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MTEX > SEC Filings for MTEX > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for MANNATECH INC

Form 10-Q for MANNATECH INC


8-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is intended to assist in the understanding of our consolidated financial position and results of operations for the nine months ended September 30, 2012 as compared to the same period in 2011, and should be read in conjunction with Item I "Financial Statements" in Part I of this quarterly report on Form 10-Q. Unless stated otherwise, all financial information presented below, throughout this report, and in the consolidated financial statements and related notes includes Mannatech 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. We operate in the United States, Canada, Australia, the United Kingdom, Japan, New Zealand, the Republic of Korea, Taiwan, Denmark, Germany, South Africa, the Republic of Namibia (via South Africa), Singapore, Austria, the Netherlands, Norway, Sweden, Mexico, the Czech Republic, Estonia, Finland, and the Republic of Ireland. Our Switzerland office was created to manage certain day-to-day business needs of non-North American markets.

We conduct our business as a single operating segment and primarily sell our products through a network of approximately 233,000 associates and members who have purchased our products and/or packs within the last 12 months, who we refer collectively to as current associates and members. New recruits and pack sales are leading indicators for the long-term success of our business. New recruits include new associates and members purchasing 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 twenty-two countries. We review and analyze net sales by geographical location and by packs and products on a consolidated basis. Each of our subsidiaries sells similar products and exhibits 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 associates and members; entry into new markets and growth of existing markets; niche market development; new product introduction; and investment in our infrastructure.

Current Economic Conditions and Recent Developments

During the third quarter of 2012, we continued building the foundation for future revenue growth. The recruitment of new associates and members in the third quarter of 2012 increased 15% compared to third quarter of 2011. The increase in recruitment is due to an increase in the number of first-time members. We believe the increase was due to the offering of NutriVerus powder for sale in the United States and the introduction of the 4Free Discount Program in the United States and Canada. In tandem, we believe these programs offer a business building opportunity to the associates previously not available to them. We introduced NutriVerus powder to our markets in the Republic of Korea, Japan, Australia, New Zealand, Singapore, Taiwan, and Canada during the third quarter and early in the fourth quarter of 2012. The offering of NutriVerus powder in our European and South Africa markets is planned for late 2012 or early 2013, depending on regulatory approvals.

We continue to experience a declining sales trend in the third quarter equivalent to the declines experienced in the first and second quarters of 2012. Although recruitment of associates and members increased for the nine months ended September 30, 2012, the revenue from the sale of products and packs decreased as compared to the nine months ended September 30, 2011.

One of our goals during 2012 was to restore profitability and reduce operational expenses. In July 2012, the Company expanded its use of third-party logistic providers into our United States operations. Our largest warehouse, located in Coppell, Texas, was sublet to a third-party logistics company for operation. We believe this will decrease shipping times to our associates and members in the United States by taking advantage of distribution capabilities of the third-party logistics company on the west coast and east coast. Additionally, by subletting our warehouse space to the third-party logistics company, we are monetizing our excess warehouse space, which reduces our costs of operations.

In August 2012, we also moved our European inventory from England to another third-party logistics company located in the Netherlands. This allows us to concentrate on our core competencies and offering our associates and members in our European markets an improved distribution experience.

Our on-going reduction of operational expenses assisted in our achieving net income of $2.2 million for the third quarter of 2012. Other non-cash items impacting profitability included a reduction in a previously recognized deferred tax asset valuation allowance of approximately $1.0 million, a release of reserves related to transaction taxes of $0.8 million due to expiration of statutes of limitations, and income from foreign currency exchange rate fluctuations of $0.5 million. As illustrated, we remain dedicated to our 2012 goal of restoring profitability. We expect our continuation of targeted expense reductions to have a positive impact on profitability and cash flow.


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, 2012 and 2011
(in thousands, except percentages):

                                                                              Change from
                                  2012                   2011                2012 to 2011
                           Total       % of       Total       % of
                          dollars    net sales   dollars    net sales     Dollar    Percentage
Net sales                 $ 43,049       100.0 % $ 50,520         100 %  $ (7,471 )      (14.8 )%
Cost of sales                6,755        15.7 %    7,407        14.7 %      (652 )       (8.8 )%
Commissions and
incentives                  18,658        43.3 %   22,041        43.6 %    (3,383 )      (15.3 )%
                            25,413        59.0 %   29,448        58.3 %    (4,035 )      (13.7 )%
Gross profit                17,636        41.0 %   21,072        41.7 %    (3,436 )      (16.3 )%

Operating expenses:
Selling and
administrative expenses     10,516        24.4 %   12,373        24.5 %    (1,857 )      (15.0 )%
Depreciation and
amortization                   703         1.6 %    2,644         5.2 %    (1,941 )      (73.4 )%
Other operating costs        5,328        12.4 %    7,627        15.1 %    (2,299 )      (30.1 )%
Total operating
expenses                    16,547        38.4 %   22,644        44.8 %    (6,097 )      (26.9 )%
Income (loss) from
operations                   1,089         2.5 %   (1,572 )      (3.1 )%    2,661        169.3 %
Interest income
(expense)                        6           0 %       (4 )       0.0 %        10        250.0 %
Other income (expense),
net                            455         1.1 %   (1,557 )      (3.1 )%    2,012        129.2 %
Income (loss) before
income taxes                 1,550         3.6 %   (3,133 )      (6.2 )%    4,683        149.5 %
Benefit (provision) for
income taxes                   663         1.5 %     (530 )      (1.0 )%    1,193        225.1 %
Net income (loss)         $  2,213         5.1 % $ (3,663 )      (7.3 )% $  5,876        160.4 %

The table below summarizes our consolidated operating results in dollars and as a percentage of net sales for the nine months ended September 30, 2012 and 2011 (in thousands, except percentages):

                                                                                Change from
                                 2012                     2011                  2012 to 2011
                           Total       % of         Total       % of
                          dollars    net sales     dollars    net sales     Dollar     Percentage
Net sales                $ 131,162       100.0 %  $ 152,782         100 %  $ (21,620 )      (14.2 )%
Cost of sales               20,038        15.3 %     22,164        14.5 %     (2,126 )       (9.6 )%
Commissions and
incentives                  56,280        42.9 %     66,644        43.6 %    (10,364 )      (15.6 )%
                            76,318        58.2 %     88,808        58.1 %    (12,490 )      (14.1 )%
Gross profit                54,844        41.8 %     63,974        41.9 %     (9,130 )      (14.3 )%

Operating expenses:
Selling and
administrative
expenses                    33,793        25.8 %     43,202        28.3 %     (9,409 )      (21.8 )%
Depreciation and
amortization                 4,082         3.1 %      8,132         5.3 %     (4,050 )      (49.8 )%
Other operating costs       19,342        14.7 %     23,439        15.3 %     (4,097 )      (17.5 )%
Total operating
expenses                    57,809        43.6 %     74,773        48.9 %    (17,556 )      (23.5 )%
Loss from operations        (2,373 )      (1.8 )%   (10,799 )      (7.1 )%     8,426         78.0 %
Interest income
(expense)                      (26 )       0.0 %         (3 )       0.0 %        (23 )     (766.7 )%
Other income
(expense), net                 542         0.4 %     (1,094 )      (0.7 )%     1,636        149.5 %
Loss before income
taxes                       (1,857 )      (1.4 )%   (11,896 )      (7.8 )%    10,039         84.4 %
Benefit (provision)
for income taxes               215         0.1 %     (1,795 )      (1.2 )%     2,010        112.0 %
Net loss                 $  (1,642 )      (1.3 )% $ (13,691 )      (9.0 )% $  12,049         88.0 %


Consolidated net sales by customer location for the three months ended September 30, 2012 and 2011 were as follows (in millions, except percentages):

Net Sales in Dollars and as a Percentage of Consolidated Net Sales

                                           2012         2011
                  United States       $ 16.9   39.3 %   $ 20.4     40.4 %
                  Japan                  6.4   14.9 %      7.7     15.2 %
                  Republic of Korea      6.0   14.0 %      6.0     11.9 %
                  Canada                 3.6    8.4 %      4.1      8.1 %
                  Australia              3.5    8.1 %      4.4      8.7 %
                  South Africa(1)        2.0    4.6 %      2.3      4.5 %
                  Singapore              0.8    1.9 %      1.4      2.8 %
                  Czech Republic(2)      0.7    1.6 %        -        -
                  New Zealand            0.5    1.2 %      0.6      1.2 %
                  Taiwan                 0.5    1.2 %      1.1      2.2 %
                  United Kingdom(3)      0.5    1.2 %      0.5 (4)  1.0 %
                  Germany                0.4    0.9 %      0.5      1.0 %
                  Norway                 0.3    0.7 %      0.4      0.8 %
                  The Netherlands        0.3    0.7 %      0.3      0.6 %
                  Mexico                 0.2    0.5 %      0.4      0.8 %
                  Austria                0.1    0.2 %      0.2      0.4 %
                  Denmark                0.1    0.2 %      0.1      0.2 %
                  Finland(5)             0.1    0.2 %        -        -
                  Sweden                 0.1    0.2 %      0.1      0.2 %
                  Total               $ 43.0    100 %   $ 50.5      100 %


________________________


(1) Includes sales for the Republic of Namibia, where the Company began operations in August 2011.

(2) The Company began operations in the Czech Republic in June 2011; net sales for 2011 are included in net sales for the United Kingdom.

(3) Includes sales for Estonia and the Republic of Ireland, where the Company began operations in June 2011. Their combined consolidated sales for the three months ended September 30, 2012 were less than $0.1 million and are included in net sales for the United Kingdom.

(4) Includes sales for the Czech Republic, where the Company began operations in June 2011.

(5) The Company began operations in Finland in June 2011.


Consolidated net sales by customer location for the nine months ended September 30, 2012 and 2011 were as follows (in millions, except percentages):

Net Sales in Dollars and as a Percentage of Consolidated Net Sales

                                           2012         2011
                 United States       $  54.1   41.2 %   $  64.0     41.9 %
                 Japan                  20.0   15.3 %      22.9     15.0 %
                 Republic of Korea      16.9   12.9 %      17.4     11.4 %
                 Canada                 11.3    8.6 %      12.3      8.0 %
                 Australia              10.9    8.3 %      13.3      8.7 %
                 South Africa(1)         5.9    4.5 %       6.5      4.3 %
                 Singapore               1.9    1.4 %       2.8      1.8 %
                 Taiwan                  1.7    1.3 %       3.4      2.2 %
                 New Zealand             1.5    1.1 %       1.9      1.2 %
                 United Kingdom(2)       1.2    0.9 %       1.4 (3)  0.9 %
                 Germany                 1.3    1.0 %       1.5      1.0 %
                 Norway                  1.1    0.8 %       1.4      0.9 %
                 Czech Republic(4)       0.9    0.7 %         -        -
                 The Netherlands         0.8    0.6 %       0.9      0.6 %
                 Mexico                  0.6    0.5 %       1.7      1.1 %
                 Austria                 0.3    0.2 %       0.7      0.5 %
                 Denmark                 0.2    0.2 %       0.3      0.2 %
                 Finland(5)              0.2    0.2 %         -        -
                 Sweden                  0.2    0.2 %       0.4      0.3 %
                 Ireland                 0.1    0.1 %         -        -
                 Total               $ 131.1    100 %   $ 152.8      100 %


________________________


(1) Includes sales for the Republic of Namibia, where the Company began operations in August 2011.

(2) Includes sales for Estonia and the Republic of Ireland, where the Company began operations in June 2011. Their combined consolidated sales for the nine months ended September 30, 2012 were less than $0.1 million and are included in net sales for the United Kingdom.

(3) Includes sales for the Czech Republic, where the Company began operations in June 2011.

(4) The Company began operations in the Czech Republic in June 2011; net sales for 2011 are included in net sales for the United Kingdom.

(5) The Company began operations in Finland in June 2011.

Net Sales

For the three and nine months ended September 30, 2012, our operations outside of the United States accounted for approximately 60.7% and 58.8%, respectively, of our consolidated net sales, whereas in the same period in 2011, our operations outside of the United States accounted for approximately 59.6% and 58.1%, respectively, of our consolidated net sales.

Consolidated net sales for the three months ended September 30, 2012 decreased by $7.5 million, or 14.8%, to $43.0 million as compared to the same period in 2011. United States sales decreased by $3.5 million, or 17.2%, to $16.9 million, while international sales decreased by $4.0 million, or 13.3%, to $26.1 million for the three months ended September 30, 2012 as compared to the same period in 2011.

Consolidated net sales for the nine months ended September 30, 2012 decreased by $21.6 million, or 14.2%, to $131.1 million as compared to the same period in 2011. United States sales decreased by $9.9 million, or 15.5%, to $54.1 million, while international sales decreased by $11.8 million, or 13.3%, to $77.0 million for the nine months ended September 30, 2012 as compared to the same period in 2011.

Fluctuation in foreign currency exchange rates for the three and nine months ended September 30, 2012, had an overall unfavorable impact of approximately $1.0 million and $1.8 million, respectively, on our net sales. 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, 2011.


Net sales by country in transactional currency for the three and nine months ended September 30, 2012 and 2011 were as follows (in millions, except percentages):

                                            Three Months                Change
                          Transactional                       Transactional
Country                     Currency       2012      2011       currency      Percentage
Australia                 AUD                 3.5       4.1            (0.6 )      (14.6 )%
Austria, Germany, the
Netherlands, the Czech
Republic, Estonia,
Finland, the Republic
of Ireland                EUR                 1.2       0.8             0.4         50.0  %
Denmark                   DKK                 0.3       0.5            (0.2 )      (40.0 )%
Japan                     JPY               501.5     597.2           (95.7 )      (16.0 )%
Mexico                    MXN                 2.9       5.5            (2.6 )      (47.3 )%
New Zealand               NZD                 0.6       0.7            (0.1 )      (14.3 )%
Norway                    NOK                 1.8       2.4            (0.6 )      (25.0 )%
Republic of Korea         KRW             6,814.3   6,449.9           364.4          5.6 %
Singapore                 SGD                 1.0       1.7            (0.7 )      (41.2 )%
South Africa              ZAR                16.6      15.9             0.7          4.4  %
Sweden                    SEK                 0.6       0.7            (0.1 )      (14.3 )%
Taiwan                    TWD                16.4      29.5           (13.1 )      (44.4 )%
United Kingdom            GBP                 0.3       0.3               -            -




                                              Nine Months                 Change
                          Transactional                         Transactional
Country                     Currency        2012       2011       currency      Percentage
Australia(1)              AUD                 10.6       13.3            (2.7 )      (20.3 )%
Austria, Germany, the
Netherlands, the Czech
Republic, Estonia,
Finland, the Republic
of Ireland(2)             EUR                  2.8        2.2             0.6         27.3 %
Denmark                   DKK                  1.0        1.5            (0.5 )      (33.3 )%
Japan                     JPY              1,585.8    1,843.2          (257.4 )      (14.0 )%
Mexico                    MXN                  7.8       20.7           (12.9 )      (62.3 )%
New Zealand               NZD                  1.9        2.4            (0.5 )      (20.8 )%
Norway                    NOK                  6.0        7.2            (1.2 )      (16.7 )%
Republic of Korea         KRW             19,140.6   18,975.7           164.9          0.9  %
Singapore(1)              SGD                  2.4        2.8            (0.4 )      (14.3 ) %
South Africa              ZAR                 47.2       45.5             1.7          3.7  %
Sweden                    SEK                  1.6        2.3            (0.7 )      (30.4 )%
Taiwan                    TWD                 50.4       96.0           (45.6 )      (47.5 )%
United Kingdom            GBP                  0.8        0.9            (0.1 )      (11.1 )%



(1) In March 2011, we started transacting sales in Singapore dollars (SGD). Prior to March 2011, sales in Singapore were transacted in Australian dollars.

(2) We began operations in the Czech Republic, Estonia, Finland and the Republic of Ireland in June 2011.


Our total sales and sales mix could be influenced by any of the following:

changes in our sales prices;

changes in consumer demand;

changes in the number of 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;

direct competition; 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            Change
                                             2012      2011    Dollar    Percentage
      Consolidated product sales             $ 38.3   $ 43.0    $ (4.7 )    (10.9 )%
      Consolidated pack sales                   3.0      5.5      (2.5 )    (45.5 )%
      Consolidated other, including freight     1.7      2.0      (0.3 )    (15.0 )%
      Total consolidated net sales           $ 43.0   $ 50.5    $ (7.5 )    (14.9 )%




                                               Nine Months             Change
                                             2012      2011     Dollar    Percentage
      Consolidated product sales            $ 117.1   $ 129.6   $ (12.5 )     (9.6 )%
      Consolidated pack sales                   9.1      16.9      (7.8 )    (46.2 )%
      Consolidated other, including freight     4.9       6.3      (1.4 )    (22.2 )%
      Total consolidated net sales          $ 131.1   $ 152.8   $ (21.7 )    (14.2 )%

Pack sales correlate to new associates who purchase starter packs and to continuing associates who purchase upgrade or renewal packs. However, there is no direct correlation between product sales and the number of new and continuing associates and members because associates and members utilize products at different volumes.

Product Sales

Substantially all of our product sales are made to associates at published wholesale prices. We also sell our products to members at discounted published retail prices.


Product sales for the three months ended September 30, 2012 decreased by $4.7 million, or 10.9%, as compared to the same period in 2011. The decrease in product sales was primarily due to the loss of existing associates, which resulted in a decline in the number of orders placed during the period. The average order value for the three months ended September 30, 2012 was $153 as compared to $159 for the same period in 2011. Approximately $1.6 million of the reduction in product sales resulted from the decrease in average order value. Additionally, the decrease in products sales was also due to a decline in the number of orders processed during the three months ended September 30, 2012, which decreased by 6.7% as compared to the same period in 2011. This decrease was consistent with the decline in the number of continuing associates and members as described in detail below.

Product sales for the nine months ended September 30, 2012 decreased by $12.5 million, or 9.6%, as compared to the same period in 2011. The decrease in product sales was primarily due to the reduction in the number of new associates and the loss of existing associates, which resulted in a decline in the number of orders placed during the period. The average order value for the nine months ended September 30, 2012 was $155 as compared to $156 for the same period in 2011. The 0.4% reduction in average order value resulted in an approximately $0.5 million loss in revenue. The number of orders processed during the nine months ended September 30, 2012 decreased by 8.7% as compared to the same period in 2011. This decrease was consistent with the decline in the number of continuing associates and members as described in detail below.

Pack Sales

Packs may be purchased by our associates who wish to build a Mannatech business. These packs are offered to our associates at a discount from published retail prices. There are several pack options available to our associates. In certain markets, pack sales are completed during the final stages of the 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, additional products, and eligibility for additional commissions and incentives. Many of our business-building associates also choose to purchase renewal packs to satisfy annual renewal requirements to continue to earn various commissions.

The dollar amount of pack sales associated with new and continuing associates was as follows, for the three and nine months ended September 30 (in millions, except percentages):

                                 Three Months            Change
                                2012      2011    Dollar    Percentage
                  New          $   2.0    $ 4.0   $  (2.0 )      (50.0 )%
                  Continuing       1.0      1.5      (0.5 )      (33.3 )%
                  Total        $   3.0    $ 5.5   $  (2.5 )      (45.5 )%




                                  Nine Months            Change
                                 2012     2011    Dollar    Percentage
                   New          $  6.3   $ 11.8   $  (5.5 )      (46.6 )%
                   Continuing      2.8      5.1      (2.3 )      (45.1 )%
                   Total        $  9.1   $ 16.9   $  (7.8 )      (46.2 )%

Total pack sales for the three months ended September 30, 2012 decreased by $2.5 million, or 45.5%, to $3.0 million, as compared to $5.5 million for the same period in 2011. Average pack value for the three months ended September 30, 2012 was $159 as compared to $254 for the same period in 2011. The total number of packs sold decreased by 2,700, or 12.4%, to 19,000, and the average pack value decreased by $95, or 37.4%, for the three months ended September 30, 2012, as compared to the same period in 2011. The decrease in the average pack value is due to a change in the sales mix of the type of packs purchased. Approximately $1.8 million of the reduction in pack sales resulted from the decrease in average pack value with the remaining decrease attributable to the decline in the number of packs sold during the period.


Total pack sales for the nine months ended September 30, 2012 decreased by $7.8 million, or 46.2%, to $9.1 million, as compared to $16.9 million for the same period in 2011. Average pack value for the nine months ended September 30, 2012 was $160 as compared to $249 for the same period in 2011. The total number of packs sold decreased by 10,400, or 15.3%, to 57,600, and the average pack value . . .

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