Medifast(MED) - 2022 Q4 - Annual Report

PART I Item 1. Business Medifast's OPTAVIA community reported $1.599 billion revenue in 2022, driven by 60,900 Coaches Revenue & Operating Income Trends (in millions) | Metric | 2022 | 2021 | 2020 | | :--------------------- | :----- | :----- | :----- | | Revenue | $1,599 | $1,526 | $934.8 | | Income from operations | $184.8 | $216.2 | $134.2 | Year-over-Year Growth | Metric | 2022 YoY Change | 2021 YoY Change | | :--------------------- | :-------------- | :-------------- | | Revenue | 4.8% | 63.2% | | Income from operations | (14.5)% | 61.2% | - The OPTAVIA brand was named the 1 weight loss program in the U.S. by revenue for 2021[22] - As of December 31, 2022, the company had 60,900 active earning independent OPTAVIA Coaches, with approximately 90% having been customers first[23][26] - The OPTAVIA model differentiates itself by being customer-centric, having one sales price for coaches and customers, coaches not holding inventory, and promoting a holistic wellness program with a unified training system[45][73] - Global expansion is a key long-term growth strategy, with international operations commenced in Hong Kong and Singapore in July 2019, targeting the Asia Pacific market[47][49] - The company's manufacturing facility in Owings Mills, Maryland, produces approximately 20% of total unit sales, with the remaining 80% manufactured by third-party vendors[73][75] Item 1A. Risk Factors The company faces risks from global economic conditions, direct selling model challenges, rapid growth, supply chain reliance, competition, and international expansion - Global economic downturns, inflation, and supply chain disruptions could negatively affect demand for products and increase operational costs[111][112] - The direct selling model is subject to challenges from government regulators (e.g., FTC) and private civil actions, potentially requiring business model modifications, leading to fines, or negative publicity[113][115][116][117][118][120] - Rapid growth places significant demands on management, administrative, logistical, operational, and financial infrastructure, posing risks if not effectively managed[121][122] - Reliance on third-party manufacturers for a majority of products and third-party distributors, along with the sole in-house manufacturing facility, creates supply chain disruption risks[125][127] - Risks include claims that OPTAVIA Coaches are unqualified to provide proper weight loss advice or that products cause health problems, potentially leading to lawsuits and reputational damage[137][138] - The weight management industry is highly competitive, with larger competitors and the constant threat of new, more effective weight loss solutions (e.g., drug therapies) that could create a competitive disadvantage[140][141] - The success of the business is dependent on maintaining and growing the network of OPTAVIA Coaches, which is subject to high turnover and external factors like misconduct or negative public perceptions of multi-level marketing[150][151] - International expansion increases operational, regulatory, compliance, and reputational risks, including exposure to currency exchange rate fluctuations and anti-corruption laws like the FCPA[164][165][167][168] Item 1B. Unresolved Staff Comments The company reported no unresolved staff comments from the SEC for the fiscal year ended December 31, 2022 - No unresolved staff comments[190] Item 2. Properties Medifast leases corporate offices and a research center, owns manufacturing and distribution facilities, and outsources other distribution centers - Owned facilities include a 49,000 square-foot manufacturing facility in Owings Mills, Maryland, and a 119,000 square-foot distribution facility in Ridgley, Maryland[192] - Leased properties include corporate headquarters in Baltimore, MD (expires Feb 2026), a satellite office in Lehi, UT (expires Oct 2023), a product innovation research center in Owings Mills, MD (expires Feb 2029), and a distribution center in Havre De Grace, MD (expires Aug 2026)[191][192] - Outsourced domestic distribution centers are in Reno, Nevada, and Haltom City, Texas, and an international distribution center is in Hong Kong[192] Item 3. Legal Proceedings The company is subject to ordinary course litigation, not expecting material adverse effects, but acknowledges the unpredictability of legal outcomes - The company is subject to ordinary course litigation and similar proceedings[193] - Management does not believe current proceedings will have a material adverse effect on results, but acknowledges the unpredictability of legal outcomes[193] Item 4. Mine Safety Disclosure This item is not applicable to Medifast, Inc. as it does not engage in mining operations - Not applicable[194] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Medifast's common stock trades on NYSE, with 76 record holders and 1.35 million shares remaining for repurchase under its plan - Common stock is listed and traded on the NYSE under the ticker symbol "MED"[196] - As of February 13, 2023, there were approximately 76 record holders of the Company's common stock[196] Common Stock Repurchases for Q4 2022 | Month | Total Number of Shares Purchased | Average Price Paid per Share | | :----------------------- | :------------------------------- | :--------------------------- | | October 1 - October 31 | 94 | $110.98 | | November 1 - November 30 | 18,283 | $120.26 | | December 1 - December 31 | 35,789 | $117.30 | - As of December 31, 2022, 1,353,833 shares remained eligible for repurchase under the Stock Repurchase Plan, which has no expiration date[198][200] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue grew 4.8% to $1.599 billion in 2022, net income fell 12.5%, with strong operating cash flow Consolidated Results of Operations (2022 vs. 2021, in thousands) | Metric | 2022 | 2021 | $ Change | % Change | | :-------------------------------- | :--------- | :--------- | :--------- | :--------- | | Revenue | $1,598,577 | $1,526,087 | $72,490 | 4.8% | | Cost of sales | $458,163 | $398,490 | $(59,673) | (15.0)% | | Gross Profit | $1,140,414 | $1,127,597 | $12,817 | 1.1% | | Selling, general, and administrative | $955,608 | $911,356 | $(44,252) | (4.9)% | | Income from operations | $184,806 | $216,241 | $(31,435) | (14.5)% | | Net income | $143,568 | $164,031 | $(20,463) | (12.5)% | Profitability Ratios (2022 vs. 2021) | Metric | 2022 | 2021 | | :-------------------------- | :----- | :----- | | Gross Profit % of revenue | 71.3% | 73.9% | | Selling, general, and administrative % of revenue | 59.8% | 59.7% | | Income from Operations % of revenue | 11.6% | 14.2% | - Average revenue per active earning OPTAVIA Coach decreased 12.4% to $5,538 for Q4 2022 from $6,321 for Q4 2021, primarily due to headwinds in customer acquisition rates[227] - The total number of active earning OPTAVIA Coaches increased 1.8% to 60,900 for Q4 2022 from 59,800 for the corresponding period in 2021[235] - Cost of sales increased due to higher product and shipping costs resulting from inflation in raw materials, freight, and labor, and restructuring of certain external manufacturing agreements[228] - Net cash provided by operating activities increased $100.0 million to $194.6 million for 2022 from $94.5 million for 2021, primarily due to changes in operating assets and liabilities[249] - The company has a $225.0 million senior secured revolving credit facility, with no borrowings outstanding as of December 31, 2022[254][369] Contractual Obligations as of December 31, 2022 (in thousands) | Obligation Type | 2023 | 2024 - 2025 | 2026 - 2027 | Thereafter | Total | | :-------------------------- | :----- | :---------- | :---------- | :--------- | :------ | | Operating leases | $6,243 | $11,518 | $6,713 | $2,858 | $27,332 | | Unconditional purchase obligations | $121,710 | $91,670 | $2,141 | $129 | $215,650 | | Total contractual obligations | $127,953 | $103,188 | $8,854 | $2,987 | $242,982 | - The company increased prices for most products by an average of approximately 4.5% in November 2022 (following a 3.5% increase in December 2021) to offset inflationary pressures[257] Item 7A. Quantitative and Qualitative Disclosures about Market Risk The company faces market risks from interest rates and stock fluctuations but avoids derivatives, holding no municipal bonds or money market securities - Market risk exposure primarily stems from changes in interest rates and stock market fluctuations[258] - The company does not engage in derivatives, foreign exchange transactions, or other financial instruments for trading or speculative purposes[258] - As of December 31, 2022, the company did not hold any municipal bonds or United States money market securities[258] Item 8. Financial Statements and Supplementary Data This section presents audited consolidated financial statements for 2020-2022, with RSM US LLP providing an unqualified opinion on financial statements and internal controls - RSM US LLP issued an unqualified opinion on the Company's consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2022[265][273] - The evaluation of the Company's provision for income taxes was identified as a critical audit matter due to significant judgments in assessing complex tax laws and regulations[278] Reports of Independent Registered Public Accounting Firm This section contains the independent auditor's reports on the company's financial statements and internal control over financial reporting Consolidated Statements of Income This section presents the company's consolidated statements of income for the fiscal years 2022, 2021, and 2020 Consolidated Statements of Income (in thousands, except per share amounts) | Metric | 2022 | 2021 | 2020 | | :-------------------------- | :--------- | :--------- | :--------- | | Revenue | $1,598,577 | $1,526,087 | $934,842 | | Cost of sales | $458,163 | $398,490 | $237,027 | | Gross profit | $1,140,414 | $1,127,597 | $697,815 | | Selling, general, and administrative | $955,608 | $911,356 | $563,656 | | Income from operations | $184,806 | $216,241 | $134,159 | | Net income | $143,568 | $164,031 | $102,859 | | Earnings per share - diluted | $12.73 | $13.89 | $8.68 | | Cash dividends declared per share | $6.56 | $5.68 | $4.52 | Consolidated Statements of Comprehensive Income This section presents the company's consolidated statements of comprehensive income for the fiscal years 2022, 2021, and 2020 Consolidated Statements of Comprehensive Income (in thousands) | Metric | 2022 | 2021 | 2020 | | :------------------------------------ | :--------- | :--------- | :--------- | | Net income | $143,568 | $164,031 | $102,859 | | Other comprehensive (loss) income, net of tax | $(87) | $70 | $16 | | Comprehensive income | $143,481 | $164,101 | $102,875 | Consolidated Balance Sheets This section presents the company's consolidated balance sheets as of December 31, 2022, and 2021 Consolidated Balance Sheets (as of December 31, in thousands) | Metric | 2022 | 2021 | | :-------------------------- | :--------- | :--------- | | Cash and cash equivalents | $87,691 | $104,183 | | Inventories | $118,856 | $180,043 | | Total current assets | $222,784 | $306,866 | | Total assets | $316,213 | $398,326 | | Accounts payable and accrued expenses | $134,690 | $163,309 | | Total current liabilities | $140,894 | $169,832 | | Total liabilities | $161,169 | $195,852 | | Total stockholders' equity | $155,044 | $202,474 | Consolidated Statements of Cash Flows This section presents the company's consolidated statements of cash flows for the fiscal years 2022, 2021, and 2020 Consolidated Statements of Cash Flows (in thousands) | Metric | 2022 | 2021 | 2020 | | :------------------------------------ | :--------- | :--------- | :--------- | | Net cash flow provided by operating activities | $194,570 | $94,545 | $145,196 | | Net cash flow used in investing activities | $(11,414) | $(29,064) | $(1,282) | | Net cash flow used in financing activities | $(199,581) | $(125,133) | $(57,144) | | (Decrease) Increase in cash and cash equivalents | $(16,492) | $(59,540) | $86,749 | | Cash and cash equivalents - end of period | $87,691 | $104,183 | $163,723 | Consolidated Statements of Changes in Stockholders' Equity This section presents the company's consolidated statements of changes in stockholders' equity for the fiscal years 2022, 2021, and 2020 Consolidated Statements of Changes in Stockholders' Equity (in thousands) | Metric | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | | :-------------------------- | :----------- | :----------- | :----------- | | Total stockholders' equity | $155,044 | $202,474 | $157,246 | | Net income | $143,568 | $164,031 | $102,859 | | Stock repurchases | $(126,445) | $(55,999) | $(5,000) | | Cash dividends declared to stockholders | $(74,002) | $(67,192) | $(53,303) | Notes to Consolidated Financial Statements 1. Nature of the Business Medifast, Inc. is a Delaware corporation operating OPTAVIA, selling weight loss and healthy living products - Medifast, Inc. is a Delaware corporation, incorporated in 1989, operating primarily through wholly-owned subsidiaries including OPTAVIA, LLC[297] - The company sells weight loss, weight management, and healthy living products under brands like OPTAVIA, Optimal Health by Take Shape for Life, and Flavors of Home, with over 65 consumable options[298] 2. Significant Accounting Policies This section details the company's significant accounting policies, including revenue recognition, inventory, and share-based compensation - Revenue is primarily from e-commerce point-of-sale transactions for health products, recognized upon customer receipt, net of discounts and estimated returns[207][311] - Inventories are stated at the lower of cost or net realizable value using the first-in, first-out method[304] - The company donated $19.0 million of inventory to Ukrainian refugees in 2022, recorded as selling, general, and administrative expenses[305] - Incurred $12.2 million in costs for restructuring external manufacturing agreements in 2022, included in cost of sales[306] - Advertising costs and research and development costs are expensed as incurred[321][322] - Share-based compensation includes restricted stock awards, performance-based share awards, and stock options, expensed over the vesting/performance period[323] 3. Inventories This section provides a breakdown of the company's inventories, including raw materials, packaging, and finished goods Inventories (in thousands) | Category | December 31, 2022 | December 31, 2021 | | :---------------------- | :------------------ | :------------------ | | Raw materials | $12,670 | $15,196 | | Packaging | $3,611 | $3,641 | | Non-food finished goods | $8,738 | $15,991 | | Finished goods | $97,675 | $152,687 | | Reserve for obsolete inventory | $(3,838) | $(7,472) | | Total | $118,856 | $180,043 | 4. Property, Plant and Equipment This section details the company's property, plant, and equipment, including land, buildings, and accumulated depreciation Property, Plant, and Equipment (in thousands) | Category | December 31, 2022 | December 31, 2021 | | :------------------------------------ | :------------------ | :------------------ | | Land | $565 | $565 | | Building and leasehold improvements | $25,905 | $23,518 | | Equipment and fixtures | $49,260 | $42,708 | | Software | $21,278 | $21,894 | | Vehicles | $118 | $145 | | Property, plant and equipment - gross | $97,126 | $88,830 | | Less: accumulated depreciation | $(39,941) | $(32,699) | | Property, plant and equipment - net | $57,185 | $56,131 | - Depreciation expense was $7.9 million in 2022, up from $5.7 million in 2021 and $4.1 million in 2020[333] 5. Accounts Payable and Accrued Expenses This section provides a breakdown of the company's accounts payable and accrued expenses Accounts Payable and Accrued Expenses (in thousands) | Category | December 31, 2022 | December 31, 2021 | | :-------------------------------- | :------------------ | :------------------ | | Trade payables and accrued expenses | $58,667 | $70,894 | | OPTAVIA Coach compensation payable | $23,633 | $28,733 | | Dividends payable | $19,641 | $17,186 | | Accrued payroll and related taxes | $13,581 | $24,940 | | Promotional sales incentive accruals | $10,240 | $10,935 | | Deferred revenue | $7,357 | $8,050 | | Sales tax payable | $1,571 | $2,571 | | Total | $134,690 | $163,309 | 6. Earnings Per Share This section details the calculation of basic and diluted earnings per share for the fiscal years 2022, 2021, and 2020 Earnings Per Share (in thousands, except per share data) | Metric | 2022 | 2021 | 2020 | | :------------------------------------ | :--------- | :--------- | :--------- | | Net income | $143,568 | $164,031 | $102,859 | | Weighted average shares outstanding - Basic | 11,195 | 11,705 | 11,771 | | Weighted average shares outstanding - Diluted | 11,276 | 11,813 | 11,850 | | Earnings per share - basic | $12.82 | $14.01 | $8.74 | | Earnings per share - diluted | $12.73 | $13.89 | $8.68 | 7. Equity This section outlines the company's equity structure, including authorized shares and stock repurchase plan details - The company is authorized to issue 20.0 million shares of common stock and 1.5 million shares of preferred stock[336] - Approximately 1.4 million shares of common stock remained eligible for repurchase under the Stock Repurchase Plan as of December 31, 2022[338] 8. Share-Based Compensation This section details the company's share-based compensation expense and unrecognized compensation costs - Share-based compensation expense totaled $11.053 million in 2022, $9.903 million in 2021, and $6.796 million in 2020[347] - As of December 31, 2022, there was $6.2 million of unrecognized compensation cost related to restricted stock awards and $6.3 million for performance-based shares, expected to be recognized over weighted-average periods of 20 and 21 months, respectively[348] 9. Accumulated Other Comprehensive Income This section presents the components of accumulated other comprehensive income, including foreign currency translation Accumulated Other Comprehensive Income (in thousands) | Category | December 31, 2022 | December 31, 2021 | | :-------------------------------- | :------------------ | :------------------ | | Foreign currency translation | $24 | $90 | | Unrealized gains on investment securities | $0 | $21 | | Accumulated other comprehensive income | $24 | $111 | 10. Financial Instruments This section details the fair value of the company's financial assets, including cash and investment securities Fair Value of Financial Assets (December 31, 2022, in thousands) | Category | Cost | Unrealized Gains | Accrued Interest | Estimated Fair Value | Cash & Cash Equivalents | Investment Securities | | :-------------------------- | :----- | :--------------- | :--------------- | :------------------- | :---------------------- | :-------------------- | | Cash and cash equivalents | $87,691 | $0 | $0 | $87,691 | $87,691 | $0 | | Total | $87,691 | $0 | $0 | $87,691 | $87,691 | $0 | Fair Value of Financial Assets (December 31, 2021, in thousands) | Category | Cost | Unrealized Gains | Accrued Interest | Estimated Fair Value | Cash & Cash Equivalents | Investment Securities | | :-------------------------- | :----- | :--------------- | :--------------- | :------------------- | :---------------------- | :-------------------- | | Cash and cash equivalents | $94,824 | $0 | $0 | $94,824 | $94,824 | $0 | | Level 1: Money market accounts | $9,359 | $0 | $0 | $9,359 | $9,359 | $0 | | Level 1: Government & agency securities | $1,401 | $12 | $0 | $1,413 | $0 | $1,413 | | Level 2: Municipal bonds | $3,880 | $9 | $59 | $3,948 | $0 | $3,948 | | Total | $109,464 | $21 | $59 | $109,544 | $104,183 | $5,361 | 11. Income Taxes This section provides a breakdown of the company's income tax expense and reconciliation of federal statutory tax Income Tax Expense (in thousands) | Category | 2022 | 2021 | 2020 | | :------------------ | :--------- | :--------- | :--------- | | Current | $41,415 | $55,813 | $30,805 | | Deferred | $(924) | $(3,715) | $601 | | Provision for income taxes | $40,491 | $52,098 | $31,406 | Reconciliation of Federal Statutory Tax to Provision for Income Taxes (in thousands, except percentages) | Category | 2022 ($) | 2022 (%) | 2021 ($) | 2021 (%) | 2020 ($) | 2020 (%) | | :------------------------------------ | :--------- | :------- | :--------- | :------- | :--------- | :------- | | Statutory federal tax | $38,621 | 21.0% | $45,405 | 21.0% | $28,196 | 21.0% | | State income taxes, net of federal benefit | $4,635 | 2.5% | $4,980 | 2.3% | $1,470 | 1.1% | | Charitable donations | $(4,316) | (2.3)% | $0 | 0.0% | $0 | 0.0% | | Provision for income taxes | $40,491 | 22.0% | $52,098 | 24.1% | $31,406 | 23.4% | - The Inflation Reduction Act, signed in August 2022, will apply a one percent surtax on share buybacks to the Company starting in 2023, but the 15% alternative minimum tax will not apply[356] 12. Leases and Commitments This section details the company's operating lease expenses and future contractual obligations - Operating lease expense was $6.7 million in 2022, $5.6 million in 2021, and $3.6 million in 2020[360] Maturity of Operating Lease Liabilities (as of December 31, 2022, in thousands) | Year | Total Lease Payments | | :--- | :------------------- | | 2023 | $6,243 | | 2024 | $5,693 | | 2025 | $5,825 | | 2026 | $4,160 | | 2027 | $2,553 | | Thereafter | $2,858 | | Total lease payments | $27,332 | - As of December 31, 2022, the company had $215.7 million in unconditional purchase obligations, primarily for inventories, outsourced information technology, and Coach events[363] 13. Debt This section outlines the company's senior secured revolving credit facility and compliance with debt covenants - The company has a $225.0 million senior secured revolving credit facility, amended on May 31, 2022, with a $20.0 million letter of credit sublimit, maturing on April 13, 2026[364] - As of December 31, 2022, the company had no borrowings outstanding under the Amended Credit Agreement and was in compliance with all debt covenants[369] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no disagreements with independent auditors on accounting and financial disclosures for the fiscal year ended December 31, 2022 - No disagreements with independent auditors on accounting and financial disclosures for the fiscal year ended December 31, 2022[370] Item 9A. Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - Disclosure controls and procedures were effective as of December 31, 2022[371] - Internal control over financial reporting was effective as of December 31, 2022, based on the COSO 2013 framework[374] - RSM US LLP provided an unqualified attestation report on the effectiveness of the company's internal control over financial reporting[376] - No material changes in internal control over financial reporting occurred during the fiscal quarter ended December 31, 2022[375] Item 9B. Other Information No other information is applicable for this item - Not applicable[377] PART III Item 10. Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the 2023 annual meeting proxy statement - Information incorporated by reference from the 2023 annual meeting of stockholders proxy statement[379] Item 11. Executive Compensation Information for this item is incorporated by reference from the 2023 annual meeting proxy statement - Information incorporated by reference from the 2023 annual meeting of stockholders proxy statement[380] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item is incorporated by reference from the 2023 annual meeting proxy statement - Information incorporated by reference from the 2023 annual meeting of stockholders proxy statement[381] Item 13. Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the 2023 annual meeting proxy statement - Information incorporated by reference from the 2023 annual meeting of stockholders proxy statement[382] Item 14. Principal Accountant Fees and Services Information for this item is incorporated by reference from the 2023 annual meeting proxy statement - Information incorporated by reference from the 2023 annual meeting of stockholders proxy statement[383] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists exhibits and financial statement schedules, including consolidated financial statements and corporate governance documents - Includes Consolidated Financial Statements, Reports of RSM US LLP, and exhibits required by Item 601 of Regulation S-K[386] - Exhibits cover corporate governance documents, equity compensation plans, credit agreements, subsidiary lists, and certifications (CEO, CFO)[390][395] Item 16. Form 10-K Summary No Form 10-K Summary is applicable for this report - No Form 10-K Summary is applicable[394]