Mannatech, Inc. — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010. The filing is unaudited and reports consolidated results. Mannatech develops and sells nutritional supplements, skin-care and weight-management products through a network-marketing channel. It reported approximately 485,000 current independent associates and members, down 8.0% year over year.
Financial performance
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Net sales | $60.7 million | $70.7 million | Down 14.2% |
| Gross profit / margin | $25.0 million / 41.3% | $25.2 million / 35.7% | Profit down 0.8%; margin up 5.6 points |
| Operating expenses | $27.9 million | $30.9 million | Down 9.7% |
| Operating loss | $2.9 million | $5.7 million | Loss narrowed $2.8 million |
| Net loss | $2.8 million | $4.8 million | Loss narrowed $2.0 million |
| Basic and diluted loss per share | $0.11 | $0.18 | Improved $0.07 |
| Cash used in operating activities | $2.9 million | $3.7 million | Use decreased $0.8 million |
Cost of sales fell 26.5% and commissions and incentives fell 19.9%, both faster than sales, supporting the higher gross margin. Selling and administrative expense declined 9.6%, but rose as a share of sales to 27.2% from 25.8%. The 2010 tax provision was zero versus a $2.2 million tax benefit in 2009; the filing attributes the 2010 effective rate to jurisdictional income mix, valuation allowances, uncertain tax positions and tax benefits relating to prior years and refund claims.
Financial position and liquidity
At March 31, 2010, cash and cash equivalents were $14.7 million, down from $17.4 million at year-end 2009; restricted cash totaled $7.4 million. Working capital was $23.7 million, versus $21.8 million at December 31, 2009. Current assets were $62.8 million and current liabilities $39.1 million. Total liabilities were $48.1 million and shareholders’ equity was $48.8 million.
The filing reports capital lease obligations of $1.9 million on the balance sheet, including $1.2 million current and $0.8 million long-term; it reports no debt instruments. First-quarter investing activities provided $0.9 million, including a $1.2 million decrease in restricted cash, while capital purchases were $0.4 million. Financing activities used $0.4 million, primarily for lease repayments. The quarterly dividend had been suspended in August 2009.
An $8.1 million federal income tax refund was received in April 2010 and had been recorded as an income tax receivable at March 31. Management said existing liquidity and operating cash flows were expected to fund normal operations and possible expansion costs for the next 12 to 24 months, while cautioning that economic uncertainty could weaken cash generation and additional financing might not be available on favorable terms.
Changes in the business and management commentary
- U.S. sales declined 23.8% to $27.8 million; international sales declined 3.9% to $32.9 million. Foreign exchange movements favorably affected reported sales by approximately $3.9 million.
- Product sales fell 10.4% and pack sales fell 26.5%. New pack sales decreased 17.3%, while continuing-associate pack sales fell 38.6%. Trailing 12-month associate and member activity declined by 42,000 to 485,000.
- Management cited the weak global economy, reduced consumer spending, competition in some international markets, and negative publicity associated with litigation settled in February 2009 as factors affecting sales. It also noted that a 2%–5% price increase was implemented in most countries in late January.
- The company continued cost-control measures and reported lower payroll, marketing, freight, accounting and consulting costs. It launched Simply Delicious snack bars in Q1 and planned a new skin-care line for the second half of 2010, with sales in Mexico planned for early 2011.
Outlook, risks and contingencies
Management expected 2010 operating cash flows to be sufficient for current operations, but provided no specific earnings or revenue guidance. Its outlook depends on expense control and cash generation amid economic uncertainty. Key business risks include associate recruitment and retention, competition, product demand and pricing, regulatory changes, adverse publicity, foreign-currency movements, and product and market mix.
Legal matters include a supplier arbitration in which Marinova claimed more than $5 million in damages; Mannatech disputed the claims and asserted counterclaims. The company had terminated a separate supply contract and included $4.7 million, $2.1 million and $1.5 million of related commitments in its 2010, 2011 and 2012 purchase obligations, respectively. Mannatech accrued $1.8 million for legal matters as of March 31, 2010. It also pursued patent-infringement litigation, including an agreed judgment against one defendant entered in April. The company stated that ordinary-course claims were not expected to materially affect its financial position, results or cash flows, but cautioned that adverse litigation outcomes could be material.
Other commitments included $20.9 million of purchase obligations, $9.1 million of operating leases and $2.3 million of post-employment royalties. The company maintained a $2.6 million valuation allowance for deferred tax assets and reported $2.0 million of liabilities for uncertain tax positions. It said foreign-currency changes could positively or negatively affect results and that it did not use financial instruments to hedge this exposure.
Investor verification priorities
- Check subsequent-period sales, especially pack sales, associate activity and the recovery or continued decline of U.S. revenue.
- Verify operating cash flow, liquidity after receipt of the $8.1 million tax refund, and progress toward management’s 12-to-24-month funding expectation.
- Monitor the Marinova arbitration, terminated supplier-contract commitments, patent litigation and adequacy of the $1.8 million legal accrual.
- Assess whether improved gross margin and expense reductions can be sustained despite lower sales, and whether new products and planned expansion generate demand.
- Track tax-asset realizability, uncertain tax positions, and foreign-exchange effects on reported results.