Business

Herbalife Ltd. (HLF) DoJ Investigation Disclosed In 10Q

Last night Herbalife confirmed previous reports that the Dept. of Justice was investigating (as we first reported), but some might have missed that disclosure. The company included a single sentence about it in its regulatory filing, burying that sentence in a paragraph about the already-disclosed FTC investigation.

The Thompson Reuters transcript of last night’s earnings call indicates that the probe did not come up, but there were some interesting questions regarding Herbalife’s debt refinancing and how it relates to the share repurchase program.

Herbalife Ltd. HLF

Despite that disclosure, however, Herbalife shares continued to rally today, climbing as much as 18.78% to $47.62 per share after last night’s earnings report.

Herbalife reveals DoJ probe

Herbalife’s 10-Q filing with the Securities and Exchange Commission references the Federal Trade Commission’s investigation and then moves on to reveal that the DoJ is investigating. People who scanned the 10-Q quickly may not even have noticed this sentence buried in the paragraph referencing the FTC probe, which had already been disclosed.

The sentence reads: “The Department of Justice recently sought information from the Company, certain of its Members and others regarding allegations being made about the business practices of the Company and its Members.”

The statement backs up previously unconfirmed reports that Herbalife may be involved in more than just the FTC investigation. The official transcript of last night’s earnings call reveals that Herbalife management did not bring up the topic of the DoJ investigation, and neither did any of the analysts who participated in the call.

Herbalife amends credit facility

Last night Herbalife also announced that it had amended some of it debt that was due in 2016 and pushed it back to 2017. The company said the term loan will still mature on March 9, 2016, but under the terms of the amendment, Herbalife will pay about $20.3 million on the term loan and $50.9 million on the revolving credit facility by March 9, 2016. The company’s total expected available borrowing capacity on that facility moves to $425 million as of the end of September.

Chief Financial Officer John DeSimone said the interest on the amended deal “effectively” stays the same through March 9, 2016, the original date of maturity. From 2016 to 2017, the interest rate is 200 basis points higher than the current deal.

He added that the amended deal enables Herbalife to pay dividends or repurchase common shares for up to $233 million, which is the amount of capital return the board has already authorized. He also said though that at this time, their guidance does not include any share repurchases.

They upped their guidance for full year adjusted earnings to between $4.30 and $4.60 per share in last night’s earnings report. For the second quarter, they expect adjusted earnings to between $1.05 and $1.15 per share.

Questions about Herbalife’s debt refinancing

On last night’s earnings call, analysts had questions about Herbalife’s decision to refinance its debt. Barclays analyst Meredith Adler was the first to broach the subject. DeSimone said they decided to refinance the debt for “flexibility” purposes. Instead of having $825 million due in the next 12 months, Herbalife has $420 million due.

Further, he stated that when doing share repurchases, the banks want them to pay a dollar back on their loan for every dollar in share repurchase they make. “So if we want to pay more down in debt, we can use some to buy back stock,” he said on the earnings call. “But we’re not anticipating doing that in the near term, but at least we have some flexibility there.”

Pivotal Research analyst Tim Ramey also questioned the debt refinancing, although it doesn’t seem as if the answers satisfied him. Here’s the latter part of the exchange between Ramey and DeSimone on the earnings call:

Ramey: “Those b******* at BofA.

DeSimone: “No. No. First of all, it was the entire bank group. This went through a lot of banks, and this was, I think, a good vote of support. We are outstanding $500 million on our credit facility, and $425 million of it got extended for a year without any incremental interest cost for the original term. To me, this is a very positive step and a vote of confidence from the banks. But one of the things banks generally don’t like is, and with our overhang, is that we go spend the money and buy back stock. So there are some restrictions on it. But at least we have some flexibility to buy back the stock up to the current authorized amount.”

Ramey: “OK. Thanks. I’ll let it move on. Thanks.”

Short-seller and Seeking Alpha contributor Fear and Greed pounced on the debt refinancing topic, explaining why it could be bad news for Herbalife investors. You can read that analysis here, but remember again that the writer has disclosed that he has a short position in Herbalife.