|
ITEM
1.
|
FINANCIAL
STATEMENTS
|
SCHIFF
NUTRITION
INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE
SHEETS
(in
thousands, except share
data)
|
|
|
November
30
,
2007
|
|
|
May
31,
2007
|
|
|
ASSETS
|
|
(unaudited)
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$
|
9,980
|
|
|
$
|
34,463
|
|
|
Available-for-sale
securities
|
|
|
30,571
|
|
|
|
45,817
|
|
|
Receivables,
net
|
|
|
15,334
|
|
|
|
17,732
|
|
|
Inventories
|
|
|
31,464
|
|
|
|
23,698
|
|
|
Prepaid
expenses and
other
|
|
|
2,749
|
|
|
|
2,151
|
|
|
Deferred
taxes,
net
|
|
|
1,393
|
|
|
|
1,992
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current
assets
|
|
|
91,491
|
|
|
|
125,853
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment,
net
|
|
|
14,253
|
|
|
|
14,438
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
4,346
|
|
|
|
4,346
|
|
|
Deposits
and other
assets
|
|
|
20
|
|
|
|
105
|
|
|
Deferred
taxes,
net
|
|
|
1,377
|
|
|
|
337
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other
assets
|
|
|
5,743
|
|
|
|
4,788
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
111,487
|
|
|
$
|
145,079
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
8,303
|
|
|
$
|
7,962
|
|
|
Accrued
expenses
|
|
|
9,587
|
|
|
|
10,542
|
|
|
Short-term
debt
|
|
|
778
|
|
|
|
—
|
|
|
Dividends
payable
|
|
|
1,082
|
|
|
|
—
|
|
|
Income
taxes
payable
|
|
|
713
|
|
|
|
2,480
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current
liabilities
|
|
|
20,463
|
|
|
|
20,984
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
|
Dividends
payable
|
|
|
1,230
|
|
|
|
—
|
|
|
Other
|
|
|
494
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-term
liabilities
|
|
|
1,724
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
(Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
|
Preferred
stock, par value $.01
per share; shares authorized-10,000,000; no shares issued and
outstanding
|
|
|
—
|
|
|
|
—
|
|
|
Class
A common stock, par value
$.01 per share; shares authorized-50,000,000; shares issued and
outstanding-
11,729,534
,
and
11,664,284
|
|
|
117
|
|
|
|
116
|
|
|
Class
B common stock, par value
$.01 per share; shares authorized-25,000,000; shares issued and
outstanding-14,973,148
|
|
|
150
|
|
|
|
150
|
|
|
Additional
paid-in
capital
|
|
|
86,058
|
|
|
|
92,640
|
|
|
Retained
earnings
|
|
|
2,975
|
|
|
|
31,189
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders'
equity
|
|
|
89,300
|
|
|
|
124,095
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and
stockholders' equity
|
|
$
|
111,487
|
|
|
$
|
145,079
|
|
See
notes to condensed consolidated
financial statements.
SCHIFF
NUTRITION
INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF
INCOME
(in
thousands, except share
data)
(unaudited)
|
|
|
Three
Months Ended
November
30
,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
39,535
|
|
|
$
|
38,817
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods
sold
|
|
|
22,974
|
|
|
|
22,640
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
16,561
|
|
|
|
16,177
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Selling
and
marketing
|
|
|
6,737
|
|
|
|
8,790
|
|
|
General
and
administrative
|
|
|
4,452
|
|
|
|
4,155
|
|
|
Research
and
development
|
|
|
1,276
|
|
|
|
864
|
|
|
Reimbursement
of import
costs
|
|
|
(31
|
)
|
|
|
(278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating
expenses
|
|
|
12,434
|
|
|
|
13,531
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from
operations
|
|
|
4,127
|
|
|
|
2,646
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
(expense):
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
437
|
|
|
|
758
|
|
|
Interest
expense
|
|
|
(42
|
)
|
|
|
(45
|
)
|
|
Other,
net
|
|
|
6
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income,
net
|
|
|
401
|
|
|
|
728
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income
taxes
|
|
|
4,528
|
|
|
|
3,374
|
|
|
Income
tax
expense
|
|
|
1,725
|
|
|
|
1,125
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,803
|
|
|
$
|
2,249
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares
outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
26,639,673
|
|
|
|
26,541,764
|
|
|
Diluted
|
|
|
27,728,332
|
|
|
|
27,330,278
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per
share
:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.11
|
|
|
$
|
0.08
|
|
|
Diluted
|
|
$
|
0.10
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
2,803
|
|
|
$
|
2,249
|
|
See
notes to
condensed
consolidated financial statements.
SCHIFF
NUTRITION
INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF
INCOME
(in
thousands, except share
data)
(unaudited)
|
|
|
Six
Months
Ended
November
30
,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
80,262
|
|
|
$
|
84,469
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods
sold
|
|
|
47,280
|
|
|
|
51,176
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
32,982
|
|
|
|
33,293
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Selling
and
marketing
|
|
|
13,493
|
|
|
|
17,079
|
|
|
General
and
administrative
|
|
|
11,239
|
|
|
|
7,854
|
|
|
Research
and
development
|
|
|
2,302
|
|
|
|
1,680
|
|
|
Reimbursement
of import
costs
|
|
|
(31
|
)
|
|
|
(298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating
expenses
|
|
|
27,003
|
|
|
|
26,315
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from
operations
|
|
|
5,979
|
|
|
|
6,978
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
(expense):
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,258
|
|
|
|
1,501
|
|
|
Interest
expense
|
|
|
(69
|
)
|
|
|
(103
|
)
|
|
Other,
net
|
|
|
10
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income,
net
|
|
|
1,199
|
|
|
|
1,413
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income
taxes
|
|
|
7,178
|
|
|
|
8,391
|
|
|
Income
tax
expense
|
|
|
2,727
|
|
|
|
2,879
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
4,451
|
|
|
$
|
5,512
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares
outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
26,602,385
|
|
|
|
26,511,981
|
|
|
Diluted
|
|
|
27,480,280
|
|
|
|
27,322,498
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per
share
:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.17
|
|
|
$
|
0.21
|
|
|
Diluted
|
|
$
|
0.16
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
4,451
|
|
|
$
|
5,512
|
|
See
notes to condensed consolidated
financial statements.
SCHIFF
NUTRITION
INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF
CASH FLOWS
(in
thousands)
(unaudited)
|
|
|
Six
Months
Ended
November
30
,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Cash
flows from operating
activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
4,451
|
|
|
$
|
5,512
|
|
|
Adjustments
to reconcile net
income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
Deferred
taxes
|
|
|
(403
|
)
|
|
|
(520
|
)
|
|
Depreciation
and
amortization
|
|
|
1,780
|
|
|
|
1,615
|
|
|
Amortization
of financing
fees
|
|
|
8
|
|
|
|
28
|
|
|
Stock-based
compensation
|
|
|
5,437
|
|
|
|
2,108
|
|
|
Excess
tax benefit from equity
instruments
|
|
|
(292
|
)
|
|
|
(144
|
)
|
|
Other
|
|
|
(5
|
)
|
|
|
(14
|
)
|
|
Changes
in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
2,398
|
|
|
|
579
|
|
|
Inventories
|
|
|
(7,766
|
)
|
|
|
(5,908
|
)
|
|
Prepaid
expenses and
other
|
|
|
(598
|
)
|
|
|
(366
|
)
|
|
Deposits
and other
assets
|
|
|
77
|
|
|
|
(109
|
)
|
|
Accounts
payable
|
|
|
806
|
|
|
|
2,522
|
|
|
Other
current
liabilities
|
|
|
(2,079
|
)
|
|
|
(2,594
|
)
|
|
Other
long-term
liabilities
|
|
|
17
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating
activities
|
|
|
3,831
|
|
|
|
2,709
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
Purchase
of property and
equipment
|
|
|
(2,057
|
)
|
|
|
(2,857
|
)
|
|
Purchase
of available-for-sale
securities
|
|
|
(21,226
|
)
|
|
|
(20,049
|
)
|
|
Proceeds
from sale of
available-for-sale securities
|
|
|
36,472
|
|
|
|
18,662
|
|
|
Collection
of notes
receivable
|
|
|
—
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in)
investing activities
|
|
|
13,189
|
|
|
|
(3,944
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from
debt
|
|
|
1,350
|
|
|
|
1,996
|
|
|
Payments
on
debt
|
|
|
(572
|
)
|
|
|
(846
|
)
|
|
Proceeds
from stock options
exercised
|
|
|
150
|
|
|
|
256
|
|
|
Purchase
and retirement of common
stock
|
|
|
(120
|
)
|
|
|
(170
|
)
|
|
Excess
tax benefit from equity
instruments
|
|
|
292
|
|
|
|
144
|
|
|
Dividends
paid
|
|
|
(42,605
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in)
financing activities
|
|
|
(41,505
|
)
|
|
|
1,380
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on
cash
|
|
|
2
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(d
ecrease
)
in
cash and cash
equivalents
|
|
|
(24,483
|
)
|
|
|
145
|
|
|
Cash
and cash equivalents,
beginning of period
|
|
|
34,463
|
|
|
|
24,899
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of
period
|
|
$
|
9,980
|
|
|
$
|
25,044
|
|
See
notes to condensed consolidated
financial statements.
SCHIFF
NUTRITION
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars
in thousands, except share
data)
|
|
BASIS
OF PRESENTATION AND OTHER
MATTERS
|
The
accompanying unaudited interim
condensed consolidated financial statements (“interim financial statements”) of
Schiff Nutrition International, Inc. and its subsidiaries (the “Company,” “we,”
“us” and “our”) do not include all disclosures provided in our annual
consolidated financial statements. These interim financial statements should
be
read in conjunction with the consolidated financial statements and the footnotes
thereto contained in our Annual Report on Form 10-K for the year ended
May 31, 2007 as filed with the Securities and Exchange Commission (“SEC”).
The May 31, 2007 condensed consolidated balance sheet, included herein, was
derived from our audited financial statements, but all disclosures required
by
generally accepted accounting principles are not provided in the accompanying
footnotes. We are a majority-owned subsidiary of Weider Health and Fitness
(“WHF”).
In
our opinion, the accompanying interim
financial statements contain all material adjustments necessary for a fair
presentation of our financial position and results of operations. Results of
operations and cash flows for any interim period are not necessarily indicative
of the results of operations and cash flows that we may achieve for any other
interim period or for the entire year.
In
July 2007, our Board of Directors
approved a $1.50 per share special cash dividend, which was paid on
August 13, 2007 to shareholders of record at the close of business on
July 31, 2007
.
In connection with the declaration of
the special dividend, our Board of Directors approved certain dividend
equivalent rights, allowing holders (employees and directors) of certain equity
awards, including stock options and restricted stock units, to receive cash
dividends on each share of common stock underlying the stock options and
restricted stock units. In aggregate, at
July 31, 2007
,
the record date, the Company had
outstanding approximately 29.9 million shares of common stock (including shares
of common stock underlying equity awards subject to dividend equivalent rights),
including approximately 26.6 million shares of outstanding Class A and Class
B
common stock, approximately 1.8 million shares of Class A common stock
underlying outstanding stock options
,
and approximately 1.5
million shares of
Class A common stock underlying outstanding restricted stock units. The
aggregate amount of the special dividend was approximately $44,900, presuming
100% vesting of shares underlying
equity
awards
(approximately 5
5
%
had vested as of
November 30
,
2007
)
. To the extent outstanding
stock
options and restricted stock units were unvested at
November 30
,
2007
,
the $1.50 per share
dividend was not,
and will not be, distributed until after such equity awards become
vested.
In
connection with the dividends paid or
payable on the dividend equivalent rights received by holders (employees and
directors) of stock options and certain restricted stock units, we recognized
a
non-cash compensation expense, and a corresponding increase in additional
paid-in capital, of
$657
and $3,660, respectively,
during the
three
and six month periods ended
November 30,
2007
.
Subject to future
vesting of these equity awards, additional compensation expense of approximately
$
1,300
,
together with a corresponding increase
in additional paid-in capital, will be recognized
equally
over
the remaining
two
quarters
of fiscal
2008.
On
March
17, 2006
, the Compensation Committee
of our
Board of Directors, pursuant to our 2004 Incentive Award Plan, approved the
adoption of a long term incentive plan involving the grant of performance based
restricted stock units (the “Units”). On
March 20, 2006
,
a total of 1,437,200 Units were issued
to certain officers and employees. Each Unit represents the right to receive
one
share of the Company’s Class A common stock, subject to certain performance
based vesting requirements. The Units will vest, if at all, based on the
Company’s performance in relation to certain specified pre-established
performance criteria targets over a performance period beginning on
January 1, 2006
and
expiring on May 31, 2008. The
performance criteria upon which the Units may vest is based upon a “Business
Value Created” formula, which is comprised of two performance criteria
components: operating earnings and return on net capital. The grant date fair
value of each Unit was $5.11. We recognize compensation expense over the
performance period based on a periodic assessment of the probability that the
performance criteria will be achieved. For the fiscal 2008 and 2007
second
quarters,
respectively, we recognized
compensation expense of $812 and $
1,149
,
and the related tax benefit was
approximately $324 and $
454
.
For
the six months ended
November 30, 2007
and
2006, respectively, we recognized
compensation expense of $1,623 and $1,810, and the related tax benefit was
approximately $632 and $706.
At
November
30
,
2007
,
total unrecognized compensation
expense, based on our assessment of the probability that the performance
criteria will be achieved, was approximately $
1,623
,
which is expected to be recognized over
a weighted average period of approximately 0.
5
years.
Effective
August
16, 2002
,
we issued 640,000 restricted
shares of
Class A common stock to certain officers and employees. The aggregate grant
date
fair value of these restricted shares was approximately $1,038, which we
expensed on a straight-line basis over the accompanying five-year vesting period
ended
August
16, 2007
. During the fiscal 2008
and 2007
first quarter
s,
respectively, 83,800 and 86,200
restricted shares vested and, concurrent with the annual vesting, we reacquired
(and ultimately retired) 22,676 and 23,443 shares from certain employees in
connection with the payment of individual income taxes. As of
August 31, 2007
,
of the 640,000 restricted shares
originally issued, 528,800 shares
were
vested,
from which 103,338 shares were
reacquired (and retired) in connection with the payment of individual income
taxes, and 111,200 shares were cancelled.
SCHIFF
NUTRITION INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
-
(continued)
(dollars
in thousands, except share
data)
Property
and equipment additions
included in accounts payable amounted to $
465
and
$
249
,
respectively, for the
six months ended
November
30, 2007
and 2006
.
|
|
AVAILABLE-FOR-SALE
SECURITIES
|
Available-for-sale
securities consist
primarily of auction rate securities, long-term variable rate bonds tied to
short-term interest rates that are reset through a “dutch auction” process which
occurs every 7 to 35 days, and other variable rate debt and equity
securities.
Available-for-sale
securities at fair
value, which approximates unamortized cost, consist of the
following:
|
|
|
November
30
,
2007
|
|
|
May
31,
2007
|
|
|
|
|
|
|
|
|
|
|
Federal,
state and municipal debt
securities
|
|
$
|
23,611
|
|
|
$
|
32,529
|
|
|
Corporate
debt
securities
|
|
|
2,791
|
|
|
|
9,038
|
|
|
Corporate
equity
securities
|
|
|
2,500
|
|
|
|
4,250
|
|
|
Other
|
|
|
1,669
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
30,571
|
|
|
$
|
45,817
|
|
Despite
the long-term nature of
auction rate
securities’
stated
contractual
maturities, there is a ready liquid market for these securities based on the
interest reset mechanism. These securities are classified as current assets
in
the accompanying consolidated balance sheets because we have the ability and
intent to sell these securities as necessary to meet any current liquidity
needs. Contractual maturities of debt securities are as follows at
November 30
,
2007
:
|
Less
than one
year
|
|
$
|
3,125
|
|
|
One
to five
years
|
|
|
—
|
|
|
Over
five
years
|
|
|
23,277
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
26,402
|
|
The
amount of unrealized gains or losses
for the first
six
months
of fiscal 2008 and
2007 was not significant.
Receivables,
net, consist of the
following:
|
|
|
November
30
,
2007
|
|
|
May
31,
2007
|
|
|
|
|
|
|
|
|
|
|
Trade
accounts
|
|
$
|
16,660
|
|
|
$
|
19,467
|
|
|
Other
|
|
|
226
|
|
|
|
426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,886
|
|
|
|
19,893
|
|
|
Less
allowances for doubtful
accounts, sales returns and discounts
|
|
|
(1,552
|
)
|
|
|
(2,161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,334
|
|
|
$
|
17,732
|
|
SCHIFF
NUTRITION INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
-
(continued)
(dollars
in thousands, except share
data)
Inventories
consist of the
following:
|
|
|
November
30
,
2007
|
|
|
May
31,
2007
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
12,454
|
|
|
$
|
8,960
|
|
|
Work
in
process
|
|
|
2,243
|
|
|
|
2,340
|
|
|
Finished
goods
|
|
|
16,767
|
|
|
|
12,398
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
31,464
|
|
|
$
|
23,698
|
|
|
5.
|
GOODWILL
AND INTANGIBLE ASSETS,
NET
|
Goodwill
and intangible assets, net,
consist of the following:
|
|
|
November
30
,
2007
|
|
|
May
31,
2007
|
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumul.
Amortiz.
|
|
|
Net
Book
Value
|
|
|
Gross
Carrying
Amount
|
|
|
Accumul.
Amortiz.
|
|
|
Net
Book
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
4,346
|
|
|
$
|
—
|
|
|
$
|
4,346
|
|
|
$
|
4,346
|
|
|
$
|
—
|
|
|
$
|
4,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets-patents and
trademarks
|
|
$
|
2,090
|
|
|
$
|
(2,090
|
)
|
|
$
|
—
|
|
|
$
|
2,090
|
|
|
$
|
(2,090
|
)
|
|
$
|
—
|
|
Estimated
amortization expense, assuming
no changes in our intangible assets, is zero for all future fiscal
years.
The
carrying amount of goodwill did not
change during the
first six
months of
fiscal 2008 or
during fiscal 2007.
Accrued
expenses consist of the
following:
|
|
|
November
30
,
2007
|
|
|
May
31,
2007
|
|
|
|
|
|
|
|
|
|
|
Accrued
personnel related
costs
|
|
$
|
2,142
|
|
|
$
|
3,495
|
|
|
Accrued
promotional
costs
|
|
|
5,300
|
|
|
|
4,642
|
|
|
Other
|
|
|
2,145
|
|
|
|
2,405
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,587
|
|
|
$
|
10,542
|
|
The
combined net sales to our two
largest customers are significant. At
November 30
,
2007
and
May
31, 2007
,
respectively, amounts
due from Customer
A represented approximately 3
1
%
and 40% and amounts due from Customer
B represented approximately
40
%
and 24% of total trade accounts
receivable. For the first
six months
of
fiscal 2008 and 2007, respectively,
Customer A accounted for approximately 39% and
36
%
and Customer B accounted for
approximately
37
%
and
32
%
of total net sales. Net sales of our
Schiff
®
Move
Free
®
brand
accounted for approximately
49
%
of total net sales for the
first six months of both
fiscal 2008 and
2007.
SCHIFF
NUTRITION INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
-
(continued)
(dollars
in thousands, except share
data)
|
8.
|
COMMITMENTS
AND
CONTINGENCIES
|
From
time to time, we are involved in
claims, legal actions and governmental proceedings that arise from our business
operations. Although ultimate liability cannot be determined at the present
time, based on available information, we do not believe the resolution of these
matters will have a material adverse effect on our results of operations and
financial condition. However, it is possible that future litigation could arise,
or that developments could occur in existing litigation, that could have a
material adverse effect on our results of operations and financial
condition.
|
9.
|
RECENTLY
ISSUED ACCOUNTING
STANDARDS
|
In
July 2006, the Financial Accounting
Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes,” (“FIN No. 48”), which establishes guidelines for
recognizing, measuring and disclosing uncertainties relating to tax benefits
reflected in an enterprise’s financial statements. FIN No. 48 establishes a
“more-likely-than-not” recognition threshold that must be met before a tax
benefit, relative to a tax position in which the enterprise may be uncertain
as
to whether it will ultimately be sustained as filed in its tax return, can
be
recognized in the financial statements. We were required to apply the provisions
of FIN No. 48 on
June 1,
2007
.
The cumulative effect
of adopting FIN No. 48 resulted in a decrease in retained earnings of
approximately $88. The total amount of unrecognized tax benefits at
June 1, 2007
was
$473, which includes unrecognized
tax benefits of $88 that, if recognized, would favorably affect the effective
tax rate. The remaining unrecognized tax benefits relate to temporary items
that
would not affect the annual effective tax rate. We recognize any interest and
penalties accrued related to unrecognized tax benefits in income tax expense.
As of
June
1, 2007
,
w
e
had approximately $29 for the payment
of accrued
interest
recognized
in our
consolidated
balance sheet.
We do not believe it is reasonably possible that we will have any significant
increases or decreases to the liability for unrecognized tax benefits within
the
next twelve months. We file income tax returns in the U.S. federal jurisdiction,
and in various state and local jurisdictions. We are no longer subject to U.S.
federal income tax examinations for years prior to fiscal 2003 and we are no
longer subject to state and local income tax examinations for years prior to
fiscal 2002. The adoption of FIN No. 48 resulted in the reclassification of
$38
in deferred taxes, $351 in income taxes payable and $88 in retained earnings
to
other long-term liabilities.
In
September 2006, the FASB issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, "Fair Value
Measurements," that defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. SFAS No.
157
retains the exchange price notion in defining fair value and clarifies that
the
exchange price is the price in an orderly transaction between market
participants to sell the asset or transfer the liability in the market in which
the reporting entity would transact for the asset or liability. The definition
focuses on the price that would be received to sell the asset or paid to
transfer the liability (an exit price), not the price that would be paid to
acquire the asset or received to assume the liability (an entry price). SFAS
No.
157 expands disclosure about the use of fair value to measure assets and
liabilities in interim and annual periods subsequent to initial recognition.
The
additional disclosure focuses on the inputs used to measure fair value and
the
effect of the measurements on net income for the reporting period. The fair
value measurement and disclosure provisions of SFAS No. 157 are effective for
financial statements issued for fiscal years beginning after
November 15, 2007
.
We have not yet determined the impact
of adopting SFAS No. 157 on our results of operations and financial
condition.
In
February 2007, the FASB issued SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,”
which permits entities to choose to measure many financial instruments and
certain other items at fair value that are not currently required to be measured
at fair value. SFAS No. 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that choose
different measurement attributes for similar types of assets and liabilities.
The measurement and disclosure provisions of SFAS No. 159 are effective as
of
the beginning of an entity’s first fiscal year that begins after
November 15, 2007
.
We have not yet determined
whether we will choose
to measure any
financial assets or liabilities at fair value. Therefore,
the impact of adopting
SFAS No. 159 on
our results of operations and financial condition
is unknown
.
|
ITEM
2.
|
MANAGEMENT'S
DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
following discussion and analysis
should be read in conjunction with the condensed consolidated financial
statements, including the notes thereto, appearing elsewhere in this Quarterly
Report on Form 10-Q and other reports filed with the SEC.
Sections of t
his
Form 10-Q
including, in particular,
our
Management’s Discussion and Analysis of Financial Condition and Results of
Operations,
contain
“
forward-looking
statements
”
within
the meaning of Section 27A
of the Securities Act of 1933
,
as amended,
and
Section 21E of the Securities
Exchange Act of 1934
,
as
amended (the “Exchange Act”)
.
These statements
are
based on management’s beliefs and
assumptions, current expectations, estimates and projections
.
Statements that are not
historical
facts, including without limitation statements which are preceded by, followed
by or include the words “believes,” “anticipates,” “plans,” “expects,”
“estimates,” “may,” “should,” “intends,” or similar expressions, are
forward-looking statements.
These statements
are
subject to risks and uncertainties,
certain of which are beyond our control, and therefore, actual results may
differ materially
.
Important factors that may cause results to
materially
differ
from these forward-looking
statements include, but are not limited to, the factors indicated from time
to
time in our reports
filed
with the SEC
,
copies of
which are available upon request from our investor relations group or which
may
be obtained at the SEC’s website (
www.sec.gov
)
.
Forward-looking
statements only speak as
of the date hereof and we do not undertake and expressly disclaim any obligation
to update or release any revisions to any forward-looking statement whether
as a
result of new information, future events or otherwise, except as required by
law.
General
Schiff
Nutrition International, Inc.
develops, manufactures, markets and distributes branded and private label
vitamins, nutritional supplements and nutrition bars in the United States and
throughout the world. We offer a broad range of capsules, tablets and nutrition
bars. Our portfolio of recognized brands, including Schiff and Tiger’s Milk®, is
marketed primarily through the mass market (including club) and, to a lesser
extent, health food store distribution channels.
During
fiscal 2007 and the
first half of
fiscal
2008, we continued to provide
selling and marketing support intended both to defend our
overall
Move
Free business against competition,
including private label, and ultimately to increase our market share in the
joint care product category. The introduction of Move Free Advanced into
substantially all of our significant retail accounts during the second half
of
fiscal 2006 was substantially completed in the fiscal 2007
second quarter
.
During fiscal 2007 and continuing in
fiscal 2008, we are attempting to increase
the
distribution
of our joint care products
in international markets. Subject to the impact of our Move Free Advanced
marketing initiatives and competitive joint care product category pricing
pressures, including private label, and the success of increasing distribution
in international markets, we believe fiscal 2008 net sales will be relatively
constant, as compared to fiscal 2007 net sales. We believe any incremental
sales
volume in fiscal 2008 for our existing business may be offset by incremental
price-discounting promotional activity.
Our
operating results for fiscal 2007
were impacted by profit margin volatility due to several factors, including
significant raw material pricing fluctuations, particularly in the joint care
product category, and a strong competitive environment. During fiscal 2006,
joint care product category raw material prices, which increased significantly
during fiscal 2005, returned to pre-fiscal 2005 levels. However, our gross
profit percentage for fiscal 2007 was impacted by previous raw material purchase
commitments.
Our
operating results for fiscal 2008
were
and will be
impacted
by the declaration
of a special cash dividend in July 2007. In connection with the declaration
of
the special dividend, our Board of Directors approved certain dividend
equivalent rights allowing holders (employees and directors) of certain equity
awards, including stock options and restricted stock units, to receive cash
dividends on each share of common stock underlying the stock options and
restricted stock units. As a result, we recognized a non-cash compensation
expense, and a corresponding increase in additional paid-in capital, of
approximately $
0.7 million
and $3.7
million
,
respectively, during the three and six
month periods ended
November 30, 2007
.
Subject to future vesting of these
equity awards, additional compensation expense of approximately $
1.3
million,
together with a corresponding
increase in additional paid-in capital, will be recognized
equally
over
the remaining
two
quarters
of fiscal
2008.
In
December 2007, we announced the
fiscal 2008 third quarter introduction of smaller tablets for our existing
Move
Free items as well as a Move Free line extension. Operating results for fiscal
2008, as compared to fiscal 2007, are impacted by the shifting of advertising
support from the first half to the second half of fiscal 2008 in support of
these Move Free marketing initiatives. As a result, advertising
expense for the first half of fiscal 2008 was significantly less than the amount
recognized in the corresponding prior year period, and advertising expense
for
the second half of fiscal 2008 is expected to exceed the amount recognized
in
the corresponding period for fiscal 2007.
Factors
affecting our historical
results, including the previous implementation of strategic initiatives as
well
as continuing refinement of our growth and business strategies, are ongoing
considerations and processes. While the focus of these considerations is to
improve future profitability, we cannot assure you that our decisions relating
to these initiatives will not adversely impact our results of operations and
financial condition.
Our
principal executive offices are
located at 2002 South 5070 West, Salt Lake City, Utah 84104, and our telephone
number is (801) 975-5000.
Results
of
Operations (unaudited)
Three
Months Ended
November 30
,
2007
Compared to Three
Months
Ended
November
30
,
2006
The
following tables show comparative
results for selected items as reported and as a percentage of net sales for
the
three months ended
November
30
,
(dollars in
thousands):
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
39,535
|
|
|
|
100.0
|
%
|
|
$
|
38,817
|
|
|
|
100.0
|
%
|
|
Cost
of goods
sold
|
|
|
22,974
|
|
|
|
58.1
|
|
|
|
22,640
|
|
|
|
58.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
16,561
|
|
|
|
41.9
|
|
|
|
16,177
|
|
|
|
41.7
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and
marketing
|
|
|
6,737
|
|
|
|
17.0
|
|
|
|
8,790
|
|
|
|
22.7
|
|
|
General
and
administrative
|
|
|
4,452
|
|
|
|
11.3
|
|
|
|
4,155
|
|
|
|
10.7
|
|
|
Research
and
development
|
|
|
1,276
|
|
|
|
3.2
|
|
|
|
864
|
|
|
|
2.2
|
|
|
Reimbursement
of import
costs
|
|
|
(31
|
)
|
|
|
—
|
|
|
|
(278
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating
expenses
|
|
|
12,434
|
|
|
|
31.5
|
|
|
|
13,531
|
|
|
|
34.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from
operations
|
|
|
4,127
|
|
|
|
10.4
|
|
|
|
2,646
|
|
|
|
6.8
|
|
|
Other
income,
net
|
|
|
401
|
|
|
|
1.0
|
|
|
|
728
|
|
|
|
1.9
|
|
|
Income
tax
expense
|
|
|
(1,725
|
)
|
|
|
(4.3
|
)
|
|
|
(1,125
|
)
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,803
|
|
|
|
7.1
|
%
|
|
$
|
2,249
|
|
|
|
5.8
|
%
|
Net
Sales.
Net sales
increase
d
approximately 1.8% to $
39.5
million
for the fiscal 2008
second
quarter,
from $
38.8
million
for the fiscal 2007
second
quarter.
Overall, the
increase
in net sales was primarily attributable
to a
n increase
in
branded sales
,
substantially offset
by a decrease in
private label sales
.
Aggregate
branded net sales
increase
d
approximately
8.6
%
to $32.
2
million
for the fiscal 2008
second
quarter,
from $
29.6
million
for the fiscal 2007
second
quarter.
The
in
crease
was primarily due to
a
n in
crease
in branded joint care product
sales volume of approximately $
8.7
million,
or
29.6
%
,
and
a modest $0.2 million decrease in
estimated sales returns,
partially offset by a
$1.2
million decrease in other branded
sales volume and a
$
5.1
million
in
crease
in aggregate branded sales
promotional incentives classified as sales price reductions. Classification
of
promotional costs as a sales reduction is required when the promotion
effectively represents a price reduction. The
increase
in branded joint care product sales
volume was primarily attributable to promotional timing considerations. Move
Free net sales were $
18.9
million
and $
17.4
million,
respectively, for the fiscal
2008 and 2007
second
quarters.
Private
label sales
decreased approximately
19.9% to $7.4
million for the fiscal 2008 second quarter, from $9.2 million for the fiscal
2007 second quarter, primarily due to a reduction in customer promotional
activity
.
Gross
Profit.
Gross profit
increase
d
approximately
2.4
%
to $16.
6
million
for the fiscal 2008
second
quarter,
from $
16.2
million
for the fiscal 2007
second
quarter,
primarily due to a
n increase
in net sales. Gross profit, as a
percentage of net sales,
remained relatively constant
at 41.9%
and 41.7%, respectively, for the second quarter of fiscal 2008 and
2007. An approximate $1.5 million decrease in joint care product raw
material costs and a lower mix of lower-margin private label sales was
substantially offset by the increase in sales promotional incentives and certain
initial transition costs related to introduction of the smaller Move Free
tablet
.
Operating
Expenses.
Operating expenses
decrease
d
approximately
8.1
%
to $
12.4
million
for the fiscal 2008
second quarter
,
from $
13.5
million
for the fiscal 2007
second quarter
.
Operating expenses, as a percentage of
net sales, were
31.5
%
and
34.9
%
,
respectively, for the fiscal 2008 and
2007
second
quarter
s. The
decrease
in operating expenses resulted
primarily from
a decrease
in selling and marketing expenses, partially offset by increases in general
and
administrative and research and development expenses. In addition, the
fiscal 2007 second quarter includes approximately $0.3 million in reimbursement
from certain suppliers of previously recognized import costs as compared to
less
than $0.1 million in similar reimbursement for the second quarter of fiscal
2008.
Selling
and marketing expenses,
including sales, marketing, advertising, freight and other costs, decreased
to
approximately $6.
7
million
for the fiscal 2008
second quarter
,
from $8.
8
million
for the fiscal 2007
second quarter
,
primarily due to
a $
2.4
million
reduction in advertising costs,
partially offset by
a $0.2
million increase in selling variables due to the increase in
sales
.
The decrease in
advertising costs primarily resulted from a decision to shift certain television
advertising to the second half of fiscal 2008 to coincide with the introduction
of the smaller tablet and line extension for our Move Free
business.
General
and administrative expenses
increased to approximately $
4.5
million
for the fiscal 2008
second quarter
,
from approximately $
4.2
million
for the fiscal 2007
second quarter
,
primarily due to the fiscal 2008
second
quarter
recognition of approximately
$
0.5
million
in incremental compensation
expense for the
special
dividend
,
partially
offset by a decrease in legal
fees.
The special dividend
compensation expense represents a non-cash charge for dividend equivalent rights
received by holders (employees and directors) of certain equity awards,
including stock options and restricted stock units. Subject to future vesting
of
these equity awards, additional compensation expense, primarily included in
general and administrative expenses, of approximately $1.3 million will be
recognized equally over the remaining two quarters of fiscal
2008.
Research
and development costs increased
to approximately $1.
3
million
for the fiscal 2008
second quarter
,
from $0.
9
million
for the fiscal 2007
second quarter
,
primarily due to an increase in
expenses associated with product research
and product testing related
to the
registration of products in countries outside of the United
States
.
Other
Income/Expense.
Other income, net, was
$0.
4
million
for the fiscal 2008
second quarter
,
compared to $0.7 million for the fiscal
2007
second
quarter
.
The
decrease
was primarily due to
a reduction in
interest
income resulting from a
decrease
in cash and available-for-sale
securities
reflecting
the
impact of the special
dividend which was funded from cash and liquidation of available-for-sale
securities.
Provision
for Income
Taxes.
Provision for income
taxes was $1.
7
million
for the fiscal 2008
second quarter
,
compared to $1.
1
million
for the fiscal 2007
second quarter
.
The
increase
resulted from
an increase
in
pre-tax income
and
an
increase in our effective tax rate
primarily due to an increase in certain non-deductible officer compensation
resulting from the special dividend
and a decrease in tax-exempt
interest
income
.
The fiscal 2008
second
quarter
tax rate was
38.1
%
,
compared to the fiscal 2007
second quarter
tax
rate of
33.4
%
.
Results
of
Operations (unaudited)
Six
Months
Ended
November 30
,
2007
Compared to
Six
Months
Ended
November
30
,
2006
The
following tables show comparative
results for selected items as reported and as a percentage of net sales for
the
six
months
ended
November 30
,
(dollars in
thousands):
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
80,262
|
|
|
|
100.0
|
%
|
|
$
|
84,469
|
|
|
|
100.0
|
%
|
|
Cost
of goods
sold
|
|
|
47,280
|
|
|
|
58.9
|
|
|
|
51,176
|
|
|
|
60.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
32,982
|
|
|
|
41.1
|
|
|
|
33,293
|
|
|
|
39.4
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and
marketing
|
|
|
13,493
|
|
|
|
16.8
|
|
|
|
17,079
|
|
|
|
20.2
|
|
|
General
and
administrative
|
|
|
11,239
|
|
|
|
14.0
|
|
|
|
7,854
|
|
|
|
9.3
|
|
|
Research
and
development
|
|
|
2,302
|
|
|
|
2.9
|
|
|
|
1,680
|
|
|
|
2.0
|
|
|
Reimbursement
of import
costs
|
|
|
(31
|
)
|
|
|
—
|
|
|
|
(298
|
)
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating
expenses
|
|
|
27,003
|
|
|
|
33.7
|
|
|
|
26,315
|
|
|
|
31.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from
operations
|
|
|
5,979
|
|
|
|
7.4
|
|
|
|
6,978
|
|
|
|
8.3
|
|
|
Other
income,
net
|
|
|
1,199
|
|
|
|
1.5
|
|
|
|
1,413
|
|
|
|
1.6
|
|
|
Income
tax
expense
|
|
|
(2,727
|
)
|
|
|
(3.4
|
)
|
|
|
(2,879
|
)
|
|
|
(3.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
4,451
|
|
|
|
5.5
|
%
|
|
$
|
5,512
|
|
|
|
6.5
|
%
|
Net
Sales.
Net sales
decrease
d
approximately
5.0
%
to $
80.3
million
for the
six months ended
November
30, 2007
,
from $
84.5
million
for the
six months ended
November
30, 2006
,
primarily due to a decrease
in both
branded and private label net sales
.
Aggregate
branded net sales decreased
approximately
3.4
%
to $
64.5
million
for the
six months ended
November
30, 2007
,
from $
66.7
million
for the
six months ended
November
30, 2006
.
An approximate $2.6 million,
or 3.5%,
increase in branded joint care product sales volume and an approximate $0.5
million reduction in estimated sales returns were more than offset by a $1.2
million, or 8.5%, decrease in other branded sales volume
and an approximate $4.7
million increase
in branded sales promotional incentives classified as sales price reductions.
Classification of
promotional costs as a sales reduction is required when the promotion
effectively represents a price reduction. Move Free net sales were $
39.7
million
and $
41.6
million,
respectively, for the
six months ended
November
30, 2007
and
2006
.
Private
label sales
decreased approximately
10.9% to $15.8
million for the six months ended
November 30, 2007
,
from $17.7 million for the six months
ended
November 30,
2006
,
primarily due to a
reduction in customer promotional activity
.
Gross
Profit.
Gross profit remained
relatively constant at $33.0 million and $33.3 million, respectively, for the
six months ended
November
30, 2007
and 2006.
Gross
profit, as a
percentage of net sales,
increased to 41.1% for
the six months
ended
November 30,
2007
,
from 39.4% for the
six months ended
November
30, 2006
,
primarily due to
an approximate $4.6 million decrease in joint care product raw material costs
and a lower mix of lower-margin private label sales, partially offset by the
increase in sales promotional incentives
. The approximate $0.5 million
decrease in estimated sales returns was offset by an equal increase in inventory
valuation adjustments.
Operating
Expenses.
Operating expenses
increase
d
approximately
2.6
%
to $
27.0
million
for the
six months ended
November
30, 2007
,
from $
26.3
million
for the
six months ended
November
30, 2006
.
Operating expenses,
as a percentage of
net sales, were 3
3
.
7%
and
31.1
%
,
respectively, for the
six months ended
November
30, 2007
and 2006
.
The
increase
in operating expenses resulted
primarily from
an increase
in general and administration expenses and research and development expenses,
substantially offset by a decrease in selling and marketing expenses. In
addition, the six months ended
November 30, 2006
includes
approximately $0.3 million in
reimbursement from certain suppliers of previously recognized import costs
as
compared to less than $0.1 million in similar reimbursements for the fiscal
2008
comparable period.
Selling
and marketing expenses,
including sales, marketing, advertising, freight and other costs, decreased
to
approximately $
13.5
million
for the
six months ended
November
30,
2007
,
from $
17.1
million
for the
six months ended
November
30, 2006
,
primarily due to a
$
3.4
million
reduction in advertising
costs
.
The decrease in
advertising costs primarily results from a decision to shift certain television
advertising to the second half of fiscal 2008 to coincide with the introduction
of the smaller tablet and line extension for our Move Free
business
.
General
and administrative expenses
increased to approximately $
11.2
million
for the
six months ended
November
30, 2007
,
from approximately $
7.9
million
for the
six months ended
November
30, 2006
,
primarily due to the
recognition of
approximately $
3.4
million
in incremental
compensation expense for the
special
dividend.
The
special dividend compensation
expense represents a non-cash charge for dividend equivalent rights received
by
holders (employees and directors) of certain equity awards, including stock
options and restricted stock units. Subject to future vesting of these equity
awards, additional compensation expense, primarily included in general and
administrative expenses, of approximately $1.3 million will be recognized
equally over the remaining two quarters of fiscal 2008.
Research
and development costs increased
to approximately $
2.3
million
for the
six months ended
November
30,
2007
,
from $
1.7
million
for the
six months ended
November
30, 2006
,
primarily due to an
increase in
expenses associated with product research
and product testing related
to the
registration of products in countries outside of the United
States
.
Other
Income/Expense.
Other income, net, was
$
1.2
million
for the
six months ended
November
30, 2007
,
compared to $
1.4
million
for the
six months ended
November
30, 2006
.
The
decrease
was primarily due to
a reduction in
interest
income resulting from a
decrease
in cash and available-for-sale
securities
reflecting the
impact of the special dividend which was funded from cash and liquidation of
available-for-sale securities
.
Provision
for Income
Taxes.
Provision for income
taxes was $
2.7
million
for the
six months ended
November
30, 2007
,
compared to $
2.9
million
for the
six months ended
November
30, 2006
.
The effective tax rate
was 38.0% and
34.3%, respectively, for the six months ended
November 30, 2007
and
2006.
The
increase
in our effective tax rate
was
primarily
due to an increase in certain
non-deductible officer compensation resulting from the special dividend
and a decrease in
tax-exempt interest income
.
Liquidity
and
Capital Resources
Working
capital decreased approximately
$3
3
.
9
million to $
71.0
million
at
November 30
,
2007
,
from $104.9 million
at
May 31, 2007
,
primarily due to a decrease of
approximately $
39.7
million
in cash and
available-for-sale securities due to the
fiscal 2008 first quarter
payment
or accrual of the special
dividend. Inventories increased approximately $
7.8
million,
which reflects an increase in
finished goods for fiscal 2008
third
quarter
promotions
,
consistent with the
prior year, as well
as a decision to build up quantities of certain other inventory
components
.
Prepaid
expenses
increase
d
by approximately $0.
6
million,
primarily due to a
n
increase
in
prepaid insurance as
certain annual
insurance policies were renewed at
September 1, 2007
.
Current
liabilities decreased
approximately $
0.5
million
primarily due to the
payment of accrued management annual incentive costs
and income taxes
,
substantially
offset
by dividends payable on
non-vested stock options and restricted stock units
and the short-term financing
of annual
premiums due from the renewal of the annual insurance
policies
.
On
June
30, 2004
,
we entered into, through
our
wholly-owned direct operating subsidiary Schiff Nutrition Group, Inc. (“SNG”), a
$25.0 million revolving credit facility (the “Credit Facility”) with KeyBank
National Association, as Agent. In August 2006, we extended the maturity of
the
Credit Facility from
June
30, 2007
to
June
30, 2009
.
The Credit Facility
contains customary
terms and conditions, including, among others, financial covenants that may
limit our ability to pay dividends on our common stock and certain other
restrictions. Our obligations under the Credit Facility are secured by a first
priority security interest on all of the capital stock of SNG. If our total
coverage ratio exceeds a certain limit, our obligations will also be secured
by
a first priority security interest in all of our domestic assets. In the event
we exceed certain other ratio limits, we will be subject to a borrowing base
and
will be able to borrow up to a lesser of $25.0 million or the sum of (i) 85%
of
eligible accounts receivable and (ii) 65% of eligible inventory. Borrowings
under the Credit Facility bear interest at floating rates based on the KeyBank
National Association prime rate or the Federal Funds effective rate. The Credit
Facility can be used to fund our normal working capital and capital expenditure
requirements, with availability to fund certain permitted strategic
transactions. At
November
30
,
2007
,
there were no amounts outstanding and
$25.0 million was available for borrowing under the Credit
Facility.
In
July 2007, our Board of Directors
approved a $1.50 per share special cash dividend, which was paid on
August 13, 2007 to shareholders of record at the close of business on
July 31, 2007
.
In connection with the declaration of
the special dividend, our Board of Directors approved certain dividend
equivalent rights, allowing holders (employees and directors) of certain equity
awards, including stock options and restricted stock units, to receive cash
dividends on each share of common stock underlying the stock options and
restricted stock units. In aggregate, at
July 31, 2007
,
the record date, the Company had
outstanding approximately 29.9 million shares of common stock (including shares
of common stock underlying equity awards subject to dividend equivalent rights),
including approximately 26.6 million shares of outstanding
Class A and Class
B common stock, approximately 1.8 million shares of Class A common stock
underlying outstanding stock options, and approximately 1.5 million shares
of
Class A common stock underlying outstanding restricted stock units. The
aggregate amount of the special dividend was approximately $44.9 million,
presuming 100% vesting of shares underlying equity awards (approximately
5
5
%
had vested as of
November 30
,
2007
)
. To the extent outstanding
stock
options and restricted stock units were unvested at
November 30
,
2007
,
the $1.50 per share
dividend was not,
and will not be, distributed until after such equity awards become
vested.
The
special dividend was funded from
cash and liquidation of available-for-sale securities. Approximately $42.6
million of the distribution occurred in August 2007, and the remaining amount
has been or
will
be distributed, if at all, upon
vesting of the stock options and upon issuance of the shares underlying
restricted stock units.
We
believe that our cash, cash flows
from operations and the financing sources discussed above will be sufficient
to
meet our normal cash operating requirements during the next twelve months.
However, we continue to review opportunities to acquire or invest in companies,
product rights and other investments that are compatible with or complimentary
to our existing business. We could use cash and financing sources discussed
herein, or financing sources that subsequently become available, to fund
acquisitions or investments. In addition, we may consider issuing additional
debt or equity securities in the future to fund potential acquisitions or
growth, or to refinance existing debt. If a material acquisition, divestiture
or
investment is completed, our operating results and financial condition could
change materially in future periods. However, no assurance can be given that
additional funds will be available on satisfactory terms, or at all, to fund
such activities.
Our
Board of Directors will determine
dividend policy in the future based upon, among other factors, results of
operations, financial condition, contractual restrictions and other factors
deemed relevant at the time. In addition, our Credit Facility contains certain
customary financial covenants that may limit our ability to pay dividends on
our
common stock. We can give no assurance that we will pay dividends in the
future.
A
summary of our outstanding contractual
obligations at
November
30
,
2007
is
as follows (in
thousands):
|
Contractual Cash
Obligations
|
|
Total
Amounts
Committed
|
|
|
Less
than
1
Year
|
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
After
5
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
leases
|
|
$
|
12,617
|
|
|
$
|
2,
535
|
|
|
$
|
4,689
|
|
|
$
|
4,
623
|
|
|
$
|
770
|
|
|
Purchase
obligations
(1)
|
|
|
9,642
|
|
|
|
9,642
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Debt
obligations
|
|
|
788
|
|
|
|
788
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
obligations
|
|
$
|
23,047
|
|
|
$
|
12,965
|
|
|
$
|
4,
689
|
|
|
$
|
4,
623
|
|
|
$
|
770
|
|
|
(1)
|
Purchase
obligations consist
primarily of open purchase orders for goods and services, including
primarily raw materials, packaging and outsourced contract manufacturing
commitments.
|
Critical
Accounting
Policies and Estimates
In
preparing our condensed consolidated
financial statements, we make assumptions, estimates and judgments that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the dates of the condensed consolidated financial
statements and the reported amounts of net sales and expenses during the
reported periods. We periodically evaluate our estimates and judgments related
to the valuation of inventories and intangible assets, allowances for doubtful
accounts, notes receivable, sales returns and discounts, uncertainties related
to certain tax benefits, valuation of deferred tax assets, valuation of
share-based payments and recoverability of long-lived assets. Note 1 of Notes
to
the Consolidated Financial Statements contained in our Annual Report on Form
10-K for the year ended
May
31, 2007
,
filed with the
SEC, describes the accounting policies governing each of these matters. Our
estimates are based on historical experience and on our future expectations
that
are believed to be reasonable. The combination of these factors forms the basis
for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
our
current estimates and those differences may be material.
We
believe the following accounting
policies affect some of our more significant estimates and judgments used in
preparation of our condensed consolidated financial
statements:
|
●
|
We
provide for inventory valuation
adjustments for estimated obsolescence or unmarketable inventory
equal to
the difference between the cost of inventory and the estimated market
value based upon assumptions about future demand, market conditions
and/or
liquidation value. For the
six months
ended
November 30,
20
0
7
and
200
6,
inventory
valuation adjustments
resulted in a decrease in our gross profit and operating income of
approximately $0.
5
million and
$0.
4
million
,
respectively
.
If actual
demand and/or market
conditions are less favorable than those projected by management,
additional inventory write-downs would be
required.
|
|
●
|
We
maintain allowances for
doubtful accounts, sales returns and discounts for estimated losses
resulting from known customer exposures, including among others,
product
returns, inability to make payments and expected utilization of offered
discounts. Changes in our allowances for doubtful accounts, sales
returns
and discounts
resulted in
an increase in
our gross profit
and
operating income
of
approximately $0.5 million
for the
six
months ended
November 30,
2007
and 2006
.
At
November 30
,
2007
and
May
31, 2007
,
our allowances
for doubtful
accounts, sales returns and discounts amounted to approximately
$
1.6
million
and $2.2 million,
respectively. Actual results may differ from our current estimates,
resulting in adjustment of the respective
allowance(s).
|
|
●
|
We
recognize tax benefits relative
to certain tax positions in which we may be uncertain as to whether
that
tax position will ultimately be sustained as filed in our tax return.
The
recognition or derecognition of these tax benefits is subject to
periodic
evaluation of the sustainability of the tax position based upon changes
in
facts, circumstances or available information. Changes in the recognition
of these tax benefits did not significantly impact net income for
the
six months
ended
November 30,
2007
and
2006
.
|
|
●
|
We
currently have deferred tax
assets resulting from temporary differences between financial and
income
tax reporting. These deferred tax assets are subject to periodic
recoverability assessments. The realization of these deferred tax
assets
is primarily dependent on future operating results. Changes in these
valuation allowances did not significantly impact net income for
the
six months
ended
November 30,
2007
and 2006
.
At
November 30
,
2007
and
May
31, 2007
,
deferred tax
asset valuation
allowances were nil.
|
|
●
|
We
recognize compensation expense
for certain performance based equity instrument awards (share-based
payments) over the performance period based on a periodic assessment
of
the probability that the performance criteria will be achieved. Our
periodic assessment of the probability that the performance criteria
will
be achieved considers such factors as historical financial results
and
future financial expectations, including an analysis of sales trends
and
operating margins; as well as changes in the nutritional supplements
industry and competitive environment. For the
six months
ended
November 30,
20
0
7
and
200
6
,
we recognized compensation
expense related to these awards of approximately $
1.6
million
and
$
1.8
million,
respectively. At
November
30
,
2007
,
total unrecognized compensation
expense, based on our assessment of the probability that the performance
criteria will be achieved, was approximately $
1.6
million.
|
|
●
|
We
have certain intangible assets,
primarily consisting of goodwill, which are tested for impairment
at least
annually. The determination of whether or not goodwill is impaired
involves significant judgment. Changes in strategy or market conditions
could significantly impact our judgment and require adjustment to
the
recorded goodwill balance.
|
Impact
of
Inflation
Inflation
affects the cost of raw
materials, goods and services we use. In recent years, inflation has been
modest. We seek to mitigate the adverse effects of inflation primarily through
improved productivity, strategic buying initiatives, and cost containment
programs. However, the nutritional supplement industry competitive environment
limits our ability to recover higher costs resulting from inflation by raising
prices. See further discussion of raw material pricing matters in the “General”
and “Results of Operations” sections above.
Seasonality
Our
business is not inherently seasonal;
however, we experience fluctuations in sales resulting from timing of marketing
and promotional activities, customer buying patterns and consumer spending
patterns. In addition, as a result of changes in product sales mix, competitive
conditions, raw material pricing pressures and other factors, as discussed
above, we experience fluctuations in gross profit and operating margins on
a
quarter-to-quarter basis.