Mannatech, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited consolidated results. Mannatech develops and sells nutrition, skin-care, anti-aging and weight-management products through network marketing and e-commerce in China.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $45.1m | $47.7m | $86.5m | $88.3m |
| Gross profit / margin | $37.0m / 82.0% | $38.9m / 81.6% | $70.1m / 81.1% | $70.8m / 80.1% |
| Operating income (loss) | $(0.3)m | $2.8m | $(1.2)m | $0.8m |
| Net income (loss) | $(0.4)m | $1.8m | $(0.6)m | $0.5m |
| Diluted EPS | $(0.14) | $0.65 | $(0.24) | $0.19 |
| Operating cash flow | Not provided for quarter | $1.7m | $7.8m |
Balance sheet, liquidity and capital allocation
- At June 30, cash and cash equivalents were $28.8m, with restricted cash of $8.8m; combined cash, cash equivalents and restricted cash were $37.5m. Cash and cash equivalents were $37.7m at December 31, 2017.
- Working capital was $12.9m, down from $22.8m at year-end. Current assets were $47.4m and current liabilities $34.5m.
- Total notes payable were approximately $1.8m and capital lease obligations approximately $0.2m. Total liabilities were $39.4m; shareholders’ equity was $31.3m.
- Six-month investing cash outflow was $1.0m; financing cash outflow was $8.3m, including a $6.8m tender-offer repurchase and $0.7m in dividends. The company repurchased 316,659 shares at $21 each, about 11.6% of shares outstanding before the offer.
Changes and management commentary
- Sales fell 5.3% in Q2 and 2.0% for the first half. On a constant-dollar basis, the declines were 7.3% and 5.1%, respectively; favorable currency translation added $0.9m and $2.7m to reported sales.
- Product sales rose 7.2% in Q2 and 11.6% for the half, supported by higher average order values ($205 versus $178 in Q2; $201 versus $170 for the half). Order counts declined 8.9% and 6.5%, respectively.
- Pack sales and associate fees fell 90.0% in Q2 and 90.6% for the half, largely reflecting the 2017 compensation-plan shift from product packs to annual associate fees. The company said it intends to extend the transition to all markets.
- The approximate active associate and preferred-customer network declined to 202,000 from 218,000 a year earlier. New positions in Q2 were approximately 21,400 versus 26,500.
- Americas sales declined 11.3% in Q2 and 11.4% for the half. Asia/Pacific sales declined 0.8% in Q2 but grew 4.5% for the half; EMEA declined 5.7% in Q2 and grew 1.5% for the half.
- Operating costs weakened results: commissions and incentives were 42.8% of Q2 sales versus 39.8% a year earlier; other operating costs rose 18.3% in Q2 and 14.6% for the half. The company attributed much of the first-half increase to $1.3m of non-recurring costs related to its corporate-office move. Gross margin improved, which management attributed to inventory management and sales mix, as well as non-recurring prior-year charges.
- The company reported foreign-exchange gains within other income of $0.5m for Q2 and $0.8m for the first half. The first-half effective tax rate was unusually affected by jurisdictional earnings mix, losses in some foreign jurisdictions and GILTI; the company had not completed its accounting for the Tax Cuts and Jobs Act.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance was provided. Management said existing liquidity and operating cash flows should fund normal operations and possible international expansion for the next 12 months, contingent on maintaining or increasing revenue and/or reducing operating costs. Additional financing, if needed, may not be available on favorable terms.
- Cash and net assets are concentrated in South Korea; the company cited $35.2m of net assets there at June 30 and noted that adverse local economic conditions could affect results. Foreign-currency movements also affect reported sales, expenses and cash.
- Deferred tax assets remain subject to valuation allowances of $12.6m. Management identified tax audits and disputes as potential sources of liability; the accounting impact of the forthcoming lease standard was still under evaluation.
- The Busan customs assessment dispute remains open on appeal; the company had paid $1.0m and anticipated a decision by Q1 2019. A U.S. trademark opposition remains open, with outcome and possible liability not estimable. Other described litigation matters were closed during the period, including a personal-injury settlement for $16,000.
- ASC 606 was adopted using the modified retrospective method with no material opening-equity or overall financial impact. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether sales, order volume and the active network stabilize, particularly in the Americas, and whether higher average order values persist.
- Whether the compensation-plan transition and lower pack/fee revenue continue to affect sales comparisons, and how effectively the company recruits and retains associates and customers.
- Whether operating-cost increases, including office-move costs, abate and operating cash flow improves from the first-half level.
- Cash availability and geographic concentration, the impact of the $6.8m repurchase on liquidity, and any changes in debt or contractual commitments.
- Developments in South Korea tax/customs matters, the open trademark dispute, tax-asset realizability and the company’s currency exposure.