Herbalife Nutrition Ltd. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise noted. Herbalife sells nutrition products through independent Members across six geographic regions. Financial figures are in U.S. dollars; amounts are in millions except per-share data.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $1,335.8 | $1,501.6 | Down 11.0% (down 7.8% in local currency) |
| Gross profit / margin | $1,028.7 / 77.0% | $1,187.3 / 79.1% | Margin down 206 basis points |
| Operating income / margin | $153.1 / 11.5% | $222.5 / 14.8% | Down 31.2% |
| Net income | $98.2 | $147.4 | Down 33.4% |
| Diluted EPS | $0.96 | $1.33 | Down 27.8% |
| Operating cash flow | $130.5 | $110.1 | Up $20.4 |
| Capital expenditures, including accrued | $40.3 | $27.3 | Up $13.0 |
- Worldwide Volume Points, management’s product-volume indicator, fell 7.0%. Sales declined across North America, South and Central America, EMEA, and China; Asia Pacific grew modestly, led by India.
- Gross margin pressure reflected unfavorable country mix, higher raw material, manufacturing labor and freight costs, lower production volume, and higher inventory write-downs. Price increases partially offset these pressures.
- SG&A declined $51.8 million to $454.9 million, mainly due to lower China service fees, labor and benefits, and Member event and promotion costs. China government grants contributed $13.1 million of other operating income, versus $15.9 million a year earlier.
- Cash and cash equivalents were $569.7 million at March 31, down from $601.5 million at year-end. Working capital was $339.5 million, down $11.9 million from December 31, 2021. Management said cash, operating cash flow, and revolving-credit access should meet foreseeable needs for at least 12 months.
- Carrying value of total debt was $2,815.9 million, including $29.4 million current debt; debt was $2,762.6 million at December 31. Shareholders’ deficit was $1,453.3 million. The company reported compliance with debt covenants and no required 2022 mandatory Term Loan B prepayment.
- Operating cash flow benefited from working-capital movements, including the timing of royalty-override payments; cash flow should not be viewed as reflecting earnings alone. Financing used $122.4 million, including $116.2 million of share repurchases. Q1 repurchases included 2.6 million shares for $101.7 million at an average $39.32 per share.
Material changes and notable items
- Sales fell $165.8 million year over year. Management attributed the decline primarily to lower volume, unfavorable currency translation and country mix, partly offset by price increases. Net income was lower mainly because contribution margin fell $118.4 million, partly offset by lower SG&A and taxes.
- China sales decreased 37.6% to $105.6 million and Volume Points fell 33.6%. Management cited pandemic constraints and changes to service-provider eligibility and business practices. A change in revenue recognition for certain China service providers also affected sales mix and reported net sales.
- India sales increased 32.5% to $152.0 million. Russia sales rose in local currency, partly reflecting purchases before a March price increase, but Herbalife suspended product shipments to Russia in response to geopolitical conflict; management expects sales there to decline if shipments do not resume.
- Adoption of ASU 2020-06 increased reported long-term debt by $59.1 million at January 1, 2022, reduced paid-in capital by $136.7 million and decreased accumulated deficit by $77.6 million. It also reduced non-cash interest expense on the 2024 convertible notes.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management expects 2022 gross margin to be pressured by raw materials, manufacturing labor and freight costs, and said it is planning further pricing actions amid inflation. COVID-19 effects and regional sales comparability remain uncertain.
- Management expects 2022 capital expenditures of approximately $175 million to $225 million. Phase one of the transformation program is expected to cost $25 million to $30 million through 2023, with $1.6 million recorded in Q1; it is expected to generate annual incremental savings of $10 million to $15 million, with full-year savings expected in 2024. The cost and timing of phase two are not yet estimable.
- COVID-19-related supply-chain costs, facility and event restrictions, and limits on face-to-face Member activity may continue to affect results. The company also identified inflation, currency movements, geopolitical conflict, product supply, Member retention, regulatory requirements and execution of its transformation program as risks.
- Tax and legal matters include $20.6 million of Mexico VAT-related assets that management believes are recoverable; contested tax assessments in Brazil, India and Korea; and a proposed $12.5 million settlement in the Rodgers class action, for which the company said it had reserved the amount. The company stated that losses were not probable for the majority of disclosed tax assessments.
- The FTC Consent Order continues to impose U.S. business and compliance requirements. The company also remains subject to three-year compliance self-reporting obligations under its 2020 DOJ deferred prosecution agreement and SEC resolution; failure to comply could materially harm results.
Most important facts for investors to verify
- Whether sales-volume trends, especially in China and North America, stabilize and whether India’s growth persists.
- Whether pricing can offset inflation and freight costs without further weakening demand or gross margin.
- Debt service and refinancing exposure, including the $550 million principal of 2024 convertible notes due in 2024 and the timing of scheduled debt maturities; the filing lists $1.6 billion of scheduled principal payments in 2025.
- Cash-flow sustainability after working-capital timing effects, planned capital spending, and continued share repurchases; also note that the company has not paid cash dividends since 2014.
- Progress on Russia shipments, China business changes, transformation costs and expected savings, and resolution of material tax and litigation matters.