Nutrisystem 2008 Annual Report Download - page 31

We are continuing to see a challenging economic environment in 2009. Our key focus in 2009 is to continue
to leverage our direct-to-consumer model and improve our efficiency. We have already taken steps to reduce our
overall operating costs, improve gross margins and limit capital spending to optimize cash generation in 2009.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting
principles. Our significant accounting policies are described in Note 2 of the consolidated financial statements
included in Item 8.
The preparation of these 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. Management considers the following accounting
estimates to be the most critical in preparing our consolidated financial statements. These critical accounting
estimates are discussed with our audit committee quarterly.
Reserves for Returns. We review the reserves for customer returns at each reporting period and adjust them
to reflect data available at that time. To estimate reserves for returns, we consider 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 is inaccurate, we will adjust the reserve, which will impact the amount of product
sales revenue recognized in the period of the adjustment. The provision for estimated returns for the years ended
December 31, 2008, 2007 and 2006 were $47.6 million, $57.2 million and $39.6 million, respectively. The
reserve for returns incurred but not received and processed was $2.1 million and $2.9 million at December 31,
2008 and 2007, respectively, and has been included in other accrued expenses and current liabilities in the
accompanying consolidated balance sheets.
Vendor Rebates. One of our suppliers provides for rebates based on purchasing levels. We accrue this rebate
as purchases are made at a rebate percentage determined based upon the estimated total purchases from the
vendor. The estimated rebate is recorded as a reduction in the carrying value of purchased inventory and is
reflected in the consolidated statement of operations when the associated inventory is sold. A receivable is
recorded for the estimate of the rebate earned. The actual rebate received from the vendors has closely matched
the estimated rebate recorded and an adjustment is made to the estimate upon determination of the final rebate.
The rebate period is June 1 through May 31 of each year. For the years ended December 31, 2008, 2007 and
2006, we reduced cost of revenue by $4.4 million, $5.3 million and $4.4 million, respectively, for these rebates.
A receivable of $1.9 million and $3.7 million at December 31, 2008 and 2007, respectively, has been recorded in
receivables in the accompanying consolidated balance sheets.
Excess and Obsolete Inventory. We continually assess the quantities of inventory on hand to identify excess
or obsolete inventory and record a provision for the potential loss. We estimate the reserve for excess and
obsolete inventory based primarily on our forecasted demand and/or our ability to sell the products, future
production requirements and changes in our customers’ behavior. The reserve for excess and obsolete inventory
was $796,000 and $516,000 at December 31, 2008 and 2007, respectively.
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 are evaluated for future
realization and reduced by a valuation allowance to the extent we believe a portion will not be realized. We
consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our
recent earnings and expectations of future taxable income and other relevant factors.
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