Mannatech, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; unaudited consolidated results. Amounts are in U.S. dollars unless stated otherwise. Mannatech sells nutritional supplements, skin care and related products through network marketing in 25 countries, with a traditional retail e-commerce operation in mainland China.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $37.6m | $40.7m | $74.3m | $78.7m |
| Gross profit / margin | $28.9m / 76.9% | $32.6m / 80.1% | $58.5m / 78.8% | $63.1m / 80.2% |
| Operating income / margin | $1.1m / 2.9% | $2.0m / 5.0% | $3.1m / 4.2% | $3.1m / 4.0% |
| Net income / margin | $1.1m / 3.0% | $2.0m / 4.9% | $3.9m / 5.3% | $2.7m / 3.4% |
| Diluted EPS | $0.47 | $0.81 | $1.62 | $1.09 |
| Operating cash flow | Not presented by quarter | $2.5m | $3.8m |
- Q2 sales declined 7.5% year over year; on the company’s non-GAAP constant-dollar basis, they declined 3.9%. For the first half, reported sales fell 5.6%, or 2.3% constant-dollar. Foreign exchange reduced reported sales by $1.5m in Q2 and $2.6m in the first half.
- Q2 gross margin contracted 3.2 percentage points, which management attributed primarily to increased product promotions. First-half gross margin fell 1.4 points.
- Q2 operating income fell 45.0%, as lower sales and gross profit more than offset reduced operating expenses. First-half operating income was nearly flat. First-half net income rose 46.5%, principally reflecting a $1.2m tax benefit from carrying back U.S. net operating losses under the CARES Act; the effective tax rate was negative 24.7%.
- At June 30, cash and cash equivalents were $20.7m; restricted cash was $5.2m. Total cash, cash equivalents and restricted cash were $25.9m, down $5.1m from the start of the year, including a $1.1m adverse currency effect. Working capital was $9.8m versus $12.1m at year-end; current assets of $41.3m and current liabilities of $31.5m imply a current ratio of about 1.31.
- Operating cash flow was $2.5m versus $3.8m in the first half of 2019. Investing used $0.5m. Financing used $6.0m, including $5.2m for share repurchases and $0.6m of dividends.
- Notes payable were about $1.0m. Finance lease liabilities were $0.3m; operating lease liabilities were $8.7m. Total liabilities were $39.5m and shareholders’ equity was $24.6m.
Material changes and operating trends
- Product orders fell 7.0% in Q2 to 198,770; average order value decreased to $191 from $194. First-half orders fell 5.1% to 409,337, and average order value was $187 versus $188.
- Pack sales and associate fees fell 33.3% in both Q2 and the first half. The number sold declined 19.9% in Q2 and 14.1% for the half. Active associate and preferred-customer positions were approximately 172,000 versus 175,000 a year earlier.
- All regions reported lower Q2 sales: Americas declined 12.1% to $10.9m; Asia/Pacific declined 5.2% to $23.5m; EMEA declined 8.6% to $3.2m. Asia/Pacific represented 62.5% of Q2 sales.
- Operating expense reductions included lower payroll, marketing, travel and office costs. Prior-year other income included a $1.1m VAT refund, contributing to the year-over-year decline in other income in 2020.
- The company repurchased 306,123 shares in Q2, including 294,117 shares in a Dutch auction tender offer at $17 per share for $5.0m. It paid two quarterly dividends of $0.125 per share during the first half.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance is provided. Management said existing liquidity and operating cash flows should fund normal expected operations for the next 12 months, conditional on maintaining revenue and/or controlling expenses.
- COVID-19 affected orders, associate recruitment and events, and created raw-material, transportation and distribution challenges. One distribution center closed for a week; the filing says the resulting Q2 revenue impact was immaterial. Management warned that prolonged disruption or weaker consumer demand could reduce 2020 sales and liquidity.
- The company received a $2.2m Paycheck Protection Program loan on April 10, 2020, then repaid it in full on April 30 after subsequent SBA guidance.
- Liquidity and results are exposed to foreign-exchange movements and geographic concentration: South Korea accounted for a significant portion of cash and operating cash flows. The company does not use financial instruments to hedge currency exposure.
- Open matters include a Korean customs assessment appeal, a Korean product-liability claim seeking approximately $90,000, and a China product claim seeking approximately $50,000; COVID-19 delayed hearings. Outcomes and potential losses are uncertain. The filing also notes ongoing tax audits and other disputes.
- 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 order volumes, customer/associate activity and sales stabilize after the COVID-related declines, and whether supply constraints persist.
- Whether promotional activity continues to pressure gross margin and whether expense reductions can offset weaker revenue.
- The sustainability of cash generation and liquidity after the large share repurchase, dividends and inventory build; inventory rose to $13.3m from $10.2m.
- The effect of foreign exchange and South Korea business concentration on future reported results and cash availability.
- Developments in the identified litigation, customs matter and tax audits, and any resulting financial exposure.
- The first-half earnings comparison is affected by the $1.2m CARES Act tax benefit, while prior-year other income included a $1.1m VAT refund; assess results apart from these items.