Medifast, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013, compared with the three months ended March 31, 2012, unless otherwise noted. Medifast sells weight-management products and services through direct sales, its Take Shape For Life coaching network, weight-control centers, and wholesale physicians. Meal products accounted for 96% of Q1 2013 revenue.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 or comparison |
|---|---|---|
| Revenue | $96.0 million | $88.9 million; up 8% |
| Gross profit / margin | $72.4 million / 75.4% | $66.8 million / 75.1% |
| Operating income / margin | $8.6 million / 8.9% | $6.1 million / 6.9% |
| Income before taxes | $8.7 million | $6.3 million |
| Net income / diluted EPS | $5.9 million / $0.43 | $4.0 million / $0.29 |
| Operating cash flow | $14.8 million | $20.7 million |
| Capital expenditures | $2.5 million | $2.5 million |
| Cash and cash equivalents | $49.2 million at March 31 | $39.9 million at December 31, 2012 |
| Investment securities | $19.7 million at March 31 | $20.1 million at December 31, 2012 |
| Debt and capital leases | No long-term debt; $0.9 million in current and long-term capital lease obligations | $3.6 million in long-term debt and current maturities, plus $1.2 million in capital leases |
Net income rose 49% year over year. Gross margin improved modestly, while SG&A increased 5% to $63.8 million but declined as a share of revenue to 66.5% from 68.2%. Cash from operations decreased despite higher earnings, reflecting lower cash contributions from inventory reductions, payables and other working-capital items than in the prior-year quarter. Cash increased by $9.3 million during Q1. The company repaid its outstanding debt during the quarter and reported an undrawn $5 million revolving credit line.
Performance changes and management commentary
- Take Shape For Life revenue increased 12% to $59.4 million. Active Health Coaches rose 11% to 11,300, and average monthly revenue per coach increased to $1,720 from $1,650.
- Medifast Direct revenue increased about 2% to $23.0 million. Weight Control Centers and Wholesale revenue also increased about 2%.
- Corporate-center same-store sales declined 16% for centers open more than one year, across a 73-center comparison base. Management attributed the weakness in part to efforts to improve profitability through operational efficiency, staffing and advertising-spend management.
- MWCC and Wholesale moved from a $2.2 million pretax loss to $0.6 million pretax income. Management cited prior restructuring savings, stronger franchise-center performance and lower advertising spend as a percentage of sales. The Medifast segment’s pretax income was $9.5 million versus $9.9 million.
- Management attributed gross-margin improvement to fewer customer discounts, partly offset by higher commodity and shipping costs. SG&A included higher Take Shape For Life commissions as sales grew, partly offset by lower salaries and benefits and marketing expense.
Outlook, risks and unusual items
- Management anticipated a 2013 full-year effective tax rate of approximately 34%–35%. The filing provides no broader numerical revenue or earnings guidance and cautions that Q1 results are not necessarily indicative of full-year results.
- Two shareholder derivative cases were dismissed without prejudice by joint stipulation and court order on April 15, 2013. The court granted the company’s motion to dismiss all claims in a securities class action on March 28, 2013. Appeals in the company’s separate defamation and market-manipulation lawsuit remained pending; the company seeks $270 million in compensatory damages, plus punitive damages and other relief.
- A bankruptcy-trustee preference-payment matter involving a subsidiary was settled for $6,500, subject to court approval. The company said pending employment-related claims were not material.
- The company reported no Q1 repurchases under its share-repurchase program; 1,125,000 shares remained authorized for repurchase. Management stated disclosure controls and internal control over financial reporting were effective as of March 31, 2013.
Important facts for investors to verify
- Whether Take Shape For Life coach growth and revenue per coach continue, and whether the 16% same-store sales decline at corporate centers stabilizes.
- Whether operating cash flow recovers and how investment holdings, capital spending and working capital affect cash generation.
- The status and potential financial implications of the pending appeals and any remaining litigation contingencies.
- Whether the expected 34%–35% tax rate and management’s profitability improvements are borne out over the rest of 2013.
- The company’s use of its repurchase authorization and liquidity, including the undrawn revolving credit line and remaining lease obligations.