Medifast, Inc. — FY 2017 Form 10-K
Business context and reporting period. Medifast manufactures and sells meal replacements and other weight-management and healthy-living products. This annual report covers the year ended December 31, 2017; amounts below are in U.S. dollars. The OPTA VIA coach-led model was the primary growth engine, representing 85.1% of revenue. Product sales generated 98% of revenue.
Key financial results
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue | $301.6 million | $274.5 million | +9.8% |
| Gross profit / margin | $227.8 million / 75.5% | $205.7 million / 74.9% | Margin +0.6 percentage points |
| Operating income / margin | $39.6 million / 13.1% | $26.9 million / 9.8% | +47.6% |
| Net income | $27.7 million | $17.8 million | +55.4% |
| Diluted EPS | $2.29 | $1.49 | +53.7% |
| Cash from continuing operating activities | $43.2 million | $26.0 million | +$17.2 million |
- Fourth quarter: Revenue was $78.0 million versus $62.5 million in Q4 2016; net income was $7.3 million versus $4.1 million; diluted EPS was $0.60 versus $0.34.
- Liquidity and debt: Cash and cash equivalents were $75.1 million and investment securities were $23.8 million, totaling $98.8 million. Working capital was $88.1 million. The company reported no debt at year-end.
- Cash uses and obligations: Investing activities used $3.2 million, including $3.2 million of property and equipment purchases. Financing activities used $17.4 million, including $15.4 million of dividends paid. Contractual obligations totaled $18.0 million, including $8.5 million of inventory purchase commitments.
- Dividends: $1.44 per share was declared for 2017. A further $0.48 per share dividend was declared in March 2018, payable in May.
Material changes and management commentary
- OPTA VIA revenue grew 15.4% to $256.5 million. Active earning coaches in Q4 rose 20% to 15,000, while quarterly revenue per coach increased 9.7% to $4,562.
- Other channels declined: Medifast Direct revenue fell 9.1% to $31.9 million; Medifast Weight Control Centers (MWCC) fell to $12.2 million as operating franchise and reseller locations decreased; Wholesale revenue declined 29% to $0.9 million. The wholesale channel was discontinued in December 2017.
- Gross margin improvement reflected lower shipping expense and the April 2016 price increase. SG&A rose 5.2% to $188.2 million, including higher OPTA VIA commissions, but declined as a share of revenue to 62.4% from 65.1%.
- Reported operating income increased 47.6%; the comparison benefited from $6.1 million of impairment charges and $1.2 million of restructuring costs in 2016. Excluding those 2016 items, operating income increased from $34.1 million to $39.6 million, or about 16%.
- Management plans to integrate Medifast Direct into the Coach model and stop separately reporting the historical business units beginning in Q1 2018. The company announced plans to introduce OPTA VIA in Hong Kong and Singapore in the first half of 2019; consumer acceptance is uncertain.
Outlook, risks, and unusual items
- Management anticipated a 2018 full-year tax rate of 22%–23%. The 2017 effective rate was 31.3%, including a $1.2 million discrete share-based compensation tax benefit and a $0.4 million benefit from revaluing deferred taxes following U.S. tax reform.
- Effective January 1, 2018, the company adopted the new revenue standard. It expects product revenue to be recognized when customers receive shipments rather than when products ship, and recorded an approximately $2.0 million after-tax reduction to opening retained earnings. The filing does not provide a clear quantified estimate of the standard’s ongoing effect on reported revenue or earnings.
- Key risks include retaining and growing independent OPTA VIA coaches; regulatory scrutiny of direct selling, distributor earnings claims, and advertising; product-liability and health-related claims; competition and changing consumer preferences; reliance on third-party manufacturers for 58% of products and on one manufacturing facility for the balance; and cyber, privacy, and supply-chain disruptions.
- The company disclosed a 2012 FTC consent decree governing certain advertising procedures. It reported no material unresolved legal proceedings and stated that existing litigation was not expected to materially affect results, financial position, or liquidity.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also assessed controls as effective at year-end.
Important facts for investors to verify
- Whether coach growth and productivity can sustain OPTA VIA’s contribution to revenue, and how coach retention and compensation develop.
- Whether the reported operating improvement persists after accounting for the 2016 impairment and restructuring charges, and whether margins hold as commissions and other costs rise.
- The effects of the 2018 revenue-recognition change on quarterly comparisons, revenue timing, and opening retained earnings.
- Execution, investment requirements, and consumer acceptance for the planned Hong Kong and Singapore expansion.
- Potential changes in direct-selling regulation and advertising enforcement, and the company’s compliance with the FTC consent decree.
- Capacity and continuity of third-party suppliers and the Owings Mills facility, alongside the company’s dividend commitments and inventory purchase obligations.