Nutrisystem 2015 Annual Report Download

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DELIVERING
RESULTS
2015 ANNUAL REPORT

Table of contents

  • Page 1
    DELIVERING RESULTS 2015 ANNUAL REPORT

  • Page 2

  • Page 3
    ... meal delivery space. In addition to our Nutrisystem® D® program for people living with Type 2 diabetes or pre-diabetes, we expanded our health segment offerings to include a heart healthy DASH diet compliant plan. At retail, we introduced new varieties of the 5-Day Nutrisystem® kit along...

  • Page 4
    ... weight and health conscious consumers. We leverage our product development, marketing, ecommerce, supply chain, and distribution know-how to drive successful commercialization of our offerings. And our new initiatives, like our core business, are designed to be very capital efficient. As we head...

  • Page 5
    ... Executive Center 600 Office Center Drive Fort Washington, Pennsylvania (Address of principal executive offices) 19034 (Zip Code) Registrant's telephone number, including area code: (215) 706-5300 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange...

  • Page 6
    ... and Supplementary Data ...Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...Other Information ...PART III Item 10. Item 11. Item 12. Item 13. Item 14. Directors, Executive Officers and Corporate Governance ...Executive Compensation ...Security Ownership...

  • Page 7
    ... to appeal to the market; the effectiveness of our marketing and advertising programs; loss, or disruption in the business, of any of our food suppliers; loss, or disruption in the business, of our fulfillment provider; disruptions in the shipping of our food products; claims that our personnel are...

  • Page 8
    ... services, including nutritionally balanced weight loss programs, multi-day kits available at select retail locations and digital tools to support weight loss. Typically, our program customers purchase monthly food packages containing a four-week meal plan consisting of breakfasts, lunches, dinners...

  • Page 9
    ... telephone and have their food delivered directly to their homes. This affords our customers the convenience and anonymity that other diets, which rely on weight-loss centers, cannot ensure. Additionally, we provide our customers with a package of food, including breakfast, lunch, dinner and snacks...

  • Page 10
    ... primarily of a pre-packaged food program, digital tools and counseling. Typically, our customers purchase monthly food packages of frozen and ready-to-go food containing a four-week meal plan consisting of breakfasts, lunches, dinners and snacks and flex meal plan recipes, which they supplement...

  • Page 11
    ... were designed to deliver. Our program includes seven days of breakfasts, lunches, and dinners, plus shakes with formulations for men and women to meet their unique nutritional needs. As part of our program, customers are given a meal plan, access to trackers and tools via NuMi, educational digital...

  • Page 12
    ...Eating Out Guide and a Daily Food Tracker) and a robust set of personalized online tools and trackers. On-Program We use customer preferences to offer a variety of additional products and services that help customers while on the path to their weight loss goals. These offers are made via our website...

  • Page 13
    ... the date the order was received. Direct customers are not charged for their orders until the ordered product is shipped. We do not charge customers for shipping and handling on any four-week meal plan. For customers who purchase an Auto-Delivery plan, we provide a discount off the full retail value...

  • Page 14
    ... and social media, particularly around the key dieting seasons. In addition, the public relations team supports an executive communication program to broadly support the Nutrisystem brand. Our Customers We offer weight loss programs designed for women and men as well as people with Type 2 diabetes...

  • Page 15
    ...these employees to be good. Seasonality Typically in the weight loss industry, revenue is greatest in the first calendar quarter and lowest in the fourth quarter. We believe our business experiences seasonality, driven primarily by the predisposition of dieters to initiate a diet at certain times of...

  • Page 16
    ... LLP. Keira Krausz has served as our Executive Vice President and Chief Marketing Officer since February 2013. Prior to joining us, Ms. Krausz served as head of new business development for Animated Storyboards, a global independent provider of television test spots to the advertising industry...

  • Page 17
    ..., quality and variety of food, other products and packaging materials in a timely and low-cost manner from our manufacturers, we will be unable to fulfill our customers' orders in a timely manner, which may cause us to lose revenue and market share or incur higher costs, as well as damage the value...

  • Page 18
    ... would adversely affect our business. We may be subject to health or advertising related claims from our customers. Our weight loss program does not include medical treatment or medical advice, and we do not engage physicians or nurses to monitor the progress of our customers. Many people who are...

  • Page 19
    ..., price, taste, customer service and brand recognition. Our competitors include companies selling pharmaceutical products and weight loss programs, digital tools and wearable trackers, as well as a wide variety of diet foods and meal replacement bars and shakes, appetite suppressants and nutritional...

  • Page 20
    ... opportunities in the market for weight management and fitness products and other complimentary products and services. On December 17, 2015, we acquired the South Beach Diet ("SBD") brand for a cash payment of $15.0 million. These types of transactions will face a number of risks and uncertainties...

  • Page 21
    ...of-mouth advertising for a portion of our new customers. If our brand suffers or the number of customers acquired through referrals drops due to other circumstances, our costs associated with acquiring new customers and generating revenue will increase, which will, in turn, have an adverse effect on...

  • Page 22
    ...program features frozen and ready-to-go food selections, which we believe offer convenience and value to our customers. Our continued success depends, to a large degree, upon the continued popularity of our program versus various other weight loss, weight management and fitness regimens, such as low...

  • Page 23
    ... to weight loss claims and other advertising practices. In October 2009, the FTC published its revised Guides concerning the Use of Endorsements and Testimonials in Advertising which now requires us to use a statement as to what the typical weight loss a customer can expect to achieve on our program...

  • Page 24
    ... and FDA that establish manufacturing practices and quality standards for food products. Product liability claims could have a material adverse effect on our business as existing insurance coverage may not be adequate. Distributors of weight loss food products, including dietary supplements, as well...

  • Page 25
    ... PROCEEDINGS Litigation The Company is involved in various claims and routine litigation matters. In the opinion of management, after consultation with legal counsel, the outcomes of such matters are not anticipated to have a material adverse effect on the Company's consolidated financial position...

  • Page 26
    ...low sale prices for the Company's common stock as reported on the NASDAQ Stock Market. High Low 2016 First Quarter (through February 19, 2016) ...2015 First Quarter ...2015 Second Quarter ...2015 Third Quarter ...2015 Fourth Quarter ...2014 First Quarter ...2014 Second Quarter ...2014 Third Quarter...

  • Page 27
    ...Jones US Specialized Consumer Services Index (a published industry index), each of which assumes an initial value of $100 and reinvestment of dividends. Our common stock trades on the NASDAQ Stock Market under the ticker symbol NTRI. Comparison of Cumulative Total Return Among Nutrisystem, Inc., the...

  • Page 28
    ... 7 and 8, respectively, in this Annual Report. Selected Consolidated Financial Data (In thousands, except per share data) 2015 Year Ended December 31, 2014 2013 2012(d) 2011 Statements of Operations Data: Revenue ...Costs and expenses: Cost of revenue ...Marketing ...General and administrative...

  • Page 29
    ...our former President and Chief Executive Officer's cessation of employment. Additionally, we recorded an impairment charge of $2,100 related to advances paid to a frozen food supplier as the supplier was in default with its bank lender and negotiating a work out plan and a charge of $1,980 to vacate...

  • Page 30
    ...nutritionally balanced weight loss programs, multi-day kits available at select retail locations and digital tools to support weight loss. The weight loss programs are designed for women and men. Additionally, our Nutrisystem® D® program is designed specifically to help people with Type 2 diabetes...

  • Page 31
    ... $15.0 million. We will begin developing South Beach Diet meal programs, products and services as a distinct brand with the intent to launch in both the direct-to-consumer and retail channels in 2017. The acquisition will provide consumers with additional quality choices and enable us to capture an...

  • Page 32
    ...direct channel was $415.8 million in 2015 compared to $365.1 million in 2014 and $327.8 million in 2013. Revenue is generated primarily through customer starts, reactivation of former customers and the customer ordering behavior, including length of time on our program and the diet program selection...

  • Page 33
    ...to an increase in new customers, on-program revenue and reactivation revenue. Additionally, we had a higher average selling price in 2015 as compared 2014. Critical to increasing customer starts is our ability to deploy marketing dollars while maintaining marketing effectiveness. Factors influencing...

  • Page 34
    ... revenue was attributable primarily to an increase in new customers, retail and on-program revenue that was slightly offset by decreased reactivation and QVC revenue. Additionally, we had a higher average selling price in 2014 as compared to 2013. In 2014, direct revenue accounted for 91% of revenue...

  • Page 35
    ... and computer services expenses ($390,000), decreased new packaging expense ($274,000). Depreciation and amortization expense decreased to $7.8 million in 2014 from $8.9 million in 2013 as certain fixed assets for our website and assets purchased when we relocated our corporate headquarters reached...

  • Page 36
    ... in the fourth calendar quarter. We believe our business experiences seasonality, driven primarily by the predisposition of dieters to initiate a diet at certain times of the year and the placement of our advertising, which is based on the price and availability of certain media at such times. 32

  • Page 37
    ...cash equivalents at December 31, 2015 of $6.2 million were maintained in bank and money market funds. Additionally, we invested $9.3 million in short term investments, which are classified as available-for-sale securities and are reported at fair value in the accompanying consolidated balance sheets...

  • Page 38
    ... report, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures at the end of the period covered by this report were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange...

  • Page 39
    ... or procedures may deteriorate. In our opinion, Nutrisystem, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring...

  • Page 40
    ..., to be filed within 120 days after the end of the fiscal year covered by this annual report on Form 10-K, and is incorporated herein by reference. The required information as to executive officers is set forth in Part I hereof. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11...

  • Page 41
    NUTRISYSTEM, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets at December 31, 2015 and 2014 ...Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013 ......

  • Page 42
    ...accordance with the standards of the Public Company Accounting Oversight Board (United States), Nutrisystem, Inc.'s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring...

  • Page 43
    ... value (100,000 shares authorized; shares issued - 29,621 at December 31, 2015 and 28,990 at December 31, 2014) ...Additional paid-in capital ...Treasury stock, at cost, 389 shares at December 31, 2015 and 249 shares at December 31, 2014 ...Retained earnings ...Accumulated other comprehensive (loss...

  • Page 44
    NUTRISYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Year Ended December 31, 2015 2014 2013 REVENUE ...COSTS AND EXPENSES: Cost of revenue ...Marketing ...General and administrative ...Depreciation and amortization ...Total costs and ...

  • Page 45
    NUTRISYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Year Ended December 31, 2015 2014 2013 Net income ...OTHER COMPREHENSIVE (LOSS) INCOME: Short term investments: Unrealized (loss) gain on short term investments, net of income tax (benefit) expense of ...

  • Page 46
    ..., 2013 ...28,866 Net income ...0 Share-based compensation expense ...92 Exercise of stock options ...32 Equity compensation awards, net ...0 Cash dividends ...0 Employee tax withholdings related to the vesting of equity awards ...0 Other comprehensive loss, net of tax ...0 BALANCE, December 31, 2014...

  • Page 47
    ..., 2015 2014 2013 CASH FLOWS FROM OPERATING ACTIVITIES: Net income ...$ 26,143 $ 19,311 $ 7,370 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ...9,158 7,849 8,896 Loss on disposal of fixed assets ...17 35 145 Share-based compensation...

  • Page 48
    ...nutritionally balanced weight loss programs, multi-day kits available at select retail locations and digital tools to support weight loss. The weight loss programs are designed for women and men. Additionally, the Nutrisystem® D® program is designed specifically to help people with Type 2 diabetes...

  • Page 49
    ...of purchase in order to receive a refund or credit. Frozen products are non-returnable and they are non-refundable unless the order is canceled within 14 days of delivery. Estimated returns are accrued at the time the sale is recognized and actual returns are tracked monthly. The Company reviews its...

  • Page 50
    ... returns and billed sales tax. Revenue from the retail programs is also net of any trade allowances, reclamation reserves or broker commissions. Revenue from shipping and handling charges was $2,561, $2,013 and $2,000 in 2015, 2014 and 2013, respectively. Shipping-related costs are included in cost...

  • Page 51
    ...to unrecognized tax benefits as part of interest expense, net. Segment Information The Company is managed and operated as one business. The entire business is managed by a single management team that reports to the chief executive officer. Revenue consists primarily of food sales. Earnings Per Share...

  • Page 52
    ... include a software license, the customer should account for the arrangement as a service contract. The new standard is effective for annual periods beginning after December 15, 2015, and interim periods within those annual periods. Early adoption is permitted. The Company is currently assessing the...

  • Page 53
    ...TERM INVESTMENTS At December 31, 2015, cash, cash equivalents and short term investments consisted of the following: Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Cost Cash ...Money market funds ...Government and agency securities ...Corporate debt securities ... $ 5,890 301...

  • Page 54
    ...December 31, 2015 and 2014. The following table summarizes the Company's financial assets measured at fair value at December 31, 2015: Quoted Prices in Active Markets for Identical Assets (Level 1) Total Fair Value Money market funds ...Government and agency securities ...Corporate debt securities...

  • Page 55
    ...with existing cash. The Company will begin developing South Beach Diet meal programs, products, and services as a distinct brand with the intent to launch in both the direct-to-consumer and retail channels in 2017. The acquisition will provide consumers with additional quality choices and enable the...

  • Page 56
    ... a material adverse effect on the Company's consolidated financial position, results of operations or cash flows in future years. Contractual Commitments The Company has entered into agreements with various food suppliers. These agreements may provide for annual pricing, annual purchase obligations...

  • Page 57
    ... four quarters of 2014, the Company paid a dividend of $0.175 per share to all stockholders of record. In 2013, the Company issued 1 share of common stock upon the exercise of stock options. During 2013, employees surrendered to the Company 85 shares of common stock valued at $950 in satisfaction of...

  • Page 58
    ... to the Company's effective tax rate is as follows: Year Ended December 31, 2015 2014 2013 Statutory federal income tax rate ...State income taxes, net of federal benefit ...Executive compensation limitation ...Food donations ...Fixed assets ...Changes in reserves ...Tax credits ...Other ...Expired...

  • Page 59
    ... and Restated 2008 Long-Term Incentive Plan is currently the only plan under which new awards may be granted. Under that plan, a variety of equity instruments can be granted to key employees and directors including incentive and nonqualified stock options to purchase shares of the Company's common...

  • Page 60
    ... 2015, 2014 and 2013 was $5,520, $219 and $7, respectively. The fair value of each stock option was estimated on the date of grant using the Black-Scholes option pricing model and the following weighted average assumptions: 2015 2014 2013 Expected dividend yield ...Expected volatility ...Risk-free...

  • Page 61
    ... market price of the Company's common stock on the date of grant. Expense for restricted stock is amortized ratably over the vesting period. The following table summarizes the restricted stock activity for 2013, 2014 and 2015: WeightedAverage Grant-Date Fair Value Aggregate Intrinsic Value Number...

  • Page 62
    ... be fully charged to expense through the fourth quarter of 2018. 12. EMPLOYEE BENEFIT PLAN The Company maintains a qualified tax deferred defined contribution retirement plan (the "Plan"). Under the provisions of the Plan, substantially all employees meeting minimum age and service requirements are...

  • Page 63
    ... Ended December 31, 2015 2014 2013 Balance at beginning of year ...Provision for estimated returns ...Actual returns ...Balance at end of year ... $ 762 13,225 (13,117) 870 $ 637 12,661 (12,536) 762 $ 652 10,838 (10,853) 637 $ $ $ 14. QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED) First...

  • Page 64
    ... Annual Report on Form 10-K filed on March 14, 2006. Compensation Policy For Non-Employee Directors incorporated by reference to the designated exhibit of the Company's Current Report on Form 8-K filed on March 6, 2008. Amended and Restated Credit Agreement, dated November 6, 2015, among Nutrisystem...

  • Page 65
    ..., the Company's Executive Vice President and Chief Marketing Officer, incorporated by reference to the designated exhibit on the Company's Annual Report on Form 10-K filed on March 12, 2013. First Amendment to the Employment Agreement between Nutrisystem, Inc. and Keira Krausz, dated January 2, 2015...

  • Page 66
    ..., 2013, between Nutrisystem, Inc. and Hormel Food Sales, LLC, incorporated by reference to the designated exhibit on the Company's Current Report on Form 8-K filed on October 29, 2013. Subsidiaries of Nutrisystem, Inc. Consent of KPMG LLP. Certifying Statement of the Chief Executive Officer pursuant...

  • Page 67
    ...undersigned, thereunto duly authorized. Nutrisystem, Inc. By: /S/ DAWN M. ZIER Dawn M. Zier, President and Chief Executive Officer Dated: February 26, 2016 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the...

  • Page 68
    Exhibit 31.1 Certification of Chief Executive Officer of Nutrisystem, Inc. Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Dawn M. Zier, certify that: 1. 2. I have reviewed this annual report on Form 10-K of Nutrisystem, Inc.; Based on my knowledge, this report does not contain any ...

  • Page 69
    ...31.2 Certification of Chief Financial Officer of Nutrisystem, Inc. Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Michael P. Monahan, certify that: 1. 2. I have reviewed this annual report on Form 10-K of Nutrisystem, Inc.; Based on my knowledge, this report does not contain any untrue...

  • Page 70
    ...2002, the undersigned, Dawn M. Zier, the Chief Executive Officer of Nutrisystem, Inc. (the "Company"), hereby certifies that based on the undersigned's knowledge: 1) The Company's Annual Report on Form 10-K for the period ended December 31, 2015 (the "Report") fully complies with the requirements of...

  • Page 71
    ... Officer of Nutrisystem, Inc. (the "Company"), hereby certifies that based on the undersigned's knowledge: 1) The Company's Annual Report on Form 10-K for the period ended December 31, 2015 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange...

  • Page 72
    ... and Chief Executive Officer Michael P. Monahan Executive Vice President and Chief Financial Officer Keira Krausz Executive Vice President and Chief Marketing Officer GENERAL INFORMATION Corporate Headquarters Fort Washington Executive Center 600 Office Center Drive Fort Washington, PA 19034 (215...

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    600 Office Center Dr. | Fort Washington, PA 19034 | www.nutrisystem.com