Mannatech, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited consolidated results; dollar amounts below are in millions except per-share data.
Business context
Mannatech develops and sells nutritional supplements, skin-care and anti-aging, and weight-management products, primarily through network marketing in 25 countries, with a traditional retail e-commerce business in China. On July 1, 2017, the company revised its associate compensation plan, replacing packs with annual associate fees in the U.S., Canada, South Africa, and Japan and changing associate and preferred-customer terms.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $42.0 | $48.1 | $130.3 | $137.7 |
| Gross profit / margin | $33.8 / 80.4% | $38.4 / 79.8% | $104.5 / 80.2% | $109.4 / 79.5% |
| Operating income / margin | $0.7 / 1.6% | $0.5 / 1.1% | $1.5 / 1.1% | $0.9 / 0.7% |
| Net income | $1.4 | $1.3 | $1.9 | $0.5 |
| Diluted EPS | $0.50 | $0.46 | $0.69 | $0.19 |
- Cash flow: Nine-month operating cash flow was $9.0, versus $7.2 a year earlier. Investing activities used $1.1, principally for software and other capital spending; financing activities used $2.3, including $1.2 in capital-lease repayments and $1.0 in dividends. Cash and cash equivalents ended at $35.4, up $6.7 from year-end 2016, including a $1.0 favorable currency effect.
- Liquidity and debt: Working capital was $22.3, compared with $20.8 at December 31, 2016. Total restricted cash was $8.3. Notes payable were approximately $0.9; capital-lease liabilities totaled approximately $0.5. The filing reports no off-balance-sheet arrangements.
- Other balance-sheet items: Total assets were $78.5 and total liabilities $36.9 at September 30, 2017. Inventory declined to $10.6 from $12.0 at year-end 2016; deferred revenue rose to $8.8 from $8.2.
Changes versus prior periods
- Sales fell 12.8% in Q3 and 5.3% for the first nine months. On the company’s constant-dollar, non-GAAP basis, declines were 12.5% and 6.4%, respectively. Q3 foreign exchange reduced sales by $0.1; nine-month foreign exchange increased sales by $1.4.
- The compensation-plan transition substantially reduced pack sales and associate fees: combined revenue declined 73.9% in Q3 to $1.8 and 33.2% year to date to $13.5. Product sales were comparatively resilient, down 1.8% in Q3 and 0.4% year to date.
- Q3 sales weakness was concentrated in the Americas, down 25.8% to $14.1; Asia/Pacific declined 4.3% to $24.4, and EMEA declined 2.8% to $3.5. For the first nine months, all three regions reported lower sales.
- Gross margin improved in both periods, attributed to a more favorable product mix and, year to date, favorable currency effects. Operating income increased despite lower sales, supported by lower operating expenses.
- Net income increased to $1.9 for the nine months from $0.5, but results included income-tax benefits of $0.2 and $0.1, respectively. The unusually low reported tax rates reflect foreign-jurisdiction rate differences and other items, including expired tax reserves; the Korean audit settlement partly offset the benefits.
Outlook, risks and unusual items
- Outlook: No specific revenue or earnings guidance is provided. Management says existing liquidity and operating cash flows should fund normal operations and possible international expansion for the next 12 months. It expects pack-sales revenue to decline as associate fees replace packs in additional markets, but actual results may differ.
- Plan execution: Management’s stated aim is to stimulate business growth and improve customer buying experience through revised compensation, leadership levels, volume requirements, and pricing. The filing describes approximately 219,000 active associate and preferred-customer positions, compared with 221,000 a year earlier.
- Contingencies: After quarter-end, the company agreed to pay Natural Alternatives International $0.2 in two installments to settle an inventory dispute; final payment was due by December 30, 2017, with dismissal following payment. A separate personal-injury claim seeks damages exceeding $0.2; the company says it is insured and will defend the claim. Its Korean customs assessment appeal remains open after an adverse appellate decision; the original $1.0 assessment had already been paid.
- Other legal matters: Patent-related litigation is stayed following a defendant’s bankruptcy; Mannatech reported a judgment claim of approximately $0.7. A U.S. trademark opposition and other routine claims also remain unresolved. The company cautions that litigation outcomes and potential losses may be uncertain.
- Principal risks: Dependence on recruiting and retaining associates and customers; effects of the compensation-plan transition; foreign-currency movements; changing demand, competition, and regulation; tax audits and the recoverability of deferred tax assets; and litigation. The company maintained an $8.1 valuation allowance against deferred tax assets.
- Accounting changes: Mannatech planned to adopt the new revenue-recognition standard using the modified retrospective method on January 1, 2018. Its initial assessment indicated no material timing impact, subject to further review. The impact of the forthcoming lease standard was not yet known.
Important facts for investors to verify
- Whether the compensation-plan rollout stabilizes sales, associate/customer activity, and recurring product orders as pack revenue falls.
- Whether reported profitability and cash generation are sustainable apart from tax benefits, working-capital movements, and foreign-exchange effects.
- How the company’s unusually low effective tax rates, deferred-tax-asset valuation allowances, and ongoing tax matters evolve.
- Final resolution and cash cost of the NAI settlement, and developments in the Korean customs appeal, patent bankruptcy, and personal-injury claim.
- Actual effects of ASC 606 adoption and the company’s ability to fund operations and expansion from operating cash flow.