Herbalife Ltd. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Financial statements are unaudited. Herbalife sells nutrition and related products through independent Members in 95 markets; China uses a distinct service-provider model.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $1,281.3m | $1,295.1m | $3,847.4m | $4,023.6m |
| Gross profit | $978.1m | $1,010.0m | $2,944.0m | $3,115.6m |
| Operating income | $106.7m | $147.4m | $300.6m | $456.3m |
| Net income | $42.8m | $82.2m | $132.0m | $266.9m |
| Diluted EPS | $0.43 | $0.83 | $1.32 | $2.68 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $261.4m | $298.9m |
- Q3 sales fell 1.1% (1.5% in local currency); year-to-date sales fell 4.4% (2.8% in local currency). Price increases partly offset lower volume: Volume Points declined 5.6% in Q3 and 11.0% year to date.
- Gross margin declined to 76.3% in Q3 from 78.0%; year-to-date it was 76.5% versus 77.4%. Management cited higher raw-material, manufacturing-labor and allocated overhead costs, lower production volume, foreign exchange and mix.
- Q3 net income decreased 47.9%; nine-month net income decreased 50.5%. Interest expense, net rose to $38.5m in Q3 and $116.3m year to date, reflecting higher average borrowing rates. The 2018 Credit Facility weighted-average rate was 7.48% at quarter-end versus 4.08% at December 2022.
- Year-to-date capital expenditures were $99.8m. Cash and cash equivalents were $495.7m at September 30, 2023. Working capital was $180.7m, down from $379.5m at December 31, 2022, partly because $197.0m principal on the 2024 convertible notes was classified as current.
Debt, liquidity and capital allocation
Total debt carrying value was $2,551.6m, comprising $232.6m current and $2,319.0m long-term; scheduled principal payments include $234.7m in 2024 and $1,451.9m in 2025. The 2025 maturity schedule includes the $600m senior notes and substantial credit-facility obligations. The company had no revolving-facility borrowings outstanding at quarter-end and reported compliance with debt covenants. It stated that operating cash flow, cash, available credit and capital-market access should cover foreseeable requirements. Year-to-date financing included $64.3m repayment of convertible notes; open-market share repurchases were zero, although $9.7m of shares were withheld for taxes. No cash dividends have been paid since 2014.
Material changes and unusual items
- Q3 geographic sales were weaker in North America (-12.5%) and China (-19.1%); Latin America (+13.0%), EMEA (+5.4%) and Asia Pacific (+2.2%) increased in reported dollars. India grew, while China continued to contract.
- Q3 results included $12.1m of Digital Technology Program expense, $8.6m for a Korea customs-duty settlement, $4.6m of Transformation Program costs, and a $1.0m gain on extinguishment of 2024 notes. The Korea settlement was reached in October; the filing records the expense in Q3 and says approximately $30m of previously paid assessments was refunded in October.
- Nine-month results included $42.0m of Transformation Program costs and $22.6m of Digital Technology Program expense. The company repurchased $65.5m principal of 2024 convertible notes in August, leaving $197.0m principal outstanding, due March 2024.
- Operating cash flow declined year over year, despite favorable working-capital movements, principally because of lower earnings. Inventory fell to $496.8m from $580.7m at year-end.
Outlook, management commentary and risks
- Management expects 2023 capital expenditures of approximately $120m–$160m, including investment in Herbalife One, a multi-year, $400m digital technology program. Capital spending is expected to remain elevated in 2023–2025.
- The Transformation Program is expected to be completed in 2024, with at least $90m of annual savings, including at least $60m in 2023; expected total pre-tax costs are at least $75m. These are estimates and actual outcomes may differ.
- Management expects gross margin to remain under pressure in the remainder of 2023, particularly from raw-material and manufacturing-labor costs. No clear full-year revenue or EPS guidance is provided in the filing text.
- Key business risks include inflation, currency movements, geopolitical uncertainty, Member recruitment and retention, supply costs, and regulatory and compliance requirements. Mexico import-permit delays could affect inventory and sales. Russia shipments were suspended and inventory was depleted at quarter-end.
- Contingencies include disputed tax assessments in Mexico, Brazil, India and other jurisdictions; the company generally states it does not consider losses probable, but some outcomes cannot be reasonably estimated. It reported $16.3m in Mexican VAT-related assets and $72.0m of unrecognized tax benefits including interest and penalties. The FTC Consent Order remains an ongoing compliance obligation. The DOJ deferred-prosecution agreement’s term ended August 28, 2023; the company believes it complied, and dismissal depends on DOJ’s determination.
Investor verification priorities
- Track volume trends, especially North America and China, and whether pricing can continue to offset lower sales volumes without further weakening demand.
- Monitor gross-margin recovery, cost inflation, production utilization and the realized savings and remaining costs of the Transformation Program.
- Assess liquidity and refinancing capacity ahead of the $197m 2024 convertible-note maturity and substantial 2025 debt maturities, including the effects of variable rates and covenant terms.
- Verify progress and spending on Herbalife One, forecast capital expenditures, and any resulting operating benefits.
- Follow Mexico import permits, Korea settlement refunds, disputed tax cases and FTC/DOJ compliance developments.