Annual Reports

 
Quarterly Reports

  • 10-Q (Feb 6, 2014)
  • 10-Q (Aug 8, 2013)
  • 10-Q (May 13, 2013)
  • 10-Q (Feb 1, 2013)
  • 10-Q (Aug 7, 2012)
  • 10-Q (May 9, 2012)

 
8-K

 
Other

NBTY 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Graphic
  7. Graphic

Use these links to rapidly review the document
Table of Contents

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

LOGO

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.


Table of Contents

NBTY, INC.
INDEX

 
   
  Page  

PART I. FINANCIAL INFORMATION

       

Item 1.

 

Financial Statements (Unaudited)

   
3
 

 

Condensed Consolidated Balance Sheets

   
3
 

 

Condensed Consolidated Statements of Income

   
4
 

 

Condensed Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)

   
5
 

 

Condensed Consolidated Statements of Cash Flows

   
6
 

 

Notes to Condensed Consolidated Financial Statements

   
7
 

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

   
28
 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

   
45
 

Item 4.

 

Controls and Procedures

   
46
 

PART II. OTHER INFORMATION

       

Item 1.

 

Legal Proceedings

   
47
 

Item 1A.

 

Risk Factors

   
48
 

Item 5.

 

Other Information

   
49
 

Item 6.

 

Exhibits

   
50
 

Signatures

   
51
 

Exhibits

       

Table of Contents


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


Table of Contents


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


Table of Contents


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


Table of Contents


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


Table of Contents


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


Table of Contents


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


Table of Contents


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


Table of Contents


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


Table of Contents


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


Table of Contents


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


Table of Contents


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


Table of Contents


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 1—Quoted prices in active markets for identical assets or liabilities.

    Level 2—Observable 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 3—Unobservable 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


Table of Contents


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


Table of Contents


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


Table of Contents


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 Nutrition—This 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 Retail—This 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 Retail—This 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-Commerce—This 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


Table of Contents


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


Table of Contents


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


Table of Contents


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


Table of Contents


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


Table of Contents


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


Table of Contents


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


Table of Contents


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


Table of Contents


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


Table of Contents


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


Table of Contents


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


Table of Contents


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


Table of Contents

    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


Table of Contents


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 operations—distributes 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 operations—includes 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 operations—includes 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 operations—includes 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 %
                           

        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


Table of Contents

    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.

        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.

31


Table of Contents

        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.

        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.

32


Table of Contents

        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 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.

33


Table of Contents

        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.

        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.

34


Table of Contents

        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 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.

        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


Table of Contents

        Miscellaneous, net increased primarily due to the strengthening of the British pound sterling, which resulted in the reduction of foreign exchange losses in the prior comparable quarter. The average exchange rate for the conversion of the British pound sterling to U.S. dollars for the three months ended March 31, 2010 and 2009 was $1.56 and $1.44, respectively.

        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 March 31, 2009 was 35.3% and 35.2%, respectively.

Six Months Ended March 31, 2010 Compared to the Six Months Ended March 31, 2009:

    Net Sales

        Net sales by segment for the six months ended March 31, 2010 as compared with the prior comparable period were as follows:

 
  Net Sales by Segment
Six months ended March 31,
 
 
  2010   2009   Comparison
2010 vs 2009
 
Segment
  Net Sales   % of total   Net Sales   % of total   $ change   % change  

Wholesale/US Nutrition

  $ 897,688     61.6 % $ 756,768     60.3 % $ 140,920     18.6 %

North American Retail

    106,227     7.3 %   100,354     8.0 %   5,873     5.9 %

European Retail

    335,008     23.0 %   290,464     23.1 %   44,544     15.3 %

Direct Response/E-Commerce

    117,388     8.1 %   108,519     8.6 %   8,869     8.2 %
                           
 

Net sales

  $ 1,456,311     100.0 % $ 1,256,105     100.0 % $ 200,206     15.9 %
                           

        Net sales for the Wholesale/US Nutrition segment increased $140,920 or 18.6% to $897,688 for the six months ended March 31, 2010. This increase was attributable to the following:

    Higher net sales of domestic private label products, which increased $53,252. 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 $65,227. Some of the major brands in this segment include Nature's Bounty®, Solgar®, Osteo Bi-Flex®, Sundown® and Ester-C®.

    Net sales from our sports nutrition brands (such as WORLDWIDE Sport Nutrition®, Pure Protein® and Met-Rx®) increased $16,502.

    Wholesale net sales to international customers increased $27,171.

    Net sales from all other brands decreased $21,232 due primarily to a re-allocation of shelf space at a major customer.

        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.

36


Table of Contents

        We use targeted promotions to grow overall net sales. Promotional programs and rebates as a percentage of sales were 11.6% for the six months ended March 31, 2010 as compared to 9.5% 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 $10,687 or 1.0% of sales for the six months ended March 31, 2010 as compared to $18,317 or 2.1% of sales for the prior comparable period. The product returns for the six 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 28% and 30% of the Wholesale/US Nutrition segment's net sales for the six months ended March 31, 2010 and 2009, respectively. It also represented 17% and 18% of consolidated net sales for the six months ended March 31, 2010 and 2009, respectively. 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.

        Net sales for this segment increased $5,873 or 5.9% to $106,227 for the six months ended March 31, 2010. Sales for stores open more than one year (same store sales) increased 4.9%, representing $4,869 of the overall increase.

        The following is a summary of North American Retail store activity for the six months ended March 31, 2010 and 2009: