Herbalife Ltd. — FY2010 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2010; filed February 22, 2011. This is an annual report, not a standalone Q4 filing. The filing also presents fourth-quarter results.
Business context
Herbalife is a Cayman Islands holding company that sells nutrition, weight-management, fitness and personal-care products through a global network-marketing business. It operated in 74 countries with approximately 2.1 million distributors at year-end. China uses a distinct model involving company-operated retail stores, sales personnel and licensed business providers. Weight management accounted for 62.1% of FY2010 net sales; Formula 1 represented approximately 28%.
Financial performance and liquidity
Amounts below are in millions of U.S. dollars, except per-share data and percentages.
| Metric | FY2010 | FY2009 | Change / context |
|---|---|---|---|
| Net sales | $2,734.2 | $2,324.6 | Up 17.6%; up 17.4% in local currency |
| Gross profit / margin | $2,175.4 / 79.6% | $1,831.4 / 78.8% | Margin up 0.8 percentage points |
| Operating income / margin | $387.5 / 14.2% | $296.0 / 12.7% | Higher operating income and margin |
| Net income | $290.5 | $203.3 | Up 42.9% |
| Diluted EPS | $4.67 | $3.22 | Up from prior year |
| Operating cash flow | $380.4 | $285.1 | Up $95.3 |
| Capital expenditures | $68.1 | $60.1 | Management expects $80–$90 in 2011 |
| Cash and cash equivalents | $190.6 | $150.8 | At December 31 |
| Working capital | $124.8 | $83.5 | Positive at year-end |
| Total debt | $178.2 | $250.3 | At December 31; $219.0 of revolving capacity remained available |
FY2010 gross-margin improvement reflected currency effects and supply-chain savings, partly offset by country mix and Venezuela-related currency effects. SG&A was $887.7 million, or 32.5% of net sales, versus $773.9 million, or 33.3%, in 2009. The effective tax rate fell to 23.6% from 30.1%; 2010 included nonrecurring tax benefits.
Fourth quarter: Net sales were $738.4 million versus $630.9 million in Q4 2009; net income was $81.0 million versus $55.7 million; diluted EPS was $1.31 versus $0.88. Q4 gross profit was $589.8 million.
Material changes versus comparable periods
- Growth was broad, led by Asia Pacific excluding China, where sales rose 34.2%, and Mexico, up 27.0%. Asia Pacific volume points rose 26.8%; global volume points increased 13.9%.
- North America sales increased 16.1%; China increased 21.1%. South and Central America sales rose 6.4% in reported dollars, while local-currency sales rose 18.5%.
- Venezuela sales fell 51.7% in reported dollars, largely reflecting currency conversion effects; local-currency sales increased 29.1%. Venezuela became a highly inflationary economy for accounting purposes effective January 1, 2010.
- Asia Pacific excluding China became the largest region by sales, at $683.5 million. Outer Nutrition sales were approximately flat year over year, while other major product categories grew.
- Total debt declined by $72.2 million. The company repurchased approximately 2.9 million shares for $150.1 million and paid or declared $53.7 million in dividends during 2010.
Outlook, risks and unusual items
- Management expected 2011 SG&A to rise in absolute dollars, citing salaries and benefits, China sales-related costs, depreciation and distributor events and promotions. It forecast $80–$90 million in 2011 capital expenditures and expected to refinance its credit facility in the first half of 2011. The filing provides no specific revenue or earnings guidance.
- Management said operating cash flow and available revolving borrowings were expected to fund operations, capital expenditures and foreseeable liquidity needs for the next 12 months. Credit-facility covenants restrict certain debt, dividends, repurchases and other actions; Herbalife reported covenant compliance at year-end.
- Venezuela’s currency restrictions and exchange-rate uncertainty affected reported results and the realizability of local cash. FY2010 included a $15.1 million unfavorable remeasurement charge, $12.7 million of unfavorable costs from earlier imports, and favorable currency and tax items, including a $14.5 million tax benefit.
- Herbalife was contesting a Mexican tax assessment of approximately $93 million, principally relating to VAT on 2005–2006 imports. It recorded no provision because management did not consider a loss probable and said a possible loss range could not be reasonably estimated. Other tax audits and transfer-pricing disputes also remained unresolved.
- A Belgian consumer-protection lawsuit alleged unlawful pyramid selling; the company said it had meritorious defenses. Product-liability claims were described as not material to date, with a $10 million annual insurance deductible. Regulatory exposure includes product claims, dietary-supplement rules, direct-selling regulations and distributor conduct.
- Other key business risks include distributor recruitment and retention, reliance on Formula 1, foreign-exchange exposure, supplier and product-quality risks, China licensing and regulatory uncertainty, and competition. The company noted approximately 49% of sales leaders requalified for the latest 12-month period ending January 2011.
- Subsequent events included a proposed two-for-one share split subject to shareholder approval, a $0.25-per-share quarterly dividend, and a February 2011 Venezuela bond conversion expected to produce an approximately $1.3 million pretax loss in Q1 2011.
KPMG issued an unqualified opinion on the consolidated financial statements and concluded internal control over financial reporting was effective as of December 31, 2010.
Important facts for investors to verify
- Whether sales and cash generation remain strong after separating organic/local-currency growth from foreign-exchange effects, particularly in Venezuela.
- The status, potential financial exposure and cash or bonding requirements associated with the approximately $93 million Mexican tax assessment and other tax audits.
- Progress on the planned credit-facility refinancing, covenant headroom, debt maturities and the funding of dividends and share repurchases.
- Distributor retention and productivity trends, and whether growth from daily-consumption methods and newer markets is sustainable.
- Whether product, direct-selling and China regulatory developments or supply-chain quality issues could affect product availability, claims or market access.