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EX-32.2 - EX-32.2 - NBTY INC | a2198536zex-32_2.htm |
EX-31.1 - EX-31.1 - NBTY INC | a2198536zex-31_1.htm |
EX-31.2 - EX-31.2 - NBTY INC | a2198536zex-31_2.htm |
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | ||
ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
|
For the quarterly period ended March 31, 2010 |
||
Or |
||
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
|
For the transition period from to |
Commission File Number: 001-31788
NBTY, Inc.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
11-2228617 (I.R.S. Employer Identification No.) |
2100 Smithtown Avenue,
Ronkonkoma, New York 11779
(Address of principal executive offices) (Zip Code)
(631) 567-9500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO ý
The number of shares of Common Stock (par value $.008 per share) outstanding as of April 30, 2010 was 63,409,288.
NBTY, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NBTY, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except per share amounts)
|
March 31, 2010 |
September 30, 2009 |
|||||||
---|---|---|---|---|---|---|---|---|---|
Assets |
|||||||||
Current assets: |
|||||||||
Cash and cash equivalents |
$ | 213,905 | $ | 106,001 | |||||
Accounts receivable, net |
167,976 | 155,863 | |||||||
Inventories |
636,978 | 658,534 | |||||||
Deferred income taxes |
27,952 | 28,154 | |||||||
Other current assets |
58,709 | 49,999 | |||||||
Total current assets |
1,105,520 | 998,551 | |||||||
Property, plant and equipment, net |
363,276 |
373,817 |
|||||||
Goodwill |
332,327 | 339,099 | |||||||
Intangible assets, net |
205,367 | 214,139 | |||||||
Other assets |
19,777 | 34,615 | |||||||
Total assets |
$ | 2,026,267 | $ | 1,960,221 | |||||
Liabilities and Stockholders' Equity |
|||||||||
Current liabilities: |
|||||||||
Current portion of long-term debt |
$ | 64,108 | $ | 38,893 | |||||
Accounts payable |
109,168 | 128,485 | |||||||
Accrued expenses and other current liabilities |
154,684 | 156,734 | |||||||
Total current liabilities |
327,960 | 324,112 | |||||||
Long-term debt, net of current portion |
375,839 | 437,629 | |||||||
Deferred income taxes |
39,151 | 36,422 | |||||||
Other liabilities |
31,814 | 34,233 | |||||||
Total liabilities |
774,764 | 832,396 | |||||||
Commitments and contingencies |
|||||||||
Stockholders' equity: |
|||||||||
Common stock, $.008 par; authorized 175,000 shares; issued and outstanding 63,302 shares and 61,874 shares at March 31, 2010 and September 30, 2009, respectively |
506 | 495 | |||||||
Capital in excess of par |
163,997 | 145,885 | |||||||
Retained earnings |
1,107,039 | 984,797 | |||||||
Accumulated other comprehensive loss |
(20,039 | ) | (3,352 | ) | |||||
Total stockholders' equity |
1,251,503 | 1,127,825 | |||||||
Total liabilities and stockholders' equity |
$ | 2,026,267 | $ | 1,960,221 | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
NBTY, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
(in thousands, except per share amounts)
|
Three months ended March 31, |
Six months ended March 31, |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2010 | 2009 | |||||||||||
Net sales |
$ | 705,160 | $ | 595,553 | $ | 1,456,311 | $ | 1,256,105 | |||||||
Costs and expenses: |
|||||||||||||||
Cost of sales |
380,668 | 343,644 | 792,116 | 732,147 | |||||||||||
Advertising, promotion and catalog |
50,937 | 33,028 | 79,679 | 64,319 | |||||||||||
Selling, general and administrative |
194,593 | 174,657 | 383,324 | 370,557 | |||||||||||
IT project termination costs |
| | | 8,647 | |||||||||||
|
626,198 | 551,329 | 1,255,119 | 1,175,670 | |||||||||||
Income from operations |
78,962 | 44,224 | 201,192 | 80,435 | |||||||||||
Other income (expense): |
|||||||||||||||
Interest |
(7,616 | ) | (8,888 | ) | (15,672 | ) | (18,377 | ) | |||||||
Miscellaneous, net |
790 | 279 | 2,545 | (5,356 | ) | ||||||||||
|
(6,826 | ) | (8,609 | ) | (13,127 | ) | (23,733 | ) | |||||||
Income before provision for income taxes |
72,136 | 35,615 | 188,065 | 56,702 | |||||||||||
Provision for income taxes |
25,480 | 12,545 | 65,823 | 20,157 | |||||||||||
Net income |
$ | 46,656 | $ | 23,070 | $ | 122,242 | $ | 36,545 | |||||||
Net income per share: |
|||||||||||||||
Basic |
$ | 0.74 | $ | 0.37 | $ | 1.95 | $ | 0.59 | |||||||
Diluted |
$ | 0.73 | $ | 0.37 | $ | 1.91 | $ | 0.58 | |||||||
Weighted average common shares outstanding: |
|||||||||||||||
Basic |
63,266 | 61,600 | 62,833 | 61,600 | |||||||||||
Diluted |
64,267 | 62,948 | 64,061 | 63,043 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
NBTY, Inc.
Condensed Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
Six Months Ended March 31, 2010 and 2009
(Unaudited)
(in thousands)
|
Common Stock | |
|
|
|
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
Accumulated Other Comprehensive (Loss) Income |
|
||||||||||||||||
|
Number of Shares |
Amount | Capital in Excess of Par |
Retained Earnings |
Total Stockholders' Equity |
|||||||||||||||
Balance, September 30, 2009 |
61,874 | $ | 495 | $ | 145,885 | $ | 984,797 | $ | (3,352 | ) | $ | 1,127,825 | ||||||||
Components of comprehensive income: |
||||||||||||||||||||
Net income |
122,242 | 122,242 | ||||||||||||||||||
Foreign currency translation adjustment, net of taxes |
(17,848 | ) | (17,848 | ) | ||||||||||||||||
Change in fair value of interest rate swaps, net of taxes |
1,161 | 1,161 | ||||||||||||||||||
Comprehensive income: |
$ | 105,555 | ||||||||||||||||||
Exercise of stock options |
1,428 | 11 | 9,714 | 9,725 | ||||||||||||||||
Excess tax benefit from exercise of stock options |
4,787 | 4,787 | ||||||||||||||||||
Stock-based compensation |
3,611 | 3,611 | ||||||||||||||||||
Balance, March 31, 2010 |
63,302 | $ | 506 | $ | 163,997 | $ | 1,107,039 | $ | (20,039 | ) | $ | 1,251,503 | ||||||||
Balance, September 30, 2008 |
61,599 |
$ |
493 |
$ |
140,990 |
$ |
839,068 |
$ |
17,645 |
$ |
998,196 |
|||||||||
Components of comprehensive loss: |
||||||||||||||||||||
Net income |
36,545 | 36,545 | ||||||||||||||||||
Foreign currency translation adjustment, net of taxes |
(56,249 | ) | (56,249 | ) | ||||||||||||||||
Change in fair value of interest rate swaps, net of taxes |
(5,807 | ) | (5,807 | ) | ||||||||||||||||
Comprehensive loss: |
$ | (25,511 | ) | |||||||||||||||||
Exercise of stock options |
1 | 6 | 6 | |||||||||||||||||
Stock-based compensation |
1,069 | 1,069 | ||||||||||||||||||
Balance, March 31, 2009 |
61,600 | $ | 493 | $ | 142,065 | $ | 875,613 | $ | (44,411 | ) | $ | 973,760 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
NBTY, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
|
Six months ended March 31, |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | |||||||||
Cash flows from operating activities: |
|||||||||||
Net income |
$ | 122,242 | $ | 36,545 | |||||||
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities: |
|||||||||||
Impairments and disposals of assets |
6,196 | 688 | |||||||||
Depreciation and amortization |
33,758 | 34,800 | |||||||||
IT project termination costs |
| 4,667 | |||||||||
Foreign currency transaction loss |
130 | 6,669 | |||||||||
Amortization of deferred charges |
774 | 631 | |||||||||
Stock-based compensation |
3,611 | 1,069 | |||||||||
Allowance for doubtful accounts |
1,866 | 850 | |||||||||
Inventory reserves |
1,699 | 7,177 | |||||||||
Deferred income taxes |
1,447 | 383 | |||||||||
Excess income tax benefit from exercise of stock options |
(4,787 | ) | | ||||||||
Changes in operating assets and liabilities: |
|||||||||||
Accounts receivable |
(15,717 | ) | (16,256 | ) | |||||||
Inventories |
16,286 | (57,941 | ) | ||||||||
Other assets |
4,173 | 10,568 | |||||||||
Accounts payable |
(18,341 | ) | 47,219 | ||||||||
Accrued expenses and other liabilities |
4,099 | (20,843 | ) | ||||||||
Net cash provided by operating activities |
157,436 | 56,226 | |||||||||
Cash flows from investing activities: |
|||||||||||
Purchase of property, plant and equipment |
(24,437 | ) | (35,639 | ) | |||||||
Proceeds from sale of investments |
2,000 | | |||||||||
Cash paid for acquisitions |
(573 | ) | (264 | ) | |||||||
Escrow refund, net of purchase price adjustments |
| 11,989 | |||||||||
Net cash used in investing activities |
(23,010 | ) | (23,914 | ) | |||||||
Cash flows from financing activities: |
|||||||||||
Principal payments under long-term debt agreements and capital leases |
(35,777 | ) | (16,785 | ) | |||||||
Proceeds from borrowings under the Revolving Credit Facility |
| 60,000 | |||||||||
Principal payments under the Revolving Credit Facility |
| (115,000 | ) | ||||||||
Excess income tax benefit from exercise of stock options |
4,787 | | |||||||||
Proceeds from stock options exercised |
9,725 | 6 | |||||||||
Net cash used in financing activities |
(21,265 | ) | (71,779 | ) | |||||||
Effect of exchange rate changes on cash and cash equivalents |
(5,257 |
) |
(6,912 |
) |
|||||||
Net increase (decrease) in cash and cash equivalents |
107,904 | (46,379 | ) | ||||||||
Cash and cash equivalents at beginning of period |
106,001 | 90,180 | |||||||||
Cash and cash equivalents at end of period |
$ | 213,905 | $ | 43,801 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
NBTY, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(in thousands, except per share amounts)
1. Basis of Presentation
NBTY, Inc. (together with its subsidiaries, "we," "our," "us," "NBTY," or the "Company") is a leading global vertically integrated manufacturer, marketer, distributor and retailer of a broad line of high-quality, value-priced nutritional supplements in the United States and throughout the world. We market over 25,000 products under numerous owned and private-label brands, including Nature's Bounty®, Ester-C®, Solgar®, MET-Rx®, American Health®, Osteo Bi-Flex®, Flex-A-Min®, SISU®, Knox®, Sundown®, Rexall®, Pure Protein®, Body Fortress®, WORLDWIDE Sport Nutrition®, Natural Wealth®, Puritan's Pride®, Holland & Barrett®, GNC (UK)®, Physiologics®, Le Naturiste®, De Tuinen®, Julian Graves® and Vitamin World®.
We have prepared these financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") applicable to interim financial information and on a basis that is consistent with the accounting principles applied in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009 ("2009 Form 10-K"). In our opinion, these financial statements reflect all adjustments (including normal recurring items) necessary for a fair presentation of our results for the interim periods presented. These financial statements do not include all information or disclosures necessary for a complete presentation of financial position, results of operations and cash flows in conformity with GAAP. Accordingly, these financial statements should be read in conjunction with the financial statements and notes thereto contained in our 2009 Form 10-K. Results for interim periods are not necessarily indicative of results that may be achieved for a full year.
Estimates
The preparation of financial statements in conformity with GAAP requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. These judgments can be subjective and complex, and consequently actual results could differ materially from those estimates and assumptions. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our most significant estimates include: sales returns and other allowances; inventory valuation and obsolescence; valuation and recoverability of long-lived assets, including goodwill; income taxes; and accruals for the outcome of current litigation.
7
NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands, except per share amounts)
1. Basis of Presentation (Continued)
Accounts Receivable Reserves
Accounts receivable were net of the following reserves:
|
March 31, 2010 |
September 30, 2009 |
|||||
---|---|---|---|---|---|---|---|
Allowance for sales returns |
$ | 9,039 | $ | 11,707 | |||
Promotional programs incentive allowance |
54,434 | 49,071 | |||||
Allowance for doubtful accounts |
5,735 | 3,723 | |||||
|
$ | 69,208 | $ | 64,501 | |||
Net Income Per Share
Basic net income per share is based on the weighted average number of common shares outstanding during the three and six month periods ended March 31, 2010 and 2009. For the three and six months ended March 31, 2010, diluted net income per share includes the dilutive effect of outstanding stock options and restricted stock units, which resulted in a dilutive effect of 1,001 and 1,228 shares, respectively. For the three and six months ended March 31, 2009, diluted net income per share includes the dilutive effect of outstanding stock options, which resulted in a dilutive effect of 1,348 and 1,443 shares, respectively. There were 287 and 852 outstanding stock options at March 31, 2010 and 2009, respectively, that were not included in the calculation of diluted net income per share since they would have been anti-dilutive.
Recent Accounting Developments
In June 2009, the Financial Accounting Standards Board ("FASB") issued authoritative guidance requiring an enterprise to perform an analysis to determine whether the enterprise's variable interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as one with the power to direct the activities of a variable interest entity that most significantly impacts the entity's economic performance and the obligation to absorb losses of the entity that could potentially be significant to the variable interest. This guidance will become effective for us October 1, 2010. We anticipate that the adoption of this guidance will not have any impact on our consolidated financial position or results of operations because we currently do not have any variable interest entities.
The FASB issued authoritative guidance that retains the purchase method of accounting for acquisitions; however, it includes changes in the way assets and liabilities are recognized in purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. This guidance became effective for us October 1, 2009 and will apply prospectively to business combinations completed on or after that date. The adoption of this guidance will impact future acquisitions.
8
NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands, except per share amounts)
2. Inventories
The components of inventories were as follows:
|
March 31, 2010 |
September 30, 2009 |
||||||
---|---|---|---|---|---|---|---|---|
Raw materials |
$ | 161,394 | $ | 166,447 | ||||
Work-in-process |
23,636 | 26,447 | ||||||
Finished goods |
477,743 | 489,737 | ||||||
Valuation and obsolescence reserves |
(25,795 | ) | (24,097 | ) | ||||
Total |
$ | 636,978 | $ | 658,534 | ||||
3. Goodwill and Intangible Assets
Goodwill
The changes in the carrying amount of goodwill by segment for the six-month period ended March 31, 2010, were as follows:
|
Wholesale/ US Nutrition |
North American Retail |
European Retail |
Direct Response/ E-Commerce |
Consolidated | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at October 1, 2009: |
||||||||||||||||
Goodwill |
$ | 180,276 | $ | 7,686 | $ | 142,718 | $ | 16,105 | $ | 346,785 | ||||||
Accumulated impairment losses |
| (7,686 | ) | | | (7,686 | ) | |||||||||
|
180,276 | | 142,718 | 16,105 | 339,099 | |||||||||||
Foreign currency translation |
346 | | (7,691 | ) | | (7,345 | ) | |||||||||
Acquisitions |
| | 573 | | 573 | |||||||||||
Balance at March 31, 2010: |
||||||||||||||||
Goodwill |
180,622 | 7,686 | 135,600 | 16,105 | 340,013 | |||||||||||
Accumulated impairment losses |
| (7,686 | ) | | | (7,686 | ) | |||||||||
|
$ | 180,622 | $ | | $ | 135,600 | $ | 16,105 | $ | 332,327 | ||||||
9
NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands, except per share amounts)
3. Goodwill and Intangible Assets (Continued)
Intangible Assets
The carrying amounts of intangible assets as of March 31, 2010 and September 30, 2009 were as follows:
|
March 31, 2010 | September 30, 2009 | |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Gross carrying amount |
Accumulated amortization |
Gross carrying amount |
Accumulated amortization |
Amortization period (years) |
||||||||||||
Definite lived intangible assets |
|||||||||||||||||
Brands |
$ | 98,011 | $ | 28,636 | $ | 98,093 | $ | 26,201 | 20 | ||||||||
Customer lists |
64,922 | 45,533 | 64,948 | 43,667 | 2 - 15 | ||||||||||||
Private label and customer relationships |
122,669 | 17,545 | 122,822 | 14,374 | 10 - 20 | ||||||||||||
Trademarks and licenses |
16,912 | 7,431 | 17,844 | 7,417 | 2 - 20 | ||||||||||||
Covenants not to compete |
3,551 | 3,353 | 3,540 | 3,249 | 3 - 5 | ||||||||||||
|
306,065 | 102,498 | 307,247 | 94,908 | |||||||||||||
Indefinite lived intangible asset |
|||||||||||||||||
Trademark |
1,800 | | 1,800 | | |||||||||||||
Total intangible assets |
$ | 307,865 | $ | 102,498 | $ | 309,047 | $ | 94,908 | |||||||||
Aggregate amortization expense of other intangible assets included in the consolidated statements of income under the caption "selling, general and administrative" expenses for the three months ended March 31, 2010 and 2009 was $3,987 and $3,989, respectively. Amortization expense for the six months ended March 31, 2010 and 2009 was $7,987 and $8,024, respectively.
Assuming no changes in our definite lived intangible assets, estimated amortization expense for each of the five succeeding fiscal years is as follows:
For the fiscal year ending September 30,
|
|
|||
---|---|---|---|---|
2010 |
$ | 15,946 | ||
2011 |
$ | 15,835 | ||
2012 |
$ | 15,704 | ||
2013 |
$ | 15,605 | ||
2014 |
$ | 15,094 |
4. IT Project Termination Costs
During December 2008, management determined that certain information technology projects relating to the Direct Response/E-Commerce segment that were ineffective and not economical would be terminated. As a result, previously capitalized software configuration and other related costs of $8,647 were written-off during the six months ended March 31, 2009.
10
NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands, except per share amounts)
5. Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities were as follows:
|
March 31, 2010 |
September 30, 2009 |
|||||
---|---|---|---|---|---|---|---|
Accrued compensation and related taxes |
$ | 33,294 | $ | 38,945 | |||
Accrued purchases |
24,441 | 17,664 | |||||
Litigation |
10,477 | 9,646 | |||||
Income taxes payable |
| 16,700 | |||||
Other |
86,472 | 73,779 | |||||
|
$ | 154,684 | $ | 156,734 | |||
6. Long-Term Debt
The components of long-term debt were as follows:
|
March 31, 2010 |
September 30, 2009 |
|||||||
---|---|---|---|---|---|---|---|---|---|
Credit Agreement: |
|||||||||
$300 million, five-year Term Loan |
$ | 235,086 | $ | 270,000 | |||||
Senior Subordinated Notes |
188,934 | 188,856 | |||||||
Multi-currency Term Loan |
14,503 | 15,336 | |||||||
Mortgage and Capital Leases |
1,424 | 2,330 | |||||||
|
439,947 | 476,522 | |||||||
Less: current portion |
64,108 | 38,893 | |||||||
Total |
$ | 375,839 | $ | 437,629 | |||||
During March 2010, we made an additional principal payment of $17,000 on the Term Loan. Total additional principal payments on the Term Loan during the first six months of this fiscal year were $20,000.
7. Litigation Summary
Prohormone Products
In March 2004, a putative class-action lawsuit, captioned Jerry Beidler v. MET-Rx U.S.A, Inc, was filed in New Jersey Superior Court, Mercer County, against MET-Rx U.S.A, Inc. ("Met-Rx"), a subsidiary of the Company, claiming that the advertising and marketing of certain prohormone supplements were false and misleading and that plaintiff and the putative class of New Jersey purchasers of these products were entitled to damages and injunctive relief. Because these allegations were virtually identical to allegations made in a putative nationwide class-action previously filed against Met-Rx in California (in an action styled Eric Ayala v. MET-Rx U.S.A, Inc. et. al.), we moved in 2004 to dismiss or stay the New Jersey action pending the outcome of the California action. The motion was granted, and the New Jersey action is stayed at this time. The California action against Met-Rx was dismissed in 2009.
11
NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands, except per share amounts)
7. Litigation Summary (Continued)
Nutrition Bars
Our subsidiary, Rexall Sundown, Inc. ("Rexall"), and certain of its subsidiaries, are defendants in a class-action lawsuit, captioned Jamie Pesek, et al. v. Rexall Sundown, Inc., et al., brought in California Superior Court, County of San Francisco in 2002 on behalf of all California consumers who bought various nutrition bars. Plaintiffs allege misbranding of nutrition bars and violations of California unfair competition statutes, misleading advertising and other similar causes of action. Plaintiffs seek restitution, legal fees and injunctive relief. We have defended this action vigorously. Since December 2007, with Rexall's and the other defendants' renewed motion for judgment on the pleadings pending, the Court has stayed the case for all purposes, pending rulings on relevant cases before the California Supreme Court. Although the California Supreme Court has resolved some of those cases, others remain pending as of this date. Accordingly, the case remains stayed. The Court held a case-management conference ("CMC") on August 5, 2009. At that time, the parties requested, and the Court agreed, to keep the stay in place for at least another six months. The Court scheduled a subsequent CMC for February 25, 2010, but canceled that conference upon being informed by the parties that the California Supreme Court had not yet acted. The Court has set another CMC for May 21, 2010, and instructed the parties to report back before that date as to the status of the cases before the California Supreme Court. By agreement of the parties, the May 21, 2010 CMC has been continued for six months. The California Supreme Court still has not resolved the outstanding issues pending before it. Based upon the information currently available, no determination can be made at this time as to the final outcome of this case, nor can its materiality be accurately ascertained.
Claims in the Ordinary Course
In addition to the foregoing, other regulatory inquiries, claims, suits and complaints (including product liability, intellectual property and California Proposition 65 claims) arise in the ordinary course of our business. We believe that such other inquiries, claims, suits and complaints would not have a material adverse effect on our consolidated financial condition or results of operations, if adversely determined against us.
8. Income Taxes
Our provision for income taxes is impacted by a number of factors, including federal taxes, our international tax structure, state tax rates in the jurisdictions where we conduct business, and our ability to utilize state tax credits that expire between 2013 and 2016. Therefore, our overall effective income tax rate could vary as a result of these factors.
The effective income tax rate for the three months ended March 31, 2010 and 2009 was 35.3% and 35.2%, respectively. The effective income tax rate for the six months ended March 31, 2010 and 2009 was 35.0% and 35.5%, respectively. The effective income tax rate was lower for the six months ended March 31, 2010 as compared to the prior comparable period primarily due to the partial release of a valuation allowance on state tax credits in the current year.
We accrue interest and penalties related to unrecognized tax benefits in income tax expense. This methodology is consistent with previous periods. At March 31, 2010, we had $1,257 and $439 accrued
12
NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands, except per share amounts)
8. Income Taxes (Continued)
for the potential payment of interest and penalties, respectively. As of March 31, 2010, we were subject to U.S. Federal Income Tax examinations for the tax years 2006-2009, and to non-U.S. examinations for the tax years of 2004-2009. In addition, we are generally subject to state and local examinations for fiscal years 2006-2009.
At March 31, 2010, we had a liability of $8,711 for unrecognized tax benefits, the recognition of which would have an effect of $5,931 on income tax expense and the effective income tax rate. We do not believe that the amount will change significantly in the next 12 months. At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months due to uncertainties in the timing of tax audit outcomes.
9. Stock-based Compensation
On December 23, 2009, the Company granted 287 stock options to directors and certain employees under the 2008 and 2000 Stock Option Plans. These stock options were granted with an exercise price of $43.88, the closing price of the Company's common stock on the date of grant. The vesting period for these options is over four years, in three equal increments on each of the second, third and fourth anniversary of the date of grant, except those granted to Harvey Kamil, President and Chief Financial Officer, the vesting of which will accelerate if he retires after the second anniversary of the date of grant. All stock options granted expire ten years from the date of grant.
The weighted average fair value per share of the options granted was $22.13. The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton option pricing model. The following weighted average assumptions were used for the options granted in December 2009:
Risk-free rate(1) |
2.9 | % | ||
Expected term(2) |
6.4 | |||
Expected volatility(3) |
48.0 | % | ||
Expected dividend yield |
0.0 | % |
- (1)
- The
risk-free rate is based upon the rate on a zero coupon U.S. Treasury bill, for the expected term of the option, in effect at the time of
grant.
- (2)
- The
expected term of the option is based on historical employee exercise behavior, the vesting terms of the respective option and a contractual life of ten
years.
- (3)
- Expected volatility is primarily based on the daily historical volatility of our stock price, over a period similar to the expected term of the option.
On December 23, 2009, the Company also granted 21 restricted stock units to directors and certain executives under the 2009 Equity Awards Plan. The closing price of the Company's common stock on the date of grant was $43.88. These restricted stock units vest over four years, in three equal increments on each of the second, third and fourth anniversary of the date of grant, except those
13
NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands, except per share amounts)
9. Stock-based Compensation (Continued)
granted to Harvey Kamil, President and Chief Financial Officer, the vesting of which will accelerate if he retires after the second anniversary of the date of grant.
10. Fair Value of Financial Instruments
GAAP establishes a framework for measuring fair value and expands disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
-
- Level 1Quoted prices in active markets for identical assets or liabilities.
-
- Level 2Observable inputs other than Level 1 prices, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or
liabilities.
-
- Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Interest Rate Swaps
To manage the potential risk arising from changing interest rates and their impact on long-term debt, our policy is to maintain a combination of available fixed and variable rate financial instruments. In fiscal 2008, we entered into two interest rate swap contracts to hedge the variability of future interest relating to a portion of the interest payments on our Term Loan. Each swap contract has a notional amount of $100 million. One swap contract has a fixed interest rate, before bank margin, of 3.88% for a two-year term and the other swap contract has a fixed interest rate, before bank margin, of 4.195% for a three-year term. Under the terms of the swap contracts, variable interest payments for a portion of our Term Loan are swapped for fixed interest payments.
We have formally documented the relationship between the interest rate swap contracts and the Term Loan, as well as our risk management objective and strategy for undertaking the hedge transactions. This process includes linking the derivative that was designated as a cash flow hedge to the specific liability on the balance sheet. We record the change in the fair value of the swap contracts through Other Comprehensive Income ("OCI"), net of income tax. Since we expect these hedging relationships to be highly effective, both at inception of the hedges and on an ongoing basis, they are expected to be highly effective in achieving offsetting changes in fair value attributable to the hedged risk during the period that the hedges are designated. We have determined that there will be no ineffectiveness in the hedging relationships since the hedged forecasted interest payments are based on the same notional amount, have the same reset dates, and are based on the same benchmark interest rate designated under the variable rate Term Loan. We assess, at the inception of the hedges and on an
14
NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands, except per share amounts)
10. Fair Value of Financial Instruments (Continued)
ongoing basis, whether the derivatives used in the hedging transaction are highly effective in offsetting changes in the cash flows of the hedged item. The change in the fair value of the swap contracts for the six months ended March 31, 2010 recorded through OCI, net of income tax was $1,161. At March 31, 2010, the swap contracts liability was $8,290. Of this amount, $2,634 is included in other current liabilities and $5,656 is included in other liabilities. At September 30, 2009, the swap contracts liability, included in other liabilities, was $10,181. The fair value of the swap contracts were valued using observable current market information such as the prevailing LIBOR interest rate and LIBOR yield curve rates (Level 2).
71/8% Senior Subordinated Notes
The face value and the fair value of the 71/8% Senior Subordinated Notes at March 31, 2010, was $190,000 and $191,425, respectively. The fair value of the 71/8% Senior Subordinated Notes was based on then quoted market prices (Level 1).
11. Business and Credit Concentration
Financial Instruments
Financial instruments that potentially subject us to credit risk consist primarily of cash and cash equivalents (the amounts of which may, at times, exceed Federal Deposit Insurance Corporation limits on insurable amounts), investments and trade accounts receivable. We mitigate our risk by investing in or through major financial institutions.
Customers
We perform on-going credit evaluations of our customers and adjust credit limits based upon payment history and the customers' current creditworthiness, as determined by review of their current credit information. Customers' account activity is continuously monitored. As a result of this review process, we record bad debt expense, which is based upon historical experience as well as specific customer collection issues that have been identified, to adjust the carrying amount of the related receivable to its estimated realizable value. While such bad debt expenses historically have been within expectations and the allowances established, if the financial condition of one or more of our customers were to deteriorate, additional bad debt provisions may be required.
The following individual customer accounted for the following percentages of net sales for the three and six months ended March 31, 2010 and 2009, respectively:
|
Wholesale/ US Nutrition Segment Net Sales Three months ended March 31, |
Total Consolidated Net Sales Three months ended March 31, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2010 | 2009 | |||||||||
Customer A |
30 | % | 31 | % | 18 | % | 18 | % |
15
NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands, except per share amounts)
11. Business and Credit Concentration (Continued)
|
Wholesale/ US Nutrition Segment Net Sales Six months ended March 31, |
Total Consolidated Net Sales Six months ended March 31, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2010 | 2009 | |||||||||
Customer A |
28 | % | 30 | % | 17 | % | 18 | % |
The loss of this customer, or any other major customer, would have a material adverse effect on our consolidated results of operations if we were unable to replace that customer.
The following individual customers accounted for 10% or more of the Wholesale/US Nutrition segment's gross accounts receivable as of March 31, 2010 and September 30, 2009, respectively:
|
March 31, 2010 |
September 30, 2009 |
|||||
---|---|---|---|---|---|---|---|
Customer A |
23 | % | 25 | % | |||
Customer B |
9 | % | 11 | % |
12. Supplemental Disclosure of Cash Flow Information
|
Six months ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2010 | 2009 | |||||
Non-cash investing and financing information: |
|||||||
Property, plant and equipment additions included in accounts payable |
$ | 1,717 | $ | 797 |
13. Segment Information
We are organized by sales segments on a worldwide basis. We evaluate performance based on a number of factors; however, the primary measures of performance are the net sales, gross profit and income or loss from operations (prior to corporate allocations) of each segment, as these are the key performance indicators that we review. Operating income or loss for each segment does not include the impact of any intercompany transfer pricing mark-up, corporate general and administrative expenses, interest expense and other miscellaneous income/expense items. Corporate general and administrative expenses include, but are not limited to: human resources, legal, finance, and various other corporate level activity related expenses. Such unallocated expenses remain within the Corporate segment. During fiscal 2009, we changed the way certain expenses are allocated to the segments. Specifically, certain shipping and warehouse costs, information technology and advertising costs previously included in the Corporate segment are now allocated to the Wholesale/US Nutrition, North American Retail and Direct Response/E-Commerce segments on a percentage of sales basis. All prior period segment information has been adjusted to conform with the current period presentation.
16
NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands, except per share amounts)
13. Segment Information (Continued)
All our products fall into one or more of these four segments:
-
- Wholesale/US NutritionThis segment is comprised of several divisions, each targeting specific market groups,
which include wholesalers, distributors, food, drug and mass merchandisers, pharmacies, health food stores, bulk and international customers.
-
- North American RetailThis segment generates revenue through its 446 owned and operated Vitamin World and
Nutrition Warehouse stores selling proprietary brand and third-party products, and through its Canadian operation of 85 owned and operated Le Naturiste stores.
-
- European RetailThis segment generates revenue through its 565 Holland & Barrett stores,
324 Julian Graves stores and 35 GNC stores in the UK, 85 DeTuinen stores in the Netherlands and 27 Nature's Way stores in Ireland. In addition, Holland & Barrett has 16 franchise
locations in South Africa, Singapore and Malta. This revenue consists of sales of proprietary brand and third-party products, as well as franchise fees.
-
- Direct Response/E-CommerceThis segment generates revenue through the sale of proprietary brand and third-party products primarily through mail order catalog and the internet. Catalogs are strategically mailed to customers who order by mail, internet, or by phone.
17
NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands, except per share amounts)
13. Segment Information (Continued)
The following table represents key financial information of our business segments:
|
Wholesale/ US Nutrition |
North American Retail |
European Retail |
Direct Response/ E-Commerce |
Corporate/ Manufacturing |
Consolidated | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Three months ended March 31, 2010: |
||||||||||||||||||||
Net sales |
$ | 426,575 | $ | 54,769 | $ | 159,013 | $ | 64,803 | $ | | $ | 705,160 | ||||||||
Income (loss) from operations |
55,454 | 451 | 25,880 | 18,013 | (20,836 | ) | 78,962 | |||||||||||||
Depreciation and amortization |
3,659 | 622 | 3,458 | 1,206 | 7,866 | 16,811 | ||||||||||||||
Capital expenditures |
947 | 659 | 9,276 | 11 | 3,661 | 14,554 | ||||||||||||||
Three months ended March 31, 2009: |
||||||||||||||||||||
Net sales |
$ | 349,801 | $ | 51,916 | $ | 134,438 | $ | 59,398 | $ | | $ | 595,553 | ||||||||
Income (loss) from operations |
19,046 | (731 | ) | 20,318 | 19,244 | (13,653 | ) | 44,224 | ||||||||||||
Depreciation and amortization |
3,586 | 745 | 3,403 | 1,267 | 8,278 | 17,279 | ||||||||||||||
Capital expenditures |
455 | 2,607 | 6,367 | 253 | 3,318 | 13,000 | ||||||||||||||
Six months ended March 31, 2010: |
||||||||||||||||||||
Net sales |
$ | 897,688 | $ | 106,227 | $ | 335,008 | $ | 117,388 | $ | | $ | 1,456,311 | ||||||||
Income (loss) from operations |
141,692 | 2,523 | 60,524 | 34,401 | (37,948 | ) | 201,192 | |||||||||||||
Depreciation and amortization |
7,331 | 1,331 | 7,084 | 2,412 | 15,600 | 33,758 | ||||||||||||||
Capital expenditures |
1,086 | 1,094 | 13,380 | 41 | 8,836 | 24,437 | ||||||||||||||
Six months ended March 31, 2009: |
||||||||||||||||||||
Net sales |
$ | 756,768 | $ | 100,354 | $ | 290,464 | $ | 108,519 | $ | | $ | 1,256,105 | ||||||||
Income (loss) from operations |
49,063 | (1,886 | ) | 46,489 | 19,953 | (33,184 | ) | 80,435 | ||||||||||||
Depreciation and amortization |
7,310 | 1,497 | 6,964 | 2,532 | 16,497 | 34,800 | ||||||||||||||
Capital expenditures |
631 | 4,108 | 10,490 | 4,370 | 16,040 | 35,639 |
Net sales by location of customer:
|
Three months ended March 31, |
Six months ended March 31, |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2010 | 2009 | ||||||||||
United States |
$ | 463,883 | $ | 407,664 | $ | 960,138 | $ | 856,855 | ||||||
United Kingdom |
152,809 | 127,781 | 318,522 | 274,985 | ||||||||||
Canada |
25,909 | 19,704 | 54,484 | 41,923 | ||||||||||
Netherlands |
16,577 | 12,789 | 34,861 | 27,386 | ||||||||||
Ireland |
6,301 | 4,926 | 12,142 | 9,879 | ||||||||||
Other foreign countries |
39,681 | 22,689 | 76,164 | 45,077 | ||||||||||
Consolidated net sales |
$ | 705,160 | $ | 595,553 | $ | 1,456,311 | $ | 1,256,105 | ||||||
18
NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands, except per share amounts)
13. Segment Information (Continued)
Total assets by segment:
|
March 31, 2010 |
September 30, 2009 |
||||||
---|---|---|---|---|---|---|---|---|
Wholesale/US Nutrition |
$ | 912,173 | $ | 915,783 | ||||
North American Retail |
29,737 | 28,334 | ||||||
European Retail |
410,184 | 403,657 | ||||||
Direct Response/E-Commerce |
53,388 | 54,348 | ||||||
Corporate/Manufacturing |
620,785 | 558,099 | ||||||
Consolidated assets |
$ | 2,026,267 | $ | 1,960,221 | ||||
Approximately 30% and 29% of our net sales during the six months ended March 31, 2010 and 2009, respectively, were denominated in currencies other than U.S. dollars, principally the British pound sterling, the euro and the Canadian dollar. A significant weakening of such currencies versus the U.S. dollar could have a material adverse effect on our results of operations.
Foreign subsidiaries accounted for the following percentages of total assets and total liabilities:
|
March 31, 2010 |
September 30, 2009 |
|||||
---|---|---|---|---|---|---|---|
Total Assets |
26 | % | 26 | % | |||
Total Liabilities |
14 | % | 13 | % |
14. Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes
The 71/8% Senior Subordinated Notes due 2015 are guaranteed by our domestic wholly-owned subsidiaries. These guarantees are full, unconditional and joint and several. The following condensed consolidating financial information presents:
- 1.
- Condensed
consolidating financial statements as of March 31, 2010 and September 30, 2009 and for the three and six months ended
March 31, 2010 and 2009 of (a) NBTY, Inc., the parent and issuer, (b) the guarantor subsidiaries, (c) the non-guarantor subsidiaries and (d) the
Company on a consolidated basis; and
- 2.
- Elimination entries necessary to consolidate NBTY, Inc., the parent, with guarantor and non-guarantor subsidiaries.
The condensed consolidating financial statements are presented using the equity method of accounting for investments in wholly-owned subsidiaries. Under this method, the investments in subsidiaries are recorded at cost and adjusted for our share of the subsidiaries' cumulative results of operations, capital contributions, distributions and other equity changes. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. This financial information should be read in conjunction with the financial statements and other notes related thereto.
19
NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands, except per share amounts)
14. Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes (Continued)
Condensed Consolidating Balance Sheet
As of March 31, 2010
|
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 130,927 | $ | | $ | 82,978 | $ | | $ | 213,905 | ||||||||||
Accounts receivable, net |
| 143,939 | 24,037 | | 167,976 | |||||||||||||||
Intercompany |
| 269,056 | 751,397 | (1,020,453 | ) | | ||||||||||||||
Inventories |
| 512,023 | 124,955 | | 636,978 | |||||||||||||||
Deferred income taxes |
| 24,141 | 3,811 | | 27,952 | |||||||||||||||
Other current assets |
| 15,190 | 43,519 | | 58,709 | |||||||||||||||
Total current assets |
130,927 | 964,349 | 1,030,697 | (1,020,453 | ) | 1,105,520 | ||||||||||||||
Property, plant and equipment, net |
35,902 | 235,153 | 92,221 | | 363,276 | |||||||||||||||
Goodwill |
| 197,701 | 134,626 | | 332,327 | |||||||||||||||
Other intangible assets, net |
| 181,849 | 23,518 | | 205,367 | |||||||||||||||
Other assets |
| 19,720 | 57 | | 19,777 | |||||||||||||||
Intercompany loan receivable |
323,308 | 40,735 | | (364,043 | ) | | ||||||||||||||
Investments in subsidiaries |
2,236,402 | | | (2,236,402 | ) | | ||||||||||||||
Total assets |
$ | 2,726,539 | $ | 1,639,507 | $ | 1,281,119 | $ | (3,620,898 | ) | $ | 2,026,267 | |||||||||
Liabilities and Stockholders' Equity |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Current portion of long-term debt |
$ | 49,028 | $ | 4 | $ | 15,076 | $ | | $ | 64,108 | ||||||||||
Accounts payable |
| 67,898 | 41,270 | | 109,168 | |||||||||||||||
Intercompany |
1,020,453 | | | (1,020,453 | ) | | ||||||||||||||
Accrued expenses and other current liabilities |
| 115,982 | 38,702 | | 154,684 | |||||||||||||||
Total current liabilities |
1,069,481 | 183,884 | 95,048 | (1,020,453 | ) | 327,960 | ||||||||||||||
Intercompany loan payable |
| | 364,043 | (364,043 | ) | | ||||||||||||||
Long-term debt, net of current portion |
352,031 | | 23,808 | | 375,839 | |||||||||||||||
Deferred income taxes |
36,378 | | 2,773 | | 39,151 | |||||||||||||||
Other liabilities |
17,146 | 2,678 | 11,990 | | 31,814 | |||||||||||||||
Total liabilities |
1,475,036 | 186,562 | 497,662 | (1,384,496 | ) | 774,764 | ||||||||||||||
Commitments and contingencies |
||||||||||||||||||||
Stockholders' Equity: |
||||||||||||||||||||
Common stock |
506 | | | | 506 | |||||||||||||||
Capital in excess of par |
163,997 | 352,019 | 301,268 | (653,287 | ) | 163,997 | ||||||||||||||
Retained earnings |
1,107,039 | 1,100,926 | 489,310 | (1,590,236 | ) | 1,107,039 | ||||||||||||||
Accumulated other comprehensive loss |
(20,039 | ) | | (7,121 | ) | 7,121 | (20,039 | ) | ||||||||||||
Total stockholders' equity |
1,251,503 | 1,452,945 | 783,457 | (2,236,402 | ) | 1,251,503 | ||||||||||||||
Total liabilities and stockholders' equity |
$ | 2,726,539 | $ | 1,639,507 | $ | 1,281,119 | $ | (3,620,898 | ) | $ | 2,026,267 | |||||||||
20
NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands, except per share amounts)
14. Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes (Continued)
Condensed Consolidating Balance Sheet
As of September 30, 2009
|
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 46,169 | $ | | $ | 59,832 | $ | | $ | 106,001 | ||||||||||
Accounts receivable, net |
| 132,762 | 23,101 | | 155,863 | |||||||||||||||
Intercompany |
| 141,489 | 744,496 | (885,985 | ) | | ||||||||||||||
Inventories |
| 530,218 | 128,316 | | 658,534 | |||||||||||||||
Deferred income taxes |
| 24,124 | 4,030 | | 28,154 | |||||||||||||||
Other current assets |
| 20,910 | 29,089 | | 49,999 | |||||||||||||||
Total current assets |
46,169 | 849,503 | 988,864 | (885,985 | ) | 998,551 | ||||||||||||||
Property, plant and equipment, net |
39,246 | 245,415 | 89,156 | | 373,817 | |||||||||||||||
Goodwill |
| 197,701 | 141,398 | | 339,099 | |||||||||||||||
Other intangible assets, net |
| 189,022 | 25,117 | | 214,139 | |||||||||||||||
Other assets |
| 21,403 | 13,212 | | 34,615 | |||||||||||||||
Intercompany loan receivable |
340,710 | 40,733 | | (381,443 | ) | | ||||||||||||||
Investments in subsidiaries |
2,082,257 | | | (2,082,257 | ) | | ||||||||||||||
Total assets |
$ | 2,508,382 | $ | 1,543,777 | $ | 1,257,747 | $ | (3,349,685 | ) | $ | 1,960,221 | |||||||||
Liabilities and Stockholders' Equity |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Current portion of long-term debt |
$ | 38,138 | $ | 115 | $ | 640 | $ | | $ | 38,893 | ||||||||||
Accounts payable |
| 90,835 | 37,650 | | 128,485 | |||||||||||||||
Intercompany |
885,985 | | | (885,985 | ) | | ||||||||||||||
Accrued expenses and other current liabilities |
| 114,851 | 41,883 | | 156,734 | |||||||||||||||
Total current liabilities |
924,123 | 205,801 | 80,173 | (885,985 | ) | 324,112 | ||||||||||||||
Intercompany loan payable |
| | 381,443 | (381,443 | ) | | ||||||||||||||
Long-term debt, net of current portion |
398,411 | | 39,218 | | 437,629 | |||||||||||||||
Deferred income taxes |
35,959 | | 463 | | 36,422 | |||||||||||||||
Other liabilities |
22,064 | 2,602 | 9,567 | | 34,233 | |||||||||||||||
Total liabilities |
1,380,557 | 208,403 | 510,864 | (1,267,428 | ) | 832,396 | ||||||||||||||
Commitments and contingencies |
||||||||||||||||||||
Stockholders' Equity: |
||||||||||||||||||||
Common stock |
495 | | | | 495 | |||||||||||||||
Capital in excess of par |
145,885 | 352,019 | 301,269 | (653,288 | ) | 145,885 | ||||||||||||||
Retained earnings |
984,797 | 983,355 | 450,168 | (1,433,523 | ) | 984,797 | ||||||||||||||
Accumulated other comprehensive loss |
(3,352 | ) | | (4,554 | ) | 4,554 | (3,352 | ) | ||||||||||||
Total stockholders' equity |
1,127,825 | 1,335,374 | 746,883 | (2,082,257 | ) | 1,127,825 | ||||||||||||||
Total liabilities and stockholders' equity |
$ | 2,508,382 | $ | 1,543,777 | $ | 1,257,747 | $ | (3,349,685 | ) | $ | 1,960,221 | |||||||||
21
NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands, except per share amounts)
14. Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes (Continued)
Condensed Consolidating Statement of Income
Three Months Ended March 31, 2010
|
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net sales |
$ | | $ | 516,392 | $ | 206,568 | $ | (17,800 | ) | $ | 705,160 | |||||||
Costs and expenses: |
||||||||||||||||||
Cost of sales |
| 307,432 | 91,036 | (17,800 | ) | 380,668 | ||||||||||||
Advertising, promotion and catalog |
| 44,345 | 6,592 | | 50,937 | |||||||||||||
Selling, general and administrative |
20,836 | 90,843 | 82,914 | | 194,593 | |||||||||||||
|
20,836 | 442,620 | 180,542 | (17,800 | ) | 626,198 | ||||||||||||
Income from operations |
(20,836 | ) | 73,772 | 26,026 | | 78,962 | ||||||||||||
Other income (expense): |
||||||||||||||||||
Equity in income of subsidiaries |
64,966 | | | (64,966 | ) | | ||||||||||||
Intercompany interest |
2,106 | | (2,106 | ) | | | ||||||||||||
Interest |
(7,488 | ) | | (128 | ) | | (7,616 | ) | ||||||||||
Miscellaneous, net |
198 | 1,098 | (506 | ) | | 790 | ||||||||||||
|
59,782 | 1,098 | (2,740 | ) | (64,966 | ) | (6,826 | ) | ||||||||||
Income before provision for income taxes |
38,946 |
74,870 |
23,286 |
(64,966 |
) |
72,136 |
||||||||||||
(Benefit)/provision for income taxes |
(7,710 | ) | 26,204 | 6,986 | | 25,480 | ||||||||||||
Net income |
$ | 46,656 | $ | 48,666 | $ | 16,300 | $ | (64,966 | ) | $ | 46,656 | |||||||
22
NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands, except per share amounts)
14. Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes (Continued)
Condensed Consolidating Statement of Income
Three Months Ended March 31, 2009
|
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net sales |
$ | | $ | 446,269 | $ | 171,000 | $ | (21,716 | ) | $ | 595,553 | |||||||
Costs and expenses: |
||||||||||||||||||
Cost of sales |
| 289,559 | 75,801 | (21,716 | ) | 343,644 | ||||||||||||
Advertising, promotion and catalog |
| 28,519 | 4,509 | | 33,028 | |||||||||||||
Selling, general and administrative |
11,443 | 90,475 | 72,739 | | 174,657 | |||||||||||||
|
11,443 | 408,553 | 153,049 | (21,716 | ) | 551,329 | ||||||||||||
Income from operations |
(11,443 | ) | 37,716 | 17,951 | | 44,224 | ||||||||||||
Other income (expense): |
||||||||||||||||||
Equity in income of subsidiaries |
32,671 | | | (32,671 | ) | | ||||||||||||
Intercompany interest |
5,955 | | (5,955 | ) | | | ||||||||||||
Interest |
(8,162 | ) | | (726 | ) | | (8,888 | ) | ||||||||||
Miscellaneous, net |
(92 | ) | (133 | ) | 504 | | 279 | |||||||||||
|
30,372 | (133 | ) | (6,177 | ) | (32,671 | ) | (8,609 | ) | |||||||||
Income before provision for income taxes |
18,929 |
37,583 |
11,774 |
(32,671 |
) |
35,615 |
||||||||||||
(Benefit)/provision for income taxes |
(4,141 | ) | 13,153 | 3,533 | | 12,545 | ||||||||||||
Net income |
$ | 23,070 | $ | 24,430 | $ | 8,241 | $ | (32,671 | ) | $ | 23,070 | |||||||
23
NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands, except per share amounts)
14. Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes (Continued)
Condensed Consolidating Statement of Income
Six Months Ended March 31, 2010
|
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net sales |
$ | | $ | 1,059,690 | $ | 430,974 | $ | (34,353 | ) | $ | 1,456,311 | |||||||
Costs and expenses: |
||||||||||||||||||
Cost of sales |
| 636,749 | 189,720 | (34,353 | ) | 792,116 | ||||||||||||
Advertising, promotion and catalog |
| 67,589 | 12,090 | | 79,679 | |||||||||||||
Selling, general and administrative |
37,950 | 176,754 | 168,620 | | 383,324 | |||||||||||||
|
37,950 | 881,092 | 370,430 | (34,353 | ) | 1,255,119 | ||||||||||||
Income from operations |
(37,950 | ) | 178,598 | 60,544 | | 201,192 | ||||||||||||
Other income (expense): |
||||||||||||||||||
Equity in income of subsidiaries |
156,713 | | | (156,713 | ) | | ||||||||||||
Intercompany interest |
4,359 | | (4,359 | ) | | | ||||||||||||
Interest |
(15,315 | ) | | (357 | ) | | (15,672 | ) | ||||||||||
Miscellaneous, net |
176 | 2,281 | 88 | | 2,545 | |||||||||||||
|
145,933 | 2,281 | (4,628 | ) | (156,713 | ) | (13,127 | ) | ||||||||||
Income before provision for income taxes |
107,983 |
180,879 |
55,916 |
(156,713 |
) |
188,065 |
||||||||||||
(Benefit)/provision for income taxes |
(14,259 | ) | 63,308 | 16,774 | | 65,823 | ||||||||||||
Net income |
$ | 122,242 | $ | 117,571 | $ | 39,142 | $ | (156,713 | ) | $ | 122,242 | |||||||
24
NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands, except per share amounts)
14. Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes (Continued)
Condensed Consolidating Statement of Income
Six Months Ended March 31, 2009
|
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net sales |
$ | | $ | 931,115 | $ | 363,724 | $ | (38,734 | ) | $ | 1,256,105 | |||||||
Costs and expenses: |
||||||||||||||||||
Cost of sales |
| 613,835 | 157,046 | (38,734 | ) | 732,147 | ||||||||||||
Advertising, promotion and catalog |
| 54,640 | 9,679 | | 64,319 | |||||||||||||
Selling, general and administrative |
28,380 | 188,601 | 153,576 | | 370,557 | |||||||||||||
IT project termination costs |
| 8,647 | | | 8,647 | |||||||||||||
|
28,380 | 865,723 | 320,301 | (38,734 | ) | 1,175,670 | ||||||||||||
Income from operations |
(28,380 | ) | 65,392 | 43,423 | | 80,435 | ||||||||||||
Other income (expense): |
||||||||||||||||||
Equity in income of subsidiaries |
60,014 | | | (60,014 | ) | | ||||||||||||
Intercompany interest |
12,609 | | (12,609 | ) | | | ||||||||||||
Interest |
(17,201 | ) | (1 | ) | (1,175 | ) | | (18,377 | ) | |||||||||
Miscellaneous, net |
(472 | ) | (3,617 | ) | (1,267 | ) | | (5,356 | ) | |||||||||
|
54,950 | (3,618 | ) | (15,051 | ) | (60,014 | ) | (23,733 | ) | |||||||||
Income before provision for income taxes |
26,570 |
61,774 |
28,372 |
(60,014 |
) |
56,702 |
||||||||||||
(Benefit)/provision for income taxes |
(9,975 | ) | 21,620 | 8,512 | | 20,157 | ||||||||||||
Net income |
$ | 36,545 | $ | 40,154 | $ | 19,860 | $ | (60,014 | ) | $ | 36,545 | |||||||
25
NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands, except per share amounts)
14. Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes (Continued)
Condensed Consolidating Statement of Cash Flows
Six Months Ended March 31, 2010
|
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cash flows from operating activities: |
||||||||||||||||||||
Net income |
$ | 122,242 | $ | 117,571 | $ | 39,142 | $ | (156,713 | ) | $ | 122,242 | |||||||||
Adjustments to reconcile net income to net cash & cash equivalents provided by operating activities: |
||||||||||||||||||||
Equity in earnings of subsidiaries |
(156,713 | ) | | | 156,713 | | ||||||||||||||
Impairments and disposals of assets |
| 5,756 | 440 | | 6,196 | |||||||||||||||
Depreciation and amortization |
2,585 | 22,492 | 8,681 | | 33,758 | |||||||||||||||
Foreign currency transaction (gain) loss |
(142 | ) | | 272 | | 130 | ||||||||||||||
Amortization of deferred charges |
774 | | | | 774 | |||||||||||||||
Stock-based compensation |
2,970 | 317 | 324 | | 3,611 | |||||||||||||||
Allowance for doubtful accounts |
| 1,866 | | | 1,866 | |||||||||||||||
Inventory reserves |
| 1,699 | | | 1,699 | |||||||||||||||
Deferred income taxes |
| 1,483 | (36 | ) | | 1,447 | ||||||||||||||
Excess income tax benefit from exercise of stock options |
(4,787 | ) | | | | (4,787 | ) | |||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||||||
Accounts receivable |
| (14,508 | ) | (1,209 | ) | | (15,717 | ) | ||||||||||||
Inventories |
| 15,827 | 459 | | 16,286 | |||||||||||||||
Other assets |
| 5,704 | (1,531 | ) | | 4,173 | ||||||||||||||
Accounts payable |
| (23,936 | ) | 5,595 | | (18,341 | ) | |||||||||||||
Accrued expenses and other liabilities |
| 2,364 | 1,735 | | 4,099 | |||||||||||||||
Net cash (used in) provided by operating activities |
(33,071 | ) | 136,635 | 53,872 | | 157,436 | ||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Intercompany accounts |
137,174 | (127,246 | ) | (9,928 | ) | | | |||||||||||||
Purchase of property, plant and equipment |
(503 | ) | (8,966 | ) | (14,968 | ) | | (24,437 | ) | |||||||||||
Proceeds from sale of investments |
2,000 | | | | 2,000 | |||||||||||||||
Cash paid for acquisitions |
| | (573 | ) | | (573 | ) | |||||||||||||
Net cash provided by (used in) investing activities |
138,671 | (136,212 | ) | (25,469 | ) | | (23,010 | ) | ||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Principal payments under long-term debt agreements and capital leases |
(35,354 | ) | (423 | ) | | | (35,777 | ) | ||||||||||||
Excess income tax benefit from exercise of stock options |
4,787 | | | | 4,787 | |||||||||||||||
Proceeds from stock options exercised |
9,725 | | | | 9,725 | |||||||||||||||
Net cash used in financing activities |
(20,842 | ) | (423 | ) | | | (21,265 | ) | ||||||||||||
Effect of exchange rate changes on cash and cash equivalents |
| | (5,257 | ) | | (5,257 | ) | |||||||||||||
Net increase in cash and cash equivalents |
84,758 | | 23,146 | | 107,904 | |||||||||||||||
Cash and cash equivalents at beginning of period |
46,169 | | 59,832 | | 106,001 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 130,927 | $ | | $ | 82,978 | $ | | $ | 213,905 | ||||||||||
26
NBTY, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands, except per share amounts)
14. Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes (Continued)
Condensed Consolidating Statement of Cash Flows
Six Months Ended March 31, 2009
|
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cash flows from operating activities: |
||||||||||||||||||||
Net income |
$ | 36,545 | $ | 40,154 | $ | 19,860 | $ | (60,014 | ) | $ | 36,545 | |||||||||
Adjustments to reconcile net income to net cash & cash equivalents provided by operating activities: |
||||||||||||||||||||
Equity in earnings of subsidiaries |
(60,014 | ) | | | 60,014 | | ||||||||||||||
Impairments and disposals of property, plant and equipment |
33 | | 655 | | 688 | |||||||||||||||
Depreciation and amortization |
2,502 | 24,030 | 8,268 | | 34,800 | |||||||||||||||
IT project termination costs |
| 4,667 | | | 4,667 | |||||||||||||||
Foreign currency transaction loss |
4,287 | 639 | 1,743 | | 6,669 | |||||||||||||||
Stock-based compensation |
1,004 | (25 | ) | 90 | | 1,069 | ||||||||||||||
Amortization of deferred charges |
631 | | | | 631 | |||||||||||||||
Allowance for doubtful accounts |
| 765 | 85 | | 850 | |||||||||||||||
Inventory reserves |
| 6,382 | 795 | | 7,177 | |||||||||||||||
Deferred income taxes |
| 371 | 12 | | 383 | |||||||||||||||
Changes in operating assets and liabilities, net of acquisitions: |
||||||||||||||||||||
Accounts receivable |
| (15,069 | ) | (1,187 | ) | | (16,256 | ) | ||||||||||||
Inventories |
| (39,059 | ) | (18,882 | ) | | (57,941 | ) | ||||||||||||
Other assets |
| 9,421 | 1,147 | | 10,568 | |||||||||||||||
Accounts payable |
| 41,846 | 5,373 | | 47,219 | |||||||||||||||
Accrued expenses and other liabilities |
| (8,535 | ) | (12,308 | ) | | (20,843 | ) | ||||||||||||
Net cash (used in) provided by operating activities |
(15,012 | ) | 65,587 | 5,651 | | 56,226 | ||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Intercompany accounts |
33,113 | (40,542 | ) | 7,429 | | | ||||||||||||||
Purchase of property, plant and equipment |
(5,190 | ) | (23,933 | ) | (6,516 | ) | | (35,639 | ) | |||||||||||
Cash paid for acquisitions, net of cash acquired |
| | (264 | ) | | (264 | ) | |||||||||||||
Escrow refund, net of purchase price adjustments |
11,904 | | 85 | | 11,989 | |||||||||||||||
Net cash provided by (used in) investing activities |
39,827 | (64,475 | ) | 734 | | (23,914 | ) | |||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Principal payments under long-term debt agreements and capital leases |
(15,421 | ) | (1,112 | ) | (252 | ) | | (16,785 | ) | |||||||||||
Proceeds from borrowings under the Revolving Credit Facility |
60,000 | | | | 60,000 | |||||||||||||||
Principal payments under the Revolving Credit Facility |
(115,000 | ) | | | | (115,000 | ) | |||||||||||||
Proceeds from stock options exercised |
6 | | | | 6 | |||||||||||||||
Net cash used in financing activities |
(70,415 | ) | (1,112 | ) | (252 | ) | | (71,779 | ) | |||||||||||
Effect of exchange rate changes on cash and cash equivalents |
| | (6,912 | ) | | (6,912 | ) | |||||||||||||
Net decrease in cash and cash equivalents |
(45,600 | ) | | (779 | ) | | (46,379 | ) | ||||||||||||
Cash and cash equivalents at beginning of period |
49,662 | | 40,518 | | 90,180 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 4,062 | $ | | $ | 39,739 | $ | | $ | 43,801 | ||||||||||
27
NBTY, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(in thousands, except per share amounts and number of stores)
Forward-Looking Statements
This quarterly report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this report, the words "subject to," "believe," "expect," "plan," "project," "estimate," "intend," "may," "should," "can," and "anticipate," and the negatives thereof, or variations thereof, or similar expressions, are intended to identify forward-looking statements, which are inherently uncertain. Similarly, discussions of strategy, although believed to be reasonable, are also forward-looking statements and are inherently uncertain.
All forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from projected results. Factors that may materially affect forward-looking statements include:
-
- slow or negative growth in the nutritional supplement
industry;
-
- changes in worldwide general economic and political conditions, and in economic and political
conditions in the markets in which we compete from time to time;
-
- application of anti-trust or similar merger control laws in any jurisdiction, which
may limit our expansion plans;
-
- our inability to retain customers of companies (or mailing lists) recently
acquired;
-
- increased competition;
-
- increased costs;
-
- loss or retirement of key members of our
management;
-
- increases in the cost of borrowings or unavailability of additional debt or equity capital, or
both;
-
- unavailability of, or inability to consummate, advantageous acquisitions in the future, including
those that may be subject to bankruptcy court approval, or our inability to integrate acquisitions into the mainstream of our business;
-
- interruption of business or negative impact on sales and earnings due to acts of God, acts of war,
terrorism, bio-terrorism, civil unrest or disruption of mail service;
-
- our inability to gain or hold market share of our wholesale or retail customers anywhere in the
world;
-
- our inability to obtain or renew insurance or to manage insurance
costs;
-
- our exposure to, and the expense of defending and resolving, product liability claims,
intellectual property claims and other litigation;
-
- our inability to implement our business strategy
successfully;
-
- our inability to manage our retail, wholesale, manufacturing or other operations
efficiently;
-
- consumer acceptance of our products due to adverse publicity regarding nutritional
supplements;
-
- our inability to renew leases for our retail
locations;
-
- the inability of our retail stores to attain or maintain
profitability;
-
- the absence of clinical trials for many of our products;
28
-
- sales and earnings volatility or trends for us and our market
segments;
-
- the efficacy of our internet and on-line sales and marketing
strategies;
-
- fluctuations in foreign currencies, including the British pound sterling, the euro, the Canadian
dollar and the Chinese yuan;
-
- controls on sales to, or purchases from, foreign countries or certain
persons;
-
- our inability to secure favorable new sites for, and delays in opening, new retail and
manufacturing locations;
-
- introduction of, and compliance with, new federal, state, local or foreign legislation or
regulation, or adverse determinations by regulators anywhere in the world (including the banning of products) and, more particularly, Good Manufacturing Practices in the United States and the Food
Supplements Directive and Traditional Herbal Medicinal Products Directive in Europe;
-
- the mix of our products and the profit margins
thereon;
-
- the availability and pricing of raw materials;
-
- adverse effects on us of increased energy prices and potentially reduced traffic flow to our
retail locations;
-
- adverse tax determinations;
-
- our inability to comply with, or adverse consequences stemming from, new government regulation or
enforcement policies;
-
- the loss of a significant customer;
-
- risk factors discussed elsewhere in this report;
and
-
- other factors beyond our control.
Consequently, readers should regard these forward-looking statements solely as our current plans, estimates and beliefs. We caution readers not to place undue reliance on forward-looking statements. We cannot guarantee future results, events, levels of activity, performance or achievements. Except as required by law, we do not undertake and specifically decline any obligation to update, republish or revise forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events.
We obtained industry data used throughout this report from industry publications and internal company estimates. While we believe this information to be reliable, we have not independently verified, and cannot guarantee, its accuracy.
The following discussion should also be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included elsewhere herein and with our 2009 Form 10-K.
Overview
NBTY, Inc. (together with its subsidiaries, the "Company," "NBTY," "we," or "us") is a leading global vertically integrated manufacturer, marketer and retailer of a broad line of high-quality, value-priced nutritional supplements in the United States and throughout the world. We market approximately 25,000 products under numerous owned and private-label brands, including Nature's Bounty®, Ester-C®, Solgar®, MET-Rx®, American Health®, Osteo Bi-Flex®, Flex-A-Min®, SISU®, Knox®, Sundown®, Rexall®, Pure Protein®, Body Fortress®, WORLDWIDE Sport Nutrition®, Natural Wealth®, Puritan's Pride®, Holland & Barrett®, GNC (UK)®, Physiologics®, Le Naturiste®, De Tuinen®,
29
Julian Graves® and Vitamin World®. Our vertical integration includes purchasing raw materials and formulating and manufacturing products, which we then market through the following four channels of distribution:
-
- Wholesale/US Nutrition operationsdistributes products under various US Nutrition brand names and third party
private labels, each targeting specific market groups that include mass market retailers, supermarkets, club stores, drugstore chains, pharmacies, health and natural food stores, healthcare
practitioners, wholesalers, distributors and international customers;
-
- North American Retail operationsincludes 446 Vitamin World stores in the United States and 85 Le Naturiste
stores operating in Canada, each selling branded and third-party products;
-
- European Retail operationsincludes 565 Holland & Barrett stores in Europe and 16 franchise
Holland & Barrett stores in South Africa, Singapore and Malta (which we include in this segment); 324 Julian Graves stores and 35 GNC (UK) stores in the United Kingdom ("UK");
85 De Tuinen stores (including 16 franchise locations) in the Netherlands; and 27 Nature's Way stores in Ireland, each selling branded and third-party products; and
-
- Direct Response/E-Commerce operationsincludes the sale of branded and third-party products primarily through mail order catalogs and the internet.
Results of Operations
The timing of acquisitions and the changing mix of our businesses may affect the comparability of results from one period to another.
Three Months Ended March 31, 2010 Compared to the Three Months Ended March 31, 2009:
Net Sales
Net sales by segment for the three months ended March 31, 2010 as compared with the prior comparable period were as follows:
|
Net Sales by Segment Three months ended March 31, |
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | Comparison 2010 vs 2009 |
|||||||||||||||||
Segment
|
Net Sales | % of total | Net Sales | % of total | $ change | % change | ||||||||||||||
Wholesale/US Nutrition |
$ | 426,575 | 60.5 | % | $ | 349,801 | 58.7 | % | $ | 76,774 | 21.9 | % | ||||||||
North American Retail |
54,769 | 7.8 | % | 51,916 | 8.7 | % | 2,853 | 5.5 | % | |||||||||||
European Retail |
159,013 | 22.5 | % | 134,438 | 22.6 | % | 24,575 | 18.3 | % | |||||||||||
Direct Response/E-Commerce |
64,803 | 9.2 | % | 59,398 | 10.0 | % | 5,405 | 9.1 | % | |||||||||||
Net sales |
$ | 705,160 | 100.0 | % | $ | 595,553 | 100.0 | % | $ | 109,607 | 18.4 | % | ||||||||
Wholesale/US Nutrition
Net sales for the Wholesale/US Nutrition segment increased $76,774 or 21.9% to $426,575 for the three months ended March 31, 2010. This increase was attributable to the following:
-
- Higher net sales of domestic private label products, which increased $16,282. This increase is attributable to higher
sales volume as well as a re-allocation of shelf space at a major customer.
-
- Net sales from our major brands increased $32,017. Some of the major brands in this segment include Nature's Bounty®, Solgar®, Osteo Bi-Flex®, Sundown® and Ester-C®.
30
-
- Net sales from our sports nutrition brands (such as WORLDWIDE Sport Nutrition®, Pure Protein® and
Met-Rx®) increased $15,333.
-
- Wholesale net sales to international customers increased $12,262.
We continue to adjust shelf space allocation among our numerous wholesale brands to provide the best overall product mix and to respond to changing market conditions. These efforts have helped to strengthen US Nutrition's position in the mass marketplace. Wholesale/US Nutrition continues to leverage valuable consumer sales information obtained from our Vitamin World retail stores and Puritan's Pride Direct Response/E-Commerce operations in order to provide its mass-market customers with data and analyses to drive mass market sales.
We use targeted promotions to grow overall net sales. Promotional programs and rebates as a percentage of sales were 12.6% for the three months ended March 31, 2010 as compared to 10.0% for the prior comparable period. We expect promotional programs and rebates as a percentage of sales to fluctuate on a quarterly basis.
Product returns were $5,437 or 1.1% of sales for the three months ended March 31, 2010 as compared to $10,809 or 2.7% of sales for the prior comparable period. The product returns for the three months ended March 31, 2010 are mainly attributable to returns in the ordinary course of business. Product returns for the prior comparable period were higher than normal due to the reallocation of shelf space by customers of our US Nutrition brands and approximately $2,000 for bars primarily related to the recall of our Met-Rx® bars containing peanut butter. We expect returns relating to normal operations to trend between 1% to 2% of Wholesale/US Nutrition sales in future quarters.
One customer represented 30% and 31% of the Wholesale/US Nutrition segment's net sales for the three months ended March 31, 2010 and 2009, respectively. It also represented 18% of consolidated net sales for both the three months ended March 31, 2010 and 2009. The loss of this customer, or any other major customer, would have a material adverse effect on our results of operations if we were unable to replace that customer.
North American Retail
Net sales for this segment increased $2,853 or 5.5% to $54,769 for the three months ended March 31, 2010. Sales for stores open more than one year (same store sales) increased 4.6%, representing $2,385 of the overall increase.
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The following is a summary of North American Retail store activity for the three months ended March 31, 2010 and 2009:
|
Three months ended March 31, |
|||||||
---|---|---|---|---|---|---|---|---|
North American Retail stores:
|
2010 | 2009 | ||||||
Vitamin World |
||||||||
Open at beginning of the period |
448 | 447 | ||||||
Opened during the period |
1 | | ||||||
Closed during the period |
(3 | ) | (3 | ) | ||||
Open at end of the period |
446 | 444 | ||||||
Le Naturiste |
||||||||
Open at beginning of the period |
86 | 84 | ||||||
Opened during the period |
| 3 | ||||||
Closed during the period |
(1 | ) | | |||||
Open at end of the period |
85 | 87 | ||||||
Total North American Retail |
||||||||
Open at beginning of the period |
534 | 531 | ||||||
Opened during the period |
1 | 3 | ||||||
Closed during the period |
(4 | ) | (3 | ) | ||||
Open at end of the period |
531 | 531 |
We anticipate opening up to 14 additional Vitamin World stores during the remainder of this fiscal year. We also continually evaluate when and whether to close underperforming retail stores in this segment.
European Retail
Net sales for this segment increased $24,575 or 18.3% to $159,013 for the three months ended March 31, 2010. Same store sales increased 14.7%, representing $19,144 of the overall increase. In local currency, same store sales increased 5.7% from the prior like period.
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The following is a summary of European Retail store activity for the three months ended March 31, 2010 and 2009:
|
Three months ended March 31, |
||||||
---|---|---|---|---|---|---|---|
European Retail stores:
|
2010 | 2009 | |||||
Company-owned stores |
|||||||
Open at beginning of the period |
1,014 | 980 | |||||
Opened during the period |
9 | 3 | |||||
Acquired during the period |
3 | 2 | |||||
Closed during the period |
(6 | ) | (1 | ) | |||
Open at end of the period |
1,020 | 984 | |||||
Franchised stores |
|||||||
Open at beginning of the period |
33 | 26 | |||||
Opened during the period |
2 | 3 | |||||
Closed during the period |
(3 | ) | (2 | ) | |||
Open at end of the period |
32 | 27 | |||||
Total company-owned and franchised stores |
|||||||
Open at beginning of the period |
1,047 | 1,006 | |||||
Opened during the period |
11 | 6 | |||||
Acquired during the period |
3 | 2 | |||||
Closed during the period |
(9 | ) | (3 | ) | |||
Open at end of the period |
1,052 | 1,011 |
We anticipate opening approximately 28 additional stores during the remainder of this fiscal year. We also continually evaluate when and whether to close underperforming retail stores in this segment.
Direct Response/E-Commerce
Direct Response/E-Commerce net sales increased $5,405 or 9.1% for the three months ended March 31, 2010 as compared to the prior comparable period. The total number of orders increased approximately 15.1% and the average order size decreased approximately 3.6% for the three months ended March 31, 2010 as compared to 2009. We are a leader in the U.S. direct response nutritional supplement industry and continue to increase the number of products available through our catalogs and websites.
This segment continues to vary its promotional strategy throughout the fiscal year. Historical results reflect this pattern and therefore this segment should be viewed on an annual, and not quarterly, basis.
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Gross Profit
Gross Profit by segment for the three months ended March 31, 2010 as compared with the prior comparable period was as follows:
|
Gross Profit by Segment Three months ended March 31, |
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | Comparison 2010 vs 2009 |
|||||||||||||||||
|
|
% of sales | |
% of sales | ||||||||||||||||
Segment
|
Gross Profit | Gross Profit | $ change | % change | ||||||||||||||||
Wholesale/US Nutrition |
$ | 149,231 | 35.0 | % | $ | 95,457 | 27.3 | % | $ | 53,774 | 56.3 | % | ||||||||
North American Retail |
36,351 | 66.4 | % | 34,354 | 66.2 | % | 1,997 | 5.8 | % | |||||||||||
European Retail |
98,722 | 62.1 | % | 84,218 | 62.6 | % | 14,504 | 17.2 | % | |||||||||||
Direct Response/E-Commerce |
40,188 | 62.0 | % | 37,880 | 63.8 | % | 2,308 | 6.1 | % | |||||||||||
Gross Profit |
$ | 324,492 | 46.0 | % | $ | 251,909 | 42.3 | % | $ | 72,583 | 28.8 | % | ||||||||
The Wholesale/US Nutrition segment's gross profit percentage increased to 35.0% for the three months ended March 31, 2010 as compared to 27.3% for the prior comparable period. The prior comparable period was affected by higher raw material and other manufacturing costs which were not offset by higher prices charged to customers and lower margins on domestic private label products. During the three months ended March 31, 2010, the improved gross profit percentage reflects a more stable raw materials environment as well as efficiencies generated in manufacturing and supply chain management brought about by economies of scale. Because of the increasing competitive nature of the private label business, we anticipate gross profit margins for our private label business to decrease for the remainder of fiscal 2010. This should adversely affect gross profits for our Wholesale/US Nutrition segment during this period. To address this issue, we have begun the process of initiating additional improvements in supply chain management. We are also increasing our focus on our branded product sales, which traditionally have higher gross profit margins.
The increase in gross profit dollars across the other three segments is mainly attributable to sales increases, as the gross profit percentages remained relatively consistent with the prior comparable period.
Advertising, Promotion and Catalog Expenses
Total advertising, promotion and catalog expenses by segment for the three months ended March 31, 2010 as compared with the prior comparable period were as follows:
|
|
|
Dollar Change |
Percentage Change |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Three months ended March 31, |
|||||||||||||
|
2010 vs. 2009 | 2010 vs. 2009 | ||||||||||||
|
2010 | 2009 | ||||||||||||
Wholesale/US Nutrition |
$ | 38,105 | $ | 22,439 | $ | 15,666 | 70 | % | ||||||
North American Retail |
4,148 | 3,662 | 486 | 13 | % | |||||||||
European Retail |
3,299 | 2,114 | 1,185 | 56 | % | |||||||||
Direct Response/E-Commerce |
5,289 | 4,712 | 577 | 12 | % | |||||||||
Corporate |
96 | 101 | (5 | ) | (5 | )% | ||||||||
Total |
$ | 50,937 | $ | 33,028 | $ | 17,909 | 54 | % | ||||||
Percentage of net sales |
7.2 | % | 5.5 | % |
The increase in the Wholesale/US Nutrition segment's advertising, promotion and catalog expense is the result of an increase in television advertising campaigns for some of our major brands. The increase in the European Retail advertising also relates to television advertising. We do not expect this level of advertising to continue for the remainder of this fiscal year.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") by segment for the three months ended March 31, 2010 as compared with the prior comparable period were as follows:
|
|
|
Dollar Change |
Percentage Change |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Three months ended March 31, |
|||||||||||||
|
2010 vs. 2009 | 2010 vs. 2009 | ||||||||||||
|
2010 | 2009 | ||||||||||||
Wholesale/US Nutrition |
$ | 55,673 | $ | 53,972 | $ | 1,701 | 3 | % | ||||||
North American Retail |
31,751 | 31,424 | 327 | 1 | % | |||||||||
European Retail |
69,543 | 61,786 | 7,757 | 13 | % | |||||||||
Direct Response/E-Commerce |
16,886 | 13,924 | 2,962 | 21 | % | |||||||||
Corporate |
20,740 | 13,551 | 7,189 | 53 | % | |||||||||
Total |
$ | 194,593 | $ | 174,657 | $ | 19,936 | 11 | % | ||||||
Percentage of net sales |
27.6 | % | 29.3 | % |
Certain expenses historically included in the Corporate segment have been re-allocated to other operating segments. Specifically, certain shipping, advertising and information technology costs have been re-allocated in fiscal 2009 to the Wholesale/US Nutrition, North American Retail and Direct Response/E-Commerce segments on a percentage of sales basis. The prior year amounts have been reclassified to conform to the current year presentation.
The increase in the Wholesale/US Nutrition segment's SG&A for the three months ended March 31, 2010 as compared to the prior comparable period is due to an increase in bad debt expense, which was partially offset by lower payroll costs.
The increase in the European Retail SG&A is mainly due to the effect of foreign currency exchange rates. In local currency, SG&A increased 4% principally due to payroll related charges.
The Direct Response/E-Commerce SG&A increased $2,363 due to additional freight costs, including fuel surcharges.
The Corporate segment's SG&A increased $3,942 for payroll and payroll related costs. In addition, professional and legal expenses increased $1,711 primarily due to higher litigation costs.
Interest Expense
Interest expense decreased $1,272 due to lower principal balances outstanding on our Term Loan. The Term Loan balance was reduced by $49,914 to $235,086 at March 31, 2010 as compared to $285,000 at March 31, 2009.
Miscellaneous, net
The components of miscellaneous, net were as follows:
|
|
|
Dollar Change |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Three months ended March 31, |
|||||||||
|
2010 vs. 2009 | |||||||||
|
2010 | 2009 | ||||||||
Foreign exchange transaction gain (loss) |
$ | 316 | $ | (669 | ) | $ | 985 | |||
Rental income |
129 | 559 | (430 | ) | ||||||
Investment income |
133 | 168 | (35 | ) | ||||||
Other |
212 | 221 | (9 | ) | ||||||
Total |
$ | 790 | $ | 279 | $ | 511 | ||||
35