Herbalife Ltd. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparison is with Q1 2022 unless stated otherwise. Herbalife sells nutrition and personal-care products primarily through independent Members across five geographic regions. The company changed its name from Herbalife Nutrition Ltd. on April 26, 2023, after quarter-end.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $1,252.1 million | $1,335.8 million |
| Gross profit / margin | $953.5 million / 76.2% | $1,028.7 million / 77.0% |
| Operating income / margin | $70.5 million / 5.6% | $153.1 million / 11.5% |
| Net income / diluted EPS | $29.3 million / $0.29 | $98.2 million / $0.96 |
| Net cash from operating activities | $46.2 million | $130.5 million |
| Capital expenditures | $30.3 million cash purchases of property and equipment; $28.0 million including accrued capex | $41.3 million cash purchases |
| Cash and cash equivalents at period-end | $454.2 million | $508.0 million at Dec. 31, 2022 |
| Total debt carrying value | $2,629.1 million | $2,692.0 million at Dec. 31, 2022 |
Interest expense, net rose to $39.4 million from $29.7 million, largely reflecting higher borrowing rates. The weighted-average rate on the senior secured credit facility increased to 6.93% from 4.08% at year-end 2022. Working capital fell to $95.0 million from $379.5 million, primarily because the $262.5 million principal balance of the 2024 convertible notes became current as maturity approached.
Material changes and operating trends
- Sales declined 6.3% in U.S. dollars and 2.6% in local currency. Volume Points, management’s sales-volume indicator, fell 14.5% worldwide; price increases partly offset lower volume.
- Regional sales fell 35.9% in China, 9.1% in EMEA, and 8.9% in North America; they increased 2.1% in Latin America and 1.4% in Asia Pacific. India sales grew 17.5%, while U.S. sales fell 8.8%.
- Net income declined 70.2%. Management attributed the decrease primarily to $57.4 million lower contribution margin and $21.0 million higher SG&A, partly offset by $23.4 million lower income taxes.
- Gross margin contracted 86 basis points. Price increases helped, but higher input and labor costs, foreign exchange, sales mix, inventory write-downs, and freight weighed on margin.
- Operating cash flow decreased by $84.3 million year over year, reflecting lower earnings and unfavorable working-capital movements, including payment timing for Member compensation.
Outlook, commentary, and risks
- Capital spending: Management expects 2023 capital expenditures of approximately $175–$225 million. A multi-year Digital Technology Program is expected to cost about $400 million and keep capital expenditures elevated during 2023–2025.
- Transformation Program: Management expects at least $70 million of annual savings, with approximately half expected in 2023 and most of the remainder in 2024. At least $60 million of pretax expenses are expected; $52.3 million had been incurred through March 31, 2023, including $27.3 million in Q1 2023.
- Margins and demand: Management expects gross margin to remain pressured in 2023, particularly by raw-material and manufacturing-labor costs. It cites inflation, foreign exchange, geopolitical uncertainty, lower Member recruiting, and the transition back to in-person selling as factors affecting demand. The filing does not provide formal earnings or revenue guidance.
- Debt and liquidity: The company reported covenant compliance at March 31. April 2023 amendments increased the leverage-ratio covenant under parts of the credit facility and provided for transition from LIBOR to SOFR. Management expects available cash, operating cash flow, facility borrowings, and capital-market access to meet foreseeable needs.
- Contingencies: The company reported $20.7 million of Mexican VAT-related assets while refunds may be delayed, and described ongoing tax disputes in Mexico, Brazil, India, and Korea. It has not accrued losses for many disputed assessments because management does not believe losses are probable. Unrecognized tax benefits, including interest and penalties, totaled $61.3 million.
- Other exposures: The filing discusses continuing FTC Consent Order obligations, product-liability claims, foreign-exchange and variable-rate exposure, and uncertainty from macroeconomic and geopolitical conditions. Management reported no material changes to the risk factors in its 2022 Form 10-K.
Most important facts for investors to verify
- Whether falling Volume Points and Member recruiting stabilize, especially in China, North America, and EMEA, and whether pricing can continue to offset volume and cost pressures.
- Whether operating cash flow recovers and the company can fund planned technology investment while servicing substantial debt, including the 2024 convertible notes.
- Execution, timing, costs, and realized savings of the Digital Technology and Transformation Programs.
- Progress and potential financial effects of tax disputes, VAT recoverability, and compliance obligations.
- Whether the April credit-facility amendments materially change covenant headroom, borrowing costs, or liquidity; the filing does not state the revised covenant thresholds.