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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 DecemberMarch 31, 20152016

Commission file number 000-23731

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

Delaware
(State of incorporation)
 
87-0515089
(IRS Employer Identification No.)

1400 Kearns Boulevard, 2nd Floor, Park City, Utah
(Address of principal executive offices)

 
84060
(Zip code)
(435) 655-6106
(Registrant's telephone number, including area 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 ýx    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 ýx    NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:

Large accelerated filer o
 
Accelerated filer ýx
 
Non-accelerated filer o
(Do not check if a
smaller reporting company)
 
Smaller reporting company o

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

At JanuaryApril 26, 2016, the registrant had 9,418,4199,339,532 shares of common stock outstanding.


Table of Contents


NUTRACEUTICAL INTERNATIONAL CORPORATION

INDEX

DescriptionPage No.

Part I.

Financial Information  Page
Part I.
Financial Information
3
 




Item 1.



Financial Statements (unaudited)





3



 
 
 


Condensed Consolidated Balance Sheets—DecemberMarch 31, 20152016 and September 30, 2015





3



 
 
 


Condensed Consolidated Statements of Comprehensive Income—Three Months and Six Months Ended DecemberMarch 31, 20152016 and 2014

2015




4



 
 
 


Condensed Consolidated Statements of Cash Flows—ThreeSix Months Ended DecemberMarch 31, 20152016 and 2014

2015




5



 
 
 


Notes to Condensed Consolidated Financial Statements





6



 


Item 2.



Management's Discussion and Analysis of Financial Condition and Results of Operations





1514



 


Item 3.



Quantitative and Qualitative Disclosures About Market Risk





2221



 


Item 4.



Controls and Procedures





2221


Part II.


 


Other Information





24
 


Part II.

Other Information
22


Item 1.



Legal Proceedings





24



 


Item 1A.



Risk Factors





24
 



Item 1.
Legal Proceedings


22
Item 1A.
Risk Factors
22
Item 2.



Unregistered Sales of Equity Securities and Use of Proceeds





2422



 


Item 6.


Exhibits
23


Exhibits





25

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1.    Financial Statements


NUTRACEUTICAL INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(dollars in thousands)

 
 December 31,
2015		 September 30,
2015(1)		 

ASSETS

       

Current assets:

       

Cash

 $5,344 $4,615 

Accounts receivable, net

  18,365  16,798 

Inventories

  61,843  59,440 

Prepaid expenses and other current assets

  3,899  4,195 

Deferred income taxes

  1,176  1,167 
​​​ ​ ​​ ​ ​

Total current assets

  90,627  86,215 

Property, plant and equipment, net

  
77,908		  
77,645		 

Goodwill

  30,925  24,384 

Intangible assets, net

  24,651  17,605 

Deferred income taxes

  3,473  4,932 

Other non-current assets

  1,632  1,668 
​​​ ​ ​​ ​ ​

Total assets

 $229,216 $212,449 
​​​ ​ ​​ ​ ​

LIABILITIES AND STOCKHOLDERS' EQUITY

       

Current liabilities:

       

Accounts payable

 $13,211 $14,023 

Accrued expenses

  4,452  6,505 
​​​​ ​​ ​ ​

Total current liabilities

  17,663  20,528 

Long-term debt

  
48,000		  
31,500		 

Other non-current liabilities

  178  174 
​​​ ​ ​​ ​ ​

Total liabilities

  65,841  52,202 
​​​ ​ ​​ ​ ​

Stockholders' equity:

       

Common stock

  95  95 

Additional paid-in capital

  5,879  6,961 

Retained earnings

  157,859  153,618 

Accumulated other comprehensive income

  (458) (379)

Treasury stock

  —  (48)
​​​ ​ ​​ ​ ​

Total stockholders' equity

  163,375  160,247 
​​​ ​ ​​ ​ ​

Total liabilities and stockholders' equity

 $229,216 $212,449 
​​​ ​ ​​ ​ ​
(1)
The condensed consolidated balance sheet as of September 30, 2015 has been prepared using information from the audited financial statements at that date.

 March 31,
2016		 
September 30,
2015 (1)
ASSETS 
  
Current assets: 
  
Cash$4,162
 $4,615
Accounts receivable, net19,277
 16,798
Inventories61,491
 59,440
Prepaid expenses and other current assets3,715
 4,195
Deferred income taxes1,169
 1,167
Total current assets89,814
 86,215
    
Property, plant and equipment, net83,460
 77,645
Goodwill30,925
 24,384
Intangible assets, net24,148
 17,605
Deferred income taxes4,555
 4,932
Other non-current assets1,613
 1,668
Total assets$234,515
 $212,449
LIABILITIES AND STOCKHOLDERS' EQUITY 
  
Current liabilities: 
  
Accounts payable$13,915
 $14,023
Accrued expenses6,797
 6,505
Total current liabilities20,712
 20,528
    
Long-term debt47,500
 31,500
Other non-current liabilities184
 174
Total liabilities68,396
 52,202
Stockholders' equity: 
  
Common stock94
 95
Additional paid-in capital4,026
 6,961
Retained earnings162,477
 153,618
Accumulated other comprehensive income(396) (379)
Treasury stock(82) (48)
Total stockholders' equity166,119
 160,247
Total liabilities and stockholders' equity$234,515
 $212,449

(1)The condensed consolidated balance sheet as of September 30, 2015 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.


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NUTRACEUTICAL INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(dollars in thousands, except per share data)



 Three months ended
December 31,		 Three Months Ended
March 31,		 Six Months Ended
March 31,

 2015 2014 2016 2015 2016 2015

Net sales

 $55,959 $53,044 $59,492
 $55,404
 $115,451
 $108,448

Cost of sales

 27,851 27,189 29,163
 28,149
 57,014
 55,338
​​ ​​​ ​ ​

Gross profit

 28,108 25,855 30,329
 27,255
 58,437
 53,110

Operating expenses

      
  
    

Selling, general and administrative

 20,342 19,554 21,779
 19,789
 42,121
 39,343

Amortization of intangible assets

 981 732 999
 728
 1,980
 1,460
​​ ​ ​​ ​​

Income from operations

 6,785 5,569 7,551
 6,738
 14,336
 12,307

Interest and other expense, net

 274 297 322
 273
 596
 570
​​ ​ ​​ ​ ​

Income before provision for income taxes

 6,511 5,272 7,229
 6,465
 13,740
 11,737

Provision for income taxes

 2,270 1,921 2,611
 2,369
 4,881
 4,290
​​​ ​​ ​ ​

Net income

 $4,241 $3,351 $4,618
 $4,096
 $8,859
 $7,447

Other comprehensive loss:

 
 		 
 		 
Other comprehensive income (loss): 
  
    

Foreign currency translation adjustment, net of tax

 (79) (221)62
 (109) (17) (330)
​​ ​​​ ​ ​

Comprehensive income

 $4,162 $3,130 $4,680
 $3,987
 $8,842
 $7,117
​​ ​​​ ​ ​

Net income per common share

      
  
    

Basic

 $0.45 $0.35 $0.49
 $0.43
 $0.94
 $0.77

Diluted

 0.45 0.35 0.49
 0.43
 0.94
 0.77

Weighted average common shares outstanding

 
 		 
 		  
  
    

Basic

 9,459,470 9,653,113 9,401,972
 9,622,051
 9,430,878
 9,637,753

Dilutive effect of stock options

 — 6,894 —
 4,874
 —
 5,884
​​​ ​​ ​ ​

Diluted

 9,459,470 9,660,007 9,401,972
 9,626,925
 9,430,878
 9,643,637
​​ ​ ​​ ​ ​



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


Table of Contents


NUTRACEUTICAL INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(dollars in thousands)


 Three months ended
December 31,		 Six Months Ended
March 31,

 2015 2014 2016 2015

Cash flows from operating activities:

      
  

Net income

 $4,241 $3,351 $8,859
 $7,447

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

      
  

Depreciation and amortization

 3,482 3,239 7,020
 6,507

Amortization of deferred financing fees

 31 36 63
 67

Losses on disposals of property, plant and equipment

 — 1 4
 7
Tax benefit from stock option exercises—
 (1)

Deferred income taxes

 1,450 (75)375
 (77)

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

      
  

Accounts receivable, net

 (365) 47 (1,139) (1,706)

Inventories

 (146) 907 771
 1,137

Prepaid expenses and other current assets

 658 (11)894
 517

Other non-current assets

 (2) 60 (61) 81

Accounts payable

 (853) (2,817)(296) (1,136)

Accrued expenses

 (1,558) (1,735)804
 (1,685)

Other non-current liabilities

 4 4 10
 10
​​ ​ ​​​ ​

Net cash provided by operating activities

 6,942 3,007 17,304
 11,168
​​ ​ ​​ ​ ​

Cash flows from investing activities:

      
  

Purchases of property, plant and equipment

 (2,079) (2,634)(4,023) (4,217)

Acquisitions of businesses

 (19,026) (81)(26,235) (81)
​​ ​​​ ​ ​

Net cash used in investing activities

 (21,105) (2,715)(30,258) (4,298)
​​ ​ ​​ ​​

Cash flows from financing activities:

      
  

Proceeds from debt

 20,000 1,000 25,500
 2,000

Payments on debt

 (3,500) (2,000)(9,500) (7,000)

Payments of deferred financing fees

 — (420)—
 (420)

Proceeds from issuances of common stock

 14 25 40
 64

Purchases of common stock for treasury

 (1,604) (1,074)(3,566) (2,352)
​​ ​ ​​ ​​
Tax benefit from stock option exercises—
 1

Net cash provided by (used in) financing activities

 14,910 (2,469)12,474
 (7,707)
​​ ​​​ ​ ​

Effect of exchange rate changes on cash

 (18) (132)27
 (179)
​​ ​ ​​ ​​

Net increase (decrease) in cash

 729 (2,309)
Net decrease in cash(453) (1,016)

Cash at beginning of period

 4,615 6,232 4,615
 6,232
​​ ​ ​​​ ​

Cash at end of period

 $5,344 $3,923 $4,162
 $5,216
​​ ​ ​​ ​​

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


Table of Contents


NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(dollars in thousands, except per share data)




1. BASIS OF PRESENTATION

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

The Company manufactures and sells nutritional supplements and other natural products under numerous brands, includingSolaray®,KAL®,Dynamic HealthHealth™™,Nature's Life®,LifeTime®,Natural Balance®, NaturalCare®,Health from the Sun®,Pioneer®,Nutra BioGenesisBioGenesis™™,Life-flo®,Organix South®,Heritage Store® andMonarch NutraceuticalsNutraceuticals™™.

The Company owns neighborhood natural food markets, which operate under the trade namesThe Real Food CompanyCompany™™,Thom's Natural FoodsFoods™™,Cornucopia Community Market™ andGranola'sGranola's™™. The Company also owns health food stores, which operate under various trade names, includingFresh VitaminsVitamins™™ andPeachtree Natural Foods®.

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 DecemberMarch 31, 2015,2016, the results of its operations for the three and six months ended DecemberMarch 31, 20152016 and 20142015 and its cash flows for the threesix months ended DecemberMarch 31, 20152016 and 2014,2015, 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 DecemberMarch 31, 20152016 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, 2015, which was filed with the Securities and Exchange Commission on November 19, 2015.

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 and valuation and recoverability of long-lived assets. Actual results may differ from these estimates.


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NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(dollars in thousands, except per share data)

1. BASIS OF PRESENTATION (Continued)

New Accounting Standards

In November 2015,February 2016, the Financial Accounting Standards Board ("FASB") issued authoritative guidance, which is included in Accounting Standards Codification ("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

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


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 the consolidated financial statements as the guidance only changes the classification of deferred income taxes.

In September 2015, the FASB issued authoritative guidance, which is included in ASC 805, "Business Combinations." This guidance simplifies the accounting for measurement-period adjustments and is effective for the Company as of October 1, 2016. The Company is currently evaluating thedoes not expect this guidance to have a material impact this standard may have on its consolidated financial statements.

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 is currently evaluating thedoes not expect this guidance to have a material impact this standard may have 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.

2. ACCOUNTS RECEIVABLE

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


 December 31,
2015		 September 30,
2015		 March 31,
2016		 September 30,
2015

Accounts receivable

 $19,417 $17,882 $20,344
 $17,882

Less allowances

 (1,052) (1,084)(1,067) (1,084)
​​ ​ ​​ ​ ​

 $18,365 $16,798 $19,277
 $16,798
​​ ​ ​​ ​ ​

Table of Contents


NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(dollars in thousands, except per share data)



3. INVENTORIES

Inventories were comprised of the following:


 December 31,
2015		 September 30,
2015		 March 31,
2016		 September 30,
2015

Raw materials

 $26,137 $23,106 $26,508
 $23,106

Work-in-process

 10,299 9,755 11,576
 9,755

Finished goods

 25,407 26,579 23,407
 26,579
​​ ​ ​​ ​ ​

 $61,843 $59,440 $61,491
 $59,440
​​ ​ ​​ ​ ​

4. ACQUISITIONS

During the threesix months ended DecemberMarch 31, 2015,2016, the Company made one acquisitiontwo acquisitions of a business.businesses. On October 6, 2015, the Company acquired certain operating assets of Dynamic Health Laboratories, Inc. ("Dynamic Health"), a manufacturer. On February 18, 2016, the Company acquired certain operating assets of primarily organic and natural liquid nutritional products, for $19,026Aubrey Organics, Inc. ("Aubrey Organics"). The aggregate purchase price of these acquisitions was $26,235 in cash.

During the threesix months ended DecemberMarch 31, 2014,2015, the Company made one acquisition of a business. On November 18, 2014, the Company acquired certain operating assets of Agape Health Products for $81 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. Since the date of acquisition, net sales of $3,858 and gross profit of $1,527 for Dynamic Health were included in the Condensed Consolidated Statements of Comprehensive Income for the three months ended December 31, 2015. The Company tracks selling, general and administrative expenses on a consolidated basis, not on a brand-by-brand basis. As a result, the disclosure of any results after gross profit is impracticable. 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 aggregate purchase price was assigned to the assets acquired based on their fair values at their respective dates of acquisition. The excess of aggregate purchase price over the fair values of the assets acquired was classified as goodwill. The goodwill relates to expected synergies from these acquisitions. The following reflects the preliminary allocation of the


Table of Contents


NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(dollars in thousands, except per share data)

4. ACQUISITIONS (Continued)

aggregate purchase priceprices for the fiscal 2016 acquisitionacquisitions and the final allocation of the aggregate purchase price for the fiscal 2015 acquisition to the aggregate assets acquired:


 Fiscal 2016
Acquisition		 Fiscal 2015
Acquisition		 

Aggregate assets acquired:

     
Fiscal 2016 Acquisition - Dynamic Health Fiscal 2016 Acquisition - Aubrey Organics Fiscal 2015 Acquisition
Assets acquired: 
  
  

Current assets

 $3,821 $41 $3,821
 $755
 $41

Property, plant and equipment

 644 — 644
 6,004
 —

Goodwill

 6,541 — 6,541
 —
 —

Intangible assets

 8,020 40 8,020
 450
 40
​​ ​​​ ​ ​

 $19,026 $81 $19,026
 $7,209
 $81
​​ ​​​ ​ ​

The fiscal 2016 and fiscal 2015 acquired intangible assets totaling $8,020$8,470 and $40, respectively, 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 and fiscal 2015 acquired intangible assets are expected to be deductible for tax purposes over fifteen years. Goodwill whichof $6,541 for fiscal 2016 is not subject to amortization for financial statement purposes of $6,541 for fiscal 2016,and is expected to be deductible for tax purposes over fifteen years.

The resultsCondensed Consolidated Statements of Dynamic Health have been includedComprehensive Income and the Condensed Consolidated Statements of Cash Flows presented herein include the activities of these acquired businesses from their respective dates of acquisition. The expected long-term sales and expense synergies of acquired businesses generally are not realized immediately following acquisition, as certain transition and integration matters must be completed.

NUTRACEUTICAL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in the consolidated financial statements fromthousands, except per share data)


Since the date of acquisition (October 6, 2015)., net sales of $8,355 and gross profit of $3,207 for Dynamic Health were included in the Condensed Consolidated Statements of Comprehensive Income for the six months ended March 31, 2016. The Company tracks selling, general and administrative expenses on a consolidated basis, not on a brand-by-brand basis. As a result, the disclosure of any results after gross profit is impracticable. The following table provides unaudited pro forma information for the three and six months ended DecemberMarch 31, 2014,2015, as if the acquisition of Dynamic Health had been completed on October 1, 2014. Pro forma information was not provided for the three and six months ended DecemberMarch 31, 2015 as2016 since the acquisition was completed near the beginning of this periodthese periods and the pro forma results are not materially different than actual results. The information has been provided for illustrative purposes only and is not necessarily indicative of the actual results that would have been achieved by the Company for the periodperiods presented or that will be achieved in the future. The pro forma information has been adjusted to give effect to items directly attributable to the Dynamic Health acquisition. These adjustments include acquisition costs, amortization expense associated with acquired intangible assets, interest expense associated with borrowings on the Company's revolving credit facility to fund the acquisition, application of the Company's depreciable lives policy for property, plant and equipment, elimination of intercompany transactions and any consequential tax effects.

 Three Months Ended
March 31, 2015		 Six Months Ended
March 31, 2015
Net sales$59,970
 $117,591
Net income$4,161
 $7,580
 
 Three Months
Ended
December 31, 2014		 

Net sales

 $57,621 

Net income

 $3,419 

This information has not been adjusted to reflect any changes in the operations of the business subsequent to acquisition. Changes in the operations of the acquired business may include, but are not limited to, discontinuation of certain customers and/or products, application of the Company's pricing and credit policies, integration of systems and personnel, changes in manufacturing processes, relocation of facilities, potential cost synergies and changes in marketing and sales programs. Due to these changes, future results could be materially different than the pro forma information provided.


The actual and pro forma net sales and earnings related to the Aubrey Organics acquisition were not material.

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NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(dollars in thousands, except per share data)

5. GOODWILL AND INTANGIBLE ASSETS

The change in the carrying amount of goodwill from September 30, 2015 to DecemberMarch 31, 20152016 was as follows:

 
 Goodwill Accumulated
Impairment		 Net 

Balance as of October 1, 2015

 $64,778 $(40,394)$24,384 

Goodwill attributable to fiscal 2016 acquisition

  
6,541		  
—		  
6,541		 
​​​ ​ ​​ ​​​ ​ ​

Balance as of December 31, 2015

  71,319  (40,394) 30,925 
​​​ ​ ​​ ​​​ ​ ​
 Goodwill 
Accumulated
Impairment
 Net
Balance as of September 30, 2015$64,778
 $(40,394) $24,384
Goodwill attributable to fiscal 2016 acquisitions6,541
 —
 6,541
Balance as of March 31, 2016$71,319
 $(40,394) $30,925


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


The carrying amounts of intangible assets at DecemberMarch 31, 20152016 and September 30, 2015 were as follows:

 
 December 31, 2015 September 30, 2015 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/licenses

 $13,555 $(2,277)$11,278 $12,470 $(1,966)$10,504  11 

Customer relationships/non-compete agreements

  23,815  (10,442) 13,373  16,836  (9,773) 7,063  7 

Developed software and technology

  772  (772) —  772  (772) —  5 
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​​ ​​​​

  38,142  (13,491) 24,651  30,078  (12,511) 17,567    

Intangible assets not subject to amortization:

  
 		  
 		  
 		  
 		  
 		  
 		  
 		 

Trademarks/tradenames/licenses

  —  —  —  38  —  38    
​​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​​​

 $38,142 $(13,491)$24,651 $30,116 $(12,511)$17,605    
​​​ ​ ​​ ​ ​​​ ​​ ​ ​​ ​​​ ​ ​​​​
 March 31, 2016 September 30, 2015 
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/licenses$13,893
 $(2,587) $11,306
 $12,470
 $(1,966) $10,504
 11
Customer relationships/non-compete agreements23,975
 (11,133) 12,842
 16,836
 (9,773) 7,063
 7
Developed software and technology772
 (772) —
 772
 (772) —
 5
 38,640
 (14,492) 24,148
 30,078
 (12,511) 17,567
  
Intangible assets not subject to amortization: 
  
  
  
  
  
  
Trademarks/tradenames/licenses—
 —
 —
 38
 —
 38
  
 $38,640
 $(14,492) $24,148
 $30,116
 $(12,511) $17,605
  
(1)
Amounts include the impact of foreign currency translation adjustments.

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NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(dollars in thousands, except per share data)

5. GOODWILL AND INTANGIBLE ASSETS (Continued)

Estimated future amortization expense related to the DecemberMarch 31, 20152016 net carrying amount of $24,651$24,148 for intangible assets subject to amortization is as follows:

Year Ending September 30,
 Estimated
Amortization
Expense		 

2016(1)

 $2,898 

2017

  3,506 

2018

  3,315 

2019

  2,888 

2020

  2,799 

Thereafter

  9,245 
​​​ ​ ​

 $24,651 
​​​ ​ ​
(1)
Estimated amortization expense for the year ending September 30, 2016 includes only amortization to be recorded after December 31, 2015.
Year Ending September 30,
Estimated
Amortization
Expense
2016(1)$1,944
20173,582
20183,391
20192,964
20202,875
Thereafter9,392
 $24,148

(1)Estimated amortization expense for the year ending September 30, 2016 includes only amortization to be recorded after March 31, 2016.

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.


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


6. DEBT

Debt was comprised of the following:

 
 December 31,
2015		 September 30,
2015		 

Long-term debt—revolving credit facility

 $48,000 $31,500 
​​​ ​ ​​ ​ ​
 March 31,
2016		 September 30,
2015
Long-term debt—revolving credit facility$47,500
 $31,500

The carrying value of the Company's debt approximates fair value at DecemberMarch 31, 20152016 and September 30, 2015. 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


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NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(dollars in thousands, except per share data)

6. DEBT (Continued)

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.

At DecemberMarch 31, 2015,2016, the Company had outstanding revolving credit borrowings of $48,000$47,500 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 DecemberMarch 31, 2015,2016, the applicable weighted-average interest rate for outstanding borrowings was 1.66%2.12%. The Company is also required to pay a variable quarterly fee on the unused balance under the Credit Agreement. At DecemberMarch 31, 2015,2016, 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 DecemberMarch 31, 2015,2016, 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 DecemberMarch 31, 2015 and 2014,2016, the Company purchased 65,41180,529 and 48,562145,940 shares of common stock for an aggregate price of $1,604$1,962 and $1,074,$3,566, respectively. During the three and six months ended March 31, 2015, the Company purchased 68,463 and 117,025 shares of common stock for an aggregate price of $1,278 and $2,352, respectively. All of these shares of common stock held in treasury were retired prior to DecemberMarch 31 in the respective quarter of purchase.purchase, except at March 31, 2016 and 2015, the Company held 3,354 and 2,000 shares of common stock in treasury. As of DecemberMarch 31, 2015,2016, the Company was permitted to purchase up to 415,850 335,321

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


additional shares under its approved purchase plan, with no expiration date or restrictions. The Company accounts for treasury shares using the cost method.

8. STOCK OPTIONS AND OTHER EQUITY AWARDS

As of DecemberMarch 31, 2015,2016, the Company had no outstanding options to purchase shares of common stock, as all previously issued options were exercised or expired prior to September 30, 2015. There were no stock options exercised during
During the threesix months ended DecemberMarch 31, 2014.

2015, the Company received proceeds of $9 related to the exercise of stock options. During this same period, the Company recorded a tax benefit of $1and optionees realized an aggregate pre-tax gain of $3 from these stock option exercises.

No options to purchase shares of common stock for the three and six months ended DecemberMarch 31, 20142015 were excluded from the computation of diluted earnings per share because none of the stock options were anti-dilutive.


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NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(dollars in thousands, except per share data)

8. STOCK OPTIONS AND OTHER EQUITY AWARDS (Continued)

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 options, stock appreciation rights and stock awards. In conjunction with the Company's fiscal 2015 and fiscal 2014 incentive compensation (bonus) payments, 22,664 and 24,827 shares of the Company's common stock were issued, respectively. These non-cash stock awards were granted on December 11, 2015 and December 11, 2014 at an aggregate fair value of $556 and $504, 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. As of DecemberMarch 31, 2015,2016, 720,721 shares of the Company's common stock were available for issuance under the 2013 Plan.

9. 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 an aggregate basis.

Net sales attributed to customers in the United States and foreign countries for the three and six months ended DecemberMarch 31, 20152016 and 20142015 were as follows:


 Three Months Ended
December 31,		 Three Months Ended
March 31,		 Six Months Ended
March 31,

 2015 2014 2016 2015 2016 2015

United States

 $50,050 $46,725 $52,350
 $48,807
 $102,400
 $95,532

Foreign countries

 5,909 6,319 7,142
 6,597
 13,051
 12,916
​​ ​ ​​ ​ ​

 $55,959 $53,044 $59,492
 $55,404
 $115,451
 $108,448
​​ ​ ​​ ​ ​

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.


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NUTRACEUTICAL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(dollars in thousands, except per share data)

9. SEGMENTS (Continued)



The Company's net sales by product group for the three and six months ended DecemberMarch 31, 20152016 and 20142015 were as follows:

 
 Three Months Ended
December 31,		 
 
 2015 2014 

Branded nutritional supplements and other natural products

 $50,499 $47,088 

Other(1)

  5,460  5,956 
​​​ ​​​ ​ ​

 $55,959 $53,044 
​​​ ​​​ ​ ​
(1)
Net sales for any other product or group of similar products are less than 10% of consolidated net sales.

 Three Months Ended
March 31,		 Six Months Ended
March 31,
 2016 2015 2016 2015
Branded nutritional supplements and other natural products$53,687
 $49,102
 $104,186
 $96,190
Other(1)5,805
 6,302
 11,265
 12,258
 $59,492
 $55,404
 $115,451
 $108,448
(1)Net sales for any other product or group of similar products are less than 10% of consolidated net sales.
In October 2015, the Company made a decision to classify certain net sales in the other product group that were previously included in the branded nutritional supplements and other natural products group. As a result of this decision, the other product group net sales amount for the three and six months ended DecemberMarch 31, 20142015 has been increased by $789$781 and $1,570, respectively, from the prior year's presentation.


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

General

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

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

We manufacture and sell nutritional supplements and other natural products under numerous brands, includingSolaray®,KAL®,Dynamic HealthHealth™™,Nature's Life®,LifeTime®,Natural Balance®, NaturalCare®,Health from the Sun®,Pioneer®,Nutra BioGenesisBioGenesis™™,Life-flo®,Organix South®,Heritage Store® andMonarch NutraceuticalsNutraceuticals™™.

We own neighborhood natural food markets, which operate under the trade namesThe Real Food CompanyCompany™™,Thom's Natural FoodsFoods™™,Cornucopia Community Market™ andGranola'sGranola's™™. We also own health food stores, which operate under various trade names, includingFresh VitaminsVitamins™™ andPeachtree Natural Foods®.

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 and valuation and recoverability of long-lived assets. Actual results may differ from these estimates. Our critical accounting policies include the following:

Accounts Receivable—Provision is made for estimated bad debts based on periodic analysis of individual customer balances, including an evaluation of days sales outstanding, payment history, recent payment trends and perceived 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


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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.


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


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presented, as well as specific known claims, if any. No other significant deductions from revenue must be estimated at the point in time that revenue is recognized.

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

New Accounting Standards

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


Results of Operations

The following table sets forth certain Consolidated Statements of Comprehensive Income data as a percentage of net sales for the periods indicated:

 
 Three Months
Ended
December 31,		 
 
 2015 2014 

Net sales

  100.0% 100.0%

Cost of sales

  49.8% 51.3%
​​​ ​ ​​ ​ ​

Gross profit

  50.2% 48.7%

Selling, general and administrative

  36.4% 36.9%

Amortization of intangible assets

  1.8% 1.4%
​​​ ​ ​​ ​​

Income from operations

  12.0% 10.4%

Interest and other expense, net

  0.4% 0.5%
​​​ ​ ​​ ​ ​

Income before provision for income taxes

  11.6% 9.9%

Provision for income taxes

  4.0% 3.6%
​​​​ ​​ ​ ​

Net income

  7.6% 6.3%
​​​ ​ ​​ ​ ​

Adjusted EBITDA(1)

  18.3% 16.6%
​​​ ​ ​​ ​ ​
 Three Months Ended
March 31,		 Six Months Ended
March 31,
 2016 2015 2016 2015
Net sales100.0% 100.0% 100.0% 100.0%
Cost of sales49.0% 50.8% 49.4% 51.0%
Gross profit51.0% 49.2% 50.6% 49.0%
Selling, general and administrative36.6% 35.7% 36.5% 36.3%
Amortization of intangible assets1.7% 1.3% 1.7% 1.3%
Income from operations12.7% 12.2% 12.4% 11.4%
Interest and other expense, net0.5% 0.5% 0.5% 0.5%
Income before provision for income taxes12.2% 11.7% 11.9% 10.9%
Provision for income taxes4.4% 4.3% 4.2% 4.0%
Net income7.8% 7.4% 7.7% 6.9%
Adjusted EBITDA(1)18.6% 18.1% 18.5% 17.3%
(1)
See "—Adjusted EBITDA."

Comparison of the Three Months Ended DecemberMarch 31, 20152016 to the Three Months Ended DecemberMarch 31, 2014
2015

Net Sales.    Net sales increased by $3.0$4.1 million, or 5.5%7.4%, to $56.0$59.5 million for the three months ended DecemberMarch 31, 20152016 (the "first"second quarter of fiscal 2016") from $53.0$55.4 million for the three months ended DecemberMarch 31, 20142015 (the "first"second quarter of fiscal 2015"). Net sales of branded nutritional supplements and other natural products increased by $3.5$4.6 million, or 7.2%9.3%, to $50.5$53.7 million for the firstsecond quarter of fiscal 2016, compared to $47.0$49.1 million for the firstsecond quarter of fiscal 2015. The increase in net sales of branded nutritional supplements and other natural products was primarily related to the net sales contributions of the fiscal 2015 and fiscal 2016 acquisitions and, to a lesser extent, price increases of $1.6$1.0 million, partially offset by a decrease in sales volume of branded products to certain customers. Other net sales were $5.5$5.8 million for the firstsecond quarter of fiscal 2016 and $6.0$6.3 million for the firstsecond quarter of fiscal 2015.

Gross Profit.    Gross profit increased by $2.2$3.0 million, or 8.7%11.3%, to $28.1$30.3 million for the firstsecond quarter of fiscal 2016 from $25.9$27.3 million for the firstsecond quarter of fiscal 2015. As a percentage of net sales, gross profit increased to 50.2%51.0% for the firstsecond quarter of fiscal 2016 from 48.7%49.2% for the firstsecond quarter of fiscal


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2015. This increase in gross profit was primarily related to the increase in net sales and, to a lesser extent, a decrease in certain manufacturing overhead costs.

Selling, General and Administrative.    Selling, general and administrative expenses increased by $0.7$2.0 million, or 4.0%10.1%, to $20.3$21.8 million for the firstsecond quarter of fiscal 2016 from $19.6$19.8 million for the firstsecond quarter of fiscal 2015. As a percentage of net sales, selling, general and administrative expenses increased to 36.6% for the second quarter of fiscal 2016, compared to 35.7% for the second quarter of fiscal 2015. This increase in selling, general and administrative expenses was primarily attributable to operational and transition costs related to the fiscal 2015 and fiscal 2016 acquisitions.
Amortization of Intangible Assets.    Amortization of intangible assets was $1.0 million for second quarter of fiscal 2016 and $0.7 million for the second quarter of fiscal 2015. 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 both the second quarter of fiscal 2016 and fiscal 2015 and primarily consisted of interest expense on indebtedness under our revolving credit facility.

Provision for Income Taxes.    Our effective tax rate was 36.1% for the second quarter of fiscal 2016 and 36.6% for the second quarter of fiscal 2015. In each period, our effective tax rate was higher than the federal statutory rate primarily due to state taxes.
Comparison of the Six Months Ended March 31, 2016 to the Six Months Ended March 31, 2015
Net Sales.    Net sales increased by $7.1 million, or 6.5%, to $115.5 million for the six months ended March 31, 2016 from $108.4 million for the six months ended March 31, 2015. Net sales of branded nutritional supplements and other natural products increased by $8.0 million, or 8.3%, to $104.2 million for the six months ended March 31, 2016 from $96.2 million for the six months ended March 31, 2015. The increase in net sales of branded nutritional supplements and other natural products was primarily related to the net sales contributions of the fiscal 2015 and fiscal 2016 acquisitions and, to a lesser extent, price increases of $2.6 million, partially offset by a decrease in sales volume of branded products to certain customers. Other net sales were $11.3 million for the six months ended March 31, 2016 and $12.2 million for the six months ended March 31, 2015.
Gross Profit.    Gross profit increased by $5.3 million, or 10.0%, to $58.4 million for the six months ended March 31, 2016 from $53.1 million for the six months ended March 31, 2015. As a percentage of net sales, gross profit increased to 50.6% for the six months ended March 31, 2016 from 49.0% for the six months ended March 31, 2015. This increase in gross profit was primarily related to the increase in net sales and, to a lesser extent, a decrease in certain manufacturing overhead costs.
Selling, General and Administrative.    Selling, general and administrative expenses increased by $2.8 million, or 7.1%, to $42.1 million for the six months ended March 31, 2016 from $39.3 million for the six months ended March 31, 2015. This increase in selling, general and administrative expenses was primarily attributable to operational and transition costs related to the fiscal 2015 and fiscal 2016 acquisitions. As a percentage of net sales, selling, general and administrative expenses were 36.4%36.5% for the first quarter of fiscalsix months ended March 31, 2016 and 36.9%36.3% for the first quarter of fiscalsix months ended March 31, 2015.

Amortization of Intangible Assets.    Amortization of intangible assets was $1.0$2.0 million for first quarter of fiscalsix months ended March 31, 2016 and $0.7$1.5 million for the first quarter of fiscalsix months ended March 31, 2015. 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$0.6 million for both the first quarter of fiscalsix months ended March 31, 2016 and fiscal 2015 and primarily consisted of interest expense on indebtedness under our revolving credit facility.

Provision for Income Taxes.    Our effective tax rate was 34.9%35.5% for the first quarter of fiscalsix months ended March 31, 2016 and 36.4%36.6% for the first quarter of fiscalsix months ended March 31, 2015. The decrease in theIn each period, our effective tax rate was primarily related tohigher than the federal reinstatement of the credit for increasing research activities.statutory rate primarily due to state taxes.

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:

•
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; 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,

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      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.

▪
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; 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.

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

 
 Three Months Ended
December 31,		 
 
 2015 2014 
 
 (dollars in thousands)
 

Net income

 $4,241 $3,351 

Provision for income taxes

  2,270  1,921 

Interest and other expense, net(1)

  274  297 

Depreciation and amortization

  3,482  3,239 
​​​ ​ ​​ ​ ​

Adjusted EBITDA

 $10,267 $8,808 
​​​ ​ ​​ ​ ​
(1)
Includes amortization of deferred financing fees.

 Three Months Ended
March 31,		 Six Months Ended
March 31,
 2016 2015 2016 2015
 (dollars in thousands)
Net income$4,618
 $4,096
 $8,859
 $7,447
Provision for income taxes2,611
 2,369
 4,881
 4,290
Interest and other expense, net(1)322
 273
 596
 570
Depreciation and amortization3,538
 3,268
 7,020
 6,507
Adjusted EBITDA$11,089
 $10,006
 $21,356
 $18,814
(1)Includes amortization of deferred financing fees.
Our Adjusted EBITDA increased to $10.3$11.1 million for the firstsecond quarter of fiscal 2016 from $8.8$10.0 million for the firstsecond quarter of fiscal 2015. Adjusted EBITDA as a percentage of net sales increased to 18.3%18.6% for the firstsecond quarter of fiscal 2016 from 16.6%18.1% for the firstsecond quarter of fiscal 2015.

Our Adjusted EBITDA increased to $21.4 million for the six months ended March 31, 2016 from $18.8 million for the six months ended March 31, 2015. Adjusted EBITDA as a percentage of net sales increased to 18.5% for the six months ended March 31, 2016 from 17.3% for the six months ended March 31, 2015.
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.

Liquidity and Capital Resources

We had working capital of $73.0$69.1 million as of DecemberMarch 31, 2015,2016, compared to $65.7 million as of September 30, 2015. The increase in working capital was primarily the result of increases in accounts receivable and inventories and a decrease in accrued expenses.

inventories.

Net cash provided by operating activities for the threesix months ended DecemberMarch 31, 20152016 was $6.9$17.3 million, compared to $3.0$11.2 million for the comparable period in fiscal 2015. This increase in net cash provided by operating activities for the threesix months ended DecemberMarch 31, 20152016 was primarily attributable to an increase in net income as well as changes in operating assets and liabilities.


Net cash used in investing activities was $21.1$30.3 million for the threesix months ended DecemberMarch 31, 2015,2016, compared to $2.7$4.3 million for the comparable period in fiscal 2015. 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.


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During the threesix months ended DecemberMarch 31, 2015,2016, we made one acquisitiontwo acquisitions of a business.businesses. On October 6, 2015, we acquired certain operating assets of Dynamic Health Laboratories, Inc., a manufacturer On February 18, 2016, we acquired certain operating assets of primarily organic and natural liquid nutritional products, for $19.0Aubrey Organics, Inc. The aggregate purchase price of these acquisitions was $26.2 million in cash.

During the threesix months ended DecemberMarch 31, 2014,2015, we made one acquisition of a business. On November 18, 2014, we acquired certain operating assets of Agape Health Products for $0.1 million in cash.

Net cash provided by financing activities was $14.9$12.5 million for the threesix months ended DecemberMarch 31, 20152016 and net cash used in financing activities was $2.5$7.7 million for the comparable period in fiscal 2015. During these periods, financing activities primarily related to borrowings and repayments under our revolving credit facility, payments of deferred financing fees, purchases of common stock for treasury and proceeds from the issuance of common stock related to stock option exercises and the direct stock purchase plan. During the threesix months ended DecemberMarch 31, 2015,2016, net borrowings under our revolving credit facility were $16.5$16.0 million and primarily related to the acquisition of certain operating assets of Dynamic Health Laboratories, Inc.

and Aubrey Organics, Inc.

In October 2007, we registered a direct stock purchase plan with the Securities and Exchange Commission. The purpose of this direct stock purchase plan is to provide a convenient way for existing stockholders, as well as new investors, to purchase shares of our common stock. A total of 1,500,000 shares of our common stock were registered under the plan, with 6061,665 shares purchased during the threesix months ended DecemberMarch 31, 2015.2016. As of DecemberMarch 31, 2015,2016, there were 1,376,8381,375,779 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 DecemberMarch 31, 2015,2016, we had outstanding revolving credit borrowings of $48.0$47.5 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 DecemberMarch 31, 2015,2016, the applicable weighted-average interest rate for outstanding borrowings was 1.66%2.12%. We are also required to pay a quarterly fee on the unused balance under the Credit Agreement. At DecemberMarch 31, 2015,2016, 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.

The Credit Agreement contains restrictive covenants, including limitations on incurring certain other indebtedness and requirements that we maintain certain financial ratios. As of DecemberMarch 31, 2015,2016, 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.


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

Contractual Obligations and Other Commitments

Our significant non-cancelable contractual obligations and other commitments as of DecemberMarch 31, 20152016 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

 $48,000 $— $— $48,000 $— 

Interest on revolving credit facility(a)

  3,676  956  1,911  809  — 

Operating leases

  6,600  3,972  2,014  564  50 
​​​ ​ ​​ ​​​ ​ ​​ ​​​ ​ ​

Total

 $58,276 $4,928 $3,925 $49,373 $50 
​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​ ​
(a)
Represents estimated interest obligations associated with our outstanding revolving credit facility balance of $48.0 million at December 31, 2015, assuming no principal payments are made before maturity, a weighted-average interest rate of 1.66% and an underutilization fee rate of 0.25%.
 Payments Due By Period
Contractual Obligations and Other CommitmentsTotal 
Less Than
1 Year
 1 - 3 Years 4 - 5 Years 
After
5 Years
 (dollars in thousands)
Revolving credit facility$47,500
 $—
 $—
 $47,500
 $—
Interest on revolving credit facility(a)4,209
 1,170
 2,340
 699
 —
Operating leases6,274
 3,917
 2,040
 297
 20
Total$57,983
 $5,087
 $4,380
 $48,496
 $20

(a)Represents estimated interest obligations associated with our outstanding revolving credit facility balance of $47.5 million at March 31, 2016, assuming no principal payments are made before maturity, a weighted-average interest rate of 2.12% 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 DecemberMarch 31, 2015,2016, 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 implied by these statements.


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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 DecemberMarch 31, 2015,2016, the applicable weighted-average interest rate for borrowings was 1.66%2.12% and we had total borrowings outstanding of $48.0$47.5 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 threesix months ended DecemberMarch 31, 20152016 and 2014.

2015.

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, Canada, Dominica, Japan, 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


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officers, of the effectiveness of the design and operation of our disclosure controls and procedures as of DecemberMarch 31, 2015.2016. 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 DecemberMarch 31, 2015.

2016.

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


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PART II—OTHER INFORMATION

Item 1.    Legal Proceedings

As discussed in our other filings, we are subject to regulation by a number of federal, state and foreign agencies and are involved in various legal matters arising in the 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 2015 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 DecemberMarch 31, 2015.

2016.

Prior to fiscal 2016, our Board of Directors approved a share purchase program authorizing us to buy up to 4,500,000 shares of our common stock. As of DecemberMarch 31, 2015,2016, there were 415,850335,321 shares available for purchase under this program. The shares available for purchase under this program have no expiration date. Purchases under this program during the three months ended DecemberMarch 31, 20152016 occurred in October, NovemberJanuary, February and DecemberMarch as follows:

Period
 Total Number
of Shares
Purchased		 Average Price
Paid Per
Share		 Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plan		 Maximum
Number of
Shares that
May Yet Be
Purchased Under
the Plan		 

October 1 - 31, 2015

  22,000 $23.74  22,000    

November 1 - 30, 2015

  20,000  24.56  20,000    

December 1 - 31, 2015

  23,411  25.25  23,411    
​​​​ ​​​​​ ​ ​​​​

  65,411  24.53  65,411  415,850 
​​​ ​ ​​​​​ ​​​ ​ ​
Period 
Total Number
of Shares
Purchased
 
Average Price
Paid Per
Share
 
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plan
 
Maximum
Number of
Shares that
May Yet Be
Purchased Under
the Plan
January 1-31, 2016 33,500
 $24.34
 33,500
  
February 1-29, 2016 24,076
 24.15
 24,076
  
March 1-31, 2016 22,953
 24.61
 22,953
  
  80,529
 24.36
 80,529
 335,321

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Item 6.    Exhibits

31.1
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 
32.1

Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 
101.INS

XBRL Instance Document(1)

 
101.SCH

XBRL Taxonomy Extension Schema Document(1)

 
101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document(1)

 
101.DEF

XBRL Taxonomy Extension Definition Linkbase Document(1)

 
101.LAB

XBRL Taxonomy Extension Labels Linkbase Document(1)

 
101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document(1)
(1)
Filed herewith.
(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: JanuaryApril 28, 2016
By:
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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