Medifast, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; financial statements are unaudited. Medifast sells weight-management products and services through Medifast Direct, Take Shape For Life (TSFL), and Medifast Weight Control Centers and Wholesale (MWCC and Wholesale).
Financial results
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $80.9 million | $97.1 million | $167.4 million | $193.1 million |
| Gross profit / margin | $60.4 million / 74.6% | $72.9 million / 75.1% | $124.3 million / 74.2% | $145.3 million / 75.3% |
| Operating income / margin | $7.4 million / 9.2% | $10.6 million / 11.0% | $16.1 million / 9.6% | $19.2 million / 10.0% |
| Net income | $5.7 million | $7.1 million | $11.7 million | $13.0 million |
| Diluted EPS | $0.44 | $0.51 | $0.89 | $0.93 |
- Cash flow: First-half operating cash flow was $16.3 million, versus $27.7 million a year earlier. Investing activities used $6.4 million and financing activities used $14.3 million, including $14.2 million for share repurchases. Cash declined $4.4 million to $32.0 million.
- Liquidity and debt: June 30 working capital was $66.2 million; current assets were $92.3 million and current liabilities $26.0 million. Investment securities were $36.6 million. The company reported $0.6 million of capital lease obligations and no outstanding debt; it had an undrawn $5 million revolving credit line expiring August 1, 2015.
- Other metrics: Total assets were $129.7 million and stockholders’ equity was $97.5 million at June 30. The company repurchased 451,000 shares for $14.2 million during the first half.
Material changes and business drivers
- Revenue fell 16.7% in Q2 and 13.3% in the first half year over year. Net income declined 19% in Q2 and 10% in the first half.
- All major channels reported lower sales. TSFL revenue fell 12% in Q2 and 8% in the first half; active Health Coaches declined 8% year over year to 10,800, and first-half average monthly revenue per coach decreased to $1,596 from $1,710.
- Medifast Direct revenue fell 29% in Q2 and 27% in the first half. Management said new-customer acquisition remained challenging, while Q2 spending efficiency was strong and it expected to invest additional marketing dollars compared with the second half of 2013.
- MWCC and Wholesale revenue fell 18% in Q2 and 14% in the first half. The company had 51 corporate and 73 franchise centers at quarter-end; 24 centers transitioned from corporate to franchise ownership during Q2. Same-store sales for qualifying centers declined 13% in the first half.
- Gross margin declined, which management attributed primarily to lower manufacturing volume and channel mix. SG&A fell in dollars but increased to 65.5% of revenue in Q2; it was 64.6% of first-half revenue versus 65.3% a year earlier.
- Management said first-half profitability benefited from expense controls and a gain on center sales, partly offsetting lower revenue. The filing does not provide a clear amount for that gain.
Outlook, risks, and unusual items
- Management anticipated a 2014 full-year effective tax rate of approximately 33%–34%. The filing provides no specific revenue or earnings guidance and cautions that interim results are not necessarily indicative of full-year results.
- Medifast closed eight corporate centers in December 2013 and reported $636,000 of remaining accrued net lease liability at June 30, 2014. Separately, 11 corporate centers had closed over the prior 12 months.
- The company is pursuing litigation alleging defamation, market manipulation, and unfair business practices, seeking $270 million in damages. In June 2014, the Ninth Circuit remanded claims involving two defendants for further consideration; the case against another defendant was dismissed. The filing does not state a clear expected recovery or financial-statement recognition for the claim.
- Management reported no material changes to risk factors and concluded disclosure controls were effective at a reasonable-assurance level. It was evaluating the impact of the new revenue-recognition standard, ASU 2014-09.
Important facts for investors to verify
- Whether declining channel sales, coach counts, and center same-store sales stabilize, and whether planned marketing investment improves customer acquisition.
- Whether the reported improvement in cost discipline and center-sale gains can offset continuing revenue pressure; verify the unquantified gain’s amount and treatment.
- Execution and financial effects of shifting centers to franchises and expanding international distribution.
- Developments in the litigation, including potential outcomes and any financial exposure or recovery.
- Cash generation, investment-portfolio value, and the effect of the share-repurchase program on liquidity and share count.