Mannatech, Inc. — Q3 2012 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2012. Mannatech develops and sells nutritional supplements, skincare, and weight-management products through a network-marketing model in 22 countries. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial results and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net sales | $43.0 million; down 14.8% from $50.5 million | $131.2 million; down 14.2% from $152.8 million |
| Gross profit / margin | $17.6 million / 41.0%, versus $21.1 million / 41.7% | $54.8 million / 41.8%, versus $64.0 million / 41.9% |
| Operating income (loss) / margin | $1.1 million / 2.5%, versus a $1.6 million loss / (3.1%) | $(2.4) million / (1.8%), versus $(10.8) million / (7.1%) |
| Net income (loss) | $2.2 million, versus a $3.7 million loss; diluted EPS $0.83 | $(1.6) million, versus $(13.7) million; diluted EPS $(0.62) |
| Operating cash flow | Not separately reported in the supplied filing text | $(3.1) million, versus $(0.3) million used |
At September 30, cash and cash equivalents were $12.8 million, down from $18.1 million at year-end 2011. Restricted cash totaled approximately $5.1 million. Current assets were $36.7 million and current liabilities $24.4 million; working capital was $12.3 million. Capital-lease liabilities were $1.6 million on the balance sheet. The company reported no issued debt instruments and said it primarily funds operations from operating cash flow.
Material changes and drivers
- Sales declined in both the U.S. and international markets. Management attributed the product-sales decline mainly to fewer orders and the loss of existing associates; nine-month order volume fell 8.7%. Pack sales fell 46.2% for the nine months, reflecting fewer packs sold and a lower average pack value. Product sales declined 9.6%.
- Recruitment of new associates and members increased 15% in Q3 year over year, which management associated with the U.S. NutriVerus launch and the 4Free discount program. The trailing-12-month total of active associates and members was 233,000, down 2.5% from 239,000 a year earlier.
- Operating expenses fell, supporting the return to quarterly operating profit. Nine-month selling and administrative expense decreased 21.8%; depreciation and amortization declined as the ERP software system became fully depreciated in Q1 2012.
- Foreign exchange reduced reported net sales by approximately $1.0 million in Q3 and $1.8 million for the nine months. Q3 other income included approximately $0.5 million of foreign-currency-related income.
Outlook, risks, and unusual items
- Outlook: No specific revenue or earnings guidance is provided. Management said it expected operating cash flows for the remainder of 2012 to fund current operations and believed liquidity adequate for the next 12 months, contingent on reversing the revenue trend and/or continuing expense reductions. The filing cautions that cash generation is uncertain.
- Cash use: Nine-month operating cash use included a one-time payment of approximately $2.6 million under a Marinova settlement and $1.1 million used to purchase inventory. The filing also cites approximately $2.8 million associated with the settlement when explaining the decrease in cash.
- Quarterly earnings items: Management cited an approximately $1.0 million reduction in a deferred-tax-asset valuation allowance, a $0.8 million release of transaction-tax reserves following statute expirations, and approximately $0.5 million of foreign currency income as factors affecting Q3 profitability.
- Tax contingency: The IRS proposed a net deficiency of $8.5 million plus $1.5 million in penalties for 2005–2009. Mannatech is contesting the adjustments and said it believes the deficiency should approximate amounts previously recorded for uncertain tax positions. The outcome remains unresolved.
- Other exposures: The company noted currency, regulatory, competition, associate-retention, product-demand, and litigation risks. It had accrued $0.1 million for legal matters and said adverse outcomes could affect results or cash flows. It also had $18.9 million of stated contractual commitments and obligations as of September 30.
- Operating changes: U.S. warehousing and distribution began moving to a third-party provider in July; European inventory was moved to a provider in the Netherlands in August. Management expects the logistics changes and targeted expense reductions to support operating efficiency.
Key facts for investors to verify
- Whether sales declines stabilize and increased recruitment translates into higher orders, product sales, and pack sales.
- How much quarterly profitability depended on tax-reserve and valuation-allowance changes and foreign-currency gains, versus recurring operations.
- The resolution and potential cash impact of the IRS examination, including the proposed deficiency and penalties.
- Whether cash generation improves enough to fund operations and commitments, given declining cash and negative nine-month operating cash flow.
- The actual cost savings and service effects from third-party logistics, and the continuing impact of foreign-exchange movements.