Medifast, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless noted. Medifast sells weight-loss, weight-management and nutrition products. Product sales represented 98% of revenue. The company identified OPTAVIA as its primary business focus and discontinued reporting revenue by sales channel.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $98.6 million | $70.6 million | +39.6% |
| Gross profit / margin | $74.8 million / 75.9% | $52.9 million / 74.9% | Margin +1.0 percentage point |
| SG&A / revenue | $60.1 million / 61.0% | $44.3 million / 62.7% | Expense +35.8% |
| Operating income / margin | $14.7 million / 14.9% | $8.6 million / 12.2% | Income +70.6% |
| Net income | $12.2 million | $6.1 million | +98.9% |
| Diluted EPS | $1.01 | $0.51 | +$0.50 |
| Operating cash flow | $18.0 million | $6.7 million | +$11.3 million |
At March 31, cash and cash equivalents were $87.0 million and investment securities were $22.3 million, totaling $109.2 million. Working capital was $92.9 million; total liabilities were $38.2 million, with no debt reported on the balance sheet. Cash increased $11.9 million during the quarter. Investing activities used $0.1 million and financing activities used $6.0 million, including $5.9 million in dividends paid. The company declared a $0.48-per-share dividend, payable in Q2.
Drivers and material changes
- Active earning OPTAVIA Coaches increased 28.5% to 16,700; quarterly revenue per coach rose 18.3% to $5,278. Management attributed growth partly to field training, faster productivity among new coaches and higher-priced products.
- Gross margin improved through revenue growth, inventory-management efficiencies and lower shipping costs. SG&A rose mainly with OPTAVIA commissions, which increased $13.4 million; SG&A as a share of revenue declined.
- General and administrative costs included one-time distribution-center relocation costs, IT projects and higher credit-card costs. The filing does not quantify the relocation costs separately.
- The effective tax rate declined to 18.1% from 29.5%, primarily reflecting the lower federal statutory rate under the Tax Cuts and Jobs Act and share-based compensation tax accounting, partly offset by other tax-law changes.
Accounting, outlook and risks
- Medifast adopted ASC 606 on January 1, 2018 using the modified retrospective method. Revenue is recognized when customers receive products, rather than when products ship. Adoption reduced opening retained earnings by $2.0 million. For Q1 2018, adoption increased reported revenue by $1.3 million and net income by $0.4 million versus balances without adoption.
- Management anticipated a full-year 2018 tax rate of 21%–22%. The filing provides no specific revenue or earnings guidance and cautions that quarterly results are not necessarily indicative of full-year results.
- Management said it expects any future cash needs to be funded by operating cash flow and financing activities and evaluates acquisitions as opportunities arise. It intends to continue dividends but gave no assurance they will continue.
- Management expects adoption of the new lease standard to result in material right-of-use assets and lease liabilities; the impact was still being evaluated.
- The company reported no material changes to previously disclosed risk factors and did not believe pending routine litigation would materially affect results, financial position or liquidity. Investment securities are exposed to interest-rate and market-price risk; management estimated a hypothetical 10% adverse move would have an immaterial fair-value impact.
Important facts for investors to verify
- How much reported growth reflects underlying demand and coach productivity versus ASC 606 timing effects; adoption added $1.3 million to Q1 revenue.
- Whether coach growth and revenue per coach remain sustainable, and how higher OPTAVIA commissions affect margins.
- The full-year tax-rate outlook and effects of tax-law changes, including share-based compensation.
- The amount and duration of relocation and other unusual costs, and the expected balance-sheet impact of the lease standard.
- Dividend sustainability and future capital allocation, given the declared $0.48-per-share dividend and management’s stated caveat.