Mannatech, Inc. — Q1 2014 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2014, compared with the same period in 2013. Mannatech develops and sells nutritional supplements, skin-care and weight-management products through independent associates and members in 23 countries. It reported as one operating segment. On March 21, 2014, it temporarily suspended operations in Ukraine because of political instability.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Net sales | $43.0 million | $41.7 million; up 3.1% |
| Gross profit / margin | $33.6 million / 78.1% | $34.0 million / 81.5% |
| Operating income / margin | $1.4 million / 3.2% | $0.7 million / 1.6% |
| Income before taxes | $1.0 million | $1.1 million |
| Net income / diluted EPS | $0.2 million / $0.08 | $0.6 million / $0.24 |
| Operating cash flow | $(0.1) million | $2.3 million |
| Cash and cash equivalents, March 31 | $20.2 million | $20.4 million at Dec. 31, 2013 |
| Restricted cash, March 31 | $5.7 million | $5.8 million at Dec. 31, 2013 |
| Working capital, March 31 | $13.8 million | $13.6 million at Dec. 31, 2013 |
| Total liabilities / shareholders’ equity | $33.0 million / $23.9 million | $32.6 million / $23.5 million at Dec. 31, 2013 |
Net cash used in investing activities was $0.1 million and net cash used in financing activities was $0.3 million, including capital-lease repayments. The company reported capital-lease obligations of $1.6 million on its balance sheet; it said it had not issued debt instruments and funded operations primarily through operating cash flow. No dividend has been paid since its quarterly dividend was suspended in August 2009.
Material changes and management commentary
- Reported sales growth was partly offset by foreign exchange: at constant currency, sales would have been $44.2 million, about 6.0% above the prior-year comparison. Management attributed currency pressure principally to the yen, South African rand and Australian dollar.
- Asia/Pacific sales rose 6.7% to $19.0 million; EMEA sales rose 8.8% to $3.7 million. North American sales fell 1.0% to $20.3 million, with a 12.1% decline in active independent associates partly offset by member growth and higher revenue per active associate/member.
- Product sales fell 7.8% to $34.5 million, while pack sales rose 191.3% to $6.7 million. Average product order value declined to $137 from $152, although order volume increased 18.6%. Pack volume rose 34.9% to approximately 25,500 and average pack value increased to $263 from $124.
- Recruiting increased 7.1%; approximately 25,600 new associates and members joined during the quarter, versus 23,900 a year earlier. The active associate/member base was approximately 246,000 over the trailing 12 months, up 6.5% year over year.
- Operating expenses declined 3.4% to $32.2 million, including lower commissions and incentives and lower selling and administrative expense. However, gross margin contracted, including a $0.9 million obsolete-inventory charge. The filing’s descriptions of the charge’s component amounts vary; the detailed MD&A attributes $0.4 million to raw materials and $0.5 million to finished goods.
- Other expense was $0.3 million, versus other income of $0.4 million in Q1 2013, primarily reflecting foreign-currency gains and losses. The effective tax rate increased to 78.1% from 39.2%, with valuation allowances on certain foreign deferred tax assets and unfavorable jurisdictional rate differences cited as factors. These items contributed to net income falling 64.6%, despite higher operating income.
Liquidity, outlook, risks and contingencies
Management said existing liquidity and an anticipated return to positive operating cash flow should fund normal operations and possible international expansion for the next 12 months. This expectation depends on maintaining or increasing revenue and/or reducing operating expenses; the filing provides no quantified earnings or sales guidance. Q1 operating cash flow was negative, compared with positive cash flow in the prior-year quarter.
Deferred revenue increased to $9.7 million from $6.4 million at year-end, including $7.7 million associated with the loyalty program. The company deferred $2.8 million of net sales during the quarter for future loyalty redemptions. Changes in loyalty-related deferred revenue and commissions affect reported sales and working capital.
Key exposures include foreign-exchange movements, associate recruitment and retention, product demand and mix, competition, regulation, inventory obsolescence, and the network-marketing business model. The company reported ongoing tax audits and disputes; adverse outcomes could affect cash and results. Deferred tax assets include a $5.3 million valuation allowance. Contractual commitments and obligations totaled $16.7 million as of March 31, 2014.
A former executive’s gender-discrimination and harassment lawsuit seeks damages exceeding $1.0 million. The company denied the allegations, said it would defend the claim, and stated that the outcome and potential loss could not then be estimated; trial was scheduled for June 2, 2014, with mediation scheduled for May 14. The filing also notes that litigation outcomes are uncertain. Management stated disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Most important facts for investors to verify
- Whether sales growth, recruiting gains and the substantial increase in pack sales can persist, and whether product-order value and North American associate trends improve.
- Whether gross margin recovers and inventory reserves remain adequate, particularly given the Ukraine suspension and the filing’s differing descriptions of the Q1 inventory charge.
- Whether operating cash flow returns to positive territory and management’s liquidity expectation is supported by subsequent results.
- How loyalty-program redemptions and deferred revenue affect future recognized sales, commissions and cash flows.
- Developments in the employment lawsuit, tax audits and other contingencies, and the recoverability of deferred tax assets.
- The impact of currency movements and the operational and financial effects of the Ukraine suspension.