Mannatech, Inc. — Q2 2011 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2011. Financial statements are unaudited and consolidated. Mannatech sells nutritional supplements, skin-care and weight-management products primarily through independent associates and members using a network-marketing model.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $51.4 | $57.6 | $102.3 | $118.3 |
| Gross profit | $20.9 | $25.0 | $42.9 | $50.0 |
| Gross margin | 40.7% | 43.4% | 42.0% | 42.3% |
| Operating loss | $(4.3) | $(2.1) | $(9.2) | $(5.0) |
| Net loss | $(5.3) | $(3.8) | $(10.0) | $(6.6) |
| Basic and diluted loss per share | $(0.20) | $(0.14) | $(0.38) | $(0.25) |
| Operating cash flow | Not separately provided for the quarter | $(3.1) | $3.3 |
- Revenue and earnings: Q2 sales fell 10.8% year over year; first-half sales fell 13.5%. Losses widened in both periods. The company recorded income-tax expense despite pretax losses: $1.1 million in Q2 and $1.3 million for the first half.
- Cash flow and investment: First-half investing activities used $0.4 million, including $0.5 million of capital-asset purchases; financing activities used $0.6 million, principally for lease payments. Cash and cash equivalents declined $4.3 million to $17.3 million.
- Liquidity and obligations: Current assets were $46.4 million and current liabilities $27.8 million, yielding reported working capital of $18.6 million. Restricted cash totaled approximately $4.9 million. Capital-lease liabilities totaled about $2.2 million; the company reported no issued debt instruments. Contractual commitments and obligations totaled $36.4 million, including $19.7 million of purchase obligations and $10.7 million of operating leases.
Material changes versus the prior period
- Sales declines reflected fewer associates and members and fewer orders. The number of current associates and members purchasing in the trailing 12 months decreased 14.4%, to 385,000 from 450,000; first-half orders declined 14%.
- Pack sales were particularly weak: down 29.8% in Q2 and 37.0% in the first half. First-half product sales declined 9.2%. A higher average product order value partly offset lower order volume.
- U.S. sales fell 18.0% in Q2 and 19.0% in the first half. International sales also declined, though foreign-exchange movements favorably affected reported sales by approximately $2.8 million in Q2 and $4.4 million in the first half.
- Q2 gross margin contracted 2.7 percentage points, mainly as commissions and incentives represented a larger share of sales; higher inventory reserves also pressured cost of sales. First-half gross margin declined 0.3 percentage points.
- Cash from operations shifted from a $3.3 million inflow to a $3.1 million outflow for the first half. The company attributed the cash decline primarily to operating losses.
Outlook, management commentary, and risks
- Management’s stated priority is restoring sales volume and profitability and generating positive cash flow. It announced a U.S. restructuring in June, eliminating 64 employee positions and 34 open positions; expected annualized savings are approximately $12.0 million. Q2 selling and administrative expense included a $0.6 million restructuring reserve.
- Management expects 2011 operating cash flows to be sufficient for current operations and believes liquidity and operating cash flows can fund normal operations and possible expansion for the next 12–24 months, but cautions that cash generation is uncertain. No specific revenue or earnings guidance is provided.
- Expansion into Mexico began in January 2011; the Czech Republic, Estonia, Finland, and Ireland opened in June. Combined sales from the four June markets were less than $0.1 million in the period.
- Tax contingency: The IRS issued a report proposing an $8.5 million tax deficiency plus $1.5 million in penalties for tax years 2005–2009. The company filed a protest on July 8, 2011 and is pursuing IRS Appeals. At June 30, it reported $3.2 million of long-term liabilities and $0.1 million of taxes payable for uncertain tax positions; the filing does not establish that these balances cover the proposed assessment.
- Legal matters: Marinova claims more than $5 million in damages in a supplier-contract arbitration scheduled for December 2011; Mannatech disputes the claims and asserts counterclaims. A product-liability suit seeks unspecified damages, and the company says the outcome cannot currently be estimated. It accrued $0.3 million for legal matters. A separate patent case was closed in April 2011 after settlements and dismissals.
- Key business risks include continued associate attrition, weak recruitment and pack sales, competitive and regulatory pressures, product-related publicity, foreign-exchange exposure, inventory obsolescence, and litigation and tax outcomes. The company maintains a $6.9 million deferred-tax-asset valuation allowance.
- After quarter-end, the board reactivated a share-repurchase authorization; 5,282 shares were repurchased in July for approximately $5,000. The company had not drawn on its separate $10 million equity line as of August 4, 2011.
Important facts for investors to verify
- Whether associate and member counts, order volumes, and pack sales stabilize, and whether new-market launches can offset declines in established markets.
- Whether the announced cost reductions are realized and improve operating results and cash flow, including the timing and costs of implementation.
- The company’s ability to fund operations and contractual commitments if operating cash outflows continue; assess the availability and potential dilution of the unused equity line.
- Developments in the IRS dispute, including potential liability compared with recorded uncertain-tax-position balances.
- Outcomes and possible financial effects of the Marinova arbitration and product-liability litigation, and whether recorded legal accruals remain adequate.