Herbalife(HLF) - 2019 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Unaudited condensed consolidated financial statements for Q2 2019 show decreases in net sales, net income, and operating cash flow for the period Condensed Consolidated Balance Sheets Total assets increased to $3.08 billion by June 30, 2019, with liabilities at $3.61 billion, resulting in a -$534.2 million shareholders' deficit Condensed Consolidated Balance Sheet Highlights (in millions USD) | Balance Sheet Item | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Assets | $3,078.6 | $2,789.8 | | Cash and cash equivalents | $1,254.9 | $1,198.9 | | Inventories | $426.6 | $381.8 | | Total Liabilities | $3,612.8 | $3,513.2 | | Current portion of long-term debt | $693.7 | $678.9 | | Long-term debt, net | $1,776.2 | $1,774.9 | | Total Shareholders' Deficit | ($534.2) | ($723.4) | Condensed Consolidated Statements of Income Q2 2019 net sales decreased to $1.24 billion and net income to $76.5 million, with similar trends for the six-month period Income Statement Summary (in millions USD, except per share data) | Metric | Q2 2019 | Q2 2018 | 6 Months 2019 | 6 Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $1,240.1 | $1,285.5 | $2,412.3 | $2,462.4 | | Operating Income | $153.1 | $191.8 | $316.1 | $347.6 | | Net Income | $76.5 | $94.4 | $172.8 | $176.5 | | Diluted EPS | $0.54 | $0.62 | $1.20 | $1.15 | Condensed Consolidated Statements of Cash Flows Net cash from operating activities significantly decreased to $114.8 million for the first six months of 2019, while financing cash outflow was substantially lower Cash Flow Summary for Six Months Ended June 30 (in millions USD) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $114.8 | $344.9 | | Net cash used in investing activities | ($51.7) | ($33.0) | | Net cash used in financing activities | ($17.7) | ($722.6) | Notes to Condensed Consolidated Financial Statements Detailed notes explain accounting policies, including ASC 842 adoption, long-term debt, legal and tax contingencies, segment performance, and share-based compensation - The company adopted the new lease accounting standard ASC 842 on January 1, 2019, resulting in the recognition of operating lease right-of-use assets of $176.9 million and operating lease liabilities of $189.1 million on the balance sheet[18] - The company is involved in numerous tax and legal contingencies globally, including tax audits in Mexico, Brazil, India, and Korea, and is under investigation by the SEC and DOJ regarding FCPA compliance in China. A $20.0 million liability was accrued for a likely civil penalty related to an SEC investigation into its China marketing plan disclosures[96][110][111] - The company's debt is composed of a senior secured credit facility, 2.00% convertible senior notes due 2019, 2.625% convertible senior notes due 2024, and 7.250% senior notes due 2026[57] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2019 financial results, noting flat worldwide Volume Points, a 3.5% net sales decrease to $1.24 billion due to China's decline and currency impacts - Net sales for Q2 2019 decreased by 3.5% to $1.24 billion compared to Q2 2018, primarily driven by a 34.8% sales decline in China and unfavorable foreign currency exchange rates[218][233] - The significant sales decrease in China is attributed to the negative impact of the Chinese government's 100-day review of the health products industry, which reduced member activities and sales meetings[262] Volume Points by Geographic Region - Q2 2019 vs Q2 2018 (in millions) | Region | Q2 2019 | Q2 2018 | % Change | | :--- | :--- | :--- | :--- | | North America | 355.6 | 336.4 | 5.7% | | Mexico | 221.7 | 237.1 | (6.5)% | | South & Central America | 122.3 | 136.3 | (10.3)% | | EMEA | 336.3 | 319.5 | 5.3% | | Asia Pacific | 371.3 | 302.8 | 22.6% | | China | 122.9 | 196.1 | (37.3)% | | Worldwide | 1,530.1 | 1,528.2 | 0.1% | - Net cash from operating activities decreased significantly to $114.8 million for the first six months of 2019, down from $344.9 million in the prior year period, due to lower net income (excluding non-cash items) and unfavorable changes in working capital[288] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to foreign currency and interest rate risks, using derivatives for hedging and estimating a $9.9 million impact for a 1% interest rate change - The company uses foreign exchange derivatives, including cash flow hedges and freestanding derivatives, to mitigate risks from currency fluctuations on intercompany transactions and inventory purchases[346][348] - The company is exposed to interest rate risk due to its variable-rate 2018 Credit Facility. A hypothetical 1% change in interest rates would result in an approximate $9.9 million change in annual interest expense[353] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2019, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report (June 30, 2019)[356] - No material changes were made to the internal control over financial reporting during the quarter ended June 30, 2019[357] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 6 for details on legal proceedings, including tax disputes and ongoing SEC and DOJ investigations related to FCPA compliance in China - For details on legal proceedings, the report refers to Note 6, Contingencies, in the financial statements[366] Item 1A. Risk Factors Outlines significant risks including dependence on independent members, FTC Consent Order compliance, complexities of the China business model, foreign currency exposure, and cybersecurity threats - The company's business is highly dependent on its ability to recruit and retain its network of independent Members, who have a high turnover rate[366][367] - The company is subject to the 2016 Consent Order with the FTC, which imposes significant restrictions and compliance requirements on its U.S. operations. Failure to comply could result in enforcement actions and penalties[396][397] - The business in China operates under a modified model due to specific regulations governing direct selling. There is risk related to the interpretation and enforcement of these laws, as demonstrated by the recent 100-day government review of the health products industry[405][406][411] - As a global company with approximately 80% of sales outside the U.S., Herbalife is exposed to risks from foreign exchange restrictions, tariffs, currency fluctuations, and political instability[402] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No common shares were repurchased in Q2 2019, with $1.5 billion remaining under the authorized share repurchase program - No common shares were repurchased during the three months ended June 30, 2019[492] - As of June 30, 2019, the company had $1.5 billion remaining under its authorized share repurchase program[492] Other Items (3-6) This section reports no defaults on senior securities or other material information, with Item 4 being not applicable and Item 6 providing an index of exhibits - There were no defaults upon senior securities, and no other material information was reported under Item 5[493]