HERBALIFE LTD. 
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 Statements, of this Quarterly Report on Form 10-Q, and Part I, Item 1A, Risk Factors, and our consolidated financial statements appearing in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , or the 2021 10-K. Unless the context otherwise requires, all references herein to the "Company," "we," "us" or "our," or similar terms, refer toHerbalife Nutrition Ltd. , aCayman Islands exempted company with limited liability, and its consolidated subsidiaries.
Overview
We are a global nutrition company that sells weight management; targeted nutrition; energy, sports, and fitness; and outer nutrition products to and through independent members, or Members. InChina , we sell our 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. We refer to Members that distribute our products and achieve certain qualification requirements as "sales leaders." We provide high-quality, science-backed products to Members and their customerswho seek a healthy lifestyle and we also offer a business opportunity to those Memberswho seek additional income. We believe enhanced consumer awareness and demand for our products due to global trends such as the obesity epidemic, increasing interest in a fit and active lifestyle, living healthier, and the rise of entrepreneurship, coupled with the effectiveness of personalized selling through a direct sales channel, have been the primary reasons for our continued success. Our products are grouped in four principal categories: weight management; targeted nutrition; energy, sports, and fitness; and outer nutrition, along with literature, promotional, and other 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. While we continue to monitor the current global financial environment, including the impacts of the COVID-19 pandemic and inflation, we remain focused on the opportunities and challenges in retailing our products and enhancing the customer experience, sponsoring and retaining Members, improving Member productivity, further penetrating existing markets, globalizing successful Daily Methods of Operation, or DMOs, such asNutrition 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 sell our products in five geographic regions:
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EMEA, which consists of
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Our Company was previously organized and managed by six geographic regions:North America ,Mexico , South andCentral America , EMEA,Asia Pacific , andChina . In order to simplify the understanding of our performance and ongoing trends of the business and align with our organizational structure, we combined ourMexico geographic region with our South andCentral America region, into one geographic region now namedLatin America ; therefore, we have five geographic regions as ofSeptember 30, 2022 as opposed to six geographic regions. When applicable, historical information presented in this Management's Discussion and Analysis of Financial Condition and Results of Operations relating to our geographic regions has been reclassified to conform with the current period geographic presentation. OnJuly 15, 2016 , we reached a settlement with theU.S. Federal Trade Commission , orFTC , and entered into the Consent Order, which resolved theFTC's multi-year investigation of the Company. We continue to monitor the impact of the Consent Order and our Audit Committee assists our board of directors in overseeing continued compliance with 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 theU.S. , may be negatively impacted. The terms of the Consent 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 I, Item 1A, Risk Factors, of the 2021 10-K for a discussion of risks related to the settlement with theFTC . 35 --------------------------------------------------------------------------------
COVID-19 Pandemic
DuringMarch 2020 , theWorld 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. 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, although largely eased across most markets, have continued intermittently for certain markets and could resume more broadly as conditions evolve. Our business and operations have been affected by the pandemic in manners, in some cases adversely, and degrees that vary by market and we expect that the effects may extend through 2022 and possibly beyond. For the health and safety of our employees, our Members, and their customers, we implemented temporary access restrictions at many of our physical business locations and locations where Members conduct their business activities, some of which measures continue. Generally, we are able to satisfy current levels of demand. While pandemic constraints have lessened in most markets, our operations have been and continue to be disrupted. The most significant continuing impacts we have seen, intermittently and depending on market, include:
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Supply chain challenges, including increased costs in freight, labor, and certain raw materials, and 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;
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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; and
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Constrained ability of Members to have face-to-face contact with their
customers, including at
We and our Members 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 continuing measures, intermittent and depending on market, include:
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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;
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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
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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;
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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; and
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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 ofSeptember 30, 2022 and as of the date of this filing, combined with cash flows from operating activities, is sufficient to meet our foreseeable needs for the next twelve months. We also have access to our revolving credit facility to supplement our cash-generating ability if necessary. Although we believe that our responsive measures have been effective in limiting the adverse impact of the pandemic on most markets, the ongoing impact of the COVID-19 pandemic will likely 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 these factors 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 2022 and its expected impact in future periods, as well as the impacts specific to each geographic region, are discussed further in the Sales byGeographic Region section below. See Part I, Item 1A, Risk Factors, of the 2021 10-K for a further discussion of risks related to the COVID-19 pandemic. 36 --------------------------------------------------------------------------------
Other Factors Impacting Results
Global inflationary pressures, other macroeconomic factors such as foreign exchange rate fluctuations and geopolitical conflicts can also impact our financial condition, results of operations and liquidity. Many regions are seeing significant inflation, which can impact both our cost structures and our pricing. EffectiveJune 2022 we instituted a 10% price increase in most of our geographic markets across all product lines, most remaining markets instituted a similar increase effective during the third quarter of 2022. We continue to examine our cost structure and assess additional potential incremental pricing actions in response to ongoing inflationary pressures. The war inUkraine has also impacted our results there as well as inRussia and certain neighboring markets; we do not have any manufacturing operations inRussia andUkraine and our combined total assets inRussia andUkraine , which primarily consists of short-term assets, was approximately 1% of our consolidated total assets as ofSeptember 30, 2022 . Given the unpredictable and fluid nature of these factors, we are unable to predict the extent to which they will adversely impact our business, financial condition, and results of operations, including the impact they may have on our geographic regions and individual markets. See "Summary Financial Results" and "Sales byGeographic Region " for more specific discussion of these and other factors.
Volume Points by
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 underU.S. GAAP. Unlike net sales, which are generally recognized when the product is delivered and when control passes to the Member, as discussed in greater detail in Note 2, Significant Accounting Policies, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q, 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 underU.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. The specific number of Volume Points assigned to a product, which is generally consistent across all markets, is based on aVolume Point to suggested retail price ratio for similar products. If a product is available in different quantities, the various sizes will have differentVolume Point values. In general, once assigned, aVolume Point value is consistent in each region and country and does not change from year to year. We use Volume Points for Member qualification and recognition purposes, as well as a proxy for sales trends, and therefore we generally 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 Nine Months Ended September 30, September 30, September 30, September 30, 2022 2021 % Change 2022 2021 % Change (Volume Points in millions) North America 335.3 438.4 (23.5 )% 1,135.6 1,409.8 (19.4 )% Latin America 273.2 332.7 (17.9 )% 903.8 1,015.1 (11.0 )% EMEA 307.5 390.3 (21.2 )% 1,054.1 1,260.0 (16.3 )% Asia Pacific 561.9 489.5 14.8 % 1,659.9 1,469.5 13.0 % China 77.8 91.6 (15.1 )% 214.5 299.0 (28.3 )% Worldwide 1,555.7 1,742.5 (10.7 )% 4,967.9 5,453.4 (8.9 )% Volume Points decreased 10.7% and 8.9% for the three and nine months endedSeptember 30, 2022 , respectively, after having decreased 8.3% and increased 5.2% for the same periods in 2021. The comparative 2022 and 2021 results by region discussed below are impacted, we believe, by the significance and timing of our Members' response to and activity levels during the pandemic, which varied by region and by market within regions. We believe during certain periods our Members in certain markets where we saw increased net sales andVolume Point growth for some periods were more focused on their business due to those conditions, particularly theNorth America region and certain EMEA markets during the second half of 2020 and first half of 2021.North America's Volume Point decrease for the 2022 third quarter after a lesser decrease for the prior year period reflects lower levels of new Members as, we believe, Members work to re-establish pre-pandemic face-to-face approaches for their businesses. The region'sVolume Point decline for the first nine months after an increase for the prior year period also reflects comparison to a 2021 37 -------------------------------------------------------------------------------- period that included record levels of net sales.Latin America's Volume Point decreases for 2022, after lesser decreases for the prior-year periods, are due we believe to the cumulative adverse impact of difficult economic conditions including intermittent pandemic-related constraints, current inflationary impacts on Members' operations, and political and social instability in certain markets.EMEA's Volume Point decrease for the 2022 third quarter after a lesser decrease for the prior year period reflects lower levels of new Members and higher Member attrition as, we believe, Members work to re-establish pre-pandemic face-to-face approaches for their businesses, as well as political and economic uncertainty across much of the region. The region'sVolume Point decline for the first nine months after an increase for the prior year period also reflects comparison to a 2021 period that included record levels of sales. TheAsia Pacific region again saw year-over-yearVolume Point increases led by growth in theIndia market and partially offset by declines elsewhere in the region due in part, we believe, to lower levels of recruiting of new Members as Members transition back to traditional face-to-face approaches from pandemic-driven virtual methods.China saw continuing significantVolume Point decreases for the 2022 periods, following decreases for 2021 as well. These results inChina reflect, we believe, a near-term adverse impact of strategic changes we are making to our business inChina , as well as the continued pandemic-related constraints and business disruption. Across most markets, we expect COVID-19 pandemic conditions to continue to impactVolume 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 byGeographic Region .
Presentation
"Net sales" represent product sales to our Members, net of "distributor allowances," and inclusive of any shipping and handling revenues, as described further below.
Our Members purchase product from us at a suggested retail price, less discounts referred to as "distributor allowance." Each Member's level of discount is determined by qualification based on their volume of purchases. In cases where a Member has qualified for less than the maximum discount, the remaining discount, which we also refer to as a wholesale commission, is received by their sponsoring Members. Distributor allowances may also vary by country depending upon regulatory restrictions that limit or otherwise restrict distributor allowances. We also offer reduced distributor allowances with respect to certain products worldwide. ForU.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. In certain geographic markets, we have introduced segmentation of our Member base into two categories: "preferred members" -who are simply consumerswho wish to purchase product for their own household use, and "distributors" -who are Memberswho 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. 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 theU.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 inU.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 aU.S. GAAP financial measure. Net sales in local currency removes from net sales inU.S. dollars the impact of changes in exchange rates between theU.S. dollar and the local currencies of our foreign subsidiaries, by translating the current period net sales intoU.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 inU.S. dollar measures that reflect current period exchange rates, or to other financial measures calculated and presented in accordance withU.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. 38 -------------------------------------------------------------------------------- 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 a significant operating expense and consist of:
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royalty overrides and production bonuses;
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the Mark Hughes bonus payable to some of our most senior Members; and
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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. InChina , our independent service providers are compensated for marketing, sales support, and other services instead of the distributor allowances and royalty overrides utilized in our global Marketing Plan. The majority of service fees toChina 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 toChina independent service providers, sales events, professional fees, travel and entertainment, Member promotions, occupancy costs, communication costs, bank fees, depreciation and amortization, foreign exchange gains and losses, and other miscellaneous operating expenses.
Our "other operating income" consists of government grant income related to
Most of our sales to Members outsidethe United States are made in the respective local currencies. In preparing our financial statements, we translate revenues intoU.S. dollars using average exchange rates. Additionally, the majority of our purchases from our suppliers generally are made inU.S. dollars. Consequently, a strengthening of theU.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 were$1,295.1 million and$4,023.6 million for the three and nine months endedSeptember 30, 2022 , respectively. Net sales decreased$135.8 million , or 9.5%, and$461.2 million , or 10.3%, for the three and nine months endedSeptember 30, 2022 , respectively, as compared to the same periods in 2021. In local currency, net sales decreased 3.5% and 5.8% for the three and nine months endedSeptember 30, 2022 , respectively, as compared to the same periods in 2021. The 9.5% decrease in net sales for the three months endedSeptember 30, 2022 was primarily driven by a decrease in sales volume, as indicated by a 10.7% decrease in Volume Points, a 6.0% unfavorable impact of fluctuations in foreign currency exchange rates, and a 2.3% unfavorable impact of country sales mix, partially offset by a 10.3% favorable impact of price increases. The 10.3% decrease in net sales for the nine months endedSeptember 30, 2022 was primarily driven by a decrease in sales volume, as indicated by an 8.9% decrease in Volume Points, a 4.5% unfavorable impact of fluctuations in foreign currency exchange rates, and a 2.8% unfavorable impact of country sales mix, partially offset by a 6.1% favorable impact of price increases. Net income was$82.2 million , or$0.83 per diluted share, and$266.9 million , or$2.68 per diluted share, for the three and nine months endedSeptember 30, 2022 , respectively. Net income decreased$35.2 million , or 30.0%, and$142.1 million , or 34.7%, for the three and nine months endedSeptember 30, 2022 , respectively, as compared to the same periods in 2021. The decrease in net income for the three months endedSeptember 30, 2022 was mainly due to$80.1 million lower contribution margin driven by lower net sales, partially offset by$38.1 million lower selling, general, and administrative expenses. The decrease in net income for the nine months endedSeptember 30, 2022 was mainly due to$317.8 million lower contribution margin driven by lower net sales, partially offset by$125.8 million lower selling, general, and administrative expenses, a$24.6 million loss on extinguishment of our 2026 Notes in 2021 39 -------------------------------------------------------------------------------- (See Note 4, Long-Term Debt, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q),$16.1 million lower interest expense, net, and$10.7 million lower income taxes. Net income for the three months endedSeptember 30, 2022 included a$3.3 million pre-tax unfavorable impact ($4.2 million post-tax) of expenses relating to our new digital technology program focused on enhancing and rebuilding our Member facing technology platform and web-based Member tools; a$2.9 million pre-tax unfavorable impact ($3.0 million post-tax) of Transformation Program expenses, primarily relating to professional fees; a$0.5 million post-tax unfavorable impact from expenses related to the COVID-19 pandemic; and a$0.1 million post-tax unfavorable impact relating to theRussia -Ukraine conflict, primarily from sales centers termination and other related costs inRussia . Net income for the nine months endedSeptember 30, 2022 included a$7.7 million pre-tax unfavorable impact ($7.3 million post-tax) of Transformation Program expenses, primarily relating to professional fees; a$5.5 million pre-tax unfavorable impact ($4.3 million post-tax) relating to theRussia -Ukraine conflict, primarily from sales centers termination and other related costs inRussia ; a$3.8 million pre-tax unfavorable impact ($3.1 million post-tax) from expenses related to the COVID-19 pandemic; and a$3.3 million pre-tax unfavorable impact ($4.2 million post-tax) of expenses relating to our new digital technology program focused on enhancing and rebuilding our Member facing technology platform and web-based Member tools. The income tax impact of the expenses discussed above is based on forecasted items affecting our 2022 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 endedSeptember 30, 2021 included a$6.0 million pre-tax unfavorable impact ($6.5 million post-tax) of non-cash interest expense related to the 2024 Convertible Notes (See Note 4, Long-Term Debt, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q); a$3.9 million pre-tax unfavorable impact ($3.7 million post-tax) of Transformation Program expenses, primarily relating to professional fees; a$2.5 million pre-tax unfavorable impact ($2.3 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 unfavorable impact ($0.5 million post-tax) of debt issuance costs related to the amendment of our 2018 Credit Facility (See Note 4, Long-Term Debt, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q); a$0.2 million favorable impact of loss on extinguishment of our 2026 Notes; and a$0.1 million unfavorable impact of non-income tax items. Net income for the nine months endedSeptember 30, 2021 included a$24.6 million pre-tax unfavorable impact ($19.1 million post-tax) of loss on extinguishment of our 2026 Notes; a$17.6 million pre-tax unfavorable impact ($18.3 million post-tax) of non-cash interest expense related to the 2024 Convertible Notes; an$11.8 million pre-tax unfavorable impact ($9.7 million post-tax) from expenses related to the COVID-19 pandemic, and such expenses are expected to continue in future periods; a$7.6 million pre-tax unfavorable impact ($6.9 million post-tax) of Transformation Program expenses, primarily relating to professional fees; a$7.4 million pre-tax favorable impact ($5.6 million post-tax) of net benefit on non-income tax items; and a$1.7 million pre-tax unfavorable impact ($1.4 million post-tax) of debt issuance costs related to the amendment of our 2018 Credit Facility. 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. 40 --------------------------------------------------------------------------------
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, September 30, September 30, September 30,
2022 2021 2022 2021
Operations:
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 22.0 21.3 22.6 21.0
Gross profit 78.0 78.7 77.4 79.0
Royalty overrides(1) 32.0 31.5 32.4 31.4
Selling, general, and administrative
expenses(1) 34.6 34.0 34.1 33.4
Other operating income - - (0.4 ) (0.3 )
Operating income 11.4 13.2 11.3 14.5
Interest expense, net 2.7 2.6 2.3 2.5
Other expense, net - - - 0.6
Income before income taxes 8.7 10.6 9.0 11.4
Income taxes 2.4 2.4 2.4 2.3
Net income 6.3 % 8.2 % 6.6 % 9.1 %
(1)
The majority of service fees to our independent service providers in
Reporting Segment Results
We aggregate our operating segments, excludingChina , into a reporting segment, or the Primary Reporting Segment. The Primary Reporting Segment includes theNorth America ,Latin America , EMEA, andAsia Pacific regions.China has been identified as a separate reporting segment as it does not meet the criteria for aggregation. See Note 6, Segment Information, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for further discussion of our reporting segments. See below for discussions of net sales and contribution margin by our reporting segments.
The Primary Reporting Segment reported net sales of$1,184.5 million and$3,703.7 million for the three and nine months endedSeptember 30, 2022 , respectively, representing a decrease of$92.4 million , or 7.2%, and$282.0 million , or 7.1%, for the three and nine months endedSeptember 30, 2022 , respectively, as compared to the same periods in 2021. In local currency, net sales decreased 1.0% and 2.2% for the three and nine months endedSeptember 30, 2022 , respectively, as compared to the same periods in 2021. The 7.2% decrease in net sales for the three months endedSeptember 30, 2022 was primarily due to a decrease in sales volume, as indicated by a 10.5% decrease in Volume Points, a 6.2% unfavorable impact of fluctuations in foreign currency exchange rates, and a 1.2% unfavorable impact of sales mix, partially offset by a 11.4% favorable impact of price increases. The 7.1% decrease in net sales for the nine months endedSeptember 30, 2022 was primarily due to a decrease in sales volume, as indicated by a 7.8% decrease in Volume Points, and a 4.9% unfavorable impact of fluctuations in foreign currency exchange rates, partially offset by a 6.8% favorable impact of price increases.
For a discussion of
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$500.8 million , or 42.3% of net sales, and$1,539.3 million , or 41.6% of net sales, for the three and nine months endedSeptember 30, 2022 , respectively, representing a decrease of$38.0 million , or 7.1%, and$151.0 million , or 8.9%, for the three and nine months endedSeptember 30, 2022 , respectively, as compared to the same periods in 2021. The 7.1% decrease in contribution margin for the three months endedSeptember 30, 2022 was primarily the result of a 10.5% unfavorable impact of volume decreases, a 7.6% unfavorable impact of foreign currency fluctuations, a 3.1% unfavorable impact of sales mix, a 1.2% unfavorable impact of cost changes related to self-manufacturing and sourcing primarily related to increased raw material, manufacturing labor, and inbound freight costs and increased allocated overhead costs due to lower production volume, and a 1.9% unfavorable impact of higher inventory write-downs, partially offset by a 18.3% favorable impact of price increases. The 8.9% decrease in contribution margin for the nine months endedSeptember 30, 2022 was primarily the result of a 7.8% unfavorable 41 -------------------------------------------------------------------------------- impact of volume decreases, a 5.4% unfavorable impact of foreign currency fluctuations, a 2.6% unfavorable impact of sales mix, and a 2.2% unfavorable impact of cost changes related to self-manufacturing and sourcing primarily related to increased raw material, manufacturing labor, and inbound freight costs and increased allocated overhead costs due to lower production volume, and a 1.1% unfavorable impact of higher inventory write-downs, partially offset by a 11.0% favorable impact of price increases.China reported contribution margin of$94.8 million and$275.2 million for the three and nine months endedSeptember 30, 2022 , respectively, representing a decrease of$42.1 million , or 30.8%, and$166.8 million , or 37.7%, for the three and nine months endedSeptember 30, 2022 , respectively, as compared to the same periods in 2021. The 30.8% decrease in contribution margin for the three months endedSeptember 30, 2022 was primarily the result of a 15.1% unfavorable impact of volume decreases, and a 10.3% unfavorable impact of sales mix, and a 4.3% unfavorable impact of cost changes related to self-manufacturing and sourcing primarily related to increased raw material, manufacturing labor, and inbound freight costs and increased allocated overhead costs due to lower production volume. The 37.7% decrease in contribution margin for the nine months endedSeptember 30, 2022 was primarily the result of a 28.3% unfavorable impact of volume decreases and a 7.9% unfavorable impact of sales mix.
Sales by
Net sales by geographic region were as follows:
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2022 2021 % Change 2022 2021 % Change
(Dollars in millions)
North America $ 317.5 $ 354.8 (10.5 )% $ 987.2 $ 1,126.6 (12.4 )%
Latin America 187.6 206.7 (9.2 )% 594.7 626.5 (5.1 )%
EMEA 247.7 321.9 (23.1 )% 831.7 1,043.8 (20.3 )%
Asia Pacific 431.7 393.5 9.7 % 1,290.1 1,188.8 8.5 %
China 110.6 154.0 (28.2 )% 319.9 499.1 (35.9 )%
Worldwide $ 1,295.1 $ 1,430.9 (9.5 )% $ 4,023.6 $ 4,484.8 (10.3 )%
Changes in net sales are directly associated with the retailing of our products,
recruitment of new Members, and retention of sales leaders. Our strategies
involve providing quality products, improved DMOs, including daily consumption
approaches such as Nutrition Clubs , easier access to product, systemized
training and education of Members on our products and methods, leveraging
technology to make it easier for our Members to do business, and continued
promotion and branding of Herbalife Nutrition 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 Nutrition
simple. We continue to provide our Members with enhanced technology tools for
ordering, business performance, and customer retailing to make it easier for
them to do business with us and to optimize their customers' experiences.
Management uses the Marketing Plan, which reflects the rules for our global
network marketing organization that specify the qualification requirements and
general compensation structure for Members, coupled with educational and
motivational programs and promotions to encourage Members to increase retailing,
retention, and recruiting, which in turn affect net sales. Such programs include
sales events such as Extravaganzas, Leadership Development Weekends and World
Team Schools where large groups of Members 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.
In a number of markets, we have segmented 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 use Member data to similarly
categorize Members for communication and promotion efforts.
42
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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 an infrequent basis (e.g., monthly)
which provides fewer opportunities for interaction with their customers. Under a
daily consumption DMO, a Member interacts with its customers on a more frequent
basis, including such activities as weekly weigh-ins, which enables the Member
to better educate and advise customers about nutrition and the proper use of the
products and helps promote daily usage as well, thereby helping the Member grow
his or her business. Specific examples of globalized DMOs include the Nutrition
Club concept in Mexico and the 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.
We responded to COVID-19 pandemic conditions by adapting how we communicate
with, service, and transact with our Members, and our Members similarly adapted
their DMOs and other activities. These responsive actions and their duration
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, 2022 as compared to the same periods
in 2021, as well as the unique growth or contraction factors specific to certain
geographic regions or significant markets within a region during these periods.
Net sales fluctuations, both Company-wide and within a particular geographic
region or market, 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.
COVID-19 pandemic conditions may continue 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. In addition, global inflationary pressures and
other non-pandemic factors such as geopolitical conflict may impact both our
cost structures and our pricing, with potential sales volume impact. However,
given the unpredictable, unprecedented, and fluid nature of these factors, we
are unable to predict the extent to which they will adversely impact our
business, financial condition, and results of operations, including the impact
it may have on our regions and individual markets. As described further below,
effective June 2022 most of our geographic markets instituted a 10% price
increase across all product lines, and certain additional markets instituted
this increase effective during the third quarter of 2022 as described below. We
continue to examine our cost structure and assess potential incremental pricing
actions in response to ongoing inflationary pressures. See below for a more
detailed discussion of the pandemic and price change impacts on net sales for
the third quarter and first nine months of 2022 for each geographic region and
individual market.
North America
The North America region reported net sales of $317.5 million and $987.2 million
for the three and nine months ended September 30, 2022 , respectively. Net sales
decreased $37.3 million , or 10.5%, and $139.4 million , or 12.4%, for the three
and nine months ended September 30, 2022 as compared to the same periods in
2021. In local currency, net sales decreased 10.4% and 12.3% for the three and
nine months ended September 30, 2022 , respectively, as compared to the same
periods in 2021. The 10.5% decrease in net sales for the three months ended
September 30, 2022 was primarily due to a decrease in sales volume, as indicated
by a 23.5% decrease in Volume Points, partially offset by a 13.4% favorable
impact of price increases. The 12.4% decrease in net sales for the nine months
ended September 30, 2022 was primarily due to a decrease in sales volume, as
indicated by a 19.4% decrease in Volume Points, partially offset by a 7.2%
favorable impact of price increases.
Net sales in the U.S. were $308.8 million and $959.4 million for the three and
nine months ended September 30, 2022 , respectively. Net sales decreased $36.5
million , or 10.6%, and $133.6 million , or 12.2%, for the three and nine months
ended September 30, 2022 as compared to the same periods in 2021.
Sales volumes declined for the third quarter and first nine months of 2022
versus the 2021 periods. We believe pandemic conditions through the first half
of 2021, now largely eased, were a contributing factor in the motivation and
focus of our Members in the region during that period, impacting year-over-year
comparisons for the first nine months of 2022. Although pandemic conditions have
generally eased, we have subsequently seen lower levels of new Members in the
region as Members work to re-establish traditional face-to-face approaches for
their businesses in addition to pandemic-driven online approaches. Inflationary
pressures have also challenged our Members' operations and customer demand. We
are supporting Members with the resumption of in-person events as well as
product line expansion and deployment of enhanced technology tools and social
media to support their businesses and optimize their customers' experiences with
Herbalife Nutrition . The region saw a 10% price increase during June 2022 and a
6.8% price increase during March 2022 .
43
--------------------------------------------------------------------------------TheLatin America region reported net sales of$187.6 million and$594.7 million for the three and nine months endedSeptember 30, 2022 , respectively. Net sales decreased$19.1 million , or 9.2%, and$31.8 million , or 5.1%, for the three and nine months endedSeptember 30, 2022 as compared to the same periods in 2021. In local currency, net sales decreased 6.7% and 3.0% for the three and nine months endedSeptember 30, 2022 , respectively, as compared to the same periods in 2021. The 9.2% decrease in net sales for the three months endedSeptember 30, 2022 was due to a decrease in sales volume, as indicated by a 17.9% decrease in Volume Points, and a 2.6% unfavorable impact of fluctuations in foreign currency exchange rates, partially offset by a 14.4% favorable impact of price increases. The 5.1% decrease in net sales for the nine months endedSeptember 30, 2022 was due to a decrease in sales volume, as indicated by a 11.0% decrease in Volume Points, and a 2.0% unfavorable impact of fluctuations in foreign currency exchange rates, partially offset by a 9.0% favorable impact of price increases. Net sales inMexico were$114.8 million and$357.1 million for the three and nine months endedSeptember 30, 2022 , respectively. Net sales decreased$2.7 million , or 2.3%, and increased$2.6 million , or 0.7%, for the three and nine months endedSeptember 30, 2022 as compared to the same periods in 2021. In local currency, net sales decreased 1.2% and increased 1.4% for the three and nine months endedSeptember 30, 2022 , respectively, as compared to the same periods in 2021. The fluctuation of foreign currency exchange rates had an unfavorable impact of$1.3 million and$2.3 million on net sales for the three and nine months endedSeptember 30, 2022 , respectively. Pandemic-related constraints have largely eased inMexico . Volume declines were seen for the third quarter and first nine months versus the prior year periods, attributable we believe to the cumulative impact of several years of declines in new Members and Sales Leaders, as the market faced difficult economic conditions including the previous pandemic constraints. Inflationary conditions have adversely impactedMembers' Nutrition Club operations, which are an important DMO in the market. The region saw a 10% price increase duringJune 2022 and a 7% price increase duringFebruary 2022 . Other markets across the region also saw volume declines for the third quarter and first nine months of 2022 versus prior year periods. Although COVID-19 pandemic constraints have eased across the region, the region has seen a cumulative adverse impact of those constraints on Members' activities, as well as market-specific factors including political and social instability in certain markets. Members are working toward re-establishing traditional face-to-face business operations after operating more virtually during the pandemic. Difficult economic conditions including inflationary pressures across the region have challenged our Members' operations and customer demand. The volume declines in certain markets also included some adverse effect of volume pull-forward into the second quarter due to June price increases of 10% or more in virtually all markets of the region. Sales volume declines in markets other thanMexico were greatest forBrazil ,Chile andPeru . Markets across the region are focused on building more sustainable business for our Members through daily product consumption and retailing. Efforts within the region include support for the reopening ofMembers' Nutrition Clubs and utilization of cash prize promotions.
EMEA
The EMEA region reported net sales of$247.7 million and$831.7 million for the three and nine months endedSeptember 30, 2022 , respectively. Net sales decreased$74.2 million , or 23.1%, and$212.1 million , or 20.3%, for the three and nine months endedSeptember 30, 2022 as compared to the same periods in 2021. In local currency, net sales decreased 9.4% and 8.8% for the three and nine months endedSeptember 30, 2022 , respectively, as compared to the same periods in 2021. The 23.1% decrease in net sales for the three months endedSeptember 30, 2022 was primarily due to a decrease in sales volume, as indicated by a 21.2% decrease in Volume Points, and a 13.6% unfavorable impact of fluctuations in foreign currency exchange rates, partially offset by a 11.7% favorable impact of price increases. The 20.3% decrease in net sales for the nine months endedSeptember 30, 2022 was primarily due to a decrease in sales volume, as indicated by a 16.3% decrease in Volume Points, and a 11.5% unfavorable impact of fluctuations in foreign currency exchange rates, partially offset by a 7.1% favorable impact of price increases. The EMEA region has no single market that accounts for a significant portion of our consolidated net sales.Spain andItaly , the two largest markets in the region had the largest declines for the region and accounted for approximately 30% of the region's net sales declines for the three and nine months endedSeptember 30, 2022 , respectively, as compared to the same periods in 2021. Volumes declined across most EMEA markets for the three and nine months endedSeptember 30, 2022 , as compared to the same periods in 2021. Pandemic restrictions have generally eased in the region. We believe adaptation by Members to prior pandemic conditions, such as online communication with Members and home delivery, as well as heightened demand for our products and business opportunity, were contributing factors to strong sales volume through the first half of 2021, impacting year-over-year comparisons for the first nine months of 2022. We have subsequently seen fewer new distributors and preferred customers joining our business as Members transition back to traditional face-to-face business approaches. We have also seen higher attrition among Memberswho joined at the height of the pandemic. Economic conditions across the region, including inflation and foreign exchange rate fluctuations, and political uncertainty in certain markets appear to be hindering business recovery. The volume declines across the EMEA markets for the three and nine months endedSeptember 30, 2022 as compared to the same period in 2021 were led bySpain ,Italy ,Russia ,United Kingdom ,South Africa ,Ukraine andTurkey .Russia andUkraine volumes have been adversely affected by geopolitical conflict in the region. 44 --------------------------------------------------------------------------------
TheAsia Pacific region, which excludesChina , reported net sales of$431.7 million and$1,290.1 million for the three and nine months endedSeptember 30, 2022 , respectively. Net sales increased$38.2 million , or 9.7%, and$101.3 million , or 8.5%, for the three and nine months endedSeptember 30, 2022 as compared to the same periods in 2021. In local currency, net sales increased 17.3% and 13.7% for the three and nine months endedSeptember 30, 2022 , respectively, as compared to the same periods in 2021. The 9.7% increase in net sales for the three months endedSeptember 30, 2022 was primarily due to an increase in sales volume, as indicated by a 14.8% increase in Volume Points, and an 7.6% favorable impact of price increases, partially offset by a 7.6% unfavorable impact of fluctuations in foreign currency exchange rates and a 5.2% unfavorable impact of country sales mix. The 8.5% increase in net sales for the nine months endedSeptember 30, 2022 was primarily due to an increase in sales volume, as indicated by a 13.0% increase in Volume Points, and a 5.1% favorable impact of price increases, partially offset by a 5.2% unfavorable impact of fluctuations in foreign currency exchange rates and a 3.2% unfavorable impact of country sales mix. Net sales inIndia were$192.9 million and$508.5 million for the three and nine months endedSeptember 30, 2022 , respectively. Net sales increased$52.6 million , or 37.5%, and$128.0 million , or 33.6%, for the three and nine months endedSeptember 30, 2022 as compared to the same periods in 2021. In local currency, net sales increased 48.1% and 40.9% for the three and nine months endedSeptember 30, 2022 , respectively, as compared to the same periods in 2021. The fluctuation of foreign currency exchange rates had an unfavorable impact of$15.0 million and$27.4 million on net sales for the three and nine months endedSeptember 30, 2022 , respectively. We believe theIndia market has seen a growing interest in good health, contributing to demand for our products. Our sales volumes have increased inIndia in recent years as we continue to expand our product line and make it easier for our Members to do business, such as by streamlining our Member sign-up process, adding payment methods, and introducing a customer-direct shipping capability. Additionally, we believe adaption by our Members to pandemic-related operating constraints, such as greater use of online marketing and training tools and onlineNutrition Club operation, has broadened their geographic reach enabling them to expand their businesses, even as Members return to traditional face-to-face approaches. Pandemic conditions inIndia have generally eased.India had a 14% price increase inSeptember 2022 ; we believe Member demand ahead of this increase also contributed to volume growth for the third quarter. Net sales inVietnam were$79.2 million and$227.3 million for the three and nine months endedSeptember 30, 2022 , respectively. Net sales increased$18.4 million , or 30.3%, and$20.5 million , or 9.9%, for the three and nine months endedSeptember 30, 2022 as compared to the same periods in 2021. In local currency, net sales increased 33.5% and 10.5% for the three and nine months endedSeptember 30, 2022 , respectively, as compared to the same periods in 2021. The fluctuation of foreign currency exchange rates had an unfavorable impact of$1.9 million and$1.2 million on net sales for the three and nine months endedSeptember 30, 2022 , respectively.Vietnam saw a sales volume increases for the third quarter and first nine months of 2022 versus the prior-year periods. The market has seen several years of sales volume growth as sales leadership focused on sustainable, consumption-oriented business practices and the number of product access points increased. The third quarter increase was also contributed to, we believe, by Member demand ahead of a 10% price increase effective duringJuly 2022 . The second quarter of 2022 also saw some benefit of this demand after the price increase was announced inmid-June 2022 . Pandemic-related operating constraints are generally eased in the market. Further changes to direct-selling regulations in the market are expected to receive government approval in 2023; we continue to assess and monitor these proposed regulations. Across the remainder of the region's markets volume was down for the third quarter and first nine months of 2022 compared to the prior year periods, most significantly forMalaysia andIndonesia . Although pandemic-related restrictions are largely eased across the region, we are seeing lower levels of recruiting of new Members as Members transition back to traditional face-to-face approaches from pandemic-driven virtual methods. The third quarter volume results for certain markets in the region were also adversely impacted by Member purchases during the second quarter ahead of price increases effective or announced duringJune 2022 .China TheChina region reported net sales of$110.6 million and$319.9 million for the three and nine months endedSeptember 30, 2022 , respectively. Net sales decreased$43.4 million , or 28.2%, and$179.2 million , or 35.9%, for the three and nine months endedSeptember 30, 2022 as compared to the same periods in 2021. In local currency, net sales decreased 24.4% and 34.7% for the three and nine months endedSeptember 30, 2022 , respectively, as compared to the same periods in 2021. The 28.2% decrease in net sales for the three months endedSeptember 30, 2022 was primarily due to a decrease in sales volume, as indicated by a 15.1% decrease in Volume Points, a 9.2% unfavorable impact of sales mix mainly as a result of our determination that certainChina independent service providers are now our customers for accounting purposes as a result of changes commencingJanuary 1, 2022 , (See Note 2, Significant Accounting Policies, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q), and a 3.8% unfavorable impact of fluctuations in foreign currency exchange rates. The 35.9% decrease in net sales for the nine months endedSeptember 30, 2022 was primarily due to a decrease in sales volume, as indicated by a 28.3% decrease in Volume Points, and a 7.0% unfavorable impact of sales mix mainly as a result of our determination that certainChina independent service providers are now our customers for accounting purposes as a result of changes commencingJanuary 1, 2022 . 45 -------------------------------------------------------------------------------- Volume declines forChina continue to be attributable, we believe, to several factors including changes we are making that we believe will ultimately strengthen the consistency and sustainability of our business inChina . Efforts to establish daily consumption-orientedNutrition Clubs such as in other regions of the world have diverted traditional approaches within the region for some Members. InDecember 2020 we increased the requirements for our sales representatives inChina to be eligible to apply to become independent service providers, with further modification during the third quarter of 2021. We believe these changes will ultimately strengthen our business by improving the quality of our independent service providers, but as our Members acclimate to these new requirements we have seen declines in the number of new independent service providers and net sales. Also, the frequency and attendance of our and our Members' in-person training and sales meetings, which are important to the business as they are a central channel for attracting and retaining customers, providing personal and professional development for our Members, and promoting our products, have been below the levels of prior years due to pandemic constraints. Additional pandemic-related constraints resumed for parts of the market during the second quarter of 2022, causing business interruption in the region. Focus areas forChina include enhancing our digital capabilities and offerings, such as improving the integration of our technological tools to make it easier for our Members to do business, returning to face-to-face business approaches, encouraging a customer-based approach through DMOs such as weight management challenges, and supporting our Members' establishment of daily consumption-orientedNutrition Clubs . We have expanded our product line for theChina market and continue to conduct sales promotions in the region.China had a 5% price increase inAugust 2022 .
Sales by Product Category
Net sales by product category were as follows:
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2022 2021 % Change 2022 2021 % Change
(Dollars in millions)
Weight Management $ 738.4 $ 828.7 (10.9 )%
371.0 400.9 (7.5 )% 1,163.3 1,252.2 (7.1 )%
Energy, Sports, and
Fitness 141.7 145.5 (2.6 )% 423.5 421.8 0.4 %
Outer Nutrition 19.7 24.3 (18.9 )% 65.8 82.1 (19.9 )%
Literature, Promotional,
and Other(1) 24.3 31.5 (22.9 )% 80.1 108.0 (25.8 )%
Total $ 1,295.1 $ 1,430.9 (9.5 )% $ 4,023.6 $ 4,484.8 (10.3 )%
(1)Product buybacks and returns in all product categories are included in the Literature, Promotional, and Other category.
Net sales for the majority of product categories decreased for the three and nine months endedSeptember 30, 2022 as compared to the same periods in 2021. 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$1,010.0 million and$1,125.7 million for the three months endedSeptember 30, 2022 and 2021, respectively, and$3,115.6 million and$3,542.1 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Gross profit as a percentage of net sales was 78.0% and 78.7% for the three months endedSeptember 30, 2022 and 2021, respectively, or an unfavorable net decrease of 68 basis points, and 77.4% and 79.0% for the nine months endedSeptember 30, 2022 and 2021, respectively, or an unfavorable net decrease of 155 basis points. The decrease in gross profit as a percentage of net sales for the three months endedSeptember 30, 2022 as compared to the same period in 2021 included unfavorable cost changes related to self-manufacturing and sourcing of 99 basis points primarily related to increased raw material, manufacturing labor, and inbound freight costs and increased allocated overhead costs due to lower production volume; the unfavorable impact of higher inventory write-downs of 92 basis points; unfavorable changes in sales mix of 85 basis points; the unfavorable impact of foreign currency fluctuations of 43 basis points; and unfavorable cost changes of 14 basis points relating to increased outbound freight costs due to orders shifting toward home delivery versus Member pick-up; partially offset by the favorable impact of price increases of 260 basis points; and favorable other cost changes of 5 basis points. The decrease in gross profit as a percentage of net sales for the nine months endedSeptember 30, 2022 as compared to the same period in 2021 included unfavorable cost changes related to self-manufacturing and sourcing of 123 basis points primarily related to increased raw material, manufacturing labor, and inbound freight costs and increased allocated overhead costs due to lower production volume; unfavorable changes in sales mix of 94 basis points; the unfavorable impact of higher inventory write-downs of 47 basis points; unfavorable cost changes of 21 basis points relating to increased outbound freight costs due to orders shifting toward home delivery 46 --------------------------------------------------------------------------------
versus Member pick-up; the unfavorable impact of foreign currency fluctuations of 16 basis points; and unfavorable other cost changes of 10 basis points; partially offset by the favorable impact of price increases of 156 basis points.
We expect our gross margin to continue to be negatively impacted in the remainder of 2022 and into 2023 primarily due to increased costs related to raw materials, manufacturing labor costs, and freight costs.
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 sales mix, price increases, cost changes related to self-manufacturing and sourcing, and inventory write-downs. Royalty Overrides Royalty overrides were$414.4 million and$450.0 million for the three months endedSeptember 30, 2022 and 2021, respectively, and$1,301.1 million and$1,409.8 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Royalty overrides as a percentage of net sales were 32.0% and 31.5% for the three months endedSeptember 30, 2022 and 2021, respectively, and 32.4% and 31.4% for the nine months endedSeptember 30, 2022 and 2021, respectively. The increase in royalty overrides as a percentage of net sales for the three and nine months endedSeptember 30, 2022 as compared to the same periods in 2021 was primarily due to lower net sales inChina as a proportion of our total worldwide net sales. The majority of service fees to our independent service providers inChina are included in selling, general, and administrative expenses while Member compensation for all other countries is included in Royalty overrides.
Generally, Royalty overrides as a percentage of net sales may vary from period to period due to changes in the mix of products and countries because full royalty overrides are not paid on certain products and in certain countries.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were$448.2 million and$486.3 million for the three months endedSeptember 30, 2022 and 2021, respectively, and$1,373.1 million and$1,498.9 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Selling, general, and administrative expenses as a percentage of net sales were 34.6% and 34.0% for the three months endedSeptember 30, 2022 and 2021, respectively, and 34.1% and 33.4% for the nine months endedSeptember 30, 2022 and 2021, respectively.
The decrease in selling, general, and administrative expenses for the three
months ended
The decrease in selling, general, and administrative expenses for the nine months endedSeptember 30, 2022 as compared to the same period in 2021 was driven by$117.4 million in lower service fees forChina independent service providers due to lower sales inChina , and$60.8 million in lower labor and benefits costs primarily from lower 2022 employee bonus accrual, partially offset by$18.2 million in higher Member event and promotion costs, and$8.9 million in higher professional fees.
Other Operating Income
The$14.9 million of other operating income for the nine months endedSeptember 30, 2022 consisted of$14.9 million of government grant income forChina (See Note 2, Significant Accounting Policies, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q). The$16.4 million of other operating income for the nine months endedSeptember 30, 2021 consisted of$16.4 million of government grant income forChina . 47 --------------------------------------------------------------------------------
Interest Expense, Net
Interest expense, net was as follows:
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2022 2021 2022 2021
(in millions)
Interest expense $ 35.9 $ 38.8 $ 100.5 $ 115.5
Interest income (1.4 ) (1.1 ) (4.6 ) (3.5 )
Interest expense, net $ 34.5 $ 37.7 $ 95.9 $ 112.0
The decrease in interest expense, net for the three months ended September 30,
2022 as compared to the same period in 2021 was primarily due to the adoption of
ASU 2020-06 and the resulting decrease in non-cash interest expense, partially
offset by an increase in our weighted-average interest rate. The decrease in
interest expense, net for the nine months ended September 30, 2022 as compared
to the same period in 2021 was primarily due to the adoption of ASU 2020-06 and
the resulting decrease in non-cash interest expense.
See Note 2, Significant Accounting Policies, and Note 4, Long-Term Debt, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for a further discussion on the impact of adopting ASU 2020-06 and the non-cash interest expense related to the 2024 Convertible Notes.
Other Expense, Net
The$24.6 million of other expense, net for the nine months endedSeptember 30, 2021 consisted of a loss on the extinguishment of the 2026 Notes (See Note 4, Long-Term Debt, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q).
Income Taxes
Income taxes were$30.7 million and$34.3 million for the three months endedSeptember 30, 2022 and 2021, respectively, and$93.5 million and$104.2 million for the nine months endedSeptember 30, 2022 and 2021, respectively. The effective income tax rate was 27.2% and 22.6% for the three months endedSeptember 30, 2022 and 2021, respectively, and 25.9% and 20.3% for the nine months endedSeptember 30, 2022 and 2021, respectively. The increase in the effective tax rate for the three months endedSeptember 30, 2022 as compared to the same period in 2021 was primarily due to changes in the geographic mix of the Company's income, partially offset by an increase in tax benefits from discrete events. The increase in the effective tax rate for the nine months endedSeptember 30, 2022 as compared to the same period in 2021 was primarily due to changes in the geographic mix of the Company's income and a decrease in tax benefits from discrete events.
Liquidity and Capital Resources
We have historically met our short- and long-term 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 obtainU.S. dollars. Even with these restrictions and the impacts of the COVID-19 pandemic and the current inflationary environment, we believe we will have sufficient resources, including cash flow from operating activities and longer-term 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$6.5 billion . While a significant net sales decline could potentially affect the availability of funds, many of our largest expenses are variable in nature, which we believe protects our funding in all but a dramatic net sales downturn. Our$532.5 million cash and cash equivalents as ofSeptember 30, 2022 and our senior secured credit facility, in addition to cash flow from operations, can be used to support general corporate purposes, including any future share repurchases, dividends, and strategic investment opportunities. We have a cash pooling arrangement with a financial institution for cash management purposes. This cash pooling arrangement allows certain of our participating subsidiaries to withdraw cash from this financial institution based upon our aggregate cash deposits held by subsidiarieswho participate in the cash pooling arrangement. We did not owe any amounts to this financial institution under the pooling arrangement as ofSeptember 30, 2022 andDecember 31, 2021 . 48 -------------------------------------------------------------------------------- For the nine months endedSeptember 30, 2022 , we generated$298.9 million of operating cash flow as compared to$374.9 million for the same period in 2021. The decrease in our operating cash flow was the result of$200.5 million of lower net income excluding non-cash and reconciling items disclosed within our condensed consolidated statement of cash flows, partially offset by$124.5 million of favorable changes in operating assets and liabilities. The$200.5 million of lower net income excluding non-cash and reconciling items was primarily driven by lower contribution margin driven by lower net sales (See Summary Financial Results above for further discussion), partially offset by lower selling, general, and administrative expenses. The$124.5 million change in operating assets and liabilities was primarily the result of favorable changes in inventories, prepaid expenses and other current assets, and other current liabilities; partially offset by unfavorable changes in receivables, accounts payable, and royalty overrides. The favorable change in other current liabilities included favorable changes in accrued member events and promotions, accrued interest, and a favorable impact in 2022 due to the prior year settlement of the Mexico VAT assessments, partially offset by unfavorable changes in accrued compensation. Capital expenditures, including accrued capital expenditures, were$120.0 million and$102.1 million for the nine months endedSeptember 30, 2022 and 2021, respectively. The majority of these expenditures represented investments in management information systems, including initiatives to develop enhanced web-based Member tools, as well as expansion and enhancement of our manufacturing and distribution facilities. We expect to continue our investments in these areas and expect to incur total capital expenditures of approximately$160 million to$200 million for the full year of 2022 which includes our new digital technology program that is focused on enhancing and rebuilding our Member facing technology platform and web-based Member tools which provides enhanced digital capabilities and experiences to our Members. Based on our estimates, after reallocating future expected expenditures, we expect to incur total net incremental expenditures of approximately$200 million to$250 million over the next three years as a result of this$400 million digital technology program. InApril 2022 , we hosted our annual global Herbalife Honors event virtually where sales leaders from around the world met, shared best practices, and conducted leadership training, and our management awarded Members$85.7 million ofMark Hughes bonus payments related to their 2021 performance. InMarch 2021 , our management awarded Members$81.1 million ofMark Hughes bonus payments related to their 2020 performance. In 2021, we initiated a global transformation program to optimize global processes for future growth, or the Transformation Program. The Transformation Program involves the investment in certain new technologies and the realignment of infrastructure and the locations of certain functions to better support distributors and customers. For the first phase of the Transformation Program, we currently expect total pre-tax expenses in the range of$25 million to$30 million through 2023, of which$2.9 million and$7.7 million was recognized in selling, general, and administrative expenses within our condensed consolidated statement of income during the three and nine months endedSeptember 30, 2022 , respectively. In addition, we expect a total of$11 million to$14 million of related capital expenditures through 2023, primarily relating to technology, to support both the first and second phase of the Transformation Program. We expect to complete the first phase of the Transformation Program in 2023. In addition to better aligning our internal resources to better effect regional and market level strategies, the first phase of the Transformation Program is expected to deliver annual incremental savings in the range of$10 million to$15 million , with some savings beginning in 2022 and full-year savings expected to be realized in 2024. We are still assessing the scope, timing, and execution plan of the second phase of the Transformation Program.
Senior Secured Credit Facility
OnAugust 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. 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 ofHerbalife Nutrition Ltd. and secured by the equity interests of certain ofHerbalife Nutrition Ltd.'s subsidiaries and substantially all of the assets of the domestic loan parties. Also onAugust 16, 2018 , we issued$400.0 million aggregate principal amount of senior unsecured notes, or the 2026 Notes as described below, and used the proceeds from the 2018 Credit Facility and the 2026 Notes to repay in full the$1,178.1 million outstanding under our prior senior secured credit facility. OnDecember 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 theFinancial Accounting Standards Board , or FASB, Accounting Standards Codification, or ASC, Topic 470, Debt, or ASC 470, this transaction was accounted for as a modification of the 2018 Credit Facility. The debt issuance costs were recognized in interest expense, net within our condensed consolidated statement of income during the fourth quarter of 2019. OnMarch 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 49 -------------------------------------------------------------------------------- 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 first quarter of 2020. OnFebruary 10, 2021 , we amended the 2018 Credit Facility which, among other things, reduced the interest rate for borrowings under the 2018 Term Loan B. We incurred approximately$1.1 million of debt issuance costs in connection with the amendment. For accounting purposes, pursuant to ASC 470, this transaction was accounted for as a modification of the 2018 Credit Facility. The debt issuance costs were recognized in interest expense, net within our condensed consolidated statement of income during the first quarter of 2021. OnJuly 30, 2021 , we amended the 2018 Credit Facility which, among other things, increased borrowings under the 2018 Term Loan A from$245.0 million to a total of$286.2 million ; increased the total available borrowing capacity under the 2018 Revolving Credit Facility from$282.5 million to$330.0 million ; reduced the interest rate for borrowings under the 2018 Term Loan A and 2018 Revolving Credit Facility; and amended the commitment fee on the undrawn portion of the 2018 Revolving Credit Facility. As a result of the amendment, the applicable margin for the 2018 Term Loan A and 2018 Revolving Credit Facility is currently subject to certain premiums or discounts tied to criteria determined by certain sustainability targets. We incurred approximately$1.4 million of debt issuance costs in connection with the amendment. For accounting purposes, pursuant to ASC 470, this transaction was accounted for as a modification of the 2018 Credit Facility. Of the$1.4 million of debt issuance costs, approximately$0.8 million was recorded on our condensed consolidated balance sheet and is being amortized over the life of the 2018 Credit Facility using the effective-interest method, and approximately$0.6 million was recognized in interest expense, net within our condensed consolidated statement of income during the third quarter of 2021. The 2018 Credit Facility requires us to comply with a leverage ratio. The 2018 Credit Facility also contains affirmative and negative covenants customary for financings of this type, including, among other things, limitations or prohibitions on repurchasing common shares, declaring and paying dividends and other distributions, redeeming and repurchasing certain other indebtedness, loans and investments, additional indebtedness, liens, mergers, asset sales and transactions with affiliates. In addition, the 2018 Credit Facility contains customary events of default. As ofSeptember 30, 2022 andDecember 31, 2021 , we were in compliance with our 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 onDecember 31, 2018 . Interest is due at least quarterly on amounts outstanding under the 2018 Credit Facility. In addition, beginning in 2020, we may be required to make mandatory prepayments towards the 2018 Term Loan B based on our consolidated leverage ratio and annual excess cash flows as defined under the terms of the 2018 Credit Facility. We are also permitted to make voluntary prepayments. Amounts outstanding under the 2018 Term Loan A and 2018 Term Loan B may be voluntarily prepaid without premium or penalty, subject to customary breakage fees in connection with the prepayment of a eurocurrency loan. These prepayments, if any, will be applied against remaining quarterly installments owed under the 2018 Term Loan A and 2018 Term Loan B in order of maturity with the remaining principal due upon maturity, unless directed otherwise by us. Based on the 2021 consolidated leverage ratio and excess cash flow calculation, both as defined under the terms of the 2018 Credit Facility, we will not be required to make a mandatory prepayment in 2022 toward the 2018 Term Loan B. 50 -------------------------------------------------------------------------------- During the nine months endedSeptember 30, 2022 , we borrowed an aggregate amount of$433.0 million under the 2018 Credit Facility, all of which was under the 2018 Revolving Credit Facility, and repaid a total amount of$504.7 million on amounts outstanding under the 2018 Credit Facility, which included$483.0 million of repayments on amounts outstanding under the 2018 Revolving Credit Facility. During the nine months endedSeptember 30, 2021 , we borrowed an aggregate amount of$531.2 million under the 2018 Credit Facility, which included$490.0 million under the 2018 Revolving Credit Facility, and repaid a total amount of$415.8 million on amounts outstanding under the 2018 Credit Facility, which included$60.0 million of prepayments on amounts outstanding under the 2018 Term Loan B and$340.0 million of repayments on amounts outstanding under the 2018 Revolving Credit Facility. As ofSeptember 30, 2022 andDecember 31, 2021 , theU.S. dollar amount outstanding under the 2018 Credit Facility was$1,022.9 million and$1,094.6 million , respectively. Of the$1,022.9 million outstanding under the 2018 Credit Facility as ofSeptember 30, 2022 ,$262.9 million was outstanding under the 2018 Term Loan A,$660.0 million was outstanding under the 2018 Term Loan B, and$100.0 million was outstanding under the 2018 Revolving Credit Facility. Of the$1,094.6 million outstanding under the 2018 Credit Facility as ofDecember 31, 2021 ,$279.0 million was outstanding under the 2018 Term Loan A,$665.6 million was outstanding under the 2018 Term Loan B, and$150.0 million was outstanding under the 2018 Revolving Credit Facility. There were no outstanding foreign currency borrowings under the 2018 Credit Facility as ofSeptember 30, 2022 andDecember 31, 2021 . As ofSeptember 30, 2022 andDecember 31, 2021 , the weighted-average interest rate for borrowings under the 2018 Credit Facility was 3.46% and 2.62%, respectively. See Note 4, Long-Term Debt, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for a further discussion on the 2018 Credit Facility.
Convertible Senior Notes due 2024
InMarch 2018 , we issued$550.0 million aggregate principal amount of convertible senior notes due 2024, or the 2024 Convertible Notes. The 2024 Convertible Notes are senior unsecured obligations which rank effectively subordinate to any of our existing and future secured indebtedness, including amounts outstanding under the 2018 Credit Facility, to the extent of the value of the assets securing such indebtedness. The 2024 Convertible Notes pay interest at a rate of 2.625% per annum payable semiannually in arrears onMarch 15 andSeptember 15 of each year, beginning onSeptember 15, 2018 . Unless redeemed, repurchased or converted in accordance with their terms prior to such date, the 2024 Convertible Notes mature onMarch 15, 2024 . The primary purpose of the issuance of the 2024 Convertible Notes was to repurchase a portion of the 2019 Convertible Notes. InDecember 2021 , we made an irrevocable election under the indenture governing the 2024 Convertible Notes to require the principal portion of the 2024 Convertible Notes to be settled in cash and any excess in shares or cash. See Note 4, Long-Term Debt, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for a further discussion on our 2024 Convertible Notes.
Senior Notes due 2025
InMay 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 onMarch 1 andSeptember 1 of each year, beginning onMarch 1, 2021 . The 2025 Notes mature onSeptember 1, 2025 , unless redeemed or repurchased in accordance with their terms prior to such date. The primary purpose of the issuance of the 2025 Notes was for general corporate purposes, including share repurchases and other capital investment projects. See Note 4, Long-Term Debt, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for a further discussion on our 2025 Notes. Senior Notes due 2026 InAugust 2018 , we issued$400.0 million aggregate principal amount of senior notes due 2026, or the 2026 Notes. The 2026 Notes were senior unsecured obligations which ranked effectively subordinate to any of our existing and future secured indebtedness, including amounts outstanding under the 2018 Credit Facility, to the extent of the value of the assets securing such indebtedness. The 2026 Notes paid interest at a rate of 7.250% per annum payable semiannually in arrears onFebruary 15 andAugust 15 of each year, beginning onFebruary 15, 2019 . The 2026 Notes were to mature onAugust 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 prior senior secured credit facility. 51 -------------------------------------------------------------------------------- InMay 2021 , we issued$600.0 million aggregate principal of new senior notes due 2029 as described below, and subsequently used a portion of the proceeds to redeem all$400.0 million of our existing 2026 Notes for an aggregate purchase price of$428.5 million , which included$7.7 million of accrued interest. See Note 4, Long-Term Debt, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for a further discussion on our 2026 Notes.
Senior Notes due 2029
InMay 2021 , we issued$600.0 million aggregate principal amount of senior notes due 2029, or the 2029 Notes. The 2029 Notes are senior unsecured obligations which rank effectively subordinate to any of our existing and future secured indebtedness, including amounts outstanding under the 2018 Credit Facility, to the extent of the value of the assets securing such indebtedness. The 2029 Notes pay interest at a rate of 4.875% per annum payable semiannually in arrears onJune 1 andDecember 1 of each year, beginning onDecember 1, 2021 . The 2029 Notes mature onJune 1, 2029 , unless redeemed or repurchased in accordance with their terms prior to such date. The primary purpose of the issuance of the 2029 Notes was to repurchase the 2026 Notes as well as for general corporate purposes, which may include shares repurchases and other capital investment projects. See Note 4, Long-Term Debt, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for a further discussion on our 2029 Notes.
Cash and Cash Equivalents
The majority of our foreign subsidiaries designate their local currencies as their functional currencies. As ofSeptember 30, 2022 , the total amount of our foreign subsidiary cash and cash equivalents was$376.8 million , of which$22.4 million was held inU.S. dollars. As ofSeptember 30, 2022 , the total amount of cash and cash equivalents held byHerbalife Nutrition Ltd. and itsU.S. entities, inclusive ofU.S. territories, was$155.7 million . For earnings not considered to be indefinitely reinvested deferred taxes have been provided. For earnings considered to be indefinitely reinvested, deferred taxes have not been provided. Should we make a determination to remit the cash and cash equivalents from our foreign subsidiaries that are considered indefinitely reinvested toHerbalife Nutrition Ltd. for the purpose of repatriation of undistributed earnings, we would need to accrue and pay taxes. As ofDecember 31, 2021 ,Herbalife Nutrition Ltd. had approximately$2.8 billion of permanently reinvested unremitted earnings relating to its operating subsidiaries. As ofDecember 31, 2021 , we do not have any plans to repatriate these unremitted earnings toHerbalife Nutrition Ltd. ; therefore, we do not have any liquidity concerns relating to these unremitted earnings and related cash and cash equivalents. See Note 12, Income Taxes, to the Consolidated Financial Statements included in our 2021 10-K for additional discussion on our unremitted earnings.
Off-Balance Sheet Arrangements
As of
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 underCayman 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
OnFebruary 9, 2021 , our board of directors authorized a new three-year$1.5 billion share repurchase program that will expire onFebruary 9, 2024 , which replaced our prior share repurchase authorization that was set to expire onOctober 30, 2023 and had approximately$7.9 million of remaining authorized capacity when it was replaced. This share repurchase program allows us, which includes an indirect wholly-owned subsidiary ofHerbalife Nutrition Ltd. , to repurchase our common shares at such times and prices as determined by management, as market conditions warrant, and to the extentHerbalife Nutrition Ltd.'s distributable reserves are available underCayman Islands law. The 2018 Credit Facility permits us to repurchase our common shares as long as no default or event of default exists and other conditions, such as specified consolidated leverage ratios, are met. As ofSeptember 30, 2022 , the remaining authorized capacity under our$1.5 billion share repurchase program was approximately$985.5 million . 52 -------------------------------------------------------------------------------- During the nine months endedSeptember 30, 2022 , we repurchased approximately 3.7 million of our common shares through open-market purchases at an aggregate cost of approximately$131.8 million , or an average cost of$35.73 per share, and subsequently retired these shares. DuringJanuary 2021 , we repurchased from Mr.Carl C. Icahn and certain of his affiliates an aggregate of approximately 12.5 million common shares of ours at an aggregate cost of approximately$600.0 million , or$48.05 per share, and subsequently retired these shares. In addition, during the nine months endedSeptember 30, 2021 , we repurchased approximately 5.7 million of our common shares through open-market purchases at an aggregate cost of approximately$281.1 million , or an average cost of$49.27 per share, and subsequently retired these shares. In total, during the nine months endedSeptember 30, 2021 , we repurchased approximately 18.2 million of our common shares at an aggregate cost of approximately$881.1 million , or an average cost of$48.43 per share. As ofDecember 31, 2021 , we held approximately 10.0 million of treasury shares forU.S. GAAP purposes. These treasury shares increased our shareholders' deficit and were reflected at cost within our accompanying condensed consolidated balance sheet as ofDecember 31, 2021 . Although these shares were owned by an indirect wholly-owned subsidiary of ours and remained legally outstanding, they were reflected as treasury shares underU.S. GAAP and therefore reduced the number of common shares outstanding within our condensed consolidated financial statements and the weighted-average number of common shares outstanding used in calculating earnings per share. The common shares ofHerbalife Nutrition Ltd. held by the indirect wholly-owned subsidiary, however, remained outstanding on the books and records of our transfer agent and therefore still carried voting and other share rights related to ownership of our common shares, which could be exercised. So long as it was consistent with applicable laws, such shares were 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 ofHerbalife Nutrition Ltd.'s shareholders. InAugust 2022 , we retired these 10.0 million treasury shares and as a result the amount of our treasury shares reflected at cost within our condensed consolidated balance sheet decreased by$328.9 million as ofSeptember 30, 2022 , compared toDecember 31, 2021 . We also allocated the excess of the original repurchase price of these common shares over the par value of the shares acquired between shareholders deficit and additional paid-in capital. As a result of the retirement of our treasury shares these approximately 10.0 million shares no longer remained legally outstanding as ofSeptember 30, 2022 .
See Note 10, Shareholders' Deficit, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q, for a further discussion on our share repurchases.
Working Capital and Operating Activities
As ofSeptember 30, 2022 andDecember 31, 2021 , we had working capital of$398.2 million and$351.4 million , respectively, or an increase of$46.8 million . The increase was primarily due to increases in receivables and prepaid expenses and other current assets, and decreases in royalty overrides and other current liabilities; partially offset by decreases in cash and cash equivalents and inventories. We expect that cash and funds provided from operations, available borrowings under the 2018 Credit Facility, and longer-term access to capital markets will provide sufficient working capital to operate our business, to make expected capital expenditures, and to meet foreseeable liquidity requirements for the next twelve months and thereafter. The majority of our purchases from suppliers are generally made inU.S. dollars, while sales to our Members generally are made in local currencies. Consequently, strengthening of theU.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, Financial Statements, of this Quarterly Report on Form 10-Q, for information on our contingencies as ofSeptember 30, 2022 .
Critical Accounting Policies and Estimates
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 53 --------------------------------------------------------------------------------
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 management; targeted nutrition; energy, sports, and fitness; and outer nutrition products. Our products are manufactured by us in ourChangsha ,Hunan, China extraction facility;Suzhou, China facility;Nanjing ,China facility;Lake Forest, California facility; andWinston-Salem, North Carolina facility; and by third-party providers, and then are sold to Memberswho consume and sellHerbalife Nutrition products to retail consumers or other Members. As ofSeptember 30, 2022 , we sold products in 95 markets throughout the world and we are organized and managed by geographic region. We aggregate our operating segments into one reporting segment, exceptChina , as management believes that our operating segments have similar operating characteristics and similar long-term operating performance. In making this determination, management believes that the operating segments are similar in the nature of the products sold, the product acquisition process, the types of customers to whom products are sold, the methods used to distribute the products, the nature of the regulatory environment, and their economic characteristics. We generally recognize revenue upon delivery when control passes to the Member. Product sales are recognized net of product returns, and discounts referred to as "distributor allowances." We generally receive the net sales price in cash or through credit card payments at the point of sale. Royalty overrides are generally recorded when revenue is recognized. See Note 2, Significant Accounting Policies, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q, for a further discussion of distributor compensation in theU.S. Allowances for product returns, primarily in connection with our buyback program, are provided at the time the sale is recorded. This accrual is based upon historical return rates for each country and the relevant return pattern, which reflects anticipated returns to be received over a period of up to 12 months following the original sale. Historically, product returns and buybacks have not been significant. Product returns and buybacks were approximately 0.1% of net sales for each of the three and nine months endedSeptember 30, 2022 and 2021. We adjust our inventories to lower of cost and net realizable value. Additionally we adjust the carrying value of our inventory based on assumptions regarding future demand for our products and market conditions. If future demand and market conditions are less favorable than management's assumptions, additional inventory write-downs could be required. Likewise, favorable future demand and market conditions could positively impact future operating results if previously written down inventories are sold. We have obsolete and slow moving inventories which have been adjusted downward$33.9 million and$31.4 million to present them at their lower of cost and net realizable value in our condensed consolidated balance sheets as ofSeptember 30, 2022 andDecember 31, 2021 , respectively.Goodwill and marketing-related intangible assets not subject to amortization are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. Under the quantitative method for impairment testing of goodwill, which is done at the reporting unit level, we primarily use an income approach in order to determine the fair value of a reporting unit and compare it to its carrying amount. The determination of the fair value of the reporting units requires us to make significant estimates and assumptions. These estimates and assumptions include estimates of future revenues and expense growth rates, capital expenditures and the depreciation and amortization related to these capital expenditures, discount rates, and other inputs. Due to the inherent uncertainty involved in making these estimates, actual future results could differ. Changes in assumptions regarding future results or other underlying assumptions could have a significant impact on the fair value of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit over its fair value. During fiscal year 2021, we performed a quantitative assessment and determined that the fair value of each reporting unit was significantly greater than its respective carrying value. Under the quantitative method for impairment testing of our marketing-related intangible assets, we use a discounted cash flow model, or the income approach, under the relief-from-royalty method to determine the fair value of our marketing-related intangible assets in order to confirm there is no impairment required. An impairment loss is recognized to the extent that the carrying amount of the assets exceeds their fair value. During fiscal year 2021, we performed a quantitative assessment of our marketing-related intangible assets and determined that the fair value of the assets was significantly greater than their carrying value. As ofSeptember 30, 2022 andDecember 31, 2021 , we had goodwill of approximately$87.6 million and$95.4 million , respectively. The decrease in goodwill during the nine months endedSeptember 30, 2022 was due to foreign currency translation adjustments. As of bothSeptember 30, 2022 andDecember 31, 2021 , we had marketing-related intangible assets of approximately$310.0 million . No goodwill or marketing-related intangibles impairment was recorded during the three and nine months endedSeptember 30, 2022 and 2021. See Note 2, Significant Accounting Policies, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for a further discussion. 54 -------------------------------------------------------------------------------- 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. As part of the process of preparing our condensed consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate prior to the completion and filing of tax returns for such periods. These estimates involve complex issues and require us to make judgments about the likely application of the tax law to our situation, as well as with respect to other matters, such as anticipating the positions that we will take on tax returns prior to us actually preparing the returns and the outcomes of disputes with tax authorities. The ultimate resolution of these issues may take extended periods of time due to examinations by tax authorities and statutes of limitations. In addition, changes in our business, including acquisitions, changes in our international corporate structure, changes in the geographic location of business functions or assets, changes in the geographic mix and amount of income, as well as changes in our agreements with tax authorities, valuation allowances, applicable accounting rules, applicable tax laws and regulations, rulings and interpretations thereof, developments in tax audit and other matters, and variations in the estimated and actual level of annual pre-tax income can affect the overall effective income tax rate. We evaluate the realizability of our deferred tax assets by assessing the valuation allowance and by adjusting the amount of such allowance, if necessary. Although realization is not assured, we believe it is more likely than not that the net carrying value will be realized. The amount of the carryforwards that is considered realizable, however, could change if estimates of future taxable income are adjusted. The ability to forecast income over multiple years at a jurisdictional level is subject to uncertainty especially when our assessment of valuation allowances factor in longer term income forecasts. The impact of increasing or decreasing the valuation allowance could be material to our condensed consolidated financial statements. See Note 12, Income Taxes, to the Consolidated Financial Statements included in Part IV, Item 15, Exhibits, Financial Statement Schedules, of the 2021 10-K for additional information on our net deferred tax assets and valuation allowances. 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.
Our policy is 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 Matters. In a majority of the countries where we operate, the functional currency is the local currency. Our foreign subsidiaries' asset and liability accounts are translated for condensed consolidated financial reporting purposes intoU.S. dollar amounts at period-end exchange rates. Revenue and expense accounts are translated at the average rates during the year. Our foreign currency translation adjustments are included in accumulated other comprehensive loss on our accompanying condensed consolidated balance sheets. Foreign currency transaction gains and losses and foreign currency remeasurements are generally included in selling, general, and administrative expenses in the accompanying condensed consolidated statements of income.
New Accounting Pronouncements
See discussion under Note 2, Significant Accounting Policies, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q, for information on new accounting pronouncements.
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