Mannatech, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited consolidated results. Mannatech develops and sells nutritional supplements, skin care, anti-aging and weight-management products, primarily through a network-marketing model across 25 countries. It reported approximately 166,000 active associate and preferred-customer positions, down from 203,000 a year earlier.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $36.6 million | $38.0 million |
| Gross profit / margin | $29.6 million / 80.9% | $30.5 million / 80.4% |
| Operating income / margin | $2.0 million / 5.5% | $1.1 million / 2.9% |
| Net income | $2.8 million | $0.7 million |
| Diluted EPS | $1.15 | $0.28 |
| Operating cash flow | $2.1 million | $(0.1) million |
Sales declined 3.6% reported, but only 0.5% in constant dollars; unfavorable currency translation reduced sales by about $1.2 million. Product sales were $35.9 million, down 3.5%; packs and associate fees were $0.5 million, down 16.7%. Gross margin improved 0.5 percentage point, reflecting lower product costs. Operating expenses fell 6.3%, including lower payroll, office, legal and travel costs.
Net income included a $0.934 million income tax benefit, principally a $1.2 million benefit from carrying back U.S. net operating losses under the CARES Act. The reported effective tax rate was negative 50.4%, versus 33.2% in Q1 2019. Foreign-exchange expense was $0.208 million, compared with $0.004 million of other income a year earlier.
Liquidity, debt and capital
- At March 31, cash and cash equivalents were $24.5 million; restricted cash was $5.9 million. Working capital was $13.2 million, versus $12.1 million at year-end 2019.
- Total current assets were $43.2 million and current liabilities $30.0 million. Inventory increased to $11.5 million from $10.2 million.
- Notes payable were $1.3 million; finance lease liabilities totaled $0.3 million. Operating lease liabilities were $6.4 million. Total liabilities were $36.4 million.
- Investing activities used $0.2 million and financing activities used $0.8 million, including $0.3 million of dividends and $0.5 million of repayments of notes and finance lease obligations. Foreign-exchange movements reduced cash and cash equivalents by $1.6 million.
- Comprehensive income was $1.2 million, affected by a $1.6 million foreign-currency translation loss. The company repurchased 5,299 shares during the quarter.
Changes, outlook and risks
- Management attributed weaker sales primarily to COVID-19 and fewer product orders. Orders fell 2.6%, while average order value rose 1.1% to $183. New and continuing pack sales and associate fees declined 8.2% in volume, and average value fell to $20 from $23.
- Asia/Pacific sales fell 6.1% to $21.4 million; Americas sales fell 1.7% to $11.7 million; EMEA sales rose 6.1% to $3.5 million. The active associate/preferred-customer count and recruitment also declined.
- COVID-19 disrupted in-person sales activity and events, and caused raw-material shortages and transportation and distribution challenges. Management warned that prolonged disruption or lower demand could hurt 2020 sales and liquidity. It provided no specific revenue or earnings guidance, but said existing liquidity and operating cash flows should fund normal operations for the next 12 months.
- After quarter-end, Mannatech received a $2.24 million Paycheck Protection Program loan on April 10 and repaid it in full on April 30 after subsequent SBA guidance.
- Open matters include a Korean customs assessment appeal awaiting a Supreme Court decision, and product-related lawsuits in Korea and China. The company said potential liability in the Korean product case cannot currently be estimated; the China case seeks approximately $50,000. Hearings were delayed by COVID-19.
- Cash and operating cash flows were concentrated in South Korea: net assets there were $18.5 million at quarter-end. Currency movements, associate retention, product supply and consumer demand remain key risks.
Important facts for investors to verify
- Whether COVID-19-related order, recruitment and supply-chain pressures persisted or worsened after Q1, particularly in Asia/Pacific.
- How much of the earnings increase is sustainable excluding the CARES Act tax benefit and reduced operating expenses.
- Whether operating cash flow and working capital remained adequate after changes in inventory, payables and deferred revenue.
- Developments in the Korean customs appeal and product-liability cases, including insurance coverage and any new loss accruals.
- Currency exposure and concentration of cash and business assets in South Korea; confirm the PPP loan was repaid as disclosed.