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, 20172020
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 309GT Ugland House, South Church Street Grand Cayman, Cayman Islands | KY1-1106 |
(Address of principal executive offices) | (Zip code) |
P.O. Box 309GT
Ugland House, South Church Street
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 | ☒ | Accelerated filer | ☐ | |||
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Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||
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Emerging growth company | ☐ |
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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, 201729, 2020 was 87,197,196
131,616,026.
HERBALIFE LTD.TABLE OF CONTENTS
Page No. | ||
PART I. FINANCIAL INFORMATION | ||
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3 | ||
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3 | ||
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4 | ||
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Unaudited Condensed Consolidated Statements of Comprehensive Income | 5 | |
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6 | ||
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Notes to Unaudited Condensed Consolidated Financial Statements | 7 | |
Item 2. | ||
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Item 3. | 63 | |
Item 4. | 66 | |
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Item 1. |
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Item 1A. | 70 | |
Item 2. | ||
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Item 3. | ||
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Item 4. | 92 | |
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Item 6. | ||
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PARTPART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
HERBALIFE NUTRITION LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
| September 30, 2017 |
|
| December 31, 2016 |
| ||
|
| (In millions, except share and par value amounts) |
| |||||
ASSETS |
|
|
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 1,636.3 |
|
| $ | 844.0 |
|
Receivables, net of allowance for doubtful accounts |
|
| 95.2 |
|
|
| 70.3 |
|
Inventories |
|
| 354.2 |
|
|
| 371.3 |
|
Prepaid expenses and other current assets |
|
| 188.4 |
|
|
| 176.9 |
|
Total current assets |
|
| 2,274.1 |
|
|
| 1,462.5 |
|
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 |
|
Goodwill |
|
| 95.8 |
|
|
| 89.9 |
|
Other assets |
|
| 367.4 |
|
|
| 324.9 |
|
Total assets |
| $ | 3,422.5 |
|
| $ | 2,565.4 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
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CURRENT LIABILITIES: |
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|
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|
|
|
|
Accounts payable |
| $ | 60.6 |
|
| $ | 66.0 |
|
Royalty overrides |
|
| 266.7 |
|
|
| 261.2 |
|
Current portion of long-term debt |
|
| 104.1 |
|
|
| 9.5 |
|
Other current liabilities |
|
| 427.4 |
|
|
| 454.8 |
|
Total current liabilities |
|
| 858.8 |
|
|
| 791.5 |
|
NON-CURRENT LIABILITIES: |
|
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|
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|
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|
|
Long-term debt, net of current portion |
|
| 2,176.6 |
|
|
| 1,438.4 |
|
Other non-current liabilities |
|
| 168.1 |
|
|
| 139.2 |
|
Total liabilities |
|
| 3,203.5 |
|
|
| 2,369.1 |
|
CONTINGENCIES |
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SHAREHOLDERS’ EQUITY: |
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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 |
|
Paid-in capital in excess of par value |
|
| 452.0 |
|
|
| 467.6 |
|
Accumulated other comprehensive loss |
|
| (174.6 | ) |
|
| (205.1 | ) |
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 |
|
See the accompanying notes to unaudited condensed consolidated financial statements.
HERBALIFE 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 |
| ||||
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| (In millions, except per share amounts) |
| |||||||||||||
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 |
|
Net sales |
|
| 1,085.4 |
|
|
| 1,122.0 |
|
|
| 3,334.4 |
|
|
| 3,443.4 |
|
Cost of sales |
|
| 215.4 |
|
|
| 209.1 |
|
|
| 638.8 |
|
|
| 658.5 |
|
Gross profit |
|
| 870.0 |
|
|
| 912.9 |
|
|
| 2,695.6 |
|
|
| 2,784.9 |
|
Royalty overrides |
|
| 310.1 |
|
|
| 320.3 |
|
|
| 944.1 |
|
|
| 968.9 |
|
Selling, general & administrative expenses |
|
| 445.2 |
|
|
| 441.3 |
|
|
| 1,327.0 |
|
|
| 1,545.2 |
|
Other operating income |
|
| (4.6 | ) |
|
| (0.2 | ) |
|
| (43.5 | ) |
|
| (29.1 | ) |
Operating income |
|
| 119.3 |
|
|
| 151.5 |
|
|
| 468.0 |
|
|
| 299.9 |
|
Interest expense, net |
|
| 38.4 |
|
|
| 22.1 |
|
|
| 106.5 |
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|
| 70.1 |
|
Income before income taxes |
|
| 80.9 |
|
|
| 129.4 |
|
|
| 361.5 |
|
|
| 229.8 |
|
Income taxes |
|
| 26.4 |
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| 41.7 |
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|
| 84.2 |
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|
| 69.2 |
|
NET INCOME |
| $ | 54.5 |
|
| $ | 87.7 |
|
| $ | 277.3 |
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| $ | 160.6 |
|
Earnings per share: |
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Basic |
| $ | 0.69 |
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| $ | 1.06 |
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| $ | 3.41 |
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| $ | 1.94 |
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Diluted |
| $ | 0.66 |
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| $ | 1.01 |
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| $ | 3.26 |
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| $ | 1.87 |
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Weighted average shares outstanding: |
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Basic |
|
| 79.6 |
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|
| 83.1 |
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|
| 81.4 |
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| 83.0 |
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Diluted |
|
| 83.0 |
|
|
| 86.4 |
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|
| 85.0 |
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|
| 86.1 |
|
See the accompanying notes to unaudited condensed consolidated financial statements.
HERBALIFE 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 |
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| (In millions) |
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Net income |
| $ | 54.5 |
|
| $ | 87.7 |
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| $ | 277.3 |
|
| $ | 160.6 |
|
Other comprehensive income (loss): |
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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 |
|
See the accompanying notes to unaudited condensed consolidated financial statements.
HERBALIFE LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| Nine Months Ended |
| |||||
|
| September 30, 2017 |
|
| September 30, 2016 |
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| (In millions) |
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CASH FLOWS FROM OPERATING ACTIVITIES |
|
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Net income |
| $ | 277.3 |
|
| $ | 160.6 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
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Depreciation and amortization |
|
| 73.8 |
|
|
| 72.6 |
|
Share-based compensation expenses |
|
| 32.6 |
|
|
| 30.3 |
|
Non-cash interest expense |
|
| 44.8 |
|
|
| 42.0 |
|
Deferred income taxes |
|
| (4.1 | ) |
|
| (38.4 | ) |
Inventory write-downs |
|
| 17.7 |
|
|
| 16.7 |
|
Foreign exchange transaction loss (gain) |
|
| 4.0 |
|
|
| (1.4 | ) |
Other |
|
| (1.1 | ) |
|
| (3.8 | ) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Receivables |
|
| (22.5 | ) |
|
| (14.6 | ) |
Inventories |
|
| 29.2 |
|
|
| (56.7 | ) |
Prepaid expenses and other current assets |
|
| (3.6 | ) |
|
| (14.9 | ) |
Accounts payable |
|
| (8.2 | ) |
|
| 17.5 |
|
Royalty overrides |
|
| (6.7 | ) |
|
| 14.1 |
|
Other current liabilities |
|
| (45.0 | ) |
|
| 24.3 |
|
Other |
|
| 16.2 |
|
|
| 1.6 |
|
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
| 404.4 |
|
|
| 249.9 |
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
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|
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Purchases of property, plant and equipment |
|
| (67.9 | ) |
|
| (111.9 | ) |
Other |
|
| (2.8 | ) |
|
| 4.4 |
|
NET CASH USED IN INVESTING ACTIVITIES |
|
| (70.7 | ) |
|
| (107.5 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
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Borrowings from senior secured credit facility, net of discount |
|
| 1,274.0 |
|
|
| — |
|
Principal payments on senior secured credit facility and other debt |
|
| (468.2 | ) |
|
| (233.0 | ) |
Debt issuance costs |
|
| (22.6 | ) |
|
| — |
|
Share repurchases |
|
| (346.2 | ) |
|
| (12.5 | ) |
Other |
|
| 1.6 |
|
|
| 4.2 |
|
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 |
|
|
| September 30, 2020 |
|
| December 31, 2019 |
| |||
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| (in millions, except share and par value amounts) |
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ASSETS |
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Current assets: |
|
|
|
|
|
|
|
| |
Cash and cash equivalents |
| $ | 1,034.6 |
|
| $ | 839.4 |
| |
Receivables, net of allowance for doubtful accounts |
|
| 109.3 |
|
|
| 79.7 |
| |
Inventories |
|
| 434.1 |
|
|
| 436.2 |
| |
Prepaid expenses and other current assets |
|
| 154.1 |
|
|
| 132.9 |
| |
Total current assets |
|
| 1,732.1 |
|
|
| 1,488.2 |
| |
Property, plant, and equipment, at cost, net of accumulated depreciation and amortization |
|
| 369.7 |
|
|
| 371.5 |
| |
Operating lease right-of-use assets |
|
| 185.2 |
|
|
| 189.5 |
| |
Marketing-related intangibles and other intangible assets, net |
|
| 310.1 |
|
|
| 310.1 |
| |
Goodwill |
|
| 88.7 |
|
|
| 91.5 |
| |
Other assets |
|
| 235.4 |
|
|
| 227.8 |
| |
Total assets |
| $ | 2,921.2 |
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| $ | 2,678.6 |
| |
LIABILITIES AND SHAREHOLDERS’ DEFICIT |
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Current liabilities: |
|
|
|
|
|
|
|
| |
Accounts payable |
| $ | 102.6 |
|
| $ | 81.6 |
| |
Royalty overrides |
|
| 339.8 |
|
|
| 294.1 |
| |
Current portion of long-term debt |
|
| 24.9 |
|
|
| 24.1 |
| |
Other current liabilities |
|
| 625.4 |
|
|
| 564.6 |
| |
Total current liabilities |
|
| 1,092.7 |
|
|
| 964.4 |
| |
Long-term debt, net of current portion |
|
| 2,403.7 |
|
|
| 1,778.9 |
| |
Non-current operating lease liabilities |
|
| 171.3 |
|
|
| 169.9 |
| |
Other non-current liabilities |
|
| 166.4 |
|
|
| 155.4 |
| |
Total liabilities |
|
| 3,834.1 |
|
|
| 3,068.6 |
| |
Commitments and contingencies |
|
|
|
|
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Shareholders’ deficit: |
|
|
|
|
|
|
|
| |
Common shares, $0.0005 par value; 2.0 billion shares authorized; 121.5 million (2020) and 137.4 million (2019) shares outstanding |
|
| 0.1 |
|
|
| 0.1 |
| |
Paid-in capital in excess of par value |
|
| 335.8 |
|
|
| 366.6 |
| |
Accumulated other comprehensive loss |
|
| (229.7 | ) |
|
| (212.5 | ) | |
Accumulated deficit |
|
| (690.2 | ) |
|
| (215.3 | ) | |
Treasury stock, at cost, 10.0 million (2020) and 10.0 million (2019) shares |
|
| (328.9 | ) |
|
| (328.9 | ) | |
Total shareholders’ deficit |
|
| (912.9 | ) |
|
| (390.0 | ) | |
Total liabilities and shareholders’ deficit |
| $ | 2,921.2 |
|
| $ | 2,678.6 |
|
See the accompanying notes to unaudited condensed consolidated financial statements.
HERBALIFE NUTRITION LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 30, 2020 |
|
| September 30, 2019 |
|
| September 30, 2020 |
|
| September 30, 2019 |
| ||||
|
| (in millions, except per share amounts) |
| |||||||||||||
Net sales |
| $ | 1,521.8 |
|
| $ | 1,244.5 |
|
| $ | 4,131.1 |
|
| $ | 3,656.8 |
|
Cost of sales |
|
| 322.7 |
|
|
| 243.4 |
|
|
| 841.2 |
|
|
| 728.2 |
|
Gross profit |
|
| 1,199.1 |
|
|
| 1,001.1 |
|
|
| 3,289.9 |
|
|
| 2,928.6 |
|
Royalty overrides |
|
| 463.1 |
|
|
| 363.8 |
|
|
| 1,251.2 |
|
|
| 1,090.1 |
|
Selling, general, and administrative expenses |
|
| 529.7 |
|
|
| 500.1 |
|
|
| 1,559.5 |
|
|
| 1,412.5 |
|
Other operating income |
|
| (0.6 | ) |
|
| (6.4 | ) |
|
| (13.0 | ) |
|
| (33.7 | ) |
Operating income |
|
| 206.9 |
|
|
| 143.6 |
|
|
| 492.2 |
|
|
| 459.7 |
|
Interest expense, net |
|
| 35.2 |
|
|
| 31.6 |
|
|
| 89.0 |
|
|
| 104.0 |
|
Other income, net |
|
| — |
|
|
| (1.3 | ) |
|
| — |
|
|
| (15.7 | ) |
Income before income taxes |
|
| 171.7 |
|
|
| 113.3 |
|
|
| 403.2 |
|
|
| 371.4 |
|
Income taxes |
|
| 33.6 |
|
|
| 31.8 |
|
|
| 104.4 |
|
|
| 117.1 |
|
Net income |
| $ | 138.1 |
|
| $ | 81.5 |
|
| $ | 298.8 |
|
| $ | 254.3 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 1.07 |
|
| $ | 0.59 |
|
| $ | 2.21 |
|
| $ | 1.85 |
|
Diluted |
| $ | 1.04 |
|
| $ | 0.58 |
|
| $ | 2.17 |
|
| $ | 1.79 |
|
Weighted-average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 129.2 |
|
|
| 137.4 |
|
|
| 135.0 |
|
|
| 137.3 |
|
Diluted |
|
| 132.5 |
|
|
| 140.0 |
|
|
| 137.8 |
|
|
| 142.3 |
|
See the accompanying notes to unaudited condensed consolidated financial statements.
HERBALIFE NUTRITION LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
| Three Months Ended |
|
| Nine Months Ended |
| |||||||||||
|
| September 30, 2020 |
|
| September 30, 2019 |
|
| September 30, 2020 |
|
| September 30, 2019 |
| |||||
|
| (in millions) |
| ||||||||||||||
Net income |
| $ | 138.1 |
|
| $ | 81.5 |
|
| $ | 298.8 |
|
| $ | 254.3 |
| |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Foreign currency translation adjustment, net of income taxes of $0.7 and $(0.1) for the three months ended September 30, 2020 and 2019, respectively, and $(4.1) and $(1.1) for the nine months ended September 30, 2020 and 2019, respectively |
|
| 19.5 |
|
|
| (24.0 | ) |
|
| (20.4 | ) |
|
| (18.7 | ) | |
Unrealized (loss) gain on derivatives, net of income taxes of $(0.1) and $0 for the three months ended September 30, 2020 and 2019, respectively, and $(0.4) and $0 for the nine months ended September 30, 2020 and 2019, respectively |
|
| (3.1 | ) |
|
| — |
|
|
| 3.2 |
|
|
| (1.9 | ) | |
Total other comprehensive income (loss) |
|
| 16.4 |
|
|
| (24.0 | ) |
|
| (17.2 | ) |
|
| (20.6 | ) | |
Total comprehensive income |
| $ | 154.5 |
|
| $ | 57.5 |
|
| $ | 281.6 |
|
| $ | 233.7 |
|
See the accompanying notes to unaudited condensed consolidated financial statements.
HERBALIFE NUTRITION LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| Nine Months Ended |
| |||||
|
| September 30, 2020 |
|
| September 30, 2019 |
| ||
|
| (in millions) |
| |||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
| $ | 298.8 |
|
| $ | 254.3 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 74.3 |
|
|
| 73.4 |
|
Share-based compensation expenses |
|
| 37.9 |
|
|
| 29.7 |
|
Non-cash interest expense |
|
| 19.7 |
|
|
| 37.5 |
|
Deferred income taxes |
|
| 10.5 |
|
|
| 8.0 |
|
Inventory write-downs |
|
| 10.6 |
|
|
| 17.9 |
|
Foreign exchange transaction loss |
|
| 14.3 |
|
|
| 4.0 |
|
Other |
|
| 2.1 |
|
|
| (10.4 | ) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Receivables |
|
| (37.6 | ) |
|
| (35.7 | ) |
Inventories |
|
| (26.6 | ) |
|
| (63.5 | ) |
Prepaid expenses and other current assets |
|
| (31.0 | ) |
|
| 2.7 |
|
Accounts payable |
|
| 22.6 |
|
|
| (2.9 | ) |
Royalty overrides |
|
| 55.3 |
|
|
| 5.9 |
|
Other current liabilities |
|
| 74.2 |
|
|
| (18.0 | ) |
Other |
|
| (9.0 | ) |
|
| (2.0 | ) |
Net cash provided by operating activities |
|
| 516.1 |
|
|
| 300.9 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of property, plant, and equipment |
|
| (75.6 | ) |
|
| (79.5 | ) |
Other |
|
| 0.1 |
|
|
| — |
|
Net cash used in investing activities |
|
| (75.5 | ) |
|
| (79.5 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Borrowings from senior secured credit facility, net of discount |
|
| 30.2 |
|
|
| — |
|
Principal payments on senior secured credit facility and other debt |
|
| (15.9 | ) |
|
| (17.4 | ) |
Repayment of convertible senior notes |
|
| — |
|
|
| (675.0 | ) |
Proceeds from senior notes |
|
| 600.0 |
|
|
| — |
|
Debt issuance costs |
|
| (7.8 | ) |
|
| — |
|
Share repurchases |
|
| (844.2 | ) |
|
| (9.9 | ) |
Other |
|
| 2.6 |
|
|
| 2.5 |
|
Net cash used in financing activities |
|
| (235.1 | ) |
|
| (699.8 | ) |
Effect of exchange rate changes on cash, cash equivalents, and restricted cash |
|
| (10.1 | ) |
|
| (13.4 | ) |
Net change in cash, cash equivalents, and restricted cash |
|
| 195.4 |
|
|
| (491.8 | ) |
Cash, cash equivalents, and restricted cash, beginning of period |
|
| 847.5 |
|
|
| 1,215.0 |
|
Cash, cash equivalents, and restricted cash, end of period |
| $ | 1,042.9 |
|
| $ | 723.2 |
|
See the accompanying notes to unaudited condensed consolidated financial statements.
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 officers 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, 20162019 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, 2017,2020 and for the three and nine months ended September 30, 20172020 and 2016,2019 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, 2017,2020 and for the three and nine months ended September 30, 20172020 and 2016.2019. 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, 2016,2019, or the 20162019 10-K. Operating results for the three and nine months ended September 30, 2017,2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2020.
Recently Adopted Pronouncements
In MarchJune 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU is intended to simplify various aspects related to how share-based payments 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 whether the event that triggers the ability to exercise a put or call option is related to interest rates or credit risk of the entity. In the first quarter of 2017, the Company adopted 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 or 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, 2016-13, 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. The amendments in this update are effective for reporting periods beginning after December 15, 2017, 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 will not have a material impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instrument — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU changes the impairment model for most financial assets, requiring the use of an expected loss model which requires entities to estimate 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 cost of the financial asset, resulting in a net presentation of the amount expected 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. The amendments in this update are effective for reporting periods beginning after December 15, 2019, with early adoption permitted for reporting periods beginning after December 15, 2018. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU provides clarification on eight specific cash flow issues regarding presentation and classification in the statement of cash flows with the objective of reducing the existing diversity in practice. The amendments in this update are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The adoption of this guidance willduring the first quarter of 2020 did not have a material impact on the Company’s condensed consolidated financial statements.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, with early adoption permitted. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.
In November 2016, 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. The Company is evaluating 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 willduring the first quarter of 2020 did not have a material impact on the Company’s condensed consolidated financial statements.
In August 2017,2018, the FASB issued ASU No. 2017-12, Derivatives and Hedging: Targeted Improvements2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to Accountingthe Disclosure Requirements for Hedging ActivitiesFair Value Measurement. This ASU improvesmodifies the financial reportingdisclosure requirements on fair value measurements in Topic 820 based on the consideration of hedging relationshipscosts and benefits to better portraypromote the economic resultsappropriate exercise and discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of an entity's risk management activities in its financial statementsentities and makes certain targeted improvements to simplify the application of existing hedge accounting guidance.their auditors when evaluating disclosure requirements. The amendments in this update are effective for reporting periods beginning after December 15, 2018,2019, with early adoption permitted. The adoption of this guidance during the first quarter of 2020 did not have a material impact on the Company’s condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU clarifies the accounting for implementation costs of a hosting arrangement that is a service contract and aligns that accounting, regardless of whether the arrangement conveys a license to the hosted software. The amendments in this update are effective for reporting periods beginning after December 15, 2019, with early adoption permitted. The Company adopted the guidance with an initial application date of January 1, 2020 with prospective application to implementation costs incurred after January 1, 2020. The adoption of this guidance during the first quarter of 2020 did not have a material impact on the Company’s condensed consolidated financial statements.
In November 2019, the FASB issued ASU No. 2019-08, Compensation—Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements—Share-Based Consideration Payable to a Customer. This ASU clarifies the accounting for measuring share-based payment awards granted to a customer. The amendments in this update are effective for reporting periods beginning after December 15, 2019, with early adoption permitted. The adoption of this guidance during the first quarter of 2020 did not have a material impact on the Company’s condensed consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. The amendments in this update are effective as of March 12, 2020 through December 31, 2022. The adoption of this guidance during the first quarter of 2020 did not have a material impact on the Company’s condensed consolidated financial statements.
New Accounting Pronouncements
In August 2018, the FASB issued ASU No. 2018-14, Compensation — Retirement Benefits — Defined Benefit Plans — General (Subtopic 715-20): Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU removes disclosures that are no longer considered cost beneficial, clarifies the specific requirements of disclosures, and adds disclosure requirements identified as relevant. The amendments in this update are effective for reporting periods beginning after December 15, 2020, with early adoption permitted. The Company is evaluating the potential impact of this adoption on its condensed consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU simplifies the accounting for income taxes by eliminating some exceptions to the general approach in ASC Topic 740, Income Taxes, and clarifies certain aspects of the existing guidance to promote more consistent application, among other things. The amendments in this update are effective for reporting periods beginning after December 15, 2020, with early adoption permitted. The Company is evaluating the potential impact of this adoption on its condensed consolidated financial statements.
In August 2020, the FASB issued ASU No. 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): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU simplifies the accounting for convertible instruments by eliminating certain accounting models, resulting in fewer embedded conversion features being separately recognized from the host contract, and also 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 diluted 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 convertible instruments. The amendments in this update are effective for reporting periods beginning after December 15, 2021, with early adoption permitted. The Company is evaluating the potential impact of this adoption on its condensed consolidated financial statements.
Revenue Recognition
The Company’s net sales consist of product sales. In general, the Company's performance obligation is to transfer its products to its Members. The Company generally recognizes revenue when product is delivered 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 Company recognizes revenue based on the Company’s 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.
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 Company. Distributor allowances resulting from the Company’s sales of its products to its Members are recorded against net sales because the distributor allowances represent discounts from the 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 the principal party of the 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 $90.9 million and $56.0 million as of September 30, 2020 and December 31, 2019, respectively. Substantially all credit card receivables were current as of September 30, 2020 and December 31, 2019. The Company recorded $0.8 million and $1.2 million during the three months ended September 30, 2020 and 2019, respectively, and $2.1 million and $2.3 million during the nine months ended September 30, 2020 and 2019, respectively, in bad-debt expense related to allowances for the Company’s receivables. As of September 30, 2020 and December 31, 2019, the Company’s allowance for doubtful accounts was $2.7 million and $2.5 million, respectively. As of September 30, 2020 and December 31, 2019, 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, 2020, the Company recognized substantially all of the revenues that were included within advance sales deposits as of December 31, 2019 and any remaining such balance was not material as of September 30, 2020. Advance sales deposits are included in Other current liabilities on the Company’s condensed consolidated 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 $3.9 million and $4.7 million as of September 30, 2020 and December 31, 2019, respectively.
The Company’s products are grouped in five 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 5 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, 2017,2020, 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 recognized government grant income related to its regional headquarters and distribution centers within China as compared to $0.2of approximately $0.6 million and $29.1$6.4 million forduring the same periodsthree months ended September 30, 2020 and 2019, respectively, and approximately $13.0 million and $27.7 million during the nine months ended September 30, 2020 and 2019, 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.
Reclassifications
Certain reclassifications were madeDuring the nine months ended September 30, 2019, the Company also recognized $6.0 million in other operating income related to the prior period condensed consolidated balance sheets,finalization of insurance recoveries in connection with the flooding at one of its warehouses in Mexico during September 2017, which damaged certain of the Company’s inventory stored within the warehouse. See Note 7, Contingencies, to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, or the 2018 10-K, for further discussion.
Other Income, Net
During the three months ended September 30, 2020, the Company did not recognize any other income, net. During the three months ended September 30, 2019, the Company recognized a gain of $1.3 million on the revaluation of the non-transferable contractual contingent value right, or CVR, provided for each share tendered in the October 2017 modified Dutch auction tender offer (See Note 8, Shareholders’ Deficit, to the Consolidated Financial Statements included in the Company’s 2019 10-K for further information on the CVR) in other income, net within its condensed consolidated statements of comprehensiveincome.
During the nine months ended September 30, 2020, the Company did not recognize any other income, andnet. During the nine months ended September 30, 2019, the Company recognized a gain of $15.7 million on the revaluation of the CVR in other income, net within its condensed consolidated statements of income.
This non-cash income is included as a non-cash adjustment to net income in the Company’s cash flows from operating activities within its condensed consolidated statements of cash flows to conformflows.
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 current period presentation. See Note 13, Detailtotal of Certain Balance Sheet Accounts, for further information onthe same such amounts shown in the Company’s condensed consolidated statements of cash flows:
|
| September 30, 2020 |
|
| December 31, 2019 |
| ||
|
| (in millions) |
| |||||
Cash and cash equivalents |
| $ | 1,034.6 |
|
| $ | 839.4 |
|
Restricted cash included in Prepaid expenses and other current assets |
|
| 2.5 |
|
|
| 2.5 |
|
Restricted cash included in Other assets |
|
| 5.8 |
|
|
| 5.6 |
|
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows |
| $ | 1,042.9 |
|
| $ | 847.5 |
|
The majority of the Company’s consolidated restricted cash is held by certain balance sheet itemsof its foreign entities and consists of cash deposits that are combinedrequired due to the business operating requirements in those jurisdictions.
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 was higher for both the three and nine months ended September 30, 2020 as compared to the same periods in 2019 and its cash and cash equivalents as of September 30, 2020 increased as compared to December 31, 2019. The ultimate extent and magnitude of the impact of COVID-19 is not known and could have a material adverse impact to the Company’s business and future financial statement presentation.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 doubtful accounts. After reviewing historical and forward-looking information, the Company determined there were 0 impairments required relating to its goodwill, marketing-related intangible assets, and long-lived assets during the three and nine months ended September 30, 2020.
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, 2017 |
|
| December 31, 2016 |
|
| September 30, 2020 |
|
| December 31, 2019 |
| ||||
|
| (In millions) |
|
| (in millions) |
| ||||||||||
Raw materials |
| $ | 41.8 |
|
| $ | 49.3 |
|
| $ | 75.2 |
|
| $ | 48.7 |
|
Work in process |
|
| 5.0 |
|
|
| 3.9 |
|
|
| 6.8 |
|
|
| 6.6 |
|
Finished goods |
|
| 307.4 |
|
|
| 318.1 |
|
|
| 352.1 |
|
|
| 380.9 |
|
Total |
| $ | 354.2 |
|
| $ | 371.3 |
|
| $ | 434.1 |
|
| $ | 436.2 |
|
4. Long-Term Debt
Long-term debt consists of the following:
|
| September 30, 2017 |
|
| December 31, 2016 |
|
| September 30, 2020 |
|
| December 31, 2019 |
| ||||
|
| (In millions) |
|
| (in millions) |
| ||||||||||
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 |
| ||||||||
Borrowings under senior secured credit facility, carrying value |
| $ | 981.2 |
|
| $ | 965.3 |
| ||||||||
2.625% convertible senior notes due 2024, carrying value of liability component |
|
| 454.6 |
|
|
| 437.4 |
| ||||||||
7.875% senior notes due 2025, carrying value |
|
| 592.6 |
|
|
| — |
| ||||||||
7.250% senior notes due 2026, carrying value |
|
| 395.7 |
|
|
| 395.3 |
| ||||||||
Other |
|
| 9.7 |
|
|
| 13.1 |
|
|
| 4.5 |
|
|
| 5.0 |
|
Total |
|
| 2,280.7 |
|
|
| 1,447.9 |
|
|
| 2,428.6 |
|
|
| 1,803.0 |
|
Less: current portion |
|
| 104.1 |
|
|
| 9.5 |
|
|
| 24.9 |
|
|
| 24.1 |
|
Long-term portion |
| $ | 2,176.6 |
|
| $ | 1,438.4 |
|
| $ | 2,403.7 |
|
| $ | 1,778.9 |
|
Senior Secured Credit Facility
On May 4, 2015, the Company amended its prior 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 the 2017 Credit Facility, consisting of a $1,300.0 million term loan B, or the 2017 Term Loan B, and a $150$150.0 million revolving credit facility, or the 2017 Revolving Credit Facility, with a syndicate of financial institutions as lenders, or Lenders.lenders. The 2017 Revolving Credit Facility matureswas to mature on February 15, 2022 and the 2017 Term Loan maturesB was to mature on February 15, 2023.
The Term Loan was issued to the Lenders at a 2% discount, or $26.0 million. In connection with the2017 Credit Facility the Company also repaid the $410.0 million outstanding balance on its Prior Revolving Credit Facility. The Company incurred approximately $22.6 million of debt issuance costswas amended, effective March 16, 2018, to make certain technical amendments in connection with the offering of the 2024 Convertible Notes, as defined below. The Company terminated the 2017 Credit Facility. The debt issuance costsFacility on August 16, 2018 and the discount are recorded on$1,178.1 million outstanding was repaid in full. Prior to its termination, the Company’s condensed consolidated balance sheet and are being amortized over the life of the Credit Facility using the effective interest method.
Borrowings under the2017 Term Loan bearB most recently bore interest at either the eurocurrency rate plus a margin of 5.50% or the base rate plus a margin of 4.50%. Prior to August 15,, and the 2017 borrowings under the Revolving Credit Facility most recently 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%, based on the Company’s consolidated leverage ratio. The eurocurrency rate was based on adjusted LIBOR and was subject to a floor of 0.75%. The base rate represented 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 was subject to a floor of 1.75%.
The 2017 Term Loan B was issued to the lenders at a 2% discount, or $26.0 million. The Company incurred approximately $22.6 million of debt issuance costs in connection with the 2017 Credit Facility. The debt issuance costs and the discount were recorded on the Company’s condensed consolidated balance sheet and were being amortized over the life of the 2017 Credit Facility using the effective-interest method. The Company wrote off all remaining unamortized debt issuance costs and discount related to the 2017 Credit Facility upon its termination, which is included in the loss on extinguishment as described below.
On August 16, 2018, the Company entered into a $1.25 billion senior secured credit facility, or the 2018 Credit Facility, consisting of a $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 $250.0 million revolving credit facility, or the 2018 Revolving Credit Facility, with a syndicate of financial institutions as lenders. Prior to the amendment described below, the 2018 Term Loan A and 2018 Revolving Credit Facility both were to mature on August 16, 2023. The 2018 Term Loan B matures upon the earlier of: (i) August 18, 2025; or (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 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, the Company issued $400 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 2017 Credit Facility. For accounting purposes, pursuant to FASB ASC Topic 470, Debt, or ASC 470, these transactions were accounted for as an extinguishment of the 2017 Credit Facility. The Company recognized a loss on extinguishment of $35.4 million as a result, which was recorded in other (income) expense, net within the Company’s condensed consolidated statements of income during the year ended December 31, 2018.
The 2018 Term Loan B was issued to the lenders at a 0.25% discount, or $1.9 million. The Company incurred approximately $11.7 million of debt issuance costs in connection with the 2018 Credit Facility. The discount and debt issuance costs are recorded on the Company’s condensed consolidated balance sheet and are being amortized over the life of the 2018 Credit Facility using the effective-interest method.
On December 12, 2019, 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 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 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 year 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.
Under the 2018 Credit Facility, borrowings under both the 2018 Term Loan A and 2018 Revolving Credit Facility bear interest at either the eurocurrency rate plus a margin of 2.50% or the base rate plus a margin of 1.50%. Borrowings under the 2018 Term Loan B bear interest at either the eurocurrency rate plus a margin of 2.75% or the base rate plus a margin of 1.75%. The eurocurrency rate is based on adjusted LIBOR and is subject to a floor of 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 setquoted by Credit Suisse,The Wall Street Journal, and is subject to a floor of 1.75%. The eurocurrency rate is based on adjusted LIBOR and is subject to a floor of 0.75%1.00%. The Company is required to pay a commitment fee on the 2018 Revolving Credit Facility of 0.50%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, 20172020 and December 31, 2016,2019, 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 may be voluntarily prepaid without premium or penalty, subject to customary breakage fees in connection with the prepayment of a eurocurrency loan. Under the amended 2018 Credit Facility, amounts outstanding under the 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 2019 consolidated leverage ratio and excess cash flow calculation, both as defined under the terms of the 2018 Credit Facility, the Company was not required to make a mandatory prepayment in 2020 toward the 2018 Term Loan B.
OnAs of September 30, 20172020 and December 31, 2016,2019, the weighted averageweighted-average interest rate for borrowings under the Credit Facility and the Prior2018 Credit Facility was 6.71%3.55% and 4.29%5.52%, respectively.
During the threenine months ended March 31, 2017,September 30, 2020, the Company repaid a total amount of $410.0$15.6 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 Term Loan. 2018 Credit Facility. During the threenine months ended March 31, 2016,September 30, 2019, the Company repaid a total amount of $229.7$15.0 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, 2017,2020 and December 31, 2019, the U.S. dollar amount outstanding under the 2018 Credit Facility was $989.9 million and $975.0 million, respectively. Of the $989.9 million outstanding under the 2018 Credit Facility as of September 30, 2020, $254.9 million was outstanding under the 2018 Term Loan A and $735.0 million was $1,251.2 million.outstanding under the 2018 Term Loan B. Of the $975.0 million outstanding under the 2018 Credit Facility as of December 31, 2019, $234.4 million was outstanding under the 2018 Term Loan A and $740.6 million was outstanding under the 2018 Term Loan B. There were no0 borrowings outstanding onunder the 2018 Revolving Credit Facility as of September 30, 2017. As of2020 and December 31, 2016, the U.S. dollar amount outstanding under the Prior Revolving Credit Facility was $410.0 million.2019. There were no0 outstanding foreign currency borrowings under the 2018 Credit Facility as of September 30, 20172020 and December 31, 2016 under the Credit Facility and the Prior Credit Facility, respectively.2019.
During the three and nine months ended September 30, 2017,2020 and 2019, the Company recognized $23.9$8.0 million and $58.5$14.6 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$0.5 million and $2.0$0.5 million, respectively, relating to amortization of debt issuance costs. During the nine months ended September 30, 2020 and 2019, the Company recognized $29.2 million and $44.5 million, respectively, of interest expense relating to the 2018 Credit Facility, which included $0.2 million and $0.2 million, respectively, relating to non-cash interest expense relating to the debt discount and $1.4 million and $1.3 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, 2020 and December 31, 2019, the carrying value of the 2018 Term Loan A was $253.7 million and $233.2 million, respectively, and the fair value was approximately $251.6 million and $235.7 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, 2017,2020 and December 31, 2019, the carrying amount of the 2018 Term Loan B was $1,212.6$727.5 million and $732.1 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. The fair value of the outstanding borrowings on the Company’s Prior Revolving Credit Facility approximated its carrying value as of December 31, 2016 due to its variable interest rate which reprices frequently$725.4 million 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.$744.8 million, respectively.
Convertible Senior Notes due 2019
DuringIn February 2014, the Company initially issued $1 billion aggregate principal amount of convertible senior notes, or the 2019 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 2019 Convertible Notes which was subsequently exercised in full duringin February 2014, resulting in a total issuance of $1.15 billion aggregate principal amount of 2019 Convertible Notes. The 2019 Convertible Notes arewere senior unsecured obligations which rankranked 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 2019 Convertible Notes paypaid interest at a rate of 2.00% per annum payable semiannually in arrears on February 15 and August 15 of each year, beginning on August 15, 2014. TheUnless earlier repurchased or converted, the 2019 Convertible Notes maturematured on August 15, 2019, unless earlier repurchased or converted.2019. The Company maycould not redeem the 2019 Convertible Notes prior to their stated maturity date. Holders of the 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 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% 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 the Company’s common shares and the conversion rate for the Convertible Notes for each such day; or (iii) upon the occurrence of specified corporate events. On and after May 15, 2019, holders may convert their Convertible Notes at any time, regardless of the foregoing circumstances. Upon conversion, the 2019 Convertible Notes willwere to be settled in cash and, if applicable, the Company’s common shares, based on the applicable conversion rate at such time. The 2019 Convertible Notes had an initial conversion rate of 11.590823.1816 common shares per $1,000 principal amount of the 2019 Convertible Notes, (which is equal toor an initial conversion price of approximately $86.28$43.14 per common share).share.
The Company incurred approximately $26.6 million of issuance costs during the first quarter of 2014 relating to the issuance of the 2019 Convertible Notes. Of the $26.6 million issuance costs incurred, $21.5 million and $5.1 million were recorded as debt issuance costs and additional paid-in capital, respectively, in proportion to the allocation of the proceeds of the 2019 Convertible Notes. The $21.5 million of debt issuance costcosts recorded on the Company’s condensed consolidated balance sheet is beingwere amortized over the contractual term of the 2019 Convertible Notes using the effective interesteffective-interest method.
DuringIn February 2014, the $1.15 billion proceeds received fromaggregate principal amount of the issuance of the2019 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 million and $219.1 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 2019 Convertible Notes as a whole. Since the Company was required to settle these 2019 Convertible Notes at face value at or prior to maturity, this liability component was 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 2019 Convertible Notes remained outstanding. The effective-interest rate on the 2019 Convertible Notes was approximately 6.2% per annum. The equity component was not to be remeasured as long as it continued to meet the conditions for equity classification.
In March 2018, the Company issued $550 million aggregate principal amount of new convertible senior notes due 2024, or 2024 Convertible Notes as described below, and subsequently used the proceeds, along with cash on hand, to repurchase $475.0 million of its existing 2019 Convertible Notes from a limited number of holders in privately negotiated transactions for an aggregate purchase price of $583.5 million, which included $1.0 million of accrued interest. For accounting purposes, pursuant to ASC 470, these transactions were accounted for as an extinguishment of 2019 Convertible Notes and an issuance of new 2024 Convertible Notes. The Company allocated the purchase price between the fair value of the liability component and the equity component of the 2019 Convertible Notes at $459.4 million and $123.0 million, respectively. As a result, the Company recognized $446.4 million as a reduction to long-term debt representing the carrying value of the liability component and $123.0 million as a reduction to additional paid-in capital representing the equity component of the repurchased 2019 Convertible Notes. The $13.1 million difference between the fair value and carrying value of the liability component of the repurchased 2019 Convertible Notes was recognized as a loss on extinguishment of debt as a result of the transaction and was recorded in other (income) expense, net within the Company’s condensed consolidated statement of income during the year ended December 31, 2018. The accounting impact of the 2024 Convertible Notes is described in further detail below.
On August 15, 2019, the 2019 Convertible Notes matured and the Company repaid the $675.0 million outstanding principal in cash, as well as $6.7 million of accrued interest.
During the three months ended September 30, 2019, the Company recognized $5.4 million of interest expense relating to the 2019 Convertible Notes, which included $3.5 million relating to non-cash interest expense relating to the debt discount and $0.4 million relating to amortization of debt issuance costs. During the nine months ended September 30, 2019, the Company recognized $27.0 million of interest expense relating to the 2019 Convertible Notes, which included $17.0 million relating to non-cash interest expense relating to the debt discount and $1.7 million relating to amortization of debt issuance costs.
In conjunction with the issuance of the 2019 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, and paid approximately $123.8 million to enter into capped call transactions with respect to its common shares, or the Capped Call Transactions, with certain financial institutions. Subsequently, in conjunction with the repurchase of a portion of the 2019 Convertible Notes, during March 2018, the Company entered into agreements with the option counterparties to the Capped Call Transactions to terminate a portion of such existing transactions. See Note 10, Shareholders’ Deficit, for additional discussion on the Forward Transactions and Capped Call Transactions entered into in conjunction with the issuance of these 2019 Convertible Notes.
Convertible Senior Notes due 2024
In March 2018, the Company issued $550 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 2024 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 2.625% 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. 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 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% 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 principal amount of 2024 Convertible Notes for each trading day of that measurement period was less than 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 (iv) upon the occurrence of specified corporate events. On and after December 15, 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, 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 16.0056 common shares per $1,000 principal amount of the 2024 Convertible Notes, or an initial conversion price of approximately $62.48 per common share. The conversion rate is subject to adjustment upon the occurrence of certain events and was 16.0352 common shares per $1,000 principal amount of the 2024 Convertible Notes, or a conversion price of approximately $62.36 per common share, as of September 30, 2020.
The Company incurred approximately $12.9 million of issuance costs during the first quarter of 2018 relating to the issuance of the 2024 Convertible Notes. Of the $12.9 million issuance costs incurred, $9.6 million and $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 $9.6 million of debt issuance costs, which was recorded as an additional debt discount on the Company’s condensed consolidated balance sheet, are being amortized over the contractual term of the 2024 Convertible Notes using the effective-interest method.
In March 2018, the $550 million aggregate principal amount of the 2024 Convertible Notes were initially allocated between long-term debt, or liability component, and additional paid-in-capital, or equity component, within the Company’s condensed consolidated balance sheet at $410.1 million and $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.
As of September 30, 2017,2020, 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 $95.4 million, and the carrying amount of the liability component was $1,058.4$454.6 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. As of December 31, 2016,2019, 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 $112.6 million, and the carrying amount of the liability component was $1,024.8$437.4 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. The fair value of the liability component relating to the 2024 Convertible Notes was approximately $1,064.6$503.1 million and $961.3$508.6 million as of September 30, 20172020 and December 31, 2016,2019, respectively. At
During the three months ended September 30, 20172020 and 2019, the Company recognized $9.5 million and $9.0 million, respectively, of interest expense relating to the 2024 Convertible Notes, which included $5.5 million and $5.1 million, respectively, relating to non-cash interest expense relating to the debt discount and $0.4 million and $0.3 million, respectively, relating to amortization of debt issuance costs. During the nine months ended September 30, 2020 and 2019, the Company recognized $28.1 million and $26.7 million, respectively, of interest expense relating to the 2024 Convertible Notes, which included $16.2 million and $14.9 million, respectively, relating to non-cash interest expense relating to the debt discount and $1.1 million and $1.0 million, respectively, relating to amortization of debt issuance costs.
Senior Notes due 2025
In May 2020, the Company issued $600 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, 2020, the outstanding principal on the 2025 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 2025 Notes was approximately $646.1 million as of September 30, 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 $12.1 million of interest expense relating to the 2025 Notes, which included $0.3 million relating to amortization of debt issuance costs. During the nine months ended September 30, 2020, the Company recognized $16.4 million of interest expense relating to the 2025 Notes, which included $0.4 million relating to amortization of debt issuance costs.
Senior Notes due 2026
In August 2018, the Company issued $400 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 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 2026 Notes pay 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 mature on August 15, 2026.
At any time prior to August 15, 2021, the Company may redeem all or part of the 2026 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 August 15, 2021, the Company may redeem up to 40% of the aggregate principal amount of the 2026 Notes with the proceeds of one or more equity offerings, at a redemption price equal to 107.250%, plus accrued and unpaid interest. Furthermore, at any time on or after August 15, 2021, the Company may redeem all or part of the 2026 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 August 15 of the years indicated below:
|
| Percentage |
| |
2021 |
|
| 103.625 | % |
2022 |
|
| 101.813 | % |
2023 and thereafter |
|
| 100.000 | % |
The 2026 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 2026 Notes contain customary events of default.
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, are being amortized over the contractual term of the 2026 Notes using the effective-interest method.
As of September 30, 2020, the outstanding principal on the 2026 Notes was $400.0 million, the unamortized debt issuance costs were $4.3 million, and the carrying amount was $395.7 million, which was recorded to long-term debt within the Company’s condensed consolidated balance sheet. As of December 31, 2019, the outstanding principal on the 2026 Notes was $400.0 million, the unamortized debt issuance costs were $4.7 million, and the carrying amount was $395.3 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 $410.9 million and $424.1 million as of September 30, 2020 and December 31, 2016,2019, 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.
During the three months ended September 30, 2020 and 2019, the Company recognized $7.4 million and $7.3 million, respectively, of interest expense relating to the 2026 Notes, which included $0.1 million and $0.1 million, respectively, relating to amortization of debt issuance costs. During the nine months ended September 30, 2020 and 2019, the Company recognized $22.2 million and $22.1 million, respectively, of interest expense relating to the 2026 Notes, which included $0.4 million and $0.4 million, respectively, relating to amortization of debt issuance costs.
Valuation of 2019 Convertible Notes and 2024 Convertible Notes – Level 2 and Level 3 Inputs
In order to determine the initial value of the 2019 Convertible Notes and the 2024 Convertible Notes, the Company determined the fair value of the liability component of the 2019 Convertible Notes and 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 2019 Convertible Notes and 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 2026 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$37.0 million and $24.0$36.7 million for the three months ended September 30, 20172020 and 2016,2019, respectively, and $117.4$96.4 million and $74.6$121.5 million for the nine months ended September 30, 20172020 and 2016,2019, respectively, which was recognized within its condensed consolidated statements of income.
As of September 30, 2017,2020, 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) |
| |
2020 |
| $ | 7.3 |
|
2021 |
|
| 22.8 |
|
2022 |
|
| 27.5 |
|
2023 |
|
| 27.5 |
|
2024 |
|
| 584.0 |
|
Thereafter |
|
| 1,875.2 |
|
Total |
| $ | 2,544.3 |
|
Certain vendors and government agencies may require letters of credit or similar guaranteeing arrangements to be issued or executed. As of September 30, 2017,2020, the Company had $37.9$35.6 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 bondsletter of credit described in Note 5, Contingencies.
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. On January 16, 2018, the Tax Court of Mexico issued a verdict upholding the assessment issued by the Mexican Tax Administration Service. On April 16, 2018, the Company filed an appeal of this verdict, and in July 2019, the 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 issuedwill pay the assessed amount in due course. The Company previously recognized a surety bondloss of $19.0 million in selling, general, and administrative expenses within the amountCompany’s condensed consolidated statement of $17.9 million, translated atincome during the year ended December 31, 2019 and has a corresponding accrued liability within its condensed consolidated balance sheet as of September 30, 2017 spot rate,2020. The Company has an issued but undrawn letter of credit through an insurance companya bank to guarantee payment of the tax assessment as required, whileand the Company pursues an appealletter of the assessment. Litigation in this case is currently ongoing. The Company has not recognized a losscredit continued to remain effective as the Company does not believe a loss is probable.of September 30, 2020.
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, 2017,2020, the Company had $46.3$21.8 million of Mexico VAT related assets, of which $39.7$18.4 million was within non-current other assets and $6.6$3.4 million was within prepaid expenses and other current assets on 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$10.1 million, translated at the September 30, 20172020 spot rate, related to contributions based on payments to the Company’s Members during 2011. rate. The Company filed a first levelis currently litigating these assessments at the tax 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).level. 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.
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$28.5 million, translated at the September 30, 20172020 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$10.6 million, translated at the September 30. 201730, 2020 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 $6.3 million, translated at the September 30, 2020 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$8.9 million, translated at the September 30, 20172020 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$5.2 million, translated at the September 30, 20172020 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 as the Company does not believe a loss is probable.
The Company has received various tax assessments in multiple states in India for multiple years from the Indian VAT authorities in an amount equivalent to approximately $8.1$8.3 million, translated at the September 30, 20172020 spot rate. These assessments are for underpaid VAT. 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.
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$30.3 million, translated at the September 30, 20172020 spot rate. The Company has paid the assessment and has recognized these payments within other assets on its condensed consolidated balance sheet.sheet as of September 30, 2020. 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. 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 $9.9 million, translated at the September 30, 2020 spot rate. The Company has paid the assessment and has recognized this payment within other assets on its condensed consolidated balance sheet as of September 30, 2020. In July 2019, the Company filed an appeal to the National Tax Tribunal of Korea. 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 $15.3 million, translated at the September 30, 2020 spot rate. The Company paid the assessment in September 2020 and has recognized this payment within other assets on its condensed consolidated balance sheet. The Company plans to file an appeal to the National Tax Tribunal of Korea during the fourth quarter of 2020. The Company disagrees with the assertions made in the 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.
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.
The Italian tax authorities audited the Company for the periods 2014 and 2015. The Company responded to the various points relating to income tax and non-income tax matters raised by the tax authorities. In December 2019, the Company reached an agreement with Italian tax authorities on all issues related to the 2014 audit and paid an immaterial amount during December 2019. In regard to the 2015 audit, the Company reached an agreement with the Italian tax authorities on all issues and paid an immaterial amount during the first quarter of 2020. The audit is now closed.
During March 2018, the Chinese Customs Service began an audit of the Company’s Chinese importations initially covering the periods 2015 through 2017 and has subsequently expanded its audit. The Company has responded to the initial questions from the Customs Service and the audit is ongoing. The Company believes that it has accrued the appropriate amounts, and at the present time the Company is unable to reasonably estimate the amount of any potential loss in excess of the amount already accrued relating to these matters.
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 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; 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, haveor DOJ, conducted investigations into the Company’s compliance with the Foreign Corrupt Practices Act, or FCPA, in China. Also, as previously disclosed, the Company conducted its own review and implemented remedial and improvement measures based upon this review, including, but not limited to, 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.
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 things, the Company is required to undertake compliance self-reporting obligations for the three-year term of the respective 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 agreed to pay the SEC and the DOJ aggregate penalties, disgorgement and prejudgment interest of approximately $123 million. The $123 million settlement amount, which had previously been recognized in other current liabilities within the Company’s condensed consolidated balance sheet as of June 30, 2020, was paid in September 2020. If the Company is unable to comply with the DPA, then this could result in a material and adverse impact to the Company’s results of operations and financial condition.
As previously disclosed, the SEC had also requested from the Company documents and other information relating to the Company’s anti-corruption compliancedisclosures regarding its marketing plan in China 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 regardingChina. On September 27, 2019, 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 outthe SEC entered into a settlement resolving this matter. Pursuant to governmental authorities about whatthe administrative order settling this matter, under which the Company believes is manipulative activity with respectneither admitted nor denied the SEC’s allegations (except as to its securities. Because of these allegations,the SEC’s jurisdiction), the Company agreed to cease and others have receiveddesist from committing or causing any violations and may receive additional regulatoryany future violations of Sections 17(a)(2) and governmental inquiries. For example,17(a)(3) of the Company hasSecurities Act and Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder, and pay a $20 million civil penalty. The $20 million settlement amount, which had previously disclosed inquiries frombeen recorded as an accrued liability within 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.Company’s condensed consolidated balance sheet as of June 30, 2019, was paid in October 2019.
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. The Company believes the lawsuit is without merit and will 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 additionalthe 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, 2017,2020, the Company sold products in 9495 countries 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. 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 operatingOperating information for the two2 reportable segments areis 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, 2020 |
|
| September 30, 2019 |
|
| September 30, 2020 |
|
| September 30, 2019 |
| ||||||||
|
| (In millions) |
|
| (in millions) |
| ||||||||||||||||||||||||||
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Primary Reporting Segment |
| $ | 875.6 |
|
| $ | 907.8 |
|
| $ | 2,666.4 |
|
| $ | 2,769.3 |
|
| $ | 1,301.8 |
|
| $ | 1,035.8 |
|
| $ | 3,511.7 |
|
| $ | 3,110.7 |
|
China |
|
| 209.8 |
|
|
| 214.2 |
|
|
| 668.0 |
|
|
| 674.1 |
|
|
| 220.0 |
|
|
| 208.7 |
|
|
| 619.4 |
|
|
| 546.1 |
|
Total Net Sales |
| $ | 1,085.4 |
|
| $ | 1,122.0 |
|
| $ | 3,334.4 |
|
| $ | 3,443.4 |
| ||||||||||||||||
Total net sales |
| $ | 1,521.8 |
|
| $ | 1,244.5 |
|
| $ | 4,131.1 |
|
| $ | 3,656.8 |
| ||||||||||||||||
Contribution margin(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Primary Reporting Segment |
| $ | 538.2 |
|
| $ | 446.7 |
|
| $ | 1,485.4 |
|
| $ | 1,346.2 |
| ||||||||||||||||
China(2) |
|
| 197.8 |
|
|
| 190.6 |
|
|
| 553.3 |
|
|
| 492.3 |
| ||||||||||||||||
Total contribution margin |
| $ | 736.0 |
|
| $ | 637.3 |
|
| $ | 2,038.7 |
|
| $ | 1,838.5 |
| ||||||||||||||||
Selling, general, and administrative expenses(2) |
|
| 529.7 |
|
|
| 500.1 |
|
|
| 1,559.5 |
|
|
| 1,412.5 |
| ||||||||||||||||
Other operating income |
|
| (0.6 | ) |
|
| (6.4 | ) |
|
| (13.0 | ) |
|
| (33.7 | ) | ||||||||||||||||
Interest expense, net |
|
| 35.2 |
|
|
| 31.6 |
|
|
| 89.0 |
|
|
| 104.0 |
| ||||||||||||||||
Other income, net |
|
| — |
|
|
| (1.3 | ) |
|
| — |
|
|
| (15.7 | ) | ||||||||||||||||
Income before income taxes |
|
| 171.7 |
|
|
| 113.3 |
|
|
| 403.2 |
|
|
| 371.4 |
| ||||||||||||||||
Income taxes |
|
| 33.6 |
|
|
| 31.8 |
|
|
| 104.4 |
|
|
| 117.1 |
| ||||||||||||||||
Net income |
| $ | 138.1 |
|
| $ | 81.5 |
|
| $ | 298.8 |
|
| $ | 254.3 |
|
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 |
|
(1) | Contribution margin consists of net sales less cost of sales and |
(2) | Service fees to China independent service providers totaling |
The following table sets forth net sales by geographic area:
|
| 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, 2020 |
|
| September 30, 2019 |
|
| September 30, 2020 |
|
| September 30, 2019 |
| ||||||||
|
| (In millions) |
|
| (in millions) |
| ||||||||||||||||||||||||||
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
United States |
| $ | 193.5 |
|
| $ | 236.0 |
|
| $ | 631.3 |
|
| $ | 737.7 |
|
| $ | 386.7 |
|
| $ | 251.5 |
|
| $ | 1,033.9 |
|
| $ | 774.2 |
|
China |
|
| 220.0 |
|
|
| 208.7 |
|
|
| 619.4 |
|
|
| 546.1 |
| ||||||||||||||||
Mexico |
|
| 114.3 |
|
|
| 112.8 |
|
|
| 334.7 |
|
|
| 341.8 |
|
|
| 110.3 |
|
|
| 116.5 |
|
|
| 321.6 |
|
|
| 357.0 |
|
China |
|
| 209.8 |
|
|
| 214.2 |
|
|
| 668.0 |
|
|
| 674.1 |
| ||||||||||||||||
Others |
|
| 567.8 |
|
|
| 559.0 |
|
|
| 1,700.4 |
|
|
| 1,689.8 |
|
|
| 804.8 |
|
|
| 667.8 |
|
|
| 2,156.2 |
|
|
| 1,979.5 |
|
Total Net Sales |
| $ | 1,085.4 |
|
| $ | 1,122.0 |
|
| $ | 3,334.4 |
|
| $ | 3,443.4 |
| ||||||||||||||||
Total net sales |
| $ | 1,521.8 |
|
| $ | 1,244.5 |
|
| $ | 4,131.1 |
|
| $ | 3,656.8 |
|
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 20162019 10-K. During the nine months ended September 30, 2017,2020, 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 $15.4 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$9.2 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, 20172020 and 2016, share-based compensation expense amounted to $9.92019, respectively, and $37.9 million and $9.8$29.7 million respectively. Forfor the nine months ended September 30, 20172020 and 2016, share-based compensation expense amounted to $32.6 million and $30.3 million,2019, respectively. As of September 30, 2017,2020, the total unrecognized compensation cost related to all non-vested stock awards was $55.5$87.2 million and the related weighted-average period over which it is expected to be recognized is approximately 1.51.7 years.
The following tables summarizetable summarizes the activity for stock appreciation rights, or SARs, under all share-based compensation plans for the nine months ended September 30, 2017:2020:
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, 2019(2)(3) |
|
| 7,001 |
|
| $ | 27.85 |
|
| 5.4 years |
| $ | 138.7 |
|
Granted |
|
| — |
|
| $ | — |
|
|
|
|
|
|
|
Exercised(4) |
|
| (2,914 | ) |
| $ | 28.46 |
|
|
|
|
|
|
|
Forfeited |
|
| (7 | ) |
| $ | 29.03 |
|
|
|
|
|
|
|
Outstanding as of September 30, 2020(2)(3) |
|
| 4,080 |
|
| $ | 27.41 |
|
| 4.7 years |
| $ | 78.5 |
|
Exercisable as of September 30, 2020(5) |
|
| 4,074 |
|
| $ | 27.41 |
|
| 4.7 years |
| $ | 78.4 |
|
Vested and expected to vest as of September 30, 2020 |
|
| 4,080 |
|
| $ | 27.41 |
|
| 4.7 years |
| $ | 78.5 |
|
(1) | The intrinsic value is the amount by which the current market value of the underlying stock exceeds the exercise price of the |
(2) | Includes less than 0.1 million market condition SARs as of both September 30, |
(3) | Includes |
(4) | Includes |
(5) | Includes less than 0.1 million market condition and 1.1 million performance condition SARs. |
The weighted-average grant date fair value ofThere 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, 20172020 and 2016 was $28.36 and $29.49, respectively.2019. The total intrinsic value of SARs exercised during the three months ended September 30, 20172020 and 20162019 was $3.0$38.5 million and $17.9$2.4 million, respectively. The total intrinsic value of SARs exercised during the nine months ended September 30, 20172020 and 20162019 was $100.0$50.2 million and $32.0$19.6 million, respectively.
The following table summarizes the activities for stock units under all share-based compensation plans for the nine months ended September 30, 2020:
Incentive Plan and Independent Directors Stock Units |
| Shares |
|
| Weighted Average Grant Date Fair Value |
| ||||||||||
|
| (In thousands) |
|
|
|
|
|
| Number of Shares |
|
| Weighted-Average Grant Date Fair Value Per Share |
| |||
Outstanding and nonvested December 31, 2016 |
|
| 26 |
|
| $ | 62.35 |
| ||||||||
|
| (in thousands) |
|
|
|
|
| |||||||||
Outstanding and nonvested as of December 31, 2019(1) |
|
| 1,833 |
|
| $ | 49.49 |
| ||||||||
Granted |
|
| 154 |
|
| $ | 68.84 |
|
|
| 1,975 |
|
| $ | 39.63 |
|
Vested |
|
| (24 | ) |
| $ | 62.42 |
|
|
| (321 | ) |
| $ | 49.32 |
|
Forfeited |
|
| — |
|
|
| — |
|
|
| (115 | ) |
| $ | 43.94 |
|
Outstanding and nonvested September 30, 2017 |
|
| 156 |
|
| $ | 68.77 |
| ||||||||
Outstanding and nonvested as of September 30, 2020(1) |
|
| 3,372 |
|
| $ | 43.92 |
| ||||||||
Expected to vest as of September 30, 2020(3) |
|
| 3,094 |
|
| $ | 43.61 |
|
(1) |
|
(2) | Includes 504,908 performance-based stock unit awards. |
(3) | Includes 773,968 performance-based stock unit awards. |
The total vesting date fair value of stock units which vested during the three months ended September 30, 20172020 and 20162019 was $0.1$1.3 million and $0.2 million, respectively. The total vesting date fair value of stock units which vested during the nine months ended September 30, 20172020 and 20162019 was $1.9$12.3 million and $2.0$11.1 million, respectively.
8. Income Taxes
Income taxes were an expense of $26.4$33.6 million and $84.2$31.8 million for the three months ended September 30, 2020 and 2019, respectively, and $104.4 million and $117.1 million for the nine months ended September 30, 2017, respectively, as compared to an expense of $41.7 million2020 and $69.2 million for the same periods in 2016.2019, respectively. The effective income tax rate was 32.6%19.5% and 23.3%28.1% for the three months ended September 30, 2020 and 2019, respectively, and 25.9% and 31.5% for the nine months ended September 30, 2017, respectively, as compared to 32.2%2020 and 30.1% for the same periods in 2016.2019, respectively. The increasedecrease in the effective tax rate for the three months ended September 30, 2017,2020 as compared to the same period in 2016,2019 was primarily due to the impact of changes in the geographic mix of the Company’s income offset byand an increase in net benefits from discrete events. The decrease in the effective tax rate for the nine months ended September 30, 2017,2020 as compared to the same period in 2016,2019 was primarily due to an increasechanges in the geographic mix of the Company’s income, partially offset by a decrease in net benefits 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, 2017,2020, the total amount of unrecognized tax benefits, including related interest and penalties, was $74.2$62.5 million. If the total amount of unrecognized tax benefits was recognized, $53.1$40.8 million of unrecognized tax benefits, $12.0$10.6 million of interest, and $2.5$1.7 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$7.1 million within the next twelve months. Of this possible decrease, $3.7$2.8 million would be due to the settlement of audits or resolution of administrative or judicial proceedings. The remaining possible decrease of $5.1$4.3 million would be 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.
In July 2020, the U.S. Treasury Department issued final tax regulations related to foreign-derived intangible income and global intangible low-taxed income, or GILTI, provisions. Also in July 2020, the U.S. Treasury Department released final tax regulations that provide certain U.S. taxpayers with an annual election to exclude foreign income that is subject to a high effective tax rate from their GILTI inclusions. The Company has assessed the impact of these new regulations and determined there was no material impact to its condensed consolidated financial statements.
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 3.48%. 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, 2020, the Company recorded liabilities at fair value of $1.2 million 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 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.
As of September 30, 20172020 and December 31, 2016,2019, the aggregate notional amounts of all foreign currency contracts outstanding designated as cash flow hedges were approximately $127.0$49.4 million and $90.0$66.4 million, respectively. AtAs of September 30, 2017,2020, 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, 2017,2020, the Company recorded assets at fair value of $0.8$0.4 million and liabilities at fair value of $5.5$1.0 million relating to all outstanding foreign currency contracts designated as cash-flowcash flow hedges. As of December 31, 2016,2019, the Company recorded assets at fair value of $4.6 million.$0.1 million and liabilities at fair value of $1.9 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, 20172020 and December 31, 2016.2019.
As of both September 30, 20172020 and December 31, 2016,2019, 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, 2017,2020, the Company had aggregate notional amounts of approximately $398.6$528.5 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, 2020 and 2019 relating to all the Company’s derivatives.
Gains and Losses on Derivative Instruments
The following table summarizes gains (losses) relating to derivative instruments recorded in other comprehensive (loss) income (loss) during the three and nine months ended September 30, 20172020 and 2016:2019:
|
| Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) |
|
| Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) |
| ||||||||||||||||||||||||||
|
| 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, 2020 |
|
| September 30, 2019 |
|
| September 30, 2020 |
|
| September 30, 2019 |
| ||||||||
|
| (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 |
|
| $ | 0.1 |
|
| $ | (0.2 | ) |
| $ | 6.4 |
|
| $ | (1.2 | ) |
Interest rate swaps |
|
| — |
|
|
| — |
|
|
| (1.5 | ) |
|
| — |
|
As of September 30, 2017,2020, the estimated amount of existing net lossesgains 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$2.2 million.
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, 2020 and 2019 was as follows:
|
| Location and Amount of Gain (Loss) Recognized in Income on Cash Flow Hedging Relationships |
| |||||||||||||||||||||
|
| Three Months Ended |
| |||||||||||||||||||||
|
| September 30, 2020 |
|
| September 30, 2019 |
| ||||||||||||||||||
|
| 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 |
| $ | 322.7 |
|
| $ | 529.7 |
|
| $ | 35.2 |
|
| $ | 243.4 |
|
| $ | 500.1 |
|
| $ | 31.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts relating to inventory hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain (loss) reclassified from accumulated other comprehensive loss to income |
|
| 4.0 |
|
|
| — |
|
|
| — |
|
|
| (0.3 | ) |
|
| — |
|
|
| — |
|
Amount of loss excluded from assessment of effectiveness recognized in income |
|
| (0.8 | ) |
|
| — |
|
|
| — |
|
|
| (0.6 | ) |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts relating to intercompany management fee hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain (loss) reclassified from accumulated other comprehensive loss to income |
|
| — |
|
|
| (0.1 | ) |
|
| — |
|
|
| — |
|
|
| 0.1 |
|
|
| — |
|
Amount of gain excluded from assessment of effectiveness recognized in income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 0.1 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of loss reclassified from accumulated other comprehensive loss to income |
|
| — |
|
|
| — |
|
|
| (0.2 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Amount of gain excluded from assessment of effectiveness recognized in income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| Location and Amount of Gain (Loss) Recognized in Income on Cash Flow Hedging Relationships |
| |||||||||||||||||||||
|
| Nine Months Ended |
| |||||||||||||||||||||
|
| September 30, 2020 |
|
| September 30, 2019 |
| ||||||||||||||||||
|
| 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 |
| $ | 841.2 |
|
| $ | 1,559.5 |
|
| $ | 89.0 |
|
| $ | 728.2 |
|
| $ | 1,412.5 |
|
| $ | 104.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts relating to inventory hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain (loss) reclassified from accumulated other comprehensive loss to income |
|
| 2.8 |
|
|
| — |
|
|
| — |
|
|
| (0.2 | ) |
|
| — |
|
|
| — |
|
Amount of loss excluded from assessment of effectiveness recognized in income |
|
| (2.6 | ) |
|
| — |
|
|
| — |
|
|
| (1.9 | ) |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts relating to intercompany management fee hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain reclassified from accumulated other comprehensive loss to income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 0.9 |
|
|
| — |
|
Amount of gain excluded from assessment of effectiveness recognized in income |
|
| — |
|
|
| 0.1 |
|
|
| — |
|
|
| — |
|
|
| 0.2 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of loss reclassified from accumulated other comprehensive loss to income |
|
| — |
|
|
| — |
|
|
| (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, 20172020 and 2016:2019:
|
| Location of Gain |
| Amount of Gain (Loss) Recognized in Income |
|
| Amount of Gain Recognized in Income |
|
|
| ||||||||||||||||||||||||||
|
| (Loss) |
| For the Three Months Ended |
|
| For the Nine Months Ended |
|
| Three Months Ended |
|
| Nine Months Ended |
|
|
| ||||||||||||||||||||
|
| Recognized in Income |
| September 30, 2017 |
|
| September 30, 2016 |
|
| September 30, 2017 |
|
| September 30, 2016 |
|
| September 30, 2020 |
|
| September 30, 2019 |
|
| September 30, 2020 |
|
| September 30, 2019 |
|
| Location of Gain Recognized in Income | ||||||||
|
|
|
| (In millions) |
|
| (in millions) |
|
|
| ||||||||||||||||||||||||||
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 |
| ||||||||||||||||||
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts |
| Selling, general and administrative expenses |
| $ | (0.5 | ) |
| $ | 0.6 |
|
| $ | (7.0 | ) |
| $ | (2.6 | ) |
| $ | 4.2 |
|
| $ | 0.4 |
|
| $ | 5.9 |
|
| $ | 0.2 |
|
| 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, 20172020 and December 31, 2016.2019.
10. Shareholders’ EquityDeficit
Changes in shareholders’ deficit for the three months ended September 30, 2020 and 2019 were as follows:
|
| 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 stock options, SARs, restricted stock units, employee stock purchase plan, and other |
|
| — |
|
|
|
|
|
|
| 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 | ) |
|
| Three Months Ended September 30, 2019 |
| ||||||||||||||||||||||
|
| 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, 2019 |
| $ | 0.1 |
|
| $ | (328.9 | ) |
| $ | 354.5 |
|
| $ | (206.4 | ) |
| $ | (353.5 | ) |
| $ | (534.2 | ) | |
Issuance of 0.1 common shares from exercise of stock options, SARs, restricted stock units, employee stock purchase plan, and other |
|
| — |
|
|
|
|
|
|
| 0.9 |
|
|
|
|
|
|
|
|
|
|
| 0.9 |
| |
Additional capital from share-based compensation |
|
|
|
|
|
|
|
|
|
| 9.2 |
|
|
|
|
|
|
|
|
|
|
| 9.2 |
| |
Repurchases of 0.1 common shares |
|
| — |
|
|
|
|
|
|
| (0.9 | ) |
|
|
|
|
|
|
|
|
|
| (0.9 | ) | |
Forward Counterparties' delivery of 4.0 common shares to the Company |
|
| — |
|
|
|
|
|
|
| — |
|
|
|
|
|
|
|
|
|
|
| — |
| |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 81.5 |
|
|
| 81.5 |
| |
Foreign currency translation adjustment, net of income taxes of $(0.1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (24.0 | ) |
|
|
|
|
|
| (24.0 | ) | |
Unrealized gain on derivatives, net of income taxes of $— |
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
|
|
|
|
|
| — |
| |
Balance as of September 30, 2019 |
| $ | 0.1 |
|
| $ | (328.9 | ) |
| $ | 363.7 |
|
| $ | (230.4 | ) |
| $ | (272.0 | ) |
| $ | (467.5 | ) |
Changes in shareholders’ deficit for the nine months ended September 30, 2020 and 2019 were as follows:
|
| 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 stock options, SARs, restricted stock units, employee stock purchase plan, and other |
|
| — |
|
|
|
|
|
|
| 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 | ) |
|
| Nine Months Ended September 30, 2019 |
| |||||||||||||||||||||
|
| 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, 2018 |
| $ | 0.1 |
|
| $ | (328.9 | ) |
| $ | 341.5 |
|
| $ | (209.8 | ) |
| $ | (526.3 | ) |
| $ | (723.4 | ) |
Issuance of 0.6 common shares from exercise of stock options, SARs, restricted stock units, employee stock purchase plan, and other |
|
| — |
|
|
|
|
|
|
| 2.4 |
|
|
|
|
|
|
|
|
|
|
| 2.4 |
|
Additional capital from share-based compensation |
|
|
|
|
|
|
|
|
|
| 29.7 |
|
|
|
|
|
|
|
|
|
|
| 29.7 |
|
Repurchases of 0.2 common shares |
|
| — |
|
|
|
|
|
|
| (9.9 | ) |
|
|
|
|
|
|
|
|
|
| (9.9 | ) |
Forward Counterparties' delivery of 6.0 common shares to the Company |
|
| — |
|
|
|
|
|
|
| — |
|
|
|
|
|
|
|
|
|
|
| — |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 254.3 |
|
|
| 254.3 |
|
Foreign currency translation adjustment, net of income taxes of $(1.1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (18.7 | ) |
|
|
|
|
|
| (18.7 | ) |
Unrealized loss on derivatives, net of income taxes of $— |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1.9 | ) |
|
|
|
|
|
| (1.9 | ) |
Balance as of September 30, 2019 |
| $ | 0.1 |
|
| $ | (328.9 | ) |
| $ | 363.7 |
|
| $ | (230.4 | ) |
| $ | (272.0 | ) |
| $ | (467.5 | ) |
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,October 30, 2018, the Company’s board of directors authorized a new three-yearfive-year $1.5 billion share repurchase program that will expire on February 21, 2020,October 30, 2023, which replaced the Company’s prior share repurchase authorization whichthat was set to expire on June 30, 2017 which, as of December 31, 2016,February 21, 2020 and had $232.9approximately $113.3 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, 2020, the remaining authorized capacity under the Company’s $1.5 billion share repurchase program was $682.9 million.
In conjunction with the issuance of the 2019 Convertible Notes during February 2014, the Company paid approximately $685.8 million to enter into Forward Transactions with certain financial institutions, or the Forward Counterparties, pursuant to which the Company purchased approximately 9.919.9 million common shares, at an average cost of $69.02$34.51 per share, for settlement on or around the August 15, 2019 maturity date for the 2019 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 2019 Convertible Notes, including swaps, relating to the common shares by which holders of the 2019 Convertible Notes establish short positions relating to the common shares and otherwise hedge their investments in the 2019 Convertible Notes concurrently with, or shortly after, the pricing of the 2019 Convertible Notes. The approximate 19.9 million common shares areeffectively repurchased through the Forward Transactions were treated as retired shares for basic and diluted EPS purposes although they remainpurposes. As of September 30, 2020, the Forward Counterparties had delivered all of the approximate 19.9 million common shares effectively repurchased through the Forward Transactions and 0 shares remained 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 million during the first quarter of 2014, with amounts of $653.9 million and $31.9 million being allocated between accumulated deficitretained earnings and additional paid-in-capital,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-capitalpaid-in capital within its condensed consolidated balance sheet. These non-cash issuance costs will bewere amortized to interest expense over the contractual term of the Forward Transactions. For bothDuring the three and nine months ended September 30, 2017 and 2016,2019, the Company recognized $1.6$0.2 million and $4.8$1.2 million, respectively, of non-cash interest expense within its condensed consolidated statements of income relating to amortization of these non-cash issuance costs.costs within its condensed consolidated statements of income.
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 March 31, 2017, an indirect wholly owned subsidiary ofSeptember 30, 2020, the Company purchasedrepurchased approximately 1.11.4 million of Herbalife Ltd.’sits common shares through open market purchases at an aggregate cost of approximately $60.7$67.1 million, or an average cost of $56.10$46.44 per share.share, and subsequently retired these shares. During the threenine months ended JuneSeptember 30, 2017, an indirect wholly owned subsidiary of2019, the Company purchased approximately 2.7 milliondid not repurchase any of Herbalife Ltd.’sits common shares through open market purchases at an aggregate costpurchases.
As of approximately $179.8 million, or an average cost of $67.06 per share. During the three months endedboth September 30, 2017, an indirect wholly owned subsidiary of2020 and December 31, 2019, the Company purchasedheld approximately 0.810.0 million of Herbalife Ltd.’s commontreasury shares through open market purchases at an aggregate cost of approximately $58.7 million, or an average cost of $72.38 per share.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, 2020 and 2019, 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, 20172020 and 2016,2019, the Company’s share repurchases, inclusive of transaction costs, were $299.2$818.5 million and none,0, respectively, under the Company’s share repurchase programs, which includes open market purchases and $47.0the tender offer described above, and $26.6 million and $12.5$9.9 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, 20172020 and 2016,2019, the Company’s total share repurchases, including shares withheld for tax purposes, were $346.2$845.1 million and $12.5$9.9 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. 2020, which excludes $0.9 million of fees related to share repurchases for which payment was made subsequent to the quarter end and therefore reflected as a liability within the Company’s consolidated balance sheet as of September 30, 2020.
Capped Call Transactions
In February 2014, in connection with the issuance of the 2019 Convertible Notes, the Company paid approximately $123.8 million to enter into Capped Call Transactions with certain financial institutions. The Capped Call Transactions arewere expected generally to reduce the potential dilution upon conversion of the 2019 Convertible Notes in the event that the market price of the common shares iswas greater than the strike price of the Capped Call Transactions, initially set at $86.28$43.14 per common share, with such reduction of potential dilution subject to a cap based on the cap price initially set at $120.79$60.39 per common share. The strike price and cap price arewere subject to certain adjustments under the terms of the Capped Call Transactions. Therefore, as a result of executing the Capped Call Transactions, the Company in effect willwas only be exposed to potential net dilution once the market price of its common shares exceedsexceeded 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 quarter of 2014.
During March 2018, in connection with the Company’s repurchase of a portion of the 2019 Convertible Notes, the Company entered into partial settlement agreements with the option counterparties to the Capped Call Transactions to terminate a portion of such existing transactions, in each case, in a notional amount corresponding to the aggregate principal amount of 2019 Convertible Notes that were repurchased. As a result of terminating a portion of the Capped Call Transactions, which were in a favorable position, the Company received $55.9 million in cash and recognized an offsetting increase to additional paid-in capital during 2018.
On August 15, 2019, the 2019 Convertible Notes matured and the remaining Capped Call Transactions expired unexercised. The expiration of the Capped Call Transactions did not have an impact on the Company’s condensed consolidated financial statements.
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, 20172020 and 2016:2019:
|
| 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, 2020 |
|
| September 30, 2019 |
| ||||||||||||||||||
|
| Foreign Currency Translation Adjustments |
|
| Unrealized Gain (Loss) on Derivatives |
|
| Total |
|
| Foreign Currency Translation Adjustments |
|
| Unrealized Loss on Derivatives |
|
| Total |
| ||||||
|
| (in millions) |
| |||||||||||||||||||||
Beginning balance |
| $ | (251.5 | ) |
| $ | 5.4 |
|
| $ | (246.1 | ) |
| $ | (206.3 | ) |
| $ | (0.1 | ) |
| $ | (206.4 | ) |
Other comprehensive income (loss) before reclassifications, net of tax |
|
| 19.5 |
|
|
| 0.6 |
|
|
| 20.1 |
|
|
| (24.0 | ) |
|
| (0.2 | ) |
|
| (24.2 | ) |
Amounts reclassified from accumulated other comprehensive loss to income, net of tax(1) |
|
| — |
|
|
| (3.7 | ) |
|
| (3.7 | ) |
|
| — |
|
|
| 0.2 |
|
|
| 0.2 |
|
Total other comprehensive income (loss), net of reclassifications |
|
| 19.5 |
|
|
| (3.1 | ) |
|
| 16.4 |
|
|
| (24.0 | ) |
|
| — |
|
|
| (24.0 | ) |
Ending balance |
| $ | (232.0 | ) |
| $ | 2.3 |
|
| $ | (229.7 | ) |
| $ | (230.3 | ) |
| $ | (0.1 | ) |
| $ | (230.4 | ) |
(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 |
Other comprehensive income (loss) before reclassifications was net of tax benefits of $1.8 million for foreign currency translation adjustment for the three months ended September 30, 2017.
Other comprehensive income (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.
Other comprehensive loss before reclassifications was net of tax benefit of $0.1 million for foreign currency translation adjustments for the three months ended September 30, 2019.
The following table summarizes changes in accumulated other comprehensive income (loss)loss by component during the nine months ended September 30, 20172020 and 2016:2019:
|
| 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, 2020 |
|
| September 30, 2019 |
| ||||||||||||||||||
|
| Foreign Currency Translation Adjustments |
|
| Unrealized (Loss) Gain on Derivatives |
|
| Total |
|
| Foreign Currency Translation Adjustments |
|
| Unrealized Gain (Loss) on Derivatives |
|
| Total |
| ||||||
|
| (in millions) |
| |||||||||||||||||||||
Beginning balance |
| $ | (211.6 | ) |
| $ | (0.9 | ) |
| $ | (212.5 | ) |
| $ | (211.6 | ) |
| $ | 1.8 |
|
| $ | (209.8 | ) |
Other comprehensive (loss) income before reclassifications, net of tax |
|
| (20.4 | ) |
|
| 5.7 |
|
|
| (14.7 | ) |
|
| (18.7 | ) |
|
| (1.2 | ) |
|
| (19.9 | ) |
Amounts reclassified from accumulated other comprehensive loss to income, net of tax(1) |
|
| — |
|
|
| (2.5 | ) |
|
| (2.5 | ) |
|
| — |
|
|
| (0.7 | ) |
|
| (0.7 | ) |
Total other comprehensive (loss) income, net of reclassifications |
|
| (20.4 | ) |
|
| 3.2 |
|
|
| (17.2 | ) |
|
| (18.7 | ) |
|
| (1.9 | ) |
|
| (20.6 | ) |
Ending balance |
| $ | (232.0 | ) |
| $ | 2.3 |
|
| $ | (229.7 | ) |
| $ | (230.3 | ) |
| $ | (0.1 | ) |
| $ | (230.4 | ) |
(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 |
Other comprehensive income (loss)loss before reclassifications was net of tax expensebenefit of $3.5$4.1 million and $0.5 million for foreign currency translation adjustment for the nine months ended September 30, 2017.
Other comprehensive income (loss) before reclassifications was net of tax expense of $7.3 million and tax benefits of $0.3 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 million for otherunrealized gain (loss) on derivatives for the nine months ended September 30, 2016.2020.
Other comprehensive loss before reclassifications was net of tax benefit of $1.1 million for foreign currency translation adjustments for the nine months ended September 30, 2019.
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, 2020 |
|
| September 30, 2019 |
|
| September 30, 2020 |
|
| September 30, 2019 |
| ||||
|
| (in millions) |
| |||||||||||||
Weighted-average shares used in basic computations |
|
| 129.2 |
|
|
| 137.4 |
|
|
| 135.0 |
|
|
| 137.3 |
|
Dilutive effect of exercise of equity grants outstanding |
|
| 3.3 |
|
|
| 2.6 |
|
|
| 2.8 |
|
|
| 3.7 |
|
Dilutive effect of 2019 Convertible Notes |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1.3 |
|
Weighted-average shares used in diluted computations |
|
| 132.5 |
|
|
| 140.0 |
|
|
| 137.8 |
|
|
| 142.3 |
|
There were an aggregate of 3.30.8 million and 3.61.7 million of equity grants, consisting of SARs and stock units, that were outstanding during the three and nine months ended September 30, 2017,2020 and 2019, respectively,and an aggregate of 3.90.9 million and 4.81.0 million of equity grants, consisting of SARs and stock units, that were outstanding during the three and nine months ended September 30, 2016,2020 and 2019, 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.
Since the Company willwas required to settle the principal amount of its 2019 Convertible Notes in cash and settle the conversion feature for the amount above the conversion price in common shares, or the conversion spread, the Company used the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted earnings per share, if applicable. The conversion spread would have had a dilutive impact on diluted earnings per share when the average market price of the Company’s common shares for a given period exceeded the conversion price of the 2019 Convertible Notes. The dilutive impacts for the three and nine months ended September 30, 2019 are disclosed in the table above. The initial conversion rate and conversion price for the 2019 Convertible Notes are described further in Note 4, Long-Term Debt.
For the 2024 Convertible Notes, the Company has the intent and ability to settle the principal amount in cash and intends to settle the conversion feature for the amount above the conversion price, or the conversion spread, in 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, 20172020 and 2016,2019, 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 2020 and 2016.2019. 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 arewere excluded from the calculation of diluted earnings per share because their impact iswas always anti-dilutive.anti-dilutive and the Forward Transactions were treated as retired shares for basic and diluted EPS purposes, in each case for the periods the transactions were in effect. On August 15, 2019, the remaining Capped Call Transactions expired unexercised and all shares were retired under the Forward Transactions. See Note 10, Shareholders’ Deficit, for additional discussion regarding the Capped Call Transactions and Forward Transactions.
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 Value Measurements 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.
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, 20172020 and December 31, 2016:2019:
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 |
|
|
| Significant Other Observable Inputs (Level 2) Fair Value as of September 30, 2020 |
|
| Significant Other Observable Inputs (Level 2) Fair Value as of December 31, 2019 |
|
| Balance Sheet Location | ||
|
| (in millions) |
|
|
| |||||
ASSETS: |
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts relating to inventory and intercompany management fee hedges |
| $ | 0.4 |
|
| $ | 0.1 |
|
| Prepaid expenses and other current assets |
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts |
|
| 4.4 |
|
|
| 3.1 |
|
| Prepaid expenses and other current assets |
|
| $ | 4.8 |
|
| $ | 3.2 |
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts relating to inventory and intercompany management fee hedges |
| $ | 1.0 |
|
| $ | 1.9 |
|
| Other current liabilities |
Interest rate swaps |
|
| 1.2 |
|
|
| — |
|
| Other current liabilities |
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts |
|
| 1.4 |
|
|
| 1.1 |
|
| Other current liabilities |
|
| $ | 3.6 |
|
| $ | 3.0 |
|
|
|
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 20162019 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, 20172020 and December 31, 2016:2019:
|
| Offsetting of Derivative Assets |
|
| 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 |
|
| Gross Amounts of Recognized Assets |
|
| Gross Amounts Offset in the Balance Sheet |
|
| Net Amounts of Assets Presented in the Balance Sheet |
| ||||||
|
| (In millions) |
|
| (in millions) |
| ||||||||||||||||||
September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Foreign exchange currency contracts |
| $ | 1.9 |
|
| $ | (1.6 | ) |
| $ | 0.3 |
|
| $ | 4.8 |
|
| $ | (1.2 | ) |
| $ | 3.6 |
|
Total |
| $ | 1.9 |
|
| $ | (1.6 | ) |
| $ | 0.3 |
|
| $ | 4.8 |
|
| $ | (1.2 | ) |
| $ | 3.6 |
|
December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Foreign exchange currency contracts |
| $ | 7.4 |
|
| $ | (3.0 | ) |
| $ | 4.4 |
|
| $ | 3.2 |
|
| $ | (1.4 | ) |
| $ | 1.8 |
|
Total |
| $ | 7.4 |
|
| $ | (3.0 | ) |
| $ | 4.4 |
|
| $ | 3.2 |
|
| $ | (1.4 | ) |
| $ | 1.8 |
|
|
| Offsetting of Derivative Liabilities |
|
| 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 |
|
| Gross Amounts of Recognized Liabilities |
|
| Gross Amounts Offset in the Balance Sheet |
|
| Net Amounts of Liabilities Presented in the Balance Sheet |
| ||||||
|
| (In millions) |
|
| (in millions) |
| ||||||||||||||||||
September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Foreign exchange currency contracts |
| $ | 2.4 |
|
| $ | (1.2 | ) |
| $ | 1.2 |
| ||||||||||||
Interest rate swaps |
|
| 1.2 |
|
|
| — |
|
|
| 1.2 |
| ||||||||||||
Total |
| $ | 3.6 |
|
| $ | (1.2 | ) |
| $ | 2.4 |
| ||||||||||||
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Foreign exchange currency contracts |
| $ | 6.6 |
|
| $ | (1.6 | ) |
| $ | 5.0 |
|
| $ | 3.0 |
|
| $ | (1.4 | ) |
| $ | 1.6 |
|
Total |
| $ | 6.6 |
|
| $ | (1.6 | ) |
| $ | 5.0 |
|
| $ | 3.0 |
|
| $ | (1.4 | ) |
| $ | 1.6 |
|
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, 20172020 and December 31, 2016,2019, 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$39.8 million and $30.6$38.9 million and long-term deferred tax assets of $190.3$66.3 million and $155.2$79.3 million as of September 30, 20172020 and December 31, 2016,2019, respectively.
Other Current Liabilities
Other current liabilities consist of the following:
|
| September 30, 2017 |
|
| December 31, 2016 |
|
| September 30, 2020 |
|
| December 31, 2019 |
| ||||
|
| (In millions) |
|
| (in millions) |
| ||||||||||
Accrued compensation |
| $ | 110.1 |
|
| $ | 125.8 |
|
| $ | 141.4 |
|
| $ | 121.6 |
|
Accrued liabilities |
|
| 243.1 |
|
|
| 236.9 |
| ||||||||
Accrued service fees to China independent service providers |
|
| 69.0 |
|
|
| 62.2 |
| ||||||||
Accrued advertising, events, and promotion expenses |
|
| 59.6 |
|
|
| 48.5 |
| ||||||||
Current operating lease liabilities |
|
| 34.0 |
|
|
| 37.4 |
| ||||||||
Advance sales deposits |
|
| 68.2 |
|
|
| 50.1 |
|
|
| 103.4 |
|
|
| 64.3 |
|
Income taxes payable |
|
| 6.0 |
|
|
| 42.0 |
|
|
| 20.2 |
|
|
| 17.0 |
|
Other accrued liabilities |
|
| 197.8 |
|
|
| 213.6 |
| ||||||||
Total |
| $ | 427.4 |
|
| $ | 454.8 |
|
| $ | 625.4 |
|
| $ | 564.6 |
|
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$66.8 million and $50.0$62.4 million and deferred income tax liabilities of $15.4$21.4 million and $15.3$21.4 million as of September 30, 20172020 and December 31, 2016,2019, respectively. See Note 6, Employee Compensation Plans, to the consolidated financial statementsConsolidated Financial Statements included in the 20162019 10-K for a further description of the Company’s deferred compensation plan assets and liabilities.
14. Subsequent Events
In October 2017,On November 4, 2020, the Company's Board of Directors declared a pro rata distribution of stock purchase warrants to the Company's shareholders of one warrant for every four common shares held. Each warrant will entitle the holder to purchase an Herbalife Nutrition common share at an exercise price of $67.50 per share where the Company completed its modified Dutch auction tender offerwill have the option to net share settle these warrants if they are exercised in the future. The warrants will have a seven-year term and then subsequently paid cashwill be exercisable only on the expiration date. The record date for the distribution is November 16, 2020 and the distribution or payment date is December 14, 2020. The Company expects 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.list the warrants on The New York Stock Exchange. The Company’s cash2024 Convertible Notes and cash equivalents and total shareholders’employee equity at September 30, 2017, have been subsequently reduced by $457.8 million during the fourth quarter of 2017,awards will also be required to be adjusted accordingly 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 |
|
distribution.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 Information, 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, 2016,2019, or the 20162019 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 officers 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 trends such as the global obesity epidemic, has made our quality products more relevantincreasing healthcare costs, and aging populations, 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 and promotional 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, 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 Distributor 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;
• | North America; |
Mexico;
• | Mexico; |
South and Central America;
• | South and Central America; |
EMEA, which consists of Europe, the Middle East and Africa;
• | EMEA, which consists of Europe, the Middle East, and Africa; |
Asia Pacific (excluding China); and
• | Asia Pacific (excluding China); and |
China.
• | 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, and more recently, our Audit Committee assumed oversight of continued compliance with the Consent Order. The committee hasImplementation Oversight Committee had met and will meet regularly with management to oversee our 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.
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, may become more restrictive or continue indefinitely.
Our business and operations have been affected by the pandemic in manners and degrees that vary by market and we expect that the effects may extend through the end of 2020 and 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 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:
• | Constrained ability to deliver product to Members and/or have Members pick product up from our access points due to facility closures and other precautionary measures we have implemented; |
• | Restrictions or outright prohibitions on in-person training and promotional meetings and events for Members that are a key aspect of our business model, such as our annual regional Extravaganzas; |
• | Constrained ability of Members to have face-to-face contact with their customers, including at Nutrition Clubs; and |
• | Slowed office operations as many of our employees have limited access to their regular place of employment. |
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:
• | Adapting product access to the varying market-specific challenges, including shifting to more home product delivery from Member pick-up, and shifting to online or phone orders only from in-person ordering; |
• | Enhancing our training and promotion of technological tools offered to support Members’ online operations and accelerating the launch of certain functionalities, such as functions that facilitate our Members’ ability to communicate and transact with Nutrition Club customers; |
• | Members continuing to or increasing the ways they leverage the Internet and social media for customer contact including training, order-taking, and acceptance of payment; |
• | Member-operated Nutrition Clubs adding to or shifting from on-site offerings of single servings to carry-out and home delivery of single servings, as well as sales of fully packaged products; |
• | Instituting product purchase limitations for certain in-demand products to help ensure as many Members and their customers have fair access to these products and to minimize out-of-stock conditions; and |
• | Physical changes at our major facilities, such as our manufacturing plants and distribution centers, including pre-entry temperature checks, face masks for employees, and plexiglass barriers, and employees working from home where possible rather than at company offices. |
We believe our cash on hand as of September 30, 2020 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 $282.5 million 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 2020 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.
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 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, 2020 |
|
| September 30, 2019 |
|
| % Change |
|
| September 30, 2020 |
|
| September 30, 2019 |
|
| % Change |
| ||||||||||||
|
| (Volume Points in millions) |
|
| (Volume Points in millions) |
| ||||||||||||||||||||||||||||||||||||||||||
North America |
|
| 261.5 |
|
|
| 311.6 |
|
|
| (16.1 | )% |
|
| 848.2 |
|
|
| 978.1 |
|
|
| (13.3 | )% |
|
| 501.0 |
|
|
| 330.8 |
|
|
| 51.5 | % |
|
| 1,349.4 |
|
|
| 1,017.1 |
|
|
| 32.7 | % |
Mexico |
|
| 213.3 |
|
|
| 234.5 |
|
|
| (9.0 | )% |
|
| 667.7 |
|
|
| 693.1 |
|
|
| (3.7 | )% |
|
| 232.3 |
|
|
| 216.4 |
|
|
| 7.3 | % |
|
| 655.6 |
|
|
| 663.0 |
|
|
| (1.1 | )% |
South & Central America |
|
| 150.2 |
|
|
| 161.1 |
|
|
| (6.8 | )% |
|
| 440.9 |
|
|
| 499.2 |
|
|
| (11.7 | )% | ||||||||||||||||||||||||
South and Central America |
|
| 150.7 |
|
|
| 130.1 |
|
|
| 15.8 | % |
|
| 386.5 |
|
|
| 386.2 |
|
|
| 0.1 | % | ||||||||||||||||||||||||
EMEA |
|
| 258.9 |
|
|
| 252.0 |
|
|
| 2.7 | % |
|
| 816.7 |
|
|
| 789.6 |
|
|
| 3.4 | % |
|
| 423.1 |
|
|
| 315.2 |
|
|
| 34.2 | % |
|
| 1,166.5 |
|
|
| 977.0 |
|
|
| 19.4 | % |
Asia Pacific (excluding China) |
|
| 278.7 |
|
|
| 275.9 |
|
|
| 1.0 | % |
|
| 815.4 |
|
|
| 803.2 |
|
|
| 1.5 | % | ||||||||||||||||||||||||
Asia Pacific |
|
| 448.9 |
|
|
| 406.6 |
|
|
| 10.4 | % |
|
| 1,211.3 |
|
|
| 1,147.1 |
|
|
| 5.6 | % | ||||||||||||||||||||||||
China |
|
| 147.8 |
|
|
| 153.2 |
|
|
| (3.5 | )% |
|
| 483.7 |
|
|
| 488.1 |
|
|
| (0.9 | )% |
|
| 143.5 |
|
|
| 142.4 |
|
|
| 0.8 | % |
|
| 412.8 |
|
|
| 361.6 |
|
|
| 14.2 | % |
Worldwide |
|
| 1,310.4 |
|
|
| 1,388.3 |
|
|
| (5.6 | )% |
|
| 4,072.6 |
|
|
| 4,251.3 |
|
|
| (4.2 | )% |
|
| 1,899.5 |
|
|
| 1,541.5 |
|
|
| 23.2 | % |
|
| 5,182.1 |
|
|
| 4,552.0 |
|
|
| 13.8 | % |
We believe the decrease in worldwide
Volume Points increased 23.2% and 13.8% for the three and nine months ended September 30, 20172020, respectively, including a mixed impact of 5.6%COVID-19 pandemic conditions across our markets, after having increased 2.3% and 4.2%2.7%, respectively, versusfor the same periods in 2019. Although pandemic conditions had adverse operational impacts across all markets, we believe our Members in certain markets are more focused on their business where we have seen increased net sales and Volume Point growth in certain markets, particularly the North America region and certain EMEA markets.
We believe North America’s Volume Point increases reported for the quarter and year-to-date periods, which were well above the increases for the comparable prior year periods, were drivenalso reflect the continuing success of our Distributors as supported by regional specific factors. The decreases for North Americaour product line expansion and technological tools, as well as targeted communications and promotions. We believe Mexico’s increase for the threequarter, after decreases compared to prior years for a number of quarters and 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 spent to then train their sales organizations. The decrease for Mexico for the three and nine months ended September 30, 2017, reflectsdespite continuing difficult economic conditions for the market, reflects the success of our program of promotions to encourage Member sponsorship and activity. After some years of declines, the South and Central America region saw an increase in Volume Points for the third quarter versus the 2019 period, despite pandemic-related continuing declines in several key markets, as we believe efforts to build more sustainable business for our Members through a focus on daily product consumption and retailing take hold in certain markets in the market and,region. EMEA saw increased Volume Point growth for the quarter and year-to-date periods versus 2019, a result we believe of customer-oriented efforts including Member training, brand awareness, and product line expansion, as well as strong business momentum including new Member recruitment. The Asia Pacific region saw Volume Point increases for the third quarter and year-to-date period, continuing favorable long-term trends seen in the region, although the growth rates were below those seen in the 2019 periods due to the adverse impact of the damaging natural disasterpandemic conditions in the greater Mexico City area.region, especially in India and South Korea. China achieved Volume Point increases for the quarter and year-to-date periods, compared to declines for the 2019 periods which were weakened by disruption from the Chinese government’s 100-day review, concluded in April 2019, of the health product industry. We expect COVID-19 pandemic conditions to continue to see declines in the South & Central America region as a result of regional and country specific challenges discussed in greater detail in Sales by Geographic Region below, and as many Members transition to customer-based, sustainable business practices. Lower levels of growth for the EMEA region versus comparable prior year periods are also driven by country specific results, including declines in several countries that have followed several years of growth. Asia Pacific (excluding China) has had mixed results by country within the region, as discussed in greater detail in Sales by Geographic Region below. Theimpact Volume Point declines in China after growth in comparable year periods is attributableresults; however, we are unable to factors such as Members testing new business methods that did not prove to be as sustainable as traditional methods. Sales volume resultspredict 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 sustainable 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 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 and is the gross sales amount reflected on our invoices. Retail value is a Non-GAAPnon-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. Our Members purchase product from us at a discount from the suggested retail price. We refer to these discounts as “distributor allowance”, allowance,” and we refer to retail value less distributor allowances as “product sales”.sales.”
Total distributor allowances were 41.2% and 40.6% of retail value for the three months ended September 30, 20172020 and 2016 were 40.7%2019, respectively, and 40.5%41.1% of retail value respectively. Total distributor allowances for both the nine months ended September 30, 20172020 and 2016 were 40.4%2019. Depending on product and 40.2% of retail value, respectively. Distributormarket, distributor allowances and Marketing Plan payouts generally utilizefor the three and nine months ended September 30, 2020 utilized on a weighted-average basis approximately 90% to 95% of suggested retail price, depending on the product and market, to which we applyapplied discounts of up to 50% for 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. Each Member’s level of discount is determined by qualification based on 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, product sales are recognized net of product returns and distributor allowances.
“Net sales” equal product sales plus “shipping and handling, revenues”, and generally represents what we collect. 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 sales and are not considered as separate revenues.
We do not have visibility into all of the sales from our Members to their customers, but such a figure would differ from our reported “retail value” by factors includingincluding: (a) the amount 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.prices, and (c) the discount from retail value at which preferred members purchase products from us. We discuss retail value because of its fundamental role in our systems, internal controls and operations, and its correlation to Member discounts and Royalty Overrides.overrides. In addition, 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.Operations.
In 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 organization. Additionally, in certain markets we are simplifying our pricing by eliminating certain shipping and handling charges and recovering those costs within suggested retail price. As we continue to extend the segmentation of our distributors and preferred members to additional geographic markets and consider other pricing simplification efforts for our Members, we are evaluating the utility of retail value to management and investors and whether it will continue to be used in the same way in the future.
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.
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 most significant operating expense and consist of:
royalty overrides and production bonuses;
• | royalty overrides and production bonuses; |
the Mark Hughes bonus payable to some of our most senior Members; and
• | the Mark Hughes bonus payable to some of our most senior Members; and |
other discretionary incentive cash bonuses to qualifying Members.
• | 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 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.China and the finalization of insurance recoveries in connection with the flooding at one of our warehouses in Mexico during September 2017.
Our “other income, net” consists of non-operating income and expenses such as gains or losses due to subsequent changes in the fair value of the non-transferable contractual contingent value right, or CVR, provided for each share tendered in the October 2017 modified Dutch auction tender offer. See Note 8, Shareholders’ Deficit, to the Consolidated Financial Statements included in the 2019 10-K for further information on the CVR.
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.
Summary Financial Results
Net sales for the three and nine months ended September 30, 20172020 were $1,085.4$1,521.8 million and $3,334.4$4,131.1 million, respectively. Net sales decreased $36.6increased $277.3 million, or 3.3%22.3% ($277.2 million, or 22.3% excluding Venezuela), and $109.0$474.3 million, or 3.2%13.0% ($474.2 million, or 13.0% excluding Venezuela), for the three and nine months ended September 30, 2017,2020, respectively, as compared to the same periods in 2016.2019. In local currency, net sales decreased 4.0%increased 26.1% and 2.5%17.6% (25.1% and 16.7% excluding Venezuela) for the three and nine months ended September 30, 2017,2020, respectively, as compared to the same periods in 2016.2019. The decrease22.3% increase in net sales of 3.3% for the three months ended September 30, 20172020 was primarily driven by a decreasean increase in sales volume, as indicated by a 5.6% decrease23.2% increase in Volume Points;Points and, a 3.6% favorable impact of price increases (2.7% favorable impact excluding Venezuela), partially offset by price increases, which increased neta 3.8% unfavorable impact of fluctuations in foreign currency exchange rates (2.9% unfavorable impact excluding Venezuela), and a 0.8% unfavorable impact of country sales by approximately 3.3%.mix. The decrease13.0% increase in net sales of 3.2% for the nine months ended September 30, 20172020 was primarily driven by a decreasean increase in sales volume, as indicated by a 4.2% decrease13.8% increase in Volume Points, and a 1.3% unfavorable country mix;3.9% favorable impact of price increases (2.8% favorable impact excluding Venezuela), partially offset by price increases, which increased net sales by approximately 2.5%a 4.6% unfavorable impact of fluctuations in foreign currency exchange rates (3.7% unfavorable impact excluding Venezuela).
Net income for the three and nine months ended September 30, 20172020 was $54.5$138.1 million, or $0.66$1.04 per diluted share, and $277.3$298.8 million, or $3.26$2.17 per diluted share, respectively. Net income decreased $33.2increased $56.6 million, or 37.9%69.4%, and $44.5 million, or 17.5%, for the three months ended September 30, 2017, and increased $116.7 million, or 72.7% for the nine months ended September 30, 2017.2020, respectively, as compared to the same periods in 2019. The decreaseincrease in net income for the three months ended September 30, 20172020 was primarilymainly due to a lower$98.7 million higher contribution margin driven by the decrease inhigher net sales, and higher interest expense, partially offset by lower income tax expense.$29.6 million higher selling, general, and administrative expenses. The increase in net income for the nine months ended September 30, 20172020 was primarilymainly due to a$200.2 million higher contribution margin driven by higher net sales; $15.0 million lower interest expense, net; and $12.7 million lower income taxes; partially offset by $147.0 million higher selling, general, and administrative expenseexpenses primarily 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 (See Note 4, Long-Term Debt5, Contingencies, to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q); a $3.3$15.7 million unfavorable impact from other income, net relating to CVR revaluations in 2019 as described below; and $14.7 million lower China government grant income.
Net income for the three months ended September 30, 2020 included a $5.5 million pre-tax unfavorable impact ($2.25.1 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 by a hedge fund manager which started in late 2012 (See Selling, General and Administrative Expenses below for further discussion); and a $3.0 million pre-tax unfavorable impact ($1.9 million post-tax) from expenses related to the implementation 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 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); a $10.0$4.7 million pre-tax unfavorable impact ($6.64.4 million post-tax) from expenses related to the COVID-19 pandemic, and such expenses are expected to continue in future periods; a $0.6 million pre-tax favorable impact ($0.3 million post-tax) of government grant income in China; and a $0.4 million pre-tax unfavorable impact ($4.7 million post-tax) from expenses related to regulatory inquiries;inquiries.
Net income for the nine months ended September 30, 2020 included an $85.7 million unfavorable impact ($81.0 million post-tax) from expenses related to regulatory inquiries and a $4.2legal 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 ($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 ($11.114.6 million post-tax) from expenses related to the implementationCOVID-19 pandemic, and such expenses are expected to continue in future periods; a $16.2 million pre-tax unfavorable impact ($16.4 million post-tax) of non-cash interest expense related to the FTC Consent Order.2024 Convertible Notes (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 $13.0 million pre-tax favorable impact ($9.4 million post-tax) of government grant income in China; and a $0.5 million pre-tax unfavorable impact ($0.4 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 20172020 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, 20162019 included a $2.2 million post-tax favorable impact related to regulatory settlements; $0.2$19.0 million pre-tax favorableunfavorable impact ($0.216.2 million post-tax) of government grant income in China; a $11.8an accrual for Mexico VAT assessments; an $8.7 million pre-tax unfavorable impact ($8.0 million post-tax) of non-cash interest expense related to the 2019 Convertible Notes, 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); a $3.8$1.9 million pre-tax unfavorable impact ($2.23.2 million post-tax) from expenses related to regulatory inquiries; a $3.1$6.4 million pre-tax unfavorablefavorable impact ($2.14.7 million post-tax) relatedof government grant income in China; a $1.3 million pre-tax favorable impact ($1.8 million post-tax) of gain on the revaluation of the CVR (See Note 8, Shareholders’ Deficit, to legal, advisory services and other expenses for our response to allegations and other negative information put forwardthe Consolidated Financial Statements included in the marketplace by a hedge fund manager which started in late 2012 (See Selling, General and Administrative Expenses below for further discussion)2019 10-K); 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$0.4 million pre-tax unfavorablepost-tax favorable impact ($3.1 million post-tax) from expenses related to the implementationfinalization of insurance recoveries in connection with the FTC Consent Order.flooding at one of our warehouses in Mexico during September 2017, which damaged certain of our inventory stored within the warehouse (See Note 7, Contingencies, to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2018, or the 2018 10-K).
Net income for the nine months ended September 30, 20162019 included a $203.0$34.1 million pre-tax unfavorable impact ($134.330.9 million post-tax) from expenses related to regulatory settlements;inquiries and a $29.1 million pre-tax favorable impact ($20.7 million post-tax) of government grant income in China; a $35.4 million unfavorable impact of non-cash interest expenselegal accrual related to the Convertible Notes and the Forward TransactionsSEC investigation relating to our disclosures regarding our marketing plan in China (See Note 4, Long-Term Debt,5, Contingencies, to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q); a $13.9$33.0 million pre-tax unfavorable impact ($8.631.7 million post-tax) from expensesof non-cash interest expense related to regulatory inquiries;the 2019 Convertible Notes, 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); a $10.7$19.0 million pre-tax unfavorable impact ($7.816.2 million post-tax) of an accrual for Mexico VAT assessments; a $27.7 million pre-tax favorable impact ($19.6 million post-tax) of government grant income in China; a $15.7 million pre-tax favorable impact ($14.4 million post-tax) of gain on the revaluation of the CVR (See Note 8, Shareholders’ Deficit, to the Consolidated Financial Statements included in the 2019 10-K); and a $6.0 million pre-tax favorable impact ($5.5 million post-tax) related to legal, advisory services and other expenses forthe finalization of insurance recoveries in connection with the flooding at one of our responsewarehouses in Mexico during September 2017, which damaged certain of our inventory stored within the warehouse (See Note 7, Contingencies, to allegations and other negative information put forwardthe Consolidated Financial Statements included 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 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.2018 10-K).
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, 2020 |
|
| September 30, 2019 |
|
| September 30, 2020 |
|
| September 30, 2019 |
| ||||||||
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 |
|
|
| 21.2 |
|
|
| 19.6 |
|
|
| 20.4 |
|
|
| 19.9 |
|
Gross profit |
|
| 80.2 |
|
|
| 81.4 |
|
|
| 80.8 |
|
|
| 80.9 |
|
|
| 78.8 |
|
|
| 80.4 |
|
|
| 79.6 |
|
|
| 80.1 |
|
Royalty overrides(1) |
|
| 28.6 |
|
|
| 28.6 |
|
|
| 28.3 |
|
|
| 28.1 |
|
|
| 30.4 |
|
|
| 29.2 |
|
|
| 30.3 |
|
|
| 29.8 |
|
Selling, general and administrative expenses(1) |
|
| 41.0 |
|
|
| 39.3 |
|
|
| 39.8 |
|
|
| 44.9 |
| ||||||||||||||||
Selling, general, and administrative expenses(1) |
|
| 34.8 |
|
|
| 40.2 |
|
|
| 37.7 |
|
|
| 38.6 |
| ||||||||||||||||
Other operating income |
|
| (0.4 | ) |
|
| — |
|
|
| (1.3 | ) |
|
| (0.8 | ) |
|
| — |
|
|
| (0.5 | ) |
|
| (0.3 | ) |
|
| (0.9 | ) |
Operating income |
|
| 11.0 |
|
|
| 13.5 |
|
|
| 14.0 |
|
|
| 8.7 |
|
|
| 13.6 |
|
|
| 11.5 |
|
|
| 11.9 |
|
|
| 12.6 |
|
Interest expense, net |
|
| 3.5 |
|
|
| 2.0 |
|
|
| 3.2 |
|
|
| 2.0 |
|
|
| 2.3 |
|
|
| 2.5 |
|
|
| 2.1 |
|
|
| 2.8 |
|
Other income, net |
|
| — |
|
|
| (0.1 | ) |
|
| — |
|
|
| (0.4 | ) | ||||||||||||||||
Income before income taxes |
|
| 7.5 |
|
|
| 11.5 |
|
|
| 10.8 |
|
|
| 6.7 |
|
|
| 11.3 |
|
|
| 9.1 |
|
|
| 9.8 |
|
|
| 10.2 |
|
Income taxes |
|
| 2.5 |
|
|
| 3.7 |
|
|
| 2.5 |
|
|
| 2.0 |
|
|
| 2.2 |
|
|
| 2.6 |
|
|
| 2.6 |
|
|
| 3.2 |
|
Net income |
|
| 5.0 | % |
|
| 7.8 | % |
|
| 8.3 | % |
|
| 4.7 | % |
|
| 9.1 | % |
|
| 6.5 | % |
|
| 7.2 | % |
|
| 7.0 | % |
(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 |
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 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 SegmentNorth America
The Primary Reporting Segment reported
501.0
330.8
51.5
%
1,349.4
1,017.1
32.7
%
Mexico
232.3
216.4
7.3
%
655.6
663.0
(1.1
)%
South and Central America
150.7
130.1
15.8
%
386.5
386.2
0.1
%
EMEA
423.1
315.2
34.2
%
1,166.5
977.0
19.4
%
Asia Pacific
448.9
406.6
10.4
%
1,211.3
1,147.1
5.6
%
China
143.5
142.4
0.8
%
412.8
361.6
14.2
%
Worldwide
1,899.5
1,541.5
23.2
%
5,182.1
4,552.0
13.8
%
Volume Points increased 23.2% and 13.8% for the three and nine months ended September 30, 2020, respectively, including a mixed impact of COVID-19 pandemic conditions across our markets, after having increased 2.3% and 2.7%, respectively, for the same periods in 2019. Although pandemic conditions had adverse operational impacts across all markets, we believe our Members in certain markets are more focused on their business where we have seen increased net sales and Volume Point growth in certain markets, particularly the North America region and certain EMEA markets.
We believe North America’s Volume Point increases for the quarter and year-to-date periods, which were well above the increases for the comparable prior year periods, also reflect the continuing success of our Distributors as supported by our product line expansion and technological tools, as well as targeted communications and promotions. We believe Mexico’s increase for the quarter, after decreases compared to prior years for a number of quarters and despite continuing difficult economic conditions for the market, reflects the success of our program of promotions to encourage Member sponsorship and activity. After some years of declines, the South and Central America region saw an increase in Volume Points for the third quarter versus the 2019 period, despite pandemic-related continuing declines in several key markets, as we believe efforts to build more sustainable business for our Members through a focus on daily product consumption and retailing take hold in certain markets in the region. EMEA saw increased Volume Point growth for the quarter and year-to-date periods versus 2019, a result we believe of customer-oriented efforts including Member training, brand awareness, and product line expansion, as well as strong business momentum including new Member recruitment. The Asia Pacific region saw Volume Point increases for the third quarter and year-to-date period, continuing favorable long-term trends seen in the region, although the growth rates were below those seen in the 2019 periods due to the adverse impact of pandemic conditions in the region, especially in India and South Korea. China achieved Volume Point increases for the quarter and year-to-date periods, compared to declines for the 2019 periods which were weakened by disruption from the Chinese government’s 100-day review, concluded in April 2019, of the health product industry. We expect COVID-19 pandemic conditions to continue 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.
Presentation
“Retail value” represents the suggested retail price of products we sell to our Members 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. 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 were 41.2% and 40.6% of retail value for the three months ended September 30, 2020 and 2019, respectively, and 41.1% of retail value for both the nine months ended September 30, 2020 and 2019. Depending on product and market, distributor allowances and Marketing Plan payouts for the three and nine months ended September 30, 2020 utilized on a weighted-average basis approximately 90% of suggested retail price, to which we applied discounts of up to 50% for 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. Each Member’s level of discount is determined by qualification based on 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, product sales are recognized net of product returns and distributor allowances.
“Net sales” equal product sales plus shipping and handling, and generally represents what we collect. 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 sales and are not considered as separate revenues.
We do not have visibility into all the sales from our Members to their customers, but such a figure would differ from our reported “retail value” by factors including: (a) the amount of product purchased by our Members for their own personal consumption, (b) prices charged by our Members to their customers other than our suggested retail prices, and (c) the discount from retail value at which preferred members purchase products from us. We discuss retail value because of its fundamental role in our systems, internal controls and operations, and its correlation to Member discounts and Royalty overrides. In addition, 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.
In 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 organization. Additionally, in certain markets we are simplifying our pricing by eliminating certain shipping and handling charges and recovering those costs within suggested retail price. As we continue to extend the segmentation of our distributors and preferred members to additional geographic markets and consider other pricing simplification efforts for our Members, we are evaluating the utility of retail value to management and investors and whether it will continue to be used in the same way in the future.
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 currency.” 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.
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 most significant operating expense and consist of:
• | royalty overrides and production bonuses; |
• | the Mark Hughes bonus payable to some of
|
The Primary Reporting Segment reported contribution margin of $375.9 million, or 42.9% of net sales, and $1,155.7 million, or 43.3% of net sales, representing a decrease of $22.9 million, or 5.7%, and a decrease of $45.8 million, or 3.8%, for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016. The 5.7% decrease for the three months ended September 30, 2017 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%, 2.7% and 1.8%, respectively, partially offset by price increases which increased contribution margin by approximately 4.7%. The 3.8% decrease for the nine months ended September 30, 2017 was primarily the result of unfavorable country mix and volume decreases which reduced contribution margin by approximately 5.2% and 3.9%, respectively, partially offset by price increases which increased contribution margin by approximately 3.7%.
China reported contribution margin of $184.0 million and $595.8 million for the three and nine months ended September 30, 2017, respectively, representing a decrease of $9.8 million, or 5.1%, and $18.7 million, or 3.0%, for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016. The decrease of 5.1% for the three months ended September 30, 2017 was primarily due to a decline in sales volume and fluctuation in foreign currency rates, which reduced 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, 2017 was primarily due to 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%.
Sales by Geographic Region
The following chart reconciles retail value to net sales by geographic region:
| • | 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. 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 Royalty override percentage may vary over time.
Our “contribution margins” consist of net sales less cost of sales and Royalty overrides.
“Selling, general, and administrative expenses” represent our operating expenses, which include labor and benefits, service fees to China 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 and the finalization of insurance recoveries in connection with the flooding at one of our warehouses in Mexico during September 2017.
Our “other income, net” consists of non-operating income and expenses such as gains or losses due to subsequent changes in the fair value of the non-transferable contractual contingent value right, or CVR, provided for each share tendered in the October 2017 modified Dutch auction tender offer. See Note 8, Shareholders’ Deficit, to the Consolidated Financial Statements included in the 2019 10-K for further information on the CVR.
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, of this Quarterly Report on Form 10-Q.
Summary Financial Results
Net sales for the three and nine months ended September 30, 2020 were $1,521.8 million and $4,131.1 million, respectively. Net sales increased $277.3 million, or 22.3% ($277.2 million, or 22.3% excluding Venezuela), and $474.3 million, or 13.0% ($474.2 million, or 13.0% excluding Venezuela), for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. In local currency, net sales increased 26.1% and 17.6% (25.1% and 16.7% excluding Venezuela) for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The 22.3% increase in net sales for the three months ended September 30, 2020 was primarily driven by an increase in sales volume, as indicated by a 23.2% increase in Volume Points and, a 3.6% favorable impact of price increases (2.7% favorable impact excluding Venezuela), partially offset by a 3.8% unfavorable impact of fluctuations in foreign currency exchange rates (2.9% unfavorable impact excluding Venezuela), and a 0.8% unfavorable impact of country sales mix. The 13.0% increase in net sales for the nine months ended September 30, 2020 was primarily driven by an increase in sales volume, as indicated by a 13.8% increase in Volume Points, and a 3.9% favorable impact of price increases (2.8% favorable impact excluding Venezuela), partially offset by a 4.6% unfavorable impact of fluctuations in foreign currency exchange rates (3.7% unfavorable impact excluding Venezuela).
Net income for the three and nine months ended September 30, 2020 was $138.1 million, or $1.04 per diluted share, and $298.8 million, or $2.17 per diluted share, respectively. Net income increased $56.6 million, or 69.4%, and $44.5 million, or 17.5%, for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The increase in net income for the three months ended September 30, 2020 was mainly due to $98.7 million higher contribution margin driven by higher net sales, partially offset by $29.6 million higher selling, general, and administrative expenses. The increase in net income for the nine months ended September 30, 2020 was mainly due to $200.2 million higher contribution margin driven by higher net sales; $15.0 million lower interest expense, net; and $12.7 million lower income taxes; partially offset by $147.0 million higher selling, general, and administrative expenses primarily driven by $83.1 million of expenses relating to the SEC and DOJ investigations relating to the FCPA matter in China (See Note 5, Contingencies, to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q); a $15.7 million unfavorable impact from other income, net relating to CVR revaluations in 2019 as described below; and $14.7 million lower China government grant income.
Net income for the three months ended September 30, 2020 included a $5.5 million pre-tax unfavorable impact ($5.1 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 of this Quarterly Report on Form 10-Q); a $4.7 million pre-tax unfavorable impact ($4.4 million post-tax) from expenses related to the COVID-19 pandemic, and such expenses are expected to continue in future periods; a $0.6 million pre-tax favorable impact ($0.3 million post-tax) of government grant income in China; and a $0.4 million pre-tax unfavorable impact ($4.7 million post-tax) from expenses related to regulatory inquiries.
Net income for the nine months ended September 30, 2020 included an $85.7 million unfavorable impact ($81.0 million post-tax) from expenses related to regulatory inquiries and a legal 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 ($14.6 million post-tax) from expenses related to the COVID-19 pandemic, and such expenses are expected to continue in future periods; a $16.2 million pre-tax unfavorable impact ($16.4 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 of this Quarterly Report on Form 10-Q); a $13.0 million pre-tax favorable impact ($9.4 million post-tax) of government grant income in China; and a $0.5 million pre-tax unfavorable impact ($0.4 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 2020 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, 2019 included a $19.0 million pre-tax unfavorable impact ($16.2 million post-tax) of an accrual for Mexico VAT assessments; an $8.7 million pre-tax unfavorable impact ($8.0 million post-tax) of non-cash interest expense related to the 2019 Convertible Notes, 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); a $1.9 million pre-tax unfavorable impact ($3.2 million post-tax) from expenses related to regulatory inquiries; a $6.4 million pre-tax favorable impact ($4.7 million post-tax) of government grant income in China; a $1.3 million pre-tax favorable impact ($1.8 million post-tax) of gain on the revaluation of the CVR (See Note 8, Shareholders’ Deficit, to the Consolidated Financial Statements included in the 2019 10-K); and a $0.4 million post-tax favorable impact related to the finalization of insurance recoveries in connection with the flooding at one of our warehouses in Mexico during September 2017, which damaged certain of our inventory stored within the warehouse (See Note 7, Contingencies, to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2018, or the 2018 10-K).
Net income for the nine months ended September 30, 2019 included a $34.1 million pre-tax unfavorable impact ($30.9 million post-tax) from expenses related to regulatory inquiries and a legal accrual related to the SEC investigation relating to our disclosures regarding our marketing plan in China (See Note 5, Contingencies, to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q); a $33.0 million pre-tax unfavorable impact ($31.7 million post-tax) of non-cash interest expense related to the 2019 Convertible Notes, 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); a $19.0 million pre-tax unfavorable impact ($16.2 million post-tax) of an accrual for Mexico VAT assessments; a $27.7 million pre-tax favorable impact ($19.6 million post-tax) of government grant income in China; a $15.7 million pre-tax favorable impact ($14.4 million post-tax) of gain on the revaluation of the CVR (See Note 8, Shareholders’ Deficit, to the Consolidated Financial Statements included in the 2019 10-K); and a $6.0 million pre-tax favorable impact ($5.5 million post-tax) related to the finalization of insurance recoveries in connection with the flooding at one of our warehouses in Mexico during September 2017, which damaged certain of our inventory stored within the warehouse (See Note 7, Contingencies, to the Consolidated Financial Statements included in the 2018 10-K).
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 |
| ||||||||||
|
| September 30, 2020 |
|
| September 30, 2019 |
|
| September 30, 2020 |
|
| September 30, 2019 |
| ||||
Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
Cost of sales |
|
| 21.2 |
|
|
| 19.6 |
|
|
| 20.4 |
|
|
| 19.9 |
|
Gross profit |
|
| 78.8 |
|
|
| 80.4 |
|
|
| 79.6 |
|
|
| 80.1 |
|
Royalty overrides(1) |
|
| 30.4 |
|
|
| 29.2 |
|
|
| 30.3 |
|
|
| 29.8 |
|
Selling, general, and administrative expenses(1) |
|
| 34.8 |
|
|
| 40.2 |
|
|
| 37.7 |
|
|
| 38.6 |
|
Other operating income |
|
| — |
|
|
| (0.5 | ) |
|
| (0.3 | ) |
|
| (0.9 | ) |
Operating income |
|
| 13.6 |
|
|
| 11.5 |
|
|
| 11.9 |
|
|
| 12.6 |
|
Interest expense, net |
|
| 2.3 |
|
|
| 2.5 |
|
|
| 2.1 |
|
|
| 2.8 |
|
Other income, net |
|
| — |
|
|
| (0.1 | ) |
|
| — |
|
|
| (0.4 | ) |
Income before income taxes |
|
| 11.3 |
|
|
| 9.1 |
|
|
| 9.8 |
|
|
| 10.2 |
|
Income taxes |
|
| 2.2 |
|
|
| 2.6 |
|
|
| 2.6 |
|
|
| 3.2 |
|
Net income |
|
| 9.1 | % |
|
| 6.5 | % |
|
| 7.2 | % |
|
| 7.0 | % |
|
| 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 | )% |
(1)
|
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 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.
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, as compared to the same periods in 2016, as well as the unique growth or contraction factors specific to certain geographic regions or significant countries within a region during these periods. Net sales fluctuations, both Company-wide and within a particular geographic region or country, 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 uses Volume Points as an indication for changes in sales volume.
North America
The North America region reported net sales of $199.8 million and $648.0 million for the three and nine months ended September 30, 2017, respectively. Net sales decreased $41.2 million, or 17.1%, and $105.5 million, or 14.0% for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016. In local currency, net sales decreased 17.2% and 14.0% for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016. The decrease in net sales for the three and nine months ended September 30, 2017, as compared 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 decreases in Volume Points.
As part of our FTC settlement, we have implemented certain new procedures and enhanced certain existing procedures in the United States. We believe North America’s Volume Point decreases for the three and nine months ended September 30, 2017, versus increases for the prior year periods, reflect a transitionary 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 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.
501.0
330.8
51.5
%
1,349.4
1,017.1
32.7
%
Mexico
The Mexico region reported net sales of $114.3 million and $334.7 million for the three and nine months ended September 30, 2017, respectively. Net sales increased $1.5 million, or 1.3%, and decreased $7.1 million, or 2.1%, 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 3.6% and increased 1.0% for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016. The 1.3% increase in net sales for the three months ended September 30, 2017 was primarily the result of price increases and a favorable fluctuation in foreign currency exchange rates which contributed approximately 6.1% and 5.0% to net sales, respectively. These increases were partially offset by a decrease in sales volume, as indicated by a 9.0% decrease in Volume Points. The 2.1% decrease in net sales for the nine months ended September 30, 2017 was primarily the result of a decrease in sales volume, as indicated by a 3.7% decrease in Volume Points, and an unfavorable fluctuation in foreign currency exchange rates, which reduced net 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 declines for the quarter and year-to-date after increases for the comparable periods of 2016 were attributable to a difficult economic environment marked by rising inflation and a weaker peso, as well as the adverse impact late in the quarter of the damaging natural disaster in the greater Mexico City area.
232.3
216.4
7.3
%
655.6
663.0
(1.1
)%
South and Central America
The South and Central America region reported net sales of $116.7 million and $349.1 million for the three and nine months ended September 30, 2017, respectively. Net sales decreased $4.3 million, or 3.6%, and $18.8 million, or 5.1%, for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016. In local currency, net sales increased 1.5% and decreased 5.1% for the three and nine months ended September 30, 2017, 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.
The 3.6% decrease in net sales for the three months ended September 30, 2017 was primarily the result of a decline in sales volume, as indicated by a 6.8% decrease in Volume Points and unfavorable fluctuations in foreign currency exchange rates of 5.0%. These reductions to net sales were partially offset by price increases which contributed approximately 8.7% to net sales. The 5.1% decrease in net sales for the nine months ended September 30, 2017 was primarily the result of a decline in sales volume, as indicated by an 11.7% decrease in Volume Points. This reduction to net 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 sales for the quarter and year-to-date were led by the Venezuela market.
In Brazil, the region’s largest market, net sales were $47.3 million and $141.8 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 2017.150.7
Net sales in Peru were $15.3 million and $46.0 million for the three and nine months ended September 30, 2017, respectively. Net sales decreased $0.8 million, or 5.3%, and $2.2 million, or 4.7%, 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 8.0% and 7.6% 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 $0.4 million and $1.4 million on net sales for the three and nine months ended September 30, 2017, respectively.
130.1
15.8
%
386.5
386.2
0.1
%
EMEA
The EMEA region reported net sales of $213.9 million and $648.4 million for the three and nine months ended September 30, 2017, respectively. Net sales increased $12.3 million, or 6.1%, and $29.4 million, or 4.7%, 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 2.0% and 3.8% for the three and nine months ended September 30, 2017, 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. The fluctuation of foreign currency 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 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 million on net sales for the three and nine months ended September 30, 2017, respectively. Product prices in Russia were increased 5% in February 2017 and 5% in March 2016. The market has continued to utilize the Member Activation Program to attract new Members.423.1
Net sales in Spain were $27.0 million and $76.9 million for the three and nine months ended September 30, 2017, respectively. Net sales increased $1.9 million, or 7.7%, and $0.5 million, or 0.7%, 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 2.2% and 0.8% 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 $1.4 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.
315.2
34.2
%
1,166.5
977.0
19.4
%
Asia Pacific
The Asia Pacific region, which excludes
448.9
406.6
10.4
%
1,211.3
1,147.1
5.6
%
China reported net sales of $230.9 million
143.5
142.4
0.8
%
412.8
361.6
14.2
%
Worldwide
1,899.5
1,541.5
23.2
%
5,182.1
4,552.0
13.8
%
Volume Points increased 23.2% and 13.8% for the three and nine months ended September 30, 2020, respectively, including a mixed impact of COVID-19 pandemic conditions across our markets, after having increased 2.3% and 2.7%, respectively, for the same periods in 2019. Although pandemic conditions had adverse operational impacts across all markets, we believe our Members in certain markets are more focused on their business where we have seen increased net sales and Volume Point growth in certain markets, particularly the North America region and certain EMEA markets.
We believe North America’s Volume Point increases for the quarter and year-to-date periods, which were well above the increases for the comparable prior year periods, also reflect the continuing success of our Distributors as supported by our product line expansion and technological tools, as well as targeted communications and promotions. We believe Mexico’s increase for the quarter, after decreases compared to prior years for a number of quarters and despite continuing difficult economic conditions for the market, reflects the success of our program of promotions to encourage Member sponsorship and activity. After some years of declines, the South and Central America region saw an increase in Volume Points for the third quarter versus the 2019 period, despite pandemic-related continuing declines in several key markets, as we believe efforts to build more sustainable business for our Members through a focus on daily product consumption and retailing take hold in certain markets in the region. EMEA saw increased Volume Point growth for the quarter and year-to-date periods versus 2019, a result we believe of customer-oriented efforts including Member training, brand awareness, and product line expansion, as well as strong business momentum including new Member recruitment. The Asia Pacific region saw Volume Point increases for the third quarter and year-to-date period, continuing favorable long-term trends seen in the region, although the growth rates were below those seen in the 2019 periods due to the adverse impact of pandemic conditions in the region, especially in India and South Korea. China achieved Volume Point increases for the quarter and year-to-date periods, compared to declines for the 2019 periods which were weakened by disruption from the Chinese government’s 100-day review, concluded in April 2019, of the health product industry. We expect COVID-19 pandemic conditions to continue 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.
Presentation
“Retail value” represents the suggested retail price of products we sell to our Members 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. 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 were 41.2% and 40.6% of retail value for the three months ended September 30, 2020 and 2019, respectively, and 41.1% of retail value for both the nine months ended September 30, 2020 and 2019. Depending on product and market, distributor allowances and Marketing Plan payouts for the three and nine months ended September 30, 2020 utilized on a weighted-average basis approximately 90% of suggested retail price, to which we applied discounts of up to 50% for 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. Each Member’s level of discount is determined by qualification based on 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, product sales are recognized net of product returns and distributor allowances.
“Net sales” equal product sales plus shipping and handling, and generally represents what we collect. 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 sales and are not considered as separate revenues.
We do not have visibility into all the sales from our Members to their customers, but such a figure would differ from our reported “retail value” by factors including: (a) the amount of product purchased by our Members for their own personal consumption, (b) prices charged by our Members to their customers other than our suggested retail prices, and (c) the discount from retail value at which preferred members purchase products from us. We discuss retail value because of its fundamental role in our systems, internal controls and operations, and its correlation to Member discounts and Royalty overrides. In addition, 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.
In 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 organization. Additionally, in certain markets we are simplifying our pricing by eliminating certain shipping and handling charges and recovering those costs within suggested retail price. As we continue to extend the segmentation of our distributors and preferred members to additional geographic markets and consider other pricing simplification efforts for our Members, we are evaluating the utility of retail value to management and investors and whether it will continue to be used in the same way in the future.
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 currency.” 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.
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 most significant operating expense and consist of:
• | royalty overrides and |
• | the |
• | 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. 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 Royalty override percentage may vary over time.
Our “contribution margins” consist of net sales less cost of sales and Royalty overrides.
“Selling, general, and administrative expenses” represent our operating expenses, which include labor and benefits, service fees to China 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 and the finalization of insurance recoveries in connection with the flooding at one of our warehouses in Mexico during September 2017.
Our “other income, net” consists of non-operating income and expenses such as gains or losses due to subsequent changes in the fair value of the non-transferable contractual contingent value right, or CVR, provided for each share tendered in the October 2017 modified Dutch auction tender offer. See Note 8, Shareholders’ Deficit, to the Consolidated Financial Statements included in the 2019 10-K for further information on the CVR.
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, of this Quarterly Report on Form 10-Q.
Summary Financial Results
Net sales for the three and nine months ended September 30, 2020 were $1,521.8 million and $4,131.1 million, respectively. Net sales increased $277.3 million, or 22.3% ($277.2 million, or 22.3% excluding Venezuela), and $474.3 million, or 13.0% ($474.2 million, or 13.0% excluding Venezuela), for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. In local currency, net sales increased 26.1% and 17.6% (25.1% and 16.7% excluding Venezuela) for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The 22.3% increase in net sales for the three months ended September 30, 2020 was primarily driven by an increase in sales volume, as indicated by a 23.2% increase in Volume Points and, a 3.6% favorable impact of price increases (2.7% favorable impact excluding Venezuela), partially offset by a 3.8% unfavorable impact of fluctuations in foreign currency exchange rates (2.9% unfavorable impact excluding Venezuela), and a 0.8% unfavorable impact of country sales mix. The 13.0% increase in net sales for the nine months ended September 30, 2020 was primarily driven by an increase in sales volume, as indicated by a 13.8% increase in Volume Points, and a 3.9% favorable impact of price increases (2.8% favorable impact excluding Venezuela), partially offset by a 4.6% unfavorable impact of fluctuations in foreign currency exchange rates (3.7% unfavorable impact excluding Venezuela).
Net income for the three and nine months ended September 30, 2020 was $138.1 million, or $1.04 per diluted share, and $298.8 million, or $2.17 per diluted share, respectively. Net income increased $56.6 million, or 69.4%, and $44.5 million, or 17.5%, for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The increase in net income for the three months ended September 30, 2020 was mainly due to $98.7 million higher contribution margin driven by higher net sales, partially offset by $29.6 million higher selling, general, and administrative expenses. The increase in net income for the nine months ended September 30, 2020 was mainly due to $200.2 million higher contribution margin driven by higher net sales; $15.0 million lower interest expense, net; and $12.7 million lower income taxes; partially offset by $147.0 million higher selling, general, and administrative expenses primarily driven by $83.1 million of expenses relating to the SEC and DOJ investigations relating to the FCPA matter in China (See Note 5, Contingencies, to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q); a $15.7 million unfavorable impact from other income, net relating to CVR revaluations in 2019 as described below; and $14.7 million lower China government grant income.
Net income for the three months ended September 30, 2020 included a $5.5 million pre-tax unfavorable impact ($5.1 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 of this Quarterly Report on Form 10-Q); a $4.7 million pre-tax unfavorable impact ($4.4 million post-tax) from expenses related to the COVID-19 pandemic, and such expenses are expected to continue in future periods; a $0.6 million pre-tax favorable impact ($0.3 million post-tax) of government grant income in China; and a $0.4 million pre-tax unfavorable impact ($4.7 million post-tax) from expenses related to regulatory inquiries.
Net income for the nine months ended September 30, 2020 included an $85.7 million unfavorable impact ($81.0 million post-tax) from expenses related to regulatory inquiries and a legal 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 ($14.6 million post-tax) from expenses related to the COVID-19 pandemic, and such expenses are expected to continue in future periods; a $16.2 million pre-tax unfavorable impact ($16.4 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 of this Quarterly Report on Form 10-Q); a $13.0 million pre-tax favorable impact ($9.4 million post-tax) of government grant income in China; and a $0.5 million pre-tax unfavorable impact ($0.4 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 2020 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, 2019 included a $19.0 million pre-tax unfavorable impact ($16.2 million post-tax) of an accrual for Mexico VAT assessments; an $8.7 million pre-tax unfavorable impact ($8.0 million post-tax) of non-cash interest expense related to the 2019 Convertible Notes, 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); a $1.9 million pre-tax unfavorable impact ($3.2 million post-tax) from expenses related to regulatory inquiries; a $6.4 million pre-tax favorable impact ($4.7 million post-tax) of government grant income in China; a $1.3 million pre-tax favorable impact ($1.8 million post-tax) of gain on the revaluation of the CVR (See Note 8, Shareholders’ Deficit, to the Consolidated Financial Statements included in the 2019 10-K); and a $0.4 million post-tax favorable impact related to the finalization of insurance recoveries in connection with the flooding at one of our warehouses in Mexico during September 2017, which damaged certain of our inventory stored within the warehouse (See Note 7, Contingencies, to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2018, or the 2018 10-K).
Net income for the nine months ended September 30, 2019 included a $34.1 million pre-tax unfavorable impact ($30.9 million post-tax) from expenses related to regulatory inquiries and a legal accrual related to the SEC investigation relating to our disclosures regarding our marketing plan in China (See Note 5, Contingencies, to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q); a $33.0 million pre-tax unfavorable impact ($31.7 million post-tax) of non-cash interest expense related to the 2019 Convertible Notes, 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); a $19.0 million pre-tax unfavorable impact ($16.2 million post-tax) of an accrual for Mexico VAT assessments; a $27.7 million pre-tax favorable impact ($19.6 million post-tax) of government grant income in China; a $15.7 million pre-tax favorable impact ($14.4 million post-tax) of gain on the revaluation of the CVR (See Note 8, Shareholders’ Deficit, to the Consolidated Financial Statements included in the 2019 10-K); and a $6.0 million pre-tax favorable impact ($5.5 million post-tax) related to the finalization of insurance recoveries in connection with the flooding at one of our warehouses in Mexico during September 2017, which damaged certain of our inventory stored within the warehouse (See Note 7, Contingencies, to the Consolidated Financial Statements included in the 2018 10-K).
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 |
| ||||||||||
|
| September 30, 2020 |
|
| September 30, 2019 |
|
| September 30, 2020 |
|
| September 30, 2019 |
| ||||
Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
Cost of sales |
|
| 21.2 |
|
|
| 19.6 |
|
|
| 20.4 |
|
|
| 19.9 |
|
Gross profit |
|
| 78.8 |
|
|
| 80.4 |
|
|
| 79.6 |
|
|
| 80.1 |
|
Royalty overrides(1) |
|
| 30.4 |
|
|
| 29.2 |
|
|
| 30.3 |
|
|
| 29.8 |
|
Selling, general, and administrative expenses(1) |
|
| 34.8 |
|
|
| 40.2 |
|
|
| 37.7 |
|
|
| 38.6 |
|
Other operating income |
|
| — |
|
|
| (0.5 | ) |
|
| (0.3 | ) |
|
| (0.9 | ) |
Operating income |
|
| 13.6 |
|
|
| 11.5 |
|
|
| 11.9 |
|
|
| 12.6 |
|
Interest expense, net |
|
| 2.3 |
|
|
| 2.5 |
|
|
| 2.1 |
|
|
| 2.8 |
|
Other income, net |
|
| — |
|
|
| (0.1 | ) |
|
| — |
|
|
| (0.4 | ) |
Income before income taxes |
|
| 11.3 |
|
|
| 9.1 |
|
|
| 9.8 |
|
|
| 10.2 |
|
Income taxes |
|
| 2.2 |
|
|
| 2.6 |
|
|
| 2.6 |
|
|
| 3.2 |
|
Net income |
|
| 9.1 | % |
|
| 6.5 | % |
|
| 7.2 | % |
|
| 7.0 | % |
(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 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 $1,301.8 million and $3,511.7 million for the three and nine months ended September 30, 2020, respectively, representing an increase of $266.0 million, or 25.7% ($265.9 million, or 25.7% excluding Venezuela), and $401.0 million, or 12.9% ($400.9 million, or 12.9% excluding Venezuela), for the three and nine months ended September 30, 2020 and 2019, respectively, as compared to the same periods in 2019. In local currency, net sales increased 30.5% and 18.0% (29.4% and 16.8% excluding Venezuela) for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The 25.7% increase in net sales for the three months ended September 30, 2020 was primarily due to an increase in sales volume, as indicated by a 25.5% increase in Volume Points, and a 4.3% favorable impact of price increases (3.2% favorable impact excluding Venezuela); partially offset by a 4.8% unfavorable impact of fluctuations in foreign currency exchange rates (3.7% unfavorable impact excluding Venezuela). The 12.9% increase in net sales for the nine months ended September 30, 2020 was primarily due to an increase in sales volume, as indicated by a 13.8% increase in Volume Points, and a 4.4% favorable impact of price increases (3.2% favorable impact excluding Venezuela); partially offset by a 5.1% unfavorable impact of fluctuations in foreign currency exchange rates (4.0% unfavorable impact excluding Venezuela).
For a discussion of China’s net sales for the three and nine months ended September 30, 2020, see the China section of 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.
The Primary Reporting Segment reported contribution margin of $538.2 million, or 41.3% of net sales, and $1,485.4 million, or 42.3% of net sales, for the three and nine months ended September 30, 2020, respectively, representing an increase of $91.5 million, or 20.5% ($91.4 million, or 20.5% excluding Venezuela), and $139.2 million, or 10.3% ($138.6 million, or 10.3% excluding Venezuela), for the three and nine months ended September 30, 2020 and 2019, respectively, as compared to the same periods in 2019. The 20.5% increase in contribution margin for the three months ended September 30, 2020 was primarily the result of a 25.5% favorable impact of volume increases, a 6.9% favorable impact of price increases (5.1% favorable impact excluding Venezuela), and a 1.5% favorable impact of sales mix; partially offset by a 6.9% unfavorable impact of fluctuations in foreign currency exchange rates (5.1% unfavorable impact excluding Venezuela) and a 4.3% unfavorable impact of other cost changes related to self-manufacturing and sourcing and increased freight costs from orders shifting toward home delivery versus Member pick-up. The 10.3% increase in contribution margin for the nine months ended September 30, 2020 was primarily the result of a 13.8% favorable impact of volume increases and a 6.9% favorable impact of price increases (5.0% favorable impact excluding Venezuela); partially offset by a 6.1% unfavorable impact of fluctuations in foreign currency exchange rates (4.2% unfavorable impact excluding Venezuela) and a 2.8% unfavorable impact of other cost changes related to self-manufacturing and sourcing and increased freight costs from orders shifting toward home delivery versus Member pick-up.
China reported contribution margin of $197.8 million and $553.3 million for the three and nine months ended September 30, 2020, respectively, representing an increase of $7.2 million, or 3.8%, and $61.0 million, or 12.4%, for the three and nine months ended September 30, 2020 and 2019, respectively, as compared to the same periods in 2019. The 3.8% increase in contribution margin for the three months ended September 30, 2020 was primarily the result of a 2.6% favorable impact of sales mix and a 1.2% favorable impact of timing differences between the recognition of net sales and sales volume. The 12.4% increase in contribution margin for the nine months ended September 30, 2020 was primarily the result of a 14.2% favorable impact of volume increases, a 2.7% favorable impact of sales mix, and a 1.1% favorable impact of price increases, partially offset by a 2.4% unfavorable impact of fluctuations in foreign currency exchange rates and a 2.1% unfavorable impact of timing differences between the recognition of net sales and sales volume.
Sales by Geographic Region
The following chart reconciles retail value to net sales by geographic region:
|
| Three Months Ended |
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
|
| September 30, 2020 |
|
| September 30, 2019 |
|
|
|
|
| ||||||||||||||||||||||||||||||||||
|
| Retail Value(1) |
|
| Distributor Allowance |
|
| Product Sales |
|
| Shipping and Handling |
|
| Net Sales |
|
| Retail Value(1) |
|
| Distributor Allowance |
|
| Product Sales |
|
| Shipping and Handling |
|
| Net Sales |
|
| % Change in Net Sales |
| |||||||||||
|
| (Dollars in millions) |
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
North America |
| $ | 662.4 |
|
| $ | (304.1 | ) |
| $ | 358.3 |
|
| $ | 40.4 |
|
| $ | 398.7 |
|
| $ | 427.9 |
|
| $ | (195.8 | ) |
| $ | 232.1 |
|
| $ | 25.0 |
|
| $ | 257.1 |
|
|
| 55.1 | % |
Mexico |
|
| 193.1 |
|
|
| (89.6 | ) |
|
| 103.5 |
|
|
| 6.8 |
|
|
| 110.3 |
|
|
| 200.4 |
|
|
| (91.2 | ) |
|
| 109.2 |
|
|
| 7.3 |
|
|
| 116.5 |
|
|
| (5.3 | )% |
South and Central America |
|
| 175.6 |
|
|
| (75.9 | ) |
|
| 99.7 |
|
|
| 3.0 |
|
|
| 102.7 |
|
|
| 162.3 |
|
|
| (72.3 | ) |
|
| 90.0 |
|
|
| 5.4 |
|
|
| 95.4 |
|
|
| 7.7 | % |
EMEA |
|
| 574.3 |
|
|
| (255.5 | ) |
|
| 318.8 |
|
|
| 15.5 |
|
|
| 334.3 |
|
|
| 413.7 |
|
|
| (185.8 | ) |
|
| 227.9 |
|
|
| 14.4 |
|
|
| 242.3 |
|
|
| 38.0 | % |
Asia Pacific |
|
| 613.2 |
|
|
| (267.6 | ) |
|
| 345.6 |
|
|
| 10.2 |
|
|
| 355.8 |
|
|
| 555.7 |
|
|
| (242.7 | ) |
|
| 313.0 |
|
|
| 11.5 |
|
|
| 324.5 |
|
|
| 9.6 | % |
China |
|
| 237.4 |
|
|
| (18.7 | ) |
|
| 218.7 |
|
|
| 1.3 |
|
|
| 220.0 |
|
|
| 227.1 |
|
|
| (19.6 | ) |
|
| 207.5 |
|
|
| 1.2 |
|
|
| 208.7 |
|
|
| 5.4 | % |
Worldwide |
| $ | 2,456.0 |
|
| $ | (1,011.4 | ) |
| $ | 1,444.6 |
|
| $ | 77.2 |
|
| $ | 1,521.8 |
|
| $ | 1,987.1 |
|
| $ | (807.4 | ) |
| $ | 1,179.7 |
|
| $ | 64.8 |
|
| $ | 1,244.5 |
|
|
| 22.3 | % |
|
| Nine Months Ended |
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
|
| September 30, 2020 |
|
| September 30, 2019 |
|
|
|
|
| ||||||||||||||||||||||||||||||||||
|
| Retail Value(1) |
|
| Distributor Allowance |
|
| Product Sales |
|
| Shipping and Handling |
|
| Net Sales |
|
| Retail Value(1) |
|
| Distributor Allowance |
|
| Product Sales |
|
| Shipping and Handling |
|
| Net Sales |
|
| % Change in Net Sales |
| |||||||||||
|
| (Dollars in millions) |
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
North America |
| $ | 1,764.3 |
|
| $ | (808.2 | ) |
| $ | 956.1 |
|
| $ | 106.3 |
|
| $ | 1,062.4 |
|
| $ | 1,315.9 |
|
| $ | (601.0 | ) |
| $ | 714.9 |
|
| $ | 77.0 |
|
| $ | 791.9 |
|
|
| 34.2 | % |
Mexico |
|
| 558.7 |
|
|
| (256.8 | ) |
|
| 301.9 |
|
|
| 19.7 |
|
|
| 321.6 |
|
|
| 604.4 |
|
|
| (274.4 | ) |
|
| 330.0 |
|
|
| 27.0 |
|
|
| 357.0 |
|
|
| (9.9 | )% |
South and Central America |
|
| 452.2 |
|
|
| (198.6 | ) |
|
| 253.6 |
|
|
| 11.0 |
|
|
| 264.6 |
|
|
| 487.6 |
|
|
| (217.6 | ) |
|
| 270.0 |
|
|
| 16.3 |
|
|
| 286.3 |
|
|
| (7.6 | )% |
EMEA |
|
| 1,529.1 |
|
|
| (681.4 | ) |
|
| 847.7 |
|
|
| 45.6 |
|
|
| 893.3 |
|
|
| 1,291.1 |
|
|
| (578.8 | ) |
|
| 712.3 |
|
|
| 44.6 |
|
|
| 756.9 |
|
|
| 18.0 | % |
Asia Pacific |
|
| 1,673.6 |
|
|
| (731.7 | ) |
|
| 941.9 |
|
|
| 27.9 |
|
|
| 969.8 |
|
|
| 1,572.4 |
|
|
| (686.3 | ) |
|
| 886.1 |
|
|
| 32.5 |
|
|
| 918.6 |
|
|
| 5.6 | % |
China |
|
| 666.4 |
|
|
| (51.1 | ) |
|
| 615.3 |
|
|
| 4.1 |
|
|
| 619.4 |
|
|
| 592.8 |
|
|
| (49.8 | ) |
|
| 543.0 |
|
|
| 3.1 |
|
|
| 546.1 |
|
|
| 13.4 | % |
Worldwide |
| $ | 6,644.3 |
|
| $ | (2,727.8 | ) |
| $ | 3,916.5 |
|
| $ | 214.6 |
|
| $ | 4,131.1 |
|
| $ | 5,864.2 |
|
| $ | (2,407.9 | ) |
| $ | 3,456.3 |
|
| $ | 200.5 |
|
| $ | 3,656.8 |
|
|
| 13.0 | % |
(1) | Retail value is a non-GAAP measure which
|
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, 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 innovative product line, offer leading-edge business tools and technology services, and encourage strong teamwork and Member leadership to make doing business with Herbalife simple. 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 tools and promotions to encourage Members to increase retailing, retention, and recruiting, which in turn affect net sales. Such tools 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 in 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. Additionally, 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 two 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 promotion efforts.
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 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, 2020 as compared to the same periods in 2019, as well as the unique growth or contraction factors specific to certain geographic regions or significant countries within a region during these periods. Net sales fluctuations, both Company-wide and within a particular geographic region or country, are primarily the result of changes in volume, changes in prices, 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. We 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 first quarter for each geographic region and individual market.
North America
The North America region reported net sales of $398.7 million and $1,062.4 million for the three and nine months ended September 30, 2020, respectively. Net sales increased $141.6 million, or 55.1%, and $270.5 million, or 34.2%, for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. In local currency, net sales increased 55.1% and 34.2% for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The 55.1% increase in net sales for the three months ended September 30, 2020 was primarily due to an increase in sales volume, as indicated by a 51.5% increase in Volume Points, and a 3.2% favorable impact of price increases. The 34.2% increase in net sales for the nine months ended September 30, 2020 was primarily due to an increase in sales volume, as indicated by a 32.7% increase in Volume Points, and a 2.9% favorable impact of price increases.
Net sales in the U.S. were $386.7 million and $1,033.9 million for the three and nine months ended September 30, 2020, respectively. Net sales increased $135.2 million, or 53.8%, and $259.7 million, or 33.5%, for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019.
Growth in the region continues to be 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. Strengthened momentum for the market has resulted in higher rates of growth in net sales for the region for the quarter and year-to-date periods than those for the comparable 2019 periods.
In response to pandemic conditions, product distribution to our Members was altered to allow online orders only; our two major U.S. distribution centers were shipping product only, with no in-person pick-ups permitted; and our sales centers were for pick-up only, with no orders taken on-site as of yet; however, our Members’ ability to obtain product has not materially decreased. Late in the third quarter, our Memphis distribution center began allowing pick-up orders; however, we continue to not allow in-person orders at any of our sales centers. Members’ Nutrition Clubs, which represent a major DMO for the region, are operating in some areas as pick-up points for product only versus their more traditional on-site consumption approach. Nutrition Club sales volume increased for the third quarter versus the prior year, 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. Promotional activities aimed at our Members continue, though prizes that have involved travel to events have shifted to cash and other awards.
As evidenced by continuing Volume Point growth for the region, we believe that our responsive efforts to pandemic conditions have been effective to date and we believe that pandemic conditions may have been a contributing factor in the motivation and focus of our Members. Certain modified practices by us and our Members may prove to be lasting improvements, such as an increased focus on customer-direct orders, and events and trainings that are offered virtually as well as in-person.
Mexico
The Mexico region reported net sales of $110.3 million and $321.6 million for the three and nine months ended September 30, 2020, respectively. Net sales decreased $6.2 million, or 5.3%, and $35.4 million, or 9.9%, for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. In local currency, net sales increased 7.6% and 1.1% for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The 5.3% decrease in net sales for the three months ended September 30, 2020 was primarily due to a 12.9% unfavorable impact of fluctuations in foreign currency exchange rates and a 2.2% unfavorable impact of timing differences between the recognition of net sales and Volume Points, partially offset by an increase in sales volume, as indicated by a 7.3% increase in Volume Points, and a 3.3% favorable impact of price increases. The 9.9% decrease in net sales for the nine months ended September 30, 2020 was primarily due to a 11.0% unfavorable impact of fluctuations in foreign currency exchange rates and a decrease in sales volume, as indicated by a 1.1% decrease in Volume Points, partially offset by a 2.8% favorable impact of price increases.
We believe the Volume Point increase for the quarter, after decreases for a number of prior quarters including the 2019 period, reflects the success of our program of promotions to encourage Member sponsorship and activity, including additional promotions offered since the second quarter of 2020 as a response to pandemic conditions. We believe the Volume Point decrease for the year-to-date period reflects difficult economic conditions in the region and a consequent slowing of our business momentum for the market prior to the third quarter. Despite the pandemic conditions, nearly all product access points in Mexico, both Company-operated and third party, have remained open.
South and Central America
The South and Central America region reported net sales of $102.7 million and $264.6 million for the three and nine months ended September 30, 2020, respectively. Net sales increased $7.3 million, or 7.7% ($7.2 million, or 7.6% excluding Venezuela), and decreased $21.7 million, or 7.6% ($21.8 million, or 7.7% excluding Venezuela), for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. In local currency, net sales increased 35.4% and 17.4% (22.9% and 4.8% excluding Venezuela) for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The 7.7% increase in net sales for the three months ended September 30, 2020 was due to an increase in sales volume, as indicated by a 15.8% increase in Volume Points, and a 19.0% favorable impact of price increases (6.6% favorable impact excluding Venezuela), partially offset by a 27.7% unfavorable impact of fluctuations in foreign currency exchange rates (15.4% unfavorable impact excluding Venezuela). The 7.6% decrease in net sales for the nine months ended September 30, 2020 was due to a 25.0% unfavorable impact of fluctuations in foreign currency exchange rates (12.5% unfavorable impact excluding Venezuela), partially offset by an 18.2% favorable impact of price increases (5.3% favorable impact excluding Venezuela) and a slight increase in sales volume, as indicated by a 0.1% increase in Volume Points. The region saw a sales volume increase for the quarter versus the prior year period led by Colombia and Chile, as markets adapted to pandemic conditions and efforts to build more sustainable business for our Members through a focus on daily product consumption and retailing take hold in certain markets in the region. The region is seeing success leveraging social media, utilizing cash prize promotions, and using the weight loss challenge DMO. COVID-19 pandemic conditions, however, have impacted the region adversely, and significantly so for certain markets in the region including Brazil and Peru. Pandemic impacts have varied by market across the region and have begun to ease, but have included product shipping delays and widespread suspension of product access points and Members’ Nutrition Clubs, requiring reliance on shipping product to Members’ and customers’ homes.
Net sales in Brazil were $20.8 million and $62.4 million for the three and nine months ended September 30, 2020, respectively. Net sales decreased $5.7 million, or 21.6%, and $20.9 million, or 25.2%, for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. In local currency, net sales increased 6.2% and decreased 4.1% for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The fluctuation of foreign currency exchange rates had an unfavorable impact of $7.4 million and $17.6 million on net sales for the three and nine months ended September 30, 2020, respectively. In May 2019, we segmented our Member base in the market into distributors and preferred members; we are leveraging this segmentation for communication and promotion purposes, and have made preferred members a strategic focus in order to drive a larger base of new customers. We have expanded our product line to meet consumer demands in new product segments. However, COVID-19 pandemic conditions have constrained our business in Brazil since March 2020. Although most Members’ Nutrition Clubs are now permitted to be open, broader pandemic conditions in the country have adversely impacted sales volumes for this important DMO for the market. Home delivery is operating and is the primary distribution channel for the market, though the majority of other product access points are now open for pick-up. Brazil had a 4% price increase in March 2020.
Net sales in Peru were $17.1 million and $44.6 million for the three and nine months ended September 30, 2020, respectively. Net sales increased $1.4 million, or 9.1%, and decreased $3.0 million, or 6.3%, for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. In local currency, net sales increased 15.7% and decreased 2.7% for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The fluctuation of foreign currency exchange rates had an unfavorable impact of $1.0 million and $1.7 million on net sales for the three and nine months ended September 30, 2020, respectively. Sales volumes that were above the volumes for the prior year through mid-March declined significantly from that time through most of the second quarter due to pandemic conditions. We are taking orders by Internet and phone and shipping product to Member homes; during October 2020, our sales centers began to open for product pick-up as well as home delivery. Members’ Nutrition Clubs were also modified for home delivery only, though they are now beginning to re-open more fully with certain restrictions. These adaptations to pandemic conditions, as well as Members’ success leveraging social media and using the weight loss challenge DMO, contributed to strengthened business momentum and a sales volume increase for the third quarter versus the prior year period.
EMEA
The EMEA region reported net sales of $334.3 million and $893.3 million for the three and nine months ended September 30, 2020, respectively. Net sales increased $92.0 million, or 38.0%, and $136.4 million, or 18.0%, for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. In local currency, net sales increased 39.7% and 22.0% for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The 38.0% increase in net sales for the three months ended September 30, 2020 was primarily due to an increase in sales volume, as indicated by a 34.2% increase in Volume Points, and a 3.6% favorable impact of price increases; partially offset by a 1.7% unfavorable impact of fluctuations in foreign currency exchange rates. The 18.0% increase in net sales for the nine months ended September 30, 2020 was primarily due to an increase in sales volume, as indicated by a 19.4% increase in Volume Points, and a 3.8% favorable impact of price increases; partially offset by a 4.0% unfavorable impact of fluctuations in foreign currency exchange rates. Volume Points were generally higher across the region for the quarter and year-to-date periods. The 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. In addition to the major markets discussed below, strong business momentum in the United Kingdom, South Africa, and France contributed to region net sales growth for the third quarter and year to date.
Due to COVID-19 pandemic conditions, our sales centers and other product access points in many markets within the region are closed or open for limited operations only, leaving shipping for home delivery as the primary distribution channel while these conditions persist. Members are turning further to social media to carry out their sales and oversight activities. These adaptations have been successful in limiting the adverse impact of the pandemic.
Net sales in Spain were $48.8 million and $125.0 million for the three and nine months ended September 30, 2020, respectively. Net sales increased $16.5 million, or 50.7%, and $19.2 million, or 18.1%, for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. In local currency, net sales increased 43.7% and 17.6% for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The fluctuation of foreign currency exchange rates had a favorable impact of $2.3 million and $0.5 million on net sales for the three and nine months ended September 30, 2020, respectively. In recent years, Spain has seen sales volume increases as it benefited from programs of promotions and sponsorships, as well as enhanced technology tools, that have raised brand awareness through healthy active lifestyle and contributed to broad-based success across Member sales organizations in the market. In response to pandemic conditions, we are shifting our operations to primarily online activities to mitigate the negative impacts of being unable to conduct in-person meetings, trainings, and selling activities. Home delivery continues to be our prevailing distribution channel and has not seen significant disruption. After the first quarter of 2020 saw a small sales volume decline, subsequent quarters have seen significant volume increases as our Members appear to have adapted to pandemic conditions, such as leveraging online tools to reach their customers, and business momentum has increased.
Net sales in Russia were $36.7 million and $111.1 million for the three and nine months ended September 30, 2020, respectively. Net sales increased $1.8 million, or 5.1%, and $8.4 million, or 8.2%, for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. In local currency, net sales increased 19.8% and 17.9% for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The fluctuation of foreign currency exchange rates had an unfavorable impact of $5.2 million and $9.9 million on net sales for the three and nine months ended September 30, 2020, respectively. Russia achieved sales volume increases for the third quarter and year-to-date periods versus the prior year despite some pandemic disruption commencing late in the first quarter. Our sales centers are now reopened for product pick-up, although we continue to support home delivery for the market. Due to pandemic conditions, Nutrition Clubs are operating primarily online in the market and remain a key DMO, supported by new products, training, and promotion for all levels of Membership, as well as product access expansion. During the third quarter, we introduced Member segmentation to the market by adding a preferred customer program option for new Members. Russia had an approximate 5% price increase in September 2020.
Net sales in Italy were $39.5 million and $103.8 million for the three and nine months ended September 30, 2020, respectively. Net sales increased $10.2 million, or 34.3%, and $6.1 million, or 6.2%, for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. In local currency, net sales increased 28.0% and 5.9% for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The fluctuation of foreign currency exchange rates had a favorable impact of $1.9 million and $0.3 million on net sales for the three and nine months ended September 30, 2020, respectively. Sales volume increased for the third quarter and year to date versus the prior year periods. After weakened momentum in our business and pandemic conditions in the country contributed to a sales volume decline for the first quarter of the year, we believe adaptation by Members to pandemic conditions, such as online communication with customers, has been a contributing factor to our sales volume increase and strengthened momentum for subsequent quarters.
Asia Pacific
The Asia Pacific region, which excludes China, reported net sales of $355.8 million and $969.8 million for the three and nine months ended September 30, 2020, respectively. Net sales increased $31.3 million, or 9.6%, and $51.2 million, or 5.6%, for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. In local currency, net sales increased 10.9% and 7.5% for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The 9.6% increase in net sales for the three months ended September 30, 2020 was primarily due to an increase in sales volume, as indicated by a 10.4% increase in Volume Points, and a 1.8% favorable impact of price increases, partially offset by a 1.3% unfavorable impact of fluctuations in foreign currency exchange rates. The 5.6% increase in net sales for the nine months ended September 30, 2020 was primarily due to an increase in sales volume, as indicated by a 5.6% increase in Volume Points, and a 2.4% favorable impact of price increases, partially offset by a 1.9% unfavorable impact of fluctuations in foreign currency exchange rates. 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 and daily consumption DMOs, including Nutrition Clubs, as well as product line and access point expansion. However, COVID-19 pandemic conditions, such as closed sales centers and Members’ Nutrition Clubs and an increased reliance on home delivery for product distribution, have had an adverse impact on results commencing late in the first quarter, most significantly for India, South Korea, and Indonesia. The region has adapted to pandemic conditions and achieved sales volume increases for the third quarter as well as the year to date compared to the prior year periods. Volume increases were led by India and Vietnam, and the ongoing pandemic conditions contributed to decreases for South Korea and Indonesia.
Net sales in India were $96.2 million and $244.9 million for the three and nine months ended September 30, 2020, respectively. Net sales increased $10.2 million, or 12.0%, and $9.6 million, or 4.1%, for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. In local currency, net sales increased 18.2% and 9.7% for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The fluctuation of foreign currency exchange rates had an unfavorable impact of $5.4 million and $13.2 million on net sales for the three and nine months ended September 30, 2020, respectively. Sales volumes have increased in India in recent years, including the current quarter and year-to-date periods despite some pandemic disruption, 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.
Although certain Indian states have implemented pandemic-related operating constraints, including reduced product manufacturing capacity and constrained ability to deliver product to Members, our manufacturing capacity has met demand. We continue to take Member orders and payments online. Although Company locations are now open for the taking of orders and payments and pick-up of product, home delivery volumes continue to exceed pre-pandemic levels. 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.
Separately, regulatory restrictions on direct selling, including registration requirements for our Members that were implemented during February 2020, have reduced the number of new Members since that time, despite certain subsequent relaxations of regulations by the government in response to pandemic conditions. We have seen an increase in new Preferred Members, since these do not have similar registration requirements, but during a transition period, we may see some adverse impact on the net sales growth rate from these regulatory changes.
Net sales in Vietnam were $53.5 million and $149.9 million for the three and nine months ended September 30, 2020, respectively. Net sales increased $12.9 million, or 31.5%, and $35.8 million, or 31.3%, for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. In local currency, net sales increased 31.3% and 31.4% for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The fluctuation of foreign currency exchange rates had a favorable impact of $0.1 million and an unfavorable impact of $0.1 million on net sales for the three and nine months ended September 30, 2020, respectively. Vietnam continues to have strong momentum, having adapted to increased direct-selling regulatory requirements and as sales leadership continues to focus on sustainable, consumption-oriented business practices. COVID-19 pandemic-related operating constraints that we saw in the second quarter had eased somewhat for the third quarter and we and our Members have adapted to constraints by moving events, trainings, and product ordering online.
Net sales in Indonesia were $42.6 million and $131.3 million for the three and nine months ended September 30, 2020, respectively. Net sales decreased $5.7 million, or 11.8%, and $1.7 million, or 1.3%, for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. In local currency, net sales decreased 8.3% and increased 1.5% for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The fluctuation of foreign currency exchange rates had an unfavorable impact of $1.7 million and $3.7 million on net sales for the three and nine months ended September 30, 2020, respectively. Although Indonesia has increased sales volumes in recent years by focusing on a customer-based business and daily consumption through Nutrition Clubs and training activities, supported by increased product access, pandemic conditions have had an adverse impact on our operations and results for the third quarter and year to date. 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, that have continued to operate experienced pandemic-related constraints on their activities and public movement. Our responsive measures include training and promotions targeted to sales leaders, non-sales leader Members, and their customers as appropriate.
Net sales in South Korea were $34.0 million and $97.4 million for the three and nine months ended September 30, 2020, respectively. Net sales decreased $4.8 million, or 12.3%, and $11.4 million, or 10.5%, for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. In local currency, net sales decreased 12.6% and 7.6% for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The fluctuation of foreign currency exchange rates had a favorable impact of $0.1 million and an unfavorable impact of $3.2 million on net sales for the three and nine months ended September 30, 2020, respectively. South Korea achieved Volume Point and net sales growth for 2019 after several years of transitionary impact from Marketing Plan changes that led to contraction in our business in the market, and this growth continued in the early part of 2020. Pandemic conditions, however, including the suspension of our training facilities and our Members’ Nutrition Clubs and restrictions on gatherings, have affected the market since mid-February and contributed to sales volume declines for the third quarter and year to date versus the prior year periods. Nutrition Clubs have begun to open on a limited basis, sales and training activities continue online, and delivery of product continues.
China
The China region reported net sales of $220.0 million and $619.4 million for the three and nine months ended September 30, 2020, respectively. Net sales increased $11.3 million, or 5.4%, and $73.3 million, or 13.4%, for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. In local currency, net sales increased 4.2% and 15.7% for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The 5.4% increase in net sales for the three months ended September 30, 2020 was primarily due to a 1.2% favorable impact of fluctuations in foreign currency exchange rates, an increase in sales volume, as indicated by a 0.8% increase in Volume Points, a 2.4% favorable impact of sales mix, and a 1.1% favorable impact of timing differences between the recognition of net sales and Volume Points. The 13.4% increase in net sales for the nine months ended September 30, 2020 was primarily due to an increase in sales volume, as indicated by a 14.2% increase in Volume Points, a 2.4% favorable impact of sales mix, and a 1.0% favorable impact of price increases, partially offset by a 2.3% unfavorable impact of fluctuations in foreign currency exchange rates and a 1.9% unfavorable impact of timing differences between the recognition of net sales and Volume Points.
The volume growth for the nine months ended September 30, 2020 versus the prior year period, despite some disruption due to the COVID-19 viral outbreak, was partially attributable to comparison to a weakened 2019 period. During 2019, our China net sales were negatively impacted by the Chinese government’s 100-day review, or Review, of the health products industry, which concluded in April 2019. The Review, combined with negative media coverage about the Review, impacted our business as Members significantly reduced activities and sales meetings during and following the Review. These activities and sales meetings are important to our business as they are a central channel for attracting and retaining customers, providing personal and professional development for our Members, and promoting our products. While our Members had begun conducting meetings again toward the end of 2019 and the first quarter of 2020, the COVID-19 pandemic resulted in travel restrictions and other temporary measures which commenced early in the first quarter and also negatively impacted our business, including renewed sales meeting restrictions and Nutrition Club closures. We and our Members have been able to mitigate the impact of these restrictions through 2020 by taking many sales and promotional activities online. By April 2020, though subject to additional changes in conditions, China operations had largely resumed on an adapted basis. Manufacturing plants and distribution centers are open and operating normally, as well as Nutrition Clubs, subject to certain social distancing measures. Some in-person sales meetings have begun to be held again, based on location and size and subject to government approval, though sales meetings also continue to be successfully held online.
During 2019 we expanded our e-commerce platform to provide the ability for our China Members to service their customers via personalized sites, and for their retail customers to purchase products directly from the Company. We have expanded our product line for the China market and continue to conduct sales promotions in the region.
Sales by Product Category
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| Three Months Ended |
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| September 30, 2020 |
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| September 30, 2019 |
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| Retail Value(2) |
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| Distributor Allowance |
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| Product Sales |
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| Shipping and Handling |
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| Net Sales |
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| Retail Value(2) |
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| Distributor Allowance |
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| Product Sales |
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| Shipping and Handling |
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| Net Sales |
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| % Change in Net Sales |
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| (Dollars in millions) |
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Weight Management |
| $ | 1,486.4 |
|
| $ | (622.7 | ) |
| $ | 863.7 |
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| $ | 46.7 |
|
| $ | 910.4 |
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| $ | 1,241.1 |
|
| $ | (513.0 | ) |
| $ | 728.1 |
|
| $ | 40.5 |
|
| $ | 768.6 |
|
|
| 18.4 | % |
Targeted Nutrition |
|
| 679.1 |
|
|
| (284.6 | ) |
|
| 394.5 |
|
|
| 21.3 |
|
|
| 415.8 |
|
|
| 524.1 |
|
|
| (216.7 | ) |
|
| 307.4 |
|
|
| 17.1 |
|
|
| 324.5 |
|
|
| 28.1 | % |
Energy, Sports, and Fitness |
|
| 204.4 |
|
|
| (85.7 | ) |
|
| 118.7 |
|
|
| 6.5 |
|
|
| 125.2 |
|
|
| 153.4 |
|
|
| (63.5 | ) |
|
| 89.9 |
|
|
| 5.0 |
|
|
| 94.9 |
|
|
| 31.9 | % |
Outer Nutrition |
|
| 46.1 |
|
|
| (19.3 | ) |
|
| 26.8 |
|
|
| 1.4 |
|
|
| 28.2 |
|
|
| 37.1 |
|
|
| (15.3 | ) |
|
| 21.8 |
|
|
| 1.2 |
|
|
| 23.0 |
|
|
| 22.6 | % |
Literature, Promotional, and Other(1) |
|
| 40.0 |
|
|
| 0.9 |
|
|
| 40.9 |
|
|
| 1.3 |
|
|
| 42.2 |
|
|
| 31.4 |
|
|
| 1.1 |
|
|
| 32.5 |
|
|
| 1.0 |
|
|
| 33.5 |
|
|
| 26.0 | % |
Total |
| $ | 2,456.0 |
|
| $ | (1,011.4 | ) |
| $ | 1,444.6 |
|
| $ | 77.2 |
|
| $ | 1,521.8 |
|
| $ | 1,987.1 |
|
| $ | (807.4 | ) |
| $ | 1,179.7 |
|
| $ | 64.8 |
|
| $ | 1,244.5 |
|
|
| 22.3 | % |
|
| Nine Months Ended |
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
|
| September 30, 2020 |
|
| September 30, 2019 |
|
|
|
|
| ||||||||||||||||||||||||||||||||||
|
| Retail Value(2) |
|
| Distributor Allowance |
|
| Product Sales |
|
| Shipping and Handling |
|
| Net Sales |
|
| Retail Value(2) |
|
| Distributor Allowance |
|
| Product Sales |
|
| Shipping and Handling |
|
| Net Sales |
|
| % Change in Net Sales |
| |||||||||||
|
| (Dollars in millions) |
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Weight Management |
| $ | 4,042.9 |
|
| $ | (1,689.2 | ) |
| $ | 2,353.7 |
|
| $ | 130.6 |
|
| $ | 2,484.3 |
|
| $ | 3,696.6 |
|
| $ | (1,546.4 | ) |
| $ | 2,150.2 |
|
| $ | 126.4 |
|
| $ | 2,276.6 |
|
|
| 9.1 | % |
Targeted Nutrition |
|
| 1,834.4 |
|
|
| (766.5 | ) |
|
| 1,067.9 |
|
|
| 59.2 |
|
|
| 1,127.1 |
|
|
| 1,527.4 |
|
|
| (638.9 | ) |
|
| 888.5 |
|
|
| 52.2 |
|
|
| 940.7 |
|
|
| 19.8 | % |
Energy, Sports, and Fitness |
|
| 525.5 |
|
|
| (219.6 | ) |
|
| 305.9 |
|
|
| 17.0 |
|
|
| 322.9 |
|
|
| 427.5 |
|
|
| (178.8 | ) |
|
| 248.7 |
|
|
| 14.6 |
|
|
| 263.3 |
|
|
| 22.6 | % |
Outer Nutrition |
|
| 131.0 |
|
|
| (54.7 | ) |
|
| 76.3 |
|
|
| 4.2 |
|
|
| 80.5 |
|
|
| 113.1 |
|
|
| (47.3 | ) |
|
| 65.8 |
|
|
| 3.9 |
|
|
| 69.7 |
|
|
| 15.5 | % |
Literature, Promotional, and Other(1) |
|
| 110.5 |
|
|
| 2.2 |
|
|
| 112.7 |
|
|
| 3.6 |
|
|
| 116.3 |
|
|
| 99.6 |
|
|
| 3.5 |
|
|
| 103.1 |
|
|
| 3.4 |
|
|
| 106.5 |
|
|
| 9.2 | % |
Total |
| $ | 6,644.3 |
|
| $ | (2,727.8 | ) |
| $ | 3,916.5 |
|
| $ | 214.6 |
|
| $ | 4,131.1 |
|
| $ | 5,864.2 |
|
| $ | (2,407.9 | ) |
| $ | 3,456.3 |
|
| $ | 200.5 |
|
| $ | 3,656.8 |
|
|
| 13.0 | % |
(1) | Product buybacks and returns in all product categories are included in the Literature, Promotional, and Other category. |
(2) | Retail value is a non-GAAP measure which may not be comparable to similarly-titled measures used by other companies. See “Presentation” above for a discussion of how we
Net sales for all categories increased for the three and nine months ended September 30, 2020 as compared to the same periods in 2019. The trends and business factors described in the above discussions of the individual geographic regions apply generally to all product categories.
Gross Profit Gross profit was The decrease in gross profit as a percentage of net sales for the three months ended September 30, 2020 as compared to the same period in 2019 included the unfavorable impact of foreign currency fluctuations of The decrease in gross profit as a percentage of net sales for the nine months ended September 30, 2020 as compared to the same period in 2019 included unfavorable cost changes of 51 basis points relating to increased freight costs due to orders shifting toward home delivery versus Member pick-up, unfavorable cost changes related to self-manufacturing and sourcing of 32 basis points, which includes decreased costs related to Mexico tariffs, the unfavorable impact of foreign currency fluctuations of 29 basis points (unfavorable impact of 11 basis points excluding Venezuela), unfavorable other cost changes of 11 basis points, and unfavorable changes in country mix of 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 Royalty Overrides Royalty overrides were Service fees to our independent service providers in China Selling, General, and Administrative Expenses Selling, general, and administrative expenses were The increase in selling, general, and administrative expenses for the three months ended September 30, The
Other Operating Income The $0.6 million of other
Interest Expense, Net
The increase in
Other Income, Net We did not recognize any other income, net for the three months ended September 30, 2020. The $1.3 million of other income, net for the three months ended September 30, 2019 consisted of a $1.3 million gain on the revaluation of the CVR (See Note 8, Shareholders’ Deficit, to the Consolidated Financial Statements included in the 2019 10-K). We did not recognize any other income, net for the nine months ended September 30, 2020. The $15.7 million of other income, net for the nine months ended September 30, 2019 consisted of a $15.7 million gain on the revaluation of the CVR. Income Taxes Income taxes were $33.6 million and 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 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, For the nine months ended September 30, Capital expenditures, including accrued capital expenditures, were $74.8 million and $76.0 million for the nine months ended September 30, In March Senior Secured Credit Facility
On August 16, 2018, we entered into a $1.25 billion senior secured credit facility, or the 2018 Credit Facility, consisting of a $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 $250.0 million revolving credit facility, or the 2018 Revolving Credit Facility, with a syndicate of financial institutions as lenders. Prior to the amendment described below, the 2018 Term Loan A and 2018 Revolving Credit Facility both were to mature on August 16, 2023. The 2018 Term Loan B matures upon the earlier of: (i) August 18, 2025, or (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 million aggregate principal amount of senior unsecured notes, or 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 2017 Credit Facility. For accounting purposes, pursuant to FASB ASC Topic 470, Debt (“ASC 470”), these transactions were accounted for as an extinguishment of the 2017 Credit Facility. We recognized a loss on extinguishment of $35.4 million as a result, which was recorded in other (income) expense, net within our consolidated statements of income for the year ended December 31, 2018. 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 ASC 470, this transaction was accounted for as a modification of the 2018 Credit Facility. The debt issuance costs were recognized in interest expense within our consolidated statement of income for the year ended December 31, 2019. 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 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 we exceed 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. 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. 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 The 2018 Term Loan During the 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 for a further discussion on the 2018 Credit Facility. Convertible Senior Notes due 2019 In February 2014, we issued $1.15 billion aggregate principal amount of convertible senior notes due 2019, or the 2019 Convertible Notes. The 2019 Convertible 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 2019 Convertible Notes paid interest at a rate of 2.00% per annum payable semiannually in arrears on February 15 and August 15 of each year, beginning on August 15, 2014. Unless earlier repurchased or converted, the 2019 Convertible Notes matured on August 15, 2019. The primary purpose of the issuance of the 2019 Convertible Notes was for share repurchase purposes. In March 2018, we issued $550 million aggregate principal of new convertible senior notes due 2024 as described below, and subsequently used the proceeds, along with cash on hand, to repurchase $475.0 million of our existing 2019 Convertible Notes from a limited number of holders in privately negotiated transactions for an aggregate purchase price of $583.5 million, which included $1.0 million of accrued interest. In August 2019, we repaid a total amount of $675.0 million to repay in full amounts outstanding on the accrued interest. 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 for a further discussion on our Convertible Senior Notes due 2024
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 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 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 2026 Notes pay 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 mature on August 15, 2026, unless redeemed or repurchased in accordance with their terms prior to such date. The primary purpose of the issuance of the 2026 Notes was to refinance a portion of our 2017 Credit Facility. 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 for a further discussion on our 2026 Notes. Cash and The majority of our foreign subsidiaries designate their local currencies as their functional currencies. 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 group for the purpose of repatriation of undistributed earnings, we would need to accrue and pay taxes. As of December 31, Off-Balance Sheet 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 In conjunction with the issuance of the 2019 Convertible Notes during February 2014, we paid approximately $685.8 million to enter into prepaid forward share repurchase transactions, or the Forward Transactions, with certain financial institutions, or the Forward Counterparties, pursuant to which we purchased approximately
As of See Note 10, Shareholders’ Capped Call Transactions In February 2014, in connection with the issuance of the 2019 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 During March 2018, in connection with our repurchase of a portion of the 2019 Convertible Notes, we entered into partial settlement agreements with the option counterparties to the Capped Call Transactions to terminate a portion of the Capped Call Transactions, in each case, in a notional amount corresponding to the aggregate principal amount of the 2019 Convertible Notes that were repurchased. On August 15, 2019, the 2019 Convertible Notes matured and the remaining Capped Call Transactions expired unexercised. The expiration of the Capped Call Transactions did not have an impact on our condensed consolidated financial statements. See Note 10, Shareholders’ Working Capital and Operating Activities As of September 30, 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 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 Contingencies 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 further discussion of our contingencies as of September 30, 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. We are a nutrition company that sells a wide range of weight We generally recognize revenue upon delivery 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 product sales for 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 Goodwill and As part of the For our If we
If we are required to determine As of September 30, 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.
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. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act of 2017, or U.S. Tax Reform, which contains several key tax provisions that affect us, including, but not limited to, a one-time mandatory transition tax on accumulated foreign earnings, changes in the sourcing and calculation of foreign income, and a reduction of the corporate income tax rate to 21% effective January 1, 2018. We are required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, remeasuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. See Note 12, Income Taxes, to the Consolidated Financial Statements included in the 2019 10-K for a further discussion of U.S. Tax Reform. We have made an accounting policy election to account for global intangible low-taxed income as a period cost if and when incurred. We account for foreign currency transactions in accordance with FASB ASC Topic 830, Foreign Currency New Accounting Pronouncements See discussion under Note 2, Significant Accounting Policies, to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, for information on new accounting pronouncements.
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 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 The foreign We also purchase foreign currency forward contracts in order to hedge forecasted inventory transactions and intercompany management fees that are designated as As of both September 30, The following table provides information about the details of
The majority of our foreign subsidiaries designate their local currencies as their functional currencies. See Liquidity and Capital Resources — Cash and Interest Rate Risk As of September 30, During the first quarter of 2020, we entered into various interest rate swap agreements 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 3.48%. The fair values of the interest rate swap agreements are based on third-party bank quotes, and as of September 30, 2020, we recorded liabilities at fair value of $1.2 million 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 As of September 30, As of September 30, 2020, the fair value of the 2025 Notes was approximately $646.1 million and the carrying value was $592.6 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 by approximately $19.4 million or increase by approximately $11.6 million. As of September 30, 2020, the fair value of the 2026 Notes was approximately $410.9 million and the carrying value was $395.7 million. As of December 31, 2019, the fair value of the 2026 Notes was approximately $424.1 million and the carrying value was $395.3 million. The 2026 Notes pay interest at a fixed rate of 7.250% per annum payable semiannually in arrears on February 15 and August 15 of each year, beginning on
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, 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,
This document 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 for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements of 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,
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 Forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the date
See discussion under Note 5, Contingencies, to the Condensed Consolidated Financial Statements included in Part I, Item 1 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 in our securities risky. The events 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, growth, reputation, prospects, financial condition, operating results (including components of our financial results such as sales and profits), cash flows, liquidity, and stock price. These risk factors do not identify all risks that we face; our operations 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 significant risks to our operations.
Risks Related to Us and Our Business Our failure to establish and maintain Member and sales leader relationships for any reason could negatively impact sales of our products and harm our financial condition and operating results. 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 or any legal or regulatory impact to our Members’ ability to conduct their business 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. Additionally, with the outbreak of COVID-19 and the uncertainties surrounding the ultimate spread of the virus, the severity thereof, the duration of the outbreak, the actions taken and may be taken by governments and responses thereto, we cannot reasonably estimate the impact the outbreak may have on our business, our operations, our Members’ business or our Members’ operations.
Because we cannot exert the same level of influence or control over our independent Members as we could were they our own employees, our Members could fail to comply with applicable law or our Member Our Members are independent contractors and, accordingly, we are not in a position to directly provide the same direction, motivation and oversight as we would 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 our Extensive federal, state and local laws regulate our business, products, direct sales channel, and Adverse publicity associated with our products, ingredients or network marketing program, or those of similar companies, could harm our financial condition and operating results. The size of our distribution force and the results of our operations may be significantly affected by the public’s perception of the Company and similar companies. This perception is dependent upon opinions concerning:
Adverse publicity concerning any actual or purported failure of our Company or our Members to comply with applicable laws and regulations regarding product claims and advertising, good manufacturing practices, the regulation of our network marketing program, the registration of our products for sale in our target markets or other aspects of our business, whether or not resulting in investigation, enforcement, or legal actions or the imposition of penalties, could have an adverse effect on the goodwill of our Company and could negatively affect our ability to attract, motivate and retain Members, which would negatively impact our ability to generate revenue. In addition, our Members’ and consumers’ perception of the safety and quality of our products and ingredients 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 accurate or resulting from consumers’ use or misuse of our products, that associates consumption of our products or ingredients, or any similar products or ingredients, with illness or other adverse effects, questions the benefits of our or similar 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 challenges and could negatively impact our reputation, the market demand for our products, or our general business. 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 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 Our failure to appropriately respond to changing consumer preferences and demand for new products or product enhancements could significantly harm our Member relationships and our Members’ customer relationships and product sales and harm our financial condition and operating results. Our business is subject to changing consumer trends and preferences, especially with respect to weight
If we do not introduce new products or make enhancements to meet the changing needs of our Members and their customers in a timely manner, some of our Due to the high level of competition in our industry, we might fail to retain our The business of marketing weight management and nutrition products is highly competitive and sensitive to the introduction of new products or weight management plans, including various prescription drugs, which may rapidly capture a significant share of the market. These market segments include numerous manufacturers, distributors, marketers, retailers and physicians that actively compete for the business of consumers both in the United States and abroad. In addition, we We are also subject to significant competition for the recruitment of Members from other network marketing organizations, including those that market weight management products, dietary and nutritional supplements, 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 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 The Consent Order we entered into with the FTC in July 2016 prohibits us from making, or allowing our Members to make, any On January 4, 2018, the 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 typical 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 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 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
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 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. For example, in certain foreign countries, compensation to distributors in the direct-selling industry may be limited to a certain percentage of sales. 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, which may impact our ability to recruit and maintain Members or 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. 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 The ambiguity surrounding these laws can also affect the public perception of the Company. 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 The Consent Order includes a number of restrictions and requirements and therefore creates compliance risks, and while we believe we are The Consent Order has impacted, and may 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
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 natural disasters, including, but not limited to, fires, floods, hurricanes, volcanoes, and earthquakes, could adversely affect our ability to conduct business. For example, our operations in Mexico were impacted by flooding in September 2017, when the severe weather conditions damaged or otherwise destroyed inventory stored at one of our facilities. Furthermore, our headquarters and one of our distribution facilities and manufacturing facilities are located in Southern California, an area susceptible to earthquakes. Although the events in Mexico did not have a material negative impact to our Mexico operations, we cannot make assurances that any future natural disasters will not adversely affect our ability to operate our business and our financial conditions and results of our operations. Furthermore, material disruption caused by power loss or shortages; environmental disasters; telecommunications or business information systems failures; acts of war or terrorism; viral outbreaks and other similar epidemics; cybersecurity incidents, including malicious software attacks intended to render our internal operating systems, third-party providers, or data unavailable, such as ransomware, phishing attacks; and/or other actions by third parties and other similar disruptions could adversely affect our ability to conduct business. Additionally, intentional or inadvertent exposure of content perceived to be sensitive data may adversely affect our 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. In March 2020, the World Health Organization declared the rapidly growing COVID-19 outbreak a global pandemic. Our business and operations may also be materially and adversely affected by pandemics and other regional spread of viruses and other infections. For example, the COVID-19 pandemic has significantly impacted health and economic conditions globally, and has adversely affected our business, particularly in the South and Central America region. Additionally, government, agency or other regulatory recommendations, guidelines or mandates in regions we operate in 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 in the future or that we will not voluntarily limit or cease operations in one or more markets if we believe doing so is necessary or otherwise in our best interests. We may also be forced to or voluntarily elect to close or shut down operations for other reasons such as the health and safety of our employees or because of disruptions in the continued operation of our supply chain and sources of supply. It is possible closure of manufacturing facilities could also impact our distribution centers and our ability to deliver product 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 pandemic continues for a prolonged period of time or was to worsen. The pandemic has also had an adverse impact on Members’ product access in some markets, which may or 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 customers and attract new customers. Significant limitations on cash transactions could also have an adverse effect on sales in certain markets. The COVID-19 pandemic is also adversely affecting the economies and financial markets of many countries, causing a significant deceleration of 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 significant disruption of and extreme volatility in the global capital markets, which could increase the cost of, or entirely restrict access to, capital. Considerable uncertainty still surrounds the outbreak, its potential effects and the extent and effectiveness of responses and effective vaccines or treatments may not be discovered soon enough to protect against a worsening of the outbreak. If the outbreak is not contained, these adverse impacts 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 longer 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 results of operations. 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. 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 Approximately 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 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 Chinese 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 certain product categories 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 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 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 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 We currently have a social e-commerce business in China, which enables our sales representatives and independent service providers in China to promote the Company’s products and provide services to our customers in China through virtual online stores. On January 1, 2019, the E-Commerce Law of the People’s Republic of China was established and regulates social e-commerce businesses. The regulatory environment in China continues to evolve, and government officials in China, including at the local and national 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 new regulation, both current interpretations and enforcement thereof or future iterations, and may also modify such regulations, any of which could have an adverse impact on our business and net sales 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
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 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 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. We depend on the integrity and reliability of our information technology infrastructure, and any related inadequacies may result in Our ability to provide products and services to our Members depends on the performance and availability of our core transactional systems. We operate our global back office transactional systems on an Oracle Enterprise Suite which is supported by a robust hardware and network infrastructure. The Oracle Enterprise Suite is a scalable and stable solution that provides a solid foundation upon which we are building our next generation Member facing Internet toolset. 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. This infrastructure, as well as that of our Members and the other third parties with which we interact, may be damaged, disrupted, or otherwise breached for a number of reasons, including power outages, computer and telecommunication failures, computer viruses, malware or other destructive software, internal design, manual or usage errors, cyberattacks, terrorism, workplace violence or wrongdoing, catastrophic events, natural disasters, and severe weather conditions. 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. For example, in Europe, the Payment Services Directive 2 (PSD2), includes strong customer authentication (SCA) requirements for online transactions that could impose technology challenges and could negatively impact our sales in that region. In addition, numerous and evolving cybersecurity threats, including advanced and persistent cyberattacks, phishing, and social engineering schemes could compromise the confidentiality, availability, and integrity of data in our systems as well as those of the third parties with which we interact. We have been the target of, and may be the target of in the future, malicious cyberattack attempts, although to date none of these attacks have had a meaningful adverse impact on our business. 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, potential or attempted cybersecurity attacks, and compromise the integrity and reliability of our information technology infrastructure and our internal controls. The most important aspect of our information technology infrastructure is the system through which we record and track Member sales, Volume Points, royalty overrides, bonuses and other incentives. We have encountered, and may encounter in the future, errors in our software or our enterprise network, or inadequacies in the software and services supplied by our vendors, although to date none of these errors or inadequacies has had a meaningful adverse impact on our business. Any such errors, inadequacies, or Our ability to effectively manage our network of Members, 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 breach 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 interruption in our operations, damage our computers or otherwise damage our reputation 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 In addition, the use and handling of this information is regulated by evolving and increasingly demanding laws and
A significant portion of our products are manufactured For the portion of our product supply that Our product supply contracts generally have a three-year term. Except for force majeure events such as natural disasters and other acts of God, and non-performance by Herbalife, our manufacturers generally cannot unilaterally terminate these contracts. These contracts can generally be extended by us at the end of the relevant time period and we have exercised this right in the past. Globally, we have over 50 product suppliers, with Fine Foods (Italy) being a major supplier for meal replacements, protein powders and nutritional supplements. Additionally, we use contract manufacturers in the United States, India, Brazil, South Korea, If we fail to protect our trademarks and tradenames, then our ability to compete could be negatively affected, which would harm our financial condition and operating results. The market for our products depends to a significant extent upon the goodwill associated with our trademark and tradenames. 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. In addition, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as 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, there is limited protection of intellectual property 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 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 our financial condition and operating results would be harmed. 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 financial condition and operating results would be 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 Monitoring infringement Additionally, third parties may claim that products or marks that we have independently developed 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 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 should we cease offering it would harm our financial condition and operating results. For If we lose the services of members of our senior management team, then our financial condition and operating results could be harmed. We Additionally, 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 Our international operations are subject to the laws and regulations of the United States and many foreign countries, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and other similar laws in a number of countries. We are subject to a variety of laws regarding our international operations, including the U.S. Foreign Corrupt Practices Act, or the FCPA, the U.K. Bribery Act of 2010, or the UK Bribery Act, and regulations issued by U.S. Customs and Border Protection, U.S. Treasury Department’s Office of Foreign Assets Control, or OFAC, and various foreign governmental agencies. The FCPA, the UK Bribery Act and similar As previously disclosed, the SEC and the DOJ conducted investigations into the Company’s compliance with the FCPA in China. Also, as previously disclosed, the Company conducted its own review and implemented remedial and improvement measures based upon this review, including, but not limited to, 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. 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 things, the Company is required to undertake compliance self-reporting obligations for the three-year term of the respective 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 agreed to pay the SEC and the DOJ aggregate penalties, disgorgement and prejudgment interest of approximately $123 million. The $123 million settlement amount, which had previously been recognized in other current liabilities within the Company’s condensed consolidated balance sheet as of June 30, 2020, was paid in September 2020. If the Company fails to comply with the DPA, such failure or any resulting further government action could result in a material and adverse impact to the Company’s results of operations and financial condition. The United Kingdom’s On 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 negotiations with the European Union to determine the terms of the U.K.’s exit. The terms and covenants in our existing indebtedness could limit our discretion with respect to certain business matters, which could limit our ability to pursue certain strategic objectives and in turn harm our financial condition and operating results. Our credit facility
In addition, our credit facility requires us to meet certain financial ratios and financial conditions. 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 a default causing all amounts to become due and payable under our credit facility, which is secured by the equity interests of certain of our subsidiaries and substantially all of The required payments on our indebtedness or other agreements may be impacted by expected reforms related to LIBOR. The variable interest rates payable under our 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 expected to ultimately cause LIBOR to be discontinued or become unavailable as a benchmark rate. Although our credit facility includes mechanics to facilitate the adoption by us and our lenders of an alternative benchmark rate for use in place of LIBOR, no assurance can be made that such alternative rate will perform in a manner similar to LIBOR and may result in interest rates that are higher or lower than those that would have resulted had LIBOR remained in effect. We may use from time to time a certain amount of cash in order to satisfy the obligations relating to our convertible notes. The maturity or conversion of any of our convertible notes may adversely affect our financial condition and operating results, which could adversely affect the amount or timing of future potential share repurchases or the payment of dividends to our shareholders. In 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 The 2024 Convertible Notes The conversion of any of the The 2024 Convertible Notes, until 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 market price of our common shares to decline. The conversion rate for the 2024 Convertible Notes as of 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 harm our financial condition and operating results. As a multinational corporation, operating in many countries including the United States, 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 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. We have reserved in our 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. 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. 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 further information on contingencies relating to VAT and other related matters.
A non-U.S. corporation will be classified as a
As a result of certain changes to the CFC constructive ownership rules introduced by U.S. Tax Reform, one or more of our non-U.S. corporate subsidiaries that were not previously classified as CFCs are While we do not believe that Herbalife Nutrition Ltd. is classified as a CFC, such entity and Further, under U.S. Tax Reform, a one-time tax is imposed upon our 10% U.S. Shareholders on certain historic accumulated, undistributed foreign earnings of CFCs and other “specified foreign corporations,” which earnings have not been previously subject to
Shareholders who own, or contemplate owning, 10% or more of our No assurances can be given that future legislative, administrative, or judicial developments will not result in an increase in the 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, within recent years, 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 and regulations, including with respect to transfer pricing that could materially increase our effective tax rate. No assurances can be given that future legislative,
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 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
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 Companies Law Shareholders of Cayman Islands exempted companies such as Herbalife 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 bring a suit personally where its individual rights have been, or are about to be, infringed. Our Cayman Islands counsel, Maples and Calder, 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, 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, our officers or directors usually may not be brought by a shareholder. However, based on English authorities, which would in all likelihood 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:
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 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 change the direction or management of our Company, including the inability of shareholders to act by written consent, a limitation on the ability of shareholders to call special meetings of shareholders and 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 have provisions under the Companies Law to facilitate mergers and consolidations between Cayman Islands companies and non-Cayman Islands There are however a number of important differences that could impede a takeover. First, the threshold for approval of the merger plan by shareholders is higher. The threshold is a special resolution of the shareholders (being 66 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 Companies Law also contains separate statutory provisions that provide for the merger, reconstruction and amalgamation of companies. These are commonly referred to in the Cayman Islands as “schemes of arrangement.” The procedural and legal requirements necessary to consummate these transactions 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
If the scheme of arrangement is approved, the dissenting shareholder 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 our issued and outstanding shares (not including such a third party) pursuant to an offer within a four-month period of making such an offer, the purchaser 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 our 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. 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. A material portion of our assets are located outside of the United States. As a result, it may be difficult for our shareholders to enforce judgments against us or judgments obtained in 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. We have been advised by our Cayman Islands counsel, Maples and Calder, that although there is no statutory enforcement in the Cayman Islands of judgments obtained in the United States, the courts of the Cayman Islands will — based on the principle that a judgment by a competent foreign court imposes upon the judgment debtor an obligation to pay the sum for which judgment has been given — recognize and enforce a foreign judgment of a court of competent jurisdiction if such judgment is final, for a liquidated sum, not in respect of taxes or a fine or penalty, is not inconsistent with a Cayman Islands judgment in respect of the same matters, impeachable on the grounds of fraud, and was not obtained in a manner, and is not of a kind, the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands. There is doubt, however, as to whether the Grand Court of the 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 Islands may stay proceedings if concurrent proceedings are being brought elsewhere. Mail 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, 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. Our stock price may be adversely affected by third parties who raise allegations about our Company. Short sellers and others who raise allegations regarding the legality of our business activities, some of whom are positioned to profit if our stock declines, can negatively affect our stock price.
(a) None. (b) None. (c) On
None.
Not applicable.
(a) (b) None.
(a) Exhibit Index:
EXHIBIT INDEX
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.
Dated: November
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