accounting Changes and Error Corrections, ASC Topic 250-10-S99-1, Assessing Materiality, and ASC Topic 250-10-S99-2, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. The Company concluded that these errors were not material, individually or in the aggregate, to any of the prior reporting periods, and therefore, amendments of previously filed reports were not required. If the entire correction was recorded in the second quarter of 2013, it was expected that the cumulative amount would not be material for the fiscal year ending December 31, 2013. As such, this cumulative amount could have been recorded as an out of period adjustment during the second quarter of 2013. However, because the Company will be amending its Annual Report on Form 10-K for the fiscal year ended December 31, 2012 due to its predecessor auditors withdrawing their opinions, and will be amending its Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2013, June 30, 2013, and September 30, 2013, and any other Quarterly Reports on Form 10-Q that are deficient due to the absence of a SAS 100 review, the Company decided to revise its applicable prior period financial statements so that the financial statements included therein and herein do not include these income tax errors. The Company believes this approach is more beneficial to investors due to the Company’s unusual facts and circumstances surrounding its predecessor auditors resigning and withdrawing their audit opinions and the Company being required to file future amendments to its Annual Report on Form 10-K and Quarterly Reports on Form 10-Q referenced above. As such, the revisions for these corrections are and will be reflected in the financial information of the applicable prior periods and will be reflected in future filings containing such financial information. The Company has also provided, within this Note, the financial statement items that were impacted and included within its prior period consolidated balance sheets and full year prior period consolidated statements of income so this financial information is presented timely to the Company’s shareholders and other interested parties.

The effects of these prior period errors in the condensed consolidated financial statements are as follows:

Condensed Consolidated Balance Sheets

 

		December 31, 2012								December 31, 2011
		As  Previously Reported				As Adjusted				As  Previously Reported				As Adjusted
		(In thousands, except per share amount)
Prepaid expenses and other current assets		$	125,425			$	145,624			$	117,073			$	134,605
Deferred income taxes		$	49,339			$	49,339			$	55,615			$	54,949
Total current assets		$	963,848			$	984,047			$	768,819			$	785,685
Total assets		$	1,703,944			$	1,724,143			$	1,446,209			$	1,463,075
Income taxes payable		$	15,854			$	61,325			$	31,415			$	62,283
Total current liabilities		$	716,891			$	762,362			$	548,689			$	579,557
Deferred income taxes		$	62,982			$	62,982			$	72,348			$	70,390
Total liabilities		$	1,283,189			$	1,328,660			$	886,021			$	914,931
Retained earnings		$	148,368			$	123,096			$	305,931			$	293,887
Total shareholders’ equity		$	420,755			$	395,483			$	560,188			$	548,144
Total liabilities and shareholders’ equity		$	1,703,944			$	1,724,143			$	1,446,209			$	1,463,075

 

Condensed Consolidated Statements of Income

 

		Three Months Ended September 30, 2012								Nine Months Ended September 30, 2012
		As  Previously Reported				As Adjusted				As  Previously Reported				As Adjusted
		(In thousands, except per share amount)
Income taxes		$	39,518			$	45,424			$	134,257			$	141,811
Net Income		$	117,779			$	111,873			$	359,309			$	351,755
Basic earnings per share		$	1.08			$	1.03			$	3.16			$	3.09
Diluted earnings per share		$	1.04			$	0.98			$	3.01			$	2.95

 

		Year Ended December 31, 2012								Year Ended December 31, 2011								Year Ended December 31, 2010
		As  Previously Reported				As Adjusted				As  Previously Reported				As Adjusted				As  Previously Reported				As Adjusted
		(In thousands, except per share amount)
Income taxes		$	173,716			$	186,944			$	147,201			$	144,820			$	80,880			$	87,212
Net Income		$	477,190			$	463,962			$	412,578			$	414,959			$	299,215			$	292,883
Basic earnings per share		$	4.25			$	4.13			$	3.51			$	3.53			$	2.51			$	2.46
Diluted earnings per share		$	4.05			$	3.94			$	3.30			$	3.32			$	2.37			$	2.32

Condensed Consolidated Statements of Comprehensive Income

 

		Three Months Ended September 30, 2012								Nine Months Ended September 30, 2012
		As  Previously Reported				As Adjusted				As  Previously Reported				As Adjusted
		(In thousands)
Net Income		$	117,779			$	111,873			$	359,309			$	351,755
Total comprehensive income		$	124,081			$	118,175			$	360,493			$	352,939

Condensed Consolidated Statement of Cash Flows

 

		Nine Months Ended September 30, 2012
		As  Previously Reported				As Adjusted
		(In thousands)
Net Income		$	359,309			$	351,755
Deferred income taxes		$	(9,246	)		$	(8,249	)
Income taxes		$	22,561			$	29,118

Venezuela

Currency restrictions enacted by the Venezuelan government have become more restrictive and have impacted the ability of the Company’s subsidiary in Venezuela, Herbalife Venezuela, to timely obtain U.S. dollars in exchange for Venezuelan Bolivars, or Bolivars, at the official foreign exchange rate from the Venezuelan government and its foreign exchange commission, CADIVI. The application and approval process continue to be delayed and the Company’s ability to timely obtain U.S. dollars at the official exchange rate remains uncertain. In recent instances, the Company has been unsuccessful in obtaining U.S. dollars at the official rate and it remains uncertain whether the Company’s current pending applications and future anticipated applications will be approved.

 

In February 2013, the Venezuela government announced that it devalued its Bolivar currency and will eliminate the SITME regulated system. The SITME 5.3 Bolivars per U.S. dollar rate was eliminated and the CADIVI rate has been devalued from 4.3 Bolivars to 6.3 Bolivars per U.S. dollar. This new CADIVI rate is approximately 16% less favorable than the previously published 5.3 SITME rate. The Company recognized approximately $15.1 million of net foreign exchange losses within its condensed consolidated statement of income during the first quarter of 2013, as a result of remeasuring the Company’s Bolivar denominated monetary assets and liabilities at this new CADIVI rate of 6.3 Bolivars per U.S. dollar. The majority of these foreign exchange losses related to the approximately $16.9 million devaluation of Herbalife Venezuela’s Bolivar denominated cash and cash equivalents. In March 2013, the Venezuelan government also announced they will introduce an additional complimentary exchange mechanism known as SICAD. It is currently unknown whether Herbalife Venezuela will be able to access this new exchange mechanism and the Company is currently assessing and monitoring the restrictions and exchange rates relating to this alternative mechanism.

During the nine months ended September 30, 2013, the Company also recognized $0.7 million of foreign exchange losses as a result of exchanging Bolivars for U.S. dollars using alternative legal exchange mechanisms that were approximately 75% less favorable than the new CADIVI rate. During the nine months ended September 30, 2013, the Company exchanged 5.6 million Bolivars for $0.2 million U.S. dollars using these alternative legal exchange mechanisms. The Company did not exchange Bolivars for U.S. dollars using these alternative legal exchange mechanisms during the three months ended June 30, 2013 or the three months ended September 30, 2013. As of September 30, 2013, Herbalife Venezuela’s net monetary assets and liabilities denominated in Bolivars were approximately $146.7 million, and included approximately $150.1 million in Bolivar denominated cash and cash equivalents. These Bolivar denominated assets and liabilities were remeasured at the CADIVI rate. The Company remeasures its Bolivars at the official published CADIVI rate given the limited availability of alternative exchange mechanisms and the uncertainty in the effective exchange rate for alternative exchange mechanisms. These remeasured amounts, including cash and cash equivalents, being reported on the Company’s condensed consolidated balance sheet using the published CADIVI rate may not accurately represent the amount of U.S. dollars that the Company could ultimately realize. While the Company continues to monitor the exchange mechanisms and restrictions under CADIVI, and assess and monitor the current economic and political environment in Venezuela, there is no assurance that the Company will be able to exchange Bolivars into U.S. dollars on a timely basis. Herbalife Venezuela’s net sales represented approximately 5% and 3% of the Company’s consolidated net sales for the nine months ended September 30, 2013 and 2012, respectively, and its total assets represented approximately 9% and 7% of the Company’s consolidated total assets as of September 30, 2013 and December 31, 2012, respectively. As of September 30, 2013 and December 31, 2012, the majority of its total assets consisted of Bolivar denominated cash and cash equivalents.

See the Company’s 2012 10-K for further information on Herbalife Venezuela and Venezuela’s highly inflationary economy.