Mannatech, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Unaudited consolidated results; comparisons are with the same 2011 periods unless stated otherwise. Mannatech sells nutritional, skin-care, and weight-management products through independent associates and members in 22 countries.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $43.6 million | $51.4 million | $88.1 million | $102.3 million |
| Gross profit / margin | $18.1 million / 41.5% | $20.9 million / 40.7% | $37.2 million / 42.2% | $42.9 million / 42.0% |
| Operating loss / margin | $(1.4) million / (3.2)% | $(4.3) million / (8.4)% | $(3.5) million / (3.9)% | $(9.2) million / (9.0)% |
| Net loss | $(2.5) million | $(5.3) million | $(3.9) million | $(10.0) million |
| Basic and diluted loss per share | $(0.93) | $(1.98) | $(1.46) | $(3.79) |
- Q2 sales fell 15.1%; first-half sales fell 13.8%. U.S. and international sales both declined. Currency movements reduced sales by about $1.0 million in Q2 and $0.9 million in the first half.
- Pack sales fell 49.2% in Q2 and 46.5% in the first half; product sales fell 10.4% and 9.0%, respectively. Management cited fewer orders and lower pack volumes and average pack values, including a shift in pack mix.
- Operating expenses declined 22.8% in Q2 and 22.0% in the first half, reflecting lower payroll, contract labor, freight, and other costs. Depreciation also fell as the enterprise resource planning software became fully depreciated. Gross margin improved modestly, primarily because commissions and incentives were lower relative to sales.
- Other expense was $0.8 million in Q2, versus $0.2 million of other income in Q2 2011; first-half other income was $0.1 million, compared with $0.5 million. The filing attributes these items primarily to foreign-currency gains and losses.
Cash, liquidity, and obligations
- Cash and cash equivalents were $12.1 million at June 30, down $6.0 million from year-end 2011. Restricted cash totaled $5.0 million. Working capital was $10.6 million, versus $11.9 million at year-end.
- For the first half, operating cash use was $4.4 million, compared with $3.1 million in 2011; investing cash use was $0.5 million and financing cash use was $0.6 million. Operating cash use included a $2.6 million payment related to a Marinova settlement.
- There was no reported conventional long-term borrowing. Capital lease obligations totaled $2.1 million, including $0.7 million current. The company reported $21.3 million of total contractual commitments and obligations, including leases, purchase commitments, royalties, and employment agreements.
- Management said existing liquidity and anticipated positive operating cash flow were expected to fund normal operations and possible expansion for the next 12–24 months, while noting there is no assurance cash generation will continue at current levels. The quarterly dividend remained suspended.
Outlook, risks, and notable items
- Management’s 2012 goal was to restore profitability. It planned further global expense reductions and expected these actions to support profitability and cash flow; it provided no specific revenue or earnings forecast.
- New associate and member recruitment increased 4% year over year in Q2 and 9% from Q1, which management associated with the U.S. NutriVerus launch and the 4Free Discount Program. However, sales declined, and the number of associates and eligible members over the trailing 12 months fell 1.8% year over year to about 378,000.
- In July, Mannatech outsourced U.S. warehousing and distribution to SPExpress, sold certain related assets, and subleased most of its Coppell distribution-center space. Management expected the arrangement to improve delivery times and reduce operating costs.
- The IRS proposed adjustments for tax years 2005–2009 involving an $8.5 million net tax deficiency plus $1.5 million in penalties. Mannatech disputed the adjustments and said it believed the deficiency should approximate amounts already accrued for uncertain tax positions; an Appeals Division hearing took place July 26, 2012. The outcome remains uncertain.
- A lawsuit seeking substantial damages was dismissed without prejudice after the plaintiff moved to dismiss; the company considered the matter closed. Mannatech reported a $0.2 million accrual for legal matters. It also identified foreign exchange, product demand, associate recruitment and retention, competition, regulation, and tax and litigation outcomes as risks.
- The company effected a 1-for-10 reverse stock split in January 2012; share figures in the filing reflect the split. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether recruitment initiatives translate into sustained product orders and revenue growth, particularly given the sharp decline in pack sales.
- Progress toward restoring profitability, including whether cost reductions and the SPExpress logistics arrangement deliver the expected savings and service improvements.
- Operating cash flow and unrestricted liquidity, including the effect of ongoing losses and working-capital movements.
- The resolution of the IRS examination, adequacy of recorded tax reserves, and any resulting cash or earnings impact.
- Foreign-currency effects and demand trends across major markets, especially the United States, Japan, and South Korea.