Yesterday, KPMG announced its resignation as Herbalife Ltd. (NYSE:HLF)’s independent auditor because of alleged insider trading in HLF’s stock by a KPMG partner. KPMG also notified HLF that this problem has impaired its independence, requiring it to withdraw its audit reports for the past three years. KPMG also resigned and withdrew its audit reports for Skechers USA Inc (NYSE:SKX) for the same reasons. HLF already has a search underway for a new auditor, and we expect an announcement in the coming weeks. It is not clear how long the new accountants will take to re-audit Herbalife Ltd. (NYSE:HLF)’s financials, but Barclays analysts believe the stock was weak yesterday ‘due to misguided concerns’, which we Summarize below
- Barclays sees ‘it as highly unlikely’ that these actions will result in the de-listing of Herbalife Ltd. (NYSE:HLF) stock from the NYSE. Although providing audited financial statements is a requirement for exchange listing, there have been numerous situations in which the exchange has been willing to waive this condition temporarily due to unusual circumstances. Some examples include Sarbanes Oxley problems at 99 Cents Only and accounting control deficiencies at Sonic Automotive. The companies typically submit NT filings to notify the SEC of their temporary noncompliance. They expect this to be the case with HLF, since the issue was caused by KPMG and HLF is taking the appropriate steps to rectify the situation.
- Barclays’ discussions with fixed income experts ‘lead us to believe that there is virtually no likelihood that Herbalife Ltd. (NYSE:HLF)’s banks will pull its credit facilities’. However, the analysts note ‘it is not clear whether HLF is in default of any covenant, but even if it were, we believe the situation would be similar to the NYSE listing requirement, and HLF would request and get a temporary waiver from the lending group probably with no amendment fee required’.
- Finally, it is Barlcays understanding that there is nothing that precludes Herbalife Ltd. (NYSE:HLF) from repurchasing its stock, as long as the details around the situation are fully disclosed. The company is currently in a blackout period because its 1Q has just ended, but they expect it to resume buying back stock in May after results are reported.