Nutrisystem 2009 Annual Report Download - page 36

tax rate in 2008 was 42.0%. The decrease is primarily related to our abandonment of our investment in Zero
Water. This abandonment will provide a current year income tax deduction for the entire original $14.3 million
tax basis investment in Zero Water and will reduce 2009 income tax payments by approximately $5.0 million.
The reduction in income tax payments resulted in a similar decrease in income tax expense in 2009, including a
reversal of a $3.7 million valuation allowance established in 2008 for deferred tax assets related to prior Zero
Water losses and impairment charges not previously considered realizable.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Year Ended December 31,
2008 2007 $ Change % Change
(in thousands)
REVENUE ............................................ $687,741 $776,767 $(89,026) -11%
COSTS AND EXPENSES:
Cost of revenue ..................................... 326,453 349,891 (23,438) -7%
Marketing ......................................... 175,027 178,700 (3,673) -2%
General and administrative ............................ 87,605 79,435 8,170 10%
Depreciation and amortization ......................... 8,508 5,812 2,696 46%
Total costs and expenses ......................... 597,593 613,838 (16,245) -3%
Operating income from continuing operations ......... 90,148 162,929 (72,781) -45%
OTHER EXPENSE ..................................... (1,145) (39) (1,106) -2836%
EQUITY AND IMPAIRMENT LOSS ...................... (9,458) (800) (8,658) -1082%
INTEREST INCOME, net ................................ 454 3,728 (3,274) -88%
Income from continuing operations before income taxes .... 79,999 165,818 (85,819) -52%
INCOME TAXES ...................................... 33,572 60,871 (27,299) -45%
Income from continuing operations ..................... 46,427 104,947 (58,520) -56%
LOSS ON DISCONTINUED OPERATION, net .............. (174) (795) 621 78%
Net income ........................................ $ 46,253 $104,152 $(57,899) -56%
% of revenue
Gross margin .......................................... 52.5% 55.0%
Marketing ............................................. 25.4% 23.0%
General and administrative ................................ 12.7% 10.2%
Operating income from continuing operations ................. 13.1% 21.0%
Revenue. Revenue decreased to $687.7 million in 2008 from $776.8 million in 2007. The revenue decrease
resulted primarily from a decrease in customer starts due to the weakening economy. In 2008, direct revenue
accounted for 93% of total revenue compared to 6% for QVC and 1% for the other channels. In 2007, the
comparable percentages were 94%, 5% and 1%, respectively.
Costs and Expenses. Cost of revenue decreased to $326.5 million in 2008, from $349.9 million in 2007.
Gross margin as a percent of revenue decreased to 52.5% in 2008 from 55.0% in 2007. The decrease in gross
margin was primarily attributable to increased food and freight costs. We are continuing to experience pressure
on gross margins but are focusing on these costs and are working on a full supply chain optimization effort. In
addition, we increased prices on October 1, 2008, to help mitigate these pressures during 2009.
Marketing expense decreased to $175.0 million in 2008 from $178.7 million in 2007. Marketing expense as a
percent of revenue increased to 25.4% in 2008 from 23.0% in 2007. Substantially all of the marketing spending
32