Medifast, Inc. — Q1 2016 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2016, compared with Q1 2015. Medifast sells weight-loss, weight-management and health products, principally through its Take Shape For Life coaching network. Product sales represented 97% of revenue. The former corporate weight-control center business is reported as discontinued operations.
Financial results
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $72.3 | $73.4 | -1.5% |
| Gross profit / margin | $53.2 / 73.5% | $53.8 / 73.3% | Margin +0.2 pts |
| Operating income / margin | $6.3 / 8.7% | $6.5 / 8.9% | -3.7% income |
| Continuing-operations income | $4.3 | $4.4 | -3.5% |
| Net income | $4.3 | $4.4 | -4.1% |
| Diluted EPS | $0.36 | $0.36 | Unchanged |
| Operating cash flow | $7.7 | $10.1 | Down $2.4 |
| Cash and cash equivalents | $47.3 | $42.0 at Dec. 31, 2015 | Up $5.3 |
Gross margin edged higher, primarily reflecting the March 2015 price increase. SG&A was $46.9 million, or 64.9% of revenue, versus $47.3 million, or 64.4%. Reported Q1 2016 operating income included $1.2 million of net restructuring costs; Q1 2015 included $1.8 million of extraordinary legal and advisory costs related to Schedule 13D filings. Excluding those respective items, the company reported adjusted operating income of $7.4 million versus $8.4 million, and adjusted diluted EPS of $0.42 versus $0.46. These are non-GAAP measures.
At March 31, 2016, total assets were $119.4 million, current assets $92.1 million, current liabilities $24.8 million, working capital $67.4 million, and stockholders’ equity $89.9 million. The balance sheet shows no conventional borrowings; capital lease obligations were $0.2 million current, with additional discontinued-operation lease liabilities. Cash plus investment securities totaled approximately $71.6 million. Q1 investing activities provided $1.2 million; financing activities used $3.6 million, including share-related tax withholding and dividends. The filing reports a $0.25-per-share dividend declared in March.
Business trends and material changes
- Take Shape For Life revenue rose 8.8% to $56.7 million. Active Health Coaches increased 4% to 12,600, while quarterly revenue per coach rose 4% to $4,490.
- Medifast Direct revenue fell 24% to $10.9 million as customer acquisition remained challenging; advertising spend declined to $4.1 million from $5.3 million.
- Franchise center revenue declined 9% to $4.2 million. There were 58 centers at quarter-end versus 70 a year earlier.
- Wholesale revenue fell to $0.5 million from $2.2 million, mainly after the company enforced business-partner distribution requirements and lost certain accounts.
- Total advertising spend decreased 25.5% to $4.1 million. Revenue-to-advertising-spend ratio improved to 17.5-to-1 from 13.4-to-1.
Outlook, risks and unusual items
- Management anticipated a 2016 full-year effective tax rate of approximately 33%–34%. It estimated $2.2 million in future annual savings from executive restructuring; related expenses were expected to be paid within 12 months.
- The company stated it intended to continue its dividend program but could not assure future declarations or payments. It expected any future cash needs to be funded by operating cash flow and financing activities.
- Four senior leaders departed or resigned during the quarter, including three Executive Vice Presidents and the President/COO. The company recorded $1.2 million in net restructuring costs.
- Legacy obligations from exited corporate centers included $0.9 million of discontinued-operation liabilities at quarter-end. The filing describes franchise-related litigation; a summary judgment was granted against a guarantor on April 21, 2016. A separate dispute was settled and dismissed with prejudice in February 2016. Management did not expect other routine proceedings to have a material adverse effect.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting. It reported no material change in risk factors or market-risk exposure; investment-portfolio sensitivity to a uniform 10% adverse market move was estimated to be immaterial.
Important facts for investors to verify
- Whether growth in the coach channel can offset continued weakness in direct, franchise and wholesale channels, and whether reported coach activity and revenue-per-coach trends persist.
- How the company’s adjusted results reconcile to GAAP results, and the comparability limitations of excluding different one-time costs in each year.
- The timing and amount of dividend payments: the filing says the $0.25 dividend was paid in Q2, while its cash-flow statement reports approximately $3.0 million of dividends paid during Q1.
- Resolution and collectability of franchise-related claims, including the ongoing guarantor case, and remaining closed-center lease and exit obligations.
- Management cautioned that quarterly results are not necessarily indicative of full-year results; the filing provided no revenue or earnings forecast.