Herbalife’s Independent Auditor
When a public company files its Form 10-Q, it is customary for an independent auditor to review the filingbeforehand. Page 8 of the 10-
Q notes that “The unaudited interim financial in
formation presented in thisQuarterly 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
In light of the fact tha
t PwC was retained by Herbalife in May, why didn’t it review the Company’s Q2’13
When will PwC begin reviewing and auditing the Company’s 10
-Q and 10-K reports?
When will PwC complete its auditing review of Herbalife’s 2010 through 2012 public f
Prior Period Errors in Reported Income Tax Expenses
Page 9 of Herbalife’s Q2’13 10
Q notes that “in connection with preparing the unaudited and unreviewed
interimfinancial information presented in this Quarterly Report on Form 10-Q, prior period errors were identified whichaffected the interim period ended June 30, 2013, and the interim periods within and annual periods endedDecember 31, 2012, 2011 and 2010. These income tax errors primarily relate to income tax expenses calculated on
intercompany inventory transactions and the Company’s application of ASC 740
3(e).” The 10
The Company concluded that these errors were not material
, individually or in the aggregate, to any of the prior
reporting periods. (emphasis added)”
Pages 9 and 10 of Herbalife’s 10
Q disclose that the impact of such “prior period errors” caused Herbalife’s
reported deferred tax liability as of December 31, 2012 to increase by 286%, from $15.9mm to $61.3mm. Inaddition, reported 2012 diluted earnings per share decreased approximately 3% from $4.05 to $3.94.
Who discovered these errors
was it the Company or PwC?
Given that the Company’s reported deferred tax liabi
lity increased 286%, why does the Company believe
that “these errors were not material?”
Page 10 of the 10-Q further discloses that, of the $13.2mm tax expense adjustment in year 2012, $1.6mm wasmisstated in the first six months. Assuming the remainder of the restatement is split across the third and fourth
quarters, this implies that Herbalife’s Q4’12 diluted EPS results were overstated by five cents per share.We note that Herbalife’s Q4’12 results were the first period reported after Pershing Square’
s presentation entitled
“Who wants to be a Millionaire?” on December 20, 2012. This was an important quarter for the Company to
demonstrate EPS growth. During that quarter, the Company reported $1.05 of diluted EPS, which exceededconsensus EPS estimates by four cents per share.
Had Herbalife correctly accounted for its income tax expense in Q4’12, would the Company’s reported
diluted EPS have been less than the consensus figure of $1.01? If so, does the Company still believe that the restatement is not material?
Reconciliation of Non-GAAP Financial Measures
The Company’s press release for Q2’13 notes $26.1mm of “Non
GAAP financial measures” net of taxes, which
serve to make reported Adj. EPS for the first half of 2013 10% greater than GAAP diluted EPS. These financialmeasures include add-backs for expenses associated with (1) the Venezuela devaluation impact, (2) expenses
incurred responding to attacks on the Company’s business model, and (3) expenses incurred for the re
-audit of 2010 to 2012 financial statements due to resignation of KPMG. The press release also notes that such Non-GAAP
adjustments are “unaudited and unreviewed.”