Herbalife Ltd. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011; unaudited. Herbalife sells nutrition and personal-care products through about 2.5 million independent distributors across 78 countries. In China, sales use retail stores, sales representatives, and independent service providers.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $895.2 million | $688.4 million | $2,570.0 million | $1,995.9 million |
| Operating income | $151.3 million | $101.0 million | $427.9 million | $281.3 million |
| Net income | $108.0 million | $78.9 million | $307.2 million | $212.9 million |
| Diluted EPS | $0.87 | $0.63 | $2.44 | $1.69 |
- Sales rose 30.0% in Q3 and 28.8% year to date; local-currency growth was 24.1% and 22.8%, respectively. Net income increased 36.9% and 44.3%.
- Q3 gross, operating, and net margins were 80.4%, 16.9%, and 12.1%, compared with 80.6%, 14.7%, and 11.5%. Nine-month margins were 80.2%, 16.6%, and 11.9%, versus 79.4%, 14.1%, and 10.7%.
- Operating cash flow was $393.6 million for nine months, versus $271.1 million. Capital expenditures were $61.5 million. Cash ended at $261.5 million, up from $190.6 million at year-end 2010.
- Working capital was $183.3 million, compared with $124.8 million at December 31, 2010. Total debt was $222.1 million, including $220.0 million drawn on a new revolving facility; $477.8 million of its $700 million capacity remained undrawn. The company reported covenant compliance.
- Cash used for share repurchases was $268.8 million and dividends paid were $62.2 million in the first nine months. The repurchase authorization had about $527.9 million remaining.
Changes and management commentary
- Management attributed growth chiefly to daily-consumption distributor methods, stronger distributor engagement and recruitment, and marketing activities. Worldwide Volume Points rose 23.4% in Q3; average active sales leaders increased 23.6%.
- Growth was broad-based, particularly in Asia Pacific, Mexico, and South and Central America. Taiwan sales declined 21.3% in Q3, which management linked to club closures following actions addressing distributor training practices.
- Q3 gross margin declined 20 basis points, mainly from country mix and inventory write-downs, partly offset by sourcing savings. Nine-month gross margin improved 80 basis points, largely reflecting comparison with Venezuela-related costs in 2010.
- The effective tax rate rose to 28.5% in Q3 and 27.6% year to date, versus 20.1% and 22.6%. Management cited country mix and prior-year tax benefits. The 2011 results include a $1.3 million pretax loss on a Venezuelan currency conversion and a $0.9 million pretax financing-cost write-off.
Outlook, risks, and contingencies
- No earnings or revenue guidance is provided. Management expected 2011 capital expenditures of approximately $85–$90 million and said operating cash, cash on hand, and available facility borrowings should cover working capital, investment, and foreseeable liquidity needs.
- Management highlighted foreign-exchange exposure and Venezuela’s restricted access to U.S. dollars and uncertain repatriation. Venezuela represented less than 2% of consolidated nine-month sales; the company continued to consolidate the business.
- A Mexican tax assessment of approximately $84 million was nullified on administrative appeal, but authorities could reissue it. The company recorded no provision and said it could not reasonably estimate a possible loss range. Other tax audits and uncertain tax positions remain; unrecognized tax benefits, interest, and penalties were $32.4 million, $5.6 million, and $1.3 million.
- Other disclosed risks include regulatory scrutiny of direct selling and product claims, distributor recruitment and retention, China licensing and regulatory requirements, product liability, currency and economic volatility, and litigation. The Belgian challenge to the legality of the company’s marketing program remained pending; the adidas dispute over use of the Tri-Leaf mark also remained unresolved.
- The company changed its accounting method for share-based compensation tax benefits to the with-and-without method and applied it to periods presented. A two-for-one share split was also reflected retrospectively. Management reported effective disclosure controls and no material third-quarter changes in internal control over financial reporting.
Important facts for investors to verify
- Whether sales and distributor engagement growth can be sustained, and whether reported growth translates into recurring cash generation.
- Progress in Taiwan and China, including the effect of club closures, China’s operating model changes, and additional direct-selling licenses.
- Developments in Venezuela’s currency access, cash repatriation, and accounting treatment.
- Outcomes of the Mexican and other tax matters, the Belgian marketing-program case, and the adidas dispute.
- Whether substantial buybacks and dividends remain supportable alongside capital spending, debt obligations, and credit-facility covenants.