Herbalife Ltd. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; the filing also reports fourth-quarter results. Herbalife is a global nutrition company selling primarily through independent Members in 93 countries. Its approximately 4.0 million Members distribute products, with weight management representing 64.1% of 2015 net sales; Formula 1 was about 30% of sales.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $4.469 billion | $4.959 billion |
| Gross profit / gross margin | $3.613 billion / 80.9% | $3.976 billion / 80.2% |
| Operating income / margin | $583.6 million / 13.1% | $513.5 million / 10.3% |
| Net income | $339.1 million | $308.7 million |
| Diluted EPS | $3.97 | $3.40 |
| Operating cash flow | $628.7 million | $511.4 million |
| Cash and cash equivalents, year-end | $889.8 million | $645.4 million |
| Total debt, year-end | $1.622 billion | $1.792 billion |
| Working capital, year-end | $541.9 million | $518.6 million |
Capital expenditures were $79.1 million (including accrued amounts); operating cash flow less that figure was approximately $549.6 million. Shareholders’ deficit was $53.5 million at year-end. The $1.15 billion convertible notes mature in August 2019 and bear 2.00% stated interest; the secured credit facility had $639.7 million outstanding, including a $229.7 million term loan due March 9, 2016. The revolving facility’s available capacity was $425 million, but borrowing and repurchase flexibility was constrained by covenants and a minimum $200 million cash requirement.
Changes versus prior period
- Net sales fell 9.9% in U.S. dollars, while local-currency sales increased 4.7% including Venezuela’s remeasurement impact. The strong U.S. dollar reduced reported sales by about 14.6%; Volume Points fell 2.0%, partly offset by price increases and favorable country mix.
- Net income increased 9.8%, despite lower sales. Lower SG&A, including lower Venezuela-related foreign-exchange losses and lower impairment charges, more than offset weaker contribution margin, higher China service fees, increased interest expense and higher taxes. The 2014 comparison included $229 million of specified pre-tax Venezuela-related losses and other charges.
- China sales increased 27.4% to $846.2 million; the Primary Reporting Segment declined 15.6% to $3.623 billion. Regional results were uneven: EMEA volume grew, while declines in South Korea, Mexico, and South and Central America weighed on results.
- Gross margin improved 70 basis points to 80.9%; royalty overrides declined to 28.0% of sales from 29.7%. SG&A was $1.778 billion versus $1.991 billion, and net interest expense rose to $94.9 million from $79.2 million.
- Fourth-quarter 2015 sales were $1.098 billion, net income $84.5 million, and diluted EPS $0.98, versus $1.134 billion, $103.3 million, and $1.21 in fourth-quarter 2014. The 2014 quarter included a $16.6 million pre-tax favorable employee-bonus accrual adjustment.
Outlook, commentary, risks and unusual items
- Management provided no quantified revenue or earnings guidance in the supplied filing text. It estimated 2016 capital expenditures of approximately $105 million to $135 million and expected cash, operating cash flow, available borrowings and capital-market access to meet foreseeable needs.
- Management attributed recent volume softness partly to Members adapting to Marketing Plan changes intended to improve sales-leader training, retention and business sustainability. Worldwide average active sales leaders rose 5.0% in 2015, while worldwide Volume Points declined 2.0%.
- Venezuela remained exposed to currency controls, inflation, import constraints and potential further devaluation. The company used the SIMADI rate of 198.7 bolivars per U.S. dollar at year-end and recognized $32.9 million of Venezuela remeasurement losses in 2015. Local contract manufacturing was expected to begin in the first half of 2016; further devaluation could cause additional losses.
- The FTC’s confidential investigation of the company’s marketing and business-opportunity practices remained unresolved; the company was discussing a potential resolution and could not estimate any loss range. The company also disclosed inquiries from the SEC, DOJ and other authorities. The 2015 statements include $21.4 million of pre-tax regulatory-inquiry expenses and $18.7 million of expenses responding to a short seller’s allegations. Management said these matters could take years to resolve.
- The Bostick consumer case settlement was finally approved and became final in 2015; it provided for a $15 million fund and up to $2.5 million of product returns, with amounts reserved. A separate federal securities class action was dismissed with prejudice in November 2015, with no appeal filed. Multiple tax and customs disputes remained, including Mexico VAT matters, Brazil assessments and a Korea customs assessment; management generally stated that losses were not probable, but some exposure could not be reasonably estimated.
- The company paid no dividends and made no open-market share repurchases in 2015. It reported effective disclosure controls and internal control over financial reporting; PwC issued an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Progress and potential financial or operational consequences of the FTC inquiry and other governmental investigations, including any settlement terms or required changes to the Member program.
- Whether sales volumes and Member productivity stabilize after Marketing Plan changes, particularly in South Korea, Mexico and South and Central America, and whether China’s growth continues.
- Venezuela’s exchange-rate access, ability to repatriate or use Bolivar cash, local manufacturing progress and exposure to additional devaluation.
- Refinancing or repayment of the $229.7 million term loan due March 2016, subsequent credit-facility terms, covenant headroom and liquidity available for debt service.
- Outcomes of tax, VAT, customs and Member-related assessments, and whether reserves and recoverability of tax-related assets remain adequate.
- Reliance on Formula 1, which accounted for about 30% of net sales, and on independent Members for substantially all sales.