Medifast, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Medifast sells weight-management products and services through Take Shape For Life (TSFL), Medifast Direct, and Weight Control Centers/Wholesale. Financial statements are unaudited.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $97.1 million | $93.6 million | $193.1 million | $182.5 million |
| Gross profit / margin | $72.9 million / 75.1% | $70.1 million / 75.0% | $145.3 million / 75.3% | $136.9 million / 75.0% |
| Operating income / margin | $10.6 million / 11.0% | $4.6 million / 4.9% | $19.2 million / 10.0% | $10.7 million / 5.9% |
| Net income | $7.1 million | $2.8 million | $13.0 million | $6.8 million |
| Diluted EPS | $0.51 | $0.20 | $0.93 | $0.49 |
- Q2 revenue rose 4%; six-month revenue rose 6%. Q2 operating income increased 131% and net income 151%; six-month operating income rose 79% and net income 91%.
- For the six months, operating cash flow was $27.7 million, compared with $31.4 million in 2012. Investing cash outflow was $19.9 million, including $20.2 million of investment-security purchases and $5.6 million of property and equipment purchases. Financing cash outflow was $3.4 million. Cash increased $4.5 million to $44.4 million.
- At June 30, cash and investment securities totaled $78.1 million; current assets were $101.2 million and current liabilities $30.9 million. Long-term debt was repaid in Q1; no long-term debt remained at quarter-end. Capital-lease obligations totaled approximately $0.8 million. The company also had an undrawn, unsecured $5 million revolving credit line.
Changes, drivers, and segments
- TSFL grew 10% in Q2 and 11% year to date, reaching $61.4 million and $120.8 million, respectively. Active Health Coaches increased 17% year over year to 11,800 at quarter-end; six-month average monthly revenue per coach increased to $1,710 from $1,670.
- Medifast Direct revenue declined 4% in Q2 and 1% year to date. Management cited weaker discretionary spending, lower advertising spend, and a greater emphasis on brand awareness.
- Weight Control Centers and Wholesale revenue declined 8% in Q2 and 3% year to date. Same-store sales fell 20% in Q2 and 18% for the first half. Management attributed the weakness partly to expense and staffing optimization and reduced advertising. There were 86 corporate and 36 franchise centers at quarter-end.
- Gross margin edged up, which management attributed to fewer discounts and higher prices, partly offset by commodity and shipping costs. SG&A fell to 64.2% of Q2 revenue from 70.0%, and to 65.3% for the first half from 69.1%; lower staffing, marketing and corporate costs contributed.
- Reported 2012 comparisons included a $3.7 million FTC settlement accrual and $0.4 million accelerated executive-chairman compensation, partly offset by a $0.8 million key-person insurance gain. Excluding the FTC charge, management reported adjusted diluted EPS of $0.47 for Q2 2012 and $0.76 for the first half of 2012, versus $0.51 and $0.93, respectively, in 2013.
Outlook, risks, and unusual items
- Management anticipated a full-year 2013 effective tax rate of approximately 34%–35%. The filing provides no specific revenue or EPS guidance. Management said it would continue monitoring advertising mix to support Medifast Direct demand while building brand awareness.
- The FTC consent decree, entered in September 2012, required changes to certain advertising claims and clinical-study protocols; the company paid a $3.7 million civil penalty, accrued in Q2 2012. The filing notes the importance of substantiating advertising and complying with the decree.
- Pending litigation included the company’s appeal in its defamation and market-manipulation lawsuit, seeking $270 million, with appellate proceedings deferred pending another case. Prior shareholder derivative claims were dismissed without prejudice, and a securities class-action motion to dismiss was granted as to all claims in March 2013. A bankruptcy preference matter was settled for $6,500. The company said pending employment-related claims were not material.
- Management identified risks including estimates for returns, impairment judgments, tax positions, consumer demand, and market values of investments. A hypothetical immediate 10% change in investment rates and pricing was expected to have an immaterial fair-value impact. No material change in risk factors from the 2012 Form 10-K was reported.
- The company reported effective disclosure controls and internal control over financial reporting as of June 30, 2013, with no material quarterly change. No shares were repurchased during the first half; 1,125,000 shares remained authorized for repurchase under outstanding programs.
Investor verification priorities
- Verify whether TSFL growth and coach productivity can offset continued weakness in Medifast Direct and center same-store sales.
- Assess the durability of margin gains and cost reductions, including the impact of price increases, discounts, commodity costs, and sales-tax accruals.
- Review cash conversion and investment-security exposures, and confirm the status of debt repayment, capital leases, and the revolving credit facility.
- Track compliance with FTC advertising and clinical-study requirements, and developments in the company’s pending appeal and other legal matters.
- Compare reported earnings with the company’s non-GAAP adjustments and account for the prior-year FTC charge and other unusual items.