Medifast, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Comparisons are with Q1 2019 unless otherwise noted. Medifast sells nutrition and weight-management products and supports clients through its OPTAVIA independent Coach model. Product sales represented 98% of revenue.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $178.5 million | $165.9 million | +7.6% |
| Gross profit / gross margin | $135.2 million / 75.8% | $125.1 million / 75.4% | Profit +8.1%; margin +0.4 percentage points |
| SG&A | $111.7 million / 62.6% of revenue | $100.4 million / 60.5% | +11.2% |
| Operating income / margin | $23.5 million / 13.2% | $24.7 million / 14.9% | −4.8%; margin −1.7 points |
| Net income | $18.5 million | $20.8 million | −11.0% |
| Diluted EPS | $1.56 | $1.70 | −8.2% |
| Operating cash flow | $26.7 million | $32.7 million | −$6.0 million |
Gross-margin improvement reflected the 2019 price increase and fewer sales discounts. SG&A growth included higher Coach commissions, $4.6 million of professional services related to a Schedule 13D filing, and $1.0 million of severance associated with the CFO’s departure. Excluding those two identified items, adjusted SG&A was $106.1 million; adjusted operating income was $29.1 million, adjusted net income $22.9 million, and adjusted diluted EPS $1.93. These are non-GAAP measures and are not substitutes for GAAP results.
Active earning OPTAVIA Coaches increased 19.9% to 32,600, while average revenue per active earning Coach fell 8.3% to $5,333. OPTAVIA-branded products were 79% of consumable units sold, versus 73% a year earlier. The effective tax rate rose to 21.8% from 17.1%, which management attributed to a higher state tax rate and a lower tax benefit from stock compensation.
Cash, liquidity and capital
- Cash and cash equivalents were $90.7 million at March 31, 2020; investment securities were $14.6 million. Combined cash, cash equivalents and investments totaled $105.3 million, up from $92.7 million at year-end 2019.
- Working capital was $79.4 million. Current assets were $161.2 million and current liabilities $81.8 million.
- Operating activities provided $26.7 million; investing activities provided $0.7 million; financing activities used $13.7 million. Cash increased $13.7 million to $90.7 million. Lower operating cash flow reflected lower net income and changes in operating assets and liabilities; the prior-year comparison included a larger increase in accounts payable and accrued expenses.
- The balance sheet reported no borrowings; lease obligations totaled $12.8 million, including $3.2 million current. Stockholders’ equity was $110.7 million.
- The company declared $13.1 million, or $1.13 per share, in dividends for Q1, payable in Q2; it paid $13.3 million in dividends during the quarter. Management expects to continue the dividend program but gave no assurance it can do so.
Outlook, risks and notable items
- COVID-19: Management said the pandemic had not materially affected Q1 consolidated results, though effects were most pronounced in March. It expected the most significant reported impact in Q2 2020 and possible effects in later periods; the magnitude and duration were uncertain. The filing identifies risks from weaker consumer confidence and discretionary spending, changing purchasing patterns, and broader economic disruption. Manufacturing and distribution were reported operating without meaningful supply-chain disruption as of the filing; non-essential employees shifted to remote work, the July convention became virtual, and Coach incentives and promotions were introduced. No numerical earnings or revenue guidance was provided.
- Product recall: On or about April 30, the company learned that a product sold in Q1 and early Q2 might contain undeclared traces of milk. It initiated a recall of affected lots and notified the FDA. Management considered the Q1 effect immaterial but said it would continue assessing potential Q2 adjustments.
- Other items: Adoption of an internal-use software accounting standard resulted in $1.9 million of Q1 capitalization, principally for a new hosted ERP system. The CARES Act had no material Q1 financial-statement impact; future effects were under evaluation.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting. It said ordinary-course legal proceedings were not expected to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
Key facts for investors to verify
- Whether the Q2 and later COVID-19 impact materially changes revenue, Coach activity, margins, cash flow or liquidity.
- The recall’s scope, any resulting costs or claims, and whether a Q2 adjustment is required.
- Whether Coach growth and the shift toward higher-priced OPTAVIA products persist while revenue per Coach remains lower.
- The sustainability of operating margins given faster SG&A growth, and the nature and recurrence of the Schedule 13D-related professional costs and severance.
- Dividend capacity and cash deployment, including the company’s stated intention to continue dividends.