Nutrisystem 2014 Annual Report Download - page 34

Interest Expense, Net. Interest expense, net, was $142,000 in 2014 compared to $89,000 in 2013.
Income Tax Expense. In 2014, we recorded income tax expense of $9.8 million, which reflects an effective tax
rate of 33.6%, as compared to $3.5 million in 2013 with an effective tax rate of 32.3%. The change in the
effective income tax rate was due to changes in executive compensation, decreased levels of food donations and
the reduction in tax reserves during 2013 due to the lapse of the statute of limitations which offset a charge to
record a valuation allowance for charitable contributions recorded in 2013.
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Year Ended December 31,
2013 2012 $ Change % Change
(in thousands)
REVENUE ............................................ $358,086 $396,878 $(38,792) (10)%
COSTS AND EXPENSES:
Cost of revenue ..................................... 184,210 213,095 (28,885) (14)%
Marketing ......................................... 95,784 111,095 (15,311) (14)%
General and administrative ............................ 58,227 66,332 (8,105) (12)%
Depreciation and amortization ......................... 8,896 10,724 (1,828) (17)%
Total costs and expenses ......................... 347,117 401,246 (54,129) (13)%
Operating income (loss) .......................... 10,969 (4,368) 15,337 351%
OTHER EXPENSE ..................................... 0 78 (78) (100)%
INTEREST EXPENSE, net ............................... 89 2,034 (1,945) (96)%
Income (loss) before income tax expense (benefit) ..... 10,880 (6,480) 17,360 268%
INCOME TAX EXPENSE (BENEFIT) ..................... 3,510 (3,675) 7,185 196%
Net income (loss) ............................... $ 7,370 $ (2,805) $ 10,175 363%
% of revenue
Gross margin .......................................... 48.6% 46.3%
Marketing ............................................. 26.7% 28.0%
General and administrative ................................ 16.3% 16.7%
Operating income (loss) .................................. 3.1% (1.1)%
Revenue. Revenue decreased to $358.1 million in 2013 from $396.9 million in 2012. The revenue decline
occurred primarily due to declines in new customer starts and decreased on-program revenue partially offset by
increased retail and reactivation revenue and higher average selling prices. In 2013, direct revenue accounted for
92% of total revenue compared to 5% for retail and 3% for QVC. In 2012, direct revenue accounted for 96% of
total revenue compared to 3% for QVC and 1% for other channels.
Costs and Expenses. Cost of revenue decreased to $184.2 million in 2013 from $213.1 million in 2012. Gross
margin as a percent of revenue increased to 48.6% in 2013 from 46.3% in 2012. The increase in the gross margin
percent was primarily attributable to pricing discipline, the removal of certain promotional items and free food
promotions and process re-engineering. These items offset a higher mix of lower margin products resulting from
an increase in retail sales and a $5.0 million charge to settle certain disputes that had arisen with a supplier over a
legacy contract.
Marketing expense decreased to $95.8 million in 2013 from $111.1 million in 2012. Marketing expense as a
percent of revenue decreased to 26.7% in 2013 from 28.0% in 2012. Substantially all of the marketing spending
in 2013 promoted the direct business. The decrease in marketing expense was attributable to decreased spending
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