Herbalife Nutrition Ltd. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited results; amounts in U.S. dollars unless otherwise noted. Herbalife sells nutrition and personal-care products primarily through independent Members in 95 markets, with China operating under a modified model.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $1,430.9m | $1,521.8m | $4,484.8m | $4,131.1m |
| Operating income | $189.4m | $206.9m | $649.8m | $492.2m |
| Net income | $117.4m | $138.1m | $409.0m | $298.8m |
| Diluted EPS | $1.09 | $1.04 | $3.73 | $2.17 |
- Gross margin was 78.7% in Q3 (78.8% prior year) and 79.0% for the nine months (79.6% prior year). Operating margin was 13.2% and 14.5%, respectively, versus 13.6% and 11.9% in the comparable periods.
- Q3 sales fell 6.0% in reported dollars and 7.3% in local currency; nine-month sales rose 8.6% reported and 6.2% in local currency. Volume Points declined 8.3% for Q3 but increased 5.2% year to date.
- Q3 net income declined 15.0%, principally on lower contribution margin, partly offset by lower SG&A. Nine-month net income increased 36.9%, aided by higher contribution margin and lower SG&A, including comparison with 2020 FCPA-related expenses.
- Cash from operations was $374.9m for the nine months, down from $516.1m; investing cash use was $108.9m, including $104.5m of property and equipment purchases. Financing cash use was $620.0m, including share repurchases. Cash and equivalents were $678.2m at quarter-end, versus $1,045.4m at year-end 2020.
- Working capital was $488.4m, down from $648.5m. Total debt carrying value was $2,762.7m ($29.6m current); shareholders’ deficit was $1,333.4m. The company reported compliance with its credit-facility covenants.
Changes and notable items
- China sales fell 30.0% in Q3 and 19.4% year to date; China Volume Points were down 36.2% and 27.6%. Asia Pacific sales grew 10.6% and 22.6%, respectively. For the nine months, EMEA sales rose 16.8%, while North America rose 6.0%.
- Q3 sales declines also reflected lower volume in North America, South and Central America, and EMEA; price increases and currency movements partly offset declines. Energy, Sports, and Fitness was the only major product category with Q3 sales growth, up 16.2%.
- In May 2021, Herbalife issued $600m of 4.875% notes due 2029 and redeemed all $400m of 7.25% notes due 2026. The refinancing resulted in a $24.6m extinguishment loss in the first nine months. Nine-month net interest expense increased to $112.0m from $89.0m.
- The company repurchased approximately 18.2m shares for $881.1m during the nine months, including a $600m purchase from Carl Icahn and affiliates. A new $1.5bn repurchase authorization was approved; approximately $1.2bn remained at quarter-end. No cash dividends have been paid since 2014.
- China government grants contributed $16.4m of other operating income for the nine months; no grant income was recognized in Q3 2021. Grant income is not assured in future periods.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided in the filing. Management expects 2021 capital expenditures of approximately $145m–$175m. Management believes cash, operating cash flow, and available credit are sufficient for foreseeable needs over the next 12 months.
- Management expects COVID-19 impacts and related comparability effects to continue, but cannot predict their duration or magnitude. Disclosed constraints include freight, labor and raw-material cost increases, intermittent access-point or event restrictions, and supply-chain disruption.
- Management cited China sales weakness amid revised qualifications for independent service providers, reduced in-person meetings, pandemic effects, and residual effects of the government’s 2019 industry review. The company says the changes are intended to improve business consistency and sustainability.
- Other key risks include Member recruitment and retention, direct-selling and product regulation, compliance with the FTC Consent Order, international tax and foreign-exchange exposure, and leverage. The DOJ deferred prosecution agreement and related SEC/DOJ compliance obligations run for three years from 2020; noncompliance could have a material adverse effect.
- Contingencies include $25.5m of Mexican VAT-related assets subject to possible refund delays; contested tax assessments in Brazil and India; and paid Korean customs assessments being litigated. The company generally has not accrued losses where it does not consider a loss probable. The Mexican 2007 tax assessment was paid in Q2 2021 and is closed.
- A U.S. putative class action remains unresolved; the company says it cannot reasonably estimate a potential loss. Product-liability claims are also possible; insurance has a $12.5m annual deductible.
- Management reported disclosure controls were effective as of September 30, 2021, with no material quarterly change in internal control over financial reporting.
Investor verification priorities
- Assess whether Q3 volume weakness, especially in China and North America, continued after the reporting date and how price increases and currency movements affect underlying demand.
- Review cash conversion and working-capital movements, particularly inventory growth, prepaid assets, and other current-liability changes, alongside planned capital expenditures.
- Verify debt maturities, variable-rate exposure, refinancing capacity, covenant headroom, and the effect of the 2024 convertible notes and LIBOR transition.
- Evaluate the scale and sustainability of share repurchases relative to cash generation, debt, and the shareholders’ deficit.
- Track FTC Consent Order and FCPA agreement compliance, outstanding tax disputes and VAT recoverability, and any developments in the class action or product-liability matters.