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	)

 

Dividends

The declaration of future dividends is subject to the discretion of the Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s share repurchase program was $232.9 million inclusive of reductions for the Forward Transactions.

 

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 Company’s 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 Company’s 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 Company’s 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 Company’s 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.

 

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.

 

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.