Nutrisystem 2006 Annual Report Download - page 34

I
ncome
T
axes
.
In 2006, we recorded income tax ex
p
ense of
$
50.6 million, which reflects an estimated
a
nnual effective tax rate of 37.3%. In 2005, we recorded
$
13.1 million of income tax expense for the reportin
g
period. The effective tax rate in 200
5
was 38.
5
%. The decrease in the effective tax rate was primaril
y
due t
o
l
ower state income taxes due to the a
pp
ortionment of income to states with lower tax rates.
N
et
I
ncome
.
F
or the year ended December 31, 2006, net income increased by
$
64.1 million to
$
85.1
million from net income of $21.0 million in 2005. The increase in net income in 2006 is primaril
y
due to hi
g
her
g
ross profit in 2006 versus 200
5
resultin
g
from increased revenue offset b
y
hi
g
her advertisin
g
and marketin
g
spen
di
ng, genera
l
an
d
a
d
m
i
n
i
strat
i
ve expenses an
di
ncome taxes
.
Y
ear En
d
e
d
Decem
b
er 31, 2005 Com
p
are
d
to Year En
d
e
d
Decem
b
er 31, 200
4
Y
ear Ended December 31
,
2005
2004
$
Chan
ge
%
C
han
ge
(
in thousands
)
R
EVEN
U
E
...............................................
$
212,506 $37,996 $174,510 459%
COS
T
S
AND EXPEN
S
E
S
:
Cost of revenue
.......................................
1
09,431 21,
6
12 87,819 40
6
%
Marketin
g
.
..........................................
.
47,793 7,
5
48 40,24
55
33%
G
enera
l
an
d
a
d
m
i
n
i
strat
iv
e
..............................
21,009
7
,039 13,9
7
0 198%
D
e
p
reciation and amortizatio
n
.
...........................
9
83 268 71
5
26
7%
T
ota
l
costs an
d
expense
s
............................
1
79
,
21
6
3
6,
4
6
7 142
,
749 391%
O
perat
i
ng
i
ncome .................................
.
3
3
,
290 1
,
529 31
,
761 2077%
O
THER IN
CO
ME
.
........................................ —
134
(134) (100%)
I
NTEREST INCOME, net
.
.................................. 860 36 82
4
2289%
In
co
m
ebe
f
o
r
e
in
co
m
eta
x
es
.........................
3
4,1
5
0 1,699 32,4
5
1 1910%
I
NCOME TAXE
S
.
.......................................
.
13,13
5
680 12,4
55
1832%
N
et incom
e
.
...................................... $ 21,015 $ 1,019 $ 19,996 1962%
%o
fr
eve
n
ue
Gross marg
i
n
.............................................
4
8
.
5
%4
3
.1%
Marketin
g
................................................
22.
5
% 19.9%
Genera
l
an
d
a
d
m
i
n
i
strat
i
ve .................................
.
9.9% 18.
5
%
Operat
i
ng
i
ncom
e
..........................................
1
5
.7% 4.
0
%
Revenue. Revenue increased to $212.5 million for the
y
ear ended December 31, 2005 from $38.0 millio
n
f
or the year ended December 31, 2004. The revenue increase of
$
174.5 million, or 459%, resulted from increased
d
irect sales (
$
158.5 million), QVC sales (
$
11.4 million) and the field sales channel (
$
2.7 million) plus th
e
a
ddition of Slim and Tone ($2.3 million), offset b
y
decreased sales in our case distributor channel ($360,000). In
the year ended December 31, 200
5
, direct revenue accounted for 89% of total revenue, while QVC, field sales,
case
di
str
ib
utor an
d
S
li
man
d
Tone revenue accounte
df
or 7%, 2%, 1% an
d
1% o
f
revenue, respect
i
ve
l
y. In 2004
,
the comparable percenta
g
es were 81%, 11%,
5
%, 3% and 0%, respectivel
y.
Costs and Expenses
.
Cost of revenue increased $87.8 million to $109.4 million for the
y
ear ended
December 31, 2005 from
$
21.6 million for the year ended December 31, 2004. Gross margin as a percent of
revenue increased to 48.5% in 2005 from 43.1% in 2004. The increase in
g
ross mar
g
in is primaril
y
attributable t
o
a
3.4 percenta
g
e point increase in our direct channel
g
ross mar
g
in (discussed above) and a
g
reater proportion o
f
o
ur revenue was represented by the higher margin direct channel (89% in 2005 versus 81% in 2004). The
rema
i
n
i
n
gi
ncrease
i
n
g
ross mar
gi
n
i
spr
i
mar
ily
attr
ib
uta
bl
etot
h
e
f
u
ll y
ear
i
mpact o
f
S
li
man
d
Tone, w
hi
c
h
was
a
c
q
uired in December 2004, and therefore had minimal im
p
act on 2004 results
.
28