Medifast, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing. Medifast sells weight-management and nutrition products through health coaches, direct-to-consumer, franchise/reseller, and medical-provider channels.
Financial performance
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $274.5 million | $272.8 million |
| Gross profit / margin | $205.7 million / 74.9% | $201.3 million / 73.8% |
| Operating income / margin | $26.9 million / 9.8% | $28.7 million / 10.5% |
| Continuing-operations income | $17.8 million | $19.6 million |
| Net income | $17.8 million | $20.1 million |
| Diluted EPS | $1.49 | $1.66 |
| Cash from operating activities | $25.4 million consolidated; $26.0 million from continuing operations | $29.4 million consolidated |
Revenue rose 1%, while net income fell 11%. Gross margin improved, but operating margin narrowed as SG&A increased. The reported 2016 results included a $6.1 million impairment charge and $1.2 million in restructuring costs; 2015 included $2.1 million in extraordinary legal expenses. Management’s non-GAAP adjusted diluted EPS was $1.89 for 2016 versus $1.77 for 2015; these figures exclude specified unusual items.
Business trends and material changes
- Take Shape For Life generated 81% of 2016 revenue, up 10% to $222.4 million. Fourth-quarter active Health Coaches increased 5% year over year to 12,500, and quarterly revenue per coach rose 3% to $4,158.
- Medifast Direct revenue fell 28% to $35.1 million amid continued challenges acquiring new customers. Wholesale revenue declined 73% to $1.3 million after the company enforced partner-distribution requirements.
- MWCC revenue fell 8% to $15.7 million. At year-end, the network included 37 franchise centers and 19 reseller locations; 19 former franchise locations had transitioned to reseller agreements and five centers closed.
- Advertising spending declined to $9.4 million from $15.3 million. Management reported a continuing-operations revenue-to-advertising-spend ratio of 29.2-to-1, versus 17.9-to-1 in 2015.
- The company abandoned software under development for Take Shape For Life and recorded a $6.1 million impairment. Four senior executives departed or resigned during a leadership realignment; management estimated $2.2 million in future annual savings from the restructuring.
Cash, liquidity, debt and capital allocation
- Cash and cash equivalents were $52.4 million, up from $42.0 million. Investment securities were $24.4 million. Working capital was $76.9 million, and stockholders’ equity was $96.0 million.
- The balance sheet reported no debt or capital-lease obligations at year-end; current liabilities were $24.4 million. Cash from continuing operating activities was $26.0 million, capital expenditures were $2.9 million, and cash dividends paid were $11.9 million.
- The company declared dividends of $1.07 per share in 2016. A $0.32-per-share dividend was declared after year-end, payable May 9, 2017. Management said it intended to continue dividends but gave no assurance of future payments.
Outlook, risks and contingencies
- Management anticipated an effective tax rate of approximately 34%–35% in 2017. The filing provides no revenue, earnings, or margin guidance.
- Management said future cash needs were expected to be funded by operating cash flow and financing activities; acquisitions, if pursued, could involve borrowing. In the first quarter of 2017, Medifast terminated its Medix licensing agreement, citing a desire to focus on core businesses.
- Key risks include retaining and growing the independent Health Coach network; marketing effectiveness and customer acquisition; intense competition and changing consumer preferences; reliance on third-party manufacturers for about 57% of products and on a single company manufacturing facility for about 43%; product, health-claim, and advertising liability; regulatory compliance; and cybersecurity and technology interruptions.
- Medifast is subject to a 2012 FTC consent decree concerning advertising procedures and disclosures. The company said pending litigation and claims were not expected to materially affect results, financial position, or liquidity. It reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
- Fourth-quarter revenue was $62.5 million and net income was $4.1 million, compared with $61.3 million and $3.9 million, respectively, in fourth-quarter 2015. The filing notes historical seasonality, with sales typically weaker during the holiday quarter.
Important facts for investors to verify
- Whether Health Coach growth and higher revenue per coach can offset continued weakness in direct-to-consumer and wholesale channels.
- Whether gross-margin gains persist and operating expenses normalize after the software impairment and executive restructuring.
- Inventory rose to $18.3 million from $13.3 million, while the obsolete-inventory reserve increased to $0.8 million from $0.3 million; assess inventory quality and demand.
- Confirm the sustainability of operating cash generation and dividends, including the effect of working-capital movements and future capital needs.
- Monitor execution after the Medix agreement termination, franchise/reseller changes, and leadership transition, as well as FTC, product-liability, supply-chain, and cybersecurity risks.