Mannatech, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2015; comparisons are with the third quarter and first nine months of 2014. Unaudited consolidated results. Mannatech sells nutritional supplements, skin-care and weight-management products through a network-marketing model in 24 countries.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $43.9 million | $55.6 million | $135.0 million | $144.9 million |
| Gross profit / margin | $35.6 million / 81.2% | $45.3 million / 81.5% | $109.9 million / 81.4% | $115.5 million / 79.7% |
| Operating income / margin | $2.2 million / 5.1% | $8.2 million / 14.7% | $9.4 million / 6.9% | $10.2 million / 7.0% |
| Net income / diluted EPS | $0.1 million / $0.03 | $5.1 million / $1.89 | $4.3 million / $1.58 | $4.6 million / $1.71 |
| Operating cash flow | Not stated separately | Not stated separately | $7.8 million | $14.5 million |
Q3 pretax loss was $0.1 million, versus pretax income of $7.1 million a year earlier. A $0.2 million tax benefit produced slight net income; the reported Q3 effective tax rate was 175.5%. Nine-month effective tax rate was 24.5%, compared with 48.0% in 2014.
At September 30, cash and cash equivalents were $35.3 million, up from $28.0 million at year-end 2014; restricted cash was $8.0 million. Working capital was $21.9 million, versus $16.4 million at year-end. Total assets were $75.3 million and total liabilities $38.7 million. Capital-lease liabilities were $1.1 million on the balance sheet; the commitments schedule also listed $1.2 million of notes payable. The filing reports no long-term debt, and the company says it funds operations primarily from operating cash flow.
Nine-month investing cash use was $1.6 million, mainly software projects and international-office improvements. Financing cash use was $0.1 million, including $1.3 million of capital-lease repayments, substantially offset by financing proceeds and option exercises. Cash increased by $7.3 million, including a $1.1 million favorable currency-translation effect.
Material changes and operating drivers
- Reported sales fell 21.2% in Q3 and 6.9% for the first nine months. Excluding loyalty-program effects, management said sales declined 22.2% and 11.1%, respectively. Constant-currency sales were $48.2 million for Q3 and $144.2 million for nine months; these are non-GAAP measures.
- Management attributed the comparisons to fewer associate/member positions and lower revenue per position overall, currency weakness, the loyalty program, and the 2014 launch of the Uth skin-care product. Uth sales were $1.0 million for Q3 and $5.1 million for nine months, compared with $7.2 million and $11.5 million in 2014.
- Product sales fell 23.1% in Q3 and 10.1% for nine months. Average order value declined to $154 from $182 in Q3 and to $155 from $169 for nine months. Nine-month pack sales increased 14.7% to $24.9 million, while Q3 pack sales decreased 9.0% to $7.1 million.
- Q3 operating income fell 72.7%; net income fell 98.7%. Operating expenses declined less than sales, increasing their share of revenue. Other expense, net rose to $2.4 million in Q3 and $3.8 million year to date, primarily due to foreign-exchange losses.
- Gross margin improved year to date but edged down in Q3. Commission and incentive expense declined in dollars, but commissions rose as a share of sales to 39.0% in Q3 and 38.6% year to date.
Outlook, risks and contingencies
Management expects available liquidity and operating cash flows to cover normal operations and possible international expansion costs for the next 12 months, and believes operating cash flow should support longer-term needs. This depends on maintaining or increasing revenue and/or reducing expenses; additional financing may be needed if cash resources prove insufficient. The company planned to begin operating in Colombia by year-end 2015. No numerical earnings or sales guidance was provided.
Key risks include continued declines in network positions or customer spending, foreign-exchange movements, competition and product demand, regulatory changes, and the ability to recruit and retain associates and members. The company does not hedge currency exposure. It maintained an $8.8 million valuation allowance against deferred tax assets and reported $0.7 million in other long-term liabilities and $0.1 million in taxes payable related to uncertain tax positions.
Open matters include an associate-related contract lawsuit seeking more than $1 million, with trial scheduled for March 2016; arbitration in which Mannatech seeks estimated damages of $0.5 million to $3.5 million, with a hearing scheduled for April 2016; and a trademark opposition. A Korean customs assessment of $1.0 million had already been paid and was being challenged. In a patent case, the court issued a permanent injunction on November 5, 2015, stayed pending the defendants’ appeal. The company states litigation outcomes remain uncertain and adverse outcomes could affect results and cash flows.
Other notable items: the quarterly cash dividend has been suspended since August 2009. Management reported effective disclosure controls and no materially affecting changes in internal control during the quarter.
Important facts for investors to verify
- Whether sales, order values, and active associate/member positions stabilize, particularly in Asia/Pacific and North America.
- How much reported performance depends on loyalty-program revenue recognition, product-launch comparisons, and currency translation; review the company’s non-GAAP constant-dollar calculations.
- Whether operating cash flow recovers from its year-over-year decline and whether liquidity supports planned expansion and contractual obligations.
- Developments and potential financial exposure in the disclosed lawsuits, arbitration, trademark opposition, and tax matters.
- Whether foreign-exchange losses, deferred-tax-asset realizability, and the company’s stated funding assumptions materially change.