Medifast, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Unaudited financial statements. Amounts are in millions of dollars except per-share data.
Business context
Medifast operates as a single reportable segment, OPTA VIA, selling nutrition and wellness products through a community of independent coaches and its other sales channels. Product sales represented 98% of revenue. Management attributed growth in part to more active earning coaches, new client starts, and clients shifting toward higher-priced OPTA VIA products.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $165.9 | $98.6 | +68.2% |
| Gross profit / margin | $125.1 / 75.4% | $74.8 / 75.9% | +67.3% / down 0.5 percentage point |
| SG&A / share of revenue | $100.4 / 60.5% | $60.1 / 61.0% | +67.0% |
| Operating income / margin | $24.7 / 14.9% | $14.7 / 14.9% | +68.3% |
| Net income | $20.8 | $12.2 | +69.8% |
| Diluted EPS | $1.70 | $1.01 | Up $0.69 |
| Operating cash flow | $32.7 | $18.0 | Up $14.7 |
Active earning OPTA VIA coaches increased 62.9% to 27,200; quarterly revenue per coach rose 10.2% to $5,817. OPTA VIA products were 73% of consumable units sold, versus 58% a year earlier. Gross-margin pressure reflected higher obsolescence and shipping costs. SG&A growth mainly reflected higher coach commissions, as well as consulting, payroll and card-processing costs; commissions were 41.3% of revenue versus 37.9%.
Cash and cash equivalents were $101.8 at March 31, 2019, and investment securities were $18.6, for combined cash and investments of $120.4. Working capital was $92.4. The balance sheet reported no conventional borrowings; lease obligations totaled $13.6, including $2.4 current. Operating cash flow benefited from higher net income and a $14.7 increase in accounts payable and accrued expenses. Investing cash outflow was $3.4, including $4.4 of property and equipment purchases; financing cash outflow was $8.8, primarily dividends. Cash increased $20.5 to $101.8.
Material changes, outlook and risks
- Effective January 1, 2019, adoption of ASC 842 brought operating lease right-of-use assets and liabilities onto the balance sheet. At quarter-end, the right-of-use asset was $12.9 and lease obligations were $13.6. The company said adoption materially affected the balance sheet but did not significantly affect earnings or cash flows.
- Management anticipated a 2019 full-year effective tax rate of 21.5%–22.5%; the Q1 effective rate was 17.1%. The filing provides no revenue or earnings guidance.
- The company said it intended to continue its dividend program and believed liquidity would be sufficient, but gave no assurance dividends would continue. It declared $9.1 in dividends, or $0.75 per share, for payment in Q2.
- Management cited forward-looking risks, including those described in the 2018 Form 10-K. Ordinary-course litigation was not expected to have a material adverse effect based on information then available, though outcomes could not be predicted with certainty. The company reported no material changes to its previously disclosed risk factors or market-risk exposure.
- Investment securities are exposed to interest-rate and market-price risk; management estimated an immediate, uniform 10% adverse change would cause an immaterial portfolio fair-value decline.
Important facts for investors to verify
- Whether coach and client growth, including the shift to higher-priced OPTA VIA products, can be sustained.
- Whether gross-margin pressure from obsolescence and shipping, and the higher commission share of revenue, affect future profitability.
- How inventory growth and the increase in accounts payable and accrued expenses affect cash conversion and working capital.
- The company’s capacity to fund dividends, capital spending and operating needs, and the impact of lease commitments.
- Developments in ordinary-course legal matters and other risks identified in the 2018 Form 10-K.