Medifast, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; filed August 9, 2012. Interim financial statements are unaudited. Medifast sells weight-management and related products through direct sales, its Take Shape for Life coaching network, weight-control centers, and wholesale physicians.
Financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $93.6 million | $78.3 million | $182.5 million | $152.6 million |
| Gross profit | $70.1 million | $59.0 million | $136.9 million | $115.7 million |
| Operating income | $4.6 million | $9.1 million | $10.7 million | $19.2 million |
| Net income | $2.8 million | $5.9 million | $6.8 million | $12.3 million |
| Diluted EPS | $0.20 | $0.41 | $0.49 | $0.85 |
- Revenue grew 20% in both the quarter and first half, while net income declined 53% and 45%, respectively.
- Gross margin was 75.0% in both periods in 2012, versus 75.4% in Q2 2011 and 75.9% in the first half of 2011. Management cited higher commodity costs, discounted shipping, and promotions.
- SG&A rose 31% year over year in both periods. It represented 70.0% of Q2 revenue and 69.1% of first-half revenue, up from 63.9% and 63.3%, respectively. Operating margin fell to 4.9% in Q2 and 5.9% for the first half, from 11.6% and 12.6%.
- Operating cash flow was $31.4 million for the first half, versus $30.5 million a year earlier. Investing used $5.1 million and financing used $3.5 million; cash increased $22.9 million to $37.1 million. The cash-flow statement shows material contributions from higher accounts payable/accruals and income taxes payable, as well as lower inventory.
- At June 30, cash was $37.1 million and investment securities were $19.4 million. Current assets were $79.5 million against current liabilities of $30.6 million. Debt and capital leases totaled approximately $4.6 million, including current maturities; the company also held $19.4 million of investment securities.
Changes, segments, and unusual items
- Take Shape for Life revenue grew 13% in the first half to $108.7 million; monthly revenue per active Health Coach increased to $1,683 from $1,615. Active coaches were 10,200 at quarter-end, down 1% year over year but up 6% from year-end 2011.
- Medifast Direct first-half revenue increased 18% to $45.1 million; advertising return was reported at 2.8 to 1. Weight Control Centers and Wholesale revenue rose 61% to $28.7 million, helped by new locations and same-store sales growth of 20% for the first half.
- The company recorded a $3.7 million expense for a proposed FTC settlement concerning advertising substantiation. It also reported a one-time $0.8 million gain from key-person life insurance proceeds. The FTC agreement, signed July 20, 2012, remained subject to FTC acceptance and federal court approval.
- Company-presented non-GAAP adjusted net income was $6.5 million and adjusted diluted EPS was $0.47 for Q2, excluding the FTC charge; first-half adjusted net income was $10.5 million and adjusted diluted EPS was $0.76. These measures do not replace GAAP results.
- A March workforce reduction and staffing realignment affected approximately 70 positions. Management expected about $3 million in annualized savings overall; $174,000 of restructuring charges remained accrued at June 30 and was expected to be paid by year-end.
Outlook, risks, and contingencies
- Management anticipated a 2012 full-year effective tax rate of approximately 38%–39%. No specific revenue or earnings guidance was provided in the filing.
- Management planned to expand franchise centers, improve corporate-center profitability, enhance customer services, and invest in manufacturing capacity and warehouse systems. Growth could strain call-center, website, order-processing, shipping, and production capacity; the company also cited the risk of losing Health Coaches.
- Other disclosed proceedings include consolidated shareholder derivative and securities class-action cases, a bankruptcy trustee preference-payment claim, and remaining employment-discrimination litigation. The company stated it intended to defend these matters; outcomes and potential liabilities are uncertain.
- The board authorized repurchases of up to an additional 1 million shares on May 29, 2012, with authorization through May 29, 2014. The company repurchased 150,000 shares in May at an average $18.34 per share; repurchases are discretionary and funded from cash.
- Management assessed disclosure controls as effective at June 30, 2012 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the proposed FTC decree received approval, the final payment and required advertising or study changes, and any related compliance costs.
- Whether revenue growth can translate into improved operating margins after the sharp increase in SG&A and the costs of center expansion.
- The sustainability and cash-flow quality of operating cash generation, particularly the effects of payables, accrued expenses, and income taxes.
- Actual savings and profitability trends following the restructuring, including the economics of company-operated and franchise centers.
- Developments and potential exposure in the pending shareholder, securities, bankruptcy, and employment matters; the filing does not provide clear quantified loss estimates for these proceedings.
- Future share repurchases and the amount ultimately used under the remaining authorization.