# Medifast Inc: Form 10-Q for the period ended Jun 30, 2023

- Company: [Medifast Inc](/companies/med.md) (CIK 910329)
- Form: 10-Q
- Filed: 2023-08-07
- Accepted by EDGAR: Aug 7, 2023, 16:50 ET
- Period: 2023-06-30
- Accession: 0001628280-23-027815
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/910329/000162828023027815/med-20230630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/910329/000162828023027815/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-04-01 to 2023-06-30 | $296.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2023-01-01 to 2023-06-30 | $645.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-04-01 to 2023-06-30 | $85.5m | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2023-01-01 to 2023-06-30 | $188.1m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2023-04-01 to 2023-06-30 | $210.7m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2023-01-01 to 2023-06-30 | $457.1m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2023-04-01 to 2023-06-30 | $172.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2023-01-01 to 2023-06-30 | $364.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-04-01 to 2023-06-30 | $38.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2023-01-01 to 2023-06-30 | $92.2m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-04-01 to 2023-06-30 | $8.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-01-01 to 2023-06-30 | $22.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-04-01 to 2023-06-30 | $30.3m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-01-01 to 2023-06-30 | $70.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-04-01 to 2023-06-30 | $2.77 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-01-01 to 2023-06-30 | $6.43 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-01 to 2023-06-30 | $2.78 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-01-01 to 2023-06-30 | $6.46 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 10,917,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-01-01 to 2023-06-30 | 10,923,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-01-01 to 2023-06-30 | $107.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-01-01 to 2023-06-30 | $3.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2023-01-01 to 2023-06-30 | $37.0m | us-gaap:PaymentsOfDividends |
| Share repurchases | 6 months, 2023-01-01 to 2023-06-30 | $3.6m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-06-30 | $147.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-06-30 | $228.8m | us-gaap:AssetsCurrent |
| Total assets | at 2023-06-30 | $318.7m | us-gaap:Assets |
| Current liabilities | at 2023-06-30 | $114.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-06-30 | $133.2m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-06-30 | $185.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 31,189 characters.

### Note Regarding Forward-Looking Statements

Certain information in this report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Act”). These forward-looking statements generally can be identified by use of phrases or terminology such as “intend,” “anticipate,” “expect” or other similar words or the negative of such terminology. Similarly, descriptions of Medifast's objectives, strategies, plans, goals or targets contained herein are also considered forward-looking statements. These statements are based on the current expectations of our management and are subject to certain events, risks, uncertainties and other factors. These risks and uncertainties include, but are not limited to, those described in our 2022 Form 10-K and those described from time to time in our future reports filed with the SEC. Although Medifast believes that the expectations, statements and assumptions reflected in these forward-looking statements are reasonable, it cautions readers to always consider all of the risk factors and any other cautionary statements carefully in evaluating each forward-looking statement in this report. All of the forward-looking statements contained herein speak only as of the date of this report.

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes appearing elsewhere herein.

### Overview

Medifast is the health and wellness company known for its habit-based and Coach-guided lifestyle solution OPTAVIA®, which provides people with a simple, yet comprehensive approach to help them achieve lasting optimal health and wellbeing. OPTAVIA offers clinically proven plans, scientifically developed products and a framework for habit creation reinforced by independent Coaches and Community support. As a physician-founded company with a 40+ year history, Medifast is a leader in the U.S. weight management industry. The company continues to innovate and build upon its scientific and clinical heritage to deliver on its mission of offering the world Lifelong Transformation, One Healthy Habit at a Time®.

Our **OPTA**VIA brand offers a highly competitive and effective lifestyle solution centered on developing new healthy habits through smaller, foundational changes called micro-habits. The program is built around four key components:

- **Independent OPTA**VIA **Coaches:** Provide individualized support and guidance to customers on the path to optimal health and wellbeing.
- **OPTA**VIA **Community:** A Community of like-hearted people providing each other with real-time connection and support.
- **The Habits of Health® Transformational System:** A proprietary system which offers easy steps to a sustainably healthy lifestyle.
- **Products & Plans:** Clinically proven plans and scientifically developed products, called “Fuelings,” backed by dietitians, scientists and physicians.

We help customers achieve their health goals through a network of approximately 53,100 independent active earning **OPTA**VIA Coaches, about 90% of whom were customers first, and have impacted more than 3 million lives to date. **OPTA**VIA Coaches introduce customers to a set of healthy habits, in most cases starting with the habit of healthy eating, and offer exclusive **OPTA**VIA-branded Fuelings. Fuelings are nutrient-dense, portion-controlled, nutritionally interchangeable and simple to use. They are formulated with high-quality ingredients and are fortified with probiotic BC30™ cultures, vitamins and minerals, as well as other nutrients essential for good health. Our products support the process of integrating healthy habits into our customers’ day-to-day lives.

The **OPTA**VIA coaching model is customer-centric and boasts an energized health and wellness community. It promotes holistic health and wellness and positions healthy weight as a catalyst to greater lifestyle changes. **OPTA**VIA Coaches provide personalized support to customers and motivate them by sharing their passion for healthy living and lifestyle transformation.

The entrepreneurial spirit of our **OPTA**VIA Coaches is another key to our success, as they create a continuous cycle of growth, activating new customers, many of whom go on to become **OPTA**VIA Coaches. We offer economic incentives designed to support each **OPTA**VIA Coach’s long-term success, which we believe plays an important role in their financial wellness, providing the opportunity to improve their finances while changing the health trajectory of families, communities and generations.1

**OPTA**VIA Coaches are independent contractors, not employees, who support customers and market our products and services primarily through word of mouth, email and social media channels such as Facebook, Instagram, Twitter and video conferencing platforms. As entrepreneurs, **OPTA**VIA Coaches market our products to friends, family and other acquaintances. **OPTA**VIA products are shipped directly to **OPTA**VIA customers who are working with an **OPTA**VIA Coach. **OPTA**VIA Coaches do not handle inventory or deliver merchandise to customers. This arrangement frees our **OPTA**VIA Coaches from having to manage inventory and allows them to maintain an arms-length transactional relationship while focusing their attention on support and encouragement.

We measure our success by the results our customers are able to achieve. The more **OPTA**VIA Coaches we have, the more customers we can serve. We believe our Coach-based model is scalable and drives both customer success and growth. We expect our continued investment in fostering a robust community around our **OPTA**VIA brand and Coaching Model will continue to drive a sustainable, repeatable business rhythm focused on our mission of offering the world Lifelong Transformation, One Healthy Habit at a Time.

1 **OPTA**VIA makes no guarantee of financial success. Success with **OPTA**VIA results from successful sales efforts, which require hard work, diligence, skill, persistence, competence, and leadership. Please see the **OPTA**VIA Income Disclosure Statement (http://bit.ly/ids**OPTA**VIA) for statistics on actual earnings of Coaches.

Our operations are conducted through our wholly owned subsidiaries, Jason Pharmaceuticals, Inc., **OPTA**VIA, LLC, Jason Enterprises, Inc., Jason Properties, LLC, Seven Crondall Associates, LLC, Corporate Events, Inc., **OPTA**VIA (Hong Kong) Limited, **OPTA**VIA (Singapore) PTE. LTD and **OPTA**VIA Health Consultation (Shanghai) Co., Ltd.

### Recent Initiatives

As part of the Company’s recently announced Fuel for the Future program, which is intended to optimize spending through value engineering, operational efficiency and improved procurement, and is expected to free up capital to invest in growth initiatives and raise margins. As a part of these efforts and due to economic changes in the Asia-Pacific region following the COVID-19 pandemic, Medifast exited its operations in Hong Kong and Singapore as of July 1, 2023. This transition is intended to help better prioritize resources that were previously dedicated to these markets in order to support initiatives that the Company anticipates will have a greater impact on revenues and profitability. This includes investing in technology and digital capabilities as well as rolling out product offerings that are complementary to its existing program, bringing **OPTA**VIA to new demographics and expanding the Company's total addressable market considerably.

On July 27, 2023, the Company announced a new product line, **OPTA**VIA ACTIVE, which includes premium amino acid supplements and protein powders, **OPTA**VIA ACTIVE Essential Amino Acid (EAAs) Blend and **OPTA**VIA ACTIVE Whey Protein, with other products expected to be rolled out next year. Both products are designed to help new and existing customers of all fitness levels. With the announcement of the new product line, the Company targets new customer segments and triples its total addressable market by entering the sports nutrition category, a $30 billion market. Formulated to work with or without **OPTA**VIA nutrition plans and guided by Coach support, **OPTA**VIA ACTIVE, similar to the Company’s other lines of products, is backed by science, made with no colors, flavors or sweeteners from artificial sources and is Informed Sport certified, which is a global standard in sports nutrition quality control that ensures its certified products contain no banned substances. The Company plans to launch **OPTA**VIA ACTIVE to customers in September 2023.

Through a small pilot launched in 2023, in partnership with a network of several telehealth providers, the Company began exploring a combination of its habit-based, Coach-guided solution, **OPTA**VIA, together with innovations in medically supported weight loss, including GLP-1 drugs.

Medifast plans to continue investing in its offer to support all areas of its proprietary Habits of Health Transformational System, which includes weight loss, motion, hydration, sleep, and other macro-habits. The Company is committed to innovating as the industry evolves to continue delivering evidence-based solutions that are effective in helping customers create healthy habits and reach their wellness goals.

### Macroeconomic Conditions

Global economic challenges including the impact of rising inflation, adverse labor market conditions, the war in Ukraine and the continuing impact of the COVID-19 pandemic have caused macroeconomic uncertainty and volatility in markets where we, our suppliers and our **OPTA**VIA Coaches operate. These uncertainties make it challenging for our management to estimate our future business performance.

We are exposed to market risks from changes in commodity or other raw material prices. Rising inflation could impact our cost structure and put pressure on consumer spending. Increases in commodity prices or food costs, including as a result of inflation, could affect the global and U.S. economies and could also adversely impact our business, financial condition or results of operations. Our variable cost structure can be utilized to adapt to changing market conditions with potential actions including adjustments to our manufacturing, distribution and customer support infrastructure. In addition, adverse labor market conditions could constrain our ability to manufacture and deliver products or increase the associated costs. As a response, we may periodically take incremental pricing actions to offset supply chain costs, inflationary pressures, and adverse labor market conditions.

In addition, beginning in February 2022, the war in Ukraine and corresponding events have had, and could continue to have, adverse effects on regional and global markets. While our operations are not directly impacted by the war in Ukraine, the duration of hostilities and the vast array of sanctions and related events (including cyberattacks) cannot be predicted. As a result, those events present uncertainty and risk. To date, the war in Ukraine has had no material impact on our business.

In response to changing macroeconomic conditions, the Company may take further actions that alter its business operations as may be required by governmental authorities, or that are determined to be in the best interests of employees, **OPTA**VIA Coaches and customers.

### Critical Accounting Policies and Estimates

The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Management develops, and changes periodically, these estimates and assumptions based on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. There were no significant changes in our critical estimates during the first six months of 2023.

Our unaudited condensed consolidated financial statements are prepared in accordance with GAAP. Our significant accounting policies are described in Note 2 to the audited consolidated financial statements included in the 2022 Form 10-K. We consider all of our significant accounting policies and estimates to be critical. During Q1 2023 we made a change to our customer terms and conditions (“Customer T&Cs”) that resulted in a change to our revenue recognition policy which is described below. There were no other significant changes in our critical accounting policies during the first six months of 2023.

Revenue Recognition: Our revenue is derived primarily from point of sale transactions executed over an e-commerce platform for weight loss, weight management, and other healthy living products. Prior to a change in our Customer T&Cs in the first quarter of 2023, revenue was recognized upon receipt by the customer and net of discounts, rebates, promotional adjustments, price adjustments, allocated consideration to loyalty programs, and estimated returns. Upon the change of our Customer T&Cs, revenue is now recognized upon delivery to the shipping carrier and net of discounts, rebates, promotional adjustments, price adjustments, allocated consideration to loyalty programs, and estimated returns. The impact of this change to the quarter ended March 31, 2023 was an increase of approximately $9.1 million in revenue and $2.8 million of income from operations.

Revenue is recognized when control of the promised products is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for transferring those products. When determining whether the customer has obtained control of the products, we consider any future performance obligations.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, each performance obligation is satisfied. Our contracts have performance obligations to fulfill and deliver products from the point of sale transaction along with the related customer reward programs.

Our performance obligations are satisfied at a point in time. Revenue from products transferred to customers at a point in time accounted for substantially all of our revenue for the six months ended June 30, 2023 and 2022. Revenue on these contracts is recognized when the obligations under the terms of the contract with our customer are satisfied.

Our return policy allows for customer returns of consumable products within 30 days of purchase and upon our authorization. We adjust revenues for the products expected to be returned and a liability is recognized for expected refunds to customers. We estimate expected returns based on historical levels and project this experience into the future.

Our sales contracts may give customers the option to purchase additional products priced at a discount. Options to acquire additional products at a discount can come in many forms, such as customer reward programs and incentive offerings including pricing arrangements, and promotions.

We reduce the transaction price for customer reward programs and certain incentive offerings including pricing arrangements, promotions, and incentives that represent variable consideration and separate performance obligations. The Company accounts for sales rewards that provide the customer with a material right as a separate performance obligation of the transactions, and therefore allocates consideration between the initial sale of products and the customer reward program and incentive offering.

Amounts billed to customers for shipping and handling activities are treated as a promised service performance obligation and are recorded as revenue in our Consolidated Statements of Income upon fulfillment of the performance obligation. Shipping and handling costs incurred by the Company for the delivery of products to customers are considered a cost to fulfill the contract and are included in cost of sales in our Consolidated Statements of Income.

We expense **OPTA**VIA Coach compensation and credit card fees during the period in which the corresponding revenue is earned. These costs are recorded in selling, general and administrative expense in our Consolidated Statements of Income.

### Overview of Results of Operations

Our product sales accounted for approximately 98% of our revenues for each of the three months ended June 30, 2023 and 2022.

The following tables reflect our income statements (in thousands, except percentages):

|  | Three months ended June 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $296,188 | $453,333 | $(157,145) | (34.7)% |
| Cost of sales | 85,473 | 131,651 | (46,178) | (35.1)% |
| **Gross profit** | **210,715** | **321,682** | **(110,967)** | **(34.5)%** |
| Selling, general, and administrative | 172,009 | 272,718 | (100,709) | (36.9)% |
| **Income from operations** | **38,706** | **48,964** | **(10,258)** | **(21.0)%** |
| Other income (expense) |  |  |  |  |
| Interest income (expense) | 462 | (164) | 626 | 381.7% |
| Other expense | (51) | (4) | (47) | (1175.0)% |
|  | 411 | (168) | 579 | 344.6% |
| **Income from operations before income taxes** | **39,117** | **48,796** | **(9,679)** | **(19.8)%** |
| Provision for income taxes | 8,837 | 9,683 | (846) | (8.7)% |
| **Net income** | **$30,280** | **$39,113** | **$(8,833)** | **(22.6)%** |
| **% of revenue** |  |  |  |  |
| Gross profit | 71.1% | 71.0% |  |  |
| Selling, general, and administrative costs | 58.1% | 60.2% |  |  |
| Income from operations | 13.1% | 10.8% |  |  |

17

|  | Six months ended June 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $645,170 | $870,933 | (225,763) | (25.9)% |
| Cost of sales | 188,065 | 246,965 | (58,900) | (23.8)% |
| **Gross profit** | **457,105** | **623,968** | **(166,863)** | (26.7)% |
| Selling, general, and administrative | 364,887 | 519,917 | (155,030) | (29.8)% |
| **Income from operations** | **92,218** | **104,051** | **(11,833)** | **(11.4)%** |
| Other income (expense) |  |  |  |  |
| Interest income (expense) | 281 | (259) | 540 | 208.5% |
| Other expense | (53) | (20) | (33) | (165.0)% |
|  | 228 | (279) | 507 | 181.7% |
| **Income from operations before income taxes** | **92,446** | **103,772** | **(11,326)** | **(10.9)%** |
| Provision for income taxes | 22,198 | 22,878 | (680) | (3.0)% |
| **Net income** | **$70,248** | **$80,894** | **$(10,646)** | **(13.2)%** |
| **% of revenue** |  |  |  |  |
| Gross profit | 70.9% | 71.6% |  |  |
| Selling, general, and administrative costs | 56.6% | 59.7% |  |  |
| Income from operations | 14.3% | 11.9% |  |  |

**Revenue:** Revenue decreased $157.1 million, or 34.7%, to $296.2 million for the three months ended June 30, 2023 from $453.3 million for the three months ended June 30, 2022. The decline in revenue for the three months ended June 30, 2023 was primarily driven by a decrease in the number of active earning **OPTA**VIA Coaches to 53,100 as of June 30, 2023 from 68,000 as of June 30, 2022 and the decline in the productivity per active earning **OPTA**VIA Coach. The average revenue per active earning **OPTA**VIA Coach was $5,578 for the three months ended June 30, 2023 compared to $6,667 for the three months ended June 30, 2022. Revenue decreased $225.8 million, or 25.9%, to $645.2 million for the six months ended June 30, 2023 from $870.9 million for the six months ended June 30, 2023. The decline in revenue for the six months ended June 30, 2023 was driven by a decrease in the number of active earnings **OPTA**VIA Coaches and the decline in productivity per active earnings **OPTA**VIA Coach, partially offset by a $9.1 million impact from a timing difference related to changes in the Company’s sales order terms and conditions with its customers in the first quarter. The average revenue per active earning **OPTA**VIA Coach was $5,771 for the six months ended June 30, 2023 compared to $6,603 for the six months ended June 30, 2022. The decrease in productivity per active earning **OPTA**VIA Coach for the three months ended June 30, 2023 and six months ended June 30, 2023 was driven by continued pressure on customer acquisition, partially offset by a price increase implemented in November 2022.

**Cost of sales:** Cost of sales decreased $46.2 million, or 35.1%, to $85.5 million from $131.7 million for the three months ended June 30, 2023 from the corresponding period in 2022. Cost of sales decreased $58.9 million, or 23.8%, to $188.1 million from $247.0 million for the six months ended June 30, 2023. The decrease in cost of sales for the three months ended June 30, 2023 and six months ended June 30, 2023 was primarily driven by decreased volumes, partially offset by higher product costs resulting from inflationary pressures on raw ingredient costs, shipping costs, and labor costs.

**Gross profit:** For the three months ended June 30, 2023, gross profit decreased $111.0 million, or 34.5%, to $210.7 million from $321.7 million for the three months ended June 30, 2022. The decrease in gross profit for the three months ended June 30, 2023 was due to lower revenue. As a percentage of revenue, gross profit increased 10 basis points to 71.1% for the three months ended June 30, 2023 from 71.0% for the corresponding period in 2022. For the six months ended June 30, 2023, gross profit decreased $166.9 million, or 26.7%, to $457.1 million from $624.0 million for the six months ended June 30, 2023. The decrease in gross profit for the six months ended June 30, 2023 was due to lower revenue as well as cost inflation from raw ingredient costs, shipping costs, and labor costs. As a percentage of revenue, gross profit decreased 70 basis points to 70.9% for the six months ended June 30, 2023 from 71.6% for the corresponding period in 2022. The decrease in gross profit as a percentage of revenue for the six months ended June 30, 2023 is due to deleveraging of fixed costs due to lower volumes and product cost inflation.

**Selling, general, and administrative:** SG&A expenses were $172.0 million for the three months ended June 30, 2023, a decrease of $100.7 million, or 36.9%, as compared to $272.7 million from the corresponding period in 2022. As a percentage of revenue, SG&A expenses were 58.1% for the three months ended June 30, 2023 as compared to 60.2% for the corresponding period in 2022. SG&A expenses included research and development costs of $1.1 million and $1.2 million for the three months ended June 30, 2023 and 2022, respectively, in connection with the development of new products, programs and clinical research activities. SG&A expenses were $364.9 million for the six months ended June 30, 2023, a decrease of $155.0 million, or 29.8%, as compared to $519.9 million from the corresponding period in 2022. As a percentage of revenue, SG&A expenses were 56.6% for the six months ended June 30, 2023 as compared to 59.7% for the corresponding period in 2022. SG&A expenses included research and development costs of $2.1 million and $2.2 million for the six months ended June 30, 2023 and 2022, respectively, in connection with the development of new products and programs and clinical research activities. SG&A expenses decreased for the three months ended June 30, 2023 and six months ended June 30, 2023 primarily due to progress on several cost reduction and optimization initiatives, charitable donations in the second quarter of 2022 that did not recur in 2023, and decreased Coach compensation due to lower volumes and fewer active earning Coaches.

**Income from operations:** For the three months ended June 30, 2023, income from operations decreased $10.3 million to $38.7 million from $49.0 million for the corresponding period in 2022 primarily as a result of decreased gross profit partially offset by decreased SG&A expenses. Income from operations as a percentage of revenue increased to 13.1% for the three months ended June 30, 2023 from 10.8% for the corresponding period in 2022 due to the factors described above impacting revenue and SG&A expenses. For the six months ended June 30, 2023, income from operations decreased $11.8 million to $92.2 million from $104.1 million for the corresponding period in 2022 primarily as a result of decreased gross profit partially offset by decreased SG&A expenses. Income from operations as a percentage of revenue increased to 14.3% for the six months ended June 30, 2023 from 11.9% for the corresponding period in 2022 due to the factors above impacting revenue and SG&A expenses.

**Provision for income taxes:** For the three months ended June 30, 2023, the Company recorded $8.8 million in income tax expense, an effective tax rate of 22.6%, as compared to $9.7 million in income tax expense, an effective tax rate of 19.8%, for the three months ended June 30, 2022. The increase in the effective tax rate for the three months ended June 30, 2023 was primarily driven by a decrease in the tax benefit for charitable donations of inventory in the quarter. For the six months ended June 30, 2023, the Company recorded $22.2 million in income tax expense, an effective tax rate of 24.0%, as compared to $22.9 million in income tax expense, an effective tax rate of 22.0%, for the six months ended June 30, 2022. The increase in the effective tax rate for the six months ended June 30, 2023 was primarily driven by a decrease in the tax benefit for charitable donations of inventory as well as an increase in the limitations on executive compensation and meals and entertainment costs partially offset by an increase in the tax benefit for research and development tax costs.

**Net income:** Net income was $30.3 million and $70.2 million, or $2.77 and $6.43 per diluted share for the three and six months ended June 30, 2023 as compared to $39.1 million and $80.9 million, or $3.42 and $7.01 per diluted share, for the three and six months ended June 30, 2022. The period-over-period changes were driven by the factors described above in the section titled “Income from operations.

### Liquidity and Capital Resources

The Company had stockholders’ equity of $185.6 million and working capital of $113.9 million at June 30, 2023 as compared with $155.0 million and $81.9 million at December 31, 2022, respectively. The $30.5 million net increase in stockholders’ equity reflects $70.2 million in net income for the six months ended June 30, 2023 offset by $3.6 million used for repurchases of the Company’s common stock and $36.2 million for declared dividends paid to holders of the Company’s common stock as well as the other equity transactions described in the “Condensed Consolidated Statements of Changes in Stockholders’ Equity” included in this report. On June 15, 2023, the Company declared a quarterly dividend of $1.65 per share payable on August 8, 2023, to stockholders of record as of June 27, 2023. Future share repurchases and the payment of any future dividends are subject to the business judgment of our Board of Directors, taking into consideration our historical and projected results of operations, financial condition, cash flows, capital requirements, industry conditions, covenant compliance, changes in laws and regulations, current economic environment and other factors considered relevant. The Company’s cash, and cash equivalents increased from $87.7 million at December 31, 2022 to $147.4 million at June 30, 2023.

Net cash provided by operating activities increased by $19.8 million to $107.2 million for the six months ended June 30, 2023 from $87.4 million for the six months ended June 30, 2022 primarily driven by a $26.9 million increase related to changes in inventory balances, a $4.1 million increase in prepaid expenses and other current assets, a $6.0 million increase in other assets and a $11.5 million reduction in income taxes payable, partially offset by a reduction in net income, a $2.0 million reduction in share-based compensation, and a $17.9 million reduction in accounts payable and accrued expenses. We decreased our inventory purchases during the period ended June 30, 2023 to align with sales demand. Accounts payable and accrued expenses decreased due to the timing of payments.

Net cash used in investing activities was $3.9 million for the six months ended June 30, 2023 as compared to $0.6 million for the six months ended June 30, 2022.

Net cash used in financing activities decreased by $86.4 million to $43.7 million for the six months ended June 30, 2023 from $130.1 million for the six months ended June 30, 2022. This decrease was primarily due to the $100.0 million accelerated share repurchase (“ASR”) program as of June 30, 2022 that did not recur in 2023, a $16.4 million decrease in other repurchases of the Company’s common stock, partially offset by $27.0 million in borrowings under revolving credit facility as of June 30, 2022 that did not recur in 2023.

In pursuing its business strategy, the Company may require additional cash for operating and investing activities. The Company expects future cash requirements in both the short term and the long term, if any, to be funded from operating cash flow and financing activities.

From time to time the Company evaluates potential acquisitions that complement our business. If consummated, any such transactions may use a portion of our working capital or require the issuance of equity or debt. We have no present understandings, commitments or agreements with respect to any material acquisitions.

On April 13, 2021, the Company and certain of its subsidiaries (collectively, the “Guarantors”) entered into a credit agreement among the Company, the Guarantors, the lenders party thereto and Citibank, N.A., in its capacity as administrative agent. On May 31, 2022, the Credit Agreement was amended to increase the borrowing capacity and convert the interest rate to be based on SOFR, from LIBOR (the “Amended Credit Agreement”). The Amended Credit Agreement provides for a $225.0 million senior secured revolving credit facility with a $20.0 million letter of credit sublimit. The Amended Credit Agreement also provides for an uncommitted incremental facility that permits the Company, subject to certain conditions, to increase the senior secured revolving credit facility by up to $100.0 million. The Amended Credit Agreement contains affirmative and negative covenants customarily applicable to credit facilities. As of June 30, 2023, the Company had no borrowings under the credit facility and was in compliance with all of its debt covenants.

## Market risk

As filed, 751 characters.

Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and a decline in the stock market. The Company does not enter into derivatives, foreign exchange transactions or other financial instruments for trading or speculative purposes.

The Company is exposed to market risk related to changes in interest rates and market pricing impacting our credit facility. The Company did not have any outstanding borrowings or investments at June 30, 2023, and therefore it would not expect its operating results or cash flows to be affected to any significant degree by the effect of a change in market conditions.

There have been no material changes to our market risk exposure since December 31, 2022.

## Controls and procedures

As filed, 1,293 characters.

Management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Act, as amended, as of June 30, 2023. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Act is recorded, processed, summarized and reported accurately and on a timely basis. Based on this evaluation performed in accordance with the criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, our management concluded that the Company’s disclosure controls and procedures are effective at the reasonable assurance level as of the end of the period covered by this report.

### Changes in Internal Control over Financial Reporting

There have been no material changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Act) during the fiscal quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Filed Aug 7, 2023.
Source: SEC EDGAR, the filing index for accession 0001628280-23-027815. Last ingested by Listed: Nov 6, 2026, 14:33 ET. No prices; not investment advice.