UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20172021
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number: 1-32381
HERBALIFE NUTRITION LTD.
(Exact name of registrant as specified in its charter)
Cayman Islands | 98-0377871 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
P.O. Box 309 Ugland House Grand Cayman Cayman Islands | KY1-1104 |
(Address of principal executive offices) | (Zip code) |
P.O. Box 309GT
Ugland House, South Church Street(213) 745-0500
Grand Cayman, Cayman Islands
(Address of principal executive offices) (Zip code)
(213) 745-0500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: | Trading Symbol(s): | Name of each exchange on which registered: |
Common Shares, par value $0.0005 per share | HLF | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ |
|
| ☐ | ||
Non-accelerated filer | ☐ |
| Smaller reporting company | ☐ | ||
Emerging growth company | ☐ |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Number of shares of registrant’s common shares outstanding as of October 26, 20172021 was 87,197,196112,132,940.
HERBALIFE LTD.TABLE OF CONTENTS
Page No. | ||
PART I. FINANCIAL INFORMATION | ||
3 | ||
3 | ||
4 | ||
Unaudited Condensed Consolidated Statements of Comprehensive Income | 5 | |
6 | ||
Notes to Unaudited Condensed Consolidated Financial Statements | 7 | |
Item 2. | ||
| ||
Item 3. | ||
|
| |
Item 4. | 59 | |
| ||
| ||
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Item 1A. | 62 | |
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Item 3. | ||
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Item 4. | 84 | |
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Item 6. | ||
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2
PARTPART I. FINANCIAL INFORMATION
HERBALIFE NUTRITION LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
| September 30, 2017 |
|
| December 31, 2016 |
|
| September 30, |
|
| December 31, |
| ||||
|
| (In millions, except share and par value amounts) |
|
| (in millions, except share and par value amounts) |
| ||||||||||
ASSETS |
|
|
|
|
|
|
|
| ASSETS |
| ||||||
CURRENT ASSETS: |
|
|
|
|
|
|
|
| ||||||||
Current assets: |
|
|
|
|
| |||||||||||
Cash and cash equivalents |
| $ | 1,636.3 |
|
| $ | 844.0 |
|
| $ | 678.2 |
|
| $ | 1,045.4 |
|
Receivables, net of allowance for doubtful accounts |
|
| 95.2 |
|
|
| 70.3 |
|
|
| 85.9 |
|
|
| 83.3 |
|
Inventories |
|
| 354.2 |
|
|
| 371.3 |
|
|
| 559.8 |
|
|
| 501.4 |
|
Prepaid expenses and other current assets |
|
| 188.4 |
|
|
| 176.9 |
|
|
| 203.1 |
|
|
| 145.7 |
|
Total current assets |
|
| 2,274.1 |
|
|
| 1,462.5 |
|
|
| 1,527.0 |
|
|
| 1,775.8 |
|
Property, at cost, net of accumulated depreciation and amortization |
|
| 375.1 |
|
|
| 378.0 |
| ||||||||
Marketing related intangibles and other intangible assets, net |
|
| 310.1 |
|
|
| 310.1 |
| ||||||||
Property, plant, and equipment, at cost, net of accumulated depreciation and amortization |
|
| 411.8 |
|
|
| 390.2 |
| ||||||||
Operating lease right-of-use assets |
|
| 218.5 |
|
|
| 222.8 |
| ||||||||
Marketing-related intangibles and other intangible assets, net |
|
| 317.8 |
|
|
| 313.3 |
| ||||||||
Goodwill |
|
| 95.8 |
|
|
| 89.9 |
|
|
| 96.4 |
|
|
| 100.5 |
|
Other assets |
|
| 367.4 |
|
|
| 324.9 |
|
|
| 281.5 |
|
|
| 273.5 |
|
Total assets |
| $ | 3,422.5 |
|
| $ | 2,565.4 |
|
| $ | 2,853.0 |
|
| $ | 3,076.1 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
| ||||||||
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
| ||||||||
LIABILITIES AND SHAREHOLDERS’ DEFICIT | LIABILITIES AND SHAREHOLDERS’ DEFICIT |
| ||||||||||||||
Current liabilities: |
|
|
|
|
| |||||||||||
Accounts payable |
| $ | 60.6 |
|
| $ | 66.0 |
|
| $ | 98.9 |
|
| $ | 88.7 |
|
Royalty overrides |
|
| 266.7 |
|
|
| 261.2 |
|
|
| 346.9 |
|
|
| 358.2 |
|
Current portion of long-term debt |
|
| 104.1 |
|
|
| 9.5 |
|
|
| 29.6 |
|
|
| 22.9 |
|
Other current liabilities |
|
| 427.4 |
|
|
| 454.8 |
|
|
| 563.2 |
|
|
| 657.5 |
|
Total current liabilities |
|
| 858.8 |
|
|
| 791.5 |
|
|
| 1,038.6 |
|
|
| 1,127.3 |
|
NON-CURRENT LIABILITIES: |
|
|
|
|
|
|
|
| ||||||||
Long-term debt, net of current portion |
|
| 2,176.6 |
|
|
| 1,438.4 |
|
|
| 2,733.1 |
|
|
| 2,405.5 |
|
Non-current operating lease liabilities |
|
| 200.3 |
|
|
| 206.7 |
| ||||||||
Other non-current liabilities |
|
| 168.1 |
|
|
| 139.2 |
|
|
| 214.4 |
|
|
| 192.7 |
|
Total liabilities |
|
| 3,203.5 |
|
|
| 2,369.1 |
|
|
| 4,186.4 |
|
|
| 3,932.2 |
|
CONTINGENCIES |
|
|
|
|
|
|
|
| ||||||||
SHAREHOLDERS’ EQUITY: |
|
|
|
|
|
|
|
| ||||||||
Common shares, $0.001 par value; 1.0 billion shares authorized; 89.3 million (2017) and 93.1 million (2016) shares outstanding |
|
| 0.1 |
|
|
| 0.1 |
| ||||||||
Commitments and contingencies |
|
|
|
|
| |||||||||||
Shareholders’ deficit: |
|
|
|
|
| |||||||||||
Common shares, $0.0005 par value; 2.0 billion shares authorized; 102.9 million (2021) and 120.1 million (2020) shares outstanding |
|
| 0.1 |
|
|
| 0.1 |
| ||||||||
Paid-in capital in excess of par value |
|
| 452.0 |
|
|
| 467.6 |
|
|
| 312.1 |
|
|
| 342.3 |
|
Accumulated other comprehensive loss |
|
| (174.6 | ) |
|
| (205.1 | ) |
|
| (204.8 | ) |
|
| (182.2 | ) |
Retained earnings (accumulated deficit) |
|
| 240.7 |
|
|
| (66.3 | ) | ||||||||
Treasury stock, at cost, 4.6 million shares (2017) |
|
| (299.2 | ) |
|
| — |
| ||||||||
Total shareholders’ equity |
|
| 219.0 |
|
|
| 196.3 |
| ||||||||
Total liabilities and shareholders’ equity |
| $ | 3,422.5 |
|
| $ | 2,565.4 |
| ||||||||
Accumulated deficit |
|
| (1,111.9 | ) |
|
| (687.4 | ) | ||||||||
Treasury stock, at cost, 10.0 million (2021) and 10.0 million (2020) shares |
|
| (328.9 | ) |
|
| (328.9 | ) | ||||||||
Total shareholders’ deficit |
|
| (1,333.4 | ) |
|
| (856.1 | ) | ||||||||
Total liabilities and shareholders’ deficit |
| $ | 2,853.0 |
|
| $ | 3,076.1 |
| ||||||||
See the accompanying notes to unaudited condensed consolidated financial statements.
3
HERBALIFE NUTRITION LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||||||||||||||||||
|
| September 30, 2017 |
|
| September 30, 2016 |
|
| September 30, 2017 |
|
| September 30, 2016 |
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||||||
|
| (In millions, except per share amounts) |
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
| |||||||||||||||||
Product sales |
| $ | 1,029.7 |
|
| $ | 1,063.2 |
|
| $ | 3,162.8 |
|
| $ | 3,253.1 |
| ||||||||||||||||
Shipping & handling revenues |
|
| 55.7 |
|
|
| 58.8 |
|
|
| 171.6 |
|
|
| 190.3 |
| ||||||||||||||||
|
| (in millions, except per share amounts) |
| |||||||||||||||||||||||||||||
Net sales |
|
| 1,085.4 |
|
|
| 1,122.0 |
|
|
| 3,334.4 |
|
|
| 3,443.4 |
|
| $ | 1,430.9 |
|
| $ | 1,521.8 |
|
| $ | 4,484.8 |
|
| $ | 4,131.1 |
|
Cost of sales |
|
| 215.4 |
|
|
| 209.1 |
|
|
| 638.8 |
|
|
| 658.5 |
|
|
| 305.2 |
|
|
| 322.7 |
|
|
| 942.7 |
|
|
| 841.2 |
|
Gross profit |
|
| 870.0 |
|
|
| 912.9 |
|
|
| 2,695.6 |
|
|
| 2,784.9 |
|
|
| 1,125.7 |
|
|
| 1,199.1 |
|
|
| 3,542.1 |
|
|
| 3,289.9 |
|
Royalty overrides |
|
| 310.1 |
|
|
| 320.3 |
|
|
| 944.1 |
|
|
| 968.9 |
|
|
| 450.0 |
|
|
| 463.1 |
|
|
| 1,409.8 |
|
|
| 1,251.2 |
|
Selling, general & administrative expenses |
|
| 445.2 |
|
|
| 441.3 |
|
|
| 1,327.0 |
|
|
| 1,545.2 |
| ||||||||||||||||
Selling, general, and administrative expenses |
|
| 486.3 |
|
|
| 529.7 |
|
|
| 1,498.9 |
|
|
| 1,559.5 |
| ||||||||||||||||
Other operating income |
|
| (4.6 | ) |
|
| (0.2 | ) |
|
| (43.5 | ) |
|
| (29.1 | ) |
|
| 0 |
|
|
| (0.6 | ) |
|
| (16.4 | ) |
|
| (13.0 | ) |
Operating income |
|
| 119.3 |
|
|
| 151.5 |
|
|
| 468.0 |
|
|
| 299.9 |
|
|
| 189.4 |
|
|
| 206.9 |
|
|
| 649.8 |
|
|
| 492.2 |
|
Interest expense, net |
|
| 38.4 |
|
|
| 22.1 |
|
|
| 106.5 |
|
|
| 70.1 |
|
|
| 37.7 |
|
|
| 35.2 |
|
|
| 112.0 |
|
|
| 89.0 |
|
Other expense, net |
|
| 0 |
|
|
| 0 |
|
|
| 24.6 |
|
|
| 0 |
| ||||||||||||||||
Income before income taxes |
|
| 80.9 |
|
|
| 129.4 |
|
|
| 361.5 |
|
|
| 229.8 |
|
|
| 151.7 |
|
|
| 171.7 |
|
|
| 513.2 |
|
|
| 403.2 |
|
Income taxes |
|
| 26.4 |
|
|
| 41.7 |
|
|
| 84.2 |
|
|
| 69.2 |
|
|
| 34.3 |
|
|
| 33.6 |
|
|
| 104.2 |
|
|
| 104.4 |
|
NET INCOME |
| $ | 54.5 |
|
| $ | 87.7 |
|
| $ | 277.3 |
|
| $ | 160.6 |
| ||||||||||||||||
Net income |
| $ | 117.4 |
|
| $ | 138.1 |
|
| $ | 409.0 |
|
| $ | 298.8 |
| ||||||||||||||||
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Basic |
| $ | 0.69 |
|
| $ | 1.06 |
|
| $ | 3.41 |
|
| $ | 1.94 |
|
| $ | 1.11 |
|
| $ | 1.07 |
|
| $ | 3.81 |
|
| $ | 2.21 |
|
Diluted |
| $ | 0.66 |
|
| $ | 1.01 |
|
| $ | 3.26 |
|
| $ | 1.87 |
|
| $ | 1.09 |
|
| $ | 1.04 |
|
| $ | 3.73 |
|
| $ | 2.17 |
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Weighted-average shares outstanding: |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Basic |
|
| 79.6 |
|
|
| 83.1 |
|
|
| 81.4 |
|
|
| 83.0 |
|
|
| 105.5 |
|
|
| 129.2 |
|
|
| 107.3 |
|
|
| 135.0 |
|
Diluted |
|
| 83.0 |
|
|
| 86.4 |
|
|
| 85.0 |
|
|
| 86.1 |
|
|
| 107.8 |
|
|
| 132.5 |
|
|
| 109.8 |
|
|
| 137.8 |
|
See the accompanying notes to unaudited condensed consolidated financial statements.
4
HERBALIFE NUTRITION LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 30, 2017 |
|
| September 30, 2016 |
|
| September 30, 2017 |
|
| September 30, 2016 |
| ||||
|
| (In millions) |
| |||||||||||||
Net income |
| $ | 54.5 |
|
| $ | 87.7 |
|
| $ | 277.3 |
|
| $ | 160.6 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment, net of income taxes of $(1.8) and $5.8 for the three months ended September 30, 2017 and 2016, respectively, and $3.5 and $7.3 for the nine months ended September 30, 2017 and 2016, respectively |
|
| 11.3 |
|
|
| (2.6 | ) |
|
| 41.0 |
|
|
| 1.6 |
|
Unrealized (loss) gain on derivatives, net of income taxes of $— for both the three months ended September 30, 2017 and 2016 and $— and $(0.3) for the nine months ended September 30, 2017 and 2016, respectively |
|
| 2.5 |
|
|
| (2.2 | ) |
|
| (10.5 | ) |
|
| (9.3 | ) |
Other, net of income taxes of $0.1 for the nine months ended September 30, 2016 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (0.1 | ) |
Total other comprehensive income (loss) |
|
| 13.8 |
|
|
| (4.8 | ) |
|
| 30.5 |
|
|
| (7.8 | ) |
Total comprehensive income |
| $ | 68.3 |
|
| $ | 82.9 |
|
| $ | 307.8 |
|
| $ | 152.8 |
|
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
| ||||
|
| (in millions) |
| |||||||||||||
Net income |
| $ | 117.4 |
|
| $ | 138.1 |
|
| $ | 409.0 |
|
| $ | 298.8 |
|
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign currency translation adjustment, net of income taxes of $(0.6) and $0.7 for the three months ended September 30, 2021 and 2020, respectively, and $0.9 and $(4.1) for the nine months ended September 30, 2021 and 2020, respectively |
|
| (14.5 | ) |
|
| 19.5 |
|
|
| (25.8 | ) |
|
| (20.4 | ) |
Unrealized gain (loss) on derivatives, net of income taxes of $0 and $(0.1) for the three months ended September 30, 2021 and 2020, respectively, and $0 and $(0.4) for the nine months ended September 30, 2021 and 2020, respectively |
|
| 2.0 |
|
|
| (3.1 | ) |
|
| 3.2 |
|
|
| 3.2 |
|
Total other comprehensive (loss) income |
|
| (12.5 | ) |
|
| 16.4 |
|
|
| (22.6 | ) |
|
| (17.2 | ) |
Total comprehensive income |
| $ | 104.9 |
|
| $ | 154.5 |
|
| $ | 386.4 |
|
| $ | 281.6 |
|
See the accompanying notes to unaudited condensed consolidated financial statements.
5
HERBALIFE NUTRITION LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| Nine Months Ended |
| |||||||||||||
|
| September 30, 2017 |
|
| September 30, 2016 |
|
| Nine Months Ended |
| |||||||
|
| (In millions) |
|
| September 30, |
|
| September 30, |
| |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
| ||||||||
|
| (in millions) |
| |||||||||||||
Cash flows from operating activities: |
|
|
|
|
| |||||||||||
Net income |
| $ | 277.3 |
|
| $ | 160.6 |
|
| $ | 409.0 |
|
| $ | 298.8 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Depreciation and amortization |
|
| 73.8 |
|
|
| 72.6 |
|
|
| 80.1 |
|
|
| 74.3 |
|
Share-based compensation expenses |
|
| 32.6 |
|
|
| 30.3 |
|
|
| 42.3 |
|
|
| 37.9 |
|
Non-cash interest expense |
|
| 44.8 |
|
|
| 42.0 |
|
|
| 22.4 |
|
|
| 19.7 |
|
Deferred income taxes |
|
| (4.1 | ) |
|
| (38.4 | ) |
|
| 2.9 |
|
|
| 10.5 |
|
Inventory write-downs |
|
| 17.7 |
|
|
| 16.7 |
|
|
| 16.9 |
|
|
| 10.6 |
|
Foreign exchange transaction loss (gain) |
|
| 4.0 |
|
|
| (1.4 | ) | ||||||||
Foreign exchange transaction loss |
|
| 10.5 |
|
|
| 14.3 |
| ||||||||
Loss on extinguishment of debt |
|
| 24.6 |
|
|
| 0 |
| ||||||||
Other |
|
| (1.1 | ) |
|
| (3.8 | ) |
|
| 1.0 |
|
|
| 2.1 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Receivables |
|
| (22.5 | ) |
|
| (14.6 | ) |
|
| (6.7 | ) |
|
| (37.6 | ) |
Inventories |
|
| 29.2 |
|
|
| (56.7 | ) |
|
| (92.2 | ) |
|
| (26.6 | ) |
Prepaid expenses and other current assets |
|
| (3.6 | ) |
|
| (14.9 | ) |
|
| (68.1 | ) |
|
| (31.0 | ) |
Accounts payable |
|
| (8.2 | ) |
|
| 17.5 |
|
|
| 11.8 |
|
|
| 22.6 |
|
Royalty overrides |
|
| (6.7 | ) |
|
| 14.1 |
|
|
| (1.7 | ) |
|
| 55.3 |
|
Other current liabilities |
|
| (45.0 | ) |
|
| 24.3 |
|
|
| (86.2 | ) |
|
| 74.2 |
|
Other |
|
| 16.2 |
|
|
| 1.6 |
|
|
| 8.3 |
|
|
| (9.0 | ) |
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
| 404.4 |
|
|
| 249.9 |
| ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
| ||||||||
Purchases of property, plant and equipment |
|
| (67.9 | ) |
|
| (111.9 | ) | ||||||||
Net cash provided by operating activities |
|
| 374.9 |
|
|
| 516.1 |
| ||||||||
Cash flows from investing activities: |
|
|
|
|
| |||||||||||
Purchases of property, plant, and equipment |
|
| (104.5 | ) |
|
| (75.6 | ) | ||||||||
Other |
|
| (2.8 | ) |
|
| 4.4 |
|
|
| (4.4 | ) |
|
| 0.1 |
|
NET CASH USED IN INVESTING ACTIVITIES |
|
| (70.7 | ) |
|
| (107.5 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
| ||||||||
Net cash used in investing activities |
|
| (108.9 | ) |
|
| (75.5 | ) | ||||||||
Cash flows from financing activities: |
|
|
|
|
| |||||||||||
Borrowings from senior secured credit facility, net of discount |
|
| 1,274.0 |
|
|
| — |
|
|
| 531.1 |
|
|
| 30.2 |
|
Principal payments on senior secured credit facility and other debt |
|
| (468.2 | ) |
|
| (233.0 | ) |
|
| (416.0 | ) |
|
| (15.9 | ) |
Proceeds from senior notes |
|
| 600.0 |
|
|
| 600.0 |
| ||||||||
Repayment of senior notes |
|
| (420.7 | ) |
|
| 0 |
| ||||||||
Debt issuance costs |
|
| (22.6 | ) |
|
| — |
|
|
| (8.4 | ) |
|
| (7.8 | ) |
Share repurchases |
|
| (346.2 | ) |
|
| (12.5 | ) |
|
| (909.2 | ) |
|
| (844.2 | ) |
Other |
|
| 1.6 |
|
|
| 4.2 |
|
|
| 3.2 |
|
|
| 2.6 |
|
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
|
| 438.6 |
|
|
| (241.3 | ) | ||||||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH |
|
| 20.0 |
|
|
| (2.6 | ) | ||||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS |
|
| 792.3 |
|
|
| (101.5 | ) | ||||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
| 844.0 |
|
|
| 889.8 |
| ||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
| $ | 1,636.3 |
|
| $ | 788.3 |
| ||||||||
Net cash used in financing activities |
|
| (620.0 | ) |
|
| (235.1 | ) | ||||||||
Effect of exchange rate changes on cash, cash equivalents, and restricted cash |
|
| (13.0 | ) |
|
| (10.1 | ) | ||||||||
Net change in cash, cash equivalents, and restricted cash |
|
| (367.0 | ) |
|
| 195.4 |
| ||||||||
Cash, cash equivalents, and restricted cash, beginning of period |
|
| 1,054.0 |
|
|
| 847.5 |
| ||||||||
Cash, cash equivalents, and restricted cash, end of period |
| $ | 687.0 |
|
| $ | 1,042.9 |
| ||||||||
See the accompanying notes to unaudited condensed consolidated financial statements.
6
HERBALIFE NUTRITION LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization
Herbalife Nutrition Ltd., a Cayman Islands exemptexempted company with limited liability, company, was incorporated on April 4, 2002. Herbalife Nutrition Ltd. (and together with its subsidiaries, the “Company” or “Herbalife”) is a global nutrition company that sells weight management,management; targeted nutrition,nutrition; energy, sports, & fitness,and fitness; and outer nutrition products to and through a network of independent members, or Members. In China, the Company sells its products to and through independent service providers sales representatives, and sales officersrepresentatives to customers and preferred customers, as well as through Company-operated retail storesplatforms when necessary. The Company reports revenuesells its products in six6 geographic regions: North America; Mexico; South and Central America; EMEA, which consists of Europe, the Middle East, and Africa; Asia Pacific (excluding China); and China.
2. Significant Accounting Policies
Basis of Presentation
The unaudited condensed consolidated interim financial information of the Company has been prepared in accordance with Article 10 of the Securities and Exchange Commission’s, or the SEC, Regulation S-X. Accordingly, as permitted by Article 10 of the SEC’s Regulation S-X, it does not include all of the information required by generally accepted accounting principles in the U.S., or U.S. GAAP, for complete financial statements. The condensed consolidated balance sheet atas of December 31, 20162020 was derived from the audited financial statements at that date and does not include all the disclosures required by U.S. GAAP, as permitted by Article 10 of the SEC’s Regulation S-X. The Company’s unaudited condensed consolidated financial statements as of September 30, 2017,2021 and for the three and nine months ended September 30, 20172021 and 2016,2020 include Herbalife Nutrition Ltd. and all of its direct and indirect subsidiaries. In the opinion of management, the accompanying financial information contains all adjustments, consisting of normal recurring adjustments, necessary to present fairly the Company’s unaudited condensed consolidated financial statements as of September 30, 2017,2021 and for the three and nine months ended September 30, 20172021 and 2016.2020. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2020, or the 20162020 10-K. Operating results for the three and nine months ended September 30, 2017,2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2021.
Recently Adopted Pronouncements
In March 2016,August 2018, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2016-09, 2018-14, Compensation — Stock Compensation (Topic 718)Retirement Benefits — Defined Benefit Plans — General (Subtopic 715-20): ImprovementsDisclosure Framework — Changes to Employee Share-Based Payment Accountingthe Disclosure Requirements for Defined Benefit Plans. This ASU is intended to simplify various aspects related to how share-based paymentsremoves disclosures that are accounted for and presented in the financial statements, including the income tax effects of share-based payments and accounting for forfeitures. The amendments in this update became effective for the Company’s reporting period beginning January 1, 2017. This guidance requires the Company to recognize excess tax benefits on share-based compensation arrangements in its tax provision, instead of in shareholders’ equity as under the previous guidance. During the three and nine months ended September 30, 2017, the Company recorded $0.6 million and $26.4 million of excess tax benefits in its tax provision, respectively, as described further in Note 8, Income Taxes. In addition, these amounts are now required to be classified as an operating activity in the Company’s statement of cash flows rather than a financing activity. The Company has elected to present the cash flow statement using a prospective transition method and prior periods have not been adjusted. In addition, the Company has made an accounting policy election to continue to estimate the number of forfeitures expected to occur. The adoption of this guidance also increased the Company’s number of shares used in its calculation of fully diluted earnings per share due to the reduction in assumed proceeds under the treasury stock method which also impacts how the Company determines its earnings per share calculation. Upon adoption of this guidance on January 1, 2017, the Company also recognized $29.6 million of its unrealized excess tax benefits, described further in Note 12, Income Taxes in the 2016 10-K, as deferred tax assets on its consolidated balance sheet with a corresponding increase to its retained earnings.
In March 2016, the FASB issued ASU No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. This ASU clarified the requirements for assessing whether contingent put or call options that can accelerate the payment of principal on debt instruments are clearly and closely related (i.e. an entity is required to assess whether the economic characteristics and risks of embedded put or call options are clearly and closely related to those of their debt hosts only in accordance with the four-step decision sequence of FASB Accounting Standards Codification, or ASC 815, Derivatives and Hedging). An entity should no longer assess whetherconsidered cost beneficial, clarifies the event that triggers the ability to exercise a put or call option is related to interest rates or credit riskspecific requirements of the entity. In the first quarter of 2017, the Company adopteddisclosures, and applied the standard to its applicable financial instruments. The adoption of this guidance had no financial impact on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. This ASU provides guidance clarifying that the novation of a derivative contract (i.e. a change in counterparty) in a hedge accounting relationship does not, in and of itself, require dedesignation of that hedge accounting relationship. If all of the other hedge accounting criteria are met, including the expectation that the hedge will be highly effective when the creditworthiness of the new counterpart to the derivative contract is considered, the hedging relationship will continue uninterrupted. The adoption of this guidance during the first quarter of 2017 had no financial impact on the Company’s consolidated financial statements.
New Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The new revenue recognition standard provides a five-step analysis of contracts to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB deferred the effective date of ASU No. 2014-09 for all entities by one year to annual reporting periods beginning after December 15, 2017. The FASB has issued several updates subsequently including implementation guidance on principal versus agent considerations, on how an entity should account for licensing arrangements with customers, and to improve guidance on assessing collectability, presentation of sales taxes, noncash consideration, and contract modifications and completed contracts at transition. The amendments in this series of updates shall be applied either retrospectively to each period presented oradds disclosure requirements identified as a cumulative-effect adjustment as of the date of adoption. Early adoption is permitted. The Company continues to assess the impact this ASU, and related subsequent updates, will have on its consolidated financial statements. As of September 30, 2017, the Company has not identified any material impact to its consolidated net income relating to this ASU. However, the final impact of this ASU on the Company’s financial statements will not be known until the assessment is complete. The Company expects to update its disclosure in future periods as the analysis is completed.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The updated guidance enhances the reporting model for financial instruments by modifying how entities measure and recognize equity investments and present changes in the fair value of financial liabilities, and by simplifying the disclosure guidance for financial instruments. The amendments in this update are effective for fiscal years beginning after December 15, 2017. The amendments in this update should be applied prospectively. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842).The updated guidance requires lessees to recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. The amendments also require certain quantitative and qualitative disclosures. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. A modified retrospective approach must be applied for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is evaluating the potential impact of this adoption on its consolidated financial statements, however, increases in both assets and liabilities are expected.
In March 2016, the FASB issued ASU No. 2016-04, Liabilities — Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products. This ASU requires entities that sell prepaid stored-value products redeemable for goods, services or cash at third-party merchants to recognize breakage (i.e., the value that is ultimately not redeemed by the consumer) in a way that is consistent with how it will be recognized under the new revenue recognition standard. Under current U.S. GAAP, there is diversity in practice in how entities account for breakage that results when a consumer does not redeem the entire product balance. This ASU clarifies that an entity’s liability for prepaid stored-value products within its scope meets the definition of a financial liability.relevant. The amendments in this update are effective for reporting periods beginning after December 15, 2017,2020, with early adoption permitted. The amendment may be applied using either a modified retrospective approach or a full retrospective approach. The adoption of this guidance willduring the first quarter of 2021 did not have a material impact on the Company’s condensed consolidated financial statements.
In June 2016,December 2019, the FASB issued ASU No. 2016-13, Financial Instrument — Credit Losses2019-12, Income Taxes (Topic 326)740): Measurement of Credit Losses on Financial InstrumentsSimplifying the Accounting for Income Taxes. This ASU changessimplifies the impairment modelaccounting for most financial assets, requiringincome taxes by eliminating some exceptions to the use of an expected loss model which requires entities to estimategeneral approach in the lifetime expected credit loss on financial assets measured at amortized cost. Such credit losses will be recorded as an allowance to offset the amortized costFASB Accounting Standards Codification, or ASC, Topic 740, Income Taxes, and clarifies certain aspects of the financial asset, resulting in a net presentation of the amount expectedexisting guidance to be collected on the financial asset. In addition, credit losses relating to available-for-sale debt securities will now be recorded through an allowance for credit losses rather than as a direct write-down to the security.promote more consistent application, among other things. The amendments in this update are effective for reporting periods beginning after December 15, 2019,2020, with early adoption permitted for reporting periods beginning after December 15, 2018.permitted. The Company is evaluating the potential impactadoption of this adoptionguidance during the first quarter of 2021 did not have a material impact on itsthe Company’s condensed consolidated financial statements.
New Accounting Pronouncements
In August 2016,2020, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230)2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Classification of Certain Cash ReceiptsAccounting for Convertible Instruments and Cash PaymentsContracts in an Entity’s Own Equity. This ASU provides clarification on eight specific cash flow issues regarding presentationsimplifies the accounting for convertible instruments by eliminating certain accounting models, resulting in fewer embedded conversion features being separately recognized from the host contract, and classificationalso amends the guidance for derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. Additionally, the amendments in this ASU affect the diluted EPS calculation for convertible instruments. It will require that the effect of potential share settlement be included in the statementdiluted EPS calculation when a convertible instrument may be settled in cash or shares; the if-converted method as opposed to the treasury stock method would be required to calculate diluted EPS for these types of cash flows with the objective of reducing the existing diversity in practice.convertible instruments. The amendments in this update are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This ASU requires that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this update do not change U.S. GAAP for the pre-tax effects of an intra-entity asset transfer under Topic 810, Consolidation, or for an intra-entity transfer of inventory. The amendments in this update are effective for reporting periods beginning after December 15, 2017,2021, with early adoption permitted. The Company is evaluating the potential impact of this adoption on its condensed consolidated financial statements.
7
Revenue Recognition
The Company’s net sales consist of product sales. In November 2016,general, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This ASU requires that restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flows. The amendments in this update are effective for reporting periods beginning after December 15, 2017, with early adoption permitted.Company's performance obligation is to transfer its products to its Members. The Company generally recognizes revenue when product is evaluatingdelivered to its Members. For China independent service providers and for third-party importers utilized in certain other countries where sales historically have not been material, the potential impact of this adoption on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies the test for goodwill impairment by removing Step 2 from the goodwill impairment test. Companies will now perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value not to exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments in this update are effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted for goodwill impairment tests performed after January 1, 2017. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU provides additional guidance for when a company should apply modification accounting when there is a change in either the terms or conditions of a share-based payment award. Specifically, a company should not apply modification accounting if the fair value, vesting conditions, and classification of the award remains the same immediately before and after the modification. The amendments in this update must be applied on a prospective basis and are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The adoption of this guidance will not have a material impactrecognizes revenue based on the Company’s consolidated financial statements.estimate of when the service provider or third-party importer sells the products because the Company is deemed to be the principal party of these product sales due to the additional selling and operating requirements relating to pricing of products, conducting business with physical locations, and other selling and marketing activities required of the service providers and third-party importers.
In August 2017,The Company’s Members, excluding its China independent service providers, may receive distributor allowances, which are comprised of discounts, rebates, and wholesale commission payments from the FASB issued ASU No. 2017-12, Derivatives and Hedging: Targeted ImprovementsCompany. Distributor allowances resulting from the Company’s sales of its products to Accounting for Hedging Activities. This ASU improvesits Members are recorded against net sales because the financial reporting of hedging relationships to better portraydistributor allowances represent discounts from the economic results of an entity's risk management activities in its financial statements and makes certain targeted improvements to simplify the application of existing hedge accounting guidance. The amendments in this update are effective for reporting periods beginning after December 15, 2018, with early adoption permitted. suggested retail price.
The Company compensates its sales leader Members with royalty overrides for services rendered relating to the development, retention, and management of their sales organizations. Royalty overrides are payable based on achieved sales volume. Royalty overrides are classified as an operating expense reflecting the services provided to the Company. The Company compensates its China independent service providers and third-party importers utilized in certain other countries for providing marketing, selling, and customer support services. As the Company is evaluating the potential impactprincipal party of this adoptionthe product sales as described above, the service fees payable to China independent service providers and the compensation received by third-party importers for the services they provide, which represents the discount provided to them, are recorded in selling, general, and administrative expenses within the Company’s condensed consolidated statements of income.
The Company recognizes revenue when it delivers products to its United States Members; distributor allowances, inclusive of discounts and wholesale commissions, are recorded as a reduction to net sales; and royalty overrides are classified as an operating expense.
Shipping and handling services relating to product sales are recognized as fulfillment activities on the Company’s performance obligation to transfer products and are therefore recorded within net sales as part of product sales and are not considered as separate revenues. Shipping and handling costs paid by the Company are included in cost of sales.
The Company presents sales taxes collected from customers on a net basis.
The Company generally receives the net sales price in cash or through credit card payments at the point of sale. Accounts receivable consist principally of credit card receivables arising from the sale of products to the Company’s Members, and its collection risk is reduced due to geographic dispersion. Credit card receivables were $72.4 million and $65.2 million as of September 30, 2021 and December 31, 2020, respectively. Substantially all credit card receivables were current as of September 30, 2021 and December 31, 2020. The Company recorded bad-debt expense related to allowances for the Company’s receivables of $0.2 million and $0.8 million during the three months ended September 30, 2021 and 2020, respectively, and $0.4 million and $2.1 million during the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021 and December 31, 2020, the Company’s allowance for doubtful accounts was $2.9 million and $3.3 million, respectively. As of September 30, 2021 and December 31, 2020, the majority of the Company’s total outstanding accounts receivable were current.
The Company records advance sales deposits when payment is received but revenue has not yet been recognized. In the majority of the Company’s markets, advance sales deposits are generally recorded to income when the product is delivered to its Members. Additionally, advance sales deposits also include deferred revenues due to the timing of revenue recognition for products sold through China independent service providers. The estimated deferral period for advance sales deposits is generally within one week. During the nine months ended September 30, 2021, the Company recognized substantially all of the revenues that were included within advance sales deposits as of December 31, 2020 and any remaining such balance was not material as of September 30, 2021. Advance sales deposits are included in other current liabilities within the Company’s condensed consolidated financial statements.balance sheets. See Note 13, Detail of Certain Balance Sheet Accounts, for further information.
In general, if a Member returns product to the Company on a timely basis, they may obtain replacement product from the Company for such returned products. In addition, in general the Company maintains a buyback program pursuant to which it will repurchase products sold to a Member who has decided to leave the business. Allowances for product returns, primarily in connection with the Company’s buyback program, are provided at the time the sale is recorded. This accrual is based upon historical return rates for each country and the relevant return pattern, which reflects anticipated returns to be received over a period of up to 12 months following the original sale. Allowances for product returns were $3.8 million and $3.7 million as of September 30, 2021 and December 31, 2020, respectively.
8
The Company’s products are grouped in 5 principal categories: weight management; targeted nutrition; energy, sports, and fitness; outer nutrition; and literature and promotional items. However, the effect of economic factors on the nature, amount, timing, and uncertainty of revenue recognition and cash flows are similar among all five product categories. The Company defines its operating segments through 6 geographic regions. The effect of economic factors on the nature, amount, timing, and uncertainty of revenue recognition and cash flows are similar among the geographic regions within the Company’s Primary Reporting Segment. See Note 6, Segment Information, for further information on the Company’s reportable segments and the Company’s presentation of disaggregated revenue by reportable segment.
Distributor Compensation – U.S.
In the U.S., distributor compensation, including Royalty overrides, is capped if the Company does not meet an annual requirement as described in the Consent Orderconsent order discussed in more detail in Note 5, Contingencies. On a periodic basis, the Company evaluates if this requirement will be achieved by year end to determine if a cap on distributor compensation will be required, and then determines the appropriate amount of distributor compensation expense, which may vary in each reporting period. As of September 30, 2017,2021, the Company believes that the cap to distributor compensation will not be applicable for the current year.
Other Operating Income
To encourage local investment and operations, governments in various China provinces conduct grant programs. The Company applied for and received several such grants in China. Government grants are recorded into income when a legal right to the grant exists, there is a reasonable assurance that the grant proceeds will be received, and the substantive conditions under which the grants were provided have been met. During the three and nine months ended September 30, 2017,Generally, these substantive conditions are the Company recognized $4.6 millionmaintaining operations and $43.5 millionpaying certain taxes in the relevant province and obtaining government approval by completing an annual application process. The Company believes the continuing obligation with respect to the funds is a general requirement that they are used only for its business in China. The Company did not recognize any government grant income related to its regional headquarters and distribution centers within China as comparedduring the three months ended September 30, 2021. The Company recognized government grant income related to $0.2its regional headquarters and distribution centers within China of approximately $0.6 million during the three months ended September 30, 2020 and approximately $16.4 million and $29.1$13.0 million forduring the same periodsnine months ended September 30, 2021 and 2020, respectively, in 2016.other operating income within its condensed consolidated statements of income. The Company intends to continue applying for government grants in China when programs are available; however, there is no assurance that the Company will receive grants in future periods.
Other Expense, Net
Reclassifications
Certain reclassifications were made toDuring the prior periodnine months ended September 30, 2021, the Company recognized a $24.6 million loss on the extinguishment of the 2026 Notes (See Note 4, Long-Term Debt) in other expense, net within its condensed consolidated statements of income.
RestrictedCash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Company’s condensed consolidated balance sheets that sum to the condensed consolidated statementstotal of comprehensive income and the same such amounts shown in the Company’s condensed consolidated statements of cash flows to conformflows:
|
| September 30, |
|
| December 31, |
| ||
|
| (in millions) |
| |||||
Cash and cash equivalents |
| $ | 678.2 |
|
| $ | 1,045.4 |
|
Restricted cash included in Prepaid expenses and other current assets |
|
| 2.6 |
|
|
| 2.5 |
|
Restricted cash included in Other assets |
|
| 6.2 |
|
|
| 6.1 |
|
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows |
| $ | 687.0 |
|
| $ | 1,054.0 |
|
The majority of the Company’s consolidated restricted cash is held by certain of its foreign entities and consists of cash deposits that are required due to the currentbusiness operating requirements in those jurisdictions.
9
COVID-19 Pandemic
During March 2020, the World Health Organization characterized the outbreak of coronavirus disease 2019, or COVID-19, as a pandemic. In response to the spread of COVID-19, certain government agencies and the Company itself have mandated various measures and recommended others, in each to protect the public and the Company’s employees, which have disrupted certain areas of the Company’s business including, but not limited to, distribution and selling activities. Despite the pandemic having a negative impact in certain of the Company’s markets, the Company’s consolidated net sales were higher for the nine months ended September 30, 2021 as compared to the same period presentation. See Note 13, Detailin 2020. However, the Company's consolidated net sales were lower for the three months ended September 30, 2021 as compared to the same period in 2020. The ultimate extent and magnitude of Certain Balance Sheet Accounts,the impact of COVID-19 is not known and could have a material adverse impact to the Company’s business and future financial condition and results of operations. Management has been and continues to actively monitor the impact of COVID-19 generally and on the Company.
The Company’s condensed consolidated financial statements presented herein reflect the latest estimates and assumptions made by management that affect the reported amounts of assets and liabilities and related disclosures as of the date of the condensed consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. The Company believes it has used reasonable estimates and assumptions to assess the fair values of its goodwill, marketing-related intangible assets, and long-lived assets; assessment of the annual effective tax rate; valuation of deferred income taxes; and the allowance for furtherdoubtful accounts. After reviewing historical and forward-looking information, on certain balance sheet items that are combined for financial statement presentation.the Company determined there were no impairments required relating to its goodwill, marketing-related intangible assets, and long-lived assets during the three and nine months ended September 30, 2021.
3. Inventories
Inventories consist primarily of finished goods available for resale. Inventories are stated at lower of cost (primarily on the first-in, first-out basis) and net realizable value.
The following are the major classes of inventory:
|
| September 30, |
|
| December 31, |
| ||
|
| (in millions) |
| |||||
Raw materials |
| $ | 80.1 |
|
| $ | 80.1 |
|
Work in process |
|
| 6.6 |
|
|
| 7.9 |
|
Finished goods |
|
| 473.1 |
|
|
| 413.4 |
|
Total |
| $ | 559.8 |
|
| $ | 501.4 |
|
|
| September 30, 2017 |
|
| December 31, 2016 |
| ||
|
| (In millions) |
| |||||
Raw materials |
| $ | 41.8 |
|
| $ | 49.3 |
|
Work in process |
|
| 5.0 |
|
|
| 3.9 |
|
Finished goods |
|
| 307.4 |
|
|
| 318.1 |
|
Total |
| $ | 354.2 |
|
| $ | 371.3 |
|
4. Long-Term Debt
Long-term debt consists of the following:
|
| September 30, 2017 |
|
| December 31, 2016 |
| ||||||||||
|
| (In millions) |
|
| September 30, |
|
| December 31, |
| |||||||
Borrowings under prior senior secured credit facility, carrying value |
| $ | — |
|
| $ | 410.0 |
| ||||||||
Borrowings under new senior secured credit facility, carrying value |
|
| 1,212.6 |
|
|
| — |
| ||||||||
Convertible senior notes, carrying value of liability component |
|
| 1,058.4 |
|
|
| 1,024.8 |
| ||||||||
|
| (in millions) |
| |||||||||||||
Borrowings under senior secured credit facility, carrying value |
| $ | 1,093.6 |
|
| $ | 976.5 |
| ||||||||
2.625% convertible senior notes due 2024, carrying value of liability component |
|
| 479.4 |
|
|
| 460.6 |
| ||||||||
7.875% senior notes due 2025, carrying value |
|
| 593.8 |
|
|
| 592.9 |
| ||||||||
7.250% senior notes due 2026, carrying value |
|
| — |
|
|
| 395.9 |
| ||||||||
4.875% senior notes due 2029, carrying value |
|
| 592.6 |
|
|
| — |
| ||||||||
Other |
|
| 9.7 |
|
|
| 13.1 |
|
|
| 3.3 |
|
|
| 2.5 |
|
Total |
|
| 2,280.7 |
|
|
| 1,447.9 |
|
|
| 2,762.7 |
|
|
| 2,428.4 |
|
Less: current portion |
|
| 104.1 |
|
|
| 9.5 |
|
|
| 29.6 |
|
|
| 22.9 |
|
Long-term portion |
| $ | 2,176.6 |
|
| $ | 1,438.4 |
|
| $ | 2,733.1 |
|
| $ | 2,405.5 | �� |
10
Senior Secured Credit Facility
On May 4, 2015,August 16, 2018, the Company amended its priorentered into a $1.25 billion senior secured credit facility, or the Prior Credit Facility, to extend the maturity date of its revolving credit facility, or the Prior Revolving Credit Facility, by one year to March 9, 2017. Pursuant to this amendment and upon execution, the Company made prepayments of approximately $20.3 million and $50.9 million on its $500 million term loan under the Prior Credit Facility, or the Prior Term Loan, and the Prior Revolving Credit Facility, respectively. Additionally, the Company’s $700 million borrowing capacity on its Prior Revolving Credit Facility was reduced by approximately $235.9 million upon execution of this amendment, and was further reduced by approximately $39.1 million on September 30, 2015. The Prior Term Loan matured on March 9, 2016 and was repaid in full. The total available borrowing capacity under the Prior Revolving Credit Facility was $425.0 million as of December 31, 2016. Prior to March 9, 2016, the interest rates on the Company’s borrowings under the Prior Credit Facility remained effectively unchanged except that the minimum applicable margin was increased by 0.50% and LIBOR was subject to a minimum floor of 0.25%. After March 9, 2016, the applicable interest rates on the Company’s borrowings under the Prior Credit Facility increased by 2.00% such that borrowings under the Prior Credit Facility began bearing interest at either LIBOR plus the applicable margin between 4.00% and 5.00% or the base rate plus the applicable margin between 3.00% and 4.00%, based on the Company’s consolidated leverage ratio. The Company incurred approximately $6.2 million of debt issuance costs in connection with the amendment. These debt issuance costs were recorded on the Company’s condensed consolidated balance sheet and were amortized over the life of the Prior Revolving Credit Facility.
On February 15, 2017, the Company entered into a new $1,450.0 million senior secured credit facility, or the2018 Credit Facility, consisting of a $1,300.0$250.0 million term loan A, or the 2018 Term Loan A, a $750.0 million term loan B, or the 2018 Term Loan B, and a $150$250.0 million revolving credit facility, or the 2018 Revolving Credit Facility, with a syndicate of financial institutions as lenders,lenders. The 2018 Term Loan B matures upon the earlier of: (i) August 18, 2025; or Lenders. The Revolving(ii) December 15, 2023 if the outstanding principal on the 2024 Convertible Notes, as defined below, exceeds $350.0 million and the Company exceeds certain leverage ratios as of that date. All obligations under the 2018 Credit Facility maturesare unconditionally guaranteed by certain direct and indirect wholly-owned subsidiaries of Herbalife Nutrition Ltd. and secured by the equity interests of certain of Herbalife Nutrition Ltd.’s subsidiaries and substantially all of the assets of the domestic loan parties. Also on February 15, 2022August 16, 2018, the Company issued $400.0 million aggregate principal amount of senior unsecured notes, or the 2026 Notes as described below, and used the proceeds from the 2018 Credit Facility and the 2026 Notes to repay in full the $1,178.1 million outstanding under the Company's prior senior secured credit facility.
The 2018 Term Loan matures on February 15, 2023.
The Term LoanB was issued to the Lenderslenders at a 2%0.25% discount, or $26.0$1.9 million. In connection with the Credit Facility, the Company also repaid the $410.0 million outstanding balance on its Prior Revolving Credit Facility. The Company incurred approximately $22.6$11.7 million of debt issuance costs in connection with the 2018 Credit Facility. The discount and debt issuance costs and the discount are recorded on the Company’s condensed consolidated balance sheet and are being amortized over the life of the 2018 Credit Facility using the effectiveeffective-interest method.
On December 12, 2019, the Company amended the 2018 Credit Facility which, among other things, reduced the interest method.rate for borrowings under the 2018 Term Loan B from either the eurocurrency rate plus a margin of 3.25% or the base rate plus a margin of 2.25% to either the eurocurrency rate plus a margin of 2.75% or the base rate plus a margin of 1.75%. The Company incurred approximately $1.2 million of debt issuance costs in connection with the amendment. For accounting purposes, pursuant to FASB ASC Topic 470, Debt, or ASC 470, this transaction was accounted for as a modification of the 2018 Credit Facility. The debt issuance costs were recognized in interest expense, net within the Company’s condensed consolidated statement of income during the three months ended December 31, 2019.
On March 19, 2020, the Company amended the 2018 Credit Facility which, among other things, extended the maturity of both the 2018 Term Loan A and 2018 Revolving Credit Facility to the earlier of: (i) March 19, 2025 or (ii) September 15, 2023 if the outstanding principal on the 2024 Convertible Notes, as defined below, exceeds $350.0 million and the Company exceeds certain leverage ratios as of that date; increased borrowings under the 2018 Term Loan A from $234.4 million to a total of $264.8 million; increased the total available borrowing capacity under 2018 Revolving Credit Facility from $250.0 million to $282.5 million; and reduced the interest rate for borrowings under both the 2018 Term Loan A and 2018 Revolving Credit Facility from either the eurocurrency rate plus a margin of 3.00% or the base rate plus a margin of 2.00% to either the eurocurrency rate plus a margin of 2.50% or the base rate plus a margin of 1.50%. The Company incurred approximately $1.6 million of debt issuance costs in connection with the amendment. For accounting purposes, pursuant to ASC 470, this transaction was accounted for as a modification of the 2018 Credit Facility. Of the $1.6 million of debt issuance costs, approximately $1.1 million was recorded on the Company’s condensed consolidated balance sheet and is being amortized over the life of the 2018 Credit Facility using the effective-interest method, and approximately $0.5 million was recognized in interest expense, net within the Company’s condensed consolidated statement of income during the three months ended March 31, 2020.
On February 10, 2021, the Company amended the 2018 Credit Facility which, among other things, reduced the interest rate for borrowings under the 2018 Term Loan B from either the eurocurrency rate plus a margin of 2.75% or the base rate plus a margin of 1.75% to either the eurocurrency rate plus a margin of 2.50% or the base rate plus a margin of 1.50%. The Company incurred approximately $1.1 million of debt issuance costs in connection with the amendment. For accounting purposes, pursuant to ASC 470, this transaction was accounted for as a modification of the 2018 Credit Facility. The debt issuance costs were recognized in interest expense, net within the Company’s condensed consolidated statement of income during the three months ended March 31, 2021.
11
On July 30, 2021, the Company amended the 2018 Credit Facility which, among other things, increased borrowings under the 2018 Term Loan A from $245.0 million to a total of $286.2 million; increased the total available borrowing capacity under the 2018 Revolving Credit Facility from $282.5 million to $330.0 million; reduced the interest rate for borrowings under the 2018 Term Loan A and 2018 Revolving Credit Facility from either the eurocurrency rate plus a margin of 2.50% or the base rate plus a margin of 1.50% to, depending on the Company's total leverage ratio, either the eurocurrency rate plus a margin of between 1.75% and 2.25% or the base rate plus a margin of between 0.75% and 1.25%; and amended the commitment fee on the undrawn portion of the 2018 Revolving Credit Facility from 0.35% per annum to, depending on the Company's total leverage ratio, between 0.25% to 0.35% per annum. As a result of the amendment, the applicable margin for the 2018 Term Loan A and 2018 Revolving Credit Facility may also be subject to certain premiums or discounts tied to criteria determined by certain sustainability targets. The Company incurred approximately $1.4 million of debt issuance costs in connection with the amendment. For accounting purposes, pursuant to ASC 470, this transaction was accounted for as a modification of the 2018 Credit Facility. Of the $1.4 million of debt issuance costs, approximately $0.8 million was recorded on the Company’s condensed consolidated balance sheet and is being amortized over the life of the 2018 Credit Facility using the effective-interest method, and approximately $0.6 million was recognized in interest expense, net within the Company’s condensed consolidated statement of income during the three months ended September 30, 2021.
Under the 2018 Credit Facility, borrowings under both the 2018 Term Loan A and 2018 Revolving Credit Facility bear interest at, depending on the Company's total leverage ratio, either the eurocurrency rate plus a margin of between 1.75% and 2.25% or the base rate plus a margin of between 0.75% and 1.25%. The applicable margin may also be subject to certain premiums or discounts tied to criteria determined by certain sustainability targets. Borrowings under the 2018 Term Loan B bear interest at either the eurocurrency rate plus a margin of 5.50%2.50% or the base rate plus a margin of 4.50%. Prior to August 15, 2017, borrowings under the Revolving Credit Facility bore interest at the eurocurrency rate plus a margin of 4.75% or the base rate plus a margin of 3.75%. After August 15, 2017, borrowings under the Revolving Credit Facility, depending on Herbalife’s consolidated leverage ratio, bear interest at either the eurocurrency rate plus a margin of either 4.50% or 4.75% or the base rate plus a margin of either 3.50% or 3.75%. The base rate represents the highest of the Federal Funds Rate plus 0.50%, one-month adjusted LIBOR plus 1.00%, and the prime rate set by Credit Suisse, and is subject to a floor of 1.75%1.50%. The eurocurrency rate is based on adjusted LIBOR and is subject to a floor of 0.75%0.00%. The base rate represents the highest of the Federal Funds Rate plus 0.50%, one-month adjusted LIBOR plus 1.00%, and the prime rate quoted by The Wall Street Journal, and is subject to a floor of 1.00%. The Company is required to pay a commitment fee on the 2018 Revolving Credit Facility of, 0.50%depending on the Company's total leverage ratio, between 0.25% to 0.35% per annum on the undrawn portion of the 2018 Revolving Credit Facility. Interest is due at least quarterly on amounts outstanding onunder the 2018 Credit Facility.
The 2018 Credit Facility requires the Company to comply with a leverage ratio. The 2018 Credit Facility also contains affirmative and negative covenants customary for financings of this type, including, among other things, limitations or prohibitions on repurchasing common shares, declaring and paying dividends and other distributions, redeeming and repurchasing certain other indebtedness, loans and investments, additional indebtedness, liens, mergers, asset sales and transactions with affiliates. In addition, the 2018 Credit Facility contains customary events of default and covenants, including covenants that limit or restrict the Company’s ability to incur liens, incur indebtedness, make investments, dispose of assets, make certain restricted payments, pay dividends, repurchase its common shares, merge or consolidate and enter into certain transactions with affiliates. The Company is also required to maintain a minimum balance of $200.0 million of consolidated cash and cash equivalents.default. As of September 30, 20172021 and December 31, 2016,2020, the Company was in compliance with its debt covenants under the 2018 Credit Facility and the Prior Credit Facility, respectively.Facility.
The 2018 Term Loan isA and 2018 Term Loan B are payable in consecutive quarterly installments each in an aggregate principal amount of $24.4 million which began on June 30, 2017.December 31, 2018. In addition, beginning in 2020, the Company may be required to make mandatory prepayments towards the 2018 Term Loan B based on the Company’s consolidated leverage ratio and annual excess cash flows as defined under the terms of the 2018 Credit Facility. The Company is also permitted to make voluntary prepayments. Amounts outstanding under the 2018 Term Loan A and 2018 Term Loan B may be voluntarily prepaid without premium or penalty, subject to customary breakage fees in connection with the prepayment of a eurocurrency loan. These prepayments, if any, will be applied against remaining quarterly installments owed under the 2018 Term Loan A and 2018 Term Loan B in order of maturity with the remaining principal due upon maturity,. unless directed otherwise by the Company. Based on the 2020 consolidated leverage ratio and excess cash flow calculation, both as defined under the terms of the 2018 Credit Facility, the Company will not be required to make a mandatory prepayment in 2021 toward the 2018 Term Loan B.
OnAs of September 30, 20172021 and December 31, 2016,2020, the weighted averageweighted-average interest rate for borrowings under the Credit Facility and the Prior2018 Credit Facility was 6.71%2.65% and 4.29%3.39%, respectively.
During the threenine months ended March 31, 2017,September 30, 2021, the Company borrowed an aggregate amount of $531.2 million under the 2018 Credit Facility and repaid a total amount of $410.0$415.8 million to repay in full amounts outstanding on the Prior Revolving Credit Facility. During both the three months ended June 30, 2017 and September 30, 2017, the Company repaid $24.4 million, respectively, on amounts outstanding under the 2018 Credit Facility, including a $60.0 million prepayment on amounts outstanding under the 2018 Term Loan. Loan B. During the threenine months ended March 31, 2016,September 30, 2020, the Company borrowed an aggregate amount of $30.4 million under the 2018 Credit Facility and repaid a total amount of $229.7$15.6 million to repay in full the Prior Term Loan. The Company did not repay anyon amounts outstanding under the Prior Revolving2018 Credit Facility during the three months ended September 30, 2016. Facility. As of September 30, 2017,2021 and December 31, 2020, the U.S. dollar amount outstanding under the Term Loan2018 Credit Facility was $1,251.2 million. There were no borrowings$1,100.1 million and $984.7 million, respectively. Of the $1,100.1 million outstanding onunder the Revolving2018 Credit Facility as of September 30, 2017. As2021, $282.6 million was outstanding under the 2018 Term Loan A, $667.5 million was outstanding under the 2018 Term Loan B, and $150.0 million was outstanding under the 2018 Revolving Credit Facility. Of the $984.7 million outstanding under the 2018 Credit Facility as of December 31, 2016, the U.S. dollar amount2020, $251.6 million was outstanding under the Prior2018 Term Loan A and $733.1 million was outstanding under the 2018 Term Loan B. There were 0 borrowings outstanding under the 2018 Revolving Credit Facility was $410.0 million.as of December 31, 2020. There were no outstanding foreign currency borrowings under the 2018 Credit Facility as of September 30, 20172021 and December 31, 2016 under the Credit Facility and the Prior Credit Facility, respectively.2020.
12
During the three and nine months ended September 30, 2017,2021 and 2020, the Company recognized $23.9$8.9 million and $58.5$8.0 million, respectively, of interest expense relating to the Term Loan,2018 Credit Facility, which included $1.2$0.1 million and $3.0$0.1 million, respectively, relating to non-cash interest expense relating to the debt discount and $0.8$0.9 million and $2.0$0.5 million, respectively, relating to amortization of debt issuance costs. During the nine months ended September 30, 2021 and 2020, the Company recognized $26.1 million and $29.2 million, respectively, of interest expense relating to the 2018 Credit Facility, which included $0.3 million and $0.2 million, respectively, relating to non-cash interest expense relating to the debt discount and $1.8 million and $1.4 million, respectively, relating to amortization of debt issuance costs.
The fair value of the outstanding borrowings on the 2018 Term Loan A is determined by utilizing over-the-counter market quotes for similar instruments, which are considered Level 2 inputs as described in Note 12, Fair Value Measurements. As of September 30, 2021 and December 31, 2020, the carrying value of the 2018 Term Loan A was $281.6 million and $250.5 million, respectively, and the fair value was approximately $281.9 million and $251.9 million, respectively. The fair value of the outstanding borrowings under the 2018 Term Loan B is determined by utilizing over-the-counter market quotes, which are considered Level 2 inputs as defineddescribed in Note 12, Fair Value Measurements. As of September 30, 2017,2021 and December 31, 2020, the carrying amount of the 2018 Term Loan B was $1,212.6$662.0 million and $726.0 million, respectively, and the fair value was approximately $1,228 million. There were no amounts outstanding on the Revolving Credit Facility as of September 30, 2017.$665.8 million and $734.0 million, respectively. The fair value of the outstanding borrowings on the Company’s Prior2018 Revolving Credit Facility approximated its carrying value of $150.0 million as of December 31, 2016September 30, 2021 due to its variable interest rate which reprices frequently and which represents floating market rates.The fair value of the outstanding borrowings on the Prior Revolving Credit Facility was determined by utilizing Level 2 inputs as defined in Note 12, Fair Value Measurements, such as observable market interest rates and yield curves.
Convertible Senior Notes due 2024
During February 2014,In March 2018, the Company initially issued $1 billion$550.0 million aggregate principal amount of convertible senior notes, or the 2024 Convertible Notes, in a private offering to qualified institutional buyers, pursuant to Rule 144A under the Securities Act of 1933, as amended. The Company granted an option to the initial purchasers to purchase up to an additional $150 million aggregate principal amount of Convertible Notes which was subsequently exercised in full during February 2014, resulting in a total issuance of $1.15 billion aggregate principal amount of Convertible Notes. The2024 Convertible Notes are senior unsecured obligations which rank effectively subordinate to any of the Company’s existing and future secured indebtedness, including amounts outstanding under the 2018 Credit Facility, to the extent of the value of the assets securing such indebtedness. The 2024 Convertible Notes pay interest at a rate of 2.00%2.625% per annum payable semiannually in arrears on FebruaryMarch 15 and AugustSeptember 15 of each year, beginning on AugustSeptember 15, 2014. The2018. Unless redeemed, repurchased or converted in accordance with their terms prior to such date, the 2024 Convertible Notes mature on AugustMarch 15, 2019, unless earlier repurchased or converted. The Company may not redeem the Convertible Notes prior to their stated maturity date. 2024. Holders of the 2024 Convertible Notes may convert their notes at their option under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending March 31, 2014,June 30, 2018, if the last reported sale price of the Company’s common shares for at least 20 trading days (whether or not consecutive) in a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter exceeds 130%130% of the conversion price for the 2024 Convertible Notes on each applicable trading day; (ii) during the five business-day period immediately after any five consecutive trading day period, or the measurement period, in which the trading price per $1,000$1,000 principal amount of 2024 Convertible Notes for each trading day of that measurement period was less than 98%98% of the product of the last reported sale price of the Company’s common shares and the conversion rate for the 2024 Convertible Notes for each such day; (iii) if the Company calls the 2024 Convertible Notes for redemption; or (iii)(iv) upon the occurrence of specified corporate events. On and after MayDecember 15, 2019,2023, holders may convert their 2024 Convertible Notes at any time, regardless of the foregoing circumstances. Upon conversion, the 2024 Convertible Notes will be settled, at the Company’s election, in cash, and, if applicable, the Company’s common shares, or a combination thereof, based on the applicable conversion rate at such time. The 2024 Convertible Notes had an initial conversion rate of 11.590816.0056 common shares per $1,000 principal amount of the 2024 Convertible Notes, (which is equal toor an initial conversion price of approximately $86.28$62.48 per common share).share. The conversion rate is subject to adjustment upon the occurrence of certain events and was 16.0467 common shares per $1,000 principal amount of the 2024 Convertible Notes, or a conversion price of approximately $62.32 per common share, as of September 30, 2021.
The Company incurred approximately $26.6$12.9 million of issuance costs during the first quarter of 20142018 relating to the issuance of the 2024 Convertible Notes. Of the $26.6$12.9 million issuance costs incurred, $21.5$9.6 million and $5.1$3.3 million were recorded as debt issuance costs and additional paid-in capital, respectively, in proportion to the allocation of the proceeds of the 2024 Convertible Notes. The $21.5$9.6 million of debt issuance costcosts, which was recorded as an additional debt discount on the Company’s condensed consolidated balance sheet, isare being amortized over the contractual term of the 2024 Convertible Notes using the effective interesteffective-interest method.
During February 2014,In March 2018, the $1.15 billion proceeds received from the issuance$550.0 million aggregate principal amount of the 2024 Convertible Notes were initially allocated between long-term debt, or liability component, and additional paid-in-capital,paid-in capital, or equity component, within the Company’s condensed consolidated balance sheet at $930.9$410.1 million and $219.1$139.9 million, respectively. The liability component was measured using the nonconvertible debt interest rate. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the face value of the 2024 Convertible Notes as a whole. Since the Company must still settle these 2024 Convertible Notes at face value at or prior to maturity, this liability component will be accreted up to its face value resulting in additional non-cash interest expense being recognized within the Company’s condensed consolidated statements of income while the 2024 Convertible Notes remain outstanding. The effective interesteffective-interest rate on the 2024 Convertible Notes is approximately 6.2%8.4% per annum. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
13
As of September 30, 2017,2021, the outstanding principal on the 2024 Convertible Notes was $1.15 billion,$550.0 million, the unamortized debt discount and debt issuance cost was $91.6costs were $70.6 million, and the carrying amount of the liability component was $1,058.4$479.4 million, which was recorded to long-term debt within the Company’s condensed consolidated balance sheet as reflected in the table above within this Note. sheet. As of December 31, 2016,2020, the outstanding principal on the 2024 Convertible Notes was $1.15 billion,$550.0 million, the unamortized debt discount and debt issuance costs was $125.2were $89.4 million, and the carrying amount of the liability component was $1,024.8$460.6 million, which was recorded to long-term debt within the Company’s condensed consolidated balance sheet as reflected in the table above within this Note. sheet. The fair value of the liability component relating to the 2024 Convertible Notes was approximately $1,064.6$548.6 million and $961.3$541.8 million as of September 30, 20172021 and December 31, 2016,2020, respectively. At
During the three months ended September 30, 20172021 and 2020, the Company recognized $10.0 million and $9.5 million, respectively, of interest expense relating to the 2024 Convertible Notes, which included $6.0 million and $5.5 million, respectively, relating to non-cash interest expense relating to the debt discount and $0.4 million and $0.4 million, respectively, relating to amortization of debt issuance costs. During the nine months ended September 30, 2021 and 2020, the Company recognized $29.6 million and $28.1 million, respectively, of interest expense relating to the 2024 Convertible Notes, which included $17.6 million and $16.2 million, respectively, relating to non-cash interest expense relating to the debt discount and $1.2 million and $1.1 million, respectively, relating to amortization of debt issuance costs.
Senior Notes due 2025
In May 2020, the Company issued $600.0 million aggregate principal amount of senior notes, or the 2025 Notes, in a private offering in the United States to qualified institutional buyers, pursuant to Rule 144A under the Securities Act of 1933, as amended, and outside the United States pursuant to Regulation S under the Securities Act of 1933, as amended. The 2025 Notes are senior unsecured obligations which rank effectively subordinate to any of the Company’s existing and future secured indebtedness, including amounts outstanding under the 2018 Credit Facility, to the extent of the value of the assets securing such indebtedness. The 2025 Notes pay interest at a rate of 7.875% per annum payable semiannually in arrears on March 1 and September 1 of each year, beginning on March 1, 2021. The 2025 Notes mature on September 1, 2025.
At any time prior to September 1, 2022, the Company may redeem all or part of the 2025 Notes at a redemption price equal to 100% of their principal amount, plus a “make whole” premium as of the redemption date, and accrued and unpaid interest to the redemption date. In addition, at any time prior to September 1, 2022, the Company may redeem up to 40% of the aggregate principal amount of the 2025 Notes with the proceeds of one or more equity offerings, at a redemption price equal to 107.875%, plus accrued and unpaid interest. Furthermore, at any time on or after September 1, 2022, the Company may redeem all or part of the 2025 Notes at the following redemption prices, expressed as percentages of principal amount, plus accrued and unpaid interest thereon to the redemption date, if redeemed during the twelve-month period beginning on September 1 of the years indicated below:
|
| Percentage |
| |
2022 |
|
| 103.938 | % |
2023 |
|
| 101.969 | % |
2024 and thereafter |
|
| 100.000 | % |
The 2025 Notes contain customary negative covenants, including, among other things, limitations or prohibitions on restricted payments, incurrence of additional indebtedness, liens, mergers, asset sales and transactions with affiliates. In addition, the 2025 Notes contain customary events of default.
The Company incurred approximately $7.9 million of issuance costs during the second quarter of 2020 relating to the issuance of the 2025 Notes. The $7.9 million of debt issuance costs, which was recorded as a debt discount on the Company’s condensed consolidated balance sheet, are being amortized over the contractual term of the 2025 Notes using the effective-interest method.
As of September 30, 2021, the outstanding principal on the 2025 Notes was $600.0 million, the unamortized debt issuance costs were $6.2 million, and the carrying amount was $593.8 million, which was recorded to long-term debt within the Company’s condensed consolidated balance sheet. As of December 31, 2020, the outstanding principal on the 2025 Notes was $600.0 million, the unamortized debt issuance costs were $7.1 million, and the carrying amount was $592.9 million, which was recorded to long-term debt within the Company’s condensed consolidated balance sheet. The fair value of the 2025 Notes was approximately $647.7 million and $656.3 million as of September 30, 2021 and December 31, 2016,2020, respectively, and was determined by utilizing over-the-counter market quotes and yield curves, which are considered Level 2 inputs as defined in Note 12, Fair Value Measurements.
14
During the three months ended September 30, 2021 and 2020, the Company recognized $12.1 million and $12.1 million, respectively, of interest expense relating to the 2025 Notes, which included $0.4 million and $0.3 million, respectively, relating to amortization of debt issuance costs. During the nine months ended September 30, 2021 and 2020, the Company recognized $36.4 million and $16.4 million, respectively, of interest expense relating to the 2025 Notes, which included $1.0 million and $0.4 million, respectively, relating to amortization of debt issuance costs.
Senior Notes due 2026
In August 2018, the Company issued $400.0 million aggregate principal amount of senior notes, or the 2026 Notes, in a private offering in the United States to qualified institutional buyers, pursuant to Rule 144A under the Securities Act of 1933, as amended, and outside the United States pursuant to Regulation S under the Securities Act of 1933, as amended. The 2026 Notes were senior unsecured obligations which ranked effectively subordinate to any of the Company’s existing and future secured indebtedness, including amounts outstanding under the 2018 Credit Facility, to the extent of the value of the assets securing such indebtedness. The 2026 Notes paid interest at a rate of 7.250% per annum payable semiannually in arrears on February 15 and August 15 of each year, beginning on February 15, 2019. The 2026 Notes were to mature on August 15, 2026.
The Company incurred approximately $5.4 million of issuance costs during the third quarter of 2018 relating to the issuance of the 2026 Notes. The $5.4 million of debt issuance costs, which was recorded as a debt discount on the Company’s condensed consolidated balance sheet, were being amortized over the contractual term of the 2026 Notes using the effective-interest method.
In May 2021, the Company issued $600.0 million aggregate principal of new senior notes due 2029, or the 2029 Notes as described below, and subsequently used a portion of the proceeds to redeem all $400.0 million of its existing 2026 Notes for an aggregate purchase price of $428.5 million, which included $7.7 million of accrued interest. For accounting purposes, pursuant to ASC 470, these transactions were accounted for as an extinguishment of the 2026 Notes. The Company recognized a loss on extinguishment of $24.6 million as a result, which was recorded in other expense, net within the Company’s condensed consolidated statement of income for the three months ended June 30, 2021.
As of December 31, 2020, the outstanding principal on the 2026 Notes was $400.0 million, the unamortized debt issuance costs were $4.1 million, and the carrying amount was $395.9 million, which was recorded to long-term debt within the Company’s condensed consolidated balance sheet. The fair value of the 2026 Notes was approximately $425.0 million as of December 31, 2020 and was determined by utilizing over-the-counter market quotes and yield curves, which are considered Level 2 inputs as defined in Note 12, Fair Value Measurements.
During the three months ended September 30, 2020, the Company recognized $7.4 million of interest expense relating to the 2026 Notes, which included $0.1 million relating to amortization of debt issuance costs. During the nine months ended September 30, 2021 and 2020, the Company recognized $11.5 million and $22.2 million, respectively, of interest expense relating to the 2026 Notes, which included $0.2 million and $0.4 million, respectively, relating to amortization of debt issuance costs.
Senior Notes due 2029
In May 2021, the Company issued $600.0 million aggregate principal amount of senior notes, or the 2029 Notes, in a private offering in the United States to qualified institutional buyers, pursuant to Rule 144A under the Securities Act of 1933, as amended, and outside the United States pursuant to Regulation S under the Securities Act of 1933, as amended. The 2029 Notes are senior unsecured obligations which rank effectively subordinate to any of the Company’s existing and future secured indebtedness, including amounts outstanding under the 2018 Credit Facility, to the extent of the value of the assets securing such indebtedness. The 2029 Notes pay interest at a rate of 4.875% per annum payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2021. The 2029 Notes mature on June 1, 2029.
At any time prior to June 1, 2024, the Company may redeem all or part of the 2029 Notes at a redemption price equal to 100% of their principal amount, plus a “make whole” premium as of the redemption date, and accrued and unpaid interest to the redemption date. In addition, at any time prior to June 1, 2024, the Company may redeem up to 40% of the aggregate principal amount of the 2029 Notes with the proceeds of one or more equity offerings, at a redemption price equal to 104.875%, plus accrued and unpaid interest. Furthermore, at any time on or after June 1, 2024, the Company may redeem all or part of the 2029 Notes at the following redemption prices, expressed as percentages of principal amount, plus accrued and unpaid interest thereon to the redemption date, if redeemed during the twelve-month period beginning on June 1 of the years indicated below:
|
| Percentage |
| |
2024 |
|
| 102.438 | % |
2025 |
|
| 101.219 | % |
2026 and thereafter |
|
| 100.000 | % |
15
The 2029 Notes contain customary negative covenants, including, among other things, limitations or prohibitions on restricted payments, incurrence of additional indebtedness, liens, mergers, asset sales and transactions with affiliates. In addition, the 2029 Notes contain customary events of default.
The Company incurred approximately $7.7 million of issuance costs during the second quarter of 2021 relating to the issuance of the 2029 Notes. The $7.7 million of debt issuance costs, which was recorded as a debt discount on the Company’s condensed consolidated balance sheet, are being amortized over the contractual term of the 2029 Notes using the effective-interest method.
As of September 30, 2021, the outstanding principal on the 2029 Notes was $600.0 million, the unamortized debt issuance costs were $7.4 million, and the carrying amount was $592.6 million, which was recorded to long-term debt within the Company’s condensed consolidated balance sheet. The fair value of the 2029 Notes was approximately $600.1 million as of September 30, 2021 and was determined by utilizing over-the-counter market quotes and yield curves, which are considered Level 2 inputs as defined in Note 12, Fair Value Measurements.
During the three months ended September 30, 2021, the Company recognized $7.5 million of interest expense relating to the 2029 Notes, which included $0.2 million relating to amortization of debt issuance costs. During the nine months ended September 30, 2021, the Company recognized $10.9 million of interest expense relating to the 2029 Notes, which included $0.3 million relating to amortization of debt issuance costs.
Valuation of 2024 Convertible Notes – Level 2 and Level 3 Inputs
In order to determine the initial value of the 2024 Convertible Notes, the Company determined the fair value of the liability component of the 2024 Convertible Notes using two valuation methods. The Company reviewed market data that was available for publicly traded, senior, unsecured nonconvertible corporate bonds issued by companies with similar credit ratings. Assumptions used in the estimate represent what market participants would use in pricing the liability component, including market yields and credit standing to develop the straight debt yield estimate. The Company also used a lattice model, which included inputs such as stock price, the Convertible Note trading price, volatility and dividend yield to estimate the straight debt yield. The Company combined the results of the two valuation methods to determine the fair value of the liability component of the 2024 Convertible Notes. Most of these inputs are primarily considered Level 2 and Level 3 inputs. ThisThe Company used similar valuation approach was similar to the approach the Company usedapproaches to determine the initialsubsequent fair value of the liability component of the Convertible Notes on the February 7, 2014 issuance date.
In conjunction with the issuance of the Convertible Notes, during February 2014, the Company paid approximately $685.8 million to enter into prepaid forward share repurchase transactions, or the Forward Transactions, with certain financial institutions,only for disclosure purposes, which includes using a lattice model and paid approximately $123.8 million to enter into capped call transactions with respect(1) reviewing market data relating to its common shares,2025 Notes and 2029 Notes and comparable yield curves to determine its straight debt yield estimate, or the Capped Call Transactions, with certain financial institutions. See Note 10, Shareholders’ Equity, for additional discussion on the Forward Transactions and Capped Call Transactions entered into in conjunction with the issuance of these Convertible Notes.
During the three and nine months ended September 30, 2017, the Company recognized $17.2 million and $50.9 million, respectively, of interest expense(2) reviewing market data relating to the Convertible Notes, which included $10.4 million and $30.6 million, respectively, relatingpublicly traded, senior, unsecured nonconvertible corporate bonds issued by companies with similar credit ratings in order to non-cash interest expense relating to thedetermine its straight debt discount and $1.0 million and $3.0 million, respectively, relating to amortization of debt issuance costs. During the three and nine months ended September 30, 2016, the Company recognized $16.4 million and $48.7 million, respectively, of interest expense relating to the Convertible Notes, which included $9.7 million and $28.7 million, respectively, relating to non-cash interest expense relating to the debt discount and $0.9 million and $2.8 million, respectively, relating to amortization of debt issuance costs. yield estimate.
Total Debt
The Company’s total interest expense was $43.0$38.8 million and $24.0$37.0 million for the three months ended September 30, 20172021 and 2016,2020, respectively, and $117.4$115.5 million and $74.6$96.4 million for the nine months ended September 30, 20172021 and 2016,2020, respectively, which was recognized within its condensed consolidated statements of income.
As of September 30, 2017,2021, annual scheduled principal payments of debt were: $26.2 million for the remainder of 2017; and $102.3 million; $1,250.0 million; $97.9 million; $97.5 million; $97.5 million; and $739.4 million for the years ended December 31, 2018, 2019, 2020, 2021, 2022, and 2023, respectively.were as follows:
|
| Principal Payments |
| |
|
| (in millions) |
| |
2021 |
| $ | 7.6 |
|
2022 |
|
| 29.4 |
|
2023 |
|
| 29.4 |
|
2024 |
|
| 586.4 |
|
2025 |
|
| 1,600.6 |
|
Thereafter |
|
| 600.0 |
|
Total |
| $ | 2,853.4 |
|
Certain vendors and government agencies may require letters of credit or similar guaranteeing arrangements to be issued or executed. As of September 30, 2017,2021, the Company had $37.9$39.9 million of issued but undrawn letters of credit or similar arrangements that were unsecured, which included the Mexico Value Added Tax, or VAT, related surety bonds described in Note 5, Contingencies.arrangements.
16
5. Contingencies
The Company is from time to time engaged in routine litigation. The Company regularly reviews all pending litigation matters in which it is involved and establishes reserves deemed appropriate by management for these litigation matters when a probable loss estimate can be made.
TheseThe matters described in this Note may take several years to resolve. While the Company believes it has meritorious defenses, it cannot be sure of their ultimate resolution. Although the Company may reserve amounts for certain matters that the Company believes represent the most likely outcome of the resolution of these related disputes, if the Company is incorrect in its assessment, the Company may have to record additional expenses, when it becomes probable that an increased potential liability is warranted.
Tax Matters
On May 7, 2010, the Company received an assessment from the Mexican Tax Administration Service in an amount equivalent to approximately $63.1 million, translated at the September 30, 2017 spot rate, for various items, the majority of which was VAT allegedly owed on certain of the Company’s products imported into Mexico during the years 2005 and 2006. This assessment is subject to interest and inflationary adjustments. On July 8, 2010, the Company initiated a formal administrative appeal process. On May 13, 2011, the Mexican Tax Administration Service issued a resolution on the Company’s administrative appeal. The resolution nullified the assessment. Since the Mexican Tax Administration Service can further review the tax audit findings and re-issue some or all of the original assessment, the Company commenced litigation in the Tax Court of Mexico in August 2011 to dispute the assertions made by the Mexican Tax Administration Service in the case. The Company received notification on February 6, 2015 that the Tax Court of Mexico nullified substantially all of the assessment. On March 18, 2015, the Mexican Tax Administration Service filed an appeal against the verdict with the Circuit Court. On August 27, 2015, the Circuit Court remanded the case back to the Tax Court of Mexico to reconsider a portion of the procedural decision that was adverse to the Mexican Tax Administration Service. The Company received notification on March 18, 2016 that the Tax Court of Mexico nullified a portion of the assessment and upheld a portion of the original assessment. On August 25, 2016, the Company filed a further appeal of this decision to the Circuit Court. On April 6, 2017, the Circuit Court issued a verdict with the Company prevailing on some lesser issues and the Tax Administration Service prevailing on the core issue. On May 11, 2017, the Company filed a further appeal to the Supreme Court of Mexico. On June 14, 2017, the Supreme Court of Mexico agreed to hear the appeal. The Company believes that it has meritorious defenses if the assessment is reissued. The Company has not recognized a loss as the Company does not believe a loss is probable.
The Mexican Tax Administration Service commenced audits of the Company’s Mexican subsidiaries for the period from January to September 2007 and on May 10, 2013, the Company received an assessment of approximately $16.2 million, translated at the September 30, 2017 spot rate, related to that period. This assessment is subject to interest and inflationary adjustments. On July 11, 2013, the Company filed an administrative appeal disputing the assessment. On September 22, 2014, the Mexican Tax Administration Service denied the Company’s administrative appeal. The Company commenced litigation in the Tax Court of Mexico in November 2014 to dispute the assertions made by the Mexican Tax Administration Service in the case. The CompanyOn January 16, 2018, the Tax Court of Mexico issued a surety bond inverdict upholding the amount of $17.9 million, translated atassessment issued by the September 30, 2017 spot rate, through an insurance company to guarantee payment of the tax assessment as required whileMexican Tax Administration Service. On April 16, 2018, the Company pursuesfiled an appeal of this verdict, and in July 2019, the assessment. Litigation in this case is currently ongoing.Circuit Court issued a written verdict upholding the assessment and the judgment of the Tax Court of Mexico. On August 12, 2019, the Company filed an appeal with the Supreme Court of Mexico. On October 16, 2019, the Supreme Court of Mexico refused to hear the Company’s appeal. On October 21, 2019, the Company filed a petition with the Supreme Court of Mexico, asking them to reconsider their previous decision. On April 29, 2020, the Supreme Court of Mexico declined the Company’s second petition and the adverse verdicts of the lower courts became final. The Company has notpreviously recognized a loss asof $19.0 million in selling, general, and administrative expenses within the Company’s condensed consolidated statement of income during the year ended December 31, 2019. The Company does not believe a losspaid the assessment during the second quarter of 2021 and the case is probable.now closed.
The Mexican Tax Administration Service has delayed processing VAT refunds for companies operating in Mexico and the Company believes that the process for its Mexico subsidiary to receive VAT refunds may be delayed. As of September 30, 2017,2021, the Company had $46.3$25.5 million of Mexico VAT related assets, of which $39.7$22.0 million was within non-currentrecognized in other assets and $6.6$3.5 million was withinrecognized in prepaid expenses and other current assets onwithin its condensed consolidated balance sheet. This amount relates to VAT payments made over various periods and the Company believes these amounts are recoverable by refund or they may be applied against certain future tax liabilities. Effective January 1, 2019, a tax reform law changed the rules concerning possible use of VAT assets, specifically providing that, for VAT balances generated after December 31, 2018, those balances could not be offset against taxes other than VAT obligations currently due. The Company has not recognized any losses related to these VAT related assets as the Company does not believe a loss is probable.
On March 26, 2015, the Office of the President of Mexico issued a decree relating to the application of VAT to nutritional supplements. The Company continues to believe its application of the VAT law in Mexico is correct. At September 30, 2017, the Company has not recognized any losses as the Company, based on its current analysis and guidance from its advisors, does not believe a loss is probable. The Company continues to evaluate and monitor its situation as it develops, including whether it will make any changes to its operations in Mexico.
The Company has not recognized a loss with respect to any of these Mexican matters as the Company, based on its analysis and guidance from its advisors, does not believe a loss is probable. Further, the Company is currently unable to reasonably estimate a possible loss or range of loss that could result from an unfavorable outcome if an assessment was re-issued or any additionalreceived tax assessments were to be issued for these or other periods. The Company believes that it has meritorious defenses if an assessment is re-issued or would have meritorious defenses if any additional assessment is issued.
As previously disclosed, the Mexican Tax Administration Service has requested information related to the Company’s 2010 year. This information has been provided and the Tax Administration Service has now completed its income tax audit related to the 2010 year. The Tax Administration Service is now discussing its preliminary findings with the Company. It is possible that the Company could receive a final assessment from the Tax Administration Service after these discussions are completed. The Company believes that it has recognized an appropriate amount of income tax expense with respect to its Mexican operations during the 2010 year. The Company believes that it has meritorious defenses if a formal assessment is issued by the Tax Administration Service. The Company is currently unable to reasonably estimate the amount of loss that may result from an unfavorable outcome if a formal assessment is issued by the Tax Administration Service.
The Company received a tax assessment in September 2009multiple years from the Federal Revenue Office of Brazil in an amount equivalent to approximately $2.2 million, translated at the September 30, 2017 spot rate, related to withholding/contributions based on payments to the Company’s Members during 2004. On December 28, 2010, the Company appealed this tax assessment to the Administrative CouncilMembers. The aggregate combined amount of Tax Appeals (2nd level administrative appeal). The Company believes it has meritorious defenses and it has not recognized a loss as the Company does not believe a lossall these assessments is probable. On March 6, 2014, the Company was notified of a similar audit of the 2011 year. In January 2016, the Company received a tax assessment for an amount equivalent to approximately $5.6$10.2 million, translated at the September 30, 20172021 spot rate, related to contributions based on payments to the Company’s Members during 2011. rate. The Company filed a first level administrative appeal against most of the assessment on February 23, 2016, which was subsequently denied. On March 13, 2017, the Company appealed this tax assessment to the Administrative Council of Tax Appeals (2nd level administrative appeal).is currently litigating these assessments. The Company has not accrued a loss for the majority of the assessmentassessments because the Company does not believe a loss is probable. The Company is currently unable to reasonably estimate the amount of the loss that may result from an unfavorable outcome if additional assessments for other periods were to be issued.
The Company’s Brazilian subsidiary pays ICMS-ST taxes on its product purchases, similar to VAT. As of September 30, 2017, the Company had $16.0 million of Brazil ICMS-ST, of which $7.5 million was within non-current other assets and $8.5 million was within prepaid expenses and other current assets on its condensed consolidated balance sheet. The Company believes it will be able to utilize or recover these ICMS-ST credits in the future.17
The Company is under examination in several Brazilian states related to ICMS and ICMS-ST taxation. Some of these examinations have resulted in assessments for underpaid tax that the Company has appealed. The State of SaoSão Paulo has audited the Company for the 2013 and 2014 tax years. During July 2016, for the State of SaoSão Paulo, the Company received an assessment in the aggregate amount of approximately $50.8$29.6 million, translated at the September 30, 20172021 spot rate, relating to various ICMS issues for its 2013 tax year. In August 2016, the Company filed a first levelfirst-level administrative appeal which was denied in February 2017. The Company filed a further appeal on March 9, 2017. On March 20, 2018, the Court held a hearing and a verdict was issued in June 2019, remanding the case back to the first-level administrative court. During August 2017, for the stateState of SaoSão Paulo, the Company received an assessment in the aggregate amount of approximately $18.8$11.0 million, translated at the September 30. 201730, 2021 spot rate, relating to various ICMS issues for its 2014 tax year. In September 2017, the Company filed a first levelfirst-level administrative appeal for the 2014 tax year. The first-level administrative appeal was denied. The Company has not recognizedfiled an appeal at the second-level administrative court in December 2018 and a loss asverdict was issued in April 2019, remanding the case back to the first-level administrative court. During September 2018, for the State of Rio de Janeiro, the Company does not believereceived an assessment in the aggregate amount of approximately $6.5 million, translated at the September 30, 2021 spot rate, relating to various ICMS-ST issues for its 2016 and 2017 tax years. On November 8, 2018, the Company filed a loss is probable.first-level administrative appeal, which was subsequently denied. On April 5, 2019, the Company appealed this tax assessment to the Administrative Council of Tax Appeals (second-level administrative appeal). The Company has also received other ICMS tax assessments in Brazil. During the fourth quarter of 2015, the Company filed appeals with state judicial courts against three of the assessments. The Company had issued surety bonds in the aggregate amount of $13.4$9.3 million, translated at the September 30, 20172021 spot rate, to guarantee payment of some of the tax assessments as required while the Company pursues the appeals. In addition, the Company has received several ICMS tax assessments in the aggregate amount of $7.2$5.3 million, translated at the September 30, 20172021 spot rate, from several other Brazilian states where surety bonds have not been issued. Litigation in all these cases is currently ongoing. The Company has not recognized a loss relating to any of these cases, assessments, and matters as the Company does not believe a loss is probable.
The Company has received various tax assessments in multiple statesjurisdictions in India for multiple years from the Indian VAT and Service Tax authorities in an amount equivalent to approximately $8.1$14.2 million, translated at the September 30, 20172021 spot rate. These assessments are for underpaid VAT.VAT and the ability to claim input Service Tax credits. The Company is litigating these cases at the tax administrative level and the tax tribunal levels as it believes it has meritorious defenses. The Company has not recognized a loss as it does not believe a loss is probable. In addition, the Indian income tax authorities audited the Company's fiscal years ended March 31, 2017 and 2018 and the Company has received assessments of approximately $13.4 million and $13.9 million for those respective years, translated at the September 30, 2021 spot rate. These assessments are subject to interest and penalties adjustments. The Company is currently litigating these cases. The Company currently believes that it is more likely than not that it will be successful in supporting its positions relating to these assessments. Accordingly, the Company has not accrued any amounts relating to these matters. In addition, the Indian income tax authorities are auditing the Company's fiscal years ended March 31, 2013 and 2020 and it is uncertain whether additional assessments will be received.
The Korea Customs Service audited the importation activities of Herbalife Korea for the period January 2011 through May 2013. The total assessment for the audit period is $31.2$30.0 million, translated at the September 30, 20172021 spot rate. The Company has paid the assessment and has recognized these payments withinin other assets onwithin its condensed consolidated balance sheet.sheet as of September 30, 2021. The Company lodged a first levelfirst-level administrative appeal, which was denied on October 21, 2016. On January 31, 2017, the Company filed a further appeal to the National Tax Tribunal of Korea. In November 2018, the Company received an unfavorable decision from the National Tax Tribunal of Korea. In February 2019, the Company submitted an appeal to the Seoul Administrative Court. On February 17, 2021, the Seoul Administrative Court issued a verdict in favor of the Company. On March 10, 2021, the Korea Customs Service filed an appeal to the High Court against the verdict and the appeal is currently pending. The Korea Customs Service audited the importation activities of Herbalife Korea for the period May 2013 through December 2013. The total assessment for the audit period is $9.8 million, translated at the September 30, 2021 spot rate. The Company has paid the assessment and has recognized this payment in other assets within its condensed consolidated balance sheet as of September 30, 2021. The Korea Customs Service audited the importation activities of Herbalife Korea for the period January 2014 through December 2014. The total assessment for the audit period is $15.2 million, translated at the September 30, 2021 spot rate. The Company paid the assessment in September 2020 and has recognized this payment in other assets within its condensed consolidated balance sheet as of September 30, 2021. The Company is currently litigating both of these assessments at the Seoul Administrative Court. The Korea Customs Service audited the importation activities of Herbalife Korea for the period January 2015 through December 2017. The total assessment for the audit period is $12.3 million, translated at the September 30, 2021 spot rate. The Company intends to timely pay and subsequently appeal this assessment. The Company disagrees with the assertions made in theall of these assessments, as well as the calculation methodology used in the assessments. The Company has not recognized a loss as the Company does not believe a loss is probable.
18
During the course of 2016, the Company received various questions from the Greek Social Security Agency and on December 29, 2016, the Greek Social Security Agency issued an assessment of approximately $2.4 million translated at the September 30, 2017 spot rate, with respect to Social Security Contributions on Member earnings for the 2006 year. For Social Security issues, the Statutestatute of Limitationslimitations is open for 2007 and later years in Greece. TheDespite the assessment amount being immaterial, the Company could receive similar assessments covering other years. The Company disputescontinues to litigate the allegations raised in the assessment and has filed an administrative appeal against the assessment with the Social Security Agency.assessment. The Company has not recognized a loss as it does not believe a loss is probable. The Company is currently unable to reasonably estimate the amount of the loss that may result from an unfavorable outcome if additional assessments for other periods were to be issued.
During March 2018, the Chinese Customs Service began an audit of the Company’s Chinese importations initially covering the periods 2015 through 2017 and had subsequently expanded its audit. The Company responded to the initial questions from the Customs Service. The Custom cases are now closed and resulted in immaterial settlement amounts that were accrued in prior periods.
U.S. Federal Trade Commission Consent Order
As previously disclosed, the Company received from the U.S. Federal Trade Commission, or the FTC, a Civil Investigative Demand, or a CID, relating to the FTC’s confidential investigation of whether the Company has complied with federal law in the advertising, marketing, or sale of business opportunities. On July 15, 2016, the Company and the Federal Trade Commission, or the FTC, entered into a proposed Stipulation to Entry of Order for Permanent Injunction and Monetary Judgment, or the Consent Order. The Consent Order was lodged with the U.S. District Court for the Central District of California on July 15, 2016 and became effective on July 25, 2016, or the Effective Date, upon final approval by the Court. Date. The Consent Order resolved the FTC’s multi-year investigation of the Company.
Pursuant to the Consent Order, under which the Company neither admitted nor denied the FTC’s allegations (except as to the Court having jurisdiction over the matter), the Company made, through its wholly ownedwholly-owned subsidiary Herbalife International of America, Inc., a $200$200 million payment to the FTC. Additionally, the Company agreedimplemented and continues to implement certain new procedures and enhance certain existing procedures in the U.S., most of which the Company had 10 months from the Effective Date to implement. Among other requirements, the Consent Order requires the Company to categorize all existing and future Members in the U.S. as either “preferred members” – who are simply consumers who only wish to purchase products for their own household use, or “distributors” – who are membersMembers who wish to resell some products or build a sales organization. The Company also agreed to compensate distributors on eligible U.S. sales within their downline organization, which include purchases by preferred members, purchases by a distributor for his or her personal consumption within allowable limits and sales of product by a distributor to his or her customers. The Consent Order also imposes restrictions on a distributor’s ability to open Nutrition Clubs in the United States. The Consent Order subjects the Company to certain audits by an independent compliance auditor for a period of seven years;years; imposes requirements on the Company regarding compliance certification and record creation and maintenance; and prohibits the Company, its affiliates and its distributors from making misrepresentations and misleading claims regarding, among other things, income and lavish lifestyles. The FTC and the independent compliance auditor have the right to inspect Company records and request additional compliance reports for purposes of conducting audits pursuant to the Consent Order. In September 2016, the Company and the FTC mutually selected Affiliated Monitors, Inc. to serve as the independent compliance auditor. The Company is monitoringcontinues to monitor the impact of the Consent Order and, while the Company currently does not expect the settlement to have a long-term and materially adverse impact on its business and its Member base, the Company’s business and its Member base, particularly in the United States, may be negatively impacted as the Company and the Member base adjust to the changes.impacted. If the Company is unable to comply with the Consent Order then this could result in a material and adverse impact to the Company’s results of operations and financial condition.
Other Matters
As a marketer of foods, dietary and nutritional supplements, and other products that are ingested by consumers or applied to their bodies, the Company has been and is currently subjected to various product liability claims. The effects of these claims to date have not been material to the Company. The Company currently maintains product liability insurance with an annual deductible of $15$12.5 million.
TheAs previously disclosed, the SEC and the Department of Justice, have requested fromor DOJ, conducted investigations into the Company’s compliance with the Foreign Corrupt Practices Act, or FCPA, in China. Also, as previously disclosed, the Company documentsconducted its own review and implemented remedial and improvement measures based upon this review, including replacement of certain employees and enhancements of Company policies and procedures in China. The Company cooperated with the SEC and the DOJ and has now reached separate resolutions with each of them.
19
On August 28, 2020, the SEC accepted the Offer of Settlement and issued an administrative order finding that the Company violated the books and records and internal controls provisions of the FCPA. In addition, on August 28, 2020, the Company and the DOJ separately entered into a court-approved deferred prosecution agreement, or DPA, under which the DOJ deferred criminal prosecution of the Company for a period of three years related to a conspiracy to violate the books and records provisions of the FCPA. Among other information relatingthings, the Company is required to undertake compliance self-reporting obligations for the three-year terms of the agreements with the SEC and the DOJ. If the Company remains in compliance with the DPA during its three-year term, the deferred charge against the Company will be dismissed with prejudice. In addition, the Company paid the SEC and the DOJ aggregate penalties, disgorgement and prejudgment interest of approximately $123 million in September 2020, where $83 million and $40 million were recognized in selling, general, and administrative expenses within the Company's condensed consolidated statements of income for the years ended December 31, 2020 and 2019, respectively, related to this matter. Any failure to comply with these agreements, or any resulting further government action, could result in a material and adverse impact to the Company’s anti-corruption compliance in Chinabusiness, financial condition, and the Company is conducting its own review. The Company is cooperating with the government and cannot predict the eventual scope, duration, or outcome of the matter at this time.
Since late 2012, a short seller has made and continues to make allegations regarding the Company and its network marketing program. The Company believes these allegations are without merit and is vigorously defending itself against such claims, including proactively reaching out to governmental authorities about what the Company believes is manipulative activity with respect to its securities. Because of these allegations, the Company and others have received and may receive additional regulatory and governmental inquiries. For example, the Company has previously disclosed inquiries from the FTC, SEC and other governmental authorities. In the future, governmental authorities may determine to seek information from the Company and other persons relating to these same or other allegations. If the Company believes any governmental or regulatory inquiry or investigation is or becomes material it will be disclosed individually. Consistent with its policies, the Company has cooperated and will continue to fully cooperate with any governmental or regulatory inquiries or investigations.operating results.
On September 18, 2017, the Company and certain of its subsidiaries and Members were named as defendants in a purported class action lawsuit, titled Rodgers, et al. v Herbalife Ltd., et al. and filed in the U.S. District Court for the Southern District of Florida, which alleges violations of Florida’s Deceptive and Unfair Trade Practices statute and federal Racketeer Influenced and Corrupt Organizations statutes, unjust enrichment, and negligent misrepresentation. On August 23, 2018, the Court issued an order transferring the action to the U.S. District Court for the Central District of California as to 4 of the putative class plaintiffs and ordering the remaining 4 plaintiffs to arbitration, thereby terminating the Company defendants from the Florida action. The plaintiffs seek damages in an unspecified amount. TheWhile the Company believescontinues to believe the lawsuit is without merit, the parties are exploring possible resolution, including settlement of this matter. Any settlement would be without admission of liability or wrongdoing by the Company and subject to the preliminary and final approval of the court. If the parties are unable to reach a settlement, the Company will continue to vigorously defend itself against the claims in the lawsuit.
In September 2017, one of the Company’s warehouses located in Mexico sustained flooding which damaged certain inventory stored within the warehouse. The Company maintains insurance coverage with third party carriers on the affected property. As of September 30, 2017, the Company has recorded a loss for the portion of its inventory balance for which the Company believes a loss is probable and estimable and has recognized an equal offsetting receivable for insurance recoveries. The Company continuescurrently unable to assess the remaining warehouse inventory but has not recognized any additional loss asreasonably estimate the amount of any additionalpotential loss has not been identified and cannot be reasonably estimated. The Company believes this event will not have a material negative impact to its Mexico operations.that may result from an unfavorable outcome.
6. Segment Information
The Company is a nutrition company that sells a wide range of weight management,management; targeted nutrition,nutrition; energy, sports, & fitness,and fitness; and outer nutrition products. The Company’s products are manufactured by the Company in its Changsha, Hunan, China extraction facility,facility; Suzhou, China facility,facility; Nanjing, China facility,facility; Lake Forest, California facility,facility; and Winston-Salem, North Carolina facility, andas well as by third partythird-party providers, and then are sold to Members who consume and sell Herbalife products to retail consumers or other Members. Revenues reflect sales of products by the Company to its Members and are categorized based on geographic location.
As of September 30, 2017,2021, the Company sold products in 94 countries95 markets throughout the world and was organized into and managed throughby six geographic regions: North America, Mexico, South &and Central America, EMEA, (Europe, Middle East, and Africa), Asia Pacific, and China. China. The Company defines its operating segments as those geographical operations. The Company aggregates its operating segments, excluding China, into a reporting segment, or the Primary Reporting Segment, as management believes that the Company’s operating segments have similar operating characteristics and similar long termlong-term operating performance. In making this determination, management believes that the operating segments are similar in the nature of the products sold, the product acquisition process, the types of customers to whom products are sold, the methods used to distribute the products, the nature of the regulatory environment, and their economic characteristics. China has been identified as a separate reporting segment as it does not meet the criteria for aggregation. The Company reviews its net sales and contribution margin by operating segment and reviews its assets and capital expenditures on a consolidated basis and not by operating segment. Therefore, net sales and contribution margin are presented by reportable segment and assets and capital expenditures by segment are not presented.
The operating20
Operating information for the two2 reportable segments areis as follows:
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||||||||||||||||||
|
| September 30, 2017 |
|
| September 30, 2016 |
|
| September 30, 2017 |
|
| September 30, 2016 |
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||||||
|
| (In millions) |
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
| |||||||||||||||||
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
| (in millions) |
| |||||||||||||||||||||||||||||
Net sales: |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Primary Reporting Segment |
| $ | 875.6 |
|
| $ | 907.8 |
|
| $ | 2,666.4 |
|
| $ | 2,769.3 |
|
| $ | 1,276.9 |
|
| $ | 1,301.8 |
|
| $ | 3,985.7 |
|
| $ | 3,511.7 |
|
China |
|
| 209.8 |
|
|
| 214.2 |
|
|
| 668.0 |
|
|
| 674.1 |
|
|
| 154.0 |
|
|
| 220.0 |
|
|
| 499.1 |
|
|
| 619.4 |
|
Total Net Sales |
| $ | 1,085.4 |
|
| $ | 1,122.0 |
|
| $ | 3,334.4 |
|
| $ | 3,443.4 |
| ||||||||||||||||
Total net sales |
| $ | 1,430.9 |
|
| $ | 1,521.8 |
|
| $ | 4,484.8 |
|
| $ | 4,131.1 |
| ||||||||||||||||
Contribution margin(1): |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Primary Reporting Segment |
| $ | 538.8 |
|
| $ | 538.2 |
|
| $ | 1,690.3 |
|
| $ | 1,485.4 |
| ||||||||||||||||
China(2) |
|
| 136.9 |
|
|
| 197.8 |
|
|
| 442.0 |
|
|
| 553.3 |
| ||||||||||||||||
Total contribution margin |
| $ | 675.7 |
|
| $ | 736.0 |
|
| $ | 2,132.3 |
|
| $ | 2,038.7 |
| ||||||||||||||||
Selling, general, and administrative expenses(2) |
|
| 486.3 |
|
|
| 529.7 |
|
|
| 1,498.9 |
|
|
| 1,559.5 |
| ||||||||||||||||
Other operating income |
|
| 0 |
|
|
| (0.6 | ) |
|
| (16.4 | ) |
|
| (13.0 | ) | ||||||||||||||||
Interest expense, net |
|
| 37.7 |
|
|
| 35.2 |
|
|
| 112.0 |
|
|
| 89.0 |
| ||||||||||||||||
Other expense, net |
|
| 0 |
|
|
| 0 |
|
|
| 24.6 |
|
|
| 0 |
| ||||||||||||||||
Income before income taxes |
|
| 151.7 |
|
|
| 171.7 |
|
|
| 513.2 |
|
|
| 403.2 |
| ||||||||||||||||
Income taxes |
|
| 34.3 |
|
|
| 33.6 |
|
|
| 104.2 |
|
|
| 104.4 |
| ||||||||||||||||
Net income |
| $ | 117.4 |
|
| $ | 138.1 |
|
| $ | 409.0 |
|
| $ | 298.8 |
| ||||||||||||||||
(1) Contribution margin consists of net sales less cost of sales and Royalty overrides. For the China segment, contribution margin does not include service fees to China independent service providers.
(2) Service fees to China independent service providers totaling $85.9 million and $124.1 million for the three months ended September 30, 2021 and 2020, respectively, and $279.1 million and $352.0 million for the nine months ended September 30, 2021 and 2020, respectively, are included in selling, general, and administrative expenses.
Contribution Margin(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Reporting Segment |
| $ | 375.9 |
|
| $ | 398.8 |
|
| $ | 1,155.7 |
|
| $ | 1,201.5 |
|
China(2) |
|
| 184.0 |
|
|
| 193.8 |
|
|
| 595.8 |
|
|
| 614.5 |
|
Total Contribution Margin |
|
| 559.9 |
|
|
| 592.6 |
|
|
| 1,751.5 |
|
|
| 1,816.0 |
|
Selling, general and administrative expenses(2) |
|
| 445.2 |
|
|
| 441.3 |
|
|
| 1,327.0 |
|
|
| 1,545.2 |
|
Other operating income |
|
| (4.6 | ) |
|
| (0.2 | ) |
|
| (43.5 | ) |
|
| (29.1 | ) |
Interest expense, net |
|
| 38.4 |
|
|
| 22.1 |
|
|
| 106.5 |
|
|
| 70.1 |
|
Income before income taxes |
|
| 80.9 |
|
|
| 129.4 |
|
|
| 361.5 |
|
|
| 229.8 |
|
Income taxes |
|
| 26.4 |
|
|
| 41.7 |
|
|
| 84.2 |
|
|
| 69.2 |
|
Net income |
| $ | 54.5 |
|
| $ | 87.7 |
|
| $ | 277.3 |
|
| $ | 160.6 |
|
|
|
|
|
The following table sets forth net sales by geographic area:
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
| ||||
|
| (in millions) |
| |||||||||||||
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
United States |
| $ | 345.3 |
|
| $ | 386.7 |
|
| $ | 1,093.0 |
|
| $ | 1,033.9 |
|
China |
|
| 154.0 |
|
|
| 220.0 |
|
|
| 499.1 |
|
|
| 619.4 |
|
Mexico |
|
| 117.5 |
|
|
| 110.3 |
|
|
| 354.5 |
|
|
| 321.6 |
|
Others |
|
| 814.1 |
|
|
| 804.8 |
|
|
| 2,538.2 |
|
|
| 2,156.2 |
|
Total net sales |
| $ | 1,430.9 |
|
| $ | 1,521.8 |
|
| $ | 4,484.8 |
|
| $ | 4,131.1 |
|
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 30, 2017 |
|
| September 30, 2016 |
|
| September 30, 2017 |
|
| September 30, 2016 |
| ||||
|
| (In millions) |
| |||||||||||||
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
| $ | 193.5 |
|
| $ | 236.0 |
|
| $ | 631.3 |
|
| $ | 737.7 |
|
Mexico |
|
| 114.3 |
|
|
| 112.8 |
|
|
| 334.7 |
|
|
| 341.8 |
|
China |
|
| 209.8 |
|
|
| 214.2 |
|
|
| 668.0 |
|
|
| 674.1 |
|
Others |
|
| 567.8 |
|
|
| 559.0 |
|
|
| 1,700.4 |
|
|
| 1,689.8 |
|
Total Net Sales |
| $ | 1,085.4 |
|
| $ | 1,122.0 |
|
| $ | 3,334.4 |
|
| $ | 3,443.4 |
|
7. Share-Based Compensation
The Company has share-based compensation plans, which are more fully described in Note 9, Share-Based Compensation, to the Consolidated Financial Statements included in the 20162020 10-K. During the nine months ended September 30, 2017,2021, the Company granted stock appreciation rights, or SARs, andrestricted stock units subject to service conditions and restricted stock units subject to service and performance conditions.
In the secondShare-based compensation expense amounted to $14.4 million and third quarters of 2017, the Company granted performance stock unit awards to certain executives, which will vest on December 31, 2019 subject to their continued employment through that date and the achievement of certain performance conditions. The performance conditions include targets$15.4 million for Volume Points, adjusted earnings before interest and taxes, and adjusted earnings per share. These performance stock unit awards can vest at between 0% and 200% of the target award based on the achievement of the performance conditions.
For the three months ended September 30, 20172021 and 2016, share-based compensation expense amounted to $9.92020, respectively, and $42.3 million and $9.8$37.9 million respectively. Forfor the nine months ended September 30, 20172021 and 2016, share-based compensation expense amounted to $32.6 million and $30.3 million,2020, respectively. As of September 30, 2017,2021, the total unrecognized compensation cost related to all non-vested stock awards was $55.5$89.2 million and the related weighted-average period over which it is expected to be recognized is approximately 1.51.6 years.
21
The following tables summarizetable summarizes the activity for all stock appreciation rights, or SARs, under allthe Company's share-based compensation plans for the nine months ended September 30, 2017:2021:
SARs |
| Awards |
|
| Weighted Average Exercise Price |
|
| Weighted Average Remaining Contractual Term |
| Aggregate Intrinsic Value(1) |
| |||
|
| (In thousands) |
|
|
|
|
|
|
|
| (In millions) |
| ||
Outstanding at December 31, 2016(2)(3) |
|
| 11,998 |
|
| $ | 41.52 |
|
| 6.0 years |
| $ | 148.7 |
|
Granted |
|
| 1,358 |
|
| $ | 57.30 |
|
|
|
|
|
|
|
Exercised |
|
| (2,511 | ) |
| $ | 28.62 |
|
|
|
|
|
|
|
Forfeited |
|
| (321 | ) |
| $ | 53.67 |
|
|
|
|
|
|
|
Outstanding at September 30, 2017(2)(3) |
|
| 10,524 |
|
| $ | 46.26 |
|
| 6.3 years |
| $ | 237.4 |
|
Exercisable at September 30, 2017(4) |
|
| 6,308 |
|
| $ | 45.61 |
|
| 4.9 years |
| $ | 150.6 |
|
|
| Number of Awards |
|
| Weighted-Average Exercise Price Per Award |
|
| Weighted-Average Remaining Contractual Term |
| Aggregate Intrinsic Value(1) |
| |||
|
| (in thousands) |
|
|
|
|
|
|
| (in millions) |
| |||
Outstanding as of December 31, 2020(2)(3) |
|
| 3,737 |
|
| $ | 27.23 |
|
| 4.6 years |
| $ | 77.8 |
|
Granted |
|
| — |
|
| $ | — |
|
|
|
|
|
| |
Exercised(4) |
|
| (1,027 | ) |
| $ | 27.67 |
|
|
|
|
|
| |
Forfeited |
|
| (23 | ) |
| $ | 25.03 |
|
|
|
|
|
| |
Outstanding as of September 30, 2021(3) |
|
| 2,687 |
|
| $ | 27.08 |
|
| 4.0 years |
| $ | 41.1 |
|
Exercisable as of September 30, 2021(5) |
|
| 2,687 |
|
| $ | 27.08 |
|
| 4.0 years |
| $ | 41.1 |
|
Vested and expected to vest as of September 30, 2021 |
|
| 2,687 |
|
| $ | 27.08 |
|
| 4.0 years |
| $ | 41.1 |
|
| (1) The intrinsic value is the amount by which the current market |
|
|
|
|
|
|
The weighted-average grant date fair value of the underlying stock exceeds the exercise price of the SARs.
(2) Includes less than 0.1 million market condition SARs as of December 31, 2020.
(3) Includes 0.8 million and 1.1 million performance condition SARs as of September 30, 2021 and December 31, 2020, respectively, which represents the maximum amount that can vest.
(4) Includes less than 0.1 million market condition SARs and 0.3 million performance condition SARs.
(5) Includes 0.8 million performance condition SARs.
There were 0 SARs granted during the three months ended September 30, 2017 and 2016 was $31.31 and $32.06, respectively. The weighted-average grant date fair value of SARs granted during the nine months ended September 30, 20172021 and 2016 was $28.36 and $29.49, respectively.2020. The total intrinsic value of SARs exercised during the three months ended September 30, 20172021 and 20162020 was $3.0$1.6 million and $17.9$38.5 million, respectively. The total intrinsic value of SARs exercised during the nine months ended September 30, 20172021 and 20162020 was $100.0$25.7 million and $32.0$50.2 million, respectively.
The following table summarizes the activities for all stock units under the Company's share-based compensation plans for the nine months ended September 30, 2021:
Incentive Plan and Independent Directors Stock Units |
| Shares |
|
| Weighted Average Grant Date Fair Value |
| ||
|
| (In thousands) |
|
|
|
|
| |
Outstanding and nonvested December 31, 2016 |
|
| 26 |
|
| $ | 62.35 |
|
Granted(1) |
|
| 154 |
|
| $ | 68.84 |
|
Vested |
|
| (24 | ) |
| $ | 62.42 |
|
Forfeited |
|
| — |
|
|
| — |
|
Outstanding and nonvested September 30, 2017 |
|
| 156 |
|
| $ | 68.77 |
|
|
| Number of Shares |
|
| Weighted-Average Grant Date Fair Value Per Share |
| ||
|
| (in thousands) |
|
|
|
| ||
Outstanding and nonvested as of December 31, 2020(1) |
|
| 3,068 |
|
| $ | 44.01 |
|
Granted(2) |
|
| 1,526 |
|
| $ | 48.36 |
|
Vested |
|
| (811 | ) |
| $ | 43.57 |
|
Forfeited(3) |
|
| (111 | ) |
| $ | 44.95 |
|
Outstanding and nonvested as of September 30, 2021(1) |
|
| 3,672 |
|
| $ | 45.89 |
|
Expected to vest as of September 30, 2021(4) |
|
| 3,212 |
|
| $ | 45.51 |
|
(1) Includes 1,156,954 and 712,596 performance-based stock unit awards as of September 30, 2021 and December 31, 2020, respectively, which represents the maximum amount that can vest.
(2) Includes 447,346 performance-based stock unit awards.
(3) Includes 2,988 performance-based stock unit awards
(4) Includes 768,754 performance-based stock unit awards.
|
|
The total vesting date fair value of stock units which vested during the three months ended September 30, 20172021 and 20162020 was $0.1$0.4 million and $0.2$1.3 million, respectively. The total vesting date fair value of stock units which vested during the nine months ended September 30, 20172021 and 20162020 was $1.9$37.8 million and $2.0$12.3 million, respectively.
22
8. Income Taxes
Income taxes were an expense of $26.4$34.3 million and $84.2$33.6 million for the three months ended September 30, 2021 and 2020, respectively, and $104.2 million and $104.4 million for the nine months ended September 30, 2017, respectively, as compared to an expense of $41.7 million2021 and $69.2 million for the same periods in 2016.2020, respectively. The effective income tax rate was 32.6%22.6% and 23.3%19.5% for the three months ended September 30, 2021 and 2020, respectively, and 20.3% and 25.9% for the nine months ended September 30, 2017, respectively, as compared to 32.2%2021 and 30.1% for the same periods in 2016.2020, respectively. The increase in the effective tax rate for the three months ended September 30, 2017,2021 as compared to the same period in 2016,2020 was primarily due to the impact ofa decrease in net benefits from discrete events, partially offset by changes in the geographic mix of the Company’s income, offset by an increase in net benefits from discrete events.income. The decrease in the effective tax rate for the nine months ended September 30, 2017,2021 as compared to the same period in 2016,2020 was primarily due to an increasechanges in net benefitsthe geographic mix of the Company’s income and a decrease in expense from discrete events. Included in the discrete events for the three and nine months ended September 30, 2017 was the impact of $0.6 million and $26.4 million of excess tax benefits generated during those respective periods, relating to the Company’s application of ASU 2016-09 that was adopted on January 1, 2017.
As of September 30, 2017,2021, the total amount of unrecognized tax benefits, including related interest and penalties, was $74.2$76.8 million. If the total amount of unrecognized tax benefits was recognized, $53.1$53.5 million of unrecognized tax benefits, $12.0$15.0 million of interest, and $2.5$2.5 million of penalties would impact the effective tax rate.
The Company believes that it is reasonably possible that the amount of unrecognized tax benefits could decrease by up to approximately $8.8$9.1 million within the next twelve months. Of this possible decrease, $3.7 million would be due to the settlement of audits or resolution of administrative or judicial proceedings. The remaining possible decrease of $5.1 million would bemonths due to the expiration of statute of limitations in various jurisdictions. For a description on contingency matters relating to income taxes see Note 5, Contingencies.
9. Derivative Instruments and Hedging Activities
Interest Rate Risk Management
The Company engages in an interest rate hedging strategy for which the hedged transactions are forecasted interest payments on the Company’s 2018 Credit Facility, which are based on variable rates.
During the first quarter of 2020, the Company entered into various interest rate swap agreements with effective dates ranging between February 2020 and March 2020. These agreements collectively provide for the Company to pay interest at a weighted-average fixed rate of 0.98% on aggregate notional amounts of $100.0 million under the 2018 Credit Facility until their respective expiration dates ranging between February 2022 and March 2023, while receiving interest based on LIBOR on the same notional amounts for the same periods. At inception, these swap agreements were designated as cash flow hedges against the variability in certain LIBOR-based borrowings under the 2018 Credit Facility, effectively fixing the interest rate on such notional amounts at a weighted-average effective rate of, depending on the Company's total leverage ratio, between 2.73% and 3.23%. These hedge relationships qualified as effective under FASB ASC Topic 815, Derivatives and Hedging, or ASC 815, and consequently all changes in the fair value of these interest rate swaps are recorded as a component of accumulated other comprehensive loss within shareholders’ deficit, and are recognized in interest expense, net within the Company’s condensed consolidated statement of income during the period when the hedged item and underlying transaction affect earnings. The fair values of the interest rate swap agreements are based on third-party bank quotes, and as of September 30, 2021 and December 31, 2020, the Company recorded liabilities at fair value of $0.4 million and $1.0 million, respectively, relating to these interest rate swap agreements.
Foreign Currency Instruments
The Company designates certain foreign currency derivatives, primarily comprised of foreign currency forward contracts and option contracts, as freestanding derivatives for which hedge accounting does not apply. The changes in the fair market value of these freestanding derivatives are included in selling, general, and administrative expenses inwithin the Company’s condensed consolidated statements of income. The Company primarily uses freestanding foreign currency derivatives to hedge foreign-currency-denominatedforeign currency-denominated intercompany transactions and to partially mitigate the impact of foreign currency fluctuations. The fair value of the freestanding foreign currency derivatives is based on third-party quotes. The Company’s foreign currency derivative contracts are generally executed on a monthly basis.
The Company designates as cash-flowcash flow hedges those foreign currency forward contracts it enters into to hedge forecasted inventory purchases and intercompany management fees that are subject to foreign currency exposures. Forward contracts are used to hedge forecasted inventory purchases over specific months. Changes in the fair value of these forward contracts designated as cash flow hedges, excluding forward points, designated as cash-flow hedges are recorded as a component of accumulated other comprehensive income (loss)loss within shareholders’ equity,deficit, and are recognized in cost of sales inwithin the Company's condensed consolidated statementsstatement of income during the period which approximates the time the hedged inventory is sold. The Company also hedges forecasted intercompany management fees over specific months. These contracts allow the Company to sell Euros in exchange for U.S. dollars at specified contract rates. Changes in the fair value of these forward contracts designated as cash flow hedges, excluding forward points, are recorded as a component of accumulated other comprehensive income (loss)loss within shareholders’ equity,deficit, and are recognized in selling, general, and administrative expenses inwithin the Company’s condensed consolidated statementsstatement of income during the period when the hedged item and underlying transaction affect earnings. The Company has elected to record changes in the fair value of amounts excluded from the assessment of effectiveness currently in earnings.
23
As of September 30, 20172021 and December 31, 2016,2020, the aggregate notional amounts of all foreign currency contracts outstanding designated as cash flow hedges were approximately $127.0$56.2 million and $90.0$56.4 million, respectively. AtAs of September 30, 2017,2021, these outstanding contracts were expected to mature over the next fifteen months. The Company’s derivative financial instruments are recorded on the condensed consolidated balance sheetsheets at fair value based on third-party quotes. As of September 30, 2017,2021, the Company recorded assets at fair value of $0.8$0.3 million and liabilities at fair value of $5.5$0.9 million relating to all outstanding foreign currency contracts designated as cash-flowcash flow hedges. As of December 31, 2016,2020, the Company recorded assetsliabilities at fair value of $4.6 million.$3.9 million relating to all outstanding foreign currency contracts designated as cash flow hedges. The Company assesses hedge effectiveness and measures hedge ineffectiveness at least quarterly. During the three and nine months ended September 30, 2017 and 2016, the ineffective portion relating to these hedges was immaterialquarterly and the hedges remained effective as of September 30, 20172021 and December 31, 2016.2020.
As of both September 30, 20172021 and December 31, 2016,2020, the majority of the Company’s outstanding foreign currency forward contracts had maturity dates of less than twelve months with the majority of freestanding derivatives expiring within one month as of September 30, 2017 and December 31, 2016. month. As of September 30, 2017,2021, the Company had aggregate notional amounts of approximately $398.6$539.8 million of foreign currency contracts, inclusive of freestanding contracts and contracts designated as cash flow hedges.
The following tables summarize the derivative activity during the three and nine months ended September 30, 2021 and 2020 relating to all the Company’s derivatives.
Gains and Losses on Derivative Instruments
The following table summarizes gains (losses)losses relating to derivative instruments recorded in other comprehensive income (loss) during the three and nine months ended September 30, 20172021 and 2016:2020:
|
| Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) |
|
| Amount of Gain (Loss) Recognized in Other Comprehensive (Loss) Income |
| ||||||||||||||||||||||||||
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||||||||||||
|
| September 30, 2017 |
|
| September 30, 2016 |
|
| September 30, 2017 |
|
| September 30, 2016 |
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
| ||||||||
|
| (In millions) |
|
| (in millions) |
| ||||||||||||||||||||||||||
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Foreign exchange currency contracts relating to inventory and intercompany management fee hedges |
| $ | (0.3 | ) |
| $ | 0.8 |
|
| $ | (10.8 | ) |
| $ | 3.1 |
|
| $ | 0.9 |
|
| $ | 0.1 |
|
| $ | 0.7 |
|
| $ | 6.4 |
|
Interest rate swaps |
|
| (0.1 | ) |
|
| — |
|
|
| (0.1 | ) |
|
| (1.5 | ) | ||||||||||||||||
As of September 30, 2017,2021, the estimated amount of existing net losses related to cash flow hedges recorded in accumulated other comprehensive loss that are expected to be reclassified into earnings over the next twelve months was $5.4$1.2 million.
24
The effect of cash flow hedging relationships on the Company’s condensed consolidated statements of income for the three and nine months ended September 30, 2021 and 2020 was as follows:
|
| Location and Amount of (Loss) Gain Recognized in Income on Cash Flow Hedging Relationships |
| |||||||||||||||||||||
|
| Three Months Ended |
| |||||||||||||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||||||||||
|
| Cost of sales |
|
| Selling, general, and administrative expenses |
|
| Interest expense, net |
|
| Cost of sales |
|
| Selling, general, and administrative expenses |
|
| Interest expense, net |
| ||||||
|
| (in millions) |
| |||||||||||||||||||||
Total amounts presented in the condensed consolidated statements of income |
| $ | 305.2 |
|
| $ | 486.3 |
|
| $ | 37.7 |
|
| $ | 322.7 |
|
| $ | 529.7 |
|
| $ | 35.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign exchange currency contracts relating to inventory hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Amount of (loss) gain reclassified from accumulated other comprehensive loss to income |
|
| (0.8 | ) |
|
| — |
|
|
| — |
|
|
| 4.0 |
|
|
| — |
|
|
| — |
|
Amount of loss excluded from assessment of effectiveness recognized in income |
|
| (0.9 | ) |
|
| — |
|
|
| — |
|
|
| (0.8 | ) |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign exchange currency contracts relating to intercompany management fee hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Amount of loss reclassified from accumulated other comprehensive loss to income |
|
| — |
|
|
| 0 |
|
|
| — |
|
|
| — |
|
|
| (0.1 | ) |
|
| — |
|
Amount of gain excluded from assessment of effectiveness recognized in income |
|
| — |
|
|
| 0 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest rate swaps: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Amount of loss reclassified from accumulated other comprehensive loss to income |
|
| — |
|
|
| — |
|
|
| (0.3 | ) |
|
| — |
|
|
| — |
|
|
| (0.2 | ) |
Amount of gain excluded from assessment of effectiveness recognized in income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
25
|
| Location and Amount of (Loss) Gain Recognized in Income on Cash Flow Hedging Relationships |
| |||||||||||||||||||||
|
| Nine Months Ended |
| |||||||||||||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||||||||||
|
| Cost of sales |
|
| Selling, general, and administrative expenses |
|
| Interest expense, net |
|
| Cost of sales |
|
| Selling, general, and administrative expenses |
|
| Interest expense, net |
| ||||||
|
| (in millions) |
| |||||||||||||||||||||
Total amounts presented in the condensed consolidated statements of income |
| $ | 942.7 |
|
| $ | 1,498.9 |
|
| $ | 112.0 |
|
| $ | 841.2 |
|
| $ | 1,559.5 |
|
| $ | 89.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign exchange currency contracts relating to inventory hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Amount of (loss) gain reclassified from accumulated other comprehensive loss to income |
|
| (1.5 | ) |
|
| — |
|
|
| — |
|
|
| 2.8 |
|
|
| — |
|
|
| — |
|
Amount of loss excluded from assessment of effectiveness recognized in income |
|
| (3.0 | ) |
|
| — |
|
|
| — |
|
|
| (2.6 | ) |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign exchange currency contracts relating to intercompany management fee hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Amount of loss reclassified from accumulated other comprehensive loss to income |
|
| — |
|
|
| (0.3 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Amount of gain excluded from assessment of effectiveness recognized in income |
|
| — |
|
|
| 0.1 |
|
|
| — |
|
|
| — |
|
|
| 0.1 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest rate swaps: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Amount of loss reclassified from accumulated other comprehensive loss to income |
|
| — |
|
|
| — |
|
|
| (0.7 | ) |
|
| — |
|
|
| — |
|
|
| (0.3 | ) |
Amount of gain excluded from assessment of effectiveness recognized in income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
The following table summarizes gains (losses) recorded to income relating to derivative instruments recorded to incomenot designated as hedging instruments during the three and nine months ended September 30, 20172021 and 2016:2020:
|
| Location of Gain |
| Amount of Gain (Loss) Recognized in Income |
| |||||||||||||||||||||||||||||||
|
| (Loss) |
| For the Three Months Ended |
|
| For the Nine Months Ended |
|
| Amount of Gain Recognized in Income |
|
|
| |||||||||||||||||||||||
|
| Recognized in Income |
| September 30, 2017 |
|
| September 30, 2016 |
|
| September 30, 2017 |
|
| September 30, 2016 |
|
| Three Months Ended |
|
| Nine Months Ended |
|
|
| ||||||||||||||
|
|
|
| (In millions) |
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| Location of Gain Recognized in Income | |||||||||||||||||
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Foreign exchange currency contracts relating to inventory hedges and intercompany management fee hedges(1) |
| Selling, general and administrative expenses |
| $ | (2.6 | ) |
| $ | — |
|
| $ | (1.4 | ) |
| $ | 0.1 |
| ||||||||||||||||||
|
| (in millions) |
|
| ||||||||||||||||||||||||||||||||
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Foreign exchange currency contracts |
| Selling, general and administrative expenses |
| $ | (0.5 | ) |
| $ | 0.6 |
|
| $ | (7.0 | ) |
| $ | (2.6 | ) |
| $ | 2.8 |
|
| $ | 4.2 |
|
| $ | 3.7 |
|
| $ | 5.9 |
|
| Selling, general, and administrative expenses |
|
|
The following table summarizes gains (losses) relating to derivative instruments reclassified from accumulated other comprehensive loss into income during the three and nine months ended September 30, 2017 and 2016:
|
| Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive |
| Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income |
| |||||||||||||
|
| Loss into Income |
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
|
| (Effective Portion) |
| September 30, 2017 |
|
| September 30, 2016 |
|
| September 30, 2017 |
|
| September 30, 2016 |
| ||||
|
|
|
| (In millions) |
| |||||||||||||
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts relating to inventory hedges |
| Cost of sales |
| $ | (1.3 | ) |
| $ | 3.2 |
|
| $ | 0.3 |
|
| $ | 12.9 |
|
Foreign exchange currency contracts relating to intercompany management fee hedges |
| Selling, general and administrative expenses |
| $ | (1.5 | ) |
| $ | (0.2 | ) |
| $ | (0.6 | ) |
| $ | (0.8 | ) |
The Company reports its derivatives at fair value as either assets or liabilities within its condensed consolidated balance sheet.sheets. See Note 12, Fair Value Measurements, for information on derivative fair values and their condensed consolidated balance sheetsheets location as of September 30, 20172021 and December 31, 2016.2020.
26
10. Shareholders’ EquityDeficit
Changes in shareholders’ deficit for the three months ended September 30, 2021 and 2020 were as follows:
Dividends
|
| Three Months Ended September 30, 2021 |
| |||||||||||||||||||||
|
| Common Shares |
|
| Treasury Stock |
|
| Paid-in Capital in Excess of Par Value |
|
| Accumulated Other Comprehensive Loss |
|
| Accumulated Deficit |
|
| Total Shareholders' Deficit |
| ||||||
|
| (in millions) |
| |||||||||||||||||||||
Balance as of June 30, 2021 |
| $ | 0.1 |
|
| $ | (328.9 | ) |
| $ | 306.1 |
|
| $ | (192.3 | ) |
| $ | (1,076.2 | ) |
| $ | (1,291.2 | ) |
Issuance of 0.1 common shares from exercise of SARs, restricted stock units, employee stock purchase plan, and other |
|
| 0 |
|
|
|
|
|
| 1.2 |
|
|
|
|
|
|
|
|
| 1.2 |
| |||
Additional capital from share-based compensation |
|
|
|
|
|
|
|
| 14.4 |
|
|
|
|
|
|
|
|
| 14.4 |
| ||||
Repurchases of 3.5 common shares |
|
| — |
|
|
|
|
|
| (9.6 | ) |
|
|
|
|
| (153.1 | ) |
|
| (162.7 | ) | ||
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 117.4 |
|
|
| 117.4 |
| ||||
Foreign currency translation adjustment, net of income taxes of $(0.6) |
|
|
|
|
|
|
|
|
|
|
| (14.5 | ) |
|
|
|
|
| (14.5 | ) | ||||
Unrealized gain on derivatives, net of income taxes of $— |
|
|
|
|
|
|
|
|
|
|
| 2.0 |
|
|
|
|
|
| 2.0 |
| ||||
Balance as of September 30, 2021 |
| $ | 0.1 |
|
| $ | (328.9 | ) |
| $ | 312.1 |
|
| $ | (204.8 | ) |
| $ | (1,111.9 | ) |
| $ | (1,333.4 | ) |
|
| Three Months Ended September 30, 2020 |
| |||||||||||||||||||||
|
| Common Shares |
|
| Treasury Stock |
|
| Paid-in Capital in Excess of Par Value |
|
| Accumulated Other Comprehensive Loss |
|
| Accumulated Deficit |
|
| Total Shareholders' Deficit |
| ||||||
|
| (in millions) |
| |||||||||||||||||||||
Balance as of June 30, 2020 |
| $ | 0.1 |
|
| $ | (328.9 | ) |
| $ | 380.7 |
|
| $ | (246.1 | ) |
| $ | (70.6 | ) |
| $ | (264.8 | ) |
Issuance of 0.8 common shares from exercise of SARs, restricted stock units, employee stock purchase plan, and other |
|
| 0 |
|
|
|
|
|
| 1.1 |
|
|
|
|
|
|
|
|
| 1.1 |
| |||
Additional capital from share-based compensation |
|
|
|
|
|
|
|
| 15.4 |
|
|
|
|
|
|
|
|
| 15.4 |
| ||||
Repurchases of 16.8 common shares |
|
| — |
|
|
|
|
|
| (61.4 | ) |
|
|
|
|
| (757.7 | ) |
|
| (819.1 | ) | ||
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 138.1 |
|
|
| 138.1 |
| ||||
Foreign currency translation adjustment, net of income taxes of $0.7 |
|
|
|
|
|
|
|
|
|
|
| 19.5 |
|
|
|
|
|
| 19.5 |
| ||||
Unrealized loss on derivatives, net of income taxes of $(0.1) |
|
|
|
|
|
|
|
|
|
|
| (3.1 | ) |
|
|
|
|
| (3.1 | ) | ||||
Balance as of September 30, 2020 |
| $ | 0.1 |
|
| $ | (328.9 | ) |
| $ | 335.8 |
|
| $ | (229.7 | ) |
| $ | (690.2 | ) |
| $ | (912.9 | ) |
27
Changes in shareholders’ deficit for the nine months ended September 30, 2021 and 2020 were as follows:
|
| Nine Months Ended September 30, 2021 |
| |||||||||||||||||||||
|
| Common Shares |
|
| Treasury Stock |
|
| Paid-in Capital in Excess of Par Value |
|
| Accumulated Other Comprehensive Loss |
|
| Accumulated Deficit |
|
| Total Shareholders' Deficit |
| ||||||
|
| (in millions) |
| |||||||||||||||||||||
Balance as of December 31, 2020 |
| $ | 0.1 |
|
| $ | (328.9 | ) |
| $ | 342.3 |
|
| $ | (182.2 | ) |
| $ | (687.4 | ) |
| $ | (856.1 | ) |
Issuance of 1.6 common shares from exercise of SARs, restricted stock units, employee stock purchase plan, and other |
|
| 0 |
|
|
|
|
|
| 3.2 |
|
|
|
|
|
|
|
|
| 3.2 |
| |||
Additional capital from share-based compensation |
|
|
|
|
|
|
|
| 42.3 |
|
|
|
|
|
|
|
|
| 42.3 |
| ||||
Repurchases of 18.8 common shares |
|
| — |
|
|
|
|
|
| (75.7 | ) |
|
|
|
|
| (833.5 | ) |
|
| (909.2 | ) | ||
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 409.0 |
|
|
| 409.0 |
| ||||
Foreign currency translation adjustment, net of income taxes of $0.9 |
|
|
|
|
|
|
|
|
|
|
| (25.8 | ) |
|
|
|
|
| (25.8 | ) | ||||
Unrealized gain on derivatives, net of income taxes of $— |
|
|
|
|
|
|
|
|
|
|
| 3.2 |
|
|
|
|
|
| 3.2 |
| ||||
Balance as of September 30, 2021 |
| $ | 0.1 |
|
| $ | (328.9 | ) |
| $ | 312.1 |
|
| $ | (204.8 | ) |
| $ | (1,111.9 | ) |
| $ | (1,333.4 | ) |
|
| Nine Months Ended September 30, 2020 |
| |||||||||||||||||||||
|
| Common Shares |
|
| Treasury Stock |
|
| Paid-in Capital in Excess of Par Value |
|
| Accumulated Other Comprehensive Loss |
|
| Accumulated Deficit |
|
| Total Shareholders' Deficit |
| ||||||
|
| (in millions) |
| |||||||||||||||||||||
Balance as of December 31, 2019 |
| $ | 0.1 |
|
| $ | (328.9 | ) |
| $ | 366.6 |
|
| $ | (212.5 | ) |
| $ | (215.3 | ) |
| $ | (390.0 | ) |
Issuance of 1.5 common shares from exercise of SARs, restricted stock units, employee stock purchase plan, and other |
|
| 0 |
|
|
|
|
|
| 2.7 |
|
|
|
|
|
|
|
|
| 2.7 |
| |||
Additional capital from share-based compensation |
|
|
|
|
|
|
|
| 37.9 |
|
|
|
|
|
|
|
|
| 37.9 |
| ||||
Repurchases of 17.4 common shares |
|
| — |
|
|
|
|
|
| (71.4 | ) |
|
|
|
|
| (773.7 | ) |
|
| (845.1 | ) | ||
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 298.8 |
|
|
| 298.8 |
| ||||
Foreign currency translation adjustment, net of income taxes of $(4.1) |
|
|
|
|
|
|
|
|
|
|
| (20.4 | ) |
|
|
|
|
| (20.4 | ) | ||||
Unrealized gain on derivatives, net of income taxes of $(0.4) |
|
|
|
|
|
|
|
|
|
|
| 3.2 |
|
|
|
|
|
| 3.2 |
| ||||
Balance as of September 30, 2020 |
| $ | 0.1 |
|
| $ | (328.9 | ) |
| $ | 335.8 |
|
| $ | (229.7 | ) |
| $ | (690.2 | ) |
| $ | (912.9 | ) |
Dividends
The Company has not declared or paid cash dividends since 2014. The declaration of future dividends is subject to the discretion of the Company’s board of directors and will depend upon various factors, including its earnings, financial condition, Herbalife Nutrition Ltd.’s available distributable reserves under Cayman Islands law, restrictions imposed by the 2018 Credit Facility and the terms of any other indebtedness that may be outstanding, cash requirements, future prospects and other factors deemed relevant by its board of directors.
Share Repurchases
On February 21, 2017,9, 2021, the Company’s board of directors authorized a new three-year $1.5$1.5 billion share repurchase program that will expire on February 21, 2020,9, 2024, which replaced the Company’s prior share repurchase authorization whichthat was set to expire on JuneOctober 30, 2017 which, as of December 31, 2016,2023 and had $232.9approximately $7.9 million of remaining authorized capacity.capacity when it was replaced. This share repurchase program allows the Company, which includes an indirect wholly ownedwholly-owned subsidiary of Herbalife Nutrition Ltd., to repurchase the Company’s common shares at such times and prices as determined by the Company’s management, as market conditions warrant, and to the extent Herbalife Nutrition Ltd.’s distributable reserves are available under Cayman Islands law. The 2018 Credit Facility permits the Company to repurchase its common shares as long as no default or event of default exists and other conditions, such as specified consolidated leverage ratios, are met. As of September 30, 2021, the remaining authorized capacity under the Company’s $1.5 billion share repurchase program was approximately $1.2 billion.
In conjunction with the issuance of the Convertible Notes during February 2014,28
During January 2021, the Company paidrepurchased from Mr. Carl C. Icahn and certain of his affiliates an aggregate of approximately $685.8 million to enter into Forward Transactions with certain financial institutions, or the Forward Counterparties, pursuant to which the Company purchased approximately 9.912.5 million common shares of the Company at an averageaggregate cost of $69.02approximately $600.0 million, or $48.05 per share, for settlement on or around the August 15, 2019 maturity date for the Convertible Notes, subject to the ability of each Forward Counterparty to elect to settle all or a portion of its Forward Transactions early. See Note 4, Long-Term Debt for further information on the conditions for which Holders of the Convertible Notes may convert their notes prior to the maturity date. The Forward Transactions were generally expected to facilitate privately negotiated derivative transactions between the Forward Counterparties and holders of the Convertible Notes, including swaps, relating to the common shares by which holders of the Convertible Notes establish short positions relating to the common shares and otherwise hedge their investments in the Convertible Notes concurrently with, or shortly after, the pricing of the Convertible Notes. The shares are treated assubsequently retired shares for basic and diluted EPS purposes although they remain legally outstanding.
As a result of the Forward Transactions, the Company’s total shareholders’ equity within its condensed consolidated balance sheet was reduced by approximately $685.8 millionthese shares. In addition, during the first quarter of 2014, with amounts of $653.9 million and $31.9 million being allocated between accumulated deficit and additional paid-in-capital, respectively, within total shareholders’ equity. Also, upon executing the Forward Transactions, the Company recorded, at fair value, $35.8 million in non-cash issuance costs to other assets and a corresponding amount to additional paid-in-capital within its condensed consolidated balance sheet. These non-cash issuance costs will be amortized to interest expense over the contractual term of the Forward Transactions. For both the three and nine months ended September 30, 2017 and 2016,2021, the Company recognized $1.6 million and $4.8 million, respectively, of non-cash interest expense within its condensed consolidated statements of income relating to amortization of these non-cash issuance costs.
During the three months ended March 31, 2017, an indirect wholly owned subsidiary of the Company purchasedrepurchased approximately 1.15.7 million of Herbalife Ltd.’sits common shares through open marketopen-market purchases at an aggregate cost of approximately $60.7$281.1 million, or an average cost of $56.10$49.27 per share, and subsequently retired these shares. In total, during the nine months ended September 30, 2021, the Company repurchased approximately 18.2 million of its common shares at an aggregate cost of approximately $881.1 million, or an average cost of $48.43 per share. DuringIn August 2020, the threeCompany completed its modified Dutch auction tender offer and then subsequently paid cash to repurchase and retire a total of approximately 15.4 million of its common shares at an aggregate cost of approximately $750.0 million, or $48.75 per share. In addition, during the nine months ended JuneSeptember 30, 2017, an indirect wholly owned subsidiary of2020, the Company purchasedrepurchased approximately 2.71.4 million of Herbalife Ltd.’sits common shares through open marketopen-market purchases at an aggregate cost of approximately $179.8$67.1 million, or an average cost of $67.06$46.44 per share. Duringshare, and subsequently retired these shares. In total, during the threenine months ended September 30, 2017, an indirect wholly owned subsidiary of2020, the Company purchasedrepurchased approximately 0.816.8 million of Herbalife Ltd.’sits common shares through open market purchases at an aggregate cost of approximately $58.7$817.1 million, or an average cost of $72.38$48.55 per share.
As of both September 30, 2021 and December 31, 2020, the Company held approximately 10.0 million of treasury shares for U.S. GAAP purposes. These 2017 share repurchases reducedtreasury shares increased the Company’s total shareholders’ equitydeficit and are reflected at cost within the Company’s accompanying condensed consolidated balance sheet.sheets. Although these shares are owned by an indirect wholly ownedwholly-owned subsidiary of the Company and remain legally outstanding, they are reflected as treasury shares under U.S. GAAP and therefore reduce the number of common shares outstanding within the Company’s condensed consolidated financial statements and the weighted-average number of common shares outstanding used in calculating earnings per share. The common shares of Herbalife Nutrition Ltd. held by the indirect wholly ownedwholly-owned subsidiary, however, remain outstanding on the books and records of the Company’s transfer agent and therefore still carry voting and other share rights related to ownership of the Company’s common shares, which may be exercised. So long as it is consistent with applicable laws, such shares will be voted by such subsidiary in the same manner, and to the maximum extent possible in the same proportion, as all other votes cast with respect to any matter properly submitted to a vote of Herbalife Nutrition Ltd.’s shareholders. As of September 30, 2017, the Company held approximately 4.6 million of treasury shares for U.S. GAAP purposes. The Company did not repurchase any common shares in the open market during the three and nine months ended September 30, 2016. As of September 30, 2017, the remaining authorized capacity under the Company’s $1.5 billion share repurchase program was $1,200.8 million.
The number of shares issued upon vesting or exercise for certain restricted stock units and SARs granted pursuant to the Company’s share-based compensation plans is net of the statutory withholding requirements that the Company pays on behalf of its employees. Although shares withheld are not issued, they are treated as common share repurchases in the Company’s condensed consolidated financial statements, and reduce the Company’s additional paid-in-capital within total shareholders’ equity and are reflected as share repurchases on the Company’s condensed consolidated statements of cash flows as they reduce the number of shares that would have been issued upon vesting. These shares do not count against the authorized capacity under the Company’s share repurchase program described above. During the three and nine months ended September 30, 2021 and 2020, the Company withheld shares on its vested restricted stock units and exercised SARs relating to its share-based compensation plans.
The Company reflects the aggregate purchase price of its common shares repurchased as an increase to shareholders’ deficit. The Company generally allocated the purchase price of the repurchased shares to accumulated deficit, common shares, and additional paid-in capital, with the exception of treasury shares, which are recorded separately on the Company’s condensed consolidated balance sheets.
For the nine months ended September 30, 20172021 and 2016,2020, the Company’s share repurchases, inclusive of transaction costs, were $299.2$881.1 million and none,$818.5 million, respectively, under the Company’s share repurchase programs, and $47.0$28.1 million and $12.5$26.6 million, respectively, due to shares withheld for tax purposes related to the Company’s share-based compensation plans. For the nine months ended September 30, 20172021 and 2016,2020, the Company’s total share repurchases, including shares withheld for tax purposes, were $346.2$909.2 million and $12.5$845.1 million, respectively, and have been recorded as a reductionan increase to shareholders’ equitydeficit within the Company’s condensed consolidated balance sheet assheets. The Company recorded $844.2 million of September 30, 2017 andtotal share repurchases within financing activities on its condensed consolidated statement of cash flows for the nine months ended September 30, 2017.
Capped Call Transactions
In February 2014, in connection with2020, which excludes $0.9 million of fees related to share repurchases for which payment was made subsequent to the issuance of Convertible Notes, the Company paid approximately $123.8 million to enter into Capped Call Transactions with certain financial institutions. The Capped Call Transactions are expected generally to reduce the potential dilution upon conversion of the Convertible Notes in the event that the market price of the common shares is greater than the strike price of the Capped Call Transactions, initially set at $86.28 per common share, with such reduction of potential dilution subject to a cap based on the cap price initially set at $120.79 per common share. The strike pricequarter end and cap price are subject to certain adjustments under the terms of the Capped Call Transactions. Therefore,therefore reflected as a result of executingliability within the Capped Call Transactions, the Company in effect will only be exposed to potential net dilution once the market price of its common shares exceeds the adjusted cap price. As a result of the Capped Call Transactions, the Company’s additional paid-in capital within shareholders’ equity on its condensed consolidated balance sheet was reduced by $123.8 million during the first quarteras of 2014.September 30, 2020.
29
Accumulated Other Comprehensive Income (Loss)Loss
The following table summarizes changes in accumulated other comprehensive income (loss)loss by component during the three months ended September 30, 20172021 and 2016:2020:
|
| Changes in Accumulated Other Comprehensive |
| |||||||||||||||||||||
|
| Income (Loss) by Component |
| |||||||||||||||||||||
|
| Three Months Ended September 30, |
| |||||||||||||||||||||
|
| 2017 |
|
| 2016 |
| ||||||||||||||||||
|
| Foreign Currency Translation Adjustments |
|
| Unrealized Gain (Loss) on Derivatives |
|
| Total |
|
| Foreign Currency Translation Adjustments |
|
| Unrealized Gain (Loss) on Derivatives |
|
| Total |
| ||||||
|
| (In millions) |
| |||||||||||||||||||||
Beginning Balance |
| $ | (185.8 | ) |
| $ | (2.6 | ) |
| $ | (188.4 | ) |
| $ | (178.8 | ) |
| $ | 10.3 |
|
| $ | (168.5 | ) |
Other comprehensive income (loss) before reclassifications, net of tax |
|
| 11.3 |
|
|
| (0.2 | ) |
|
| 11.1 |
|
|
| (2.6 | ) |
|
| 0.8 |
|
|
| (1.8 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) to income, net of tax(1) |
|
| — |
|
|
| 2.7 |
|
|
| 2.7 |
|
|
| — |
|
|
| (3.0 | ) |
|
| (3.0 | ) |
Total other comprehensive income (loss), net of reclassifications |
|
| 11.3 |
|
|
| 2.5 |
|
|
| 13.8 |
|
|
| (2.6 | ) |
|
| (2.2 | ) |
|
| (4.8 | ) |
Ending balance |
| $ | (174.5 | ) |
| $ | (0.1 | ) |
| $ | (174.6 | ) |
| $ | (181.4 | ) |
| $ | 8.1 |
|
| $ | (173.3 | ) |
|
| Changes in Accumulated Other Comprehensive Loss by Component |
| |||||||||||||||||||||
|
| Three Months Ended |
| |||||||||||||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||||||||||
|
| Foreign Currency Translation Adjustments |
|
| Unrealized (Loss) Gain on Derivatives |
|
| Total |
|
| Foreign Currency Translation Adjustments |
|
| Unrealized Gain (Loss) on Derivatives |
|
| Total |
| ||||||
|
| (in millions) |
| |||||||||||||||||||||
Beginning balance |
| $ | (189.7 | ) |
| $ | (2.6 | ) |
| $ | (192.3 | ) |
| $ | (251.5 | ) |
| $ | 5.4 |
|
| $ | (246.1 | ) |
Other comprehensive (loss) income before reclassifications, net of tax |
|
| (14.5 | ) |
|
| 0.9 |
|
|
| (13.6 | ) |
|
| 19.5 |
|
|
| 0.6 |
|
|
| 20.1 |
|
Amounts reclassified from accumulated other comprehensive loss to income, net of tax(1) |
|
| 0 |
|
|
| 1.1 |
|
|
| 1.1 |
|
|
| 0 |
|
|
| (3.7 | ) |
|
| (3.7 | ) |
Total other comprehensive (loss) income, net of reclassifications |
|
| (14.5 | ) |
|
| 2.0 |
|
|
| (12.5 | ) |
|
| 19.5 |
|
|
| (3.1 | ) |
|
| 16.4 |
|
Ending balance |
| $ | (204.2 | ) |
| $ | (0.6 | ) |
| $ | (204.8 | ) |
| $ | (232.0 | ) |
| $ | 2.3 |
|
| $ | (229.7 | ) |
(1) See Note 9, Derivative Instruments and Hedging Activities, for information regarding the location in the condensed consolidated statements of income of gains (losses) reclassified from accumulated other comprehensive loss into income during the three months ended September 30, 2021 and 2020.
|
|
Other comprehensive income (loss)loss before reclassifications was net of tax benefitsbenefit of $1.8$0.6 million for foreign currency translation adjustmentadjustments for the three months ended September 30, 2017.2021.
Other comprehensive income (loss)loss before reclassifications was net of tax expense of $5.8$0.7 million for foreign currency translation adjustmentadjustments for the three months ended September 30, 2016.2020. Amounts reclassified from accumulated other comprehensive loss to income was net of tax benefit of $0.1 million for unrealized gain (loss) on derivatives for the three months ended September 30, 2020.
The following table summarizes changes in accumulated other comprehensive income (loss)loss by component during the nine months ended September 30, 20172021 and 2016:2020:
|
| Changes in Accumulated Other Comprehensive |
| |||||||||||||||||||||||||
|
| Income (Loss) by Component |
| |||||||||||||||||||||||||
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||||||
|
| 2017 |
|
| 2016 |
| ||||||||||||||||||||||
|
| Foreign Currency Translation Adjustments |
|
| Unrealized Gain (Loss) on Derivatives |
|
| Total |
|
| Foreign Currency Translation Adjustments |
|
| Unrealized Gain (Loss) on Derivatives |
|
| Other |
|
| Total |
| |||||||
|
| (In millions) |
| |||||||||||||||||||||||||
Beginning Balance |
| $ | (215.5 | ) |
| $ | 10.4 |
|
| $ | (205.1 | ) |
| $ | (183.0 | ) |
| $ | 17.4 |
|
| $ | 0.1 |
|
| $ | (165.5 | ) |
Other comprehensive income (loss) before reclassifications, net of tax |
|
| 41.0 |
|
|
| (10.8 | ) |
|
| 30.2 |
|
|
| 1.6 |
|
|
| 3.4 |
|
|
| — |
|
|
| 5.0 |
|
Amounts reclassified from accumulated other comprehensive income (loss) to income, net of tax(1) |
|
| — |
|
|
| 0.3 |
|
|
| 0.3 |
|
|
| — |
|
|
| (12.7 | ) |
|
| (0.1 | ) |
|
| (12.8 | ) |
Total other comprehensive income (loss), net of reclassifications |
|
| 41.0 |
|
|
| (10.5 | ) |
|
| 30.5 |
|
|
| 1.6 |
|
|
| (9.3 | ) |
|
| (0.1 | ) |
|
| (7.8 | ) |
Ending balance |
| $ | (174.5 | ) |
| $ | (0.1 | ) |
| $ | (174.6 | ) |
| $ | (181.4 | ) |
| $ | 8.1 |
|
| $ | — |
|
| $ | (173.3 | ) |
|
| Changes in Accumulated Other Comprehensive Loss by Component |
| |||||||||||||||||||||
|
| Nine Months Ended |
| |||||||||||||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||||||||||
|
| Foreign Currency Translation Adjustments |
|
| Unrealized (Loss) Gain on Derivatives |
|
| Total |
|
| Foreign Currency Translation Adjustments |
|
| Unrealized (Loss) Gain on Derivatives |
|
| Total |
| ||||||
|
| (in millions) |
| |||||||||||||||||||||
Beginning balance |
| $ | (178.4 | ) |
| $ | (3.8 | ) |
| $ | (182.2 | ) |
| $ | (211.6 | ) |
| $ | (0.9 | ) |
| $ | (212.5 | ) |
Other comprehensive (loss) income before reclassifications, net of tax |
|
| (25.8 | ) |
|
| 0.7 |
|
|
| (25.1 | ) |
|
| (20.4 | ) |
|
| 5.7 |
|
|
| (14.7 | ) |
Amounts reclassified from accumulated other comprehensive loss to income, net of tax(1) |
|
| 0 |
|
|
| 2.5 |
|
|
| 2.5 |
|
|
| 0 |
|
|
| (2.5 | ) |
|
| (2.5 | ) |
Total other comprehensive (loss) income, net of reclassifications |
|
| (25.8 | ) |
|
| 3.2 |
|
|
| (22.6 | ) |
|
| (20.4 | ) |
|
| 3.2 |
|
|
| (17.2 | ) |
Ending balance |
| $ | (204.2 | ) |
| $ | (0.6 | ) |
| $ | (204.8 | ) |
| $ | (232.0 | ) |
| $ | 2.3 |
|
| $ | (229.7 | ) |
(1) See Note 9, Derivative Instruments and Hedging Activities, for information regarding the location in the condensed consolidated statements of income of gains (losses) reclassified from accumulated other comprehensive loss into income during the nine months ended September 30, 2021 and 2020.
|
|
Other comprehensive income (loss)loss before reclassifications was net of tax expense of $3.5$0.9 million for foreign currency translation adjustmentadjustments for the nine months ended September 30, 2017.2021.
30
Other comprehensive income (loss)loss before reclassifications was net of tax expensebenefit of $7.3$4.1 million and tax benefits of $0.3$0.5 million for foreign currency translation adjustmentadjustments and unrealized gain (loss) on derivatives, respectively, for the nine months ended September 30, 2016.2020. Amounts reclassified from accumulated other comprehensive income (loss)loss to income werewas net of tax expense of $0.1$0.1 million for otherunrealized gain (loss) on derivatives for the nine months ended September 30, 2016.2020.
11.11. Earnings Per Share
Basic earnings per share represents net income divided by the weighted averageweighted-average number of common shares outstanding for the period. Diluted earnings per share represents net income divided by the weighted averageweighted-average number of common shares outstanding, inclusive of the effect of dilutive securities, such as outstanding SARs, stock units, and stock units.convertible notes.
The following are the common share amounts used to compute the basic and diluted earnings per share for each period:
|
| For the Three Months Ended September 30, |
|
| For the Nine Months Ended September 30, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
|
| (in millions) |
| |||||||||||||
Weighted average shares used in basic computations |
|
| 79.6 |
|
|
| 83.1 |
|
|
| 81.4 |
|
|
| 83.0 |
|
Dilutive effect of exercise of equity grants outstanding |
|
| 3.4 |
|
|
| 3.3 |
|
|
| 3.6 |
|
|
| 3.1 |
|
Weighted average shares used in diluted computations |
|
| 83.0 |
|
|
| 86.4 |
|
|
| 85.0 |
|
|
| 86.1 |
|
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
| ||||
|
| (in millions) |
| |||||||||||||
Weighted-average shares used in basic computations |
|
| 105.5 |
|
|
| 129.2 |
|
|
| 107.3 |
|
|
| 135.0 |
|
Dilutive effect of exercise of equity grants outstanding |
|
| 2.3 |
|
|
| 3.3 |
|
|
| 2.5 |
|
|
| 2.8 |
|
Weighted-average shares used in diluted computations |
|
| 107.8 |
|
|
| 132.5 |
|
|
| 109.8 |
|
|
| 137.8 |
|
There were an aggregate of 3.31.1 million and 3.60.8 million of equity grants, consisting of SARs and stock units, that were outstanding during the three and nine months ended September 30, 2017,2021 and 2020, respectively,,and an aggregate of 3.91.1 million and 4.80.9 million of equity grants, consisting of SARs and stock units, that were outstanding during the three and nine months ended September 30, 2016,2021 and 2020, respectively, but were not included in the computation of diluted earnings per share because their effect would be anti-dilutive or the performance condition forof the award had not been satisfied.
SinceFor the 2024 Convertible Notes, the Company willhas the intent and ability to settle the principal amount of its Convertible Notes in cash and intends to settle the conversion feature for the amount above the conversion price, in common shares, or the conversion spread, thein common shares. The Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted earnings per share, if applicable. The conversion spread will have a dilutive impact on diluted earnings per share when the average market price of the Company’s common shares for a given period exceeds the initial conversion price of $86.28 per share.the 2024 Convertible Notes. For the three and nine months ended September 30, 20172021 and 2016,2020, the 2024 Convertible Notes have been excluded from the computation of diluted earnings per share, as the effect would be anti-dilutive since the conversion price of the 2024 Convertible Notes exceeded the average market price of the Company’s common shares for the three and nine months ended September 30,, 2017 2021 and 2016.2020. The initial conversion rate and conversion price isfor the 2024 Convertible Notes are described further in Note 4, Long-Term Debt.
The Capped Call Transactions are excluded from the calculation of diluted earnings per share because their impact is always anti-dilutive.
See Note 10, Shareholders’ EquityDeficit, for a discussion of how common shares repurchased by the Company’s indirect wholly ownedwholly-owned subsidiary are treated under U.S. GAAP.
12. Fair Value Measurements
The Company applies the provisions of the FASB Accounting Standards Codification, or ASC Topic 820, Fair ValueMeasurements and Disclosures, or ASC 820, for its financial and non-financial assets and liabilities. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 inputs are unobservable inputs for the asset or liability.
31
The Company measures certain assets and liabilities at fair value as discussed throughout the notes to its condensed consolidated financial statements. Foreign exchange currency contracts and interest rate swaps are valued using standard calculations and modelsmodels. Foreign exchange currency contracts are valued primarily based on inputs such as observable forward rates, spot rates and foreign currency exchange rates at the reporting period ended date. Interest rate swaps are valued primarily based on inputs such as LIBOR and swap yield curves at the reporting period ended date. The Company’s derivative assets and liabilities are measured at fair value and consisted of Level 2 inputs and their amounts are shown below at their gross values atas of September 30, 20172021 and December 31, 2016:2020:
|
| Significant Other Observable Inputs (Level 2) Fair Value as of September 30, |
|
| Significant Other Observable Inputs (Level 2) Fair Value as of December 31, |
|
| Balance Sheet Location | ||
|
| (in millions) |
|
|
| |||||
ASSETS: |
|
|
|
|
|
|
|
| ||
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
| ||
Foreign exchange currency contracts relating to inventory and intercompany management fee hedges |
| $ | 0.3 |
|
| $ | 0 |
|
| Prepaid expenses and other current assets |
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
| ||
Foreign exchange currency contracts |
|
| 6.5 |
|
|
| 9.4 |
|
| Prepaid expenses and other current assets |
|
| $ | 6.8 |
|
| $ | 9.4 |
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
| ||
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
| ||
Foreign exchange currency contracts relating to inventory and intercompany management fee hedges |
| $ | 0.9 |
|
| $ | 3.9 |
|
| Other current liabilities |
Interest rate swaps |
|
| 0.4 |
|
|
| 1.0 |
|
| Other current liabilities |
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
| ||
Foreign exchange currency contracts |
|
| 2.2 |
|
|
| 3.2 |
|
| Other current liabilities |
|
| $ | 3.5 |
|
| $ | 8.1 |
|
|
|
Fair Value Measurements at Reporting Date
|
| Derivative Balance Sheet Location |
| Significant Other Observable Inputs (Level 2) Fair Value at September 30, 2017 |
|
| Significant Other Observable Inputs (Level 2) Fair Value at December 31, 2016 |
| ||
|
|
|
| (in millions) |
| |||||
ASSETS: |
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts relating to inventory and intercompany management fee hedges |
| Prepaid expenses and other current assets |
| $ | 0.8 |
|
| $ | 4.6 |
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts |
| Prepaid expenses and other current assets |
| $ | 1.1 |
|
| $ | 2.8 |
|
|
|
|
| $ | 1.9 |
|
| $ | 7.4 |
|
LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts relating to inventory and intercompany management fee hedges |
| Other current liabilities |
| $ | 5.5 |
|
| $ | — |
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts |
| Other current liabilities |
| $ | 1.1 |
|
| $ | 3.5 |
|
|
|
|
| $ | 6.6 |
|
| $ | 3.5 |
|
The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Cash and cash equivalents are comprised of money market funds and foreign and domestic bank accounts. These cash and cash equivalents are valued based on levelLevel 1 inputs which consist of quoted prices in active markets. To reduce its credit risk, the Company monitors the credit standing of the financial institutions that hold the Company’s cash and cash equivalents.
The Company’s deferred compensation plan assets consist of Company ownedCompany-owned life insurance policies. As these policies are recorded at their cash surrender value, they are not required to be included in the fair value table above. See Note 6, Employee Compensation Plans, to the consolidated financial statementsConsolidated Financial Statements included in the 20162020 10-K for a further description of the Company’s deferred compensation plan assets.
The following tables summarize the offsetting of the fair values of the Company’s derivative assets and derivative liabilities for presentation in the Company’s condensed consolidated balance sheet atsheets as of September 30, 20172021 and December 31, 2016:2020:
|
| Offsetting of Derivative Assets |
| |||||||||
|
| Gross Amounts of Recognized Assets |
|
| Gross Amounts Offset in the Balance Sheet |
|
| Net Amounts of Assets Presented in the Balance Sheet |
| |||
|
| (in millions) |
| |||||||||
September 30, 2021 |
|
|
|
|
|
|
|
|
| |||
Foreign exchange currency contracts |
| $ | 6.8 |
|
| $ | (1.9 | ) |
| $ | 4.9 |
|
Total |
| $ | 6.8 |
|
| $ | (1.9 | ) |
| $ | 4.9 |
|
December 31, 2020 |
|
|
|
|
|
|
|
|
| |||
Foreign exchange currency contracts |
| $ | 9.4 |
|
| $ | (1.8 | ) |
| $ | 7.6 |
|
Total |
| $ | 9.4 |
|
| $ | (1.8 | ) |
| $ | 7.6 |
|
|
| Offsetting of Derivative Assets |
| |||||||||
|
| Gross Amounts of Recognized Assets |
|
| Gross Amounts Offset in the Balance Sheet |
|
| Net Amounts of Assets Presented in the Balance Sheet |
| |||
|
| (In millions) |
| |||||||||
September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts |
| $ | 1.9 |
|
| $ | (1.6 | ) |
| $ | 0.3 |
|
Total |
| $ | 1.9 |
|
| $ | (1.6 | ) |
| $ | 0.3 |
|
December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts |
| $ | 7.4 |
|
| $ | (3.0 | ) |
| $ | 4.4 |
|
Total |
| $ | 7.4 |
|
| $ | (3.0 | ) |
| $ | 4.4 |
|
32
|
| Offsetting of Derivative Liabilities |
| |||||||||
|
| Gross Amounts of Recognized Liabilities |
|
| Gross Amounts Offset in the Balance Sheet |
|
| Net Amounts of Liabilities Presented in the Balance Sheet |
| |||
|
| (in millions) |
| |||||||||
September 30, 2021 |
|
|
|
|
|
|
|
|
| |||
Foreign exchange currency contracts |
| $ | 3.1 |
|
| $ | (1.9 | ) |
| $ | 1.2 |
|
Interest rate swaps |
|
| 0.4 |
|
|
| 0 |
|
|
| 0.4 |
|
Total |
| $ | 3.5 |
|
| $ | (1.9 | ) |
| $ | 1.6 |
|
December 31, 2020 |
|
|
|
|
|
|
|
|
| |||
Foreign exchange currency contracts |
| $ | 7.1 |
|
| $ | (1.8 | ) |
| $ | 5.3 |
|
Interest rate swaps |
|
| 1.0 |
|
|
| 0 |
|
|
| 1.0 |
|
Total |
| $ | 8.1 |
|
| $ | (1.8 | ) |
| $ | 6.3 |
|
|
| Offsetting of Derivative Liabilities |
| |||||||||
|
| Gross Amounts of Recognized Liabilities |
|
| Gross Amounts Offset in the Balance Sheet |
|
| Net Amounts of Liabilities Presented in the Balance Sheet |
| |||
|
| (In millions) |
| |||||||||
September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts |
| $ | 6.6 |
|
| $ | (1.6 | ) |
| $ | 5.0 |
|
Total |
| $ | 6.6 |
|
| $ | (1.6 | ) |
| $ | 5.0 |
|
December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts |
| $ | 3.5 |
|
| $ | (3.0 | ) |
| $ | 0.5 |
|
Total |
| $ | 3.5 |
|
| $ | (3.0 | ) |
| $ | 0.5 |
|
The Company offsets all of its derivative assets and derivative liabilities in its condensed consolidated balance sheetsheets to the extent it maintains master netting arrangements with related financial institutions. As of September 30, 20172021 and December 31, 2016,2020, all of the Company’s derivatives were subject to master netting arrangements and no collateralization was required for the Company’s derivative assets and derivative liabilities.
13. Detail of Certain Balance Sheet Accounts
Other Assets
The Other assets on the Company’s accompanying condensed consolidated balance sheets includesinclude deferred compensation plan assets of $32.7$46.7 million and $30.6$43.8 million and long-term deferred tax assets of $190.3$90.5 million and $155.2$96.0 million as of September 30, 20172021 and December 31, 2016,2020, respectively.
Other Current Liabilities
Other current liabilities consist of the following:
|
| September 30, 2017 |
|
| December 31, 2016 |
|
| September 30, |
|
| December 31, |
| ||||
|
| (In millions) |
|
| (in millions) |
| ||||||||||
Accrued compensation |
| $ | 110.1 |
|
| $ | 125.8 |
|
| $ | 152.6 |
|
| $ | 163.8 |
|
Accrued liabilities |
|
| 243.1 |
|
|
| 236.9 |
| ||||||||
Accrued service fees to China independent service providers |
|
| 50.5 |
|
|
| 63.3 |
| ||||||||
Accrued advertising, events, and promotion expenses |
|
| 56.0 |
|
|
| 67.6 |
| ||||||||
Current operating lease liabilities |
|
| 40.3 |
|
|
| 35.5 |
| ||||||||
Advance sales deposits |
|
| 68.2 |
|
|
| 50.1 |
|
|
| 90.1 |
|
|
| 68.5 |
|
Income taxes payable |
|
| 6.0 |
|
|
| 42.0 |
|
|
| 15.0 |
|
|
| 23.0 |
|
Other accrued liabilities |
|
| 158.7 |
|
|
| 235.8 |
| ||||||||
Total |
| $ | 427.4 |
|
| $ | 454.8 |
|
| $ | 563.2 |
|
| $ | 657.5 |
|
Other Non-Current Liabilities
The Other non-current liabilities on the Company’s accompanying condensed consolidated balance sheets includesinclude deferred compensation plan liabilities of $55.9$79.9 million and $50.0$72.3 million and deferred income tax liabilities of $15.4$39.6 million and $15.3$39.3 million as of September 30, 20172021 and December 31, 2016,2020, respectively. See Note 6, Employee Compensation Plans, to the consolidated financial statementsConsolidated Financial Statements included in the 20162020 10-K for a further description of the Company’s deferred compensation plan assets and liabilities.
33
14. Subsequent Events
In October 2017, the Company completed its modified Dutch auction tender offer and then subsequently paid cash to repurchase a total of approximately 6.7 million of its common shares at an aggregate cost of approximately $457.8 million, or $68.00 per share. The Company’s cash and cash equivalents and total shareholders’ equity at September 30, 2017, have been subsequently reduced by $457.8 million during the fourth quarter of 2017, as a result of this Dutch auction tender offer transaction. In connection with the tender offer, the Company also provided a non-transferable contractual contingent value right, or CVR, for each share tendered, allowing participants in the tender offer to receive a contingent cash payment in the event Herbalife is acquired in a going-private transaction (as defined in the CVR Agreement) within two years of the commencement of the tender offer. The initial fair value of the CVR was $7.3 million, which will be recorded as a liability in the fourth quarter with a corresponding decrease to shareholders’ equity. Subsequent changes in the fair value of the CVR liability are then recognized within the Company's consolidated balance sheet with corresponding gains or losses being recognized in non-operating expense (income) within the Company's condensed consolidated statements of income during each reporting period until the CVR expires in August 2019 or is terminated due to a going-private transaction.
The following table presents selected pro forma balance sheet data as if the Dutch auction tender offer transaction had been completed and the 6.7 million shares had been repurchased as of September 30, 2017:
|
| September 30, 2017 |
|
| Adjustments |
|
| September 30, 2017 |
| |||
|
| As Reported |
|
|
|
|
|
| Pro Forma |
| ||
|
| (In millions) |
| |||||||||
ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 1,636.3 |
|
| $ | (457.8 | ) |
| $ | 1,178.5 |
|
Total assets |
|
| 3,422.5 |
|
|
| (457.8 | ) |
|
| 2,964.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Other non-current liabilities |
| $ | 168.1 |
|
| $ | 7.3 |
|
| $ | 175.4 |
|
Total liabilities |
|
| 3,203.5 |
|
|
| 7.3 |
|
|
| 3,210.8 |
|
SHAREHOLDERS’ EQUITY (DEFICIT): |
|
|
|
|
|
|
|
|
|
|
|
|
Common shares |
|
| 0.1 |
|
|
| (0.0 | ) |
|
| 0.1 |
|
Paid-in capital in excess of par value |
|
| 452.0 |
|
|
| (40.4 | ) |
|
| 411.6 |
|
Retained earnings (accumulated deficit) |
|
| 240.7 |
|
|
| (424.7 | ) |
|
| (184.0 | ) |
Total shareholders’ equity (deficit) |
|
| 219.0 |
|
|
| (465.1 | ) |
|
| (246.1 | ) |
Total liabilities and shareholders’ equity (deficit) |
| $ | 3,422.5 |
|
| $ | (457.8 | ) |
| $ | 2,964.7 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with other information, including our condensed consolidated financial statements and related notes included in Part I, Item 1, – Financial InformationStatements, and Part II, Item 1A, Risk Factors, of this Quarterly Report on Form 10-Q, and our consolidated financial statements appearing in our Annual Report on Form 10-K for the year ended December 31, 2016,2020, or the 20162020 10-K. Unless the context otherwise requires, all references herein to the “Company,” “we,” “us” or “our,” or similar terms, refer to Herbalife Nutrition Ltd., a Cayman Islands exemptexempted company with limited liability, company, and its consolidated subsidiaries.
Overview
We are a global nutrition company that sells weight management,management; targeted nutrition,nutrition; energy, sports, & fitness,and fitness; and outer nutrition products to and through independent members, or Members. In China, we sell our products to and through independent service providers sales representatives, and sales officersrepresentatives to customers and preferred customers, as well as through Company-operated retail storesplatforms when necessary. We refer to Members that distribute our products and achieve certain qualification requirements as “sales leaders.”
We pursue our mission of “changing people’s lives” by providing high quality, science-basedprovide high-quality, science-backed products to Members and their customers who seek a healthy lifestyle and we also offer a business opportunity to those Members who seek additional income. We believe enhanced consumer awareness and demand for our products due to global trends such as the global obesity epidemic, has made our quality products more relevantincreasing interest in a fit and active lifestyle, living healthier and the rise of entrepreneurship, coupled with the effectiveness of our distribution network, coupled with geographic expansion,personalized selling through a direct sales channel, have been the primary reasons for our success throughout our 37-year operating history.continued success.
Our products are grouped in four principal categories: weight management; targeted nutrition; energy, sports, &and fitness; and outer nutrition, along with literature, promotional, and promotionalother items. Our products are often sold through a series of related products and literature designed to simplify weight management and nutrition for consumers and maximize our Members’ cross-selling opportunities.
Industry-wide factors that affect us and our competitors include the global obesity epidemic, the aging of the worldwide population and rising public health care costs, which are driving demand for weight management, nutrition and wellness-related products along with the global increase in under employment and unemployment which can affect the recruitment and retention of Members seeking additional income opportunities.
While we continue to monitor the current global financial environment and the impacts of the COVID-19 pandemic, we remain focused on the opportunities and challenges in retailing of our products and enhancing the customer experience, sponsoring and retaining Members, improving Member productivity, further penetrating existing markets, opening new markets, globalizing successful DistributorDaily Methods of Operation, or DMOs, such as Nutrition Clubs, Fit Clubs, and Weight Loss Challenges, introducing new products and globalizing existing products, developing niche market segments and further investing in our infrastructure.
We report revenue fromsell our products in six geographic regions:
North America;
Mexico;
South and Central America;
EMEA, which consists of Europe, the Middle East, and Africa;
Asia Pacific (excluding China); and
China.
On July 15, 2016, we reached a settlement with the U.S. Federal Trade Commission, or the FTC, and entered into a proposed Stipulation to Entry of Order for Permanent Injunction and Monetary Judgment, or the Consent Order, which resolved the FTC’s multi-year investigation of the Company. The Consent Order became effective on July 25, 2016, or the Effective Date, upon final approval by the U.S. District Court for the Central District of California. PursuantWe continue to the Consent Order, we agreed to implement certain new procedures and enhance certain existing procedures in the U.S., most of which we had 10 months from the Effective Date to implement. Among other requirements, the Consent Order required us to categorize all existing and future Members in the U.S. as either “preferred members” - who are simply consumers who only wish to purchase product for their own household use, or “distributors” - who are Members who wish to resell some products or build a sales organization. We also agreed to compensate distributors on eligible U.S. sales within their downline organizations, which include purchases by preferred members, purchases by a distributor for his or her personal consumption within allowable limits and sales of product by a distributor to his or her customers. The Consent Order also requires distributors to meet certain conditions before opening Nutrition Clubs and/or entering into leases for their Herbalife business in the United States. The Consent Order also prohibits the Company from making expressly or by implication, any representation regarding the amount or level of income, including full-time or part-time income, that a participant can reasonably expect to earn in the Company’s network marketing program, unless the representation is non-misleading and the Company possesses competent and reliable evidence sufficient to substantiate that the representation is true.
We are monitoringmonitor the impact of the Consent Order and our Boardboard of Directors hasdirectors established the Implementation Oversight Committee in connection with the Consent Order. The committee has metOrder, and will meet regularly with management to overseemore recently, our Audit Committee assumed oversight of continued compliance with the terms of the Consent Order. While we currently do not expect the settlement to have a long-term and materially adverse impact on our business and our Member base, our business and our Member base, particularly in the U.S., may be negatively impacted as we and they adjust to the changes.impacted. The terms of the settlementConsent Order do not change our going to market through direct selling by independent distributors, and compensating those distributors based upon the product they and their sales organization sell. See Part II, Item 1A, – Risk Factors, of this Quarterly Report on Form 10-Q for a discussion of risks related to the settlement with the FTC.
34
COVID-19 Pandemic
During March 2020, the World Health Organization declared the outbreak of coronavirus disease 2019, or COVID-19, as a pandemic. The outbreak and subsequent global spread of the virus has impacted the general public, companies and state, local and national governments and economies worldwide, as well as global financial markets, and caused unemployment to increase. Public health organizations and international, federal, state and local governments have implemented measures to combat the spread of COVID-19, including restrictions on movement such as quarantines, “stay-at-home” orders and social distancing ordinances and restricting or prohibiting outright some or all forms of commercial and business activity. These measures, or others that may be implemented in the future, although temporary in nature, have continued intermittently for many markets.
Our business and operations have been affected by the pandemic in manners, in some cases adversely, and degrees that vary by market and we expect that the effects may extend through 2021 and possibly beyond. For the health and safety of our employees, our Members, and their customers, we implemented temporary access restrictions at many of our physical business locations and locations where Members conduct their business activities, some of which measures continue. Generally, we have been able to satisfy current levels of demand. While demand for our nutritional products continues to be at or above pre-pandemic levels and pandemic constraints have been lessened in most markets, including by the designation of our nutritional business as “essential” or other similar characterization, our operations have been and continue to be disrupted. The most significant impacts we have seen, depending on market, include:
We and our Members have responded to the pandemic and its impacts on our business and theirs by adapting operations and taking a number of proactive measures to mitigate those impacts. The most significant measures include:
We believe our cash on hand as of September 30, 2021 and as of the date of this filing, combined with cash flows from operating activities, is sufficient to meet our foreseeable needs for the next twelve months. We also have access to our revolving credit facility to supplement our cash-generating ability if necessary.
Although we believe that our responsive measures have been effective in limiting the adverse impact of the pandemic on most markets, the ongoing impact of the COVID-19 pandemic will affect our business, financial condition, and results of operations in future quarters, including their comparability to prior periods. Given the unpredictable, unprecedented, and fluid nature of the pandemic and its economic consequences, we are unable to predict the duration and extent to which the pandemic and its related impacts will impact our business, financial condition, and results of operations. A more detailed discussion of the pandemic’s impact on net sales for the third quarter and first nine months of 2021 and its expected impact in future periods, as well as the impacts specific to each geographic region, are discussed further in the Sales by Geographic Region section below. See Part II, Item 1A, Risk Factors, of this Quarterly Report on Form 10-Q for a further discussion of risks related to the COVID-19 pandemic.
35
Volume Points by Geographic Region
A key non-financial measure we focus on is Volume Points on a Royalty Basis, or Volume Points, which is essentially our weighted-average measure of product sales volume. Volume Points, which are unaffected by exchange rates or price changes, are used by management as a proxy for sales trends because in general, excluding the impact of price changes, an increase in Volume Points in a particular geographic region or country indicates an increase in our local currency net sales while a decrease in Volume Points in a particular geographic region or country indicates a decrease in our local currency net sales. The criteria we use to determine how and when we recognize Volume Points are not identical to our revenue recognition policies under U.S. GAAP. Unlike net sales, which are generally recognized when the product is delivered and both the title and risk and rewards passwhen control passes to the Member, as discussed in greater detail in Note 2, Significant Accounting Policies, to the 2016 10-K,Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q, we recognize Volume Points when a Member pays for the order, which is generally prior to the product being delivered. Further, the periods in which Volume Points are tracked can vary slightly from the fiscal periods for which we report our results under U.S. GAAP. Therefore, there can be timing differences between the product orders for which net sales are recognized and for which Volume Points are recognized within a given period. However, historically these timing differences generally have been immaterial in the context of using changes in Volume Points as a proxy to explain volume-driven changes in net sales.
We assign a Volume Point value to a product when it is first introduced into a market and the value is unaffected by subsequent foreign exchange rate and price changes. The specific number of Volume Points assigned to a product, andwhich is generally consistent across all markets, is based on a Volume Point to suggested retail price ratio for similar products. If a product is available in different quantities, the various sizes will have different Volume Point values. In general, once assigned, a Volume Point value is consistent in each region and country and does not change from year to year. The reason Volume Points are used in the manner described above is that weWe use Volume Points for Member qualification and recognition purposes, as well as a proxy for sales trends, and therefore we attempt togenerally keep Volume Points for a similar or like product consistent on a global basis. However, because Volume Points are a function of value rather than product type or size, they are not a reliable measure for product mix. As an example, an increase in Volume Points in a specific country or region could mean a significant increase in sales of less expensive products or a marginal increase in sales of more expensive products.
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||||||||||||||||||||||||||||
|
| 2017 |
|
| 2016 |
|
| % Change |
|
| 2017 |
|
| 2016 |
|
| % Change |
|
| September 30, |
|
| September 30, |
|
| % Change |
|
| September 30, |
|
| September 30, |
|
| % Change |
| ||||||||||||
|
| (Volume Points in millions) |
|
| (Volume Points in millions) |
| ||||||||||||||||||||||||||||||||||||||||||
North America |
|
| 261.5 |
|
|
| 311.6 |
|
|
| (16.1 | )% |
|
| 848.2 |
|
|
| 978.1 |
|
|
| (13.3 | )% |
|
| 438.4 |
|
|
| 501.0 |
|
|
| (12.5 | )% |
|
| 1,409.8 |
|
|
| 1,349.4 |
|
|
| 4.5 | % |
Mexico |
|
| 213.3 |
|
|
| 234.5 |
|
|
| (9.0 | )% |
|
| 667.7 |
|
|
| 693.1 |
|
|
| (3.7 | )% |
|
| 208.3 |
|
|
| 232.3 |
|
|
| (10.3 | )% |
|
| 640.8 |
|
|
| 655.6 |
|
|
| (2.3 | )% |
South & Central America |
|
| 150.2 |
|
|
| 161.1 |
|
|
| (6.8 | )% |
|
| 440.9 |
|
|
| 499.2 |
|
|
| (11.7 | )% | ||||||||||||||||||||||||
South and Central America |
|
| 124.4 |
|
|
| 150.7 |
|
|
| (17.5 | )% |
|
| 374.3 |
|
|
| 386.5 |
|
|
| (3.2 | )% | ||||||||||||||||||||||||
EMEA |
|
| 258.9 |
|
|
| 252.0 |
|
|
| 2.7 | % |
|
| 816.7 |
|
|
| 789.6 |
|
|
| 3.4 | % |
|
| 390.3 |
|
|
| 423.1 |
|
|
| (7.8 | )% |
|
| 1,260.0 |
|
|
| 1,166.5 |
|
|
| 8.0 | % |
Asia Pacific (excluding China) |
|
| 278.7 |
|
|
| 275.9 |
|
|
| 1.0 | % |
|
| 815.4 |
|
|
| 803.2 |
|
|
| 1.5 | % | ||||||||||||||||||||||||
Asia Pacific |
|
| 489.5 |
|
|
| 448.9 |
|
|
| 9.0 | % |
|
| 1,469.5 |
|
|
| 1,211.3 |
|
|
| 21.3 | % | ||||||||||||||||||||||||
China |
|
| 147.8 |
|
|
| 153.2 |
|
|
| (3.5 | )% |
|
| 483.7 |
|
|
| 488.1 |
|
|
| (0.9 | )% |
|
| 91.6 |
|
|
| 143.5 |
|
|
| (36.2 | )% |
|
| 299.0 |
|
|
| 412.8 |
|
|
| (27.6 | )% |
Worldwide |
|
| 1,310.4 |
|
|
| 1,388.3 |
|
|
| (5.6 | )% |
|
| 4,072.6 |
|
|
| 4,251.3 |
|
|
| (4.2 | )% |
|
| 1,742.5 |
|
|
| 1,899.5 |
|
|
| (8.3 | )% |
|
| 5,453.4 |
|
|
| 5,182.1 |
|
|
| 5.2 | % |
We believe the decrease in worldwide
Volume Points decreased 8.3% and increased 5.2% for the three and nine months ended September 30, 20172021, including a mixed impact of 5.6%COVID-19 pandemic conditions across our markets, after having increased 23.2% and 4.2%, respectively, versus increases reported13.8% for the prior yearsame periods in 2020. The comparative 2021 and 2020 results by region discussed below are greatly impacted, we believe, by the significance and timing of pandemic conditions and our and our Members’ ability to respond to the conditions, which varied by region and by market within regions. Although pandemic conditions had adverse operational impacts across all markets, we believe during certain periods our Members in certain markets where we saw increased net sales and Volume Point growth for some periods were driven by regional specific factors. Themore focused on their business due to those conditions, particularly the North America region and certain EMEA markets during the second half of 2020 and first half of 2021.
We believe North America’s Volume Point decrease for the third quarter of 2021, after a significant year-over-year increase for the third quarter of 2020, reflects in part the comparison to a 2020 base period that saw a record level of sales. We believe the Volume Point increase for the year-to-date period versus the 2020 period, although well below the rate of year-over-year increase for the 2020 period, reflects both the continuing success and expansion of our Distributors as well as the enhanced motivation and focus of our Members due to pandemic conditions seen through the first half of 2021. We believe Mexico’s Volume Point decreases for North Americathe third quarter and first nine months of 2021, after a year-over-year increase for the threethird quarter of 2020 and a small decline for the first nine months ended September 30, 2017, following increases in the prior year periods, reflect Member focus on FTC settlement implementation actions including training on new tools and methods for documenting sales, and time spentof 2020, is due to then train their sales organizations. The decrease for Mexico for the three and nine months ended September 30, 2017, reflectsongoing difficult economic conditions in the market, and, for the quarter,exacerbated by the adverse impact of the damaging natural disaster in the greater Mexico City area. We continue to see declines in theintermittent pandemic-related constraints.
36
The South &and Central America region assaw a result of regional and country specific challenges discussedsignificant decrease in greater detail in Sales by Geographic Region below, and as many Members transition to customer-based, sustainable business practices. Lower levels of growthVolume Points for the EMEA regionthird quarter of 2021 versus comparable prior year periods are also driventhe prior-year period, after a significant year-over-year increase for the third quarter of 2020. The current-year quarter was impacted by country specificcontinuing intermittent adverse impacts of the pandemic seen across most markets in the region. The first nine months of 2021 saw a small Volume Point decline versus the 2020 period after essentially even year-over-year results including declinesfor the 2020 period. The volume decline was greatest in several countries that have followed several years of growth. Asia Pacific (excluding China) has had mixed results by country withinBrazil, our largest market in the region, as discussed in greater detail in Sales by Geographic Region below. Theit saw adverse pandemic effects as well as longer-term negative momentum. EMEA has seen Volume Point declinesgrowth in recent years, a result we believe of customer-oriented efforts including Member training, brand awareness, and product line expansion, as well as Member success in leveraging online approaches and new Member recruitment, plus, during the second half of 2020 and first half of 2021, enhanced motivation and focus of our Members due to pandemic conditions. Volume Points declined significantly, however, for the third quarter versus the 2020 period due in part to comparison to base periods that saw record levels of sales.
The Asia Pacific region saw Volume Point increases for the third quarter and first nine months of 2021 versus the prior-year periods, led by the India market and continuing favorable long-term trends seen in the region. The third quarter Volume Point growth was below the rate seen for the 2020 period due to intermittent adverse pandemic conditions in most markets. China saw significant Volume Point decreases for the third quarter and first nine months of 2021, versus increases for the prior-year periods. Results for the 2021 periods reflect some adverse near-term impact of efforts we are making to ultimately strengthen the consistency and sustainability of our business in China afterand the continuing impact on sales and training meetings of pandemic conditions and the residual effects of the Chinese government's 100-day review of the health product industry, or the Review, which concluded in April 2019. Also notable is that the growth in comparable yearrates for the 2020 periods is attributablewere favorably impacted by weakened 2019 base periods due to factors such as Members testing new business methods that did not provedisruption from Review.
Across most markets, we expect COVID-19 pandemic conditions to be as sustainable as traditional methods. Sales volume resultscontinue to impact Volume Point results; however, we are unable to predict the duration or magnitude of these effects. Results and more regional or country-specific impacts of the COVID-19 pandemic are discussed further below in the applicable sections of Sales by Geographic Region. We believe our competitive strengths and business strategies, each of which is discussed in greater detail in Item 1 — Business of the 2016 10-K, will contribute to achieving our long-term objective of sustainableRegion.
Presentation
“Net sales growth through retailing, recruiting and retention.
Number of Sales Leaders and Retention Rates by Geographic Region as of Re-qualification Period
Our compensation system requires each” represent product sales leader to re-qualify for such status each year, prior to February, in order to maintain their 50% discount on products and be eligible to receive royalty payments. In February of each year, we demote from the rank of sales leader those Members who did not satisfy the re-qualification requirements during the preceding twelve months. The re-qualification requirement does not apply to new sales leaders (i.e. those who became sales leaders subsequent to the January re-qualification of the prior year). Volume Points are the basis for sales leader qualification, as discussed in greater detail in Item 1, Business of the 2016 10-K. Typically, a Member accumulates Volume Points for a given sale at the time the Member pays for the product. However, effective beginning in May 2017, a Member does not receive Volume Point credit for a transaction in the United States until it is documented in compliance with the Consent Order.
For the latest twelve month re-qualification period ending January 2017, approximately 60.9% of our sales leaders, excluding China and Venezuela, re-qualified. This figure excludes sales leaders in the United States who had converted to preferred member prior to the re-qualification period-end, as those individuals were not eligible for requalification; had these individuals been included in the calculation the figure would have been 59.3%. Venezuelan Members were excluded from retention figures for the year ended January 2017 due to revised requalification criteria that are not comparable to prior periods or to other markets and were excluded from 2016 as sales leaders in the market were not required to requalify that year due to product supply limitations. Argentina is excluded from 2016 for comparability purposes; demotion figures for the year are amplified as the qualification requirement had been reinstated after having been waived for 2015.
Sales Leaders Statistics (Excluding China) |
| 2017 |
|
| 2016 |
| ||
|
| (In thousands) |
| |||||
January 1 total sales leaders |
|
| 572.9 |
|
|
| 603.3 |
|
January & February new sales leaders |
|
| 26.8 |
|
|
| 27.7 |
|
Demoted sales leaders (did not re-qualify)(1) |
|
| (124.0 | ) |
|
| (207.6 | ) |
Sales leaders who converted to preferred members |
|
| (38.3 | ) |
|
| — |
|
Other sales leaders (resigned, etc.) |
|
| (2.0 | ) |
|
| (3.9 | ) |
End of February total sales leaders(1) |
|
| 435.4 |
|
|
| 419.5 |
|
The statistics below further highlight the calculation for retention.
Sales Leaders Retention (Excluding China) |
| 2017 |
|
| 2016 |
| ||
|
| (In thousands) |
| |||||
Sales leaders needed to re-qualify |
|
| 379.0 |
|
|
| 450.2 |
|
Demoted sales leaders (did not re-qualify)(2) |
|
| (148.3 | ) |
|
| (206.4 | ) |
Total re-qualified |
|
| 230.7 |
|
|
| 243.8 |
|
Retention rate |
|
| 60.9 | % |
|
| 54.2 | % |
|
|
|
|
The table below reflects the number of sales leaders as of the end of February of the year indicated (subsequent to the annual re-qualification date) and sales leader retention rate by year and by region.
|
| Number of Sales Leaders |
|
| Sales Leaders Retention Rate |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
North America |
|
| 61,362 |
|
|
| 79,305 |
|
|
| 74.8 | % |
|
| 58.3 | % |
Mexico |
|
| 74,968 |
|
|
| 67,294 |
|
|
| 71.7 | % |
|
| 57.1 | % |
South & Central America |
|
| 73,375 |
|
|
| 77,523 |
|
|
| 55.2 | % |
|
| 53.0 | % |
EMEA |
|
| 101,101 |
|
|
| 87,500 |
|
|
| 62.2 | % |
|
| 63.6 | % |
Asia Pacific (excluding China) |
|
| 124,555 |
|
|
| 107,871 |
|
|
| 49.7 | % |
|
| 43.8 | % |
Total Sales Leaders |
|
| 435,361 |
|
|
| 419,493 |
|
|
| 60.9 | % |
|
| 54.2 | % |
China |
|
| 47,244 |
|
|
| 41,890 |
|
|
|
|
|
|
|
|
|
Worldwide Total Sales Leaders |
|
| 482,605 |
|
|
| 461,383 |
|
|
|
|
|
|
|
|
|
Sales leaders generally purchase our products for resale to other Members and retail consumers. The number of sales leaders by geographic region as of the quarterly reporting dates will normally be higher than the number of sales leaders by geographic region as of the re-qualification period because sales leaders who do not re-qualify during the relevant twelve-month period will be removed from the rank of sales leader the following February. Comparisons of sales leader totals on a year-to-year basis are indicators of our recruitment and retention efforts in different geographic regions.
Retention Rate for the requalification period ended January 2017 was significantly improved compared to prior year periods. We believe this performance is the result of efforts we have made to improve the sustainability of sales leaders’ businesses such as encouraging Members to obtain experience retailing Herbalife products before becoming a sales leader.
Presentation
“Retail value” represents the suggested retail price of products we sell to our Members, net of “distributor allowances,” and is the gross sales amount reflected on our invoices. Retail value is a Non-GAAP measure which may not be comparable to similarly-titled measures used by other companies. This is not the price paid to us by our Members. inclusive of any shipping and handling revenues, as described further below.
Our Members purchase product from us at a discount from the suggested retail price. We refer to these discounts as “distributor allowance”, and we refer to retail value less distributor allowances as “product sales”.
Total distributor allowances for the three months ended September 30, 2017 and 2016 were 40.7% and 40.5% of retail value, respectively. Total distributor allowances for the nine months ended September 30, 2017 and 2016 were 40.4% and 40.2% of retail value, respectively. Distributor allowances and Marketing Plan payouts generally utilize 90% to 95% of suggested retail price, depending on the product and market,less discounts referred to which we apply discounts of up to 50% for as “distributor allowances and payout rates of up to 15% for royalty overrides, up to 7% for production bonuses, and approximately 1% for the Mark Hughes bonus. Distributor allowances as a percentage of retail value may vary by country depending upon regulatory restrictions that limit or otherwise restrict distributor allowances. We also offer reduced distributor allowances with respect to certain products worldwide.allowance.” Each Member’s level of discount is determined by qualification based on their volume of purchases. In cases where a Member has qualified for less than the maximum discount, the remaining discount, which we also refer to as a wholesale commission, is received by their sponsoring Members. Therefore,Distributor allowances may also vary by country depending upon regulatory restrictions that limit or otherwise restrict distributor allowances. We also offer reduced distributor allowances with respect to certain products worldwide.
For U.S. GAAP purposes, shipping and handling services relating to product sales are recognized as fulfillment activities on our performance obligation to transfer products and are therefore recorded within net sales as part of product returnssales and distributor allowances.are not considered as separate revenues.
“Net sales” equalIn certain geographic markets, we have introduced segmentation of our Member base into two categories: “preferred members” – who are simply consumers who wish to purchase product for their own household use, and “distributors” – who are Members who also wish to resell products or build a sales plus “organization. Additionally, in certain markets we are simplifying our pricing by eliminating certain shipping and handling revenues”,charges and generally represents whatrecovering those costs within suggested retail price. As we collect.
We do not have visibility into allcontinue to extend the segmentation of the sales fromour distributors and preferred members to additional geographic markets and consider other pricing simplification efforts for our Members, to their customers, but such a figure would differ from our reported “retail value” by factors including (a) the amountutility of, product purchased by our Members for their own personal consumption and (b) prices charged by our Members to their customers other than our suggested retail prices. We discusstherefore management’s reliance on, total retail value becausehas decreased and we have discontinued the disclosure of its fundamental role in our systems, internal controls and operations, and its correlation to Member discounts and Royalty Overrides. In addition,this non-GAAP retail value is a component of the financial reports we use to analyze our financial results because, among other things, it can provide additional detail and visibility into our net sales results on a Company-wide and a geographic region and product category basis. Therefore, this non-GAAP measure may be useful to investors because it provides investors with the same information used by management. As this measure is not in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, retail value should not be considered in isolation from, nor as a substitute for, net sales and other consolidated income or cash flow statement data prepared in accordance with U.S. GAAP, or as a measure of profitability or liquidity. A reconciliation of retail value to net sales is presented below under Results of Operations.information.
Our international operations have provided and will continue to provide a significant portion of our total net sales. As a result, total net sales will continue to be affected by fluctuations in the U.S. dollar against foreign currencies. In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency fluctuations, in addition to comparing the percent change in net sales from one period to another in U.S. dollars, we also compare the percent change in net sales from one period to another period using “net sales in local currencycurrency.”. Net sales in local currency is not a U.S. GAAP financial measure. Net sales in local currency removes from net sales in U.S. dollars the impact of changes in exchange rates between the U.S. dollar and the local currencies of our foreign subsidiaries, by translating the current period net sales into U.S. dollars using the same foreign currency exchange rates that were used to translate the net sales for the previous comparable period. We believe presenting net sales in local currency is useful to investors because it allows a meaningful comparison of net sales of our foreign operations from period to period. However, net sales in local currency measures should not be considered in isolation or as an alternative to net sales in U.S. dollar measures that reflect current period exchange rates, or to other financial measures calculated and presented in accordance with U.S. GAAP.
37
Additionally, the impact of foreign currency fluctuations in Venezuela and the price increases we implement as a result of the highly inflationary economy in that market can each, when considered in isolation, have a disproportionately large impact to our consolidated results despite the offsetting nature of these drivers and that net sales in Venezuela, which represent less than 1% of our consolidated net sales, are not material to our consolidated results. Therefore, in certain instances, we believe it is helpful to provide additional information with respect to these factors as reported and excluding the impact of Venezuela to illustrate the disproportionate nature of Venezuela’s individual pricing and foreign exchange impact to our consolidated results. However, excluding the impact of Venezuela from these measures is not in accordance with U.S. GAAP and should not be considered in isolation or as an alternative to the presentation and discussion thereof calculated in accordance with U.S. GAAP.
Our “gross profit” consists of net sales less “cost of sales,” which represents our manufacturing costs, the price we pay to our raw material suppliers and manufacturers of our products as well as shipping and handling costs including duties, tariffs, and similar expenses.
While certain Members may profit from their activities by reselling our products for amounts greater than the prices they pay us, Members that develop, retain, and manage other Members may earn additional compensation for those activities, which we refer to as “Royalty overrides.” Royalty overrides are our mosta significant operating expense and consist of:
royalty overrides and production bonuses;
the Mark Hughes bonus payable to some of our most senior Members; and
other discretionary incentive cash bonuses to qualifying Members.
Royalty overrides are compensation to Members for the development, retention and improved productivity of their sales organizations and are paid to several levels of Members on each sale. Royalty overrides are compensation for services rendered to us and, as such, are recorded as an operating expense.
In China, our independent service providers are compensated for marketing, sales support, and other services instead of the distributor allowances and royalty overrides utilized in our global marketing plan.Marketing Plan. Service fees to China independent service providers are included in selling, general, and administrative expenses.
Because of local country regulatory constraints, we may be required to modify our Member incentive plans as described above. We also pay reduced royalty overrides with respect to certain products worldwide. Consequently, the total royaltyRoyalty override percentage may vary over time and from the percentages noted above.time.
Our “contribution margins” consist of net sales less cost of sales and royaltyRoyalty overrides.
“Selling, general, and administrative expenses” represent our operating expenses, which include labor and benefits, service fees to China independent service providers, sales events, professional fees, travel and entertainment, Member promotions, occupancy costs, communication costs, bank fees, depreciation and amortization, foreign exchange gains and losses, and other miscellaneous operating expenses.
Our “other operating income” consists of government grant income related to China.
Our “other expense, net” consists of non-operating income and expenses such as gains or losses on extinguishment of debt.
Most of our sales to Members outside the United States are made in the respective local currencies. In preparing our financial statements, we translate revenues into U.S. dollars using average exchange rates. Additionally, the majority of our purchases from our suppliers generally are made in U.S. dollars. Consequently, a strengthening of the U.S. dollar versus a foreign currency can have a negative impact on our reported sales and contribution margins and can generate foreign currency losses on intercompany transactions. Foreign currency exchange rates can fluctuate significantly. From time to time, we enter into foreign currency derivatives to partially mitigate our foreign currency exchange risk as discussed in further detail in Part I, Item 3, — Quantitative and Qualitative Disclosures about Market Risk.Risk, of this Quarterly Report on Form 10-Q.
38
Summary Financial Results
Net sales for the three and nine months ended September 30, 20172021 were $1,085.4$1,430.9 million and $3,334.4$4,484.8 million, respectively. Net sales decreased $36.6$90.9 million, or 3.3%6.0% ($90.8 million, or 6.0% excluding Venezuela), and $109.0increased $353.7 million, or 3.2%8.6% ($353.7 million, or 8.6% excluding Venezuela), for the three and nine months ended September 30, 2017,2021, respectively, as compared to the same periods in 2016.2020. In local currency, net sales decreased 4.0%7.3% and 2.5%increased 6.2% (decreased 7.6% and increased 5.7% excluding Venezuela) for the three and nine months ended September 30, 2017,2021, respectively, as compared to the same periods in 2016.2020. The 6.0% decrease in net sales of 3.3% for the three months ended September 30, 20172021 was primarily driven by a decrease in sales volume, as indicated by a 5.6%an 8.3% decrease in Volume Points;Points, and a 2.5% unfavorable impact of country sales mix, partially offset by a 2.8% favorable impact of price increases which increased net sales by approximately 3.3%(2.5% favorable impact excluding Venezuela) and a 1.3% favorable impact of fluctuations in foreign currency exchange rates (1.6% favorable impact excluding Venezuela). The decrease8.6% increase in net sales of 3.2% for the nine months ended September 30, 20172021 was primarily driven by a decreasean increase in sales volume, as indicated by a 4.2% decrease5.2% increase in Volume Points, a 3.0% favorable impact of price increases (2.4% favorable impact excluding Venezuela), and a 1.3% unfavorable country mix;2.4% favorable impact of fluctuations in foreign currency exchange rates (2.9% favorable impact excluding Venezuela), partially offset by price increases, which increased neta 2.8% unfavorable impact of country sales by approximately 2.5%.mix.
Net income for the three and nine months ended September 30, 20172021 was $54.5$117.4 million, or $0.66$1.09 per diluted share, and $277.3$409.0 million, or $3.26$3.73 per diluted share, respectively. Net income decreased $33.2$20.7 million, or 37.9%15.0%, and increased $110.2 million, or 36.9%, for the three months ended September 30, 2017, and increased $116.7 million, or 72.7% for the nine months ended September 30, 2017.2021, respectively, as compared to the same periods in 2020. The decrease in net income for the three months ended September 30, 20172021 was primarilymainly due to a$60.3 million lower contribution margin driven by the decrease inlower net sales, and higher interest expense, partially offset by $43.4 million lower income tax expense.selling, general, and administrative expenses. The increase in net income for the nine months ended September 30, 20172021 was primarilymainly due to a$93.6 million higher contribution margin driven by higher net sales and $60.6 million lower selling, general, and administrative expenseexpenses driven by the $203.0$83.1 million regulatory settlements in 2016, partially offset by a lower contribution margin driven by lower net sales, and higher interest expense.
Net income for the three months ended September 30, 2017 included a $4.6 million favorable impact ($3.1 million post-tax) of government grant income in China; a $11.3 million unfavorable impact of non-cash interest expense relatedexpenses relating to the Convertible NotesSEC and DOJ investigations relating to the Forward TransactionsFCPA matter in China in 2020 (See Note 4, Long-Term Debt5, Contingencies, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q); a $3.3 million pre-tax unfavorable impact ($2.2 million post-tax) from expenses related to regulatory inquiries; a $1.1 million pre-tax unfavorable impact ($0.9 million post-tax) related to legal, advisory services and other expenses for our response to allegations and other negative information put forward in the marketplace, partially offset by a hedge fund manager which started in late 2012 (See Selling, General and Administrative Expenses below for further discussion); and a $3.0$24.6 million pre-tax unfavorable impact ($1.9 million post-tax) from expenses related to the implementationloss on extinguishment of the FTC Consent Order.
Net income for the nine months ended September 30, 2017 included a $43.5 million favorable impact ($30.8 million post-tax) of government grant income in China; a $36.6 million unfavorable impact of non-cash interest expense related to the Convertibleour 2026 Notes and the Forward Transactions (See Note 4, Long-Term Debt, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q) and $23.0 million higher interest expense, net.
Net income for the three months ended September 30, 2021 included a $6.0 million pre-tax unfavorable impact ($6.5 million post-tax) of non-cash interest expense related to the 2024 Convertible Notes (See Note 4, Long-Term Debt, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q); a $10.0$3.9 million pre-tax unfavorable impact ($6.63.7 million post-tax) fromof transformation initiative expenses, relatedprimarily relating to regulatory inquiries;professional fees; a $4.2$2.5 million pre-tax unfavorable impact ($3.2 million post-tax) related to legal, advisory services and other expenses for our response to allegations and other negative information put forward in the marketplace by a hedge fund manager which started in late 2012 (See Selling, General and Administrative Expenses below for further discussion); and a $16.7 million pre-tax unfavorable impact ($11.12.3 million post-tax) from expenses related to the implementationCOVID-19 pandemic, and such expenses are expected to continue in future periods; a $0.6 million pre-tax unfavorable impact ($0.5 million post-tax) of debt issuance costs related to the FTC Consent Order.amendment of our 2018 Credit Facility (See Note 4, Long-Term Debt, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q); a $0.2 million favorable impact of loss on extinguishment of our 2026 Notes; and a $0.1 million unfavorable impact of non-income tax items.
Net income for the nine months ended September 30, 2021 included a $24.6 million pre-tax unfavorable impact ($19.1 million post-tax) of loss on extinguishment of our 2026 Notes; a $17.6 million pre-tax unfavorable impact ($18.3 million post-tax) of non-cash interest expense related to the 2024 Convertible Notes; an $11.8 million pre-tax unfavorable impact ($9.7 million post-tax) from expenses related to the COVID-19 pandemic, and such expenses are expected to continue in future periods; a $7.6 million pre-tax unfavorable impact ($6.9 million post-tax) of transformation initiative expenses, primarily relating to professional fees; a $7.4 million pre-tax favorable impact ($5.6 million post-tax) of net benefit on non-income tax items; and a $1.7 million pre-tax unfavorable impact ($1.4 million post-tax) of debt issuance costs related to the amendment of our 2018 Credit Facility.
The income tax impact of the expenses discussed above is based on forecasted items affecting our 20172021 full year effective tax rate. Adjustments to forecasted items unrelated to these expenses, as well as impacts related to interim reporting, will have an effect on the income tax impact of these items in subsequent periods.
Net income for the three months ended September 30, 20162020 included a $2.2 million post-tax favorable impact related to regulatory settlements; $0.2$5.5 million pre-tax favorableunfavorable impact ($0.25.1 million post-tax) of government grant income in China; a $11.8 million unfavorable impact of non-cash interest expense related to the 2024 Convertible Notes and the Forward Transactions (See Note 4, Long-Term Debt, to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q);Notes; a $3.8$4.7 million pre-tax unfavorable impact ($2.24.4 million post-tax) from expenses related to the COVID-19 pandemic; and a $0.4 million pre-tax unfavorable impact ($4.7 million post-tax) from expenses related to regulatory inquiries; a $3.1 million pre-tax unfavorable impact ($2.1 million post-tax) related to legal, advisory services and other expenses for our response to allegations and other negative information put forward in the marketplace by a hedge fund manager which started in late 2012 (See Selling, General and Administrative Expenses below for further discussion); a $0.2 million pre-tax unfavorable impact ($0.2 million post-tax) related to expenses incurred for the recovery of costs associated with the re-audit of our 2010 to 2012 financial statements after the resignation of KPMG as our independent registered public accounting firm; and a $5.3 million pre-tax unfavorable impact ($3.1 million post-tax) from expenses related to the implementation of the FTC Consent Order.inquiries.
Net income for the nine months ended September 30, 20162020 included an $85.7 million unfavorable impact ($81.0 million post-tax) from expenses related to regulatory inquiries and a $203.0legal accrual, which includes $83.1 million of expenses relating to the SEC and DOJ investigations relating to the FCPA matter in China; a $16.6 million pre-tax unfavorable impact ($134.314.6 million post-tax) from expenses related to regulatory settlements;the COVID-19 pandemic; a $29.1$16.2 million pre-tax favorableunfavorable impact ($20.716.4 million post-tax) of government grant income in China; a $35.4 million unfavorable impact of non-cash interest expense related to the 2024 Convertible NotesNotes; and the Forward Transactions (See Note 4, Long-Term Debt, to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q); a $13.9$0.5 million pre-tax unfavorable impact ($8.60.4 million post-tax) from expenses related to regulatory inquiries; a $10.7 million pre-tax unfavorable impact ($7.8 million post-tax) related to legal, advisory services and other expenses for our response to allegations and other negative information put forward in the marketplace by a hedge fund manager which started in late 2012 (See Selling, General and Administrative Expenses below for further discussion); a $3.5 million pre-tax unfavorable impact ($2.5 million post-tax) related to expenses incurred for the recovery of debt issuance costs associated with the re-audit of our 2010 to 2012 financial statements after the resignation of KPMG as our independent registered public accounting firm; and a $5.3 million pre-tax unfavorable impact ($3.1 million post-tax) from expenses related to the implementationamendment of the FTC Consent Order.our 2018 Credit Facility.
39
Results of Operations
Our results of operations for the periods below are not necessarily indicative of results of operations for future periods, which depend upon numerous factors, including our ability to sponsor Members and retain sales leaders, further penetrate existing markets, introduce new products and programs that will help our Members increase their retail efforts and develop niche market segments.
The following table sets forth selected results of our operations expressed as a percentage of net sales for the periods indicated:
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||||||||||||
|
| September 30, 2017 |
|
| September 30, 2016 |
|
| September 30, 2017 |
|
| September 30, 2016 |
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
| ||||||||
Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net sales |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
Cost of sales |
|
| 19.8 |
|
|
| 18.6 |
|
|
| 19.2 |
|
|
| 19.1 |
|
|
| 21.3 |
|
|
| 21.2 |
|
|
| 21.0 |
|
|
| 20.4 |
|
Gross profit |
|
| 80.2 |
|
|
| 81.4 |
|
|
| 80.8 |
|
|
| 80.9 |
|
|
| 78.7 |
|
|
| 78.8 |
|
|
| 79.0 |
|
|
| 79.6 |
|
Royalty overrides(1) |
|
| 28.6 |
|
|
| 28.6 |
|
|
| 28.3 |
|
|
| 28.1 |
|
|
| 31.5 |
|
|
| 30.4 |
|
|
| 31.4 |
|
|
| 30.3 |
|
Selling, general and administrative expenses(1) |
|
| 41.0 |
|
|
| 39.3 |
|
|
| 39.8 |
|
|
| 44.9 |
| ||||||||||||||||
Selling, general, and administrative expenses(1) |
|
| 34.0 |
|
|
| 34.8 |
|
|
| 33.4 |
|
|
| 37.7 |
| ||||||||||||||||
Other operating income |
|
| (0.4 | ) |
|
| — |
|
|
| (1.3 | ) |
|
| (0.8 | ) |
|
| — |
|
|
| — |
|
|
| (0.3 | ) |
|
| (0.3 | ) |
Operating income |
|
| 11.0 |
|
|
| 13.5 |
|
|
| 14.0 |
|
|
| 8.7 |
|
|
| 13.2 |
|
|
| 13.6 |
|
|
| 14.5 |
|
|
| 11.9 |
|
Interest expense, net |
|
| 3.5 |
|
|
| 2.0 |
|
|
| 3.2 |
|
|
| 2.0 |
|
|
| 2.6 |
|
|
| 2.3 |
|
|
| 2.5 |
|
|
| 2.1 |
|
Other expense, net |
|
| — |
|
|
| — |
|
|
| 0.6 |
|
|
| — |
| ||||||||||||||||
Income before income taxes |
|
| 7.5 |
|
|
| 11.5 |
|
|
| 10.8 |
|
|
| 6.7 |
|
|
| 10.6 |
|
|
| 11.3 |
|
|
| 11.4 |
|
|
| 9.8 |
|
Income taxes |
|
| 2.5 |
|
|
| 3.7 |
|
|
| 2.5 |
|
|
| 2.0 |
|
|
| 2.4 |
|
|
| 2.2 |
|
|
| 2.3 |
|
|
| 2.6 |
|
Net income |
|
| 5.0 | % |
|
| 7.8 | % |
|
| 8.3 | % |
|
| 4.7 | % |
|
| 8.2 | % |
|
| 9.1 | % |
|
| 9.1 | % |
|
| 7.2 | % |
|
|
(1) Service fees to our independent service providers in China are included in selling, general, and administrative expenses while Member compensation for all other countries is included in Royalty overrides.
Reporting Segment Results
We aggregate our operating segments, excluding China, into a reporting segment, or the Primary Reporting Segment. The Primary Reporting Segment includes the North America, Mexico, South &and Central America, EMEA, and Asia Pacific regions. China has been identified as a separate reporting segment as it does not meet the criteria for aggregation. See Note 6, Segment Information, to the Condensed Consolidated Financial Statements included in Part I, Item 1,Financial Statements, of this Quarterly Report on Form 10-Q for further discussion of our reporting segments. See below for discussions of net sales and contribution margin by our reporting segments.
Net Sales by Reporting Segment
The Primary Reporting Segment reported net sales of $875.6$1,276.9 million and $2,666.4$3,985.7 million for the three and nine months ended September 30, 2017,2021, respectively, representing a decrease of $32.2$24.9 million, or 3.5%1.9% ($24.8 million, or 1.9% excluding Venezuela), and a decreasean increase of $102.9$474.0 million, or 3.7%13.5% ($474.0 million, or 13.5% excluding Venezuela), for the three and nine months ended September 30, 2017,2021, respectively, as compared to the same periods in 2016.2020. In local currency, net sales decreased 4.5%2.7% and 3.8%increased 11.8% (decreased 3.1% and increased 11.2% excluding Venezuela) for the three and nine months ended September 30, 2017,2021, respectively, as compared to the same periods in 2016 for the Primary Reporting Segment.2020. The 3.5%1.9% decrease in net sales for the three months ended September 30, 20172021 was primarily due to a decrease in sales volume, as indicated by a 5.9%6.0% decrease in Volume Points;Points, partially offset by a 3.3% favorable impact of price increases which increased net sales by approximately 3.0%(2.9% favorable impact excluding Venezuela) and a 0.8% favorable impact of fluctuations in foreign currency exchange rates (1.2% favorable impact excluding Venezuela). The 3.7% decrease13.5% increase in net sales for the nine months ended September 30, 20172021 was primarily due to a decreasean increase in sales volume, as indicated by a 4.6% decreasean 8.1% increase in Volume Points, and an unfavorable change in country mix, which reduced net sales by approximately 1.9%; partially offset bya 3.5% favorable impact of price increases which increased net sales by approximately 2.4%(2.9% favorable impact excluding Venezuela), and a 1.7% favorable impact of fluctuations in foreign currency exchange rates (2.3% favorable impact excluding Venezuela).
For a discussion of China’s net sales for the three and nine months ended September 30, 20172021, see the China section of the Sales by Geographic Region below.
Contribution Margin by Reporting Segment
As discussed above under “Presentation,” contribution margin consists of net sales less cost of sales and Royalty overrides.
40
The Primary Reporting Segment reported contribution margin of $375.9$538.8 million, or 42.9%42.2% of net sales, and $1,155.7$1,690.3 million, or 43.3%42.4% of net sales, for the three and nine months ended September 30, 2021, respectively, representing a decreasean increase of $22.9$0.6 million, or 5.7%0.1% ($0.3 million, or 0.1% excluding Venezuela), and a decrease of $45.8$204.9 million, or 3.8%13.8% ($204.4 million, or 13.8% excluding Venezuela), for the three and nine months ended September 30, 2017,2021, respectively, as compared to the same periods in 2016.2020. The 5.7% decrease0.1% increase in contribution margin for the three months ended September 30, 20172021 was primarily the result of volume decreases, unfavorable country mix and unfavorable fluctuations in foreign currency rates which reduced contribution margin by approximately 5.1%a 5.4% favorable impact of price increases (4.8% favorable impact excluding Venezuela), 2.7% and 1.8%, respectively, partially offset by price increases which increaseda 6.0% unfavorable impact of volume decreases. The 13.8% increase in contribution margin by approximately 4.7%. The 3.8% decrease for the nine months ended September 30, 20172021 was primarily the result of unfavorable country mixan 8.1% favorable impact of volume increases and volume decreases which reduced contribution margin by approximately 5.2% and 3.9%, respectively, partially offset bya 5.6% favorable impact of price increases which increased contribution margin by approximately 3.7%(4.6% favorable impact excluding Venezuela).
China reported contribution margin of $184.0$136.9 million and $595.8$442.0 million for the three and nine months ended September 30, 2017,2021, respectively, representing a decrease of $9.8$60.9 million, or 5.1%30.8%, and $18.7$111.3 million, or 3.0%20.1%, for the three and nine months ended September 30, 2017,2021, respectively, as compared to the same periods in 2016.2020. The 30.8% decrease of 5.1%in contribution margin for the three months ended September 30, 20172021 was primarily due tothe result of a decline in sales36.2% unfavorable impact of volume and fluctuationdecreases, partially offset by a 5.3% favorable impact of fluctuations in foreign currency rates, which reducedexchange rates. The 20.1% decrease in contribution margin by approximately 6.1% and 1.8%, respectively, partially offset by the favorable impact of price increases which increased contribution margin by approximately 5.0%. The decrease of 3.0% for the nine months ended September 30, 20172021 was primarily due tothe result of a 27.6% unfavorable impact of volume decreases, partially offset by a 6.1% favorable impact of fluctuations in foreign currency rates and volume decreases which reduced contribution margin by approximately 4.0% and 1.0%, respectively, partially offset by the favorable impact of price increases which increased contribution margin by approximately 3.1%. exchange rates.
Sales by Geographic Region
The following chart reconciles retail value to netNet sales by geographic region:region were as follows:
|
| Three Months Ended September 30, |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| 2017 |
|
| 2016 |
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| Retail Value(1) |
|
| Distributor Allowance |
|
| Product Sales |
|
| Shipping & Handling Revenues |
|
| Net Sales |
|
| Retail Value(1) |
|
| Distributor Allowance |
|
| Product Sales |
|
| Shipping & Handling Revenues |
|
| Net Sales |
|
| Change in Net Sales |
|
| September 30, |
|
| September 30, |
|
| % Change |
|
| September 30, |
|
| September 30, |
|
| % Change |
| |||||||||||||||||
|
| (In millions) |
|
| (Dollars in millions) |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
North America |
| $ | 331.1 |
|
| $ | (150.7 | ) |
| $ | 180.4 |
|
| $ | 19.4 |
|
| $ | 199.8 |
|
| $ | 399.8 |
|
| $ | (181.5 | ) |
| $ | 218.3 |
|
| $ | 22.7 |
|
| $ | 241.0 |
|
|
| (17.1 | )% |
| $ | 354.8 |
|
| $ | 398.7 |
|
|
| (11.0 | )% |
| $ | 1,126.6 |
|
| $ | 1,062.4 |
|
|
| 6.0 | % |
Mexico |
|
| 197.1 |
|
|
| (89.7 | ) |
|
| 107.4 |
|
|
| 6.9 |
|
|
| 114.3 |
|
|
| 193.9 |
|
|
| (87.9 | ) |
|
| 106.0 |
|
|
| 6.8 |
|
|
| 112.8 |
|
|
| 1.3 | % |
|
| 117.5 |
|
|
| 110.3 |
|
|
| 6.5 | % |
|
| 354.5 |
|
|
| 321.6 |
|
|
| 10.2 | % |
South & Central America |
|
| 203.8 |
|
|
| (95.0 | ) |
|
| 108.8 |
|
|
| 7.9 |
|
|
| 116.7 |
|
|
| 211.2 |
|
|
| (98.5 | ) |
|
| 112.7 |
|
|
| 8.3 |
|
|
| 121.0 |
|
|
| (3.6 | )% | ||||||||||||||||||||||||
South and Central America |
|
| 89.2 |
|
|
| 102.7 |
|
|
| (13.1 | )% |
|
| 272.0 |
|
|
| 264.6 |
|
|
| 2.8 | % | ||||||||||||||||||||||||||||||||||||||||||||
EMEA |
|
| 368.6 |
|
|
| (167.6 | ) |
|
| 201.0 |
|
|
| 12.9 |
|
|
| 213.9 |
|
|
| 346.6 |
|
|
| (157.6 | ) |
|
| 189.0 |
|
|
| 12.6 |
|
|
| 201.6 |
|
|
| 6.1 | % |
|
| 321.9 |
|
|
| 334.3 |
|
|
| (3.7 | )% |
|
| 1,043.8 |
|
|
| 893.3 |
|
|
| 16.8 | % |
Asia Pacific |
|
| 395.3 |
|
|
| (171.9 | ) |
|
| 223.4 |
|
|
| 7.5 |
|
|
| 230.9 |
|
|
| 392.0 |
|
|
| (167.8 | ) |
|
| 224.2 |
|
|
| 7.2 |
|
|
| 231.4 |
|
|
| (0.2 | )% |
|
| 393.5 |
|
|
| 355.8 |
|
|
| 10.6 | % |
|
| 1,188.8 |
|
|
| 969.8 |
|
|
| 22.6 | % |
China |
|
| 239.3 |
|
|
| (30.6 | ) |
|
| 208.7 |
|
|
| 1.1 |
|
|
| 209.8 |
|
|
| 242.8 |
|
|
| (29.8 | ) |
|
| 213.0 |
|
|
| 1.2 |
|
|
| 214.2 |
|
|
| (2.1 | )% |
|
| 154.0 |
|
|
| 220.0 |
|
|
| (30.0 | )% |
|
| 499.1 |
|
|
| 619.4 |
|
|
| (19.4 | )% |
Worldwide |
| $ | 1,735.2 |
|
| $ | (705.5 | ) |
| $ | 1,029.7 |
|
| $ | 55.7 |
|
| $ | 1,085.4 |
|
| $ | 1,786.3 |
|
| $ | (723.1 | ) |
| $ | 1,063.2 |
|
| $ | 58.8 |
|
| $ | 1,122.0 |
|
|
| (3.3 | )% |
| $ | 1,430.9 |
|
| $ | 1,521.8 |
|
|
| (6.0 | )% |
| $ | 4,484.8 |
|
| $ | 4,131.1 |
|
|
| 8.6 | % |
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||||||||||||||||||||||
|
| 2017 |
|
| 2016 |
| ||||||||||||||||||||||||||||||||||||||
|
| Retail Value(1) |
|
| Distributor Allowance |
|
| Product Sales |
|
| Shipping & Handling Revenues |
|
| Net Sales |
|
| Retail Value(1) |
|
| Distributor Allowance |
|
| Product Sales |
|
| Shipping & Handling Revenues |
|
| Net Sales |
|
| Change in Net Sales |
| |||||||||||
|
| (In millions) |
| |||||||||||||||||||||||||||||||||||||||||
North America |
| $ | 1,080.9 |
|
| $ | (496.1 | ) |
| $ | 584.8 |
|
| $ | 63.2 |
|
| $ | 648.0 |
|
| $ | 1,246.8 |
|
| $ | (564.1 | ) |
| $ | 682.7 |
|
| $ | 70.8 |
|
| $ | 753.5 |
|
|
| (14.0 | )% |
Mexico |
|
| 576.2 |
|
|
| (261.7 | ) |
|
| 314.5 |
|
|
| 20.2 |
|
|
| 334.7 |
|
|
| 587.0 |
|
|
| (265.8 | ) |
|
| 321.2 |
|
|
| 20.6 |
|
|
| 341.8 |
|
|
| (2.1 | )% |
South & Central America |
|
| 609.3 |
|
|
| (283.8 | ) |
|
| 325.5 |
|
|
| 23.6 |
|
|
| 349.1 |
|
|
| 637.3 |
|
|
| (295.2 | ) |
|
| 342.1 |
|
|
| 25.8 |
|
|
| 367.9 |
|
|
| (5.1 | )% |
EMEA |
|
| 1,117.0 |
|
|
| (507.8 | ) |
|
| 609.2 |
|
|
| 39.2 |
|
|
| 648.4 |
|
|
| 1,060.5 |
|
|
| (480.1 | ) |
|
| 580.4 |
|
|
| 38.6 |
|
|
| 619.0 |
|
|
| 4.7 | % |
Asia Pacific |
|
| 1,171.1 |
|
|
| (506.8 | ) |
|
| 664.3 |
|
|
| 21.9 |
|
|
| 686.2 |
|
|
| 1,145.6 |
|
|
| (489.3 | ) |
|
| 656.3 |
|
|
| 30.8 |
|
|
| 687.1 |
|
|
| (0.1 | )% |
China |
|
| 754.0 |
|
|
| (89.5 | ) |
|
| 664.5 |
|
|
| 3.5 |
|
|
| 668.0 |
|
|
| 767.3 |
|
|
| (96.9 | ) |
|
| 670.4 |
|
|
| 3.7 |
|
|
| 674.1 |
|
|
| (0.9 | )% |
Worldwide |
| $ | 5,308.5 |
|
| $ | (2,145.7 | ) |
| $ | 3,162.8 |
|
| $ | 171.6 |
|
| $ | 3,334.4 |
|
| $ | 5,444.5 |
|
| $ | (2,191.4 | ) |
| $ | 3,253.1 |
|
| $ | 190.3 |
|
| $ | 3,443.4 |
|
|
| (3.2 | )% |
|
|
Changes in net sales are directly associated with the retailing of our products, recruitment of new Members, and retention of sales leaders. Our strategies involve providing quality products, improved DMOs, including daily consumption approaches such as Nutrition Clubs, easier access to product, systemized training and education of Members on our products and methods, leveraging technology to make it easier for our Members to do business, and continued promotion and branding of Herbalife products.
Management’s role, in-country and at the region and corporate level, is to provide Members with a competitive, broad, and broadinnovative product line, offer leading-edge business tools and technology services, and encourage strong teamwork and Member leadership and offer leading edge business tools and technology services to make doing business with Herbalife simple. We have provided to our Members enhanced technology tools for ordering, business performance, and customer retailing to make it easier for them to do business with us and to optimize their customers’ experiences. Management uses the Marketing Plan, which reflects the rules for our global network marketing organization that specify the qualification requirements and general compensation structure for Members, coupled with educational and motivational toolsprograms and promotions to encourage Members to increase retailing, retention, and recruiting, which in turn affect net sales. Such toolsprograms include sales events such as Extravaganzas, Leadership Development Weekends and World Team Schools where large groups of Members gather, thus allowing them to network with other Members, learn retailing, retention, and recruiting techniques from our leading Members, and become more familiar with how to market and sell our products and business opportunities. Accordingly, management believes that these development and motivation programs increase the productivity of the sales leader network. The expenses for such programs are included in selling, general, and administrative expenses. We also use event and non-event product promotions to motivate Members to increase retailing, retention, and recruiting activities. These promotions have prizes ranging from qualifying for events to product prizes and vacations. A program that we have seen success with and begun to use on a broad basisin many markets is the Member Activation Program, under which new Members, who order a modest number of Volume Points in each of their first three months, earn a prize. Our objective is to improve the quality of sales leaders by encouraging new Members to begin acquiring retail customers before attempting to qualify for sales leader status. The costsAdditionally, in certain markets we have begun to utilize the segmentation of our Member base into “preferred members” and “distributors” for more targeted and efficient communication and promotions for these programs are included in selling, generaltwo differently motivated types of Members. In certain other markets that have not been segmented, we have begun using Member data to similarly categorize Members for communication and administrative expenses.promotion efforts.
41
DMOs are being generated in many of our markets and are globalized where applicable through the combined efforts of Members and country, regional and corporate management. While we support a number of different DMOs, one of the most popular DMOs is the daily consumption DMO. Under our traditional DMO, a Member typically sells to its customers on a somewhat infrequent basis (e.g., monthly) which provides fewer opportunities for interaction with their customers. Under a daily consumption DMO, a Member interacts with its customers on a more frequent basis, including such activities as weekly weigh-ins, which enables the Member to better educate and advise customers about nutrition and the proper use of the products and helps promote daily usage as well, thereby helping the Member grow his or her business. Specific examples of globalized DMOs include the Nutrition Club concept in Mexico, the Healthy Breakfast concept in Russia, and the Internet/Sampling and Weight Loss Challenge in the United States. Management’s strategy is to review the applicability of expanding successful country initiatives throughout a region, and where appropriate, support the globalization of these initiatives.
As discussed further by market below, the Company has responded to COVID-19 pandemic conditions by adapting how it communicates with, services, and transacts with our Members and our Members have similarly adapted their DMOs and other activities. These responsive actions have varied by region and by market due to the differing market- and regional-specific impacts of the pandemic and the conditions and challenges unique to a particular market or region independent of the impacts of the pandemic. The factors described above help Members increase their business, which in turn helps drive Volume Point growth in our business, and thus, net sales growth. The discussion below of net sales details some of the specific drivers of changes in our business and causes of sales fluctuations during the three and nine months ended September 30, 2017,2021 as compared to the same periods in 2016,2020, as well as the unique growth or contraction factors specific to certain geographic regions or significant countriesmarkets within a region during these periods. Net sales fluctuations, both Company-wide and within a particular geographic region or country,market, are primarily the result of changes in volume, changes in prices, and/or changes in foreign currency translation rates. The discussion of changes in net sales quantifies the impact of those drivers that are quantifiable such as changes in foreign currency translation rates, and cites the estimated impact of any significant price changes. The remaining drivers, which management believes are the primary drivers of changes in volume, are typically qualitative factors whose impact cannot be quantified. The Company usesWe use Volume Points as an indication for changes in sales volume.
We expect the impact of the COVID-19 pandemic to impact our results of operations in future quarters and their comparability to prior periods, both on a consolidated basis and at the regional level. However, given the unpredictable, unprecedented, and fluid nature of the pandemic and its economic consequences, we are unable to predict the extent to which the pandemic and its related impacts will adversely impact our business, financial condition, and results of operations, including the impact it may have on our regions and individual markets. See below for a more detailed discussion of the pandemic’s impact on net sales for the third quarter and first nine months of 2021 for each geographic region and individual market.
North America
The North America region reported net sales of $199.8$354.8 million and $648.0$1,126.6 million for the three and nine months ended September 30, 2017,2021, respectively. Net sales decreased $41.2$43.9 million, or 17.1%11.0%, and $105.5increased $64.2 million, or 14.0%6.0%, for the three and nine months ended September 30, 2017,2021, respectively, as compared to the same periods in 2016.2020. In local currency, net sales decreased 17.2%11.1% and 14.0%increased 5.8% for the three and nine months ended September 30, 2017,2021, respectively, as compared to the same periods in 2016.2020. The 11.0% decrease in net sales for the three and nine months ended September 30, 2017, as compared2021 was primarily due to the same periods in 2016, was a result of a net sales decrease in the U.S. of $42.5 million or 18.0%, and $106.4 million, or 14.4%, respectively. The decreases in net sales for the North America region for the three and nine months ended September 30, 2017 were primarily the result of decreases in sales volume, as indicated by decreasesa 12.5% decrease in Volume Points.
As partPoints, partially offset by a 1.0% favorable impact of our FTC settlement, we have implemented certain new procedures and enhanced certain existing proceduresprice increases. The 6.0% increase in the United States. We believe North America’s Volume Point decreasesnet sales for the three and nine months ended September 30, 2017, versus increases for the prior year periods, reflect2021 was primarily due to an increase in sales volume, as indicated by a transitionary4.5% increase in Volume Points, and a 1.4% favorable impact of Member focus on FTC settlement implementation actions including training on new tools and methods for documenting sales and time spent to then train their sales organizations. Similar to the transitionary impact that occurred as a result of Marketing Plan changes made in 2014, we do not expect the FTC settlement to have a long-term material adverse impact on our netprice increases.
Net sales in the North America region or on our Member base. However, we believe net sales for the region could continue to be negatively impacted during the remainder of 2017 as we and our Members spend time educating and training, and as our Members implement and adjust to the changes. North America has implemented programs to encourage sponsorship and increase Distributor, Preferred Member, and customer activity.
Mexico
The Mexico region reported net sales of $114.3U.S. were $345.3 million and $334.7$1,093.0 million for the three and nine months ended September 30, 2017,2021, respectively. Net sales increased $1.5decreased $41.4 million, or 1.3%10.7%, and decreased $7.1increased $59.1 million, or 2.1%5.7%, for the three and nine months ended September 30, 2017,2021, respectively, as compared to the same periods in 2016. 2020.
The region has generally seen growth in recent years, supported by product line expansion and deployment of enhanced technology tools to support our distributors’ businesses and optimize their customers’ experiences with Herbalife. The number of active Nutrition Clubs in the region has continued to grow and the Nutrition Club DMO is a focus area for training and technological support of our Members. Our communications, promotions, and other operations in the region are targeted to our distributors, or their preferred members or retail customers as appropriate. Our promotional program is designed to encourage consistency and sustainability in our Members’ businesses. Additionally, we believe that pandemic conditions may have been a contributing factor in the motivation and focus of our Members, contributing to year-over-year sales volume increases during the second half of 2020 and the first half of 2021.
The third quarter of 2021 saw a sales volume decline compared to the 2020 period, due in part to comparison to a base period that saw a record level of sales. Higher sales in the Energy, Sports, and Fitness product category contributed to sales volume for the quarter.
42
In response to the pandemic conditions, product distribution to our Members was temporarily altered during 2020 to allow online and phone-in orders only. Currently, two of our three major U.S. distribution centers are shipping product only, with no in-person pick-ups permitted, and our sales centers are for pick-up only, with no orders taken on-site; however, our Members’ ability to obtain product has not materially decreased. Our access points, including distribution centers and sales centers, generally allow in-person pick-up orders, with exceptions as local currency,conditions warrant; however, our access points generally continue to not allow in-person orders. Members’ Nutrition Clubs, which represent a major DMO for the region, are operating in some areas as pick-up points for product only, and returning to traditional on-site consumption approach as local conditions allow. Nutrition Club sales volume increased for both the quarter and the year-to-date period versus the prior-year periods, including the impact of home deliveries from Nutrition Clubs to their customers, an approach that has seen increased use as a response to the pandemic. Our Member training and promotion events, such as our Success Training Seminars and our Leadership Development Weekends, have shifted to a “virtual” online approach, with in-person events to be reinstituted commencing in the fourth quarter on a case-by-case basis as conditions allow. Promotional activities aimed at our Members continue, though prizes that have involved travel to events have shifted to cash and other awards. Certain modified practices by us and our Members may prove to be lasting improvements, such as events and trainings that are offered virtually as well as in-person and expanded use of social media channels.
Mexico
The Mexico region reported net sales decreased 3.6%of $117.5 million and increased 1.0%$354.5 million for the three and nine months ended September 30, 2017,2021, respectively. Net sales increased $7.2 million, or 6.5%, and $32.9 million, or 10.2%, for the three and nine months ended September 30, 2021, respectively, as compared to the same periods in 2016.2020. In local currency, net sales decreased 3.5% and increased 2.5% for the three and nine months ended September 30, 2021, respectively, as compared to the same periods in 2020. The 1.3%6.5% increase in net sales for the three months ended September 30, 20172021 was primarily the resultdue to a 10.0% favorable impact of fluctuations in foreign currency exchange rates, a 4.1% favorable impact of price increases, and a 1.2% favorable fluctuation in foreign currency exchange rates which contributed approximately 6.1% and 5.0% toimpact of timing differences between the recognition of net sales respectively. These increases wereand Volume Points, partially offset by a decrease in sales volume, as indicated by a 9.0%10.3% decrease in Volume Points. The 2.1% decrease10.2% increase in net sales for the nine months ended September 30, 20172021 was primarily the resultdue to a 7.7% favorable impact of fluctuations in foreign currency exchange rates and a 4.3% favorable impact of price increases, partially offset by a decrease in sales volume, as indicated by a 3.7%2.3% decrease in Volume Points, and an unfavorable fluctuation in foreign currency exchange rates, which reduced netPoints.
Mexico saw lower sales by 3.1%. These reductions to net sales were partially offset by price increases which contributed approximately 5.1% to net sales.
We believe Volume Point declinesvolume for the quarter and year-to-date after increases forperiod versus the comparable periods of 2016 were attributable to aprior-year periods. Mexico has faced ongoing difficult economic environment marked by rising inflation and a weaker peso,conditions, as well as the adverse impact lateof intermittent pandemic-related constraints, particularly on Nutrition Club operations which are important to the market. Although nearly all product access points in Mexico, both Company-operated and third party, have remained open, in some areas Nutrition Clubs are operating under restrictions such as for product pick-up only. During March 2021 we introduced Member segmentation to the quarter ofmarket by adding a preferred customer program option for new Members; we have seen some decline in new Members since that time which we believe is due in part to Members adapting to the damaging natural disaster in the greater Mexico City area. segmentation.
South and Central America
The South and Central America region reported net sales of $116.7$89.2 million and $349.1$272.0 million for the three and nine months ended September 30, 2017,2021, respectively. Net sales decreased $4.3$13.5 million, or 3.6%13.1% ($13.3 million, or 13.1% excluding Venezuela), and $18.8increased $7.4 million, or 5.1%2.8% ($7.4 million, or 2.8% excluding Venezuela), for the three and nine months ended September 30, 2017,2021, respectively, as compared to the same periods in 2016.2020. In local currency, net sales decreased 4.8% and increased 1.5%15.0% (decreased 9.9% and decreased 5.1%increased 7.0% excluding Venezuela) for the three and nine months ended September 30, 2017,2021, respectively, as compared to the same periods in 2016. Excluding Venezuela, which saw significant price increases in response to a highly inflationary environment, South and Central America local currency net sales decreased 4.3% and 8.5% for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016.
2020. The 3.6%13.1% decrease in net sales for the three months ended September 30, 20172021 was primarily the result ofdue to a declinedecrease in sales volume, as indicated by a 6.8%17.5% decrease in Volume Points, and an 8.3% unfavorable impact of fluctuations in foreign currency exchange rates of 5.0%. These reductions to net sales were(3.2% unfavorable impact excluding Venezuela), partially offset by a 9.9% favorable impact of price increases which contributed approximately 8.7% to net sales.(4.8% favorable impact excluding Venezuela). The 5.1% decrease2.8% increase in net sales for the nine months ended September 30, 20172021 was primarily the resultdue to a 12.5% favorable impact of price increases (4.5% favorable impact excluding Venezuela) and a decline4.0% favorable impact of sales mix, partially offset by a 12.2% unfavorable impact of fluctuations in foreign currency exchange rates (4.2% unfavorable impact excluding Venezuela) and a decrease in sales volume, as indicated by an 11.7%a 3.2% decrease in Volume Points. This reduction to net
The region saw sales was partially offset by price increases which contributed approximately 7.8% to net sales. Volume declines have been widespread across the region for both market-specific factors and as Members in many markets continue to transition to customer-based, sustainable business practices. The effect of price increases on salesvolume decreases for the quarter and, to a lesser extent, the year-to-date period versus the prior-year periods. For the third quarter, the sales volume decline was seen across most markets in the region due, we believe, to continuing intermittent adverse impacts of the pandemic seen across most markets. For the year-to-date period, region results were mixed by market. Sales volume declines were greatest in Brazil, our largest market in the region; sales volume increases were led by Chile and Peru.
43
Pandemic impacts have varied by market across the Venezuela market.region, but have at times included product shipping delays and suspension of product access points and Members’ Nutrition Clubs, requiring reliance on shipping product to Members’ and customers’ homes. More broadly, markets across the region are focused on building more sustainable business for our Members through daily product consumption and retailing. We believe the region is seeing success leveraging social media, utilizing cash prize promotions, and using the weight management challenge DMO. The region is also introducing Member segmentation on a market-by-market basis by adding preferred customer program options for new Members.
InNet sales in Brazil the region’s largest market, net sales were $47.3$15.9 million and $141.8$49.2 million for the three and nine months ended September 30, 2017, respectively. Net sales increased $0.9 million, or 1.9%, and decreased $0.3 million, or 0.2% for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016. In local currency, net sales decreased 0.7% and 10.5% for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016. The fluctuation of foreign currency rates had a favorable impact of $1.2 million and $14.7 million, respectively, on net sales for the three and nine months ended September 30, 2017. Marketing Plan changes intended to build more sustainable business for our Members through a focus on daily product consumption and retailing are taking hold following a lengthy transition period. In addition, we have introduced programs in Brazil that have been successful in other regions to improve Member activity. We are also increasing the number of product access points and expanding our product offering, including the recent launch of a soy milk product. Changes in ICMS tax legislation, effective April 2016, reduced net sales by approximately $4.0 million for the first quarter of 2017.
Net sales in Peru were $15.3 million and $46.0 million for the three and nine months ended September 30, 2017,2021, respectively. Net sales decreased $0.8$4.9 million, or 5.3%23.6%, and $2.2$13.2 million, or 4.7%21.1%, for the three and nine months ended September 30, 2017,2021, respectively, as compared to the same periods in 2016.2020. In local currency, net sales decreased 8.0%25.7% and 7.6%15.3% for the three and nine months ended September 30, 2017,2021, respectively, as compared to the same periods in 2016.2020. The fluctuation of foreign currency exchange rates had a favorable impact of $0.4 million and $1.4an unfavorable impact of $3.6 million on net sales for the three and nine months ended September 30, 2017,2021, respectively.
EMEA Sales volumes declined in the market for the quarter and year-to-date period versus the prior-year periods. COVID-19 pandemic conditions continue in the market and have constrained our business and that of our Members, particularly the important Nutrition Club DMO. Although Members’ Nutrition Clubs are currently operating, we have seen declines in both the number of Clubs and their customer traffic. Home delivery is operating and other product access points are open for pick-up. More broadly, the market has seen some years of negative momentum, though we continue to support our Members with innovative measures, such as the Preferred Member program, and work with Member leadership to identify best practices for replication within the market.
The EMEA region reported netNet sales of $213.9in Peru were $14.0 million and $648.4$45.3 million for the three and nine months ended September 30, 2017,2021, respectively. Net sales increased $12.3decreased $3.1 million, or 6.1%18.0%, and $29.4increased $0.7 million, or 4.7%1.4%, for the three and nine months ended September 30, 2017,2021, respectively, as compared to the same periods in 2016.2020. In local currency, net sales decreased 6.5% and increased 2.0% and 3.8%12.1% for the three and nine months ended September 30, 2017,2021, respectively, as compared to the same periods in 2016. The 6.1% increase in net sales for the three months ended September 30, 2017 was contributed to by an increase in sales volume, as indicated by a 2.7% increase in Volume Points, a favorable fluctuation in foreign currency exchange rates of 4.1% and price increases which contributed approximately 2.9%. These increases in net sales were partially offset by an unfavorable change in country mix resulting from a lower percentage of our sales volume coming from markets with higher prices, which reduced net sales by 1.3%. The 4.7% increase in net sales for the nine months ended September 30, 2017 was contributed to by an increase in sales volume, as indicated by a 3.4% increase in Volume Points, price increases which contributed approximately 2.0%, and a favorable fluctuation in foreign currency exchange rates which contributed approximately 0.9%. These increases in net sales were partially offset by an unfavorable change in country mix resulting from a lower percentage of our sales volume coming from markets with higher prices, which reduced net sales by 2.1%. Though the region is made up of a large number of markets with different characteristics and levels of success, generally we believe volume growth for the region is correlated with programs that have enhanced the quality and activity of sales leaders as they continue to focus on customer-oriented initiatives.
Net sales in Italy were $34.5 million and $105.8 million for the three and nine months ended September 30, 2017, respectively. Net sales increased $0.2 million, or 0.6%, and decreased $0.9 million, or 0.8%, for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016. In local currency, net sales decreased 4.5% and 0.4% for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016.2020. The fluctuation of foreign currency exchange rates had a favorable impact of $1.7 million net sales for the quarter and an unfavorable impact of $0.4 million for the nine months ended September 30, 2017. Italy has seen a modest decline in new Members and volumes after several years of growth as the Member Activation Program introduced earlier this year is adopted and optimized by Members and sales leaders.
Net sales in Russia were $29.8$2.0 million and $94.5 million for the three and nine months ended September 30, 2017, respectively. Net sales increased $4.7 million, or 18.5%, and $18.3 million, or 24.0%, for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016. In local currency, net sales increased 8.0% and 6.1% for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016. The fluctuation of foreign currency rates had a favorable impact of $2.6 million and $13.7$4.8 million on net sales for the three and nine months ended September 30, 2017,2021, respectively. Product prices in RussiaSales volume decreased for the quarter and increased for the year-to-date period versus the respective prior-year periods. The market continues to experience intermittent disruptions due to COVID-19 pandemic conditions, and we have adapted our business with steps including taking orders by Internet and phone and shipping product to Member homes. Members’ Nutrition Clubs were increased 5% in February 2017 and 5% in March 2016.also modified for home delivery only or are open for partial operation. The market has continued to utilizeseen Members’ leveraging social media and using the Member Activation Program to attract new Members.weight management challenge DMO.
NetEMEA
The EMEA region reported net sales in Spain were $27.0of $321.9 million and $76.9$1,043.8 million for the three and nine months ended September 30, 2017,2021, respectively. Net sales increased $1.9decreased $12.4 million, or 7.7%3.7%, and $0.5increased $150.5 million, or 0.7%16.8%, for the three and nine months ended September 30, 2017,2021, respectively, as compared to the same periods in 2016.2020. In local currency, net sales decreased 4.5% and increased 2.2% and 0.8%12.6% for the three and nine months ended September 30, 2017,2021, respectively, as compared to the same periods in 2016.2020. The fluctuation of foreign currency rates had a favorable impact of $1.4 million on net sales for the quarter and an unfavorable impact of $0.1 million on net sales for the nine months ended September 30, 2017. Product prices in Spain were increased 2% in July 2017.
Asia Pacific
The Asia Pacific region, which excludes China, reported net sales of $230.9 million and $686.2 million for the three and nine months ended September 30, 2017, respectively. Net sales decreased $0.5 million, or 0.2%, and $0.9 million, or 0.1%, for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016. In local currency, net sales decreased 0.5% and 1.1% for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016. The 0.2%3.7% decrease in net sales for the three months ended September 30, 20172021 was primarily the result of an unfavorable change in country sales mix resulting fromdue to a lower percentage of our sales volume coming from markets with higher prices, which reduced net sales by approximately 2.8%. This reduction to net sales was partially offset by price increases which increased net sales by approximately 1.7% and an increasedecrease in sales volume, as indicated by a 1.0% increase7.8% decrease in Volume Points.Points, partially offset by a 2.9% favorable impact of price increases and a 0.8% favorable impact of fluctuations in foreign currency exchange rates. The 0.1% decrease16.8% increase in net sales for the nine months ended September 30, 20172021 was primarily the result of an unfavorable change in country sales mix resulting from a lower percentage of our sales volume coming from markets with higher prices, which decreased net sales by approximately 3.5%. This reductiondue to net sales was partially offset by an increase in sales volume, as indicated by a 1.5%an 8.0% increase in Volume Points, anda 4.2% favorable impact of fluctuations in foreign currency exchange rates, and a 3.6% favorable impact of price increases, which contributed approximately 1.0% and 0.9%, respectively, to net sales. Theincreases.
Although Volume Points decreased year-over-year in the third quarter of 2021, the general, overall trend of Volume Point growth that has been seen across the EMEA region for a number of years reflects, we believe, efforts to enhance the quality and activity of sales leaders including Member training, brand awareness, and product line expansion, as well as enhanced technology tools for ordering, business performance, and customer retailing. Nearly all markets saw sales volume declines for the region hasthird quarter of 2021 versus 2020, however, and results for the first nine months of 2021 versus those of 2020 have been mixed by country, with continuingmarket. Declines include the effect of comparison to base periods that saw record levels of sales; we believe that pandemic conditions may have been a contributing factor in the motivation and focus of our Members in certain markets of the region during the second half of 2020 and first half of 2021. Volume declines for the third quarter were greatest for South Africa and the United Kingdom. Volume increases for the year-to-date period were greatest for Turkey, Italy, and Spain, and volume decline was most significant for South Africa.
Due to COVID-19 pandemic conditions, our sales centers and other product access points in Indonesiacertain markets within the region have at times been closed or open for limited operations only, leaving shipping for home delivery as the primary distribution channel while those conditions persist. Members are turning further to social media to carry out their sales and India as well as other markets, offset by declines primarilyoversight activities. Although we and our Members are anxious to reinstitute face-to-face approaches, we believe these adaptations have been successful in South Korea and Taiwan.limiting the adverse impact of the pandemic.
44
Net sales in IndiaSpain were $47.7$44.8 million and $136.8$148.0 million for the three and nine months ended September 30, 2017,2021, respectively. Net sales increased $2.8decreased $4.0 million, or 6.2%8.1%, and $15.5increased $23.0 million, or 12.7%18.4%, for the three and nine months ended September 30, 2017,2021, respectively, as compared to the same periods in 2016.2020. In local currency, net sales decreased 8.9% and increased 1.9% and 9.5%11.0% for the three and nine months ended September 30, 2017,2021, respectively, as compared to the same periods in 2016.2020. The fluctuation of foreign currency exchange rates had a favorable impact of $1.9$0.4 million and $4.0$9.3 million on net sales for the three and nine months ended September 30, 2017,2021, respectively. In 2016, we introduced the Associate Activation Program which we believerecent years, Spain has generally seen sales volume increases as it benefited from programs of promotions and sponsorships that have raised brand awareness through healthy active lifestyle and contributed to higherbroad-based success across Member sales leader activity. Additionally, we beganorganizations in the segmentationmarket. After the first quarter of 2020 saw a small sales volume decline due to pandemic disruption, subsequent quarters saw volume increases as our Members into preferred memberscontinued to adapt to pandemic conditions, such as leveraging online tools for meetings, trainings, and distributorsselling activities. The third quarter of 2021 saw a sales volume decrease year-over-year as required by local regulations. India continuesthe 2020 base period reflected significant strength. In response to expand its product line and has added product pickup locations for Members.pandemic conditions, we have temporarily shifted our Member support operations to primarily online activities, as well as continuing normal home delivery.
Net sales in South KoreaItaly were $36.1$39.1 million and $107.2$130.7 million for the three and nine months ended September 30, 2017,2021, respectively. Net sales decreased $8.9$0.4 million, or 19.8%0.8%, and $35.3increased $26.9 million, or 24.8%26.0%, for the three and nine months ended September 30, 2017,2021, respectively, as compared to the same periods in 2016.2020. In local currency, net sales decreased 18.9%1.8% and 26.2%increased 18.1% for the three and nine months ended September 30, 2017,2021, respectively, as compared to the same periods in 2016.2020. The fluctuation of foreign currency exchange rates had an unfavorablea favorable impact of $0.4 million on net sales for the quarter and a favorable impact of $2.0 million for the nine months ended September 30, 2017. The South Korea market has been impacted by Marketing Plan changes, including certain changes unique to the market. We believe these changes support improved retailing opportunity.
Net sales in Indonesia were $33.8 million and $98.8 million for the three and nine months ended September 30, 2017, respectively. Net sales increased $4.8 million, or 16.6%, and $15.3 million, or 18.3%, for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016. In local currency, net sales increased 18.3% and 18.4% for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016. The fluctuation of foreign currency rates had an unfavorable impact of $0.5 million and $0.1$8.2 million on net sales for the three and nine months ended September 30, 2017,2021, respectively. The Indonesia market has continued to make progress by focusing on a customer-basedSales volume declined slightly for the quarter and increased year-to-date versus the prior-year periods. After weakened performance in our business and daily consumption through Nutrition Clubs, training activities, and new products. We have increasedpandemic conditions in the number of product access pointscountry contributed to a sales volume decline for the marketfirst quarter of 2020, we believe adaptation by Members to pandemic conditions, such as online communication with Members and expanded a city-by-city traininghome delivery, as well as heightened demand for our products and promotion approach.business opportunity, have been contributing factors to our sales volume increase through the second quarter of 2021 and generally strengthened performance for subsequent quarters.
Net sales in TaiwanRussia were $26.0$36.0 million and $90.5$106.6 million for the three and nine months ended September 30, 2017,2021, respectively. Net sales decreased $2.7$0.7 million, or 9.4%1.7%, and $4.6$4.5 million, or 4.9%4.0%, for the three and nine months ended September 30, 2017,2021, respectively, as compared to the same periods in 2016.2020. In local currency, net sales decreased 13.6%2.3% and 10.5%increased 0.2% for the three and nine months ended September 30, 2017,2021, respectively, as compared to the same periods in 2016.2020. The fluctuation of foreign currency exchange rates had a favorable impact of $1.2$0.2 million and $5.3an unfavorable impact of $4.7 million on net sales for the three and nine months ended September 30, 2017,2021, respectively. TaiwanRussia saw a sales have declinedvolume decline for the quarter and year-to-date period versus the prior year periods asprior-year periods. Members' Nutrition Clubs, a key DMO for the market, adjustsare operating primarily online due to pandemic conditions, an approach that Members are taking time to adapt to, as supported by Herbalife with new products, training, and Members optimize programspromotion for all levels of Membership. Our sales centers are open for product pick-up, although we continue to support home delivery for the market. Product access expansion, such as same-day express delivery in many areas has enabled growth in smaller cities. During the third quarter of 2020, we introduced Member segmentation to the market by adding a preferred customer program option for new Members. Russia had a 4% price increase in September 2021 and training intended to help Members establish customer-based, sustainable business approaches.a 5% price increase in September 2020.
ChinaAsia Pacific
NetThe Asia Pacific region, which excludes China, reported net sales in China were $209.8of $393.5 million and $668.0$1,188.8 million for the three and nine months ended September 30, 2017,2021, respectively. Net sales decreased $4.4increased $37.7 million, or 2.1%10.6%, and $6.1$219.0 million, or 0.9%22.6%, for the three and nine months ended September 30, 2017,2021, respectively, as compared to the same periods in 2016.2020. In local currency, net sales decreased 2.0%increased 9.5% and increased 2.8%19.8% for the three and nine months ended September 30, 2017,2021, respectively, as compared to the same periods in 2016.2020. The 2.1%10.6% increase in net sales for the three months ended September 30, 2021 was primarily due to an increase in sales volume, as indicated by a 9.0% increase in Volume Points, a 4.1% favorable impact of price increases, and a 1.1% favorable impact of fluctuations in foreign currency exchange rates, partially offset by a 3.6% unfavorable impact of sales mix. The 22.6% increase in net sales for the nine months ended September 30, 2021 was primarily due to an increase in sales volume, as indicated by a 21.3% increase in Volume Points, a 3.0% favorable impact of price increases, and a 2.8% favorable impact of fluctuations in foreign currency exchange rates, partially offset by a 4.1% unfavorable impact of sales mix.
Volume Point and net sales increases in recent years for most markets in the region are a result, we believe, of a customer-focused business, daily consumption DMOs including Nutrition Clubs, and ongoing product line expansion. COVID-19 pandemic conditions, such as closed sales centers and operating constraints on Members’ Nutrition Clubs, have had an intermittent adverse impact on results. The volume increase for the third quarter versus the prior-year period was driven by India, as other markets across the region generally saw volume declines. The volume increase for the year-to-date period versus the prior-year period was led by India, Vietnam, and Malaysia.
45
Net sales in India were $140.3 million and $380.5 million for the three and nine months ended September 30, 2021, respectively. Net sales increased $44.1 million, or 45.8%, and $135.6 million, or 55.3%, for the three and nine months ended September 30, 2021, respectively, as compared to the same periods in 2020. In local currency, net sales increased 45.3% and 54.0% for the three and nine months ended September 30, 2021, respectively, as compared to the same periods in 2020. The fluctuation of foreign currency exchange rates had a favorable impact of $0.5 million and $3.3 million on net sales for the three and nine months ended September 30, 2021, respectively. Sales volumes have increased in India in recent years as we continued to expand our product line and make it easier for our Members to do business, such as by adding product access points and payment methods, and introducing a customer-direct shipping capability for our Members. Additionally, we believe adaption by our Members to pandemic-related operating constraints, such as greater use of online marketing and training tools and online Nutrition Club operation, has broadened their geographic reach enabling them to expand their businesses.
Pandemic-related operating constraints continue to be intermittent in the market, as conditions evolve by area and Indian states institute constraints as warranted. We are increasing our manufacturing capacity to continue to meet demand. We continue to take Member orders and payments online. Company locations are now open for the taking of orders and payments and pick-up of product, though home delivery volumes continue to exceed pre-pandemic levels and home delivery is becoming an important distribution channel for the market. Disruption to our collections and expenditures of cash have eased, though we continue to move transactions to electronic collection and payment for operating efficiency purposes and for Member convenience.
Regulatory restrictions on direct selling in India, including registration requirements for our distributors, have reduced the number of new distributors. However, we have seen a significant increase in new Preferred Members since these do not have similar registration requirements and as distributors encourage the Preferred Membership pathway for their customers.
Net sales in Vietnam were $60.8 million and $206.8 million for the three and nine months ended September 30, 2021, respectively. Net sales increased $7.3 million, or 13.5%, and $56.9 million, or 38.0%, for the three and nine months ended September 30, 2021, respectively, as compared to the same periods in 2020. In local currency, net sales increased 12.1% and 36.4% for the three and nine months ended September 30, 2021, respectively, as compared to the same periods in 2020. The fluctuation of foreign currency exchange rates had a favorable impact of $0.8 million and $2.4 million on net sales for the three and nine months ended September 30, 2021, respectively. Vietnam continues to see year-over-year sales volume growth as sales leadership continues to focus on sustainable, consumption-oriented business practices and the number of product access points are increased. COVID-19 pandemic-related operating constraints, such as the closure of Members' Nutrition Clubs for in-person customer servicing and some home delivery disruption, continue to be intermittent and contributed to a reduced rate of year-over-year volume growth for the third quarter of 2021. We and our Members have adapted to such constraints by moving events, trainings, and product ordering online, as well as providing home delivery. Further changes to direct-selling regulations in the market are expected to be proposed to the government for preliminary approval in late 2021. We continue to assess and monitor these preliminary draft regulations.
Net sales in Indonesia were $38.3 million and $121.1 million for the three and nine months ended September 30, 2021, respectively. Net sales decreased $4.3 million, or 9.9%, and $10.2 million, or 7.7%, for the three and nine months ended September 30, 2021, respectively, as compared to the same periods in 2020. In local currency, net sales decreased 11.7% and 9.4% for the three and nine months ended September 30, 2021, respectively, as compared to the same periods in 2020. The fluctuation of foreign currency exchange rates had a favorable impact of $0.8 million and $2.2 million on net sales for the three and nine months ended September 30, 2021, respectively. The sales volume decline for the quarter and year-to-date period versus the prior-year periods are attributable in part, we believe, to ongoing pandemic conditions. These conditions include intermittent constraints on the operating hours and capacity of our product access points. Our sales centers have continued to operate via online ordering, home delivery, and pick-up, which were already established methods for the market. Many Members’ Nutrition Clubs, the major DMO for the market, have experienced pandemic-related constraints on their activities, including limitations on operating hours and capacity. Additionally, we have applied to comply with new online licensing and filing requirements, subject to review by the government; we continue to monitor this review.
Net sales in South Korea were $35.1 million and $103.9 million for the three and nine months ended September 30, 2021, respectively. Net sales increased $1.1 million, or 3.1%, and $6.5 million, or 6.7%, for the three and nine months ended September 30, 2021, respectively, as compared to the same periods in 2020. In local currency, net sales increased 0.6% and 0.5% for the three and nine months ended September 30, 2021, respectively, as compared to the same periods in 2020. The fluctuation of foreign currency exchange rates had a favorable impact of $0.9 million and $6.0 million on net sales for the three and nine months ended September 30, 2021, respectively. Sales volumes increased slightly for the quarter and year-to-date period versus the prior-year periods as pandemic conditions eased somewhat and social interactions in the market such as visits to Members' Nutrition Clubs increased, and as our Members continue to adapt to virtual approaches for their businesses. Pandemic conditions continue to be intermittent with potential ongoing adverse impact on sales volumes, however, including suspension of our training facilities, constraints on Nutrition Clubs operations, and restrictions on gatherings.
46
China
The China region reported net sales of $154.0 million and $499.1 million for the three and nine months ended September 30, 2021, respectively. Net sales decreased $66.0 million, or 30.0%, and $120.3 million, or 19.4%, for the three and nine months ended September 30, 2021, respectively, as compared to the same periods in 2020. In local currency, net sales decreased 34.6% and 25.5% for the three and nine months ended September 30, 2021, respectively, as compared to the same periods in 2020. The 30.0% decrease in net sales for the three months ended September 30, 20172021 was primarily the result ofdue to a declinedecrease in sales volume, as indicated by a 3.5%36.2% decrease in Volume Points plus a 2.6% decrease due to a timing difference between the recognition of net sales and Volume Points, partially offset by price increases which contributed approximatelya 4.6% to net sales.favorable impact of fluctuations in foreign currency exchange rates. The 0.9%19.4% decrease in net sales for the nine months ended September 30, 2017,2021 was primarily the result of a 3.6% unfavorable fluctuation in foreign currency exchange rates, as well asdue to a decrease in sales volume, as indicated by a 0.9%27.6% decrease in Volume Points, partially offset by thea 6.1% favorable effectsimpact of price increases effective April 2017, which increased net sales by approximately 2.8%.fluctuations in foreign currency exchange rates.
We believe the decrease in salesThe volume declines for the quarter and year-to-date period versus the prior-year periods were attributable, we believe, to several factors including efforts we are attributablemaking to factors suchultimately strengthen the consistency and sustainability of our business in China. In December 2020 we increased the requirements for our sales representatives in China to be eligible to apply to become independent service providers, with further modification during the third quarter of 2021. We believe these changes will ultimately strengthen our business by improving the quality of our independent service providers, but as a reductionour Members acclimate to these new requirements we have seen declines in the number of Nutrition Clubsnew independent service providers and net sales. Also, the frequency and attendance of our and our Members’ in-person training and sales meetings, which are important to the business as Members in some cases consolidated smaller clubs into larger, more commercialized clubs; government limitations on companies conducting commercial meetings ahead of the National Congress this fall,they are a central channel for attracting and retaining customers, providing personal and professional development for the year-to-date period, Member overemphasis on social media business methods over more traditional methods. We have introduced the Member Activation Program for new members, expanded our online ordering platform; which allow our Members, and Preferred Customerspromoting our products, are below the levels of prior years due to the intermittent effects of the COVID-19 pandemic and residual effects of the Chinese government’s 100-day review of the health product industry, which concluded in April 2019.
Focus areas for China include enhancing our digital capabilities and offerings, such as improving the integration of our technological tools to purchase certain new products from a wholly owned subsidiary outsidemake it easier for our Members to do business. We have expanded our product line for the China for only personal consumption,market and renewed a branding campaign.continue to conduct sales promotions in the region.
Sales by Product Category
Net sales by product category were as follows:
|
| Three Months Ended September 30, |
| |||||||||||||||||||||||||||||||||||||||||
|
| 2017 |
|
| 2016 |
| ||||||||||||||||||||||||||||||||||||||
|
| Retail Value(2) |
|
| Distributor Allowance |
|
| Product Sales |
|
| Shipping & Handling Revenues |
|
| Net Sales |
|
| Retail Value(2) |
|
| Distributor Allowance |
|
| Product Sales |
|
| Shipping & Handling Revenues |
|
| Net Sales |
|
| % Change in Net Sales |
| |||||||||||
|
| (In millions) |
| |||||||||||||||||||||||||||||||||||||||||
Weight Management |
| $ | 1,128.7 |
|
| $ | (468.4 | ) |
| $ | 660.3 |
|
| $ | 36.2 |
|
| $ | 696.5 |
|
| $ | 1,156.9 |
|
| $ | (480.3 | ) |
| $ | 676.6 |
|
| $ | 38.1 |
|
| $ | 714.7 |
|
|
| (2.5 | )% |
Targeted Nutrition |
|
| 431.5 |
|
|
| (179.1 | ) |
|
| 252.4 |
|
|
| 13.8 |
|
|
| 266.2 |
|
|
| 432.6 |
|
|
| (179.6 | ) |
|
| 253.0 |
|
|
| 14.3 |
|
|
| 267.3 |
|
|
| (0.4 | )% |
Energy, Sports and Fitness |
|
| 107.1 |
|
|
| (44.5 | ) |
|
| 62.6 |
|
|
| 3.5 |
|
|
| 66.1 |
|
|
| 113.5 |
|
|
| (47.1 | ) |
|
| 66.4 |
|
|
| 3.7 |
|
|
| 70.1 |
|
|
| (5.7 | )% |
Outer Nutrition |
|
| 34.2 |
|
|
| (14.2 | ) |
|
| 20.0 |
|
|
| 1.1 |
|
|
| 21.1 |
|
|
| 41.0 |
|
|
| (17.1 | ) |
|
| 23.9 |
|
|
| 1.3 |
|
|
| 25.2 |
|
|
| (16.3 | )% |
Literature, Promotional and Other(1) |
|
| 33.7 |
|
|
| 0.7 |
|
|
| 34.4 |
|
|
| 1.1 |
|
|
| 35.5 |
|
|
| 42.3 |
|
|
| 1.0 |
|
|
| 43.3 |
|
|
| 1.4 |
|
|
| 44.7 |
|
|
| (20.6 | )% |
Total |
| $ | 1,735.2 |
|
| $ | (705.5 | ) |
| $ | 1,029.7 |
|
| $ | 55.7 |
|
| $ | 1,085.4 |
|
| $ | 1,786.3 |
|
| $ | (723.1 | ) |
| $ | 1,063.2 |
|
| $ | 58.8 |
|
| $ | 1,122.0 |
|
|
| (3.3 | )% |
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| 2017 |
|
| 2016 |
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| Retail Value(2) |
|
| Distributor Allowance |
|
| Product Sales |
|
| Shipping & Handling Revenues |
|
| Net Sales |
|
| Retail Value(2) |
|
| Distributor Allowance |
|
| Product Sales |
|
| Shipping & Handling Revenues |
|
| Net Sales |
|
| % Change in Net Sales |
|
| September 30, |
|
| September 30, |
|
| % Change |
|
| September 30, |
|
| September 30, |
|
| % Change |
| |||||||||||||||||
|
| (In millions) |
|
| (Dollars in millions) |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Weight Management |
| $ | 3,465.6 |
|
| $ | (1,430.8 | ) |
| $ | 2,034.8 |
|
| $ | 112.0 |
|
| $ | 2,146.8 |
|
| $ | 3,538.4 |
|
| $ | (1,463.2 | ) |
| $ | 2,075.2 |
|
| $ | 123.7 |
|
| $ | 2,198.9 |
|
|
| (2.4 | )% |
| $ | 828.7 |
|
| $ | 910.4 |
|
|
| (9.0 | )% |
| $ | 2,620.7 |
|
| $ | 2,484.3 |
|
|
| 5.5 | % |
Targeted Nutrition |
|
| 1,303.6 |
|
|
| (538.2 | ) |
|
| 765.4 |
|
|
| 42.1 |
|
|
| 807.5 |
|
|
| 1,300.7 |
|
|
| (537.8 | ) |
|
| 762.9 |
|
|
| 45.5 |
|
|
| 808.4 |
|
|
| (0.1 | )% |
|
| 400.9 |
|
|
| 415.8 |
|
|
| (3.6 | )% |
|
| 1,252.2 |
|
|
| 1,127.1 |
|
|
| 11.1 | % |
Energy, Sports and Fitness |
|
| 321.3 |
|
|
| (132.7 | ) |
|
| 188.6 |
|
|
| 10.4 |
|
|
| 199.0 |
|
|
| 332.5 |
|
|
| (137.5 | ) |
|
| 195.0 |
|
|
| 11.6 |
|
|
| 206.6 |
|
|
| (3.7 | )% | ||||||||||||||||||||||||
Energy, Sports, and Fitness |
|
| 145.5 |
|
|
| 125.2 |
|
|
| 16.2 | % |
|
| 421.8 |
|
|
| 322.9 |
|
|
| 30.6 | % | ||||||||||||||||||||||||||||||||||||||||||||
Outer Nutrition |
|
| 113.1 |
|
|
| (46.7 | ) |
|
| 66.4 |
|
|
| 3.7 |
|
|
| 70.1 |
|
|
| 134.9 |
|
|
| (55.8 | ) |
|
| 79.1 |
|
|
| 4.7 |
|
|
| 83.8 |
|
|
| (16.3 | )% |
|
| 24.3 |
|
|
| 28.2 |
|
|
| (13.8 | )% |
|
| 82.1 |
|
|
| 80.5 |
|
|
| 2.0 | % |
Literature, Promotional and Other(1) |
|
| 104.9 |
|
|
| 2.7 |
|
|
| 107.6 |
|
|
| 3.4 |
|
|
| 111.0 |
|
|
| 138.0 |
|
|
| 2.9 |
|
|
| 140.9 |
|
|
| 4.8 |
|
|
| 145.7 |
|
|
| (23.8 | )% | ||||||||||||||||||||||||
Literature, Promotional, and Other(1) |
|
| 31.5 |
|
|
| 42.2 |
|
|
| (25.4 | )% |
|
| 108.0 |
|
|
| 116.3 |
|
|
| (7.1 | )% | ||||||||||||||||||||||||||||||||||||||||||||
Total |
| $ | 5,308.5 |
|
| $ | (2,145.7 | ) |
| $ | 3,162.8 |
|
| $ | 171.6 |
|
| $ | 3,334.4 |
|
| $ | 5,444.5 |
|
| $ | (2,191.4 | ) |
| $ | 3,253.1 |
|
| $ | 190.3 |
|
| $ | 3,443.4 |
|
|
| (3.2 | )% |
| $ | 1,430.9 |
|
| $ | 1,521.8 |
|
|
| (6.0 | )% |
| $ | 4,484.8 |
|
| $ | 4,131.1 |
|
|
| 8.6 | % |
|
|
|
|
(1) Product buybacks and returns in all product categories are included in the Literature, Promotional, and Other category.
Net sales for all productmajor categories decreased for the three and nine months ended September 30, 20172021 as compared to the same periods in 2016. The trend and2020 followed the trends of total net sales, as the business factors described in the above discussions of the individual geographic regions apply generally to all product categories.
Gross Profit
Gross profit The exception was $870.0 millionthe Energy, Sports, and $2,695.6 millionFitness product category, which saw increased net sales for both the three and nine months ended September 30, 2017, respectively, as compared to $912.92021 based on strength in the North America region.
Gross Profit
Gross profit was $1,125.7 million and $2,784.9$1,199.1 million for the same periods in 2016. As a percentage of net sales, gross profit for the three months ended September 30, 2017 was 80.2% as compared to 81.4% for the same period in 2016, or an unfavorable net decrease of 122 basis points2021 and 2020, respectively, and $3,542.1 million and $3,289.9 million for the nine months ended September 30, 20172021 and 2020, respectively. Gross profit as a percentage of net sales was 80.8% as compared to 80.9% for the same period in 2016, or an unfavorable net decrease of 4 basis points. The gross profit rate78.7% and 78.8% for the three months ended September 30, 20172021 and 2020, respectively, or an unfavorable net decrease of 13 basis points, and 79.0% and 79.6% for the nine months ended September 30, 2021 and 2020, respectively, or an unfavorable net decrease of 66 basis points.
47
The decrease in gross profit as a percentage of net sales for the three months ended September 30, 2021 as compared to the same period in 2020 included unfavorable changes in country mix of 45 basis points, unfavorable cost changes related to self-manufacturing and sourcing of 33 basis points primarily related to increased freight costs, and the unfavorable impact of foreign currency fluctuationshigher inventory write-downs of 132 basis points, reduction in cost savings through strategic sourcing and self-manufacturing of 45 basis points, other cost changes of 38 basis points, and country mix of 2310 basis points, partially offset by the favorable impact of retail price increases of 7167 basis points (favorable impact of 59 basis points excluding Venezuela), and lower inventory write-downsfavorable other cost changes of 458 basis points.
The decrease in gross profit as a percentage of net sales for the nine months ended September 30, 20172021 as compared to the same period in 2020 included unfavorable changes in country mix of 52 basis points, the unfavorable impact of foreign currency fluctuations of 7743 basis points other(unfavorable impact of 33 basis points excluding Venezuela), the unfavorable impact of higher inventory write-downs of 14 basis points, unfavorable cost changes related to self-manufacturing and sourcing of 10 basis points, and unfavorable cost changes of 810 basis points and country mix of 7 basis points,relating to increased freight costs due to orders shifting toward home delivery versus Member pick-up, partially offset by the favorable impact of retail price increases of 60 basis points (favorable impact of 50 basis points excluding Venezuela) and favorable other cost savings through strategic sourcing and self-manufacturingchanges of 34 basis points, and lower inventory write-downs of 43 basis points.
Generally, gross profit as a percentage of net sales may vary from period to period due to the impact of foreign currency fluctuations, changes in country mix as volume changes among countries with varying margins, retail price increases, cost savings through strategicchanges related to self-manufacturing and sourcing, and self-manufacturing, and inventory write-downs.
Royalty Overrides
Royalty overrides were $310.1$450.0 million and $944.1$463.1 million for the three months ended September 30, 2021 and 2020, respectively, and $1,409.8 million and $1,251.2 million for the nine months ended September 30, 2017, respectively, as compared to $320.3 million2021 and $968.9 million for the same periods in 2016.2020, respectively. Royalty overrides as a percentage of net sales were 28.6%31.5% and 28.3%30.4% for the three months ended September 30, 2021 and 2020, respectively, and 31.4% and 30.3% for the nine months ended September 30, 2017, respectively, as compared to 28.6%2021 and 28.1% for the same periods in 2016. Compensation2020, respectively.
Service fees to our independent service providers in China isare included in selling, general, and administrative expenses as opposed to royalty overrides where it is includedwhile Member compensation for all other Members.countries is included in Royalty overrides. Generally, royaltyRoyalty overrides as a percentage of net sales may vary slightly from period to period due to changes in the mix of products and countries because full royalty overrides are not paid on certain products and in certain countries.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were $445.2$486.3 million and $1,327.0$529.7 million for the three months ended September 30, 2021 and 2020, respectively, and $1,498.9 million and $1,559.5 million for the nine months ended September 30, 2017, respectively, as compared to $441.3 million2021 and $1,545.2 million for the same periods in 2016.2020, respectively. Selling, general, and administrative expenses as a percentage of net sales were 41.0%34.0% and 39.8%34.8% for the three months ended September 30, 2021 and 2020, respectively, and 33.4% and 37.7% for the nine months ended September 30, 2017, respectively, as compared to 39.3%2021 and 44.9% for the same periods in 2016.2020, respectively.
The increasedecrease in selling, general, and administrative expenses for the three months ended September 30, 20172021 as compared to the same period in 2020 was driven by $7.3$38.2 million in lower service fees for China independent service providers due to lower sales in China, $5.5 million in lower foreign exchange losses, and $5.0 million in lower Member event and promotion costs, partially offset by $6.1 million in higher Member promotion and event costs; $4.9 million in higher labor and employee benefit costs; $4.0 million in higher foreign exchange loss; partially offset by $4.8 million in lower professional fees primarily from lower expenses related to allegations raised by a hedge fund manager; $4.5 million in lower travel expenses due to cost control initiatives and $2.2 million in lower advertising and sponsorships. fees.
The decrease in selling, general, and administrative expenses for the nine months ended September 30, 20172021 as compared to the same period in 2020 was driven by the $203.0$83.1 million regulatory settlements in 2016; $13.7 million in lower advertising and sponsorships; $9.3 million in lower professional fees primarily from lowerof expenses related to allegations raised by a hedge fund manager; and $7.7 million in lower travel expenses due to cost control initiatives; partially offset by $14.4 million in higher labor and employee benefit costs and $8.7 million in higher Member promotion and event costs.
In late 2012, a hedge fund manager publicly raised allegations regarding the legality of our network marketing program and announced that the hedge fund manager had taken a significant short position regarding our common shares, leading to intense public scrutiny and significant stock price volatility. We have engaged legal and advisory services firms to assist with respondingrelating to the allegationsSEC and to perform other related services in connection to these events. For the three months ended September 30, 2017 and 2016, we recorded approximately $1.1 million and $3.2 million, respectively, of expenses related to this matter, which includes approximately $0.6 million and $2.7 million, respectively, of legal, advisory and other professional service fees. For the nine months ended September 30, 2017 and 2016, we recorded approximately $4.2 million and $10.7 million, respectively, of expenses related to this matter, which includes approximately $2.6 million and $8.5 million, respectively, of legal, advisory and other professional service fees. We expect to continue to incur expenses related to this matter over the next several periods and the expenses are expected to vary from period to period.
Other Operating Income
During the three and nine months ended September 30, 2017, the Company recognized government grant income of approximately $4.6 million and $43.5 million, respectively, as compared to $0.2 million and $29.1 million for the same periods in 2016, respectively,DOJ investigations relating to government grant income for China. Seethe FCPA matter in China in 2020 (See Note 2, Significant Accounting Policies5, Contingencies, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q,10-Q) and $72.9 million in lower service fees for a further discussion.China independent service providers due to lower sales in China, partially offset by $55.4 million in higher labor and benefits costs, $21.9 million in higher professional fees, and $14.7 million in higher Member event and promotion costs.
Net Other Operating Income
We did not recognize any other operating income for the three months ended September 30, 2021. The $0.6 million of other operating income for the three months ended September 30, 2020 consisted of $0.6 million of government grant income for China (See Note 2, Significant Accounting Policies, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q).
The $16.4 million of other operating income for the nine months ended September 30, 2021 consisted of $16.4 million of government grant income for China. The $13.0 million of other operating income for the nine months ended September 30, 2020 consisted of $13.0 million of government grant income for China.
48
Interest Expense, Net
Net interestInterest expense, isnet was as follows:
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||||||||||||
|
| September 30, 2017 |
|
| September 30, 2016 |
|
| September 30, 2017 |
|
| September 30, 2016 |
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
| ||||||||
|
| (Dollars in millions) |
|
| (in millions) |
| ||||||||||||||||||||||||||
Interest expense |
| $ | 43.0 |
|
| $ | 24.0 |
|
| $ | 117.4 |
|
| $ | 74.6 |
|
| $ | 38.8 |
|
| $ | 37.0 |
|
| $ | 115.5 |
|
| $ | 96.4 |
|
Interest income |
|
| (4.6 | ) |
|
| (1.9 | ) |
|
| (10.9 | ) |
|
| (4.5 | ) |
|
| (1.1 | ) |
|
| (1.8 | ) |
|
| (3.5 | ) |
|
| (7.4 | ) |
Net interest expense |
| $ | 38.4 |
|
| $ | 22.1 |
|
| $ | 106.5 |
|
| $ | 70.1 |
| ||||||||||||||||
Interest expense, net |
| $ | 37.7 |
|
| $ | 35.2 |
|
| $ | 112.0 |
|
| $ | 89.0 |
| ||||||||||||||||
The increase in net interest expense, net for the three and nine months ended September 30, 2017,2021 as compared to the same periodperiods in 2016,2020 was primarily due to thean increase in our interest expense due to higher interest rates and increased borrowing amounts relating to our new $1.45 billion senior secured credit facility, which includes a $1.3 billion term loan B, that was entered into on February 15, 2017 as discussed further below in Liquidity and Capital Resources. These increases wereoverall weighted-average borrowings, partially offset by highera decrease in our overall weighted-average interest income related to proceeds from the $1.3 billion term loan B.rate.
Income TaxesOther Expense, Net
Income taxes were anThe $24.6 million of other expense, of $26.4 million and $84.2 millionnet for the three and nine months ended September 30, 2017, respectively, as compared2021 consisted of a loss on the extinguishment of the 2026 Notes (See Note 4, Long-Term Debt, to expensethe Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of $41.7this Quarterly Report on Form 10-Q).
Income Taxes
Income taxes were $34.3 million and $69.2$33.6 million for the same periods in 2016.three months ended September 30, 2021 and 2020, respectively, and $104.2 million and $104.4 million for the nine months ended September 30, 2021 and 2020, respectively. The effective income tax rate was 32.6%22.6% and 23.3%19.5% for the three months ended September 30, 2021 and 2020, respectively, and 20.3% and 25.9% for the nine months ended September 30, 2017, respectively, as compared to 32.2%2021 and 30.1% for the same periods in 2016.2020, respectively. The increase in the effective tax rate for the three months ended September 30, 2017,2021 as compared to the same period in 2016,2020 was primarily due to the impact ofa decrease in net benefits from discrete events, partially offset by changes in the geographic mix of the Company’s income, offset by an increase in net benefits from discrete events.our income. The decrease in the effective tax rate for the nine months ended September 30, 2017,2021 as compared to the same period in 2016,2020 was primarily due to an increasechanges in net benefitsthe geographic mix of our income and a decrease in expense from discrete events. Included in the discrete events for the three and nine months ended September 30, 2017 was the impact of $0.6 million and $26.4 million of excess tax benefits generated during those respective periods, relating to the Company’s application of ASU 2016-09 that was adopted on January 1, 2017.
Liquidity and Capital Resources
We have historically met our working capital and capital expenditure requirements, including funding for expansion of operations, through net cash flows provided by operating activities. Variations in sales of our products directly affect the availability of funds. There are no material contractual restrictions on our ability to transfer and remit funds among our international affiliated companies. However, there are foreign currency restrictions in certain countries which could reduce our ability to timely obtain U.S. dollars. Even with these restrictions and the impacts of the COVID-19 pandemic, we believe we will have sufficient resources, including cash flow from operating activities and access to capital markets, to meet debt service obligations in a timely manner and be able to continue to meet our objectives.
Historically, our debt has not resulted from the need to fund our normal operations, but instead has resulted primarily from our share repurchase programs. Since inception in 2007, total share repurchases amounted to approximately $3.4$6.3 billion. While a significant net sales decline could potentially affect the availability of funds, many of our largest expenses are variable in nature, which we believe protects our funding in all but a dramatic net sales downturn. Our $1,636.3$678.2 million cash and cash equivalents as of September 30, 2021 and our senior secured credit facility, in addition to cash flow from operations, can be used to support general corporate purposes, including any future share repurchases, dividends, and strategic investment opportunities.
We have a cash pooling arrangement with a financial institution for cash management purposes. This cash pooling arrangement allows certain of our participating subsidiaries to withdraw cash from this financial institution based upon our aggregate cash deposits held by subsidiaries who participate in the cash pooling arrangement. We did not owe any amounts to this financial institution under the pooling arrangement as of September 30, 20172021 and December 31, 2016.2020.
49
For the nine months ended September 30, 2017,2021, we generated $404.4$374.9 million of operating cash flow as compared to $249.9$516.1 million for the same period in 2016.2020. The increasedecrease in our operating cash flow was the result of higher net income, higher non-cash items; partially offset by$282.7 million of unfavorable changes in operating assets and liabilities. The increase in net income was primarily the result of lower selling, general and administrative expenses mainly due to the $203.0 million regulatory settlements in 2016,liabilities, partially offset by lower contribution margin$141.5 million of $64.5higher net income excluding non-cash and reconciling items disclosed within our condensed consolidated statement of cash flows. The $282.7 million driven by lower net sales. The increase in non-cash items was primarily the result of an increase in deferred income taxes. The unfavorable change in operating assets and liabilities was primarily the result of unfavorable changes in accounts payable; royalty overrides; accrued compensation; and non-income and income tax payables, partially offset by favorable changes in inventories;inventories, prepaid expenses and other current assets.assets, royalty overrides, and other current liabilities, partially offset by a favorable change in receivables. The unfavorable change in other current liabilities included unfavorable changes in accrued compensation, accrued interest, and settlement of Mexico VAT assessments, partially offset by a favorable impact in 2021 due to the prior-year settlement of the SEC and DOJ investigations relating to the FCPA matter in China. The $141.5 million of higher net income excluding non-cash and reconciling items was primarily driven by higher contribution margin driven by higher net sales (See Summary Financial Results above for further discussion) and lower selling, general, and administrative expenses primarily as a result of the $83.1 million in higher expenses recognized in 2020 related to the SEC and DOJ investigations relating to the FCPA matter in China.
Capital expenditures, including accrued capital expenditures, were $102.1 million and $74.8 million for the nine months ended September 30, 20172021 and 2016 were $67.1 million and $111.5 million,2020, respectively. The majority of these expenditures represented investments in management information systems, including the upgrade of our Oracle enterprise wide systems which went live in August 2017, manufacturing facilities both domestically and internationally, and initiatives to develop web-based Member tools.tools, as well as expansion of our manufacturing and distribution facilities. We expect to incur total capital expenditures of approximately $88$145 million to $108$175 million for the full year of 2017.2021.
In March 2017, Herbalife2021, we hosted itsour annual global Herbalife SummitHonors event in Charlotte, North Carolinavirtually where President Team memberssales leaders from around the world met, and shared best practices, and conducted leadership training, and Herbalifeour management awarded Members $65.2$81.1 million of Mark Hughes bonus payments related to their 20162020 performance. In March 2016, Herbalife2020, our management awarded Members $64.3$71.3 million of Mark Hughes bonus payments related to their 20152019 performance.
Management has begun efforts to design and build a transformation program to optimize global processes through investment in and realignment of the infrastructure and locations of certain supporting functions and is also separately assessing the realignment of certain front office functions and exploring new technology to ensure the Company is optimally structured to better support distributors and customers. In connection with the aforementioned initiatives, for the three and nine months ended September 30, 2021, we incurred $3.9 million and $7.6 million of expenses, respectively, primarily relating to professional fees. We continue to assess the scope of these initiatives and accordingly cannot estimate the total amounts to be incurred.
Senior Secured Credit Facility
In May 2015,On August 16, 2018, we amended our priorentered into a $1.25 billion senior secured credit facility, or the Prior Credit Facility, and our $700 million borrowing capacity on our prior revolving credit facility, or the Prior Revolving Credit Facility, was reduced by approximately $235.9 million, and was further reduced by approximately $39.1 million on September 30, 2015, bringing the total available borrowing capacity to $425.0 million as of December 31, 2016. The Company repaid in full its $500 million term loan under the Prior Credit Facility, or the Prior Term Loan, on March 9, 2016. On February 15, 2017, we entered into a $1,450.0 million senior secured credit facility, or the2018 Credit Facility, consisting of a $1,300.0$250.0 million term loan A, or the 2018 Term Loan A, a $750.0 million term loan B, or the 2018 Term Loan B, and a $150$250.0 million revolving credit facility, or the 2018 Revolving Credit Facility, with a syndicate of financial institutions as lenders,lenders. The 2018 Term Loan B matures upon the earlier of: (i) August 18, 2025, or Lenders.(ii) December 15, 2023 if the outstanding principal on the 2024 Convertible Notes, as defined below, exceeds $350.0 million and we exceed certain leverage ratios as of that date. All obligations under the 2018 Credit Facility are unconditionally guaranteed by certain direct and indirect wholly-owned subsidiaries of Herbalife Nutrition Ltd. and secured by the equity interests of certain of Herbalife Nutrition Ltd.’s subsidiaries and substantially all of the assets of the domestic loan parties. Also on August 16, 2018, we issued $400.0 million aggregate principal amount of senior unsecured notes, or the 2026 Notes as described below, and used the proceeds from the 2018 Credit Facility and the 2026 Notes to repay in full the $1,178.1 million outstanding under our prior senior secured credit facility.
On December 12, 2019, we amended the 2018 Credit Facility which, among other things, reduced the interest rate for borrowings under the 2018 Term Loan B. We incurred approximately $1.2 million of debt issuance costs in connection with the amendment. For accounting purposes, pursuant to the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 470, Debt, or ASC 470, this transaction was accounted for as a modification of the 2018 Credit Facility. The debt issuance costs were recognized in interest expense, net within our condensed consolidated statement of income during the three months ended December 31, 2019.
50
On March 19, 2020, we amended the 2018 Credit Facility which, among other things, extended the maturity of both the 2018 Term Loan A and 2018 Revolving Credit Facility maturesto the earlier of: (i) March 19, 2025 or (ii) September 15, 2023 if the outstanding principal on February 15, 2022the 2024 Convertible Notes, as defined below, exceeds $350.0 million and we exceed certain leverage ratios as of that date; increased borrowings under the 2018 Term Loan maturesA from $234.4 million to a total of $264.8 million; increased the total available borrowing capacity under 2018 Revolving Credit Facility from $250.0 million to $282.5 million; and reduced the interest rate for borrowings under both the 2018 Term Loan A and 2018 Revolving Credit Facility. We incurred approximately $1.6 million of debt issuance costs in connection with the amendment. For accounting purposes, pursuant to ASC 470, this transaction was accounted for as a modification of the 2018 Credit Facility. Of the $1.6 million of debt issuance costs, approximately $1.1 million was recorded on our condensed consolidated balance sheet and is being amortized over the life of the 2018 Credit Facility using the effective-interest method, and approximately $0.5 million was recognized in interest expense, net within our condensed consolidated statement of income during the three months ended March 31, 2020.
On February 15, 2023.10, 2021, we amended the 2018 Credit Facility which, among other things, reduced the interest rate for borrowings under the 2018 Term Loan B. We incurred approximately $1.1 million of debt issuance costs in connection with the amendment. For accounting purposes, pursuant to ASC 470, this transaction was accounted for as a modification of the 2018 Credit Facility. The debt issuance costs were recognized in interest expense, net within our condensed consolidated statement of income during the three months ended March 31, 2021.
On July 30, 2021, we amended the 2018 Credit Facility which, among other things, increased borrowings under the 2018 Term Loan A from $245.0 million to a total of $286.2 million; increased the total available borrowing capacity under the 2018 Revolving Credit Facility from $282.5 million to $330.0 million; reduced the interest rate for borrowings under the 2018 Term Loan A and 2018 Revolving Credit Facility; and amended the commitment fee on the undrawn portion of the 2018 Revolving Credit Facility. As a result of the amendment, the applicable margin for the 2018 Term Loan A and 2018 Revolving Credit Facility may also be subject to certain premiums or discounts tied to criteria determined by certain sustainability targets. We incurred approximately $1.4 million of debt issuance costs in connection with the amendment. For accounting purposes, pursuant to ASC 470, this transaction was accounted for as a modification of the 2018 Credit Facility. Of the $1.4 million of debt issuance costs, approximately $0.8 million was recorded on our condensed consolidated balance sheet and is being amortized over the life of the 2018 Credit Facility using the effective-interest method, and approximately $0.6 million was recognized in interest expense, net within our condensed consolidated statement of income during the three months ended September 30, 2021.
The 2018 Credit Facility requires us to comply with a leverage ratio. The 2018 Credit Facility also contains affirmative and negative covenants customary for financings of this type, including, among other things, limitations or prohibitions on repurchasing common shares, declaring and paying dividends and other distributions, redeeming and repurchasing certain other indebtedness, loans and investments, additional indebtedness, liens, mergers, asset sales and transactions with affiliates. In addition, the 2018 Credit Facility contains customary covenants, including covenants that limit or restrict our ability to incur liens, incur indebtedness, make investments, disposeevents of assets, make certain restricted payments, pay dividends, repurchase our common shares, merge or consolidate and enter into certain transactions with affiliates. We are also required to maintain a minimum balance of $200.0 million of consolidated cash and cash equivalents.default. As of September 30, 20172021 and December 31, 2016,2020, we were compliantin compliance with our debt covenants under the 2018 Credit Facility and the Prior Credit Facility, respectively.Facility.
The 2018 Term Loan isA and 2018 Term Loan B are payable in consecutive quarterly installments each in an aggregate principal amount of $24.4 million, which began on June 30, 2017. December 31, 2018. Interest is due at least quarterly on amounts outstanding onunder the 2018 Credit Facility. In addition, beginning in 2020, we may be required to make mandatory prepayments towards the 2018 Term Loan B based on the Company’sour consolidated leverage ratio and annual excess cash flows as defined under the terms of the credit agreement.2018 Credit Facility. We are also permitted to make voluntary prepayments. Amounts outstanding under the 2018 Term Loan A and 2018 Term Loan B may be voluntarily prepaid without premium or penalty, subject to customary breakage fees in connection with the prepayment of a eurocurrency loan. These prepayments, if any, will be applied against remaining quarterly installments owed under the 2018 Term Loan A and 2018 Term Loan B in order of maturity with the remaining principal due upon maturity. maturity, unless directed otherwise by us. Based on the 2020 consolidated leverage ratio and excess cash flow calculation, both as defined under the terms of the 2018 Credit Facility, we will not be required to make a mandatory prepayment in 2021 toward the 2018 Term Loan B.
51
During the threenine months ended March 31, 2017,September 30, 2021, we borrowed an aggregate amount of $531.2 million under the 2018 Credit Facility and repaid a total amount of $410.0$415.8 million to repay in full amounts outstanding on the Prior Revolving Credit Facility. During both the three months ended June 30, 2017 and September 30, 2017, the Company repaid $24.4 million, respectively, on amounts outstanding under the 2018 Credit Facility, including a $60.0 million prepayment on amounts outstanding under the 2018 Term Loan. Loan B. During the threenine months ended March 31, 2016,September 30, 2020, we borrowed an aggregate amount of $30.4 million under the 2018 Credit Facility and repaid a total amount of $229.7$15.6 million to repay in full the Prior Term Loan. The Company did not repay anyon amounts outstanding under the Prior Revolving2018 Credit Facility during the three months ended September 30, 2016.Facility. As of September 30, 2017,2021 and December 31, 2020, the U.S. dollar amount outstanding under the Term Loan2018 Credit Facility was $1,251.2 million. There were no amounts$1,100.1 million and $984.7 million, respectively. Of the $1,100.1 million outstanding onunder the Revolving2018 Credit Facility as of September 30, 2017. As2021, $282.6 million was outstanding under the 2018 Term Loan A, $667.5 million was outstanding under the 2018 Term Loan B, and $150.0 million was outstanding under the 2018 Revolving Credit Facility. Of the $984.7 million outstanding under the 2018 Credit Facility as of December 31, 2016, the U.S. dollar amount2020, $251.6 million was outstanding under the Prior2018 Term Loan A and $733.1 million was outstanding under the 2018 Term Loan B. There were no borrowings outstanding under the 2018 Revolving Credit Facility was $410.0 million.as of December 31, 2020. There were no outstanding foreign currency borrowings under the 2018 Credit Facility as of September 30, 20172021 and December 31, 2016 under the Credit Facility and the Prior Credit Facility, respectively. On2020. As of September 30, 20172021 and December 31, 2016,2020, the weighted averageweighted-average interest rate for borrowings under the Credit Facility and the Prior2018 Credit Facility was 6.71%2.65% and 4.29%3.39%, respectively.
See Note 4, Long-Term Debt, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for a further discussion on ourthe 2018 Credit Facility.
Convertible Senior Notes due 2024
During February 2014,In March 2018, we issued $1.15 billion$550.0 million aggregate principal amount of convertible senior notes due 2024, or the 2024 Convertible Notes. The 2024 Convertible Notes are senior unsecured obligations which rank effectively subordinate to any of our existing and future secured indebtedness, including amounts outstanding under the 2018 Credit Facility, to the extent of the value of the assets securing such indebtedness. The 2024 Convertible Notes pay interest at a rate of 2.00%2.625% per annum payable semiannually in arrears on March 15 and September 15 of each year, beginning on September 15, 2018. Unless redeemed, repurchased or converted in accordance with their terms prior to such date, the 2024 Convertible Notes mature on March 15, 2024. The primary purpose of the issuance of the 2024 Convertible Notes was to repurchase a portion of the 2019 Convertible Notes. See Note 4, Long-Term Debt, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for a further discussion on our 2024 Convertible Notes.
Senior Notes due 2025
In May 2020, we issued $600.0 million aggregate principal amount of senior notes due 2025, or the 2025 Notes. The 2025 Notes are senior unsecured obligations which rank effectively subordinate to any of our existing and future secured indebtedness, including amounts outstanding under the 2018 Credit Facility, to the extent of the value of the assets securing such indebtedness. The 2025 Notes pay interest at a rate of 7.875% per annum payable semiannually in arrears on March 1 and September 1 of each year, beginning on March 1, 2021. The 2025 Notes mature on September 1, 2025, unless redeemed or repurchased in accordance with their terms prior to such date. The primary purpose of the issuance of the 2025 Notes was for general corporate purposes, including share repurchases and other capital investment projects. See Note 4, Long-Term Debt, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for a further discussion on our 2025 Notes.
Senior Notes due 2026
In August 2018, we issued $400.0 million aggregate principal amount of senior notes due 2026, or the 2026 Notes. The 2026 Notes were senior unsecured obligations which ranked effectively subordinate to any of our existing and future secured indebtedness, including amounts outstanding under the 2018 Credit Facility, to the extent of the value of the assets securing such indebtedness. The 2026 Notes paid interest at a rate of 7.250% per annum payable semiannually in arrears on February 15 and August 15 of each year, beginning on AugustFebruary 15, 2014.2019. The Convertible2026 Notes were to mature on August 15, 2019,2026, unless earlierredeemed or repurchased or converted.in accordance with their terms prior to such date. The primary purpose of the issuance of the Convertible2026 Notes was to refinance a portion of our 2017 Credit Facility.
In May 2021, we issued $600.0 million aggregate principal of new senior notes due 2029 as described below, and subsequently used a portion of the proceeds to redeem all $400.0 million of our existing 2026 Notes for share repurchase purposes.an aggregate purchase price of $428.5 million, which included $7.7 million of accrued interest. See Note 4, Long-Term Debt, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for a further discussion on our Convertible2026 Notes.
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Senior Notes due 2029
In May 2021, we issued $600.0 million aggregate principal amount of senior notes due 2029, or the 2029 Notes. The 2029 Notes are senior unsecured obligations which rank effectively subordinate to any of our existing and future secured indebtedness, including amounts outstanding under the 2018 Credit Facility, to the extent of the value of the assets securing such indebtedness. The 2029 Notes pay interest at a rate of 4.875% per annum payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2021. The 2029 Notes mature on June 1, 2029, unless redeemed or repurchased in accordance with their terms prior to such date. The primary purpose of the issuance of the 2029 Notes was to repurchase the 2026 Notes as well as for general corporate purposes, which may include shares repurchases and other capital investment projects. See Note 4, Long-Term Debt, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for a further discussion on our 2029 Notes.
Cash and cash equivalentsCash Equivalents
The majority of our foreign subsidiaries designate their local currencies as their functional currencies. AtAs of September 30, 2017 and December 31, 2016,2021, the total amount of our foreign subsidiary cash and cash equivalents was $1,303.5$485.9 million, and $316.2 million, respectively, of which $786.3$19.4 million and $28.2 million, respectively, was invested in U.S. dollars. The increase in our foreign subsidiary U.S. dollar denominated cash and cash equivalents primarily relates to our borrowings from our Credit Facility executed on February 15, 2017. AtAs of September 30, 2017 and December 31, 2016,2021, the total amount of cash and cash equivalents held by our parentHerbalife Nutrition Ltd. and its U.S. entities, inclusive of U.S. territories, was $332.8 million and $527.8 million, respectively.$192.3 million.
For earnings not considered to be indefinitely reinvested deferred taxes have been provided. For earnings considered to be indefinitely reinvested, deferred taxes have not been provided. Should we make a determination to remit the cash and cash equivalents from our foreign subsidiaries that are considered indefinitely reinvested to our U.S. consolidated groupHerbalife Nutrition Ltd. for the purpose of repatriation of undistributed earnings, we would need to accrue and pay taxes. As of December 31, 2016, our U.S. consolidated group2020, Herbalife Nutrition Ltd. had approximately $131.9 million of permanently reinvested unremitted earnings from certain foreign subsidiaries, and if these monies were ever needed to be remitted, the impact of any tax consequences on our overall liquidity position would not be material. As of December 31, 2016, our parent, Herbalife Ltd., had $2.5$2.6 billion of permanently reinvested unremitted earnings relating to its operating subsidiaries. As of September 30, 2017,December 31, 2020, we do not have any plans to repatriate these unremitted earnings to our parent;Herbalife Nutrition Ltd.; therefore, we do not have any liquidity concerns relating to these unremitted earnings and related cash and cash equivalents. See Note 12, Income Taxes, to the Consolidated Financial Statements included in our 20162020 10-K for additional discussion on our unremitted earnings.
Off-Balance Sheet Arrangements
AtAs of September 30, 20172021 and December 31, 2016,2020, we had no material off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.arrangements.
Dividends
We have not declared or paid cash dividends since 2014. The declaration of future dividends is subject to the discretion of our board of directors and will depend upon various factors, including our earnings, financial condition, Herbalife Nutrition Ltd.’s available distributable reserves under Cayman Islands law, restrictions imposed by the 2018 Credit Facility and the terms of any other indebtedness that may be outstanding, cash requirements, future prospects, and other factors deemed relevant by our board of directors.
Share Repurchases
On February 21, 2017,9, 2021, our board of directors authorized a new three-year $1.5 billion share repurchase program that will expire on February 21, 2020,9, 2024, which replaced our prior share repurchase authorization whichthat was set to expire on JuneOctober 30, 2017 which, as of December 31, 2016,2023 and had $232.9approximately $7.9 million of remaining authorized capacity.capacity when it was replaced. This share repurchase program allows us, which includes an indirect whollywholly-owned subsidiary of Herbalife Nutrition Ltd., to repurchase our common shares at such times and prices as determined by management, as market conditions warrant.warrant, and to the extent Herbalife Nutrition Ltd.’s distributable reserves are available under Cayman Islands law. The 2018 Credit Facility permits us to repurchase our common shares as long as no default or event of default exists and other conditions, such as specified consolidated leverage ratios, are met.
In conjunction with As of September 30, 2021, the issuance of the Convertible Notes during February 2014, we paid approximately $685.8 million to enter into prepaid forwardremaining authorized capacity under our $1.5 billion share repurchase transactions, or the Forward Transactions, withprogram was approximately $1.2 billion.
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During January 2021, we repurchased from Mr. Carl C. Icahn and certain financial institutions, or the Forward Counterparties, pursuant to which we purchasedof his affiliates an aggregate of approximately 9.912.5 million common shares of ours at an averageaggregate cost of $69.02approximately $600.0 million, or $48.05 per share, for settlement on or aroundand subsequently retired these shares. In addition, during the August 15, 2019 maturity date for the Convertible Notes, subject to the ability of each Forward Counterparty to elect to settle all or a portion of its Forward Transactions early. The shares are treated as retired shares for basic and diluted EPS purposes although they remain legally outstanding. See Note 10, Shareholders’ Equity, to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, for a further discussion on the Forward Transactions.
During the threenine months ended March 31, 2017, an indirect wholly owned subsidiary of the Company purchasedSeptember 30, 2021, we repurchased approximately 1.15.7 million of Herbalife Ltd.’sour common shares through open marketopen-market purchases at an aggregate cost of approximately $60.7$281.1 million, or an average cost of $56.10$49.27 per share, and subsequently retired these shares. In total, during the nine months ended September 30, 2021, we repurchased approximately 18.2 million of our common shares at an aggregate cost of approximately $881.1 million, or an average cost of $48.43 per share. DuringIn August 2020, we completed our modified Dutch auction tender offer and then subsequently paid cash to repurchase and retire a total of approximately 15.4 million of our common shares at an aggregate cost of approximately $750.0 million, or $48.75 per share. In addition, during the threenine months ended JuneSeptember 30, 2017, an indirect wholly owned subsidiary of the Company purchased2020, we repurchased approximately 2.71.4 million of Herbalife Ltd.’sour common shares through open marketopen-market purchases at an aggregate cost of approximately $179.8$67.1 million, or an average cost of $67.06$46.44 per share. Duringshare, and subsequently retired these shares. In total, during the threenine months ended September 30, 2017, an indirect wholly owned subsidiary of the Company purchased 0.82020, we repurchased approximately 16.8 million of Herbalife Ltd.’sour common shares through open market purchases at an aggregate cost of approximately $58.7$817.1 million, or an average cost of $72.38$48.55 per share.
As of both September 30, 2021 and December 31, 2020, we held approximately 10.0 million of treasury shares for U.S. GAAP purposes. These 2017 share repurchases reduced the Company’s totaltreasury shares increased our shareholders’ equitydeficit and are reflected at cost within the Company’sour accompanying condensed consolidated balance sheet. sheets. Although these shares are owned by the Company’san indirect wholly ownedwholly-owned subsidiary of ours and remain legally outstanding, they are reflected as treasury shares under U.S. GAAP and therefore reduce the number of common shares outstanding within our condensed consolidated financial statements and the weighted-average number of common shares outstanding used in calculating our earnings per share.share. The common shares of Herbalife Nutrition Ltd. held by the indirect wholly ownedwholly-owned subsidiary, however, remain outstanding on the books and records of the Company’sour transfer agent and therefore still carry voting and other share rights related to ownership of the Company’sour common shares, which may be exercised. So long as it is consistent with applicable laws, such shares will be voted by such subsidiary in the same manner, and to the maximum extent possible in the same proportion, as all other votes cast with respect to any matter properly submitted to a vote of Herbalife Nutrition Ltd.’s shareholders. We did not repurchase any common shares in the open market during the three and nine months ended September 30, 2016. As of September 30, 2017, the remaining authorized capacity under our $1.5 billion share repurchase program was $1,200.8 million.
See Note 10, Shareholders’ Equity and Note 14, Subsequent EventsDeficit, to the Condensed Consolidated Financial Statements included in Part I, Item 1,Financial Statements, of this Quarterly Report on Form 10-Q, for a further discussion on our share repurchases.
Capped Call Transactions
In February 2014, in connection with the issuance of Convertible Notes, we paid approximately $123.8 million to enter into capped call transactions with respect to our common shares, or the Capped Call Transactions, with certain financial institutions. The Capped Call Transactions are expected generally to reduce the potential dilution upon conversion of the Convertible Notes in the event that the market price of the common shares is greater than the strike price of the Capped Call Transactions, initially set at $86.28 per common share, with such reduction of potential dilution subject to a cap based on the cap price initially set at $120.79 per common share. See Note 10, Shareholders’ Equity, to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, for a further discussion of the Capped Call Transactions.
Working Capital and Operating Activities
As of September 30, 20172021 and December 31, 2016,2020, we had positive working capital of $1,415.3$488.4 million and $671.0$648.5 million, respectively, or an increasea decrease of $744.3$160.1 million. This increaseThe decrease was primarily due to the increasea decrease in cash and cash equivalents and an increase in accounts payable, partially offset by the increaseincreases in theinventories and prepaid expenses and other current portion of long-term debt primarily related to the Credit Facility entered into on February 15, 2017.assets and decreases in royalty overrides and other current liabilities.
We expect that cash and funds provided from operations, available borrowings under the 2018 Credit Facility, and access to capital markets will provide sufficient working capital to operate our business, to make expected capital expenditures, and to meet foreseeable liquidity requirements including payment of amounts outstanding under the Credit Facility, for the next twelve months and thereafter.
The majority of our purchases from suppliers are generally made in U.S. dollars, while sales to our Members generally are made in local currencies. Consequently, strengthening of the U.S. dollar versus a foreign currency can have a negative impact on net sales and contribution margins and can generate transaction gains or losses on intercompany transactions. For discussion of our foreign exchange contracts and other hedging arrangements, see Part I, Item 3, Quantitative and Qualitative Disclosures about Market Risk, of this Quarterly Report on Form 10-Q — Quantitative and Qualitative Disclosures about Market Risk.
Contingencies.
Contingencies
See Note 5, Contingencies, to the Condensed Consolidated Financial Statements included in Part I, Item 1,Financial Statements, of this Quarterly Report on Form 10-Q, for a further discussion of our contingencies as of September 30, 2017.2021.
Subsequent Events
See Note 14, Subsequent Events, to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, for information regarding subsequent events.
Critical Accounting Policies
U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. We regularly evaluate our estimates and assumptions related to revenue recognition, allowance for product returns, inventory, goodwill and purchased intangible asset valuations, deferred income tax asset valuation allowances, uncertain tax positions, tax contingencies, and other loss contingencies. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses. Actual results could differ from those estimates. We consider the following policies to be most critical in understanding the judgments that are involved in preparing the financial statements and the uncertainties that could impact our operating results, financial condition and cash flows.
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We are a nutrition company that sells a wide range of weight management,management; targeted nutrition,nutrition; energy, sports, & fitness,and fitness; and outer nutrition products. Our products are manufactured by us in our Changsha, Hunan, China extraction facility,facility; Suzhou, China facility,facility; Nanjing, China facility,facility; Lake Forest, California facility,facility; and in our Winston-Salem, North Carolina facility,facility; and by third partythird-party providers, and then are sold to Members who consume and sell Herbalife products to retail consumers or other Members. As of September 30, 2017,2021, we sold products in 94 countries95 markets throughout the world and we are organized and managed by geographic region. We aggregate our operating segments into one reporting segment, except China, as management believes that our operating segments have similar operating characteristics and similar long term operating performance. In making this determination, management believes that the operating segments are similar in the nature of the products sold, the product acquisition process, the types of customers to whom products are sold, the methods used to distribute the products, the nature of the regulatory environment, and their economic characteristics.
We generally recognize revenue upon delivery and when both the title and risk and rewards passcontrol passes to the Member or importer, or as products are sold in China to and through independent service providers, sales representatives, and sales officers to customers and preferred customers, as well as through Company-operated retail stores when necessary.Member. Product sales are recognized net of product returns, and discounts referred to as “distributor allowances.” We generally receive the net sales price in cash or through credit card payments at the point of sale. Royalty overrides are generally recorded when revenue is recognized. See Note 2, Significant Accounting Policies, to the Condensed Consolidated Financial Statements included in Part I, Item 1,Financial Statements, of this Quarterly Report on Form 10-Q, for a further discussion of distributor compensation in the U.S.
Allowances for product returns, primarily in connection with our buyback program, are provided at the time the sale is recorded. This accrual is based upon historical return rates for each country and the relevant return pattern, which reflects anticipated returns to be received over a period of up to 12 months following the original sale. Historically, product returns and buybacks have not been significant. Product returns and buybacks were approximately 0.1% of net sales for botheach of the three and nine months ended September 30, 20172021 and 2016.2020.
We adjust our inventories to lower of cost and net realizable value. Additionally we adjust the carrying value of our inventory based on assumptions regarding future demand for our products and market conditions. If future demand and market conditions are less favorable than management’s assumptions, additional inventory write-downs could be required. Likewise, favorable future demand and market conditions could positively impact future operating results if previously written down inventories are sold. We have obsolete and slow moving inventories which have been adjusted downward $33.1$28.1 million and $25.5$23.0 million to present them at their lower of cost and net realizable value in our condensed consolidated balance sheets as of September 30, 20172021 and December 31, 2016,2020, respectively.
Goodwill and marketing relatedmarketing-related intangible assets not subject to amortization are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to
As part of the extent that the carrying amount exceeds the asset’s fair value. As discussed below, forannual goodwill impairment testing,test, which is performed at the reporting unit level, we have the option to perform a qualitativemay conduct an assessment of qualitative factors to determine whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If we conclude it is not more likely than not that the fair value of a reporting unit is less than its carrying amount,amount. In a qualitative assessment, we would consider the macroeconomic conditions, including any deterioration of general conditions and industry and market conditions, including any deterioration in the environment where the reporting unit operates, increased competition, changes in the products/services and regulatory and political developments, cost of doing business, overall financial performance, including any declining cash flows and performance in relation to planned revenues and earnings in past periods, other relevant reporting unit specific facts, such as changes in management or key personnel or pending litigation, and events affecting the reporting unit, including changes in the carrying value of net assets. If we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying value, then there is no need towe would perform the two-stepquantitative goodwill impairment test. Currently,test as required. If we dodetermine that it is not use thismore likely than not that the fair value of the reporting unit is less than the carrying value, then no further testing is required. During fiscal year 2020, we performed a qualitative assessment option but we could inand determined that it is not more likely than not that the future elect to use this option. fair value of each reporting unit is less than its respective carrying value.
For our marketing relatedmarketing-related intangible assets, we may also utilize a qualitative assessment similar to the one described above, with the exception that the test is performed at the consolidated level rather than at the reporting unit level. During fiscal year 2020, we performed a qualitative optionassessment of our marketing-related intangible assets and determined that it is also currently available. However,not more likely than not that the fair value of the assets is less than their carrying value.
If we currently use a discounted cash flow model, or the income approach, under the relief-from-royalty methodare required to determine the fair value of our marketing related intangible assets in order to confirm there is no impairment required. For our marketing related intangible assets, ifeach reporting unit using the quantitative method, we do not use this qualitative assessment option, we could still in the future elect to use this option.
In order to estimate the fair value of goodwill, we also primarily use an income approach. The determination of impairment is made at the reporting unit level and consists of two steps. First, weapproach in order to determine the fair value of a reporting unit and compare it to its carrying amount. The determination of the fair value of the reporting units requires us to make significant estimates and assumptions. These estimates and assumptions include estimates of future revenues and expense growth rates, capital expenditures and the depreciation and amortization related to these capital expenditures, discount rates, and other inputs. Due to the inherent uncertainty involved in making these estimates, actual future results could differ. Changes in assumptions regarding future results or other underlying assumptions could have a significant impact on the fair value of the reporting unit. Second, ifIf the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill and other intangiblesunit over the impliedits fair value as determined in Step 2 of the goodwill impairment test. Also, if during Step 1 of a goodwill impairment testvalue.
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If we are required to determine we have reporting units with zero or negative carrying amounts, then we perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. During Step 2 of a goodwill impairment test, the implied fair value of goodwill is determined in a similar manner as how the amount of goodwill recognized in a business combination is determined, in accordance with the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 805, Business Combinations. We would assign the fair value of our marketing-related intangible assets using the quantitative method, we use a reporting unitdiscounted cash flow model, or the income approach, under the relief-from-royalty method to all of the assets and liabilities of that reporting unit as if the reporting unit had been acquired in a business combination anddetermine the fair value of our marketing related intangible assets in order to confirm there is no impairment required. An impairment loss is recognized to the reporting unit wasextent that the price paid to acquire the reporting unit. The excesscarrying amount of the assets exceeds their fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. value.
As of September 30, 20172021 and December 31, 2016,2020, we had goodwill of approximately $95.8$96.4 million and $89.9$100.5 million, respectively. As of both September 30, 2017 and December 31, 2016, we had marketing related intangible assets of approximately $310 million. The increasedecrease in goodwill during the nine months ended September 30, 20172021 was due to cumulativeforeign currency translation adjustments. As of both September 30, 2021 and December 31, 2020, we had marketing-related intangible assets of approximately $310.0 million. No marketing relatedmarketing-related intangibles or goodwill impairment was recorded during the three and nine months ended September 30, 20172021 and 2016.2020. See Note 2, Significant Accounting Policies, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for a further discussion.
Contingencies are accounted for in accordance with FASB ASC Topic 450, Contingencies, or ASC 450. ASC 450 requires that we record an estimated loss from a loss contingency when information available prior to issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. We also disclose material contingencies when we believe a loss is not probable but reasonably possible as required by ASC 450. Accounting for contingencies such as legal and non-income tax matters requires us to use judgment related to both the likelihood of a loss and the estimate of the amount or range of loss. Many of these legal and tax contingencies can take years to be resolved. Generally, as the time period increases over which the uncertainties are resolved, the likelihood of changes to the estimate of the ultimate outcome increases.
The Company evaluatesWe evaluate the realizability of itsour deferred tax assets by assessing the valuation allowance and by adjusting the amount of such allowance, if necessary. Although realization is not assured, we believe it is more likely than not that the net carrying value will be realized. The amount of the carryforwards that is considered realizable, however, could change if estimates of future taxable income are adjusted. In the ordinary course of our business, there are many transactions and calculations where the tax law and ultimate tax determination is uncertain. As part of the process of preparing our condensed consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate prior to the completion and filing of tax returns for such periods. These estimates involve complex issues and require us to make judgments about the likely application of the tax law to our situation, as well as with respect to other matters, such as anticipating the positions that we will take on tax returns prior to us actually preparing the returns and the outcomes of disputes with tax authorities. The ultimate resolution of these issues may take extended periods of time due to examinations by tax authorities and statutes of limitations. In addition, changes in our business, including acquisitions, changes in our international corporate structure, changes in the geographic location of business functions or assets, changes in the geographic mix and amount of income, as well as changes in our agreements with tax authorities, valuation allowances, applicable accounting rules, applicable tax laws and regulations, rulings and interpretations thereof, developments in tax audit and other matters, and variations in the estimated and actual level of annual pre-tax income can affect the overall effective income tax rate.
We account for uncertain tax positions in accordance with FASB ASC Topic 740, Income Taxes, or ASC 740, which provides guidance on the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, we must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.
We account for foreign currency transactions in accordance with FASB ASC Topic 830, Foreign Currency Matters.Matters. In a majority of the countries where we operate, the functional currency is the local currency. Our foreign subsidiaries’ asset and liability accounts are translated for condensed consolidated financial reporting purposes into U.S. dollar amounts at period-end exchange rates. Revenue and expense accounts are translated at the average rates during the year. Our foreign exchangecurrency translation adjustments are included in accumulated other comprehensive loss on our accompanying condensed consolidated balance sheets. Foreign currency transaction gains and losses and foreign currency remeasurements are generally included in selling, general, and administrative expenses in the accompanying condensed consolidated statements of income.
New Accounting Pronouncements
See discussion under Note 2, Significant Accounting Policies, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q, for information on new accounting pronouncements.
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Item 3.Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks, which arise during the normal course of business from changes in interest rates and foreign currency exchange rates. On a selected basis, we use derivative financial instruments to manage or hedge certain of these risks. All hedging transactions are authorized and executed pursuant to written guidelines and procedures.
We apply FASB ASC Topic 815, Derivatives and Hedging, or ASC 815, which established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair-value hedge, the changes in the fair value of the derivative and the underlying hedged item are recognized concurrently in earnings. If the derivative is designated as a cash-flowcash flow hedge, changes in the fair value of the derivative are recorded in other comprehensive income (loss)loss and are recognized in the condensed consolidated statements of income when the hedged item affects earnings. ASC 815 defines the requirements for designation and documentation of hedging relationships as well as ongoing effectiveness assessments in order to use hedge accounting. For a derivative that does not qualify as a hedge, changes in fair value are recognized concurrently in earnings.
A discussion of our primary market risk exposures and derivatives is presented below.
Foreign Exchange Risk
We transact business globally and are subject to risks associated with changes in foreign exchange rates. Our objective is to minimize the impact to earnings and cash flow associated with foreign exchange rate fluctuations. We enter into foreign exchange derivatives in the ordinary course of business primarily to reduce exposure to currency fluctuations attributable to intercompany transactions, translation of local currency revenue,earnings, inventory purchases subject to foreign currency exposure, and to partially mitigate the impact of foreign currency rate fluctuations. Due to volatility in foreign exchange markets, our current strategy, in general, is to hedge some of the significant exposures on a short-term basis. We will continue to monitor the foreign exchange markets and evaluate our hedging strategy accordingly. With the exception of our foreign exchangecurrency forward contracts relating to forecasted inventory purchases and intercompany management fees discussed below, all of our foreign exchange contracts are designated as free standingfreestanding derivatives for which hedge accounting does not apply. The changes in the fair value of the derivatives not qualifying as cash flow hedges are included in selling, general, and administrative expenses inwithin our condensed consolidated statements of income.
The foreign exchangecurrency forward contracts and option contracts designated as free standingfreestanding derivatives are primarily used to hedge advances between subsidiariesforeign currency-denominated intercompany transactions and to partially mitigate the impact of foreign currency fluctuations. The fair value of foreign exchange derivative contracts is based on third-party quotes. Our foreign currency derivative contracts are generally executed on a monthly basis.
We also purchase foreign currency forward contracts in order to hedge forecasted inventory transactions and intercompany management fees that are designated as cash-flowcash flow hedges and are subject to foreign currency exposures. We applied the hedge accounting rules as required by ASC 815 for these hedges. These contracts allow us to buy and sell certain currencies at specified contract rates. As of September 30, 20172021 and December 31, 2016,2020, the aggregate notional amounts of these contracts outstanding were approximately $127.0$56.2 million and $90.0$56.4 million, respectively. AtAs of September 30, 2017,2021, the outstanding contracts were expected to mature over the next fifteen months. Our derivative financial instruments are recorded on the condensed consolidated balance sheetsheets at fair value based on quoted market rates. For the forecasted inventory transactions, the forward contracts are used to hedge forecasted inventory transactions over specific months. Changes in the fair value of these forward contracts designated as cash flow hedges, excluding forward points, designated as cash-flow hedges are recorded as a component of accumulated other comprehensive income (loss)loss within shareholders’ equity,deficit, and are recognized in cost of sales in the condensed consolidated statements of income during the period which approximates the time the hedged inventory is sold. We also hedge forecasted intercompany management fees over specific months. Changes in the fair value of these forward contracts designated as cash flow hedges, excluding forward points, are recorded as a component of accumulated other comprehensive income (loss)loss within shareholders’ equity,deficit, and are recognized in selling, general, and administrative expenses inwithin the condensed consolidated statements of income induring the period when the hedged item and underlying transaction affectsaffect earnings. As of September 30, 2017,2021, we recorded assets at fair value of $0.8$0.3 million and liabilities at fair value of $5.5$0.9 million relating to all outstanding foreign currency contracts designated as cash-flowcash flow hedges. As of December 31, 2016,2020, we recorded assetsliabilities at fair value of $4.6$3.9 million relating to all outstanding foreign currency contracts designated as cash-flowcash flow hedges. During the three and nine months ended September 30, 2017 and 2016, the ineffective portion relating to these hedges was immaterial and theThese hedges remained effective as of September 30, 20172021 and December 31, 2016.2020.
As of both September 30, 20172021 and December 31, 2016,2020, the majority of our outstanding foreign currency forward contracts had maturity dates of less than twelve months with the majority of freestanding derivatives expiring within one month as of September 30, 2017 and December 31, 2016, respectively.month.
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The following table provides information about the details of ourall foreign exchangecurrency forward contracts:contracts that were outstanding as of September 30, 2021:
Foreign Currency |
| Average Contract Rate |
|
| Notional Amount |
|
| Fair Value Gain (Loss) |
| |||
|
|
|
|
|
| (In millions) |
|
| (In millions) |
| ||
At September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
Buy Argentine peso sell Euro |
|
| 20.72 |
|
| $ | 0.9 |
|
| $ | — |
|
Buy Chinese yuan sell Euro |
|
| 7.98 |
|
|
| 65.0 |
|
|
| 0.2 |
|
Buy Colombian peso sell U.S. dollar |
|
| 2,943.40 |
|
|
| 0.7 |
|
|
| — |
|
Buy Euro sell Argentine peso |
|
| 21.13 |
|
|
| 2.1 |
|
|
| — |
|
Buy Euro sell Australian dollar |
|
| 1.50 |
|
|
| 4.6 |
|
|
| — |
|
Buy Euro sell Chilean peso |
|
| 749.80 |
|
|
| 1.4 |
|
|
| — |
|
Buy Euro sell Ghanaian cedi |
|
| 5.45 |
|
|
| 3.0 |
|
|
| (0.1 | ) |
Buy Euro sell Hong Kong dollar |
|
| 9.31 |
|
|
| 12.6 |
|
|
| (0.1 | ) |
Buy Euro sell Indonesian rupiah |
|
| 15,955.81 |
|
|
| 6.6 |
|
|
| — |
|
Buy Euro sell Japanese yen |
|
| 133.79 |
|
|
| 0.6 |
|
|
| — |
|
Buy Euro sell Kazakhstani tenge |
|
| 413.12 |
|
|
| 2.0 |
|
|
| — |
|
Buy Euro sell Mexican peso |
|
| 21.96 |
|
|
| 67.5 |
|
|
| 0.3 |
|
Buy Euro sell Malaysian ringgit |
|
| 5.02 |
|
|
| 1.5 |
|
|
| — |
|
Buy Euro sell Peruvian sol |
|
| 3.88 |
|
|
| 4.4 |
|
|
| — |
|
Buy Euro sell Philippine peso |
|
| 61.10 |
|
|
| 6.4 |
|
|
| (0.1 | ) |
Buy Euro sell Russian ruble |
|
| 69.60 |
|
|
| 5.9 |
|
|
| (0.1 | ) |
Buy Euro sell Thai baht |
|
| 39.69 |
|
|
| 2.0 |
|
|
| — |
|
Buy Euro sell Taiwan dollar |
|
| 36.04 |
|
|
| 0.6 |
|
|
| — |
|
Buy Euro sell U.S. dollar |
|
| 1.19 |
|
|
| 41.1 |
|
|
| (0.1 | ) |
Buy Euro sell South African rand |
|
| 15.73 |
|
|
| 5.1 |
|
|
| 0.1 |
|
Buy British pound sell Euro |
|
| 0.88 |
|
|
| 3.3 |
|
|
| — |
|
Buy British pound sell U.S. dollar |
|
| 1.36 |
|
|
| 2.8 |
|
|
| — |
|
Buy Indonesian rupiah sell Euro |
|
| 15,898.00 |
|
|
| 1.0 |
|
|
| — |
|
Buy Indonesian rupiah sell U.S. dollar |
|
| 13,380.50 |
|
|
| 6.4 |
|
|
| (0.1 | ) |
Buy South Korean won sell U.S. dollar |
|
| 1,131.25 |
|
|
| 5.2 |
|
|
| (0.1 | ) |
Buy Kazakhstani tenge sell U.S. dollar |
|
| 345.00 |
|
|
| 0.9 |
|
|
| — |
|
Buy Mexican peso sell Euro |
|
| 21.33 |
|
|
| 5.3 |
|
|
| (0.1 | ) |
Buy Malaysian ringgit sell Euro |
|
| 4.96 |
|
|
| 1.0 |
|
|
| — |
|
Buy Norwegian krone sell U.S. dollar |
|
| 7.79 |
|
|
| 1.3 |
|
|
| — |
|
Buy Peruvian sol sell Euro |
|
| 3.89 |
|
|
| 1.1 |
|
|
| — |
|
Buy Philippine peso sell Euro |
|
| 60.18 |
|
|
| 1.4 |
|
|
| — |
|
Buy Swedish krona sell U.S. dollar |
|
| 7.98 |
|
|
| 1.9 |
|
|
| — |
|
Buy Thai baht sell Euro |
|
| 39.55 |
|
|
| 1.1 |
|
|
| — |
|
Buy Taiwan dollar sell U.S. dollar |
|
| 29.78 |
|
|
| 5.9 |
|
|
| (0.1 | ) |
Buy U.S. dollar sell Colombian peso |
|
| 2,912.50 |
|
|
| 0.8 |
|
|
| — |
|
Buy U.S. dollar sell Euro |
|
| 1.15 |
|
|
| 117.6 |
|
|
| (4.5 | ) |
Buy U.S. dollar sell British pound |
|
| 1.34 |
|
|
| 3.2 |
|
|
| — |
|
Buy U.S. dollar sell South African rand |
|
| 13.19 |
|
|
| 2.8 |
|
|
| 0.1 |
|
Buy South African rand sell Euro |
|
| 15.76 |
|
|
| 1.6 |
|
|
| — |
|
Total forward contracts |
|
|
|
|
| $ | 398.6 |
|
| $ | (4.7 | ) |
|
| Weighted-Average Contract Rate |
|
| Notional Amount |
|
| Fair Value Gain (Loss) |
| |||
|
| (in millions, except weighted-average contract rate) |
| |||||||||
As of September 30, 2021 |
|
|
|
|
|
|
|
|
| |||
Buy British pound sell Euro |
|
| 0.86 |
|
| $ | 33.7 |
|
| $ | — |
|
Buy Chinese yuan sell Euro |
|
| 8.14 |
|
|
| 49.2 |
|
|
| 4.3 |
|
Buy Chinese yuan sell U.S. dollar |
|
| 6.63 |
|
|
| 103.2 |
|
|
| 1.3 |
|
Buy Danish krone sell U.S. dollar |
|
| 6.32 |
|
|
| 0.8 |
|
|
| — |
|
Buy Euro sell Australian dollar |
|
| 1.62 |
|
|
| 1.4 |
|
|
| — |
|
Buy Euro sell Chilean peso |
|
| 929.40 |
|
|
| 0.4 |
|
|
| — |
|
Buy Euro sell Hong Kong dollar |
|
| 9.16 |
|
|
| 5.2 |
|
|
| (0.1 | ) |
Buy Euro sell Indian rupee |
|
| 86.85 |
|
|
| 2.3 |
|
|
| — |
|
Buy Euro sell Indonesiah rupiah |
|
| 16,701.42 |
|
|
| 12.5 |
|
|
| (0.1 | ) |
Buy Euro sell Kazakhstani tenge |
|
| 504.40 |
|
|
| 1.0 |
|
|
| — |
|
Buy Euro sell Malaysian ringgit |
|
| 4.93 |
|
|
| 22.9 |
|
|
| (0.4 | ) |
Buy Euro sell Mexican peso |
|
| 24.74 |
|
|
| 53.4 |
|
|
| (0.8 | ) |
Buy Euro sell Peruvian nuevo sol |
|
| 4.83 |
|
|
| 1.7 |
|
|
| — |
|
Buy Euro sell Philippine peso |
|
| 59.15 |
|
|
| 0.9 |
|
|
| — |
|
Buy Euro sell Russian ruble |
|
| 86.53 |
|
|
| 8.0 |
|
|
| (0.1 | ) |
Buy Euro sell South African rand |
|
| 17.99 |
|
|
| 15.1 |
|
|
| (0.4 | ) |
Buy Euro sell Thai baht |
|
| 38.73 |
|
|
| 1.3 |
|
|
| — |
|
Buy Euro sell Turkish lira |
|
| 10.48 |
|
|
| 3.7 |
|
|
| — |
|
Buy Euro sell Vietnamese dong |
|
| 26,780.79 |
|
|
| 28.2 |
|
|
| (0.4 | ) |
Buy Hong Kong dollar sell Euro |
|
| 9.19 |
|
|
| 1.3 |
|
|
| — |
|
Buy Indonesiah rupiah sell U.S. dollar |
|
| 14,372.20 |
|
|
| 6.9 |
|
|
| — |
|
Buy Mexican peso sell U.S. dollar |
|
| 20.52 |
|
|
| 1.9 |
|
|
| — |
|
Buy Norwegian krone sell U.S. dollar |
|
| 8.62 |
|
|
| 2.2 |
|
|
| — |
|
Buy Polish zloty sell U.S. dollar |
|
| 3.94 |
|
|
| 1.0 |
|
|
| — |
|
Buy Swedish krona sell U.S. dollar |
|
| 8.65 |
|
|
| 2.1 |
|
|
| — |
|
Buy Taiwan dollar sell U.S. dollar |
|
| 27.60 |
|
|
| 15.3 |
|
|
| (0.1 | ) |
Buy U.S. dollar sell Brazilian real |
|
| 5.41 |
|
|
| 8.7 |
|
|
| 0.2 |
|
Buy U.S. dollar sell Chinese yuan |
|
| 6.51 |
|
|
| 45.2 |
|
|
| — |
|
Buy U.S. dollar sell Colombian peso |
|
| 3,837.56 |
|
|
| 1.2 |
|
|
| — |
|
Buy U.S. dollar sell Euro |
|
| 1.17 |
|
|
| 83.3 |
|
|
| 0.6 |
|
Buy U.S. dollar sell Indian rupee |
|
| 75.65 |
|
|
| 2.0 |
|
|
| — |
|
Buy U.S. dollar sell Mexican peso |
|
| 21.93 |
|
|
| 10.7 |
|
|
| (0.5 | ) |
Buy U.S. dollar sell Philippine peso |
|
| 50.67 |
|
|
| 5.9 |
|
|
| 0.1 |
|
Buy U.S. dollar sell Thai baht |
|
| 33.27 |
|
|
| 6.0 |
|
|
| 0.1 |
|
Buy Ukrainian hryvnia sell Euro |
|
| 31.70 |
|
|
| 1.2 |
|
|
| — |
|
Total forward contracts |
|
|
|
| $ | 539.8 |
|
| $ | 3.7 |
| |
The majority of our foreign subsidiaries designate their local currencies as their functional currencies. See Liquidity and Capital Resources — Cash and cash equivalents Cash Equivalents in Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this Quarterly Report on Form 10-Q for further discussion of our foreign subsidiary cash and cash equivalents.
Interest Rate Risk
As of September 30, 2017,2021, the aggregate annual maturities of the 2018 Credit Facility were expected to be $24.3$5.5 million for the remainder of 2017, $97.5 million for 2018, $97.5 million for 2019, $97.5 million for 2020, $97.5 million for 2021, $97.5$29.0 million for 2022, and $739.4$29.0 million for 2023.2023, $36.1 million for 2024, and $1,000.5 million for 2025. As of September 30, 2017,2021, the fair valuevalues of the 2018 Term Loan wasA, 2018 Term Loan B, and 2018 Revolving Credit Facility were approximately $1,228$281.9 million, $665.8 million, and $150.0 million, respectively, and the carrying value was $1,212.6 million.values were $281.6 million, $662.0 million, and $150.0 million, respectively. As of December 31, 2020, the fair values of the 2018 Term Loan A and 2018 Term Loan B were approximately $251.9 million and $734.0 million, respectively, and the carrying values were $250.5 million and $726.0 million, respectively. There were no outstanding borrowings on the 2018 Revolving Credit Facility as of September 30, 2017.December 31, 2020. The fair value of the Prior2018 Credit Facility approximated its carrying value of $410.0 million as of December 31, 2016. The Credit Facility bears and the Prior Credit Facility bore variable interest rates, and on September 30, 2017 and December 31, 2016, the weighted average interest rate of the Credit Facility and the Prior Credit Facility was 6.71% and 4.29%, respectively. As of September 30, 2017 the fair value of the liability component of our $1.15 billion Convertible Notes was approximately $1,064.6 million and the carrying value was $1,058.4 million. As of December 31, 2016, the fair value of the liability component of our $1.15 billion Convertible Notes was approximately $961.3 million and the carrying value was $1,024.8 million. The Convertible Notes pay interest at a fixed rate of 2.00% per annum payable semiannually in arrears on February 15 and August 15 of each year, beginning on August 15, 2014. The Convertible Notes mature on August 15, 2019, unless earlier repurchased or converted. We may not redeem the Convertible Notes prior to their stated maturity date. Since our Credit Facility is based on variable interest rates, and as of September 30, 2021 and December 31, 2020, the weighted-average interest rate for borrowings under the 2018 Credit Facility was 2.65% and 3.39%, respectively.
58
During the first quarter of 2020, we have not entered into anyvarious interest rate swap arrangements, ifagreements with effective dates ranging between February 2020 and March 2020. These agreements collectively provide for us to pay interest at a weighted-average fixed rate of 0.98% on aggregate notional amounts of $100.0 million under the 2018 Credit Facility until their respective expiration dates ranging between February 2022 and March 2023, while receiving interest based on LIBOR on the same notional amounts for the same periods. At inception, these swap agreements were designated as cash flow hedges against the variability in certain LIBOR-based borrowings under the 2018 Credit Facility, effectively fixing the interest rate on such notional amounts at a weighted-average effective rate of, depending on our total leverage ratio, between 2.73% and 3.23%. The fair values of the interest rate swap agreements are based on third-party bank quotes, and as of September 30, 2021 and December 31, 2020, we recorded liabilities at fair value of $0.4 million and $1.0 million, respectively, relating to these interest rate swap agreements.
Our exposure to interest rate volatility risk related to our 2018 Credit Facility is partially mitigated by our interest rate swaps. If interest rates were to increase or decrease by 1% for the year and our borrowing amounts on our 2018 Credit Facility and related interest rate swaps remained constant, our annual interest expense could increase by approximately $10.0 million or decrease by approximately $12.5$0.8 million, respectively. The variable interest rates payable under our 2018 Credit Facility are linked to LIBOR as the benchmark for establishing such rates. Recent national, international and other regulatory guidance and reform proposals regarding LIBOR are requiring certain LIBOR tenors to be discontinued or become unavailable by the end of 2021 and LIBOR to be fully discontinued or become unavailable as a benchmark rate by June 2023. Our 2018 Credit Facility includes mechanics to facilitate the adoption by us and our lenders of an alternative benchmark rate for use in place of LIBOR which may result in interest rates that are higher or lower than those that would have resulted had LIBOR remained in effect.
As of September 30, 2021, the fair value of the liability component of the 2024 Convertible Notes was approximately $548.6 million and the carrying value was $479.4 million. As of December 31, 2020, the fair value of the liability component of the 2024 Convertible Notes was approximately $541.8 million and the carrying value was $460.6 million. The 2024 Convertible Notes pay interest at a fixed rate of 2.625% per annum payable semiannually in arrears on March 15 and September 15 of each year, beginning on September 15, 2018. Unless redeemed, repurchased or converted in accordance with their terms prior to such date, the 2024 Convertible Notes mature on March 15, 2024.
As of September 30, 2021, the fair value of the 2025 Notes was approximately $647.7 million and the carrying value was $593.8 million. As of December 31, 2020, the fair value of the 2025 Notes was approximately $656.3 million and the carrying value was $592.9 million. The 2025 Notes pay interest at a fixed rate of 7.875% per annum payable semiannually in arrears on March 1 and September 1 of each year, beginning on March 1, 2021. The 2025 Notes mature on September 1, 2025, unless redeemed or repurchased in accordance with their terms prior to such date. The 2025 Notes are recorded at their carrying value and their fair value is used only for disclosure purposes, so an increase or decrease in interest rates would not have any impact to our condensed consolidated financial statements; however, if interest rates were to increase or decrease by 1%, their fair value could decrease or increase by approximately $5.8 million, respectively.
As of September 30, 2021, the fair value of the 2029 Notes was approximately $600.1 million and the carrying value was $592.6 million. The 2029 Notes pay interest at a fixed rate of 4.875% per annum payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2021. The 2029 Notes mature on June 1, 2029, unless redeemed or repurchased in accordance with their terms prior to such date. The 2029 Notes are recorded at their carrying value and their fair value is used only for disclosure purposes, so an increase or decrease in interest rates would not have any impact to our condensed consolidated financial statements; however, if interest rates were to increase or decrease by 1%, their fair value could decrease by approximately $36.5 million or increase by approximately $25.4 million, respectively.
Item 4. Controls Andand Procedures
Evaluation of Disclosure Controls and Procedures. Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2017.2021.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 20172021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
59
FORWARD-LOOKINGFORWARD-LOOKING STATEMENTS
This documentQuarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management, including for future operations;operations, capital expenditures, or share repurchases; any statements concerning proposed new products, services, or developments; any statements regarding future economic conditions or performance; any statements of belief;belief or expectation; and any statements of assumptions underlying any of the foregoing.foregoing or other future events. Forward-looking statements may include, among other, the words “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect”“expect,” “anticipate” or “anticipate” and any other similar words.
Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, such as those disclosed or incorporatedmany of which are beyond our control. Additionally, many of these risks and uncertainties are, and may continue to be, amplified by reference in our filings with the Securities and Exchange Commission.COVID-19 pandemic. Important factors that could cause our actual results, performance and achievements, or industry results to differ materially from estimates or projections contained in or implied by our forward-looking statements include among others, the following:
the potential impacts of the COVID-19 pandemic on us; our Members, customers, and supply chain; and the world economy;
our noncompliance with, or improper action by our employees or Members in violation of, applicable law;
adverse publicity associated with our productsCompany or network marketing organization,the direct-selling industry, including our ability to comfort the marketplace and regulators regarding our compliance with applicable laws;
changing consumer preferences and demands;
the competitive nature of our business;
legal and regulatory matters, governing our products, including potential governmental or regulatory actions concerning, the safety or efficacy of our products and network marketing program, including the direct selling market in which we operate;
legal challenges to, our products or network marketing program;
the consent orderConsent Order entered into with the FTC, the effects thereof and any failure to comply therewith;
risks associated with operating internationally and the effect of economic factors, including foreign exchange, inflation, disruptions or conflicts with our third party importers, pricing and currency devaluation risks, especially in countries such as Venezuela;
uncertainties relating to interpretation and enforcement of legislation in China governing direct selling and anti-pyramiding;
our inability to obtain the necessary licenses to expand our direct selling business in China;
adverse changes in the Chinese economy;
our dependence on increased penetration of existing markets;
any material disruption to our business caused by natural disasters, other catastrophic events, acts of war or terrorism, cybersecurity incidents, pandemics and/or cyber-security incidents;
noncompliance by us or our Members with any privacy laws, rules, or regulations or any security breach involving the misappropriation, loss, or other unauthorized use or disclosure of confidential information;
our reliance on our information technology infrastructure and manufacturing facilities and those of our outside manufacturers;
the sufficiency of our trademarks and other intellectual property rights;
product concentration;
our reliance upon, or the loss or departure of any member of, our senior management team which could negatively impact our Member relations and operating results;
U.S. and foreign laws and regulations applicable to our international operations;
uncertainties relating to the United Kingdom’s vote to exit from the European Union;
restrictions imposed by covenants in the agreements governing our credit facility;
changes in, and uncertainties relating to, the application of transfer pricing, customs duties, value added taxes, and other tax regulations, and changes thereto;
changes in tax laws, treaties, orand regulations, or their interpretation;
taxation relating to our Members;
product liability claims;
our incorporation under the laws of the Cayman Islands;
andwhether we will purchase any of our shares in the open markets or otherwise; and
share price volatility related to, among other things, speculative trading and certain traders shorting our common shares.
60
Additional factors and uncertainties that could cause actual results to differ materially from our forward-looking statements are set forth in this Quarterly Report on Form 10-Q, including under the headingheadings “Risk Factors,”Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in our Condensed Consolidated Financial Statements and the related Notes.
Forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the date hereof, and forward-looking statements in documents attached that are incorporated by reference speak only as of the date of those documents.hereof. We do not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as required by law.
61
See discussion under Note 5, Contingencies, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
Please carefully consider the following discussion of significant factors, events, and uncertainties that make an investment decision regarding our securities risky. The factors, events, uncertainties, and consequences discussed in these risk factors could, in circumstances we may not be able to accurately predict, recognize, or control, have a material adverse effect on our business, reputation, prospects, financial condition, operating results, cash flows, liquidity, and share price. These risk factors do not identify all risks that we face. We could also be affected by factors, events, or uncertainties that are not presently known to us or that we currently do not consider to present material risks.
Additionally, the COVID-19 pandemic has also amplified many of the other risks discussed below to which we are subject. We are unable to predict the duration and extent to which the pandemic and its related impacts will adversely impact our business, financial condition, and operating results as well as our share price. In addition, given the unpredictable, unprecedented, and fluid nature of the pandemic, it may also materially and adversely affect our business, financial condition, and operating results in ways that are not currently anticipated by or known to us or that we do not currently consider to present material risk.
Risk Factor Summary
This risk factor summary contains a high-level summary of certain of the principal factors, events and uncertainties that make an investment in our securities risky, including risks related to our business and industry, risks related to regulatory and legal matters, risks related to our international operations, risks related to our indebtedness and risks related to our common shares. The following summary is not complete and should be read together with the more detailed discussion of these and the other factors, events and uncertainties set forth below before making an investment decision regarding our securities. The principal factors, events and uncertainties that make an investment in our securities risky include the following:
Risks Related to UsOur Business and Our BusinessIndustry
We distribute our products exclusively to and through independent Members, and we depend upon them directly for substantially all of our sales. Our Members, including our sales leaders, may voluntarily terminate their Member agreements with us at any time. To increase our revenue, we must increase the number of, or the productivity of, our Members. Accordingly, our success depends in significant part upon our ability to recruit, retain and motivate a large base of Members. The loss of a significant number of Members for any reason could negatively impact sales of our products and could impair our ability to attract new Members. In our efforts to attract and retain Members, we compete with other network marketing organizations, including those in the weight management, dietary and nutritional supplement and personal care and cosmetic product industries. Our operating results could be harmed if our existing and new business opportunities and products do not generate sufficient interest to retain existing Members and attract new Members.
Our Member organization has a high turnover rate, which is a common characteristic found in the direct selling industry. See Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this Quarterly Report on Form 10-Q for additional information regarding sales leader retention rates.
62
Risks Related to Regulatory and Legal Matters
Risks Related to Our International Operations
Risks Related to Our Indebtedness
Risks Related to Our Common Shares
63
Risks Related to Our Business and Industry
Our failure to establish and maintain Member and sales leader relationships could negatively impact sales of our products and materially harm our business, financial condition, and operating results.
We distribute our products exclusively to and through our independent Members, and we depend on them directly for substantially all of our sales. To increase our revenue, we must increase the number and productivity of our Members. Accordingly, our success depends in significant part on our ability to recruit, retain, and motivate a large base of Members, including through an attractive compensation plan, the maintenance of an attractive product portfolio, and other incentives. The loss of a significant number of Members, our inability to generate sufficient interest in our business opportunities and products, or any legal or regulatory impact to our Members’ ability to conduct their business could negatively impact sales of our products and our ability to attract and retain Members, each of which could have a material adverse effect on our business, financial condition, and operating results. In our efforts to attract and retain Members, we compete with other direct-selling organizations. In addition, our Member organization has a high turnover rate, which is common in the direct-selling industry, in part because our Members, including our sales leaders, may easily enter and exit our network marketing program without facing a significant investment or loss of capital. For example, the upfront financial cost to become a Member is low, we do not have time or exclusivity requirements, we do not charge for any required training, and, in substantially all jurisdictions, we maintain a buyback program.
We believe the COVID-19 pandemic could have an adverse impact on the pipeline of new Members and our Member turnover rate, and may impact our future net sales. See the COVID-19 Pandemic and Sales by Geographic Region sections in Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this Quarterly Report on Form 10-Q for further discussion of the impacts of the COVID-19 pandemic on our business and results of operations. For additional information regarding sales leader retention rates, see Part I, Item 1, Business, of our Annual Report on Form 10-K for the year ended December 31, 2020, or the 2020 10-K.
Because we cannot exert the same level of influence or control over our Members as we could if they were our employees, our Members could fail to comply with applicable law or our rules and procedures, which could result in claims against us that could materially harm our business, financial condition, and operating results.
Our Members are independent contractors and, accordingly, we are not in a position to directly provide the same direction, motivation and oversight as we wouldcould if Members were our own employees. As a result, there can be no assurance that our Members will participate in our marketing strategies or plans, accept our introduction of new products, or comply with applicable legal requirements or our Members policiesrules and procedures.
ExtensiveWe are subject to extensive federal, state, local, and localforeign laws, rules, and regulations that regulate our business, products, direct sales channel, and network marketing program. Because we have expanded into foreign countries, our policies and proceduresplan. See the Regulation section of Part I, Item 1, Business, of the 2020 10-K for our independent Members differ due to the different legal requirements of each country in which we do business.additional information. While we have implemented Member policies and procedures designed to govern Member conduct and to protect the goodwill associated with Herbalife trademarks and tradenames,Nutrition, it can be difficult to enforce these policies and procedures because of theour large number of Members and their status as independent status. Violations by our independent Members of applicable law or ofcontractors and because our policies and procedures in dealing with customers could reflect negatively on our products and operations and harm our business reputation.differ by jurisdiction as a result of varying local legal requirements. In addition, italthough we train our Members and attempt to monitor our Members’ marketing materials, we cannot ensure that our Members will comply with applicable legal requirements or our policies and procedures or that such marketing materials or other Member practices comply with applicable laws, rules, and regulations. It is possible that a court could hold us civilly or criminally accountable based on vicarious liability because ofliable for the actions of our independent Members.Members, which could materially harm our business, financial condition, and operating results.
Adverse publicity associated with our products, ingredientsCompany or network marketing program, or those of similar companies,the direct-selling industry could materially harm our business, financial condition, and operating results.
The size of our distribution forceMember organization, our operating results, and the results of our operationsshare price may be significantly affected by the public’s perception of the CompanyHerbalife Nutrition and similarother direct-selling companies. This perception is dependent upon opinions concerning:concerning a number of factors, including:
the safety, quality, and qualityefficacy of our products, and ingredients;
the safety and qualityas well as those of similar products and ingredients distributed by other companies;
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our Members;
our network marketing program; and
the direct sellingdirect-selling business generally.
Adverse publicity concerning any
Adverse publicity concerning any of the foregoing whether or not accurate or resulting in investigation, enforcement, or other legal or regulatory actions or the imposition of fines, penalties, or other sanctions, could have an adverse effect onnegatively impact the goodwill of our Company, and could negatively affect our ability to attract, motivate, and retain Members, which would negatively impactand our ability to generate revenue. We cannot ensure that all of our Members will comply with applicable legal requirements relating to the advertising, labeling, licensing or distribution of our products.
In addition, our Members’ and consumers’ perception of the safetyHerbalife Nutrition and quality of our products and ingredientsdirect-selling business as well as similar products and ingredients distributed by other companies can be significantly influenced by media attention, publicized scientific research or findings, widespread product liability claims, and other publicity, concerning our products or ingredients or similar products and ingredients distributed by other companies. Adverse publicity, whether or not it is legitimate. For example, as a result of the prevalence and marked increase in the use of blogs, social media platforms, and other forms of Internet-based communications, the opportunity for dissemination of information, both accurate and inaccurate, is seemingly limitless and readily available, and often does not provide any opportunity for correction or resulting from consumers’ use or misuse of our products,other redress.
Adverse publicity that associates consumptionuse of our products or ingredients, or any similar products or ingredients with illness or other adverse effects, questions the benefits of our or similarany such products, or claims that any such products are ineffective, inappropriately labeled, or have inaccurate instructions as to their use, could lead to lawsuits or other legal or regulatory challenges and could negativelymaterially and adversely impact our reputation, the market demand for our products, orand our general business.business, financial condition, and operating results.
From time to time, we receive inquiries from government agencies and third parties requesting information concerning our products. We fully cooperate with these inquiries including, when requested, by the submission of detailed technical dossiers addressing product composition, manufacturing, process control, quality assurance, and contaminant testing. Further, we periodically respond to requests from regulators for additional information regarding product-specific adverse events. We are confident in the safety of our products when used as directed. However, there can be no assurance that regulators in these or other markets will not take actions that might delay or prevent the introduction of new products, or require the reformulation or the temporary or permanent withdrawal of certain of our existing products from their markets.
Adverse publicity relating to us our products or our operations, including our network marketing program or the attractiveness or viability of the financial opportunities provided thereby, has had, and could again have, a negative effect on our ability to attract, motivate, and retain Members, and it could also affecton our share price. InFor example, the mid-1980s, our products and marketing program became the subject of regulatory scrutiny in the United States, resulting in large part from claims and representations made about our products by our Members, including impermissible therapeutic claims. The resulting adverse publicity from the 1986 permanent injunction entered in California caused a rapid, substantial loss of Members in the United States and a corresponding reduction in sales beginning in 1985. In addition, in late 2012, a hedge fund manager publicly raisedSee also the risk factor titled “Our share price may be adversely affected by third parties who raise allegations regarding the legality ofabout our network marketing program and announced that his fund had taken a significant short position regarding our common shares, leading to intense public scrutiny and governmental inquiries, and significant stock price volatility.Company.” We expect that negativeadverse publicity will, from time to time, continue to negatively impact our business in particular markets and may adversely affect our share price.
Our failure to appropriately respond to changing consumer preferences and demand for new products or product enhancementscompete successfully could significantlymaterially harm our Member and customer relationships and product sales and harm ourbusiness, financial condition, and operating results.
Our business is subject to changing consumer trends and preferences, especially with respect to weight management products. Our continued success depends in part on our ability to anticipate and respond to these changes, and we may not respond in a timely or commercially appropriate manner to such changes. Furthermore, the nutritional supplement industry is characterized by rapid and frequent changes in demand for products and new product introductions and enhancements. Our failure to accurately predict these trends could negatively impact consumer opinion of our products, which in turn could harm our customer and Member relationships and cause the loss of sales. The success of our new product offerings and enhancements depends upon a number of factors, including our ability to:
accurately anticipate customer needs;
innovate and develop new products or product enhancements that meet these needs;
successfully commercialize new products or product enhancements in a timely manner;
price our products competitively;
manufacture and deliver our products in sufficient volumes and in a timely manner; and
differentiate our product offerings from those of our competitors.
If we do not introduce new products or make enhancements to meet the changing needs of our customers in a timely manner, some of our products could be rendered obsolete, which could negatively impact our revenues, financial condition and operating results.
Due to the high level of competition in our industry, we might fail to retain our customers and Members, which would harm our financial condition and operating results.
The business of developing and marketing weight management and other nutrition and personal care products is highly competitive and sensitive to the introduction of new products orand weight management plans, including various prescription drugs, which may rapidly capture a significant share of the market. These market segmentsOur competitors include numerous manufacturers, distributors, marketers, retailersmanufacturers; distributors; marketers; online, specialty, mass, and other retailers; and physicians that actively compete for the business of consumers both in the United States and abroad. In addition, we anticipate that we will be subject to increasing competition in the future from sellers that utilize electronic commerce. Some of theseour competitors have longer operating histories, significantly greater financial, technical, product development, marketingresources, better-developed and more innovative sales resources,and distribution channels and platforms, greater name recognition, and larger established customer bases and better-developed distribution channels than we do. Our present orand future competitors may be able to better withstand reductions in prices or other adverse economic or market conditions than we can; develop products that are comparable or superior to those we offer,offer; adapt more quickly than we door effectively to new technologies, changing regulatory requirements, evolving industry trends and standards, orand customer requirements than we can; and/or devote greater resources to the development, promotion, and sale of their products than we do. For example, if our competitors develop other diet or weight management products that prove to be more effective than our products, demand for our products could be reduced. Accordingly, we may not be able to compete effectively in our markets and competition may intensify.
We are also subject to significant competition for the recruitment of Members from other network marketingdirect-selling organizations, including those that market weight management products, dietary and nutritional supplements, and personal care products, and other types of products, as well as other types of products. We compete for global customers andthose organizations in which former employees or Members with regard to weight management, nutritional supplement and personal care products. Our competitors include both direct selling companies such as NuSkin Enterprises, Nature’s Sunshine, Alticor/Amway, Melaleuca, Avon Products, Oriflame, Omnilife, Tupperware and Mary Kay, as well as retail establishments such as Weight Watchers, Jenny Craig, General Nutrition Centers, Wal-Mart and retail pharmacies.
are involved. In addition, because the industry in which we operate is not particularly capital intensive or otherwise subject to high barriers to entry, it is relatively easy for new competitors to emerge whothat will compete with us, including for our Members and their customers. In addition, the fact thatAccordingly, competition may intensify and we may not be able to compete effectively in our markets. If we are not able to retain our Members may easily enter and exittheir customers or otherwise compete successfully, our network marketing program contributes to the level of competition that we face. For example, a Member can enter or exit our network marketing system with relative ease at any time without facing a significant investment or loss of capital because (1) we have a low upfront financial cost to become a Herbalife Member, (2) we do not require any specific amount of time to work as a Member, (3) we do not charge Members for any training that we might require, (4) we do not prohibit a new Member from working with another company, and (5) in substantially all jurisdictions, we maintain a buyback program pursuant to which we will repurchase products sold to a Member who has decided to leave the business. Our ability to remain competitive therefore depends, in significant part, on our success in recruiting and retaining Members through an attractive compensation plan, the maintenance of an attractive product portfolio and other incentives. We cannot ensure that our programs for recruitment and retention of Members will be successful and if they are not, ourbusiness, financial condition, and operating results would be harmed.
We are affected by extensive laws, governmental regulations, administrative determinations, court decisions and similar constraints both domestically and abroad, and our failure or our Members’ failure to comply with these constraints could lead to the imposition of significant penalties or claims, which could harm our financial condition and operating results.
In both domestic and foreign markets, the formulation, manufacturing, packaging, labeling, distribution, advertising, importation, exportation, licensing, sale and storage of our products are affected by extensive laws, governmental regulations, administrative determinations, court decisions and other similar constraints. Such laws, regulations and other constraints may exist at the federal, state or local levels in the United States and at all levels of government in foreign jurisdictions. There can be no assurance that we or our Members are in compliance with all of these regulations. Our failure or our Members’ failure to comply with these regulations or new regulations could disrupt our Members’ sale of our products, or lead to the imposition of significant penalties or claims and could negatively impact our business. In addition, the adoption of new regulations or changes in the interpretations of existing regulations, such as those relating to genetically modified foods, may result in significant compliance costs or discontinuation of product sales and may negatively impact the marketing of our products, resulting in significant loss of sales revenues.
The Consent Order prohibits us from making, or allowing our Members to make, any representation regarding the amount or level of income, including full-time or part-time income, that a participant can reasonably expect to earn in our network marketing program, unless the representation is non-misleading and we possesses competent and reliable evidence sufficient to substantiate that the representation is true. The Consent Order also prohibits us and other persons who act in active concert with us from representing that participation in the network marketing program will result in a lavish lifestyle and from using images or descriptions to represent or imply that participation in the program is likely to result in a lavish lifestyle. In addition, the Consent Order prohibits specified misrepresentations in connection with marketing the program, including misrepresentations regarding any fact material to participation such as the cost to participate or the amount of income likely to be earned. The Consent Order also requires us to clearly and conspicuously disclose all information material to participation in the marketing program, including our refund and buyback policy before the participant pays any money to us.
The FTC revised its Guides Concerning the Use of Endorsements and Testimonials in Advertising, or Guides, which became effective on December 1, 2009. Although the Guides are not binding, they explain how the FTC interprets Section 5 of the FTC Act’s prohibition on unfair or deceptive acts or practices. Consequently, the FTC could bring a Section 5 enforcement action based on practices that are inconsistent with the Guides. Under the revised Guides, advertisements that feature a consumer and convey his or her atypical experience with a product or service are required to clearly disclose the results that consumers can generally expect. In contrast to the 1980 version of the Guides, which allowed advertisers to describe atypical results in a testimonial as long as they included a disclaimer such as “results not typical”, the revised Guides no longer contain such a safe harbor. The revised Guides also add new examples to illustrate the long-standing principle that “material connections” between advertisers and endorsers (such as payments or free products), connections that consumers might not expect, must be disclosed. Herbalife has revised its marketing materials to be compliant with the revised Guides and the Consent Order. However, it is possible that our use, and that of our Members, of testimonials in the advertising and promotion of our products, including but not limited to our weight management products and our income opportunity, will be significantly impacted and therefore might negatively impact our sales.
Governmental regulations in countries where we plan to commence or expand operations may prevent or delay entry into those markets. In addition, our ability to sustain satisfactory levels of sales in our markets is dependent in significant part on our ability to introduce additional products into such markets. However, governmental regulations in our markets, both domestic and international, can delay or prevent the introduction, or require the reformulation or withdrawal, of certain of our products. Any such regulatory action, whether or not it results in a final determination adverse to us, could create negative publicity, with detrimental effects on the motivation and recruitment of Members and, consequently, on sales.
We are subject to rules of the Food and Drug Administration, or FDA, for current good manufacturing practices, or cGMPs, for the manufacture, packing, labeling and holding of dietary supplements and over-the-counter drugs distributed in the United States. Herbalife has implemented a comprehensive quality assurance program that is designed to maintain compliance with the cGMPs for products manufactured by or on behalf of Herbalife for distribution in the United States. However, if Herbalife should be found not to be in compliance with cGMPs for the products we self-manufacture, it could negatively impact our reputation and ability to sell our products even after any such situation had been rectified. Further, if contract manufacturers whose products bear Herbalife labels fail to comply with the cGMPs, this could negatively impact Herbalife’s reputation and ability to sell its products even though Herbalife is not directly liable under the cGMPs for such compliance. In complying with the dietary supplement cGMPs, we have experienced increases in production costs as a result of the necessary increase in testing of raw ingredients, work in process and finished products.
Since late 2012, a hedge fund manager has made and continues to make allegations regarding the Company and its network marketing program. We believe these allegations are without merit and are vigorously defending ourselves against such claims, including proactively reaching out to governmental authorities about what we believe is manipulative activity with respect to our securities. Because of these allegations, we and others have received and may receive additional regulatory and governmental inquiries. For example, we have previously disclosed inquiries from the FTC, SEC and other governmental authorities. In the future, these and other governmental authorities may determine to seek information from us and other persons relating to these same or other allegations. If we believe any governmental or regulatory inquiry or investigation is or becomes material, it will be disclosed individually. Consistent with our policies, we have cooperated and will continue to fully cooperate with any governmental or regulatory inquiries or investigations.
Our network marketing program could be found to be not in compliance with current or newly adopted laws or regulations in one or more markets, which could prevent us from conducting our business in these markets or require us to alter compensation practices under our network marketing program, and harm our financial condition and operating results.
Our network marketing program is subject to a number of federal and state regulations administered by the FTC and various federal and state agencies in the United States as well as regulations on direct selling in foreign markets administered by foreign agencies. We are subject to the risk that, in one or more markets, our network marketing program could be found by federal, state or foreign regulators not to be in compliance with applicable law or regulations or we may be required to alter compensation practices under our network marketing program in order to comply with applicable law or regulations. As previously disclosed, we entered into the Consent Order with the FTC to settle the FTC’s multi-year investigation into our business for compliance with these regulations. Another example is the 1986 permanent injunction entered in California in proceedings initiated by the California Attorney General. There can be no assurances other federal, state attorneys general or foreign regulators will not take similar action.
Regulations applicable to network marketing organizations generally are directed at preventing fraudulent or deceptive schemes, sometimes referred to as “pyramid” or “chain sales” schemes, by ensuring that product sales ultimately are made to consumers and that advancement within an organization is based on sales of the organization’s products rather than investments in the organization or other non-retail sales-related criteria. The regulatory requirements concerning network marketing programs do not include “bright line” rules and are inherently fact-based and, thus, we are subject to the risk that these laws or regulations or the enforcement or interpretation of these laws and regulations by governmental agencies or courts can change. While we believe we are in compliance with these regulations, including those enforced by the FTC and the permanent injunction in California, and are compliant with the Consent Order, there is no assurance any federal, state or foreign courts or agencies or the independent compliance auditor under the Consent Order would agree, including a federal court or the FTC in respect of the Consent Order or a court or the California Attorney General in respect to the permanent injunction.
The ambiguity surrounding these laws can also affect the public perception of the Company. Specifically, in late 2012, a hedge fund manager publicly raised allegations regarding the legality of our network marketing program and announced that his fund had taken a significant short position regarding our common shares, leading to intense public scrutiny and significant stock price volatility. The failure of our network marketing program to comply with current or newly adopted regulations, the Consent Order or California injunction or any allegations or charges to that effect brought by federal, state, or foreign regulators could negatively impact our business in a particular market or in general and may adversely affect our share price.
We are also subject to the risk of private party challenges to the legality of our network marketing program, whether as a result of the Consent Order or otherwise. Some network marketing programs of other companies have been successfully challenged in the past, while other challenges to network marketing programs of other companies have been defeated. Adverse judicial determinations with respect to our network marketing program, or in proceedings not involving us directly but which challenge the legality of network marketing systems, in any other market in which we operate, could negatively impact our business.
We are subject to the Consent Order with the FTC, the effects of which, or any failure to comply therewith, could harm our financial condition and operating results.
As previously disclosed, on July 15, 2016, we reached a consensual resolution with the FTC regarding its multi-year investigation of our business resulting in the entry into a Stipulation to Entry of Order for Permanent Injunction and Monetary Judgment in the U.S. District Court for the Central District of California. The Consent Order became effective on July 25, 2016 upon final approval by the Court. As part of the Consent Order, we agreed to make a payment of $200 million and to implement certain new procedures and enhance certain existing procedures in the United States. We also agreed to be subject to certain audits by an independent compliance auditor, or the ICA, for a period of seven years; requirements regarding compliance certification and record creation and maintenance; and a prohibition on misrepresentations and misleading claims regarding, among other things, income and lavish lifestyles. The FTC and ICA will also have the right to inspect Company records and request additional compliance reports for purposes of conducting audits pursuant to the Consent Order. In September 2016, we and the FTC mutually selected Affiliated Monitors, Inc. to serve as the ICA. The terms of the Consent Order are described in greater detail in our Current Report on Form 8-K filed on July 15, 2016.
The Consent Order includes a number of restrictions and requirements and therefore creates compliance risks, and while we believe we are fully compliant with the Consent Order, there is no guarantee that we are fully compliant or in the future will continue to be fully compliant with the Consent Order. We do not believe the Consent Order changes our business model as a direct selling company. However, compliance with the Consent Order required us to implement new and enhanced procedures regarding, among other things, tracking retail sales and internal consumption by distributors. We have instituted controls and procedures and developed technology solutions that we believe address these Consent Order requirements, including tools and software used by distributors to, among other things, document their sales and more efficiently track and manage their customer base. However, there can be no assurances that some or all of these controls and procedures and technology solutions will operate as expected. Any failure of these systems to operate as designed could cause us to fail to maintain the records required under, or otherwise violate terms of, the Consent Order. Compliance with the Consent Order will require the cooperation of Members and, while we have updated our training programs and policies to address the Consent Order and expect our Members to cooperate, we do not have the same level of influence or control over our Members as we could were they our own employees. Failure by our Members to comply with the relevant aspects of the Consent Order could be a violation of the Consent Order and impact our ability to comply. While we believe we are compliant with the Consent Order and our board of directors has established the Implementation Oversight Committee, a committee which meets regularly with management to oversee our compliance with the terms of the Consent Order, there can be no assurances that the FTC or ICA would agree now or will agree in the future. In the event we are found to be in violation of the Consent Order, the FTC could, among other things, take corrective actions such as initiating enforcement actions, seeking an injunction or other restrictive orders and imposing civil monetary penalties against us and our officers and directors.
The Consent Order may also impact our business operations, including our net sales and profitability. For example, the Consent Order imposes certain requirements regarding the verification and receipting of sales and there can be no assurances that these or other requirements of the Consent Order, our compliance therewith and the new and enhanced business procedures implemented as a result thereof, will not lead to reduced sales, whether as a result of undocumented sales activity or otherwise. The Consent Order also imposes restrictions on distributors’ ability to open Nutrition Clubs in the United States. Additionally, the new and enhanced procedures described above, and any other actions taken in respect of compliance with the Consent Order, could be costly. These extensive costs or any amounts in excess of our cost estimates could have a material adverse effect on our financial condition and results of operations. Our Members may also disagree with our decision to enter into the Consent Order, whether because they disagree with certain terms thereof, they believe it will negatively impact their personal business or they would not have settled the investigation on any terms. The Consent Order also provides that if the total eligible U.S. sales on which compensation may be paid falls below 80% of the Company’s total U.S. sales for a given year, compensation payable to distributors on eligible U.S. sales will be capped at 41.75% of the Net Rewardable Sales amount as defined in the Consent Order. While we believe we will achieve the required 80% threshold necessary to pay full distributor compensation, this result is subject to the review and audit of the FTC and ICA and they may not agree with our conclusions. Because our business is dependent on our Members, our business operations and net sales could be adversely affected if U.S. distributor compensation is restricted or if any meaningful number of Members are dissatisfied, choose to reduce activity levels or leave our business altogether. Member dissatisfaction may also negatively impact the willingness of new Members to join Herbalife as a distributor. Further, management and the board of directors may be required to focus a substantial amount of time on compliance activities, which could divert their attention from running and growing our business. We may also be required to suspend or defer many or all of our current or anticipated business development, capital deployment and other projects unrelated to compliance with the Consent Order to allow resources to be focused on our compliance efforts, which could cause us to fall short of our guidance or analyst or investor expectations. In addition, while we believe the Consent Order will set a new standard within the industry, our competitors are not required to comply with the Consent Order and may not be subject to similar actions, which could limit our ability to effectively compete for Members, customers and ultimately net sales.
The Consent Order also creates additional third-party risks. Although the Consent Order resolved the FTC’s multi-year investigation into the Company, it does not prevent other third-parties from bringing actions against us, whether in the form of other state, federal or foreign regulatory investigations or proceedings, or private litigation, any of which could lead to, among other things, monetary settlements, fines, penalties or injunctions. Although we neither admitted nor denied the allegations in the FTC’s complaint in agreeing to the terms of the Consent Order (except as to the Court having jurisdiction over the matter), third-parties may use specific statements or other matters addressed in the Consent Order as the basis for their action. The Consent Order or any subsequent legal or regulatory claim may also lead to negative publicity, whether because some view it as a condemnation of the Company or our direct selling business model or because other third parties use it as justification to make unfounded and baseless assertions against us, our business model or our Members. An increase in the number, severity or scope of third-party claims, actions or public assertions may result in substantial costs and harm to our reputation. The Consent Order may also impact third parties willingness to work with us as a company.
The impact of the Consent Order on our business, including the effectiveness of the controls, procedures and technology solutions implemented to comply therewith, and on our business and our member base, could be significant. If our business is adversely impacted, it is uncertain as to whether, or how quickly, we would be able to rebuild, irrespective of market conditions. Our financial condition and results of operations could be harmed if we are not able to comply with the Consent Order, if costs related to compliance exceed our estimates, if it has a negative impact on net sales, or if it leads to further legal, regulatory, or compliance claims, proceedings, or investigations or litigation.
A substantial portion of our business is conducted in foreign markets, exposing us to the risks of trade or foreign exchange restrictions, increased tariffs, foreign currency fluctuations, disruptions or conflicts with our third party importers and similar risks associated with foreign operations.
Approximately 80% of our net sales for the year ended December 31, 2016 were generated outside the United States, exposing our business to risks associated with foreign operations. For example, a foreign government may impose trade or foreign exchange restrictions or increased tariffs, or otherwise limit or restrict our ability to import products into a country, any of which could negatively impact our operations. We are also exposed to risks associated with foreign currency fluctuations. For instance, purchases from suppliers are generally made in U.S. dollars while sales to Members are generally made in local currencies. Accordingly, strengthening of the U.S. dollar versus a foreign currency could have a negative impact on us. Although we engage in transactions to protect against risks associated with foreign currency fluctuations, we cannot be certain any hedging activity will effectively reduce our exchange rate exposure. Additionally, we may be negatively impacted by conflicts with or disruptions caused or faced by our third party importers, as well as conflicts between such importers and local governments or regulating agencies. Our operations in some markets also may be adversely affected by political, economic and social instability in foreign countries. Our operations, both domestically and internationally, could also be affected by laws and regulations related to immigration. For example, current and future tightening of U.S. immigration controls may adversely affect the residence status of non-U.S. employees in our U.S. locations or our ability to hire new non-U.S. employees in such locations and may adversely affect the ability of non-U.S. Members from entering the U.S. As we continue to focus on expanding our existing international operations, these and other risks associated with international operations may increase, which could harm our financial condition and operating results.
Another risk associated with our international operations is the possibility that a foreign government may impose foreign currency remittance restrictions. Due to the possibility of government restrictions on transfers of cash out of the country and control of exchange rates, we may not be able to immediately repatriate cash at the official exchange rate. If this should occur, or if the official exchange rate devalues, it may have a material adverse effect on our business, assets, financial condition, liquidity, results of operations or cash flows. For example, currency restrictions enacted by the Venezuelan government continue to be restrictive and have impacted the ability of our subsidiary in Venezuela, or Herbalife Venezuela, to obtain U.S. dollars in exchange for Venezuelan Bolivars at the official foreign exchange rate. These currency restrictions and current pricing restrictions continue to limit Herbalife Venezuela’s ability to import U.S. dollar denominated raw materials and finished goods which in addition to the Venezuelan Bolivar devaluations has significantly negatively impacted our Venezuelan operations. If we are unsuccessful in implementing any financially and economically viable strategies, including local manufacturing, we may be required to fundamentally change our business model or suspend or cease operations in Venezuela. Also, if the foreign currency and pricing or other restrictions in Venezuela intensify or do not improve and, as a result, impact our ability to control our Venezuelan operations, we may be required to deconsolidate Herbalife Venezuela for U.S. GAAP purposes and would be subject to the risk of further impairments.
Our business in China is subject to general, as well as industry-specific, economic, political and legal developments and risks in China and requires that we utilize a modified version of the business model we use elsewhere in the world.
Our expansion of operations into China and the continued success of our business in China is subject to risks and uncertainties related to general economic, political and legal developments in China, among other things. The Chinese government exercises significant control over the Chinese economy, including but not limited to controlling capital investments, allocating resources, setting monetary policy, controlling foreign exchange and monitoring foreign exchange rates, implementing and overseeing tax regulations, providing preferential treatment to certain industry segments or companies and issuing necessary licenses to conduct business. In addition, we could face additional risks resulting from changes in China’s data privacy and cybersecurity requirements. Accordingly, any adverse change in the Chinese economy, the Chinese legal system or Chinese governmental, economic or other policies could have a material adverse effect on our business in China and our prospects generally.
China has published regulations governing direct selling and prohibiting pyramid promotional schemes, and a number of administrative methods and proclamations have been issued. These regulations require us to use a modified version of the business model we use in other markets. To allow us to operate under these regulations, we have created and introduced a model specifically for China based on our understanding as to how regulators are interpreting and enforcing these regulations, our interpretation of applicable regulations and our understanding of the practices of other international direct selling companies in China.
In China, we have sales representatives who are permitted by the terms of our direct selling licenses to sell away from fixed retail locations in the provinces of Jiangsu, Guangdong, Shandong, Zhejiang, Guizhou, Beijing, Fujian, Sichuan, Hubei, Shanxi, Shanghai, Jiangxi, Liaoning, Jilin, Henan, Chongqing, Hebei, Shaanxi, Tianjin, Heilongjiang, Hunan, Guangxi, Hainan, Anhui, Yunnan, Gansu, Ningxia, and Inner Mongolia. In Xinjiang province where the Company does not have a direct selling license, it has a Company-operated retail store that can directly serve customers and preferred customers. With online orderings throughout China, there has been a declining demand in Company-operated retail stores.
We also engage independent service providers who meet both the requirements to operate their own business under Chinese law as well as the conditions set forth by Herbalife to sell products and provide marketing, sales support and other services to Herbalife customers. In China, our independent service providers are compensated for marketing, sales support, and other services instead of the distributor allowances and royalty overrides utilized in our global marketing plan. The service hours and related fees eligible to be earned by and then paid to independent service providers are based on a number of factors including the sales generated by them and by others to whom they may provide marketing, sales support and other services, the quality of their service and other factors as well as any potential future sales generated from the recently announced and expanded online ordering platform. Total compensation available to our independent service providers in China can generally be comparable to the total compensation available to other sales leaders globally.
These business model features in China are not common to the business model we employ elsewhere in the world, and based on the direct selling licenses we have received and the terms of those which we hope to receive in the future to conduct a direct selling enterprise in China, our business model in China will continue to incorporate some or all of these features. The direct selling regulations require us to apply for various approvals to conduct a direct selling enterprise in China. The process for obtaining the necessary licenses to conduct a direct selling business is protracted and cumbersome and involves multiple layers of Chinese governmental authorities and numerous governmental employees at each layer. While direct selling licenses are centrally issued, such licenses are generally valid only in the jurisdictions within which related approvals have been obtained. Such approvals are generally awarded on local and provincial bases, and the approval process requires involvement with multiple ministries at each level. Our participation and conduct during the approval process is guided not only by distinct Chinese practices and customs, but is also subject to applicable laws of China and the other jurisdictions in which we operate our business, including the U.S., as well as our internal code of ethics. There is always a risk that in attempting to comply with local customs and practices in China during the application process or otherwise, we will fail to comply with requirements applicable to us in China itself or in other jurisdictions, and any such failure to comply with applicable requirements could prevent us from obtaining the direct selling licenses or related local or provincial approvals. Furthermore, we rely on certain key personnel in China to assist us during the approval process, and the loss of any such key personnel could delay or hinder our ability to obtain licenses or related approvals. For all of the above reasons, there can be no assurance that we will obtain additional direct selling licenses, or obtain related approvals to expand into any or all of the localities or provinces in China that are important to our business. Our inability to obtain, retain, or renew any or all of the licenses or related approvals that are required for us to operate in China could negatively impact our business.
Additionally, although certain regulations have been published with respect to obtaining and operating under such approvals and otherwise conducting business in China, other regulations are pending and there continues to be uncertainty regarding the interpretation and enforcement of Chinese regulations. The regulatory environment in China is evolving, and officials in the Chinese government, including at the local and central level, exercise broad discretion in deciding how to interpret, apply, and enforce regulations as they deem appropriate, including to promote social order. Regulators in China may change how they interpret and enforce the direct selling regulations, both current interpretations and enforcement thereof or future iterations. Regulators in China may also modify the regulations. We cannot be certain that our business model will continue to be deemed by national or local Chinese regulatory authorities to be compliant with any such regulations. The Chinese government rigorously monitors the direct selling market in China, and in the past has taken serious action against companies that the government believed were engaging in activities they regarded to be in violation of applicable law, including shutting down their businesses and imposing substantial fines. For example, in August 2017, China’s State Administration for Industry and Commerce, Ministry of Education, Ministry of Public Security and Ministry of Human Resources and Social Security published a notice announcing they are carrying out a three-month campaign ending on November 15, 2017 to investigate pyramid selling activities in order to eliminate activities prohibited under relevant regulations. The campaign seeks to eliminate organizations that use recruitment to lure and mislead people into participating in pyramid schemes. As a result, there can be no guarantee that the Chinese government’s current or future interpretation and application of the existing and new regulations will not negatively impact our business in China, result in regulatory investigations or lead to fines or penalties against us or our Chinese Members. If our business practices are deemed to be in violation of applicable regulations as they are or may be interpreted or enforced, or modified regulations, in particular with respect to the factors used in determining the services a service provider is eligible to perform and service fees they are eligible to earn and to receive, then we could be sanctioned and/or required to change our business model, either of which could have a significant adverse impact on our business in China.
Chinese regulations prevent persons who are not Chinese nationals from engaging in direct selling in China. We cannot guarantee that any of our Members living outside of China or any of our sales representatives or independent service providers in China have not engaged or will not engage in activities that violate our policies in this market, or that violate Chinese law or other applicable law, and therefore result in regulatory action and adverse publicity.
China has also enacted labor contract and social insurance legislation. We have reviewed our employment contracts and contractual relations with employees in China, which include certain of our employed sales personnel, and have transferred those employed sales personnel to independent service providers and have made such other changes as we believe to be necessary or appropriate to bring these contracts and contractual relations into compliance with these laws and their implementing regulations. In addition, we continue to monitor the situation to determine how these laws and regulations will be implemented in practice. There is no guarantee that these laws will not adversely impact us, cause us to change our operating plan for China or otherwise have an adverse impact on our business operations in China.
We may continue to experience growth in China, and there can be no assurances that we will be able to successfully manage expansion of manufacturing operations and a growing and dynamic sales force. If we are unable to effectively scale our supply chain and manufacturing infrastructure to support future growth in China, our operations in China may be adversely impacted.
If we fail to further penetrate existing markets, then the growth in sales of our products, along with our operating results, could be negatively impacted.
The success of our business is to a large extent contingent on our ability to further penetrate existing markets which is subject to numerous factors, many of which are out of our control. Government regulations in both our domestic and international markets can delay or prevent the introduction, or require the reformulation or withdrawal, of some of our products, which could negatively impact our business, financial condition and results of operations. Also, our ability to increase market penetration in certain countries may be limited by the finite number of persons in a given country inclined to pursue a direct selling business opportunity or consumers willing to purchase Herbalife products. Moreover, our growth will depend upon improved training and other activities that enhance Member retention in our markets. While we have recently experienced significant growth in certain of our markets, we cannot assure you that such growth levels will continue in the immediate or long term future. Furthermore, our efforts to support growth in such international markets could be hampered to the extent that our infrastructure in such markets is deficient when compared to our infrastructure in our more developed markets, such as the U.S. Therefore, we cannot assure you that our general efforts to increase our market penetration and Member retention in existing markets will be successful. If we are unable to further penetrate existing markets, our operating results could suffer.
Our business could be materially and adversely affected as a result of natural disasters, other catastrophic events, acts of war or terrorism, or cyber-security incidents and other acts by third parties.
We depend on the ability of our business to run smoothly, including the ability of Members to engage in their day-to-day selling and business building activities and the ability of our inventories and products to move reasonably unimpeded around the world. Any material disruption caused by natural disasters, including, but not limited to, fires, floods, hurricanes, volcanoes, and earthquakes; power loss or shortages; environmental disasters; telecommunications or business information systems failures; acts of war or terrorism and other similar disruptions, including those due to cyber-security incidents, ransomware, or other actions by third parties, could adversely affect our ability to conduct business. If such disruptions result in significant cancellations of Member orders, contribute to a general decrease in local, regional or global economic activity, directly impact our marketing, manufacturing, financial or logistics functions, or impair our ability to meet Member demands, our operating results and financial condition could be materially adversely affected. For example, our operations in Mexico were impacted by flooding in September 2017. The severe weather conditions directly affected inventory stored at that facility. Furthermore, our headquarters along with one of our distribution facilities is located in Southern California, an area susceptible to earthquakes. Although the Company believes the events in Mexico will not have a material negative impact to its Mexico operations, we cannot assure you that any future natural disasters, catastrophic events; acts of war or terrorism and other similar disruptions, including those due to cyber-security incidents, ransomware, or other actions by third parties, will not adversely affect our ability to operate our business and our financial condition and results of operations.
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Our contractual obligation to sell our products only through our Herbalife Member network and to refrain from changing certain aspects of our Marketing Plan may limit our growth.
We are a party to an agreement with our Members that provides assurances, to the extent legally permitted, we will not sell Herbalife products worldwide through any distribution channel other than our network of independent Herbalife Members. Thus, we are contractually prohibited from expanding our business by selling Herbalife products through other distribution channels that may be available to our competitors, such as over the Internet, through wholesale sales, by establishing retail stores or through mail order systems. To the extent legally permitted, an agreement we entered into with our Members provides assurances that we will not sell Herbalife products worldwide through any distribution channel other than our network of independent Herbalife Members. Since this is an open-ended commitment, there can be no assurance that we will be able to take advantage of innovative new distribution channels that are developed in the future.
In addition, this agreement with our Members provides that we will not make any material changes adverse to our Members to certain aspects of our Marketing Plan that may negatively impact our Members without thetheir approval as described in further detail below. For example, our agreement with our Members provides that we may increase, but not decrease, the discount percentages available to our Members for the purchase of products or the applicable royalty override percentages, and production and other bonus percentages available to our Members at various qualification levels within our Member hierarchy. We may not modify the eligibility or qualification criteria for these discounts, royalty overrides and production and other bonuses unless we do so in a manner to make eligibility and/or qualification easier than under the applicable criteria in effect as of the date of the agreement. Our agreement with our Members further provides that we may not vary the criteria for qualification for each Member tier within our Member hierarchy, unless we do so in such a way so as to make qualification easier.
Although we reserved the right to make these changes to our Marketing Plan without the consent of our Members in the event that changes are required by applicable law or are necessary in our reasonable business judgment to account for specific local market or currency conditions to achieve a reasonable profit on operations, we may initiate other changes that are adverse to our Members based on an assessment of what will be best for the Company and its Members. Under the agreement with our Members, these other adverse changes would then be submitted to our Member leadership for a vote. The vote would require the approval of at least 51% of our Members then at the level of President’s Team earning at the production bonus level of 6% who vote, provided that at least 50% of those Members entitled to vote do in fact vote. Therefore, whileWhile we believe that this agreement has strengthened our relationship with our existing Members, improved our ability to recruit new Members and generally increased the long-term stability of our business, there can be no assurance that our agreement with our Members will not restrict our ability to adapt our Marketing Plan to the evolving requirements of the markets in which we operate. As a result, our growth may be limited.
Our failure to appropriately respond to changing consumer trends, preferences, and demand for new products and product enhancements could materially harm our Member relationships and our Members’ customer relationships and product sales or otherwise materially harm our business, financial condition, and operating results.
Our business is subject to rapidly changing consumer trends and preferences and product introductions, especially with respect to our nutrition products. Our continued success depends in part on our ability to anticipate and respond to these changes and introductions, and we may not respond or develop new products or product enhancements in a cost-effective, timely, or commercially appropriate manner, or at all, particularly while the COVID-19 pandemic persists. The success of our new product offerings and enhancements depends on a number of factors, including our ability to:
Our failure to accurately predict changes in consumer demand and technological advancements could negatively impact consumer opinion of our products or our business, which in turn could harm our Member relationships and the Members’ relationships with their customers, and cause the loss of sales. In addition, if we do not introduce new products or make enhancements to meet the changing needs of our Members and their customers in a cost-effective, timely, and commercially appropriate manner, or if our competitors release new products or product enhancements before we do, some of our product offerings could be rendered obsolete, which could cause our market share to decline and negatively impact our business, financial condition, and operating results.
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If we fail to further penetrate existing markets, the growth in sales of our products, along with our operating results, could be negatively impacted.
The success of our business is to a large extent contingent on our ability to further penetrate existing markets, which is subject to numerous factors, many of which are out of our control. Our ability to increase market penetration may be limited by the finite number of persons in a given country inclined to pursue a direct-selling business opportunity or consumers aware of, or willing to purchase, Herbalife Nutrition products. Moreover, our growth in existing markets will depend upon increased brand awareness and improved training and other activities that enhance Member retention in our markets. While we have recently experienced significant growth in certain of our foreign markets, we cannot assure you that such growth levels will continue in the immediate or long-term future. Furthermore, our efforts to support growth in such foreign markets could be hampered to the extent that our infrastructure in such markets is deficient when compared to our infrastructure in our more developed markets, such as the United States. For example, there can be no assurances that we will be able to successfully manage expansion of manufacturing operations and a growing and dynamic sales force in China. If we are unable to effectively scale our supply chain and manufacturing infrastructure to support future growth in China or other foreign markets, our operations in such markets may be adversely impacted. Therefore, we cannot assure you that our general efforts to increase our market penetration and Member retention in existing markets will be successful. If we are unable to further penetrate existing markets, our business, financial condition, and operating results could materially suffer.
Since one of our products constitutes a significant portion of our net sales, significant decreases in consumer demand for this product or our failure to produce a suitable replacement could materially harm our business, financial condition, and operating results.
Our Formula 1 Healthy Meal, which is our best-selling product line, approximated 28% of our net sales for the year ended December 31, 2020. If consumer demand for this product decreases significantly or we cease offering this product without a suitable replacement, or if the replacement product fails to gain market acceptance, our business, financial condition, and operating results could be materially harmed.
Our business could be materially and adversely affected by natural disasters, other catastrophic events, acts of war or terrorism, cybersecurity incidents, pandemics, and/or other acts by third parties.
We depend on the ability of our business to run smoothly, including the ability of Members to engage in their day-to-day selling and business building activities and the ability of our inventories and products to move reasonably unimpeded around the world. Any material disruption caused by unforeseen or catastrophic events, such as (i) natural disasters or severe weather conditions, including fires, floods, hurricanes, volcanic eruptions, and earthquakes; (ii) power loss or shortages; (iii) telecommunications or information technology infrastructure failures; (iv) acts or threats of war, terrorism, or other armed hostilities; (v) outbreaks of contagious diseases, epidemics, and pandemics; (vi) cybersecurity incidents, including intentional or inadvertent exposure of content perceived to be sensitive data; (vii) employee misconduct or error; and/or (viii) other actions by third parties and other similar disruptions, could adversely affect our ability to conduct business and our Members’ selling activities. For example, our operations in Central America were impacted in November 2020 when Hurricanes Eta and Iota made landfall in the region. The storms created disruptions to our supply chain transportation network and our ability to import product. In addition, our distribution center in Honduras experienced flooding, which damaged or destroyed product. Furthermore, our headquarters and one of our distribution facilities and manufacturing facilities are located in Southern California, an area susceptible to fires and earthquakes. Although the events in Central America did not have a material negative impact on our operations, we cannot make assurances that any future catastrophic events will not adversely affect our ability to operate our business or our financial condition and operating results. In addition, catastrophic events may result in significant cancellations of Member orders; contribute to a general decrease in local, regional, or global economic activity; directly impact our marketing, manufacturing, financial, or logistics functions; impair our ability to meet Member demands; harm our reputation; and expose us to significant liability, losses, and legal proceedings, any of which could materially and adversely affect our business, financial condition, and operating results.
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In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. The COVID-19 pandemic has significantly impacted health and economic conditions globally, and has adversely affected the Company’s business and that of its Members in certain of the Company’s markets and may continue to so impact those markets or others in the future. Government, agency, and other regulatory recommendations, guidelines, mandates, and actions to address public health concerns, including restrictions on movement, public gatherings, and travel and restrictions on, or in certain cases outright prohibitions of, companies’ ability to conduct normal business operations, have and may continue to adversely affect our business. Although we have been classified as an essential business in most jurisdictions where we operate, there is no guarantee that this classification will not change. We may also be forced to or voluntarily elect to limit or cease operations in one or more markets for other reasons, such as the health and safety of our employees or because of disruptions in the operation of our supply chain and sources of supply. For example, it is possible that closures of our manufacturing facilities could impact our distribution centers and our ability to manufacture and deliver products to our Members. In general, our inventory of products continues to be adequate to meet demand, but we do expect our supply chain and our ability to source and/or manufacture products will be negatively impacted if the negative effects of the pandemic continue for a prolonged period of time or worsen. The pandemic has had an adverse impact on our distribution channels and Members’ product access in some markets, which may, and in some cases will, continue until conditions improve. Our Members’ businesses are also subject to many of the same risks and uncertainties related to the COVID-19 pandemic, as well as other pandemic-related risks and uncertainties that may not directly impact our operations, any of which could adversely affect demand for our products. For example, limitations on public gatherings has restricted our Members’ ability to hold meetings with their existing customers and to attract new customers. Significant limitations on cash transactions could also have an adverse effect on sales of products in certain markets.
The COVID-19 pandemic has also adversely affected the economies and financial markets of many countries, at times causing a significant deceleration of or interruption to economic activity. This slowdown has reduced production, decreased demand for a broad variety of goods and services, diminished trade levels and led to widespread corporate downsizing, causing a sharp increase in unemployment. We have also seen periods of significant disruption of and extreme volatility in the global capital markets, which could increase the cost of, or entirely restrict access to, capital. Further, while some countries have progressed in distributing COVID-19 vaccines to the general population, many countries have limited to no access to vaccines at this time. To the extent the global supply of vaccine remains limited or vaccination rates do not significantly increase, government restrictions in the countries with limited to no access or low vaccination rates may persist or increase and economic activity may remain at depressed levels in those countries or regions.
Despite the relaxation of pandemic-related constraints in certain markets, considerable uncertainty still surrounds the COVID-19 pandemic, its potential effects and the extent and effectiveness of government responses to the pandemic. If the pandemic is not contained, or if effective vaccines are not made available and utilized quickly enough, the adverse impacts of the COVID-19 pandemic could worsen, impacting all segments of the global economy, and result in a significant recession or worse. However, the unprecedented and sweeping nature of the COVID-19 pandemic makes it extremely difficult to predict how our business and operations will be affected in the long run. Accordingly, our ability to conduct our business in the manner previously done or planned for the future could be materially and adversely affected, and any of the foregoing risks, or other cascading effects of the COVID-19 pandemic that are not currently foreseeable, could materially and adversely affect our business, financial condition, and operating results. See the COVID-19 Pandemic and Sales by Geographic Region sections in Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this Quarterly Report on Form 10-Q for further discussion of the impacts of the COVID-19 pandemic on our business and operating results.
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We depend on the integrity and reliability of our information technology infrastructure, and any related interruptions or inadequacies may result in substantial interruptions tohave a material adverse effect on our business.business, financial condition, and operating results.
Our business, including our ability to provide products and services to and manage our Members, depends on the performance and availability of our information technology infrastructure, including our core transactional systems. We operateThe most important aspect of our global back office transactional systems on an Oracle Enterprise Suite whichinformation technology infrastructure is supported by a robust hardware and network infrastructure. The Oracle Enterprise Suite is a scalable and stable solution that provides a solid foundation uponthe system through which we are buildingrecord and track Member sales, Volume Points, royalty overrides, bonuses, and other incentives. The failure of our next generation Member facing Internet toolset.information systems to operate effectively, or a breach in security of these systems, could adversely impact the promptness and accuracy of our product distribution and transaction processing. While we continue to invest in our information technology infrastructure, there can be no assurance that there will not be any significant interruptions to such systems or that the systems will be adequate to meet all of our future business needs.
The most important aspect Our information technology infrastructure, as well as that of our Members and the other third parties with which we interact, may be damaged, disrupted, or breached or otherwise fail for a number of reasons, including power outages, computer and telecommunication failures, internal design, manual or usage errors, workplace violence or wrongdoing, or catastrophic events such as natural disasters, severe weather conditions, or acts of war or terrorism. In addition, numerous and evolving cybersecurity threats, including advanced and persistent cyberattacks, such as unauthorized attempts to access, disable, improperly modify, exfiltrate, or degrade our information technology infrastructure, or the introduction of computer viruses, malware, “phishing” emails, and other destructive software, and social engineering schemes, could compromise the confidentiality, availability, and integrity of our information technology infrastructure isas well as those of the system throughthird parties with which we record and track Member sales, Volume Points, royalty overrides, bonuses and other incentives.interact. These attacks may come from external sources, such as governments or hackers, or may originate internally from an employee or a third party with which we interact. We have encountered,been the target of, and may encounterbe the target of in the future, errors in our software or our enterprise network, or inadequacies in the software and services supplied by our vendors,malicious cyber-attacks, although to date none of these errors or inadequacies hasattacks have had a meaningful adverse impact on our business. business, financial condition, or operating results. Additionally, in response to the COVID-19 pandemic, many of our employees have been encouraged to work remotely, which may increase our exposure to significant systems interruptions, cybersecurity attacks, and otherwise compromise the integrity and reliability of our information technology infrastructure and our internal controls.
Any such errorsdisruptions to, or failures or inadequacies of, our information technology infrastructure that we may encounter in the future may result in substantial interruptions to our servicesoperations, expose us to significant liability, and may damage our reputation and our relationships with, or cause us to lose, our Members, especially if the errorsdisruptions, failures, or inadequacies impair our ability to track sales and pay royalty overrides, bonuses, and other incentives, any of which would harm our business, financial condition and operating results. Any such errorsdisruptions, failures, or inadequacies could also create compliance risks under the Consent Order and result in penalties, fines, or sanctions under any applicable laws or regulations. Such errorsFurthermore, it may be expensive or difficult to correct or replace any aspect of our information technology infrastructure in a timely manner, if at all, and we may have little or no control over whether any inadequacies in software ormalfunctioning information technology services supplied to us by third parties are appropriately corrected, if at all.
Our ability to effectively manage our network of Members, We have encountered, and to ship products, and track royalty and bonus payments on a timely basis, depends significantly on our information systems. The failure of our information systems to operate effectively, or a breachmay encounter in security of these systems, could adversely impact the promptness and accuracy of our product distribution and transaction processing. We could be required to make significant additional expenditures to remediate any such failure, problem or breach.
Anyone who is able to circumvent our security measures could misappropriate confidential or proprietary information, including that of third parties such as our Members, cause interruptionfuture, errors in our operations, damagesoftware and our computers or otherwise damage our reputationenterprise network, and business. We may need to expend significant resources to protect against security breaches or to address problems caused by such breaches. Any actual security breaches could damage our reputation and expose us to a risk of loss or litigation and possible liability under various laws and regulations. In addition, employee error or malfeasance or other errorsinadequacies in the storage, use or transmission of any such information could result in a disclosure to third parties. If this should occur we could incur significant expenses addressing such problems. Since we collectsoftware and store Member and vendor information, including credit card information, these risks are heightened.
In addition, the use and handling of this information is regulatedservices supplied by evolving and increasingly demanding laws and regulations. As such, we may be required to upgrade our current information technology infrastructure and systems and incur additional costs.
Since we rely on independent third parties for the manufacture and supply of certain of our products, ifvendors, although to date none of these third partieserrors or inadequacies have had a meaningful adverse impact on our business, financial condition or operating results.
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If any of our manufacturing facilities or third-party manufacturers fail to reliably supply products to us at required levels of quality and which are manufactured in complianceor fail to comply with applicable laws, including the dietary supplement and OTC drug cGMPs, then our financial condition and operating results wouldcould be harmed.materially and adversely impacted.
AAny significant portioninterruption of production at any of our products are manufactured at third party contract manufacturers. We cannot assure you that our outsidemanufacturing facilities or third-party contract manufacturers, will continue to reliably supply products to us at the levels of quality, or the quantities, we require, and in compliance with applicable laws, including under the FDA’s cGMP regulations. Additionally, while we are not presently aware of any current liquidity issues with our suppliers, we cannot assure you that they will not experience financial hardship.
For the portion of our product supply that is self-manufactured, we believe we have significantly lowered the product supply risk, as the risk factors of financial health, liquidity, capacity expansion, reliability and product quality are all within our control. However, increases to the volume of products that we self-manufactureother interruption in our Winston Salemsupply chain, may materially harm our business, financial condition, and Lake Forest facilities andoperating results. For example, natural disasters, including earthquakes, fires, hurricanes, or floods, technical issues, work stoppages, or other unforeseen or catastrophic events, that result in Nanjing and Suzhou for the support of China raise the concentration risk that a significant interruption of production at any of our facilities due to, for example, natural disasters including earthquakes, hurricanes and floods, technical issues or work stoppagesthird-party contract manufacturers could impede our ability to conduct business. While ourwe have business continuity programs for our manufacturing facilities which contemplate and plan for such events, if we were to experience such an event resulting in the temporary, partial, or complete shutdown of one of these manufacturing facilities, we could be required to transfer manufacturing to thea surviving facility and/or third-party contract manufacturers if permissible. When permissible, converting or transferring manufacturing to a third-party contract manufacturer could be expensive and time-consuming, result in delays in our production or shipping, reduce our net sales, damage our relationship with Members, and damage our reputation, in the marketplace, any of which could harm our business, resultsfinancial condition, and operating results. Additionally, we cannot assure you that our third-party contract manufacturers will continue to reliably supply products to us at the levels of operationsquality, or the quantities, we require, and financial condition.
in compliance with applicable laws, including the FDA’s CGMP regulations. Our product supply contracts generally have a three-year term.terms. Except for force majeure events, such as natural disasters and other acts of God, and non-performance by Herbalife Nutrition, our contract manufacturers generally cannot unilaterally terminate these contracts. These contracts can generally be extended by us at the end of the relevant time periodtime-period and we have exercised this right in the past. Globally, we have over 50 product suppliers,contract manufacturers, with Fine Foods (Italy) being a major supplier for meal replacements, protein powders and nutritional supplements. Additionally, we useOur contract manufacturers are also located in the United States, India, Brazil, South Korea, Japan, Taiwan, Germany, and the Netherlands to support our global business. In the eventNetherlands. If any of our contract manufacturers were to become unable or unwilling to continue to provide us with products in required volumes, and at suitable quality levels, or in a cost-effective manner, we would be required to identify and obtain acceptable replacement manufacturing sources. There is no assurance that we would be able to obtain acceptable alternative manufacturing sources on a cost-effective or timely basis.basis, or at all. An extended interruption in the supply of our products, including any interruptions that may arise as a result of the COVID-19 pandemic, would result in the loss of sales.sales, which could have a material adverse effect on our business, financial condition, or operating results. In addition, any actual or perceived degradation of product quality as a result of reliance on contract manufacturers may have an adverse effect on sales or result in increased product returns and buybacks.
As a result of the COVID-19 pandemic, we and our contract manufacturers have experienced some delays in receiving and delivering certain ingredients and packaging components. While these delays have not materially impacted our supply levels, there is no guarantee that there will be sufficient global supply for us or our contract manufacturers to manufacture our products at sufficient levels to meet demand or at the pre-pandemic levels. Given the uncertainties surrounding COVID-19, including the duration and extent of the pandemic, and actions taken or to be taken by governmental authorities and the resulting impacts from those responses to us and our third-party suppliers and contract manufacturers, we cannot guarantee that we will have a sufficient and reliable supply of ingredients and other raw materials from our third-party suppliers or products from our contract manufacturers. In addition, if price changes within our supply chain lead to unexpected or significant increases in the costs of any ingredients, raw materials, or other products we source, we may be unwilling or unable to increase our product prices or unable to effectively hedge against price increases or find alternative suppliers at lower cost. We are actively monitoring the pandemic and economic conditions and their potential impact on our supply chain and operations. Additionally, while we are not presently aware of any current liquidity issues with our suppliers or contract manufacturers, we cannot assure you that they will not experience financial hardship as a result of the COVID-19 pandemic, economic conditions, or otherwise, which could impact their ability to meet our needs.
If we lose the services of members of our senior management team, our business, financial condition, and operating results could be materially harmed.
We depend on the continued services of our senior management team as it works closely with the senior Member leadership to create an environment of inspiration, motivation, and entrepreneurial business success. Although we have entered into employment agreements with certain members of our senior management team, and do not believe that any of them are planning to leave or retire in the near term, we cannot assure you that all members of our senior management team will remain with us. The loss or departure of any member of our senior management team could adversely impact our Member relations and operating results. Also, the loss of key personnel, including our regional and country managers, could negatively impact our ability to implement our business strategy, and our continued success will also be dependent on our ability to retain existing, and attract additional, qualified personnel to meet our needs. Further, to the extent we are required to replace members of senior management or key personnel, any significant leadership change or transition involves inherent risk and any failure to ensure a smooth transition could hinder our strategic planning and execution, adversely impact our Member relations, or cause our business to suffer. While we strive to mitigate any negative impact associated with changes to our senior management team or key personnel, there may be uncertainty among investors, employees, Members, and others concerning our future direction and performance. Any disruption in our operations or uncertainty could have a material adverse effect on our business, financial condition, and operating results. We currently do not maintain “key person” life insurance with respect to our senior management team.
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Our share price may be adversely affected by third parties who raise allegations about our Company.
Short sellers and others who raise allegations regarding our business activities, some of whom are positioned to profit if our share price declines, can negatively affect our share price. For example, in late 2012, a hedge fund manager publicly raised allegations regarding the legality of our network marketing program, our product safety, our accounting practices, and other matters, and announced that his fund had taken a significant short position regarding our common shares, leading to intense public scrutiny and significant share price volatility. Following this public announcement, our share price dropped significantly. Additionally, from time to time we are subject to various legal proceedings, including governmental and regulatory inquiries and inquiries from legislators, that may adversely affect our share price. Significant volatility of our share price may cause the value of a shareholder’s investment to decline rapidly.
Risks Related to Regulatory and Legal Matters
Our products are affected by extensive regulations and our failure or our Members’ failure to comply with any regulations could lead to significant penalties or claims, which could materially harm our financial condition and operating results.
The majority of our products are classified as foods, dietary supplements, and cosmetics. In both domestic and foreign markets, the formulation, manufacturing, packaging, labeling, distribution, advertising, importation, exportation, licensing, sale, and storage of our products are subject to extensive government regulation. This regulation takes the form of laws, governmental regulations, administrative determinations, court decisions, and other similar constraints and exists at the federal, state, and local levels in the United States and at all levels of government in foreign jurisdictions. There can be no assurance that we or our Members are, or will remain, in compliance with all of these regulations. Our failure or our Members’ failure to comply with applicable regulations could disrupt the manufacturing of our products, our marketing activity, our Members’ sale of our products, or lead to increased costs, legal or regulatory proceedings, the imposition of significant penalties, or harm our reputation, any of which could adversely impact our business, financial condition, and operating results. In addition, regulatory authorities periodically review legislative and regulatory policies and initiatives, and may promulgate new or revised, or adopt changes in the interpretation and enforcement of existing, regulations at any time. The adoption of new regulations or changes in the interpretations of existing regulations, such as those relating to genetically modified foods, may result in significant compliance costs or discontinuation of impacted product sales and may negatively impact the marketing of our products or require us to change or cease aspects of our business, any of which could result in significant loss of sales and harm our business, financial condition, and operating results.
For example, we are subject to the rules of the FDA, including for CGMPs. Any failure by us or our contract manufacturers to comply with the CGMPs could negatively impact our reputation and ability to sell our products even after the situation has been rectified and, in the case of our contract manufacturers, even though we are not directly liable under the CGMPs for their compliance. In complying with the dietary supplement CGMPs, we have experienced increases in production costs due to increases in required testing of raw ingredients, work in process, and finished products. In addition, regulators and other governmental authorities limit the types of claims that we and our Members can make about our products, including nutrition content claims, health claims, and therapeutic claims and otherwise regulate the marketing of our products. For example, the FTC’s Guides explain how the FTC interprets prohibitions on unfair or deceptive acts or practices. Consequently, the FTC could bring an enforcement action based on practices that are inconsistent with the Guides. The Consent Order entered into with the FTC in 2016 also includes restrictions regarding the marketing of our products. It is possible that our use, and that of our Members, of marketing materials, including testimonials about our products, may be significantly impacted by laws, rules, and regulations governing the marketing of our products and therefore might negatively impact our sales.
From time to time, we receive inquiries from regulators and third parties requesting information concerning our products. We fully cooperate with these inquiries including, when requested, by the submission of detailed technical documents addressing product composition, manufacturing, process control, quality assurance, and contaminant testing. We are confident in the safety of our products when used as directed. However, there can be no assurance that regulators, including in countries where we plan to commence or expand operations, will not take actions that may adversely affect our business and our sales, including preventing or delaying entry into markets or the introduction of new products or requiring the reformulation or the temporary or permanent withdrawal of certain of our existing products from their markets. Any such regulatory action, regardless of whether it results in a final determination adverse to us, could create negative publicity, with detrimental effects on the motivation and recruitment of Members and, consequently, on sales. For example, the Chinese government carried out a 100-day review, or the Review, in 2019 to investigate the unlawful promotion and sales of health products, which resulted in negative media attention to the health products industry and materially and adversely impacted our business in China in 2019 as Members significantly reduced activities and sales meetings during and following the Review. Additionally, in response to the COVID-19 pandemic, the FTC has increased its scrutiny of claims being made by companies and issued hundreds of warning letters to, and initiated enforcement actions against, companies making health claims related to the ability of their products to treat, cure, or prevent COVID-19 or business opportunity claims related to COVID-19.
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Our network marketing program is subject to extensive regulation and scrutiny and any failure to comply, or alteration to our compensation practices in order to comply, with these regulations could materially harm our business, financial condition, and operating results.
Our network marketing program, like the compensation practices of other direct-selling organizations, is subject to a number of federal, state, and foreign regulations administered by the FTC and other federal, state, and foreign agencies. Regulations applicable to network marketing organizations generally are directed at preventing fraudulent or deceptive schemes, sometimes referred to as “pyramid” or “chain sales” schemes, by ensuring that product sales ultimately are made to consumers and that advancement within an organization is based on genuine demands and sales of the organization’s products rather than investments in the organization or other non-retail sales-related criteria. For example, in certain foreign countries, compensation to distributors in the direct-selling industry may be limited to a certain percentage of sales.
The regulatory requirements concerning network marketing programs do not include “bright line” rules and are inherently fact-based and, thus, we are subject to the risk that these regulations or the enforcement or interpretation of these regulations by regulators or courts can change. Regulatory authorities also periodically review legislative and regulatory policies and initiatives and may promulgate new or revised regulations. For example, in 2018, the FTC released its nonbinding Business Guidance Concerning Multi-Level Marketing. The adoption of new regulations, or changes in the interpretations or enforcement of existing regulations, may result in significant compliance costs or require us to change or cease aspects of our network marketing program. In addition, the ambiguity surrounding these regulations can also affect the public perception of the Company and our business model. For example, in the past, allegations regarding the legality of our network marketing program have been raised, which led to intense public scrutiny and significant share price volatility.
From time to time, we are a party to various regulatory proceedings related to compliance with regulations applicable to our network marketing program. We are also subject to the risk of private party challenges to the legality of our network marketing program, and similar programs of other companies have been successfully challenged in the past. Legal proceedings may cause us to incur significant expenses, including legal fees and costs for remediation efforts, and result in fines, penalties, sanctions, adverse judgments, or negative publicity, any of which could materially harm our business, financial condition, and operating results and impact our share price. For example, in one or more markets, our network marketing program could be found not to be in compliance, or a court could issue an adverse determination with respect to our network marketing program specifically or with respect to network marketing practices generally in proceedings not involving us, any of which may require us to alter our compensation practices under our network marketing program and adversely impact our ability to recruit and maintain Members or to obtain or maintain a license, permit, or similar certification. As previously disclosed, the Consent Order entered into with the FTC in 2016 and the 1986 permanent injunction entered in California required us to make changes to our network marketing program and our business operations. There can be no assurances that federal, state, or foreign regulators or courts will not require similar actions in the future. While we believe we are in compliance with regulations applicable to our network marketing program, including those enforced by the Consent Order and the permanent injunction in California, there is no assurance that any federal, state, or foreign courts or regulators or the independent compliance auditor under the Consent Order would agree. The failure of our network marketing program to comply with current or newly adopted laws, rules, and regulations, the Consent Order, or the California injunction, or any allegations or charges to that effect brought by federal, state, or foreign regulators, could have a material adverse impact our business in a particular market or in general and may adversely affect our share price.
We are subject to the Consent Order with the FTC, the effects of which, or any failure to comply therewith, could materially harm our business, financial condition, and operating results.
As previously disclosed, in July 2016, we entered into the Consent Order with the FTC. As part of the Consent Order, we agreed to make a payment of $200 million and to implement, and continue to enhance, certain procedures in the United States. We also agreed, among other things, to (i) be subject to certain audits by an independent compliance auditor, or the ICA, for a period of seven years; (ii) requirements regarding compliance certification and record creation and maintenance; (iii) a prohibition on misrepresentations and misleading claims made by us or our Members regarding the income potential of participants in our network marketing program and misleading depictions of lavish lifestyles; and (iv) restrictions on distributors’ ability to open Nutrition Clubs in the United States. The FTC and ICA have the right to inspect Company records and request additional compliance reports for purposes of conducting audits pursuant to the Consent Order. The terms of the Consent Order are described in greater detail in our Current Report on Form 8-K filed on July 15, 2016.
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The Consent Order, including our compliance therewith and the procedures implemented as a result thereof, has impacted, and may continue to impact, our business operations, including our net sales and profitability. For example, the Consent Order includes a number of restrictions and requirements, including regarding the verification and receipting of sales, and therefore creates compliance risks and costs. As a result, we have implemented a number of enhanced procedures regarding, among other things, tracking retail sales and internal consumption by distributors. We have also instituted controls and procedures and developed technology solutions that we believe address our Consent Order requirements, including tools and software used by distributors to document their sales and more efficiently track and manage their customer base. However, there can be no assurances that some or all of these controls and procedures and technology solutions will continue to operate as expected. These controls and procedures and technology solutions have been, and may continue to be, costly. These extensive costs or any amounts in excess of our cost estimates could have a material adverse effect on our financial condition and operating results. In addition, any failure of these systems to operate as designed could cause us to fail to maintain the records required under, or otherwise violate terms of, the Consent Order.
Further, management and our board of directors have been, and may continue to be, required to focus a substantial amount of time on Consent Order compliance activities, which could divert their attention from running and growing our business. At any time, we may also be required to suspend or defer many or all of our current or anticipated business development, capital deployment and other projects unrelated to compliance with the Consent Order to allow resources to be focused on our compliance efforts, which could cause us to fall short of any guidance or analyst or investor expectations. In addition, while we believe the Consent Order has set new standards within the direct-selling industry, our competitors are not required to comply with the Consent Order and may not be subject to similar actions, which could limit our ability to effectively compete for Members, customers, and ultimately sales.
A number of our Members disagreed with our decision to enter into the Consent Order, whether because they disagreed with certain terms thereof, they believed it would negatively impact their personal business, or they would not have settled the investigation on any terms. Compliance with the Consent Order, however, requires the cooperation of our Members and, while we have updated our training programs and policies to address the Consent Order and expect our Members to cooperate, we do not have the same level of influence or control over our Members as we would if they were our employees. Failure by our Members to comply with the relevant aspects of the Consent Order could be a violation of the Consent Order and impact our ability to comply. In addition, the Consent Order provides that if the total eligible U.S. sales on which compensation may be paid falls below 80% of the Company’s total U.S. sales for a given year, compensation payable to distributors on eligible U.S. sales will be capped at 41.75% of the Net Rewardable Sales amount as defined in the Consent Order. Because our business is dependent on our Members, our business operations and net sales could be adversely affected if U.S. distributor compensation is restricted or if any meaningful number of Members are dissatisfied, choose to reduce activity levels, or leave our business altogether. Member dissatisfaction may also negatively impact the willingness of new Members to join Herbalife Nutrition as a distributor.
The Consent Order also creates additional third-party risks. The Consent Order does not prevent other third parties from bringing actions against us, whether in the form of other federal, state, or foreign regulatory proceedings or private litigation, any of which could lead to monetary settlements, fines, penalties, or injunctions. Although we neither admitted nor denied the allegations in the FTC’s complaint (except as to the Court having jurisdiction over the matter), third parties may use specific statements or other matters addressed in the Consent Order as the basis for their action. The Consent Order has caused, and any subsequent legal or regulatory claim may also lead to, negative publicity, whether because some view it as a condemnation of the Company or our direct-selling business model or because other third parties use it as justification to make unfounded and baseless assertions against us, our business model, or our Members. An increase in the number, severity or scope of third-party claims, actions or public assertions may result in substantial costs and harm to our reputation. The Consent Order may also impact third parties’ willingness to work with us as a company.
We believe we have complied with the Consent Order and we will continue to do so. However, the FTC or ICA may not agree now or in the future. In the event we are found to be in violation of the Consent Order, the FTC could take corrective actions such as initiating enforcement actions, seeking an injunction or other restrictive orders and imposing civil monetary penalties against us and our officers and directors. Further, the impact of the Consent Order on our business, including the effectiveness of the controls, procedures, and technology solutions implemented to comply therewith, and on our Member base could be significant. If our business or Member base is adversely impacted, it is uncertain as to whether, or how quickly, we would be able to restructure or rebuild, irrespective of market conditions. Our financial condition and operating results could be materially harmed if we fail to comply with the Consent Order, if costs related to compliance exceed our estimates, if it has a negative impact on net sales, or if it leads to further legal, regulatory, or compliance claims, proceedings, or investigations or litigation.
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Our actual or perceived failure to comply with privacy and data protection laws, rules, and regulations could materially harm our business, financial condition, and operating results.
Our business requires the collection, transmission, and retention of large volumes of confidential and proprietary information, including personally identifiable information of our Members, customers, leads, vendors, and employees in various information technology systems that we maintain and in those maintained by third parties with which we interact. Anyone who is able to circumvent our security measures or those of our third-party service providers could misappropriate such confidential or proprietary information, including that of third parties such as our Members, cause interruption in our operations, damage our information technology infrastructure or otherwise damage our business. We may need to expend significant resources to protect against security breaches or to address problems caused by such breaches. Any actual security breaches could result in legal and financial exposure, including litigation and other potential liability, and a loss of confidence in our security measures, which could have a material adverse effect on our business, financial condition, and operating results and our reputation as a brand, business partner, and employer. In addition, employee error or malfeasance or other errors in the storage, use, or transmission of any such information could result in disclosure to third parties. If this should occur, we could incur significant expenses addressing such problems. Since we collect and store Member, customer, and vendor information, including credit card banking information, these risks are heightened. In addition, our role as a credit card merchant may also put us at a greater risk of being targeted by hackers and requires us to comply with certain regulatory requirements. See also the risk factor titled “We depend on the integrity and reliability of our information technology infrastructure, and any related interruptions or inadequacies may have a material adverse effect on our business, financial condition, and operating results.”
In addition, the use and handling of certain types of information, including personally identifiable and financial information, is regulated by evolving and increasingly demanding laws, rules, and regulations, such as the European Union General Data Protection Regulation, which became effective in May 2018, the Brazil Law on General Data Protection, which became effective in September 2020, the California Consumer Privacy Act, or the CCPA, which became effective in January 2020, and the European Union Payment Services Directive 2, which became effective in January 2021 and requires stronger customer authentication for online transactions in that region. These laws impose continuing, and at times new, responsibilities on our operations, including, among other things, the collection, deletion, disclosure, and maintenance of personally identifiable and financial information of our customers and Members and could present technological challenges and negatively impact our sales. These privacy and data security laws, rules, and regulations are increasing in their complexity, enactment, and amendments. As such, compliance with these laws, rules, and regulations and potential and actual conflicts amongst them in the various jurisdictions in which we operate have resulted in greater compliance burden and risk and increased costs for us. If we fail to comply with these privacy and data security laws, rules, and regulations, we could be subject to significant litigation, monetary damages, and regulatory enforcement actions or fines in one or more jurisdictions, which could have a material adverse effect on our operating results.
We are subject to material product liability risks, which could increase our costs and materially harm our business, financial condition, and operating results.
Our ingestible products include vitamins, minerals, botanicals, and other ingredients and are classified as foods or dietary supplements and are not subject to pre-market regulatory approval in the United States. Our products could contain contaminated substances, and some of our products contain ingredients that do not have long histories of human consumption or use. Although we rely upon published and unpublished safety information, including clinical studies on ingredients used in our products, and conduct limited clinical studies on some key products, unknown adverse reactions resulting from human consumption or use of these ingredients could occur. We have been, and may again be, subjected to various product liability claims, including claims that the products contain contaminants, include inadequate instructions as to their uses, and include inadequate warnings concerning side effects and interactions with other substances. It is possible that widespread product liability claims could increase our costs and materially adversely affect our business, financial condition, and operating results. Even claims without merit could subject us to adverse publicity and require us to incur significant legal fees. Moreover, product liability claims may increase our costs through higher insurance premiums and deductibles, and may make it more difficult to secure adequate insurance coverage in the future. In addition, our product liability insurance may not cover all product liability claims, which may require us to pay substantial monetary damages. Finally, even if our insurance covers a claim, given the level of self-insured retentions that we have accepted under our current product liability insurance policies, which is $12.5 million, in certain cases we may be subject to the full amount of liability associated with any claims, which could be substantial.
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If we fail to protect our trademarks and tradenames, thenintellectual property, our ability to compete could be negatively affected, which wouldcould materially harm our financial condition and operating results.
TheOur success and the market for our products dependsdepend to a significant extent upon the goodwill associated with our trademark and tradenames.tradenames and our ability to protect our proprietary rights in our innovative products and product enhancements. We own, or have licenses to use, the material trademark and trade name rights used in connection with the packaging, marketing, and distribution of our products in the markets where those products are sold. Therefore, trademark and trade name protection is important to our business. Although most of our trademarks are registered in the United States and in certain foreign countries in which we operate, we may not be successful in asserting trademark or trade name protection or obtaining new trademark registrations. We permit the limited use of our trademarks by our Members to assist them in marketing our products. It is possible that doing so may increase the risk of unauthorized use or misuse of our trademarks in markets where their registration status differs from that asserted by our Members, or they may be used in association with claims or products in a manner not permitted under applicable laws, rules, and regulations. Were these to occur, it is possible that this could diminish the value of these marks or otherwise impair our further use of these marks.
We attempt to protect our innovative products and product enhancements under a combination of copyright, trademark, and trade secret laws, confidentiality procedures, and contractual provisions. However, our products are generally not patented domestically or abroad, and the legal protections afforded by common law and contractual proprietary rights in our products provide only limited protection. In addition,
Monitoring infringement or misappropriation of intellectual property can be difficult and expensive, and we may not be able to detect every infringement or misappropriation of our proprietary rights or to prevent third parties from infringing upon or misappropriating our proprietary rights or from independently developing non-infringing products that are competitive with, equivalent to, or superior to our products. Even if we do detect infringement or misappropriation of our proprietary rights, litigation to enforce these rights could cause us to divert financial and other resources away from our business operations and may result in the impairment or loss of all or portions of our proprietary rights. Further, the laws of certainsome foreign countries maydo not protect our intellectual property rights to the same extent as do the laws of the United States. The loss or infringement of our trademarks or tradenames could impair the goodwill associated with our brands and harm our reputation, which would harm our financial condition and operating results.
Unlike in most of the other markets in which we operate,For example, there is limited protection of intellectual property is available under Chinese law. Accordingly, we face an increased risk in China that unauthorized parties may attempt to copy or otherwise obtain or use our trademarks, copyrights, product formulations or other intellectual property. Further, because Chinese commercial law is relatively undeveloped, we may have limited legal recourse in the event we encounter significant difficulties with intellectual property theft or infringement. As a result, we cannot assure you that we will be able to adequately protect our product formulationsintellectual property in any jurisdictions. The loss or other intellectual property.
We permit the limited useinfringement of our trademarks byor tradenames or other proprietary rights could impair the goodwill associated with our Members to assist them in marketingbrands and harm our products. It is possible that doing so may increase the risk of unauthorized use or misuse ofreputation, which could materially harm our trademarks in markets where their registration status differs from that asserted by our Members, or they may be used in association with claims or products in a manner not permitted under applicable laws and regulations. Were these to occur it is possible that this could diminish the value of these marks or otherwise impair our further use of these marks.
If our Members fail to comply with labeling laws, then ourbusiness, financial condition, and operating results would be harmed.results.
Although the physical labeling of our products is not within the control of our Members, our Members must nevertheless advertise our products in compliance with the extensive regulations that exist in certain jurisdictions, such as the United States, which considers product advertising to be labeling for regulatory purposes.
Our products are sold principally as foods, dietary supplements and cosmetics and are subject to rigorous FDA and related legal regimens limiting the types of therapeutic claims that can be made for our products. The treatment or cure of disease, for example, is not a permitted claim for these products. While we train our Members and attempt to monitor our Members’ marketing materials, we cannot ensure that all such materials comply with applicable regulations, including bans on therapeutic claims. If our Members fail to comply with these restrictions, then we and our Members could be subjected to claims, financial penalties, mandatory product recalls or relabeling requirements, which could harm our financial condition and operating results. Although we expect that our responsibility for the actions of our Members in such an instance would be dependent on a determination that we either controlled or condoned a noncompliant advertising practice, there can be no assurance that we could not be held vicariously liable for the actions of our Members.
If our intellectual property is not adequate to provide us with a competitive advantage or to prevent competitors from replicating our products, or if we infringe the intellectual property rights of others, then our business, financial condition, and operating results wouldcould be materially harmed.
Our future success and ability to compete depend upon our ability to timely produce innovative products and product enhancements that motivate our Members and customers, which we attempt to protect under a combination of copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions. However, our products are generally not patented domestically or abroad, and the legal protections afforded by common law and contractual proprietary rights in our products provide only limited protection and may be time-consuming and expensive to enforce and/or maintain. Further, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our proprietary rights or from independently developing non-infringing products that are competitive with, equivalent to and/or superior to our products.
Monitoring infringement and/or misappropriation of intellectual property can be difficult and expensive, and we may not be able to detect every infringement or misappropriation of our proprietary rights. Even if we do detect infringement or misappropriation of our proprietary rights, litigation to enforce these rights could cause us to divert financial and other resources away from our business operations. Further, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States.
Additionally, thirdThird parties may claim that products or marks that we have independently developed or licensed, or which bear certain of our trademarks, infringe upon their intellectual property rights and there can be no assurance that one or more of our products or marks will not be found to infringe upon third partythird-party intellectual property rights in the future.
Since one of our products constitutes a significant portion of our net sales, significant decreases in consumer demand for this product or our failurefuture and we may need to produce a suitable replacement should we cease offering it would harm our financial condition and operating results.
For 2016, 2015 and 2014, our Formula 1 Healthy Meal, our best-selling product line, approximated 30% of our net sales. If consumer demand for this product decreases significantlysettle disputes on terms that are unfavorable to us, or we may be subject to an unfavorable judgment. Defending these and other intellectual property infringement claims can be time-consuming and costly and require the attention of management. The terms of any settlement or judgment may require us to pay substantial amounts to the other party or cease, offering this product withoutor seek a suitable replacement, then our financial conditionlicense to continue, using products or marks found to be in violation of third-party intellectual property rights. A license may not be available on reasonable terms, or at all, and operating results wouldwe may be harmed.
If we lose the servicesrequired to develop alternative non-infringing products or marks or discontinue use of members of our senior management team, then our financial conditionsuch products or marks. Any development efforts could require significant effort and operating results could be harmed.
We have depended, and will continue to depend, on the continued services of our senior management team as it works closely with the senior Member leadership to create an environment of inspiration, motivation and entrepreneurial business success. Effective June 1, 2017, Richard P. Goudis, our previous Chief Operating Officer, became the Chief Executive Officerexpense. Any of the Company and Michael O. Johnson, our previous Chairman and Chief Executive Officer, became Executive Chairman of the Company, consistent with a succession strategy plan previously approved by our board of directors. Any significant leadership change or senior management transition involves inherent risk and any failure to ensure a smooth transition could hinder our strategic planning, execution and future performance. While we strive to mitigate the negative impact associated with changes to our senior management team, there may be uncertainty among investors, employees, Members and others concerning our future direction and performance. Any disruption in our operations or uncertaintyforegoing could have a material adverse effect on our business, financial condition, and operating results.
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We may be held responsible for additional compensation, certain taxes, or results of operations.
Additionally, although we have entered into employment agreements with certain membersassessments relating to the activities of our senior management team,Members, which could materially harm our financial condition and do not believe thatoperating results.
Our Members are subject to certain taxation, and in some instances, we are required to collect taxes from our Members, such as value-added tax, or VAT, and social contributions, and to maintain appropriate records. In addition, if local laws, rules, and regulations or their interpretation change to require us to treat our Members as employees, or if our Members are deemed by regulatory authorities to be our employees rather than independent contractors, in any of them are planning to leavesuch jurisdictions we may be held responsible for additional compensation, social security or retire in the near term, we cannot assure you thatsimilar contributions, withholding, and related taxes, and workers’ compensation insurance, plus any related assessments and penalties, which could materially harm our senior managers will remain with us. The loss or departure of any member of our senior management team could adversely impact our Member relationsfinancial condition and operating results. IfOur Members could face similar risks with respect to other Members in their sales organizations who may claim they are employees of that Member rather than independent contractors or independent business owners, which could impact their sales operations or lead them to cease their participation in our network marketing program. For example, California passed legislation, taking effect January 1, 2020, which seeks to expand the classification of employees. Other states may propose similar legislation or interpret existing laws, rules, and regulations to expand the classification of employees. Although the California legislation provides an exemption for direct sellers, there can be no assurance that other jurisdictions will provide such an exemption or that judicial or regulatory authorities will not assert interpretations that would mandate that we change our classification. See Note 5, Contingencies, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for a more specific discussion of contingencies related to the activities of our Members.
Risks Related to Our International Operations
A substantial portion of our business is conducted in foreign jurisdictions, exposing us to the risks associated with international operations.
Approximately 76% of our net sales for the year ended December 31, 2020 were generated outside the United States, exposing our business to risks associated with international operations. We have invested significant resources in our international operations and expect to continue to do so in the future. However, there are certain risks inherent in doing business in international markets, particularly in the direct-selling industry, which is regulated in many jurisdictions.
For example, a foreign government may impose trade restrictions or increased tariffs, require compliance with trade and economic sanctions laws, rules, or regulations, such as those administered by U.S. Customs and Border Protection and the U.S. Treasury Department’s Office of Foreign Assets Control, implement new or change existing trade policies, or otherwise limit or restrict our ability to import products in a cost-effective manner, or at all, any of these executives do not remain with us, our business could suffer. Also, the loss of key personnel, including our regional and country managers,which could negatively impact our ability to implementoperations. Additionally, we may be negatively impacted by conflicts with or disruptions caused or faced by our business strategy,third-party importers, as well as conflicts between such importers and our continued success willlocal governments or regulators.
Our operations in some jurisdictions also may be dependent on our ability to retain existing,adversely affected by political, economic, legal, regulatory, and attract additional, qualified personnel to meet our needs. We currently do not maintain “key person” life insurance with respectsocial conditions, or instability, as well as by economic and political tensions between governments. For example, tariffs enacted by the United States and other foreign governments, such as China or Mexico, that apply to our senior management team.
Our international operationsproducts or our ingredients may have an adverse impact on the costs and future sales of our products, particularly if we deem it necessary to increase product prices. In addition, our compliance with anti-bribery laws, rules, and regulations may conflict with local customs and practices in certain of the jurisdictions in which we operate. See the risk factor titled “We are subject to the anti-bribery, laws, rules, and regulations of the United States and manythe other foreign countries, includingjurisdictions in which we operate.”
Our ability to staff and manage our international operations could also be affected by laws and regulations related to immigration. For example, current and future tightening of U.S. immigration controls may adversely affect the residence status of non-U.S. employees in our U.S. locations or our ability to hire new non-U.S. employees in such locations and may adversely affect the ability of non-U.S. Members from entering the United States.
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We are also exposed to risks associated with foreign currency fluctuations, foreign exchange controls, limitations on the repatriation of funds, and changes in currency policies or practices. For instance, purchases from suppliers are generally made in U.S. dollars while sales to Members are generally made in local currencies. Accordingly, any strengthening of the U.S. Foreign Corrupt Practices Act,dollar versus a foreign currency could have a negative impact on us. Although we engage in transactions to protect against risks associated with foreign currency fluctuations, we cannot be certain any hedging activity will effectively reduce our exchange rate exposure. In addition, due to the U.K. Bribery Act,possibility of government restrictions on transfers of cash out of a country and control of exchange rates, we may not be able to immediately repatriate cash at the official exchange rate. If this should occur, or if the official exchange rate devalues, it may have a material adverse effect on our business, assets, financial condition, liquidity, operating results, or cash flows. For example, currency restrictions enacted by the Venezuelan government continue to impact the ability of our subsidiary in Venezuela, or Herbalife Venezuela, to obtain U.S. dollars in exchange for Venezuelan Bolivars at the official foreign exchange rate and limit Herbalife Venezuela’s ability to import U.S. dollar denominated raw materials and finished goods, both of which have significantly negatively impacted our Venezuelan operations. We may be required to fundamentally change or cease operations in Venezuela or any other jurisdiction that may be similarly affected in the future. If these restrictions intensify or do not improve and impact our ability to control our Venezuelan operations, we may be required to deconsolidate Herbalife Venezuela for U.S. GAAP purposes and would be subject to the risk of further impairments.
Our overall success depends, in part, on our ability to anticipate and effectively manage these risks, and to coordinate the various legal and regulatory requirements of multiple jurisdictions that are constantly evolving and subject to change, and there can be no assurance that we will be able to do so without incurring unexpected or increased costs or at all. In certain regions, the degree of these risks may be higher due to more volatile economic, political, or social conditions; less developed and predictable legal and regulatory regimes; and increased potential for various types of adverse governmental action. As we continue to focus on expanding our existing international operations, these and other similarrisks associated with international operations will likely increase, which could materially harm our business, financial condition, and operating results.
We are subject to the anti-bribery laws, rules, and regulations of the United States and the other foreign jurisdictions in a number of countries.which we operate.
We are subject to a variety of anti-bribery laws, regarding our international operations,rules, and regulations, including the U.S. Foreign Corrupt Practices Act, or the FCPA, the U.K. Bribery Act of 2010 or the UK Bribery Act,and similar anti-bribery laws, rules, and regulations issued by U.S. Customs and Border Protection, U.S. Treasury Department’s Office of Foreign Assets Control, or OFAC, and variousin the other foreign governmental agencies. The FCPA, the UK Bribery Act and similar anti-bribery lawsjurisdictions in other jurisdictionswhich we operate. These regimes generally prohibit companies and their intermediaries from making improper payments for the purpose of obtaining or retaining business as well as requiringrequire companies to maintain accurate books and records. In recent years thereThere has been a substantial increase in anti-bribery law enforcement activity with more frequent and aggressive investigations and enforcement proceedings by both the Department of Justice and the SEC, increased enforcement activity by non-U.S. regulators and increases in criminal and civil enforcement proceedings brought against companies and individuals.individuals by regulators, including the Department of Justice, or DOJ, and the SEC. Our policies mandate compliance with these anti-bribery laws, rules, and regulations, including the requirements to maintain accurate information and internal controls. We operate in many parts of the world that have experienced governmental corruption to some degree and in certain circumstances, strict compliance with anti-bribery laws, rules, and regulations may conflict with local customs and practices. Notwithstanding our compliance programs, which include annual training and certification requirements, there is no assurance that our internal control policies and procedures will protect us from acts committed by our employees or agents. Additionally, we cannot predict the nature, scope, or effect of future regulatoryanti-bribery requirements to which our international operations might be subject or the manner in which existing or new lawsrequirements might be administered or interpreted. Alleged or actual violations of any such existing or future laws, (eitherrules, or regulations, whether due to our own acts or ourinadvertence or due to the acts or inadvertence of others)others, may result in criminal or civil sanctions, including fines, penalties, contract cancellations, or debarment, increased compliance costs, changes to our activities, and loss of reputation, any of which could have a material adverse effect on our business, financial condition, and operating results.
As previously disclosed, the SEC and the DOJ conducted investigations into our compliance with the FCPA in China. Also, as previously disclosed, we conducted our own review and implemented remedial and improvement measures based upon this review, including replacement of certain employees and enhancements of our policies and procedures in China. We cooperated with the SEC and the DOJ and have now reached separate resolutions with each of them. On August 28, 2020, the SEC accepted the Offer of Settlement and issued an administrative order finding that we violated the books and records and internal controls provisions of the FCPA. In addition, on August 28, 2020, we and the DOJ separately entered into a court-approved deferred prosecution agreement, or DPA, under which the DOJ deferred criminal prosecution of the Company for a period of three years related to a conspiracy to violate the books and records provisions of the FCPA. Among other things, we are required to undertake compliance self-reporting obligations for the three-year terms of the agreements with the SEC and the DOJ. If we remain in compliance with the DPA during its three-year term, the deferred charge against us will be dismissed with prejudice. In addition, we paid the SEC and the DOJ aggregate penalties, disgorgement, and prejudgment interest of approximately $123 million in September 2020. Any failure to comply with these agreements, or any resulting further government action, could result in a material and adverse impact to our business, financial condition, and operating results.
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If we do not comply with transfer pricing, customs duties, VAT, and similar regulations, we may be subject to additional taxes, customs duties, interest, and penalties in material amounts, which could materially harm our financial condition and operating results.
As a multinational corporation operating in many countries, we are subject to transfer pricing and other tax regulations designed to ensure that our intercompany transactions are consummated at prices that have not been manipulated to produce a desired tax result, that appropriate levels of income are reported as earned by our United States and local entities, and that we are taxed appropriately on such transactions. In addition, our operations are subject to regulations designed to ensure that appropriate levels of customs duties are assessed on the importation of our products.
If the United States Internal Revenue Service, or the IRS, or the taxing authorities of any other jurisdiction were to successfully challenge our transfer pricing practices or our positions regarding the payment of income taxes, customs duties, value added taxes, withholding taxes, and sales and use and other taxes, we could become subject to higher taxes and may increase product prices in certain jurisdictions accordingly. The imposition of new taxes, even pass-through taxes such as VAT could result in increased product prices in certain jurisdictions. Any increases in prices could adversely affect product demand and therefore could have a negative impact on our business, financial condition, and operating results. From time to time, we are a party to various regulatory proceedings related to compliance with applicable tax regulations, including audits, examinations, and investigations. We are currently subject to ongoing audits that are at various levels of review, assessment, or appeal in a number of jurisdictions involving issues of transfer pricing, income taxes, customs duties, value added taxes, withholding taxes, and sales and use and other taxes. In some circumstances, additional taxes, interest, and penalties have been assessed. We have reserved in our consolidated financial statements an amount that we believe represents the most likely outcome of the resolution of these audits, but if we are incorrect in our assessment we may have to pay additional amounts, which could potentially be material. Ultimate resolution of these ongoing audits may take several years, and the outcome is uncertain. See Note 5, Contingencies, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for further information on contingencies relating to tax matters.
In addition, any change in applicable tax laws, rules, treaties, or regulations, or their interpretation, could result in a higher effective tax rate on our worldwide earnings. For example, the Organisation for Economic Co-operation and Development, or OECD, has released guidance covering various international tax standards as part of its “base erosion and profit shifting,” or BEPS, initiative. The anticipated implementation of BEPS by non-U.S. jurisdictions in which we operate could result in changes to tax laws, rules, and regulations, including with respect to transfer pricing, that could materially increase our effective tax rate. For example, on October 8, 2021, the OECD issued a statement announcing that 136 of its 140 members had agreed upon two groups of proposals for global tax reform, labeled “Pillar One” and “Pillar Two.” Pillar One is focused on providing a mechanism for taxing rights more closely aligned with market engagement (generally where people or consumers are located). Pillar Two is focused on establishing a global minimum tax rate and would apply when a country’s income tax rate is below a minimum tax rate of at least 15%. The framework’s implementation plan targets 2023 for full implementation of Pillar One and the end of 2022 for full implementation of Pillar Two, though details regarding the exact steps (and timing) of the framework’s implementation are unclear. This framework is wide ranging and could affect all multinational enterprises across all industries, including ours, by increasing our effective tax rate on earnings. No assurances can be given that future legislative, regulatory, or judicial developments will not result in an increase in the amount of taxes payable by us. If any such developments occur, our business, financial condition, and operating results could be materially and adversely affected.
Our business in China is subject to general, as well as industry-specific, economic, political, and legal developments and risks and requires that we utilize a modified version of operations.the business model we use elsewhere in the world.
Our business and operations in China, which generated approximately 15% of our net sales for the year ended December 31, 2020, are subject to unique risks and uncertainties related to general economic, political and legal developments. The Chinese government exercises significant control over the Chinese economy, including by controlling capital investments, allocating resources, setting monetary policy, controlling and monitoring foreign exchange rates, implementing and overseeing tax regulations, providing preferential treatment to certain industry segments or companies and issuing necessary licenses to conduct business. Accordingly, any adverse change in the Chinese economy, the Chinese legal system or Chinese governmental, economic or other policies could have a material adverse effect on our business and operations in China and our prospects generally.
China has published regulations governing direct selling, prohibiting pyramid promotional schemes, regulating e-commerce, and a number of related administrative methods and proclamations have been issued. To operate under these regulations, we created and introduced a modified business model specific to China based on our understanding of how Chinese regulators interpret and enforce these regulations, our own interpretation of applicable regulations and the enforcement thereof, and our understanding of the practices of other licensed direct-selling organizations in China.
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In China, we sell our products to and through independent service providers and sales representatives, to preferred customers and other customers, as well as through Company-operated retail platforms when necessary. We also have a social e-commerce business in China, which enables our sales representatives who are also individual e-commerce promoters and independent service providers to promote our products and provide services to our customers in China through virtual online stores. Our independent service providers must meet requirements to operate their own business under Chinese law, which prohibits fraudulent or misleading claims and engaging in any pyramid sales schemes, as well as our policies. In China, our independent service providers receive compensation for marketing, sales support, and other services instead of the Member allowances and royalty overrides utilized in our network marketing plan outside China. The service hours and related fees eligible to be earned by the independent service providers are based on a number of factors, including the sales generated through them and through others to whom they may provide marketing, sales support and other services, the quality of their service, and other factors. Total compensation available to our independent service providers in China can generally be comparable to the total compensation available to other sales leaders globally. The Company does this by performing an analysis in our worldwide system to estimate the potential compensation available to the service providers, which can generally be comparable to that of sales leaders in other countries. After adjusting such amounts for other factors and dividing by each service provider’s hourly rate, we then notify each independent service provider the maximum hours of work for which they are eligible to be compensated in the given month. In order for a service provider to be paid, the Company requires each service provider to invoice the Company for their services and submit a timesheet of such services and, upon the Company’s request, service providers may be required to submit additional supporting documents for the Company’s further verification. These and other business model features in China are not common to the business model we employ elsewhere in the world, and we expect our business model in China will continue to incorporate some or all of these features, and any failure of this model or our business to comply with Chinese law could materially and negatively impact our business, financial condition, and operating results.
Direct-selling regulations in China require us to apply for various approvals to conduct direct selling in China. The process for obtaining the necessary licenses to conduct direct selling is protracted and cumbersome and involves multiple layers of Chinese governmental authorities and numerous governmental employees at each layer. While direct-selling licenses are centrally issued, such licenses are generally valid only in the jurisdictions within which related approvals have been obtained, and such approvals are generally awarded on local and provincial bases. Accordingly, there can be no assurance that we will obtain additional, or maintain our existing, direct-selling licenses and approvals in China that are important to our business, which could materially and negatively impact our business, financial condition, and operating results. The approval process is guided by distinct Chinese practices and customs, and is subject to applicable laws of China and the other jurisdictions in which we operate our business, including the United States, as well as our internal policies, such as our code of ethics. There is a risk that in attempting to comply with local customs and practices in China during the application process or otherwise, we will fail to comply with applicable requirements or violate the laws of another jurisdiction, any of which could prevent us from obtaining direct-selling licenses or other approvals or result in adverse publicity or legal or regulatory proceedings. Furthermore, we rely on certain key personnel in China, including to assist us during the approval process and to maintain our licenses, and the loss of any such key personnel could delay or hinder our ability to obtain or maintain licenses or related approvals or otherwise negatively impact our operations in China.
Additionally, there continues to be uncertainty regarding the interpretation and enforcement of Chinese regulations. The regulatory environment in China continues to evolve, and officials at all levels of the Chinese, provincial, and local government exercise broad discretion in deciding how to interpret, apply, and enforce regulations as they deem appropriate. Regulators in China may modify existing, or introduce new, regulations or interpretations. There can be no guarantee that changes in regulations, or their interpretation or enforcement, will not negatively impact our business in China, create industry reputational risk, result in regulatory proceedings, or lead to fines or penalties against us or our Chinese Members. If our business practices are deemed to be in violation of applicable regulations, in particular with respect to the factors used in determining the services a service provider is eligible to perform and service fees they are eligible to earn and receive, we could be sanctioned and/or required to change our business model, either of which could have a significant adverse impact on our business in China. In addition, the Chinese government rigorously monitors markets, including the direct-selling market, in China and in the past has taken serious action against companies engaged in activities that the government regarded as in violation of applicable law, including shutting down their businesses and imposing substantial fines, such as the Review, which investigated unlawful promotion and sales within the health products industry. There is no guarantee the government will not revisit its focus on health products, expand its investigation to cover direct-selling business models, or otherwise launch into a new investigation or multiple investigations that may result in a material adverse effect to our business in China.
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The United Kingdom’s vote to exit from the European Union could adversely impact us.
OnIn June 23, 2016, in a referendum vote commonly referred to as “Brexit,” a majority of British voters voted to exit the European Union and, in March 2017, the British government delivered formal notice of the U.K.’s intention to leave the European Union. On January 31, 2020, the U.K. formally exited the European Union. The British government is currently in negotiationshas reached a formal agreement with the European Union to determineregarding the terms of the U.K.’s exit. A withdrawalexit, but it is unclear whether additional agreements will need to be negotiated in the future and what long-term economic, financial, trade, and legal implications the exit of the U.K. from the European Union will have and how such exit could affect our business globally and in the region. The exit could potentially disrupt the free movement of goods, services, and people between the U.K. and the European Union, undermine bilateral cooperation in key geographic areas and significantly disrupt trade between the U.K. and the European Union or other nations as the U.K. pursues independent trade relations. In addition, BrexitIt could also lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which European Union laws to replace or replicate. The effects of Brexit will depend on any agreements the U.K. makes to retain access to European Union or other markets either during a transitional period or more permanently. It is unclear what long-term economic, financial, trade and legal implications the withdrawal of the U.K. from the European Union would have and how such withdrawal would affect our business globally and in the region. In addition, Brexit may lead other European Union member countries to consider referendums regarding their European Union membership. Any of these events, along with any political, economic and regulatory changes that may occur, could cause political and economic uncertainty in Europe and internationallyglobally and materially harm our business, financial condition, and financialoperating results.
Risks Related to Our Indebtedness
The terms and covenants in our existing indebtedness could limit our discretion with respect to certain business matters, which could limitharm our ability to pursue certain strategic objectives and in turn harm ourbusiness, financial condition, and operating results.
Our senior secured credit facility, contains financialor the 2018 Credit Facility, and operatingthe indentures governing the senior notes due September 1, 2025, or the 2025 Notes, and the senior notes due June 1, 2029, or the 2029 Notes, have restrictive covenants that restrictlimit our and our subsidiaries’ ability to, among other things:
pay dividends, redeem share capital or capital stock and make other restricted payments and investments;
sell assets or merge, consolidate, or transfer all or substantially all of our subsidiaries’ assets;
impose dividend or other distribution restrictions on our subsidiaries; and
create liens on our and our subsidiaries’ assets.
In addition, our credit facilitythe 2018 Credit Facility requires us to meet certain financial ratios and financial conditions. These covenants could limit our ability to grow our business, take advantage of attractive business opportunities, successfully compete, obtain future financing, withstand future downturns in our business or the economy in general, or otherwise conduct necessary corporate activities.
Our ability to comply with these covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions. Failure to comply with these covenants could result in aan event of default. Upon the occurrence of an event of default causingunder any of our debt agreements, the lenders or noteholders, as applicable, could cause all outstanding amounts under such agreements to become due and payable, and it could trigger a cross-default with respect to other outstanding indebtedness under our credit facility, whichcertain circumstances. The 2018 Credit Facility is secured by the equity interests of certain of our subsidiaries and substantially all of ourthe assets of the domestic assets, against whichloan parties, and the lenders thereunder could proceed to foreclose.foreclose on such assets if we are unable to repay or refinance any accelerated debt under the 2018 Credit Facility. Following an event of default, the lenders under our revolving credit facility would also have the right to terminate any commitments they have to provide further borrowings.
WeThe required interest payments on our indebtedness under the 2018 Credit Facility or other agreements may be impacted by expected reforms related to the London Interbank Offered Rate, or LIBOR. The variable interest rates applicable under the 2018 Credit Facility are linked to LIBOR as the benchmark rate for establishing such rates. Recent national, international, and other regulatory guidance and reform proposals regarding LIBOR are requiring certain LIBOR tenors to be discontinued or become unavailable by the end of 2021 and LIBOR to be fully discontinued or become unavailable as a benchmark rate by June 2023. Although the 2018 Credit Facility includes mechanics to facilitate the adoption by us and our lenders of an alternative benchmark rate for use from timein place of LIBOR, no assurance can be made that such alternative benchmark rate will perform in a manner similar to timeLIBOR or result in interest rates that are at least as favorable to us as those that would have resulted had LIBOR remained in effect, which could result in an increase in our interest expense and other debt service obligations. In addition, the overall credit market may be disrupted as a certain amountresult of cashthe replacement of LIBOR or in orderthe anticipation thereof, which could have an adverse impact on our ability to satisfy the obligations relating torefinance, reprice, or amend our convertible notes. existing indebtedness or incur additional indebtedness on favorable terms or at all.
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The maturityconversion or conversion of anymaturity of our convertible notes may adversely affect our financial condition and operating results, whichand their conversion into common shares could adversely affect the amount or timing of future potentialhave a dilutive effect that could cause our share repurchases or the payment of dividendsprice to our shareholders.go down.
In February 2014, weWe issued convertible senior notes due on AugustMarch 15, 2019,2024, or the 2024 Convertible Notes, in the aggregate principal amount of $1.15 billion. At maturity, we will have$550 million. Prior to pay theDecember 15, 2023, under certain circumstances, holders of the Convertible Notes the full aggregate principal amount of the Convertible Notes then outstanding.
Holders of our 2024 Convertible Notes may convert their notes at their option under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending March 31, 2014, if the last reported sale price of our common shares for at least 20 trading days (whether or not consecutive) in a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter exceeds 130% of the conversion price for the Convertible Notes on each applicable trading day; (ii) during the five business-day period immediately after any five consecutive trading day period, or the measurement period, in which the trading price per $1,000 principal amount of Convertible Notes for each trading day of that measurement period was less than 98% of the product of the last reported sale price of our common shares and the conversion rate for the Convertible Notes for each such day; or (iii) upon the occurrence of specified corporate events.option. On and after MayDecember 15, 2019,2023, holders may convert their 2024 Convertible Notes at any time, regardless of the foregoing circumstances. time.
The 2024 Convertible Notes are net-share settled.may be settled in cash, common shares, or a combination of cash and common shares, at our option. If one or more holders elect to convert their 2024 Convertible Notes when conversion is permitted, we could be requiredelect to make cash payments equal to the par amount of each Convertible Note,satisfy our conversion obligations, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their 2024 Convertible Notes, because our Convertible Notes are net-share settled, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal amount of our 2024 Convertible Notes as a current rather than long-term liability, which could result in a material reduction of our net working capital. The requirement to payPayment of cash upon conversion of the 2024 Convertible Notes, or any adverse change in the accounting treatment of the 2024 Convertible Notes, may adversely affect our financial condition and operating results, each of which could in turn adversely impact the amount or timing of future potential share repurchases or the payment of dividends to our shareholders.
The conversion of any of the Convertible Notes into common shares could have a dilutive effect that could cause our share price to go down.
The Convertible Notes, until May 15, 2019, are convertible into common shares onlyIn addition, if specified conditions are met and thereafter convertible at any time, at the option of the holder. We have reserved common shares for issuance upon conversion of the Convertible Notes. Upon conversion, the principal amount is due in cash, and to the extent that the conversion value exceeds the principal amount, the difference is due in common shares. While we have entered into capped call transactions to effectively increase the conversion of the Convertible Notes and lessen the risk of dilution to shareholders upon conversion, if the market price of our common shares, as measured under the terms of the capped call transactions, exceeds the cap price of the capped call transactions, the number of our common shares we receive upon exercise of the capped call transactions will be capped. In that case, there would be dilution in respect of our common shares, because the number of our common shares or amounts of cash that we would owe upon conversion of the Convertible Notes in excess of the principal amount of converted Convertible Notes would exceed the number of common shares that we would be entitled to receive upon exercise of the capped call transactions, which would cause a dilutive effect that could cause our share price to go down. If any or all of the 2024 Convertible Notes are converted into common shares, our existing shareholders will experience immediate dilution of voting rights and our common share price may decline. Furthermore, the perception that such dilution could occur may cause the marketour share price of our common shares to decline.
The conversion rate for the Convertible Notes as of February 7, 2014, the date of issuance thereof, was 11.5908 common shares per $1,000 principal amount or a conversion price of approximately $86.28 per common share. Because the conversion rate of the 2024 Convertible Notes adjusts upward upon the occurrence of certain events, such as a dividend payment, our existing shareholders may experience morefurther dilution if any or all of the 2024 Convertible Notes are converted into common shares afterand the currently effective adjusted conversion rates became effective.
If we do not comply with transfer pricing, customs duties, VAT, and similar regulations, then we may be subjected to additional taxes, duties, interest and penalties in material amounts, which could harmrate is further adjusted. For more information regarding the conversion features of our financial condition and operating results.
As a multinational corporation, operating in many countries2024 Convertible Notes, including the United States, we are subject to transfer pricing and other tax regulations designed to ensureevents that our intercompany transactions are consummated at prices that have not been manipulated to produce a desired tax result, that appropriate levels of income are reported as earned by our United States or local entities, and that we are taxed appropriately on such transactions. In addition, our operations are subject to regulations designed to ensure that appropriate levels of customs duties are assessed on the importation of our products. We are currently subject to pending or proposed audits that are at various levels of review, assessment or appeal in a number of jurisdictions involving transfer pricing issues, income taxes, customs duties, value added taxes, withholding taxes, sales and use and other taxes and related interest and penalties in material amounts. In some circumstances, additional taxes, interest and penalties have been assessed and we will be required to pay the assessments or post surety, in order to challenge the assessments.
The imposition of new taxes, even pass-through taxes such as VAT, could have an impact on our perceived product pricing and will likely require that we increase prices in certain jurisdictions and therefore could have a potential negative impact on our business and results of operations. We have reserved in the consolidated financial statements an amount that we believe represents the most likely outcome of the resolution of these disputes, but if we are incorrect in our assessment we may have to pay the full amount asserted which could potentially be material. Ultimate resolution of these matters may take several years,allow for early conversion and the outcome is uncertain. If the United States Internal Revenue Service or the taxing authorities of any other jurisdiction were to successfully challenge our transfer pricing practices or our positions regarding the payment of income taxes, customs duties, value added taxes, withholding taxes, sales and use, and other taxes, we could become subject to higher taxes, we may determine it is necessary to raise prices in certain jurisdictions accordingly and our revenue and earnings and our results of operations could be adversely affected.
Seecurrent conversion rate, see Note 5, Contingencies4, Long-Term Debt, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for further information on contingencies relating10-Q.
Risks Related to VAT and other related matters.Our Common Shares
We could become a “controlled foreign corporation” for U.S. federal income tax purposes.
We believe that we are currently not a “controlled foreign corporation” for U.S. federal income tax purposes. However, this conclusion depends upon whether United States persons or entities who own 10% or more of the total combined voting power (10% shareholders”) own in the aggregate more than 50% of (i) the total combined voting power, or (ii) the total value of all our stock. In determining voting power, in addition to voting stock any special voting rights to appoint directors, whether by law, agreement or other arrangement, may also be taken into account. For purposes of applying the voting and value tests, certain constructive ownership rules apply, which attribute ownership among certain family members and certain entities and their owners. These rules may also attribute ownership of our stock to a person or entity that is entitled to acquire our stock pursuant to an option, such as the holders of our Convertible Notes. These constructive ownership rules are very complex and their application to specific circumstances is subject to uncertainty.
If we were to be or become a “controlled foreign corporation,” our 10% shareholders would be subject to special tax treatment. Any shareholders who contemplate owning 10% or more of our outstanding shares (taking into account the impact of any share repurchases we may undertake pursuant to share repurchase programs) are urged to consult with their tax advisors with respect to the special rules applicable to 10% shareholders of controlled foreign corporations.
Changes in tax laws, treaties or regulations, or their interpretation could adversely affect us.
A change in applicable tax laws, treaties or regulations or their interpretation could result in a higher effective tax rate on our worldwide earnings and such change could be significant to our financial results. The Organisation for Economic Co-operation and Development has released guidance covering various international tax standards as part of its “base erosion and profit shifting” or “BEPS” initiative. The implementation of BEPS by jurisdictions in which we operate could result in changes to tax laws and regulations, including with respect to transfer pricing, that could materially increase our effective tax rate. Additionally, tax legislative proposals intending to eliminate some perceived tax advantages of companies that have legal domiciles outside the U.S. but have certain U.S. connections have repeatedly been introduced in the U.S. Congress. If these proposals are enacted, the result would increase our effective tax rate and could have a material adverse effect on the Company’s financial condition and results of operations. Further, it is expected that extensive U.S. tax legislative proposals will be released. If such proposals are enacted, our effective tax rate could increase or decrease.
We may be held responsible for certain taxes or assessments relating to the activities of our Members, which could harm our financial condition and operating results.
Our Members are subject to taxation, and in some instances, legislation or governmental agencies impose an obligation on us to collect taxes, such as value added taxes and social contributions, and to maintain appropriate records. In addition, we are subject to the risk in some jurisdictions of being responsible for social security, withholding or other taxes with respect to payments to our Members. In addition, in the event that local laws and regulations or the interpretation of local laws and regulations change to require us to treat our Members as employees, or that our Members are deemed by local regulatory authorities in one or more of the jurisdictions in which we operate to be our employees rather than independent contractors under existing laws and interpretations, we may be held responsible for social contributions, withholding and related taxes in those jurisdictions, plus any related assessments and penalties, which could harm our financial condition and operating results. See Note 5, Contingencies, to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a more specific discussion of contingencies related to the activities of our Members.
We may incur material product liability claims, which could increase our costs and harm our financial condition and operating results.
Our ingestible products include vitamins, minerals and botanicals and other ingredients and are classified as foods or dietary supplements and are not subject to pre-market regulatory approval in the United States. Our products could contain contaminated substances, and some of our products contain some ingredients that do not have long histories of human consumption. We rely upon published and unpublished safety information including clinical studies on ingredients used in our products and conduct limited clinical studies on some key products but not all products. Previously unknown adverse reactions resulting from human consumption of these ingredients could occur. As a marketer of dietary and nutritional supplements and other products that are ingested by consumers or applied to their bodies, we have been, and may again be, subjected to various product liability claims, including that the products contain contaminants, the products include inadequate instructions as to their uses, or the products include inadequate warnings concerning side effects and interactions with other substances. It is possible that widespread product liability claims could increase our costs, and adversely affect our revenues and operating income. Moreover, liability claims arising from a serious adverse event may increase our costs through higher insurance premiums and deductibles, and may make it more difficult to secure adequate insurance coverage in the future. In addition, our product liability insurance may fail to cover future product liability claims, thereby requiring us to pay substantial monetary damages and adversely affecting our business. Finally, given the higher level of self-insured retentions that we have accepted under our current product liability insurance policies, which are as high as approximately $15 million, in certain cases we may be subject to the full amount of liability associated with any injuries, which could be substantial.
On February 6, 2004, the FDA banned the sale and use of dietary supplements containing botanical sources of ephedrine alkaloids. A number of jurisdictions have imposed similar bans or restrictions. Until late 2002, we had sold Thermojetics® original green herbal tablets, Thermojetics® green herbal tablets and Thermojetics® gold herbal tablets, all of which contained ephedrine alkaloids. Accordingly, we run the risk of product liability claims related to the ingestion of ephedrine alkaloids contained in those products. We have been in the past, and may be in the future, named as a defendant in product liability lawsuits seeking to link the ingestion of certain of the aforementioned products to subsequent alleged medical problems suffered by plaintiffs. There can be no assurance that we will prevail if we are named as a defendant in the future to product liability lawsuits related to the ingestion of ephedrine alkaloids contained in those products.
Holders of our common shares may face difficulties in protecting their interests because we are incorporated under Cayman Islands law.
Our corporate affairs are governed by our amended and restated memorandum and articles of association, by the Cayman Islands Companies Law (2016 Revision)Act (as revised), or the Companies Law,Act, and the common law of the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly establisheddefined as and may be different from those under statutes or judicial precedent in existence in jurisdictions in the United States. In particular, the Cayman Islands has a less prescriptive body of corporate laws compared to the United States, and certain states, such as Delaware, may have more fulsome and judicially interpreted bodies of corporate law. Therefore, shareholders may have more difficulty in protecting their interests in the face of actions by our management or board of directors than would shareholders of a corporation incorporated in a jurisdiction in the United States due to the comparatively less developed nature of Cayman Islands law in this area.States.
ShareholdersFor example, shareholders of Cayman Islands exempted companies such as Herbalife Nutrition Ltd. have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of our shareholders. Our directors have discretion under our articles of association to determine whether, or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.
A shareholder can bringmay have a suit personallydirect right of action against us where its individual rights have been, or are about to be, infringed. Our Cayman Islands counsel, Maples and Calder (Cayman) LLP, is not aware of any reported class action having been brought in a Cayman Islands court. Derivative actions have been brought in the Cayman Islands courts, and the Cayman Islands courts have confirmed the availability of such actions. In most cases, however, we would be the proper plaintiff where an action is brought to redress any loss or damage suffered by us, or based on a breach of duty owed to us, and a claim, against, for example, against our officers or directors, usually may not be brought by a shareholder. However, based on English authorities, which would in all likelihoodlikely be of persuasive authority and be applied by a court in the Cayman Islands, exceptions to the foregoing principle may apply and a shareholder may be permitted to bring a claim derivatively on a company's behalf, where:
a company is acting or proposing to act illegally or outside the scope of its corporate authority;
the act complained of, although not acting outsidebeyond the scope of itsthe company’s corporate authority, could be effected only if authorized by more than a simple majority vote;the number of votes of the shareholders of the company actually obtained; or
those who control the company are perpetrating a “fraud on the minority”.
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Provisions of our articles of association and Cayman Islands corporate law may impede a takeover or make it more difficult for shareholders to change the direction or management of the Company, which could reduce shareholders’ opportunity to influence management of the Company.
Our articles of association contain certain provisions which could have an effect of discouraging a takeover or other transaction or preventing or making it more difficult for shareholders to change the direction or management of our Company. For example, our articles of association permit our board of directors to issue preference shares from time to time, with such rights and preferences as they consider appropriate. Our board of directors could authorize the issuance of preference shares with terms and conditions and under circumstances that could have an effect of discouraging a takeover or other transaction.
In addition, our articles of association contain certain other provisions which could have an effect of discouraging a takeover or other transaction or preventing or making it more difficult for shareholders to changeprohibit the direction or management of our Company, including the inabilityability of shareholders to act by written consent, a limitation onlimit the ability of shareholders to call special meetings of shareholders, and contain advance notice provisions. As a result, our shareholders may have less input into the management of our Company than they might otherwise have if these provisions were not included in our articles of association.
The Cayman Islands haveCompanies Act contains provisions under the Companies Law to facilitate mergers and consolidations between Cayman Islands companies and non-Cayman Islands companies.companies (provided that is facilitated by the laws of such other jurisdiction). These provisions, contained within Part XVI of the Companies Law,Act, are broadly similar to the merger provisions as provided for under Delaware Law.law.
There are, however, a number of important differences that could impede a takeover. First,For example, the threshold for approval of the merger plan by shareholders is higher. The threshold is a special resolution of the shareholders (being 66 2/3%⅔% of those present in person or by proxy and voting) together with such other authorization, if any, as may be specified in the articles of association.
Additionally, the consent of each holder of a fixed or floating security interest (in essence a documented security interest as opposed to one arising by operation of law) is required to be obtained unless the Grand Court of the Cayman Islands waives such requirement.
The merger provisions contained within Part XVI of the Companies Law do contain shareholder appraisal rights similar to those provided for under Delaware law. Such rights are limited to a merger under Part XVI and do not apply to schemes of arrangement as discussed below.
The Companies Law alsoAct contains separate statutory provisions that provide for the merger, reconstruction, and amalgamation of companies.companies pursuant to court-approved arrangements. These are commonly referred to in the Cayman Islands as “schemes of arrangement.”
The procedural and legal requirements necessary to consummate these transactionsa scheme of arrangement are more rigorous and take longer to complete than the procedures typically required to consummate a merger in the United States. Under Cayman Islands law and practice, a scheme of arrangement in relation to a solvent Cayman Islands company must be approved at a shareholders’ meeting by a majority in number of each class of the company’s shareholders who are present and voting (either in person or by proxy) at such meeting. The shares voted in favor of the scheme of arrangement must also represent at least 75% of the value of each relevant class of the company’s shareholders present and voting at the meeting. The convening of these meetings and the terms of the amalgamationarrangement must also be sanctioned by the Grand Court of the Cayman Islands. Although there is no requirement to seek the consent of the creditors of the parties involved in the scheme of arrangement, the Grand Court typically seeks to ensure that the creditors have consented to the transfer of their liabilities to the surviving entity or that the scheme of arrangement does not otherwise materially adversely affect creditors’ interests. Furthermore, the court will only approve a scheme of arrangement if it is satisfied that:
the company is not proposing to act illegally or beyond the scope of its corporate authority and the statutory provisions as to majority vote have been complied with;
the shareholders who voted at the meeting in question fairly represent the relevant class of shareholders to which they belong;
the scheme of arrangement is such as a businessman would reasonably approve; and
the scheme of arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law.
If the scheme of arrangement is approved, the dissenting shareholdershareholders would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of U.S. corporations, providing rights to receive payment in cash for the judicially determined value of the shares.
In addition, if an offer by a third party to purchase shares in us has been approved by the holders of at least 90% of ourthe issued and outstanding shares (not including shares held by such a third party) pursuant to an offer within a four-month periodfour months of the third party making such an offer, the purchaserthird party may, during the two months following expiration of the four-month period, require the holders of the remaining shares to transfer their shares on the same terms on which the purchaser acquired the first 90% of ourthe issued and outstanding shares. An objection can be made to the Grand Court of the Cayman Islands, but this is unlikely to succeed unless there is evidence of fraud, bad faith, collusion or inequitable treatment of the shareholders.
Further, transactions similar to a merger, reconstruction and/or an amalgamation may in some cases be achieved through means other than these statutory provisions, such as a share capital exchange, asset acquisition or control, or through contractual arrangements of an operating business.
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There is uncertainty as to shareholders’ ability to enforce certain foreign civil liabilities in the Cayman Islands.
We are incorporated as an exempted company with limited liability under the laws of the Cayman Islands. AIslands and a material portion of our assets are located outside of the United States. As a result, it may be difficult for our shareholders
Herbalife Nutrition Ltd. has been advised by its Cayman Islands legal counsel, Maples and Calder (Cayman) LLP, that the courts of the Cayman Islands are unlikely (i) to recognize or enforce against Herbalife Nutrition Ltd. judgments against us or judgments obtained in U.S.of courts of the United States predicated upon the civil liability provisions of the federalsecurities laws of the United States or any state; and (ii) in original actions brought in the Cayman Islands, to impose liabilities against Herbalife Nutrition Ltd. predicated upon the civil liability provisions of the securities laws of the United States or any state, ofso far as the United States.
We have been advisedliabilities imposed by our Cayman Islands counsel, Maples and Calder, thatthose provisions are penal in nature. ln those circumstances, although there is no statutory enforcement in the Cayman Islands of judgments obtained in the United States, the courts of the Cayman Islands will —recognize and enforce a foreign money judgment of a foreign court of competent jurisdiction without retrial on the merits based on the principle that a judgment byof a competent foreign court imposes upon the judgment debtor an obligation to pay the sum for which judgment has been given — recognize and enforceprovided certain conditions are met. For a foreign money judgment of a court of competent jurisdiction ifto be enforced in the Cayman Islands, such judgment ismust be final and conclusive and for a liquidated sum, and must not be in respect of taxes or a fine or penalty, is not inconsistent with a Cayman Islands judgment in respect of the same matters, and was notmatter, impeachable on the grounds of fraud, or obtained in a manner, and is notor be of a kind the enforcement of which is, contrary to natural justice or the public policy of the Cayman Islands. There is doubt, however, asIslands (awards of punitive or multiple damages may well be held to whether the Grand Court of thebe contrary to public policy). A Cayman Islands will (1) recognize or enforce judgments of U.S. courts predicated upon the civil liability provisions of the federal securities laws of the United States or any state of the United States, or (2) in original actions brought in the Cayman Islands, impose liabilities predicated upon the civil liability provisions of the federal securities laws of the United States or any state of the United States, on the grounds that such provisions are penal in nature.
The Grand Court of the Cayman Islandscourt may stay enforcement proceedings if concurrent proceedings are being brought elsewhere.
Our stock priceMail addressed to the Company and received at its registered office will be forwarded unopened to the forwarding address supplied by the Company. None of Herbalife Nutrition Ltd., its directors, officers, advisors or service providers (including the organization that provides registered office services in the Cayman Islands) will bear any responsibility for any delay caused in mail reaching the forwarding address.
U.S. Tax Reform may be adversely affected by third parties who raise allegations about ourimpact certain U.S. shareholders of the Company.
Short sellers and others who raise allegations regarding the legalityIf a U.S. shareholder owns 10% or more of our business activities, some of whom are positioned to profit if our stock declines, can negatively affect our stock price. In late 2012, a hedge fund manager publicly raised allegations regarding the legality of our network marketing program and announced that his fund had taken a significant short position regarding our common shares, leadingit may be subject to intense public scrutinyincreased U.S. federal income taxation under the “controlled foreign corporation,” or CFC, rules. A non-U.S. corporation will be classified as a CFC for any particular taxable year, if U.S. persons (including individuals and significant stock price volatility. Following this public announcemententities) who own (directly, indirectly, or constructively) 10% or more of the voting power or value of shares, or 10% U.S. Shareholders, own, in December 2012, our stock price dropped significantly. This hedge fund manager continuesthe aggregate, more than 50% of the total combined voting power or value of the shares. In determining whether a shareholder is treated as a 10% U.S. Shareholder, the voting power of the shares and any special voting rights, such as to make allegations regardingappoint directors, may also be taken into account. In addition, certain constructive ownership rules apply, which attribute share ownership among certain family members and certain entities and their owners. Such constructive ownership rules may also attribute share ownership to persons that are entitled to acquire shares pursuant to an option, such as the legalityholders of our network marketing program,2024 Convertible Notes.
As a result of certain changes to the CFC constructive ownership rules introduced by the Tax Cuts and Jobs Act of 2017, or U.S. Tax Reform, one or more of our product safety, our accounting practicesnon-U.S. corporate subsidiaries that were not previously classified as CFCs are now classified as CFCs, including on a retroactive basis. For 10% U.S. Shareholders, this may result in adverse tax consequences. Generally, 10% U.S. Shareholders of a CFC are required to include currently in gross income their respective shares of (i) the CFC’s “Subpart F income” (e.g. items of passive income and other matters. Additionally,certain income resulting from time to timeinter-company sales and services), (ii) the Company isCFC’s earnings (that have not been subject to governmentaltax under the Subpart F rules) to the extent the CFC holds certain U.S. property, and regulatory inquiries(iii) the CFC’s global intangible low-taxed income pursuant to the U.S. Tax Reform. Such 10% U.S. Shareholders are subject to current U.S. federal income tax with respect to the foregoing income items, even if the CFC has not made an actual distribution to such shareholders.
While we do not believe that Herbalife Nutrition Ltd. is classified as a CFC, such entity and inquiriesone or more of our non-U.S. corporate subsidiaries not already classified as CFCs could become classified as CFCs either as a result of (i) additional changes to tax laws, rules, or regulations, including future pronouncements or other guidance from legislators that may adversely affect our stock price. Our stock price has continued to exhibit heightened volatility and the short interestIRS or (ii) an increase in the percentage ownership of our common shares continues to remain high. Short sellers expect to make a profit ifby shareholders who hold, or in the future may hold, 10% or more of our common shares, declinewhether as a result of future share acquisitions, the impact of any share repurchases we may undertake, or otherwise.
Shareholders who own, or contemplate owning, 10% or more of our shares (taking into account the impact of any share repurchases we may undertake and the constructive ownership rules) are urged to consult their tax advisors.
No assurances can be given that future legislative, administrative, or judicial developments will not result in value, and their actions and their public statements may cause further volatilityan increase in the amount of U.S. taxes payable by an investor in our share price. Whileshares. If any such developments occur, such developments could have a number of traders have publicly announced that they have taken long positions contrary to the hedge fund shortingmaterial and adverse effect on an investment in our shares, the existence of such a significant short interest position and the related publicity may lead to continued volatility. The volatility of our stock may cause the value of a shareholder’s investment to decline rapidly.shares.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) None.
(b) None.
(c) On February 21, 2017,9, 2021, our board of directors authorized a new three-year $1.5 billion share repurchase program that will expire on February 21, 2020,9, 2024, which replaced our prior share repurchase authorization whichthat was set to expire on JuneOctober 30, 2017 which, as of December 31, 2016,2023 and had $232.9approximately $7.9 million of remaining authorized capacity.capacity when it was replaced. This share repurchase program allows us, which includes a wholly ownedan indirect wholly-owned subsidiary of Herbalife Nutrition Ltd., to repurchase our common shares at such times and prices as determined by our management, as market conditions warrant, and to the extent Herbalife Nutrition Ltd.’s distributable reserves are available under Cayman Islands law. The 2018 Credit Facility permits us to repurchase our common shares as long as no default or event of default exists and other conditions, such as specified consolidated leverage ratios, are met. As of September 30, 2017,2021, the remaining authorized capacity under the Company’sour $1.5 billion share repurchase program was approximately $1,200.8 million.$1.2 billion. The following is a summary of our repurchases of common shares during the three months ended September 30, 2017, all of which were repurchased by our indirect wholly owned subsidiary.2021. For further information on our share repurchases, see Note 10, Shareholders’ EquityDeficit, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q:10-Q:
Period |
| Total Number of Shares Purchased |
|
| Average Price Paid per Share |
|
| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
| Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
| ||||||||||||||||||||
|
| Total Number of Shares Purchased |
|
| Average Price Paid per Share |
|
| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
| Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs |
| ||||||||||||||||||||
July 1 — July 31 |
|
| 811,393 |
|
| $ | 72.38 |
|
|
| 811,393 |
|
| $ | 1,200,818,018 |
|
|
| 776,898 |
|
| $ | 52.08 |
|
|
| 776,898 |
|
| $ | 1,340,499,038 |
|
August 1 — August 31 |
| — |
|
| — |
|
| — |
|
| $ | 1,200,818,018 |
|
|
| 656,645 |
|
| $ | 50.68 |
|
|
| 656,645 |
|
| $ | 1,307,221,916 |
| |||
September 1 — September 30 |
| — |
|
| — |
|
| — |
|
| $ | 1,200,818,018 |
|
|
| 1,993,754 |
|
| $ | 44.30 |
|
|
| 1,993,754 |
|
| $ | 1,218,898,344 |
| |||
|
|
| 811,393 |
|
| $ | 72.38 |
|
|
| 811,393 |
|
| $ | 1,200,818,018 |
|
|
| 3,427,297 |
|
| $ | 47.29 |
|
|
| 3,427,297 |
|
| $ | 1,218,898,344 |
|
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
(a) NoneNone.
(b) None.
(a) Exhibit Index:
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EXHIBIT INDEX
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10.36# | Retention Agreement, effective as of April 6, 2020, by and between Mark Schissel and the Company | * | ||
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** Furnished herewith.
# Management contract or compensatory plan or arrangement.
(a) Previously filed on October 1, 2004 as an Exhibit to the Company’s registration statement on Form S-1 (File No. 333-119485) and is incorporated herein by reference.
(b) Previously filed on December 2, 2004 as an Exhibit to Amendment No. 4 to the Company’s registration statement on Form S-1 (File No. 333-119485) and is incorporated herein by reference.
(c) Previously filed on December 14, 2004 as an Exhibit to Amendment No. 5 to the Company’s registration statement on Form S-1 (File No. 333-119485) and is incorporated herein by reference.
(d) Previously filed on May 5, 2015 as an Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 and is incorporated herein by reference.
(e) Previously filed on August 5, 2015 as an Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 and is incorporated herein by reference.
(f) Previously filed on May 5, 2016 as an Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 and is incorporated herein by reference.
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(g) Previously filed on July 15, 2016 as an Exhibit to the Company’s Current Report on Form 8-K and is incorporated herein by reference.
(h) Previously filed on February 23, 2017 as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 and is incorporated herein by reference.
(i) Previously filed on August 1, 2017 as an Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 and is incorporated herein by reference.
(j) Previously filed on February 22, 2018 as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 and is incorporated herein by reference.
(k) Previously filed on March 29, 2018 as an Exhibit to the Company’s Current Report on Form 8-K and is incorporated herein by reference.
(l) Previously filed on May 3, 2018 as an Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 and is incorporated herein by reference.
(m) Previously filed on August 22, 2018 as an Exhibit to the Company’s Current Report on Form 8-K and is incorporated herein by reference.
(n) Previously filed on February 19, 2019 as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 and is incorporated herein by reference.
(o) Previously filed on August 1, 2019 as an Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 and is incorporated herein by reference.
(p) Previously filed on October 29, 2019 as an Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 and is incorporated herein by reference.
(q) Previously filed on December 12, 2019 as an Exhibit to the Company’s Current Report on Form 8-K and is incorporated herein by reference.
(r) Previously filed on February 18, 2020 as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
(s) Previously filed on March 19, 2020 as an Exhibit to the Company’s Current Report on Form 8-K and is incorporated herein by reference.
(t) Previously filed on May 7, 2020 as an Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and is incorporated herein by reference.
(u) Previously filed on May 29, 2020 as an Exhibit to the Company’s Current Report on Form 8-K and is incorporated herein by reference.
(v) Previously filed on November 5, 2020 as an Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 and is incorporated herein by reference.
(w) Previously filed on February 11, 2021 as an Exhibit to the Company’s Current Report on Form 8-K and is incorporated herein by reference.
(x) Previously filed on May 4, 2021 as an Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 and is incorporated herein by reference.
(y) Previously filed on May 20, 2021 as an Exhibit to the Company’s Current Report on Form 8-K and is incorporated herein by reference.
(z) Previously filed on July 30, 2021 as an Exhibit to the Company’s Current Report on Form 8-K and is incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HERBALIFE NUTRITION LTD. | |||
By: | /s/ | ||
Chief Financial Officer | |||
Dated: November 2, 20172021
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