Mannatech, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited consolidated results. Mannatech develops and sells nutritional supplements, skin-care and weight-management products through a network-marketing model in 24 countries. It reported one operating segment.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $41.7 million | $44.5 million |
| Gross profit / margin | $34.0 million / 81.5% | $36.2 million / 81.4% |
| Operating income (loss) | $0.7 million / 1.6% of sales | $(2.1) million / (4.6)% |
| Net income (loss) | $0.6 million; $0.24 per diluted share | $(1.4) million; $(0.53) per diluted share |
| Operating cash flow | $2.3 million | $(3.6) million |
- Sales fell 6.4%. Product sales declined 6.3% to $37.4 million; pack sales fell 25.8% to $2.3 million. Other sales, including freight, rose 33.3% to $2.0 million.
- Operating expenses decreased 13.0% to $33.3 million. Depreciation and amortization fell $1.8 million, primarily because depreciation of the enterprise resource system ended in March 2012.
- Cash and cash equivalents were $15.1 million at quarter-end, up $0.7 million from year-end. Restricted cash totaled about $5.1 million. Working capital was $11.0 million.
- Total liabilities were $26.2 million. Capital lease and other financing obligations totaled approximately $1.9 million, including current and long-term portions. The company reported no debt instruments.
- Cash from operations, partly offset by $1.2 million of unfavorable currency effects on cash and $0.4 million of lease repayments, drove the increase in cash. Investing activities used $0.1 million; financing activities used $0.4 million.
Changes versus prior comparable period
- Despite lower sales, the company moved from an operating loss and net loss in Q1 2012 to operating and net income in Q1 2013, mainly as operating expenses declined.
- Sales declined in North America by 8.9%, Asia/Pacific by 1.7%, and EMEA by 12.8%. Currency movements reduced sales by an estimated $0.8 million; excluding currency effects, Asia/Pacific sales rose 1.1% and EMEA sales fell 5.1%.
- Management attributed North American weakness to fewer active associates and lower revenue per order. Product average order value decreased to $152 from $159; orders processed fell 2.0%. New associate and member recruitment increased 10.1% year over year, but the overall sales trend remained lower.
- Foreign currency translation reduced comprehensive results by $0.9 million in Q1 2013; comprehensive loss was $0.3 million, versus $2.2 million in Q1 2012.
- Presentation changes moved commissions and incentives from cost of sales to operating expenses, and freight and royalty costs into cost of sales; prior periods were reclassified for comparability.
Outlook, risks and unusual items
- Management’s stated 2013 goal is to restore profitability. It expects continued expense controls to support profitability and cash flow, and believes liquidity and anticipated operating cash flows should fund normal operations and possible expansion for the next 12 months. These expectations depend on reversing declining revenue and/or further reducing costs; no specific revenue or earnings guidance was provided.
- Formal Hong Kong operations began in April 2013; the company expected formal Ukraine operations later in 2013.
- Key risks include continued sales declines, associate recruitment and retention, competition and regulatory changes, foreign exchange volatility, and possible inability to generate sufficient operating cash or obtain additional financing on favorable terms. The company said it was in compliance with Nasdaq continued-listing rules as of the report date.
- The IRS has proposed adjustments for tax years 2005–2009 resulting in an $8.5 million net tax deficiency plus $1.5 million in penalties. Mannatech is contesting the adjustments and says the deficiency should approximate amounts previously recorded for uncertain tax positions. Deferred-tax valuation allowances were $8.5 million.
- A lawsuit filed May 10, 2013 by a former executive alleges gender discrimination and harassment and seeks damages exceeding $1 million. The company said it would defend the claim; the outcome and potential liability could not yet be estimated. Existing legal matters had a $0.1 million accrual at March 31.
- The quarterly dividend remained suspended. No shares had been issued under the company’s equity line as of May 3, 2013.
Important facts for investors to verify
- Whether revenue and active-associate trends stabilize, and whether increased recruitment translates into sustained orders and sales.
- Whether expense reductions can support profitability without impairing growth, and whether operating cash flow remains positive.
- Developments in the IRS tax dispute, uncertain-tax-position liabilities and deferred-tax-asset valuation allowances.
- Updates on the former executive’s lawsuit and any resulting financial exposure.
- The extent of foreign-exchange effects and progress, costs and results from Hong Kong and Ukraine expansion.