Mannatech, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited consolidated results; amounts below are in U.S. dollars. Mannatech sells nutritional, skin-care and weight-management products through a network-marketing business operating in 25 countries.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $48.1m | $43.9m | $137.7m | $135.0m |
| Gross profit / margin | $38.4m / 79.8% | $35.6m / 81.2% | $109.4m / 79.5% | $109.9m / 81.4% |
| Operating income / margin | $0.5m / 1.1% | $2.2m / 5.1% | $0.9m / 0.7% | $9.4m / 6.9% |
| Net income | $1.3m | $0.1m | $0.5m | $4.3m |
| Diluted EPS | $0.46 | $0.03 | $0.19 | $1.58 |
Q3 sales grew 9.8% year over year; nine-month sales grew 2.0%. On a constant-currency, non-GAAP basis, sales increased 6.8% in Q3 and 3.6% for the nine months. Product sales rose, while pack sales fell, particularly for continuing associates. Sales outside the Americas represented about 61% of sales in both 2016 periods.
Cash provided by operations was $7.2m for the nine months, versus $7.8m a year earlier. Investing used $1.7m and financing used $1.6m. Cash and cash equivalents were $38.3m at September 30, up from $32.0m at year-end; restricted cash totaled $8.6m. Working capital was $24.0m. Notes payable were $1.5m and capital lease obligations were about $0.7m; the filing reports no variable-rate debt.
Changes and management commentary
- Q3 revenue gains reflected new products and promotions, which management said added $4.1m across the period, and a $0.5m contribution from the loyalty program. Nine-month contributions were $7.4m from products and promotions, partly offset by a $1.7m decline related to the loyalty program.
- Asia/Pacific led regional growth. EMEA sales declined 12.2% in Q3 and 12.5% for the nine months; Americas sales rose in Q3 but slipped for the nine months.
- Gross margin fell in both comparisons, attributed to promotional discounting, higher transportation costs and foreign exchange. Higher commissions, selling and administrative costs, and other operating costs further reduced operating profitability.
- Nine-month net income fell 87% year over year. Management cited increased operating costs; Q3’s comparison also benefited from a swing in other income/expense, largely foreign-exchange related. Tax benefits and jurisdictional tax items materially affected reported effective tax rates.
Outlook, risks and unusual items
- Management expected to begin a non-direct-selling business in China in Q4 2016. It believed cash and operating cash flows would fund normal operations and possible expansion for the next 12 months, while noting that this depends on revenue and expense trends; additional funding might be needed if resources prove insufficient. No numerical earnings or revenue guidance was provided.
- Other operating costs included a $0.4m charge for abandoning internally developed back-office software after vendor problems. The company also reported higher legal and consulting costs, including costs tied to expansion, supply-chain work and patent defense.
- Key risks include recruiting and retaining associates and members, market and product demand, competition, regulation and product publicity, and foreign-exchange movements. The company does not hedge currency exposure. Approximately $33.8m of cash was held in foreign countries.
- Legal matters included an open contract dispute seeking more than $1m, for which the company said liability could not be estimated; an open trademark opposition; and a patent case in which an appeals court affirmed the company’s judgment, with a motion concerning the permanent injunction still pending. A Korean customs court ruled for the company on an assessment it had paid, but an appeal remained possible. Other specified disputes had been dismissed or settled.
- The company reported $8.0m of deferred-tax-asset valuation allowances and ongoing tax audits. Management said adverse litigation or tax outcomes could affect cash and results. Disclosure controls were assessed as effective, with no material quarterly change in internal control reported.
Important facts for investors to verify
- Whether product and promotional-driven sales growth is sustainable, given declining pack sales and a lower active-position count in some regions.
- Whether margins and operating profit recover after higher discounting, transportation, commissions and other operating costs.
- The drivers and repeatability of foreign-exchange and tax effects, which materially influenced comparisons and effective tax rates.
- Progress, costs and performance of the planned China business, and whether operating cash flows remain adequate for expansion.
- Developments in the contract and trademark matters, the patent injunction, the Korean customs appeal period, and international tax audits.
- The share-repurchase authorization: the filing describes an August 2016 authorization of up to $0.5m, while another disclosure presents remaining capacity under the original $20m plan. Confirm the currently available authorization and its terms.