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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, 2021

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 1-32381

 

HERBALIFE NUTRITION LTD.

(Exact name of registrant as specified in its charter)

 

Cayman Islands

98-0377871

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

P.O. Box 309

Ugland House

Grand Cayman

Cayman Islands

KY1-1104

(Address of principal executive offices)

(Zip code)

 

(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 every Interactive Data File required to be submitted 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 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

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ☒

Number of shares of registrant’s common shares outstanding as of October 26, 2021 was 112,132,940.

 

 


 

TABLE OF CONTENTS

 

 

 

Page No.

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

3

 

Unaudited Condensed Consolidated Balance Sheets

3

 

Unaudited Condensed Consolidated Statements of Income

4

 

Unaudited Condensed Consolidated Statements of Comprehensive Income

5

 

Unaudited Condensed Consolidated Statements of Cash Flows

6

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

34

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

57

Item 4.

Controls and Procedures

59

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

62

Item 1A.

Risk Factors

62

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

84

Item 3.

Defaults Upon Senior Securities

84

Item 4.

Mine Safety Disclosures

84

Item 5.

Other Information

84

Item 6.

Exhibits

84

 

2


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HERBALIFE NUTRITION LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

September 30,
2021

 

 

December 31,
2020

 

 

 

(in millions, except share and par value amounts)

 

ASSETS

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

678.2

 

 

$

1,045.4

 

Receivables, net of allowance for doubtful accounts

 

 

85.9

 

 

 

83.3

 

Inventories

 

 

559.8

 

 

 

501.4

 

Prepaid expenses and other current assets

 

 

203.1

 

 

 

145.7

 

Total current assets

 

 

1,527.0

 

 

 

1,775.8

 

Property, plant, and equipment, at cost, net of accumulated depreciation and amortization

 

 

411.8

 

 

 

390.2

 

Operating lease right-of-use assets

 

 

218.5

 

 

 

222.8

 

Marketing-related intangibles and other intangible assets, net

 

 

317.8

 

 

 

313.3

 

Goodwill

 

 

96.4

 

 

 

100.5

 

Other assets

 

 

281.5

 

 

 

273.5

 

Total assets

 

$

2,853.0

 

 

$

3,076.1

 

LIABILITIES AND SHAREHOLDERS’ DEFICIT

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

98.9

 

 

$

88.7

 

Royalty overrides

 

 

346.9

 

 

 

358.2

 

Current portion of long-term debt

 

 

29.6

 

 

 

22.9

 

Other current liabilities

 

 

563.2

 

 

 

657.5

 

Total current liabilities

 

 

1,038.6

 

 

 

1,127.3

 

Long-term debt, net of current portion

 

 

2,733.1

 

 

 

2,405.5

 

Non-current operating lease liabilities

 

 

200.3

 

 

 

206.7

 

Other non-current liabilities

 

 

214.4

 

 

 

192.7

 

Total liabilities

 

 

4,186.4

 

 

 

3,932.2

 

Commitments and contingencies

 

 

 

 

 

 

Shareholders’ deficit:

 

 

 

 

 

 

Common shares, $0.0005 par value; 2.0 billion shares authorized; 102.9 million (2021) and 120.1 million (2020) shares outstanding

 

 

0.1

 

 

 

0.1

 

Paid-in capital in excess of par value

 

 

312.1

 

 

 

342.3

 

Accumulated other comprehensive loss

 

 

(204.8

)

 

 

(182.2

)

Accumulated deficit

 

 

(1,111.9

)

 

 

(687.4

)

Treasury stock, at cost, 10.0 million (2021) and 10.0 million (2020) shares

 

 

(328.9

)

 

 

(328.9

)

Total shareholders’ deficit

 

 

(1,333.4

)

 

 

(856.1

)

Total liabilities and shareholders’ deficit

 

$

2,853.0

 

 

$

3,076.1

 

 

See the accompanying notes to unaudited condensed consolidated financial statements.

3


 

HERBALIFE NUTRITION LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,
2021

 

 

September 30,
2020

 

 

September 30,
2021

 

 

September 30,
2020

 

 

 

(in millions, except per share amounts)

 

Net sales

 

$

1,430.9

 

 

$

1,521.8

 

 

$

4,484.8

 

 

$

4,131.1

 

Cost of sales

 

 

305.2

 

 

 

322.7

 

 

 

942.7

 

 

 

841.2

 

Gross profit

 

 

1,125.7

 

 

 

1,199.1

 

 

 

3,542.1

 

 

 

3,289.9

 

Royalty overrides

 

 

450.0

 

 

 

463.1

 

 

 

1,409.8

 

 

 

1,251.2

 

Selling, general, and administrative expenses

 

 

486.3

 

 

 

529.7

 

 

 

1,498.9

 

 

 

1,559.5

 

Other operating income

 

 

 

 

 

(0.6

)

 

 

(16.4

)

 

 

(13.0

)

Operating income

 

 

189.4

 

 

 

206.9

 

 

 

649.8

 

 

 

492.2

 

Interest expense, net

 

 

37.7

 

 

 

35.2

 

 

 

112.0

 

 

 

89.0

 

Other expense, net

 

 

 

 

 

 

 

 

24.6

 

 

 

 

Income before income taxes

 

 

151.7

 

 

 

171.7

 

 

 

513.2

 

 

 

403.2

 

Income taxes

 

 

34.3

 

 

 

33.6

 

 

 

104.2

 

 

 

104.4

 

Net income

 

$

117.4

 

 

$

138.1

 

 

$

409.0

 

 

$

298.8

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.11

 

 

$

1.07

 

 

$

3.81

 

 

$

2.21

 

Diluted

 

$

1.09

 

 

$

1.04

 

 

$

3.73

 

 

$

2.17

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

105.5

 

 

 

129.2

 

 

 

107.3

 

 

 

135.0

 

Diluted

 

 

107.8

 

 

 

132.5

 

 

 

109.8

 

 

 

137.8

 

 

See the accompanying notes to unaudited condensed consolidated financial statements.

4


 

HERBALIFE NUTRITION LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,
2021

 

 

September 30,
2020

 

 

September 30,
2021

 

 

September 30,
2020

 

 

 

(in millions)

 

Net income

 

$

117.4

 

 

$

138.1

 

 

$

409.0

 

 

$

298.8

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment, net of income taxes of $(0.6) and $0.7 for the three months ended September 30, 2021 and 2020, respectively, and $0.9 and $(4.1) for the nine months ended September 30, 2021 and 2020, respectively

 

 

(14.5

)

 

 

19.5

 

 

 

(25.8

)

 

 

(20.4

)

Unrealized gain (loss) on derivatives, net of income taxes of $ and $(0.1) for the three months ended September 30, 2021 and 2020, respectively, and $ and $(0.4) for the nine months ended September 30, 2021 and 2020, respectively

 

 

2.0

 

 

 

(3.1

)

 

 

3.2

 

 

 

3.2

 

Total other comprehensive (loss) income

 

 

(12.5

)

 

 

16.4

 

 

 

(22.6

)

 

 

(17.2

)

Total comprehensive income

 

$

104.9

 

 

$

154.5

 

 

$

386.4

 

 

$

281.6

 

 

See the accompanying notes to unaudited condensed consolidated financial statements.

5


 

HERBALIFE NUTRITION LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,
2021

 

 

September 30,
2020

 

 

 

(in millions)

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

409.0

 

 

$

298.8

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

80.1

 

 

 

74.3

 

Share-based compensation expenses

 

 

42.3

 

 

 

37.9

 

Non-cash interest expense

 

 

22.4

 

 

 

19.7

 

Deferred income taxes

 

 

2.9

 

 

 

10.5

 

Inventory write-downs

 

 

16.9

 

 

 

10.6

 

Foreign exchange transaction loss

 

 

10.5

 

 

 

14.3

 

Loss on extinguishment of debt

 

 

24.6

 

 

 

 

Other

 

 

1.0

 

 

 

2.1

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Receivables

 

 

(6.7

)

 

 

(37.6

)

Inventories

 

 

(92.2

)

 

 

(26.6

)

Prepaid expenses and other current assets

 

 

(68.1

)

 

 

(31.0

)

Accounts payable

 

 

11.8

 

 

 

22.6

 

Royalty overrides

 

 

(1.7

)

 

 

55.3

 

Other current liabilities

 

 

(86.2

)

 

 

74.2

 

Other

 

 

8.3

 

 

 

(9.0

)

Net cash provided by operating activities

 

 

374.9

 

 

 

516.1

 

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property, plant, and equipment

 

 

(104.5

)

 

 

(75.6

)

Other

 

 

(4.4

)

 

 

0.1

 

Net cash used in investing activities

 

 

(108.9

)

 

 

(75.5

)

Cash flows from financing activities:

 

 

 

 

 

 

Borrowings from senior secured credit facility, net of discount

 

 

531.1

 

 

 

30.2

 

Principal payments on senior secured credit facility and other debt

 

 

(416.0

)

 

 

(15.9

)

Proceeds from senior notes

 

 

600.0

 

 

 

600.0

 

Repayment of senior notes

 

 

(420.7

)

 

 

 

Debt issuance costs

 

 

(8.4

)

 

 

(7.8

)

Share repurchases

 

 

(909.2

)

 

 

(844.2

)

Other

 

 

3.2

 

 

 

2.6

 

Net cash used in financing activities

 

 

(620.0

)

 

 

(235.1

)

Effect of exchange rate changes on cash, cash equivalents, and restricted cash

 

 

(13.0

)

 

 

(10.1

)

Net change in cash, cash equivalents, and restricted cash

 

 

(367.0

)

 

 

195.4

 

Cash, cash equivalents, and restricted cash, beginning of period

 

 

1,054.0

 

 

 

847.5

 

Cash, cash equivalents, and restricted cash, end of period

 

$

687.0

 

 

$

1,042.9

 

 

See the accompanying notes to unaudited condensed consolidated financial statements.

6


 

HERBALIFE NUTRITION LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization

Herbalife Nutrition Ltd., a Cayman Islands exempted company with limited liability, 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; targeted nutrition; energy, sports, 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 and sales representatives to customers and preferred customers, as well as through Company-operated retail platforms when necessary. The Company sells its products in six geographic regions: North America; Mexico; South and Central America; EMEA, which consists of Europe, the Middle East, and Africa; Asia Pacific (excluding China); and China.

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 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 as of December 31, 2020 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, 2021 and for the three and nine months ended September 30, 2021 and 2020 include Herbalife Nutrition Ltd. and all of its direct and indirect subsidiaries. In the opinion of management, the accompanying financial information contains all adjustments, consisting of normal recurring adjustments, necessary to present fairly the Company’s unaudited condensed consolidated financial statements as of September 30, 2021 and for the three and nine months ended September 30, 2021 and 2020. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, or the 2020 10-K. Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

Recently Adopted Pronouncements

In August 2018, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or 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 adoption of this guidance during the first quarter of 2021 did not have a material impact on the Company’s 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 the FASB Accounting Standards Codification, or 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 adoption of this guidance during the first quarter of 2021 did not have a material impact on the Company’s condensed consolidated financial statements.

New Accounting Pronouncements

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.

7


 

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 $72.4 million and $65.2 million as of September 30, 2021 and December 31, 2020, respectively. Substantially all credit card receivables were current as of September 30, 2021 and December 31, 2020. The Company recorded bad-debt expense related to allowances for the Company’s receivables of $0.2 million and $0.8 million during the three months ended September 30, 2021 and 2020, respectively, and $0.4 million and $2.1 million during the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021 and December 31, 2020, the Company’s allowance for doubtful accounts was $2.9 million and $3.3 million, respectively. As of September 30, 2021 and December 31, 2020, the majority of the Company’s total outstanding accounts receivable were current.

The Company records advance sales deposits when payment is received but revenue has not yet been recognized. In the majority of the Company’s markets, advance sales deposits are generally recorded to income when the product is delivered to its Members. Additionally, advance sales deposits also include deferred revenues due to the timing of revenue recognition for products sold through China independent service providers. The estimated deferral period for advance sales deposits is generally within one week. During the nine months ended September 30, 2021, the Company recognized substantially all of the revenues that were included within advance sales deposits as of December 31, 2020 and any remaining such balance was not material as of September 30, 2021. Advance sales deposits are included in other current liabilities within the Company’s condensed consolidated balance sheets. See Note 13, Detail of Certain Balance Sheet Accounts, for further information.

In general, if a Member returns product to the Company on a timely basis, they may obtain replacement product from the Company for such returned products. In addition, in general the Company maintains a buyback program pursuant to which it will repurchase products sold to a Member who has decided to leave the business. Allowances for product returns, primarily in connection with the Company’s buyback program, are provided at the time the sale is recorded. This accrual is based upon historical return rates for each country and the relevant return pattern, which reflects anticipated returns to be received over a period of up to 12 months following the original sale. Allowances for product returns were $3.8 million and $3.7 million as of September 30, 2021 and December 31, 2020, respectively.

8


 

The Company’s products are grouped in 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 five product categories. The Company defines its operating segments through six 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 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, 2021, the Company believes that the cap to distributor compensation will not be applicable for the current year.

Other Operating Income

To encourage local investment and operations, governments in various China provinces conduct grant programs. The Company applied for and received several such grants in China. Government grants are recorded into income when a legal right to the grant exists, there is a reasonable assurance that the grant proceeds will be received, and the substantive conditions under which the grants were provided have been met. Generally, these substantive conditions are the Company maintaining operations and paying certain taxes in the relevant province and obtaining government approval by completing an annual application process. The Company believes the continuing obligation with respect to the funds is a general requirement that they are used only for its business in China. The Company did not recognize any government grant income related to its regional headquarters and distribution centers within China during the three months ended September 30, 2021. The Company recognized government grant income related to its regional headquarters and distribution centers within China of approximately $0.6 million during the three months ended September 30, 2020 and approximately $16.4 million and $13.0 million during the nine months ended September 30, 2021 and 2020, respectively, in other operating income within its condensed consolidated statements of income. The Company intends to continue applying for government grants in China when programs are available; however, there is no assurance that the Company will receive grants in future periods.

Other Expense, Net

During the nine months ended September 30, 2021, the Company recognized a $24.6 million loss on the extinguishment of the 2026 Notes (See Note 4, Long-Term Debt) in other expense, net within its condensed consolidated statements of income.

Restricted Cash

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 total of the same such amounts shown in the Company’s condensed consolidated statements of cash flows:

 

 

 

September 30,
2021

 

 

December 31,
2020

 

 

 

(in millions)

 

Cash and cash equivalents

 

$

678.2

 

 

$

1,045.4

 

Restricted cash included in Prepaid expenses and other current assets

 

 

2.6

 

 

 

2.5

 

Restricted cash included in Other assets

 

 

6.2

 

 

 

6.1

 

Total cash, cash equivalents, and restricted cash shown in the statement of cash flows

 

$

687.0

 

 

$

1,054.0

 

 

The majority of the Company’s consolidated restricted cash is held by certain of its foreign entities and consists of cash deposits that are required due to the business operating requirements in those jurisdictions.

9


 

COVID-19 Pandemic

During March 2020, the World Health Organization characterized the outbreak of coronavirus disease 2019, or COVID-19, as a pandemic. In response to the spread of COVID-19, certain government agencies and the Company itself have mandated various measures and recommended others, in each to protect the public and the Company’s employees, which have disrupted certain areas of the Company’s business including, but not limited to, distribution and selling activities. Despite the pandemic having a negative impact in certain of the Company’s markets, the Company’s consolidated net sales were higher for the nine months ended September 30, 2021 as compared to the same period in 2020. However, the Company's consolidated net sales were lower for the three months ended September 30, 2021 as compared to the same period in 2020. The ultimate extent and magnitude of the impact of COVID-19 is not known and could have a material adverse impact to the Company’s business and future financial condition and results of operations. Management has been and continues to actively monitor the impact of COVID-19 generally and on the Company.

The Company’s condensed consolidated financial statements presented herein reflect the latest estimates and assumptions made by management that affect the reported amounts of assets and liabilities and related disclosures as of the date of the condensed consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. The Company believes it has used reasonable estimates and assumptions to assess the fair values of its goodwill, marketing-related intangible assets, and long-lived assets; assessment of the annual effective tax rate; valuation of deferred income taxes; and the allowance for doubtful accounts. After reviewing historical and forward-looking information, the Company determined there were no impairments required relating to its goodwill, marketing-related intangible assets, and long-lived assets during the three and nine months ended September 30, 2021. 

3. Inventories

Inventories consist primarily of finished goods available for resale. Inventories are stated at lower of cost (primarily on the first-in, first-out basis) and net realizable value.

The following are the major classes of inventory:

 

 

 

September 30,
2021

 

 

December 31,
2020

 

 

 

(in millions)

 

Raw materials

 

$

80.1

 

 

$

80.1

 

Work in process

 

 

6.6

 

 

 

7.9

 

Finished goods

 

 

473.1

 

 

 

413.4

 

Total

 

$

559.8

 

 

$

501.4

 

 

4. Long-Term Debt

Long-term debt consists of the following:

 

 

 

September 30,
2021

 

 

December 31,
2020

 

 

 

(in millions)

 

Borrowings under senior secured credit facility, carrying value

 

$

1,093.6

 

 

$

976.5

 

2.625% convertible senior notes due 2024, carrying value of liability component

 

 

479.4

 

 

 

460.6

 

7.875% senior notes due 2025, carrying value

 

 

593.8

 

 

 

592.9

 

7.250% senior notes due 2026, carrying value

 

 

 

 

 

395.9

 

4.875% senior notes due 2029, carrying value

 

 

592.6

 

 

 

 

Other

 

 

3.3

 

 

 

2.5

 

Total

 

 

2,762.7

 

 

 

2,428.4

 

Less: current portion

 

 

29.6

 

 

 

22.9

 

Long-term portion

 

$

2,733.1

 

 

$

2,405.5

 

 

10


 

 

Senior Secured Credit Facility

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. 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 $400.0 million aggregate principal amount of senior unsecured notes, or the 2026 Notes as described below, and used the proceeds from the 2018 Credit Facility and the 2026 Notes to repay in full the $1,178.1 million outstanding under the Company's prior senior secured credit facility.

The 2018 Term Loan 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 FASB ASC Topic 470, Debt, or ASC 470, this transaction was accounted for as a modification of the 2018 Credit Facility. The debt issuance costs were recognized in interest expense, net within the Company’s condensed consolidated statement of income during the three months ended December 31, 2019.

On March 19, 2020, the Company amended the 2018 Credit Facility which, among other things, extended the maturity of both the 2018 Term Loan A and 2018 Revolving Credit Facility to the earlier of: (i) March 19, 2025 or (ii) September 15, 2023 if the outstanding principal on the 2024 Convertible Notes, as defined below, exceeds $350.0 million and the Company exceeds certain leverage ratios as of that date; increased borrowings under the 2018 Term Loan A from $234.4 million to a total of $264.8 million; increased the total available borrowing capacity under 2018 Revolving Credit Facility from $250.0 million to $282.5 million; and reduced the interest rate for borrowings under both the 2018 Term Loan A and 2018 Revolving Credit Facility from either the eurocurrency rate plus a margin of 3.00% or the base rate plus a margin of 2.00% to either the eurocurrency rate plus a margin of 2.50% or the base rate plus a margin of 1.50%. The Company incurred approximately $1.6 million of debt issuance costs in connection with the amendment. For accounting purposes, pursuant to ASC 470, this transaction was accounted for as a modification of the 2018 Credit Facility. Of the $1.6 million of debt issuance costs, approximately $1.1 million was recorded on the Company’s condensed consolidated balance sheet and is being amortized over the life of the 2018 Credit Facility using the effective-interest method, and approximately $0.5 million was recognized in interest expense, net within the Company’s condensed consolidated statement of income during the three months ended March 31, 2020.

On February 10, 2021, the Company amended the 2018 Credit Facility which, among other things, reduced the interest rate for borrowings under the 2018 Term Loan B from either the eurocurrency rate plus a margin of 2.75% or the base rate plus a margin of 1.75% to either the eurocurrency rate plus a margin of 2.50% or the base rate plus a margin of 1.50%. The Company incurred approximately $1.1 million of debt issuance costs in connection with the amendment. For accounting purposes, pursuant to ASC 470, this transaction was accounted for as a modification of the 2018 Credit Facility. The debt issuance costs were recognized in interest expense, net within the Company’s condensed consolidated statement of income during the three months ended March 31, 2021.

11


 

On July 30, 2021, the Company amended the 2018 Credit Facility which, among other things, increased borrowings under the 2018 Term Loan A from $245.0 million to a total of $286.2 million; increased the total available borrowing capacity under the 2018 Revolving Credit Facility from $282.5 million to $330.0 million; reduced the interest rate for borrowings under the 2018 Term Loan A and 2018 Revolving Credit Facility from either the eurocurrency rate plus a margin of 2.50% or the base rate plus a margin of 1.50% to, depending on the Company's total leverage ratio, either the eurocurrency rate plus a margin of between 1.75% and 2.25% or the base rate plus a margin of between 0.75% and 1.25%; and amended the commitment fee on the undrawn portion of the 2018 Revolving Credit Facility from 0.35% per annum to, depending on the Company's total leverage ratio, between 0.25% to 0.35% per annum. As a result of the amendment, the applicable margin for the 2018 Term Loan A and 2018 Revolving Credit Facility may also be subject to certain premiums or discounts tied to criteria determined by certain sustainability targets. The Company incurred approximately $1.4 million of debt issuance costs in connection with the amendment. For accounting purposes, pursuant to ASC 470, this transaction was accounted for as a modification of the 2018 Credit Facility. Of the $1.4 million of debt issuance costs, approximately $0.8 million was recorded on the Company’s condensed consolidated balance sheet and is being amortized over the life of the 2018 Credit Facility using the effective-interest method, and approximately $0.6 million was recognized in interest expense, net within the Company’s condensed consolidated statement of income during the three months ended September 30, 2021.

Under the 2018 Credit Facility, borrowings under both the 2018 Term Loan A and 2018 Revolving Credit Facility bear interest at, depending on the Company's total leverage ratio, either the eurocurrency rate plus a margin of between 1.75% and 2.25% or the base rate plus a margin of between 0.75% and 1.25%. The applicable margin may also be subject to certain premiums or discounts tied to criteria determined by certain sustainability targets. Borrowings under the 2018 Term Loan B bear interest at either the eurocurrency rate plus a margin of 2.50% or the base rate plus a margin of 1.50%. 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 quoted by The Wall Street Journal, and is subject to a floor of 1.00%. The Company is required to pay a commitment fee on the 2018 Revolving Credit Facility of, depending on the Company's total leverage ratio, between 0.25% to 0.35% per annum on the undrawn portion of the 2018 Revolving Credit Facility. Interest is due at least quarterly on amounts outstanding under 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. As of September 30, 2021 and December 31, 2020, the Company was in compliance with its debt covenants under the 2018 Credit Facility.

The 2018 Term Loan A and 2018 Term Loan B are payable in consecutive quarterly installments which began on December 31, 2018. In addition, beginning in 2020, the Company may be required to make mandatory prepayments towards the 2018 Term Loan B based on the Company’s consolidated leverage ratio and annual excess cash flows as defined under the terms of the 2018 Credit Facility. The Company is also permitted to make voluntary prepayments. Amounts outstanding under the 2018 Term Loan A and 2018 Term Loan B may be voluntarily prepaid without premium or penalty, subject to customary breakage fees in connection with the prepayment of a eurocurrency loan. These prepayments, if any, will be applied against remaining quarterly installments owed under the 2018 Term Loan A and 2018 Term Loan B in order of maturity with the remaining principal due upon maturity, unless directed otherwise by the Company. Based on the 2020 consolidated leverage ratio and excess cash flow calculation, both as defined under the terms of the 2018 Credit Facility, the Company will not be required to make a mandatory prepayment in 2021 toward the 2018 Term Loan B.

As of September 30, 2021 and December 31, 2020, the weighted-average interest rate for borrowings under the 2018 Credit Facility was 2.65% and 3.39%, respectively.

During the nine months ended September 30, 2021, the Company borrowed an aggregate amount of $531.2 million under the 2018 Credit Facility and repaid a total amount of $415.8 million on amounts outstanding under the 2018 Credit Facility, including a $60.0 million prepayment on amounts outstanding under the 2018 Term Loan B. During the nine months ended September 30, 2020, the Company borrowed an aggregate amount of $30.4 million under the 2018 Credit Facility and repaid a total amount of $15.6 million on amounts outstanding under the 2018 Credit Facility. As of September 30, 2021 and December 31, 2020, the U.S. dollar amount outstanding under the 2018 Credit Facility was $1,100.1 million and $984.7 million, respectively. Of the $1,100.1 million outstanding under the 2018 Credit Facility as of September 30, 2021, $282.6 million was outstanding under the 2018 Term Loan A, $667.5 million was outstanding under the 2018 Term Loan B, and $150.0 million was outstanding under the 2018 Revolving Credit Facility. Of the $984.7 million outstanding under the 2018 Credit Facility as of December 31, 2020, $251.6 million was outstanding under the 2018 Term Loan A and $733.1 million was outstanding under the 2018 Term Loan B. There were no borrowings outstanding under the 2018 Revolving Credit Facility as of December 31, 2020. There were no outstanding foreign currency borrowings under the 2018 Credit Facility as of September 30, 2021 and December 31, 2020.

12


 

During the three months ended September 30, 2021 and 2020, the Company recognized $8.9 million and $8.0 million, respectively, of interest expense relating to the 2018 Credit Facility, which included $0.1 million and $0.1 million, respectively, relating to non-cash interest expense relating to the debt discount and $0.9 million and $0.5 million, respectively, relating to amortization of debt issuance costs. During the nine months ended September 30, 2021 and 2020, the Company recognized $26.1 million and $29.2 million, respectively, of interest expense relating to the 2018 Credit Facility, which included $0.3 million and $0.2 million, respectively, relating to non-cash interest expense relating to the debt discount and $1.8 million and $1.4 million, respectively, relating to amortization of debt issuance costs.

The fair value of the outstanding borrowings on the 2018 Term Loan A is determined by utilizing over-the-counter market quotes for similar instruments, which are considered Level 2 inputs as described in Note 12, Fair Value Measurements. As of September 30, 2021 and December 31, 2020, the carrying value of the 2018 Term Loan A was $281.6 million and $250.5 million, respectively, and the fair value was approximately $281.9 million and $251.9 million, respectively. The fair value of the outstanding borrowings under the 2018 Term Loan B is determined by utilizing over-the-counter market quotes, which are considered Level 2 inputs as described in Note 12, Fair Value Measurements. As of September 30, 2021 and December 31, 2020, the carrying amount of the 2018 Term Loan B was $662.0 million and $726.0 million, respectively, and the fair value was approximately $665.8 million and $734.0 million, respectively. The fair value of the outstanding borrowings on the 2018 Revolving Credit Facility approximated its carrying value of $150.0 million as of September 30, 2021 due to its variable interest rate which reprices frequently and represents floating market rates.

Convertible Senior Notes due 2024

In March 2018, the Company issued $550.0 million aggregate principal amount of convertible senior notes, or the 2024 Convertible Notes, in a private offering to qualified institutional buyers, pursuant to Rule 144A under the Securities Act of 1933, as amended. The 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 16.0467 common shares per $1,000 principal amount of the 2024 Convertible Notes, or a conversion price of approximately $62.32 per common share, as of September 30, 2021.

The Company incurred approximately $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 $550.0 million aggregate principal amount of the 2024 Convertible Notes were initially allocated between long-term debt, or liability component, and additional paid-in capital, 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-interest rate on the 2024 Convertible Notes is approximately 8.4% per annum. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

13


 

As of September 30, 2021, the outstanding principal on the 2024 Convertible Notes was $550.0 million, the unamortized debt discount and debt issuance costs were $70.6 million, and the carrying amount of the liability component was $479.4 million, which was recorded to long-term debt within the Company’s condensed consolidated balance sheet. As of December 31, 2020, the outstanding principal on the 2024 Convertible Notes was $550.0 million, the unamortized debt discount and debt issuance costs were $89.4 million, and the carrying amount of the liability component was $460.6 million, which was recorded to long-term debt within the Company’s condensed consolidated balance sheet. The fair value of the liability component relating to the 2024 Convertible Notes was approximately $