Herbalife Ltd. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Herbalife sells nutrition products through independent Members across 95 markets; China is reported separately from its aggregated Primary Reporting Segment. Unaudited results are not necessarily indicative of full-year performance.
Financial performance and liquidity
- Revenue: Net sales were $1,264.3 million, up 1.0% year over year; sales in local currency increased 2.4%. Price increases contributed 6.6%, offset by lower sales volume, unfavorable foreign exchange, and mix. Worldwide Volume Points fell 3.6%.
- Profitability: Gross profit was $979.3 million, with gross margin of 77.5% versus 76.2%. Operating income was $71.9 million versus $70.5 million; operating margin was 5.7% versus 5.6%. Net income declined to $24.3 million from $29.3 million; diluted EPS was $0.24 versus $0.29. Net margin was 1.9% versus 2.3%.
- Costs and taxes: SG&A rose to $492.2 million from $475.9 million, or 38.9% of sales versus 38.1%. Net interest expense decreased to $37.9 million from $39.4 million. The effective tax rate rose to 28.5% from 5.8%.
- Cash flow: Operating cash flow was $13.8 million, down from $46.2 million. Investing cash outflow was $32.8 million, including $32.9 million of property and equipment purchases. Financing cash outflow was $158.2 million, including repayment of $197.0 million principal on the matured 2024 convertible notes. Cash and cash equivalents ended at $398.3 million, down from $575.2 million at year-end.
- Debt and liquidity: Debt carrying value totaled $2,407.9 million at March 31; cash was $398.3 million. Working capital was $281.5 million, compared with $121.7 million at year-end, partly reflecting repayment of the 2024 notes and lower current debt classification. The company reported compliance with its credit-facility covenants at March 31. Shareholders’ deficit was $1,036.6 million.
Material changes and business trends
- Primary Reporting Segment sales increased 0.4%; China sales increased 11.1%. By region, sales fell 10.6% in North America and increased 4.2% in Latin America, 3.7% in EMEA, 4.3% in Asia Pacific, and 11.1% in China.
- Volume Points declined 16.0% in North America, 5.9% in Latin America, and 5.0% in EMEA, while increasing 4.6% in Asia Pacific and 12.8% in China. Management cited ongoing pressure from inflation and economic conditions, alongside price increases and foreign-exchange effects.
- Net income included $16.7 million of restructuring expense, $11.0 million of Digital Technology Program expense, and $5.9 million of Transformation Program expense, all pre-tax. Q1 2023 included $8.9 million of China government grant income; none was recognized in Q1 2024.
Outlook, financing, and risks
- Capital investment: Management expects 2024 capital expenditures of approximately $120–$150 million. It expects $30–$35 million of non-cash amortization in 2024 related to Herbalife One, a multiyear digital technology program.
- Restructuring and savings: The ongoing Transformation Program is expected to deliver at least $115 million in annual savings in 2024 and thereafter, with total pre-tax costs of at least $95 million. The new Restructuring Program is expected to cost at least $60 million through 2024 and deliver at least $80 million in annual savings beginning in 2025; management expects about $40 million of savings in 2024. Estimates are preliminary.
- April 2024 refinancing: Subsequent to quarter-end, Herbalife issued $800 million of 12.25% senior secured notes due 2029 and replaced its 2018 credit facility with a $400 million term loan B and a $400 million revolving facility. Proceeds were used to repay the old credit facility and reduce 2025 notes; after transactions, $262.3 million of 2025 notes remained outstanding. Management expects refinancing to increase the weighted-average interest rate and interest expense in 2024. The new facility includes leverage, fixed-charge coverage, and minimum-liquidity covenants, including a $200 million minimum liquidity requirement.
- Contingencies: The filing describes unresolved tax assessments and disputes in Mexico, Brazil, and India, among other matters; the company generally states that losses are not probable and has not accrued amounts for the cited assessments. Mexico VAT-related assets totaled $23.1 million, which management believes recoverable. The company also disclosed ongoing litigation with a former technology vendor; it could not reasonably estimate a potential loss and does not believe one is probable.
- Other risks and controls: Management cited inflation, currency fluctuations, geopolitical conflicts, Member recruitment and retention, regulation, and execution of technology and restructuring initiatives as risks. The DOJ dismissed its deferred-prosecution action with prejudice in February 2024 after determining the company complied with its agreement. Management concluded disclosure controls were effective at March 31, 2024.
Important facts for investors to verify
- Whether the post-quarter refinancing and high-cost 12.25% secured notes materially increase ongoing interest expense and affect covenant headroom and liquidity.
- Whether revenue growth can be sustained if volume declines continue, particularly in North America, Latin America, and EMEA, and whether price increases affect demand.
- Whether management achieves projected savings from the Transformation and Restructuring Programs, and whether implementation costs exceed estimates.
- Progress and total cost of Herbalife One, including the expected 2024 capital spending and amortization.
- Developments in tax assessments and litigation, and the timing and recoverability of Mexico VAT assets.