Mannatech, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unaudited consolidated results compare with the corresponding 2013 periods. Mannatech develops and sells nutritional supplements, skin-care and weight-management products through network marketing in 23 countries. The company reported approximately 239,000 active associates and members; operations in Ukraine were temporarily suspended in March 2014.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $46.3 million | $44.8 million | $89.3 million | $86.5 million |
| Gross profit / margin | $36.6 million / 79.0% | $36.1 million / 80.6% | $70.1 million / 78.6% | $70.1 million / 81.0% |
| Income from operations | $0.6 million | $1.6 million | $2.0 million | $2.2 million |
| Income before taxes | $0.8 million | $0.1 million | $1.9 million | $1.2 million |
| Net income (loss) | ($0.7 million) | $0.8 million | ($0.5 million) | $1.4 million |
| Basic and diluted EPS | ($0.26) | $0.30 | ($0.17) | $0.54 |
Cash flow (six months): Operating cash flow was $7.4 million, versus $5.3 million; investing cash outflow was $1.2 million, versus $0.3 million; financing cash outflow was $0.6 million, versus $0.8 million. Cash and cash equivalents rose to $26.5 million from $20.4 million at year-end 2013. Management attributed operating cash generation in part to increased deferred revenue, customer deposits and the loyalty program.
Balance sheet and liquidity: At June 30, cash and cash equivalents were $26.5 million and restricted cash totaled $5.9 million. Current assets were $51.9 million and current liabilities $39.4 million; working capital was $12.5 million, down from $13.6 million at December 31, 2013. Total liabilities were $41.9 million. The filing reports capital lease obligations of $1.2 million on the balance sheet, including current and long-term portions; it reports no issued debt instruments. Contractual capital lease and other financing obligations totaled $2.1 million. The quarterly cash dividend has been suspended since August 2009.
Material changes and drivers
- Sales increased 3.4% in Q2 and 3.2% for the first half. Asia/Pacific sales rose 7.5% and 7.2%, respectively; EMEA also grew, while North American sales declined.
- Product sales fell 4.4% in Q2 and 5.9% for the first half, while pack sales increased 87.2% and 122.2%. Management linked product-sales weakness partly to revenue deferred under the loyalty program and shipments not yet received by customers.
- Active associates and members declined 0.4% year over year. Q2 recruiting fell 13.0% to approximately 31,500; management said new incentive-program qualification rules affected comparability.
- Gross margin weakened due largely to inventory obsolescence charges: $0.8 million in Q2 and $1.7 million for the first half, compared with $0.1 million and $0.2 million in the comparable 2013 periods. The company said planned promotions to reduce future inventory charges may also affect profitability.
- Operating income declined despite higher sales, as operating expenses increased 4.1% in Q2 and 0.4% for the first half. Other income improved year over year, primarily reflecting foreign-currency effects.
Outlook, risks and unusual items
- Management said existing liquidity and anticipated operating cash flows should fund normal operations and possible international expansion for the next 12 months, and stated longer-term needs should also be met. This depends on maintaining or increasing revenue and/or reducing expenses; additional financing may be needed if resources prove insufficient, and may not be available on favorable terms.
- The effective tax rate was unusually high at 183.7% for Q2 and 124.8% for the first half, contributing to the reported net losses despite pretax income. Management cited valuation allowances, foreign tax-rate differences and a deemed intercompany dividend related to a 2012 working-capital loan. It anticipates a lower tax rate as profitability becomes more uniform across regions.
- Deferred revenue was $11.3 million at June 30, including $9.1 million for loyalty points. The company also recorded more than $2.8 million of customer deposits from a Uth skin-care pre-launch in Asia/Pacific; these orders were expected to be recognized as revenue upon fulfillment. Related accrued commission payable was $0.5 million.
- Foreign-exchange movements affected reported results: currency translation increased first-half cash by $0.5 million, while currency movements reduced first-half sales by approximately $0.7 million. The company does not hedge these exposures with financial instruments.
- A former executive’s employment lawsuit was settled and dismissed with prejudice in June 2014; settlement terms are confidential. In July, the company filed a patent-infringement lawsuit and sought a preliminary injunction. The outcome is uncertain.
- Management is evaluating the impact of the new revenue-recognition standard, effective for the company in 2017; adoption method and financial impact had not been determined.
Important facts for investors to verify
- Whether Asia/Pacific growth and higher pack sales can offset declining product sales, North American weakness and slower recruiting.
- How much reported cash generation reflects sustainable operations versus customer deposits, loyalty-related deferrals and other working-capital timing.
- Whether inventory reserves and planned promotions will create further margin pressure or charges.
- Whether the company can improve profitability across jurisdictions and reduce its unusually high effective tax rate, including realization of deferred tax assets.
- Potential effects of foreign-currency movements, tax audits and legal matters on earnings and liquidity; the filing does not provide a clear quantified estimate for potential adverse outcomes.