Herbalife Nutrition Ltd. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Herbalife sells nutrition and personal-care products through independent Members; China is reported separately from the other geographic regions. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $1,392.7m | $1,552.3m | $2,728.5m | $3,053.9m |
| Gross profit | $1,076.9m | $1,229.1m | $2,105.6m | $2,416.4m |
| Operating income | $155.8m | $237.9m | $308.9m | $460.4m |
| Net income | $86.5m | $144.2m | $184.7m | $291.6m |
| Diluted EPS | $0.88 | $1.31 | $1.84 | $2.63 |
| Operating cash flow | — | $229.3m | $286.9m |
- Sales fell 10.3% in Q2 and 10.7% in the first half; in local currency, declines were 5.9% and 6.9%. Worldwide Volume Points declined 9.1% and 8.0%, respectively. Price increases partly offset lower volume; foreign exchange also reduced reported sales.
- Gross margin contracted to 77.3% in Q2 from 79.2%, and to 77.2% for the first half from 79.1%. Management cited higher raw-material, labor and freight costs, lower production volume, sales mix, and inventory write-downs; pricing partly offset these pressures.
- Operating margin was 11.2% in Q2 versus 15.3%; first-half margin was 11.3% versus 15.1%. Net margin was 6.2% and 6.8%, versus 9.3% and 9.5% in the comparable periods.
- Q2 revenue was especially weak in China, down 41.0%, and EMEA, down 21.4%; North America fell 16.5%. Asia Pacific grew 15.0%, led by India. First-half China sales declined 39.4%.
- First-half operating cash flow was $229.3m, down from $286.9m. Capital expenditures, including accrued expenditures, were $85.1m. Cash and cash equivalents were $581.4m at June 30, down from $601.5m at year-end; working capital was $375.7m.
Debt, liquidity and capital allocation
- Total debt carrying value was $2,810.2m, compared with $2,762.6m at December 31, 2021; long-term debt was $2,780.8m. Shareholders’ deficit was $1,415.4m.
- Debt includes $1,080.2m under the senior secured credit facility, $550m principal of 2.625% convertible notes due 2024, $600m principal of 7.875% notes due 2025, and $600m principal of 4.875% notes due 2029. The facility’s weighted-average rate rose to 2.87% from 2.62%; the company was in covenant compliance.
- Scheduled principal payments disclosed as of June 30 include $586.4m in 2024 and $1,600.7m in 2025. The filing says management expects cash, operating cash flow and borrowing access to meet foreseeable needs, including the next 12 months.
- Herbalife repurchased approximately 3.7m shares for $131.8m during the first half; total cash-flow-statement share repurchases were $146.5m. Remaining authorization was approximately $985.5m. The company has not paid cash dividends since 2014.
Changes, outlook and risks
- Net income declined 40.0% in Q2 and 36.7% in the first half. Lower contribution margin from weaker sales was the main pressure, partly offset by lower SG&A. Prior-year comparisons included a $24.6m loss on extinguishment of 2026 Notes; 2022 also benefited from lower noncash interest after adoption of a convertible-debt accounting standard.
- Management noted that pandemic-related restrictions and supply-chain disruption continued intermittently, alongside inflation and foreign-exchange volatility. A 10% price increase took effect in most markets in June 2022, with some markets expected to follow in Q3; management cautioned that pre-increase purchases could weigh on subsequent volumes. It expects gross margin to remain pressured in 2022 by raw materials, labor and freight costs. No full-year revenue or earnings guidance is provided in the filing text.
- Management forecasts 2022 capital expenditures of approximately $175m–$225m, including a digital technology program. It expects $200m–$250m of net incremental expenditures over three years for that program. Phase one of the transformation program is expected to cost $25m–$30m through 2023 and deliver $10m–$15m in annual incremental savings, with full-year savings expected in 2024; the scope and cost of phase two remain undetermined.
- Russia shipments were suspended amid the Ukraine conflict; Q2 included $5.4m of pretax costs related primarily to sales-center termination and related costs. Management cannot predict the full impact if shipments do not resume.
- Material uncertainties include COVID-19 effects, inflation and supply constraints, Member recruitment and retention, China’s sales and operating changes, currency movements, and compliance with the FTC consent order and DOJ deferred prosecution agreement. The company disclosed ongoing tax disputes in multiple jurisdictions and a proposed $12.5m class-action settlement, subject to court approval; it had reserved the settlement amount. It reported $17.2m of Mexico VAT-related assets and stated it did not believe a loss was probable. Management reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether sales-volume declines—particularly in China, North America and EMEA—stabilize, and whether recent price increases sustain revenue without further reducing demand.
- How much inflation, freight, manufacturing under-utilization and foreign exchange continue to affect gross margin and cash generation.
- Debt maturities, variable-rate exposure, covenant headroom and refinancing capacity, especially the disclosed 2024–2025 principal-payment schedule.
- Whether forecast capital spending and transformation costs translate into the stated savings, and how share repurchases affect liquidity and leverage.
- Developments in Russia, China, tax assessments, the proposed class-action settlement, and ongoing FTC/DOJ compliance obligations.