LifeVantage Corporation — Q2 FY2015 Form 10-Q
Reporting period: Three and six months ended December 31, 2014. Figures are unaudited; dollar amounts below are in millions unless noted.
Business context
LifeVantage sells dietary supplements, skin-care products, and energy drink mixes through independent distributors and preferred customers. It operates in the Americas and Asia/Pacific; revenue depends substantially on distributor and customer activity. Protandim is a key product, alongside TrueScience, Canine Health, and Axio.
Financial results and liquidity
| Metric | Three months ended Dec. 31 | Six months ended Dec. 31 |
|---|---|---|
| Revenue | $48.2 (2014); $51.5 (2013), down 6.4% | $99.9 (2014); $102.9 (2013), down 2.9% |
| Gross profit / margin | $40.8 / 84.5%; $43.6 / 84.6% | $86.7 / 86.8%; $87.1 / 84.7% |
| Operating income | $3.1; $5.2 | $10.9; $10.2 |
| Net income | $1.5; $3.3 | $6.2; $6.5 |
| Diluted EPS | $0.01; $0.03 | $0.06; $0.06 |
Quarterly operating and net income fell year over year despite lower operating expenses, as revenue declined and SG&A and other expense increased. For the six-month period, operating income improved, but net income was slightly lower. The six-month gross-margin increase was primarily due to approximately $2 million of settlement proceeds received in September 2014 relating to a December 2012 product recall.
Six-month operating cash flow was $8.0, compared with $6.9 a year earlier. Investing cash outflow was $0.9, mainly equipment purchases; financing cash outflow was $8.8, including $6.6 of stock repurchases and $2.35 of debt principal payments. Cash declined to $18.6 at December 31 from $20.4 at June 30, 2014.
Working capital was $17.1, versus $17.3 at June 30. Debt principal totaled $28.5, including $4.7 current and $23.8 long-term; the term loan averaged 8.75% interest in the six-month period. The company reported compliance with credit-facility covenants at December 31. Management said cash and expected operating cash flow should meet requirements for at least 12 months.
Material changes and management commentary
- Americas revenue rose 1.8% for the quarter and 3.7% for six months, supported by U.S., Canada, and Mexico sales, including newer products.
- Asia/Pacific revenue fell 22.9% for the quarter and 16.4% for six months. Japan revenue fell 27.2% and 21.7%, respectively; weaker yen and lower product sales contributed. Foreign exchange reduced total revenue by $1.6 for the quarter and $2.3 for six months.
- Active distributors were 67,000, down 2.9% year over year; active preferred customers were 119,000, down 11.9%.
- SG&A increased to $14.5 for the quarter and $28.1 for six months, mainly from sales and marketing costs, including sponsorship, an event, and customer-service call-center labor. Commission and incentive expense declined with lower Japan sales.
- Inventory increased to $12.1 from $8.8 at June 30, while accounts payable rose to $4.0 from $2.9.
- The company repurchased $6.6 of stock during the six months. The November 2014 $7 million authorization had $4.4 remaining at December 31; additional purchases of $1.9 were made from January 1 through January 30, 2015.
Outlook, risks, contingencies, and unusual items
- Management expects Japan revenue to decrease in fiscal 2015 compared with fiscal 2014, citing market contraction and distributor disruption involving former leaders. The company said it is pursuing legal action and taking steps to unify and support the Japan distributor base.
- Management expects growth in the Americas and in Australia, Hong Kong, and the Philippines, while planning continued investment in product development, marketing, and geographic support. It expects commission expense and sales and marketing expense to increase slightly during the remainder of fiscal 2015.
- Management reported a decline in consolidated EBITDA for the quarter versus the prior quarter and expects improvement. It cautioned that without improvement the company may not meet future EBITDA covenant targets; it was compliant at December 31.
- On February 2, 2015, CEO and President Douglas C. Robinson agreed to step down immediately. Director Dave S. Manovich became Executive Vice Chairman and was assigned to oversee an interim Office of the President pending a new CEO.
- Management characterized the likelihood of an adverse outcome in pending litigation as remote and did not expect a material financial impact. The filing reports no off-balance-sheet arrangements and no material change to previously disclosed risk factors.
- Key risks include Japan market weakness, foreign-exchange exposure, distributor retention and conduct, product acceptance and supply chain execution, reliance on a significant product, regulation of direct selling and supplements, litigation, and debt covenants. A 10% U.S. dollar strengthening against relevant currencies would have reduced six-month revenue by an estimated $2.8; a 100-basis-point rate move would change annual interest expense by about $0.3.
Important facts for investors to verify
- Whether Japan revenue and distributor activity stabilize, and whether management’s FY2015 Japan outlook changes.
- Future covenant headroom, especially EBITDA performance against required targets, and the company’s ability to service variable-rate debt.
- Whether cash generation can support operating needs alongside continued buybacks, debt repayment, and increased inventory.
- The impact of CEO transition, ongoing Japan-related legal action, foreign-exchange movements, and the product-recall settlement benefit on subsequent results.