Mannatech, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; unaudited consolidated results. Mannatech develops and sells nutritional supplements, skincare, and weight-management products through independent associates and members across 24 countries. It reported approximately 240,000 active associates and members for the 12 months ended June 30, 2013.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $44.8m | $43.6m | $86.5m | $88.1m |
| Gross profit / margin | $36.1m / 80.6% | $34.8m / 79.7% | $70.1m / 81.0% | $71.0m / 80.6% |
| Operating income (loss) | $1.6m | $(1.4)m | $2.2m | $(3.5)m |
| Net income (loss) | $0.8m | $(2.5)m | $1.4m | $(3.9)m |
| Diluted EPS | $0.30 | $(0.93) | $0.54 | $(1.46) |
Q2 sales rose 2.7% year over year, while six-month sales fell 1.9%. Operating expenses declined 4.4% in Q2 and 8.8% for the half, supporting a return to operating profitability; management cited lower payroll, occupancy costs, and depreciation. The six-month gross margin improved despite lower sales.
Q2 regional sales: North America $21.3m, down 6.6%; Asia/Pacific $19.9m, up 17.1%; EMEA $3.6m, down 5.3%. For the half, North America declined 7.7%, Asia/Pacific grew 7.4%, and EMEA declined 9.1%. Currency movements reduced sales by about $1.1m in Q2 and $1.9m for the half, primarily due to the weaker yen. Six-month product sales decreased 3.3%; pack sales increased 3.3%. Q2 new associate and member recruits rose 31.2% to approximately 36,200.
Cash, liquidity, and obligations
- Cash and cash equivalents were $17.8m at June 30, 2013, up from $14.4m at year-end; restricted cash totaled approximately $5.7m.
- Six-month operating cash flow was $6.0m, versus cash used of $4.4m in the prior-year period. Investing activities used $1.0m and financing activities used $0.8m, mainly for capital lease repayments.
- Working capital was $11.6m. Total assets were $49.0m, total liabilities $28.1m, and shareholders’ equity $20.9m.
- No debt instruments were outstanding; balance-sheet capital lease liabilities were approximately $1.6m. The company said it funds operations primarily from operating cash flow and had suspended its dividend.
- Management believed liquidity and expected operating cash flow would fund normal operations and possible expansion for the next 12 months, while cautioning that cash generation depends on revenue and expense control.
Outlook, risks, and unusual items
- No numerical earnings or revenue guidance was provided. Management reported improved recruitment and active-participant counts, and said global compensation-plan changes and enhanced sign-up packs were fully implemented in July 2013. It viewed these initiatives as supportive of recruitment and sales.
- The IRS settled its 2005–2009 audit in Q2: a $0.8m tax deficiency plus $0.2m interest, with no penalties. The settlement produced a $1.0m tax benefit from reclassification of previously recorded uncertain tax positions. Reported tax rates were unusually affected; excluding the release, management stated effective rates would have been 263.2% for Q2 and 66.7% for the half.
- After quarter-end, Korea’s Busan Customs Office issued an approximately $1.9m assessment relating to 2008–2012. Mannatech recorded a $0.9m reserve, including $0.5m in cost of sales and $0.4m in other expense, and identified about $0.7m as recoverable VAT. It is pursuing administrative review.
- A former executive’s gender discrimination and harassment lawsuit seeks damages exceeding $1.0m. The company denied the allegations; trial was scheduled for June 2014. Management said the outcome and potential liability could not yet be estimated.
- Other key exposures include foreign-exchange volatility, international tax and regulatory audits, associate recruitment and retention, product demand, and network-marketing publicity. The company reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether the recruitment gains and July compensation-plan changes translate into sustained sales and improved revenue per associate, particularly in North America.
- How operating cash flow and liquidity develop, and whether lower expenses can be maintained without impairing growth.
- The final outcome and financial impact of the Korean customs assessment, including the appeal and recoverable VAT.
- The tax effects of the IRS settlement and future international tax assessments; reported earnings benefited materially from the Q2 tax item.
- Developments in the former executive’s lawsuit and any resulting costs or liability.