Basis of Presentation

3 Months Ended

Dec. 31, 2015

1. Basis of Presentation

NBTY, Inc. ("NBTY"), together with its subsidiaries, (the "Company," "we," or "us"), is the leading global vertically integrated manufacturer, marketer, distributor and retailer of a broad line of high-quality vitamins, minerals, herbs, specialty supplements, and sports/active nutrition products ("VMHS") in the United States, with operations worldwide. We have prepared these financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") applicable to interim financial information and on a basis that is consistent with the accounting principles applied in our audited financial statements for the fiscal year ended September 30, 2015, including the notes thereto (our "2015 Financial Statements") included in our Annual Report on Form 10-K/A for the fiscal year ended September 30, 2015 ("2015 Annual Report"). In our opinion, these financial statements reflect all adjustments (including normal recurring items) necessary for a fair presentation of our results for the interim periods presented. These financial statements do not include all information or notes necessary for a complete presentation in conformity with GAAP. Accordingly, these financial statements should be read in conjunction with the 2015 Financial Statements. Results for interim periods are not necessarily indicative of results which may be achieved for a full year.

Revision to Financial Statements

During the preparation of the annual consolidated financial statements for the fiscal year ended September 30, 2015 ("fiscal 2015"), the Company discovered a financial statement error attributable to the accounting for the accelerated depreciation of assets being sold in conjunction with the closure of its nutritional bar manufacturing plant. More specifically, the Company determined that accelerated depreciation had been understated for the three and nine months ended June 30, 2015 by $4,904 and $6,539, respectively. Accordingly, the Company restated those periods.

Additionally, in prior interim periods during fiscal 2015 the Company had recorded and disclosed out-of-period adjustments that the Company concluded at the time of recording of those adjustments, based on its evaluation of both quantitative and qualitative factors, were not material to any of its previously issued consolidated financial statements.

These adjustments included the following:


	•	During the first quarter of fiscal 2015, the Company recorded an out-of-period adjustment to cost of sales and label inventory of $3,707. This immaterial adjustment is a result of the Company correcting its policy of expensing all labels upon receipt. Accordingly on-hand labels are now recorded as a part of ending inventory on the consolidated balance sheet.
	•	During the second and third quarters of fiscal 2015, the Company recorded an out-of-period adjustment to selling, general and administrative expenses and cost of sales and prepaid rent totaling $3,252. This immaterial adjustment is a result of the Company correcting its policy of expensing rent, primarily at certain retail locations, at the payment date. Accordingly prepaid rent is now recorded on the consolidated balance sheet and expensed during the period of use.

The Company concluded that the aggregate impact of these errors resulted in a material misstatement to its consolidated financial statements for the three and nine months ended June 30, 2015. In connection with the Company's restatement of those interim consolidated financial statements the Company revised its historical financial statements to reflect the impact of the correction of the accounting policies noted above. The impact of correcting these policies was recorded as an adjustment to Shareholder's Equity as of September 30, 2012. Therefore, the Consolidated Statements of Shareholder's Equity and the Consolidated Balance Sheet have been revised to reflect this change. There was no change to the previously reported Consolidated Statements of Operations and Comprehensive Income (Loss), for these adjustments as the impact to the Company's results of operations for all previously reported periods was de minimis. Furthermore, there was no change to the Consolidated Statements of Cash Flows and no impact on any covenants contained in its debt agreements.

During the second quarter of 2016, the Company identified errors related to its previously issued financial statements that the Company concluded, based on its evaluation of both quantitative and qualitative factors, were not material to any of its previously issued consolidated financial statements:


	•	In accounting for deferred taxes related to certain of the Company's long-lived assets recorded in connection with the acquisition of the Company by Carlyle, inclusive of intangible assets and property, plant and equipment, the Company did not properly consider the implications of income tax and foreign currency rate changes when recording deferred taxes at the end of each reporting period. The correction of these errors results in the reduction of long-term deferred income tax liabilities of $45,235 and $38,671 as of December 31, 2015 and September 30, 2015, respectively, the reduction in Provision (benefit) for income taxes of $4,680 for the three months ended December 31, 2015 and an increase in Foreign currency translation adjustments of $1,884 and $3,477, for the three months December 31, 2015 and 2014, respectively. Accordingly, the Consolidated Balance Sheets, Statements of Operations and Comprehensive Income (Loss) and Statements of Stockholders' Equity have been revised, as applicable, to reflect these changes. The impact of these errors for fiscal periods prior to 2013 but subsequent to the acquisition of the Company by Carlyle was recorded as an adjustment to Shareholder's Equity as of September 30, 2012.
	•	In accounting for the acquisition of the Company by Carlyle, the Company improperly recorded a deferred tax liability related to carryover tax-deductible goodwill resulting in an overstatement of its long-term deferred tax liabilities and goodwill in the amount of $13,930. The Consolidated Balance Sheets have been revised to reflect this change.

The correction of these errors had no impact on the total captions as reported in the Consolidated Statements of Cash Flows and no impact on any covenants contained in its debt agreements.

The aggregate impact of these revisions to correct the previously issued financial statements is follows:

	December 31, 2015									September 30, 2015
	As Reported			Adjustment			As Revised			As Reported			Adjustment			As Revised
Consolidated Balance Sheets
Goodwill	$	1,200,501		$	(13,930	)	$	1,186,571		$	1,118,020		$	(13,930	)	$	1,104,090
Total assets	$	4,901,327		$	(13,930	)	$	4,887,397		$	4,868,409		$	(13,930	)	$	4,854,479
Deferred income taxes	$	723,201		$	(45,235	)	$	677,966		$	701,694		$	(38,671	)	$	663,023
Total liabilities	$	3,420,166		$	(45,235	)	$	3,374,931		$	3,436,663		$	(38,671	)	$	3,397,992
Capital in excess of par	$	1,507,408		$	22,498		$	1,529,906		$	1,542,584		$	—		$	1,542,584
Retained earnings	$	—		$	—		$	—		$	(1,136	)	$	17,818		$	16,682
Accumulated other comprehensive loss	$	(129,758	)	$	8,807		$	(120,951	)	$	(109,702	)	$	6,923		$	(102,779	)
Total shareholder's equity	$	1,377,650		$	31,305		$	1,408,955		$	1,431,746		$	24,741		$	1,456,487
Total liabilities and shareholder's equity	$	4,901,327		$	(13,930	)	$	4,887,397		$	4,868,409		$	(13,930	)	$	4,854,479

	Three months ended December 31, 2015									Three months ended December 31, 2014
	As Reported			Adjustment			As Revised			As Reported			Adjustment			As Revised
Consolidated Statements of Income and Comprehensive Income (Loss)
Cost of sales (See Note 3)	$	443,144		$	—		$	443,144		$	445,180		$	3,707		$	448,887
Total costs and expenses	$	759,949		$	—		$	759,949		$	730,246		$	3,707		$	733,953
Income from operations	$	42,041		$	—		$	42,041		$	95,525		$	(3,707	)	$	91,818
Income from operations before income taxes	$	5,743		$	—		$	5,743		$	59,423		$	(3,707	)	$	55,716
(Benefit) provision for income taxes	$	1,945		$	(4,680	)	$	(2,735	)	$	21,232		$	(1,423	)	$	19,809
Net income (loss)	$	3,798		$	4,680		$	8,478		$	38,191		$	(2,284	)	$	35,907
Net (loss) income attributable to NBTY, Inc.	$	3,937		$	4,680		$	8,617		$	38,191		$	(2,284	)	$	35,907
Foreign currency translation adjustment, net of taxes of ($997) and $396, respectively	$	(20,630	)	$	1,884		$	(18,746	)	$	(30,307	)	$	3,477		$	(26,830	)
Total other comprehensive loss, net of tax:	$	(20,630	)	$	1,884		$	(18,746	)	$	(29,586	)	$	3,477		$	(26,109	)
Comprehensive loss	$	(16,832	)	$	6,564		$	(10,268	)	$	8,606		$	1,192		$	9,798
Comprehensive loss attributable to NBTY, Inc.	$	(16,119	)	$	6,564		$	(9,555	)	$	8,606		$	1,192		$	9,798

	Three months ended December 31, 2015									Three months ended December 31, 2014
	As Reported			Adjustment			As Revised			As Reported			Adjustment			As Revised
Consolidated Statement of Cash Flows
Net income (loss)	$	3,798		$	4,680		$	8,478		$	38,191		$	(2,284	)	$	35,907
Inventories	$	10,024		$	—		$	10,024		$	37,604		$	3,707		$	41,311
Deferred income taxes	$	5,499		$	(4,680	)	$	819		$	(256	)	$	—		$	(256	)
Net cash provided by operating activities	$	64,629		$	—		$	64,629		$	133,070		$	—		$	133,070
Accrued expenses and other liabilities	$	(56,537	)	$	—		$	(56,537	)	$	(15,390	)	$	(1,423	)		(16,813	)

Estimates

The preparation of financial statements in conformity with GAAP requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements and reported amounts of revenues and expenses during the reporting periods. These judgments can be subjective and complex, and consequently actual results could differ materially from those estimates and assumptions. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our most significant estimates include: sales returns, promotions and other allowances; inventory valuation and obsolescence; valuation and recoverability of long-lived assets, including goodwill and intangible assets; income taxes, and accruals for the outcome of current litigation.

Accounts Receivable Reserves

Accounts receivable are presented net of the following reserves:

	December 31, 2015		September 30, 2015
Promotional program incentive allowances	$	102,758	$	84,088
Allowance for sales returns		18,282		17,080
Allowance for doubtful accounts		2,632		2,600
Other accounts receivable allowances		3,516		3,091

	$	127,188	$	106,859

Redeemable non-controlling interest

In December 2015, we acquired a controlling interest in Dr. Organic Limited ("Dr. Organic"). The Company assessed the terms of the redemption features related to the non-controlling interest ("NCI") and concluded that based on the nature of those features the NCI should be accounted for as redeemable non-controlling interest. Accordingly, the NCI is classified outside of stockholders' equity in the Consolidated Balance Sheets as temporary equity under the caption, Redeemable non-controlling interest. The Company measures the NCI at its redemption value at the end of each period and if the redemption value is greater than the carrying value, an adjustment is recorded in retained earnings to record the NCI at its redemption value.

Net income attributable to the NCI reflects the portion of the net income (loss) of the consolidated entities applicable to the NCI stockholders in the accompanying Consolidated Statements of Operations. The net income attributable to NCIs is classified in the Consolidated Statements of Operations as part of consolidated net income and deducted from total consolidated net income to arrive at the net income attributable to the Company.

The changes in the temporary equity attributable to the redeemable NCI for the three months ended December 31, 2015 are as follows:

	Equity attributable to redeemable non-controlling interest
Balance at September 30, 2015	$	—

Issuance of non-controlling interest—Doctor Organic Limited		104,224
Net loss attributable to non-controlling interests		(139	)
Other comprehensive loss		(574	)

Balance at December 31, 2015	$	103,511

Recent Accounting Developments

In May 2014, the Financial Accounting Standards Board ("FASB") issued guidance on revenue from contracts with customers that will supersede virtually all existing revenue recognition guidance, including industry-specific guidance, and is designed to create greater comparability for financial statement users across industries and jurisdictions. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers. The guidance would have been effective for us beginning October 1, 2017, however in July 2015, the FASB decided to defer the effective date of the new standard by one year. Early adoption would be permitted for us beginning October 1, 2017. The guidance permits the use of either a retrospective or cumulative effect transition method. We have not yet selected a transition method and are currently evaluating the impact of the amended guidance on our consolidated financial statements and related disclosures.

In July 2015, the FASB issued guidance which applies to inventory for which cost is determined by methods other than the last-in first-out and the retail inventory method. Under the new guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This guidance is effective for us beginning October 1, 2017, and should be applied prospectively with early adoption permitted. We are currently evaluating the impact of adopting this guidance on our consolidated financial statements and related disclosures.

In November 2015, the Financial Accounting Standards Board issued guidance which requires all deferred tax assets and liabilities to be presented in the balance sheet as noncurrent. This guidance is effective for us on October 1, 2017. Upon adoption, we will present the net deferred tax assets as noncurrent and reclassify any current deferred tax assets and liabilities in our consolidated financial position on a retrospective basis and will not have a material impact on our Consolidated Balance Sheets.

NBTY INC 10-Q/A