Back to GetFilings.com

Use these links to rapidly review the document
NUTRACEUTICAL INTERNATIONAL CORPORATION INDEX

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2002

Commission file number 000-23731

NUTRACEUTICAL INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)

(435) 655-6106
(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

        At February 7, 2003, the registrant had 11,208,424 shares of common stock outstanding.

NUTRACEUTICAL INTERNATIONAL CORPORATION

INDEX

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

NUTRACEUTICAL INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(dollars in thousands)

(1)

The condensed consolidated balance sheet as of September 30, 2002 has been prepared using information from the audited financial statements at that date.

The accompanying notes are an integral part of these condensed consolidated financial statements.

NUTRACEUTICAL INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)

(unaudited)

(dollars in thousands, except per share data)

The accompanying notes are an integral part of these condensed consolidated financial statements.

NUTRACEUTICAL INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(dollars in thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements.

NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(dollars in thousands, except per share data)

1.  INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

        In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all necessary adjustments (consisting of normal recurring accruals) to present fairly the financial position of Nutraceutical International Corporation and its subsidiaries (the "Company") as of December 31, 2002, the results of its operations for the three months ended December 31, 2001 and 2002 and its cash flows for the three months ended December 31, 2001 and 2002, in conformity with accounting principles generally accepted in the United States of America for interim financial information applied on a consistent basis. The results for the three months ended December 31, 2002 are not necessarily indicative of the results to be expected for the full fiscal year.

        Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. Accordingly, these financial statements should be read in conjunction with the Company's Form 10-K for the fiscal year ended September 30, 2002, which was filed with the Securities and Exchange Commission on December 12, 2002.

2.    INVENTORIES, NET

        Inventories, net of reserves for obsolete and slow moving inventory, are comprised of the following:

3.    ADOPTION OF ACCOUNTING STANDARD

        The Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), effective October 1, 2001. In accordance with SFAS 142, the Company determined that it had one reporting unit at that date. The fair value of this reporting unit was determined using a market approach based on quoted market prices (Nasdaq: NUTR). Other valuation methods such as the income and cost approaches to value were also considered.

        Based on the valuation findings, the Company determined that it had a goodwill impairment in accordance with the first step of the goodwill impairment test described in SFAS 142. The Company then performed the second step of the goodwill impairment test described in SFAS 142 to measure the amount of the impairment loss, which was determined by comparing the implied fair value of the reporting unit goodwill to the carrying amount of that goodwill.

        The implied fair value of goodwill was determined to be $0 at October 1, 2001, and a non-cash goodwill impairment equal to the goodwill carrying amount of $51,765 was recognized in the Company's condensed consolidated financial statements. As prescribed by SFAS 142, the Company treated this non-cash goodwill impairment as a cumulative effect of change in accounting principle, which resulted in a non-cash charge of $35,311, net of tax benefit of $16,454, for the three months ended December 31, 2001, on the Company's Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

        During fiscal 2002, the Company acquired four neighborhood natural food markets. Goodwill of $2,310 was recorded related to these fiscal 2002 acquisitions. Based on the Company's adoption of SFAS 142 effective October 1, 2001, no amortization of goodwill was recorded for the three months ended December 31, 2001 and 2002. The Company had no other material intangible assets recorded on its Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2002.

4.    CAPITAL STOCK

        The following table provides a reconciliation of basic weighted average common shares (which represent the weighted average number of common shares outstanding without regard to potential common shares) to diluted weighted average common shares (which include potential common shares in accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share):

5.    OPERATING SEGMENTS

        The Company is a manufacturer and marketer of quality branded products sold to health and natural food stores in the United States, and to distributors and stores worldwide. In addition to branded products, the Company manufactures bulk materials for use in its own products and for sale to other manufacturers and marketers in the nutritional supplement industry. The Company also operates neighborhood natural food markets.

        Based on the Company's method of internal reporting, the Company has one operating segment. The Company does not review operating results on a disaggregated basis. Following the acquisition of the bulk materials business in 1995, the Company maintained separate manufacturing operations which allowed for the identification of operating results through the gross profit line for two operating segments: branded products and bulk materials. However, manufacturing operations for the bulk materials operating segment were subsequently consolidated with manufacturing operations for the branded products operating segment, which resulted in a single operating segment. Currently, management reviews operating results on an aggregate basis.

        For informational purposes, net sales for branded products, bulk materials and neighborhood natural food markets are presented below for the three months ended December 31, 2001 and 2002:

        The Company sells products worldwide. Net sales to distributors and customers outside the United States are less than 10% of consolidated net sales.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

General

        The following discussion and analysis should be read in conjunction with the response to Part I, Item 1-Financial Statements of this report.

        The Company is one of the nation's largest manufacturers and marketers of quality branded nutritional supplements sold to health and natural food stores. The Company sells its branded products under the brand names Solaray®, KAL®, NaturalMax®, VegLife®, Premier One®, Sunny Green™, Natural Sport®, ActiPet®, Action Labs® and Thompson® to health and natural food stores in the United States, and to distributors and stores worldwide. Under the name Woodland Publishing™, the Company publishes, prints and markets a line of books and booklets to, among others, book distributors, national retail bookstores and health and natural food stores. The Company manufactures and/or distributes one of the broadest branded product lines in the industry with over 2,600 stock keeping units ("SKUs"), including over 600 SKUs exclusively sold internationally. The Company believes that as a result of its emphasis on innovation, quality, loyalty, education and customer service, the Company's brands are widely recognized in health and natural food stores and among their customers.

        In addition to its branded products, the Company manufactures bulk materials for use in its own products and for sale to other manufacturers and marketers in the nutritional supplement industry under the tradenames Monarch Nutritional Laboratories™ and Great Basin Botanicals™. The Company also distributes branded products of certain third parties, and owns and operates four neighborhood natural food markets under the trade names The Real Food Company™ and Thom's Natural Foods™.

        The Company was formed in 1993 by senior management and Bain Capital, Inc. to effect a consolidation strategy in the fragmented vitamin, mineral, herbal and other nutritional supplements industry (the "VMS Industry"). Since its formation, the Company has completed the following acquisitions: Solaray, Inc., Premier One Products, Inc., Makers of KAL, Inc. and Makers of KAL, B.V., Monarch Nutritional Laboratories, Inc., Action Labs, Inc., NutraForce (Canada) International, Inc., Woodland Publishing, Inc., Summit Graphics, Inc., Thompson Nutritionals, Inc., The Real Food Company, Inc. and Thom's Natural Foods. As a result of these acquisitions, internal growth and cost management, management believes that the Company is well positioned to continue to capitalize on the consolidation the Company believes is occurring in the VMS Industry.

Results of Operations

        The following table sets forth certain consolidated statements of operations data as a percentage of net sales for the periods indicated:

(1)

See "—EBITDA."

Comparison of the Three Months Ended December 31, 2002 to the Three Months Ended December 31, 2001

        Net Sales.    Net sales increased by $4.4 million, or 18.1%, to $28.9 million for the three months ended December 31, 2002 ("first quarter of fiscal 2003") from $24.5 million for the three months ended December 31, 2001 ("first quarter of fiscal 2002"). Net sales of branded products increased by $2.1 million, or 9.4%, to $24.5 million for the first quarter of fiscal 2003 from $22.4 million for the first quarter of fiscal 2002. The increase in net sales of branded products was primarily the result of increased sales volume. Net sales of bulk materials decreased by $0.6 million, or 29.5%, to $1.5 million for the first quarter of fiscal 2003 from $2.1 million for the first quarter of fiscal 2002. The decrease in net sales of bulk materials was primarily the result of decreased sales volume related to decreased customer orders. Net sales of neighborhood natural food markets, the first of which were acquired in March 2002, were $2.9 million for the first quarter of fiscal 2003.

        Gross Profit.    Gross profit increased by $2.1 million, or 17.0%, to $14.8 million for the first quarter of fiscal 2003 from $12.7 million for the first quarter of fiscal 2002. As a percentage of net sales, gross profit decreased to 51.3% for the first quarter of fiscal 2003 from 51.8% for the first quarter of fiscal 2002. This decrease in gross profit as a percentage of net sales was primarily attributable to a change in sales mix. Sales for the neighborhood natural food markets, which were $2.9 million for the first quarter of fiscal 2003, have lower gross profit margins than sales of branded products.

        Selling, General and Administrative.    Selling, general and administrative expenses increased by $2.0 million, or 24.0%, to $10.4 million for the first quarter of fiscal 2003 from $8.4 million for the first quarter of fiscal 2002. As a percentage of net sales, selling, general and administrative expenses increased to 35.9% for the first quarter of fiscal 2003 from 34.2% for the first quarter of fiscal 2002. This increase in selling, general and administrative expenses was primarily attributable to the recently acquired neighborhood natural food markets, as well as general labor and cost increases and facility consolidation efforts.

        Interest and Other (Income)/Expense, Net.    Net interest and other (income)/expense decreased by $0.1 million, or 34.3%, to $0.2 million for the first quarter of fiscal 2003 from $0.3 million for the first quarter of fiscal 2002. As a percentage of net sales, net interest and other (income)/expense was 0.7% for the first quarter of fiscal 2003 compared to 1.3% for the first quarter of fiscal 2002. This decrease in net interest and other (income)/expense for the first quarter of fiscal 2003 was primarily attributable to decreased indebtedness resulting from repayments made under the Company's revolving credit facility as well as decreased interest rates.

        Provision for Income Taxes.    The Company's effective tax rate was 38.0% for the first quarter of fiscal 2003 and 37.5% for the first quarter of fiscal 2002. This increase in the Company's effective tax rate was due to a projected increase in the Company's marginal federal income tax rate. In each period, the Company's effective tax rate was higher than the federal statutory rate primarily due to state tax considerations.

        Cumulative Effect of Change in Accounting Principle.    As a result of the Company's adoption of SFAS 142 effective October 1, 2001, the Company recognized a non-cash goodwill impairment of $51.8 million in its condensed consolidated financial statements as of December 31, 2001. As prescribed by SFAS 142, the Company treated this non-cash goodwill impairment as a cumulative effect of change in accounting principle, which resulted in a non-cash charge of $35.3 million, which is net of tax benefit of $16.5 million, for the three months ended December 31, 2001, on its Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

EBITDA

        EBITDA (earnings before net interest and other (income)/expense, taxes, depreciation and amortization) is a commonly reported standard measure that is used by analysts and investors in the VMS Industry. Management considers EBITDA to be an important measure of the Company's operating performance. In addition, EBITDA provides additional information for determining the ability of the Company to meet its debt service requirements and for other comparative analyses of the Company's operating performance relative to other publicly traded nutritional supplement companies.

(1)

Includes amortization of deferred financing fees.

        The Company's EBITDA was $5.4 million for both the first quarter of fiscal 2003 and the first quarter of fiscal 2002. EBITDA as a percentage of net sales decreased to 18.7% for the first quarter of fiscal 2003 from 22.1% for the first quarter of fiscal 2002.

        The Company understands that while EBITDA is frequently used by analysts in the evaluation of nutritional supplement companies, it is not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the method of calculation. EBITDA is not intended as an alternative to cash flows from operating activities, as a measure of liquidity or as an alternative to net income as an indicator of the Company's operating performance or any other measure of performance in accordance with accounting principles generally accepted in the United States of America.

Seasonality

        The Company believes that its business is characterized by minor seasonality. However, sales to any particular customer can vary substantially from one quarter to the next based on such factors as industry trends, timing of promotional discounts, international economic conditions and acquisition-related activities.

        Historically, the Company has recorded higher branded products sales volume during the second fiscal quarter due to increased interest in health-related products among consumers following the holiday season. The Company's sales of bulk materials are characterized by periodic shipments to certain customers and can vary significantly from quarter to quarter. In addition, the Company's sales through its neighborhood natural food markets are characterized by minor seasonality.

Liquidity and Capital Resources

        The Company had working capital of $19.9 million as of December 31, 2002 compared to $20.5 million as of September 30, 2002. This decrease in working capital was primarily the result of a decrease in inventories and accounts receivable and an increase in accrued expenses. These changes were partially offset by an increase in cash and a decrease in accounts payable.

        Net cash provided by operating activities for the three months ended December 31, 2002 was $5.1 million compared to $4.6 million for the comparable period in fiscal 2002. The increase in net cash provided by operating activities for the three months ended December 31, 2002 was primarily attributable to an increase in income before change in accounting principle as well as changes in cash provided by prepaid expenses and other current assets and accrued expenses which were partially offset by a change in cash used for accounts payable.

        Net cash used in investing activities was $0.7 million for the three months ended December 31, 2002 and $0.6 million for the comparable period in fiscal 2002. Capital expenditures during these periods related primarily to distribution and manufacturing equipment, building improvements related to facility consolidation efforts and, to a lesser extent, information systems.

        Net cash used in financing activities was $3.9 million for the three months ended December 31, 2002 compared to $4.1 million for the comparable period in fiscal 2002. Net cash used in financing activities was primarily related to repayments of borrowings under the Company's current and prior revolving credit facilities.

        The Company's current revolving credit facility had available credit borrowings of sixty million dollars at December 31, 2002. The available credit borrowings are reduced quarterly by $1.25 million beginning in March 2004. Borrowings under the revolving credit facility are collateralized by substantially all assets of the Company and bear interest at the applicable Eurodollar Rate plus a variable margin or at the base rate, which is the higher of the Federal Funds Rate plus 0.5% or the Prime Lending Rate, plus a variable margin. At December 31, 2002, the applicable weighted-average interest rate for borrowings was 3.12%. The Company is also required to pay a variable quarterly fee on the unused balance under the revolving credit facility. At December 31, 2002, the applicable rate was 0.25%. Accrued interest on Eurodollar Rate borrowings is payable based on elected intervals of one, two or three months. Accrued interest on base rate borrowings is payable quarterly. The revolving credit facility matures on January 28, 2007, and the Company is required to repay all principal outstanding under the revolving credit facility on such date. Accordingly, the outstanding principal balance of $10.5 million at December 31, 2002 was classified as long-term debt.

        The revolving credit facility contains restrictive covenants, including restrictions on incurring other indebtedness, limitations on capital expenditures and requirements that the Company maintain certain financial ratios. As of December 31, 2002, the Company was in compliance with these restrictive covenants. Upon the occurrence of a default or an event of default, the lender has various remedies or rights, which may include proceeding against the collateral or requiring the Company to repay all amounts borrowed under the revolving credit facility.

        The Company believes that borrowings under its revolving credit facility, together with cash flows from operations, will be sufficient to fund working capital needs and make anticipated capital expenditures during fiscal 2003, to continue to make certain acquisitions and to make required payments under its revolving credit facility.

        The Company's significant non-cancelable operating lease obligations as of December 31, 2002 are as follows:

(1)

The amounts for the year ended September 30, 2003 include only payments to be made after December 31, 2002.

New Accounting Standards

        The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS 146"). SFAS 146 addresses significant issues relating to the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities, and nullifies the guidance in Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring.) SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002, with earlier application encouraged. The Company does not expect the adoption of this standard to have a significant impact on its financial statements.

        The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure ("SFAS 148"), which amends Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). SFAS 148 provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. SFAS 148 is effective for fiscal years ending after December 15, 2002 and interim periods beginning after December 15, 2002. The Company expects to adopt the disclosure provisions of SFAS 148 for the quarter ending March 31, 2003.

Inflation

        Inflation affects the cost of raw materials, goods and services used by the Company. In recent years, inflation has been modest. The competitive environment somewhat limits the ability of the Company to recover higher costs resulting from inflation by raising prices. Overall, product prices have generally been stable. The Company seeks to mitigate the adverse effects of inflation primarily through improved productivity and cost containment programs. The Company does not believe that inflation has had a material impact on its results of operations for the periods presented, except with respect to payroll-related costs and government imposed regulations.

Forward-Looking Statements

        The Securities and Exchange Commission ("SEC") encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limitation, the words "may," "will," "should," "believes," "anticipates," "plans," "expects," "intends" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these words. There are a number of important factors that could cause actual events or the Company's actual results to differ materially from those indicated by such forward-looking statements, including, without limitation, (i) changing domestic and international market and political conditions; (ii) interruption of business or negative impact on sales and earnings due to acts of war, terrorism, bio-terrorism, civil unrest or disruption of mail service; (iii) changes in laws and regulations, including adverse federal, state or foreign legislation or regulation or adverse determinations or actions by regulators; (iv) import/export controls with respect to products sold into foreign markets, as well as other restrictions on the sale of the Company's products in such countries; (v) the unavailability of or interruption in the supply of utilities, including electricity and telecommunications; (vi) slow or negative growth in the nutritional supplement industry; (vii) increased product competition; (viii) adverse publicity regarding the consumption of nutritional supplements; (ix) increased costs, including raw material and labor costs; (x) the inability of the Company to gain and/or hold market share of its health and natural food store customers and bulk material customers; (xi) loss or retirement of key members of management; (xii) inability of the Company to successfully implement its business strategy or plan or otherwise manage growth, including the Company's ability to locate and consummate advantageous acquisitions, or otherwise integrate acquired operations, including the ability to retain customers of existing and acquired operations; (xiii) product development efforts and consumer acceptance of the Company's products; (xiv) the absence of clinical trials for many of the Company's products; (xv) availability and price of raw materials; (xvi) the Company's ability to manufacture its products efficiently; (xvii) the mix of the Company's products and their related profit margins; (xviii) dependence on distributors and customers; (xix) sales and earnings volatility; (xx) adequacy and availability of insurance coverage, and any losses or damages sustained by the Company not covered by insurance; (xxi) exposure to and expense of prosecuting, defending and/or resolving and defending claims or litigation, including but not limited to product liability claims, class action suits, stockholder derivative suits, patent or trademark infringement suits and other litigation which may arise from time to time; (xxii) other factors discussed in the Company's filings with the Securities and Exchange Commission or referenced in its press releases and (xxiii) other factors beyond the Company's control.

        In addition, any forward-looking statements represent the Company's estimates only as of the day this Form 10-Q was first filed with the SEC and should not be relied upon as representing the Company's estimates as of any subsequent date. No assurance can be given that the future results covered by such forward-looking statements will be achieved and readers are cautioned not to place undue reliance on forward-looking statements. While the Company may elect to update forward-looking statements at some point in the future, the Company specifically disclaims any obligation to do so.

        The SEC maintains an Internet site (http://www.sec.gov) which contains reports, proxy and information statements, and other information regarding the Company. Copies of this Form 10-Q are available without charge upon request. Please contact the Company to request copies of this Form 10-Q (435-655-6106).

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

        As discussed in other filings, the Company is subject to regulation by a number of federal, state and foreign agencies and is involved in various legal matters arising in the normal course of business.

        The Company carries insurance coverage in the types and amounts that management considers reasonably adequate to cover the risks it faces in the industry in which it competes. However, the Company's current liability policy excludes claims related to products containing ephedra.

        In the opinion of management, the Company's liability, if any, arising from individual regulatory and legal proceedings in which it is involved is not expected to have a material adverse effect on the Company's financial position, results of operations or cash flows. However, the aggregate liability of the Company arising from regulatory and legal proceedings related to these matters could have a material effect on the Company's financial position, results of operations or cash flows. The outcomes of legal matters in which the Company is presently involved are not probable and reasonably estimable.

SIGNATURE

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.