Herbalife Nutrition Ltd. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing; fourth-quarter figures are noted separately where relevant. Herbalife sells nutrition and personal-care products through independent Members in 94 countries. Formula 1, its largest product line, represented approximately 30% of net sales.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $4.892 billion | $4.428 billion |
| Gross profit / gross margin | $3.973 billion / 81.2% | $3.579 billion / 80.8% |
| Operating income / margin | $683.1 million / 14.0% | $617.1 million / 13.9% |
| Net income | $296.6 million | $213.9 million |
| Diluted EPS | $1.98 | $1.29 |
| Operating cash flow | $648.4 million | $590.8 million |
| Capital expenditures | $88.2 million | $95.1 million |
| Cash and cash equivalents at year-end | $1.199 billion | $1.279 billion |
| Total debt, carrying value | $2.454 billion | $2.268 billion |
| Working capital | $216.2 million | $953.5 million |
Fourth quarter: Net sales were $1.187 billion versus $1.093 billion in Q4 2017. Net income was $48.9 million, or $0.34 diluted EPS, compared with a $63.4 million loss, or $(0.43) per diluted share, in Q4 2017.
FY 2018 financing cash outflow was $593.1 million, including substantial share repurchases and debt refinancing activity. Shareholders’ deficit was $723.4 million at year-end. The company repurchased 11.4 million shares for approximately $600.3 million during 2018; no dividends were declared.
Changes versus the prior year
- Net sales increased 10.5% and worldwide Volume Points, management’s sales-volume proxy, rose 9.5%. Management cited growth across North America, EMEA, Asia Pacific and China; South and Central America Volume Points declined 5.4%.
- Management reported local-currency net sales growth of 11.3% excluding Venezuela. The filing’s reported local-currency increase including Venezuela was 103.4%, reflecting the unusual inflation and price increases in that market; foreign-exchange effects materially offset reported-dollar results.
- Net income rose 38.7%, supported by higher contribution margin and lower income taxes. Results also included $29.8 million of China government grant income, $35.4 million of loss on extinguishment of the 2017 credit facility, $13.1 million of loss on repurchasing convertible notes, and an $8.8 million loss from revaluing the contingent value right.
- Gross margin improved 37 basis points. SG&A increased to $1.955 billion, including higher China service-provider fees, Member events and promotions, professional fees, and employee costs.
- Working capital fell by $737.3 million, principally because the 2019 convertible notes moved into current liabilities and cash declined. At year-end, $678.9 million of debt was classified as current.
Outlook, risks and unusual items
- Management forecast 2019 capital expenditures of approximately $135 million to $175 million and stated that operating cash flow, available credit and capital-market access were expected to support operations and foreseeable liquidity needs. No 2019 revenue or earnings guidance is provided in the filing text.
- The company had $675 million principal outstanding on 2.00% convertible notes due August 2019; contractual payments including interest were listed at $688.5 million due in 2019. These notes were convertible at holders’ option during Q1 2019 under specified conditions. The new credit facility contains conditional maturity provisions linked to convertible-note balances and leverage tests.
- Debt totaled $2.454 billion carrying value, including $995 million outstanding under the secured credit facility and $400 million principal of 7.25% senior notes due 2026. The credit facility bears variable rates; management estimated a 1 percentage-point rate change would change annual interest expense by about $10 million at constant borrowings. The company reported compliance with debt covenants at year-end.
- Regulatory and legal exposure remains significant. The 2016 FTC Consent Order requires U.S. sales documentation, compliance monitoring and restrictions on income claims and certain Nutrition Clubs; an independent compliance auditor is required for seven years. The company says it believes it is compliant, while noting potential business and compliance-cost impacts.
- The SEC’s inquiry into China marketing-plan disclosures was described as nearing conclusion, but possible outcomes include settlement, enforcement action or closure without action. A separate SEC/DOJ FCPA investigation concerning China expenditures and controls remained ongoing; the company could not estimate a loss.
- Tax and customs disputes are pending in several jurisdictions, including Brazil, India, Korea and Mexico. Mexican VAT-related assets totaled $33.1 million; the company did not record losses because it considered losses not probable. Outcomes and potential losses for multiple matters remain uncertain.
- China growth slowed in Q4 amid challenging economic and industry conditions that management said may persist into 2019. The business depends on licenses and regulatory interpretations in China. Venezuela’s currency restrictions, devaluation and pricing controls have significantly harmed local operations.
- CEO Richard Goudis resigned effective January 8, 2019; Chairman Michael O. Johnson became CEO. The filing describes leadership-transition risks. FY 2018 also included completion of adoption of ASC 606, with no material net-income effect, and a $29.5 million tax expense related to foreign-tax-credit valuation allowances.
PricewaterhouseCoopers LLP issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of December 31, 2018.
Most important facts for investors to verify
- How the company repaid or refinanced the 2019 convertible notes and whether the credit facility’s conditional maturity provisions were triggered.
- Subsequent developments and potential financial consequences of the SEC/DOJ China investigations and the SEC China marketing-plan inquiry.
- Ongoing compliance with the FTC Consent Order, including U.S. eligible-sales thresholds, Member documentation and independent-auditor findings.
- Updates to tax, VAT, customs and other legal contingencies, including recoverability of Mexican VAT assets and the status of the Korean customs appeal.
- Whether sales-volume growth continues excluding Venezuela, and the effects of foreign exchange, inflation and tariffs—especially in Venezuela and Mexico.
- Whether the planned 2019 capital spending and liquidity outlook remain achievable given debt service, buybacks and working capital needs.