Mannatech, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; unaudited consolidated results. Mannatech sells nutritional supplements, skin-care and anti-aging, and weight-management products through network marketing in 24 countries, with a non-direct e-commerce retail business in mainland China.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $42.5m | $37.6m | $80.8m | $74.3m |
| Gross profit / margin | $32.4m / 76.2% | $28.9m / 76.9% | $63.5m / 78.5% | $58.5m / 78.8% |
| Operating income / margin | $2.0m / 4.7% | $1.1m / 2.9% | $4.8m / 5.9% | $3.1m / 4.2% |
| Net income / margin | $2.1m / 5.0% | $1.1m / 3.0% | $4.3m / 5.3% | $3.9m / 5.3% |
| Diluted EPS | $0.99 | $0.47 | $2.03 | $1.62 |
| Operating cash flow | Not presented quarterly | $8.3m | $2.5m |
Q2 sales grew 12.9% year over year; first-half sales rose 8.8%. At constant exchange rates, growth was 6.4% for Q2 and 3.5% for the first half. Favorable currency translation added $2.5m and $3.9m to reported sales, respectively. First-half product sales grew 4.4% in reported dollars but declined 0.5% at constant currency; pack sales and associate fees increased substantially from a low prior-year base.
Asia/Pacific provided 61.4% of Q2 sales and 61.5% of first-half sales. Management attributed growth to higher revenue per active associate/customer and, in some regions, more active positions. Q2 product orders increased 6.9% to 212,455, while average order value rose to $198 from $191. The company reported approximately 176,000 active associate and preferred-customer positions over the trailing 12 months.
Gross margin declined modestly year over year in both periods, which management attributed to increased product promotions. Operating income improved as sales growth outpaced operating expense growth. The first-half effective tax rate was 8.1%, versus a tax benefit-driven rate of negative 24.7% in 2020; the prior period included a $1.2m benefit from CARES Act net operating loss carrybacks. This helps explain why first-half net income rose only 10.3% despite higher operating income.
Financial position and liquidity
- At June 30, 2021, cash and cash equivalents were $26.0m, with $2.1m of restricted cash; cash, cash equivalents, and restricted cash totaled $28.1m. Cash and cash equivalents increased $3.8m from year-end 2020.
- Working capital was $12.6m, compared with $10.5m at December 31, 2020. Current assets were $46.6m and current liabilities $33.9m.
- First-half operating cash flow of $8.3m funded $0.3m of investing outflows and $6.2m of financing outflows. Financing included $4.9m in share repurchases, $0.7m in dividends, and $0.7m in repayments of notes and finance leases.
- Notes payable were $0.5m, all current, with no long-term notes payable. Finance lease liabilities were $0.2m; operating lease liabilities were $7.0m. Total liabilities were $40.1m and shareholders’ equity was $23.7m.
- Management said existing liquidity and operating cash flows should fund normal business operations for the next 12 months, but noted that weaker revenue or insufficient cash flows could require additional funding, which might not be available on favorable terms.
Material changes, outlook, and risks
- On a tender offer concluded June 25, the company repurchased 171,433 shares at $26 per share for $4.5m. Total first-half repurchases were $4.9m. Shares outstanding were 1,892,646 at June 30, down from 2,071,081 at December 31, 2020.
- No numerical earnings or sales guidance was provided. Management’s liquidity outlook is conditional on maintaining or improving revenue relative to operating expenses.
- COVID-19 could disrupt distributor engagement, events, supply chains, and consumer demand. The company was monitoring these effects and warned prolonged disruption could hurt 2021 sales and liquidity.
- Foreign-exchange movements are material: operations outside the Americas contributed about 71% of first-half sales, and currency translation significantly increased reported revenue. The company does not use financial instruments to hedge this exposure.
- Cash and operating cash flows are concentrated in South Korea; an adverse change in that market could negatively affect results. The company also faces risks from distributor recruitment and retention, product competition and publicity, regulation, manufacturing costs, and changes to compensation plans.
- A product-related case in China seeking approximately $286,600 remained open; jurisdictional objections were rejected and appealed. The company said the outcome and potential liability could not be estimated and stated it would defend the claim. No legal reserve was considered necessary at June 30. A separate Korean claim was withdrawn, but plaintiffs may refile.
- The company reported no material change in internal control over financial reporting and concluded disclosure controls were effective. It identified no off-balance-sheet arrangements.
Investor verification priorities
- Assess whether reported sales growth can persist without favorable currency translation, particularly given first-half product sales declined at constant currency.
- Track gross margin, promotional intensity, operating expense leverage, and the unusually low effective tax rate.
- Review cash generation against repurchases, dividends, lease obligations, and working-capital needs; distinguish unrestricted from restricted cash.
- Monitor South Korea’s contribution to cash and sales, foreign-exchange exposure, and the effects of COVID-19 on distributors and supply chains.
- Follow the China product-liability litigation and any tax audits or other contingencies, including whether potential losses become estimable or require reserves.