Herbalife Nutrition Ltd. — Q2 2021 Form 10-Q
Business context and period. Herbalife sells nutrition and personal-care products through independent Members in 95 markets; in China it operates under a modified distribution model. This unaudited report covers the quarter and six months ended June 30, 2021, compared with the corresponding 2020 periods.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $1,552.3 million | $1,346.9 million | $3,053.9 million | $2,609.3 million |
| Operating income | $237.9 million | $189.7 million | $460.4 million | $285.3 million |
| Net income | $144.2 million | $115.1 million | $291.6 million | $160.7 million |
| Diluted EPS | $1.31 | $0.82 | $2.63 | $1.15 |
| Operating cash flow | Not separately provided | Not separately provided | $286.9 million | $385.0 million |
- Q2 sales rose 15.2% and first-half sales rose 17.0%; in local currency, growth was 10.5% and 14.1%, respectively. Worldwide Volume Points increased 9.5% in Q2 and 13.0% for the first half.
- Q2 gross margin was 79.2%, down 56 basis points year over year; first-half gross margin was 79.1%, down 100 basis points. Q2 operating margin was 15.3%, versus 14.1%; first-half operating margin was 15.1%, versus 10.9%.
- Q2 net income increased 25.3%; first-half net income increased 81.5%. First-half comparison benefited from the prior-year $83.0 million FCPA-related expense, while 2021 included a $24.6 million debt-extinguishment loss.
- First-half operating cash flow fell by $98.1 million, primarily reflecting less favorable working-capital movements. Capital expenditures were $62.2 million. Management expects full-year 2021 capital expenditures of approximately $160–$200 million.
- Cash and cash equivalents were $837.5 million at June 30, down from $1,045.4 million at year-end 2020. Working capital was $564.0 million, down from $648.5 million.
- Debt carrying value was $2,779.2 million, including $26.4 million current and $2,752.8 million long-term. Total liabilities were $4,257.9 million; shareholders’ deficit was $1,291.2 million. The company reported compliance with credit-facility covenants.
Material changes and drivers
- Sales growth was broad outside China: Q2 net sales rose 37.8% in Asia Pacific, 22.4% in EMEA, 23.2% in Mexico, and 23.3% in South and Central America; North America rose 6.6%. China fell 16.1% in Q2 and 13.6% for the first half, with lower Volume Points.
- Energy, Sports, and Fitness sales grew 44.6% in Q2; Weight Management grew 11.7% and Targeted Nutrition grew 18.6%.
- Q2 SG&A increased $25.1 million, including higher labor, events, and professional fees; first-half SG&A decreased $17.2 million, chiefly because 2020 included $83.0 million of China FCPA investigation expenses.
- Interest expense, net rose to $36.8 million in Q2 and $74.3 million for the first half, reflecting higher average borrowings. Effective tax rates declined to 18.3% in Q2 and 19.4% for the first half, from 28.5% and 30.6%, respectively.
- In May 2021, Herbalife issued $600 million of 4.875% notes due 2029 and used part of the proceeds to redeem all $400 million of 7.25% notes due 2026. The refinancing generated a $24.6 million extinguishment loss.
- Herbalife repurchased approximately 14.8 million shares for $719 million during the first half, including a $600 million purchase from Carl Icahn and affiliates. A new $1.5 billion repurchase authorization was approved in February; approximately $1.4 billion remained available at June 30.
Outlook, commentary, and risks
- No specific revenue or earnings guidance is provided. Management says cash on hand, operating cash flow, and available revolving credit are expected to meet foreseeable needs for at least the next 12 months; it also cautions that pandemic effects and period comparability remain uncertain.
- Management expects COVID-19-related expenses to continue. Pandemic restrictions have disrupted Member events, in-person selling, product access, and some supply-chain activities, although demand was at or above pre-pandemic levels in many markets.
- China sales remain pressured by lower training and sales meetings, pandemic conditions, and tighter eligibility requirements for independent service providers. Management describes these changes as intended to improve business consistency and sustainability.
- On July 30, 2021, after quarter-end, the credit facility was amended to increase Term Loan A borrowings and revolving capacity and reduce certain interest margins, with some pricing tied to leverage and sustainability targets.
- Material legal and compliance exposures include the FTC Consent Order and a DOJ deferred prosecution agreement with three-year compliance obligations arising from the China FCPA matter. The filing also describes contested tax assessments in Brazil and India and paid Korean customs assessments under appeal. The 2007 Mexican tax assessment was paid in Q2 and the case closed.
- Other notable exposures include foreign-currency movements, variable-rate debt and LIBOR transition, Member retention and conduct, product and network-marketing regulation, China operating and licensing risks, and possible tax or litigation outcomes. Management states that no material goodwill or long-lived-asset impairment was identified in the period.
Important facts for investors to verify
- Whether sales and Volume Point growth can continue after pandemic-affected comparison periods, particularly as China remains in decline.
- How cash conversion develops: first-half operating cash flow declined despite higher earnings, while inventory and other working-capital movements absorbed cash.
- Debt service, refinancing terms, covenant headroom, and the effects of the July 30 credit-facility amendment; also assess the large share-repurchase program relative to leverage and liquidity.
- Whether the FTC/DOJ compliance obligations and outstanding tax disputes create additional costs, restrictions, or losses beyond recorded amounts.
- Share-count and EPS effects of repurchases and the convertible notes; the filing reports substantially fewer weighted-average shares than in 2020 and explains that subsidiary-held shares are treated as treasury shares for U.S. GAAP.