Mannatech, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited consolidated results; amounts are U.S. dollars unless noted.
Business context
Mannatech develops and sells nutritional supplements, skin-care and weight-management products through independent associates and members in 23 countries. It reports one operating segment. The company temporarily suspended operations in Ukraine in March 2014 because of political instability.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $55.6m | $44.4m | $144.9m | $130.9m |
| Gross profit / margin | $45.3m / 81.5% | $35.2m / 79.2% | $115.5m / 79.7% | $105.3m / 80.4% |
| Operating income / margin | $8.2m / 14.7% | $0.4m / 0.9% | $10.2m / 7.0% | $2.6m / 2.0% |
| Net income (loss) | $5.1m | ($0.8m) | $4.6m | $0.6m |
| Diluted EPS | $1.89 | ($0.30) | $1.71 | $0.23 |
Q3 sales increased 25.2%; nine-month sales increased 10.7%. Management said that excluding the U th skin-care launch and loyalty-program effects, sales growth was 5.0% for the quarter and 3.3% for the nine-month period. Q3 product sales rose 44.8%, while pack sales fell 28.4%. For nine months, product sales rose 9.0% and pack sales rose 26.9%.
Asia/Pacific was the largest region: sales rose 37.7% in Q3 to $30.3m and 18.8% for nine months to $70.9m. Currency movements added approximately $1.2m to Q3 sales and $0.2m to nine-month sales. The U th product contributed $7.2m of Q3 and $11.5m of nine-month sales. The loyalty program increased Q3 sales by $1.9m but reduced nine-month sales by $1.8m versus 2013.
Q3 operating improvement reflected sales growth and higher gross margin; operating expenses rose 6.8%, slower than sales. Nine-month gross margin eased to 79.7%, which management attributed in part to prior-year pack-value enhancements. The nine-month effective tax rate was 48.0%, affected by deferred-tax valuation allowances, Subpart F income and a deemed intercompany dividend related to a 2012 working-capital loan. The company said the dividend-related expense was not material for the year and that it did not anticipate similar transactions.
Cash, liquidity and obligations
- At September 30, cash and cash equivalents were $32.2m, up from $20.4m at year-end 2013. Restricted cash totaled $8.9m, including $7.4m long-term restricted cash.
- Current assets were $57.2m and current liabilities $43.4m; working capital was $13.8m, versus $13.6m at December 31, 2013. Deferred revenue was $12.8m, up from $6.4m, including $9.8m related to loyalty points.
- Nine-month operating cash flow was $14.5m, compared with $7.0m in 2013; investing cash outflow was $2.2m and financing cash outflow was $1.0m. Operating cash flow benefited from improved earnings, higher taxes payable and deferred revenue; deferred revenue contributed $6.5m of cash.
- Total liabilities were $46.6m. Capital-lease obligations were $1.9m on the balance sheet; the contractual-obligations schedule reports $2.0m including other financing. The company reported no issued debt instruments and no off-balance-sheet arrangements.
Outlook, risks and unusual items
No specific revenue or earnings guidance was provided. Management said available liquidity and operating cash flows should fund normal operations and possible international expansion for the next 12 months and over the long term. This expectation depends on maintaining or growing revenue and/or reducing operating costs; additional financing may be needed if resources prove insufficient and may not be available on favorable terms.
Key risks include dependence on recruiting and retaining associates and members, product demand and competition, regulation and product-related publicity, and foreign-exchange movements. Active associates and members totaled approximately 234,000 for the 12 months ended September 30, down from 239,000 a year earlier; Q3 recruitment was approximately 29,000 versus 28,800.
The company filed a patent-infringement suit in July 2014 and was seeking a preliminary injunction; the case remained open, and the filing did not quantify a potential recovery. It also disclosed ongoing tax audits and disputes whose outcomes and possible liabilities could not be estimated. Deferred-tax valuation allowances were $5.2m. The company identified no material change in market-risk exposure and reported effective disclosure controls.
Most important facts to verify
- Whether reported sales growth is sustainable after the U th launch and loyalty-program effects, and how loyalty redemptions, forfeitures and deferred revenue develop.
- Whether Asia/Pacific growth and associate/member activity continue, particularly given the decline in the 12-month active base.
- Whether operating cash flow remains robust after accounting for taxes payable and deferred-revenue timing; confirm the availability of cash held abroad and restricted cash.
- How tax audits, deferred-tax asset realizability and uncertain tax positions affect future cash taxes and earnings.
- The outcome and financial implications, if any, of the patent litigation and other disputes.