Herbalife Ltd. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing, not a standalone fourth-quarter report; quarterly results are noted separately below. Amounts are in U.S. dollars.
Business context
Herbalife sells nutrition, weight-management, fitness and personal-care products in 94 countries, primarily through independent Members. Formula 1 Healthy Meal products accounted for approximately 30% of net sales. The business depends heavily on Member recruitment, retention and sales activity; the U.S. business operated under procedures required by the FTC consent order.
Financial performance and position
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $4,427.7 million | $4,488.4 million |
| Gross profit / gross margin | $3,579.1 million / 80.8% | $3,633.8 million / 81.0% |
| Operating income / operating margin | $617.1 million / 13.9% | $458.1 million / 10.2% |
| Net income / diluted EPS | $213.9 million / $2.58 | $260.0 million / $3.02 |
| Operating cash flow | $590.8 million | $367.3 million |
| Cash and cash equivalents at year-end | $1,278.8 million | $844.0 million |
| Working capital at year-end | $953.5 million | $671.0 million |
| Total debt at year-end | $2,268.1 million | $1,447.9 million |
| Shareholders’ equity (deficit) | $(334.7) million | $196.3 million |
Capital expenditures were $95.1 million. The company repurchased approximately 11.7 million shares for an aggregate cost of approximately $786.4 million; no dividends were paid. The 2017 share repurchases contributed to the year-end shareholders’ deficit.
Changes versus prior periods
- Net sales fell 1.4% in reported currency and 1.1% in local currency. Volume Points, management’s non-GAAP proxy for sales volume, declined 3.6%; price increases partly offset lower volume and unfavorable sales mix.
- Operating income increased, while net income declined. SG&A fell to $1,758.6 million from $1,966.9 million, largely because 2016 included $203.0 million of regulatory settlements. Higher interest costs and taxes more than offset the operating-income improvement.
- Net interest expense rose to $146.3 million from $93.4 million, mainly after the company entered a new credit facility in February 2017. The year-end weighted-average rate on credit-facility borrowings was 6.79%, versus 4.29% in 2016.
- Regional results diverged: North America sales fell 12.1%, while EMEA rose 6.5%, China rose 2.0%, and Asia Pacific rose 0.3%. South and Central America sales fell 2.9%.
- Fourth-quarter 2017 sales were $1,093.3 million and net loss was $63.4 million, compared with fourth-quarter 2016 sales of $1,045.0 million and net income of $99.4 million. The 2017 quarter included a $153.3 million provisional net tax expense related to U.S. tax reform.
Outlook, commentary and key risks
- Management expected 2018 capital expenditures of approximately $115 million to $155 million. It anticipated that North America sales comparisons could remain under pressure in the first half of 2018 as Members adapted to consent-order documentation, training and operating requirements. No full-year revenue or earnings guidance is provided in the filing text.
- The FTC consent order requires U.S. Member categorization, qualifying sales documentation, restrictions on certain Nutrition Club activity, limits on income and lifestyle claims, and independent compliance audits for seven years. The company reported implementation costs and warned that compliance failures, costs or reduced sales could adversely affect results.
- The 2017 effective tax rate was 54.6%, including the provisional $153.3 million tax-reform expense, principally a valuation allowance on deferred tax assets. The company said its tax-reform accounting remained provisional and could be adjusted during 2018.
- Material uncertainties include pending tax and customs disputes in multiple jurisdictions, including Mexico, Brazil, India and Korea; the company generally stated it did not consider losses probable in the matters described. The SEC and Department of Justice requested information concerning anti-corruption compliance in China; the company was cooperating and could not predict the outcome.
- Other risks include Member retention and conduct, legal challenges to the network-marketing model, product and advertising regulation, China licensing and regulatory interpretation, foreign exchange and Venezuela operating restrictions, reliance on third-party manufacturers, and share-price volatility. The filing also describes a putative class action filed in 2017; the company disputed the claims.
- Liquidity was supported by cash, operating cash flow and credit-facility access. The company reported compliance with debt covenants at year-end and no borrowings on its $150 million revolving facility. The $1.15 billion convertible notes mature August 2019, subject to conversion or earlier repurchase provisions.
Most important facts for investors to verify
- Whether Member activity and sales volumes recover, particularly in North America, and whether consent-order processes continue to affect U.S. sales or costs.
- The final tax effects of U.S. tax reform, including any revisions to the provisional tax charge and the recoverability of foreign tax credits.
- Debt service and refinancing needs, including the 2019 convertible-note maturity, variable-rate exposure and compliance with credit-facility covenants.
- Developments in tax/customs disputes and the China anti-corruption inquiry, and whether any resulting liability or operating restriction becomes probable or estimable.
- Cash deployment and capital allocation: share repurchases, remaining authorization, liquidity needs and the effect of buybacks on the company’s deficit equity position.
The auditor issued an unqualified opinion on the consolidated financial statements and concluded internal control over financial reporting was effective as of December 31, 2017.