Herbalife Ltd. — Form 10-K Summary
Period: Fiscal year ended December 31, 2011; filed February 21, 2012. The filing is an annual report, not a standalone fourth-quarter filing. Herbalife sells nutrition, weight-management, sports and personal-care products through independent distributors in 79 countries; China operates under a distinct sales model. The company reported approximately 2.7 million distributors, and about 80% of annual net sales came from outside the United States.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 | Change or context |
|---|---|---|---|
| Net sales | $3,454.5 million | $2,734.2 million | Up 26.3% reported; up 22.8% in local currency |
| Gross profit / margin | $2,774.5 million / 80.3% | $2,175.4 million / 79.6% | Margin up 0.7 percentage points |
| Operating income / margin | $562.3 million / 16.3% | $387.5 million / 14.2% | Margin up 2.1 percentage points |
| Net income / margin | $412.6 million / 11.9% | $299.2 million / 10.9% | Net income up 37.9% |
| Diluted EPS | $3.30 | $2.37 | Share amounts reflect the two-for-one split |
| Operating cash flow | $509.3 million | $389.1 million | Increased with higher operating income |
| Capital expenditures | $90.9 million | $68.1 million | Primarily systems, distribution and manufacturing investments |
| Cash and cash equivalents | $258.8 million | $190.6 million | At year end |
| Total debt | $203.6 million | $178.2 million | Year-end debt; $202.0 million under the revolving facility |
| Working capital | $220.1 million | $124.8 million | Positive; increased $95.3 million |
Fourth-quarter reference: Q4 2011 net sales were $884.6 million versus $738.4 million in Q4 2010; net income was $105.4 million versus $86.3 million; diluted EPS was $0.86 versus $0.69.
The company entered a $700 million, five-year senior secured revolving credit facility in March 2011, maturing in March 2016. It reported $492 million of undrawn capacity at year end, a 1.89% weighted-average borrowing rate, and compliance with its covenants. Dividends paid or declared totaled $85.5 million in 2011; share repurchases cost approximately $298.8 million. The board subsequently approved a $0.30 quarterly dividend in February 2012.
Material changes versus prior periods
- Growth was broad-based. FY 2011 net sales increased in every reported region; Asia Pacific excluding China rose 37.3%, South and Central America 42.0%, Mexico 30.8%, and North America 13.8%.
- Worldwide volume points rose 21.3%, and average active sales leaders increased 22.4%. Management attributed growth chiefly to daily-consumption distributor methods, increased distributor engagement and recruiting, and branding activity.
- All product categories grew. Weight management remained the largest at 62.5% of net sales; Formula 1 alone represented approximately 29%.
- Gross margin improved, while SG&A increased in dollars to $1,074.6 million but declined as a share of sales, from 32.5% to 31.1%. Royalty overrides remained 32.9% of net sales.
- The effective tax rate increased to 26.3% from 21.3%, partly reflecting the prior-year Venezuela-related tax benefit, an international tax audit settlement benefit in 2010, and changes in geographic income mix.
- Herbalife transitioned its China sales employees to sales officers and independent service providers in the third quarter of 2011, citing changes in Chinese labor laws.
Outlook, risks, contingencies and unusual items
- Management expected 2012 capital expenditures of approximately $110 million to $120 million, planned to open several new markets, and expected its Changsha, China botanical extraction facility to become operational during 2012. The filing provides no clear numerical revenue or earnings guidance.
- Management cited distributor recruitment, retention and productivity; expansion of daily-consumption methods; new products; and further penetration of existing markets as key business priorities. It said operating cash flow and available facility borrowings were expected to support working capital, planned capital spending and foreseeable liquidity needs.
- Belgium legal matter: A Brussels Commercial Court judgment in November 2011 found the Belgian subsidiary in violation of unfair-commercial-practices law concerning pyramid schemes. The company planned to appeal and was considering changes pending appeal. The judgment provided for penalties of EUR 5,000 per infringement, capped at EUR 250,000, after official notification and a two-month period.
- Venezuela: Currency controls and limited access to U.S. dollars constrain conversion and repatriation. The company used the SITME rate of 5.3 bolivars per U.S. dollar for remeasurement but cautioned that reported amounts, including cash, might not reflect realizable U.S. dollars. Alternative conversion mechanisms caused losses in 2011; further restrictions could affect supply, earnings or consolidation.
- Tax disputes: A Mexican tax assessment of approximately $82 million for 2005–2006 was nullified administratively, but the authority could reissue it; the company initiated litigation and said it could not reasonably estimate a potential loss. Separate Spanish and Brazilian distributor-related tax assessments remained under appeal. The filing also describes audits and proposed assessments in multiple jurisdictions.
- Other disclosed risks include product and advertising regulation, distributor conduct and turnover, product liability, foreign-exchange exposure, China licensing and regulatory uncertainty, supplier dependence, and competition. The filing reports a $10 million annual deductible on product-liability insurance and says the reasonably possible exposure on existing product-liability claims was not material.
- FY 2011 included a $0.9 million pre-tax write-off of deferred financing costs following refinancing. FY 2010 results included several Venezuela-related foreign-exchange and tax effects, including a $15.1 million unfavorable remeasurement impact and a $14.5 million favorable one-time tax impact.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded disclosure controls and internal controls were effective at December 31, 2011; no material fourth-quarter control changes were reported.
Important facts for investors to verify
- How much distributor activity represents verified retail sales to end consumers, and how sustainable the growth in volume points and active sales leaders is. The company notes that retail sales are not GAAP net sales and that it relies partly on distributor certifications for sales information.
- The status and financial or operational consequences of the Belgian appeal and any changes to the marketing plan or distributor practices.
- Whether Venezuela’s reported cash and assets can be converted or repatriated at the stated rates, and the effects of further currency restrictions.
- Developments in the Mexican, Spanish, Brazilian and other tax disputes, including any reassessments, settlements or cash requirements.
- Whether planned 2012 capital spending, supply-chain projects and China licensing expansion proceed as expected, and whether the $492 million reported undrawn credit capacity and covenant headroom remain available.
- The effect of distributor-related compensation, buybacks and repurchases on cash generation, and the basis for any future dividends.