Medifast, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Medifast is a health and wellness company whose primary model combines proprietary products with independent OPTA VIA wellness coaches. Product sales represented 98% of revenue in the first half. The company reports one segment, OPTA VIA.
Financial results
| Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 |
|---|---|---|---|---|
| Revenue | $187.1 million | $117.3 million | $353.0 million | $215.9 million |
| Gross profit / margin | $140.7 million / 75.2% | $88.8 million / 75.7% | $265.9 million / 75.3% | $163.6 million / 75.8% |
| Operating income / margin | $27.4 million / 14.6% | $17.1 million / 14.6% | $52.1 million / 14.8% | $31.8 million / 14.7% |
| Net income | $21.4 million | $14.1 million | $42.1 million | $26.4 million |
| Diluted EPS | $1.75 | $1.16 | $3.45 | $2.17 |
Q2 revenue rose 59.5% and net income 51.3% year over year; H1 revenue rose 63.5% and net income 59.9%. Net margins were approximately 11.4% in Q2 and 11.9% in H1, versus 12.0% and 12.2%, respectively, in 2018. H1 operating margin edged up 0.1 percentage point, while gross margin declined 0.5 point.
- Growth drivers and costs: Active earning OPTA VIA coaches increased 55.3% to 30,600 in Q2; quarterly revenue per coach rose 7.1% to $5,863. Management attributed growth partly to coach and client additions and a shift to higher-priced OPTA VIA products. OPTA VIA represented 75% of consumable units in Q2, versus 64% a year earlier. Commission expense increased 69.0% in Q2 and 75.5% in H1; its share of revenue rose to 41.7% and 41.5%, respectively.
- Cash flow: H1 operating cash flow was $47.2 million, up from $38.5 million. Investing cash outflow was $4.5 million, including $7.0 million of capital expenditures; financing cash outflow was $27.7 million, including $17.7 million of dividends paid and $10.0 million of repurchases. Cash increased $14.9 million to $96.3 million.
- Liquidity and obligations: At June 30, cash and investment securities totaled $113.5 million; working capital was $95.9 million and stockholders’ equity was $126.0 million. No borrowing debt is listed on the balance sheet; reported lease obligations totaled $13.0 million, of which $2.5 million was current. Accounts payable and accrued expenses were $73.6 million.
- Capital returns: The company declared $0.75 per share in dividends for Q2, compared with $0.48 a year earlier. A $8.9 million dividend declared in June was payable in Q3. About 71,000 shares were repurchased in May at an average $140.35 per share.
Outlook, commentary, and risks
- Management forecast a 2019 full-year effective tax rate of 21.5%–22.5%, excluding potential discrete tax benefits from share-based compensation vesting in Q4. The filing provides no revenue or earnings guidance.
- Medifast commenced operations in Hong Kong and Singapore in July 2019 as part of its international growth strategy. Management described this as an important component of long-term growth.
- Management cited higher product costs, obsolescence for a slow-moving product, and compliance with new U.S. FDA nutrition-labeling requirements as contributors to lower gross margin. SG&A growth also reflected commissions, IT consulting, salaries and benefits, and credit-card fees.
- The company adopted lease accounting standard ASC 842 on January 1, 2019, recognizing operating-lease right-of-use assets and liabilities. The adoption materially affected the balance sheet but did not significantly affect earnings or cash flows.
- Management said it expects adequate liquidity to continue its dividend program but gave no assurance dividends will continue. Ordinary-course litigation was not expected to have a material adverse effect, although outcomes are uncertain. The company reported no material changes to its previously disclosed risk factors and said disclosure controls were effective.
Important facts for investors to verify
- Whether rapid coach and revenue growth continues, and whether revenue per coach and the shift toward higher-priced products persist.
- Whether commission expense and other operating costs remain manageable as the coach model scales; monitor gross-margin pressure, inventory levels, and obsolescence reserves.
- Whether operating cash generation supports capital spending, dividends, and repurchases; consider the lease obligations alongside other liabilities.
- Execution and financial contribution of the Hong Kong and Singapore launches, and any subsequent changes to management’s outlook or risk disclosures.