Mannatech, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2013; comparisons are with the third quarter and first nine months of 2012. Unaudited consolidated results. Mannatech sells nutritional, skin-care, and weight-management products through a network-marketing model in 24 countries.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $44.4 million | $43.0 million | $130.9 million | $131.2 million |
| Gross profit / margin | $35.2 million / 79.2% | $34.4 million / 79.8% | $105.3 million / 80.4% | $105.3 million / 80.3% |
| Operating income (loss) | $0.4 million | $1.1 million | $2.6 million | $(2.4) million |
| Net income (loss) | $(0.8) million | $2.2 million | $0.6 million | $(1.6) million |
| Basic EPS | $(0.30) | $0.84 | $0.24 | $(0.62) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $8.2 million | $(3.1) million |
- Revenue mix and geography: Q3 sales rose 3.2%, but nine-month sales were nearly flat, down 0.2%. Q3 Asia/Pacific sales increased 23.6% to $22.0 million, while North America fell 9.7% to $18.7 million and EMEA fell 17.8% to $3.7 million. Nine-month sales rose in Asia/Pacific and declined in North America and EMEA.
- Cash and liquidity: Cash and cash equivalents were $19.4 million at September 30, up from $14.4 million at year-end 2012. Restricted cash totaled $6.6 million. Working capital was $11.0 million, down slightly from $11.1 million; current assets were $42.8 million and current liabilities $31.8 million.
- Cash flows and obligations: Nine-month investing cash use was $1.8 million and financing cash use was $1.1 million, primarily capital-lease repayments. Capital lease obligations totaled $1.2 million, including current and long-term portions. The filing reports no issued debt instruments or off-balance-sheet arrangements.
- Other balance-sheet measures: Total assets were $55.0 million and shareholders’ equity $21.0 million. Inventory was $14.7 million. Total liabilities were $34.1 million.
Changes versus the prior comparable periods
- Q3 revenue growth was supported by more new associates and members and substantially higher pack sales; product sales declined 17.2% to $31.7 million. Pack sales increased to $10.9 million from $3.0 million, reflecting more packs sold and a higher average pack value.
- Management reported a 2.6% year-over-year increase in active associates and members over the trailing 12 months, and a 33.3% rise in new independent associates in Q3. North America, however, had a net 5.6% reduction in active associates and members during the quarter.
- For the first nine months, operating expenses declined 4.7%, chiefly reflecting lower selling and administrative costs and depreciation and amortization. Operating results improved from a loss to income, although net income was also affected by higher other expense and income-tax expense.
- Foreign exchange reduced sales by approximately $1.6 million in Q3 and $3.5 million for the first nine months, with the Japanese yen a major contributor. Other expense, primarily foreign-currency remeasurement, was $0.3 million in Q3 and $1.3 million for nine months, versus income in the comparable 2012 periods.
Outlook, commentary, risks, and unusual items
- Management said existing liquidity and expected operating cash flows should fund normal operations and possible international expansion for at least the next 12 months, while cautioning that cash generation depends on maintaining or increasing revenue and/or reducing expenses. No numerical earnings or revenue guidance was provided.
- The global associate compensation-plan changes were fully implemented in July 2013. A loyalty program launched during Q3; the company defers revenue for points until redeemed or forfeited. Deferred revenue was $5.3 million at quarter-end, including $2.5 million attributed to the loyalty program in the notes.
- The Q3 effective tax rate was reported as 548.26%; the nine-month rate was 54.72%. The IRS settled its examination of 2005–2009 tax years for a $0.8 million deficiency plus $0.2 million interest, paid in Q3. The settlement produced a $1.0 million tax benefit recognized through September 30. The filing also reports a $0.9 million reserve against a Korean customs assessment of approximately $1.9 million; the company is pursuing administrative review.
- A former executive’s gender-discrimination and harassment lawsuit seeks damages exceeding $1 million. The company denies the allegations; it said the outcome and any potential liability could not then be estimated. Trial was scheduled for June 2014.
- Principal risks highlighted include foreign-exchange movements, recruitment and retention of associates and members, competition, regulatory developments, product and network-marketing publicity, and the uncertain economic environment. Management reported disclosure controls as effective and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the loyalty-program revenue deferral: the notes identify $2.5 million in loyalty-related deferred revenue, while regional sales discussion refers to $1.2 million in deferred revenue in certain comparisons.
- Track whether recruitment and higher pack sales translate into recurring product sales, particularly given the Q3 decline in product sales and North American customer activity.
- Monitor foreign-exchange effects, especially the Japanese yen, and any further impact on sales, expenses, and reported earnings.
- Follow the Korean customs assessment appeal, the former executive’s lawsuit, and the effect of the unusually high effective tax rates and deferred-tax valuation allowances.
- Assess whether operating cash generation and $19.4 million of cash remain adequate as purchase, lease, tax, and other contractual commitments come due.