Washington, D.C. 20549
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
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No
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
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No
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
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No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
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No
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The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2017, was $1,532,917,310. Such aggregate market value was computed by reference to the closing price of the common stock as reported on the Nasdaq Stock Market on June 30, 2017 (the last business day of the registrant’s most recently completed second fiscal quarter).
Number of shares outstanding of the registrant’s common stock, $0.001 par value, as of February 21, 2018: 30,208,021 shares
Portions of the definitive proxy statement to be filed with the United States Securities and Exchange Commission (the “SEC”) for Nutrisystem, Inc.’s annual meeting of stockholders are incorporated by reference into Part III of this Form 10-K.
From time to time, information provided by us, including but not limited to statements in this Annual Report, or other statements made by or on our behalf, may contain “forward-looking” information within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “believe,” “estimate,” “will be,” “will,” “would,” “expect,” “anticipate,” “plan,” “project,” “intend,” “could,” “should,” or other similar words or expressions often identify forward-looking statements.
Such statements are based on current expectations only, and are subject to certain risks, uncertainties, and assumptions, many of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results, performance, or achievements may vary materially from those anticipated, estimated, or projected. Among the factors that could cause actual results to materially differ include:
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
PART
I
Overview
Nutrisystem, Inc. (together with its consolidated subsidiaries, “Nutrisystem,” the “Company,” “we,” “us,” or “our”) is a provider of weight management products and services, including nutritionally balanced weight loss programs sold primarily online and over the telephone and multi-day kits and single items available at select retail locations. The Company’s multi-brand approach includes Nutrisystem and the South Beach Diet. Typically, our program customers purchase monthly food packages containing a four-week meal plan consisting of breakfasts, lunches, dinners, snacks and flex meals, which they supplement, depending on the program they are following, with items such as fresh fruits, fresh vegetables, lean protein and dairy. Most of our customers order on an auto-delivery basis (“Auto-Delivery”), which means we send a four-week meal plan on an ongoing basis until notified of a customer’s cancellation. Auto-Delivery customers are offered savings off of our regular one-time rate with each order. Monthly notifications are also sent to remind customers to update order preferences. We offer pre-selected favorites or customers may personalize their meal plan by selecting their entire menu or customizing plans to their specific tastes or dietary preference. In total, our plans feature approximately 235 food options including frozen and ready-to-go entrees, snacks and shakes, at different price points. Additionally
, we offer unlimited
counseling from our trained weight loss counselors, registered dietitians and certified diabetes educators at no cost. Counselors are available as needed, seven days a week from 7am to midnight ET, with further support provided through our digital tools.
Our programs are based on the following cornerstones that represent who we are to our customers:
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Real Results
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Our programs have helped millions of people lose weight for more than 45 years. Our programs are nutritionally balanced and portioned for weight loss. We also offer transition and maintenance plans, which include personalized menu options (e.g., only dinner entrees) as well as continued counseling support and access to apps that provide easy-to-use, interactive and personalized weight loss tracking tools. These digital products integrate with wearable fitness devices and health platforms and are available at no cost to customers, as well as the general population of do-it-yourself dieters.
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Sound Science
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The Nutrisystem®
program provides a balanced approach to weight loss. The program delivers a reduced calorie meal plan that is high in protein, low in fat and focuses on the right amount of “smart” carbohydrates like whole grains and fiber. The Nutrisystem program offers portion-controlled items that are incorporated into a meal plan. The South Beach Diet
®
program is a high-protein, low-carb, low-sugar weight loss program. Our programs offer customers a variety of meal choices, including approximately 235 foods with no artificial flavors, sweeteners, high-fructose corn syrup, MSG, or hydrogenated oils and more than 195 foods with no artificial preservatives.
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Complete Convenience
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Our weight loss programs are primarily sold through a direct-to-consumer sales and distribution approach using the Internet and telephone. Our customers can place orders 24 hours a day, seven days a week on our websites and the food is shipped directly to our customers’ door. Our customers can either choose our pre-selected favorites meal plan
or customers may personalize the plan by selecting their entire menu or customizing plans to their specific tastes or dietary preference.
The entrees are individually packaged and food preparation time is minimal. The direct-to-consumer approach using the Internet and telephone provides the convenience and privacy that our customers value.
Additionally
, we offer unlimited
counseling from our trained weight loss counselors, registered dietitians and certified diabetes educators at no cost. Counselors are available as needed, seven days a week from 7am to midnight ET, with further support provided through our digital tools.
Our programs do not require customers to visit centers, measure foods or count calories.
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Value
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We believe our products and programs are very competitively priced within the weight management industry and provide a compelling value proposition to our customers, which includes approximately 235 menu items, expert guides, unlimited
counseling from our trained weight loss counselors, registered dietitians and certified diabetes educators and
apps available at no cost. We do not charge membership fees. Various promotional offers and pricing are offered throughout the year.
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Competitive Strengths
We believe our programs, meal kits and digital tools offer a sensible approach to losing weight while also educating customers about proper portion size, as well as the appropriate combinations of fiber, protein, good carbohydrates and fat.
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We intend to capitalize on the following competitive strengths:
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Product Efficacy
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We believe most of our customers are very satisfied with our products and believe they have lost weight while using one of our programs. Our customer research has found that customers tend to stay on the program for 11 to 12 weeks. We have sponsored clinical trials at leading academic centers, including in patients with Type 2 diabetes. Studies on our Nutrisystem® D® (diabetes) plan (in combination with counseling sessions) showed statistically significant and clinically meaningful weight loss and improvements in HbA1c (a key measure of blood glucose control), in addition to improvements in secondary endpoints such as waist circumference, total plasma cholesterol and blood pressure.
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Strong Brand Recognition
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We believe that our brands are well recognized in the weight management industry. The Nutrisystem name has been in the weight management industry for more than 45 years, and we estimate that our company and our predecessors have spent hundreds of millions of dollars in advertising over that time period. The South Beach Diet, created 15 years ago by world-renowned cardiologist Dr. Arthur Agatston, was a bestseller and has more than 23 million copies in print.
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Low Cost, Highly Scalable Model
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Unlike traditional commercial weight loss programs, which primarily sell through franchisee and company-owned centers, we primarily generate revenue in our direct channel online and through the telephone (including the redemption of prepaid gift cards). Our method of distribution removes the fixed costs and capital investment associated with diet centers. We minimize fixed costs and capital investments in food procurement and fulfillment by outsourcing the production of our food products to a number of vendors. We also outsource 100% of our fulfillment operations.
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Superior Customer Value Proposition
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Our goal is to offer our customers a complete weight loss program that is convenient, private and cost-effective. Our customers primarily place their orders online or over the telephone and have their food delivered directly to their home. This affords our customers the convenience and anonymity that other diets, which rely on weight-loss centers, cannot ensure. Additionally, we provide our customers with monthly food packages containing a four-week meal plan consisting of breakfasts, lunches, dinners, snacks and flex meals, which they supplement, depending on which program they are using, with fresh fruits, fresh vegetables, lean protein and dairy. This removes the confusion of reading nutrition labels, measuring portions or counting calories, carbohydrates or points. We believe our weight loss programs offer our customers significant value and are priced below those of our competitors. In addition, unlike some of our competitors, we do not charge a membership fee.
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Retail
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We also generate revenue through the sale of our multi-day kits and single items at select retail locations. These multi-day kits and single items have expanded our products and consumer reach. The retail channel provides us with great brand exposure, offering consumers who may not be aware of our programs an opportunity to sample Nutrisystem at a more attractive price point.
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Our Industry
Weight management is a challenge for a significant portion of the U.S. population, as well as the global population. It is estimated that more than one-third (34.9% or 78.6 million) of U.S. adults are obese. According to the U.S. Department of Health and Human Services, overweight and obese individuals are increasingly at risk for diseases such as Type 2 diabetes, heart disease, certain types of cancer, stroke, arthritis, sleep apnea and depression.
Centers for Disease Control and Prevention (the “CDC”) estimates one out of every ten people (30.3 million) have diabetes in the U.S. and more than one out of three adults (84.1 million) have a condition known as prediabetes. The CDC estimates 110 million Americans will have diabetes by the year 2050.
However, there is evidence that weight loss may reduce the risk of developing these conditions, as well as improve the health and quality of life of people who have these conditions.
Competition
The weight loss industry is very competitive and consists of pharmaceutical products and weight loss programs, digital tools and wearable trackers, as well as a wide variety of diet foods and meal replacement bars and shakes, appetite suppressants, nutritional supplements and surgical procedures. The weight loss market is served by a diverse array of competitors. Potential customers seeking to manage their weight can turn to traditional center-based competitors, online diet-oriented sites, self-directed dieting and self-administered products such as prescription drugs, over-the-counter drugs and supplements, meal replacement products, as well as medically supervised programs.
We believe that our principal competitive factors in the weight loss market are:
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the availability, convenience, privacy and effectiveness of the weight loss program;
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brand recognition and trustworthiness;
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new products and innovative offerings;
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the ability to attract and retain customers through promotion and personal referral.
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Based on these factors, we believe that we can compete effectively in the weight loss industry. We, however, have no control over how successful competitors will be in addressing these factors. By providing well-recognized food-based weight management programs using the direct channel, we believe that we have a competitive advantage in our market.
Our Products and Services
For more than 45 years, Nutrisystem has been recognized as a leader in the weight loss industry. We provide comprehensive weight loss programs consisting primarily of a pre-packaged food program, digital tools and counseling. Typically, our customers purchase monthly food packages of frozen and ready-to-go food containing a four-week meal plan consisting of breakfasts, lunches, dinners, snacks and flex meals, which they supplement, depending on the program they are following, with fresh fruits, fresh vegetables, lean proteins and dairy. Most customers order through our Auto-Delivery feature. Our programs feature approximately 235 menu options at different price points including frozen and ready-to-go entrees, snacks and shakes. Trained weight loss counselors are available to answer questions and make recommendations to help each customer achieve and maintain his or her weight loss goal. Customers support and encourage each other and share information via social media channels. These services are complemented with relevant information on diet, nutrition and physical activity. Additionally, our digital products integrate with wearable fitness devices and health platforms, and are offered at no charge.
Our programs consist of approximately 235 foods that contain no artificial flavors, sweeteners,
high-fructose corn syrup, MSG, or hydrogenated oils
. More than 195 foods have no artificial preservatives.
In 2017, we began to offer the clinically-tested Nutrisystem® Lean13 program which meets the United States Department of Agriculture (“USDA”) guidelines for fat, saturated fat, trans fat, sodium, carbohydrates, fiber, added sugars and protein. A large number of our foods aim to have at least 50% of the grains coming from whole grain sources. Including grocery additions to supplement our meals, all plans contain less than 2,300 milligrams of sodium per day, consistent with national guidelines, and tailored versions of the plans are available that deliver as low as 1,500 mg/day. In contrast, the average American consumes 2,900 to 4,000 milligrams of sodium per day. We constantly strive to meet or exceed national nutritional guidelines as they are updated. Convenient and easy-to-follow, Lean13 provides safe and meaningful weight loss and includes support and counseling options from trained weight loss coaches, registered dietitians and certified diabetes educators available seven days a week. The plan includes the NuMi® digital app, which acts as the customer’s weight loss companion and provides an easy-to-use, interactive and personalized solution.
In 2017, the South Beach Diet® made its debut as an all-new structured weight-loss program, offering a safe, effective method of weight loss. The plan allows individuals to eat heart healthy, good fats that nourish and satisfy, versus other high protein diets that do not distinguish between good and bad fats. Created by Dr. Arthur Agatston, a renowned cardiologist from southern Florida, “The South Beach Diet,” was first published in 2003 and became a bestseller with more than 23 million copies in print and multiple titles appearing on the New York Times bestseller list. The plan includes support and counseling options from trained weight-loss coaches and registered dietitians available seven days a week. Customers can also download the new South Beach Diet Tracker app.
Additionally, our multi-day meal kits are available at select retailers. We offer several varieties of our Nutrisystem 5-day kit, a “D” kit targeted to individuals with or at risk of Type 2 diabetes, as well as SmartCarb and PowerFuel products including meal replacement bars, multiple varieties of powder shakes, baked goods and a line of snacks designed to complement our multi-day kits. The retail channel provides us with great brand exposure, offering consumers who may not be aware of our programs an opportunity to sample our products at a more attractive price point. We are seeing repeat business as well as multiple kit purchases, indicating that customers are seeing results or enlisting other family members to diet with them. Also, we continue to offer our programs at Costco through the sale of prepaid gift cards. We are actively developing our retail product pipeline and have multiple kits and single items available for purchase.
For those with Type 2 diabetes or for those at risk for Type 2 diabetes, we have the Nutrisystem® D® Program, a weight loss program specifically designed to produce gradual weight loss. It provides nutrition consistent with the guidelines of the American Diabetes Association and the USDA. Two randomized controlled trials published in peer-reviewed medical journals found the Nutrisystem® D® Program, in combination with counseling sessions, produced statistically and clinically meaningful improvements in weight, HbA1c (a key measure of blood glucose control), and several other risk factors. Notably, improvements in diabetes control were observed along with a reduction in diabetes medications among participants who received the Nutrisystem D intervention. A third
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study, utiliz
ing continuous glucose monitoring technology, found improvements in blood glucose control when subjects used the Nutrisystem® D® Program, even before the achievement of significant weight loss.
By offering a variety of frozen and ready-to-go foods, we help our customers sustain their weight loss efforts. On our websites, customers can order food 24 hours a day, seven days a week. The transition and maintenance plans allow customers the means to gradually increase their responsibility for grocery shopping and food preparation while adhering to the principles of our weight loss programs. These lower cost programs help extend the supportive relationship and allow time to reinforce the dietary changes that produced the initial weight loss. These plans include recipes and portion-control tools in addition to a reduced number of entrees delivered each month.
Our weight loss programs’ features are counter to traditional weight loss programs’ limitations, such as, high initiation and recurring membership fees, the inconvenience of traveling to weight loss centers for scheduled appointments and lack of privacy. In addition, our prepared meals provide our customers with a structured program with limited weighing and measuring of foods and no need to count calories, carbohydrates or points. Customers are provided breakfasts, lunches, dinners, snacks and flex meals, which they supplement, depending on the program they are following, with items such as fresh fruits, fresh vegetables, lean protein and dairy. We believe that the convenience of home delivery, reduced grocery shopping time, the portability of the food, and rapid food preparation also aid customer compliance with our weight loss program.
Our food items have accounted for 99%, 99% and 98% of our revenue for the years ended December 31, 2017, 2016 and 2015, respectively. No other product or service has accounted for more than 1% of our revenue in any of the last three years. Approximately 99% of our revenue was generated in the United States in each of the years ended December 31, 2017, 2016 and 2015.
The Customer Experience
Our sales, marketing, ecommerce and service operations seek to understand our customers’ needs throughout their weight loss and management journey to help us develop effective, compelling and innovative products and services. Through a combination of consumer research and data management, we personalize the introduction, on-boarding, weight loss, transition and maintenance phases of our customers’ experience.
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Introduction/Acquisition
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We attract new customers via direct response television, online marketing (including search engine marketing, search engine optimization, affiliate marketing, display advertising, partnerships, social media and email), direct mail, print advertisements and a variety of other direct marketing efforts. We have a fully integrated acquisition enterprise. Response is tracked to the specific vehicle, and analytic models are used to attribute other orders back to the response source, in order to closely manage the effectiveness of our specific direct marketing efforts.
The majority of our new customers buy via our websites. We consistently seek to refine our sales conversion funnel through thoughtful testing to improve the learning and buying experience for prospects and to increase conversion rates.
We also have an in-house call center. Staffing levels fluctuate seasonally and are aligned to marketing spend and consequent call volume. Sales agents, paid primarily on commission, take in-bound responses from our advertisements and personalize the weight loss plan for each customer. They also make out-bound calls to customers who have provided their contact information.
To help customers get off to a strong and successful start, we provide both printed materials in initial shipments of food (including guides and a daily food tracker) and access to a robust set of customizable online tools and trackers.
We use customer preferences to offer a variety of additional products and services that help customers while on the path to their weight loss goals. These offers are made via our websites, emails, social media, newsletters and our contact center.
We also offer unlimited counseling services for our customers with trained weight loss counselors, registered dietitians and certified diabetes educators at no cost. We seek to hire counselors with backgrounds in psychology, sociology, nutrition, dietetics or other health-related fields and with suitable, compassionate personalities to help and support our customers throughout their weight loss journey. Counselors are trained in our programs, motivational techniques and problem solving. Counselors take in-bound requests for help via phone and also reach out to customers via email and phone.
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Transition and Maintenance
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As customers reach their weight loss goals, we offer transition and maintenance programs that provide products and guidance that combine the right amount of structure and flexibility. These programs are offered online, via email marketing, and via our contact center’s retention agents.
Because we realize that weight management is a lifelong process, and that customers may need our programs again from time to time, we reach out to past customers to attempt to put them back on structured programs if needed. Our digital content, e-newsletters and apps help keep customer relationships active after the completion of the first weight loss cycle. Employing data and segmentation, we develop products and programs that address the varied needs of past customers. We offer these products and programs via our contact center, television, digital marketing and targeted emails, social media efforts and direct mail.
We are committed to the highest levels of customer service and manage our customer relations through our in-house call center. Our representatives are trained to answer questions and solve problems once a purchase has been made. Customers contact us via email, online chat and phone. Typical inquiries concern delivery dates, reported missing or damaged items, and requests for credits or exchanges. For email inquiries, we have a software system that scans the customer’s email for key words and automatically supplies the representative with a response that is then reviewed, edited and sent to the customer. We regularly review customer satisfaction levels and improve our practices accordingly.
Supply Chain
An integrated order receipt, billing, picking, shipping and delivery tracking system comprised of proprietary and third-party components is utilized for our orders. This system integrates the front end, or website customer interface, with order processing and shipping, and allows customers to access shippers’ order tracking numbers online. Our computer-assisted picking system allows for virtually paperless order picking in all warehouse facilities.
We utilize an integrated network of distribution facilities through an existing arrangement with our outside fulfillment provider. We work closely with our fulfillment provider to drive out waste and continuously improve processes. We currently utilize seven outsourced distribution facilities. Three are located in Pennsylvania (Allentown, Bethlehem and Chambersburg), two in Nevada (both in Sparks), one in Illinois (Troy) and one in Georgia (Atlanta). As of December 31, 2017, all fulfillment was being handled by one outsourced provider.
We have a service agreement with our outside fulfillment provider which provides for storage, handling of frozen and ready-to-go foods and other services, including pricing and minimum space commitments. The current contract expires on various dates ranging from June 30, 2020 to June 30, 2023 with respect to certain of the sites, but may be terminated sooner upon 180-day written notice. We believe that other outside fulfillment providers could be utilized if needed and we continually evaluate the need for secondary fulfillment services.
We continue to partner with our fulfillment provider to efficiently process and ship our orders. In 2017, approximately, 94% of all direct customer initial orders were shipped within three business days of the date the order was received.
Direct customers are not charged for their orders until the ordered product is shipped. We do not charge customers for shipping on any four-week meal plan. For customers who purchase an Auto-Delivery plan, we provide a discount off the regular one-time rate of the four-week meal plan. If an Auto-Delivery customer cancels before receipt of a second shipment and after the 14-day money back guarantee period, the customer will be charged a cancellation fee for the Auto-Delivery discount received on the first shipment.
Product Development
All of our foods and supplements are currently outsourced from more than 35 manufacturers or vendors. We have entered into supply agreements with several of these food vendors, some of which may provide for annual pricing, annual purchase obligations, exclusivity in the production of certain products, as well as certain rebates to us if certain volume thresholds are exceeded. These contracts have terms of five years or less and generally may be terminated by us upon written notice, mostly between 30 and 180 days, or under certain circumstances only upon a default of the vendor. We anticipate meeting all annual purchase obligations.
In 2017, approximately 12% and 8% of inventory purchases were from two vendors. We have a supply agreement with one of these vendors that requires us to make certain minimum purchases. In 2016, these vendors each supplied approximately 11% of inventory purchases and in 2015, approximately 17% and 19% of inventory purchases.
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Our product development team uses a number of sources – customer feedback, market trends, nutrition science, national dietary guidelines and breakthroughs in food te
chnology – to create new ideas for our program. New foods are created to enhance the variety of our current offerings or to support the efforts of creating a new program. Typically, concepts are formulated in collaboration with our food manufacturers to me
et our requirements for nutrition and stability. We then contract with these food manufacturers to produce these products based on our specifications. Alternatively, food manufacturers may suggest items. Regardless of a given food item’s pathway through de
velopment, that food is evaluated for nutrition, compliance with our program, taste and cost considerations. The number of stock keeping units, or SKUs, we introduce each year varies depending on whether we are introducing a new program or simply updating
an existing one.
Public Relations
We conduct a proactive public relations program that is designed to garner positive coverage of the Company and our weight loss programs across all media platforms including television, magazine, print, online news, blogs and social media, particularly around the key dieting seasons. In addition, the public relations team supports an executive communication program to broadly support our brands.
Community Support
We
have been a local sponsor of the Go Red for Women Campaign for three years. The
Go Red for Women Campaign in Greater Philadelphia, u
nder Nutrisystem CEO Dawn Zier’s leadership as chair in 2017,
generated more funds than ever before, setting a new local record for total funds raised making Greater Philadelphia’s efforts the largest in the nation in 2017.
Nutrisystem is a perennial sponsor –– 2017 was the 8
th
consecutive year –– of The American Diabetes Association Step Out: Walk to Stop Diabetes in Philadelphia. As part of our sponsorship in 2017, we hosted the Step Out Café and dozens of our employees assisted with the registration of event participants and provided other logistical services in support of the event.
Our Customers
We offer weight loss programs designed for women and men as well as people with Type 2 diabetes or at risk for Type 2 diabetes who want to lose weight and manage their diabetes. Based on our customer research, our typical Nutrisystem® customer is female and we believe that, on average, customers want to lose 40 pounds over a period of time. Additionally, based on our customer research, we believe our typical customers tend to stay on our program for 11 to 12 weeks. We believe that this research indicates our customers value the following Nutrisystem® program attributes:
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convenient direct delivery to their door;
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simple to follow and stay on program;
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food can be easily prepared in minutes;
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wide variety of food choices; and
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they feel satisfied while on the program.
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Information Systems
Our ecommerce and community websites and our tools and trackers, all of which are based primarily on third-party software customized to meet our business needs, are each hosted in top tier hosting facilities. These facilities provide redundant network connections, physical and fire security and generator power back up for the equipment upon which our websites rely and are intended to provide an uninterruptible power supply. Our servers and our network are monitored 24 hours a day, seven days a week.
We use a variety of security techniques to protect our confidential customer data. When our customers place an order or access their account information, we secure that transaction by using encryption technologies, including transport layer security, or TLS. Our customer data is protected against unauthorized access by security measures and we engage a variety of industry leading technology providers including VeriSign, CyberSource and SecureWorks to further ensure the security of our credit card transactions and the safety of our customers’ personal information.
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Intellectual Property
We own numerous domestic and international trademarks and other proprietary rights that are important to our business. Depending upon the jurisdiction, trademarks are valid as long as they are used in the regular course of trade and/or their registrations are properly maintained. We believe the protection of our trademarks, copyrights, patents, domain names, trade dress, and trade secrets is important to our success. We aggressively protect our intellectual property rights by relying on a combination of watch services and trademark, copyright, patent, trade dress and trade secret laws, and through the domain name dispute resolution system.
Employees
As of December 31, 2017, we had 606 employees and consider our relations with these employees to be good.
Seasonality
Typically in the weight loss industry, revenue is greatest in the first calendar quarter and lowest in the fourth quarter. We believe our business experiences seasonality, driven primarily by the predisposition of dieters to initiate a diet at certain times of the year and the placement of our advertising, which is based on the price and availability of certain media at such times.
Available Information
All periodic and current reports, registration statements, code of conduct and other material that we are required to file with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available free of charge through our investor relations page at
www.nutrisystem.com
. Such documents are available as soon as reasonably practicable after electronic filing of the material with the SEC. Our Internet website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report.
The public may also read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site,
www.sec.gov
, which contains reports, proxy and information statements, and other information regarding issuers that file such information electronically with the SEC.
Executive Officers of the Company
The Company’s current executive officers and their respective ages and positions are as follows:
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Position
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Dawn M. Zier
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52
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President and Chief Executive Officer
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Michael P. Monahan
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45
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Executive Vice President and Chief Financial Officer
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Keira Krausz
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52
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Executive Vice President and Chief Marketing Officer
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Dawn M. Zier
has served as our President and Chief Executive Officer and as a member of our Board of Directors since November 2012. Before joining us, Ms. Zier served as the President of International at The Reader's Digest Association, Inc., a global media and direct marketing company (the “Reader's Digest Association”), from April 2011 until November 2012, and as an Executive Vice President of the Reader's Digest Association from February 2011 until November 2012. From October 2009 to April 2011, Ms. Zier served as President, Europe of the Reader's Digest Association. Prior to serving in these roles, Ms. Zier served as the President of Global Consumer Marketing for the Reader's Digest Association from June 2008 to October 2009 and as the President and Chief Executive Officer of Direct Holdings U.S. Corp., a marketer of audio and video products and at such time a subsidiary of the Reader's Digest Association, from June 2009 to October 2009. From August 2005 to June 2008, Ms. Zier served as the President of North American Consumer Marketing for the Reader's Digest Association. In February 2013, RDA Holdings Co., the holding company and parent of the Reader’s Digest Association, filed voluntary petitions for reorganization relief pursuant to Chapter 11 of the United States Bankruptcy Code. Ms. Zier currently serves on the board of Spirit Airlines, joining in 2015 and on the board of the Hain Celestial Group, joining in 2017. Ms. Zier served on the Velo Holdings Inc. Board of Directors from 2015 to 2016, Marketing Edge’s Board of Trustees from 2010 to 2012, and the Direct Marketing Association’s Board of Directors from 2008 to 2015, while also serving as its Nominating Committee Chair and Secretary from 2012 to 2014. From 2005 to 2009, she chaired the Magazine’s Director’s Advisory Committee for the Audit Bureau of Circulations.
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Michael P. Monahan
has served as our Executive Vic
e President and Chief Financial Officer since May 2013. Prior to joining us, Mr. Monahan served as the Chief Financial Officer of PetroChoice Holdings, Inc., a privately-held distributor of industrial, commercial and passenger car lubricants since January
2009. From April 2006 through January 2009, Mr. Monahan served as our Vice President of Finance. Prior to that, Mr. Monahan held positions with Exelon Corporation, Accenture and Arthur Andersen LLP.
Keira Krausz
has served as our Executive Vice President and Chief Marketing Officer since February 2013. Prior to joining us, Ms. Krausz served as head of new business development for Animated Storyboards, a global independent provider of television test spots to the advertising industry, from April 2012 to January 2013. Prior to that, Ms. Krausz served as Vice President of Marketing for QSP, Inc., a subsidiary of Time, Inc. from 2005 until March 2012 as QSP was sold. Ms. Krausz started her career at Reader's Digest Association in 1992, and held a number of progressively-responsible positions in product management, marketing, and business management, ultimately ascending to Vice President, Marketing and General Manager, of Reader's Digest Association’s Books & Music Business. Ms. Krausz currently serves on the Data & Marketing Association’s Board of Directors.
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You should consider carefully the following risks and uncertainties when reading this Annual Report. If any of the events described below actually occurs, the Company’s business, financial condition and operating results could be materially adversely affected. You should understand that it is not possible to predict or identify all such risks and uncertainties. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties.
Our future growth and profitability will depend in large part upon the effectiveness and efficiency of our marketing expenditures and our ability to select effective markets and media in which to advertise.
Our marketing expenditures were $198.9 million, $152.4 million and $124.2 million in 2017, 2016 and 2015, respectively. Our future growth and profitability will depend in large part upon the effectiveness and efficiency of our marketing expenditures, including our ability to:
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create greater awareness of our brands and our programs;
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identify the most effective and efficient levels of spending in each market, media and specific media vehicle;
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determine the appropriate creative messages and media mix for advertising, marketing and promotional expenditures;
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effectively manage marketing costs (including creative and media) in order to maintain acceptable customer acquisition costs;
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acquire cost-effective national television advertising;
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select the most effective markets, media and specific media vehicles in which to advertise; and
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convert consumer inquiries into actual orders.
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Our planned marketing expenditures may not result in increased revenue or generate sufficient levels of brand name and program awareness. We may not be able to manage our marketing expenditures on a cost-effective basis whereby our customer acquisition costs may exceed the contribution profit generated from each additional customer.
Our sales may be adversely impacted by the health and stability of the general economy.
Unfavorable changes in general economic conditions, such as a recession or prolonged economic slowdown, may reduce the demand for our products and otherwise adversely affect our sales. For example, economic forces, including general economic conditions, demographic trends, consumer confidence in the economy, changes in disposable consumer income and/or reductions in discretionary spending, may cause consumers to defer purchases of our programs which could adversely affect our revenue, gross margins, and/or our overall financial condition and operating results.
We rely on third parties to provide us with adequate food supply, freight and fulfillment and Internet and networking services, the loss of any of which could cause our revenue, earnings or reputation to suffer.
Food Manufacturers and Other Suppliers
. We rely solely on third-party manufacturers to supply all of the food and other products we sell as well as packaging materials. In 2017, approximately 12% and 8% of inventory purchases were from two vendors. If we are unable to obtain sufficient quantity, quality and variety of food, other products and packaging materials in a timely and low-cost manner from our manufacturers, we will be unable to fulfill our customers’ orders in a timely manner, which may cause us to lose revenue and market share or incur higher costs, as well as damage the value of our brands.
Freight and Fulfillment
. In 2017, 100% of our order fulfillment was handled by one third-party provider. Also, more than 98% of our direct to consumer orders were shipped by one third-party provider and more than 98% of our orders for retail programs were shipped by another third-party provider. Should these providers be unable to service our needs for even a short duration, our revenue and business could be harmed. Additionally, the cost and time associated with replacing these providers on short notice would add to our costs. Any replacement fulfillment provider would also require startup time, which could cause us to lose sales and market share.
Internet and Networking
. Our business also depends on a number of third parties for Internet access and networking, and we have limited control over these third parties. Should our network connections go down, our ability to fulfill orders would be delayed. Further, if our websites or call center become unavailable for a noticeable period of time due to Internet or communication failures, our business could be adversely affected, including harm to our brands and loss of sales.
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The
refore, we are dependent on maintaining good relationships with these third parties. The services we require from these parties may be disrupted by a number of factors associated with their businesses, including the following:
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financial condition or results of operations;
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internal inefficiencies;
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natural or man-made disasters; and
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with respect to our food suppliers, shortages of ingredients or USDA or United States Food and Drug Administration (“FDA”) compliance issues.
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We may be subject to claims that our personnel are unqualified to provide proper weight loss advice.
We offer counseling options from weight loss counselors, registered dietitians and certified diabetes educators with varying levels of training. We may be subject to claims from our customers alleging that our personnel lack the qualifications necessary to provide proper advice regarding weight loss and related topics. We may also be subject to claims that our personnel have provided inappropriate advice or have inappropriately referred or failed to refer customers to health care providers for matters other than weight loss. Such claims could result in lawsuits, damage to our reputation and divert management’s attention from our business, which would adversely affect our business.
We may be subject to health or advertising related claims from our customers.
Our weight loss programs do not include medical treatment or medical advice, and we do not engage physicians or nurses to monitor the progress of our customers. Many people who are overweight suffer from other physical conditions, and our target consumers could be considered a high-risk population. A customer who experiences health problems could allege or bring a lawsuit against us on the basis that those problems were caused or worsened by participating in our weight management programs or by consuming one or more of our individual products. For example, our predecessor businesses suffered substantial losses due to health-related claims and related publicity. Further, customers who allege that they were deceived by any statements that we made in advertising or labeling could bring a lawsuit against us under consumer protection laws. Currently, we are neither subject to any such allegations nor have we been named in any such litigation. If we were subject to any such claims, while we would defend ourselves against such claims, we may ultimately be unsuccessful in our defense. Also, defending ourselves against such claims, regardless of their merit and ultimate outcome, would likely be lengthy and costly, and adversely affect our results of operations. Further, our general liability insurance may not cover claims of these types.
The weight management industry is highly competitive. If any of our competitors or a new entrant into the market with significant resources pursues a weight management program similar to ours, our business could be significantly affected.
Competition is intense in the weight management industry and we must remain competitive in the areas of program efficacy, price, taste, customer service and brand recognition. Our competitors include companies selling pharmaceutical products and weight loss programs, digital tools and wearable trackers, as well as a wide variety of diet foods and meal replacement bars and shakes, appetite suppressants and nutritional supplements. Some of our competitors are significantly larger than we are and have substantially greater resources. Our business could be adversely affected if someone with significant resources decided to imitate our weight management programs. For example, if a major supplier of pre-packaged foods decided to enter this market and made a substantial investment of resources in advertising and training diet counselors, our business could be significantly affected. Any increased competition from new entrants into our industry or any increased success by existing competition could result in reductions in our sales or prices, or both, which could have an adverse effect on our business and results of operations.
We are dependent on certain third-party agreements for a percentage of revenue.
We have contractual agreements with certain third-party retailers. Under the agreements, these third parties control when and how often our products are offered and we are not guaranteed any minimum level of sales. If any third party elects not to renew their agreement with us or reduces the promotion of our products, our revenue will suffer. In addition, our third-party retailers may decide
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to stop selling our products upon written notice, which may result in an increased level of reclamation claims. In the event any retailer terminates its relationship with us and the level of reclamation claims exceeds the estimated amoun
t reserved on our balance sheet at the time of sale to the retailer, we will have to record an expense for the excess claims, which could adversely impact our results of operations and financial condition. Additionally, in certain instances, we could be pr
ohibited from selling our products through competitors of these third parties for a specified time after the termination of the agreements.
New weight loss products or services may put us at a competitive disadvantage.
On an ongoing basis, many existing and potential providers of weight loss solutions, including many pharmaceutical firms with significantly greater financial and operating resources than we have, are developing new products and services. The creation of a weight loss solution, such as a drug therapy, that is perceived to be safe, effective and “easier” than a portion-controlled meal plan would put us at a disadvantage in the marketplace and our results of operations could be negatively affected.
We may be subject to litigation from our competitors.
Our competitors may pursue litigation against us based on our advertising or other marketing practices regardless of its merit and chances of success, especially if we engage in comparative advertising, which includes advertising that directly or indirectly mentions a competitor or a competitor’s weight loss program in comparison to our programs. While we would defend ourselves against any such claims, our defense may ultimately be unsuccessful. Also, defending against such claims, regardless of their merit and ultimate outcome, may be lengthy and costly, strain our resources and divert management’s attention from their core responsibilities, which would have a negative impact on our business.
Our business is subject to online security risks, including security breaches and identity theft.
Unauthorized users who penetrate our information security could misappropriate proprietary or customer information or data or cause interruptions to the product offerings on our websites. As a result, it may become necessary to expend significant additional amounts of capital and resources to protect against, or to alleviate, problems caused by unauthorized users. These expenditures, however, may not prove to be a timely remedy against unauthorized users who are able to penetrate our information security. In addition to purposeful security breaches, the inadvertent transmission of computer viruses could adversely affect our computer systems and, in turn, harm our business.
A significant number of states require that customers be notified if a security breach results in the disclosure of their personal financial account or other information. Additional states and governmental entities are considering such “notice” laws. In addition, other public disclosure laws may require that material security breaches be reported. If we experience a security breach and such notice or public disclosure is required in the future, our reputation and our business may be harmed.
In the ordinary course of our business, we collect and utilize proprietary and customer information and data. Privacy concerns among prospective and existing customers regarding our use of such information or data collected on our websites or through our services and products, such as weight management information, financial data, email addresses and home addresses, could keep them from using our websites or purchasing our services or products. We currently face certain legal obligations regarding the manner in which we treat such information and data. Businesses have been criticized by privacy groups and governmental bodies for their use and handling of such information and data. Currently, a significant number of our customers authorize us to bill their credit cards directly for fees charged by us. We rely on third-party software products to secure our credit card transactions. Although we have developed systems and processes that are designed to protect consumer information and prevent fraudulent payment transactions and other security breaches, failure to prevent or mitigate such fraud or breaches or changes in industry standards or regulations may adversely affect our business and operating results or cause us to lose our ability to accept credit cards as a form of payment and result in chargebacks of the fraudulently charged amounts. Furthermore, widespread credit card fraud may lessen our customers’ willingness to purchase our products on our websites.
We may experience fluctuations in our operating results which may cause our stock price to be volatile.
We have experienced and expect to continue to experience fluctuations in our quarterly results of operations. Our business is seasonal, with revenue generally greatest in the first calendar quarter and weakest in the fourth quarter. The market price of our common stock is subject to fluctuations in response to our operating results, general trends in the weight loss industry, announcements by our competitors, our ability to meet or exceed securities analysts’ expectations, recommendations by securities analysts, the condition of the financial markets and other factors. These fluctuations, as well as general economic and market conditions, may adversely affect the market price of our common stock and cause it to fluctuate significantly.
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Acquisitions and the pursuit of
new business opportunities present risks, and we may be unable to achieve the financial and strategic goals of any acquisition or new business.
A component of our growth strategy has been and may continue to be to acquire existing businesses or pursue other business opportunities in the market for weight management and fitness products and other complimentary products and services. These types of transactions will face a number of risks and uncertainties, including:
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difficulties in integrating newly acquired or newly started businesses into existing operations, which may result in increasing operating costs that would adversely affect our operating income and earnings;
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the risk that our current and planned facilities, information systems, personnel and controls will not be adequate to support our future operations;
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diversion of management time and capital resources from our existing businesses, which could adversely affect their performance and our operating results;
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dependence on key management personnel of acquired or newly started businesses and the risk that we will be unable to integrate or retain such personnel;
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the risk that the new products or services we may introduce or begin offering, whether as a result of internal expansion or business acquisitions, will not gain acceptance among consumers and existing customers;
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the risk that new efforts may have a detrimental effect on our brands;
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the risk that we will face competition from established or larger competitors in the new markets we may enter, which could adversely affect the financial performance of any businesses we might acquire or start; and
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the risk that the anticipated benefits of any acquisition or of the commencement of any new business may not be realized, in which event we will not be able to achieve any return on our investment in that new business.
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Consummating these transactions could also result in the incurrence of additional debt and related interest expense, as well as unforeseen contingent liabilities, all of which could have a material adverse effect on our business, financial condition or results of operations. We may also issue additional equity in connection with these transactions, which would dilute our existing stockholders.
We have and expect to continue to launch new weight loss programs and brands which may not be successful due to the failure of such programs or brands to achieve anticipated levels of market acceptance, which could adversely affect our business, financial condition and results of operations.
There are a number of risks inherent in any new program or brand introduction, which could prevent us from achieving revenue growth and increasing our overall market share in the commercial weight loss market. Any new program or brand may fail to achieve the anticipated level of market acceptance or appeal to consumer tastes and preferences. In addition, introduction costs, including product testing and marketing, may be greater than anticipated. If the new program or brand is not successful or falls short of anticipated market acceptance, we may be adversely affected by continued expenses and the diversion of management time to this initiative. Any or all of such events could have adverse effects on our business, financial condition and results of operations.
If we do not continue to receive referrals from existing customers, our customer acquisition cost may increase.
We rely on word-of-mouth advertising for a portion of our new customers. If our brands suffer or the number of customers acquired through referrals drops due to other circumstances, our costs associated with acquiring new customers and generating revenue will increase, which will, in turn, have an adverse effect on our profitability.
We use third-party marketing vendors to promote our products. If the spokespersons affiliated with the third-party marketing vendors suffer adverse publicity or elect to not renew, our revenue could be adversely affected.
Our marketing strategy depends in part on celebrity spokespersons, as well as customer spokespersons, to promote our weight loss programs. Any of these spokespersons may become the subject of adverse news reports, negative publicity or otherwise be alienated from a segment of our customer base, whether weight loss related or not. If so, such events may reduce the effectiveness of his or her endorsement and, in turn, adversely affect our revenue and results of operations. Additionally, if a spokesperson elects not to renew their agreement with us, our revenue may suffer.
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Third parties may infringe on our brands, trad
emarks and other intellectual property rights, which may have an adverse impact on our business.
We currently rely on a combination of trademark and other intellectual property laws and confidentiality procedures to establish and protect our proprietary rights, including our brands. If we fail to successfully enforce our intellectual property rights, the value of our brands, services and products could be diminished and our business may suffer. Our precautions may not prevent misappropriation of our intellectual property. Any legal action that we may bring to protect our brands and other intellectual property could be unsuccessful and expensive and could divert management’s attention from other business concerns. In addition, legal standards relating to the validity, enforceability and scope of protection of intellectual property, especially in Internet-related businesses, are uncertain and evolving. We cannot assure you that these evolving legal standards will sufficiently protect our intellectual property rights in the future.
We may in the future be subject to intellectual property rights claims.
Third parties may in the future make claims against us alleging infringement of their intellectual property rights. Any intellectual property claims, regardless of merit, could be time-consuming and expensive to litigate or settle and could significantly divert management’s attention from other business concerns. In addition, if we were unable to successfully defend against such claims, we may have to pay damages, stop selling the service or product or stop using the software, technology or content found to be in violation of a third party’s rights, seek a license for the infringing service, product, software, technology or content or develop alternative non-infringing services, products, software, technology or content. If we cannot license on reasonable terms, develop alternatives or stop using the service, product, software, technology or content for any infringing aspects of our business, we may be forced to limit our service and product offerings. Any of these results could reduce our revenue and our ability to compete effectively, increase our costs or harm our business.
Our credit agreement contains financial and other covenants. The failure to comply with such covenants could have an adverse effect on us.
Our credit agreement contains certain financial and other covenants including a minimum consolidated fixed charge coverage ratio (applicable if there are outstanding borrowings), and limitations on, among other things, liens, indebtedness, certain acquisitions, consolidations and sales of assets. There were no borrowings outstanding as of December 31, 2017. Any failure to comply with the restrictions of the credit agreement may result in an event of default under the agreement.
We are dependent on our key executive officers for future success. If we lose the services of any of our key executive officers and we are unable to timely retain a qualified replacement, our business could be harmed.
Our future success depends to a significant degree on the skills, experience and efforts of our key executive officers. The loss of the services of any of these individuals could harm our business. If any key executive officers left us or were seriously injured and became unable to work, our business could be harmed.
Provisions in our certificate of incorporation may deter or delay an acquisition of us or prevent a change in control, even if an acquisition or a change of control would be beneficial to our stockholders.
Provisions of our certificate of incorporation (as amended) may have the effect of deterring unsolicited takeovers or delaying or preventing a third party from acquiring control of us, even if our stockholders might otherwise receive a premium for their shares over then current market prices. In addition, these provisions may limit the ability of stockholders to approve transactions that they may deem to be in their best interests.
Our certificate of incorporation (as amended) permits our Board of Directors to issue preferred stock without stockholder approval upon such terms as the Board of Directors may determine. The rights of the holders of our common stock will be junior to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of our outstanding common stock. The issuance of a substantial number of preferred shares could adversely affect the price of our common stock.
Changes in consumer preferences could negatively impact our operating results.
Our programs feature frozen and ready-to-go food selections, which we believe offer convenience and value to our customers. Our continued success depends, to a large degree, upon the continued popularity of our programs versus various other weight loss, weight management and fitness regimens, such as low carbohydrate diets, appetite suppressants and diets featured in the published media. Changes in consumer tastes and preferences away from our frozen or ready-to-go food and support and counseling services, and any
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failure to provide innovative responses to these changes, may have a materia
lly adverse impact on our business, financial condition, operating results and cash flows.
Our success is also dependent on our food innovation including maintaining a robust array of food items and improving the quality of existing items. If we do not continually expand our food items or provide customers with items that are desirable in taste and quality, our business could be harmed.
The weight loss industry is subject to adverse publicity, which could harm our business.
The weight loss industry receives adverse publicity from time to time, and the occurrence of such publicity could harm us, even if the adverse publicity is not directly related to us. In the early 1990s, our predecessor businesses were subject to extremely damaging adverse publicity relating to a large number of lawsuits alleging that the Nutrisystem® weight loss program in use at that time led to gall bladder disease. This publicity was a factor that contributed to the bankruptcy of our predecessor businesses in 1993. In addition, our predecessor businesses were severely impacted by significant litigation and damaging publicity related to their customers’ use of fen-phen as an appetite suppressant, which the FDA ordered withdrawn from the market in September 1997. The significant decline in business resulting from the fen-phen problems caused our predecessor businesses to close all of their company-owned weight loss centers.
Congressional hearings about practices in the weight loss industry have also resulted in adverse publicity and a consequent decline in the revenue of weight loss businesses. Future research reports or publicity that is perceived as unfavorable or that question certain weight loss programs, products or methods could result in a decline in our revenue. Because of our dependence on consumer perceptions, adverse publicity associated with illness or other undesirable effects resulting from the consumption of our products or similar products by competitors, whether or not accurate, could also damage customer confidence in our weight loss program and result in a decline in revenue. Adverse publicity could arise even if the unfavorable effects associated with weight loss products or services resulted from the user’s failure to use such products or services appropriately.
Our industry is subject to governmental regulation that could increase in severity and hurt results of operations.
Our industry is subject to federal, state and other governmental regulation. Certain federal and state agencies, such as the Federal Trade Commission (the “FTC”), regulate and enforce such laws relating to advertising, disclosures to consumers, privacy, consumer pricing and billing arrangements and other consumer protection matters. A determination by a federal or state agency, or a court, that any of our practices do not meet existing or new laws or regulations could result in liability, adverse publicity and restrictions on our business operations. Some advertising practices in the weight loss industry, in particular, have led to investigations from time to time by the FTC and other governmental agencies and many companies in the weight loss industry, including our predecessor businesses, have entered into consent decrees with the FTC relating to weight loss claims and other advertising practices. In addition, the FTC’s Guides Concerning the Use of Endorsements and Testimonials in Advertising require us and other weight loss companies to use a statement as to what the typical weight loss a customer can expect to achieve on our programs when using a customer’s weight loss testimonial in advertising. Federal and state regulation of advertising practices generally, and in the weight loss industry in particular, may increase in scope or severity in the future, which could have a material adverse impact on our business.
Other aspects of our industry are also subject to government regulation. For example, the manufacturing, labeling and distribution of food products, including dietary supplements, are subject to strict USDA and FDA requirements and food manufacturers are subject to rigorous inspection and other requirements of the USDA and FDA, and companies operating in foreign markets must comply with those countries’ requirements for proper labeling, controls on hygiene, food preparation and other matters. If federal, state, local or foreign regulation of our industry increases for any reason, then we may be required to incur significant expenses, as well as modify our operations to comply with new regulatory requirements, which could harm our operating results. Additionally, remedies available in any potential administrative or regulatory actions may include product recalls and requiring us to refund amounts paid by all affected customers or pay other damages, which could be substantial.
Laws and regulations directly applicable to communications, operations or commerce over the Internet such as those governing intellectual property, privacy, libel and taxation, are becoming more prevalent and some remain unsettled. If we are required to comply with new laws or regulations or new interpretations of existing laws or regulations, or if we are unable to comply with these laws, regulations or interpretations, our business could be adversely affected.
Future laws or regulations, including laws or regulations affecting our marketing and advertising practices, relations with consumers, employees, service providers, or our services and products, may have an adverse impact on us.
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The sale of ingested products involves product liability and other risks.
Like other distributors of products that are ingested, we face an inherent risk of exposure to product liability claims if the use of our products results in illness or injury. The foods that we resell in the U.S. are subject to laws and regulations, including those administered by the USDA and FDA that establish manufacturing practices and quality standards for food products. Product liability claims could have a material adverse effect on our business as existing insurance coverage may not be adequate. Distributors of weight loss food products, including dietary supplements, as well as our predecessor businesses, have been named as defendants in product liability lawsuits from time to time. The successful assertion or settlement of an uninsured claim, a significant number of insured claims or a claim exceeding the limits of our insurance coverage would harm us by adding costs to the business and by diverting the attention of senior management from the operation of the business. We may also be subject to claims that our products contain contaminants, are improperly labeled, include inadequate instructions as to use or inadequate warnings covering interactions with other substances. Product liability litigation, even if not meritorious, is very expensive and could also entail adverse publicity for us and reduce our revenue. In addition, the products we distribute, or certain components of those products, may be subject to product recalls or other deficiencies. Any negative publicity associated with these actions would adversely affect our brand and may result in decreased product sales and, as a result, lower revenue and profits.
The effects of the Tax Cuts and Jobs Act on our business have not yet been fully analyzed and could have an adverse effect on our net income.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. We are continuing to analyze the Tax Act and its possible effects on us, including on our subsidiaries. The Tax Act reduces the federal corporate tax rate to 21% from 35%, among other things, which has caused us to write-down a portion of our deferred tax assets. The changes included in the Tax Act are broad and complex and could be subject to further interpretation. The final transition impacts of the Tax Act may differ from the amounts provided elsewhere in this report, possibly materially, and our expectation of our future effective tax rate may also differ, due to changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act or any changes in accounting standards for income taxes or related interpretations in response to the Tax Act. Based on these factors we cannot determine at this time the full effects of the Tax Act on our business and future financial results.
ITEM 1B.
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UNRESOLVED STAFF COMMENTS
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None.
We currently lease one location in Fort Washington, Pennsylvania. This location totals 119,767 square feet of office space and our lease expires in 2022. Our fulfillment capacity is located in Chambersburg, Pennsylvania; Allentown, Pennsylvania; Bethlehem, Pennsylvania; Atlanta, Georgia; Troy, Illinois and Sparks, Nevada through an outsourced provider. We have no lease obligations to our outsourced fulfillment provider; however, we are subject to minimum space commitments which we may reduce over a specified period of time. Management believes our outsourced fulfillment capacity is adequate to meet our needs for the foreseeable future.
ITEM 3.
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LEGAL PROCEEDINGS
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The Company is involved in various claims and routine litigation matters that arise in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the outcomes of such matters are not anticipated to have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows in future years
and management believes the range of reasonably possible losses from current matters is immaterial
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MINE SAFETY DISCLOSURES
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Not applicable.
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The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Nature of the Business
Nutrisystem, Inc. (the “Company” or “Nutrisystem”) is a provider of weight management products and services, including nutritionally balanced weight loss programs sold primarily online and over the telephone and multi-day kits and single items available at select retail locations. The weight loss programs are designed for women and men. Additionally, the Nutrisystem® D® program is designed specifically to help people with Type 2 diabetes or at risk for Type 2 diabetes who want to lose weight and manage their diabetes. The Nutrisystem® programs are based on over 45 years of nutrition research. The Company’s pre-packaged foods are sold directly to weight loss program participants primarily through the Internet and telephone (including the redemption of prepaid gift cards), referred to as the direct channel, through QVC, a television shopping network, and select retailers. Approximately 99% of revenue for each of the years ended December 31, 2017, 2016 and 2015 was generated in the United States.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Presentation of Financial Statements
The Company’s consolidated financial statements include 100% of the assets and liabilities of Nutrisystem, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Cash,
Cash Equivalents and Short Term Investments
Cash equivalents include only securities having a maturity of three months or less at the time of purchase. At December 31, 2017 and 2016, demand accounts and money market funds comprised all of the Company’s cash and cash equivalents.
Short term investments consist of investments in government and agency securities and corporate debt securities with original maturities between three months and three years. The Company classifies these investments as available-for-sale securities. These investments are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive loss, a component of stockholders’ equity, net of related tax effects.
The Company evaluates its investments for other-than-temporary impairment by reviewing factors such as the length of time and extent to which fair value has been below cost basis and the Company’s ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery of the market value. There were no other-than-temporary impairments in 2017, 2016 or 2015.
Inventories
Inventories consist principally of packaged food held in outside fulfillment locations. Inventories are valued at the lower of cost or net realizable value, with cost determined using the first-in, first-out method. Quantities of inventory on hand are continually assessed to identify excess or obsolete inventory and a provision is recorded for any estimated loss. The reserve is estimated for excess and obsolete inventory based primarily on forecasted demand and/or the Company’s ability to sell the products, introduction of new products, future production requirements and changes in customers’ behavior. The reserve for excess and obsolete inventory was $1,945 and $1,260 at December 31, 2017 and 2016, respectively.
Fixed Assets
Fixed assets are stated at cost. Depreciation expense is calculated using the straight-line method over the estimated useful lives of the related assets, which are generally two to seven years. Leasehold improvements are amortized on a straight-line basis over the lesser of the estimated useful life of the asset or the related lease term. Expenditures for repairs and maintenance are charged to expense as incurred, while major renewals and improvements are capitalized.
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Included in fixed assets is the capitalized cost of internal-use software and website development incurred during the applicat
ion development stage. Capitalized costs are amortized using the straight-line method over the estimated useful life of the asset, which is generally two to five years. Costs incurred related to planning or maintenance of internal-use software and website
development are charged to expense as incurred. The net book value of capitalized software was $16,419 and $17,868 at December 31, 2017 and December 31, 2016, respectively.
During 2016, the Company determined certain software licenses were no longer expected to be used as more enhanced software options were available to handle its evolving business needs and a charge of $1,297 was recorded to write-down these assets. The charge was recorded as depreciation and amortization in the accompanying consolidated statement of operations.
Intangible Assets
Intangible assets consist of a trade name from the acquisition of the South Beach Diet (“SBD”) brand in December 2015 and domain names (see Note 6). The trade name is presented at cost, net of accumulated amortization, and is amortized on a straight-line basis over its estimated useful life. The domain names have indefinite lives and are not being amortized but are reviewed for impairment.
Long-Lived Assets
The Company continually evaluates whether events or circumstances have occurred that would indicate that the remaining estimated useful lives of long-lived assets may warrant revision or that the remaining balance may not be recoverable. Long-lived assets are evaluated for indicators of impairment. When factors indicate that long-lived assets should be evaluated for possible impairment, an estimate of the related undiscounted cash flows over the remaining life of the long-lived assets is used to measure recoverability. If any impairment is indicated, measurement of the impairment will be based on the difference between the carrying value and fair value of the asset, generally determined based on the present value of expected future cash flows associated with the use of the asset. As of December 31, 2017, management believes that no reductions to the remaining useful lives or write-downs of long-lived assets are required.
Revenue Recognition
Revenue from direct to consumer product sales is recognized when the earnings process is complete, which is upon transfer of title to the product. Recognition of revenue upon shipment meets the revenue recognition criteria in that persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable and collection is reasonably assured. The Company also sells prepaid gift cards to wholesalers. Revenue from these cards is recognized after the card is redeemed online at the Company’s website or via telephone by the customer and the product is shipped to the customer. Revenue from the retail programs is recognized when the product is received at the seller’s location.
Deferred revenue consists primarily of unredeemed prepaid gift cards and unshipped foods. When a customer orders the frozen program, two separate shipments are delivered. One contains Nutrisystem’s ready-to-go food and the other contains the frozen food. Both shipments qualify as separate units of accounting and the fair value is based on estimated selling prices of both units.
Nutrisystem’s direct to consumer customers may return unopened ready-to-go products within 30 days of purchase in order to receive a refund or credit. Frozen products are non-returnable and non-refundable unless the first food order is canceled within 14 days of delivery. Estimated returns are accrued at the time the sale is recognized and actual returns are tracked monthly.
The Company reviews the reserves for customer returns at each reporting period and adjusts them to reflect data available at that time. To estimate reserves for returns, the Company considers actual return rates in preceding periods and changes in product offerings or marketing methods that might impact returns going forward. To the extent the estimate of returns changes, the Company will adjust the reserve, which will impact the amount of revenue recognized in the period of the adjustment.
Revenue from product sales includes amounts billed for shipping and handling and is presented net of estimated returns and billed sales tax. Revenue from the retail programs is also net of any trade allowances, reclamation reserves or broker commissions. Revenue from shipping and handling charges was $7,295, $2,869 and $2,561 in 2017, 2016 and 2015, respectively. The increase in shipping and handling from 2016 to 2017 was due primarily to the increased volume of orders and an additional handling charge paid by the customer. Shipping-related costs are included in cost of revenue in the accompanying consolidated statements of operations.
41
Cost of Revenue
Cost of revenue consists primarily of the cost of the products sold, including compensation related to fulfillment, the costs of outside fulfillment, incoming and outgoing shipping costs, charge card fees and packing material. Cost of products sold includes products provided at no charge as part of promotions and the non-food materials provided with customer orders.
Dependence on Suppliers
In 2017, approximately 12% and 8% of inventory purchases were from two suppliers. The Company has a supply arrangement with one of these suppliers that requires the Company to make minimum purchases. In 2016, these suppliers each provided approximately 11% of inventory purchases and in 2015, approximately 17% and 19% of inventory purchases (see Note 8).
The Company outsources 100% of its fulfillment operations to a third-party provider. Additionally, more than 98% of its direct to consumer orders are shipped by one third-party provider and more than 98% of its orders for the retail programs are shipped by another third-party provider.
Supplier Rebates
Two of the Company’s suppliers provide for rebates based on purchasing levels. The Company accounts for these rebates on an accrual basis as purchases are made at a rebate percentage determined based upon the estimated total purchases from the supplier. The estimated rebate is recorded as a receivable from the supplier with a corresponding reduction in the carrying value of purchased inventory and is reflected in the consolidated statements of operations when the associated inventory is sold. For the years ended December 31, 2017, 2016 and 2015, the Company reduced cost of revenue for these rebates by $486, $75 and $698, respectively. No receivable was recorded at December 31, 2017 or 2016.
Marketing Expense
Marketing expense includes media, advertising production, marketing and promotional expenses and payroll-related expenses, including share-based payment arrangements, for personnel engaged in these activities. Media expense was $177,387, $130,451 and $104,621 in 2017, 2016 and 2015, respectively.
Internet advertising expense is recorded based on either the rate of delivery of a guaranteed number of impressions over the advertising contract term or on a cost per customer acquired, depending upon the terms.
Direct-mail advertising costs are capitalized if the primary purpose was to elicit sales to customers who could be shown to have responded specifically to the advertisements and results in probable future economic benefits. The capitalized costs are amortized to expense over the period during which the future benefits are expected to be received. Typically, this period falls within 50 days of the initial direct mailing. All other advertising costs are charged to expense as incurred or the first time the advertising takes place. At December 31, 2017 and 2016, $3,426 and $2,155, respectively, of costs have been prepaid for future advertisements and promotions.
General and Administrative Expense
General and administrative expense consists of compensation for administrative, information technology, call center and sales personnel, share-based payment arrangements for related employees, facility expenses, website development costs, professional service fees and other general corporate expenses.
Lease Related Expenses
Certain of the Company’s lease contracts contain rent holidays, various escalation clauses or landlord/tenant incentives.
The Company records rental costs, including costs related to fixed rent escalation clauses and rent holidays, on a straight-line basis over the lease term. Lease allowances utilized for space improvement are recorded as leasehold improvement assets and amortized over the shorter of the economic useful life of the asset or the lease term. Tenant lease incentive allowances received are recorded as deferred rent and amortized as reductions to rent expense over the lease term. Included in the accompanying consolidated balance sheet is $1,576 of a tenant improvement allowance at December 31, 2017, of which $345 is included in other accrued expenses and current liabilities and $1,231 in non-current liabilities. At December 31, 2016, the tenant improvement allowance was $1,921, of which $345 was included in other accrued expenses and current liabilities and $1,576 in non-current liabilities.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years
42
in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recogniz
ed in the consolidated statements of operations in the period that includes the enactment date. In assessing the ability to realize deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax a
ssets will not be realized.
A tax benefit from an uncertain tax position may be recognized only if it is “more likely than not” that the position is sustainable, based on its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with a taxing authority having full knowledge of all relevant information. The Company records accrued interest and penalties related to unrecognized tax benefits as part of interest (income) expense, net.
Segment Information
The Company is managed and operated as one business. The entire business is managed by a single management team that reports to the chief executive officer. Revenue consists primarily of food sales.
Earnings Per Share
The Company uses the two-class method to calculate earnings per share (“EPS”) as the unvested restricted stock issued under the Company’s equity incentive plans are participating shares with nonforfeitable rights to dividends. Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings to common stockholders and undistributed earnings allocated to common stockholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on the number of weighted average shares outstanding during the period. Undistributed losses are not allocated to unvested restricted stock as the restricted stockholders are not obligated to share in the losses. The following table sets forth the computation of basic and diluted EPS:
|
|
Year Ended December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Net income
|
|
$
|
57,872
|
|
|
$
|
35,469
|
|
|
$
|
26,143
|
|
|
Net income allocated to unvested restricted stock
|
|
|
(487
|
)
|
|
|
(294
|
)
|
|
|
(306
|
)
|
|
Net income allocated to common shares
|
|
$
|
57,385
|
|
|
$
|
35,175
|
|
|
$
|
25,837
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
29,706
|
|
|
|
29,213
|
|
|
|
28,695
|
|
|
Effect of dilutive securities
|
|
|
485
|
|
|
|
332
|
|
|
|
480
|
|
|
Diluted
|
|
|
30,191
|
|
|
|
29,545
|
|
|
|
29,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share
|
|
$
|
1.93
|
|
|
$
|
1.20
|
|
|
$
|
0.90
|
|
|
Diluted income per common share
|
|
$
|
1.90
|
|
|
$
|
1.19
|
|
|
$
|
0.89
|
|
|
In 2017, 2016 and 2015, common stock equivalents representing 146, 335 and 229 shares of common stock, respectively, were excluded from weighted average shares outstanding for diluted income per common share purposes because the effect would be anti-dilutive or the minimum performance requirements for such common stock equivalents have not yet been met.
Share-Based Payment Awards
The cost of all share-based awards to employees and non-employees, including grants of stock options, restricted stock and restricted stock units, is recognized in the financial statements based on the fair value of the awards at grant date. The fair value of stock option awards is determined using the Black-Scholes valuation model on the date of grant. The fair value of restricted stock and performance-based restricted stock unit awards is equal to the market price of the Company’s common stock on the date of grant.
The fair value of share-based awards is recognized over the requisite service period, net of estimated forfeitures. The Company relies primarily upon historical experience to estimate expected forfeitures and recognizes compensation expense on a straight-line basis from the date of grant over the requisite service period except for performance-based units which are recognized on a straight-line basis based on the probable expected performance to be achieved and adjusted accordingly if performance varies. The Company issues new shares upon exercise of stock options, granting of restricted stock or vesting of restricted stock units.
43
Cash Flow Information
The Company made payments for income taxes of $28,547, $14,175 and $13,508 in 2017, 2016, and 2015, respectively. Interest payments in 2017, 2016 and 2015 were $210, $171 and $182, respectively. During 2017, 2016 and 2015, the Company had non-cash capital additions of $128, $548 and $670, respectively, of unpaid invoices in accounts payable and other accrued expenses and current liabilities.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” (“ASU 2014-09”). ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This guidance is effective for annual periods beginning on or after December 15, 2017, including interim reporting periods within that reporting period and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application.
The Company has completed its analysis of the new revenue standard and adopted this standard on January 1, 2018 using the modified retrospective method by recognizing the cumulative effect as an adjustment to the opening balance of stockholders’ equity at January 1, 2018. Therefore, the comparative information for years ended prior to January 1, 2018 will not be restated to comply with the ASU. The Company applied the transition practical expedient to only assess contracts that are not completed contracts at the date of initial application when applying the cumulative effect method. The adoption of this standard will not have a material impact on the amount or timing of revenue recognition for transactions with customers in the direct or retail channels. The adoption of this standard will have an impact on the timing of revenue recognized in accounting for gift cards as presented in the consolidated statements of operations. The Company will be recognizing the estimated breakage of gift cards over the pattern of redemption of the gift cards. Prior to adopting the ASU, the Company recognized gift card breakage when the likelihood of redemption became remote. The Company will also recognize direct-mail advertising costs as expense as incurred. Prior to adopting the ASU, the Company capitalized these costs which were expensed over the period of benefit. Additionally, the Company will recognize contract assets for the carrying amount of product expected to be returned and for costs to obtain a contract if the contract is more than one year. The Company will expense as incurred costs to obtain a contract if the contract is less than one year. Product expected to be returned was presented as a reduction of the related reserve for returns prior to adopting the ASU. The Company expects the cumulative impact of adopting the ASU on January 1, 2018 to be an increase in stockholders’ equity of approximately $1,500. The Company has identified and is implementing changes to its accounting policies, practices and controls to support the ASU. The Company is continuing its assessment of potential changes to its disclosures under the ASU.
In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory.” An entity using an inventory method other than last-in, first-out or the retail inventory method should measure inventory at the lower of cost and net realizable value. The new guidance clarifies that net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The Company adopted this new accounting standard in the first quarter of 2017 and it did not have a material impact on the Company’s consolidated financial statements and footnote disclosures.
In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes,”
which eliminates the previous requirement to present deferred tax assets and liabilities as current and noncurrent amounts in a classified statement of financial position. Instead, entities are required to classify all deferred tax assets and liabilities as noncurrent in a statement of financial position. The Company adopted this new accounting standard in the first quarter of 2017, which resulted in a reclassification of $1,642 at December 31, 2016 from current deferred income taxes to non-current deferred income taxes in the accompanying consolidated balance sheet.
In February 2016, the FASB issued ASU No. 2016-02, “Leases,” which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. This standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. Although the Company is in the process of evaluating the impact of the adoption of the ASU on its consolidated financial statements, the Company
44
currently believes the most significant changes will be related to the recognition of new right-of-use assets and lease liabilities on the Company’s balance sheet for operating
leases.
In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The Company adopted this standard in the first quarter of 2017 and recognized an excess tax benefit from share-based compensation of $5,491 for the year ended December 31, 2017 within income tax expense on the accompanying consolidated statement of operations as opposed to being recognized in additional paid-in capital under previous accounting guidance. The amounts recognized in additional paid-in capital were $2,936 and $2,750 for the years ended December 31, 2016 and 2015, respectively. In addition, the excess tax benefits from share-based compensation are now classified as operating cash flows on the consolidated statement of cash flows instead of being separately stated in the financing activities for the year ended December 31, 2017. The prior periods have not been restated. The Company has elected to continue to estimate expected forfeitures.
In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which clarifies and provides guidance on eight cash flow classification issues and is intended to reduce existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This standard is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The adoption of this new accounting standard will not have a material impact on the Company’s consolidated financial statements and footnote disclosures.
In May 2017, the FASB issued ASU No. 2017-09, “Scope of Modification Accounting,” which provides guidance about which changes to the terms or conditions of share-based payment awards require an entity to apply modification accounting. This standard is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The adoption of this new accounting standard will not have a material impact on the Company’s consolidated financial statements and footnote disclosures.
Use of Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and operating expenses during the reporting period. Actual results could differ from these estimates
.
3.
CASH, CASH EQUIVALENTS AND SHORT TERM INVESTMENTS
At December 31, 2017, cash, cash equivalents and short term investments consisted of the following:
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
Cash
|
|
$
|
24,454
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
24,454
|
|
Money market funds
|
|
|
200
|
|
|
|
0
|
|
|
|
0
|
|
|
|
200
|
|
Government and agency securities
|
|
|
42,220
|
|
|
|
135
|
|
|
|
(355
|
)
|
|
|
42,000
|
|
Corporate debt securities
|
|
|
5,577
|
|
|
|
28
|
|
|
|
(37
|
)
|
|
|
5,568
|
|
|
|
$
|
72,451
|
|
|
$
|
163
|
|
|
$
|
(392
|
)
|
|
$
|
72,222
|
|
At December 31, 2016, cash, cash equivalents and short term investments consisted of the following:
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
Cash
|
|
$
|
9,166
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
9,166
|
|
Money market funds
|
|
|
457
|
|
|
|
0
|
|
|
|
0
|
|
|
|
457
|
|
Government and agency securities
|
|
|
19,132
|
|
|
|
51
|
|
|
|
(96
|
)
|
|
|
19,087
|
|
Corporate debt securities
|
|
|
4,791
|
|
|
|
18
|
|
|
|
(23
|
)
|
|
|
4,786
|
|
|
|
$
|
33,546
|
|
|
$
|
69
|
|
|
$
|
(119
|
)
|
|
$
|
33,496
|
|
45
4.
|
FAIR VALUE MEASUREMENTS
|
A three-tier fair value hierarchy has been established by
the FASB
to prioritize the inputs used in measuring fair value. These tiers are as follows:
Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
The fair values of the Company’s Level 1 instruments are based on quoted prices in active exchange markets for identical assets. The Company had no Level 2 or 3 instruments at December 31, 2017 and 2016.
The following table summarizes the Company’s financial assets measured at fair value at December 31, 2017:
|
|
Total Fair Value
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Money market funds
|
|
$
|
200
|
|
|
$
|
200
|
|
Government and agency securities
|
|
|
42,000
|
|
|
|
42,000
|
|
Corporate debt securities
|
|
|
5,568
|
|
|
|
5,568
|
|
Total assets
|
|
$
|
47,768
|
|
|
$
|
47,768
|
|
The following table summarizes the Company’s financial assets measured at fair value at December 31, 2016:
|
|
Total Fair Value
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Money market funds
|
|
$
|
457
|
|
|
$
|
457
|
|
Government and agency securities
|
|
|
19,087
|
|
|
|
19,087
|
|
Corporate debt securities
|
|
|
4,786
|
|
|
|
4,786
|
|
Total assets
|
|
$
|
24,330
|
|
|
$
|
24,330
|
|
Fixed assets consist of the following:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Furniture and fixtures
|
|
$
|
3,106
|
|
|
$
|
5,745
|
|
Computer hardware and software
|
|
|
69,865
|
|
|
|
69,973
|
|
Equipment
|
|
|
7,515
|
|
|
|
5,173
|
|
Leasehold improvements
|
|
|
12,661
|
|
|
|
11,936
|
|
|
|
|
93,147
|
|
|
|
92,827
|
|
Accumulated depreciation
|
|
|
(61,598
|
)
|
|
|
(60,184
|
)
|
|
|
$
|
31,549
|
|
|
$
|
32,643
|
|
Depreciation and amortization expense related to fixed assets was $14,082, $12,736 and $9,158 in 2017, 2016 and 2015, respectively.
6. INTANGIBLE ASSETS
On December 17, 2015, the Company acquired the South Beach Diet (“SBD”) brand for a cash payment of $15,000. The acquisition was financed with existing cash.
46
The Company developed the South Beach Diet® meal programs, products, and
services in 2016 and launched a structured meal delivery weight-loss program as a distinct brand in 2017. The acquisition provides consumers with additional choices and enables the Company the ability to capture a greater share of the commercial
weight los
s
market as it further leverages its expertise in product development, marketing, ecommerce, supply chain logistics and retail.
The allocation of the purchase price was to the SBD trade name and is being amortized on a straight-line basis over a period of 15 years. The fair value measurement method used to measure the assets acquired utilized a number of significant unobservable inputs or Level 3 assumptions. These assumptions included, among others, projections of the acquired businesses future operating results, the implied fair value of assets using an income approach by preparing a discounted cash flow analysis and other subjective assumptions.
The following table summarizes the Company’s identifiable intangible assets:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Gross
|
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
Trade name
|
|
$
|
15,000
|
|
|
$
|
(2,000
|
)
|
|
$
|
13,000
|
|
|
$
|
15,000
|
|
|
$
|
(1,000
|
)
|
|
$
|
14,000
|
|
Amortization expense for intangible assets was $1,000 for both 2017 and 2016. Estimated amortization expense for identifiable intangible assets for the next five years is expected to be as follows:
2018
|
|
$
|
1,000
|
|
2019
|
|
|
1,000
|
|
2020
|
|
|
1,000
|
|
2021
|
|
|
1,000
|
|
2022
|
|
|
1,000
|
|
Additionally, the Company had $84 of domain names acquired in previous years with indefinite lives that are not being amortized.
On November 6, 2015, the Company entered into an Amended and Restated Credit Agreement that provides for a $50,000 unsecured revolving credit facility (the “Credit Facility”) with a lender. The Credit Facility can be drawn upon through November 6, 2020, at which time all amounts must be repaid. There were no borrowings outstanding at December 31, 2017 or December 31, 2016 under the Credit Facility.
The Credit Facility provides for interest at either a base rate or a LIBOR rate, in each case plus an applicable margin. The base rate will be the highest of (i) the Administrative Agent’s prime rate, (ii) 0.50% above the Federal Funds Rate and (iii) the LIBOR rate for deposits in dollars for a one-month interest period as determined three business days prior to such date, plus 1.50%. The LIBOR rate is equal to the London Inter-Bank Offered Rate for the relevant term. The applicable margin is subject to adjustment based on the Company’s consolidated fixed charge coverage ratio and ranges from 0.00-0.50% per year for base rate loans and from 1.25-1.75% per year for LIBOR rate loans. The Company pays an unused line fee. The unused line fee is 0.25% of the total available credit. The Company incurred no interest expense during 2017, 2016 and 2015. During 2017, 2016 and 2015, the Company incurred $127, $127 and $118 in an unused line fee, respectively, under the Credit Facility and prior financing arrangements. Interest payments and unused line fees are classified within interest (income) expense, net in the accompanying consolidated statements of operations.
The Credit Facility contains financial and other covenants including a minimum consolidated fixed charge coverage ratio (applicable if there are outstanding borrowings), and limitations on, among other things, liens, indebtedness, certain acquisitions, consolidations and sales of assets. As of December 31, 2017, the Company was in compliance with all covenants contained in the Credit Facility.
At December 31, 2017, the Company had $13 of unamortized debt issuance costs associated with the Credit Facility that are being amortized over its remaining term.
8.
|
COMMITMENTS AND CONTINGENCIES
|
Operating Leases
The Company leases its corporate headquarters and certain equipment. These leases generally have initial terms of one to 12 years and have renewal options for additional periods. Certain of the leases also contain escalation clauses based upon increases in costs related
47
to the properties. Lease obligations, with initial or remaining terms of one or more years, consist of the following at December 31, 2017:
2018
|
|
$
|
2,844
|
|
2019
|
|
|
2,877
|
|
2020
|
|
|
2,907
|
|
2021
|
|
|
2,963
|
|
2022
|
|
|
1,753
|
|
|
|
$
|
13,344
|
|
Total rent expense for 2017, 2016 and 2015 was $2,185, $2,185 and $2,304, respectively.
Litigation
The Company is involved in various claims and routine litigation matters that arise in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the outcomes of such matters are not anticipated to have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows in future years
and management believes the range of reasonably possible losses from current matters is immaterial
.
Other Contractual Commitments
The Company’s principal other commitments consisted of obligations under agreements with food suppliers, an agreement with its outside fulfillment provider, agreements with its Internet and networking providers and employment contracts. These agreements may provide for annual pricing, annual purchase obligations, exclusivity in the production of certain products, as well as rebates if certain volume thresholds are exceeded, with terms of five years or less. The Company has total purchase obligations of $39,756 as of December 31, 2017. The Company anticipates it will meet all annual purchase obligations outstanding at December 31, 2017.
Common Stock
In 2017, the Company issued 271 shares of common stock upon the exercise of stock options and received proceeds of $4,266. During 2017, employees surrendered to the Company 90 shares of common stock valued at $4,545 in satisfaction of tax withholding obligations associated with the vesting of equity awards. These shares are included in treasury stock. Additionally, during 2017, employees surrendered to the Company 22 shares of common stock valued at $785, also in satisfaction of tax withholding obligations associated with the vesting of equity awards, which were retired. Also, in 2017, the Company issued 14 shares of common stock as compensation to board members. During each of the four quarters of 2017, the Company paid a dividend of $0.175 per share to all stockholders of record. Subsequent to December 31, 2017, the Board of Directors declared a quarterly dividend of $0.25 per share payable on March 19, 2018 to stockholders of record as of March 8, 2018.
In 2016, the Company issued 286 shares of common stock upon the exercise of stock options and received proceeds of $2,760. During 2016, employees surrendered to the Company 128 shares of common stock valued at $2,657 in satisfaction of tax withholding obligations associated with the vesting of equity awards. These shares are included in treasury stock. Also, in 2016, the Company issued 27 shares of common stock as compensation to board members. During each of the four quarters of 2016, the Company paid a dividend of $0.175 per share to all stockholders of record.
In 2015, the Company issued 335 shares of common stock upon the exercise of stock options and received proceeds of $3,182. During 2015, employees surrendered to the Company 140 shares of common stock valued at $2,610 in satisfaction of tax withholding obligations associated with the vesting of equity awards. These shares are included in treasury stock. Also, in 2015, the Company issued 22 shares of common stock as compensation to board members. During each of the four quarters of 2015, the Company paid a dividend of $0.175 per share to all stockholders of record.
The Company had a share repurchase program to repurchase up to $50,000 of its outstanding shares of common stock that expired on November 3, 2017. On October 25, 2017, the Company announced that its Board of Directors had authorized a new share repurchase program to replace that expiring program. The Company may repurchase up to $50,000 of its outstanding shares of common stock over a 24-month period commencing November 4, 2017. The timing, number and amount of any shares repurchased will be determined by the Company at its discretion and will be based on a number of factors including its evaluation of general market and economic conditions, the trading price of the common stock, regulatory requirements and compliance with the terms of the Company’s outstanding indebtedness. The stock repurchase program may be suspended or discontinued at any time without prior
48
no
tice. During the year ended December 31, 2017, the Company purchased and subsequently retired 29 shares of common stock under these programs for an aggregate cost of $1,500. Additionally, the Company purchased and placed in treasury 72 shares of common sto
ck under these programs for an aggregate cost of $3,485.
Preferred Stock
The Company has authorized 5,000
shares of preferred stock issuable in series upon resolution of the Board of Directors.
Unless otherwise required by law, the Board of Directors can, without stockholder approval, issue preferred stock in the future with voting and conversion rights that could adversely affect the voting power of the common stock. The issuance of preferred stock may have the effect of delaying, averting or preventing a change in control of the Company.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cut and Jobs Act (the “Tax Act”). The Tax Act includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. Other changes include the acceleration of depreciation for certain assets placed into service after September 27, 2017 as well as, prospective changes beginning in 2018 including additional limitations on executive compensation.
Income tax expense consists of the following:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
20,930
|
|
|
$
|
17,562
|
|
|
$
|
14,395
|
|
State
|
|
|
953
|
|
|
|
539
|
|
|
|
31
|
|
|
|
|
21,883
|
|
|
|
18,101
|
|
|
|
14,426
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
2,794
|
|
|
|
509
|
|
|
|
(662
|
)
|
State
|
|
|
981
|
|
|
|
(61
|
)
|
|
|
(66
|
)
|
|
|
|
3,775
|
|
|
|
448
|
|
|
|
(728
|
)
|
|
|
$
|
25,658
|
|
|
$
|
18,549
|
|
|
$
|
13,698
|
|
A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Statutory federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes, net of federal benefit
|
|
|
0.7
|
|
|
|
0.6
|
|
|
|
0
|
|
Executive compensation limitation
|
|
|
0.3
|
|
|
|
0.1
|
|
|
|
0
|
|
Stock-based compensation
|
|
|
(6.4
|
)
|
|
|
0
|
|
|
|
0
|
|
Food donations
|
|
|
(1.1
|
)
|
|
|
(1.1
|
)
|
|
|
(1.2
|
)
|
Fixed assets
|
|
|
0
|
|
|
|
0
|
|
|
|
0.5
|
|
Changes in reserves
|
|
|
0
|
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
Tax credits
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
|
(0.5
|
)
|
Expired charitable contribution carryover
|
|
|
0.8
|
|
|
|
0
|
|
|
|
1.9
|
|
Rate change due to tax reform
|
|
|
1.0
|
|
|
|
0
|
|
|
|
0
|
|
Valuation allowance
|
|
|
0.8
|
|
|
|
0
|
|
|
|
(2.0
|
)
|
Other
|
|
|
(0.2
|
)
|
|
|
0
|
|
|
|
0.8
|
|
|
|
|
30.7
|
%
|
|
|
34.3
|
%
|
|
|
34.4
|
%
|
The change in the effective tax rate from 2016 to 2017 was due primarily to the adoption of ASU No. 2016-09 as of January 1, 2017 partially offset by a charge recorded to write-down the net deferred asset due to the enactment of the Tax Act. The Company recognized an excess tax benefit from share-based compensation of $5,491 in the year ended December 31, 2017 within income tax expense in the accompanying consolidated statement of operations rather than as additional paid-in capital in the accompanying consolidated balance sheet under previous accounting guidance. This benefit was partially offset by a charge of $836 to write-down the net deferred tax asset to reflect the reduction of the future federal corporate income tax rate from 35% to 21%.
49
The significant items comprising the Company’s deferred income tax assets and liabilities are as follows:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Reserves and accruals
|
|
$
|
979
|
|
|
$
|
1,470
|
|
Goodwill/Intangible assets
|
|
|
396
|
|
|
|
721
|
|
Net operating loss carryforwards
|
|
|
2,074
|
|
|
|
1,653
|
|
Stock-based compensation
|
|
|
2,437
|
|
|
|
2,441
|
|
Charitable contribution carryforward
|
|
|
122
|
|
|
|
1,432
|
|
Other
|
|
|
608
|
|
|
|
1,014
|
|
|
|
|
6,616
|
|
|
|
8,731
|
|
Valuation allowance
|
|
|
(817
|
)
|
|
|
0
|
|
|
|
|
5,799
|
|
|
|
8,731
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(2,597
|
)
|
|
|
(1,791
|
)
|
Net deferred tax asset
|
|
$
|
3,202
|
|
|
$
|
6,940
|
|
At December 31, 2017 and 2016, the Company had net operating loss carryforwards of approximately $27,948 and $28,038, respectively, for state tax purposes. For state tax purposes, there is a limitation on the amount of net operating loss carryforwards that can be utilized in a given year to offset state taxable income. The net operating losses will begin to expire in 2025.
At December 31, 2014, the Company had a valuation allowance of $800 recorded against its deferred tax asset generated for charitable contributions. The Company recorded the valuation allowance to reduce the deferred tax asset to an amount it expected was more likely than not to be realized due to the short carryforward period for this temporary difference. In 2015, the Company reduced the valuation allowance to zero due to the expiration of certain charitable contribution carryovers. At December 31, 2016, there was no valuation allowance. At December 31, 2017, the Company recorded a valuation allowance of $817 as certain state net operating loss carryforwards might not be realized due to changes in tax legislation. Based on the projected level of future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the remaining net deferred tax assets. An analysis of the activity of the valuation allowance is as follows:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Balance at beginning of year
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
800
|
|
Additions charged to expense
|
|
|
817
|
|
|
|
0
|
|
|
|
0
|
|
Deductions
|
|
|
0
|
|
|
|
0
|
|
|
|
(800
|
)
|
Balance at end of year
|
|
$
|
817
|
|
|
$
|
0
|
|
|
$
|
0
|
|
The total amount of gross unrecognized tax benefits as of December 31, 2017, 2016 and 2015 was $131, $168 and $272, respectively, which is included as a reduction of deferred income taxes in the accompanying consolidated balance sheets. The total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate is approximately $103, $109 and $177 as of December 31, 2017, 2016 and 2015, respectively. The Company records accrued interest and penalties related to unrecognized tax benefits as part of interest (income) expense, net. No interest expense was recognized during 2017, 2016 and 2015. The Company’s federal income tax returns for 2014 through 2017 are open and are subject to examination by the Internal Revenue Service. State tax jurisdictions that remain open to examination range from 2014 through 2017. The Company does not believe that that there will be any material changes to unrecognized tax positions over the next 12 months.
A reconciliation of the beginning and ending amounts of the total unrecognized tax benefit is as follows:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Balance at beginning of year
|
|
$
|
168
|
|
|
$
|
272
|
|
|
$
|
332
|
|
Increase related to current year tax positions
|
|
|
30
|
|
|
|
20
|
|
|
|
19
|
|
Increase related to prior year tax positions
|
|
|
0
|
|
|
|
0
|
|
|
|
72
|
|
Decrease due to lapse of statute of limitations
|
|
|
(67
|
)
|
|
|
(124
|
)
|
|
|
(151
|
)
|
Balance at end of year
|
|
$
|
131
|
|
|
$
|
168
|
|
|
$
|
272
|
|
50
Equity Incentive Plans
The Company has three equity incentive plans: the 1999 Equity Incentive Plan, the 2000 Equity Incentive Plan and the Second Amended and Restated 2008 Long-Term Incentive Plan (collectively, the “Equity Incentive Plans”). The Second Amended and Restated 2008 Long-Term Incentive Plan is currently the only plan under which new awards may be granted. Under that plan, a variety of equity instruments can be granted to key employees and directors including incentive and nonqualified stock options to purchase shares of the Company’s common stock, restricted stock, restricted stock units or shares of common stock. The 1999 Equity Incentive Plan, the 2000 Equity Incentive Plan and the Second Amended and Restated 2008 Long-Term Incentive Plan authorize up to 1,000, 5,600 and 7,400 shares of common stock, respectively, for issuance. At December 31, 2017, the Second Amended and Restated 2008 Long-Term Incentive Plan had 2,898 shares available for grant.
Under each of the plans, the Board’s Compensation Committee determines the term of each award, but no award can be exercisable more than 10 years from the date the award is granted. The stock options issued under the Equity Incentive Plans generally expire seven years from the grant date. The Compensation Committee also determines the vesting provisions of all awards and the exercise price per share of stock options issued under the plans, which is the fair value at date of grant. Awards issued to employees generally vest over terms ranging from two to four years.
The following table summarizes the Company’s stock option activity for 2015, 2016 and 2017:
|
|
Number
of Shares
|
|
|
Weighted-
Average
Exercise
Price Per
Share
|
|
|
Weighted-
Average
Remaining Contractual
Life (years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding, January 1, 2015
|
|
|
892
|
|
|
$
|
9.97
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
194
|
|
|
|
19.82
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(335
|
)
|
|
|
9.50
|
|
|
|
|
|
|
|
|
|
Forfeited/expired
|
|
|
(25
|
)
|
|
|
16.54
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2015
|
|
|
726
|
|
|
|
12.60
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
140
|
|
|
|
20.94
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(286
|
)
|
|
|
9.65
|
|
|
|
|
|
|
|
|
|
Forfeited/expired
|
|
|
(3
|
)
|
|
|
20.94
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2016
|
|
|
577
|
|
|
|
16.04
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(271
|
)
|
|
|
15.76
|
|
|
|
|
|
|
|
|
|
Forfeited/expired
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
|
306
|
|
|
$
|
16.28
|
|
|
|
3.78
|
|
|
$
|
11,121
|
|
Exercisable at December 31, 2017
|
|
|
130
|
|
|
$
|
12.52
|
|
|
|
3.02
|
|
|
$
|
5,230
|
|
Vested and expected to vest at December 31, 2017
|
|
|
303
|
|
|
$
|
16.25
|
|
|
|
3.78
|
|
|
$
|
11,029
|
|
The Company recorded compensation expense of $884, $1,072 and $647, in the accompanying consolidated statements of operations for 2017, 2016 and 2015, respectively, for stock option awards. No options were granted in 2017. The weighted-average grant date fair value of stock options granted in 2016 and 2015 was $5.99 and $5.18, respectively. The total intrinsic value of stock options exercised in 2017, 2016 and 2015 was $8,660, $5,727 and $5,520, respectively.
The fair value of each stock option was estimated on the date of grant using the Black-Scholes option pricing model and the following weighted average assumptions:
|
|
2016
|
|
|
2015
|
|
Expected dividend yield
|
|
|
3.29
|
%
|
|
|
3.48
|
%
|
Expected volatility
|
|
|
43.53
|
%
|
|
|
40.81
|
%
|
Risk-free interest rate
|
|
|
1.62
|
%
|
|
|
1.55
|
%
|
Expected life (in years)
|
|
|
4.50
|
|
|
|
4.42
|
|
In 2017, 2016 and 2015, the Company authorized the issuance of 14, 27 and 22 fully vested shares of common stock, respectively, as compensation to the Board of Directors resulting in compensation expense of $700, $700 and $509, respectively. In addition, in 2017, the Company issued 1 share of common stock to consultants for services resulting in expense of $20. No shares were issued to consultants during 2016 or 2015.
51
The Company has issued restricted stock to employees generally with vesting terms ranging from two to four years. The fair value is equal to the market price of th
e Company’s common stock on the date of grant. Expense for restricted stock is amortized ratably over the vesting period.
The following table summarizes the restricted stock activity for 2015, 2016 and 2017:
|
|
Number
of Shares
|
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
|
Aggregate
Intrinsic
Value
|
|
Nonvested, January 1, 2015
|
|
|
422
|
|
|
$
|
13.56
|
|
|
|
|
|
Granted
|
|
|
89
|
|
|
|
19.72
|
|
|
|
|
|
Vested
|
|
|
(183
|
)
|
|
|
11.30
|
|
|
|
|
|
Forfeited
|
|
|
(52
|
)
|
|
|
13.51
|
|
|
|
|
|
Nonvested, December 31, 2015
|
|
|
276
|
|
|
|
17.05
|
|
|
|
|
|
Granted
|
|
|
84
|
|
|
|
21.02
|
|
|
|
|
|
Vested
|
|
|
(139
|
)
|
|
|
12.40
|
|
|
|
|
|
Forfeited
|
|
|
(5
|
)
|
|
|
19.91
|
|
|
|
|
|
Nonvested, December 31, 2016
|
|
|
216
|
|
|
|
21.51
|
|
|
|
|
|
Granted
|
|
|
140
|
|
|
|
35.11
|
|
|
|
|
|
Vested
|
|
|
(120
|
)
|
|
|
14.93
|
|
|
|
|
|
Forfeited
|
|
|
(4
|
)
|
|
|
31.23
|
|
|
|
|
|
Nonvested, December 31, 2017
|
|
|
232
|
|
|
$
|
32.96
|
|
|
$
|
12,269
|
|
Additionally, the Company grants performance-based restricted stock units. The performance-based units have performance conditions and service-based vesting conditions. Each vesting tranche is treated as an individual award and the compensation expense is recognized on a straight-line basis over the requisite service period for each tranche. The requisite service period is a combination of the performance period and the subsequent vesting period based on continued service. The level of achievement of such goals may cause the actual amount of units that ultimately vest to range from 0% to 200% of the original units granted. The Company recognizes expense ratably over the vesting period for performance-based restricted stock units when it is probable that the performance criteria specified will be achieved. The fair value is equal to the market price of the Company’s common stock on the date of grant.
The following table summarizes the restricted stock unit activity for 2015, 2016 and 2017:
|
|
Number of Restricted
Stock Units
|
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
|
Aggregate
Intrinsic
Value
|
|
Nonvested, January 1, 2015
|
|
|
366
|
|
|
$
|
9.81
|
|
|
|
|
|
Granted
|
|
|
123
|
|
|
|
19.28
|
|
|
|
|
|
Performance factor adjustment
|
|
|
62
|
|
|
|
12.48
|
|
|
|
|
|
Vested
|
|
|
(237
|
)
|
|
|
8.64
|
|
|
|
|
|
Forfeited
|
|
|
(1
|
)
|
|
|
16.67
|
|
|
|
|
|
Nonvested, December 31, 2015
|
|
|
313
|
|
|
|
14.92
|
|
|
|
|
|
Granted
|
|
|
161
|
|
|
|
26.59
|
|
|
|
|
|
Vested
|
|
|
(190
|
)
|
|
|
12.54
|
|
|
|
|
|
Forfeited
|
|
|
(3
|
)
|
|
|
20.39
|
|
|
|
|
|
Nonvested, December 31, 2016
|
|
|
281
|
|
|
|
23.18
|
|
|
|
|
|
Granted
|
|
|
73
|
|
|
|
35.75
|
|
|
|
|
|
Performance factor adjustment
|
|
|
34
|
|
|
|
17.56
|
|
|
|
|
|
Vested
|
|
|
(155
|
)
|
|
|
18.92
|
|
|
|
|
|
Forfeited
|
|
|
(1
|
)
|
|
|
20.52
|
|
|
|
|
|
Nonvested, December 31, 2017
|
|
|
232
|
|
|
$
|
29.20
|
|
|
$
|
12,175
|
|
The Company recorded compensation expense of $9,319, $5,198 and $4,312 in the accompanying consolidated statements of operations for 2017, 2016 and 2015, respectively, in connection with the issuance of restricted stock and restricted stock units. As of December 31, 2017, the Company expects 228 shares of restricted stock and 227 restricted stock units to vest.
52
As of December 31, 2017, there was $7,664 of total unrecognized compensation expense related to unvested share-based compensatio
n arrangements, which is expected to be recognized over a weighted-average period of 1 year. The total unrecognized compensation expense will be fully charged to expense through the first quarter of 2020.
12.
|
EMPLOYEE BENEFIT PLAN
|
The Company maintains a qualified tax deferred defined contribution retirement plan (the “Plan”). Under the provisions of the Plan, substantially all employees meeting minimum age and service requirements are entitled to contribute on a before and after-tax basis a certain percentage of their compensation. The Company matched 100% of employees’ first 3% contribution and 50% of the employees’ next 2% contribution. Employees vest immediately in their contributions and the Company’s contribution. The Company’s contributions in 2017, 2016 and 2015 were $965, $892 and $794, respectively.
Following is an analysis for the returns reserve which is included as other accrued expenses and current liabilities in the accompanying consolidated balance sheets:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Balance at beginning of year
|
|
$
|
740
|
|
|
$
|
870
|
|
|
$
|
762
|
|
Provision for estimated returns
|
|
|
19,011
|
|
|
|
14,929
|
|
|
|
13,225
|
|
Actual returns
|
|
|
(18,883
|
)
|
|
|
(15,059
|
)
|
|
|
(13,117
|
)
|
Balance at end of year
|
|
$
|
868
|
|
|
$
|
740
|
|
|
$
|
870
|
|
14.
|
QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
|
|
|
Quarter
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Year
|
|
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
212,677
|
|
|
$
|
194,894
|
|
|
$
|
158,149
|
|
|
$
|
131,237
|
|
|
$
|
696,957
|
|
Gross margin
|
|
$
|
114,447
|
|
|
$
|
105,797
|
|
|
$
|
85,792
|
|
|
$
|
69,711
|
|
|
$
|
375,747
|
|
Net income
|
|
$
|
7,484
|
|
|
$
|
24,435
|
|
|
$
|
15,027
|
|
|
$
|
10,926
|
|
|
$
|
57,872
|
|
Basic income per common share
|
|
$
|
0.25
|
|
|
$
|
0.82
|
|
|
$
|
0.50
|
|
|
$
|
0.36
|
|
|
$
|
1.93
|
|
Diluted income per common share
|
|
$
|
0.25
|
|
|
$
|
0.80
|
|
|
$
|
0.49
|
|
|
$
|
0.36
|
|
|
$
|
1.90
|
|
2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
162,110
|
|
|
$
|
149,823
|
|
|
$
|
124,571
|
|
|
$
|
108,947
|
|
|
$
|
545,451
|
|
Gross margin
|
|
$
|
83,552
|
|
|
$
|
80,681
|
|
|
$
|
66,877
|
|
|
$
|
57,347
|
|
|
$
|
288,457
|
|
Net income
|
|
$
|
2,552
|
|
|
$
|
16,118
|
|
|
$
|
7,949
|
|
|
$
|
8,850
|
|
|
$
|
35,469
|
|
Basic income per common share
|
|
$
|
0.09
|
|
|
$
|
0.55
|
|
|
$
|
0.27
|
|
|
$
|
0.30
|
|
|
$
|
1.20
|
|
Diluted income per common share
|
|
$
|
0.09
|
|
|
$
|
0.54
|
|
|
$
|
0.27
|
|
|
$
|
0.29
|
|
|
$
|
1.19
|
|
The sum of the quarterly basic and diluted per share amounts may not equal amounts reported for the year. This is due to the effects of rounding and changes in weighted average shares outstanding for each period.
53