Medifast, Inc. — FY 2011 Form 10-K
Business context and reporting period. Medifast sells meal-replacement, weight-management and related health products through Take Shape For Life (independent health coaches), direct marketing, company-owned and franchised weight-control centers, and physician wholesale. This filing covers the fiscal year ended December 31, 2011; quarterly figures below identify the fourth quarter where relevant. Most revenue comes from meal-food products, and Take Shape For Life is the largest sales channel.
Financial performance and position
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $298.2 million | $257.6 million |
| Gross profit / gross margin | $224.5 million / 75.3% | $192.5 million / 74.7% |
| Operating income / operating margin | $27.4 million / 9.2% | $31.6 million / 12.3% |
| Net income | $18.5 million | $19.6 million |
| Diluted EPS | $1.31 | $1.35 |
| Cash provided by operations | $34.9 million | $28.8 million |
| Cash and cash equivalents at year-end | $14.3 million | $17.2 million |
| Working capital at year-end | $43.7 million | $44.7 million |
| Total assets / stockholders’ equity at year-end | $105.7 million / $73.4 million | $94.1 million / $72.0 million |
Cash and cash equivalents plus investment securities totaled $33.8 million at year-end 2011. Long-term debt principal was $4.456 million, including $1.119 million current; the balance sheet also reports capital lease obligations. The company had $24.75 million in total contractual obligations, including operating and capital leases. Variable-rate borrowings were approximately $4.5 million; management estimated a 100-basis-point LIBOR increase would add about $45,000 to annual interest expense. Debt facilities are secured and subject to covenants; the company reported compliance at year-end.
2011 investing cash outflow was $16.9 million, including $14.3 million for property and equipment and a net $2.2 million for investment purchases. Financing used $20.9 million, principally the $20.4 million treasury-stock purchases and $1.1 million of debt repayment. No dividends were declared, and management said none were planned for the foreseeable future.
Changes versus the prior comparable period
- Revenue rose 16% ($40.6 million), led by Take Shape For Life, direct marketing and the center/physician channel. Gross margin improved 0.6 percentage points.
- Operating income fell 13% and net income fell 5%; operating margin contracted to 9.2% from 12.3%. SG&A grew 23%, faster than revenue, as the company invested in clinics, staffing, advertising and infrastructure.
- Take Shape For Life revenue grew 12% to $186.2 million. Active health coaches rose 7% to about 9,600, while average monthly revenue per coach declined 7% to $1,555; management cited the challenge of training a larger coach network.
- Medifast Direct revenue increased 14% to $73.0 million, with a reported 2.8-to-1 return on advertising spend in both years. Weight Control Centers and Wholesale revenue increased 41% to $39.0 million. The company had 70 corporate centers and 30 franchise centers at year-end; same-store sales at eligible corporate centers increased 13%.
- The Weight Control Centers and Wholesale segment moved from $6.8 million pretax profit in 2010 to a $2.7 million pretax loss in 2011, mainly due to new-center start-up costs and support infrastructure. The Medifast segment’s pretax profit rose to $36.2 million from $30.8 million.
- Fourth-quarter 2011 revenue was $69.6 million versus $63.0 million in Q4 2010, but quarterly net income declined to $1.17 million from $3.42 million and diluted EPS to $0.08 from $0.23.
Outlook, commentary, risks and unusual items
- Management anticipated opening 25–30 additional company-owned centers in 2012 and forecast an effective tax rate of approximately 35–36%. The filing provides no clear full-year revenue or EPS guidance.
- Management identified clinic profitability, advertising effectiveness, staffing and operating efficiency as priorities. It also described continued investment in coach training, logistics, technology and operational capacity.
- Key risks include intense competition and changing consumer preferences; dependence on direct-response marketing and independent health coaches; product safety, liability and adverse publicity; FDA, FTC and other regulatory requirements; supplier and manufacturing disruptions; and the ability of systems and infrastructure to support growth.
- The company disclosed securities class-action and shareholder derivative litigation, EEOC-related claims, a disputed bankruptcy-trustee claim against a subsidiary, and its own defamation/market-manipulation lawsuit seeking at least $270 million. The company stated it intended to defend against the claims; the filing does not provide a clear expected loss value for the outstanding matters.
- Leadership changed during and after the year: Executive Chairman Bradley T. MacDonald resigned in October 2011 for health reasons; Michael C. MacDonald became Executive Chairman in November and CEO in February 2012; Michael S. McDevitt departed as CEO in February 2012.
- Management and the auditor concluded internal control over financial reporting was effective at December 31, 2011. Two material weaknesses reported for 2010 were stated to have been remediated during 2011. The financial-statement audit opinion was unqualified.
Important facts for investors to verify
- Whether center expansion can improve segment profitability after the 2011 pretax loss and whether the planned 2012 openings are achievable without further margin pressure.
- Whether health-coach productivity stabilizes or improves, given the decline in average revenue per coach and the need for stronger training and retention.
- Whether advertising returns, customer acquisition costs and reported channel growth remain sustainable as spending and competition evolve.
- Cash conversion, planned capital spending and liquidity after substantial share repurchases; confirm debt and lease obligations and covenant terms.
- Status and potential financial exposure of the disclosed litigation, discrimination claims and tax contingencies.
- Execution of the leadership transition and continued effectiveness of the remediated financial controls.