Mannatech, Incorporated — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unaudited consolidated results. Mannatech sells nutritional supplements, skin care, anti-aging and weight-management products through network marketing and China e-commerce.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $43.0m | $42.0m | $129.5m | $130.3m |
| Gross profit | $34.0m | $33.8m | $104.1m | $104.5m |
| Gross margin | 79.0% | 80.4% | 80.4% | 80.2% |
| Operating income | $1.7m | $0.7m | $0.4m | $1.5m |
| Net income (loss) | $(1.7)m | $1.4m | $(2.3)m | $1.9m |
| Operating cash flow | Not reported separately for the quarter | $1.7m | $9.0m |
Q3 GAAP sales rose 2.4%; on a constant-currency basis they rose 2.9%. Nine-month GAAP sales fell 0.6%; constant-currency sales fell 2.5%. Q3 operating margin improved to 3.9% from 1.6%, while nine-month operating margin declined to 0.3% from 1.1%. The nine-month net loss mainly reflects a $3.6m income tax provision despite $1.3m pretax income. Effective tax rates were 167.8% for Q3 and 298.5% year to date, affected by jurisdictional earnings mix, valuation allowances on foreign losses and GILTI.
Financial position and liquidity
- At September 30, cash and cash equivalents were $25.7m; restricted cash was $8.8m, bringing cash, cash equivalents and restricted cash to $34.5m. Cash and cash equivalents were $37.7m at December 31, 2017.
- Working capital was $10.5m, down from $22.8m at year-end 2017. Current assets were $46.7m and current liabilities $36.3m.
- Total liabilities were $41.3m. Notes payable totaled $1.8m and capital lease liabilities were approximately $0.2m. The filing reports $27.2m in contractual commitments and obligations, including operating leases and purchase obligations.
- Nine-month investing cash use was $1.8m; financing cash use was $10.4m. Financing outflows included $7.4m of share repurchases, $1.9m of dividends and $1.1m of capital-lease repayments.
Material changes and management commentary
- Product sales increased 5.2% in Q3 and 9.5% year to date, while pack sales and associate fees fell 66.7% and 87.4%, respectively, reflecting the transition under the 2017 Associate Compensation Plan. Average product order values rose, but order counts declined.
- Asia/Pacific sales rose 9.0% in Q3 and 5.9% year to date. Americas sales declined 5.7% and 9.8%; EMEA sales declined 11.4% and 2.0%, respectively.
- Active associate and preferred-customer positions were approximately 202,000 over the preceding 12 months, down from 219,000 a year earlier. Management identifies recruiting and retaining these positions as important to business performance.
- Nine-month other operating costs included $1.3m of non-recurring costs related to the corporate office move. Q3 gross margin was pressured by freight-out costs, variances and write-offs.
- Management believes existing liquidity and operating cash flows are adequate for normal operations and possible international expansion over the next 12 months, while noting funding may be needed if resources or cash flows prove insufficient.
Risks, contingencies and unusual items
- A significant share of cash and operating cash flow is tied to South Korea; the filing cites $13.0m of net assets there at September 30, down from $32.7m at year-end. Currency movements reduced cash by $1.7m during the first nine months.
- The company maintains a $14.4m valuation allowance against deferred tax assets. The realization of remaining deferred tax assets and outcomes of ongoing tax audits remain uncertain.
- A Korean customs assessment dispute remains open; the company expects a decision on appeal by Q1 2019. The UTH trademark dispute with Shaklee was settled in October 2018 and is closed.
- On October 23, 2018, the Asia regional president was placed on administrative leave pending review of a whistleblower report. The company engaged local counsel and was also reviewing policies and procedures at its South Korean office.
- The company adopted ASC 606 in 2018 with no material financial impact. It expected to adopt the new lease standard in 2019; the main expected effect was recognition of operating-lease assets and liabilities.
Key investor verification points
- Assess whether product-order value gains can offset declining order counts and the lower active network base.
- Review the drivers and sustainability of the unusually high tax provision, valuation allowances and deferred tax assets.
- Track operating cash generation, working capital and liquidity after buybacks, dividends and capital spending.
- Monitor South Korean business concentration, foreign-exchange exposure, the customs appeal and the whistleblower review.
- Confirm the timing and balance-sheet effect of lease-standard adoption and the company’s ability to meet contractual commitments.