Herbalife Nutrition Ltd. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited consolidated results. Amounts are in U.S. dollars; financial amounts are in millions except per-share data.
Business context
Herbalife sells nutrition products through independent Members in 95 markets. China is reported separately from the aggregated Primary Reporting Segment. During Q3, the company combined Mexico and South and Central America into a Latin America region; this did not change its two reportable segments.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $1,295.1 | $1,430.9 | $4,023.6 | $4,484.8 |
| Gross profit | $1,010.0 | $1,125.7 | $3,115.6 | $3,542.1 |
| Operating income | $147.4 | $189.4 | $456.3 | $649.8 |
| Net income | $82.2 | $117.4 | $266.9 | $409.0 |
| Diluted EPS | $0.83 | $1.09 | $2.68 | $3.73 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $298.9 | $374.9 |
- Q3 sales fell 9.5% (3.5% in local currency); nine-month sales fell 10.3% (5.8% in local currency). Volume Points declined 10.7% in Q3 and 8.9% year to date. Price increases partly offset lower volume, foreign-exchange headwinds and unfavorable sales mix.
- Q3 gross margin was 78.0%, versus 78.7%; operating margin was 11.4%, versus 13.2%; net margin was 6.3%, versus 8.2%. Nine-month gross margin was 77.4%, versus 79.0%; operating margin was 11.3%, versus 14.5%; net margin was 6.6%, versus 9.1%.
- Q3 net income decreased 30.0%; nine-month net income decreased 34.7%. Lower contribution margin, primarily from reduced sales, was the main pressure. Lower SG&A partly offset the declines. Nine-month 2021 results also included a $24.6 million debt-extinguishment loss.
- Nine-month operating cash flow decreased to $298.9 million from $374.9 million. Capital expenditures, including accrued amounts, were $120.0 million, versus $102.1 million.
- Cash and cash equivalents were $532.5 million at September 30, down from $601.5 million at year-end 2021. Working capital was $398.2 million, up from $351.4 million.
Debt, liquidity and capital allocation
- Total debt carrying value was $2,754.5 million, including $29.5 million current debt; long-term debt was $2,725.0 million. Cash less debt was approximately $2.22 billion of net debt. The company reported compliance with credit-facility covenants.
- The weighted-average rate on the senior secured credit facility rose to 3.46% from 2.62% at year-end 2021. Nine-month net interest expense was $95.9 million, down from $112.0 million, largely reflecting lower non-cash interest expense after adoption of new convertible-debt accounting.
- Scheduled principal payments disclosed at quarter-end include $586.5 million in 2024 and $1,550.7 million in 2025. These maturities and refinancing capacity merit attention.
- The company repurchased 3.7 million shares for $131.8 million in open-market purchases during the first nine months; total cash-flow statement share repurchases were $146.6 million, including shares withheld for employee taxes. No shares were repurchased in Q3. Remaining authorization was approximately $985.5 million. No cash dividends have been paid since 2014.
Material changes and operating trends
- Sales decreased across most regions. Q3 declines were North America 10.5%, Latin America 9.2%, EMEA 23.1% and China 28.2%; Asia Pacific grew 9.7%, with India a notable growth market. EMEA also faced adverse currency translation.
- China’s nine-month sales fell 35.9%. Management attributed weakness to pandemic-related disruption and business-model changes, as well as lower volume; a change in accounting treatment for certain service providers also affected reported sales mix.
- Q3 selling, general and administrative expenses decreased by $38.1 million year over year, including lower China service fees and employee costs, partly offset by higher Member event and promotion costs. As a share of sales, SG&A increased to 34.6% from 34.0%.
- Inventory write-downs were $29.2 million for the first nine months, versus $16.9 million. Inventory stood at $537.0 million, down from $575.7 million at year-end.
Outlook, commentary and risks
- Management expects cash on hand, operating cash flow and available revolving-credit capacity to meet foreseeable needs for at least the next 12 months. It forecast full-year 2022 capital expenditures of approximately $160 million to $200 million.
- The company expects gross margin pressure into the remainder of 2022 and 2023, principally from raw materials, manufacturing labor and freight costs. It implemented price increases in most markets during 2022 and said it was assessing further pricing actions.
- A digital technology program is expected to involve approximately $400 million of spending; management estimated $200 million to $250 million of net incremental expenditures over the next three years after reallocating expected spending. Phase one of the Transformation Program is expected to incur $25 million to $30 million of pre-tax expenses through 2023 and generate $10 million to $15 million in annual incremental savings, with full-year savings expected in 2024. The second phase remains under assessment.
- Management cited inflation, foreign-exchange movements, pandemic-related disruption, supply-chain and freight costs, lower Member recruiting or retention in some regions, China business changes, and the Russia-Ukraine conflict as uncertainties. It cannot predict the duration or magnitude of these effects.
- Contingencies include tax disputes in Brazil and India, delayed Mexico VAT refunds ($16.4 million of related assets), and a proposed $12.5 million class-action settlement subject to court approval. In October 2022, after the quarter-end, the company received a $24.6 million Korean customs-tax refund following nullification of an assessment; the tax authority may still issue a new assessment for that period.
- The company remains subject to the FTC Consent Order and a three-year DOJ deferred prosecution agreement with compliance reporting obligations. It cautioned that noncompliance or further government action could materially affect results. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether sales-volume and Member trends stabilize, particularly in North America, EMEA and China, and whether India-led Asia Pacific growth continues.
- Whether pricing offsets inflation and currency headwinds without further weakening volume or contribution margin.
- Debt maturities, variable-rate exposure, covenant headroom and the company’s ability to refinance or repay upcoming principal.
- Actual spending, savings and execution progress for the digital technology and Transformation Programs.
- Developments in tax disputes, the proposed class-action settlement, FTC/DOJ compliance obligations and the potential for additional assessments or costs.