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TABLE OF CONTENTS

Table of Contents

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q

(Mark One)    

ý

 

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

For the quarterly period ended March 31, 2015

or

o

 

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

For the transition period from                             to                            

Commission File Number: 333-186802

LOGO

NBTY, Inc.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  11-2228617
(I.R.S. Employer
Identification No.)

2100 Smithtown Avenue,
Ronkonkoma, New York 11779

(Address of principal executive offices) (Zip Code)

(631) 200-2000
(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

        As of May 4, 2015, the number of shares of common stock outstanding was 1,000.

   


Table of Contents

NBTY, Inc. and Subsidiaries
INDEX


Table of Contents

PART I
Item 1. Financial Statements

        


NBTY, Inc. and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

(in thousands, except share and per share amounts)

 
  March 31,
2015
  September 30,
2014
 
 
   
  (As Adjusted)
 

Assets

             

Current assets:

             

Cash and cash equivalents

  $ 250,398   $ 139,488  

Accounts receivable, net

    208,451     175,701  

Inventories

    780,100     853,226  

Deferred income taxes

    26,603     28,915  

Other current assets

    48,808     61,509  

Total current assets

    1,314,360     1,258,839  

Property, plant and equipment, net

   
591,895
   
597,202
 

Goodwill

    1,118,867     1,163,282  

Intangible assets, net

    1,736,521     1,791,592  

Other assets

    21,157     8,207  

Total assets

  $ 4,782,800   $ 4,819,122  

Liabilities and Stockholders' Equity

             

Current liabilities:

             

Current portion long-term debt

  $ 174   $ 261  

Accounts payable

    269,694     227,877  

Accrued expenses and other current liabilities

    235,021     221,056  

Total current liabilities

    504,889     449,194  

Long-term debt, net of current portion

    2,107,757     2,099,487  

Deferred income taxes

    691,767     707,962  

Other liabilities

    37,224     53,386  

Total liabilities

    3,341,637     3,310,029  

Commitments and contingencies

             

Stockholder's equity:

   
 
   
 
 

Common stock, successor, $0.01 par; one thousand shares authorized, issued and outstanding at March 31, 2015 and September 30, 2014

         

Capital in excess of par

    1,562,427     1,561,014  

Accumulated deficit

    (10,021 )   (22,718 )

Accumulated other comprehensive loss

    (111,243 )   (29,203 )

Total stockholder's equity

    1,441,163     1,509,093  

Total liabilities and stockholder's equity

  $ 4,782,800   $ 4,819,122  

   

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

3


Table of Contents


NBTY, Inc. and Subsidiaries

Consolidated Statements of Income and Comprehensive (Loss) Income

(Unaudited)

(in thousands)

 
  Three Months Ended
March 31,
  Six Months Ended
March 31,
 
 
  2015   2014   2015   2014  

Net sales

  $ 787,876   $ 779,026   $ 1,613,647   $ 1,606,131  

Costs and expenses:

                         

Cost of sales

    438,864     431,081     884,044     872,799  

Advertising, promotion and catalog

    58,505     58,783     105,399     97,305  

Selling, general and administrative

    235,460     238,894     473,632     471,577  

Facility restructuring charges (See Note 2)

    4,418         4,418      

    737,247     728,758     1,467,493     1,441,681  

Income from operations

    50,629     50,268     146,154     164,450  

Other income (expense):

                         

Interest

    (32,426 )   (33,086 )   (67,173 )   (67,904 )

Miscellaneous, net

    2,525     (1,714 )   1,170     (725 )

    (29,901 )   (34,800 )   (66,003 )   (68,629 )

Income from operations before income taxes

    20,728     15,468     80,151     95,821  

Provision for income taxes

   
7,472
   
5,568
   
28,705
   
32,100
 

Net income

    13,256     9,900     51,446     63,721  

Other comprehensive (loss) income, net of tax:

                         

Foreign currency translation adjustment, net of taxes of $(1,697), $1,145, $(2,093), and $3,533

    (52,455 )   (706 )   (82,761 )   11,489  

Change in fair value of interest rate swaps, net of taxes of $0, $(427), $(442) and $(1,124)

        684     721     1,769  

Total other comprehensive (loss) income, net of tax:

    (52,455 )   (22 )   (82,040 )   13,258  

Comprehensive (loss) income

 
$

(39,199

)

$

9,878
 
$

(30,594

)

$

76,979
 

   

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

4


Table of Contents


NBTY, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 
  Six Months Ended
March 31,
 
 
  2015   2014  

Cash flows from operating activities:

             

Net income

  $ 51,446   $ 63,721  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

             

Impairments and disposals of assets

    945     5,324  

Depreciation of property, plant and equipment

    35,123     28,262  

Amortization of intangible assets

    22,675     23,137  

Foreign currency transaction (gain) loss

    (55 )   376  

Amortization and write-off of deferred financing fees

    9,581     9,408  

Stock-based compensation

    1,406     2,556  

Allowance for doubtful accounts

    256     303  

Inventory reserves

    12,401     4,752  

Deferred income taxes

    (8,379 )   (3,041 )

Changes in operating assets and liabilities:

             

Accounts receivable

    (38,566 )   5,552  

Inventories

    42,479     (135,680 )

Other assets

    7,569     7,005  

Accounts payable

    46,802     4,069  

Accrued expenses and other liabilities

    20,354     (17,813 )

Net cash provided by (used in) operating activities

    204,037     (2,069 )

Cash flows from investing activities:

             

Purchase of property, plant and equipment

    (45,967 )   (47,244 )

Proceeds from sale of equipment

    260      

Net cash used in investing activities

    (45,707 )   (47,244 )

Cash flows from financing activities:

             

Principal payments

    (255 )   (215 )

Payments for financing fees

    (611 )    

Dividends paid

    (38,750 )   (21,313 )

Share repurchase

         

Exercise of stock options

         

Net cash used in financing activities

    (39,616 )   (21,528 )

Effect of exchange rate changes on cash and cash equivalents

    (7,804 )   1,213  

Net increase (decrease) in cash and cash equivalents

    110,910     (69,628 )

Cash and cash equivalents at beginning of period

    139,488     198,561  

Cash and cash equivalents at end of period

  $ 250,398   $ 128,933  

Non-cash investing and financing information:

             

Property, plant and equipment additions included in total liabilities

  $ 12,732   $ 4,896  

   

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

5


Table of Contents


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, 2014, including the notes thereto (our "2014 Financial Statements") included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2014 ("2014 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 2014 Financial Statements. Results for interim periods are not necessarily indicative of results which may be achieved for a full year.

        During the three and six months ended March 31, 2015, the Company identified and recorded adjustments for immaterial errors in its previously reported financial statements. Accordingly, we recorded a reduction in selling, general and administrative expenses of $2,520, primarily related to prepaid rent in our retail operations and a reduction in cost of sales of $0, and $3,708 to increase the value of its label inventory for the three and six months ended March 31, 2015, respectively, which has an immaterial impact on the current year financial statements.

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 and intangible assets; stock-based compensation; income taxes and accruals for the outcome of current litigation.

6


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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

1. Basis of Presentation (Continued)

Accounts Receivable Reserves

        Accounts receivable are presented net of the following reserves:

 
  March 31,
2015
  September 30,
2014
 

Promotional program incentive allowances

  $ 71,403   $ 83,768  

Allowance for sales returns

    15,821     15,409  

Allowance for doubtful accounts

    2,583     2,564  

  $ 89,807   $ 101,741  

Recent Accounting Developments

        In January 2015, the Financial Accounting Standards Board ("FASB") issued guidance which eliminates from GAAP the concept of extraordinary items. The guidance is effective for us beginning October 1, 2016, and early adoption is permitted, provided that adoption is applied from the beginning of the fiscal year of adoption. This guidance may be applied prospectively or retrospectively to all prior periods presented in the financial statements. The adoption of this guidance is not expected to have an impact on our consolidated financial statements.

        In February 2015, the FASB issued guidance that amends the current consolidation guidance. The amendments affect both the variable interest entity and voting interest entity consolidation models. The new guidance is effective for the Company beginning October 1, 2016, with early adoption permitted. This new guidance is not expected to have a material impact on our consolidated financial statements.

        In April 2015, the FASB issued guidance which changes the presentation of debt issuance costs. Under the new guidance, debt issuance costs will be presented as a reduction of the carrying amount of the related liability, rather than as an asset. The new treatment is consistent with the current literature for accounting for debt discounts. The guidance is effective for us beginning October 1, 2016, and early adoption is permitted. This guidance has been early adopted as of March 31, 2015 and applied retrospectively to the prior period presented in the consolidated financial statements. See Note 5 "Long-Term Debt."

Revision

        See Note 13 for a revision that was made to the Condensed Consolidating Financial Statements of Guarantors.

2. Sale of Nutritional Bar and Powder Product Assets

        On March 3, 2015, NBTY and Nellson Nutraceutical, LLC ("Nellson") entered into (i) a bar asset purchase agreement,(the "Bar APA") and (ii) a powder asset purchase agreement (the "Powder APA" and, together with the Bar APA, the "APAs"), pursuant to which NBTY agreed to sell certain production assets, raw materials, packaging, labeling, in process products, component inventories and

7


Table of Contents


NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

2. Sale of Nutritional Bar and Powder Product Assets (Continued)

contracts (the "Transferred Assets") associated with NBTY's nutritional bar and powder manufacturing operations (the "Divested Manufacturing Operations").

        The aggregate sales price for the production assets and transferred contracts is approximately $17,000. The sales price for the raw materials, packaging, labels, work in process and component inventories to be transferred under each of the APAs will be equal to NBTY's cost for such assets, as estimated by NBTY prior to the closing of the transactions, and subject to post-closing adjustments.

        The closing of the sale pursuant to the Powder APA is expected to occur on or around the end of May 2015, and the closing of the sale pursuant to the Bar APA is expected to occur during the second half of calendar 2015, in each case subject to customary closing conditions.

        In connection with the APAs, NBTY has entered into supply agreements with Nellson, pursuant to which NBTY will purchase from Nellson the nutritional bar and powder products for a period of ten years. NBTY currently manufactures using the Transferred Assets.

        As a result of these arrangements, the Company will incur cumulative charges of approximately $15,000 before tax over the period in which these transactions are completed, of which charges will consist primarily of accelerated depreciation of approximately $11,500 (non-cash); costs related to workforce reductions will be approximately $2,200 and other costs will be approximately $1,300. All costs associated with the Divested Manufacturing Operations will be reflected in the Corporate / Manufacturing segment.

        Charges related to this divestiture of $4,418 for the three and six months ended March 31, 2015 were $2,171 for severance and employee related costs, $1,647 for accelerated depreciation and $600 of other costs.

3. Inventories

        The components of inventories are as follows:

 
  March 31,
2015
  September 30,
2014
 

Raw materials

  $ 196,133   $ 217,697  

Work-in-process

    22,132     20,898  

Finished goods

    561,835     614,631  

Total

  $ 780,100   $ 853,226  

8


Table of Contents


NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

4. Goodwill and Intangible Assets

        The change in the carrying amount of goodwill by segment is as follows:

 
  Wholesale   European
Retail
  Direct
Response /
E-Commerce
  Consolidated  

Balance at September 30, 2014

  $ 638,630   $ 321,257   $ 203,395   $ 1,163,282  

Foreign currency translation

    (11,576 )   (32,839 )       (44,415 )

Balance at March 31, 2015

  $ 627,054   $ 288,418   $ 203,395   $ 1,118,867  

        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:

 
  March 31, 2015   September 30, 2014    
 
  Gross
carrying
amount
  Accumulated
amortization
  Gross
carrying
amount
  Accumulated
amortization
  Amortization
period
(years)

Definite lived intangible assets:

                           

Brands and customer relationships

  $ 907,728   $ 174,800   $ 912,200   $ 155,776   17 - 25

Tradenames and other

    171,928     24,781     175,872     22,644   20 - 30

    1,079,656     199,581     1,088,072     178,420    

Indefinite lived intangible assets:

                           

Tradenames

    856,446         881,940        

Total intangible assets

  $ 1,936,102   $ 199,581   $ 1,970,012   $ 178,420    

        Aggregate amortization expense of definite lived intangible assets included in the consolidated statements of operations and comprehensive (loss) income in selling, general and administrative expenses for the three months ended March 31, 2015, and 2014 was $11,316 and $11,534, respectively. Amortization expense for the six months ended March 31, 2015, and 2014 was $22,675 and $23,137, respectively.

        Assuming no changes in our intangible assets, estimated amortization expense for each of the five succeeding years will be approximately $45,000 per year.

5. Long-Term Debt

        As a result of adopting the new guidance related to the presentation of debt issuance costs, our September 30, 2014 consolidated balance sheet has been retrospectively adjusted to reduce long-term debt by $58,600, reduce other assets by $41,285 and reduce other current assets by $17,315. Debt issuance costs relating to unused revolving lines of credit will remain in other assets and other current assets.

9


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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

5. Long-Term Debt (Continued)

        The components of long-term debt are as follows:

 
  March 31,
2015
  September 30,
2014
 

Senior Credit Facilities:

             

Term loan B-2

             

Principal amount

  $ 1,507,500   $ 1,507,500  

Less unamortized debt issuance costs

    (38,375 )   (45,539 )

    1,469,125     1,461,961  

Notes

   
 
   
 
 

Principal amount

    650,000     650,000  

Less unamortized debt issuance costs

    (11,684 )   (13,061 )

    638,316     636,939  

Other

   
490
   
848
 

    2,107,931     2,099,748  

Less current portion

    (174 )   (261 )

Total

  $ 2,107,757   $ 2,099,487  

    Senior secured credit facilities

        On October 1, 2010, NBTY entered into its senior secured credit facilities with Barclays Bank PLC, as administrative agent (the "Original Credit Agreement"). The Original Credit Agreement was amended pursuant to the First Amendment and Refinancing Agreement, dated as of March 1, 2011, and further amended pursuant to that Second Amendment Agreement, dated as of October 11, 2012.

        On March 21, 2013, NBTY, Alphabet Holding Company, Inc. ("Holdings"), our parent company, 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 then existing 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 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

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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

5. Long-Term Debt (Continued)

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. In accordance with the 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 at maturity in October 2017.

        On November 20, 2014, NBTY amended its senior secured revolving credit facility, extending its maturity to September 2017 and reducing the commitment from $200,000 to $175,000. In connection with this amendment, deferred financing costs of $611 were incurred and are being amortized over the remaining period and $359 of previously capitalized financing costs were written off.

        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.

        As of March 31, 2015, there were no borrowings drawn from our $175,000 revolving credit facility and there was a letter of credit totaling $4,400, reducing the net availability to $170,600.

        NBTY may voluntarily prepay loans or reduce commitments under its senior secured credit facilities, in whole or in part, subject to minimum amounts, with prior notice but without premium or penalty.

        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 its senior secured credit facilities unless specifically incurred to refinance a portion of its 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).

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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

5. Long-Term Debt (Continued)

        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 change our line of business or fiscal year. In addition, NBTY's 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 covenants under the senior secured credit facilities at March 31, 2015.

        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 accrues 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 $721,682 cash 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 original 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.

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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

5. Long-Term Debt (Continued)

        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 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.

        All interest payments to date have been in cash and were funded by dividends from NBTY.

        Holdings may redeem the Holdco 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 to the 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), if redeemed during the 12-month period commencing on November 1 of the years set forth below:

Period
  Redemption Price  

2014

    102.00 %

2015

    101.00 %

2016 and thereafter

    100.00 %

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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

5. Long-Term Debt (Continued)

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.

        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 to the 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), 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 %

        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 NBTY and its 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 March 31, 2015.

6. Fair Value of Financial Instruments

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

    Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

6. Fair Value of Financial Instruments (Continued)

    Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

        The following table summarizes the assets / (liabilities) measured at fair value on a recurring basis at March 31, 2015:

 
  Level 1   Level 2   Level 3  

Current (included in accrued expenses and other current liabilities):

                   

Cross currency swaps

  $   $   $ (2,409 )

Non-current (included in other assets):

                   

Cross currency swaps

  $   $   $ 11,219  

        The following table summarizes the assets / (liabilities) liabilities measured at fair value on a recurring basis at September 30, 2014:

 
  Level 1   Level 2   Level 3  

Current (included in accrued expenses and other current liabilities):

                   

Interest rate swaps

  $   $ (1,151 ) $  

Cross currency swaps

  $   $   $ (3,857 )

Non-current (included in other liabilities):

                   

Cross currency swaps

  $   $   $ (14,773 )

        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 did 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 assets / (liabilities) ranged from 6.0% to 9.7% (8.2% weighted average) as of March 31, 2015 and 8.1% to 8.5% (8.3% weighted average) as of September 30, 2014.

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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

6. Fair Value of Financial Instruments (Continued)

        The following table shows the Level 3 activity related to our cross currency swaps for the three and six months ended March 31, 2015 and 2014:

 
  Three Months Ended
March 31,
  Six Months Ended
March 31,
 
 
  2015   2014   2015   2014  

Beginning balance:

  $ (6,882 ) $ (27,359 ) $ (18,630 ) $ (22,254 )

Unrealized gain (loss) on cross currency swaps

    15,692     (1,862 )   27,440     (6,967 )

Ending balance:

  $ 8,810   $ (29,221 ) $ 8,810   $ (29,221 )

Interest Rate Swaps

        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 had a declining notional amount with a fixed interest rate of 1.92% for a four-year term and matured in December 2014. Under the terms of the swap contracts, variable interest payments for a portion of our senior secured credit facilities were 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 was assessed based on the overall changes in the fair value of the interest rate swap contracts. Hedge ineffectiveness from inception to March 31, 2015 was insignificant, and was recorded in Miscellaneous, net.

Cross Currency Swaps

        To manage the potential exposure from adverse changes in currency exchange rates, specifically the British pound sterling, arising from our net investment in British pound sterling 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 sterling (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 sterling 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 loss/(gain) for the three months ended March 31, 2015 and 2014 was $(185) and $58, respectively, and is recorded in Miscellaneous, net. Hedge ineffectiveness loss/(gain) for the six months ended March 31, 2015 and 2014 was $1,749 and ($952), respectively.

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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

6. 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 March 31,  
 
  2015   2014  
 
  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

  $   $   $ (463 ) $ (1,147 )

Net Investment Hedges:

                         

Cross currency swaps

    9,481         (1,090 )    

Total

  $ 9,481   $   $ (1,553 ) $ (1,147 )

 

 
  Six Months Ended March 31,  
 
  2015   2014  
 
  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

  $ (438 ) $ (1,159 ) $ (1,245 ) $ (3,014 )

Net Investment Hedges:

                         

Cross currency swaps

    18,651         (5,244 )    

Total

  $ 18,213   $ (1,159 ) $ (6,489 ) $ (3,014 )

Notes

        The fair value of the Notes based on quoted market prices (Level 2), was approximately $677,677 as of March 31, 2015.

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.

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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

7. Litigation Summary

Herbal Dietary Supplements

        In February 2015, the New York State Office of the Attorney General ("NY AG") began an investigation concerning the authenticity and purity of herbal supplements and associated marketing. As part of this investigation, the NY AG is reviewing the sufficiency of the measures that several manufacturers and retailers, including NBTY, are taking to independently assess the validity of their representations and advertising in connection with the sale of herbal supplements. NBTY has fully cooperated with the NY AG, however until this investigation is concluded, no final determination can be made as to its ultimate outcome or the amount of liability, if any, on the part of NBTY. However, we do not believe the ultimate outcome will have a material adverse effect on our consolidated financial statements.

        Following the NY AG investigation, starting in February 2015, numerous putative class actions were filed in various jurisdictions against NBTY, certain of its customers and/or other companies as to which there may be a duty to defend and indemnify, challenging the authenticity and purity of herbal supplements and associated marketing, under various states' consumer protection statutes. Motions for transfer and consolidation of all of the federal actions as multidistrict litigation into a single district before a single judge ("MDL motions") are currently pending and the hearing date of the MDL motions is scheduled for May 28, 2015. Certain state court actions are proceeding independently or have been removed to federal court and stayed pending a decision on the MDL motions. These cases seek some combination of monetary damages, injunctive relief and specific performance.

        At this time, no determination can be made as to the ultimate outcome of the litigation or the amount of liability, if any, on the part of NBTY, however, we do not believe the ultimate outcome will have a material adverse effect on our consolidated financial statements.

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.

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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

7. Litigation Summary (Continued)

        In March 2013, NBTY agreed upon a proposed settlement with plaintiffs, which included all cases and resolved all pending claims without any admission of or concession of liability by NBTY, and which provided 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. 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 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.

        On November 19, 2014, the appellate court issued a decision granting the objectors' appeal. The appellate court reversed and remanded the matter to the district court for further proceedings consistent with the appellate court's decision. In April 2015, NBTY agreed upon a revised proposed settlement with certain plaintiffs which includes all cases and resolves all pending claims without any admission of or concession of liability by NBTY. The parties have signed settlement documentation providing for a release of all claims in return for payments to the class, together with attorneys' fees, and notice and administrative costs estimated to be in the amount of $9,000, which resulted in an additional charge of $4,300 in the second quarter results for fiscal 2015. The settlement has not yet been submitted to the court for preliminary approval. Until the cases are 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 on February 11, 2015 the court issued an Order and Opinion dismissing the class-action. On February 27, 2015, Plaintiff filed an appeal to the court's dismissal of the action and that appeal is pending.

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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

7. Litigation Summary (Continued)

        At 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 our consolidated financial statements.

Claims in the Ordinary Course

        In addition to the foregoing, other regulatory inquiries, claims, suits and complaints (including product liability, intellectual property and Proposition 65 claims) arise from time to time in the ordinary course of our business. We currently believe that such other inquiries, claims, suits and complaints would not have a material adverse effect on our consolidated financial statements, if adversely determined against us.

        Over the past several years, we have been served with various false advertising putative class action cases in various U.S. jurisdictions, as have various other companies in the industry. Over the past few years, the number of these cases has increased, such that at any given time we are defending several suits concerning a variety of products. These cases challenge the marketing of the subject dietary supplements under various states' consumer protection statutes and generally seek unspecified compensatory damages based on theories of restitution and disgorgement, plus punitive damages and injunctive relief. Until these cases are resolved, no determination can be made as to the ultimate outcome of the litigation or the amount of liability on our part.

8. Income Taxes

        Our provision for income taxes is impacted by a number of factors, including federal taxes, our international tax structure, state tax rates in the jurisdictions where we conduct business, and our ability to utilize state tax credits that expire between 2015 and 2029. Therefore, our overall effective income tax rate could vary.

        The effective income tax rate for the three months ended March 31, 2015 and 2014 was 36.0%. The effective income tax rate for the six months ended March 31, 2015 and 2014 was 35.8% and 33.5%, respectively. Our effective tax rates for the three and six month periods are different than the federal statutory rate generally due to the impact of state and local taxes and the partial reinvestment of foreign earnings in fiscal 2014.

        We accrue interest and penalties related to unrecognized tax benefits in the provision for income taxes. At March 31, 2015, we had accrued $563 and $174 for the potential payment of interest and penalties, respectively. As of March 31, 2015, we were subject to U.S. federal income tax examinations for the tax years 2011 through 2014, and to non-U.S. examinations for tax years 2009 through 2014. In addition, we are generally subject to state and local examinations for fiscal years 2011 through 2014.

        During our fiscal second quarter, the Internal Revenue Service ("IRS") finalized its examination of the Company for tax years 2011 and 2012, which resulted in an immaterial reduction to its unrecognized tax benefit.

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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

9. Accumulated Other Comprehensive Income (Loss)

        Additions to and reclassifications out of accumulated other comprehensive income (loss) attributable to the Company for the three and six months ended March 31, 2015 and 2014 were as follows:

 
  Three Months Ended March 31, 2015(1)  
 
  Foreign currency
translation
adjustments
  Gains and
losses on
cash flow
hedges
  Total  

Balance at December 31, 2014

  $ (58,788 ) $   $ (58,788 )

Other comprehensive income (loss) before reclassifications

    (52,455 )       (52,455 )

Amounts reclassified from accumulated other comprehensive income (loss)(2)

             

Balance at March 31, 2015

  $ (111,243 ) $   $ (111,243 )

 

 
  Three Months Ended March 31, 2014(1)  
 
  Foreign currency
translation
adjustments
  Gains and
losses on
cash flow
hedges
  Total  

Balance at December 31, 2013

  $ 2,514   $ (2,817 ) $ (303 )

Other comprehensive income (loss) before reclassifications

    (705 )   (462 )   (1,167 )

Amounts reclassified from accumulated other comprehensive income (loss)(2)

        1,146     1,146  

Balance at March 31, 2014

  $ 1,809   $ (2,133 ) $ (324 )

 

 
  Six Months Ended March 31, 2015(1)  
 
  Foreign currency
translation
adjustments
  Gains and
losses on
cash flow
hedges
  Total  

Balance at September 30, 2014

  $ (28,482 ) $ (721 ) $ (29,203 )

Other comprehensive income (loss) before reclassifications

    (82,761 )   (438 )   (83,199 )

Amounts reclassified from accumulated other comprehensive income (loss)(2)

        1,159     1,159  

Balance at March 31, 2015

  $ (111,243 ) $   $ (111,243 )

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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

9. Accumulated Other Comprehensive Income (Loss) (Continued)


 
  Six Months Ended March 31, 2014(1)  
 
  Foreign currency
translation
adjustments
  Gains and
losses on
cash flow
hedges
  Total  

Balance at September 30, 2013

  $ (9,680 ) $ (3,902 ) $ (13,582 )

Other comprehensive income (loss) before reclassifications

    11,489     (1,245 )   10,244  

Amounts reclassified from accumulated other comprehensive income (loss)(2)

        3,014     3,014  

Balance at March 31, 2014

  $ 1,809   $ (2,133 ) $ (324 )

(1)
All amounts are net of tax, amounts in parentheses indicate debits.

(2)
These losses are reclassified into Interest expense. See Note 6, Fair Value of Financial Instruments.

10. 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.

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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

10. Business and Credit Concentration (Continued)

        The following customers accounted for the following percentages of net sales for the three and six months ended March 31, 2015 and 2014, respectively:

 
  Wholesale
Segment Net
Sales
  Total
Consolidated
Net Sales
 
 
  Three Months
Ended
March 31,
  Three Months
Ended
March 31,
 
 
  2015   2014   2015   2014  

Customer A

    19 %   21 %   11 %   12 %

Customer B

    10 %   8 %   6 %   5 %

 

 
  Wholesale
Segment Net
Sales
  Total
Consolidated
Net Sales
 
 
  Six Months
Ended
March 31,
  Six Months
Ended
March 31,
 
 
  2015   2014   2015   2014  

Customer A

    18 %   20 %   10 %   12 %

Customer B

    14 %   13 %   8 %   8 %

Customer C

    10 %   9 %   6 %   5 %

        The following customers accounted for the following percentages of the Wholesale segment's gross accounts receivable:

 
  March 31,
2015
  September 30,
2014
 

Customer A

    12 %   13 %

Customer B

    12 %   11 %

Customer C

    10 %   9 %

        The loss of any of these customers, or any one of our other major customers, would have a material adverse effect on our consolidated financial statements if we were unable to replace that customer.

11. Related Party Transactions

Consulting Agreement—The Carlyle Group ("Carlyle")

        NBTY entered into a consulting agreement with Carlyle under which it pays Carlyle a fee for consulting services Carlyle provides to it and its subsidiaries. Under this agreement, subject to certain conditions, NBTY expects to pay an annual consulting fee to Carlyle of $3,000; NBTY reimburses Carlyle for out-of-pocket expenses, and may pay Carlyle additional fees associated with other future transactions. For the three and six months ended March 31, 2015 and 2014, these fees totaled $750 and $1,500, in each of the respective periods, and are recorded in selling, general and administrative expenses. Out of pocket expenditures paid to Carlyle were $54 and $39 for the three months ended

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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

11. Related Party Transactions (Continued)

March 31, 2015 and 2014, respectively, and $388 and $368 for the six months ended March 31, 2015 and 2014, respectively.

Services from Portfolio Companies of Funds Affiliated with Carlyle

        From time to time, we receive services from other portfolio companies of funds that are affiliated with Carlyle, but these services are not material and such services are provided on an arms-length basis.

Holdings

        Holdings does not have any 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 5 Long-Term Debt for further information.

12. 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:

    Wholesale—This 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 Retail—This segment generates revenue through its 992 Holland & Barrett and co-branded stores; including company-owned stores in the following countries: 684 in the UK, 145 in the Netherlands, 48 in Ireland, 17 in Belgium; and franchised stores in the following countries: 30 in China, 30 in Singapore, 14 in United Arab Emirates, 10 in Cyprus, five in each of Malta and the Netherlands, two in Kuwait and one in each of Gibraltar and Spain. We also have 49 GNC branded UK stores, as well as internet-based sales from www.hollandandbarrett.com, www.hollandandbarrett.co.uk, www.hollandandbarrett.ie,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. We are currently in the process of co-branding the De Tuinen, Essenza and Natures Way stores to leverage the value of the Holland & Barrett brand.

    Direct Response/E-Commerce—This segment generates revenue through the sale of proprietary brand and third-party products primarily through mail order catalogs and the internet under the Puritan's Pride tradename. Catalogs are strategically mailed to customers who order by mail, internet, or phone.

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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

12. Segment Information (Continued)

    North American Retail—This segment generates revenue through its 390 owned and operated Vitamin World stores selling proprietary brand and third-party products, as well as internet-based sales from www.vitaminworld.com.

        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 March 31, 2015:(1)

                                           

Net sales

  $ 454,340   $ 216,805   $ 63,375   $ 53,356   $ 787,876   $   $ 787,876  

Income (loss) from operations

    24,844     46,082     6,990     4,610     82,526     (31,897 )   50,629  

Depreciation and amortization

    9,026     5,107     2,839     905     17,877     11,856     29,733  

Capital expenditures

    627     12,449     258     648     13,982     12,896     26,878  

Three Months Ended March 31, 2014:

   
 
   
 
   
 
   
 
   
 
   
 
   
 
 

Net sales

  $ 443,449   $ 215,317   $ 63,601   $ 56,659   $ 779,026   $   $ 779,026  

Income (loss) from operations

    19,004     49,915     7,388     1,702     78,009     (27,741 )   50,268  

Depreciation and amortization

    9,081     4,133     2,833     767     16,814     9,020     25,834  

Capital expenditures

    172     9,547     113     3,957     13,789     12,208     25,997  

Six Months Ended March 31, 2015:(1)(2)

   
 
   
 
   
 
   
 
   
 
   
 
   
 
 

Net sales

  $ 949,467   $ 430,402   $ 126,517   $ 107,261   $ 1,613,647   $   $ 1,613,647  

Income (loss) from operations

    89,673     92,397     13,050     5,914     201,034     (54,880 )   146,154  

Depreciation and amortization

    18,028     10,156     5,670     1,800     35,654     22,144     57,798  

Capital expenditures

    700     23,153     271     1,671     25,795     20,172     45,967  

Six Months Ended March 31, 2014:

   
 
   
 
   
 
   
 
   
 
   
 
   
 
 

Net sales

  $ 948,723   $ 420,229   $ 123,963   $ 113,216   $ 1,606,131   $   $ 1,606,131  

Income (loss) from operations

    101,732     93,875     14,363     4,494     214,464     (50,014 )   164,450  

Depreciation and amortization

    18,167     8,177     5,645     1,473     33,462     17,937     51,399  

Capital expenditures

    203     14,868     682     7,590     23,343     23,901     47,244  

(1)
Included in the North American Retail segment's income (loss) from operations for the three and six months ended March 31, 2015, is an adjustment to correct the Company's accounting for prepaid rent, whereby a benefit of $2,520 was recorded.

(2)
Included in the income (loss) from operations for the six months ended March 31, 2015, is an adjustment to correct the valuation of our labels inventory, whereby a benefit of $3,708 was recorded and benefited the Wholesale, Direct Response / E-Commerce and North American Retail segments by $2,975, $397, and $336, respectively.

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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

12. Segment Information (Continued)

        Total assets by segment are as follows:

 
  March 31,
2015
  September 30,
2014
 

Reportable Business Segments:

             

Wholesale

  $ 2,469,040   $ 2,500,659  

European Retail

    890,472     948,010  

Direct Response / E-Commerce

    513,248     512,642  

North American Retail

    108,801     107,442  

Total Reportable Business Segments:

    3,981,561     4,068,753  

Corporate / Manufacturing

    801,239     750,369  

Consolidated assets

  $ 4,782,800   $ 4,819,122  

13. 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 March 31, 2015 and September 30, 2014 and for the three and six months ended March 31, 2015 and 2014 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. This financial information should be read in conjunction with the financial statements and other notes related thereto.

        We revised the statement of operations with respect to equity in income of subsidiaries from the non-guarantor subsidiaries to the guarantor. This revision impacted the condensed consolidating statement of operations and comprehensive income (loss) for the three and six months ended March 31, 2014 increasing net income for the guarantors and decreasing the eliminations by $7,480 and $13,646, respectively. The revision 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

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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

13. Condensed Consolidating Financial Statements of Guarantors (Continued)

comparative prior period supplemental guarantor subsidiaries financial information is presented in future filings, we will similarly revise such prior period information.


Condensed Consolidating Balance Sheet
As of March 31, 2015

 
  Parent
Company
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  

Assets

                               

Current assets:

                               

Cash and cash equivalents

  $ 149,486   $ 2,732   $ 98,180   $   $ 250,398  

Accounts receivable, net

        163,443     45,008         208,451  

Intercompany

    29,257         25,268     (54,525 )    

Inventories

        587,139     192,961         780,100  

Deferred income taxes

        24,856     1,747         26,603  

Other current assets

    876     18,393     29,539         48,808  

Total current assets

    179,619     796,563     392,703     (54,525 )   1,314,360  

Property, plant and equipment, net

   
112,284
   
287,773
   
191,838
   
   
591,895
 

Goodwill

        726,354     392,513         1,118,867  

Other intangible assets, net

        1,418,079     318,442         1,736,521  

Other assets

    1,312     19,821     24         21,157  

Intercompany loan receivable

    2,418,909     1,210,172         (3,629,081 )    

Investments in subsidiaries

    2,100,597     139,638         (2,240,235 )    

Total assets

  $ 4,812,721   $ 4,598,400   $ 1,295,520   $ (5,923,841 ) $ 4,782,800  

Liabilities and Stockholder's Equity

                               

Current liabilities:

                               

Current portion of long-term debt

  $   $   $ 174   $   $ 174  

Accounts payable

        185,414     84,280         269,694  

Intercompany

        54,525         (54,525 )    

Accrued expenses and other current liabilities

    31,666     160,168     43,187         235,021  

Total current liabilities

    31,666     400,107     127,641     (54,525 )   504,889  

Intercompany loan payable

    1,210,172     2,107,441     311,468     (3,629,081 )    

Long-term debt, net of current portion

    2,107,441         316         2,107,757  

Deferred income taxes

    22,279     570,727     98,761         691,767  

Other liabilities

        14,879     22,345         37,224  

Total liabilities

    3,371,558     3,093,154     560,531     (3,683,606 )   3,341,637  

Commitments and contingencies

   
 
   
 
   
 
   
 
   
 
 

Stockholder's Equity:

                               

Common stock

                     

Capital in excess of par

    1,562,427     1,408,921     746,911     (2,155,832 )   1,562,427  

(Accumulated deficit) retained earnings

    (10,021 )   115,433     92,620     (208,053 )   (10,021 )

Accumulated other comprehensive income (loss)

    (111,243 )   (19,108 )   (104,542 )   123,650     (111,243 )

Total stockholder's equity

    1,441,163     1,505,246     734,989     (2,240,235 )   1,441,163  

Total liabilities and stockholder's equity

  $ 4,812,721   $ 4,598,400   $ 1,295,520   $ (5,923,841 ) $ 4,782,800  

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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

13. Condensed Consolidating Financial Statements of Guarantors (Continued)

Condensed Consolidating Balance Sheet
As of September 30, 2014

 
  Parent
Company
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  

Assets

                               

Current assets:

                               

Cash and cash equivalents

  $ 77,550   $ 751   $ 61,187       $ 139,488  

Accounts receivable, net

        130,749     44,952         175,701  

Intercompany

    30,425         32,102     (62,527 )    

Inventories

        650,484     202,742         853,226  

Deferred income taxes

        27,002     1,913         28,915  

Other current assets

    2,618     18,048     40,843         61,509  

Total current assets

    110,593     827,034     383,739     (62,527 )   1,258,839  

Property, plant and equipment, net

   
95,022
   
304,274
   
197,906
   
   
597,202
 

Goodwill

        726,354     436,928         1,163,282  

Other intangible assets, net

        1,439,374     352,218         1,791,592  

Other assets

        8,116     91         8,207  

Intercompany loan receivable

    2,438,743     1,060,793         (3,499,536 )    

Investments in subsidiaries

    2,095,763     148,921         (2,244,684 )    

Total assets

  $ 4,740,121   $ 4,514,866   $ 1,370,882   $ (5,806,747 ) $ 4,819,122  

Liabilities and Stockholder's Equity

                               

Current liabilities:

                               

Current portion of long-term debt

  $   $   $ 261   $   $ 261  

Accounts payable

        140,761     87,116         227,877  

Intercompany

        62,527         (62,527 )    

Accrued expenses and other current liabilities

    34,282     112,136     74,638         221,056  

Total current liabilities

    34,282     315,424     162,015     (62,527 )   449,194  

Intercompany loan payable

    1,060,793     2,098,900     339,843     (3,499,536 )    

Long-term debt, net of current portion

    2,098,900         587         2,099,487  

Deferred income taxes

    22,280     586,116     99,566         707,962  

Other liabilities

    14,773     13,732     24,881         53,386  

Total liabilities

    3,231,028     3,014,172     626,892     (3,562,063 )   3,310,029  

Commitments and contingencies

   
 
   
 
   
 
   
 
   
 
 

Stockholder's Equity:

                               

Common stock

                     

Capital in excess of par

    1,561,014     1,417,462     739,911     (2,157,373 )   1,561,014  

(Accumulated deficit) retained earnings

    (22,718 )   89,265     24,570     (113,835 )   (22,718 )

Accumulated other comprehensive income (loss)

    (29,203 )   (6,033 )   (20,491 )   26,524     (29,203 )

Total stockholder's equity

    1,509,093     1,500,694     743,990     (2,244,684 )   1,509,093  

Total liabilities and stockholder's equity

  $ 4,740,121   $ 4,514,866   $ 1,370,882   $ (5,806,747 ) $ 4,819,122  

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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

13. Condensed Consolidating Financial Statements of Guarantors (Continued)


Consolidated Statements of Operations and Comprehensive (Loss) Income
For three months ended March 31, 2015

 
  Parent
Company
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  

Net sales

  $   $ 517,461   $ 283,597   $ (13,182 ) $ 787,876  

Costs and expenses:

                               

Cost of sales

        324,196     127,850     (13,182 )   438,864  

Advertising, promotion and catalog

        44,655     13,850         58,505  

Selling, general and administrative

    27,269     110,835     97,356         235,460  

Facility Restructuring Charges (see Note 2)

        4,418             4,418  

    27,269     484,104     239,056     (13,182 )   737,247  

Income (loss) from operations

    (27,269 )   33,357     44,541         50,629  

Other income (expense):

                               

Intercompany interest

    67,428     (62,709 )   (4,719 )        

Interest

    (62,709 )   30,298     (15 )       (32,426 )

Miscellaneous, net

    401     183     1,941         2,525  

    5,120     (32,228 )   (2,793 )       (29,901 )

Income (loss) before income taxes

    (22,149 )   1,129     41,748         20,728  

Provision (benefit) for income taxes

    (2,334 )   412     9,394         7,472  

Equity in income of subsidiaries

    33,071     6,971         (40,042 )    

Net income (loss)

    13,256     7,688     32,354     (40,042 )   13,256  

Other comprehensive (loss) income, net of tax:

                               

Foreign currency translation adjustment, net of taxes

    (52,455 )   (8,115 )   (53,604 )   61,719     (52,455 )

Change in fair value of interest rate swaps, net of taxes

                     

Total other comprehensive (loss) income, net of tax

    (52,455 )   (8,115 )   (53,604 )   61,719     (52,455 )

Comprehensive (loss) income

  $ (39,199 ) $ (427 ) $ (21,250 ) $ 21,677   $ (39,199 )

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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

13. Condensed Consolidating Financial Statements of Guarantors (Continued)


Consolidated Statements of Operations and Comprehensive Income (Loss)
Three Months Ended March 31, 2014

 
  Parent
Company
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  

Net sales

  $   $ 514,810   $ 289,468   $ (25,252 ) $ 779,026  

Costs and expenses:

                               

Cost of sales

        330,923     125,410     (25,252 )   431,081  

Advertising, promotion and catalog

        47,709     11,074         58,783  

Selling, general and administrative

    27,813     113,790     97,291         238,894  

    27,813     492,422     233,775     (25,252 )   728,758  

Income (loss) from operations

    (27,813 )   22,388     55,693         50,268  

Other income (expense):

                               

Intercompany interest

    39,121     (34,204 )   (4,917 )        

Interest

    (34,204 )   605     513         (33,086 )

Miscellaneous, net

    95     (1,653 )   (156 )       (1,714 )

    5,012     (35,252 )   (4,560 )       (34,800 )

Income (loss) before income taxes

    (22,801 )   (12,864 )   51,133         15,468  

Provision (benefit) for income taxes

    51     (5,843 )   11,360         5,568  

Equity in income of subsidiaries

    32,752     7,480         (40,232 )    

Net income (loss)

  $ 9,900   $ 459   $ 39,773   $ (40,232 ) $ 9,900  

Other comprehensive income (loss), net of tax:

                               

Foreign currency translation adjustment, net of taxes

    (706 )   1,398     1,486     (2,884 )   (706 )

Change in fair value of interest rate swaps net of taxes

    684     684         (684 )   684  

Total other comprehensive income (loss), net of tax

    (22 )   2,082     1,486     (3,568 )   (22 )

Comprehensive income (loss)

  $ 9,878   $ 2,541   $ 41,259   $ (43,800 ) $ 9,878  

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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

13. Condensed Consolidating Financial Statements of Guarantors (Continued)

Consolidated Statements of Operations and Comprehensive (Loss) Income
For six months ended March 31, 2015

 
  Parent
Company
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  

Net sales

  $   $ 1,074,822   $ 572,614   $ (33,789 ) $ 1,613,647  

Costs and expenses:

                               

Cost of sales

        663,142     254,691     (33,789 )   884,044  

Advertising, promotion and catalog

        79,602     25,797         105,399  

Selling, general and administrative

    50,159     225,772     197,701         473,632  

Facility Restructuring Charges (see Note 2)

        4,418             4,418  

    50,159     972,934     478,189     (33,789 )   1,467,493  

Income (loss) from operations

    (50,159 )   101,888     94,425         146,154  

Other income (expense):

                               

Intercompany interest

    107,237     (97,490 )   (9,747 )        

Interest

    (97,490 )   30,363     (46 )       (67,173 )

Miscellaneous, net

    (1,345 )   (660 )   3,175         1,170  

    8,402     (67,787 )   (6,618 )       (66,003 )

Income (loss) before income taxes

    (41,757 )   34,101     87,807         80,151  

Provision (benefit) for income taxes

   
(3,499

)
 
12,447
   
19,757
   
   
28,705
 

Equity in income of subsidiaries

    89,704     13,304         (103,008 )    

Net income (loss)

    51,446     34,958     68,050     (103,008 )   51,446  

Other comprehensive (loss) income, net of tax:

                               

Foreign currency translation adjustment, net of taxes

    (82,761 )   (13,796 )   (84,051 )   97,847     (82,761 )

Change in fair value of interest rate swaps, net of taxes

    721     721         (721 )   721  

Total other comprehensive (loss) income, net of tax

    (82,040 )   (13,075 )   (84,051 )   97,126     (82,040 )

Comprehensive (loss) income

 
$

(30,594

)

$

21,883
 
$

(16,001

)

$

(5,882

)

$

(30,594

)

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NBTY, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands)

13. Condensed Consolidating Financial Statements of Guarantors (Continued)


Consolidated Statements of Operations and Comprehensive Income (Loss)
Six Months Ended March 31, 2014

 
  Parent
Company
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  

Net sales

  $   $ 1,085,876   $ 574,609   $ (54,354 ) $ 1,606,131  

Costs and expenses:

                               

Cost of sales

        672,791     254,362     (54,354 )   872,799  

Advertising, promotion and catalog

        76,823     20,482         97,305  

Selling, general and administrative

    50,085     230,670     190,822         471,577  

    50,085     980,284     465,666     (54,354 )   1,441,681  

Income (loss) from operations

    (50,085 )   105,592     108,943         164,450  

Other income (expense):

                               

Intercompany interest

    78,829     (69,002 )   (9,827 )        

Interest

    (69,002 )   605     493         (67,904 )

Miscellaneous, net

    1,005     (701 )   (1,029 )       (725 )

    10,832     (69,098 )   (10,363 )       (68,629 )

Income (loss) before income taxes

    (39,253 )   36,494     98,580         95,821  

Provision (benefit) for income taxes

   
(5,318

)
 
12,773
   
24,645
   
   
32,100
 

Equity in income of subsidiaries

    97,656     13,646         (111,302 )    

Net income (loss)

  $ 63,721   $ 37,367   $ 73,935   $ (111,302 ) $ 63,721  

Other comprehensive income (loss), net of tax:

                               

Foreign currency translation adjustment, net of taxes

    11,489     3,603     8,429     (12,032 )   11,489  

Change in fair value of interest rate swaps net of taxes

    1,769     1,769         (1,769 )   1,769  

Total other comprehensive income (loss), net of tax

    13,258     5,372     8,429     (13,801 )   13,258  

Comprehensive income (loss)

  $ 76,979   $ 42,739   $ 82,364   $ (125,103 ) $ 76,979