Mannatech, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited consolidated results. Mannatech develops and sells nutritional supplements, skin care, anti-aging and weight-management products, primarily through network marketing across the Americas, EMEA and Asia/Pacific; it also operates a cross-border e-commerce retail business in China.
Financial performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $47.7m, down 2.3% from $48.8m | $88.3m, down 1.3% from $89.5m |
| Gross profit / margin | $38.9m / 81.6%, versus $38.7m / 79.3% | $70.8m / 80.1%, versus $71.0m / 79.3% |
| Operating income | $2.8m, versus operating loss of $0.1m | $0.8m, versus $0.4m |
| Net income (loss) | $1.8m, versus loss of $1.3m; diluted EPS $0.65 versus loss per share of $0.49 | $0.5m, versus loss of $0.7m; diluted EPS $0.19 versus loss per share of $0.27 |
| Operating cash flow | $7.8m for the six months, versus $5.6m in the prior-year period |
In constant dollars, sales declined 3.5% for Q2 and 3.0% for the first half; favorable currency translation added approximately $0.6m and $1.5m, respectively. Q2 sales were supported by the Americas, up 2.6%, while Asia/Pacific declined 6.1%; EMEA was flat. Pack sales fell 20.0% in Q2 and 11.4% in the first half. The company attributed improved gross margin chiefly to currency, promotion margins and product mix. Lower operating expenses and a much smaller foreign-exchange-related other expense than in 2016 contributed to the Q2 return to profitability.
Balance sheet, cash flow and capital
- At June 30, cash and cash equivalents were $35.6m, versus $28.7m at year-end 2016; total restricted cash was about $8.3m. Working capital was $22.2m, up from $20.8m.
- Total assets were $74.8m and total liabilities $33.9m. Notes payable totaled about $1.1m and capital lease liabilities about $0.6m; the filing reports no material long-term debt program.
- First-half investing cash outflow was $0.7m, chiefly for software and equipment. Financing cash outflow was $1.4m, including $0.8m of lease repayments and $0.7m of dividends. The company paid two $0.125-per-share dividends during the first half.
- Management said existing liquidity and operating cash flows should fund normal operations and potential international expansion for the next 12 months, while noting that additional funding might be needed if resources prove insufficient and may not be available on favorable terms.
Changes, outlook and risks
- Sales weakness was concentrated in packs: Q2 pack units fell 12.8% to about 30,700, and average pack value fell to $195 from $212. For the first half, pack units declined 8.2% to about 59,300. Active associate and member positions over the preceding 12 months totaled approximately 218,000, down from 222,000.
- Effective tax rates were 36.5% for Q2 and 36.6% for the first half. The company maintained $8.3m of valuation allowances against deferred tax assets; realization of remaining deferred tax assets depends on future taxable income and assumptions.
- On July 1, the company revised its associate compensation plan, including income streams, leadership levels, volume requirements and preferred-customer pricing. Management said the change could cause future results to differ materially from historical results; no quantified impact or formal earnings guidance is provided.
- On July 10, the company learned that Korean tax authorities assessed approximately $1.1m in additional income taxes relating to 2012–2016 returns. This is a subsequent event and is separate from the reported June 30 balances.
- A Korean customs assessment appeal was decided against the company on June 30; the company is appealing. A patent-damages case is stayed after a defendant filed for Chapter 7 bankruptcy, and the company says no property currently appears available to creditors. A trademark dispute with Shaklee remains ongoing; the company says outcomes and potential damages cannot be estimated.
- A confidential contract dispute settlement was reached in April and dismissed with prejudice in July; the company had accrued $0.5m at March 31. Q2 selling and administrative expense included $0.2m in severance charges. The filing identifies foreign-exchange movements, recruiting and retaining associates, competition, regulation, product publicity and consumer demand as risks.
- The company planned to adopt the new revenue standard, ASC 606, on January 1, 2018 using the modified retrospective method; its financial impact was still under evaluation. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether pack volumes, average pack value and associate/member activity stabilize, and how the July compensation-plan changes affect sales and commissions.
- The outcome, timing and cash impact of the approximately $1.1m Korean tax assessment and the customs appeal.
- Progress and potential exposure in the patent bankruptcy/damages proceedings and the Shaklee trademark dispute.
- Whether operating cash generation and liquidity remain adequate, given restricted cash, contractual purchase commitments and tax uncertainty.
- The eventual financial and reporting impact of ASC 606 and the recoverability of deferred tax assets.
- The filing’s MD&A discusses Q2 commissions of $18.3m, while the statement of operations reports a combined commissions-and-incentives line of $19.0m; investors should consult the detailed filing presentation when reconciling these disclosures.