Medifast, Inc. — Q3 2012 Form 10-Q
Business context and reporting period
Medifast sells weight-management and related health products through Take Shape for Life, Medifast Direct, weight-control centers, and wholesale channels. This unaudited report covers the quarter and nine months ended September 30, 2012; comparisons are with the corresponding 2011 periods.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $91.0 million | $76.1 million | $273.5 million | $228.6 million |
| Gross profit | $68.3 million | $56.4 million | $205.2 million | $172.2 million |
| Gross margin | 75.1% | 74.2% | 75.0% | 75.3% |
| Operating income | $8.9 million | $6.7 million | $19.7 million | $25.9 million |
| Net income | $7.2 million | $5.1 million | $14.0 million | $17.4 million |
| Diluted EPS | $0.52 | $0.36 | $1.02 | $1.22 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $39.7 million | $33.4 million |
Q3 revenue grew 20% and net income 42% year over year; operating margin was 9.8%, versus 8.8%. For the nine-month period, revenue rose 20%, but operating income fell 24% and net income fell 19%; operating margin declined to 7.2% from 11.3%. Nine-month adjusted net income, excluding the $3.7 million FTC settlement expense, was $17.7 million, and adjusted diluted EPS was $1.29. These are non-GAAP measures.
Cash and cash equivalents were $43.4 million at September 30, 2012, compared with $14.3 million at December 31, 2011; investment securities were $19.5 million. Current assets totaled $87.6 million and current liabilities $30.0 million. Total debt and capital lease liabilities were approximately $4.5 million, including $3.4 million of variable-rate loans. Total liabilities were $41.1 million and stockholders’ equity $87.2 million.
Nine-month operating cash flow was $39.7 million; investing used $7.1 million and financing used $3.5 million. Cash increased $29.1 million. Operating cash flow included increases in accounts payable and accrued expenses ($10.6 million) and income taxes ($4.8 million). The company repurchased $2.8 million of shares during the nine months, but none during Q3.
Material changes and management commentary
- Take Shape for Life and Medifast Direct grew nine-month revenue 15% and 16%, respectively. Active Health Coaches increased 5% to 10,800; quarterly revenue per coach rose to $1,634 from $1,585.
- Weight Control Centers and Wholesale revenue increased 52% for the first nine months, supported by new locations and improved same-store sales. At quarter-end, 88 corporate centers and 32 franchise centers were operating.
- Q3 gross margin improved as the company reduced discounts and manufacturing overhead costs improved slightly. Year-to-date gross margin was lower, reflecting earlier commodity-cost increases, shipping promotions, and discounting.
- Nine-month SG&A increased 27% to $185.6 million, with the expense ratio rising to 67.9% from 64.0%. Drivers included higher commissions, center expansion, staffing and infrastructure costs, and the FTC settlement.
- A workforce restructuring eliminated or realigned approximately 70 positions. The company expects about $3 million in annualized savings; $40,000 of the $803,000 restructuring charges remained unpaid at September 30.
Outlook, risks, contingencies, and unusual items
- Management anticipated a 2012 full-year tax rate of approximately 33%. No specific revenue or earnings guidance was stated in the provided filing text.
- The company paid a $3.7 million civil penalty under an FTC consent decree concerning substantiation of advertising claims. It agreed to modify certain claims and ensure clinical studies follow specified protocols.
- Pending matters include securities class-action and shareholder derivative litigation. The company says it intends to defend the amended securities complaint; its motion to dismiss was pending. Other disclosed proceedings include an appeal of an employment claim and the company’s own defamation and market-manipulation lawsuit.
- Management identified operational capacity risks from growth, including call-center, website, order-processing, shipping, and inventory constraints. Investment in manufacturing, warehouse systems, and distribution capacity was described as a mitigation effort.
- Management reported disclosure controls and internal control over financial reporting were effective as of September 30, 2012, with no material quarterly change in internal controls.
- The board authorized repurchases of up to 1 million additional shares in May 2012; the filing reported 1.125 million shares remaining under repurchase authorizations. Repurchases are discretionary and may be discontinued.
Key facts for investors to verify
- Whether Q3 revenue growth and coach productivity persist, and how channel growth translates into sustainable profitability.
- Drivers of the year-to-date decline in operating income and whether restructuring savings offset expansion and infrastructure costs.
- Cash-flow quality, particularly the contribution from higher accrued liabilities and income taxes.
- Implementation and financial consequences of the FTC decree, including advertising and clinical-study requirements.
- Developments in pending litigation, state tax contingencies, and the pace and terms of any future share repurchases.