Schiff Nutrition International (WNI) 10-Q 2007 Q1 Quarterly report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 2007
q	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____.
Commission file number:
001-14608

SCHIFF NUTRITION INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Delaware	87-0563574
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2002 South 5070 West Salt Lake City, Utah	84104-4726
(Address of principal executive offices)	(Zip Code)

(801) 975-5000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No q

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer q                                                                Accelerated Filer q                                                      Non-Accelerated Filer ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes q No ý

As of April 12, 2007 the registrant had outstanding 11,663,784 shares of Class A common stock and 14,973,148 shares of Class B common stock.

Schiff Nutrition International, Inc.

Table of Contents

ITEM 1.   FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (3 months)  (9 months)

1.   BASIS OF PRESENTATION AND OTHER MATTERS

2.   AVAILABLE-FOR-SALE SECURITIES

3.   RECEIVABLES, NET

4.   INVENTORIES

5.   GOODWILL AND INTANGIBLE ASSETS, NET

6.   ACCRUED EXPENSES

7.   CONCENTRATION RISK

8.   COMMITMENTS AND CONTINGENCIES

9.   RECENTLY ISSUED ACCOUNTING STANDARDS

ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

-     General

-Results of Operations (unaudited) (3 months)  (9 months)

-Liquidity and Capital Resources

-Critical Accounting Policies and Estimates

-Impact of Inflation

-Seasonality

-Forward-Looking Statements

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4.   CONTROLS AND PROCEDURES

ITEM 1.     LEGAL PROCEEDINGS

ITEM 1A.   RISK FACTORS

ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ITEM 3.     DEFAULTS UPON SENIOR SECURITIES

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

ITEM 5.     OTHER INFORMATION

ITEM 6.     EXHIBITS

Exhibit 31.1 - Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2 - Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1 - CEO and CFO Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

PART I. FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

SCHIFF NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	February 28, 2007		May 31, 2006
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	30,530	$	24,899
Available-for-sale securities		44,224		40,120
Receivables, net		20,507		20,431
Inventories		23,915		23,515
Prepaid expenses and other		2,281		2,444
Deferred taxes, net		1,963		2,419
Total current assets		123,420		113,828
Property and equipment, net		14,762		13,287
Other assets:
Goodwill		4,346		4,346
Deposits and other assets		124		154
Total other assets		4,470		4,500
Total assets	$	142,652	$	131,615
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	11,559	$	10,547
Accrued expenses		9,950		11,472
Short-term debt		290		—
Income taxes payable		1,305		1,293
Total current liabilities		23,104		23,312
Deferred taxes, net		73		796
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, par value $.01 per share; shares authorized-10,000,000; no shares issued and outstanding		—		—
Class A common stock, par value $.01 per share; shares authorized-50,000,000; shares issued and outstanding-11,659,784 and 11,606,193		116		116
Class B common stock, par value $.01 per share; shares authorized-25,000,000; shares issued and outstanding-14,973,148		150		150
Additional paid-in capital		91,703		88,488
Retained earnings		27,506		18,753
Total stockholders' equity		119,475		107,507
Total liabilities and stockholders' equity	$	142,652	$	131,615

See notes to condensed consolidated financial statements.

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SCHIFF NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except share data)

(unaudited)

	Three Months Ended February 28,
	2007			2006
Net sales	$	44,999		$	49,641
Cost of goods sold		28,570			32,709
Gross profit		16,429			16,932
Operating expenses:
Selling and marketing		8,060			8,527
General and administrative		2,985			3,609
Research and development		995			667
Amortization of intangible assets		—			6
Reimbursement of import costs		(96	)		(125	)
Total operating expenses		11,944			12,684
Income from operations		4,485			4,248
Other income (expense):
Interest income		760			547
Interest expense		(43	)		(53	)
Other, net		(1	)		8
Total other income, net		716			502
Income before income taxes		5,201			4,750
Income tax expense		1,960			1,561
Net income	$	3,241		$	3,189
Weighted average shares outstanding:
Basic		26,549,132			26,336,274
Diluted		27,353,200			27,044,012
Net income per share-basic and diluted	$	0.12		$	0.12
Comprehensive income	$	3,241		$	3,189

See notes to condensed consolidated financial statements.

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SCHIFF NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except share data)

(unaudited)

	Nine Months Ended February 28,
	2007			2006
Net sales	$	129,468		$	133,114
Cost of goods sold		79,746			92,263
Gross profit		49,722			40,851
Operating expenses:
Selling and marketing		25,138			20,603
General and administrative		10,839			11,252
Research and development		2,675			1,978
Amortization of intangible assets		—			17
Reimbursement of import costs		(394	)		(2,413	)
Total operating expenses		38,258			31,437
Income from operations		11,464			9,414
Other income (expense):
Interest income		2,261			1,322
Interest expense		(146	)		(129	)
Foreign currency translation gain		—			1,584
Other, net		14			(21	)
Total other income, net		2,129			2,756
Income from continuing operations before income taxes		13,593			12,170
Income tax expense		4,840			2,384
Income from continuing operations		8,753			9,786
Loss from discontinued operations, net of income taxes		—			(127	)
Net income	$	8,753		$	9,659
Weighted average shares outstanding:
Basic		26,524,365			26,229,774
Diluted		27,332,732			26,894,878
Net income per share-basic:
Income from continuing operations	$	0.33		$	0.37
Loss from discontinued operations		—			—
Net income	$	0.33		$	0.37
Net income per share-diluted:
Income from continuing operations	$	0.32		$	0.36
Loss from discontinued operations		—			—
Net income	$	0.32		$	0.36
Comprehensive income	$	8,753		$	9,492

See notes to condensed consolidated financial statements.

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SCHIFF NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended February 28,
	2007			2006
Cash flows from operating activities:
Net income	$	8,753		$	9,659
Adjustments to reconcile net income to net cash provided by operating activities:
Changes in provision for bad debts		(54	)		—
Deferred taxes		(267	)		3,038
Depreciation and amortization		2,474			2,240
Amortization of financing fees		35			41
Stock-based compensation		2,962			117
Excess tax benefit from equity instruments		(141	)		—
Foreign currency translation (gain) loss		2			(1,584	)
Other		(15	)		23
Changes in operating assets and liabilities:
Receivables		(422	)		(1,551	)
Inventories		(400	)		3,513
Prepaid expenses and other		163			517
Deposits and other assets		(5	)		(115	)
Accounts payable		361			1,911
Other current liabilities		(1,369	)		(4,017	)
Net cash provided by operating activities		12,077			13,792
Cash flows from investing activities:
Purchase of property and equipment		(3,305	)		(1,755	)
Proceeds from sale of property and equipment		19			4
Proceeds from sale of Haleko Unit, net (Note 1)		—			13,683
Purchase of available-for-sale securities		(28,053	)		(38,330	)
Proceeds from sale of available-for-sale securities		23,949			27,794
Collection of notes receivable		400			450
Net cash provided by (used in) investing activities		(6,990	)		1,846
Cash flows from financing activities:
Proceeds from stock options exercised		282			801
Acquisition and retirement of common stock		(170	)		(143	)
Excess tax benefit from equity instruments		141			—
Proceeds from short-term debt		1,996			1,693
Payments on short-term debt		(1,706	)		(1,949	)
Net cash provided by financing activities		543			402
Effect of exchange rate changes on cash		1			(83	)
Increase in cash and cash equivalents		5,631			15,957
Cash and cash equivalents, beginning of period		24,899			11,358
Cash and cash equivalents, end of period	$	30,530		$	27,315

See notes to condensed consolidated financial statements.

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SCHIFF NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)
(unaudited)

1.   BASIS OF PRESENTATION AND OTHER MATTERS

The accompanying unaudited interim condensed consolidated financial statements (“interim financial statements”) do not include all disclosures provided in our annual consolidated financial statements.  These interim financial statements should be read in conjunction with the consolidated financial statements and the footnotes thereto contained in our Annual Report on Form 10-K for the year ended May 31, 2006 as filed with the Securities and Exchange Commission.  The May 31, 2006 condensed consolidated balance sheet, included herein, was derived from audited financial statements, but all disclosures required by generally accepted accounting principles are not provided in the accompanying footnotes.  We are a majority-owned subsidiary of Weider Health and Fitness (“WHF”).

In our opinion, the accompanying interim financial statements contain all material adjustments necessary for a fair presentation of our financial position and results of operations.  Results of operations and cash flows for any interim period are not necessarily indicative of the results of operations and cash flows that we may achieve for any other interim period or for the entire year.

On June 17, 2005, we announced the sale of our Haleko Unit to Atlantic Grupa of Zagreb, Croatia and certain of its subsidiaries for approximately $15,089 in cash.  The transaction included the sale of the capital stock and partnership interests of the international subsidiaries that operate the Haleko Unit.  In connection with the sale, we incurred transaction related costs of approximately $687 and relinquished cash of approximately $719.  The transaction closed on June 17, 2005, with an effective date of May 1, 2005 (the first day of Haleko's fiscal year 2006).  The impact of the sale on the fiscal 2006 first quarter operating income was not significant.

On April 1, 2005, we announced the sale of certain assets of our Active Nutrition Unit relating to our Weider branded business domestically and internationally to Weider Global Nutrition, LLC (“WGN”), a wholly-owned subsidiary of WHF.  The terms of the transaction provided for a cash payment of approximately $12,900 and a note receivable of $1,100 in exchange for assets relating to the domestic Weider branded business, including inventory, receivables, and intangible and intellectual property, the capital stock of certain of our international subsidiaries related to the international Weider branded business (including the working capital of those subsidiaries), and the assumption of certain associated liabilities by WGN.  The transaction closed on April 1, 2005, with an effective date of March 1, 2005.

In connection with the sale of the Weider branded business, we also entered into two separate agreements (domestic and European) whereby we agreed to provide certain general and administrative, research and development, and logistics services to WGN for an annual fee.  The domestic service agreement provided for a one year term, with an option to either party for one additional year.  The parties exercised this option for the second year and have further extended the term of the agreement through March 1, 2008.  In connection with the sale of our Haleko Unit, the European service agreement was transferred to the purchaser of the Haleko Unit.

Historical operating results for the Haleko Unit are reflected as discontinued operations in our condensed consolidated financial statements, including the notes thereto.  We believe our remaining business, which consists of the aggregation of several product-based operating segments, represents our only reportable segment.  Accordingly, beginning with the fiscal 2006 first quarter, we have reported one business unit.

On March 17, 2006, the Compensation Committee of our Board of Directors, pursuant to our 2004 Incentive Award Plan, approved the adoption of a long term incentive plan involving the grant of performance based restricted stock units (the “Units”).  On March 20, 2006, a total of 1,437,200 Units were issued to certain officers and employees.  Each Unit represents the right to receive one share of the Company’s Class A common stock, subject to certain performance based vesting requirements.  The Units will vest, if at all, based on the Company’s performance in relation to certain specified pre-established performance criteria targets over a performance period beginning on January 1, 2006 and expiring on May 31, 2008.  The performance criteria upon which the Units may vest is based upon a “Business Value Created” formula, which is comprised of two performance criteria components: operating earnings and return on net capital.  The grant date fair value of each Unit was $5.11.  We recognize compensation expense, net of forfeitures, over the performance period based on a periodic assessment of the probability that the performance criteria will be achieved.  For the three and nine month periods ended February 28, 2007, respectively, we recognized net compensation expense of $742 and $2,552, and the related tax benefit was approximately $280 and $909.  At February 28, 2007, total unrecognized compensation expense, based on our assessment of the probability that the performance criteria will be achieved, was approximately $4,058, which is expected to be recognized over a weighted average period of 1.3 years.

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SCHIFF NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share data)

(unaudited)

Effective August 16, 2002, we issued 640,000 restricted shares of Class A common stock to certain officers and employees.  The aggregate value of these restricted shares was approximately $1,038, which we are expensing on a straight-line basis over the accompanying five-year vesting (service) period.  During the fiscal 2007 first quarter, 86,200 restricted shares vested.  During the fiscal 2007 third quarter, 2,400 shares were cancelled as a result of the termination of an employee.  During the fiscal 2006 first quarter, 98,200 restricted shares vested, and as a result of the voluntary termination of an employee, 12,000 restricted shares were cancelled.  During the fiscal 2007 and 2006 first quarters, concurrent with the annual vesting, we reacquired (and ultimately retired) 23,443 and 27,201 shares, respectively, from certain employees in connection with the payment of individual income taxes.  As of February 28, 2007, of the 640,000 restricted shares originally issued, 445,000 shares have vested, of which 80,662 shares were reacquired (and retired), 111,200 shares have been cancelled and 83,800 shares are subject to future vesting.

Effective March 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, "Share-Based Payment," using the modified prospective method and began recognizing compensation expense for all awards granted after March 1, 2006, and for the unvested portion of previously granted awards that were outstanding at March 1, 2006.  Compensation expense is recognized over the vesting period based on the computed fair value on the grant date of the award.

Prior to March 1, 2006, we disclosed the effect of SFAS No. 123, “Accounting for Stock-Based Compensation,” on a proforma basis and continued to follow Accounting Principles Board (“APB”) Opinion No. 25 (as permitted by SFAS No. 123) as it relates to stock based compensation.

Proforma information regarding net income and net income per share is required by SFAS No. 123R and has been determined as if we had accounted for our employee stock options under the fair value method of SFAS No. 123R.  For the purposes of proforma disclosure, the estimated fair value of the stock options is amortized to expense over the options’ vesting period.  Our proforma net income and net income per share are as follows for the nine months ended February 28, 2006:

Net income, as reported	$	9,659
Deduct stock-based employee compensation expense determined under fair-value based method, net of related tax effects		(232	)
Net income, proforma	$	9,427
Basic net income per share, as reported	$	0.37
Diluted net income per share, as reported	$	0.36
Basic net income per share, proforma	$	0.36
Diluted net income per share, proforma	$	0.35

Net cash paid for income taxes was approximately $4,934 and $4,394, respectively, for the nine months ended February 28, 2007 and 2006.

2.   AVAILABLE-FOR-SALE SECURITIES

Available-for-sale securities consist primarily of auction rate securities, long-term variable rate bonds tied to short-term interest rates that are reset through a “dutch auction” process which occurs every 7 to 35 days, and other variable rate debt and equity securities.

Available-for-sale securities at fair value, which approximates unamortized cost, consist of the following:

	February 28, 2007		May 31, 2006
Federal, state and municipal debt securities	$	31,391	$	29,114
Corporate debt securities		8,583		7,306
Corporate equity securities		4,250		3,700
	$	44,224	$	40,120

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SCHIFF NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share data)

(unaudited)

Despite the long-term nature of these auction rate securities’ stated contractual maturities, there is a ready liquid market for these securities based on the interest reset mechanism.  These securities are classified as current assets in the accompanying consolidated balance sheets because we have the ability and intent to sell these securities as necessary to meet our current liquidity needs.  Contractual maturities of debt securities are as follows at February 28, 2007:

Less than one year	$	2,272
One to five years		850
Over five years		36,852
	$	39,974

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The amount of unrealized gains or losses for the first nine months of fiscal 2007 and 2006 was not significant.

3.   RECEIVABLES, NET

Receivables, net, consist of the following:
	February 28, 2007			May 31, 2006
Trade accounts	$	22,277		$	23,103
Note receivable due from WGN		—			400
Other		840			248
		23,117			23,751
Less allowances for doubtful accounts, sales returns and discounts		(2,610	)		(3,320	)
Total	$	20,507		$	20,431

4.   INVENTORIES

Inventories consist of the following:
	February 28, 2007		May 31, 2006
Raw materials	$	12,058	$	9,694
Work in process		2,456		1,275
Finished goods		9,401		12,546
Total	$	23,915	$	23,515

5.   GOODWILL AND INTANGIBLE ASSETS, NET

Goodwill and intangible assets, net, consist of the following:
	February 28, 2007							May 31, 2006
	Gross Carrying Amount		Accumul. Amortiz.			Net Book Value		Gross Carrying Amount		Accumul. Amortiz.			Net Book Value
Goodwill	$	4,346	$	—		$	4,346	$	4,346	$	—		$	4,346
Intangible assets-patents and trademarks	$	2,090	$	(2,090	)	$	—	$	2,090	$	(2,090	)	$	—

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SCHIFF NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share data)

(unaudited)

Estimated amortization expense, assuming no change in the gross carrying amount of our intangible assets, is zero for all future fiscal years.

The carrying amount of goodwill did not change during the first nine months of fiscal 2007 or during fiscal 2006.

6.   ACCRUED EXPENSES

Accrued expenses consist of the following:
	February 28, 2007		May 31, 2006
Accrued personnel related costs	$	2,838	$	3,477
Accrued promotional costs		5,029		5,260
Other		2,083		2,735
Total	$	9,950	$	11,472

7.   CONCENTRATION RISK

The combined net sales to our two largest customers are significant.  For the first nine months of fiscal 2007 and 2006, respectively, Customer A accounted for approximately 35% and 32% and Customer B accounted for approximately 35% and 39% of total net sales.  At February 28, 2007, and May 31, 2006, respectively, amounts due from Customer A represented approximately 41% and 30% and amounts due from Customer B represented approximately 28% and 27% of total trade accounts receivable.  Net sales of our Schiff® Move Free® brand accounted for approximately 49% and 48%, respectively, of total net sales for the first nine months of fiscal 2007 and 2006.

8.   COMMITMENTS AND CONTINGENCIES

In July 2003, we were named as a defendant in Cain v. Metabolife, Inc., Weider Nutrition International, Inc., et. al. filed in Texas state court.  In connection with the bankruptcy filing of another defendant company, the case was removed to a United States Bankruptcy Court in New Jersey. The lawsuit alleged that the consumption of various products containing ephedra (distributed by several different companies) caused injuries and damages to the plaintiff.  We disputed the allegations and opposed the lawsuit.

In connection with the recent bankruptcy filing of a second defendant, the matter subsequently was removed to the United States Bankruptcy Court for the Southern District of California (the “Bankruptcy Proceedings”).  In the Bankruptcy Proceedings, the various parties reached a global settlement agreement in March 2007, which settlement agreement is subject to court approval.  The settlement agreement, which has been circulated to the parties for signature, resolves over 250 individual cases and claims (including the Cain litigation described above).  The settlement agreement provides for the dismissal with prejudice of all of the cases and claims (including the Cain litigation described above), whether or not the defendants are contributing parties.  We did not contribute any amounts to the settlement of this matter, and we did not have insurance coverage for this matter.

From time to time, we are involved in claims, legal actions and governmental proceedings that arise from our business operations.  Although ultimate liability cannot be determined at the present time, we believe that any liability resulting from these matters, if any, after taking into consideration our insurance coverage will not have a material adverse effect on our results of operations and financial condition.

9.   RECENTLY ISSUED ACCOUNTING STANDARDS

In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, “Inventory Costs,” which amends the guidance in Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, “Inventory Pricing,” to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) should be recognized as a current-period expense.  In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities.  The inventory costing provisions of SFAS No. 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005.  The adoption of SFAS No. 151 did not have a material impact on our results of operations and financial condition.

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SCHIFF NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share data)

(unaudited)

In December 2004, the FASB issued SFAS No. 123R, which replaces SFAS No. 123, supersedes APB Opinion No. 25 and amends SFAS No. 95, “Statement of Cash Flows.”  SFAS No. 123R eliminates the ability for public companies to measure share-based compensation transactions at the intrinsic value as allowed by APB Opinion No. 25, and requires that such transactions be accounted for based on the grant date fair value of the award.  SFAS No. 123R also amends SFAS No. 95, to require that excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid.  Under the intrinsic value method allowed under APB Opinion No. 25, the difference between the quoted market price as of the date of the grant and the contractual purchase price of the share is charged to operations over the vesting period, and no compensation expense is recognized for fixed stock options with exercise prices equal to the market price of the stock on the dates of grant.  Under the fair value based method as prescribed by SFAS No. 123R, we are required to charge the value of all newly granted stock-based compensation to expense over the vesting period based on the computed fair value on the grant date of the award.  Effective March 1, 2006, we adopted SFAS No. 123R using the modified prospective method, recording compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption.  The adoption of SFAS No. 123R resulted in incremental stock-based compensation expense of approximately $29 and $254, respectively, for the three and nine month periods ended February 28, 2007.  The incremental stock-based compensation expense caused income from continuing operations to decrease by $29 and $254, respectively, and net income to decrease by $18 and $164, respectively, for the three and nine month periods ended February 28, 2007.  The impact on basic and diluted earnings per share was less than $.01 per share for the three and nine months ended February 28, 2007.  Cash provided by operating activities decreased and cash provided by financing activities increased by $141 related to excess tax benefits from stock-based payment arrangements.

In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections," which replaces APB Opinion No. 20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements."  SFAS No. 154 requires changing the accounting and reporting requirements of voluntary and mandatory (unless the pronouncement provides other transition requirements) changes in accounting principle by requiring retroactive application of the change in accounting principle to prior periods' financial statements, unless it is not practical to do so, rather than recording a cumulative catch-up adjustment in net income in the year of the change.  Reporting error corrections will be handled similarly to a change in accounting principle.  The accounting and reporting requirements of SFAS No. 154 are effective for accounting changes and error corrections made in fiscal years beginning after December 15, 2005.

In November 2005, the FASB issued Staff Position No. 123R-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards,” that allows for a simplified method to establish the beginning balance of the additional paid-in capital pool (“APIC Pool”) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC Pool and consolidated statements of cash flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS No. 123R. We are still in the process of calculating the APIC Pool and have not yet determined if we will elect to adopt the simplified method.

In July 2006, the FASB issued Interpretation No. 48, “Uncertainty in Income Taxes,” (“FIN No. 48”), which establishes guidelines for recognizing, measuring and disclosing uncertainties relating to tax benefits reflected in an enterprise’s financial statements.  FIN No. 48 establishes a “more-likely-than-not” recognition threshold that must be met before a tax benefit, relative to a tax position in which the enterprise may be uncertain as to whether it will ultimately be sustained as filed in its tax return, can be recognized in the financial statements.  The tax benefit recognizing, measuring and disclosing provisions of FIN No. 48 are effective at the beginning of the first fiscal year that begins after December 15, 2006.  We have not yet determined the impact of adopting FIN No. 48 on our results of operations and financial condition.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," that defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  SFAS No. 157 retains the exchange price notion in defining fair value and clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability.  The definition focuses on the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price).  SFAS No. 157 expands disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition.  The additional disclosure focuses on the inputs used to measure fair value and the effect of the measurements on net income for the reporting period.  The fair value measurement and disclosure provisions of SFAS No. 157 are effective for financial statements issued for fiscal years beginning after November 15, 2007.  We have not yet determined the impact of adopting SFAS No. 157 on our results of operations and financial condition.

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SCHIFF NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share data)

(unaudited)

In September 2006, the Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin (SAB) No. 108, “Financial Statements — Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.”  SAB No. 108 provides interpretive guidance on how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in the current year financial statements.  SAB No. 108 requires registrants to quantify misstatements using both the income statement and balance sheet approach and evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material.  SAB No. 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006.  We have not yet determined the impact of adopting SAB No. 108 on our results of operations and financial condition.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value.  SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities.  The measurement and disclosure provisions of SFAS No. 159 are effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007.  We have not yet determined the impact of adopting SAB No. 108 on our results of operations and financial condition.  

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ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements, including the notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q and other reports filed with the SEC.  We disclaim any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

General

Schiff Nutrition International, Inc. develops, manufactures, markets and distributes branded and private label vitamins, nutritional supplements and nutrition bars in the United States and throughout the world.  We offer a broad range of capsules, tablets and nutrition bars.  Our portfolio of recognized brands, including Schiff and Tiger’s Milk®, is marketed primarily through the mass market (including club) and, to a lesser extent, health food store distribution channels.

Prior to fiscal 2006, we were organized into three business units: the Schiff Specialty Unit, the Active Nutrition Unit and the Haleko Unit.  The business units generally were managed independently, each with its own sales and marketing resources, and supported by common product research and development, operations and technical services and administrative functions.  The Schiff Specialty Unit included the Schiff brand, as well as private label (contract manufacturing) business limited to customers that otherwise carry our products.  The Active Nutrition Unit included our Weider branded global business and the Tiger's Milk brand.  The Haleko Unit, our primary European operations, included the Multipower and Multaben nutritional supplement brands and private label businesses.

On June 17, 2005, we announced the sale of our Haleko Unit to Atlantic Grupa of Zagreb, Croatia and certain of its subsidiaries for approximately $15.1 million in cash.  The transaction included the sale of the capital stock and partnership interests of the international subsidiaries that operate the Haleko Unit.  The transaction closed on June 17, 2005, with an effective date of May 1, 2005 (the first day of Haleko’s fiscal year 2006).

On April 1, 2005, we announced the sale of certain assets of our Active Nutrition Unit relating to our Weider branded business domestically and internationally to Weider Global Nutrition, LLC (“WGN”), a wholly-owned subsidiary of Weider Health and Fitness, a privately held company headquartered in California and our majority stockholder.  The terms of the transaction provided for a cash payment of approximately $12.9 million and a note receivable of $1.1 million in exchange for assets relating to our domestic Weider branded business, including inventory, receivables, and intangible and intellectual property, the capital stock of certain of our international subsidiaries related to our international Weider branded business (including the working capital of those subsidiaries), and the assumption of certain associated liabilities by WGN. The transaction closed on April 1, 2005, with an effective date of March 1, 2005.

In connection with the sale of the Weider branded business, we also entered into two separate agreements (domestic and European) whereby we agreed to provide certain general and administrative, research and development, and logistics services to WGN for an annual fee.  The domestic service agreement provided for a one year term, with an option to either party to extend the term for one additional year.  The parties exercised this option for the second year and have further extended the term of the agreement through March 1, 2008.  In connection with the sale of our Haleko Unit, the European service agreement was transferred to the purchaser of the Haleko Unit.

Historical operating results for the Haleko Unit are reflected as discontinued operations in our condensed consolidated financial statements, including the notes thereto.  We believe our remaining business, which consists of the aggregation of several product-based operating segments, represents our only reportable segment.  Accordingly, beginning with the fiscal 2006 first quarter, we have reported one business segment.

During fiscal 2006 and the first nine months of fiscal 2007, we continued to provide selling and marketing support intended both to defend our Move Free business against competition, including private label, and ultimately to increase our market share in the joint care product category.  Our primary initiative was the introduction of our Move Free Advanced product, which we believe is an improved, more effective version of our existing Move Free product.  We began implementing the Move Free Advanced initiative during the latter part of the fiscal 2006 second quarter.  The introduction of Move Free Advanced into substantially all of our significant retail accounts continued during the second half of fiscal 2006 and was substantially completed in the fiscal 2007 first quarter.  We provided incremental selling and marketing support for our Move Free Advanced product during the second half of fiscal 2006 and continuing in the first nine months of fiscal 2007.  Subject to the impact of Move Free Advanced marketing initiatives and competitive joint care category pricing pressures, including private label, we believe our fiscal 2007 net sales may reflect a modest decrease, as compared to fiscal 2006 net sales.

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In addition to the ongoing impact of competitive pricing pressures, our operating results for the first half of fiscal 2006 were impacted by significant raw material pricing fluctuations, particularly in the joint care category.  During fiscal 2006, joint care category raw material prices, which increased significantly during fiscal 2005, returned to pre-fiscal 2005 levels.  However, our gross profit throughout fiscal 2006 was impacted by previous raw material purchase commitments.  During fiscal 2005 and early fiscal 2006, as a result of the significant volatility in raw material costs and the inability to secure an acceptable price increase from customers, we discontinued certain private label (contract manufacturing) business.

Our operating results for the first nine months of fiscal 2006, as compared to the first nine months of fiscal 2007, were favorably impacted by the recognition of approximately $2.0 million (net difference) in reimbursement of import related costs, the recognition of approximately $1.6 million of non-taxable foreign currency related gain and an overall effective tax rate of approximately 19.6%.

Factors affecting our historical results, including the previous implementation of strategic initiatives as well as continuing refinement of our growth and business strategies, are ongoing considerations and processes.  While the focus of these considerations is to improve future profitability, no assurance can be given that our decisions relating to these initiatives will not adversely impact our results of operations and financial condition.

Our principal executive offices are located at 2002 South 5070 West, Salt Lake City, Utah 84104, and our telephone number is (801) 975-5000.

Results of Operations (unaudited)

Three Months Ended February 28, 2007 Compared to Three Months

Ended February 28, 2006

The following tables show comparative results for selected items as reported and as a percentage of net sales for the three months ended February 28, (dollars in thousands):

	2007					2006
Net sales	$	44,999		100.0	%	$	49,641		100.0	%
Cost of goods sold		28,570		63.5			32,709		65.9
Gross profit		16,429		36.5			16,932		34.1
Operating expenses:
Selling and marketing		8,060		17.9			8,527		17.2
General and administrative		2,985		6.6			3,609		7.3
Research and development		995		2.2			667		1.3
Amortization of intangible assets		—		—			6		—
Reimbursement of import costs		(96	)	(0.2	)		(125	)	(0.3	)
Total operating expenses		11,944		26.5			12,684		25.5
Income from operations		4,485		10.0			4,248		8.6
Other income, net		716		1.6			502		1.0
Income tax expense		(1,960	)	(4.4	)		(1,561	)	(3.2	)
Net income	$	3,241		7.2	%	$	3,189		6.4	%

Net Sales. Net sales decreased approximately 9.4% to $45.0 million for the fiscal 2007 third quarter, from $49.6 million for the fiscal 2006 third quarter, primarily resulting from a decrease in branded net sales, partially offset by an increase in private label sales.

Aggregate branded net sales decreased approximately 17.7% to $34.6 million for the fiscal 2007 third quarter, from $42.1 million for the fiscal 2006 third quarter.  Branded joint care product net sales decreased approximately 18.5% to $29.7 million for the fiscal 2007 third quarter, from $36.4 million for the fiscal 2006 third quarter.  Move Free net sales were $22.2 million and $24.9 million, respectively, for the fiscal 2007 and 2006 third quarters.  Other branded net sales decreased approximately 13.0% to $5.0 million for the fiscal 2007 third quarter, from $5.7 million for the fiscal 2006 third quarter.  The decrease in net sales, in both branded joint care products and other branded products, primarily resulted from an aggregate decrease in sales volume of approximately $5.4 million, or 10.0%, coupled with a $2.5 million increase in promotional incentives classified as sales price reductions.  Classification of promotional costs as a sales reduction is required when the promotion effectively represents a price reduction.  The decrease in net sales was partially offset by an approximate $0.4 million decrease in adjustments for product returns.

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Private label net sales increased approximately 37.6% to $10.4 million for the fiscal 2007 third quarter, from $7.5 million for the fiscal 2006 third quarter.  The increase in private label sales was primarily due to a volume increase from securing incremental private label business in the latter part of fiscal 2006 and the early part of fiscal 2007.

Gross Profit. Gross profit decreased approximately 3.0% to $16.4 million for the fiscal 2007 third quarter, from $16.9 million for the fiscal 2006 third quarter.  Gross profit, as a percentage of net sales, was 36.5% for the fiscal 2007 third quarter, compared to 34.1% for the fiscal 2006 third quarter.  The increase in gross profit, as a percentage of net sales, primarily resulted from an approximate $6.0 million decrease in joint care raw material costs and an approximate $0.7 million decrease in net adjustments for product returns, partially offset by the $2.5 million in incremental sales incentives, a $0.5 million increase in inventory valuation adjustments and a higher mix of lower margin private label sales.

Operating Expenses. Operating expenses decreased approximately 5.8% to $11.9 million for the fiscal 2007 third quarter, from $12.7 million for the fiscal 2006 third quarter.  Operating expenses, as a percentage of net sales, were 26.5% and 25.5%, respectively, for the fiscal 2007 and 2006 third quarters.  The decrease in operating expenses resulted primarily from a decrease in selling and marketing and general and administrative expenses, partially offset by an increase in research and development expenses.

Selling and marketing expenses, including sales, marketing, advertising, freight and other costs, decreased to approximately $8.1 million for the fiscal 2007 third quarter, from $8.5 million for the fiscal 2006 third quarter.  The decrease was primarily due to a shift in overall marketing spending towards price discount-like promotional costs classified as a reduction of sales.  Classification of promotional costs as a sales reduction is required when the promotion effectively represents a price reduction.

General and administrative expenses decreased to approximately $3.0 million for the fiscal 2007 third quarter, from $3.6 million for the fiscal 2006 third quarter.  The decrease was primarily attributable to the settlement of certain litigation matters and a reduction in legal costs, partially offset by an approximate $0.7 million increase in personnel related costs primarily due to the adoption of a long-term management incentive plan involving the grant of performance based restricted stock units (see Note 1 of Notes to Condensed Consolidated Financial Statements).  The fiscal 2007 third quarter includes litigation settlements resulting in the reversal of approximately $0.6 million in contingent liabilities and the recognition of approximately $0.7 million in reimbursements of certain insurance premiums and other expenses paid in prior fiscal years.

Research and development costs increased to approximately $1.0 million for the fiscal 2007 third quarter, from $0.7 million for the fiscal 2006 third quarter, primarily resulting from an increase in personnel related costs and expenses associated with product research.

Other Income/Expense. Other income/expense, net, was $0.7 million income for the fiscal 2007 third quarter, compared to $0.5 million income for the fiscal 2006 third quarter.  During the fiscal 2007 third quarter, we recognized approximately $0.2 million of incremental interest income resulting from an increase in cash and available-for-sale securities.

Provision for Income Taxes. Provision for income taxes was $2.0 million for the fiscal 2007 third quarter, compared to $1.6 million for the fiscal 2006 third quarter.  During the fiscal 2006 third quarter, we reduced certain valuation allowances relating to capital loss carry forwards by approximately $0.5 million.  In addition, an increase in our overall projected fiscal 2006 tax rate at February 28, 2006, resulted in an approximate $0.2 million increase in income tax expense for the fiscal 2006 third quarter.  As a result, our effective tax rate was 32.9% for the fiscal 2006 third quarter, compared to 37.7% for the fiscal 2007 third quarter.

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Results of Operations (unaudited)

Nine Months Ended February 28, 2007 Compared to Nine Months

Ended February 28, 2006

The following tables show comparative results for selected items as reported and as a percentage of net sales for the nine months ended February 28, (dollars in thousands):

	2007					2006
Net sales	$	129,468		100.0	%	$	133,114		100.0	%
Cost of goods sold		79,746		61.6			92,263		69.3
Gross profit		49,722		38.4			40,851		30.7
Operating expenses:
Selling and marketing		25,138		19.4			20,603		15.5
General and administrative		10,839		8.3			11,252		8.4
Research and development		2,675		2.1			1,978		1.5
Amortization of intangible assets		—		—			17		—
Reimbursement of import costs		(394	)	(0.3	)		(2,413	)	(1.8	)
Total operating expenses		38,258		29.5			31,437		23.6
Income from operations		11,464		8.9			9,414		7.1
Other income, net		2,129		1.6			2,756		2.1
Income tax expense		(4,840	)	(3.7	)		(2,384	)	(1.8	)
Income from continuing operations	$	8,753		6.8	%	$	9,786		7.4	%

Net Sales. Net sales decreased approximately 2.7% to $129.5 million for the nine months ended February 28, 2007, from $133.1 million for the nine months ended February 28, 2006, primarily resulting from a decrease in branded net sales, partially offset by an increase in private label sales.

Aggregate branded net sales decreased approximately 7.0% to $101.4 million for the nine months ended February 28, 2007, from $109.0 million for the nine months ended February 28, 2006.  Branded joint care product net sales decreased approximately 6.4% to $85.6 million for the nine months ended February 28, 2007, from $91.4 million for the nine months ended February 28, 2006.  Move Free net sales were $63.8 million and $64.5 million, respectively, for the nine months ended February 28, 2007 and 2006.  Other branded net sales decreased approximately 9.8% to $15.8 million for the nine months ended February 28, 2007, from $17.5 million for the nine months ended February 28, 2006.  The decreases, in both branded joint care products and other branded products, primarily resulted from a moderate decrease in aggregate sales volume of approximately $2.0 million, or 1.5%, coupled with a $5.8 million increase in promotional incentives classified as sales price reductions.  Classification of promotional costs as a sales reduction is required when the promotion effectively represents a price reduction.  The decrease in net sales was partially offset by an approximate $0.2 million decrease in adjustments for product returns.

Private label net sales increased approximately 16.3% to $28.1 million for the nine months ended February 28, 2007, from $24.2 million for the nine months ended February 28, 2006.  The increase in private label sales was primarily due to a volume increase from securing incremental private label business in the latter part of fiscal 2006 and the early part of fiscal 2007.

Gross Profit. Gross profit increased approximately 21.7% to $49.7 million for the nine months ended February 28, 2007, from $40.9 million for the nine months ended February 28, 2006.  Gross profit, as a percentage of net sales, was 38.4% and 30.7%, respectively, for the nine months ended February 28, 2007 and 2006.  The increase was primarily due to an approximate $17.3 million decrease in joint care raw material costs and an approximate $1.1 million decrease in net adjustments for product returns, partially offset by the $5.8 million in incremental sales incentives, an approximate $1.0 million increase in inventory valuation adjustments and a higher mix of lower margin private label sales.

Operating Expenses. Operating expenses increased approximately 21.7% to $38.3 million for the nine months ended February 28, 2007, from $31.4 million for the nine months ended February 28, 2006.  Operating expenses, as a percentage of net sales, were 29.5% and 23.6%, respectively, for the nine months ended February 28, 2007 and 2006.  The increase resulted primarily from an increase in selling and marketing and research and development expenses, partially offset by a decrease in general and administrative expenses.  In addition, the first nine months of fiscal 2006 includes approximately $2.4 million in reimbursement from certain suppliers of previously incurred costs associated with imported raw materials as compared to $0.4 million in similar reimbursement for the first nine months of fiscal 2007.  These reimbursements, resulting primarily from the favorable outcome of litigation between one of our suppliers and the U.S. Government, represent refunds of previously paid tariffs on imported raw materials.

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Selling and marketing expenses, including sales, marketing, advertising, freight and other costs, increased to approximately $25.1 million for the nine months ended February 28, 2007, from $20.6 million for the nine months ended February 28, 2006.  The increase was primarily due to a $3.2 million increase in promotional expenses, primarily advertising in support of our Move Free Advanced product, a $0.4 million increase in management incentive program costs due to the adoption of a long-term management incentive plan involving the grant of performance based restricted stock units (see Note 1 of Notes to Condensed Consolidated Financial Statements), and an increase in consulting fees incurred in support of our export business and the marketing of new products.

General and administrative expenses decreased to approximately $10.8 million for the nine months ended February 28, 2007, compared to $11.3 million for the nine months ended February 28, 2006.  The decrease was primarily attributable to the settlement of certain litigation matters and a reduction in legal costs, partially offset by an increase in personnel related costs of approximately $1.4 million.  The first nine months of fiscal 2007 includes favorable litigation settlements totaling approximately $1.6 million, including the recognition of approximately $1.0 million in reimbursements of insurance premiums and other expenses paid in prior fiscal years and the reversal of approximately $0.6 million in contingent liabilities.  In addition, legal fees decreased approximately $0.2 million for the nine months ended February 28, 2007, compared to the nine months ended February 28, 2006.  The first nine months of fiscal 2007 includes approximately $1.6 million in incremental management incentive program costs consisting of an increase of approximately $2.2 million due to the adoption of a long-term management incentive plan involving the grant of performance based restricted stock units (see Note 1 of Notes to Condensed Consolidated Financial Statements), partially offset by a $0.6 million reduction in management annual incentive program costs.  The first nine months of fiscal 2007 also includes approximately $0.2 million in incremental stock-based compensation expense due to the adoption of SFAS 123R (see Note 1 of Notes to Condensed Consolidated Financial statements) while the first nine months of fiscal 2006 includes approximately $0.4 million in severance expense.

Research and development costs increased to approximately $2.7 million for the nine months ended February 28, 2007, from $2.0 million for the nine months ended February 28, 2006, primarily resulting from an increase in personnel related costs and expenses associated with product research.

Other Income/Expense. Other income/expense, net, was $2.1 million income for the nine months ended February 28, 2007, compared to $2.8 million income for the nine months ended February 28, 2006.  During the first nine months of fiscal 2007, we recognized approximately $0.9 million of incremental interest income resulting from an increase in cash and available-for-sale securities.  During the fiscal 2006 first quarter, as a result of the divestiture of our Haleko Unit, certain international operating entities were substantially liquidated.  Accordingly, we recognized a non-taxable net foreign currency translation gain, previously reported as other accumulated comprehensive income in stockholders' equity, of approximately $1.6 million during the fiscal 2006 first quarter.

Provision for Income Taxes. Provision for income taxes was $4.8 million for the nine months ended February 28, 2007, compared to $2.4 million for the nine months ended February 28, 2006.  In addition to an increase in pre-tax income and the fiscal 2006 non-taxable foreign currency translation gain noted in “Other Income/Expense” above, the fiscal 2006 first quarter sale of the Haleko Unit resulted in the recognition of a gain under Internal Revenue Code Section 987 (“Section 987”).  We reduced our estimated deferred tax liability for Section 987 obligations by approximately $0.8 million, which was reflected as a decrease in fiscal 2006 first quarter income tax expense.  Also, during our fiscal 2006 second and third quarters, we reduced certain valuation adjustments and contingent tax liabilities by approximately $0.7 million.  As a result of these items, our effective tax rate was 19.6% for the nine months ended February 28, 2006, compared to 35.6% for the nine months ended February 28, 2007.

Liquidity and Capital Resources

Working capital increased approximately $9.8 million to $100.3 million at February 28, 2007, from $90.5 million at May 31, 2006, primarily due to a $5.6 million increase in cash and a $4.1 million increase in available-for-sale securities resulting primarily from operating cash flows for the first nine months of fiscal 2007.

On June 30, 2004, we entered into, through our wholly-owned direct operating subsidiary Schiff Nutrition Group, Inc. (“SNG”), a $25.0 million revolving credit facility (the “Credit Facility”) with KeyBank National Association, as Agent.  In August 2006, we agreed to extend the maturity of the Credit Facility from June 30, 2007 to June 30, 2009.  The Credit Facility contains customary terms and conditions, including, among others, financial covenants that may limit our ability to

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pay dividends on our common stock and certain other restrictions.  Our obligations under the Credit Facility are secured by a first priority security interest on all of the capital stock of SNG.  If our total coverage ratio exceeds a certain limit, our obligations will also be secured by a first priority security interest in all of our domestic assets.  In the event we exceed certain other ratio limits, we will be subject to a borrowing base and will be able to borrow up to a lesser of $25.0 million or the sum of (i) 85% of eligible accounts receivable and (ii) 65% of eligible inventory.  Borrowings under the Credit Facility bear interest at floating rates based on the KeyBank National Association prime rate or the Federal Funds effective rate.  The Credit Facility can be used to fund our normal working capital and capital expenditure requirements, with availability to fund certain permitted strategic transactions.  At February 28, 2007, there were no amounts outstanding and $25.0 million was available for borrowing under the Credit Facility.

We believe that our cash, available-for-sale securities, cash flows from operations and the Credit Facility will be sufficient to meet our normal cash operating requirements during the next twelve months.  However, we continue to review opportunities to acquire or invest in companies, product rights and other investments that are compatible with or complementary to our existing business.  We could use cash and financing sources discussed herein, or financing sources that subsequently become available, to fund additional acquisitions or investments.  In addition, we may consider issuing additional debt or equity securities in the future to fund potential acquisitions or growth, or to refinance existing debt.  If a material acquisition, divestiture or investment is completed, our operating results and financial condition could change materially in future periods.  However, no assurance can be given that additional funds will be available on satisfactory terms, or at all, to fund such activities.

Our Board of Directors will determine dividend policy in the future based upon, among other factors, results of operations, financial condition, contractual restrictions and other factors deemed relevant at the time.  In addition, the Credit Facility contains certain customary financial covenants that may limit our ability to pay dividends on our common stock.  We can give no assurance that we will pay dividends in the future.

A summary of our outstanding contractual obligations at February 28, 2007 is as follows (in thousands):

Contractual Cash Obligations	Total Amounts Committed		Less than 1 Year		1-3 Years		3-5 Years		After 5 Years
Operating leases	$	14,471	$	2,512	$	4,820	$	4,635	$	2,504
Purchase obligations		7,768		7,768		—		—		—
Debt obligations		290		290		—		—		—
Total obligations	$	22,529	$	10,570	$	4,820	$	4,635	$	2,504

Purchase obligations consist primarily of open purchase orders for goods and services, including primarily raw materials, packaging and outsourced contract manufacturing commitments.

Critical Accounting Policies and Estimates

In preparing our condensed consolidated financial statements, we make assumptions, estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the condensed consolidated financial statements and the reported amounts of net sales and expenses during the reported periods.  We periodically evaluate our estimates and judgments related to the valuation of inventories and intangible assets, allowances for doubtful accounts, notes receivable, sales returns and discounts, valuation of deferred tax assets, valuation of share-based payments and recoverability of long-lived assets.  Note 1 of Notes to the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended May 31, 2006, filed with the SEC, describes the accounting policies governing each of these matters.  Our estimates are based on historical experience and on our future expectations that are believed to be reasonable.  The combination of these factors forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from our current estimates and those differences may be material.

We believe the following accounting policies affect some of our more significant estimates and judgments used in preparation of our condensed consolidated financial statements:

·          We provide for inventory valuation adjustments for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand, market conditions and/or liquidation value.  For the nine months ended February 28, 2007, inventory valuation adjustments resulted in a decrease in our gross profit and operating income of approximately $0.9 million.  Inventory valuation adjustments did not materially impact our gross profit and operating income for the nine months ended February 28, 2006.  If actual demand and/or market conditions are less favorable than those projected by management, additional inventory write-downs would be required.

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·          We maintain allowances for doubtful accounts, sales returns and discounts for estimated losses resulting from known customer exposures, including among others, product returns, inability to make payments and expected utilization of offered discounts.  Changes in our allowances for doubtful accounts, sales returns and discounts resulted in an increase in our gross profit and operating income of approximately $0.7 million for the nine months ended February 28, 2007, and a decrease in our gross profit and operating income of approximately $1.1 million for the nine months ended February 28, 2006.  At February 28, 2007 and May 31, 2006, our allowances for doubtful accounts, sales returns and discounts amounted to approximately $2.6 million and $3.3 million, respectively.  Actual results may differ from our current estimates, resulting in adjustment of the respective allowance(s).

·          We currently have deferred tax assets resulting from certain tax credit carryforwards and other temporary differences between financial and income tax reporting.  These deferred tax assets are subject to periodic recoverability assessments.  The realization of these deferred tax assets is primarily dependent on future operating results.  To the extent that it is more likely than not that future operations will not generate sufficient profit to utilize the tax credit carryforwards, valuation allowances are established.  Changes in these valuation allowances did not significantly impact net income for the nine months ended February 28, 2007.  For the nine months ended February 28, 2006, changes in these valuation allowances resulted in an increase in net income of approximately $0.5 million.  At both February 28, 2007 and May 31, 2006, our deferred tax asset valuation allowances, primarily relating to foreign tax credit carryforwards, amounted to approximately $0.7 million.

·          We recognize compensation expense for certain performance based equity instrument awards (share-based payments) over the performance period based on a periodic assessment of the probability that the performance criteria will be achieved.  For the nine months ended February 28, 2007, we recognized compensation expense related to these awards, net of forfeitures, of approximately $2.6 million.  At February 28, 2007, total unrecognized compensation expense, based on our assessment of the probability that the performance criteria will be achieved, was approximately $4.2 million.

·          We have certain intangible assets, primarily consisting of goodwill.  The determination of whether or not goodwill is impaired involves significant judgment.  Changes in strategy or market conditions could significantly impact our judgment and require adjustment to the recorded goodwill balance.

Impact of Inflation

Inflation affects the cost of raw materials, goods and services we use.  In recent years, inflation has been modest.  We seek to mitigate the adverse effects of inflation primarily through improved productivity, strategic buying initiatives, and cost containment programs.  However, the nutritional supplement industry competitive environment limits our ability to recover higher costs resulting from inflation by raising prices.  During fiscal 2005 and early fiscal 2006, we were unable to pass on increases in raw material costs relating to our joint care products to our customers.  See further discussion of raw material pricing matters in the “General” and “Results of Operations” sections above, and under “Forward-Looking Statements” below.

Seasonality

Our business can be seasonal, with fluctuations in sales resulting from timing of marketing and promotional activities, customer buying patterns and consumer spending patterns.  In addition, as a result of changes in the amount of sales price reductions utilized for promotional incentives, product sales mix, competitive conditions, raw material pricing pressures and other factors discussed in our SEC reports, we experience fluctuations in gross profit and operating margins on a quarter-to-quarter basis.

Forward-Looking Statements

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on management’s beliefs and assumptions, current expectations, estimates, and projections.  These statements are subject to risks and uncertainties, certain of which are beyond the company’s ability to control or predict, and, therefore, actual results may differ materially.  We disclaim any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

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Important factors that may cause these forward-looking statements to be false include, but are not limited to: the level of customer and consumer acceptance of Move Free Advanced, the inability to successfully implement marketing and spending programs behind our Move Free brand and other new branded products, the impact of raw material pricing, availability and quality (particularly relating to joint care products and ingredients from suppliers outside the United States), the mix between branded and private label products, the ability to grow and/or maintain branded and private label sales, the inability to enforce or protect our intellectual property rights against infringement, the inability to achieve cost savings and operational efficiencies, the inability to increase operating margins and increase revenues, dependence on individual products, dependence on individual customers, the impact of competitive products and pricing (including private label), market and industry conditions (including pricing, demand for products and level of trade inventories), the impact of clinical studies regarding nutritional supplements, particularly relating to the joint care category, the success of product development, the inability to obtain customer acceptance of new product introductions, changes in laws and regulations, litigation and government regulatory action in the United States and internationally, the inability or increased cost to obtain product liability and general insurance, the uncertainty of market acceptance of new products, adverse publicity regarding the consumption of nutritional supplements, the inability to find strategic acquisitions or the inability to successfully consummate or integrate an acquisition, changes in accounting standards, and other factors indicated from time to time in the company’s SEC reports, copies of which are available upon request from the company’s investor relations department or may be obtained at the SEC's web site (www.sec.gov). These risks and uncertainties should be carefully considered before making an investment decision with respect to shares of our common stock.

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following discussion involves forward-looking statements of market risk which assume that certain adverse market conditions may occur.  Actual future market conditions may differ materially from such assumptions.  Accordingly, the forward-looking statements should not be considered our projections of future events or losses.

Our cash flows and net earnings may be subject to fluctuations resulting from changes in interest rates.  Our current policy does not allow speculation in derivative instruments for profit or execution of derivative instrument contracts for which there is no underlying exposure.  We do not use financial instruments for trading purposes.  We measure market risk, related to our holdings of financial instruments, based on changes in interest rates utilizing a sensitivity analysis.  We do not believe that a hypothetical 10% change in interest rates would have a material effect on our pretax earnings or cash flows.

Previously, our cash flows and net earnings were also subject to fluctuations resulting from changes in foreign currency exchange rates.  However, as a result of the divestitures of our Weider branded business and Haleko Unit, we no longer have operating subsidiaries whose net sales and expenses are denominated in foreign currencies.  Therefore, changes in foreign currency exchange rates are not expected to have a material impact on future cash flows and net earnings.

ITEM 4.   CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we are required to apply our judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report.  Based on the foregoing, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective.

There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

The information set forth in Note 8 to the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q is incorporated herein by reference.

ITEM 1A.   RISK FACTORS

We attempt to identify, manage and mitigate the risks and uncertainties that are associated with our business to the extent practical.  However, some level of risk and uncertainty will always be present.  Item1A of our Annual Report on Form 10-K for the fiscal year ended May 31, 2006 describes some of the risks and uncertainties associated with our business.  These risks and uncertainties have the potential to materially affect our business, financial condition, results of operations, cash flows, projected results and future prospects.  Other than as set forth in any subsequent Quarterly Report on Form 10-Q we have filed, there has been no material change from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended May 31, 2006.

ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable

ITEM 5.   OTHER INFORMATION

Not applicable

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ITEM 6.   EXHIBITS

3.1.	Amended and Restated Certificate of Incorporation of Schiff Nutrition International, Inc. (1)
3.2.	Amended and Restated Bylaws of Weider Nutrition International, Inc. (2)
4.1.	Revolving Credit Agreement dated as of June 30, 2004 between Schiff Nutrition Group, Inc. and KeyBank National Association. (3)
4.2.	Form of specimen Class A common stock certificate. (4)
10.1.	Build-To-Suit Lease Agreement dated March 20, 1996, between SCI Development Services Incorporated and Weider Nutrition Group, Inc. (2)
10.2.	1997 Equity Participation Plan of Weider Nutrition International, Inc. (2)*
10.3.	Form of Tax Sharing Agreement by and among Weider Nutrition International, Inc. and its subsidiaries and Weider Health and Fitness and its subsidiaries. (2)
10.4.	License Agreement dated as of December 1, 1996 between Mariz Gestao E Investmentos Limitada and Weider Nutrition Group, Inc. (2)
10.5.	Amendments to 1997 Equity Participation Plan of Weider Nutrition International, Inc. (5)*
10.6.	Employment Agreement dated as of June 1, 2002 between Weider Nutrition Group, Inc. and Bruce J. Wood. (6)*
10.7.	Consulting Agreement dated as of February 1, 2004 between Weider Nutrition Group, Inc. and Gustin Foods, LLC. (7)
10.8.	Schiff Nutrition International, Inc. 2004 Incentive Award Plan. (8)*
10.9.	Amendment effective as of March 1, 2005 to License Agreement between Mariz Gestao E Investmentos Limitada and Weider Nutrition Group, Inc. (9)
10.10.	Stock and Asset Purchase Agreement effective as of March 1, 2005 among Weider Nutrition International, Inc., Weider Nutrition Group, Inc. and Weider Global Nutrition, LLC. (9)
10.11.	Promissory Note of Weider Global Nutrition, LLC payable to Weider Nutrition Group, Inc. (9)
10.12.	Guarantee by Weider Health and Fitness in favor of Weider Nutrition International, Inc. and Weider Nutrition Group, Inc. (9)
10.13.	Share Sale and Transfer Agreement dated June 17, 2005 among Weider Nutrition GmbH, Haleko Management GmbH, Atlantic Grupa d.o.o., Hopen Investments BV and Svalbard Investments GmbH. (10)
10.14.	Form of Indemnification Agreement between Weider Nutrition Group, Inc. and certain of its executives and directors. (11)*
10.15.	Agreement dated as of October 1, 2005 between Schiff Nutrition Group, Inc. and Bruce J. Wood. (12)*
10.16.	Form Agreement between Schiff Nutrition Group, Inc. and certain of its executives. (12)*
10.17.	Form of Restricted Stock Unit Award Grant Notice, Restricted Stock Unit Award Agreement and Deferral Election between Schiff Nutrition International, Inc. and certain of its executives. (13)*
10.18.	Amendment No. 1 to the Schiff Nutrition International, Inc. 2004 Incentive Award Plan. (14)*
10.19.	Amended and Restated License and Product Supply Agreement dated as of October 13, 2006 between Unigen Pharmaceuticals, Inc. and Schiff Nutrition Group, Inc. (15)
10.20.	Form of Director Restricted Stock Unit Agreement and Deferral Election. (16)*
10.21.	Form of Director Restricted Stock Agreement. (16)*
21.1.	Subsidiaries of Schiff Nutrition International, Inc. (4)
31.1.	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act. (17)
31.2.	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act. (17)
32.1.	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act. (17)

(1)	Previously filed in the Company’s Quarterly Report on Form 10-Q filed on January 17, 2006 and incorporated herein by reference.
(2)	Previously filed in the Company's Registration Statement on Form S-1 (File No. 333-12929) and incorporated herein by reference.
(3)	Previously filed in the Company's Current Report on Form 8-K filed on July 8, 2004 and incorporated herein by reference.
(4)	Previously filed in the Company’s Annual Report on Form 10-K filed on August 29, 2006 and incorporated herein by reference.
(5)	Previously filed in the Company's Quarterly Report on Form 10-Q filed on January 14, 2002 and incorporated herein by reference.
(6)	Previously filed in the Company's Annual Report on Form 10-K filed on August 29, 2002 and incorporated herein by reference.
(7)	Previously filed in the Company's Quarterly Report on Form 10-Q filed on April 14, 2004 and incorporated herein by reference.
(8)	Previously filed in the Company's Definitive Proxy Statement on Form 14A filed on September 28, 2004 and incorporated herein by reference.

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(9)	Previously filed in the Company's Current Report on Form 8-K filed on April 4, 2005 and incorporated herein by reference.
(10)	Previously filed in the Company's Current Report on Form 8-K filed on June 23, 2005 and incorporated herein by reference.
(11)	Previously filed in the Company's Current Report on Form 8-K filed on August 10, 2005 and incorporated herein by reference.
(12)	Previously filed in the Company's Current Report on Form 8-K filed on February 3, 2006 and incorporated herein by reference.
(13)	Previously filed in the Company’s Current Report on Form 8-K filed on March 23, 2006 and incorporated herein by reference.
(14)	Previously filed in the Company’s Definitive Proxy Statement on Form 14A filed on September 27, 2006 and incorporated herein by reference.
(15)	Previously filed in the Company’s Quarterly Report on Form 10-Q filed on October 16, 2006 and incorporated herein by reference.
(16)	Previously filed in the Company’s Current Report on Form 8-K filed on October 30, 2006 and incorporated herein by reference.
(17)	Filed herewith.
*	Management contract.

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SIGNATURES

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.

SCHIFF NUTRITION INTERNATIONAL, INC.

Date: April 13, 2007	By: /s/      Bruce J. Wood
	Bruce J. Wood
	President, Chief Executive Officer and Director

Date: April 13, 2007	By: /s/      Joseph W. Baty
	Joseph W. Baty
	Executive Vice President and Chief Financial Officer

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