Herbalife Ltd. — Q2 2023 Form 10-Q
Business context and reporting period. Herbalife sells nutrition and wellness products through independent Members in 95 markets. This unaudited filing covers the quarter and six months ended June 30, 2023, compared with the same 2022 periods.
Financial performance and liquidity
| Metric | Q2 2023 | Six months 2023 |
|---|---|---|
| Net sales | $1,314.0 million, down 5.7% | $2,566.1 million, down 6.0% |
| Gross profit / margin | $1,012.4 million / 77.0% | $1,965.9 million / 76.6% |
| Operating income / margin | $123.4 million / 9.4% | $193.9 million / 7.6% |
| Net income | $59.9 million, down 30.8%; diluted EPS $0.60 | $89.2 million, down 51.7%; diluted EPS $0.89 |
| Interest expense, net | $38.4 million | $77.8 million |
| Operating cash flow | Not presented for quarter | $181.8 million, versus $229.3 million |
- For the six months, cash purchases of property and equipment were $68.6 million; management reported capital expenditures, including accrued amounts, of $64.1 million.
- At June 30, cash and cash equivalents were $526.6 million; total debt carrying value was $2.62 billion. Working capital was $130.6 million, down from $379.5 million at year-end 2022. The company reported $547.3 million of cash, cash equivalents and restricted cash in its cash-flow statement.
- Debt included $262.5 million principal of 2.625% convertible notes due March 2024, classified as current, and $600 million principal of 7.875% notes due September 2025. Scheduled principal payments were $300.1 million in 2024 and $1.45 billion in 2025. The 2018 Credit Facility had no revolver borrowings at quarter-end; its weighted-average borrowing rate was 7.21%, versus 4.08% at December 31, 2022.
- The company was in compliance with debt covenants. Its second-quarter credit amendments increased the leverage-ratio covenant and transitioned the facility from LIBOR to SOFR.
Changes versus the prior comparable periods
- Worldwide Volume Points, a company-defined sales-volume measure, fell 12.6% in Q2 and 13.5% in the first half. Price increases partly offset lower volume: Q2 net sales were down 5.7% in reported dollars and 4.2% in local currency.
- Q2 gross margin declined 27 basis points year over year; first-half gross margin fell 56 basis points. Management cited higher raw-material and manufacturing-labor costs, lower production volume, foreign exchange and sales mix, partly offset by pricing.
- Q2 net income fell $26.6 million, primarily from lower contribution margin and higher net interest expense, partly offset by lower taxes and SG&A. First-half net income fell $95.5 million, reflecting lower contribution margin, higher interest expense and higher SG&A, partly offset by lower taxes.
- Q2 sales fell in North America (11.6%), China (15.1%) and Asia Pacific (5.5%); Latin America rose 0.6% and EMEA 0.2%. India sales increased 15.8% in Q2, while U.S. sales declined 11.5%.
Outlook, management commentary and risks
- Management expects gross margin to remain pressured for the rest of 2023, primarily from raw-material and manufacturing-labor costs. It forecast 2023 capital expenditures of approximately $150–$200 million, including investment in a multiyear, $400 million Digital Technology Program; spending is expected to remain elevated in 2023–2025.
- The Transformation Program is expected to be completed in 2024. Management expects at least $90 million of annual savings, with more than half expected in 2023 and the full amount from 2024; at least $75 million of pretax expenses are expected. Cumulative expenses were $62.4 million through June 30, 2023.
- Q2 results included $10.1 million pretax of Transformation Program costs and $7.0 million of Digital Technology Program costs. First-half amounts were $37.4 million and $10.5 million, respectively. China government grants contributed $1.2 million in Q2 and $10.1 million in the first half; future grants are not assured.
- Management cited inflation, foreign-exchange movements, geopolitical uncertainty, lingering pandemic effects, and reduced Member recruitment and face-to-face activity as factors affecting demand and operations. It expects product sales in Russia to cease during Q3 2023 as inventory is depleted.
- Legal and tax exposures include delayed recovery of $19.5 million of Mexico VAT-related assets and assessments under dispute in Brazil, India and Korea. The company generally did not accrue losses where it considered a loss not probable. A $12.5 million settlement fund for the Rodgers class action was funded and reserved; final court approval was scheduled for October 2023.
- The company continues to be subject to the FTC Consent Order, including compliance requirements and independent audits. Management warned that noncompliance could materially harm results. The filing also identifies risks tied to Member retention, regulation, product liability, international operations, debt and currency exposure.
Important facts for investors to verify
- Progress in reversing the double-digit Volume Point declines and whether pricing can continue to offset weaker sales volume without further demand pressure.
- Refinancing or repayment plans for the $262.5 million 2024 convertible notes and the substantial 2025 debt maturities; monitor borrowing costs, covenant headroom and liquidity.
- Whether gross-margin pressure, the Transformation Program savings and the Digital Technology Program’s costs and capital needs track management’s expectations.
- Recovery of Mexico VAT assets and developments in Brazil, India, Korea and the Rodgers litigation, including any new assessments, accruals or court outcomes.
- Changes in cash generation, working capital and restricted cash, and the effects of foreign exchange, inflation and the Russia sales suspension.