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EXCEL - IDEA: XBRL DOCUMENT - NBTY INC | Financial_Report.xls |
EX-32.1 - EX-32.1 - NBTY INC | a2221087zex-32_1.htm |
EX-31.2 - EX-31.2 - NBTY INC | a2221087zex-31_2.htm |
EX-32.2 - EX-32.2 - NBTY INC | a2221087zex-32_2.htm |
EX-31.1 - EX-31.1 - NBTY INC | a2221087zex-31_1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) |
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ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the quarterly period ended June 30, 2014 |
||
Or |
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to |
Commission File Number: 333-172973
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 o NO ý
Note: The registrant was subject to the reporting requirements of Section 15(d) of the Exchange Act from June 16, 2011 through September 30, 2011. As of October 1, 2011, the registrant is a voluntary filer not subject to these filing requirements. However, the registrant has filed all reports required pursuant to Section 13 or 15(d) as if the registrant was subject to such filing requirements since June 16, 2011.
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 ý 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 o | Accelerated filer o | Non-accelerated filer ý (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 outstanding as of July 31, 2014 was 1,000.
NBTY, Inc. and Subsidiaries
INDEX
PART I
Item 1. Financial Statements
NBTY, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
(in thousands, except share and per share amounts)
|
June 30, 2014 |
September 30, 2013 |
|||||
---|---|---|---|---|---|---|---|
Assets |
|||||||
Current assets: |
|||||||
Cash and cash equivalents |
$ | 94,417 | $ | 198,561 | |||
Accounts receivable, net |
184,532 | 171,670 | |||||
Inventories |
872,766 | 739,952 | |||||
Deferred income taxes |
24,373 | 23,637 | |||||
Other current assets |
78,846 | 78,579 | |||||
| | | | | | | |
Total current assets |
1,254,934 | 1,212,399 | |||||
Property, plant and equipment, net |
590,365 |
571,529 |
|||||
Goodwill |
1,274,447 | 1,260,802 | |||||
Intangible assets, net |
1,941,512 | 1,960,351 | |||||
Other assets |
64,521 | 68,235 | |||||
| | | | | | | |
Total assets |
$ | 5,125,779 | $ | 5,073,316 | |||
| | | | | | | |
| | | | | | | |
Liabilities and Stockholder's Equity |
|||||||
Current liabilities: |
|||||||
Current portion long-term debt |
$ | 295 | $ | 376 | |||
Accounts payable |
256,615 | 259,060 | |||||
Accrued expenses and other current liabilities |
198,897 | 219,766 | |||||
| | | | | | | |
Total current liabilities |
455,807 | 479,202 | |||||
Long-term debt, net of current portion |
2,158,203 | 2,158,405 | |||||
Deferred income taxes |
747,900 | 751,419 | |||||
Other liabilities |
73,647 | 59,451 | |||||
| | | | | | | |
Total liabilities |
3,435,557 | 3,448,477 | |||||
| | | | | | | |
Commitments and contingencies |
|||||||
Stockholder's equity: |
|||||||
Common stock, $0.01 par; one thousand shares authorized, issued and outstanding |
| | |||||
Capital in excess of par |
1,560,298 | 1,556,926 | |||||
Retained earnings |
118,422 | 81,497 | |||||
Accumulated other comprehensive income (loss) |
11,502 | (13,584 | ) | ||||
| | | | | | | |
Total stockholder's equity |
1,690,222 | 1,624,839 | |||||
| | | | | | | |
Total liabilities and stockholder's equity |
$ | 5,125,779 | $ | 5,073,316 | |||
| | | | | | | |
| | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
3
NBTY, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
(in thousands)
|
Three Months Ended June 30, |
Nine Months Ended June 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | 2014 | 2013 | |||||||||
Net sales |
$ | 806,961 | $ | 802,829 | $ | 2,413,092 | $ | 2,349,930 | |||||
| | | | | | | | | | | | | |
Costs and expenses: |
|||||||||||||
Cost of sales |
431,204 | 424,870 | 1,304,003 | 1,267,635 | |||||||||
Advertising, promotion and catalog |
60,931 | 48,150 | 158,236 | 142,706 | |||||||||
Selling, general and administrative |
235,538 | 224,422 | 707,115 | 675,388 | |||||||||
Facility restructuring charge |
| 4,944 | | 35,144 | |||||||||
| | | | | | | | | | | | | |
|
727,673 | 702,386 | 2,169,354 | 2,120,873 | |||||||||
| | | | | | | | | | | | | |
Income from operations |
79,288 | 100,443 | 243,738 | 229,057 | |||||||||
| | | | | | | | | | | | | |
Other income (expense): |
|||||||||||||
Interest |
(33,794 | ) | (34,064 | ) | (101,698 | ) | (112,749 | ) | |||||
Miscellaneous, net |
2,534 | 3,824 | 1,809 | 4,284 | |||||||||
| | | | | | | | | | | | | |
|
(31,260 | ) | (30,240 | ) | (99,889 | ) | (108,465 | ) | |||||
| | | | | | | | | | | | | |
Income from operations before income taxes |
48,028 | 70,203 | 143,849 | 120,592 | |||||||||
Provision for income taxes |
14,761 |
18,953 |
46,861 |
34,575 |
|||||||||
| | | | | | | | | | | | | |
Net income |
33,267 | 51,250 | 96,988 | 86,017 | |||||||||
| | | | | | | | | | | | | |
Other comprehensive income, net of tax: |
|||||||||||||
Foreign currency translation adjustment, net of taxes of $(813), $(253), $2,718 and $(7,088) |
11,127 |
(2,857 |
) |
22,615 |
(45,221 |
) |
|||||||
Change in fair value of interest rate swaps, net of taxes of $(436), $(730), $(1,559) and $(2,151) |
699 | 1,161 | 2,469 | 3,422 | |||||||||
| | | | | | | | | | | | | |
Total other comprehensive income (loss), net of tax |
11,826 | (1,696 | ) | 25,084 | (41,799 | ) | |||||||
Comprehensive income |
$ |
45,093 |
$ |
49,554 |
$ |
122,072 |
$ |
44,218 |
|||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
4
NBTY, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
|
Nine Months Ended June 30, 2014 |
Nine Months Ended June 30, 2013 |
|||||
---|---|---|---|---|---|---|---|
Cash flows from operating activities: |
|||||||
Net income |
$ | 96,988 | $ | 86,017 | |||
Adjustments to reconcile net income to net cash provided by operating activities: |
|||||||
Impairments and disposals of assets |
5,974 | 4,532 | |||||
Depreciation of property, plant and equipment |
44,076 | 49,821 | |||||
Amortization of intangible assets |
34,633 | 34,123 | |||||
Foreign currency transaction loss (gain) |
632 | (1,289 | ) | ||||
Amortization and write-off of deferred financing fees |
14,200 | 16,735 | |||||
Stock-based compensation |
3,373 | 1,885 | |||||
Allowance for doubtful accounts |
579 | 25 | |||||
Inventory reserves |
3,681 | 868 | |||||
Deferred income taxes |
(4,184 | ) | (9,543 | ) | |||
Call premium on term loan |
| (15,075 | ) | ||||
Changes in operating assets and liabilities: |
|||||||
Accounts receivable |
(13,107 | ) | (23,456 | ) | |||
Inventories |
(130,953 | ) | 16,609 | ||||
Other assets |
(1,033 | ) | 14,120 | ||||
Accounts payable |
(3,798 | ) | 27,818 | ||||
Accrued expenses and other liabilities |
(24,044 | ) | 9,845 | ||||
| | | | | | | |
Net cash provided by operating activities |
27,017 | 213,035 | |||||
| | | | | | | |
Cash flows from investing activities: |
|||||||
Purchase of property, plant and equipment |
(72,436 | ) | (96,854 | ) | |||
Proceeds from sale of building |
| 7,548 | |||||
Cash paid for acquisitions, net of cash acquired |
| (82,472 | ) | ||||
| | | | | | | |
Net cash used in investing activities |
(72,436 | ) | (171,778 | ) | |||
| | | | | | | |
Cash flows from financing activities: |
|||||||
Principal payments under long-term agreements |
(298 | ) | (442 | ) | |||
Proceeds from borrowings under the revolver |
| 80,000 | |||||
Paydowns of borrowings under the revolver |
| (80,000 | ) | ||||
Payments for financing fees |
| (7,387 | ) | ||||
Dividends paid |
(60,063 | ) | (216,926 | ) | |||
| | | | | | | |
Net cash used in financing activities |
(60,361 | ) | (224,755 | ) | |||
| | | | | | | |
Effect of exchange rate changes on cash and cash equivalents |
1,636 | (4,254 | ) | ||||
| | | | | | | |
Net decrease in cash and cash equivalents |
(104,144 | ) | (187,752 | ) | |||
Cash and cash equivalents at beginning of period |
198,561 | 315,136 | |||||
| | | | | | | |
Cash and cash equivalents at end of period |
$ | 94,417 | $ | 127,384 | |||
| | | | | | | |
| | | | | | | |
Non-cash investing and financing information: |
|||||||
Property, plant and equipment additions included in accounts payable |
$ | 6,804 | $ | 10,438 | |||
| | | | | | | |
| | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
5
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(in thousands)
1. Basis of Presentation
NBTY, Inc. ("NBTY"), together with its subsidiaries, (the "Company," "we," or "us"), is the leading global vertically integrated manufacturer, marketer, distributor and retailer of a broad line of high-quality vitamins, nutritional supplements and related products in the United States, with operations worldwide. 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 audited financial statements for the fiscal year ended September 30, 2013, including the notes thereto (our "2013 Financial Statements") included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2013 ("2013 Annual Report"). 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 notes necessary for a complete presentation in conformity with GAAP. Accordingly, these financial statements should be read in conjunction with the 2013 Financial Statements. Results for interim periods are not necessarily indicative of results which 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 dates of the financial statements and reported amounts of revenues and expenses during the reporting periods. 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 that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our most significant estimates include: sales returns, promotions and other allowances; inventory valuation and obsolescence; valuation and recoverability of long-lived assets, including goodwill; stock-based compensation; income taxes and accruals for the outcome of litigation.
Accounts Receivable Reserves
Accounts receivable are presented net of the following reserves:
|
June 30, 2014 |
September 30, 2013 |
|||||
---|---|---|---|---|---|---|---|
Allowance for sales returns |
$ | 12,730 | $ | 13,549 | |||
Promotional program incentive allowances |
93,446 | 82,827 | |||||
Allowance for doubtful accounts |
3,946 | 2,472 | |||||
| | | | | | | |
|
$ | 110,122 | $ | 98,848 | |||
| | | | | | | |
| | | | | | | |
6
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands)
1. Basis of Presentation (Continued)
Recent Accounting Developments
In February 2013, the Financial Accounting Standards Board ("FASB") issued guidance on disclosure requirements for items reclassified out of Accumulated Other Comprehensive Income ("AOCI"). This new guidance requires entities to present (either on the face of the income statement or in the notes thereto) the effects on the line items of the income statement for amounts reclassified out of AOCI. The new guidance became effective for us beginning October 1, 2013. See Note 10, "Accumulated Other Comprehensive Income (Loss)" and the Consolidated Statements of Operations and Comprehensive Income (Loss).
In March 2013, the FASB issued guidance on a parent's accounting for the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. This new guidance requires that the parent release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The new guidance will be effective for us beginning on October 1, 2014. The adoption of this guidance is not expected to have a material impact on the Company's financial statements.
In July 2013, the FASB issued guidance which amends the guidance related to the presentation of unrecognized tax benefits and allows for the reduction of a deferred tax asset for a net operating loss carryforward whenever the net operating loss carryforward or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed. The new guidance will be effective for us beginning on October 1, 2014. The adoption of this guidance is not expected to have a material impact on the Company's financial statements.
In April 2014, the FASB issued revised guidance to reduce diversity in practice for reporting discontinued operations. The revised guidance only allows disposals of components of an entity that represent a strategic shift (e.g., disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity) and that have a major effect on a reporting entity's operations and financial results to be reported as discontinued operations. The revised guidance also requires expanded disclosure in the financial statements for discontinued operations as well as for disposals of significant components of an entity that do not qualify for discontinued operations presentation. The revised guidance is effective for all disposals (or classifications as held for sale) of components for us beginning October 1, 2015, and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company's financial statements.
In May 2014, the FASB issued guidance on revenue from contracts with customers that will supersede virtually all existing revenue recognition guidance, including industry-specific guidance, and is designed to create greater comparability for financial statement users across industries and jurisdictions. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers. The
7
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands)
1. Basis of Presentation (Continued)
guidance is effective for us beginning October 1, 2017 (early adoption is not permitted). The guidance permits the use of either a retrospective or cumulative effect transition method. We have not yet selected a transition method and are currently evaluating the impact of the amended guidance on our consolidated financial statements and related disclosures.
In June 2014, the FASB issued guidance to clarify the proper method of accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The guidance is effective for us beginning October 1, 2016, and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company's financial statements.
Revision
A revision was made to the prior year's Statements of Operations and Comprehensive Income to correct the prior year presentation, whereby changes in the fair value of the cross-currency swaps were reclassified from changes in the fair value of interest rate swaps to foreign currency translation adjustments. In addition, see Note 14 for a revision that was made to the Condensed Consolidating Financials Statements of Guarantors.
2. Facility Restructuring Charge
On March 12, 2013, NBTY initiated a restructuring plan to streamline its operations and improve the profitability and return on invested capital of its manufacturing/packaging and distribution facilities. The restructuring involved the sale or closure of seven of NBTY's manufacturing/packaging and distribution facilities.
The restructuring plan commenced in the second quarter of fiscal 2013 and was completed in fiscal 2014. The restructuring resulted in cumulative charges of $32,695 before tax over that period, of which non-cash charges consisted primarily of accelerated depreciation of approximately $12,588.
The following summarizes the restructuring cash charges recorded and reconciles these charges to accrued expenses:
|
Workforce Reductions |
Facility Costs |
Total | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Restructuring accrualOctober 1, 2013 |
$ | 12,436 | $ | 2,649 | $ | 15,085 | ||||
Cash payments |
(8,780 | ) | (1,588 | ) | (10,368 | ) | ||||
Other |
| (509 | ) | (509 | ) | |||||
| | | | | | | | | | |
Restructuring accrualJune 30, 2014 |
$ | 3,656 | $ | 552 | $ | 4,208 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
8
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands)
3. Acquisitions
Balance Bar
On November 26, 2012, NBTY acquired all of the outstanding shares of Balance Bar Company ("Balance Bar"), a company that markets and sells nutritional bars, for a purchase price of $77,978 of cash. NBTY used funds drawn from the revolving portion of our senior secured credit facilities to finance this acquisition.
The purchase price has been allocated to assets acquired and liabilities assumed based on the fair value of such assets and liabilities at the date of the acquisition. The fair values of the net assets acquired were determined using discounted cash flow analyses and estimates made by management. The purchase price was allocated to intangible assets as follows: approximately $35,500 to goodwill, which is non-amortizable under GAAP and is not currently deductible for income tax purposes, approximately $26,000 to tradenames, which are amortizable over 30 years and approximately $29,000 to customer relationships, which are amortizable over 22 years. Amortization of the acquired intangible assets is not currently deductible for income tax purposes. The acquisition of Balance Bar has expanded our operations in the Wholesale segment in the distribution of nutritional bars.
Essenza
In June 2013, our subsidiary, NBTY Europe Limited, acquired Essenza N.V. ("Essenza"), a Belgian company operating 13 retail stores, for a net purchase price of approximately $4,163 (€3,200 euros). The allocation of net assets acquired consisted of cash, inventory, property, plant and equipment, tradename, goodwill, accounts payable and accrued liabilities and long term debt. The goodwill of approximately $4,200 associated with this acquisition is not currently deductible for tax purposes.
4. Inventories
The components of inventories are as follows:
|
June 30, 2014 |
September 30, 2013 |
|||||
---|---|---|---|---|---|---|---|
Raw materials |
$ | 211,933 | $ | 195,713 | |||
Work-in-process |
22,184 | 25,068 | |||||
Finished goods |
638,649 | 519,171 | |||||
| | | | | | | |
Total |
$ | 872,766 | $ | 739,952 | |||
| | | | | | | |
| | | | | | | |
9
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands)
5. Goodwill and Intangible Assets
The change in the carrying amount of goodwill by segment is as follows:
|
Wholesale | European Retail |
Direct Response / E-Commerce |
North American Retail |
Consolidated | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at September 30, 2013 |
$ | 645,220 | $ | 324,853 | $ | 264,985 | $ | 25,744 | $ | 1,260,802 | ||||||
Purchase price adjustments |
| 517 | | | 517 | |||||||||||
Foreign currency translation |
(1,188 | ) | 14,316 | | | 13,128 | ||||||||||
| | | | | | | | | | | | | | | | |
Balance at June 30, 2014 |
$ | 644,032 | $ | 339,686 | $ | 264,985 | $ | 25,744 | $ | 1,274,447 | ||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
The carrying amounts of acquired other intangible assets, which are subject to the impact of changes in foreign currency, for the periods indicated are as follows:
|
June 30, 2014 | September 30, 2013 | |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Gross carrying amount |
Accumulated amortization |
Gross carrying amount |
Accumulated amortization |
Amortization period (years) |
|||||||||
Definite lived intangible assets: |
||||||||||||||
Brands and customer relationships |
$ | 914,567 | $ | 146,216 | $ | 913,971 | $ | 116,330 | 17 - 25 | |||||
Tradenames and other |
178,023 | 21,544 | 177,903 | 16,677 | 20 - 30 | |||||||||
| | | | | | | | | | | | | | |
|
1,092,590 | 167,760 | 1,091,874 | 133,007 | ||||||||||
Indefinite lived intangible assets: |
||||||||||||||
Tradenames |
1,016,682 | | 1,001,484 | | ||||||||||
| | | | | | | | | | | | | | |
Total intangible assets |
$ | 2,109,272 | $ | 167,760 | $ | 2,093,358 | $ | 133,007 | ||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Aggregate amortization expense of other definite lived intangible assets included in the consolidated statements of operations in selling, general and administrative expenses for the three months ended June 30, 2014 and 2013 was $11,495 and $11,449, respectively. Amortization expense for the nine months ended June 30, 2014 and 2013 was $34,633 and $34,123, respectively.
Assuming no changes in our intangible assets, estimated amortization expense for each of the five succeeding years will be approximately $46,000 per year.
6. Long-Term Debt
The components of long-term debt are as follows:
|
June 30, 2014 |
September 30, 2013 |
|||||
---|---|---|---|---|---|---|---|
Senior Credit Facilities: |
|||||||
Term loan B-2 |
$ | 1,507,500 | $ | 1,507,500 | |||
Notes |
650,000 | 650,000 | |||||
Other |
998 | 1,281 | |||||
| | | | | | | |
|
2,158,498 | 2,158,781 | |||||
Less: current portion |
(295 | ) | (376 | ) | |||
| | | | | | | |
Total |
$ | 2,158,203 | $ | 2,158,405 | |||
| | | | | | | |
| | | | | | | |
10
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands)
6. Long-Term Debt (Continued)
Senior credit facilities
On October 1, 2010, NBTY entered into its senior secured credit facilities (the "senior secured credit facilities") consisting of a $250,000 revolving credit facility, a $250,000 term loan A and a $1,500,000 term loan B.
On March 1, 2011, NBTY, Alphabet Holding Company, Inc. ("Holdings"), as the parent company of NBTY, and Barclays Bank PLC, as administrative agent, and several other lenders entered into the First Amendment and Refinancing Agreement pursuant to which NBTY repriced its loans. Under the terms of the agreement, the $1,750,000 term loan B-1 and revolving credit facility of $200,000 were established. Substantially all other terms are consistent with the original term loan B, including the amortization schedule of term loan B-1 and maturity dates.
On December 30, 2011, NBTY prepaid $225,000 of its future principal payments on its term loan B-1. As a result of this prepayment $9,289 of deferred financing costs were charged to interest expense. In accordance with the prepayment provisions of the credit agreement governing the senior secured credit facilities, future scheduled payments of principal will not be required until the final balloon payment in October 2017.
On October 11, 2012, NBTY amended its credit agreement to allow Holdings to issue and sell the Holdco Notes. In addition, among other things, the amendment (i) increased the general restricted payments basket to $50,000, (ii) increased the maximum total leverage ratio test which governs the making of restricted payments using Cumulative Credit (as defined in the credit agreement) and (iii) modified the definition of Cumulative Credit so that it conforms to the builder basket used in NBTY's indenture governing the Notes. Interest on the Holdco Notes will be paid via dividends from NBTY to Holdings, to the extent that NBTY is permitted under its credit agreement and the indenture governing the Notes. Expenses of $6,121 related to the amendment were capitalized as a deferred financing cost and are being amortized using the effective interest method. In conjunction with the amendment, NBTY paid Holdings a dividend of $193,956 in October 2012.
In November 2012, NBTY drew $80,000 from the revolving portion of its senior secured credit facilities to finance the acquisition of Balance Bar. As of June 30, 2013, NBTY repaid this borrowing in its entirety.
On March 21, 2013 (the "Second Refinancing Date"), NBTY, Holdings, Barclays Bank PLC, as administrative agent, and several other lenders entered into the Third Amendment and Second Refinancing Agreement (the "Second Refinancing") pursuant to which NBTY repriced its term loan B-1 under its credit agreement. Under the terms of the Second Refinancing, the $1,750,000 term loan B-1 was replaced with a new $1,507,500 term loan B-2. Borrowings under term loan B-2 and the revolving credit facility bear interest at a floating rate which can be, at NBTY's option, either (i) Eurodollar (LIBOR) rate plus an applicable margin, or (ii) base rate plus an applicable margin, in each case, subject to a Eurodollar (LIBOR) rate floor of 1.00% or a base rate floor of 2.00%, as applicable. The applicable margin for term loan B-2 is 2.50% per annum for Eurodollar (LIBOR) loans and 1.50% per annum for base rate loans. The applicable margin for the revolving credit facility remained at 3.25% per annum for Eurodollar (LIBOR) loans and 2.25% per annum for base rate
11
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands)
6. Long-Term Debt (Continued)
loans, with a step-down of 25 basis points upon the achievement of a total senior secured leverage ratio as set forth in the senior secured credit facilities. Substantially all other terms are consistent with the original term loan B-1, including the maturity dates. As a result of the Second Refinancing, $4,232 of previously capitalized deferred financing costs, as well as $1,151 of the call premium on term loan B-1, were expensed and included in interest expense. In addition, costs incurred and recorded as deferred financing costs were approximately $15,190, including $13,924 of the call premium paid on term loan B-1, and are being amortized using the effective interest method.
The following fees are applicable under the revolving credit facility: (i) an unused line fee of 0.50% per annum, based on the unused portion of the revolving credit facility; (ii) a letter of credit participation fee on the aggregate stated amount of each letter of credit available to be drawn equal to the applicable margin for Eurodollar rate loans; (iii) a letter of credit fronting fee equal to 0.25% per annum on the daily amount of each letter of credit available to be drawn; and (iv) certain other customary fees and expenses of our letter of credit issuers.
The revolving credit facility matures in October 2015 and term loan B-2 matures in October 2017.
NBTY may voluntarily prepay loans or reduce commitments under our senior secured credit facilities, in whole or in part, subject to minimum amounts, with prior notice but without premium or penalty. The Second Refinancing extended the 1.00% prepayment penalty payable pursuant to a repricing transaction to one year after the Second Refinancing Date.
NBTY must make prepayments on the term loan B-2 facility with the net cash proceeds of certain asset sales, casualty and condemnation events, the incurrence or issuance of indebtedness (other than indebtedness permitted to be incurred under our senior secured credit facilities unless specifically incurred to refinance a portion of our senior secured credit facilities) and 50% of excess cash flow, as defined in the credit agreement (such percentage subject to reduction based on achievement of total senior secured leverage ratios), in each case, subject to certain reinvestment rights and other exceptions. NBTY is also required to make prepayments under its revolving credit facility at any time when, and to the extent that, the aggregate amount of the outstanding loans and letters of credit under the revolving credit facility exceeds the aggregate amount of commitments in respect of the revolving credit facility.
Obligations under the senior secured credit facilities are guaranteed by Holdings and each of NBTY's current and future direct and indirect subsidiaries other than (i) foreign subsidiaries, (ii) unrestricted subsidiaries, (iii) non-wholly owned subsidiaries, (iv) certain receivables financing subsidiaries, (v) certain immaterial subsidiaries and (vi) certain holding companies of foreign subsidiaries, and are secured by a first lien on substantially all of their assets, including capital stock of subsidiaries (subject to certain exceptions).
The senior secured credit facilities contain customary negative covenants, including, but not limited to, restrictions on NBTY and its restricted subsidiaries' ability to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, make acquisitions, loans, advances or investments, pay dividends, sell or otherwise transfer assets, prepay or modify terms of certain junior indebtedness, enter into transactions with affiliates, amend organizational documents, or
12
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands)
6. Long-Term Debt (Continued)
change our line of business or fiscal year. In addition, our senior secured credit facilities require the maintenance of a maximum total senior secured leverage ratio on a quarterly basis, calculated with respect to Consolidated EBITDA, as defined therein, if at any time amounts are outstanding under the revolving credit facility, including swingline loans and letters of credit. NBTY was in compliance with all financial covenants under the senior secured credit facilities at June 30, 2014. All other financial covenants in the original credit agreement governing the senior secured credit facilities were removed as part of the First Refinancing.
The senior secured credit facilities provide that, upon the occurrence of certain events of default, the obligations thereunder may be accelerated and the lending commitments terminated. Such events of default include payment defaults to the lenders, material inaccuracies of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, voluntary and involuntary bankruptcy proceedings, material money judgments, material ERISA/pension plan events, certain change of control events and other customary events of default.
Holdco Notes
On October 17, 2012, Holdings issued $550,000 in aggregate principal amount of 7.75%/8.50% contingent cash pay senior notes ("Holdco Notes") that mature on November 1, 2017. Interest on the Holdco Notes will accrue at the rate of 7.75% per annum with respect to cash interest and 8.50% per annum with respect to any paid-in-kind interest ("PIK Interest"). Interest on the Holdco Notes is payable semi-annually in arrears on May 1 and November 1 of each year. All interest payments made to date have been in cash. Holdings is a holding company with no operations and has no ability to service interest or principal on the Holdco Notes, other than through dividends it may receive from NBTY. NBTY is restricted, in certain circumstances, from paying dividends to Holdings by the terms of the indenture governing NBTY's 9.00% Senior Notes due 2018 ("Notes") and the senior secured credit facilities. NBTY has not guaranteed the indebtedness of Holdings, nor pledged any of its assets as collateral, and the Holdco Notes are not reflected in NBTY's financial statements. The proceeds from the offering of the Holdco Notes, along with $200,000 of cash on hand from NBTY, as described below, were used to pay transaction fees and expenses, including a consent fee of $17,345 and a $721,678 dividend to Holdings' shareholders in October 2012.
On December 12, 2013, Holdings issued an additional $450,000 in aggregate principal amount of Holdco Notes that mature on November 1, 2017. The additional $450,000 Holdco Notes and the $550,000 of existing Holdco Notes previously issued on October 17, 2012 have identical terms and are treated as a single class for all purposes under the indenture governing the Holdco Notes. The gross proceeds from the offering of the $450,000 additional Holdco Notes was $460,125, inclusive of a $10,125 premium, which were used to pay transaction fees and expenses, including a consent fee, totaling $18,560 and a $445,537 dividend to Holdings' shareholders in December 2013.
Interest on the Holdco Notes shall be payable entirely in cash ("Cash Interest") to the extent that it is less than the maximum amount of allowable dividends and distributions plus any cash at Holdings ("Applicable Amount") as defined by the indenture governing the Holdco Notes. For any interest
13
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands)
6. Long-Term Debt (Continued)
period after May 1, 2013 (other than the final interest period ending at stated maturity), if the Applicable Amount for such interest period will:
(i) equal or exceed 75%, but be less than 100%, of the aggregate amount of Cash Interest that would otherwise be due on the relevant interest payment date, then Holdings may, at its option, elect to pay interest on (a) 25% of the then outstanding principal amount of the Holdco Notes by increasing the principal amount of the outstanding Holdco Notes or by issuing payment in kind notes ("PIK Notes") in a principal amount equal to such interest and (b) 75% of the then outstanding principal amount of the Holdco Notes as Cash Interest;
(ii) equal or exceed 50%, but be less than 75%, of the aggregate amount of Cash Interest that would otherwise be due on the relevant interest payment date, then Holdings may, at its option, elect to pay interest on (a) 50% of the then outstanding principal amount of the Holdco Notes as PIK Interest and (b) 50% of the then outstanding principal amount of the Holdco Notes as Cash Interest;
(iii) equal or exceed 25%, but be less than 50%, of the aggregate amount of Cash Interest that would otherwise be due on the relevant interest payment date, then Holdings may, at its option, elect to pay interest on (a) 75% of the then outstanding principal amount of the Holdco Notes as PIK Interest and (b) 25% of the then outstanding principal amount of the Holdco Notes as Cash Interest; or
(iv) be less than 25% of the aggregate amount of Cash Interest that would otherwise be due on the relevant interest payment date, then Holdings may, at its option, elect to pay interest on the Holdco Notes as PIK Interest.
As described above, Holdings' ability to pay PIK Interest depends on the calculation of the Applicable Amount regardless of the availability of cash at Holdings.
The interest on the Holdco Notes was paid in cash on May 1, 2013, November 1, 2013 and May 1, 2014 and was funded by a dividend of $22,970, $21,313 and $38,750, respectively from NBTY.
Notes
On October 1, 2010, NBTY issued $650,000 in aggregate principal amount of senior notes bearing interest at 9% in a private placement. On August 2, 2011, these privately placed notes were exchanged for substantially identical notes that were registered under the Securities Act of 1933, as amended, and therefore are freely tradable (the privately placed notes and such registered notes exchanged therefor, the "Notes"). The Notes are senior unsecured obligations and mature on October 1, 2018. Interest on the Notes is paid on April 1 and October 1 of each year, and commenced on April 1, 2011.
On or after October 1, 2014, NBTY may redeem the Notes, at its option, in whole at any time or in part from time to time, at the following redemption prices (expressed as a percentage of principal amount), plus accrued and unpaid interest and additional interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the
14
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands)
6. Long-Term Debt (Continued)
relevant interest payment date), if redeemed during the 12-month period commencing on October 1 of the years set forth below:
Period
|
Redemption Price |
|||
---|---|---|---|---|
2014 |
104.50 | % | ||
2015 |
102.25 | % | ||
2016 and thereafter |
100.00 | % |
In addition, at any time prior to October 1, 2014, NBTY may redeem the Notes at its option, in whole at any time or in part from time to time, at a redemption price equal to 100% of the principal amount of the Notes redeemed plus the Applicable Premium (as defined in the indenture governing the Notes) as of, and accrued and unpaid interest and additional interest, if any, to the applicable redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date).
The Notes are jointly and severally irrevocably and unconditionally guaranteed by each of NBTY's subsidiaries that is a guarantor under the credit agreement. The Notes are uncollateralized and rank senior in right of payment to existing and future indebtedness that is expressly subordinated to the Notes, rank equally in right of payment to our and our subsidiary guarantors' senior unsecured debt, and are effectively junior to any of NBTY or its subsidiary guarantors' secured debt, to the extent of the value of the collateral securing such debt. The Notes contain certain customary covenants including, but not limited to, restrictions on NBTY and its restricted subsidiaries' ability to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, make acquisitions, loans, advances or investments, or pay dividends. NBTY was in compliance with all covenants under the Notes at June 30, 2014.
7. Fair Value of Financial Instruments
GAAP establishes a framework for measuring fair value and requires 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 which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
-
- Level 1Quoted prices in active markets for identical assets or liabilities.
-
- Level 2Observable inputs other than Level 1 prices, such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or
liabilities.
-
- Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
15
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands)
7. Fair Value of Financial Instruments (Continued)
The following table summarizes liabilities measured at fair value on a recurring basis at June 30, 2014:
|
Level 1 | Level 2 | Level 3 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Current: |
||||||||||
Interest rate swaps (included in accrued expenses and other current liabilities) |
$ | | $ | (2,306 | ) | $ | | |||
Cross currency swaps (included in accrued expenses and other current liabilities) |
$ | | $ | | $ | (4,797 | ) | |||
Non-current: |
||||||||||
Cross currency swaps (included in other liabilities) |
$ | | $ | | $ | (31,125 | ) |
The following table summarizes liabilities measured at fair value on a recurring basis at September 30, 2013:
|
Level 1 | Level 2 | Level 3 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Current: |
||||||||||
Interest rate swaps (included in accrued expenses and other current liabilities) |
$ | | $ | (5,268 | ) | $ | | |||
Cross currency swaps (included in accrued expenses and other current liabilities) |
$ | | $ | | $ | (3,855 | ) | |||
Non-current: |
||||||||||
Interest rate swaps (included in other liabilities) |
$ | | $ | (1,066 | ) | $ | | |||
Cross currency swaps (included in other liabilities) |
$ | | $ | | $ | (18,399 | ) |
The Company's swap contracts are measured at fair value based on a market approach valuation technique. With the market approach, fair value is derived using prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. Although non-performance risk of the Company and the counterparty is present in all swap contracts and is a component of the estimated fair values, we do not view non-performance risk to be a significant input to the fair value for the interest rate swap contracts. However, with respect to our cross currency swap contracts, we believe that non-performance risk is higher; therefore, the Company classifies these swap contracts as "Level 3" in the fair value hierarchy and, accordingly, records estimated fair value adjustments based on internal projections and views of those contracts. The performance risk for the cross currency swap contracts as a percentage of the unadjusted liabilities ranged from 7.6% to 7.7% (7.7% weighted average) as of June 30, 2014 and 9.5% to 10.3% (9.8% weighted average) as of September 30, 2013.
16
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands)
7. Fair Value of Financial Instruments (Continued)
The following table shows the Level 3 activity related to our cross currency swaps for the three and nine months ended June 30, 2014 and 2013:
|
Three Months Ended | Nine Months Ended | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
June 30, 2014 |
June 30, 2013 |
June 30, 2014 |
June 30, 2013 |
|||||||||
Beginning balance: |
$ | (29,221 | ) | $ | (6,127 | ) | $ | (22,254 | ) | $ | (24,862 | ) | |
Unrealized (loss) gain on cross currency swaps |
(6,701 | ) | 3,492 | (13,668 | ) | 22,227 | |||||||
| | | | | | | | | | | | | |
Ending balance: |
$ | (35,922 | ) | $ | (2,635 | ) | $ | (35,922 | ) | $ | (2,635 | ) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
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. During March 2011, we entered into three interest rate swap contracts to fix the LIBOR indexed interest rates on a portion of our senior secured credit facilities until the indicated expiration dates of these swap contracts. Each swap contract has an initial notional amount of $333,333 (for a total of one billion dollars), with a fixed interest rate of 1.92% for a four-year term. The notional amount of each swap decreased to $266,666 in December 2012, decreased to $166,666 in December 2013 and has a maturity date of December 2014. Under the terms of the swap contracts, variable interest payments for a portion of our senior secured credit facilities are swapped for fixed interest payments. These interest rate swap contracts were designated as a cash flow hedge of the variable interest payments on a portion of our term loan debt. Hedge effectiveness is being assessed based on the overall changes in the fair value of the interest rate swap contracts. Any potential ineffectiveness is measured using the hypothetical derivative method. Any ineffectiveness is recognized in current earnings. Hedge ineffectiveness from inception to June 30, 2014 was $0.
Cross Currency Swaps
To manage the potential exposure from adverse changes in currency exchange rates, specifically the British pound, arising from our net investment in British pound denominated operations, we entered into three cross currency swap contracts in December 2010, to hedge a portion of the net investment in our British pound denominated foreign operations. The aggregate notional amount of the swap contracts is £194,200 British pounds (approximately $300,000 U.S. dollars), with a forward rate of 1.565, and a termination date of September 30, 2017.
These cross currency contracts were designated as a net investment hedge to the net investment in our British pound denominated operations. Hedge effectiveness is assessed based on the overall changes in the fair value of the cross currency swap contracts. Any potential hedge ineffectiveness is measured using the hypothetical derivative method and is recognized in current earnings. Hedge ineffectiveness gains for the three months ended June 30, 2014 and 2013 was $1,463and $2,065, respectively, and is recorded in Miscellaneous, net. Hedge ineffectiveness gains for the nine months ended June 30, 2014 and 2013 was $2,415 and $1,345, respectively.
17
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands)
7. Fair Value of Financial Instruments (Continued)
The following table shows the effect, net of tax impact, of the Company's derivative instruments designated as cash flow and net investment hedging instruments:
|
Three Months Ended June 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | |||||||||||
|
Amount of Gain or (Loss) Recognized in Accumulated OCI on Derivative (Effective Portion) |
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
Amount of Gain or (Loss) Recognized in Accumulated OCI on Derivative (Effective Portion) |
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
|||||||||
Cash Flow Hedges: |
|||||||||||||
Interest rate swaps |
$ | (460 | ) | $ | (1,159 | ) | $ | (695 | ) | $ | (1,855 | ) | |
Net Investment Hedges: |
|||||||||||||
Cross currency swaps |
(5,591 | ) | | 877 | | ||||||||
| | | | | | | | | | | | | |
Total |
$ | (6,051 | ) | $ | (1,159 | ) | $ | 182 | $ | (1,855 | ) | ||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
|
Nine Months Ended June 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | |||||||||||
|
Amount of Gain or (Loss) Recognized in Accumulated OCI on Derivative (Effective Portion) |
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
Amount of Gain or (Loss) Recognized in Accumulated OCI on Derivative (Effective Portion) |
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
|||||||||
Cash Flow Hedges: |
|||||||||||||
Interest rate swaps |
$ | (1,705 | ) | $ | (4,173 | ) | $ | (2,607 | ) | $ | (6,029 | ) | |
Net Investment Hedges: |
|||||||||||||
Cross currency swaps |
(10,835 | ) | | 12,822 | | ||||||||
| | | | | | | | | | | | | |
Total |
$ | (12,540 | ) | $ | (4,173 | ) | $ | 10,215 | $ | (6,029 | ) | ||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Term loan B-2
The face amount of the term loan B-2 is $1,507,500, which approximates fair value based on Level 2 inputs, as this loan accrues interest at a variable interest rate.
Notes
The fair value of the Notes based on quoted market prices (Level 2), was approximately $688,000 as of June 30, 2014.
8. Litigation Summary
Glucosamine-Based Dietary Supplements
Beginning in June 2011, certain putative class actions have been filed in various jurisdictions against NBTY, its subsidiary Rexall Sundown, Inc. ("Rexall"), and/or other companies as to which
18
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands)
8. Litigation Summary (Continued)
there may be a duty to defend and indemnify, challenging the marketing of glucosamine-based dietary supplements, under various states' consumer protection statutes. The lawsuits against NBTY and its subsidiaries are: Cardenas v. NBTY, Inc. and Rexall Sundown, Inc. (filed June 14, 2011) in the United States District Court for the Eastern District of California, on behalf of a putative class of California consumers seeking unspecified compensatory damages based on theories of restitution and disgorgement, plus punitive damages and injunctive relief; Jennings v. Rexall Sundown, Inc. (filed August 22, 2011) in the United States District Court for the District of Massachusetts, on behalf of a putative class of Massachusetts consumers seeking unspecified trebled compensatory damages; and Nunez v. NBTY, Inc. et al. (filed March 1, 2013) in the United States District Court for the Southern District of California (the "Nunez Case"), on behalf of a putative class of California consumers seeking unspecified compensatory damages based on theories of restitution and disgorgement, plus injunctive relief, as well as other cases in California and Illinois against certain wholesale customers as to which we may have certain indemnification obligations. The Nunez Case settled on an individual basis on June 20, 2013.
In March 2013, NBTY agreed upon a proposed settlement with the remaining plaintiffs, which includes all cases and resolves all pending claims without any admission of or concession of liability by NBTY, and which provides for a release of all claims in return for payments to the class, together with attorneys' fees, and notice and administrative costs. Fairness Hearings took place on October 4, 2013 and November 20, 2013. On January 3, 2014, the court issued an opinion and order approving the settlement as modified ("the Order"). The final judgment was issued on January 22, 2014 ("the Judgment"). Certain objectors filed a notice of appeal of the Order and the Judgment on January 29, 2014 and the plaintiffs filed a notice of appeal on February 3, 2014, and those appeals are pending.
In fiscal 2013, NBTY recorded a provision of $12,000 reflecting its best estimate of exposure for payments to the class together with attorney's fees, and notice and administrative costs in connection with this class action settlement. As a result of the court's approval of the settlement and the closure of the claims period, NBTY has reduced its estimate of exposure to $6,100. This reduction in the estimated exposure was reflected in the Company's first quarter results for fiscal 2014. Until the appeal is resolved, no final determination can be made as to the ultimate outcome of the litigation or the amount of liability on the part of NBTY.
Telephone Consumer Protection Act Claim
NBTY, and certain of its subsidiaries, are defendants in a class-action lawsuit, captioned John H. Lary Jr. v. Rexall Sundown, Inc.; Rexall Sundown 3001, LLC; Rexall, Inc.; NBTY, Inc.; Corporate Mailings, Inc. d/b/a CCG Marketing Solutions ("CCG") and John Does 1-10 (originally filed October 22, 2013), brought in the United States District Court, Eastern District of New York. The plaintiff alleges that the defendants faxed advertisements to plaintiff and others without invitation or permission, in violation of the Telephone Consumer Protection Act ("TCPA"). On May 2, 2014, NBTY and its named subsidiary defendants cross-claimed against CCG, who was a third party vendor engaged by NBTY, and CCG cross-claimed against NBTY and named subsidiary defendants on June 13, 2014. CCG brought a third party complaint against an unrelated entity, Healthcare Data Experts, LLC, on June 27, 2014. On July 21, 2014, CCG filed a motion to dismiss the amended complaint and that motion is pending. At
19
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands)
8. Litigation Summary (Continued)
this time, no determination can be made as to the ultimate outcome of the litigation or the amount of liability on the part of NBTY, however we do not believe the ultimate outcome will have a material adverse effect on each of our consolidated financial statements.
Claims in the Ordinary Course
In addition to the foregoing, other regulatory inquiries, claims, suits and complaints (including product liability, false advertising, intellectual property and Proposition 65 claims) arise from time to time 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 each of our consolidated financial statements, if adversely determined against us.
9. 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 2014 and 2028. Therefore, our overall effective income tax rate could vary.
The effective income tax rate for the three months ended June 30, 2014 and 2013 was 30.7% and 27.0%, respectively. The effective income tax rate for the nine months ended June 30, 2014 and 2013 was 32.6% and 28.7%, respectively. Our effective tax rate for the three and nine month periods is different than the Federal statutory rate generally due to the timing and mixture (foreign and domestic) of income, revisions to annual estimates of net income, the partial reinvestment of foreign earnings in fiscal 2014 and 2013, as well as the facility restructuring charge which had a favorable impact on the prior year.
We accrue interest and penalties related to unrecognized tax benefits in the provision for income taxes. This methodology is consistent with previous periods. At June 30, 2014, we had $1,904 and $662 accrued for the potential payment of interest and penalties, respectively. As of June 30, 2014, we were subject to U.S. federal income tax examinations for the tax years 2007-2013, and to non-U.S. examinations for the tax years 2006-2013. In addition, we are generally subject to state and local examinations for fiscal years 2008-2013.
The Company is under an Internal Revenue Service ("IRS") examination for tax years 2007-2012. Among other issues, the IRS has questioned the values used by the Company to transfer product and provide services to an international subsidiary. The Company believes it has appropriately valued such product transfers and services and intends to continue to support this position as the IRS examination progresses.
At June 30, 2014, we had a liability of $14,260 for unrecognized tax benefits, the recognition of which would have an effect of $10,670 on provision for income taxes at the effective income tax rate. The Company expects to finalize its IRS examination for the tax years 2007-2010 during the next 12 months and the results of this examination could have an impact on this liability. 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.
20
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands)
10. Accumulated Other Comprehensive Income (Loss)
Additions to and reclassifications out of accumulated other comprehensive income (loss) attributable to the Company were as follows:
|
Three Months Ended June 30, 2014(1) | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Foreign currency translation adjustments |
Gains and losses on cash flow hedges |
Total | |||||||
Balance at March 31, 2014 |
$ | 1,809 | $ | (2,133 | ) | $ | (324 | ) | ||
Other comprehensive income (loss) before reclassifications |
11,127 | (460 | ) | 10,667 | ||||||
Amounts reclassified from accumulated other comprehensive income (loss)(2) |
| 1,159 | 1,159 | |||||||
| | | | | | | | | | |
Balance at June 30, 2014 |
$ | 12,936 | $ | (1,434 | ) | $ | 11,502 | |||
| | | | | | | | | | |
| | | | | | | | | | |
|
Nine Months Ended June 30, 2014(1) | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Foreign currency translation adjustments |
Gains and losses on cash flow hedges |
Total | |||||||
Balance at September 30, 2013 |
$ | (9,679 | ) | $ | (3,903 | ) | $ | (13,582 | ) | |
Other comprehensive income (loss) before reclassifications |
22,615 | (1,705 | ) | 20,910 | ||||||
Amounts reclassified from accumulated other comprehensive income (loss)(2) |
| 4,174 | 4,174 | |||||||
| | | | | | | | | | |
Balance at June 30, 2014 |
$ | 12,936 | $ | (1,434 | ) | $ | 11,502 | |||
| | | | | | | | | | |
| | | | | | | | | | |
|
Three Months Ended June 30, 2013(1) | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Foreign currency translation adjustments |
Gains and losses on cash flow hedges |
Total | |||||||
Balance at March 31, 2013 |
$ | (52,652 | ) | $ | (6,045 | ) | $ | (58,697 | ) | |
Other comprehensive income (loss) before reclassifications |
(2,857 | ) | (695 | ) | (3,552 | ) | ||||
Amounts reclassified from accumulated other comprehensive income (loss)(2) |
| 1,855 | 1,855 | |||||||
| | | | | | | | | | |
Balance at June 30, 2013 |
$ | (55,509 | ) | $ | (4,885 | ) | $ | (60,394 | ) | |
| | | | | | | | | | |
| | | | | | | | | | |
21
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands)
10. Accumulated Other Comprehensive Income (Loss) (Continued)
|
Nine Months Ended June 30, 2013(1) | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Foreign currency translation adjustments |
Gains and losses on cash flow hedges |
Total | |||||||
Balance at September 30, 2012 |
$ | (10,288 | ) | $ | (8,306 | ) | $ | (18,594 | ) | |
Other comprehensive income (loss) before reclassifications |
(45,221 | ) | (2,607 | ) | (47,828 | ) | ||||
Amounts reclassified from accumulated other comprehensive income (loss)(2) |
| 6,029 | 6,029 | |||||||
| | | | | | | | | | |
Balance at June 30, 2013 |
$ | (55,509 | ) | $ | (4,884 | ) | $ | (60,393 | ) | |
| | | | | | | | | | |
| | | | | | | | | | |
- (1)
- All
amounts are net of tax, amounts in parentheses indicate debits.
- (2)
- These (gains) losses are reclassified into Interest expense. See Note 7, Fair Value of Financial Instruments.
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.
22
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands)
11. Business and Credit Concentration (Continued)
The following customers accounted for the following percentages of the Wholesale segment's net sales and our consolidated net sales, respectively:
|
Wholesale Segment Net Sales |
Total Consolidated Net Sales |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Three Months Ended June 30, |
Three Months Ended June 30, |
|||||||||||
|
2014 | 2013 | 2014 | 2013 | |||||||||
Customer A |
18 | % | 22 | % | 11 | % | 13 | % | |||||
Customer B |
13 | % | 12 | % | 7 | % | 7 | % | |||||
Customer C |
8 | % | 10 | % | 4 | % | 6 | % |
|
Wholesale Segment Net Sales |
Total Consolidated Net Sales |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Nine Months Ended June 30, |
Nine Months Ended June 30, |
|||||||||||
|
2014 | 2013 | 2014 | 2013 | |||||||||
Customer A |
19 | % | 22 | % | 11 | % | 13 | % | |||||
Customer B |
12 | % | 11 | % | 7 | % | 7 | % | |||||
Customer C |
8 | % | 10 | % | 5 | % | 6 | % |
The following customers accounted for the following percentages of the Wholesale segment's gross accounts receivable:
|
June 30, 2014 |
September 30, 2013 |
|||||
---|---|---|---|---|---|---|---|
Customer A |
16 | % | 12 | % | |||
Customer B |
13 | % | 11 | % |
The loss of any of these customers, or any one of our other major customers, would have a material adverse effect on our financial statements if we were unable to replace that customer.
12. Related Party Transactions
Consulting AgreementCarlyle
NBTY entered into a consulting agreement with Carlyle under which we pay Carlyle a fee for consulting services Carlyle provides to us and our subsidiaries. Under this agreement, subject to certain conditions, we expect to pay an annual consulting fee to Carlyle of $3,000; we will reimburse them for out-of-pocket expenses, and we may pay Carlyle additional fees associated with other future transactions. For the three and nine months ended June 30, 2014 and 2013, these fees totaled $750 and $2,250, respectively, and are recorded in selling, general and administrative expenses. Out of pocket expenditures paid to Carlyle were $24 and $0 for the three months ended June 30, 2014 and 2013, respectively, and $392 and $311 for the nine months ended June 30, 2014 and 2013, respectively.
23
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands)
12. Related Party Transactions (Continued)
Holdings
Holdings does not have any significant operations or cash flow other than dividends from NBTY. Holdings has $1,000,000 of Holdco Notes and relies on dividends from NBTY to service the debt. See Note 6 Long-Term Debt for further information.
13. Segment Information
We are organized by segments on a worldwide basis. We evaluate performance based on a number of factors; however, the primary measures of performance are the net sales and income or loss from operations (before 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 Corporate/Manufacturing.
All of our products fall into one or more of these four segments:
-
- WholesaleThis segment sells products under various brand
names and third-party private labels, each targeting specific market groups which include virtually all major mass merchandisers, club stores, drug store chains and supermarkets. This segment also
sells products to independent pharmacies, health food stores, the military and other retailers.
-
- European RetailThis segment generates revenue through its
746 Holland & Barrett stores (including franchised stores in the following countries: 28 in China, 27 in Singapore, nine in each of United Arab Emirates and Cyprus, four in Malta and one in
each of Gibraltar and Iceland), 138 De Tuinen stores (including seven franchised locations) in the Netherlands, 54 GNC (UK) stores in the U.K., 47 Nature's Way stores in Ireland and 13 Essenza stores
in Belgium which were acquired in June of 2013, as well as internet-based sales from www.hollandandbarret.com, www.detuinen.nl and www.gnc.co.uk. Such
revenue consists of sales of proprietary brand and third-party products as well as franchise fees.
-
- Direct Response/E-CommerceThis segment generates revenue
through the sale of proprietary brand and third-party products primarily through mail order catalog and internet under the Puritan's Pride tradename. Catalogs are strategically mailed to customers who
order by mail, internet or phone.
-
- North American RetailThis segment generates revenue through its 419 owned and operated Vitamin World stores selling proprietary brand and third-party products, as well as internet-based sales from www.vitaminworld.com.
24
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands)
13. Segment Information (Continued)
The following table represents key financial information of our business segments:
|
Total Reportable Business Segments | |
|
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Wholesale | European Retail |
Direct Response/ E-Commerce |
North American Retail |
Total | Corporate/ Manufacturing |
Consolidated | |||||||||||||||
Three Months Ended June 30, 2014: |
||||||||||||||||||||||
Net sales |
$ | 471,344 | $ | 215,328 | $ | 63,940 | $ | 56,349 | $ | 806,961 | $ | | $ | 806,961 | ||||||||
Income (loss) from operations |
41,355 | 48,386 | 9,009 | 3,073 | 101,823 | (22,535 | ) | 79,288 | ||||||||||||||
Depreciation and amortization |
9,032 | 4,807 | 2,830 | 892 | 17,561 | 9,748 | 27,309 | |||||||||||||||
Capital expenditures |
41 | 12,380 | 402 | 4,388 | 17,211 | 7,981 | 25,192 | |||||||||||||||
Three Months Ended June 30, 2013: |
||||||||||||||||||||||
Net sales |
$ | 489,228 | $ | 191,692 | $ | 63,670 | $ | 58,239 | $ | 802,829 | $ | | $ | 802,829 | ||||||||
Income (loss) from operations |
65,995 | 45,478 | 9,001 | 7,247 | 127,721 | (27,278 | ) | 100,443 | ||||||||||||||
Depreciation and amortization |
9,171 | 3,544 | 2,506 | 609 | 15,830 | 15,444 | 31,274 | |||||||||||||||
Capital expenditures |
177 | 7,494 | 2,280 | 1,475 | 11,426 | 19,736 | 31,162 | |||||||||||||||
Nine Months Ended June 30, 2014: |
||||||||||||||||||||||
Net sales |
$ | 1,420,067 | $ | 635,556 | $ | 187,904 | $ | 169,565 | $ | 2,413,092 | $ | | $ | 2,413,092 | ||||||||
Income (loss) from operations |
143,087 | 142,260 | 23,372 | 7,568 | 316,287 | (72,549 | ) | 243,738 | ||||||||||||||
Depreciation and amortization |
27,199 | 12,984 | 8,475 | 2,365 | 51,023 | 27,686 | 78,709 | |||||||||||||||
Capital expenditures |
244 | 27,248 | 1,084 | 11,977 | 40,553 | 31,883 | 72,436 | |||||||||||||||
Nine Months Ended June 30, 2013: |
||||||||||||||||||||||
Net sales |
$ | 1,429,103 | $ | 557,779 | $ | 186,252 | $ | 176,796 | $ | 2,349,930 | $ | | $ | 2,349,930 | ||||||||
Income (loss) from operations |
162,886 | 127,979 | 32,325 | 19,995 | 343,185 | (114,128 | ) | 229,057 | ||||||||||||||
Depreciation and amortization |
27,319 | 10,405 | 7,515 | 1,851 | 47,090 | 36,854 | 83,944 | |||||||||||||||
Capital expenditures |
407 | 21,412 | 3,048 | 2,900 | 27,767 | 69,087 | 96,854 |
25
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands)
13. Segment Information (Continued)
Total assets by segment are as follows:
|
June 30, 2014 |
September 30, 2013 |
|||||
---|---|---|---|---|---|---|---|
Reportable Business Segments: |
|||||||
Wholesale |
$ | 2,647,424 | $ | 2,553,857 | |||
European Retail |
992,482 | 924,979 | |||||
Direct Response / E-Commerce |
690,254 | 692,685 | |||||
North American Retail |
128,983 | 119,395 | |||||
| | | | | | | |
Total Reportable Business Segments: |
4,459,143 | 4,290,916 | |||||
| | | | | | | |
Corporate / Manufacturing |
666,636 | 782,400 | |||||
| | | | | | | |
Consolidated assets |
$ | 5,125,779 | $ | 5,073,316 | |||
| | | | | | | |
| | | | | | | |
14. Condensed Consolidating Financial Statements of Guarantors
The Notes were issued by NBTY and are guaranteed by each of its current and future direct and indirect 100% owned subsidiaries, subject to certain exceptions. These guarantees are full, unconditional and joint and several. The following condensed consolidating financial information presents:
- 1.
- Condensed
consolidating financial statements as of June 30, 2014 and September 30, 2013 and for the three and nine months ended June 30,
2014 and 2013 of (a) NBTY, the parent and issuer, (b) the guarantor subsidiaries, (c) the non-guarantor subsidiaries and (d) NBTY on a consolidated basis; and
- 2.
- Elimination entries necessary to consolidate NBTY, 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, other comprehensive income, capital contributions, distributions and other equity changes. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. For cashflow presentation purposes, cash transfers between the Guarantors and Non-guarantors (the "Operating Entities") are presented as operating activities and cash transfers between the Parent and the Operating Entities are presented as financing cashflows, unless the cash transfers relate to a statutorily recorded dividend or a formally documented loan agreement. Cash transfers which are statutorily recorded as dividends are presented as a financing outflow by the remitting entity and an operating inflow for the receiving entity, provided that the dividends remitted do not exceed the cumulative earnings of the remitting entity. Cash transfers related to formally documented loans are treated as financing activities for all entities that are party to the transfer. This financial information should be read in conjunction with the financial statements and other notes related thereto.
26
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands)
14. Condensed Consolidating Financial Statements of Guarantors (Continued)
In the first quarter of fiscal 2014, we revised the presentation of certain amounts related to the application of push-down accounting in connection with the acquisition of the Company by Carlyle on October 1, 2010 which resulted in a revised presentation of a debt balance and the associated intercompany interest between the parent and guarantors and the presentation of certain transactions previously reflected as intercompany activities as equity transactions. In addition, we revised the cash flow presentation for dividends remitted from the non-guarantor subsidiaries as well as funds remitted from the guarantor to the parent. These revisions impacted the consolidating balance sheet as of September 30, 2013, the consolidating statements of income and comprehensive income for the three and nine months ended June 30, 2013 and cash flows for the nine months ended June 30, 2013. The revisions to this supplemental information did not impact any amounts reported in our previously issued Consolidated Financial Statements. In accordance with SEC Staff Accounting Bulletin Nos. 99 and 108, we assessed the materiality of these revisions and concluded that the revisions were not material to any of our previously issued consolidating financial statements. As comparative prior period supplemental guarantor subsidiaries financial information is presented in future filings, we will similarly revise such prior period information.
27
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands)
14. Condensed Consolidating Financial Statements of Guarantors (Continued)
Condensed Consolidating Balance Sheet
As of June 30, 2014
|
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 23,735 | $ | | $ | 75,338 | $ | (4,656 | ) | $ | 94,417 | |||||
Accounts receivable, net |
| 134,636 | 49,896 | | 184,532 | |||||||||||
Intercompany |
16,957 | | 84,149 | (101,106 | ) | | ||||||||||
Inventories |
| 665,922 | 206,844 | | 872,766 | |||||||||||
Deferred income taxes |
| 23,705 | 668 | | 24,373 | |||||||||||
Other current assets |
19,703 | 23,270 | 35,873 | | 78,846 | |||||||||||
| | | | | | | | | | | | | | | | |
Total current assets |
60,395 | 847,533 | 452,768 | (105,762 | ) | 1,254,934 | ||||||||||
Property, plant and equipment, net |
90,823 | 305,318 | 194,224 | | 590,365 | |||||||||||
Goodwill |
| 813,688 | 460,759 | | 1,274,447 | |||||||||||
Other intangible assets, net |
| 1,570,022 | 371,490 | | 1,941,512 | |||||||||||
Other assets |
46,348 | 18,083 | 90 | | 64,521 | |||||||||||
Intercompany loan receivable |
2,503,720 | 1,130,845 | | (3,634,565 | ) | | ||||||||||
Investments in subsidiaries |
2,339,036 | | | (2,339,036 | ) | | ||||||||||
| | | | | | | | | | | | | | | | |
Total assets |
$ | 5,040,322 | $ | 4,685,489 | $ | 1,479,331 | $ | (6,079,363 | ) | $ | 5,125,779 | |||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Liabilities and Stockholder's Equity |
||||||||||||||||
Current liabilities: |
||||||||||||||||
Current portion of long-term debt |
$ | | $ | | $ | 295 | $ | | $ | 295 | ||||||
Accounts payable |
| 185,181 | 76,090 | (4,656 | ) | 256,615 | ||||||||||
Intercompany |
| 101,106 | | (101,106 | ) | | ||||||||||
Accrued expenses and other current liabilities |
21,755 | 136,728 | 40,414 | | 198,897 | |||||||||||
| | | | | | | | | | | | | | | | |
Total current liabilities |
21,755 | 423,015 | 116,799 | (105,762 | ) | 455,807 | ||||||||||
Intercompany loan payable |
1,130,845 | 2,157,500 | 346,220 | (3,634,565 | ) | | ||||||||||
Long-term debt, net of current portion |
2,157,500 | | 703 | | 2,158,203 | |||||||||||
Deferred income taxes |
8,875 | 639,285 | 99,740 | | 747,900 | |||||||||||
Other liabilities |
31,125 | 16,140 | 26,382 | | 73,647 | |||||||||||
| | | | | | | | | | | | | | | | |
Total liabilities |
3,350,100 | 3,235,940 | 589,844 | (3,740,327 | ) | 3,435,557 | ||||||||||
Commitments and contingencies |
||||||||||||||||
Stockholder's Equity: |
||||||||||||||||
Common stock |
| | | | | |||||||||||
Capital in excess of par |
1,560,298 | 1,211,581 | 739,911 | (1,951,492 | ) | 1,560,298 | ||||||||||
Retained earnings |
118,422 | 239,400 | 126,679 | (366,079 | ) | 118,422 | ||||||||||
Accumulated other comprehensive income (loss) |
11,502 | (1,432 | ) | 22,897 | (21,465 | ) | 11,502 | |||||||||
| | | | | | | | | | | | | | | | |
Total stockholder's equity |
1,690,222 | 1,449,549 | 889,487 | (2,339,036 | ) | 1,690,222 | ||||||||||
| | | | | | | | | | | | | | | | |
Total liabilities and stockholder's equity |
$ | 5,040,322 | $ | 4,685,489 | $ | 1,479,331 | $ | (6,079,363 | ) | $ | 5,125,779 | |||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
28
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands)
14. Condensed Consolidating Financial Statements of Guarantors (Continued)
Condensed Consolidating Balance Sheet
As of September 30, 2013
|
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 81,356 | $ | 35,357 | $ | 81,848 | $ | | $ | 198,561 | ||||||
Accounts receivable, net |
| 127,894 | 43,776 | | 171,670 | |||||||||||
Intercompany |
34,549 | | | (34,549 | ) | | ||||||||||
Inventories |
| 561,276 | 178,676 | | 739,952 | |||||||||||
Deferred income taxes |
| 23,004 | 633 | | 23,637 | |||||||||||
Other current assets |
19,033 | 24,104 | 35,442 | | 78,579 | |||||||||||
| | | | | | | | | | | | | | | | |
Total current assets |
134,938 | 771,635 | 340,375 | (34,549 | ) | 1,212,399 | ||||||||||
Property, plant and equipment, net |
88,612 | 308,852 | 174,065 | | 571,529 | |||||||||||
Goodwill |
| 813,688 | 447,114 | | 1,260,802 | |||||||||||
Other intangible assets, net |
| 1,601,963 | 358,388 | | 1,960,351 | |||||||||||
Other assets |
61,218 | 6,938 | 79 | | 68,235 | |||||||||||
Intercompany loan receivable |
2,480,760 | 1,062,900 | 29,082 | (3,572,742 | ) | | ||||||||||
Investments in subsidiaries |
2,180,814 | | | (2,180,814 | ) | | ||||||||||
| | | | | | | | | | | | | | | | |
Total assets |
$ | 4,946,342 | $ | 4,565,976 | $ | 1,349,103 | $ | (5,788,105 | ) | $ | 5,073,316 | |||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Liabilities and Stockholder's Equity |
||||||||||||||||
Current liabilities: |
||||||||||||||||
Current portion of long-term debt |
$ | | $ | | $ | 376 | $ | | $ | 376 | ||||||
Accounts payable |
| 195,712 | 63,348 | | 259,060 | |||||||||||
Intercompany |
| 34,549 | | (34,549 | ) | | ||||||||||
Accrued expenses and other current liabilities |
38,407 | 109,865 | 71,494 | | 219,766 | |||||||||||
| | | | | | | | | | | | | | | | |
Total current liabilities |
38,407 | 340,126 | 135,218 | (34,549 | ) | 479,202 | ||||||||||
Intercompany loan payable |
1,091,982 | 2,157,500 | 323,260 | (3,572,742 | ) | | ||||||||||
Long-term debt, net of current portion |
2,157,500 | | 905 | | 2,158,405 | |||||||||||
Deferred income taxes |
14,151 | 637,726 | 99,542 | | 751,419 | |||||||||||
Other liabilities |
19,463 | 14,650 | 25,338 | | 59,451 | |||||||||||
| | | | | | | | | | | | | | | | |
Total liabilities |
3,321,503 | 3,150,002 | 584,263 | (3,607,291 | ) | 3,448,477 | ||||||||||
Commitments and contingencies |
||||||||||||||||
Stockholder's Equity: |
||||||||||||||||
Common stock |
| | | | | |||||||||||
Capital in excess of par |
1,556,926 | 1,211,581 | 733,411 | (1,944,992 | ) | 1,556,926 | ||||||||||
Retained earnings |
81,497 | 208,295 | 30,198 | (238,493 | ) | 81,497 | ||||||||||
Accumulated other comprehensive income (loss) |
(13,584 | ) | (3,902 | ) | 1,231 | 2,671 | (13,584 | ) | ||||||||
| | | | | | | | | | | | | | | | |
Total stockholder's equity |
1,624,839 | 1,415,974 | 764,840 | (2,180,814 | ) | 1,624,839 | ||||||||||
| | | | | | | | | | | | | | | | |
Total liabilities and stockholder's equity |
$ | 4,946,342 | $ | 4,565,976 | $ | 1,349,103 | $ | (5,788,105 | ) | $ | 5,073,316 | |||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
29
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands)
14. Condensed Consolidating Financial Statements of Guarantors (Continued)
Consolidated Statements of Operations and Comprehensive Income (Loss)
Three Months Ended June 30, 2014
|
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net sales |
$ | | $ | 543,930 | $ | 294,293 | $ | (31,262 | ) | $ | 806,961 | |||||
| | | | | | | | | | | | | | | | |
Costs and expenses: |
||||||||||||||||
Cost of sales |
| 335,320 | 127,146 | (31,262 | ) | 431,204 | ||||||||||
Advertising, promotion and catalog |
| 51,122 | 9,809 | | 60,931 | |||||||||||
Selling, general and administrative |
22,441 | 112,937 | 100,160 | | 235,538 | |||||||||||
| | | | | | | | | | | | | | | | |
|
22,441 | 499,379 | 237,115 | (31,262 | ) | 727,673 | ||||||||||
| | | | | | | | | | | | | | | | |
Income (loss) from operations |
(22,441 | ) | 44,551 | 57,178 | | 79,288 | ||||||||||
| | | | | | | | | | | | | | | | |
Other income (expense): |
||||||||||||||||
Intercompany interest |
39,222 | (34,167 | ) | (5,055 | ) | | | |||||||||
Interest |
(34,167 | ) | 388 | (15 | ) | | (33,794 | ) | ||||||||
Miscellaneous, net |
1,538 | 586 | 410 | | 2,534 | |||||||||||
| | | | | | | | | | | | | | | | |
|
6,593 | (33,193 | ) | (4,660 | ) | | (31,260 | ) | ||||||||
| | | | | | | | | | | | | | | | |
Income (loss) before income taxes |
(15,848 | ) | 11,358 | 52,518 | | 48,028 | ||||||||||
Provision (benefit) for income taxes |
(2,344 |
) |
3,975 |
13,130 |
|
14,761 |
||||||||||
Equity in income of subsidiaries |
46,771 | | | (46,771 | ) | | ||||||||||
| | | | | | | | | | | | | | | | |
Net income (loss) |
33,267 | 7,383 | 39,388 | (46,771 | ) | 33,267 | ||||||||||
| | | | | | | | | | | | | | | | |
Other comprehensive income (loss), net of tax: |
||||||||||||||||
Foreign currency translation adjustment, net of taxes |
11,127 | | 13,238 | (13,238 | ) | 11,127 | ||||||||||
Change in fair value of interest rate swaps, net of taxes |
699 | 699 | | (699 | ) | 699 | ||||||||||
| | | | | | | | | | | | | | | | |
Total other comprehensive income (loss), net of tax |
11,826 | 699 | 13,238 | (13,937 | ) | 11,826 | ||||||||||
Comprehensive income (loss) |
$ |
45,093 |
$ |
8,082 |
$ |
52,626 |
$ |
(60,708 |
) |
$ |
45,093 |
|||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
30
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands)
14. Condensed Consolidating Financial Statements of Guarantors (Continued)
Consolidated Statements of Operations and Comprehensive Income (Loss)
Three Months Ended June 30, 2013
|
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net sales |
$ | | $ | 560,753 | $ | 268,735 | $ | (26,659 | ) | $ | 802,829 | |||||
| | | | | | | | | | | | | | | | |
Costs and expenses: |
||||||||||||||||
Cost of sales |
| 333,113 | 118,416 | (26,659 | ) | 424,870 | ||||||||||
Advertising, promotion and catalog |
| 38,315 | 9,835 | | 48,150 | |||||||||||
Selling, general and administrative |
22,320 | 114,205 | 87,897 | | 224,422 | |||||||||||
Facility restructuring charge |
| 4,944 | | | 4,944 | |||||||||||
| | | | | | | | | | | | | | | | |
|
22,320 | 490,577 | 216,148 | (26,659 | ) | 702,386 | ||||||||||
| | | | | | | | | | | | | | | | |
Income (loss) from operations |
(22,320 | ) | 70,176 | 52,587 | | 100,443 | ||||||||||
| | | | | | | | | | | | | | | | |
Other income (expense): |
||||||||||||||||
Intercompany interest |
38,825 | (34,142 | ) | (4,683 | ) | | | |||||||||
Interest |
(34,142 | ) | | 78 | | (34,064 | ) | |||||||||
Miscellaneous, net |
2,045 | 3,049 | (1,270 | ) | | 3,824 | ||||||||||
| | | | | | | | | | | | | | | | |
|
6,728 | (31,093 | ) | (5,875 | ) | | (30,240 | ) | ||||||||
| | | | | | | | | | | | | | | | |
Income (loss) before income taxes |
(15,592 | ) | 39,083 | 46,712 | | 70,203 | ||||||||||
Provision (benefit) for income taxes |
(7,805 |
) |
13,679 |
13,079 |
|
18,953 |
||||||||||
Equity in income of subsidiaries |
59,037 | | | (59,037 | ) | | ||||||||||
| | | | | | | | | | | | | | | | |
Net income (loss) |
51,250 | 25,404 | 33,633 | (59,037 | ) | 51,250 | ||||||||||
| | | | | | | | | | | | | | | | |
Other comprehensive income (loss), net of tax: |
||||||||||||||||
Foreign currency translation adjustment, net of taxes |
(2,857 | ) | | (2,938 | ) | 2,938 | (2,857 | ) | ||||||||
Change in fair value of interest rate swaps net of taxes |
1,161 | 1,161 | | (1,161 | ) | 1,161 | ||||||||||
| | | | | | | | | | | | | | | | |
Total other comprehensive income (loss), net of tax |
(1,696 | ) | 1,161 | (2,938 | ) | 1,777 | (1,696 | ) | ||||||||
Comprehensive income (loss) |
$ |
49,554 |
$ |
26,565 |
$ |
30,695 |
$ |
(57,260 |
) |
$ |
49,554 |
|||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
31
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands)
14. Condensed Consolidating Financial Statements of Guarantors (Continued)
Consolidated Statements of Operations and Comprehensive Income (Loss)
Nine Months Ended June 30, 2014
|
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net sales |
$ | | $ | 1,629,806 | $ | 868,902 | $ | (85,616 | ) | $ | 2,413,092 | |||||
| | | | | | | | | | | | | | | | |
Costs and expenses: |
||||||||||||||||
Cost of sales |
| 1,008,111 | 381,508 | (85,616 | ) | 1,304,003 | ||||||||||
Advertising, promotion and catalog |
| 127,945 | 30,291 | | 158,236 | |||||||||||
Selling, general and administrative |
72,527 | 343,606 | 290,982 | | 707,115 | |||||||||||
Merger expenses |
| | ||||||||||||||
| | | | | | | | | | | | | | | | |
|
72,527 | 1,479,662 | 702,781 | (85,616 | ) | 2,169,354 | ||||||||||
| | | | | | | | | | | | | | | | |
Income (loss) from operations |
(72,527 | ) | 150,144 | 166,121 | | 243,738 | ||||||||||
| | | | | | | | | | | | | | | | |
Other income (expense): |
||||||||||||||||
Intercompany interest |
118,051 | (103,170 | ) | (14,881 | ) | | | |||||||||
Interest |
(103,170 | ) | 994 | 478 | | (101,698 | ) | |||||||||
Miscellaneous, net |
2,543 | (115 | ) | (619 | ) | | 1,809 | |||||||||
| | | | | | | | | | | | | | | | |
|
17,424 | (102,291 | ) | (15,022 | ) | | (99,889 | ) | ||||||||
| | | | | | | | | | | | | | | | |
Income (loss) before income taxes |
(55,103 | ) | 47,853 | 151,099 | | 143,849 | ||||||||||
Provision (benefit) for income taxes |
(7,662 |
) |
16,748 |
37,775 |
|
46,861 |
||||||||||
Equity in income of subsidiaries |
144,429 | | | (144,429 | ) | | ||||||||||
| | | | | | | | | | | | | | | | |
Net income (loss) |
96,988 | 31,105 | 113,324 | (144,429 | ) | 96,988 | ||||||||||
| | | | | | | | | | | | | | | | |
Other comprehensive income (loss), net of tax: |
||||||||||||||||
Foreign currency translation adjustment, net of taxes |
22,615 | | 21,666 | (21,666 | ) | 22,615 | ||||||||||
Change in fair value of interest rate swaps net of taxes |
2,469 | 2,469 | | (2,469 | ) | 2,469 | ||||||||||
| | | | | | | | | | | | | | | | |
Total other comprehensive income (loss), net of tax |
25,084 | 2,469 | 21,666 | (24,135 | ) | 25,084 | ||||||||||
Comprehensive income (loss) |
$ |
122,072 |
$ |
33,574 |
$ |
134,990 |
$ |
(168,564 |
) |
$ |
122,072 |
|||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
32
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands)
14. Condensed Consolidating Financial Statements of Guarantors (Continued)
Consolidated Statements of Operations and Comprehensive Income (Loss)
Nine Months Ended June 30, 2013
|
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net sales |
$ | | $ | 1,652,668 | $ | 773,719 | $ | (76,457 | ) | $ | 2,349,930 | |||||
| | | | | | | | | | | | | | | | |
Costs and expenses: |
||||||||||||||||
Cost of sales |
| 1,000,989 | 343,103 | (76,457 | ) | 1,267,635 | ||||||||||
Advertising, promotion and catalog |
| 116,450 | 26,256 | | 142,706 | |||||||||||
Selling, general and administrative |
78,838 | 338,137 | 258,413 | | 675,388 | |||||||||||
Merger expenses |
| 35,144 | 35,144 | |||||||||||||
| | | | | | | | | | | | | | | | |
|
78,838 | 1,490,720 | 627,772 | (76,457 | ) | 2,120,873 | ||||||||||
| | | | | | | | | | | | | | | | |
Income (loss) from operations |
(78,838 | ) | 161,948 | 145,947 | | 229,057 | ||||||||||
| | | | | | | | | | | | | | | | |
Other income (expense): |
||||||||||||||||
Intercompany interest |
122,628 | (113,033 | ) | (9,595 | ) | | | |||||||||
Interest |
(113,033 | ) | | 284 | | (112,749 | ) | |||||||||
Miscellaneous, net |
1,182 | 6,640 | (3,538 | ) | | 4,284 | ||||||||||
| | | | | | | | | | | | | | | | |
|
10,777 | (106,393 | ) | (12,849 | ) | | (108,465 | ) | ||||||||
| | | | | | | | | | | | | | | | |
Income (loss) before income taxes |
(68,061 | ) | 55,555 | 133,098 | | 120,592 | ||||||||||
Provision (benefit) for income taxes |
(22,136 |
) |
19,444 |
37,267 |
|
34,575 |
||||||||||
Equity in income of subsidiaries |
131,942 | | | (131,942 | ) | | ||||||||||
| | | | | | | | | | | | | | | | |
Net income (loss) |
86,017 | 36,111 | 95,831 | (131,942 | ) | 86,017 | ||||||||||
| | | | | | | | | | | | | | | | |
Other comprehensive income (loss), net of tax: |
||||||||||||||||
Foreign currency translation adjustment, net of taxes |
(45,221 | ) | | (35,403 | ) | 35,403 | (45,221 | ) | ||||||||
Change in fair value of interest rate swaps net of taxes |
3,422 | 3,422 | | (3,422 | ) | 3,422 | ||||||||||
| | | | | | | | | | | | | | | | |
Total other comprehensive income (loss), net of tax |
(41,799 | ) | 3,422 | (35,403 | ) | 31,981 | (41,799 | ) | ||||||||
Comprehensive income (loss) |
$ |
44,218 |
$ |
39,533 |
$ |
60,428 |
$ |
(99,961 |
) |
$ |
44,218 |
|||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
33
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands)
14. Condensed Consolidating Financial Statements of Guarantors (Continued)
Condensed Consolidating Statement of Cash Flows
Nine Months Ended June 30, 2014
|
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cash (used in) provided by operating activities |
$ | (36,434 | ) | $ | 58,813 | $ | 26,137 | $ | (21,499 | ) | $ | 27,017 | ||||
| | | | | | | | | | | | | | | | |
Cash flows from investing activities: |
||||||||||||||||
Purchase of property, plant and equipment |
(17,979 | ) | (25,615 | ) | (28,842 | ) | | (72,436 | ) | |||||||
Investment in subsidiary |
(6,500 | ) | | | 6,500 | | ||||||||||
| | | | | | | | | | | | | | | | |
Cash used in investing activities |
(24,479 | ) | (25,615 | ) | (28,842 | ) | 6,500 | (72,436 | ) | |||||||
| | | | | | | | | | | | | | | | |
Cash flows from financing activities: |
||||||||||||||||
Principal payments under long-term agreements |
| | (298 | ) | | (298 | ) | |||||||||
Dividends paid |
(60,063 | ) | | (16,843 | ) | 16,843 | (60,063 | ) | ||||||||
Capital contribution |
| | 6,500 | (6,500 | ) | | ||||||||||
Intercompany accounts |
63,355 | (68,555 | ) | 5,200 | | | ||||||||||
| | | | | | | | | | | | | | | | |
Cash (used in) provided by financing activities |
3,292 | (68,555 | ) | (5,441 | ) | 10,343 | (60,361 | ) | ||||||||
| | | | | | | | | | | | | | | | |
Effect of exchange rate changes on cash |
| | 1,636 | | 1,636 | |||||||||||
| | | | | | | | | | | | | | | | |
Net decrease in cash and cash equivalents |
(57,621 | ) | (35,357 | ) | (6,510 | ) | (4,656 | ) | (104,144 | ) | ||||||
Cash and cash equivalents at beginning of period |
81,356 | 35,357 | 81,848 | | 198,561 | |||||||||||
| | | | | | | | | | | | | | | | |
Cash and cash equivalents at end of period |
$ | 23,735 | $ | | $ | 75,338 | $ | (4,656 | ) | $ | 94,417 | |||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
34
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands)
14. Condensed Consolidating Financial Statements of Guarantors (Continued)
Condensed Consolidating Statement of Cash Flows
Nine Months Ended June 30, 2013
|
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cash provided by operating activities |
$ | 13,906 | $ | 231,056 | $ | 72,905 | $ | (104,832 | ) | $ | 213,035 | |||||
| | | | | | | | | | | | | | | | |
Cash flows from investing activities: |
||||||||||||||||
Purchase of property, plant and equipment |
(36,172 | ) | (37,062 | ) | (23,620 | ) | | (96,854 | ) | |||||||
Proceeds from sale of building |
7,548 | | | | 7,548 | |||||||||||
Cash paid for acquisitions, net of cash acquired |
(77,936 | ) | | (4,536 | ) | | (82,472 | ) | ||||||||
| | | | | | | | | | | | | | | | |
Cash used in investing activities |
(106,560 | ) | (37,062 | ) | (28,156 | ) | | (171,778 | ) | |||||||
| | | | | | | | | | | | | | | | |
Cash flows from financing activities: |
||||||||||||||||
Principal payments under long-term agreements |
| | (442 | ) | | (442 | ) | |||||||||
Proceeds from borrowings under the revolver |
80,000 | | | | 80,000 | |||||||||||
Paydowns of borrowings under the revolver |
(80,000 | ) | | | | (80,000 | ) | |||||||||
Payments for financing fees |
(7,387 | ) | | | | (7,387 | ) | |||||||||
Dividends paid |
(216,926 | ) | (52,416 | ) | (52,416 | ) | 104,832 | (216,926 | ) | |||||||
Intercompany |
154,536 | (154,536 | ) | | | | ||||||||||
| | | | | | | | | | | | | | | | |
Cash (used in) provided by financing activities |
(69,777 | ) | (206,952 | ) | (52,858 | ) | 104,832 | (224,755 | ) | |||||||
| | | | | | | | | | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents |
| | (4,254 | ) | | (4,254 | ) | |||||||||
| | | | | | | | | | | | | | | | |
Net decrease in cash and cash equivalents |
(162,431 | ) | (12,958 | ) | (12,363 | ) | | (187,752 | ) | |||||||
Cash and cash equivalents at beginning of period |
183,661 | 14,589 | 116,886 | | 315,136 | |||||||||||
| | | | | | | | | | | | | | | | |
Cash and cash equivalents at end of period |
$ | 21,230 | $ | 1,631 | $ | 104,523 | $ | | $ | 127,384 | ||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
35
NBTY, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(in thousands)
14. Condensed Consolidating Financial Statements of Guarantors (Continued)
|
Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries |
Eliminations | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
As Reported | As Revised | As Reported | As Revised | As Reported | As Revised | As Reported | As Revised | |||||||||||||||||
Consolidating Balance sheets as of September 30, 2013 |
|||||||||||||||||||||||||
Balance Sheet |
|||||||||||||||||||||||||
Current Assets |
|||||||||||||||||||||||||
Intercompany |
$ | 857.7 | $ | 34.5 | $ | | $ | | $ | 264.1 | $ | | $ | (1,121.8 | ) | $ | (34.5 | ) | |||||||
Other current assets |
$ | | $ | 19.0 | $ | 43.1 | $ | 24.1 | $ | 35.4 | $ | 35.4 | $ | | $ | | |||||||||
Total current assets |
$ | 939.0 | $ | 134.9 | $ | 790.7 | $ | 771.6 | $ | 604.4 | $ | 340.4 | $ | (1,121.8 | ) | $ | (34.5 | ) | |||||||
Other assets |
$ |
|
$ |
61.2 |
$ |
68.2 |
$ |
6.9 |
$ |
0.1 |
$ |
0.1 |
$ |
|
$ |
|
|||||||||
Intercompany |
$ | 323.3 | $ | 2,480.8 | $ | | $ | 1,062.9 | $ | | $ | 29.1 | $ | (323.3 | ) | $ | (3,572.7 | ) | |||||||
Investments in subsidiaries |
$ | 3,211.1 | $ | 2,180.8 | $ | | $ | | $ | | $ | | $ | (3,211.1 | ) | $ | (2,180.8 | ) | |||||||
Total assets |
$ | 4,562.0 | $ | 4,946.3 | $ | 3,583.3 | $ | 4,566.0 | $ | 1,584.1 | $ | 1,349.1 | $ | (4,656.1 | ) | $ | (5,788.1 | ) | |||||||
Liabilities and Stockholder's Equity |
|||||||||||||||||||||||||
Current liabilities: |
|||||||||||||||||||||||||
Intercompany |
$ | | $ | | $ | 1,121.8 | $ | 34.5 | $ | | $ | | $ | (1,121.8 | ) | $ | (34.5 | ) | |||||||
Total current liabilities |
$ | 38.4 | $ | 38.4 | $ | 1,424.3 | $ | 340.1 | $ | 135.2 | $ | 135.2 | $ | (1,121.8 | ) | $ | (34.5 | ) | |||||||
Intercompany |
$ |
|
$ |
1,092.2 |
$ |
|
$ |
2,157.5 |
$ |
323.3 |
$ |
323.3 |
$ |
(323.3 |
) |
$ |
(3,572.7 |
) |
|||||||
Deferred income taxes |
$ | 721.8 | $ | 14.2 | $ | 22.0 | $ | 637.7 | $ | 7.5 | $ | 99.5 | $ | | $ | | |||||||||
Total liabilities |
$ | 2,937.2 | $ | 3,321.5 | $ | 1,464.0 | $ | 3,150.0 | $ | 492.3 | $ | 584.3 | $ | (1,445.0 | ) | $ | (3,607.3 | ) | |||||||
Stockholder's Equity: |
|||||||||||||||||||||||||
Capital in excess of par |
$ | 1,556.9 | $ | 1,556.9 | $ | 352.0 | $ | 1,211.6 | $ | 301.3 | $ | 733.4 | $ | (653.3 | ) | $ | (1,945.0 | ) | |||||||
Retained earnings |
$ | 81.5 | $ | 81.5 | $ | 1,767.3 | $ | 208.3 | $ | 789.3 | $ | 30.2 | $ | (2,556.6 | ) | $ | (238.5 | ) | |||||||
Accumulated other comprehensive income (loss) |
$ | (13.6 | ) | $ | (13.6 | ) | $ | | $ | (3.9 | ) | $ | 1.2 | $ | 1.2 | $ | (1.2 | ) | $ | 2.7 | |||||
Total stockholder's equity |
$ | 1,624.8 | $ | 1,624.8 | $ | 2,119.3 | $ | 1,416.0 | $ | 1,091.8 | $ | 764.8 | $ | (3,211.1 | ) | $ | (2,180.8 | ) | |||||||
Total liabilities and stockholder's equity |
$ | 4,562.0 | $ | 4,946.3 | $ | 3,583.3 | $ | 4,566.0 | $ | 1,584.1 | $ | 1,349.1 | $ | (4,656.1 | ) | $ | (5,788.1 | ) | |||||||
Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended June 30, 2013 |
|||||||||||||||||||||||||
Selling, general and administrative |
$ | 22.3 | $ | 22.3 | $ | 114.2 | $ | 114.2 | $ | 87.9 | $ | 87.9 | $ | | $ | | |||||||||
Income (loss) from operations |
$ | (22.3 | ) | $ | (22.3 | ) | $ | 70.2 | $ | 70.2 | $ | 52.6 | $ | 52.6 | $ | | $ | | |||||||
Intercompany interest |
$ | 4.7 | $ | 38.8 | $ | | $ | (34.1 | ) | $ | (4.7 | ) | $ | (4.7 | ) | $ | | $ | | ||||||
Miscellaneous, net |
$ | | $ | 2.0 | $ | 5.1 | $ | 3.0 | $ | (1.3 | ) | $ | (1.3 | ) | $ | | $ | | |||||||
Total other income (expense) |
$ | (34.1 | ) | $ | 6.7 | $ | 5.1 | $ | (31.1 | ) | $ | (5.9 | ) | $ | (5.9 | ) | $ | | $ | | |||||
Income (loss) before income taxes |
$ | (51.8 | ) | $ | (15.6 | ) | $ | 75.3 | $ | 39.1 | $ | 46.7 | $ | 46.7 | $ | | $ | | |||||||
Provision (benefit) for income taxes |
$ | (20.5 | ) | $ | (7.8 | ) | $ | 26.3 | $ | 13.7 | $ | 13.1 | $ | 13.1 | $ | | $ | | |||||||
Equity in income of subsidiaries |
$ | 82.6 | $ | 59.0 | $ | | $ | | $ | | $ | | $ | (82.6 | ) | $ | (59.0 | ) | |||||||
Net income (loss) |
$ | 51.3 | $ | 51.3 | $ | 48.9 | $ | 25.4 | $ | 33.6 | $ | 33.6 | $ | (82.6 | ) | $ | (59.0 | ) | |||||||
Foreign currency translation adjustment, net of taxes |
$ | | $ | (2.9 | ) | $ | | $ | | $ | (2.9 | ) | $ | (2.9 | ) | $ | 2.9 | $ | 2.9 | ||||||
Change in fair value of interest rate swaps, net of taxes |
$ | (3.7 | ) | $ | 1.2 | $ | | $ | 1.2 | $ | | $ | | $ | | $ | (1.2 | ) | |||||||
Comprehensive income (loss) |
$ | 49.6 | $ | 49.6 | $ | 48.9 | $ | 26.6 | $ | 30.7 | $ | 30.7 | $ | (79.6 | ) | $ | (57.3 | ) | |||||||
Consolidated Statements of Operations and Comprehensive Income (Loss) for the nine months ended June 30, 2013 |
|||||||||||||||||||||||||
Selling, general and administrative |
$ | 78.8 | $ | 78.8 | $ | 338.1 | $ | 338.1 | $ | 258.4 | $ | 258.4 | $ | | $ | | |||||||||
Income (loss) from operations |
$ | (78.8 | ) | $ | (78.8 | ) | $ | 162.0 | $ | 161.9 | $ | 145.9 | $ | 145.9 | $ | | $ | | |||||||
Intercompany interest |
$ | 9.6 | $ | 122.6 | $ | | $ | (113.0 | ) | $ | (9.6 | ) | $ | (9.6 | ) | $ | | $ | | ||||||
Miscellaneous, net |
$ | (0.2 | ) | $ | 1.2 | $ | 8.0 | $ | 6.6 | $ | (3.5 | ) | $ | (3.5 | ) | $ | | $ | | ||||||
Total other income (expense) |
$ | (103.6 | ) | $ | 10.8 | $ | 8.0 | $ | (106.4 | ) | $ | (12.8 | ) | $ | (12.8 | ) | $ | | $ | | |||||
Income (loss) before income taxes |
$ | (182.5 | ) | $ | (68.1 | ) | $ | 170.0 | $ | 55.6 | $ | 133.1 | $ | 133.1 | $ | | $ | | |||||||
Provision (benefit) for income taxes |
$ | (62.1 | ) | $ | (22.1 | ) | $ | 59.5 | $ | 19.4 | $ | 37.3 | $ | 37.3 | $ | | $ | | |||||||
Equity in income of subsidiaries |
$ | 206.4 | $ | 131.9 | $ | | $ | | $ | | $ | | $ | (206.4 | ) | $ | (131.9 | ) | |||||||
Net income (loss) |
$ | 86.0 | $ | 86.0 | $ | 110.5 | $ | 36.1 | $ | 95.8 | $ | 95.8 | $ | (206.4 | ) | $ | (131.9 | ) | |||||||
Foreign currency translation adjustment, net of taxes |
$ | (58.0 | ) | $ | (45.2 | ) | $ | | $ | | $ | (35.4 | ) | $ | (35.4 | ) | $ | 35.4 | $ | 35.4 | |||||
Change in fair value of interest rate swaps, net of taxes |
$ | 16.2 | $ | 3.4 | $ | | $ | 3.4 | $ | | $ | | $ | | $ | (3.4 | ) | ||||||||
Comprehensive income (loss) |
$ | 44.2 | $ | 44.2 | $ | 110.5 | $ | 39.5 | $ | 60.4 | $ | 60.4 | $ | (171.0 | ) | $ | (100.0 | ) | |||||||
Consolidating Statements of cash flows for the nine months ended June 30, 2013 |
|||||||||||||||||||||||||
Cash provided by (used in) operating activities |
$ | 168.4 | $ | 13.9 | $ | 29.1 | $ | 231.1 | $ | 15.5 | $ | 72.9 | $ | | $ | (104.8 | ) | ||||||||
Cash paid for acquisitions, net of cash acquired |
$ | (77.9 | ) | $ | (77.9 | ) | $ | (4.5 | ) | $ | | $ | | $ | (4.5 | ) | $ | | $ | | |||||
Cash used in investing activities |
$ | (106.6 | ) | $ | (106.6 | ) | $ | (41.6 | ) | $ | (37.1 | ) | $ | (23.6 | ) | $ | (28.2 | ) | $ | | $ | | |||
Dividends paid |
$ | (216.9 | ) | $ | (216.9 | ) | $ | | $ | (52.4 | ) | $ | | $ | (52.4 | ) | $ | | $ | 104.8 | |||||
Cash used in financing activities |
$ | (224.3 | ) | $ | (69.8 | ) | $ | (0.4 | ) | $ | (207.0 | ) | $ | | $ | (52.9 | ) | $ | | $ | 104.8 |
36
NBTY, Inc. and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
(Dollar amounts in thousands)
Forward-Looking Statements
This Quarterly Report (this "Report") contains "forward-looking statements" within the meaning of the securities laws. You should not place undue reliance on these statements. Forward-looking statements include information concerning our liquidity and our possible or assumed future results of operations, including descriptions of our business strategies. These statements often include words such as "believe," "expect," "anticipate," "intend," "plan," "estimate," "seek," "will," "may," or similar expressions. These statements are based on certain assumptions that we have made in light of our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate in these circumstances. As you read and consider this Report, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties and assumptions. Many factors could affect our actual financial results and could cause actual results to differ materially from those expressed in the forward-looking statements. Some important factors include:
-
- consumer perception of our products due to adverse scientific research or findings, regulatory investigations,
litigation, national media attention and other publicity regarding nutritional supplements;
-
- potential slow or negative growth in the vitamin, mineral and supplement market;
-
- increases in the cost of borrowings or unavailability of additional debt or equity capital, or both;
-
- volatile conditions in the capital, credit and commodities markets and in the overall economy;
-
- dependency on retail stores for sales;
-
- the loss of significant customers;
-
- compliance with new and existing federal, state, local or foreign legislation or regulation, or adverse determinations by
regulators anywhere in the world (including the banning of products) and, in particular, Good Manufacturing Practices in the United States, the Food Supplements Directive and Traditional Herbal
Medicinal Products Directive in Europe and greater enforcement by any such federal, state, local or foreign governmental entities;
-
- material product liability claims and product recalls;
-
- our inability to obtain or renew insurance, or to manage insurance costs;
-
- international market exposure and compliance with anti-corruption laws in the U.S. and foreign jurisdictions;
-
- difficulty entering new international markets;
-
- legal proceedings initiated by regulators in the United States or abroad;
-
- unavailability of, or our inability to consummate, advantageous acquisitions in the future, or our inability to integrate
acquisitions into the mainstream of our business;
-
- difficulty entering new international markets;
-
- loss of executive officers or other key personnel;
-
- loss of certain third party suppliers;
37
-
- disruptions in manufacturing operations that produce nutritional supplements and loss of manufacturing certifications;
-
- increased competition and failure to compete effectively;
-
- our inability to respond to changing consumer preferences;
-
- interruption of business or negative impact on sales and earnings due to acts of God, acts of war, sabotage, terrorism,
bio-terrorism, civil unrest or disruption of delivery service;
-
- work stoppages at our facilities;
-
- increased raw material, utility and fuel costs;
-
- fluctuations in foreign currencies, including the British pound, the euro, the Canadian dollar and the Chinese yuan;
-
- interruptions in information processing systems and management information technology, including system interruptions and
security breaches;
-
- failure to maintain and/or upgrade our information technology systems;
-
- our inability to protect our intellectual property rights;
-
- our exposure to, and the expense of defending and resolving, product liability claims, intellectual property claims and
other litigation;
-
- failure to maintain effective controls over financial reporting;
-
- other factors disclosed in this Report; and
-
- other factors beyond our control.
In light of these risks, uncertainties and assumptions, the forward-looking statements contained in this Report might not prove accurate. You should not place undue reliance upon them. All forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing cautionary statements. All such statements speak only as of the date of this Report, and we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
The statements in the following discussion and analysis regarding industry outlook, our expectations regarding the performance of our business and the forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under the heading, "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2013 (our "2013 Annual Report"). Our actual results may differ materially from those contained in or implied by any forward-looking statements. You should read the following discussion together with the condensed consolidated financial statements, including the related notes, contained elsewhere herein and with the 2013 Annual Report. All references to years, unless otherwise noted, refer to our fiscal years, which end on September 30. All dollar values in this section, unless otherwise noted, are denoted in thousands. Numerical figures have been subject to rounding adjustments. Accordingly, numerical figures shown as totals in various tables may not be arithmetic aggregations of the figures that precede them.
Executive Summary
Alphabet Holding Company, Inc.("Holdings") is a holding company with no operations and is dependent on its wholly owned subsidiary, NBTY, Inc. ("NBTY") and its wholly owned subsidiaries to service its debt and other obligations.
38
NBTY is the leading global vertically integrated manufacturer, distributor and retailer of a broad line of high-quality vitamins, nutritional supplements and related products in the United States, with operations worldwide. We currently market approximately 25,000 SKUs, including numerous private-label and owned brands, such as: Nature's Bounty®, Ester-C®, Balance Bar®, 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®, De Tuinen®, Essenza®, and Vitamin World®. Our vertical integration includes purchasing raw materials and formulating and manufacturing products, which we then market through four channels of distribution.
All of our products fall into one or more of these four segments:
-
- WholesaleThis segment sells products worldwide under various
brand names and third-party private labels, each targeting specific market groups which include virtually all major mass merchandisers, club stores, drug store chains and supermarkets. This segment
also sells products to independent pharmacies, health food stores, the military and other retailers.
-
- European RetailThis segment generates revenue through its
746 Holland & Barrett stores (including franchised stores in the following countries: 28 in China, 27 in Singapore, nine in each of United Arab Emirates and Cyprus, four in Malta and one in
each of Gibraltar and Iceland), 138 De Tuinen stores (including seven franchised locations) in the Netherlands, 54 GNC (UK) stores in the U.K., 47 Nature's Way stores in Ireland and 13 Essenza stores
in Belgium which were acquired in June of 2013, as well as internet-based sales from www.hollandandbarret.com, www.detuinen.nl and www.gnc.co.uk. Such
revenue consists of sales of proprietary brand and third-party products as well as franchise fees.
-
- Direct Response/E-CommerceThis segment generates revenue
through the sale of proprietary brand and third-party products primarily through mail order catalog and internet under the Puritan's Pride tradename. Catalogs are strategically mailed to customers who
order by mail, internet, or by phone.
-
- North American RetailThis segment generates revenue through its 419 owned and operated Vitamin World stores selling proprietary brand and third-party products, as well as internet-based sales from www.vitaminworld.com.
Operating data for each of the four distribution channels 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, the following: human resources, legal, finance and various other corporate-level activity related expenses. We attribute such unallocated expenses to Corporate/Manufacturing.
Consent Solicitation and Debt Offering
On December 2, 2013, Alphabet Holding Company, Inc. ("Holdings"), our parent company, launched a consent solicitation (the "Consent Solicitation") of consents from holders of Holdings' existing 7.75%/8.50% contingent cash pay senior notes in the aggregate principal amount of $550,000 that mature on November 1, 2017 (the "existing Holdco Notes"). The purpose of the Consent Solicitation was to amend the restricted payment covenant in the indenture governing the Holdco Notes (as defined below). Holdings sought consent to add a new "basket" in the restricted payment covenant (Section 3.4 of the indenture governing the Holdco Notes) for a dividend or distribution to Holdings' shareholders up to the net proceeds of the offering of Holdings' additional 7.75%/8.50% contingent cash pay senior notes in the aggregate principal amount of $450,000 that mature on November 1, 2017 (the "additional Holdco Notes" and, together with the existing Holdco Notes, the "Holdco Notes") less the amount available as of September 30, 2013 for restricted payments under the
39
"builder" basket in Section 3.4(a)(C) of the indenture governing the Holdco Notes (the "Proposed Amendments").
On December 10, 2013, the requisite holders of the existing Holdco Notes had consented to the Proposed Amendments and Holdings entered into a supplemental indenture (the "First Supplemental Indenture") to the indenture governing the Holdco Notes. The First Supplemental Indenture became operative upon the payment of the consent fee (the "consent fee") by Holdings to the paying agent on behalf of the holders of the existing Holdco Notes, which was paid concurrently with the closing of the offering of the additional Holdco Notes.
On December 12, 2013, Holdings issued the additional Holdco Notes in the aggregate principal amount of $450,000. The additional $450,000 Holdco Notes and the $550,000 of existing Holdco Notes previously issued on October 17, 2012 have identical terms and are treated as a single class for all purposes under the indenture governing the Holdco Notes. The proceeds from the offering of the $450,000 additional Holdco Notes, were used to pay transaction fees and expenses, including the consent fee of $18,560, and a $445,537 dividend to Holdings' shareholders in December 2013.
Results of Operations
Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013:
Net Sales
Net sales by segment were as follows:
|
Three Months Ended June 30, | |
|
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | |
|
|||||||||||||||
|
Net Sales | % of total | Net Sales | % of total | $ change | % change | |||||||||||||
Wholesale |
$ | 471,344 | 58.4 | % | $ | 489,228 | 60.9 | % | $ | (17,884 | ) | (3.7 | )% | ||||||
European Retail |
215,328 | 26.7 | % | 191,692 | 23.9 | % | 23,636 | 12.3 | % | ||||||||||
Direct Response/E-Commerce |
63,940 | 7.9 | % | 63,670 | 7.9 | % | 270 | 0.4 | % | ||||||||||
North American Retail |
56,349 | 7.0 | % | 58,239 | 7.3 | % | (1,890 | ) | (3.2 | )% | |||||||||
| | | | | | | | | | | | | | | | | | | |
Net sales |
$ | 806,961 | 100.0 | % | $ | 802,829 | 100.0 | % | $ | 4,132 | 0.5 | % | |||||||
| | | | | | | | | | | | | | | | | | | |
Wholesale
Net sales for the Wholesale segment decreased by $17,884, or 3.7%, to $471,344 for the three months ended June 30, 2014, as compared to the prior comparable period. This decrease is due to lower net sales of $12,508 of our branded products and lower net sales of $5,376 to certain private label accounts. Domestic branded net sales decreased by $16,908, primarily due to pressure on the overall joint-care products category. International branded net sales increased by $4,400 for the three months ended June 30, 2014, as compared to the prior comparable period.
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. Wholesale continues to leverage valuable consumer sales information obtained from our North American Retail and Direct Response/E-Commerce segments to provide its Wholesale customers with data and analyses to drive their sales.
We use targeted promotions to grow overall sales. Promotional programs and rebates were 15.8% of sales for the three months ended June 30, 2014, as compared to 13.4% of sales for the prior comparable period. We expect promotional programs and rebates as a percentage of sales to fluctuate on a quarterly basis.
40
Product returns were 1.2% of sales for the three months ended June 30, 2014, as compared to 1.0% of sales for the prior comparable period, and are primarily attributable to returns in the ordinary course of business. We expect product returns relating to normal operations to trend between 1% and 2% of Wholesale sales in future quarters.
The following customers accounted for the following percentages of the Wholesale segment's net sales and our consolidated net sales:
|
Wholesale Segment Net Sales |
Total Consolidated Net Sales |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Three Months Ended June 30, |
Three Months Ended June 30, |
|||||||||||
|
2014 | 2013 | 2014 | 2013 | |||||||||
Customer A |
18 | % | 22 | % | 11 | % | 13 | % | |||||
Customer B |
13 | % | 12 | % | 7 | % | 7 | % | |||||
Customer C |
8 | % | 10 | % | 4 | % | 6 | % |
The loss of any of these customers, or any one of our other major customers, would have a material adverse effect on our financial statements if we were unable to replace that customer.
European Retail
Net sales for this segment increased by $23,636, or 12.3%, to $215,328 for the three months ended June 30, 2014, as compared to the prior comparable period. The average exchange rate of the British pound to the US dollar strengthened 9.5% and the euro to the US dollar strengthened 5.0% as compared to the prior comparable period. In local currency, net sales increased 3.5% and same store sales (including internet sales) remained consistent with the prior comparable period.
The following is a summary of European Retail store activity:
|
Three Months Ended June 30, |
||||||
---|---|---|---|---|---|---|---|
|
2014 | 2013 | |||||
Company-owned stores |
|||||||
Open at beginning of the period |
908 | 871 | |||||
Opened during the period |
10 | 12 | |||||
Acquired durring the period |
| 13 | |||||
Closed during the period |
(6 | ) | | ||||
| | | | | | | |
Open at end of the period |
912 | 896 | |||||
| | | | | | | |
| | | | | | | |
Franchised stores |
|||||||
Open at beginning of the period |
83 | 59 | |||||
Opened during the period |
3 | 15 | |||||
Closed during the period |
| (1 | ) | ||||
| | | | | | | |
Open at end of the period |
86 | 73 | |||||
| | | | | | | |
| | | | | | | |
Total company-owned and franchised stores |
|||||||
Open at beginning of the period |
991 | 930 | |||||
Opened during the period |
13 | 27 | |||||
Acquired durring the period |
| 13 | |||||
Closed during the period |
(6 | ) | (1 | ) | |||
| | | | | | | |
Open at end of the period |
998 | 969 | |||||
| | | | | | | |
| | | | | | | |
41
Direct Response/E-Commerce
Direct Response/E-Commerce net sales increased by $270, or 0.4%, for the three months ended June 30, 2014 as compared to the prior comparable period. E-commerce orders comprised 72% of total Direct Response/E-Commerce orders for the three months ended June 30, 2014 as compared to 71% in the prior comparable period. We remain among the leaders for vitamin and nutritional supplements in the direct response and e-commerce sectors, and we continue to increase the number of products available via our catalog and websites.
This segment varies its promotional strategy throughout the fiscal year, utilizing highly promotional catalogs which are not offered in every quarter. Historical comparisons are impacted by this pattern and therefore this division should be viewed on an annual, and not quarterly, basis.
North American Retail
Net sales for this segment decreased by $1,890, or 3.2%, to $56,349 for the three months ended June 30, 2014 as compared to the prior comparable period. Same store sales (including internet sales) declined 2.5% due to declines in volume which are partially attributable to a softer retail environment and lower revenue in the weight management product category due to positive media attention for certain products in this category in the prior comparable period.
The following is a summary of North American Retail store activity:
|
Three Months Ended June 30, |
||||||
---|---|---|---|---|---|---|---|
|
2014 | 2013 | |||||
Open at beginning of the period |
417 | 425 | |||||
Opened during the period |
5 | | |||||
Closed during the period |
(3 | ) | (2 | ) | |||
| | | | | | | |
Open at end of the period |
419 | 423 | |||||
| | | | | | | |
| | | | | | | |
Cost of Sales
Cost of sales was as follows:
|
Three Months Ended June 30, |
|
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | $ change | % change | |||||||||
Cost of sales |
$ | 431,204 | $ | 424,870 | $ | 6,334 | 1.5 | % | |||||
Percentage of net sales |
53.4 | % | 52.9 | % |
Cost of sales as a percentage of net sales increased by 0.5 percentage points. The increase in the percentage of cost of sales was due primarily to lower margins earned on our Wholesale products as well as increased promotional activity in the North American Retail segment.
Due to competitive pressure in the private label business, the cost of sales for our private label business as a percentage of net sales may continue to fluctuate, which would adversely affect gross profits. To address this, we continuously seek to implement additional improvements in our supply chain and we are increasing our focus on our branded sales.
42
Advertising, Promotion and Catalog Expenses
Total advertising, promotion and catalog expenses were as follows:
|
Three Months Ended June 30, |
|
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | $ change | % change | |||||||||
Advertising, promotion and catalog |
$ | 60,931 | $ | 48,150 | $ | 12,781 | 26.5 | % | |||||
Percentage of net sales |
7.6 | % | 6.0 | % |
Advertising, promotion and catalog expense increased primarily due to increased advertising in our Wholesale segment associated with our branded products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") were as follows:
|
Three Months Ended June 30, |
|
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | $ change | % change | |||||||||
Selling, general and administrative |
$ | 235,538 | $ | 224,422 | $ | 11,116 | 5.0 | % | |||||
Percentage of net sales |
29.2 | % | 28.0 | % |
The SG&A increase for the three months ended June 30, 2014, as compared to the prior comparable period, is primarily due to increases of (i) $3,368 in freight costs due to increased costs of shipments to customers and movement between facilities as a result of the supply chain restructuring; (ii) $1,952 of additional depreciation and amortization relating to additional stores and the implementation of our new Point of Sale (POS) system in the European Retail segment in the second quarter of fiscal 2014; (iii) $1,844 in building and occupancy costs due to additional stores in our European Retail and North American Retail segments; and (iv) $1,750 in other professional services, primarily associated with ongoing support for our ERP system that was implemented in the third quarter of fiscal 2013. These increases were partially offset by a decrease in salaries and related benefits of $643 which is due to a reduction to the annual bonus expense , partially offset by increases in salaries in our European Retail segment due to the increase in stores and foreign currency fluctuations.
Facility Restructuring Charge
On March 12, 2013, NBTY initiated a restructuring plan to streamline its operations and improve the profitability and return on invested capital of its manufacturing/packaging and distribution facilities. The restructuring involved the sale or closure of seven of NBTY's manufacturing/packaging and distribution facilities.
The restructuring plan commenced in the second quarter of fiscal 2013 and was completed in fiscal 2014. The restructuring resulted in aggregate charges of $4,944 before tax for the three months ended June 30, 2013.
43
Income from Operations
Income from operations was as follows:
|
Three Months Ended June 30, |
|
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | $ change | % change | |||||||||
Wholesale |
$ | 41,355 | $ | 65,995 | $ | (24,640 | ) | (37.3 | )% | ||||
European Retail |
48,386 | 45,478 | 2,908 | 6.4 | % | ||||||||
Direct Response/E-Commerce |
9,009 | 9,001 | 8 | 0.1 | % | ||||||||
North American Retail |
3,073 | 7,247 | (4,174 | ) | (57.6 | )% | |||||||
Corporate |
(22,535 | ) | (27,278 | ) | 4,743 | 17.4 | % | ||||||
| | | | | | | | | | | | | |
Total |
$ | 79,288 | $ | 100,443 | $ | (21,155 | ) | (21.1 | )% | ||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Percentage of net sales |
9.8 | % | 12.5 | % |
The decrease in Wholesale segment income from operations was primarily due to the decrease in net sales and increases in advertising expenses. The increase in the European Retail segment was the result of higher sales volume partially offset by increased SG&A costs (primarily payroll costs and building costs associated with new stores), as well as significant fluctuations in foreign currency as the US dollar weakened as compared to the British pound and the euro.. The Direct Response/E-Commerce segment remained consistent with the prior comparable period. The decrease in the North American Retail segment was due to the decrease in same store sales. Corporate/Manufacturing loss decreased from the prior comparable period due to the prior period charges associated with the facilities restructuring.
Interest Expense
Interest expense for the three months ended June 30, 2014 remained consistent as compared to the prior comparable period.
Provision for 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 2014 and 2028. Our overall effective income tax rate could vary as a result of these factors. The effective income tax rate for the three months ended June 30, 2014 and 2013 was 30.7% and 27.0%, respectively. The effective income tax rate was lower for the three months ended June 30, 2014 primarily due to the timing and mixture (foreign and domestic) of income.
44
Nine months ended June 30, 2014 Compared to the Nine months ended June 30, 2013:
Net Sales
Net sales by segment were as follows:
|
Nine Months Ended June 30, | |
|
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | |
|
|||||||||||||||
|
Net Sales | % of total | Net Sales | % of total | $ change | % change | |||||||||||||
Wholesale |
$ | 1,420,067 | 58.8 | % | $ | 1,429,103 | 60.8 | % | $ | (9,036 | ) | (0.6 | )% | ||||||
European Retail |
635,556 | 26.3 | % | 557,779 | 23.8 | % | 77,777 | 13.9 | % | ||||||||||
Direct Response/E-Commerce |
187,904 | 7.8 | % | 186,252 | 7.9 | % | 1,652 | 0.9 | % | ||||||||||
North American Retail |
169,565 | 7.0 | % | 176,796 | 7.5 | % | (7,231 | ) | (4.1 | )% | |||||||||
| | | | | | | | | | | | | | | | | | | |
Net sales |
$ | 2,413,092 | 100.0 | % | $ | 2,349,930 | 100.0 | % | $ | 63,162 | 2.7 | % | |||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Wholesale
Net sales for the Wholesale segment decreased by $9,036, or 0.6%, to $1,420,067 for the nine months ended June 30, 2014, as compared to the prior comparable period. This decrease is due to lower net sales of $33,067 to certain private label accounts, partially offset by higher net sales of $24,031 of our branded products. International branded net sales increased by $22,157 and domestic branded net sales increased by $1,874 for the nine months ended June 30, 2014, as compared to the prior comparable period.
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. Wholesale continues to leverage valuable consumer sales information obtained from our North American Retail and Direct Response/E-Commerce segments to provide its Wholesale customers with data and analyses to drive their sales.
We use targeted promotions to grow overall sales. Promotional programs and rebates were 15.9% of sales for the nine months ended June 30, 2014, as compared to 14.3% of sales 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 1.4% and 1.3% of sales for each of the nine months ended June 30, 2014 and 2013, respectively, and are primarily attributable to returns in the ordinary course of business. We expect product returns relating to normal operations to trend between 1% and 2% of Wholesale sales in future quarters.
The following customers accounted for the following percentages of the Wholesale segment's net sales and our consolidated net sales for the nine months ended June 30, 2014 and 2013, respectively:
|
Wholesale Segment Net Sales |
Total Consolidated Net Sales |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Nine Months Ended June 30, |
Nine Months Ended June 30, |
|||||||||||
|
2014 | 2013 | 2014 | 2013 | |||||||||
Customer A |
19 | % | 22 | % | 11 | % | 13 | % | |||||
Customer B |
12 | % | 11 | % | 7 | % | 7 | % | |||||
Customer C |
8 | % | 10 | % | 5 | % | 6 | % |
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The loss of any of these customers, or any one of our other major customers, would have a material adverse effect on our financial statements if we were unable to replace that customer.
European Retail
Net sales for this segment increased by $77,777, or 13.9%, to $635,556 for the nine months ended June 30, 2014, as compared to the prior comparable period. This increase is attributable to more successful promotional activity and additional stores opened or acquired during the period. In addition, the average exchange rate of the British pound to the US dollar strengthened 5.6% and the average exchange rate of the euro to the US dollar strengthened 4.5% as compared to the prior comparable period. In local currency, net sales increased 8.3% and same store sales (including internet sales) increased 3.5% as compared to the prior comparable period.
The following is a summary of European Retail store activity:
|
Nine Months Ended June 30, |
||||||
---|---|---|---|---|---|---|---|
|
2014 | 2013 | |||||
Company-owned stores |
|||||||
Open at beginning of the period |
901 | 856 | |||||
Opened during the period |
22 | 29 | |||||
Acquired durring the period |
| 13 | |||||
Closed during the period |
(11 | ) | (2 | ) | |||
| | | | | | | |
Open at end of the period |
912 | 896 | |||||
| | | | | | | |
| | | | | | | |
Franchised stores |
|||||||
Open at beginning of the period |
79 | 40 | |||||
Opened during the period |
13 | 39 | |||||
Closed during the period |
(6 | ) | (6 | ) | |||
| | | | | | | |
Open at end of the period |
86 | 73 | |||||
| | | | | | | |
| | | | | | | |
Total company-owned and franchised stores |
|||||||
Open at beginning of the period |
980 | 896 | |||||
Opened during the period |
35 | 68 | |||||
Acquired durring the period |
| 13 | |||||
Closed during the period |
(17 | ) | (8 | ) | |||
| | | | | | | |
Open at end of the period |
998 | 969 | |||||
| | | | | | | |
| | | | | | | |
Direct Response/E-Commerce
Direct Response/E-Commerce net sales increased by $1,652, or 0.9%, for the nine months ended June 30, 2014 as compared to the prior comparable period. E-commerce orders comprised 71% of total Direct Response/E-Commerce net orders for the nine months ended June 30, 2014 as compared to 70% in the prior comparable period. We remain among the leaders for vitamin and nutritional supplements in the direct response and e-commerce sectors, and we continue to increase the number of products available via our catalog and websites.
This segment varies its promotional strategy throughout the fiscal year, utilizing highly promotional catalogs which are not offered in every quarter. Historical comparisons are impacted by this pattern and therefore this division should be viewed on an annual, and not quarterly, basis.
46
North American Retail
Net sales for this segment decreased by $7,231, or 4.1%, to $169,565 for the nine months ended June 30, 2014 as compared to the prior comparable period. Same store sales (including internet sales) declined 3.4% due to declines in volume which are partially attributable to severe winter weather in many of the areas where our stores are located, as well as a softer retail environment and lower revenue in the weight management product category due to positive media attention for certain products in this category in the prior comparable period.
The following is a summary of North American Retail store activity:
|
Nine Months Ended June 30, |
||||||
---|---|---|---|---|---|---|---|
|
2014 | 2013 | |||||
Open at beginning of the period |
421 | 426 | |||||
Opened during the period |
17 | 3 | |||||
Closed during the period |
(19 | ) | (6 | ) | |||
| | | | | | | |
Open at end of the period |
419 | 423 | |||||
| | | | | | | |
| | | | | | | |
Cost of Sales
Cost of sales was as follows:
|
Nine Months Ended June 30, | |
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | $ change | % change | |||||||||
Cost of sales |
$ | 1,304,003 | $ | 1,267,635 | $ | 36,368 | 2.9 | % | |||||
Percentage of net sales |
54.0 | % | 53.9 | % |
Cost of sales as a percentage of net sales remained relatively consistent as a percentage of net sales with the prior comparable period.
Advertising, Promotion and Catalog Expenses
Total advertising, promotion and catalog expenses were as follows:
|
Nine Months Ended June 30, |
|
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | $ change | % change | |||||||||
Advertising, promotion and catalog |
$ | 158,236 | $ | 142,706 | $ | 15,530 | 10.9 | % | |||||
Percentage of net sales |
6.6 | % | 6.1 | % |
The increase in advertising, promotion and catalog expense primarily related to increased advertising in our Wholesale segment associated with our branded products, spending on media and advertising costs to further develop our brand and promote a loyalty program in our European Retail segment and increased spending related to internet advertising in our Direct Response segment.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") were as follows:
|
Nine Months Ended June 30, |
|
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | $ change | % change | |||||||||
Selling, general and administrative |
$ | 707,115 | $ | 675,388 | $ | 31,727 | 4.7 | % | |||||
Percentage of net sales |
29.3 | % | 28.7 | % |
The SG&A increase for the nine months ended June 30, 2014, as compared to the prior comparable period, is primarily due to increases of (i) $11,638 in building and occupancy costs due to additional stores and foreign currency fluctuations in our European Retail segment; (ii) $8,984 in freight costs due to an increase in sales as well as increased movement between facilities as a result of the facility restructuring; (iii) $6,935 of additional depreciation and amortization due to the implementation of our new ERP system in the third quarter of fiscal 2013, additional stores and the implementation of our new Point of Sale (POS) system in the European Retail segment in the second quarter of fiscal 2014; (iv) $6,922 in salaries and related benefits, related to our European Retail segment as there was a significant increase in stores and foreign currency fluctuations, partially offset by a reduction to the annual bonus expense; and (v) $6,219 in professional services, primarily associated with ongoing implementation and support of our ERP system . These increases were partially offset by a reduction in legal expenses due to the accrual for the Glucosamine case in the prior comparable period.
Facility Restructuring Charge
On March 12, 2013, NBTY initiated a restructuring plan to streamline its operations and improve the profitability and return on invested capital of its manufacturing/packaging and distribution facilities. The restructuring involved the sale or closure of seven of NBTY's manufacturing/packaging and distribution facilities.
The restructuring plan commenced in the second quarter of fiscal 2013 and was completed in fiscal 2014. The restructuring resulted in aggregate charges of $35,144 before tax for the nine months ended June 30, 2013.
Income from Operations
Income from operations was as follows:
|
Nine Months Ended June 30, |
|
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | $ change | % change | |||||||||
Wholesale |
$ | 143,087 | $ | 162,886 | $ | (19,799 | ) | (12.2 | )% | ||||
European Retail |
142,260 | 127,979 | 14,281 | 11.2 | % | ||||||||
Direct Response/E-Commerce |
23,372 | 32,325 | (8,953 | ) | (27.7 | )% | |||||||
North American Retail |
7,568 | 19,995 | (12,427 | ) | (62.2 | )% | |||||||
Corporate |
(72,549 | ) | (114,128 | ) | 41,579 | 36.4 | % | ||||||
| | | | | | | | | | | | | |
Total |
$ | 243,738 | $ | 229,057 | $ | 14,681 | 6.4 | % | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Percentage of net sales |
10.1 | % | 9.7 | % |
The decrease in Wholesale segment income from operations was primarily due to the decrease in net sales and increases in advertising expenses. The increase in the European Retail segment was the result of higher sales volume, partially offset by increased advertising and SG&A costs (primarily
48
payroll costs and building costs associated with new and acquired stores), as well as significant fluctuations in foreign currency as the US dollar weakened as compared to the British pound and the euro. The decrease in the Direct Response/E-Commerce segment was primarily due to additional sales promotions, as well as increased advertising costs and SG&A costs. The decrease in the North American Retail segment was primarily due to the decrease in net sales from same store sales and increased SG&A costs. Corporate/Manufacturing loss decreased from the prior comparable period due to the costs associated with the facilities restructuring.
Interest Expense
Interest expense for the nine months ended June 30, 2014 decreased as compared to the prior comparable period due to the refinancing that took place in March 2013 on the term loan B-2 and the write off of deferred financing costs relating to the refinancing in the prior comparable period.
Provision for 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 2014 and 2028. Our overall effective income tax rate could vary as a result of these factors. The effective income tax rate for the nine months ended June 30, 2014 and 2013 was 32.6% and 28.7%, respectively. The effective income tax rate was higher for the nine months ended June 30, 2014 primarily due to the timing and mixture (foreign and domestic) of income.
Liquidity and Capital Resources
NBTY's primary sources of liquidity and capital resources are cash generated from operations and funds available under its revolving credit facility. We expect that ongoing requirements for debt service and capital expenditures will be funded from these sources.
The following table sets forth, for the periods indicated, cash balances and working capital:
|
As of June 30, 2014 |
As of September 30, 2013 |
|||||
---|---|---|---|---|---|---|---|
Cash and cash equivalents |
$ | 94,417 | $ | 198,561 | |||
Working capital (including cash and cash equivalents) |
$ | 799,127 | $ | 733,197 |
The increase in working capital of $65,930 was primarily due to increases in inventory to achieve higher order fulfillment rates, partially offset by a decrease in accrued expenses due to the timing of payments on long-term debt for the nine months ended June 30, 2014.
The decrease in cash and cash equivalents of $104,144 at June 30, 2014 as compared to September 30, 2013 was primarily due to net cash used in operations and purchases of property, plant and equipment.
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The following table sets forth, for the periods indicated, net cash flows provided by (used in) operating, investing and financing activities and other operating measures:
|
Nine Months Ended June 30, |
||||||
---|---|---|---|---|---|---|---|
|
2014 | 2013 | |||||
Net cash provided by operating activities |
$ | 27,017 | $ | 213,035 | |||
Net cash used in investing activities |
$ | (72,436 | ) | $ | (171,778 | ) | |
Net cash used in financing activities |
$ | (60,361 | ) | $ | (224,755 | ) | |
Inventory turnover |
2.1 | 2.3 | |||||
Days sales (Wholesale) outstanding in accounts receivable |
35 | 35 |
We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, investing and financing requirements. As of June 30, 2014, cash and cash equivalents of $75,338 was held by our foreign subsidiaries and are generally subject to U.S. income taxes upon repatriation to the U.S. We generally repatriate all earnings from our foreign subsidiaries where permitted under local law. However, during fiscal 2014, we plan to indefinitely reinvest $36,000 of our foreign earnings outside of the U.S. for capital expenditures.
Net cash provided by operating activities during the nine months ended June 30, 2014 was attributable to increased net income, partially offset by increases in inventory to maintain satisfactory customer fulfillment rates and decreases in accrued expenses and other liabilities relating to the semi-annual interest payments for interest on the Notes.
During the nine months ended June 30, 2014, net cash used in investing activities consisted of purchases of property, plant and equipment.
For the nine months ended June 30, 2014, net cash used in financing activities related to dividends paid to Holdings.
Cash provided by operating activities during the nine months ended June 30, 2013 was attributable to net income and reductions in inventories, offset by the call premium on the term loan.
During the nine months ended June 30, 2013, cash flows used in investing activities consisted of cash paid for acquisitions and the purchases of property, plant and equipment. The significant increase in purchases of property, plant and equipment is due to the implementation of a new ERP system, as well as continued investments in new facilities.
For the nine months ended June 30, 2013, cash flows used in financing activities related to dividends paid to Holdings and payments for financing fees related to the refinancing of our term loan B-1, partially offset by borrowings under the revolving credit facility, which were used to fund the acquisition of Balance Bar.
Senior credit facilities and Notes
On October 1, 2010, NBTY entered into senior secured credit facilities totaling $2,000,000, consisting of $1,750,000 term loan facilities and a $250,000 revolving credit facility. In addition, NBTY issued $650,000 aggregate principal amount of the Notes with an interest rate of 9% and a maturity date of October 1, 2018.
On March 1, 2011, NBTY, Holdings and Barclays Bank PLC, as administrative agent, and several other lenders entered into the First Amendment and Refinancing Agreement. Under the terms of the agreement, the $1,750,000 term loan B-1 and revolving credit facility of $200,000 were established. Substantially all other terms are consistent with the original term loan B, including the amortization schedule of term loan B-1 and maturity dates.
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On December 30, 2011, NBTY prepaid $225,000 of principal on its term loan B-1. As a result of this prepayment, $9,289 of deferred financing costs were written off. In accordance with the prepayment provisions of the First Refinancing, no scheduled payments of principal will be required until the final balloon payment in October 2017.
On October 11, 2012, NBTY amended its credit agreement to allow Holdings to issue and sell Holdco Notes. In addition, among other things, the amendment (i) increased the general restricted payments basket to $50,000, (ii) increased the maximum total leverage ratio test which governs the making of restricted payments using Cumulative Credit (as defined in the credit agreement) and (iii) modified the definition of Cumulative Credit so that it conforms to the builder basket used in NBTY's indenture governing the Notes. Interest on the Holdco Notes will be paid via dividends from NBTY to Holdings, to the extent that it is permitted under its credit agreement and the indenture governing the Notes. Expenses of $6,121 related to the amendment were capitalized as a deferred financing cost and are being amortized using the effective interest method. In conjunction with the amendment, NBTY paid Holdings a cash dividend of approximately $193,956 in October 2012.
On November 26, 2012, we acquired all of the outstanding shares of Balance Bar Company, a company that markets and sells nutritional bars, for a purchase price of approximately $78,000 of cash, subject to certain post-closing adjustments. We drew $80,000 from the revolving portion of our senior secured credit facilities to finance this acquisition. As of June 30, 2013, we repaid all of this borrowing.
On March 21, 2013, NBTY, Holdings, Barclays Bank PLC, as administrative agent, and several other lenders entered into the Third Amendment and Second Refinancing Agreement amending the credit agreement governing NBTY's senior secured credit facilities pursuant to which NBTY repriced its term loan B-1 under its then existing credit agreement (Second Refinancing). Under the terms of the Second Refinancing, the $1,750,000 term loan B-1 was replaced with a new $1,507,500 (the current principal amount outstanding) term loan B-2. Borrowings under term loan B-2 and the revolving credit facility bear interest at a floating rate which can be, at NBTY's option, either (i) eurodollar (LIBOR) rate plus an applicable margin, or (ii) base rate plus an applicable margin, in each case, subject to a eurodollar (LIBOR) rate floor of 1.00% or a base rate floor of 2.00%, as applicable. The applicable margin for term loan B-2 is 2.50% per annum for eurodollar (LIBOR) loans and 1.50% per annum for base rate loans. The applicable margin for the revolving credit facility remained at 3.25% per annum for eurodollar (LIBOR) loans and 2.25% per annum for base rate loans, with a step-down of 25 basis points upon the achievement of a total senior secured leverage ratio as set forth in the senior secured credit facilities. Substantially all other terms are consistent with the original term loan B-1, including the maturity dates. As a result of the Second Refinancing, $4,232 of previously capitalized deferred financing costs as well as $1,151 of the call premium on term loan B-1 were expensed and costs incurred and recorded as deferred financing costs were approximately $15,190, including $13,924 of the call premium paid on term loan B-1, and will be amortized using the effective interest method.
NBTY must make prepayments on the term loan B-2 facility with the net cash proceeds of asset sales, casualty and condemnation events, the incurrence or issuance of indebtedness (other than indebtedness permitted to be incurred under its senior secured credit facilities unless specifically incurred to refinance a portion of its senior secured credit facilities) and 50% of excess cash flow (such percentage subject to reduction based on achievement of specified total senior secured leverage ratios), in each case, subject to certain reinvestment rights and other exceptions. NBTY is also required to make prepayments under its revolving credit facility at any time when, and to the extent that, the aggregate amount of the outstanding loans and letters of credit under the revolving credit facility exceeds the aggregate amount of commitments in respect of the revolving credit facility.
In addition, the credit agreement requires the maintenance of a maximum total senior secured leverage ratio on a quarterly basis, calculated with respect to Consolidated EBITDA, as defined therein, if at any time amounts are outstanding under the revolving credit facility (including swingline
51
loans and letters of credit). All other financial covenants required by the senior secured credit facilities were removed as part of the First Refinancing.
Holdco Notes
On October 17, 2012, Holdings issued $550,000 of the existing Holdco Notes. Interest on the notes will accrue at the rate of 7.75% per annum with respect to Cash Interest and 8.50% per annum with respect to any paid-in-kind interest. Interest on the Holdco Notes will be payable semi-annually in arrears on May 1 and November 1 of each year. Holdings is a holding company with no operations of its own and has no ability to service interest or principal on the Holdco Notes, other than through dividends it may receive from NBTY. NBTY is restricted, in certain circumstances, from paying dividends to Holdings by the terms of the indenture governing the Notes and the senior secured credit facilities. NBTY has not guaranteed the indebtedness of Holdings, nor pledged any of its assets as collateral and the Holdco Notes are not reflected on NBTY's balance sheet. The proceeds from the offering of the existing Holdco Notes, along with the $200,000 from NBTY described below, were used to pay transactions fees and expenses and a dividend of approximately $721,682 to Holdings' shareholders.
Additional Holdco Notes
On December 2, 2013, Holdings launched the Consent Solicitation. The purpose of the Consent Solicitation was to amend the restricted payment covenant in the indenture governing the Holdco Notes. Holdings sought consent to add a new "basket" in the restricted payment covenant (Section 3.4 of the indenture governing the Holdco Notes) for a dividend or distribution to Holdings' shareholders up to the net proceeds of the offering of additional Holdco Notes in the aggregate principal amount of $450,000 less the amount available as of September 30, 2013 for restricted payments under the "builder" basket in Section 3.4(a)(C) of the indenture governing the Holdco Notes.
On December 10, 2013, the requisite holders of the existing Holdco Notes had consented to the Proposed Amendments and Holdings entered into the First Supplemental Indenture to the indenture governing the Holdco Notes. The First Supplemental Indenture became operative upon the payment of the consent fee by Holdings to the paying agent on behalf of the holders of the existing Holdco Notes, which was paid concurrently with the closing of the offering of the additional Holdco Notes.
On December 12, 2013, Holdings issued $450,000 of additional Holdco Notes that mature on November 1, 2017. The additional $450,000 Holdco Notes and the $550,000 of existing Holdco Notes previously issued on October 17, 2012 have identical terms and are treated as a single class for all purposes under the indenture governing the Holdco Notes. The gross proceeds from the offering of the $450,000 additional Holdco Notes was $460,125, inclusive of a $10,125 premium, which was used to pay transaction fees and expenses, including the consent fee, and a $445,537 dividend to Holdings' shareholders in December 2013.
Interest on the Holdco Notes is payable entirely in cash ("Cash Interest") to the extent that it is less than the maximum amount of allowable dividends and distributions, plus cash at Holdings ("Applicable Amount") as defined by the indenture governing the Holdco Notes. For any interest period after May 1, 2013 (other than the final interest period ending at stated maturity), if the Applicable Amount for such interest period will be:
(i) equal or exceed 75%, but be less than 100%, of the aggregate amount of Cash Interest that would otherwise be due on the relevant interest payment date, then Holdings may, at its option, elect to pay interest on (a) 25% of the then outstanding principal amount of the Holdco Notes by increasing the principal amount of the outstanding Holdco Notes or by issuing other PIK notes under the indenture governing the Holdco Notes, on the same terms and conditions of the
52
Holdco Notes, in a principal amount equal to such interest ("PIK Interest") and (b) 75% of the then outstanding principal amount of the Holdco Notes as Cash Interest;
(ii) equal or exceed 50%, but be less than 75%, of the aggregate amount of Cash Interest that would otherwise be due on the relevant interest payment date, then Holdings may, at its option, elect to pay interest on (a) 50% of the then outstanding principal amount of the Holdco Notes as PIK Interest and (b) 50% of the then outstanding principal amount of the Holdco Notes as Cash Interest;
(iii) equal or exceed 25%, but be less than 50%, of the aggregate amount of Cash Interest that would otherwise be due on the relevant interest payment date, then Holdings may, at its option, elect to pay interest on (a) 75% of the then outstanding principal amount of the Holdco Notes as PIK Interest and (b) 25% of the then outstanding principal amount of the Holdco Notes as Cash Interest; or
(iv) be less than 25% of the aggregate amount of Cash Interest that would otherwise be due on the relevant interest payment date, then Holdings may, at its option, elect to pay interest on the Holdco Notes as PIK Interest.
As described above, Holdings' ability to pay PIK Interest depends on the calculation of the Applicable Amount regardless of the availability of cash at Holdings. All interest payments made to date have been in cash. As of June 30, 2014, NBTY currently anticipates that it will have sufficient restricted payment capacity to enable Holdings to pay cash interest on the Holdco Notes for the current interest period; however, this may change as a result of a variety of factors. To the extent Holdings makes such interest payments in cash, NBTY will be required to provide the necessary funding.
The indenture governing the Notes, the credit agreement and the indenture governing the Holdco Notes contain a number of covenants imposing significant restrictions on our business. These restrictions may affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise. The restrictions these covenants place on us include limitations on our ability to:
-
- incur or guarantee additional indebtedness;
-
- make certain investments;
-
- pay dividends or make distributions on our capital stock;
-
- sell assets, including capital stock of restricted subsidiaries;
-
- agree to payment restrictions affecting our restricted subsidiaries;
-
- consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
-
- enter into transactions with our affiliates;
-
- incur liens; and
-
- designate any of our subsidiaries as unrestricted subsidiaries.
Our ability to make payments on and to refinance our indebtedness, including the Notes and Holdco Notes, will depend on our ability to generate cash in the future. We believe that our cash on hand, together with cash from operations and, if required, as of June 30, 2014 we have borrowing capacity of $200,000 under the revolving portion of our senior secured credit facilities, will be sufficient for our cash requirements for the next twelve months.
We or our affiliates, at any time and from time to time, may purchase Notes, Holdco Notes, or other indebtedness. Any such purchases may be made through the open market or privately negotiated
53
transactions with third parties or pursuant to one or more tender or exchange offers or otherwise, upon such terms and at such prices, as well as with such consideration, as we, or any of our affiliates, may determine.
We expect our fiscal 2014 capital expenditures to be less than fiscal 2013, primarily due to the expansion of certain manufacturing facilities in fiscal 2013.
EBITDA and Consolidated EBITDA
EBITDA consists of earnings before interest expense, taxes, depreciation and amortization. Consolidated EBITDA, as defined in our senior secured credit facilities, as amended, eliminates the impact of a number of items we do not consider indicative of our ongoing operating performance. You are encouraged to evaluate each adjustment and the reasons we consider it appropriate for supplemental analysis. Consolidated EBITDA is a component of certain covenants under NBTY's senior secured credit facilities. We present Consolidated EBITDA because NBTY's senior secured credit facilities provide for certain total senior secured leverage ratio thresholds calculated on a period of four consecutive fiscal quarters, with respect to Consolidated EBITDA and the senior secured debt which can be reduced by unrestricted cash-on-hand up to a maximum of $150 million during any fiscal quarter end that revolving loans or letters of credit (to the extent not cash collateralized) are outstanding or at the time of incurrence of revolving loans. The maximum senior secured leverage ratio thresholds, to the extent then applicable, are as follows: 4.25 to 1.00 in fiscal 2013; 4.00 to 1.00 in fiscal 2014; 3.75 to 1.00 in fiscal 2015; 3.50 to 1.00 in fiscal 2016 and 3.25 to 1.00 in fiscal 2017. Furthermore, we present both EBITDA and Consolidated EBITDA because we consider these items to be important supplemental measures of our performance and believe these measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry with similar capital structures. We believe issuers of debt securities also present EBITDA and Consolidated EBITDA because investors, analysts and rating agencies consider it useful in measuring the ability of those issuers to meet debt service obligations. We believe that these items are appropriate supplemental measures of debt service capacity, because cash expenditures for interest are, by definition, available to pay interest, and tax expense is inversely correlated to interest expense because tax expense goes down as deductible interest expense goes up; and depreciation and amortization are non-cash charges.
The computation of NBTY's senior secured leverage ratio is as follows:
|
|
June 30, 2014 | June 30, 2013 | ||||||
---|---|---|---|---|---|---|---|---|---|
Senior secured debt |
$ | 1,507,500 | $ | 1,507,500 | |||||
Less up to $150,000 unrestricted cash balance |
(85,376 | ) | (116,081 | ) | |||||
| | | | | | | | | |
|
(a) | $ | 1,422,124 | $ | 1,391,419 | ||||
| | | | | | | | | |
| | | | | | | | | |
NBTY Consolidated EBITDA (Four consecutive quarters) |
(b) | $ | 517,203 | $ | 535,633 | ||||
| | | | | | | | | |
| | | | | | | | | |
Senior Secured Leverage Ratio |
(a /b) | 2.75x | 2.60x | ||||||
Maximum Allowed (per the senior secured credit facilities) |
4.00x | 4.25x |
EBITDA and Consolidated EBITDA have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
-
- EBITDA and Consolidated EBITDA:
-
- exclude certain tax payments that may represent a reduction in cash available to us;
-
- do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
54
-
- do not reflect changes in, or cash requirements for, our working capital needs; and
-
- do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal
payments on our debt, including the Notes;
-
- although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have
to be replaced in the future, and EBITDA and Consolidated EBITDA do not reflect any cash requirements for such replacements; and
-
- other companies in our industry may calculate EBITDA and Consolidated EBITDA differently than we do, limiting their usefulness as comparative measures.
Because of these limitations, EBITDA and Consolidated EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. As a result, we rely primarily on our GAAP results and use EBITDA and Consolidated EBITDA only supplementally.
In addition, in calculating Consolidated EBITDA, we make certain adjustments that are based on assumptions and estimates that may prove to be inaccurate.
In addition, in evaluating Consolidated EBITDA, you should be aware that in the future we may incur expenses similar to those eliminated in this presentation. Our presentation of Consolidated EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.
The following table reconciles net income to EBITDA and Consolidated EBITDA (as defined in our senior secured credit facilities) for the three and nine months ended and four consecutive quarters ended June 30, 2014 and 2013:
|
Three Months Ended June 30, |
Nine Months Ended June 30, |
Four Consecutive quarters ended June 30, |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | 2014 | 2013 | 2014 | 2013 | |||||||||||||
Net income |
$ | 33,267 | $ | 51,250 | $ | 96,988 | $ | 86,017 | $ | 140,448 | $ | 108,566 | |||||||
Interest expense |
33,794 | 34,064 | 101,698 | 112,749 | 136,086 | 181,383 | |||||||||||||
Provision for income taxes |
14,761 | 18,953 | 46,861 | 34,575 | 67,164 | 32,848 | |||||||||||||
Depreciation and amortization |
27,310 | 31,274 | 78,709 | 83,944 | 105,401 | 109,836 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
EBITDA |
109,132 | 135,541 | 324,256 | 317,285 | 449,099 | 432,633 | |||||||||||||
Severance costs(a) |
2,435 |
678 |
3,732 |
21,695 |
4,272 |
21,848 |
|||||||||||||
Stock-based compensation(b) |
817 | 804 | 3,373 | 1,844 | 3,511 | 2,144 | |||||||||||||
Management fee(c) |
750 | 750 | 2,250 | 2,250 | 3,000 | 3,000 | |||||||||||||
Inventory fair value adjustment(d) |
| | | 2,417 | | 2,417 | |||||||||||||
Consulting fees(e) |
6,527 | 5,954 | 16,878 | 17,017 | 26,438 | 22,133 | |||||||||||||
Impairments and disposals(f) |
739 | | 5,198 | 1,593 | 5,800 | 12,364 | |||||||||||||
Other items(g) |
1,607 | 1,932 | 8,844 | 35,465 | 14,910 | 40,322 | |||||||||||||
Pro forma cost savings(h) |
5,949 | 13,401 | 17,847 | 40,203 | 23,796 | 53,604 | |||||||||||||
Limitation on certain EBITDA adjustments(i) |
(3,406 | ) | (13,708 | ) | (10,217 | ) | (41,124 | ) | (13,623 | ) | (54,832 | ) | |||||||
| | | | | | | | | | | | | | | | | | | |
Consolidated EBITDA |
$ | 124,550 | $ | 145,352 | $ | 372,161 | $ | 398,645 | $ | 517,203 | $ | 535,633 | |||||||
| | | | | | | | | | | | | | | | | | | |
- (a)
- Reflects
the exclusion of severance costs incurred at various subsidiaries of the Company. Included in the nine months and four consecutive quarters ended
June 30, 2013 are workforce reduction costs of $16,901 relating to the facility restructuring.
- (b)
- Reflects
the exclusion of non-cash expenses related to stock options.
- (c)
- Reflects the exclusion of the Carlyle consulting fee.
55
- (d)
- Reflects
the exclusion of the sell-through of the increased fair value of opening inventory at time of acquisition required under acquisition accounting.
- (e)
- Reflects
the exclusion of consulting fees, as permitted in our senior secured credit facilities, for items such as business optimization consulting.
- (f)
- Reflects
the impairment of certain assets, including the Julian Graves Limited deconsolidation loss of $7,403 in the four consecutive quarters ended
June 30, 2013.
- (g)
- Reflects
the exclusion of various items, as permitted in NBTY's senior secured credit facilities, which among other items includes: restructuring charges,
business optimization expenses, ineffectiveness on certain derivative instruments, gains and losses on dispositions and integration costs associated with acquisitions.
- (h)
- Reflects
three months, nine months and four consecutive quarters of prospective savings permitted in accordance with NBTY's senior secured credit
facilities; specifically, the amount of cost savings expected to be realized from operating expense reductions and other operating improvements as a result of specified actions taken or initiated,
less the amount of any actual cost savings realized during the period.
- (i)
- In accordance with the definition of Consolidated EBITDA under NBTY's senior secured credit facilities, this represents the limitation of certain Consolidated EBITDA adjustments such as pro forma cost savings, restructuring charges, business optimization expenses and integration costs associated with acquisitions that exceed 10% of Consolidated EBITDA for the applicable period, without giving effect to these adjustments.
Off-Balance Sheet Arrangements
See description of the Holdco Notes in the Liquidity and Capital Resources section for the off-balance sheet arrangements.
Seasonality
We believe that our business is not seasonal in nature. However, we have historically experienced, and expect to continue to experience, variations in our net sales and operating results from quarter to quarter. The factors that influence this variability of quarterly results include general economic and industry conditions affecting consumer spending, changing consumer demands and current news on nutritional supplements, the timing of our introduction of new products, promotional program incentives offered to customers, the timing of catalog promotions, the level of consumer acceptance of new products and actions of competitors. Accordingly, a comparison of our results of operations from consecutive periods is not necessarily meaningful, and our results of operations for any period are not necessarily indicative of future performance. Additionally, we may experience higher net sales in a quarter depending upon when we have engaged in significant promotional activities.
Foreign Currency
Approximately 35% and 32%, respectively, of our net sales during the nine months ended June 30, 2014 and 2013 were denominated in currencies other than U.S. dollars, principally British pounds and to a lesser extent euros, Canadian dollars and Chinese yuan. A significant weakening of such currencies versus the U.S. dollar could have a material adverse effect on us, as this would result in a decrease in our consolidated operating results.
Foreign subsidiaries accounted for the following percentages of total assets and total liabilities:
|
June 30, 2014 |
September 30, 2013 |
|||||
---|---|---|---|---|---|---|---|
Total Assets |
27 | % | 26 | % | |||
Total Liabilities |
4 | % | 3 | % |
56
In preparing the consolidated financial statements, the financial statements of the foreign subsidiaries are translated from the functional currency, generally the local currency, into U.S. dollars. This process results in translation gains and losses, which are included as a separate component of Stockholder's equity under the caption "Accumulated other comprehensive loss."
During the nine months ended June 30, 2014 and 2013, translation gains (losses) of $22,615 and ($45,217), respectively, were included in determining other comprehensive income. Cumulative translation gains (losses) of approximately $12,936 and ($9,680) were included as part of accumulated other comprehensive loss within the consolidated balance sheets at June 30, 2014 and September 30, 2013, respectively.
The magnitude of these gains or losses is dependent upon movements in the exchange rates of the foreign currencies against the U.S. dollar. Any future translation gains or losses could be significantly different than those noted in each of these years.
Recent Accounting Developments
In February 2013, the Financial Accounting Standards Board ("FASB") issued guidance on disclosure requirements for items reclassified out of Accumulated Other Comprehensive Income ("AOCI"). This new guidance requires entities to present (either on the face of the income statement or in the notes thereto) the effects on the line items of the income statement for amounts reclassified out of AOCI. The new guidance became effective for us beginning October 1, 2013. See Note 10, "Accumulated Other Comprehensive Income (loss)" and the Consolidated Statements of Operations and Comprehensive Income (Loss).
In March 2013, the FASB issued guidance on a parent's accounting for the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. This new guidance requires that the parent release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The new guidance will be effective for us beginning on October 1, 2014. The adoption of this guidance is not expected to have a material impact on the Company's financial statements.
In July 2013, the FASB issued guidance which amends the guidance related to the presentation of unrecognized tax benefits and allows for the reduction of a deferred tax asset for a net operating loss carryforward whenever the net operating loss carryforward or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed. The new guidance will be effective for us beginning on October 1, 2014. The adoption of this guidance is not expected to have a material impact on the Company's financial statements.
In April 2014, the FASB issued revised guidance to reduce diversity in practice for reporting discontinued operations. The revised guidance only allows disposals of components of an entity that represent a strategic shift (e.g., disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity) and that have a major effect on a reporting entity's operations and financial results to be reported as discontinued operations. The revised guidance also requires expanded disclosure in the financial statements for discontinued operations as well as for disposals of significant components of an entity that do not qualify for discontinued operations presentation. The revised guidance is effective for all disposals (or classifications as held for sale) of components for us beginning October 1, 2015, and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company's financial statements.
In May 2014, the FASB issued guidance on revenue from contracts with customers that will supersede virtually all existing revenue recognition guidance, including industry-specific guidance, and is
57
designed to create greater comparability for financial statement users across industries and jurisdictions. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers. The guidance is effective for us beginning October 1, 2017 (early adoption is not permitted). The guidance permits the use of either a retrospective or cumulative effect transition method. We have not yet selected a transition method and are currently evaluating the impact of the amended guidance on our consolidated financial statements and related disclosures.
In June 2014, the FASB issued guidance to clarify the proper method of accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The guidance is effective for us beginning October 1, 2016, and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company's financial statements.
Critical Accounting Policies and Estimates
We describe our significant accounting policies in Note 2 of the notes to Consolidated Financial Statements included in our 2013 Annual Report. We discuss our critical accounting estimates in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in the 2013 Annual Report. There have been no significant changes in our significant accounting policies or critical accounting estimates since September 30, 2013.
58
NBTY, Inc. and Subsidiaries
Item 3. Quantitative and Qualitative Disclosures About Market Risk
(in thousands)
Quantitative and Qualitative Disclosures About Market Risk
We are subject to currency fluctuations, primarily with respect to the British pound, the euro, the Canadian dollar and the Chinese yuan, and interest rate risks that arise from normal business operations. We regularly assess these risks.
We have subsidiaries whose operations are denominated in foreign currencies (primarily the British pound, the euro, the Canadian dollar and the Chinese yuan). We consolidate the earnings of our international subsidiaries by translating them into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar weakens against these foreign currencies, the remeasurement of these foreign currency denominated transactions results in increased net sales, operating expenses and net income. Similarly, our net sales, operating expenses and net income would decrease if the U.S. dollar strengthens against these foreign currencies.
To manage the potential exposure from adverse changes in currency exchange rates, specifically the British pound, arising from our net investment in British pound denominated operations, on December 16, 2010, we entered into three cross currency swap contracts to hedge a portion of the net investment in our British pound denominated foreign operations. The aggregate notional amount of the swap contracts is £194,200 (approximately $300,000), with a forward rate of 1.565, and a termination date of September 30, 2017.
Net sales denominated in foreign currencies were approximately $843,894, or 35.0% of total net sales, for the nine months ended June 30, 2014. A majority of our foreign currency exposure is denominated in British pounds, Canadian dollars, euros and the Chinese yuan. For the nine months ended June 30, 2014, as compared to the prior comparable period, the British pound, the euro and the Chinese yuan increased 4.6%, 4.5% and 2.5%, respectively, as compared to the U.S. dollar and the Canadian dollar decreased 7.5% as compared to the U.S. dollar. The combined effect of the changes in these currency rates resulted in an increase of $22,454 in net sales and an increase of $6,919 in operating income.
During March 2011, we entered into three interest rate swap contracts to fix the LIBOR indexed interest rates on a portion of our senior secured credit facilities until the indicated expiration dates of these swap contracts. Each swap contract has an initial notional amount of $333,333 (for a total of $1 billion), with a fixed interest rate of 1.92% for a four-year term. The notional amount of each swap decreased to $266,666 in December 2012, decreased to $166,666 in December 2013 and has a maturity date of December 2014. Under the terms of the swap contracts, variable interest payments for a portion of our senior secured credit facilities are swapped for fixed interest payments.
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. Assuming NBTY's senior secured credit facilities are fully drawn, each one-eighth percentage point increase or decrease in the applicable interest rates would correspondingly change our interest expense on NBTY's senior secured credit facilities by approximately $1,822 per year.
59
NBTY, Inc. and Subsidiaries
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. We designed our disclosure controls and procedures to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosure. Our chief executive officer and chief financial officer, with assistance from other members of our management, have reviewed the effectiveness of our disclosure controls and procedures as of June 30, 2014, and, based on their evaluation, have concluded that our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the nine months ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
60
NBTY, Inc. and Subsidiaries
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Glucosamine-Based Dietary Supplements
Beginning in June 2011, certain putative class actions have been filed in various jurisdictions against NBTY, its subsidiary Rexall Sundown, Inc. ("Rexall"), and/or other companies as to which there may be a duty to defend and indemnify, challenging the marketing of glucosamine-based dietary supplements, under various states' consumer protection statutes. The lawsuits against NBTY and its subsidiaries are: Cardenas v. NBTY, Inc. and Rexall Sundown, Inc. (filed June 14, 2011) in the United States District Court for the Eastern District of California, on behalf of a putative class of California consumers seeking unspecified compensatory damages based on theories of restitution and disgorgement, plus punitive damages and injunctive relief; Jennings v. Rexall Sundown, Inc. (filed August 22, 2011) in the United States District Court for the District of Massachusetts, on behalf of a putative class of Massachusetts consumers seeking unspecified trebled compensatory damages; and Nunez v. NBTY, Inc. et al. (filed March 1, 2013) in the United States District Court for the Southern District of California (the "Nunez Case"), on behalf of a putative class of California consumers seeking unspecified compensatory damages based on theories of restitution and disgorgement, plus injunctive relief, as well as other cases in California and Illinois against certain wholesale customers as to which we may have certain indemnification obligations. The Nunez Case settled on an individual basis on June 20, 2013.
In March 2013, NBTY agreed upon a proposed settlement with the remaining plaintiffs, which includes all cases and resolves all pending claims without any admission of or concession of liability by NBTY, and which provides for a release of all claims in return for payments to the class, together with attorneys' fees, and notice and administrative costs. Fairness Hearings took place on October 4, 2013 and November 20, 2013. On January 3, 2014, the court issued an opinion and order approving the settlement as modified ("the Order"). The final judgment was issued on January 22, 2014 ("the Judgment"). Certain objectors filed a notice of appeal of the Order and the Judgment on January 29, 2014 and the plaintiffs filed a notice of appeal on February 3, 2014, and those appeals are pending.
In fiscal 2013, NBTY recorded a provision of $12 million reflecting its best estimate of exposure for payments to the class together with attorney's fees, and notice and administrative costs in connection with this class action settlement. As a result of the court's approval of the settlement and the closure of the claims period, NBTY has reduced its estimate of exposure to $6 million. This reduction in the estimated exposure was reflected in the Company's first quarter results for fiscal 2014. Until the appeal is resolved, no final determination can be made as to the ultimate outcome of the litigation or the amount of liability on the part of NBTY.
Telephone Consumer Protection Act Claim
NBTY, and certain of its subsidiaries, are defendants in a class-action lawsuit, captioned John H. Lary Jr. v. Rexall Sundown, Inc.; Rexall Sundown 3001, LLC; Rexall, Inc.; NBTY, Inc.; Corporate Mailings, Inc. d/b/a CCG Marketing Solutions ("CCG") and John Does 1-10 (originally filed October 22, 2013), brought in the United States District Court, Eastern District of New York. The plaintiff alleges that the defendants faxed advertisements to plaintiff and others without invitation or permission, in violation of the Telephone Consumer Protection Act ("TCPA"). On May 2, 2014, NBTY and its named subsidiary defendants cross-claimed against CCG, who was a third party vendor engaged by NBTY, and CCG cross-claimed against NBTY and named subsidiary defendants on June 13, 2014. CCG brought a third party complaint against an unrelated entity, Healthcare Data Experts, LLC, on June 27, 2014. On July 21, 2014, CCG filed a motion to dismiss the amended complaint and that motion is pending. At this time, no determination can be made as to the ultimate outcome of the litigation or the amount of
61
liability on the part of NBTY, however we do not believe the ultimate outcome will have a material adverse effect on each of our consolidated financial statements.
Claims in the Ordinary Course
In addition to the foregoing, other regulatory inquiries, claims, suits and complaints (including product liability, false advertising, intellectual property and Proposition 65 claims) arise from time to time 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 each of our consolidated financial statements, if adversely determined against us.
62
NBTY, Inc. and Subsidiaries
Item 1A. Risk Factors
Risk Factors
In addition to the other information set forth in this Report, you should carefully consider the risk factors disclosed under the caption "Risk Factors" in the 2013 Annual Report. These factors could materially adversely affect our business, financial condition, operating results and cash flows. The risks and uncertainties described in the 2013 Annual Report are not the only ones we face. Risks and uncertainties not currently known to us or that we currently deem immaterial also may materially adversely affect our business, financial condition, operating results or cash flows. Since September 30, 2013 there have been no significant changes relating to risk factors.
63
NBTY, Inc. and Subsidiaries
Item 6. Exhibits
Exhibit No. | Description | ||
---|---|---|---|
3.1 | Amended and Restated Certificate of Incorporation of NBTY, Inc. (Incorporated by reference to Exhibit 3.1 to NBTY's Registration Statement on Form S-4 (No. 333-172973) (the "Registration Statement"). | ||
3.2 |
Second Amended and Restated By-laws of NBTY, Inc. (Incorporated by reference to Exhibit 3.2 to the Registration Statement). |
||
31.1 |
Rule 13a-14(a) Certification of Principal Financial Officer.* |
||
31.2 |
Rule 13a-14(a) Certification of Principal Financial Officer.* |
||
32.1 |
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
||
32.2 |
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
||
101.INS |
XBRL Instance Document*** |
||
101.SCH |
XBRL Taxonomy Extension Schema Document*** |
||
101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document*** |
||
101.DEF |
XBRL Taxonomy Extension Definition Linkbase Document*** |
||
101.LAB |
XBRL Taxonomy Extension Label Linkbase Document*** |
||
101.PRE |
XBRL Taxonomy Extension Presentation Linkbase Document*** |
- *
- Filed
herewith
- **
- Furnished,
not filed
- ***
- Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.
64
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.
NBTY, Inc. (Registrant) |
||||
Date: August 14, 2014 |
By: |
/s/ JEFFREY NAGEL Jeffrey Nagel Chief Executive Officer |
||
Date: August 14, 2014 |
By: |
/s/ MICHAEL D. COLLINS Michael D. Collins Chief Financial Officer |
65