Medifast, Inc. — Q2 2016 Form 10-Q
Business context and reporting period. Medifast produces and sells weight-loss, weight-management, and healthy-living products. This unaudited filing covers the quarter and six months ended June 30, 2016, compared with the corresponding 2015 periods. Product sales represented 97% of revenue. Take Shape For Life (TSFL), Medifast Direct, franchise centers (MWCC), and Medifast Wholesale are the principal business units.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $71.1m | $72.2m | $143.5m | $145.5m |
| Gross profit / margin | $53.2m / 74.8% | $53.2m / 73.7% | $106.4m / 74.2% | $106.9m / 73.5% |
| Operating income / margin | $5.0m / 7.1% | $8.7m / 12.0% | $11.3m / 7.9% | $15.2m / 10.4% |
| Income from continuing operations | $3.4m | $5.8m | $7.7m | $10.3m |
| Net income | $3.4m | $6.2m | $7.7m | $10.7m |
| Diluted EPS | $0.29 | $0.51 | $0.64 | $0.88 |
Cash flow and liquidity. For the six months, the cash flow statement reports $19.0m of operating cash from continuing operations and $18.7m total operating cash, $4.2m of investing cash inflow, and $6.4m of financing cash outflow. Cash increased $16.6m to $58.6m. At June 30, cash and cash equivalents were $58.6m, investment securities $21.0m, working capital $73.4m, and stockholders’ equity $91.3m. The company had no reported conventional borrowings; balance-sheet obligations included $0.1m of current capital leases and $0.5m of discontinued-operation liabilities, including $0.02m long-term lease obligations.
The company declared dividends of $0.50 per share for the first half; $0.25 per share declared in June was payable in Q3. It said it intended to continue dividends but gave no assurance of future declarations or payments.
Material changes and drivers
- Revenue fell 1.5% in Q2 and 1.4% year to date. TSFL growth and April 2016 price increases partly offset declines in Medifast Direct, MWCC, and Wholesale.
- TSFL revenue grew 10% in Q2 to $57.4m and 9% year to date to $114.1m. Active Health Coaches rose 8% to 12,800; quarterly revenue per coach increased 1% to $4,479.
- Medifast Direct revenue declined 32% in Q2 and 28% year to date, with customer acquisition challenges; advertising was reduced. MWCC revenue fell 13% and 10%, respectively, alongside a decline in operating franchise centers from 62 to 57. Wholesale revenue fell to $0.3m in Q2 and $0.8m year to date, primarily following enforcement of partner distribution requirements.
- Gross margin improved, attributed to prior and April 2016 price increases and lower shipping costs. Reported SG&A rose 8% in Q2 and 4% year to date, and operating margin contracted.
Guidance, outlook, risks, and unusual items
- Management anticipated a 2016 full-year effective tax rate of approximately 33–34%. The filing provides no specific revenue or earnings guidance.
- Management reported a $6.1m Q2 impairment charge for abandoning TSFL software under development after assessing available alternatives. It also recorded $1.2m of first-half net restructuring costs related to four senior executive departures; estimated future annual savings were $2.2m. The company launched the OPTAVIA product line in July 2016.
- Excluding the impairment, adjusted Q2 continuing-operations income was $7.5m and adjusted diluted EPS $0.63; for the first half, excluding impairment and restructuring, adjusted income was $12.5m and adjusted diluted EPS $1.05. These are company-defined non-GAAP measures.
- Management said risk factors were unchanged from the 2015 Form 10-K. The filing describes franchise-related litigation, including a judgment against Team Wellness companies and a subsequent summary judgment against their guarantor; a separate case was settled and dismissed. Management did not expect other routine claims to materially affect results, financial position, or liquidity.
- Disclosure controls were assessed as effective at the reasonable-assurance level; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Reconcile the filing’s cash-flow discussion: the cash flow statement reports $19.0m of continuing-operations operating cash, while a later MD&A passage refers to $15.3m of cash provided by operating activities. The text does not clearly reconcile these amounts.
- Assess whether TSFL growth and coach productivity can offset continued weakness in Direct, MWCC, and Wholesale.
- Review the impact of the $6.1m software impairment, restructuring savings, and the timing and costs of alternative software solutions.
- Monitor cash generation, investment portfolio liquidity, and the company’s ability to sustain dividends; verify the status and potential cash exposure of franchise-related matters and remaining center-exit obligations.
- Compare GAAP results with adjusted results, including the company’s exclusions and tax effects, and track execution of the July OPTAVIA launch.