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MTEX > SEC Filings for MTEX > Form 10-Q on 13-Nov-2013All Recent SEC Filings

Show all filings for MANNATECH INC

Form 10-Q for MANNATECH INC


13-Nov-2013

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 three and nine months ended September 30, 2013 as compared to the same period in 2012, 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 three regions: (i) North America (the United States, Canada, and Mexico); (ii) EMEA (Austria, the Czech Republic, Denmark, Estonia, Finland, Germany, the Republic of Ireland, Namibia, the Netherlands, Norway, South Africa, Sweden, Ukraine, and the United Kingdom); (iii) Asia/Pacific (Australia, Hong Kong, Japan, New Zealand, the Republic of Korea, Singapore, and Taiwan). In December 2012, we announced the shipment of our products to Hong Kong and officially launched Hong Kong operations in April 2013. In November 2012, we commenced the shipment of our products to Ukraine and officially launched Ukrainian operations in July 2013.

We conduct our business as a single operating segment and primarily sell our products through a network of approximately 239,000 active independent associates and members who have purchased our products and/or packs within the last 12 months, who we refer to as active 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-four 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 2013 we continued to observe the improvements we experienced during the first and second quarters of 2013. We increased the number of active associates and members by 2.6% as compared to the same period in 2012. This increase was due to an increase in the recruitment of both associates and members as the phased introduction of compensation plan changes targeting associates was implemented primarily during the second quarter of 2013. We implemented enhancements to our sign-up packs globally, which we believe will lead to increases in the recruitment of business- building associates. The number of new independent associates for the third quarter of 2013 increased 33.3% to approximately 22,800 as compared to approximately 17,100 for the same period in 2012. This increase led to an overall increase in revenue of $1.4 million, or 3.3%, during the three months ended September 30, 2013 as compared to the same period in 2012. In July 2013, we launched the final phases of the compensation plan, which enhance the compensation received by associates for the sale of finished products. These changes were fully implemented world-wide in July 2013. During third quarter of 2013, we started a loyalty program where customers earn loyalty points from qualified automatic orders, which can be applied to future purchases.

We experienced a $1.6 million unfavorable impact on our net sales due to fluctuations in foreign currency exchange rates for the three months ended September 30, 2013. For the nine months ended September 30, 2013, we experienced a $3.5 million unfavorable impact on our net sales due to fluctuations in foreign currency exchange rates. The majority of the unfavorable impact on our net sales is in the Asia/Pacific region due to the weakening of the Japanese Yen.

For the three months ended September 30, 2013, our operating expenses (excluding depreciation, commissions, and incentives) increased by $0.8 million as compared to the same period in 2012. This increase is due primarily to a prior year reduction in transactional sales tax expense accruals of $0.8 million relating to the expiration of certain statute of limitations, otherwise there would not be a significant change.

For the nine months ended September 30, 2013, our operating expenses (excluding depreciation, commissions, and incentives) decreased by $2.8 million as compared to the same period in 2012. The decrease in other operating costs was primarily due to a reduction in payroll and payroll-related costs. These continued improvements in our operational efficiencies generated $2.6 million of operating income for the nine months ended September 30, 2013, as compared to an operating loss of $2.4 million during the same period in 2012.


Table of Contents
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, 2013 and 2012
(in thousands, except percentages):

                                                                                            Change from
                                  2013                           2012                       2013 to 2012
                          Total          % of            Total          % of
                         dollars       net sales        dollars       net sales       Dollar        Percentage
Net sales               $  44,432           100.0 %    $  43,049           100.0 %   $   1,384              3.2 %
Cost of sales               9,225            20.8 %        8,698            20.2 %         528              6.1 %
Gross profit               35,207            79.2 %       34,351            79.8 %         856              2.5 %

Operating expenses:
Commissions and
incentives                 19,640            44.2 %       18,658            43.3 %         983              5.3 %
Selling and
administrative
expenses                    8,497            19.1 %        8,640            20.1 %        (143 )           (1.7 )%
Depreciation and
amortization                  474             1.1 %          703             1.6 %        (230 )          (32.7 )%
Other operating costs       6,167            13.9 %        5,261            12.2 %         906             17.2 %
Total operating
expenses                   34,778            78.3 %       33,262            77.2 %       1,516              4.6 %
Income from
operations                    429             0.9 %        1,089             2.6 %        (660 )          (60.6 )%
Interest income                25             0.1 %            6             0.0 %          19            316.7 %
Other income
(expense), net               (275 )          (0.6 )%         455             1.1 %        (730 )         (160.4 )%
Income before income
taxes                         179             0.4 %        1,550             3.7 %      (1,371 )          (88.5 )%
(Provision) benefit
for income taxes             (980 )          (2.2 )%         663             1.5 %      (1,643 )         (247.8 )%
Net income (loss)       $    (801 )          (1.8 )%   $   2,213             5.2 %   $  (3,014 )         (136.2 )%

The table below summarizes our consolidated operating results in dollars and as a percentage of net sales for the nine months ended September 30, 2013 and 2012 (in thousands, except percentages):

                                                                                             Change from
                                  2013                           2012                        2013 to 2012
                          Total          % of            Total          % of
                         dollars       net sales        dollars       net sales        Dollar        Percentage
Net sales               $ 130,899           100.0 %    $ 131,162           100.0 %    $    (263 )           (0.2 )%
Cost of sales              25,616            19.6 %       25,824            19.7 %         (208 )           (0.8 )%
Gross profit              105,283            80.4 %      105,338            80.3 %          (55 )           (0.1 )%

Operating expenses:
Commissions and
incentives                 56,362            43.1 %       56,280            42.9 %           82              0.1 %
Selling and
administrative
expenses                   25,669            19.6 %       28,240            21.5 %       (2,570 )           (9.1 )%
Depreciation and
amortization                1,699             1.3 %        4,082             3.1 %       (2,383 )          (58.4 )%
Other operating costs      18,919            14.4 %       19,109            14.6 %         (190 )           (1.0 )%
Total operating
expenses                  102,649            78.4 %      107,711            82.1 %       (5,061 )           (4.7 )%
Income (loss) from
operations                  2,634             2.0 %       (2,373 )          (1.8 )%       5,006            211.0 %
Interest income
(expense)                      29             0.0 %          (26 )           0.0 %           55            211.5 %
Other income
(expense), net             (1,278 )          (0.9 )%         542             0.4 %       (1,820 )         (335.8 )%
Income (loss) before
income taxes                1,385             1.1 %       (1,857 )          (1.4 )%       3,241            174.5 %
(Provision) benefit
for income taxes             (758 )          (0.6 )%         215             0.2 %         (973 )         (452.6 )%
Net income (loss)       $     627             0.5 %    $  (1,642 )          (1.2 )%   $   2,268            138.1 %


Table of Contents
Consolidated net sales by region for the three months ended September 30, 2013 and 2012 were as follows (in millions, except percentages):

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

Region                 2013                   2012
North America   $ 18.7        42.2 %   $ 20.7        48.1 %
Asia/Pacific      22.0        49.5 %     17.8        41.4 %
EMEA               3.7         8.3 %      4.5        10.5 %
Total           $ 44.4       100.0 %   $ 43.0       100.0 %

Consolidated net sales by customer location for the nine months ended September 30, 2013 and 2012 were as follows (in millions, except percentages):

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

Region                 2013                    2012
North America   $  60.5        46.2 %   $  66.0        50.3 %
Asia/Pacific       59.7        45.6 %      53.0        40.4 %
EMEA               10.7         8.2 %      12.1         9.3 %
Total           $ 130.9       100.0 %   $ 131.1       100.0 %

Net Sales

Consolidated net sales for the three months ended September 30, 2013 increased by $1.4 million, or 3.3%, to $44.4 million as compared to the same period in 2012. Consolidated net sales for the nine months ended September 30, 2013 decreased by $0.2 million, or 0.2%, to $130.9 million as compared to the same period in 2012. During the third quarter, we started a loyalty program where customers earn loyalty points from qualified automatic orders, which can be applied to future purchases. We defer the dollar equivalent in revenue of these points until the points are applied or forfeited.

North American sales decreased by $2.0 million, or 9.7%, to $18.7 million for the three months ended September 30, 2013 as compared to the same period in 2012. North American sales decreased by $5.5 million, or 8.3%, to $60.5 million for the nine months ended September 30, 2013 as compared to the same period in 2012. The decline in revenue for both the three and nine months ended September 30, 2013 as compared to the same periods in 2012 is primarily due to $1.2 million in loyalty program deferred revenue at September 30, 2013. During the third quarter, a reduction in active associates was partially offset by an increase in active members, resulting in a net 5.6% net reduction in active associates and members.

For the three and nine months ended September 30, 2013, our operations outside of North America accounted for approximately 57.8% and 53.8%, respectively, of our consolidated net sales, whereas in the same period in 2012, our operations outside of North America accounted for approximately 51.9% and 49.7%, respectively, of our consolidated net sales.

Asia/Pacific sales increased by $4.2 million, or 23.6%, to $22.0 million for the three months ended September 30, 2013 as compared to the same period in 2012. Asia/Pacific sales increased by $6.7 million, or 12.6%, to $59.7 million for the nine months ended September 30, 2013 as compared to the same period in 2012. The increase in revenue for the three months and nine months ended September 30, 2013 as compared to the same periods in 2012 was due to an increase in the number of active associates and members. During the three months ended September 30, 2013, the revenue generated per active associate and member increased. These improvements were partially offset by the $1.2 million loyalty program deferred revenue at September 30, 2013. Also, we experienced a $1.2 million unfavorable impact on our net sales due to fluctuations in foreign currency exchange rates for the three months ended September 30, 2013. For the nine months ended September 30, 2013, we experienced a $2.6 million unfavorable impact on our net sales due to fluctuations in foreign currency exchange rates. The majority of the unfavorable impact on our net sales in the Asia/Pacific region was due to the weakening of the Japanese Yen.

EMEA sales decreased by $0.8 million, or 17.8%, to $3.7 million for the three months ended September 30, 2013 as compared to the same period in 2012. Increases in active associates and members were offset by the decrease in revenue per associate and member. EMEA sales decreased by $1.4 million, or 11.6%, to $10.7 million for the nine months ended September 30, 2013 as compared to the same period in 2012. Increases in sales due to the increase in the number of active associates and members were offset by the decrease in revenue per associate and member. Also, we experienced a $0.4 million unfavorable impact on our net sales due to fluctuations in foreign currency exchange rates for the three months ended September 30, 2013. For the nine months ended September 30, 2013, we experienced a $0.9 million unfavorable impact on our net sales due to fluctuations in foreign currency exchange rates. The majority of the unfavorable impact on our net sales in the EMEA region was due to the weakening of the South African Rand.


Table of Contents
Fluctuation in foreign currency exchange rates for the three months ended September 30, 2013 had an overall unfavorable impact on our net sales of approximately $1.6 million. For the nine months ended September 30, 2013, fluctuation in foreign currency exchange had an overall unfavorable impact on our net sales of approximately $3.5 million. 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, 2012.

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
                                         2013       2012      Dollar       Percentage
Consolidated product sales              $ 31.7     $ 38.3     $  (6.6 )          (17.2 )%
Consolidated pack sales                   10.9        3.0         7.9            263.3 %
Consolidated other, including freight      1.8        1.7         0.1              5.9 %
Total consolidated net sales            $ 44.4     $ 43.0     $   1.4              3.3 %



                                            Nine Months                 Change
                                         2013        2012       Dollar      Percentage
Consolidated product sales              $ 108.0     $ 117.1     $  (9.1 )          (7.8 )%
Consolidated pack sales                    17.1         9.1         8.0            87.9 %
Consolidated other, including freight       5.8         4.9         0.9            18.4 %
Total consolidated net sales            $ 130.9     $ 131.1     $  (0.2 )          (0.2 )%

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.


Table of Contents
Product sales for the three months ended September 30, 2013 were $31.7 million, down $6.6 million from the same period in 2012. The average order value for the three months ended September 30, 2013 was $150 as compared to $153 for the same period in 2012 and this decrease resulted in a $0.7 million reduction in revenue. The number of orders processed during the three months ended September 30, 2013 decreased by 7.7%, as compared to the same period in 2012, resulting in a $2.9 million reduction in revenue. A $3.0 million reduction in product sales is attributed to deferred revenue and fluctuations in foreign currency exchange rates.

Product sales for the nine months ended September 30, 2013 decreased by $9.1 million, or 7.8%, as compared to the same period in 2012. The decrease in product sales was primarily due to the reduction in the average order size. The average order value for the nine months ended September, 2013 was $152, as compared to $155 for the same period in 2012 and this decrease resulted in a $2.4 million reduction in revenue. The number of orders processed during the nine months ended September 30, 2013 decreased by 2.9%, as compared to the same period in 2012, resulting in a $3.3 million reduction in revenue. A $3.4 million reduction in product sales is attributed to deferred revenue and fluctuations in foreign currency exchange rates.

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
              2013       2012       Dollar       Percentage
New          $   2.9     $ 2.0     $    0.9             45.0 %
Continuing       8.0       1.0          7.0            700.0 %
Total        $  10.9     $ 3.0     $    7.9            263.3 %



               Nine Months                 Change
              2013      2012       Dollar       Percentage
New          $  6.8     $ 6.3     $    0.5              7.9 %
Continuing     10.3       2.8          7.5            267.9 %
Total        $ 17.1     $ 9.1     $    8.0             87.9 %

Total pack sales for the three months ended September 30, 2013 increased by $7.9 million, or 263.3%, to $10.9 million, as compared to $3.0 million for the same period in 2012. Average pack value for the three months ended September 30, 2013 was $274 as compared to $159 for the same period in 2012. The total number of packs sold increased by 20,600, or 108.4%, to 39,600, and the average pack value increased by $115, or 72.3%, for the three months ended September 30, 2013, as compared to the same period in 2012. The increase in the average pack value is due to a change in the sales mix of the type of packs purchased.

The number of new independent associates and members for the third quarter of 2013 increased 4.4% to approximately 28,800 as compared to approximately 27,600 for the same period in 2012.

Total pack sales for the nine months ended September 30, 2013 increased by $8.0 million, or 87.9%, to $17.1 million, as compared to $9.1 million for the same period in 2012. Average pack value for the nine months ended September 30, 2013 was $198, as compared to $160 for the same period in 2012. The total number of packs sold increased by 28,600, or 49.7%, to 86,200, and the average pack value increased by $38, or 23.8%, for the nine months ended September 30, 2013, as compared to the same period in 2012. The increase in the average pack value is due to a change in the sales mix of the type of packs purchased.


Table of Contents
The approximate number of new and continuing associates and members who purchased our packs or products during the twelve months ended September 30, 2013 and 2012 were as follows:

                     2013                      2012
New            109,000        46.0 %      95,000        41.0 %
Continuing     130,000        54.0 %     138,000        59.0 %
Total          239,000       100.0 %     233,000       100.0 %

There was an overall increase of 6,000 or 2.6%, for the twelve months ended September 30, 2013 in the number of associates and members who purchased our products as compared to the same period in 2012, which was due to an increase in the number of new associates and members.

During 2012 and the first nine months of 2013, we took the following actions to recruit and retain associates and members:

registered our products with the appropriate regulatory agencies in all countries of operations;

explored new international markets;

launched marketing and educational campaigns;

continued to strengthen compliance initiatives;

initiated additional incentives;

explored new advertising and educational tools to broaden name recognition; and

implemented changes to our global associate career and compensation plan.

Other Sales

Other sales consisted of: (i) freight revenue charged to our associates and members; (ii) sales of promotional materials; (iii) monthly fees collected for Success TrackerTM and Navig8 customized electronic business-building and educational materials, databases and applications; (iv) training and event registration fees; and (v) a reserve for estimated sales refunds and returns. Promotional materials, training, database applications and business management tools support our independent associates, which in turn helps stimulate product sales.

For the three months ended September 30, 2013, other sales increased by $0.1 million, or 5.9%, to $1.8 million, as compared to $1.7 million for the same period in 2012. Other sales for the nine months ended September 30, 2013 increased by $0.9 million, or 18.4%, to $5.8 million, as compared to $4.9 million for the same period in 2012. The increase was primarily due to an increase in freight fees charged on our products and pack shipments.

Gross Profit

For the three months ended September 30, 2013, gross profit increased by $0.9 million, or 2.5%, to $35.2 million, as compared to $34.3 million for the same period in 2012 due to higher revenue. For the three months ended September 30, 2013, gross profit as a percentage of net sales decreased to 79.2%, as compared to 79.8% for the same period in 2012.

To improve the matching of costs associated with revenue from freight and shipping fees, beginning December 31, 2012, freight costs associated with shipping products to our customers were reclassified to cost of sales from selling and administrative expenses with prior periods' presentations adjusted accordingly. Total freight costs included in cost of sales were approximately $1.7 million and $1.9 for the three months ended September 30, 2013 and 2012, respectively. Additionally, to more closely conform to the financial presentation of our competitors, royalty costs were reclassified to cost of sales from selling and administrative expenses beginning in December 31, 2012. Total royalty costs included in cost of sales were approximately $0.1 million for each of the three months ended September 30, 2013 and 2012.

Cost of sales during the three months ended September 30, 2013 increased by 6.1%, or $0.5 million, to $9.2 million, as compared to $8.7 million for the same period in 2012. The increase in cost of sales was primarily due to an increase in inventory and freight. Cost of sales as a percentage of net sales for the three months ended September 30, 2013 was 20.8%, as compared to 20.2% for the same period in 2012.


Table of Contents
For each of the nine months ended September 30, 2013 and 2012, gross profit was $105.3 million. For the nine months ended September 30, 2013, gross profit as a percentage of net sales increased to 80.4%, as compared to 80.3% for the same period in 2012.

Total freight costs associated with shipping products to our customers included in cost of sales were approximately $5.0 million and $5.6 million for the nine months ended September 30, 2013 and 2012, respectively. Total royalty costs included in cost of sales were approximately $0.2 million for each of the nine months ended September 30, 2013 and 2012.

Cost of sales during the nine months ended September 30, 2013 decreased by 0.8%, or $0.2 million, to $25.6 million, as compared to $25.8 million for the same . . .

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