Medifast, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; financial statements are unaudited. Dollar amounts below are in millions except per-share data. Medifast sells weight-management and wellness products, primarily through its OPTA VIA independent Coach network.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $271.5 | $190.1 | $669.9 | $543.0 |
| Gross profit | $204.0 | $142.9 | $498.6 | $408.8 |
| Gross margin | 75.2% | 75.2% | 74.4% | 75.3% |
| SG&A | $159.5 | $122.7 | $402.4 | $336.5 |
| Operating income / margin | $44.6 / 16.4% | $20.3 / 10.7% | $96.2 / 14.4% | $72.3 / 13.3% |
| Net income | $34.5 | $15.9 | $74.9 | $58.0 |
| Diluted EPS | $2.91 | $1.32 | $6.32 | $4.77 |
- Q3 revenue rose 42.8% year over year; nine-month revenue rose 23.4%. Q3 net income increased 116.7%; nine-month net income increased 29.0%.
- Q3 Coach count increased 30.7% to 42,100 active earning OPTA VIA Coaches; average revenue per active earning Coach was $6,329, versus $5,715 a year earlier.
- Management attributed sales growth to temporary program initiatives that brought more clients onto plans and continued migration to higher-priced OPTA VIA products. OPTA VIA products were 83% of consumable units sold in Q3, up from 78%.
- Q3 gross margin was unchanged year over year; nine-month gross margin declined 90 basis points, primarily reflecting promotions and higher production costs. SG&A rose with sales, mainly from Coach commissions and increased salaries and benefits, partly offset by lower sales and marketing expense.
- Nine-month diluted EPS includes $0.46 of adjustments for $5.8 million of professional services tied to a Schedule 13D filing and $1.2 million of severance following the prior CFO’s departure. Adjusted nine-month diluted EPS was $6.78; these are non-GAAP measures.
Cash, liquidity and capital
- Operating cash flow was $125.4 million for the first nine months, versus $65.1 million in 2019. The increase reflected higher earnings and changes in operating assets and liabilities, including a $30.1 million increase in accounts payable and accrued expenses.
- Cash and cash equivalents were $156.5 million at September 30, 2020, versus $77.0 million at December 31, 2019. Cash, cash equivalents and investment securities totaled $169.9 million, versus $92.7 million.
- Working capital was $105.5 million; current assets were $217.5 million and current liabilities $112.0 million. The filing reports no conventional borrowings; lease obligations totaled $12.1 million, including $3.3 million current.
- Investing activities used $1.9 million, including $3.9 million of property and equipment purchases. Financing activities used $44.0 million, including $39.9 million of dividends paid and $5.0 million of stock repurchases.
- The company declared a Q3 dividend of $1.13 per share, payable in Q4. Dividends declared per share for the nine months were $3.39, compared with $2.25 in 2019.
Outlook, risks and other matters
- The filing provides no specific financial guidance. Management describes long-term growth and international expansion as strategic aims and says it expects any future cash needs to be funded through operating cash flow and financing activities.
- Management said COVID-19 had not materially affected results for the first nine months; manufacturing remained operational and no meaningful supply-chain disruption had occurred. It cautioned that the pandemic’s duration, spread, consumer effects and economic consequences remain uncertain.
- The company continued to monitor supply-chain and inventory risks and adjusted operations, including prioritizing higher-volume products and moving its 2020 Coach convention to a virtual format.
- Ordinary-course litigation was not expected by management to have a material adverse effect, but outcomes cannot be predicted. Management reported no material change to previously disclosed risk factors.
- Disclosure controls were assessed as effective. The new global ERP system was implemented in Q2 2020; management reported no significant resulting change to internal control over financial reporting.
Important facts for investors to verify
- Whether Coach and client growth, including revenue per Coach, remains sustainable as temporary promotions change.
- How promotions, production costs and the product mix affect gross margin and Coach commission rates.
- How much operating cash flow reflects durable earnings versus working-capital movements, particularly the increase in payables.
- The ongoing effects of COVID-19, supply availability, inventory decisions and international expansion.
- The nature and potential consequences of the Schedule 13D-related costs, severance expense and any developments in litigation or other contingencies.
- The sustainability of dividend payments and capital returns; the filing gives no assurance that dividends will continue.