Herbalife counts the cost of recapitalization

- Last updated on GMT

Related tags: Generally accepted accounting principles

Direct supplements marketer Herbalife has reported a net loss of
$14.3 million for full fiscal 2004 but attributes the huge drop in
income over the last 12 months, from $36.8 million for 2003, to
expenses associated with recapitalization.

The company​, which raised $172.6 million through its initial offering on the New York Stock Exchange in December 2004, has said that without the recapitalization net income would have reached $46.2 million. This upbeat claim is bourne out by strong global sales of $1.3 billion for the year, up 13 percent on 2003.

Michael Johnson, CEO, explained the reasoning behind the recapitalization, which cost $56 million in 4Q 2004 and reduced the company's debt by around $135 million: "The company's new debt structure will lower our annual interest expense and provide us with the flexibility to pre-pay term debt with our excess cash flow,"​ he said.

The company's net interest expense was $123 million in 2004, compared with $41 million in 2003. Its current assets at the close of fiscal 2004 totaled $369 million, of which $201.5 million was cash or cash equivalents, compared with current assets of $277.7 last year.

In addition to its listing on the NYSE, another key part of Herbalife's recapitalization is the completion of its call option to redeem $110 million, or 40%, of its outstanding 9.5 percent notes, at the beginning of this month.

The clawing back of these costly bonds was announced on 21 December 2004, but even after the completion of this transaction the company is still shouldering the $165 million of the notes, due 2011, as well as a $225 million credit facility that includes a $200 million term loan and a $25 million revolving credit facility.

Going forward in 2005 the company plans to introduce a number of new strategies relating to distribution, infrastructure, direct-to-consumer marketing and products that it hopes will pave the way towards future top and bottom line growth.

It has a new personal care line and patent-pending energy drink in the pipeline and is seeking to attract new demographics and market segments. Plans are also in progress to take make the most of the burgeoning Chinese market where, in 2004, Herbalife upgraded its manufacturing plant.

However positive these new initiatives may be, however, Herbalife's 1Q results will include a redemption premium for the 9.5 percent bonds of $10.5 million, plus remaining deferred financing costs of $3.8 million.

Excluding these costs, for fiscal 2005 the company has issued EPS guidance of $0.24 to $0.26 cents per share for 1Q, and $1.10 to $1.15 per share for its full year, with net sales growth of between 6.5 and 8.5 percent.

In April 2002 Herbalife was bought by two private equity firms - Whitney & Co. and Golden Gate Capital - for $685 million.

After founder Mark Hughes died in 2000, the company found itself fighting a slump in the vitamin and supplements business, especially in the US, which was compounded by its direct sales model.

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