Medifast, Inc. — 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013. The filing also provides unaudited fourth-quarter results. Medifast sells weight-management products through direct sales, its Take Shape For Life coach network, medical providers, and company-operated and franchised weight-control centers.
Key financial results
| Metric | FY 2013 | FY 2012 | Q4 2013 | Q4 2012 |
|---|---|---|---|---|
| Revenue | $356.9 million | $356.7 million | $77.3 million | $83.2 million |
| Gross profit / margin | $267.8 million / 75.1% | $268.0 million / 75.1% | $57.7 million / 74.6% | $62.8 million / 75.4% |
| Operating income / margin | $33.6 million / 9.4% | $23.3 million / 6.5% | Not separately stated | Not separately stated |
| Net income | $24.0 million | $15.9 million | $5.3 million | $1.9 million |
| Diluted EPS | $1.73 | $1.16 | $0.39 | $0.13 |
- Full-year revenue was essentially unchanged year over year. Q4 revenue declined about 7% versus Q4 2012; Q4 net income increased, while gross profit fell.
- FY 2013 operating income increased 44% and net income increased 51%. The improvement included lower selling, general and administrative costs and the absence of 2012 charges for the FTC settlement and sales-tax accrual. Management’s adjusted comparison shows 2013 operating income of $33.6 million versus $30.2 million in 2012, and diluted EPS of $1.73 versus adjusted $1.57.
- Net cash from operations was $42.4 million, compared with $40.3 million in 2012. Investing activities used $22.6 million, primarily reflecting purchases of securities and $11.6 million of property and equipment. Financing activities used $23.3 million, including $20.1 million for share repurchases and $3.6 million of debt repayment.
- Year-end cash and cash equivalents were $36.4 million; investment securities were $31.4 million. Working capital was $64.9 million. Total assets were $132.7 million and stockholders’ equity was $98.4 million.
- The company repaid its term debt during 2013. Remaining debt consisted principally of capital leases: $696,000 present value, including $222,000 current. A $5 million unsecured revolving credit facility was undrawn and scheduled to expire June 2, 2014; management expected to extend it or pursue other financing.
Material changes and operating trends
- Take Shape For Life revenue grew 6% to $228.7 million; active Health Coaches rose 3% to 10,500, while average monthly revenue per coach decreased to $1,605 from $1,635.
- Medifast Direct revenue declined 11% to $75.5 million, attributed mainly to reduced advertising and a more challenging consumer-spending environment. Total advertising spend, including broker fees, fell to $25.3 million from $32.6 million.
- Weight Control Centers and Wholesale revenue declined 6% to $52.6 million. Same-store sales for centers open more than a year fell 16%. Twelve corporate centers closed during the year; 75 corporate and 41 franchise centers remained at year-end. Eight late-year closures generated approximately $2.1 million of costs, including lease liabilities and asset disposals.
- Management reported a full-year revenue-to-advertising-spend ratio of 14.1-to-1, versus 10.9-to-1 in 2012. The filing’s channel-specific advertising measures are not directly interchangeable with this company-wide ratio.
- The Integrated Compensation Plan for Take Shape For Life Health Coaches entered a transition period in September 2013 and was fully effective January 1, 2014.
Outlook, risks, and unusual items
- Management anticipated a 2014 effective tax rate of approximately 33%–34%. The filing gives no specific consolidated revenue or EPS guidance.
- Management expected its international relationship with Medix to expand in 2014, including additional weight-control centers and broader regional distribution. The company also reported opening sales channels in Canada in March 2014.
- In 2012, a subsidiary paid a $3.7 million civil penalty under an FTC consent decree concerning substantiation of advertising claims. The decree requires changes to certain claims and clinical-study protocols. Compliance and advertising substantiation remain important risks.
- The company began collecting and remitting sales tax in states imposing sales or use taxes and pursued voluntary disclosure agreements for prior-period exposure. The 2012 accrual was approximately $3.3 million before tax.
- Other identified risks include product-liability or health-related claims, regulatory changes, adverse publicity, dependence on effective advertising and independent Health Coaches, supply-chain and manufacturing disruptions, changing consumer preferences, information-security incidents, and competition.
- Medifast’s pending lawsuit alleging defamation and market manipulation seeks $270 million; appeals remained unresolved at the filing date. The company stated it did not believe routine litigation and claims would materially affect results, financial position, or liquidity.
- The company reported no dividends declared in 2013 or 2012 and no plan to declare dividends in the foreseeable future. The board authorized up to 1 million additional share repurchases in February 2014.
Most important facts for investors to verify
- Whether Q4 sales weakness and the 16% same-store-sales decline persist, and whether center closures improve channel profitability.
- Whether Take Shape For Life can sustain growth given lower revenue per active coach and the new compensation plan.
- Whether advertising reductions can be maintained without further weakening Medifast Direct customer acquisition or revenue.
- The ongoing costs and compliance requirements of the FTC consent decree, and the final resolution of prior-period sales-tax matters.
- Renewal or replacement of the $5 million credit facility, along with capital spending, share repurchases, and cash generation.
- The status and potential financial effect of the pending lawsuit; the filing does not provide a clear estimate of any potential recovery or liability.