Medifast, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. Medifast sells weight-management and related products through direct sales, independent health coaches, weight control centers, and wholesale physician channels. Financial statements are unaudited.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $76.1 million | $67.3 million | $228.6 million | $194.5 million |
| Gross profit | $56.4 million | $50.5 million | $172.2 million | $145.7 million |
| Gross margin | 74.2% | 75.0% | 75.3% | 74.9% |
| Operating income | $6.7 million | $9.0 million | $25.7 million | $26.5 million |
| Operating margin | 8.8% | 13.4% | 11.2% | 13.6% |
| Net income | $5.1 million | $5.8 million | $17.4 million | $16.2 million |
| Diluted EPS | $0.36 | $0.39 | $1.22 | $1.11 |
- Q3 revenue increased 13%, but operating income fell 26% and net income fell 12%. Higher selling, general and administrative costs more than offset sales growth.
- Nine-month revenue grew 18% and net income grew 7%; operating income declined 3%. SG&A rose 23%, to $146.5 million, and operating margin contracted.
- Operating cash flow was $33.4 million for the first nine months, versus $27.5 million in 2010. Capital spending was $9.8 million; investing cash outflow was $11.5 million. Treasury-stock purchases used $20.4 million, leaving cash up $1.3 million to $18.5 million.
- At September 30, cash was $18.5 million and investment securities were $18.5 million. Current assets were $65.0 million against current liabilities of $22.3 million. Total debt was approximately $4.8 million, including $0.9 million current; total liabilities were $31.8 million.
- Effective tax rate was 25.5% in Q3 and 33.8% for the first nine months. Management attributed the reduction to state tax planning and tax credits, including favorable adjustments following tax-return filings.
Business developments and changes versus prior periods
- For the first nine months, Take Shape for Life revenue rose 16% to $142.5 million; active health coaches increased 14% to about 10,300, while monthly revenue per coach fell 9% to $1,585. Management cited challenges training a larger coach network.
- Medifast Direct revenue increased 16% to $57.9 million for the first nine months. Management reported a 2.8-to-1 return on advertising spend, unchanged year over year.
- Weight Control Centers and Wholesale revenue grew 32% for the first nine months. At quarter-end there were 60 company-operated and 26 franchise centers. Same-store sales rose 10% for company centers open over one year; Q3 growth was 13%.
- Center expansion and infrastructure investment weighed on profitability: the MWCC and Wholesale segment reported a $1.5 million Q3 pretax loss, versus $1.5 million income a year earlier, and a $0.2 million loss for the nine months, versus $4.7 million income. Management linked this to startup costs, new locations, and staffing.
- Q3 gross margin declined amid higher third-party manufacturing, raw-material, fuel, and transportation costs. For the nine-month period, margin improved modestly, supported by lower shipping costs and improved production absorption.
Outlook, risks, contingencies, and unusual items
- Management anticipated a 2011 effective tax rate of approximately 34.35% and planned 30–35 new company-operated centers during 2011, including 10–12 in Q4.
- Management cited possible capacity and service constraints as sales grow, including call-center, website, order-processing, shipping, and inventory availability risks. It described investments in distribution, technology, and call-center capacity as mitigations. Coach retention and declining revenue per coach are also relevant risks.
- The company disclosed material weaknesses in internal control over financial reporting, involving expense-period recognition and the tax provision process; disclosure controls were deemed ineffective at September 30. Management described remediation steps, including additional finance and tax personnel and enhanced reviews, and said additional procedures supported the reported statements.
- Contingencies include securities class actions alleging misleading statements and shareholder derivative actions alleging fiduciary and governance claims; damages were unspecified. The company said it intends to defend these matters. A separate bankruptcy trustee action seeking recovery of alleged preferential payments against a subsidiary was on hold. The company’s own defamation/market-manipulation suit seeks at least $270 million in damages; this is a claim brought by Medifast, not a disclosed liability estimate.
- On November 3, 2011, Executive Chairman Bradley T. MacDonald resigned that role for health reasons and remained a director; Michael C. MacDonald was selected as successor. The filing also reported subsequent board and executive-role changes.
- Medifast repurchased $20.4 million of stock in the first nine months. It reported 500,000 shares repurchased during Q3 and 275,000 shares still authorized for repurchase at quarter-end.
- The company noted historical seasonality, with November and December typically weaker and January and February stronger, though it said seasonality had not been significant in 2011.
Most important facts for investors to verify
- Whether revenue growth can translate into operating-margin recovery as center expansion and corporate costs continue.
- Whether health-coach training and productivity improve, given rising coach count but lower revenue per coach.
- Whether the company achieves its center-opening and tax-rate expectations, and whether new centers become profitable.
- Progress in remediating the disclosed material weaknesses and establishing effective internal controls.
- Developments and potential financial effects of the securities, derivative, employment, and bankruptcy-related proceedings; the filing does not provide a clear quantified exposure for most claims.
- Cash use from repurchases and capital investment, alongside liquidity, variable-rate debt exposure, and operating cash generation.