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| MTEX > SEC Filings for MTEX > Form 10-Q on 5-Nov-2009 | All Recent SEC Filings |
5-Nov-2009
Quarterly Report
The following discussion is intended to assist in the understanding of our consolidated financial position and results of operations for the three and nine months ended September 30, 2009 as compared to the same periods in 2008. Unless stated otherwise, all financial information presented below, throughout this report, and in the consolidated financial statements and related notes, includes Mannatech, Incorporated and all of our subsidiaries on a consolidated basis.
COMPANY OVERVIEW
Since November 1993, we have continued to develop innovative, high-quality, proprietary nutritional supplements, topical and skin care products, and weight-management products that are sold through a global network-marketing system operating in the United States, Canada, Australia, the United Kingdom, Japan, New Zealand, the Republic of Korea, Taiwan, Denmark, Germany, South Africa, Singapore, Austria, the Netherlands, Norway, and Sweden. The United States location processes orders for the United States and Canada. The Australian location process orders for Australia, New Zealand, and Singapore. The United Kingdom location processes orders for the United Kingdom, Denmark, Germany, Austria, the Netherlands, Norway, and Sweden. The Switzerland office was created to manage certain day-to-day business needs of non-North American markets and coordinates our continued global expansion.
We conduct our business as a single operating segment and primarily sell our products through a network of approximately 534,000 independent associates and members who have purchased our products and/or packs within the last 12 months, which we refer to as current independent associates and members. New recruits and pack sales are regarded as leading indicators for our business. We define new recruits as new independent associates and members who purchased our packs and products for the first time. We operate as a seller of nutritional supplements, topical and skin care products, and weight-management products through our network-marketing distribution channels operating in sixteen different countries. We review and analyze our net sales by geographical location and further analyze our net sales by packs and by products. Each of our subsidiaries sells the same types of products and possesses similar economic characteristics, such as selling prices and gross margins.
Because we sell our products through network-marketing distribution channels, the opportunities and challenges that affect us most are: recruitment of new and retention of existing independent associates and members, entry into new markets and growth of existing markets, niche market development, new product introduction, and investment in our infrastructure.
During calendar year 2008, the U.S. and foreign economies slowed dramatically because of the global financial crisis. The difficult conditions affecting the overall macro-economic environment continued to impact our business in 2009. Significant reduction in consumers' disposable income impacted our customers' spending practices, causing a decline in our revenues.
During 2008 and 2009, in response to adverse market conditions, we implemented various initiatives to reduce expenses, including suspension of matching contributions under our 401(k) employee savings plan, reduction in workforce, and cutback of other discretionary costs such as outside services, travel and overtime. We also reduced the level of our quarterly cash dividend in 2008 and suspended the dividend in August of 2009 as we focus all funding on the growth of the business. By establishing a culture of expense control and accountability, we achieved a significant decrease in operating costs in 2009 and positioned our business to generate incremental profit flow-through as sales increase. Our intent is to maintain a strong level of expense control and systematically review all expenditures with the goal of prudently managing our business. At the same time, we remain committed to our strategic plan of developing new, innovative science-based products, international expansion, strengthening financial results, and adding value to our shareholders and independent associates.
We continue expansion into new international markets and, on September 5th, began selling products in Austria, the Netherlands, Norway and Sweden. Among available products are the company's Advanced Ambrotose® capsules and powder, Ambrotose AO® capsules, Phytomatrix™ caplets, Plus™ tablets and OsoLean™ fat loss powder. Our expansion to 37 million people through the combined populations of these four additional markets increases our independent associates' ability to build their businesses in Europe. Entry into these four countries compliments our existing presence in the U.K., Germany and Denmark while highlighting our continued focus on being a global company.
We continue to focus on new product development. In 2008, we introduced two new products in selected markets: Bounce-Back™ capsules and OsoLean™ powder. In response to a greater than expected demand for OsoLean™ powder, we introduced new convenient OsoLean™ single-use packets in the first quarter of 2009. Sales of both products remained strong in 2009 and OsoLean™ has proven to be the best selling product in our Weight and Fitness category. In the third quarter of 2009, we launched our newest product, Essential Source™ Omega-3 in the United States and South Africa. Omega-3 provides EPA/DHA essential fatty acids and its benefits have been well-documented and supported by scientists, doctors and nutritionists alike. In addition to the inherent health benefits, our Essential Source™ Omega-3 has other distinguishing characteristics such as ultra-purity, high EPA/DHA levels, and a pleasant taste. It is made from one of the highest quality fish oils which is put through a proprietary molecular distillation process to ensure a pharmaceutical-grade standard of purity. Essential Source™ Omega-3 joins an established, successful line of innovative wellness products that address the nutritional needs of today's savvy, health-conscious consumer. Essential Source™ Omega-3 is scheduled to be available globally by December 2009. We intend to launch additional new products in the fourth quarter of 2009.
We strive to ensure all of our products meet the strictest guidelines for purity and are of exceptional quality. In the third quarter of 2009, Bounce-Back™ capsules received NSF certification. This is the ninth Mannatech product to receive this designation. NSF International is an independent, not-for-profit, public health certification organization that ensures a product's label accurately reflects the contents of the supplement, that all ingredients are openly disclosed on the label and the product's purity is acceptable. Additionally, NSF assesses each manufacturing site to ensure it complies with Good Manufacturing Practices; NSF will not certify a product unless the manufacturer meets these audits. NSF certifications exemplify our commitment to offering our customers the highest quality products. We intend to carry the NSF certification mark on the supplements' labels and promotional materials to demonstrate compliance. We will continue to seek NSF certification on our entire product line to demonstrate the ultimate quality of Mannatech products.
We continue to focus our efforts on increasing operational efficiency. We made certain changes to our management structure in 2008 and 2009 to provide a stronger foundation for growth and better align our organization with our long-term goals. We believe that efficiencies gained from this organizational realignment will help us to improve cost controls and distinguish us in the marketplace by adding emphasis to brand management, associate recruitment, supply chain excellence, new product development, and international expansion. Claire Zevalkink, the newest member of our senior management team, joined Mannatech as senior vice president and chief global marketing officer in September 2009. Ms. Zevalkink has extensive executive experience in the multi-level marketing industry that includes marketing, global brand management, brand communications, new business development and sales training.
We believe our aggressive cost reduction actions, new product introduction, international expansion, improved associate recruitment, and financial discipline will enable us to effectively manage through the challenging economy. We believe these recent changes to our business model will position us to support future long-term profitable growth.
Results of Operations
The table below summarizes our consolidated operating results in dollars and as
a percentage of net sales for the three months ended September 30, 2009 and
2008.
Change from
2009 2008 2009 to 2008
Total % of Total % of
dollars net sales dollars net sales Dollar Percentage
( in thousands, except percentages)
Net sales $ 71,295 100 % $ 77,991 100 % $ (6,696 ) (8.6 )%
Cost of sales 11,923 16.7 % 11,105 14.2 % 818 7.4 %
Commissions and incentives 35,268 49.6 % 32,396 41.6 % 2,872 8.9 %
47,191 66.2 % 43,501 55.8 % 3,690 8.5 %
Gross profit 24,104 33.8 % 34,490 44.2 % (10,386 ) (30.1 )%
Operating expenses:
Selling and administrative expenses 17,748 24.9 % 18,753 24.0 % (1,005 ) (5.4 )%
Depreciation and amortization 3,085 4.3 % 3,172 4.1 % (87 ) (2.7 )%
Other operating costs 11,842 16.6 % 11,493 14.7 % 349 3.0 %
Total operating expenses 32,675 45.8 % 33,418 42.8 % (743 ) (2.2 )%
Loss from operations (8,571 ) (12.0 )% 1,072 1.4 % (9,643 ) (899.5 )%
Interest income 39 0.1 % 266 0.3 % (227 ) (85.3 )%
Other income (expense), net 859 1.2 % (2,047 ) (2.6 )% 2,906 142.0 %
Loss before income taxes (7,673 ) (10.8 )% (709 ) (0.9 )% (6,964 ) 982.2 %
Benefit for income taxes (1,534 ) (2.2 )% 280 0.4 % (1,814 ) (647.9 )%
Net loss $ (9,207 ) (12.8 )% $ (429 ) (0.5 )% $ (8,778 ) 2,046.2 %
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The table below summarizes our consolidated operating results in dollars and as a percentage of net sales for the nine months ended September 30, 2009 and 2008.
Change from
2009 2008 2009 to 2008
Total % of Total % of
dollars net sales dollars net sales Dollar Percentage
( in thousands, except percentages)
Net sales $ 219,640 100 % $ 256,223 100 % $ (36,583 ) (14.3 )%
Cost of sales 35,944 16.4 % 37,014 14.4 % (1,070 ) (2.9 )%
Commissions and incentives 115,413 52.5 % 116,256 45.4 % (843 ) (0.7 )%
151,357 68.9 % 153,270 59.8 % (1,913 ) (1.2 )%
Gross profit 68,283 31.1 % 102,953 40.2 % (34,670 ) (33.7 )%
Operating expenses:
Selling and administrative expenses 53,403 24.3 % 63,349 24.7 % (9,946 ) (15.7 )%
Depreciation and amortization 9,357 4.3 % 9,225 3.6 % 132 1.4 %
Other operating costs 30,831 14.0 % 49,530 19.4 % (18,699 ) (37.8 )%
Total operating expenses 93,591 42.6 % 122,104 47.7 % (28,513 ) (23.4 )%
Loss from operations (25,308 ) (11.5 )% (19,151 ) (7.5 )% (6,157 ) 32.1 %
Interest income 182 0.1 % 1,219 0.5 % (1,037 ) (85.1 )%
Other income (expense), net 822 0.4 % (2,450 ) (1.0 )% 3,272 133.6 %
Loss before income taxes (24,304 ) (11.1 )% (20,382 ) (8.0 )% (3,922 ) 19.2 %
Benefit for income taxes 4,785 2.2 % 7,134 2.8 % (2,349 ) (32.9 )%
Net loss $ (19,519 ) (8.9 )% $ (13,248 ) (5.2 )% $ (6,271 ) 47.3 %
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Net Sales in Dollars and as a Percentage of Consolidated Net Sales
Consolidated net sales shipped to customers by location for the three months
ended September 30, 2009 and 2008 were as follows:
2009 2008
Country (in millions, except percentages)
United States $ 34.0 47.7 % $ 40.0 51.3 %
Japan 9.9 13.9 % 10.8 13.8 %
Republic of Korea 6.9 9.7 % 8.4 10.8 %
Canada 5.8 8.1 % 5.7 7.3 %
Australia 5.7 8.0 % 6.4 8.2 %
South Africa(1) 3.9 5.5 % 2.0 2.6 %
Taiwan 1.4 2.0 % 1.2 1.5 %
New Zealand 1.1 1.5 % 1.2 1.5 %
Germany 0.9 1.3 % 0.8 1.0 %
United Kingdom(2) 0.8 1.0 % 1.2 1.6 %
Denmark 0.5 0.7 % 0.3 0.4 %
Singapore(3) 0.4 0.6 % - -
Totals $ 71.3 100 % $ 78.0 100 %
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(1) South Africa began operations in May 2008.
(2) Net sales for Austria, the Netherlands, Norway, and Sweden are included in the United Kingdom net sales total. We began operations in these four countries in September 2009.
(3) Singapore began operations in November 2008.
Consolidated net sales shipped to customers by location for the nine months ended September 30, 2009 and 2008 were as follows:
2009 2008
Country (in millions, except percentages)
United States $ 109.7 49.9 % $ 137.3 53.6 %
Japan 31.4 14.3 % 33.9 13.3 %
Republic of Korea 19.2 8.8 % 27.4 10.7 %
Canada 17.5 8.0 % 17.8 6.9 %
Australia 16.7 7.6 % 20.8 8.1 %
South Africa(1) 9.4 4.2 % 3.4 1.3 %
Taiwan 4.8 2.2 % 3.7 1.4 %
New Zealand 3.3 1.5 % 4.2 1.6 %
Germany 2.6 1.2 % 3.0 1.2 %
United Kingdom(2) 2.5 1.1 % 3.8 1.5 %
Denmark 1.5 0.7 % 0.9 0.4 %
Singapore(3) 1.0 0.5 % - -
Totals $ 219.6 100 % $ 256.2 100 %
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(1) South Africa began operations in May 2008.
(2) Net sales for Austria, the Netherlands, Norway, and Sweden are included in the United Kingdom net sales total. We began operations in these four countries in September 2009.
(3) Singapore began operations in November 2008.
Net Sales
For the three and nine months ended September 30, 2009, our operations outside of the United States accounted for approximately 52.3% and 50.1%, respectively, of our consolidated net sales, whereas in the same period in 2008, our operations outside of the United States accounted for approximately 48.7% and 46.4%, respectively, of our consolidated net sales.
Consolidated net sales for the three months ended September 30, 2009 decreased by $6.7 million, or 8.6%, to $71.3 million, as compared to the same period in 2008. Domestic sales decreased $6.0 million, while international sales decreased $0.7 million for the three months ended September 30, 2009 as compared to the same period in 2008. We continue to see positive trends in net sales for the three months ended September 30, 2009 in Canada, Taiwan, Denmark, and South Africa. However, these positive trends were more than offset by declines in other international and domestic sales primarily due to the macro-economic factors negatively impacting our economy.
Consolidated net sales for the nine months ended September 30, 2009 decreased by $36.6 million, or 14.3%, to $219.6 million, as compared to the same period in 2008. Domestic sales decreased $27.6 million and international sales decreased $9.0 million for the nine months ended September 30, 2009 as compared to the same period in 2008. The overall decline was partially offset by increasing sales in South Africa since it began operations in May 2008.
Fluctuation in foreign currency exchange rates had an overall unfavorable impact on our net sales of approximately $0.6 million and $9.5 million for the quarter and nine months ended September 30, 2009, respectively. The net sales impact is calculated as the difference between (1) the current period's net sales in USD and (2) the current period's net sales in local currencies converted to USD by applying average exchange rates for the same periods ended September 30, 2008.
Net sales by country in local currency for the three and nine months ended September 30, 2009 and 2008 are as follows (in millions, except percentages):
Three months
Change
Local
Country Currency 2009 2008 currency Percentage
Australia and Singapore(1) AUD 7.4 7.2 0.2 2.8 %
Austria, Germany,
Netherlands(2) EUR 0.6 0.6 - -
Denmark DKK 2.4 1.7 0.7 41.2 %
Japan JPY 921.0 1,148.4 (227.4 ) (19.8 )%
Korea KRW 8,540.1 8,843.0 (302.9 ) (3.4 )%
New Zealand NZD 1.6 1.7 (0.1 ) (5.9 )%
Norway(2) NOK 0.2 - - -
South Africa(3) ZAR 30.2 15.6 14.6 93.6 %
Sweden(2) SEK 0.1 - - -
Taiwan TWD 46.1 36.5 9.6 26.3 %
United Kingdom GBP 0.5 0.6 (0.1 ) (16.7 )%
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Nine months
Change
Local
Country Currency 2009 2008 currency Percentage
Australia and Singapore(1) AUD 23.7 22.8 0.9 3.9 %
Austria, Germany,
Netherlands(2) EUR 1.9 2.0 (0.1 ) (5.0 )%
Denmark DKK 7.6 4.5 3.1 68.9 %
Japan JPY 2,945.3 3,548.1 (602.8 ) (17.0 )%
Korea KRW 25,012.7 27,642.3 (2,629.6 ) (9.5 )%
New Zealand NZD 5.5 5.4 0.1 1.9 %
Norway(2) NOK 0.2 - - -
South Africa(3) ZAR 80.7 26.1 54.6 209.2 %
Sweden(2) SEK 0.1 - - -
Taiwan TWD 159.0 115.4 43.6 37.8 %
United Kingdom GBP 1.6 2.0 (0.4 ) (20.0 )%
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(1) Singapore began operations in November 2008.
(2) Norway, Austria, Sweden and Netherlands began operations in September 2009.
(3) South Africa began operations in May 2008.
Our total sales and sales mix can be influenced by any of the following:
• changes in our sales prices;
• changes in consumer demand;
• changes in the number of independent associates and members;
• changes in competitors' products;
• changes in economic conditions;
• changes in regulations;
• announcements of new scientific studies and breakthroughs;
• introduction of new products;
• discontinuation of existing products;
• adverse publicity;
• changes in our commissions and incentives programs; and
• fluctuations in foreign currency exchange rates.
Our sales mix for the three and nine months ended September 30, was as follows (in millions, except percentages):
Three Months Nine Months
Change Change
2009 2008 Dollar Percentage 2009 2008 Dollar Percentage
Product sales $ 52.3 $ 61.1 $ (8.8 ) (14.4 )% $ 159.1 $ 199.7 $ (40.6 ) (20.3 )%
Pack sales 15.5 13.2 2.3 17.4 % 50.2 45.5 4.7 10.3 %
Other, including (0.7
freight 3.5 3.7 (0.2 ) (5.4 )% 10.3 11.0 ) (6.4 )%
Total net sales $ 71.3 $ 78.0 $ (6.7 ) (8.6 )% $ 219.6 $ 256.2 $ (36.6 ) (14.3 )%
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Although there was an overall decrease in consolidated net sales for the three and nine months ended September 30, 2009, primarily due to a decline in the volume of product sales, there was an increase in pack sales, creating a positive outlook for future product sales. Pack sales generally correlate to new independent associates who purchase starter packs and with the number of continuing independent associates who purchase upgrade or renewal packs. However, there is not a direct correlation between the number of new and continuing independent associates and members and the amount of product sales because independent associates and members utilize products at different volumes.
Product Sales
Product sales for the three months ended September 30, 2009 decreased $8.8 million, or 14.4%, to $52.3 million from $61.1 million as compared to the same period in 2008. The decrease of $8.8 million was comprised of a decrease in existing product sales of $8.5 million and a decrease in new product sales of $0.3 million. Product sales for the nine months ended September 30, 2009 decreased $40.6 million, or 20.3%, to $159.1 million from $199.7 million as compared to the same period in 2008. The decrease of $40.6 million was comprised of a decrease in existing product sales of $41.9 million, which was partially offset by a $1.3 million increase attributable to the introduction of new products, as set forth below. We believe the decrease in product sales was primarily due to the macro-economic factors negatively impacting our company.
We have introduced the following new products since September 30, 2008:
• Mannatech Optimal Skin Care System products in certain international markets;
• OsoLean™ powder in North America, Australia, New Zealand, Japan, Korea, UK, Denmark, Germany,
Taiwan, Singapore, South Africa, Austria, the Netherlands, Norway, and Sweden;
• Various promotional packages in US and Canada;
• Health Solutions Starter packs in Australia and Singapore;
• GlycoSlim® drink mix in Korea and Japan;
• OsoLean™ Single Use Packets in North America and Korea;
• HeartSmart™ tablets in Taiwan;
• Various Optimal Health products in Singapore;
• Emprizone® in Japan;
• Essential Source™ Omega 3 in North America and South Africa; and
• Various Optimal Health, Weight and Fitness products in Austria, the Netherlands, Norway and Sweden.
Pack Sales
Packs may be purchased by our independent associates who wish to build a Mannatech business. These packs are offered to our independent associates at a discount from published retail prices. There are several pack options available to our associates. In certain markets, pack sales are concluded during the associate registration process and can provide new associates with valuable training and promotional materials, as well as products for resale to retail customers, demonstration purposes, and personal consumption. Business-building associates can also purchase an upgrade pack, which provides the associate with additional promotional materials and eligibility for additional commissions and incentives. Many of our business-building independent associates also choose to purchase renewal packs to satisfy annual renewal requirements.
Members can also register for membership, which enables them to purchase our products at a discount from published retail prices.
The number of new and continuing independent associates and members who purchased our packs or products during the twelve months ended September 30, 2009 and 2008 were as follows:
2009 2008
New 151,000 28.3 % 140,000 25.9 %
Continuing 383,000 71.7 % 400,000 74.1 %
Total 534,000 100 % 540,000 100 %
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Although there was an overall decrease of 6,000, or 1.1%, in the net trailing 12-month associate activity as compared to the twelve months ended September 30, 2008, which was due to fewer continuing independent associates and members, we . . .
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