Nutraceutical International 10-Q 2012 Q1 Quarterly report

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TABLE OF CONTENTS

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

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

for the Quarterly Period Ended December 31, 2011

Commission file number 000-23731

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

Delaware (State of incorporation)	87-0515089 (IRS Employer Identification No.)
1400 Kearns Boulevard, 2nd Floor, Park City, Utah (Address of principal executive office)	84060 (Zip code)

(435) 655-6106
(Registrant's telephone number, including area code)

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

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, 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 the 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 ý Non-accelerated filer o
(Do not check if a
smaller reporting company) Smaller reporting company o

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

        At January 25, 2012, the registrant had 9,944,962 shares of common stock outstanding.

NUTRACEUTICAL INTERNATIONAL CORPORATION
INDEX

Description			Page No.
Part I.	Financial Information			3
	Item 1.	Financial Statements (unaudited)		3
		Condensed Consolidated Balance Sheets—December 31, 2011 and September 30, 2011		3
		Condensed Consolidated Statements of Operations and Comprehensive Income—Three Months Ended December 31, 2011 and 2010		4
		Condensed Consolidated Statements of Cash Flows—Three Months Ended December 31, 2011 and 2010		5
		Notes to Condensed Consolidated Financial Statements		6
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		14
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		21
	Item 4.	Controls and Procedures		21
Part II.	Other Information			23
	Item 1.	Legal Proceedings		23
	Item 1A.	Risk Factors		23
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		23
	Item 6.	Exhibits		24

2

PART I—FINANCIAL INFORMATION

Item 1.    Financial Statements

NUTRACEUTICAL INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(dollars in thousands)

	December 31, 2011			September 30, 2011(1)
ASSETS
Current assets
Cash	$	4,792		$	2,441
Accounts receivable, net		12,289			13,671
Inventories		39,855			39,853
Prepaid expenses and other current assets		3,114			4,617
Deferred income taxes		1,513			1,487
Total current assets		61,563			62,069
Property, plant and equipment, net		72,292			72,094
Goodwill		9,202			8,853
Intangible assets, net		19,562			19,693
Other non-current assets		1,735			1,781
Deferred income taxes, net		6,835			7,175
Total assets	$	171,189		$	171,665
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	12,620		$	11,892
Accrued expenses		5,491			7,845
Total current liabilities		18,111			19,737
Long-term debt		31,500			32,000
Other non-current liabilities		304			253
Total liabilities		49,915			51,990
Stockholders' equity
Common stock		100			101
Additional paid-in capital		18,233			19,794
Retained earnings		102,879			99,468
Accumulated other comprehensive income		261			312
Treasury stock		(199	)		—
Total stockholders' equity		121,274			119,675
Total liabilities and stockholders' equity	$	171,189		$	171,665

(1)

The condensed consolidated balance sheet as of September 30, 2011 has been prepared using information from the audited financial statements at that date.

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

3

NUTRACEUTICAL INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME

(unaudited)

(dollars in thousands, except per share data)

	Three months ended December 31,
	2011			2010
Net sales	$	46,628		$	45,243
Cost of sales		23,370			21,781
Gross profit		23,258			23,462
Operating expenses
Selling, general and administrative		17,140			16,735
Amortization of intangible assets		474			390
Income from operations		5,644			6,337
Interest and other expense, net		359			171
Income before provision for income taxes		5,285			6,166
Provision for income taxes		1,874			2,219
Net income	$	3,411		$	3,947
Other comprehensive income (loss)
Foreign currency translation adjustment, net of tax		(51	)		39
Comprehensive income	$	3,360		$	3,986
Net income per common share
Basic	$	0.34		$	0.38
Diluted		0.34			0.38
Weighted average common shares outstanding
Basic		10,045,224			10,378,513
Dilutive effect of stock options		14,883			83,576
Diluted		10,060,107			10,462,089

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

4

NUTRACEUTICAL INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(dollars in thousands)

	Three months ended December 31,
	2011			2010
Cash flows from operating activities
Net income	$	3,411		$	3,947
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,085			1,942
Amortization of deferred financing fees		46			19
Losses on disposals of property and equipment		1			5
Deferred income taxes		314			410
Changes in assets and liabilities, net of effects of acquisitions
Accounts receivable, net		1,523			(1,473	)
Inventories		266			1,383
Prepaid expenses and other current assets		1,529			458
Other non-current assets		7			112
Accounts payable		728			472
Accrued expenses		(2,371	)		(855	)
Other non-current liabilities		51			(120	)
Net cash provided by operating activities		7,590			6,300
Cash flows from investing activities
Acquisitions of businesses		(1,134	)		(7,118	)
Purchases of property and equipment		(1,810	)		(1,498	)
Net cash used in investing activities		(2,944	)		(8,616	)
Cash flows from financing activities
Proceeds from debt		500			8,000
Payments on debt		(1,000	)		(6,000	)
Payments of deferred financing fees		—			(867	)
Proceeds from issuances of common stock		219			431
Repurchases of common stock		(2,174	)		—
Tax benefit from stock option exercises		194			245
Net cash provided by (used in) financing activities		(2,261	)		1,809
Effect of exchange rate changes on cash		(34	)		25
Net increase (decrease) in cash		2,351			(482	)
Cash at beginning of period		2,441			3,740
Cash at end of period	$	4,792		$	3,258

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

5

NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(dollars in thousands, except per share data)

1. BASIS OF PRESENTATION

        Nutraceutical International Corporation and its subsidiaries (the "Company") is an integrated manufacturer, marketer, distributor and retailer of branded nutritional supplements and other natural products sold primarily to and through domestic health and natural food stores. Internationally, the Company markets and distributes branded nutritional supplements and other natural products to and through health and natural product distributors and retailers. The Company's core business strategy is to acquire, integrate and operate businesses in the natural products industry that manufacture, market and distribute branded nutritional supplements. The Company believes that the consolidation and integration of these acquired businesses provide ongoing financial synergies through increased scale and market penetration, as well as strengthened customer relationships.

        The Company manufactures and sells nutritional supplements and other natural products under numerous brands includingSolaray®,KAL®,Nature's Life®,LifeTime®,Natural Balance®, bioAllers®,Herbs for Kids™,NaturalCare®,Health from the Sun®,Life-flo®,Organix South®,Pioneer® andMonarch Nutraceuticals™.

        The Company owns neighborhood natural food markets, which operate under the trade namesThe Real Food Company™,Thom's Natural Foods™ andCornucopia Community Market™. The Company also owns health food stores, which operate under the trade namesFresh Vitamins™ andGranola's™.

        In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all necessary adjustments, consisting of normal recurring adjustments, to present fairly the consolidated financial position of the Company as of December 31, 2011 and the results of its operations and cash flows for the three months ended December 31, 2011 and 2010, in conformity with accounting principles generally accepted in the United States of America for interim financial information applied on a consistent basis. Results for the three months ended December 31, 2011 are not necessarily indicative of the results to be expected for the full fiscal year.

        Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. Accordingly, these financial statements should be read in conjunction with the Company's Form 10-K for the fiscal year ended September 30, 2011, which was filed with the Securities and Exchange Commission on December 19, 2011.

Use of Estimates

        The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America required management to make estimates and assumptions that affected the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net sales and expenses during the reported periods. Significant estimates included values and lives assigned to acquired intangible assets, reserves for customer returns and allowances, uncollectible accounts receivable, valuation adjustments for slow moving, obsolete and/or damaged inventory and valuation and recoverability of long-lived assets. Actual results may differ from these estimates.

6

NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(dollars in thousands, except per share data)

1. BASIS OF PRESENTATION (Continued)

New Accounting Standards

        In June 2011, the Financial Accounting Standards Board ("FASB") issued authoritative guidance which is included in Accounting Standards Codification ("ASC") 220, "Comprehensive Income." This guidance no longer allows comprehensive income to be presented as a component of the statement of stockholders' equity but instead requires comprehensive income to be presented either in a continuous statement of comprehensive income or in two separate but consecutive statements. This guidance is effective for the Company as of October 1, 2012 and will not have an impact on the Company's Consolidated Financial Statements as the guidance only changes the presentation of comprehensive income.

        In September 2011, the FASB issued authoritative guidance which is included in ASC 350, "Intangibles—Goodwill and Other." This guidance simplifies how goodwill is tested for impairment by first allowing an assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. This guidance is effective for the Company as of October 1, 2012 and is not expected to have a material impact on the Company's Consolidated Financial Statements.

        The Company reviews new accounting standards as they are issued. Although some of these accounting standards may be applicable to the Company, the Company has not identified any other new standards that the Company believes merit further discussion, and the Company expects that none would have a significant impact on the Company's consolidated financial statements.

2. ACCOUNTS RECEIVABLE, NET

        Accounts receivable, net of allowances for sales returns and doubtful accounts, consisted of the following:

	December 31, 2011			September 30, 2011
Accounts receivable	$	14,311		$	15,736
Less allowances		(2,022	)		(2,065	)
	$	12,289		$	13,671

7

NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(dollars in thousands, except per share data)

3. INVENTORIES

        Inventories were comprised of the following:

	December 31, 2011		September 30, 2011
Raw materials	$	15,261	$	16,001
Work-in-process		4,739		5,626
Finished goods		19,855		18,226
	$	39,855	$	39,853

4. ACQUISITIONS

        During the three months ended December 31, 2011, the Company made two acquisitions of businesses. On October 27, 2011, the Company acquired certain operating assets of Mia Rose Products, Inc. On November 22, 2011, the Company acquired certain operating assets of Collective Wellbeing, LLC.

        The aggregate purchase price of these acquisitions was $1,134 in cash. The Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Cash Flows presented herein include the activities of these acquired businesses from their respective dates of acquisition. The expected long-term sales and expense synergies of acquired businesses generally are not realized immediately following acquisition as certain transition and integration matters must be completed.

        These acquisitions are in keeping with the Company's business strategy of consolidating the fragmented industry in which it competes and were accounted for using the acquisition method of accounting. Accordingly, the aggregate purchase price was assigned to the assets acquired based on their fair values at their respective dates of acquisition. The excess of aggregate purchase price over the fair values of the assets acquired was classified as goodwill. The following reflects the final allocation of the aggregate purchase price for these acquisitions to the aggregate assets acquired:

Current assets	$	435
Goodwill		349
Intangible assets		350
	$	1,134

        The acquired intangible assets include trademarks and tradenames totaling $210 and customer relationships totaling $140 and are being amortized for financial statement purposes over four to seven years. The acquired intangible assets of $350, as well as goodwill of $349, which is not subject to amortization for financial statement purposes, are expected to be deductible for tax purposes over 15 years.

8

NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(dollars in thousands, except per share data)

5. GOODWILL AND INTANGIBLE ASSETS

        The change in the carrying amount of goodwill from September 30, 2011 to December 31, 2011 was as follows:

	Goodwill
Balance as of September 30, 2011
Goodwill	$	49,247
Accumulated impairment losses		(40,394	)
		8,853
Goodwill attributable to fiscal 2012 acquisitions		349
Balance as of December 31, 2011
Goodwill		49,596
Accumulated impairment losses		(40,394	)
	$	9,202

        The carrying amounts of intangible assets at December 31, 2011 and September 30, 2011 were as follows:

	December 31, 2011							September 30, 2011
															Weighted- Average Amortization Period (Years)
	Gross Carrying Amount(1)		Accumulated Amortization(1)			Net Carrying Amount		Gross Carrying Amount(1)		Accumulated Amortization(1)			Net Carrying Amount
Intangible assets subject to amortization:
Trademarks/tradenames/patents	$	2,038	$	(597	)	$	1,441	$	1,812	$	(550	)	$	1,262		12
Customer relationships/distribution rights/non-compete agreement		10,129		(4,091	)		6,038		10,037		(3,716	)		6,321		6
Developed software and technology		772		(772	)		—		772		(759	)		13		5
		12,939		(5,460	)		7,479		12,621		(5,025	)		7,596
Intangible assets not subject to amortization:
Trademarks/tradenames/licenses		12,083		—			12,083		12,097		—			12,097
	$	25,022	$	(5,460	)	$	19,562	$	24,718	$	(5,025	)	$	19,693

(1)

Amounts include the impact of foreign currency translation adjustments.

9

NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(dollars in thousands, except per share data)

5. GOODWILL AND INTANGIBLE ASSETS (Continued)

        Estimated future amortization expense related to the December 31, 2011 net carrying amount of $7,479 for intangible assets subject to amortization is as follows:

Year Ending September 30,	Estimated Amortization Expense
2012(1)	$	1,383
2013		1,663
2014		1,402
2015		1,255
2016		683
Thereafter		1,093
	$	7,479

(1)

Estimated amortization expense for the year ending September 30, 2012 includes only amortization to be recorded after December 31, 2011.

        The ongoing uncertainty in general and economic conditions may continue to impact retail and consumer demand, as well as the market price of the Company's common stock, and could negatively impact the Company's future operating performance, cash flow and/or stock price and could result in goodwill and/or intangible asset impairment charges being recorded in future periods which could materially impact the Company's consolidated financial statements. The valuation of goodwill and intangible assets is subject to a high degree of judgment, uncertainty and complexity.

6. DEBT

        Debt was comprised of the following:

	December 31, 2011		September 30, 2011
Long-term debt—revolving credit facility	$	31,500	$	32,000

        The Company's debt is stated at book value which approximated its fair value at December 31, 2011 and September 30, 2011.

        On December 17, 2010, the Company amended and restated its revolving credit facility (the "Restated Credit Agreement"). The Restated Credit Agreement extends the term of the credit facility to December 2015, resets the available credit borrowings to $90,000 with no automatic reductions and provides an accordion feature which can increase the available credit borrowings to $120,000 subject to approval by the lenders and compliance with certain covenants and conditions. The lenders under the Restated Credit Agreement are Rabobank International and Wells Fargo. To date, the Company has not experienced any difficulties in accessing the available funds under the Restated Credit Agreement. Deferred financing fees of $878 related to the Restated Credit Agreement were deferred and are being amortized over the term of the Restated Credit Agreement.

10

NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(dollars in thousands, except per share data)

6. DEBT (Continued)

        At December 31, 2011, the Company had outstanding revolving credit borrowings of $31,500 under the Restated Credit Agreement. Borrowings under the Restated Credit Agreement are collateralized by substantially all assets of the Company. At the Company's election, borrowings bear interest at the applicable Eurodollar Rate plus a variable margin or at a base rate, which is the higher of the Federal Funds Rate plus 0.5% or the Prime Lending Rate, plus a variable margin. At December 31, 2011, the applicable weighted-average interest rate for outstanding borrowings was 2.52%. The Company is also required to pay a quarterly fee of 0.50% on the unused balance under the Restated Credit Agreement. Accrued interest on Eurodollar Rate borrowings is payable based on elected intervals of one, two or three months. Accrued interest on base rate borrowings is payable quarterly. The Restated Credit Agreement matures on December 15, 2015, and the Company is required to repay all principal and interest outstanding under the Restated Credit Agreement on such date.

        The Restated Credit Agreement contains restrictive covenants, including limitations on incurring other indebtedness and requirements that the Company maintain certain financial ratios. Upon the occurrence of a default, the lender has various remedies or rights, which may include proceeding against the collateral or requiring the Company to repay all amounts outstanding under the Restated Credit Agreement.

7. SHARE REPURCHASES

        During the three months ended December 31, 2011, the Company purchased 167,616 shares of common stock for an aggregate price of $2,174. As of December 31, 2011, the Company had retired 150,000 of these shares of common stock. During the three months ended December 31, 2010, the Company did not purchase or retire any shares of common stock. As of December 31, 2011, the Company was permitted to purchase up to 376,405 additional shares under its approved purchase plan. The Company accounts for treasury shares using the cost method.

8. STOCK OPTIONS

        The following table summarizes stock option activity during the three months ended December 31, 2011:

	Number of Options			Weighted-Average Exercise Price
Options outstanding and exercisable at September 30, 2011		302,300		$	10.84
Exercised		(58,300	)		3.50
Options outstanding and exercisable at December 31, 2011		244,000		$	12.59

        Options to purchase 52,500 shares of common stock for the three months ended December 31, 2011 were excluded from the computation of diluted earnings per share because the exercise prices of these stock options were greater than the average share price of the Company's common stock and, therefore, the effect would have been antidilutive. No options to purchase shares of common stock for

11

NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(dollars in thousands, except per share data)

8. STOCK OPTIONS (Continued)

the three months ended December 31, 2010 were excluded from the computation of diluted earnings per share because the exercise prices of all stock options were less than the average share price of the Company's common stock.

        During the three months ended December 31, 2011, the Company received proceeds of $204 related to the exercise of stock options. During this same period, the Company recorded a tax benefit of $194 and optionees realized an aggregate pre-tax gain of $504 from these stock option exercises. During the three months ended December 31, 2010, the Company received proceeds of $412 related to the exercise of stock options. During this same period, the Company recorded a tax benefit of $245 and optionees realized an aggregate pre-tax gain of $636 from these stock option exercises.

9. SEGMENTS

        Segment identification and selection is consistent with the management structure used by the Company to evaluate performance and make decisions regarding resource allocation, as well as the materiality of financial results consistent with that structure. Based on the Company's management structure and method of internal reporting, the Company has one operating segment. The Company does not review operating results on a disaggregated basis; rather, management reviews operating results on an aggregate basis.

        Net sales attributed to customers in the United States and foreign countries for the three months ended December 31, 2011 and 2010 were as follows:

	Three months ended December 31,
	2011		2010
United States	$	41,427	$	40,672
Foreign countries		5,201		4,571
	$	46,628	$	45,243

        Certain net sales attributed to customers in the United States are sold to customers who in turn may sell such products to customers in foreign countries while certain net sales attributed to customers in foreign countries are sold to customers who in turn may sell such products to customers in the United States.

12

NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(dollars in thousands, except per share data)

9. SEGMENTS (Continued)

        The Company's net sales by product group for the three months ended December 31, 2011 and 2010 were as follows:

	Three months ended December 31,
	2011		2010
Branded nutritional supplements and other natural products	$	43,535	$	41,487
Other(1)		3,093		3,756
	$	46,628	$	45,243

(1)

Net sales for any other product or group of similar products are less than 10% of consolidated net sales.

13

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

General

        The following discussion and analysis should be read in conjunction with the other sections of this report on Form 10-Q, including Part I, Item 1.

        We are an integrated manufacturer, marketer, distributor and retailer of branded nutritional supplements and other natural products sold primarily to and through domestic health and natural food stores. Internationally, we market and distribute branded nutritional supplements and other natural products to and through health and natural product distributors and retailers. Our core business strategy is to acquire, integrate and operate businesses in the natural products industry that manufacture, market and distribute branded nutritional supplements. We believe that the consolidation and integration of these acquired businesses provide ongoing financial synergies through increased scale and market penetration, as well as strengthened customer relationships.

        We manufacture and sell nutritional supplements and other natural products under numerous brands includingSolaray®,KAL®,Nature's Life®,LifeTime®,Natural Balance®, bioAllers®,Herbs for Kids™,NaturalCare®,Health from the Sun®,Life-flo®,Organix South®,Pioneer® andMonarch Nutraceuticals™.

        We own neighborhood natural food markets, which operate under the trade namesThe Real Food Company™,Thom's Natural Foods™ andCornucopia Community Market™. We also own health food stores, which operate under the trade namesFresh Vitamins™ andGranola's™.

        We were formed in 1993 to effect a consolidation strategy in the fragmented vitamin, mineral, herbal and other nutritional supplements industry (the "VMS Industry"). Since our formation, we have completed thirty-seven acquisitions of assets or stock. As a result of acquisitions, internal growth and cost management, we believe that we are well positioned to continue to capitalize on acquisition opportunities that arise in the VMS Industry.

Critical Accounting Policies

        The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America required us to make estimates and assumptions that affected the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net sales and expenses during the reported periods. Significant estimates included values and lives assigned to acquired intangible assets, reserves for customer returns and allowances, uncollectible accounts receivable, valuation adjustments for slow moving, obsolete and/or damaged inventory and valuation and recoverability of long-lived assets. Actual results may differ from these estimates. Our critical accounting policies include the following:

        Accounts Receivable—Provision is made for estimated bad debts based on periodic analysis of individual customer balances, including an evaluation of days sales outstanding, payment history, recent payment trends and perceived credit worthiness. If general economic conditions and/or customer financial condition were to change, additional provisions for bad debts may be required, which could have a material impact on the consolidated financial statements.

        Inventories—Valuation adjustments are made for slow moving, obsolete and/or damaged inventory based on periodic analysis of individual inventory items, including an evaluation of historical usage and/or movement, age, expiration date and general condition. If market demand and/or consumer preferences are less favorable than historical trends or future expectations, additional valuation adjustments for slow moving, obsolete and/or damaged inventory may be required, which could have a material impact on the consolidated financial statements.

14

        Property, Plant and Equipment—Depreciation and amortization expense is impacted by our judgments regarding the estimated useful lives of assets placed in service. If the actual lives of assets are significantly less than expected, depreciation and amortization expense would be accelerated, which could have a material impact on the consolidated financial statements.

        We evaluate the recoverability of our property, plant and equipment which are reviewed for possible impairment whenever events or circumstances indicate that the carrying amount of an asset group may not be recoverable. We measure recoverability of the asset group by comparison of its carrying amount to the future undiscounted cash flows we expect the asset group to generate. If we consider the asset group to be impaired, we measure the amount of any impairment as the difference between the carrying amount and the fair value of the impaired asset group.

        Goodwill and Intangible Assets—Goodwill and intangible assets require estimates and a high degree of judgment in determining the initial recognition and measurement of goodwill and intangible assets, including factors and assumptions used in determining fair values and useful lives. Intangible assets with finite useful lives are amortized, while intangible assets with indefinite useful lives are not amortized. Amortizable intangible assets are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill and indefinite-lived intangible assets are tested annually for impairment and are tested for impairment between annual tests if an event occurs that would cause us to believe that value is impaired. The appropriateness of the indefinite-life classification of non-amortizable intangible assets is also reviewed as part of the annual testing or when circumstances warrant a change to a finite life. We perform our annual impairment testing as of September 30 each year, which is the last day of our fiscal year.

        A two step process is used to test for goodwill impairment. The first step is to determine if there is an indication of impairment by comparing the estimated fair value of each reporting unit to its carrying value, including existing goodwill. Reporting unit fair values are estimated using discounted cash flow models as well as considering market and other factors. Goodwill is considered impaired if the carrying value of a reporting unit exceeds the estimated fair value. Upon an indication of impairment, a second step is performed to measure the amount of the impairment by comparing the implied fair value of the reporting unit's goodwill with its carrying value.

        Intangible assets with indefinite useful lives are tested for impairment at the individual tradename level by comparing the fair value of the indefinite-lived intangible asset to its carrying amount. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment charge is recognized. Fair values of indefinite-lived intangible assets are determined based on discounted cash flows.

        Amortizable intangible assets are reviewed for recoverability by comparing an asset group's carrying amount to the future undiscounted cash flows the asset group is expected to generate. If the asset group is considered to be impaired, the difference between the carrying amount and the fair value of the impaired asset group is recorded.

        The ongoing uncertainty in general and economic conditions may continue to impact retail and consumer demand, as well as the market price of our common stock, and could negatively impact our future operating performance, cash flow and/or stock price and could result in goodwill and/or intangible asset impairment charges being recorded in future periods which could materially impact our consolidated financial statements. The valuation of goodwill and intangible assets is subject to a high degree of judgment, uncertainty and complexity.

        Revenue Recognition—Revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the product has been shipped and the customer takes ownership and assumes the risk of loss; (3) the selling price is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. We believe that these criteria are satisfied upon shipment

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from our facilities or, in the case of our neighborhood natural food markets and health food stores, at the point of sale within these stores. Revenue is reduced by provisions for estimated returns and allowances, which are based on historical averages that have not varied significantly for the periods presented, as well as specific known claims, if any. No other significant deductions from revenue must be estimated at the point in time that revenue is recognized.

        Our estimates and judgments related to our critical accounting policies, including factors and assumptions considered in making these estimates and judgments, did not vary significantly for the periods presented and had no material impact on the consolidated financial statements as reported.

New Accounting Standards

        See Note 1 to the Condensed Consolidated Financial Statements for information regarding new accounting standards.

Results of Operations

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

	Three Months Ended December 31,
	2011			2010
Net sales		100.0	%		100.0	%
Cost of sales		50.1	%		48.1	%
Gross profit		49.9	%		51.9	%
Selling, general and administrative		36.8	%		37.0	%
Amortization of intangible assets		1.0	%		0.9	%
Income from operations		12.1	%		14.0	%
Interest and other expense, net		0.8	%		0.4	%
Income before provision for income taxes		11.3	%		13.6	%
Provision for income taxes		4.0	%		4.9	%
Net income		7.3	%		8.7	%
EBITDA(1)		16.6	%		18.3	%

(1)

See "—EBITDA."

Comparison of the Three Months Ended December 31, 2011 to the Three Months Ended December 31, 2010

        Net Sales.    Net sales increased by $1.4 million, or 3.1%, to $46.6 million for the three months ended December 31, 2011 ("first quarter of fiscal 2012") from $45.2 million for the three months ended December 31, 2010 ("first quarter of fiscal 2011"). Net sales of branded nutritional supplements and other natural products increased by $2.0 million, or 4.9%, to $43.5 million for the first quarter of fiscal 2012 compared to $41.5 million for the first quarter of fiscal 2011. The increase in net sales of branded nutritional supplements and other natural products was primarily related to the net sales contributions of the fiscal 2011 and fiscal 2012 acquisitions. The impact on net sales of branded products attributable to price changes was not material. Other net sales were $3.1 million for the first quarter of fiscal 2012 and $3.7 million for the first quarter of fiscal 2011.

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        Gross Profit.    Gross profit was $23.3 million for the first quarter of fiscal 2012 and $23.5 million for the first quarter of fiscal 2011. As a percentage of net sales, gross profit decreased to 49.9% for the first quarter of fiscal 2012 from 51.9% for the first quarter of fiscal 2011. This decrease in gross profit percentage was primarily attributable to increased manufacturing overhead costs related to the expansion of our liquid manufacturing operations.

        Selling, General and Administrative.    Selling, general and administrative expenses were $17.1 million for the first quarter of fiscal 2012 and $16.7 million for the first quarter of fiscal 2011. This increase in selling, general and administrative expenses was primarily attributable to operational and transition costs related to the fiscal 2011 and fiscal 2012 acquisitions. As a percentage of net sales, selling, general and administrative expenses were 36.8% for the first quarter of fiscal 2012 and 37.0% for the first quarter of fiscal 2011.

        Amortization of Intangible Assets.    Amortization of intangible assets was $0.5 million for the first quarter of fiscal 2012 and $0.4 million for the first quarter of fiscal 2011. For each period, amortization expense was primarily related to intangible assets recorded in connection with acquisitions.

        Interest and Other Expense, Net.    Net interest and other expense was $0.4 million for the first quarter of fiscal 2012 and $0.2 million for the first quarter of fiscal 2011 and primarily consisted of interest expense on indebtedness under our revolving credit facility with the increase being primarily related to an increase in interest rates.

        Provision for Income Taxes.    Our effective tax rate was 35.5% for the first quarter of fiscal 2012 and 36.0% for the first quarter of fiscal 2011. In each period, our effective tax rate was higher than the federal statutory rate primarily due to state taxes.

EBITDA

        EBITDA (a non-GAAP measure) is defined in our debt covenants and performance measures as earnings before net interest and other expense, taxes, depreciation and amortization. EBITDA has some inherent limitations in measuring operating performance due to the exclusion of certain financial elements such as depreciation and amortization and is not necessarily comparable to other similarly-titled captions of other companies due to potential inconsistencies in the method of calculation. Furthermore, EBITDA is not intended to be a substitute for cash flows from operating activities, as a measure of liquidity, or an alternative to net income in determining our operating performance in accordance with generally accepted accounting principles. Our use of an EBITDA-based metric should be considered within the following context:

•

We acknowledge that plant and equipment (while less important in our line of business due to outsourcing alternatives) are necessary to earn revenue based on our current business model.

•

Our use of an EBITDA-based measure of operating performance is not based on any belief about the reasonableness of excluding depreciation and amortization when measuring financial performance.

•

Our use of an EBITDA-based measure is supported by its importance to the following key stakeholders:

•

Analysts—who estimate our projected EBITDA and other EBITDA-based metrics in their independently-developed financial models for investors;

•

Creditors—who evaluate our operating performance based on compliance with certain EBITDA-based debt covenants;

•

Investment Bankers—who use EBITDA-based metrics in their written evaluations and comparisons of companies within our industry; and

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•

Board of Directors and Executive Management—who use EBITDA-based metrics for evaluating management performance relative to our operating budget and bank covenant compliance, as well as our ability to service debt and raise capital for growth opportunities, including acquisitions, which are a critical component of our stated strategy. Historically, we have recorded a monthly accrual for incentive compensation as a percentage of EBITDA, which has been paid out to executive management, as well as other employees, upon completion of our annual audit.

        The following table sets forth a reconciliation of net income to EBITDA for each period included herein:

	Three Months Ended December 31,
	2011		2010
	(dollars in thousands)
Net income	$	3,411	$	3,947
Provision for income taxes		1,874		2,219
Interest and other expense, net(1)		359		171
Depreciation and amortization		2,085		1,942
EBITDA	$	7,729	$	8,279

(1)

Includes amortization of deferred financing fees.

        Our EBITDA decreased to $7.7 million for the first quarter of fiscal 2012 from $8.3 million for the first quarter of fiscal 2011. EBITDA as a percentage of net sales decreased to 16.6% for the first quarter of fiscal 2012 from 18.3% for the first quarter of fiscal 2011.

Seasonality

        We believe that our business is characterized by minor seasonality. However, sales to any particular customer or sales of any particular product can vary substantially from one quarter to the next based on such factors as industry trends, timing of promotional discounts, domestic and international economic conditions and acquisition-related activities. Excluding the effect of acquisitions, we have historically recorded higher branded products sales volume during the second fiscal quarter (January through March) due to increased interest in health-related products among consumers following the holiday season.

Liquidity and Capital Resources

        We had working capital of $43.5 million as of December 31, 2011 compared to $42.3 million as of September 30, 2011. The increase in working capital was primarily the result of an increase in cash and a decrease in accrued expenses partially offset by decreases in accounts receivable and prepaid expenses and other current assets.

        Net cash provided by operating activities for the three months ended December 31, 2011 was $7.6 million compared to $6.3 million for the comparable period in fiscal 2011. This increase in net cash provided by operating activities for the three months ended December 31, 2011 was primarily attributable to changes in operating assets and liabilities, net of effects of acquisitions.

        Net cash used in investing activities was $2.9 million for the three months ended December 31, 2011 compared to $8.6 million for the comparable period in fiscal 2011. Our investing activities during these periods consisted of acquisitions of businesses and capital expenditures. The capital expenditures

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primarily related to buildings, building improvements related to facility consolidation efforts, distribution and manufacturing equipment and information systems.

        During the three months ended December 31, 2011, we acquired two businesses for $1.1 million in cash. On October 27, 2011, we acquired certain operating assets of Mia Rose Products, Inc. On November 22, 2011, we acquired certain operating assets of Collective Wellbeing, LLC. During the three months ended December 31, 2010, we acquired two businesses for $7.1 million in cash. On October 7, 2010, we acquired certain operating assets of TRC Nutritional Labs, Inc. and on October 14, 2010, we acquired certain operating assets of The Heritage Store, Inc.

        Net cash used in financing activities was $2.3 million for the three months ended December 31, 2011 compared to net cash provided by financing activities of $1.8 million for the comparable period in fiscal 2011. During these periods, financing activities primarily related to borrowings and repayments under our revolving credit facility, payments of deferred financing fees, purchases of common stock for treasury and proceeds from the issuance of common stock related to stock option exercises and the direct stock purchase plan.

        In October 2007, we registered a direct stock purchase plan with the Securities and Exchange Commission. The purpose of this direct stock purchase plan is to provide a convenient way for existing stockholders, as well as new investors, to purchase shares of our common stock. A total of 1,500,000 shares of our common stock were registered under the plan with 1,208 shares purchased during the three months ended December 31, 2011. As of December 31, 2011, there were 1,411,116 shares of common stock available for purchase.

        On December 17, 2010, we amended and restated our revolving credit facility (the "Restated Credit Agreement"). The Restated Credit Agreement extends the term of the credit facility to December 2015, resets the available credit borrowings to $90 million with no automatic reductions and provides an accordion feature which can increase the available credit borrowings to $120 million subject to approval by the lenders and compliance with certain covenants and conditions. The lenders under the Restated Credit Agreement are Rabobank International and Wells Fargo. To date, we have not experienced any difficulties in accessing the available funds under the Restated Credit Agreement. Deferred financing fees of $0.9 million related to the Restated Credit Agreement were deferred and are being amortized over the term of the Restated Credit Agreement.

        At December 31, 2011, we had outstanding revolving credit borrowings of $31.5 million under the Restated Credit Agreement. Borrowings under the Restated Credit Agreement are collateralized by substantially all of our assets. At our election, borrowings bear interest at the applicable Eurodollar Rate plus a variable margin or at a base rate, which is the higher of the Federal Funds Rate plus 0.5% or the Prime Lending Rate, plus a variable margin. At December 31, 2011, the applicable weighted-average interest rate for outstanding borrowings was 2.52%. We are also required to pay a quarterly fee of 0.50% on the unused balance under the Restated Credit Agreement. Accrued interest on Eurodollar Rate borrowings is payable based on elected intervals of one, two or three months. Accrued interest on base rate borrowings is payable quarterly. The Restated Credit Agreement matures on December 15, 2015, and we are required to repay all principal and interest outstanding under the Restated Credit Agreement on such date.

        The Restated Credit Agreement contains restrictive covenants, including limitations on incurring certain other indebtedness and requirements that we maintain certain financial ratios. As of December 31, 2011, we were in compliance with the restrictive covenants. Upon the occurrence of a default, the lender has various remedies or rights, which may include proceeding against the collateral or requiring us to repay all amounts outstanding under the Restated Credit Agreement.

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        A key component of our business strategy is to seek to make additional acquisitions, which may require that we obtain additional financing, which could include the incurrence of substantial additional indebtedness or the issuance of additional stock. We believe that borrowings under our current revolving credit facility or a replacement credit facility, together with cash flows from operations, will be sufficient to make required payments under the current credit facility or any such replacement facility, and to make anticipated capital expenditures and fund working capital needs for the next twelve months.

Contractual Obligations and Other Commitments

        Our significant non-cancelable contractual obligations and other commitments as of December 31, 2011 were as follows:

	Payments Due By Period
Contractual Obligations and Other Commitments	Total		Less Than 1 Year		1 - 3 Years		4 - 5 Years		After 5 Years
	(dollars in thousands)
Revolving credit facility	$	31,500	$	—	$	—	$	31,500	$	—
Interest on revolving credit facility(a)		4,169		1,053		2,107		1,009		—
Operating leases		4,482		2,504		1,692		286		—
Total	$	40,151	$	3,557	$	3,799	$	32,795	$	—

(a)

Represents estimated interest obligations associated with our outstanding revolving credit facility balance of $31.5 million at December 31, 2011, assuming no principal payments are made before maturity, a weighted-average interest rate of 2.52% and an underutilization fee rate of 0.50%.

Inflation

        Inflation affects the cost of raw materials, goods and services used by us. In recent years, inflation has been modest. The competitive environment somewhat limits our ability to recover higher costs resulting from inflation by raising prices. We seek to mitigate the adverse effects of inflation primarily through improved productivity and cost containment programs. We do not believe that inflation has had a material impact on our results of operations for the periods presented, except with respect to increased costs in manufacturing, packaging and distribution resulting from increased fuel and other petrochemical costs, as well as payroll-related costs, insurance premiums and other costs arising from or related to government imposed regulations.

Forward-Looking Statements

        This Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our financial condition, results of operations and business. These forward-looking statements can be identified by the use of terms such as "believe," "expects," "plan," "intend," "may," "will," "should," "can," or "anticipates," or the negative thereof, or variations thereon, or comparable terminology, or by discussions of strategy. These statements involve known and unknown risks, uncertainties and other factors that may cause industry trends or our actual results to be materially different from any future results expressed or implied by these statements. Important factors that may cause our results to differ from these forward-looking statements include, but are not limited to: (i) changes in or new government regulations or increased enforcement of the same, (ii) unavailability of desirable acquisitions or inability to complete them, (iii) increased costs, including from increased raw material or energy prices, (iv) changes in general worldwide economic or political conditions, (v) adverse publicity or negative consumer perception regarding nutritional supplements, (vi) issues with obtaining raw materials of adequate quality or quantity, (vii) litigation and

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claims, including product liability, intellectual property and other types, (viii) disruptions from or following acquisitions including the loss of customers, (ix) increased competition, (x) slow or negative growth in the nutritional supplement industry or the healthy foods channel, (xi) the loss of key personnel or the inability to manage our operations efficiently, (xii) problems with information management systems, manufacturing efficiencies and operations, (xiii) insurance coverage issues, (xiv) the volatility of the stock market generally and of our stock specifically, (xv) increases in the cost of borrowings or unavailability of additional debt or equity capital, or both, or fluctuations in foreign currencies, and (xvi) interruption of business or negative impact on sales and earnings due to acts of God, acts of war, terrorism, bio-terrorism, civil unrest and other factors outside of our control.

        We undertake no obligation to update or revise publicly any forward-looking statements to reflect new information, events or circumstances occurring after the date of this Form 10-Q.

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

        At our election, borrowings under the Restated Credit Agreement bear interest at the applicable Eurodollar Rate plus a variable margin or at a base rate, which is the higher of the Federal Funds Rate plus 0.5% or the Prime Lending Rate, plus a variable margin. At December 31, 2011, the applicable weighted-average interest rate for borrowings was 2.52% and we had total borrowings outstanding of $31.5 million. A hypothetical 100 basis point change in interest rates would not have had a material impact on our reported net income or cash flows for the three months ended December 31, 2011 and 2010.

        With respect to our international operations, we are subject to currency fluctuations; however, we do not believe that these fluctuations would have a material adverse impact on our financial position because the majority of our net sales to foreign countries are transacted in U.S. dollars. Net sales to foreign countries not transacted in U.S. dollars include sales to customers in Norway, Sweden, the U.K., the Netherlands and Japan. To date, we have not hedged any of our potential foreign currency exposures.

Item 4.    Controls and Procedures

        Evaluation of Disclosure Controls and Procedures.    We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, 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 of and with the participation of our management, including our principal executive and principal financial officers, 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. As disclosed in our Form 10-K for the fiscal year ended September 30, 2011, which was filed with the Securities and Exchange Commission on December 19, 2011, we concluded that, as of September 30, 2011 a material weakness in our internal control over financial reporting existed as we did not maintain effective controls over impairment testing for certain indefinite-lived intangible assets.

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        We are currently in the process of designing and implementing enhanced processes and controls to address this material weakness and improve our internal control over financial reporting. It is our expectation that these enhanced processes and controls will be fully implemented in fiscal 2012.

        Based on the foregoing, our principal executive and principal financial officers have concluded that our disclosure controls and procedures were not effective as of December 31, 2011. However, we believe the consolidated financial statements included in this report present, in all material respects, our financial position, results of operations and cash flows for the periods presented.

        Changes in Internal Control Over Financial Reporting.    There were no changes in our internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1.    Legal Proceedings

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

        We carry insurance coverage in the types and amounts that we consider reasonably adequate to cover the risks we face in the industry in which we compete.

        In our opinion, the outcomes of individual regulatory and legal matters in which we are presently involved are not probable and no estimate can be made of the range of potential gains or losses. While incapable of estimation, in the opinion of management, the individual regulatory and legal matters in which we are involved are not expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Item 1A.    Risk Factors

        There have been no material changes in our risk factors from those disclosed in our 2011 Annual Report on Form 10-K.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

        We did not sell any unregistered equity securities during the quarterly period ended December 31, 2011.

        Prior to fiscal 2012, our Board of Directors approved a share purchase program authorizing us to buy up to 3,500,000 shares of our common stock. As of December 31, 2011, there were 376,405 shares available for purchase under this program. The shares available for purchase under this program have no expiration date. Purchases under this program during the three months ended December 31, 2011 occurred in October, November and December as follows:

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan		Maximum Number of Shares that May Yet Be Purchased Under the Plan
October 1 - 31, 2011		87,845	$	13.21		87,845
November 1 - 30, 2011		62,155		13.12		62,155
December 1 - 31, 2011		17,616		11.29		17,616
		167,616	$	12.97		167,616		376,405

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Item 6.    Exhibits

31.1	Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document(1)
101.SCH	XBRL Taxonomy Extension Schema Document(1)
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document(1)
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document(1)
101.LAB	XBRL Taxonomy Extension Labels Linkbase Document(1)
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document(1)

(1)

XBRL information will be considered to be furnished, not filed, for the first two years of a company's submission of XBRL information.

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SIGNATURE

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

NUTRACEUTICAL INTERNATIONAL CORPORATION (Registrant)
Date: January 26, 2012	By:	/s/ CORY J. MCQUEEN Cory J. McQueen Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer)

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