Mannatech, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; filed May 12, 2015. Mannatech develops and sells nutritional supplements, skin-care and weight-management products through independent associates and members in 24 countries. It reports as one operating segment.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $44.4 million | $43.0 million | Up 3.3%; up 7.4% at constant currency |
| Gross profit / margin | $35.8 million / 80.7% | $33.6 million / 78.1% | Profit up 6.7% |
| Operating income / margin | $2.5 million / 5.7% | $1.4 million / 3.2% | Up 82.0% |
| Net income | $1.1 million | $0.2 million | Up $0.9 million |
| Diluted EPS | $0.40 | $0.08 | Up $0.32 |
| Operating cash flow | $1.2 million | $(0.1) million | Improved |
Gross-margin improvement primarily reflected a $0.9 million inventory-obsolescence charge in Q1 2014. Other expense, net, increased to $0.9 million from $0.3 million, primarily due to foreign-exchange losses. The effective tax rate was 31.7%, versus 78.1% a year earlier.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $28.4 million at March 31, 2015, compared with $28.0 million at year-end; restricted cash was $8.5 million. Working capital was $17.1 million, up from $16.4 million.
- Total assets were $71.2 million and total liabilities were $38.3 million. Capital lease obligations totaled approximately $2.6 million, including current and long-term portions. The company reported no long-term debt and stated that it funds operations primarily from operating cash flows.
- Inventory rose to $13.5 million from $10.6 million. Operating cash flow benefited from higher accounts payable and the timing of commission payments; inventory purchases used cash.
- Investing cash outflow was $0.8 million, mainly for back-office software projects. Financing cash outflow was $0.3 million, primarily lease repayments. Cash increased by $0.4 million overall.
Changes, outlook and risks
- Reported sales rose despite an estimated $1.8 million adverse foreign-exchange effect. Excluding the Uth product launch and loyalty-program effects, management said sales would have declined 2.8% year over year.
- Asia/Pacific sales increased 19.5% to $22.7 million; North America fell 10.8% to $18.1 million, and EMEA declined 2.7% to $3.6 million. Active associates and members decreased 6.5% to approximately 230,000. Pack sales rose 32.8%, while product sales slipped 0.9%.
- Selling and administrative expense rose 11.9%, mainly because the MannaFest event occurred in Q1 this year rather than Q2 in 2014. Commissions and incentives were 39.5% of sales, unchanged as a combined percentage.
- Management believes liquidity and anticipated operating cash flows will fund normal operations and possible international expansion for the next 12 months, contingent on maintaining or increasing revenue and/or reducing expenses. No quantitative earnings or sales guidance was provided. The company planned to begin operating in Colombia by the end of Q3 2015.
- Key exposures include foreign-currency movements, recruitment and retention of associates, consumer demand, regulation, competition, product publicity, and inventory obsolescence. The company does not hedge currency exposure.
- Legal matters include patent litigation against Wellness Quest, a contract claim seeking more than $1 million, a trademark opposition, and a Korean customs-assessment challenge concerning $1.0 million previously paid. Outcomes and potential liabilities are uncertain; management says it will defend the claims. Ongoing international audits could also affect cash flows.
- Contractual obligations totaled $17.2 million, including purchase obligations of $5.6 million, operating leases of $5.4 million, and financing arrangements of $2.8 million. The filing excludes approximately $10.3 million of cancellable or rescheduled finished-product purchase orders from that total.
- Disclosure controls were assessed as effective, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales growth and profitability persist without relying on loyalty-program effects and new-product launches, particularly as the active associate/member base contracts.
- How currency movements, especially in Asia/Pacific, affect reported revenue, expenses and cash generation.
- Whether inventory growth converts into sales without additional obsolescence charges, and whether operating cash flow remains positive after working-capital timing effects.
- The developments and potential financial exposure from the contract, patent, trademark and customs matters, as well as international tax audits and deferred-tax-asset valuation allowances.
- Progress on Colombia expansion and spending requirements, and the company’s ability to meet contractual commitments while funding operations from cash flow.