Medifast, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; filed August 10, 2015. Medifast sells weight-management products through direct sales, Medifast Direct, franchised centers, and wholesale channels. The company exited its corporate weight-control-center model in 2014; those results are presented as discontinued operations.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $72.2 million | $74.7 million | $145.5 million | $154.0 million |
| Gross profit / margin | $53.2 million / 73.7% | $55.6 million / 74.4% | $106.9 million / 73.5% | $113.5 million / 73.7% |
| Operating income / margin | $8.7 million / 12.0% | $9.9 million / 13.2% | $15.2 million / 10.4% | $19.5 million / 12.6% |
| Income from continuing operations | $5.8 million | $6.6 million | $10.3 million | $13.2 million |
| Net income | $6.2 million | $5.7 million | $10.7 million | $11.7 million |
| Diluted EPS | $0.51 | $0.44 | $0.88 | $0.89 |
- Cash flow: For the six months, the cash-flow statement reports $21.0 million from continuing operating activities, $(3.1) million from discontinued operations, and $17.8 million total operating cash flow. Investing used $1.1 million and financing used $4.1 million. Cash increased $12.7 million to $37.1 million.
- Liquidity and debt: Working capital was $63.3 million and stockholders’ equity $88.2 million at June 30, versus $55.0 million and $80.5 million at year-end 2014. Capital lease liabilities totaled approximately $0.36 million; the filing reports no outstanding franchisee guarantees at quarter-end.
- Other balance-sheet figures: Investment securities were $27.9 million and inventory was $12.4 million, down from $28.2 million and $15.7 million, respectively, at December 31, 2014.
Changes versus prior periods
- Q2 revenue decreased 3.3%; first-half revenue declined 5.5%. Declines in Take Shape For Life and Medifast Direct were partly offset by growth in franchised centers.
- Take Shape For Life revenue fell 3% in Q2 and 6% for the first half, largely as active Health Coaches decreased 5% year over year to 11,800. Q2 revenue per active coach increased 2% to $4,423.
- Medifast Direct revenue fell 10% in Q2 and 13% for the first half; management cited difficulty acquiring new customers. Franchise center revenue rose 22% in Q2 and 26% year to date, despite center closures; 62 centers were operating versus 73 a year earlier.
- Gross margin narrowed, while operating margin fell 1.2 percentage points in Q2 and 2.2 points for the first half. Management attributed gross-margin pressure to ingredient costs, lower-volume manufacturing variances, and product obsolescence, partly offset by price increases.
- Q2 net income increased 9% despite lower continuing-operations income, mainly because discontinued operations moved from a loss to income. First-half net income decreased 9%.
Outlook, commentary, risks and unusual items
- Management anticipated a 2015 full-year effective tax rate of approximately 34%–35%. The filing provides no revenue or earnings guidance; management cautions that interim results are not necessarily indicative of full-year results.
- Advertising spend declined 16.4% in Q2 to $4.6 million and 10.6% for the first half to $10.1 million. Revenue-to-advertising-spend ratios improved to 15.6-to-1 for Q2 and 14.4-to-1 for the first half.
- SG&A included $0.3 million of extraordinary legal expenses in Q2 and $2.1 million in the first half, principally related to 13D filings. Management said it did not anticipate additional expenses related to the first-quarter settlement with Engaged Capital. Excluding these legal costs, continuing-operations income would have been $6.0 million ($0.50 diluted EPS) for Q2 and $11.6 million ($0.96 diluted EPS) for the first half.
- Discontinued operations contributed $0.4 million of income in Q2 and the first half, primarily from lease settlements, partly offset by closure costs. Remaining exit obligations were $2.3 million at June 30.
- In a franchisee dispute, the court entered a $2.1 million default judgment against the companies, including loan reimbursement and related amounts, plus $45,000 of legal fees. The case against the personal guarantor remained ongoing; no amounts were recorded for that lawsuit.
- Medifast reported no material change to its risk factors and stated that disclosure controls were effective. Marketable securities remain exposed to interest-rate and market-price risk; management estimated a hypothetical 10% adverse shift would have an immaterial effect.
Key facts for investors to verify
- Whether the contraction in active Health Coaches and Medifast Direct customer acquisition stabilizes, and whether franchise growth can persist amid center closures.
- Whether pricing and cost controls offset ingredient inflation, manufacturing variances, and inventory obsolescence without further margin erosion.
- The quality and repeatability of cash generation: the filing’s cash-flow statement reports $21.0 million from continuing operations, while the MD&A narrative also cites $12.5 million of cash provided by operating activities; reconcile the narrative figure with the statement.
- Resolution and collectability of the franchisee judgment and guarantor claim, and the ultimate costs of discontinued-center obligations.
- The impact of share repurchases and share-based compensation: Medifast repurchased 103,130 shares in May at an average $32.18 per share; six-month treasury-stock purchases totaled $3.3 million.