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Nutraceutical International Corp (NUTR) SEC Filing 10-Q Quarterly report for the period ending Friday, March 31, 2017

Nutraceutical International Corp

CIK: 1050007 Ticker: NUTR
EXHIBIT 99.1

FOR:
NUTRACEUTICAL INTERNATIONAL CORPORATION

CONTACT:
Cory McQueen
Vice President and
Chief Financial Officer
(435) 655-6106

NUTRACEUTICAL REPORTS FISCAL 2017 Q2 RESULTS

PARK CITY, Utah, Apr 27, 2017/PRNewswire/-Nutraceutical International Corporation (NASDAQ: NUTR) today reported results for the fiscal 2017 second quarter ended March 31, 2017. Net sales for the fiscal 2017 second quarter were $61.2 million, compared to $59.5 million for the same quarter of fiscal 2016. For the second quarter of fiscal 2017, net income was $4.5 million, or $0.48 diluted earnings per share, compared to net income of $4.6 million, or $0.49 diluted earnings per share, for the same quarter of fiscal 2016.
Net sales for the six months ended March 31, 2017 were $117.8 million, compared to $115.5 million for the same period of fiscal 2016. For the six months ended March 31, 2017, net income was $8.7 million, or $0.94 diluted earnings per share, compared to net income of $8.9 million, or $0.94 diluted earnings per share, for the same period of fiscal 2016.
Operating cash flow for the six months ended March 31, 2017 was $11.8 million, compared to $17.3 million for the same period of fiscal 2016. The operating cash flow for the six months ended March 31, 2017, combined with existing cash, was primarily used to repay net borrowings of $7.0 million on the Company’s revolving credit facility, to invest $4.3 million in purchases of property, plant and equipment and to pay a cash dividend to stockholders of $1.2 million.
Bill Gay, chairman and chief executive officer, commented, “Our fiscal 2017 second quarter net sales grew at 2.9% over the prior year, which included growth both domestically and internationally. Gross profit, net income and Adjusted EBITDA remained solid. A number of enhanced marketing and sales initiatives were rolled out in the second quarter, which we are hopeful will expand customer sales in several of our business channels throughout 2017 and beyond. Additional initiatives are in development.”
Mr. Gay continued, “Our pursuit of complementary growth opportunities in alternative natural product channels, like the direct-to-consumer channel, led us to complete the acquisition of the Zhou Nutrition brand in the first week of April. This approximate $19.8 million acquisition accelerated our entrance into internet sales, which was already a key 2016 internal investment initiative. During the first quarter of fiscal 2017, we commenced a re-alignment of our marketing, sales and administrative groups.



The following information was filed by Nutraceutical International Corp (NUTR) on Thursday, April 27, 2017 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-Q Quarterly Report statement of earnings and operation as management may choose to highlight particular information in the press release.
 
 
 

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 March 31, 2017
Commission file number 000-23731
g604248.jpg
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 offices)
 
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 x    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 x    NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer o
 
Accelerated filer x
 
Non-accelerated filer o
 (Do not check if a
smaller reporting company)
 
Smaller reporting company o
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 x
At April 25, 2017, the registrant had 9,246,769 shares of common stock outstanding.

 
 
 


NUTRACEUTICAL INTERNATIONAL CORPORATION 

INDEX
Description
 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 6.

2


PART I—FINANCIAL INFORMATION
Item 1.    Financial Statements
NUTRACEUTICAL INTERNATIONAL CORPORATION 
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands)
 
March 31,
2017
 
September 30,
2016
 (1)
ASSETS
 

 
 

Current assets:
 

 
 

Cash
$
6,145

 
$
6,803

Accounts receivable, net
20,648

 
17,680

Inventories
65,300

 
63,923

Prepaid expenses and other current assets
3,643

 
4,217

Deferred income taxes
1,257

 
1,243

Total current assets
96,993

 
93,866

 
 
 
 
Property, plant and equipment, net
82,242

 
83,048

Goodwill
30,925

 
30,925

Intangible assets, net
20,491

 
22,277

Deferred income taxes
4,587

 
4,310

Other non-current assets
1,367

 
1,429

Total assets
$
236,605

 
$
235,855

LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
15,206

 
$
12,696

Accrued expenses
4,921

 
7,469

Total current liabilities
20,127

 
20,165

 
 
 
 
Long-term debt
36,500

 
43,500

Other non-current liabilities
2

 
200

Total liabilities
56,629

 
63,865

Stockholders' equity:
 

 
 

Common stock
93

 
92

Additional paid-in capital
1,824

 
52

Retained earnings
178,628

 
172,276

Accumulated other comprehensive loss
(569
)
 
(430
)
Total stockholders' equity
179,976

 
171,990

Total liabilities and stockholders' equity
$
236,605

 
$
235,855

___________________
(1)
The condensed consolidated balance sheet as of September 30, 2016 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 COMPREHENSIVE INCOME
(unaudited)
(dollars in thousands, except per share data)

 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2017
 
2016
 
2017
 
2016
Net sales
$
61,215

 
$
59,492

 
$
117,834

 
$
115,451

Cost of sales
30,140

 
29,163

 
57,819

 
57,014

Gross profit
31,075

 
30,329

 
60,015

 
58,437

Operating expenses
 

 
 

 
 
 
 
Selling, general and administrative
23,011

 
21,779

 
44,266

 
42,121

Amortization of intangible assets
908

 
999

 
1,826

 
1,980

Income from operations
7,156

 
7,551

 
13,923

 
14,336

Interest and other expense, net
312

 
322

 
642

 
596

Income before provision for income taxes
6,844

 
7,229

 
13,281

 
13,740

Provision for income taxes
2,382

 
2,611

 
4,618

 
4,881

Net income
$
4,462

 
$
4,618

 
$
8,663

 
$
8,859

Other comprehensive loss:
 

 
 

 
 
 
 
Foreign currency translation adjustment, net of tax
22

 
62

 
(139
)
 
(17
)
Comprehensive income
$
4,484

 
$
4,680

 
$
8,524

 
$
8,842

Net income per common share
 

 
 

 
 
 
 
Basic
$
0.48

 
$
0.49

 
$
0.94

 
$
0.94

Diluted
0.48

 
0.49

 
0.94

 
0.94

Weighted average common shares outstanding
 

 
 

 
 
 
 
Basic
9,246,328

 
9,401,972

 
9,229,143

 
9,430,878

Dilutive effect of equity awards

 

 

 

Diluted
9,246,328

 
9,401,972

 
9,229,143

 
9,430,878

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.13

 
$

 
$
0.25

 
$



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)
 
Six Months Ended
March 31,
 
2017
 
2016
Cash flows from operating activities:
 

 
 

Net income
$
8,663

 
$
8,859

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
7,084

 
7,020

Amortization of deferred financing fees
63

 
63

Losses on disposals of property, plant and equipment
3

 
4

Stock-based compensation
361

 

Bad debt
30

 
30

Inventory obsolescence
1,100

 
1,019

Deferred income taxes
(291
)
 
375

Changes in assets and liabilities, net of effects of acquisitions:
 

 
 

Accounts receivable, net
(2,998
)
 
(1,169
)
Inventories
(2,477
)
 
(248
)
Prepaid expenses and other current assets
574

 
894

Other non-current assets
(41
)
 
(61
)
Accounts payable
1,175

 
(296
)
Accrued expenses
(1,206
)
 
804

Other non-current liabilities
(258
)
 
10

Net cash provided by operating activities
11,782

 
17,304

Cash flows from investing activities:
 

 
 

Purchases of property, plant and equipment
(4,276
)
 
(4,023
)
Acquisitions of businesses

 
(26,235
)
Net cash used in investing activities
(4,276
)
 
(30,258
)
Cash flows from financing activities:
 

 
 

Proceeds from debt
2,500

 
25,500

Payments on debt
(9,500
)
 
(9,500
)
Proceeds from issuances of common stock
42

 
40

Purchases of common stock for treasury

 
(3,566
)
Dividend paid on common stock
(1,155
)
 

Net cash provided by (used in) financing activities
(8,113
)
 
12,474

Effect of exchange rate changes on cash
(51
)
 
27

Net decrease in cash
(658
)
 
(453
)
Cash at beginning of period
6,803

 
4,615

Cash at end of period
$
6,145

 
$
4,162

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

5


NUTRACEUTICAL INTERNATIONAL CORPORATION 
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)
(dollars in thousands)
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive Loss
 
Total
Stockholders'
Equity
 
Shares
 
Amount
 
 
 
 
Balance at September 30, 2016
9,203,790

 
$
92

 
$
52

 
$
172,276

 
$
(430
)
 
$
171,990

Net income

 

 

 
8,663

 

 
8,663

Other comprehensive loss

 

 

 

 
(139
)
 
(139
)
Issuances of common stock
1,302

 

 
42

 

 

 
42

Equity compensation payments
41,449

 
1

 
1,429

 

 

 
1,430

Stock-based compensation expense

 

 
361

 

 

 
361

Other

 

 
(60
)
 

 

 
(60
)
Dividends declared on common stock

 

 

 
(2,311
)
 

 
(2,311
)
Balance at March 31, 2017
9,246,541

 
$
93

 
$
1,824

 
$
178,628

 
$
(569
)
 
$
179,976




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


6


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, including Solaray®, KAL®, Dynamic Health®, Nature's Life®, LifeTime®, Natural Balance®, NaturalCare®, Health from the Sun®, Pioneer®, Nutra BioGenesis®, Life-flo®, Organix South®, Heritage Store® and Monarch Nutraceuticals®.
The Company owns neighborhood natural food markets, which operate under the trade names The Real Food Company™, Thom's Natural Foods™, Cornucopia Community Market™ and Granola's®. The Company also owns health food stores, which operate under the trade name Fresh Vitamins®.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all necessary adjustments, consisting of normal recurring adjustments, to state fairly the consolidated financial position of the Company as of March 31, 2017, the results of its operations for the three and six months ended March 31, 2017 and 2016 and its cash flows for the six months ended March 31, 2017 and 2016, in conformity with accounting principles generally accepted in the United States of America ("US GAAP") for interim financial information applied on a consistent basis. Results for the three and six months ended March 31, 2017 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 US GAAP 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, 2016, which was filed with the Securities and Exchange Commission on November 17, 2016.
Use of Estimates
The preparation of these financial statements in conformity with US GAAP 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, valuation and recoverability of long-lived assets and valuation of performance-based equity awards. Actual results may differ from these estimates.
New Accounting Standards
In January 2017, the Financial Accounting Standards Board ("FASB") issued authoritative guidance, which is included in Accounting Standards Codification ("ASC") 805, "Business Combinations." This guidance clarifies the definition of a business, which assists a company with evaluating whether a transaction should be accounted for as an acquisition (or disposal) of an asset or a business. This guidance is effective for the Company as of October 1,

7


NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share data)

2018. The Company is currently evaluating the impact this standard may have on its consolidated financial statements.
In January 2017, the FASB issued authoritative guidance, which is included in ASC 350, "Intangibles--Goodwill and Other." This guidance simplifies the test for goodwill impairment by eliminating Step 2 from the test. This guidance is effective for the Company as of October 1, 2020. The Company is currently evaluating the impact this standard may have on its consolidated financial statements.
In March 2016, the FASB issued authoritative guidance, which is included in ASC 718, "Compensation--Stock Compensation." This guidance simplifies the accounting for share-based payments, including the income tax consequences. This guidance is effective for the Company as of October 1, 2017. The Company is currently evaluating the impact this standard may have on its consolidated financial statements.
In February 2016, the FASB issued authoritative guidance, which is included in ASC 842, "Leases." This guidance requires lessees to recognize most leases on the balance sheet by recording a right-of-use asset and a lease liability. This guidance is effective for the Company as of October 1, 2019. The Company is currently evaluating the impact this standard may have on its consolidated financial statements.
In November 2015, the FASB issued authoritative guidance, which is included in ASC 740, "Income Taxes." This guidance simplifies the presentation of deferred income taxes and requires that deferred tax assets and liabilities be classified as noncurrent in the classified statement of financial position. This guidance is effective for the Company as of October 1, 2017 and is not expected to have a material impact on its consolidated financial statements as the guidance only changes the classification of deferred income taxes.
In July 2015, the FASB issued authoritative guidance, which is included in ASC 330, "Inventory." This guidance simplifies the accounting for measuring inventory at the lower of cost and net realizable value and is effective for the Company as of October 1, 2017. The Company does not expect this guidance to have a material impact on its consolidated financial statements.
In May 2014, the FASB issued authoritative guidance, which is included in ASC 606, "Revenue from Contracts with Customers." This guidance provides a single, comprehensive revenue recognition model for all contracts with customers and requires that a company recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In July 2015, the FASB delayed the effective date of this guidance by one year. As a result, this guidance is effective for the Company as of October 1, 2018 and shall be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the impact this standard may have on its consolidated financial statements.
The Company periodically reviews new accounting standards that are issued. Although some of these accounting standards may be applicable to the Company, the Company has not identified any other new standards that it believes merit further discussion, and the Company expects that none would have a significant impact on its consolidated financial statements.

8


NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share data)

2. ACCOUNTS RECEIVABLE
Accounts receivable, net of allowances for sales returns and doubtful accounts, consisted of the following:
 
March 31,
2017
 
September 30,
2016
Accounts receivable
$
21,743

 
$
18,732

Less allowances
(1,095
)
 
(1,052
)
 
$
20,648

 
$
17,680

3. INVENTORIES
Inventories were comprised of the following:
 
March 31,
2017
 
September 30,
2016
Raw materials
$
28,181

 
$
25,792

Work-in-process
14,198

 
11,711

Finished goods
22,921

 
26,420

 
$
65,300

 
$
63,923

4. ACQUISITIONS
During the six months ended March 31, 2017, the Company made no acquisitions of businesses. During the six months ended March 31, 2016, the Company made two acquisitions of businesses. On October 6, 2015, the Company acquired certain operating assets of Dynamic Health Laboratories, Inc. ("Dynamic Health"). On February 18, 2016, the Company acquired certain operating assets of Aubrey Organics, Inc. ("Aubrey Organics"). The aggregate purchase price of these acquisitions was $26,235 in cash.
The Condensed Consolidated Statements of Comprehensive Income and the Condensed Consolidated Statements of Cash Flows presented herein include the activities of these acquired businesses from their respective dates of acquisition. Pro forma information was not provided for Dynamic Health for the three and six months ended March 31, 2016 since the acquisition was completed near the beginning of these periods and the pro forma results are not materially different than actual results. Pro forma information related to the Aubrey Organics acquisition was not material. 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. These acquisitions were accounted for using the acquisition method of accounting. Accordingly, the purchase price was assigned to the assets acquired based on their fair values at their respective dates of acquisition. The excess of purchase price over the fair values of the assets acquired was classified as

9


NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share data)

goodwill. The goodwill relates to expected synergies from these acquisitions. The following reflects the final allocation of the aggregate purchase price for the fiscal 2016 acquisitions to the assets acquired:
 
Fiscal 2016 Acquisitions
Assets acquired:
 

Current assets
$
4,576

Property, plant and equipment
6,648

Goodwill
6,541

Intangible assets
8,470

 
$
26,235

The fiscal 2016 acquired intangible assets totaling $8,470 related to trademarks, tradenames and customer relationships and are being amortized over periods of six to fifteen years for financial statement purposes. The fiscal 2016 acquired intangible assets are expected to be deductible for tax purposes over fifteen years. Goodwill of $6,541 for fiscal 2016 is not subject to amortization for financial statement purposes and is expected to be deductible for tax purposes over fifteen years.
5. GOODWILL AND INTANGIBLE ASSETS
During the six months ended March 31, 2017, there was no change in the carrying value of goodwill.
The carrying amounts of intangible assets at March 31, 2017 and September 30, 2016 were as follows:
 
March 31, 2017
 
September 30, 2016
 
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
$
13,940

 
$
(3,744
)
 
$
10,196

 
$
13,904

 
$
(3,137
)
 
$
10,767

 
11
Customer relationships/non-compete agreements/licenses
23,637

 
(13,342
)
 
10,295

 
23,867

 
(12,357
)
 
11,510

 
7
Developed software and technology
772

 
(772
)
 

 
772

 
(772
)
 

 
5
 
$
38,349

 
$
(17,858
)
 
$
20,491

 
$
38,543

 
$
(16,266
)
 
$
22,277

 
 
______________________
(1) Amounts include the impact of foreign currency translation adjustments.

10


NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share data)

Estimated future amortization expense related to the March 31, 2017 net carrying amount of $20,491 for intangible assets subject to amortization is as follows:
Year Ending September 30,
Estimated
Amortization
Expense
2017(1)
$
1,777

2018
3,415

2019
2,988

2020
2,898

2021
2,481

Thereafter
6,932

 
$
20,491

_________________________
(1)
Estimated amortization expense for the year ending September 30, 2017 includes only amortization to be recorded after March 31, 2017.
General and economic conditions may 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. Also, the Company periodically reviews its brands to achieve marketing, sales and operational synergies. These reviews could result in brands being consolidated or discontinued and could result in intangible asset impairment charges being recorded in future periods. Goodwill and/or intangible asset impairment charges 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:
 
March 31,
2017
 
September 30,
2016
Long-term debt—revolving credit facility
$
36,500

 
$
43,500

The carrying value of the Company's debt approximates fair value at March 31, 2017 and September 30, 2016. Estimated fair values for debt have been determined based on borrowing rates currently available to the Company for bank loans with similar terms and maturities and are classified as Level 2 (significant observable inputs other than quoted prices) in the FASB's fair value hierarchy.
On November 4, 2014, the Company amended its revolving credit facility (the "Credit Agreement"). The Credit Agreement extends the term of the credit facility to November 2019, increases the available credit borrowings to $100,000 with no automatic reductions and provides an accordion feature that can increase the available credit borrowings to $130,000, subject to approval by the lenders and compliance with certain covenants and conditions. The lenders under the Credit Agreement continue to be Rabobank International and Wells Fargo. To date, the Company has not experienced any difficulties in accessing the available funds under the Credit Agreement. Deferred financing fees of $420 related to the Credit Agreement are being amortized over the term of the Credit Agreement.

11


NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share data)

At March 31, 2017, the Company had outstanding revolving credit borrowings of $36,500 under the Credit Agreement. Borrowings under the 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 plus a variable margin. Base Rate is the higher of: (i) the Prime Lending Rate, (ii) the Federal Funds Rate plus 0.5% or (iii) the one-month Eurodollar Rate multiplied by the Statutory Reserve Rate plus 1.0% (capitalized terms are defined in the Credit Agreement, a copy of which was filed with the Securities and Exchange Commission on November 5, 2014). At March 31, 2017, the applicable weighted-average interest rate for outstanding borrowings was 2.30%. The Company is also required to pay a variable quarterly fee on the unused balance under the Credit Agreement. At March 31, 2017, the applicable rate was 0.25%. Accrued interest on Eurodollar Rate borrowings is payable based on elected intervals of one, two or three months. Accrued interest on Base Rate borrowings is payable quarterly. The Credit Agreement matures on November 4, 2019, and the Company is required to repay all principal and interest outstanding under the Credit Agreement on such date.
The Credit Agreement contains restrictive covenants, including limitations on incurring other indebtedness and requirements that the Company maintain certain financial ratios. As of March 31, 2017, the Company was 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 the Company to repay all amounts outstanding under the Credit Agreement.
7. SHARE PURCHASES
During the three and six months ended March 31, 2017, the Company did not purchase or retire any shares of common stock. During the three and six months ended March 31, 2016, the Company purchased 80,529 and 145,940 shares of common stock for an aggregate price of $1,962 and $3,566, respectively. All of these shares of common stock held in treasury were retired prior to March 31, 2016 except for 3,354 shares, which were subsequently retired in June 2016. As of March 31, 2017, the Company was permitted to purchase up to 1,171,170 additional shares under its approved purchase plan, with no expiration date or restrictions. The Company accounts for treasury shares using the cost method.
8. EQUITY AWARDS
On January 28, 2013, stockholders approved the Nutraceutical International Corporation 2013 Long-Term Equity Incentive Plan (the "2013 Plan") and the reservation of 800,000 shares of the Company's common stock for issuance under the 2013 Plan. Equity awards available under the 2013 Plan include stock awards, performance-based awards, stock options and stock appreciation rights. In conjunction with the Company's fiscal 2016 and fiscal 2015 incentive compensation (bonus) payments, 41,449 and 22,664 shares of the Company's common stock were issued, respectively. These non-cash stock awards were granted on December 14, 2016 and December 11, 2015 at an aggregate fair value of $1,430 and $556, respectively, with fair value being determined by the closing price of the Company's common stock on the grant date. These stock awards were registered, unrestricted and fully vested on the grant date.
On December 14, 2016, the Company’s Compensation Committee approved the grant of performance-based stock units (“PSUs”) to certain executives of the Company under the 2013 Plan. The PSUs are a new element of the Company’s executive compensation program. Generally, the PSUs vest at the end of a three-year performance period ending on September 30, 2019. Vesting is based on the achievement of two pre-set financial criteria during the performance period. The first criteria is the three-year moving average growth in net sales and the second criteria is the three-year average Adjusted EBITDA margin (prior to incentive compensation). Each of these criteria receives consideration in determining the actual number of PSUs that ultimately vest. The initial target number of PSUs is 100,000. The actual number of PSUs that are ultimately eligible to vest can range from 0% to 210% of the

12


NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share data)

initial target depending on results during the performance period. Each PSU that vests after the performance period will be exchanged for one share of common stock. The Company recognizes stock-based compensation expense for the probable number of PSUs estimated to vest at the end of the performance period. The fair value of each PSU is $34.50, with fair value being determined by the closing price of the Company’s common stock on the grant date. For the three and six months ended March 31, 2017, compensation expense related to these PSUs of $309 and $361, respectively, was included in selling, general and administrative expenses. As of March 31, 2017, 579,272 shares of the Company's common stock were available for issuance under the 2013 Plan, assuming that the target number of 100,000 PSUs ultimately vest.
For the three and six months ended March 31, 2017, PSUs totaling 56,175 and 44,513, respectively, were excluded from the computation of diluted earnings per share because the PSUs were anti-dilutive.
9. DIVIDENDS
On December 1, 2016, the Company's Board of Directors declared a quarterly cash dividend of $0.13 per share on all shares of common stock. This quarterly cash dividend totaled $1,155 and was paid on January 5, 2017 to stockholders of record on December 20, 2016.

On March 3, 2017, the Company's Board of Directors declared a quarterly cash dividend of $0.13 per share on all shares of common stock. This quarterly cash dividend totaled $1,156 and was paid on April 5, 2017 to stockholders of record on March 20, 2017.
10. SEGMENTS
Segment identification and selection is consistent with the management structure used by the Company's chief operating decision maker 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's chief operating decision maker does not review operating results on a disaggregated basis; rather, the chief operating decision maker reviews operating results on a consolidated basis.
Net sales attributed to customers in the United States and foreign countries for the three and six months ended March 31, 2017 and 2016 were as follows:
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2017
 
2016
 
2017
 
2016
United States
$
52,956

 
$
52,350

 
$
102,058

 
$
102,400

Foreign countries
8,259

 
7,142

 
15,776

 
13,051

 
$
61,215

 
$
59,492

 
$
117,834

 
$
115,451

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.

13


NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share data)

The Company's net sales by product group for the three and six months ended March 31, 2017 and 2016 were as follows:
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2017
 
2016
 
2017
 
2016
Branded nutritional supplements and other natural products
$
56,069

 
$
53,687

 
$
107,628

 
$
104,186

Other(1)
5,146

 
5,805

 
10,206

 
11,265

 
$
61,215

 
$
59,492

 
$
117,834

 
$
115,451

____________________
(1)
Net sales for any other product or group of similar products are less than 10% of consolidated net sales.
11. SUBSEQUENT EVENTS
On April 6, 2017, the Company acquired certain operating assets associated with the Zhou Nutrition brand from Branson Books, LLC for approximately $19,800 in cash. The primary assets acquired included inventory, prepaid expenses, trademarks/tradenames, customer relationships and goodwill. As of the date of these financial statements, the Company is determining the fair value of the acquired assets and the related allocation of the aggregate purchase price.

14


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, including Solaray®, KAL®, Dynamic Health®, Nature's Life®, LifeTime®, Natural Balance®, NaturalCare®, Health from the Sun®, Pioneer®, Nutra BioGenesis®, Life-flo®, Organix South®, Heritage Store® and Monarch Nutraceuticals®.
We own neighborhood natural food markets, which operate under the trade names The Real Food Company™, Thom's Natural Foods™, Cornucopia Community Market™ and Granola's®. We also own health food stores, which operate under the trade name Fresh Vitamins®.
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 numerous acquisitions of businesses in the VMS Industry. 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, valuation and recoverability of long-lived assets and valuation of performance-based equity awards. 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 creditworthiness. If general economic conditions and/or customer financial conditions 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 a 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.
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 estimated 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.

15


We evaluate the recoverability of property, plant and equipment whenever events or circumstances indicate that the carrying amount of an asset group may not be recoverable. We measure recoverability of an asset group by comparison of its carrying amount to the future undiscounted cash flows the asset group is expected to generate. If an asset group is considered to be impaired, the difference between the carrying amount and the fair value of the impaired asset group is recognized as an impairment charge.
Goodwill and Intangible Assets—Goodwill and intangible assets require estimates and judgments in determining the initial recognition and measurement, including factors and assumptions used in determining fair values and useful lives. Intangible assets with finite useful lives are amortized and are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is tested annually for impairment and when events or changes in circumstances indicate the carrying value may not be recoverable. 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 market data as well as 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.
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 an asset group is considered to be impaired, the difference between the carrying amount and the fair value of the impaired asset group is recorded.
General and economic conditions may 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. Also, we periodically review our brands to achieve marketing, sales and operational synergies. These reviews could result in brands being consolidated or discontinued and could result in intangible asset impairment charges being recorded in future periods. Such goodwill and/or intangible asset impairment charges 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 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 customer 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.
Stock-based Compensation—Stock-based compensation expense related to performance-based stock units ("PSUs") is impacted by our judgments regarding the achievement of certain pre-set financial criteria. The actual number of PSUs that are ultimately eligible to vest can vary from the initial target depending on the results during the performance period. Stock-based compensation expense is recognized for the probable number of PSUs estimated to vest at the end of the performance period.
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.

16


Results of Operations
The following table sets forth certain Consolidated Statements of Comprehensive Income data as a percentage of net sales for the periods indicated:
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2017
 
2016
 
2017
 
2016
Net sales
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Cost of sales
49.2
%
 
49.0
%
 
49.1
%
 
49.4
%
Gross profit
50.8
%
 
51.0
%
 
50.9
%
 
50.6
%
Selling, general and administrative
37.6
%
 
36.6
%
 
37.6
%
 
36.5
%
Amortization of intangible assets
1.5
%
 
1.7
%
 
1.5
%
 
1.7
%
Income from operations
11.7
%
 
12.7
%
 
11.8
%
 
12.4
%
Interest and other expense, net
0.5
%
 
0.5
%
 
0.5
%
 
0.5
%
Income before provision for income taxes
11.2
%
 
12.2
%
 
11.3
%
 
11.9
%
Provision for income taxes
3.9
%
 
4.4
%
 
3.9
%
 
4.2
%
Net income
7.3
%
 
7.8
%
 
7.4
%
 
7.7
%
Adjusted EBITDA(1)
17.4
%
 
18.6
%
 
17.8
%
 
18.5
%
___________________
(1) See "—Adjusted EBITDA."
Comparison of the Three Months Ended March 31, 2017 to the Three Months Ended March 31, 2016
Net Sales.    Net sales increased by $1.7 million, or 2.9%, to $61.2 million for the three months ended March 31, 2017 (the "second quarter of fiscal 2017") from $59.5 million for the three months ended March 31, 2016 (the "second quarter of fiscal 2016"). Net sales of branded nutritional supplements and other natural products increased by $2.4 million, or 4.4%, to $56.1 million for the second quarter of fiscal 2017, compared to $53.7 million for the second quarter of fiscal 2016. The increase in net sales of branded nutritional supplements and other natural products was primarily related to an increase in sales volume of branded products to certain customers and, to a lesser extent, the net sales contribution of the fiscal 2016 Aubrey Organics, Inc. ("Aubrey Organics") acquisition, partially offset by price decreases of $0.3 million. Other net sales were $5.1 million for the second quarter of fiscal 2017 and $5.8 million for the second quarter of fiscal 2016.
Gross Profit.    Gross profit increased by $0.8 million, or 2.5%, to $31.1 million for the second quarter of fiscal 2017 from $30.3 million for the second quarter of fiscal 2016. This increase in gross profit was primarily related to the increase in net sales. As a percentage of net sales, gross profit was 50.8% for the second quarter of fiscal 2017 and 51.0% for the second quarter of fiscal 2016.
Selling, General and Administrative.    Selling, general and administrative expenses increased by $1.2 million, or 5.7%, to $23.0 million for the second quarter of fiscal 2017 from $21.8 million for the second quarter of fiscal 2016. As a percentage of net sales, selling, general and administrative expenses increased to 37.6% for the second quarter of fiscal 2017 from 36.6% for the second quarter of fiscal 2016. This increase in selling, general and administrative expenses was primarily attributable to operational and transition costs related to the fiscal 2016 acquisitions as well as an increase in certain administrative costs.
Amortization of Intangible Assets.    Amortization of intangible assets was $0.9 million for second quarter of fiscal 2017 and $1.0 million for the second quarter of fiscal 2016. 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 $0.3 million for the second quarter of fiscal 2017 and the second quarter of fiscal 2016 and primarily consisted of interest expense on indebtedness under our revolving credit facility.

17


Provision for Income Taxes.    Our effective tax rate was 34.8% for the second quarter of fiscal 2017 and 36.1% for the second quarter of fiscal 2016. The decrease in the effective tax rate was primarily related to increases in the domestic manufacturing deduction and the credit for increasing research activities.
Comparison of the Six Months Ended March 31, 2017 to the Six Months Ended March 31, 2016
Net Sales.    Net sales increased by $2.3 million, or 2.1%, to $117.8 million for the six months ended March 31, 2017 from $115.5 million for the six months ended March 31, 2016. Net sales of branded nutritional supplements and other natural products increased by $3.4 million, or 3.3%, to $107.6 million for the six months ended March 31, 2017 from $104.2 million for the six months ended March 31, 2016. The increase in net sales of branded nutritional supplements and other natural products was primarily related to the net sales contributions of the fiscal 2016 acquisitions, an increase in sales volume to certain customers and, to a lesser extent, price increases of $0.8 million. Other net sales were $10.2 million for the six months ended March 31, 2017 and $11.3 million for the six months ended March 31, 2016.
Gross Profit.    Gross profit increased by $1.6 million, or 2.7%, to $60.0 million for the six months ended March 31, 2017 from $58.4 million for the six months ended March 31, 2016. As a percentage of net sales, gross profit increased to 50.9% for the six months ended March 31, 2017 from 50.6% for the six months ended March 31, 2016. This increase in gross profit was primarily related to the increase in net sales and a decrease in material costs.
Selling, General and Administrative.    Selling, general and administrative expenses increased by $2.2 million, or 5.1%, to $44.3 million for the six months ended March 31, 2017 from $42.1 million for the six months ended March 31, 2016. As a percentage of net sales, selling, general and administrative expenses were 37.6% for the six months ended March 31, 2017 and 36.5% for the six months ended March 31, 2016. This increase in selling, general and administrative expenses was primarily attributable to operational and transition costs related to the fiscal 2016 acquisitions as well as an increase in certain administrative costs.
Amortization of Intangible Assets.    Amortization of intangible assets was $1.8 million for six months ended March 31, 2017 and $2.0 million for the six months ended March 31, 2016. 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 $0.6 million for both the six months ended March 31, 2017 and 2016 and primarily consisted of interest expense on indebtedness under our revolving credit facility.
Provision for Income Taxes.    Our effective tax rate was 34.8% for the six months ended March 31, 2017 and 35.5% for the six months ended March 31, 2016. The decrease in the effective tax rate was primarily related to increases in the domestic manufacturing deduction and the credit for increasing research activities.
Adjusted EBITDA
Adjusted EBITDA (a non-GAAP measure) is defined in our performance measures as earnings before net interest and other expense, taxes, depreciation, amortization and goodwill and intangible asset impairments. Adjusted 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, Adjusted 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:

18


Analysts—who estimate our projected Adjusted 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;
Investors--who use EBITDA-based metrics in their investment decisions about our common stock; and
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. Generally, we have recorded a monthly accrual for incentive compensation as a percentage of Adjusted EBITDA, which has been paid out to executive management, as well as other employees, upon completion of our annual audit. Adjusted EBITDA is also one of the primary criteria used in determining our performance-based equity awards.The following table sets forth a reconciliation of net income to Adjusted EBITDA for each period included herein:
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2017
 
2016
 
2017
 
2016
 
(dollars in thousands)
Net income
$
4,462

 
$
4,618

 
$
8,663

 
$
8,859

Provision for income taxes
2,382

 
2,611

 
4,618

 
4,881

Interest and other expense, net(1)
312

 
322

 
642

 
596

Depreciation and amortization
3,524

 
3,538

 
7,084

 
7,020

Adjusted EBITDA
$
10,680

 
$
11,089

 
$
21,007

 
$
21,356

_____________________
(1)
Includes amortization of deferred financing fees.
Our Adjusted EBITDA was $10.7 million for the second quarter of fiscal 2017 and $11.1 million for the second quarter of fiscal 2016. Adjusted EBITDA as a percentage of net sales was 17.4% for the second quarter of fiscal 2017 and 18.6% for the second quarter of fiscal 2016.
Our Adjusted EBITDA was $21.0 million for the six months ended March 31, 2017 and $21.4 million for the six months ended March 31, 2016. Adjusted EBITDA as a percentage of net sales was 17.8% for the six months ended March 31, 2017 and 18.5% for the six months ended March 31, 2016.
Seasonality
We believe that our business is characterized by minor seasonality. However, sales to any particular customer or 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 product sales volume during the second fiscal quarter (January through March) due to increased interest in health-related products among consumers following the holiday season.



19


Liquidity and Capital Resources
We had working capital of $76.9 million as of March 31, 2017, compared to $73.7 million as of September 30, 2016. The increase in working capital was primarily the result of increases in accounts receivable and inventories and a decrease in accrued expenses, partially offset by an increase in accounts payable.
Net cash provided by operating activities for the six months ended March 31, 2017 was $11.8 million, compared to $17.3 million for the comparable period in fiscal 2016. This decrease in net cash provided by operating activities for the six months ended March 31, 2017 was primarily attributable to changes in operating assets and liabilities.
Net cash used in investing activities was $4.3 million for the six months ended March 31, 2017, compared to $30.3 million for the comparable period in fiscal 2016. Our investing activities consisted of acquisitions of businesses and capital expenditures. The capital expenditures primarily related to buildings, building improvements, distribution and manufacturing equipment and information systems.
During the six months ended March 31, 2017, we made no acquisitions of businesses. During the six months ended March 31, 2016, we made two acquisitions of businesses. On October 6, 2015, we acquired certain operating assets of Dynamic Health Laboratories, Inc. ("Dynamic Health"). On February 18, 2016, we acquired certain operating assets of Aubrey Organics. The aggregate purchase price of these acquisitions was $26.2 million in cash.
Net cash used in financing activities was $8.1 million for the six months ended March 31, 2017 and net cash provided by financing activities was $12.5 million for the comparable period in fiscal 2016. During these periods, financing activities primarily related to borrowings and repayments under our revolving credit facility, purchases of common stock for treasury, proceeds from the issuance of common stock related to our direct stock purchase plan and dividends paid on common stock. During the six months ended March 31, 2016, net borrowings under our revolving credit facility were $16.0 million and primarily related to the acquisition of certain operating assets of Dynamic Health and Aubrey Organics.
In October 2007, we established a direct stock purchase plan. 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 initially registered under the plan, with 1,302 shares purchased during the six months ended March 31, 2017. As of March 31, 2017, there were 1,372,799 shares of common stock available for purchase.
On November 4, 2014, we amended our revolving credit facility (the "Credit Agreement"). The Credit Agreement extends the term of the credit facility to November 2019, increases the available credit borrowings to $100.0 million with no automatic reductions and provides an accordion feature that can increase the available credit borrowings to $130.0 million, subject to approval by the lenders and compliance with certain covenants and conditions. The lenders under the Credit Agreement continue to be Rabobank International and Wells Fargo. To date, we have not experienced any difficulties in accessing the available funds under the Credit Agreement. Deferred financing fees of $0.4 million related to the Credit Agreement are being amortized over the term of the Credit Agreement.
At March 31, 2017, we had outstanding revolving credit borrowings of $36.5 million under the Credit Agreement. Borrowings under the 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 plus a variable margin. Base Rate is the higher of: (i) the Prime Lending Rate, (ii) the Federal Funds Rate plus 0.5% or (iii) the one-month Eurodollar Rate multiplied by the Statutory Reserve Rate plus 1.0% (capitalized terms are defined in the Credit Agreement, a copy of which was filed with the Securities and Exchange Commission on November 5, 2014). At March 31, 2017, the applicable weighted-average interest rate for outstanding borrowings was 2.30%. We are also required to pay a quarterly fee on the unused balance under the Credit Agreement. At March 31, 2017, the applicable rate was 0.25%. Accrued interest on Eurodollar Rate borrowings is payable based on elected intervals of one, two or three months. Accrued interest on base rate borrowings is payable quarterly. The Credit Agreement matures on November 4, 2019, and we are required to repay all principal and interest outstanding under the Credit Agreement on such date.

20


The Credit Agreement contains restrictive covenants, including limitations on incurring certain other indebtedness and requirements that we maintain certain financial ratios. As of March 31, 2017, 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 Credit Agreement.
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 March 31, 2017 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
$
36,500

 
$

 
$
36,500

 
$

 
$

Interest on revolving credit facility(a)
2,668

 
1,027

 
1,641

 

 

Operating leases
6,208

 
3,584

 
2,299

 
325

 

Total
$
45,376

 
$
4,611

 
$
40,440

 
$
325

 
$

____________________
(a)
Represents estimated interest obligations associated with our outstanding revolving credit facility balance of $36.5 million at March 31, 2017, assuming no principal payments are made before maturity, a weighted-average interest rate of 2.30% and an underutilization fee rate of 0.25%.
Off-Balance Sheet Arrangements
Our operating lease commitments are disclosed in the Contractual Obligations and Other Commitments table above. As of March 31, 2017, we had no other off-balance sheet arrangements that have had, or are reasonably likely to have, a material effect on our consolidated financial statements.
Inflation
Inflation affects the cost of raw materials, goods and services we use. 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

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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 including adverse determinations by regulators; (ii) unavailability of desirable acquisitions, inability to complete them or inability to integrate 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 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, including system interruptions and security/cybersecurity breaches; (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 bear interest at the applicable Eurodollar Rate plus a variable margin or at a Base Rate plus a variable margin. Base Rate is the higher of: (i) the Prime Lending Rate, (ii) the Federal Funds Rate plus 0.5% or (iii) the one-month Eurodollar Rate multiplied by the Statutory Reserve Rate plus 1.0%. At March 31, 2017, the applicable weighted-average interest rate for borrowings was 2.30% and we had total borrowings outstanding of $36.5 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 six months ended March 31, 2017 and 2016.
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 or results of operations because the majority of our net sales to foreign customers are transacted in U.S. dollars. Net sales to foreign customers not transacted in U.S. dollars include sales to customers in Barbados, Dominica, the Netherlands, Norway, St. Kitts, St. Lucia, St. Vincent, Sweden and the United Kingdom. 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 March 31, 2017. Based on the foregoing, our principal executive and principal financial officers have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2017.

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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.

23


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 ordinary 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 the opinion of management, the losses related to 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, none of the regulatory and legal matters in which we are involved are individually expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows. However, our aggregate liability arising from regulatory and legal proceedings related to these matters or future matters could have a material effect on our 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 2016 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 March 31, 2017.
Prior to fiscal 2017, our Board of Directors approved a share purchase program authorizing us to buy up to 5,500,000 shares of our common stock. As of March 31, 2017, there were 1,171,170 shares available for purchase under this program. The shares available for purchase under this program have no expiration date. There were no purchases under this program during the three months ended March 31, 2017.
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)
Filed herewith.

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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: April 27, 2017
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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Nutraceutical International Corp provided additional information to their SEC Filing as exhibits

Ticker: NUTR
CIK: 1050007
Form Type: 10-Q Quarterly Report
Accession Number: 0001050007-17-000021
Submitted to the SEC: Thu Apr 27 2017 4:37:47 PM EST
Accepted by the SEC: Thu Apr 27 2017
Period: Friday, March 31, 2017
Industry: Medicinal Chemicals And Botanical Products

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