Medifast, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; comparisons are to the corresponding 2016 periods. Amounts are in U.S. dollars. Financial statements are unaudited.
Business context
Medifast sells weight-management and healthy-living products through Optavia (formerly Take Shape For Life), Medifast Direct, franchise and reseller centers (MWCC), and wholesale channels. Product sales represented 97% of revenue in the first half of 2017. In July 2017, Take Shape For Life was rebranded as Optavia, with a new product line.
Financial results
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $75.7m | $71.1m | $146.4m | $143.5m |
| Gross profit | $57.6m | $53.2m | $110.5m | $106.4m |
| Gross margin | 76.1% | 74.8% | 75.5% | 74.2% |
| SG&A | $46.3m | $48.2m | $90.6m | $95.1m |
| Operating income | $11.3m | $5.0m | $19.9m | $11.3m |
| Operating margin | 14.9% | 7.1% | 13.6% | 7.9% |
| Net income | $7.6m | $3.4m | $13.7m | $7.7m |
| Diluted EPS | $0.63 | $0.29 | $1.14 | $0.64 |
Q2 diluted EPS was $0.63; first-half diluted EPS was $1.14. The effective tax rates were 33.8% for Q2 and 31.9% for the first half. Management expected a full-year 2017 tax rate of 33%–34%.
- Cash flow: First-half operating cash flow was $20.7m, versus $19.0m in 2016. Investing activities used $1.7m; financing activities used $7.9m, including $7.7m of dividends paid. Cash increased $11.1m to $63.5m.
- Liquidity and capital: Cash, cash equivalents, and investment securities totaled $88.6m at June 30, 2017, versus $76.8m at year-end 2016. Working capital was $85.6m and stockholders’ equity was $104.2m. No borrowings or debt balance is shown on the balance sheet.
- Dividends and repurchases: The company declared $0.32 per share for Q2, totaling $4.1m and payable in Q3. No shares were repurchased in Q2; a Rule 10b5-1 plan authorized potential purchases of up to 850,000 shares, with no assurance purchases would occur.
Changes versus prior period
- Q2 revenue rose 6.4%; first-half revenue rose 2.0%. Growth was led by Optavia, partly offset by declines in the other business units.
- Optavia revenue increased 10.7% to $63.5m in Q2 and 6.5% to $121.5m for the first half. Active earning coaches increased 5.5% to 13,500 in Q2, and quarterly revenue per coach rose 5.2% to $4,713.
- Medifast Direct revenue declined 7.5% in Q2 to $8.6m amid customer-acquisition challenges. MWCC revenue fell 17.9% year to date to $6.8m; the company had 36 franchise centers and two reseller locations, versus 57 centers a year earlier. Wholesale revenue also declined.
- Gross margin improved 130 basis points in both comparison periods, attributed to product mix, higher selling prices, the April 2016 price increase, and supply-chain efficiencies.
- Reported operating income and net income grew sharply, but 2016 results included $6.1m of asset impairment and $1.2m of restructuring charges in the first half. Excluding those items, first-half operating income was $19.9m versus $18.5m, and net income was $13.7m versus $12.5m. Adjusted figures are non-GAAP.
Outlook, risks, and other notable items
- No revenue or earnings guidance was provided; management cautioned that interim results are not necessarily indicative of full-year results. The stated full-year outlook was a 33%–34% tax rate.
- Management cited continued difficulty acquiring Medifast Direct customers and lower MWCC activity and center count. It also reported seven consecutive quarters of Optavia year-over-year growth.
- The Medix distribution and licensing agreement was terminated in Q1 2017, and Medix closed its centers in Q2. Management said this would allow a refocus on core businesses.
- The company reported no material change to risk factors from its 2016 annual report. It said routine litigation was not expected to materially affect results, financial position, or liquidity. Management considered disclosure controls effective and reported no material change in internal control over financial reporting.
- Marketable securities were exposed to interest-rate and market-price risk; management estimated a uniform 10% adverse move would have an immaterial fair-value impact. The company adopted updated share-based payment accounting in 2017, recognizing discrete tax benefits of $321,000 for the first half.
Important facts for investors to verify
- Whether Optavia’s coach growth and higher revenue per coach continue, and whether product mix and pricing sustain improved gross margins.
- Whether Medifast Direct customer acquisition improves and MWCC’s lower center count and activity stabilize.
- How much reported earnings growth reflects ongoing operations versus the prior-year impairment and restructuring comparison; review the company’s non-GAAP reconciliations.
- Whether cash generation supports the dividend and any share repurchases; the filing provides no assurance that the repurchase plan will be used.
- Whether the anticipated 33%–34% full-year tax rate and the company’s assessment of investment and legal risks remain valid.