Medifast, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; unaudited. Dollar amounts below are in millions unless stated otherwise. Medifast sells weight-loss, weight-management and healthy-living products through Take Shape For Life (TSFL), Medifast Direct, franchise centers and wholesale channels. Product sales represented 97% of revenue in the nine-month periods.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $68.6 | $65.9 | $212.1 | $211.5 |
| Gross profit | $52.2 | $49.2 | $158.6 | $156.1 |
| Operating income | $9.0 | $8.0 | $20.2 | $23.2 |
| Continuing-operations income | $6.1 | $5.4 | $13.7 | $15.7 |
| Net income | $6.1 | $5.5 | $13.7 | $16.2 |
| Diluted EPS | $0.51 | $0.46 | $1.15 | $1.34 |
- Margins: Gross margin was 76.1% in Q3 (74.6% prior year) and 74.8% year to date (73.8%). Operating margin was 13.1% in Q3 (12.1%) but 9.5% year to date (10.9%).
- Cash flow: Cash from continuing operating activities was $26.1 versus $30.8 for the first nine months of 2015; total operating cash flow was $25.7 versus $27.3. Investing activities used $1.2; financing activities used $9.4, including $8.9 of dividends paid.
- Liquidity and capital: Cash and cash equivalents were $57.1 at September 30, up from $42.0 at year-end 2015. Investment securities were $24.9; working capital was $77.2; stockholders’ equity was $94.9. The balance sheet lists $0.1 of current capital-lease maturities and no other borrowings.
- Shareholder distributions: The company declared dividends of $0.25 per share in Q3 and $0.75 per share year to date. A further $0.25-per-share dividend was declared in September, payable in Q4. No shares were repurchased in Q3.
Material changes and business drivers
- Q3 revenue rose 4.1%, while year-to-date revenue increased only 0.3%. TSFL growth, supported by April price increases, more active Health Coaches and higher revenue per coach, drove the gains. Q3 active coaches rose 7% to 12,800 and revenue per coach rose 7% to $4,421.
- TSFL revenue grew 13% in Q3 and 11% year to date. Medifast Direct revenue fell 28% in both periods, reflecting difficult customer acquisition; advertising was reduced. Franchise MWCC revenue fell 8% in Q3 and 10% year to date, with 55 centers operating versus 62 a year earlier. Wholesale revenue fell to $0.3 in Q3 and $1.1 year to date, mainly after enforcement of partner distribution requirements.
- Gross-margin improvement reflected price increases and lower shipping costs. SG&A rose 5% in Q3 and 4% year to date, including higher TSFL commissions and unusual 2016 charges.
- For the first nine months, reported operating income fell 13% and net income fell 15%. Excluding the 2016 impairment and restructuring costs and 2015 extraordinary legal/advisory expenses, management reported adjusted continuing-operations income of $18.6 versus $17.0 and adjusted diluted EPS of $1.56 versus $1.41. These are non-GAAP measures.
Outlook, risks and unusual items
- The filing provides no revenue or earnings guidance. Management anticipated a 2016 full-year effective tax rate of approximately 33%–34% and estimated $2.2 million of future annual savings from the executive restructuring.
- A $6.1 million Q2 impairment was recorded for abandoned TSFL software under development; management cited available alternatives considered a better business fit and less costly than continuing development and maintenance.
- The company incurred $1.2 million in net restructuring costs after the departure of three executive vice presidents and the resignation of the president/COO. A new CEO joined in October 2016; a subsequent executive award had a stated cost of $2.6 million, to be recognized through December 2019.
- Management said new-customer acquisition remained challenging at Medifast Direct, and franchise-center closures and lower same-store sales pressured MWCC. It also identified investment-portfolio exposure to interest-rate and market-pricing movements, which it estimated would have an immaterial effect under a specified 10% shock.
- Closed corporate-center exit obligations were $0.3 million at September 30. The company said ordinary-course litigation was not expected to materially affect results, financial position or liquidity; it reported no material changes to the risk factors in its 2015 Form 10-K. Disclosure controls were assessed as effective, with no material internal-control change reported.
Important facts for investors to verify
- Whether TSFL growth and coach productivity persist, and whether Medifast Direct can improve customer acquisition.
- Whether the $6.1 million software impairment and the non-GAAP adjustments are appropriately understood when assessing underlying results.
- Whether franchise attrition, MWCC same-store sales and wholesale account losses continue to weigh on revenue.
- Cash generation, dividend sustainability and remaining obligations from discontinued corporate centers.
- Execution under the new CEO, including the stated restructuring savings and subsequent executive equity awards.