Mannatech, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Mannatech develops and sells nutritional supplements, skin-care and weight-management products through a network-marketing model. It reported one operating segment, with sales across 25 countries.
Financial performance
Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise stated.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $48.8 | $46.7 | $89.5 | $91.1 |
| Gross profit | $38.7 | $38.5 | $71.0 | $74.3 |
| Gross margin | 79.3% | 82.3% | 79.3% | 81.5% |
| Operating income (loss) | $(0.1) | $4.6 | $0.4 | $7.1 |
| Net income (loss) | $(1.3) | $3.1 | $(0.7) | $4.2 |
| Basic EPS | $(0.49) | $1.17 | $(0.27) | $1.58 |
- Q2 sales increased 4.5% year over year; on a constant-currency basis, management reported growth of 7.5%. First-half reported sales fell 1.7%, while constant-currency sales increased 2.1%.
- Product sales rose 10.5% in Q2 and 4.7% for the first half. Pack sales declined 15.7% and 25.8%, respectively; first-half pack volume fell 12.2% and average pack value declined.
- Gross margin weakened in both comparison periods. Management attributed the decline to promotional discounting, higher transportation costs and foreign exchange effects.
- Operating expenses rose 14.7% in Q2 and 5.1% in the first half. Higher legal, consulting and contractor fees, travel and event costs, payroll, and marketing contributed. Q2 selling and administrative and travel costs were also affected by MannaFest occurring in Q2 in 2016 versus Q1 in 2015.
- Other expense, net was $1.0 million in Q2, primarily due to foreign-exchange losses, versus $0.5 million a year earlier. The Q2 tax benefit was $0.2 million; the first-half tax benefit was $0.5 million. Management cited jurisdictional earnings mix, foreign-exchange losses, and losses without a recognized tax benefit, partially offset by a Swiss valuation-allowance release.
Cash, liquidity and balance sheet
- At June 30, 2016, cash and cash equivalents were $36.9 million, up $4.9 million from year-end 2015; restricted cash totaled $8.2 million. Cash from operations was $5.6 million for the first half, compared with $4.5 million in 2015.
- First-half investing cash use was $1.4 million, mainly for back-office software and leasehold improvements. Financing cash use was $0.7 million, primarily capital-lease repayments.
- Working capital was $23.5 million, unchanged from December 31, 2015. Current assets were $57.5 million and current liabilities $34.0 million.
- Notes payable totaled $1.7 million; capital-lease liabilities totaled approximately $0.8 million. Total liabilities were $37.3 million, versus $30.1 million at year-end. Deferred revenue increased to $10.7 million from $8.7 million, and inventories rose to $11.7 million from $9.2 million.
- Management said existing liquidity and operating cash flows should fund normal operations and possible international expansion for the next 12 months, while noting this depends on maintaining or increasing revenue and/or controlling expenses. The quarterly cash dividend has been suspended since August 2009.
Changes, outlook and risks
- Q2 sales growth was led by Asia/Pacific, up 11.4%, including reported TruHealth launch sales of $1.9 million in that region. Americas sales rose 1.1%; EMEA sales fell 18.6%. For the first half, Americas and EMEA sales fell 5.1% and 13.9%, while Asia/Pacific increased 3.0%.
- The loyalty program reduced reported sales by $1.7 million in Q2 and $2.1 million in the first half versus the comparable 2015 periods. Management said TruHealth sales partly offset this effect. Active associate and member positions totaled approximately 222,000 over the 12 months ended June 30, down from 228,000 a year earlier.
- The company anticipated starting a non-direct-selling business in China by Q4 2016. The filing provides no quantified full-year revenue or earnings guidance.
- Key exposures include foreign-currency movements, associate recruitment and retention, regulatory and product-related risks, competition, and the ability to sustain revenue against expenses. The company does not use financial instruments to hedge currency exposure.
- Legal matters include a contract claim seeking more than $1 million, for which a conditional mediation settlement became void; an arbitration initiated by Mannatech with claimed damages estimated at $0.5–$3.5 million; and a separate distributor-related cross-complaint. Outcomes and potential liabilities were not estimable. A patent judgment in Mannatech’s favor was affirmed by the Federal Circuit on August 5, 2016, after the quarter-end.
- Other contingencies include a Korean customs assessment of $1.0 million, already paid, that the company is challenging. Management cautioned that adverse litigation, tax-audit or other dispute outcomes could affect cash and results.
Investor verification priorities
- Verify whether product-sales growth and the TruHealth launch can offset continuing declines in pack sales and active network positions.
- Track whether higher operating costs and lower gross margins persist, especially legal, consulting, travel, marketing and transportation costs.
- Assess the quality of operating cash flow, including the effects of increased accounts payable and deferred revenue, and confirm availability of cash given restricted balances and international holdings.
- Monitor outcomes and financial exposure from the pending contract, arbitration, trademark and customs matters, as well as the company’s tax valuation allowances.
- Reconcile share-count disclosures: the balance sheet reports 2,706,986 shares outstanding at June 30, while the cover page reports 2,701,986 shares as of July 31, 2016.