Herbalife Nutrition Ltd. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual filing; the supplied text does not provide a separate fourth-quarter income statement. Financial amounts are in U.S. dollars unless stated otherwise.
Business context
Herbalife sells nutrition and wellness products in 95 markets primarily through independent Members using a direct-selling model. Its largest product category is weight management; its Formula 1 shake line represented approximately 27% of FY2021 net sales. The company reported approximately 6.3 million Members at year-end. About 76% of FY2021 net sales came from outside the United States.
Key financial results
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Net sales | $5,802.8 million | $5,541.8 million | +4.7%; +3.3% in local currency |
| Gross profit / margin | $4,563.5 million / 78.6% | $4,391.2 million / 79.2% | Margin down 59 basis points |
| Operating income / margin | $734.1 million / 12.7% | $640.6 million / 11.6% | Operating income +14.6% |
| Net income | $447.2 million | $372.6 million | +20.0% |
| Diluted EPS | $4.13 | $2.77 | Increased; share repurchases reduced weighted-average shares |
| Operating cash flow | $460.3 million | $628.6 million | Down $168.3 million |
| Capital expenditures | $159.1 million | $116.8 million | Increased |
Revenue growth reflected price increases, 2.5% higher Volume Points and favorable currency, partly offset by unfavorable country mix. The gross-margin decline reflected country mix, higher freight and sourcing costs, inventory write-downs and currency effects, partly offset by price increases. SG&A declined to $2,012.1 million from $2,075.0 million, notably reflecting lower China service fees and the absence of $83.1 million of 2020 FCPA investigation expenses. Net income included a $24.6 million pretax loss on extinguishing the 2026 Notes and other disclosed pandemic, transformation and litigation costs.
Geographic and product performance
- Asia Pacific net sales increased 17.7%; India sales rose 48.7% to $519.1 million.
- EMEA increased 10.5%, and North America increased 4.1%.
- China declined 22.2% in net sales and 28.3% in Volume Points; management cited tighter service-provider qualification requirements, pandemic disruption and lingering effects of the 2019 government review.
- South and Central America declined 2.0% in reported sales; Brazil sales fell 23.3%.
- Energy, Sports, and Fitness sales grew 26.2%; weight-management sales grew 1.7%.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $601.5 million at year-end, down from $1,045.4 million. Working capital was $351.4 million, down from $648.5 million.
- Total debt carrying value was $2,762.6 million, including $1,094.6 million outstanding under the secured credit facility. The company reported compliance with its debt covenants and no mandatory Term Loan B prepayment due in 2022.
- FY2021 net interest expense was $148.7 million, up from $124.2 million. The credit facility’s weighted-average rate was 2.62% at year-end; management disclosed sensitivity of approximately $9.9 million in annual interest expense for a 1 percentage-point rate increase, assuming borrowings and swaps remain constant.
- Operating cash flow fell principally because of less favorable working-capital movements, including inventory and prepaid expenses. Financing cash use included $1,011.3 million of share repurchases, including shares withheld for taxes.
- The company repurchased approximately 20.4 million shares for $982.7 million during 2021. Approximately $1.1 billion remained under its $1.5 billion authorization at year-end. It has not paid cash dividends since 2014.
- Shareholders’ deficit was $1,391.5 million; total liabilities exceeded total assets. The company cited operating cash flow and available credit as sufficient for foreseeable needs, including the next 12 months.
Outlook, risks and unusual items
- Management did not provide a clear numerical revenue or earnings forecast in the supplied filing text. It expects FY2022 capital expenditures of approximately $175 million to $225 million and warned that gross margin would be pressured by raw-material, manufacturing-labor and freight costs.
- The first phase of a global transformation program is expected to incur $25 million to $30 million of pretax expense through 2023, with $12.9 million recognized in 2021. Management expects annual incremental savings of $10 million to $15 million, with full-year savings expected in 2024. The second phase remains under assessment.
- COVID-19 continued to disrupt Member meetings, Nutrition Clubs, distribution and supply chains; management said effects could extend through 2022 or longer and were difficult to predict.
- Regulatory exposure remains material: the 2016 FTC Consent Order requires extensive U.S. compliance controls and independent monitoring. The company also remains subject to a three-year DOJ deferred prosecution agreement and SEC compliance self-reporting following 2020 FCPA resolutions and approximately $123 million of payments.
- Tax and customs disputes remain in several jurisdictions, including Brazil, India and South Korea. Some assessments have been paid while appeals continue; outcomes and potential additional exposure are uncertain. The filing also records a proposed $12.5 million settlement of the Rodgers class action, subject to court approval.
- Other principal risks include Member recruitment and retention, the direct-selling model’s regulatory status, reliance on Formula 1, international and currency exposure, product liability, cybersecurity, supply availability, and substantial indebtedness. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether sales and Member activity can sustain growth after exceptionally strong 2020 comparisons, particularly in North America and EMEA, and whether China’s decline stabilizes.
- Whether price increases and cost controls can offset expected 2022 input, labor and freight inflation without weakening demand or margins.
- Cash conversion, inventory growth and working-capital requirements, given lower operating cash flow and the sharp year-end cash decline.
- Debt maturities, refinancing and interest-rate exposure, including the $550 million 2024 convertible notes and covenant restrictions on buybacks and distributions.
- Whether large repurchases remain supportable alongside debt service, capital spending and the company’s negative shareholders’ equity.
- Developments in regulatory monitoring, tax/customs disputes and the proposed class-action settlement; the filing text does not give one clear aggregate maximum exposure for these matters.