Medifast, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Medifast sells weight-management products and services through Take Shape For Life, Medifast Direct, weight-control centers, and wholesale physicians.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $86.5 million | $91.0 million | $279.6 million | $273.5 million |
| Gross profit / margin | $64.9 million / 75.0% | $68.3 million / 75.1% | $210.2 million / 75.2% | $205.2 million / 75.0% |
| Operating income / margin | $7.3 million / 8.5% | $8.9 million / 9.8% | $26.6 million / 9.5% | $19.7 million / 7.2% |
| Net income | $5.7 million | $7.2 million | $18.7 million | $14.0 million |
| Diluted EPS | $0.41 | $0.52 | $1.34 | $1.02 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $34.1 million | $39.7 million |
For the nine-month period, cash and cash equivalents were $48.0 million and investment securities were $34.0 million. Current assets were $106.9 million against current liabilities of $30.6 million. The company reported no long-term debt at September 30 after repaying its outstanding debt in Q1; current debt maturities were $0.2 million and capital-lease liabilities totaled $0.8 million. Total liabilities were $37.1 million.
Nine-month investing cash outflow was $22.8 million, including $8.6 million for property and equipment and net purchases of investment securities. Financing cash outflow was $3.2 million, primarily debt and lease repayments. Cash increased $8.0 million from year-end 2012.
Changes and operating drivers
- Q3 revenue fell 5% year over year, while nine-month revenue rose 2%. Q3 net income declined 21%; nine-month net income increased 33%.
- Take Shape For Life revenue rose 1% in Q3 and 8% year to date. Active Health Coaches increased 8.3% to 11,700, while average monthly revenue per coach declined slightly to $1,650 for the nine-month period.
- Medifast Direct revenue declined 19% in Q3 and 7% year to date; management cited weaker consumer discretionary spending and lower advertising spend.
- Weight Control Centers and Wholesale revenue fell 7% in Q3 and 4% year to date. Same-store sales declined 18% in Q3 and 15% year to date. Three corporate centers closed during Q3; 83 corporate and 36 franchise centers remained.
- Q3 gross margin was nearly flat, with higher shipping costs offsetting other factors. Nine-month gross margin improved slightly due to fewer discounts and higher prices, partly offset by commodity and shipping costs.
- Advertising spend fell to $5.5 million in Q3 from $7.4 million; year-to-date spend was $23.5 million versus $26.3 million. Management reported revenue-to-advertising-spend ratios of 15.8-to-1 for Q3 and 11.9-to-1 year to date.
Nine-month operating income improved in part because 2012 included a $3.7 million FTC settlement accrual and $0.4 million accelerated executive compensation. Excluding the FTC charge, 2012 adjusted operating income was $23.4 million and adjusted net income was $17.7 million, versus $26.6 million and $18.7 million, respectively, in 2013. The filing presents these as non-GAAP comparisons.
Outlook, risks, and contingencies
- Management anticipated a 2013 full-year effective tax rate of approximately 33%–34%. The filing provides no clear full-year revenue or earnings guidance.
- Management said it would continue monitoring Medifast Direct advertising to improve near-term demand and profitability. It attributed lower center sales partly to expense and staffing optimization.
- The company agreed to modify certain advertising claims and meet specified clinical-study protocols under an FTC consent decree; it paid a $3.7 million civil penalty in 2012. Management described the settlement as resolved.
- A company lawsuit seeking $270 million in compensatory damages, plus punitive damages and ancillary relief, remained in appeal proceedings; the Ninth Circuit had deferred decisions pending another case. The company also noted ordinary-course litigation and did not expect it to materially affect results, financial position, or liquidity.
- The company began accruing a sales-tax liability in Q4 2012, contributing to higher other expenses. The filing does not quantify the liability here.
- Investment securities are exposed to interest-rate and market-price movements; management estimated an immediate, uniform 10% adverse move would have an immaterial effect. A $5 million unsecured revolving credit line was undrawn.
- Management reported disclosure controls and internal control over financial reporting were effective as of September 30, 2013, with no material quarterly change in internal controls.
Important facts for investors to verify
- Whether the Q3 decline in revenue and center same-store sales continued after the reporting period, and whether advertising reductions affected demand.
- Whether Take Shape For Life coach growth translates into sustained sales and per-coach productivity.
- The composition and liquidity of the $34.0 million investment-security portfolio, and any subsequent changes in market value.
- The status and potential financial impact of the $270 million lawsuit and the accrued sales-tax liability.
- Whether the expected 33%–34% full-year tax rate and management’s profitability priorities were achieved.