Attached files
file | filename |
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EX-32 - EX-32 - MWI Veterinary Supply, Inc. | a10-13046_1ex32.htm |
EX-15 - EX-15 - MWI Veterinary Supply, Inc. | a10-13046_1ex15.htm |
EX-10.1 - EX-10.1 - MWI Veterinary Supply, Inc. | a10-13046_1ex10d1.htm |
EX-31.1 - EX-31.1 - MWI Veterinary Supply, Inc. | a10-13046_1ex31d1.htm |
EX-31.2 - EX-31.2 - MWI Veterinary Supply, Inc. | a10-13046_1ex31d2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
OR
o |
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-51468
MWI VETERINARY SUPPLY, INC.
(Exact name of registrant as specified in its Charter)
Delaware |
|
02-0620757 |
(State of Incorporation) |
|
(I.R.S. Employer Identification Number) |
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|
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651 S. Stratford Drive, Suite 100 |
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Meridian, ID |
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83642 |
(Address of principal executive offices) |
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(Zip Code) |
(208) 955-8930
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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 |
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Accelerated filer x |
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|
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Non-accelerated filer o |
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Smaller reporting company o |
(Do not check if a smaller reporting company) |
|
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of the registrants common stock, $0.01 par value, outstanding as of July 26, 2010 was 12,339,353.
MWI VETERINARY SUPPLY, INC.
MWI VETERINARY SUPPLY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Dollars and shares in thousands, except per share data
(unaudited)
|
|
Three months ended June 30, |
|
Nine months ended June 30, |
|
||||||||
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
Revenues: |
|
|
|
|
|
|
|
|
|
||||
Product sales |
|
$ |
334,242 |
|
$ |
231,743 |
|
$ |
827,614 |
|
$ |
647,979 |
|
Product sales to related party |
|
9,113 |
|
12,075 |
|
30,687 |
|
35,542 |
|
||||
Commissions |
|
4,332 |
|
3,645 |
|
12,094 |
|
10,273 |
|
||||
Total revenues |
|
347,687 |
|
247,463 |
|
870,395 |
|
693,794 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Cost of product sales |
|
303,750 |
|
212,980 |
|
750,927 |
|
594,022 |
|
||||
Gross profit |
|
43,937 |
|
34,483 |
|
119,468 |
|
99,772 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Selling, general and administrative expenses |
|
27,435 |
|
22,748 |
|
75,448 |
|
67,379 |
|
||||
Depreciation and amortization |
|
1,438 |
|
844 |
|
3,559 |
|
2,546 |
|
||||
Operating income |
|
15,064 |
|
10,891 |
|
40,461 |
|
29,847 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Other income (expense): |
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
(171 |
) |
(63 |
) |
(389 |
) |
(202 |
) |
||||
Earnings of equity method investees |
|
45 |
|
53 |
|
155 |
|
174 |
|
||||
Other |
|
57 |
|
130 |
|
299 |
|
406 |
|
||||
Total other income (expense), net |
|
(69 |
) |
120 |
|
65 |
|
378 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Income before taxes |
|
14,995 |
|
11,011 |
|
40,526 |
|
30,225 |
|
||||
Income tax expense |
|
(5,858 |
) |
(4,395 |
) |
(15,884 |
) |
(11,873 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Net income |
|
$ |
9,137 |
|
$ |
6,616 |
|
$ |
24,642 |
|
$ |
18,352 |
|
|
|
|
|
|
|
|
|
|
|
||||
Earnings per common share: |
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
0.74 |
|
$ |
0.55 |
|
$ |
2.02 |
|
$ |
1.52 |
|
Diluted |
|
$ |
0.74 |
|
$ |
0.54 |
|
$ |
1.99 |
|
$ |
1.49 |
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
||||
Basic |
|
12,265 |
|
12,079 |
|
12,215 |
|
12,075 |
|
||||
Diluted |
|
12,408 |
|
12,303 |
|
12,380 |
|
12,298 |
|
See Notes to Condensed Consolidated Financial Statements.
MWI VETERINARY SUPPLY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Dollars and shares in thousands, except per share data
(unaudited)
|
|
June 30, |
|
September 30, |
|
||
|
|
2010 |
|
2009 |
|
||
Assets |
|
|
|
|
|
||
|
|
|
|
|
|
||
Current Assets: |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
908 |
|
$ |
14,302 |
|
Receivables, net |
|
185,674 |
|
142,485 |
|
||
Inventories |
|
141,515 |
|
116,119 |
|
||
Prepaid expenses and other current assets |
|
4,410 |
|
3,946 |
|
||
Deferred income taxes |
|
2,069 |
|
1,517 |
|
||
Total current assets |
|
334,576 |
|
278,369 |
|
||
|
|
|
|
|
|
||
Property and equipment, net |
|
13,609 |
|
9,313 |
|
||
Goodwill |
|
46,297 |
|
37,610 |
|
||
Intangibles, net |
|
26,300 |
|
10,194 |
|
||
Other assets, net |
|
2,685 |
|
2,433 |
|
||
Total assets |
|
$ |
423,467 |
|
$ |
337,919 |
|
|
|
|
|
|
|
||
Liabilities And Stockholders Equity |
|
|
|
|
|
||
|
|
|
|
|
|
||
Current Liabilities: |
|
|
|
|
|
||
Credit facilities |
|
$ |
15,885 |
|
$ |
|
|
Accounts payable |
|
148,832 |
|
117,830 |
|
||
Accrued expenses |
|
14,131 |
|
10,767 |
|
||
Note payable |
|
2,000 |
|
|
|
||
Current maturities of long-term debt and capital lease obligations |
|
1,505 |
|
97 |
|
||
Total current liabilities |
|
182,353 |
|
128,694 |
|
||
|
|
|
|
|
|
||
Deferred income taxes |
|
5,329 |
|
1,298 |
|
||
|
|
|
|
|
|
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Long-term debt and capital lease obligations |
|
917 |
|
|
|
||
|
|
|
|
|
|
||
Other long-term liabilities |
|
1,117 |
|
|
|
||
|
|
|
|
|
|
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Commitments and contingencies (see Note 15) |
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|
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|
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Stockholders Equity |
|
|
|
|
|
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Common stock $0.01 par value, 40,000 authorized; 12,326 and 12,196 shares issued and outstanding, respectively |
|
123 |
|
122 |
|
||
Additional paid in capital |
|
127,224 |
|
124,337 |
|
||
Retained earnings |
|
106,404 |
|
83,468 |
|
||
Total stockholders equity |
|
233,751 |
|
207,927 |
|
||
Total liabilities and stockholders equity |
|
$ |
423,467 |
|
$ |
337,919 |
|
See Notes to Condensed Consolidated Financial Statements.
MWI VETERINARY SUPPLY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in thousands (unaudited)
|
|
Nine months ended June 30, |
|
||||
|
|
2010 |
|
2009 |
|
||
Cash Flows From Operating Activities: |
|
|
|
|
|
||
Net income |
|
$ |
24,642 |
|
$ |
18,352 |
|
Adjustments to reconcile net income to net cash provided by/(used in) operating activities: |
|
|
|
|
|
||
Depreciation and amortization |
|
3,568 |
|
2,555 |
|
||
Amortization of debt issuance costs |
|
41 |
|
32 |
|
||
Stock-based compensation |
|
490 |
|
221 |
|
||
Deferred income taxes |
|
(108 |
) |
(499 |
) |
||
Earnings of equity method investees |
|
(155 |
) |
(174 |
) |
||
(Gain)/loss on disposal of property and equipment |
|
(9 |
) |
28 |
|
||
Tax benefit of common stock options |
|
(1,829 |
) |
(225 |
) |
||
Pension payment |
|
(2,047 |
) |
|
|
||
Changes in operating assets and liabilities (net of effects of acquisitions): |
|
|
|
|
|
||
Receivables |
|
(12,072 |
) |
(2,245 |
) |
||
Inventories |
|
(8,282 |
) |
(159 |
) |
||
Prepaid expenses and other current assets |
|
155 |
|
603 |
|
||
Accounts payable |
|
6,365 |
|
(16,282 |
) |
||
Accrued expenses |
|
(159 |
) |
640 |
|
||
Net cash provided by operating activities |
|
10,600 |
|
2,847 |
|
||
|
|
|
|
|
|
||
Cash Flows From Investing Activities: |
|
|
|
|
|
||
Business acquisitions, net of cash acquired of $674 in 2010 |
|
(39,511 |
) |
117 |
|
||
Purchases of property and equipment |
|
(1,862 |
) |
(1,649 |
) |
||
Other |
|
(97 |
) |
5 |
|
||
Net cash used in investing activities |
|
(41,470 |
) |
(1,527 |
) |
||
|
|
|
|
|
|
||
Cash Flows From Financing Activities: |
|
|
|
|
|
||
Borrowings on line-of-credit |
|
124,776 |
|
179,000 |
|
||
Payments on line-of-credit |
|
(108,900 |
) |
(179,000 |
) |
||
Issuance of common stock |
|
178 |
|
188 |
|
||
Proceeds from stock options |
|
368 |
|
15 |
|
||
Tax benefit of common stock options |
|
1,829 |
|
225 |
|
||
Debt issuance costs |
|
(116 |
) |
|
|
||
Payment on long-term debt and capital lease obligations |
|
(616 |
) |
(97 |
) |
||
Net cash provided by financing activities |
|
17,519 |
|
331 |
|
||
|
|
|
|
|
|
||
Effect of Exchange Rate on Cash and Cash Equivalents |
|
(43 |
) |
|
|
||
|
|
|
|
|
|
||
Increase/(Decrease) in Cash and Cash Equivalents |
|
(13,394 |
) |
1,651 |
|
||
|
|
|
|
|
|
||
Cash and Cash Equivalents at Beginning of Period |
|
14,302 |
|
3,419 |
|
||
|
|
|
|
|
|
||
Cash and Cash Equivalents at End of Period |
|
$ |
908 |
|
$ |
5,070 |
|
See Notes to Condensed Consolidated Financial Statements.
MWI VETERINARY SUPPLY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Dollars in thousands, except per
share data
(unaudited)
NOTE 1 GENERAL
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the results of operations, financial position and cash flows of MWI Veterinary Supply, Inc. and its wholly-owned subsidiaries (collectively referred to as we, us, and our throughout this Form 10-Q). All material intercompany balances have been eliminated.
In the opinion of our management, the accompanying unaudited condensed consolidated financial statements include all adjustments necessary to present fairly, in all material respects, our results for the periods presented. These condensed consolidated financial statements have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our 2009 Annual Report on Form 10-K filed with the SEC on November 20, 2009. The results of operations for the three and nine months ended June 30, 2010 are not necessarily indicative of results to be expected for the entire fiscal year.
Our unaudited condensed consolidated balance sheet as of September 30, 2009 has been derived from the audited consolidated balance sheet as of that date.
Use of Estimates
The accompanying unaudited condensed consolidated financial statements have been prepared on the accrual basis of accounting using accounting principles generally accepted in the United States. In preparing financial information, we use certain estimates and assumptions that may affect the reported amounts and disclosures. Some of these estimates require difficult, subjective and complex judgments about matters that are inherently uncertain. As a result, actual results could differ materially from these estimates. Estimates are used when accounting for, among other items, sales returns, allowance for doubtful accounts, customer incentives, vendor rebates, inventories, goodwill and intangible assets, income taxes, impairment of long-lived assets, depreciation and amortization, employee benefits, unearned income and contingencies. The estimates of fair value of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet date and reported amounts of revenue and expenses for the periods are based on assumptions that we believe to be reasonable.
Revenue Recognition
We sell products we source from vendors to our customers through either a buy/sell transaction or an agency relationship with our vendors. In a buy/sell transaction, we purchase or take inventory of products from the vendor. When a customer places an order with us, we pick, pack, ship and invoice the customer for the order. We recognize revenue from buy/sell transactions as product sales when the product is delivered to the customer. We accept product returns from our customers. We estimate returns based on historical experience and recognize these estimated returns as a reduction of product sales. Product returns have historically not been significant to our financial statements. We record revenues net of sales tax. In an agency relationship, we generally do not purchase and take inventory of products from vendors. We receive an order from a customer, then transmit the order to the vendor, who picks, packs and ships the order to the customer. In some cases, the vendor invoices and collects payment from the customer, while in other cases we invoice and collect payment from the customer on behalf of the vendor. We receive a commission payment for soliciting the order from the customer and for providing other customer service activities. Commissions are recognized when the services upon which the commissions are based are complete. Gross billings from agency contracts were $92,504 and $72,960 for the three months ended June 30, 2010 and 2009, respectively, and generated commission revenue of $4,332 and $3,645, respectively. Gross billings from agency contracts were $234,788 and $196,097 for the nine months ended June 30, 2010 and 2009, respectively, and generated commission revenue of $12,094 and $10,273, respectively.
Cost of Product Sales and Vendor Rebates
Cost of product sales consist of our inventory product cost, including shipping and delivery costs to and from our distribution centers. Vendor rebates are recorded based on the terms of the contracts or programs with each vendor. Many of our vendors rebate programs are based on a calendar year. We may receive quarterly, semi-annual or annual performance-based rebates from third-party vendors based upon attainment of certain sales and/or purchase goals. Sales rebates are classified in the accompanying condensed consolidated statements of income as a reduction to cost of product sales at the time the sales performance measures are achieved. Purchase rebates are measured against inventory purchases from the vendors and are classified as a reduction of inventory until the product is sold. When the inventory is sold and purchase measures are achieved, purchase rebates are recognized as a reduction to cost of product sales.
Historically, actual results have not significantly deviated from those determined using the estimates described above. We expect that our estimates in the future will continue to be reasonable as our rebates are based on specific vendor program goals and are principally recorded upon achievement of sales or purchase performance measures. Vendors may change or eliminate rebate programs from year to year.
NOTE 2 EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2009, the Financial Accounting Standards Board issued authoritative guidance that amends the consolidation guidance applicable to variable interest entities and requires additional disclosures concerning an enterprises continuing involvement with variable interest entities. The guidance is effective for our fiscal year beginning October 1, 2010. We are currently evaluating the expected impact, if any, that this standard will have on our consolidated financial statements.
NOTE 3 BUSINESS ACQUISITION
On February 8, 2010, MWI Veterinary Supply Co. (MWI Co.) purchased all of the outstanding share capital of Centaur Services Limited (Centaur), based in the United Kingdom for an initial purchase price of $44,053, consisting of $42,053 in cash and $2,000 in a note payable due in one year. Subsequent to the acquisition of Centaur, we funded $2,047 to the pension plan as required by the terms of the share purchase agreement. The purchase price was reduced during the three months ended June 30, 2010 by $1,868 as a result of a post-closing working capital and debt adjustment. Centaur is a supplier of animal health products to veterinarians in the United Kingdom. Centaur sells products to both the companion animal market and production animal market. The acquisition of Centaur has allowed us to expand into the international markets. We incurred $1,100 of direct acquisition-related expenses. The intangible assets acquired in the acquisition have estimated useful lives between 1 and 20 years. The amount recorded in goodwill will not be deductible for tax purposes.
The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition, which may be adjusted during the allocation period as defined in ASC 280. These purchase price allocations are based on a combination of valuations and analyses.
Cash |
|
$ |
674 |
|
Receivables |
|
32,527 |
|
|
Inventories |
|
17,830 |
|
|
Property and equipment |
|
5,275 |
|
|
Intangibles |
|
17,658 |
|
|
Goodwill |
|
9,015 |
|
|
Other assets |
|
480 |
|
|
Total assets acquired |
|
83,459 |
|
|
|
|
|
|
|
Accounts payable |
|
25,811 |
|
|
Accrued expenses |
|
5,562 |
|
|
Other liabilities |
|
9,901 |
|
|
Total liabilities assumed |
|
41,274 |
|
|
|
|
|
|
|
Net assets acquired |
|
$ |
42,185 |
|
The following table presents information for Centaur that is included in our condensed consolidated statements of income from the acquisition date of February 8, 2010 through the three and nine months ended June 30, 2010:
|
|
Centaurs operations included in MWIs |
|
||||
|
|
Three months ended |
|
Nine months ended |
|
||
Revenues |
|
$ |
57,665 |
|
$ |
91,271 |
|
Net Income |
|
$ |
564 |
|
$ |
1,144 |
|
The following table presents supplemental pro forma information as if the acquisition of Centaur had occurred on October 1, 2009 for the periods ended June 30, 2010 and on October 1, 2008 for the periods ended June 30, 2009 (unaudited):
|
|
Unaudited Pro Forma Consolidated Results |
|
||||
|
|
Nine months ended June 30, |
|
||||
|
|
2010 |
|
2009 |
|
||
Revenues |
|
$ |
955,011 |
|
$ |
844,723 |
|
Net Income |
|
$ |
25,727 |
|
$ |
20,067 |
|
For the pro forma calculation, we used an average foreign currency exchange rate for each of the periods presented and the annual net income as a percentage of revenues for purposes of determining the net income for interim periods. The unaudited pro forma consolidated results are not necessarily indicative of what our consolidated results of operations would have been had we completed the acquisition on October 1, 2009 and on October 1, 2008. Additionally, the unaudited pro forma consolidated results do not purport to project the future results of operations of the combined company.
NOTE 4 RECEIVABLES
|
|
June 30, |
|
September 30, |
|
||
|
|
2010 |
|
2009 |
|
||
Trade |
|
$ |
170,349 |
|
$ |
132,369 |
|
Vendor rebates and programs |
|
17,999 |
|
13,122 |
|
||
|
|
188,348 |
|
145,491 |
|
||
Allowance for doubtful accounts |
|
(2,674 |
) |
(3,006 |
) |
||
|
|
$ |
185,674 |
|
$ |
142,485 |
|
Product sales resulting from transactions with Banfield, The Pet Hospital (Banfield) were approximately 9% and 12% of total product sales during the three months ended June 30, 2010 and 2009, respectively. Product sales resulting from transactions with Banfield were approximately 10% of total product sales during each of the nine months ended June 30, 2010 and 2009. Approximately 13% of our trade receivables resulted from transactions with Banfield as of June 30, 2010 and September 30, 2009.
NOTE 5 PROPERTY AND EQUIPMENT
|
|
June 30, |
|
September 30, |
|
||
|
|
2010 |
|
2009 |
|
||
Land |
|
$ |
249 |
|
$ |
20 |
|
Building and leasehold improvements |
|
5,756 |
|
3,566 |
|
||
Machinery, furniture and equipment |
|
16,471 |
|
12,792 |
|
||
Computer equipment |
|
4,697 |
|
3,325 |
|
||
Construction in progress |
|
266 |
|
1,140 |
|
||
|
|
27,439 |
|
20,843 |
|
||
Accumulated depreciation |
|
(13,830 |
) |
(11,530 |
) |
||
|
|
$ |
13,609 |
|
$ |
9,313 |
|
Depreciation expense was $1,046 and $640 for the three months ended June 30, 2010 and 2009, respectively. Depreciation expense was $2,659 and $1,931 for the nine months ended June 30, 2010 and 2009, respectively.
NOTE 6 GOODWILL AND INTANGIBLES
The changes in the carrying value of goodwill for the nine months ended June 30, 2010 are as follows:
September 30, 2009 |
|
$ |
37,610 |
|
Acquisition activity |
|
9,015 |
|
|
Foreign currency adjustments |
|
(328 |
) |
|
June 30, 2010 |
|
46,297 |
|
Balances of other intangible assets excluding goodwill are as follows:
|
|
|
|
June 30, |
|
September 30, |
|
||
|
|
Useful Lives |
|
2010 |
|
2009 |
|
||
Amortizing: |
|
|
|
|
|
|
|
||
Customer relationships |
|
9-20 years |
|
$ |
24,283 |
|
$ |
9,076 |
|
Covenants not to compete |
|
1-5 years |
|
800 |
|
686 |
|
||
Other |
|
3-7 years |
|
447 |
|
257 |
|
||
|
|
|
|
25,530 |
|
10,019 |
|
||
Accumulated amortization |
|
|
|
(2,939 |
) |
(2,177 |
) |
||
|
|
|
|
22,591 |
|
7,842 |
|
||
Non-Amortizing: |
|
|
|
|
|
|
|
||
Trade names and patents |
|
|
|
3,709 |
|
2,352 |
|
||
|
|
|
|
$ |
26,300 |
|
$ |
10,194 |
|
Amortization expense was $395 and $207 for the three months ended June 30, 2010 and 2009, respectively. Amortization expense was $909 and $624 for the nine months ended June 30, 2010 and 2009, respectively. Estimated future annual amortization expense related to intangible assets as of June 30, 2010 follows:
|
|
Amount |
|
|
Remainder of 2010 |
|
$ |
397 |
|
2011 |
|
1,581 |
|
|
2012 |
|
1,552 |
|
|
2013 |
|
1,468 |
|
|
2014 |
|
1,462 |
|
|
Thereafter |
|
16,131 |
|
|
|
|
$ |
22,591 |
|
The above projection of amortization expense includes preliminary estimates of intangible assets and lives associated with the acquisition of Centaur. These amounts may be adjusted during the allocation period as defined in ASC 805.
NOTE 7 CREDIT FACILITY AND LONG-TERM DEBT
The following table presents the outstanding debt and capital lease obligations as of June 30, 2010:
|
|
June 30, |
|
September 30, |
|
||
|
|
2010 |
|
2009 |
|
||
Revolving credit facility |
|
$ |
13,400 |
|
$ |
|
|
Fortis credit facility |
|
2,485 |
|
|
|
||
Note payable to AHN (UK) Holdings Limited (1) |
|
2,000 |
|
|
|
||
Capital lease obligations (2) |
|
1,653 |
|
|
|
||
Term note (2) |
|
769 |
|
|
|
||
Other long-term debt |
|
|
|
97 |
|
||
Total debt and capital lease obligations |
|
20,307 |
|
97 |
|
||
Less: Long-term debt and capital lease obligations |
|
(917 |
) |
|
|
||
Total debt included in current liabilities |
|
19,390 |
|
97 |
|
||
(1) Note payable is related to the acquisition of Centaur and is due one year from the date of the acquisition, which was February 8, 2010.
(2) Term note and capital lease obligations were assumed as a result of the acquisition of Centaur. The term note matures in March 2011 and the capital lease obligations have varying maturity dates.
Revolving credit facilityOn February 8, 2010, MWI Co., our wholly-owned subsidiary as borrower, entered into a First Amendment to its Credit Agreement (the First Amendment) with us and Memorial Pet Care, Inc., as guarantors, and Bank of America, N.A. and Wells Fargo Bank, N.A., (collectively, the lenders) amending the Credit Agreement dated December 13, 2006 among MWI Co., MWI Veterinary Supply, Inc., Memorial Pet Care, Inc. and the lenders a party thereto (the facility). The First Amendment increased the aggregate revolving commitment of the lenders under the facility from $70,000 to $100,000. The First Amendment also extended the maturity date of the loans under the facility from December 1, 2011 to March 1, 2013. The variable interest rate is now equal to the Daily LIBOR Floating Rate or the LIBOR 1-month fixed rate (at MWI Co.s option) plus a margin ranging from 1.75% to 2.50%, which was previously 0.7% to 1.25% under the facility prior to the First Amendment. The lenders also receive an unused line fee and letter of credit fee which is now equal to 0.2% of the unused amount of the facility, which was previously 0.125%. Our outstanding balance on the facility was $13,400 and $0 at June 30, 2010 and September 30, 2009, respectively, and the interest rate for the facility was 2.06% as of June 30, 2010. The facility contains financial covenants, including a fixed charge ratio and a funded debt to EBITDA calculation. We were in compliance with both of these covenants as of June 30, 2010.
Fortis credit facilityCentaur operates with a credit facility (Fortis facility) with Fortis Bank as the lender. The Centaur facility allows for borrowings in the aggregate of £12,000. The Fortis facility has a variable interest rate equal to a base rate of 0.50% plus GBP one-month LIBOR plus a margin of 0.85%. It is our intent to replace the Fortis facility within the next six months. The outstanding balance at June 30, 2010 on the Fortis facility was £1,649, or $2,485 using the exchange rate on June 30, 2010. The interest rate for the Fortis facility was 1.90% as of June 30, 2010.
NOTE 8 FAIR VALUE OF FINANCIAL INSTRUMENTS
Current fair value accounting guidance includes a hierarchy that is intended to increase consistency and comparability in fair value measurements and disclosures. This hierarchy prioritizes inputs to valuation techniques based on observable and unobservable data. The guidance categorizes these inputs used in measuring fair value into three levels which include the following:
· Level 1 observable inputs such as quoted prices in active markets;
· Level 2 inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; and
· Level 3 unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
For certain of our financial instruments, including cash and cash equivalents, receivables and accounts payable, the fair values approximate book values due to their short maturities.
In February 2010, we amended our facility. Because this amendment was done in the quarter ended March 31, 2010 and includes interest rates based on current market conditions, we believe that the estimated fair value of our long-term debt (including current maturities) was materially the same as our carrying value.
We have been reviewing market prices related to the refinance of the Fortis credit facility. Based on this pricing, we believe that the estimated fair value for the Fortis credit facility was materially the same as our carrying value.
NOTE 9 COMMON STOCK AND STOCK-BASED AWARDS
2002 Stock Plan
We have a 2002 Stock Plan (the 2002 Plan) to provide our directors, executives and other key employees with additional incentives by allowing them to acquire an ownership interest in us and, as a result, encouraging them to contribute to our success. As of June 30, 2010 and 2009, we had 244,304 and 402,220 shares, respectively, of our common stock available for issuance under the 2002 Plan. The options granted under the 2002 Plan are nonqualified stock options that have an exercise price per share equal to fair market value of the common stock at the time of grant. The term of each option is determined by our board of directors or by a designated committee of the board. The term of any option may not exceed ten years from the date of grant. As of June 30, 2010, 183,864 options to purchase common stock were outstanding with a weighted average exercise price of $0.18 per share and expiring through June 2012.
2005 Stock Plan
In July 2005, we adopted the 2005 Stock-Based Award and Incentive Compensation Plan (the 2005 Plan). Under the 2005 Plan as amended, we may offer restricted and unrestricted shares of our common stock and grant options to purchase shares of our common stock to selected employees and non-employee directors. The purpose of the 2005 Plan is to promote our long-term financial success by attracting, retaining and rewarding eligible participants. As of June 30, 2010 and 2009 we had 1,038,852 and 1,081,404 shares, respectively, of our common stock available for issuance under the 2005 Plan. As of June 30, 2010, 36,578 options to purchase common stock were outstanding with a weighted average exercise price of $17.88 per share and expiring through September 2015.
The 2005 Plan permits us to grant stock options (both incentive stock options and non-qualified stock options), restricted and unrestricted stock and deferred stock. The compensation committee will determine the number and type of stock-based awards to each participant, the exercise price of each award, the duration of the award (not to exceed ten years), vesting provisions and all other terms and conditions of such award in individual award agreements. The 2005 Plan provides that upon termination of employment with us, unless determined otherwise by the compensation committee at the time options are granted, the exercise period for vested awards will generally be limited, provided that vested awards will be canceled immediately upon a termination for cause or voluntary termination. The 2005 Plan provides for the cancellation of all unvested awards upon termination of employment with us, unless determined otherwise by the compensation committee at the time awards are granted.
We granted no common stock options during each of the nine months ended June 30, 2010 and 2009. During the nine months ended June 30, 2010 and 2009, we issued 2,000 and 0 shares of restricted stock under the 2005 Plan. We also granted 6,000 and 0 of unrestricted stock to non-employee directors during the nine months ended June 30, 2010 and 2009, respectively. During the three months ended June 30, 2010 and 2009, we recognized $98 and $86 of compensation expense related to stock grants, respectively. During the nine months ended June 30, 2010 and 2009, we recognized $528 and $265 of compensation expense related to stock grants, respectively.
We also have an employee stock purchase plan (ESPP) that allows substantially all employees to purchase shares of our common stock at 95% of the fair market value on the date of purchase. The purchase date is the last trading date of the purchase periods, which begin in March, June, September and December. Employees accumulate amounts through payroll deductions during the purchase period of between 1% and 10% but no more than $20 annually. An employee is allowed to purchase a maximum of 200 shares per purchase period. During the three months ended June 30, 2010 and 2009, we issued 1,408 and 2,211 shares, respectively, of our common stock under the ESPP. During the nine months ended June 30, 2010 and 2009, we issued 4,454 and 7,537 shares, respectively, of our common stock under the ESPP. As of June 30, 2010, there were 484,977 shares available to be issued under the ESPP.
NOTE 10 EMPLOYEE BENEFIT PLANS
As a result of the acquisition of Centaur, we assumed a defined benefit pension plan for United Kingdom employees. This plan was frozen prior to the acquisition of Centaur to future participants. We recorded the liability at the estimated fair value at the date of the acquisition. Subsequent to the acquisition of Centaur, we funded $2,047 to the pension plan as required by the terms of the share purchase agreement. The liability recorded as of June 30, 2010 was £741, or $1,117 using the exchange rate on June 30, 2010.
NOTE 11 INCOME TAXES
Our effective tax rate for the three months ended June 30, 2010 and 2009 was 39.1% and 39.9%, respectively. Our effective tax rate for the nine months ended June 30, 2010 and 2009 was 39.2% and 39.3%, respectively. The decrease in the effective tax rate is primarily due to the impact of the Centaur acquisition.
As of June 30, 2010, we had $205 of unrecognized tax benefits, of which $15 would impact our effective rate if recognized. Our policy for classifying interest and penalties associated with unrecognized tax benefits is to include such items in income tax expense. The amount of interest and penalties recognized during the three and nine months ended June 30, 2010 and 2009 was not material.
We filed Form 3115 Application of Change in Accounting Method with the Internal Revenue Service during the fiscal year ended September 30, 2008. We filed an advance consent request for a non-automatic account method change for tax purposes for which we had not received approval prior to our reporting period end. The method change will make revenue recognition for tax purposes the same as revenue recognized for book purposes. We expect resolution within the next twelve months, which would decrease the liability for unrecognized tax benefits by approximately $182.
With few exceptions, we are no longer subject to income tax examination for years before 2004 in the U.S. and significant state and local jurisdictions. We are no longer subject to income tax examination for years before 2008 in significant foreign jurisdictions.
NOTE 12 COMPUTATION OF EARNINGS PER SHARE (In thousands, except per share data)
|
|
Three months ended June 30, |
|
||||||||||
|
|
2010 |
|
2009 |
|
||||||||
|
|
Basic |
|
Diluted |
|
Basic |
|
Diluted |
|
||||
Net income |
|
$ |
9,137 |
|
$ |
9,137 |
|
$ |
6,616 |
|
$ |
6,616 |
|
Weighted average common shares outstanding |
|
12,265 |
|
12,265 |
|
12,079 |
|
12,079 |
|
||||
Effect of diluted securities |
|
|
|
|
|
|
|
|
|
||||
Stock options and restricted stock |
|
|
|
143 |
|
|
|
224 |
|
||||
Weighted average diluted shares outstanding |
|
|
|
12,408 |
|
|
|
12,303 |
|
||||
Earnings per share |
|
$ |
0.74 |
|
$ |
0.74 |
|
$ |
0.55 |
|
$ |
0.54 |
|
Anti-dilutive shares excluded from calculation |
|
|
|
|
|
|
|
|
|
|
|
Nine months ended June 30, |
|
||||||||||
|
|
2010 |
|
2009 |
|
||||||||
|
|
Basic |
|
Diluted |
|
Basic |
|
Diluted |
|
||||
Net income |
|
$ |
24,642 |
|
$ |
24,642 |
|
$ |
18,352 |
|
$ |
18,352 |
|
Weighted average common shares outstanding |
|
12,215 |
|
12,215 |
|
12,075 |
|
12,075 |
|
||||
Effect of diluted securities |
|
|
|
|
|
|
|
|
|
||||
Stock options and restricted stock |
|
|
|
165 |
|
|
|
223 |
|
||||
Weighted average shares outstanding |
|
|
|
12,380 |
|
|
|
12,298 |
|
||||
Earnings per share |
|
$ |
2.02 |
|
$ |
1.99 |
|
$ |
1.52 |
|
$ |
1.49 |
|
Anti-dilutive shares excluded from calculation |
|
|
|
|
|
|
|
|
|
NOTE 13 RELATED PARTIES
MWI Co. holds a 50.0% membership interest in Feeders Advantage LLC (Feeders Advantage). MWI Co. charged Feeders Advantage for certain operating and administrative services in the amounts of $172 and $189 for the three months ended June 30, 2010 and 2009, respectively, and $563 and $562 for the nine months ended June 30, 2010 and 2009, respectively. Sales of products to Feeders Advantage were $9,113 and $12,075 for the three months ended June 30, 2010 and 2009, respectively, which represented 3% and 5% of total product sales for the three months ended June 30, 2010 and 2009, respectively. Sales of products to Feeders Advantage were $30,687 and $35,542 for the nine months ended June 30, 2010 and 2009, respectively, which represented 4% and 5% of total product sales for the nine months ended June 30, 2010 and 2009, respectively.
MWI Co. provides Feeders Advantage with a line-of-credit to finance its day-to-day operations. This line-of-credit bears interest at the prime rate. The interest due on the line-of-credit is calculated and charged to Feeders Advantage on the last day of each month. Conversely, to the extent MWI Co. has a payable balance due to Feeders Advantage, the payable balance accrues interest in favor of Feeders Advantage at the average federal funds rates in effect for that month. MWI Co. had a payable balance to Feeders Advantage of $1,567 and $210 as of June 30, 2010 and September 30, 2009, respectively.
NOTE 14 STATEMENTS OF CASH FLOWS SUPPLEMENTAL AND NON-CASH DISCLOSURES
|
|
Nine months ended June 30, |
|
||||
|
|
2010 |
|
2009 |
|
||
Supplemental Disclosures |
|
|
|
|
|
||
Cash paid for interest |
|
$ |
258 |
|
$ |
149 |
|
Cash paid for income taxes |
|
13,563 |
|
11,300 |
|
||
Non-cash Activities |
|
|
|
|
|
||
Note payable issued related to Centaur acquisition |
|
2,000 |
|
|
|
||
Equipment acquisitions financed with accounts payable |
|
130 |
|
21 |
|
||
Restatement of Statements of Cash Flows We have restated the presentation of borrowings on the credit facility for the nine months ended June 30, 2009. Related amounts had previously been presented on a net basis, rather than on a gross basis in accordance with ASC 230. The correction had no effect on net cash used in financing activities.
NOTE 15 COMMITMENTS AND CONTINGENCIES
From time to time, in the normal course of business, we may become a party to legal proceedings that may have an adverse effect on our financial position, results of operations and cash flows. At June 30, 2010, we were not a party to any material pending legal proceedings and were not aware of any claims that could have a material adverse effect on our financial position, results of operations or cash flows.
NOTE 16 OTHER COMPREHENSIVE INCOME
The components of comprehensive income (loss) were as follows:
|
|
Three months ended June 30, |
|
Nine months ended June 30, |
|
||||||||
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
Net income |
|
$ |
9,137 |
|
$ |
6,616 |
|
$ |
24,642 |
|
$ |
18,352 |
|
Other comprehensive loss: |
|
|
|
|
|
|
|
|
|
||||
Foreign currency translation |
|
36 |
|
|
|
(1,706 |
) |
|
|
||||
Total comprehensive income |
|
$ |
9,173 |
|
$ |
6,616 |
|
$ |
22,936 |
|
$ |
18,352 |
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
MWI Veterinary Supply, Inc.
Meridian, Idaho
We have reviewed the accompanying condensed consolidated balance sheet of MWI Veterinary Supply, Inc. and subsidiaries (the Corporation) as of June 30, 2010, and the related condensed consolidated statements of income for the three-month and nine-month periods ended June 30, 2010 and 2009, and of cash flows for the nine-month periods ended June 30, 2010 and 2009. These interim financial statements are the responsibility of the Corporations management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of MWI Veterinary Supply, Inc. and subsidiaries as of September 30, 2009, and the related consolidated statements of income, stockholders equity, and cash flows for the year then ended (not presented herein); and in our report dated November 20, 2009, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of September 30, 2009 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ DELOITTE & TOUCHE LLP
Boise, Idaho
July 29, 2010
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
All dollar amounts are presented in thousands, except for per share amounts.
Overview
We are a distributor of animal health products to veterinarians across the United States and in the United Kingdom. We market our products to veterinarians in both the companion and production animal markets. Our growth has primarily been from internal growth initiatives and, to a lesser extent, selective acquisitions. On February 8, 2010, we acquired the outstanding share capital of Centaur Services Limited (Centaur), which is a supplier of animal health products in the United Kingdom. We operate under a single reporting segment.
Historically, we estimate that approximately two-thirds of our revenues have been generated from sales to the companion animal market and one-third from sales to the production animal market. The state of the overall economy and consumer spending have impacted both markets, with tightening credit markets, volatile commodity prices in milk, grain, corn and feeder cattle, and changes in weather patterns also affecting demand in the production animal market. Both markets have been integral to our financial results and we intend to continue supporting both markets.
Industry
We believe that the companion animal market has slowed as a result of a decrease in consumer spending. Historically, growth in the companion animal market has been due to the increasing number of households with companion animals, increased expenditures on animal health and preventative care, an aging pet population, advancements in pharmaceuticals and diagnostic testing and extensive marketing programs sponsored by companion animal nutrition and pharmaceutical companies. While the average order size for companion animal health products is often smaller than production animal health products, companion animal health products typically have higher margins. We intend to continue to penetrate this market through internal growth initiatives and selective acquisitions.
Product sales in the production animal market have been negatively impacted by volatility in commodity prices such as milk, corn, grain and feeder cattle, changes in weather patterns that allow cattle to graze for longer periods and changes in the general economy. Milk price declines in the dairy market over the last two years have had a significant impact on dairy farmers. This has created cash-flow challenges for these farmers and in turn, has impacted the time it takes for us to collect our outstanding accounts receivable from these customers. However, we still believe that it is important to our business to service this market and we intend to continue to support production animal veterinarians with a broad range of products and value-added services. Historically, sales in this market have been largely driven by spending on animal health products to improve productivity, weight gain and disease prevention, as well as a growing focus on food safety.
We generally extend some level of credit to our customers without requiring collateral, which exposes us to credit risk. If customers cash flow or operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain other sources of credit, they may not be able to pay or may delay payment to us, or in some cases may return products to us. We continually assess our customers ability to pay us and adjust our allowance for doubtful accounts, as necessary.
Our quarterly sales and operating results have varied significantly in the past, and will likely continue to do so in the future. Historically, our total revenues have typically been higher during the spring and fall months due to increased sales of production animal products. Product use cycles for production animal products are directly related to medical procedures performed by veterinarians on production animals during the spring and fall months. These buying patterns can also be affected by the marketing programs or price increase announcements of vendors and distributors, which can cause veterinarians to purchase production animal health products earlier than those products are needed. This kind of early purchasing may reduce our sales in the months these purchases would have otherwise been made.
Sales
We sell products that we source from our vendors to our customers through either a buy/sell transaction or an agency relationship with our vendors. In a buy/sell transaction, we purchase or take inventory of products from our vendors. When a customer places an order with us, we pick, pack, ship and invoice the customer for the order. We record sales from buy/sell transactions, which account for the vast majority of our business, as revenues in conformity with generally accepted accounting principles in the United States. In an agency relationship, we generally do not purchase and take inventory of products from our vendors. When we receive an order from our customer, we transmit the order to our vendor,
who picks, packs and ships the order to our customer. In some cases, our vendor invoices and collects payment from our customer, while in other cases we invoice and collect payment from our customer on behalf of our vendor. We receive a commission payment for soliciting the order from our customer and for providing other customer service activities. The aggregate revenues we receive in agency transactions constitute the commissions line item on our consolidated statements of income and are recorded in conformity with accounting principles generally accepted in the United States. Our vendors determine the method we use to sell our products. Historically, vendors have occasionally switched between the buy/sell and agency models for particular products in response to market conditions related to that particular product. A switch between models can impact our revenues and our operating income. We cannot know in advance when a vendor will switch between the buy/sell and agency models or what impact, if any, such a change may have. A switch can occur even with vendors with whom we have written agreements because most of our agreements with vendors have relatively short terms and are terminable with or without cause on short notice, normally 30 to 90 days. The impact of any individual change from a buy/sell to an agency model depends on the costs and expenses associated with a particular product, and can have either a positive or a negative effect on our profitability.
Historically, our contract with Merial to sell their flea, tick and heartworm products included an exclusivity requirement. This requirement did not permit us to sell or distribute other competing flea, tick and heartworm products. For calendar year 2010, we agreed with Merial to begin a non-exclusive arrangement where we are permitted to sell and distribute other competing products. Some of these competing products will be sold under buy-sell arrangements, while others will be sold under agency arrangements. Merials flea, tick and heartworm products are primarily sold under an agency arrangement. This addition of buy-sell arrangements for certain flea, tick and heartworm products will have an impact on how our revenues are reported, since under agency sales, only commissions are reported as revenues, while for buy-sell products the total sale price of the product is reported as revenue.
Vendor Consolidation
On October 15, 2009, Pfizer completed its acquisition of Wyeth. Prior to this acquisition, Pfizer and Fort Dodge, a division of Wyeth, were our two largest vendors as measured by our revenues. In connection with this acquisition, Pfizer divested certain animal health products to Boehringer Ingelheim. Fort Dodge supplied products that accounted for approximately 11% of our revenues for fiscal year 2009. Of this amount, based on information received from the Federal Trade Commission, Pfizer and Boehringer Ingelheim, we estimate that approximately 43% of such revenues were attributable to products now owned by Pfizer and approximately 57% of such revenues were attributable to products now owned by Boehringer Ingelheim. We have received contracts for calendar year 2010 from these vendors. Based on these contracts, we do not believe that these changes described will have a material impact on our results for fiscal year 2010.
On November 3, 2009, Merck and Schering-Plough completed their merger under which Merck acquired all of the outstanding stock of Schering-Plough. Merial was a joint venture between Merck and Sanofi-Aventis, and Sanofi-Aventis acquired Mercks interest in Merial shortly before Merck and Schering-Plough completed their merger. Merck has announced that Sanofi-Aventis has an option to combine the Intervet/Schering-Plough Animal Health business with Merial to form an animal health joint venture that would be equally owned by the new Merck and Sanofi-Aventis. On March 9, 2010, Sanofi-Aventis and Merck announced that Sanofi-Aventis exercised its option to combine Merial with Intervet/Schering-Plough, Mercks animal health business. The completion of the transaction is expected to occur in the next twelve months. Merial and Intervet-Schering are also two of our larger vendors. We have received contracts for calendar year 2010 from these vendors. Based on these contracts, we do not believe that these changes described will have a material impact on our results for fiscal year 2010.
The surviving companies from these transactions will have high market shares with respect to certain animal health products, and they could use their increased leverage in the channel to negotiate terms with distributors that are materially worse to the distributor than the terms that we have been able to negotiate with Pfizer, Fort Dodge, Boehringer Ingelheim, Merial and Intervet-Schering individually while they were competing with each other. There also remains uncertainty related to any changes to the terms that may be included in the vendor contracts we negotiate for the upcoming year as a result of these transactions. There is also a possibility of product disruption as these companies integrate their operations which could adversely impact our financial results. Further consolidation among animal health product vendors could result in our vendors further increasing their market share, which could give vendors greater pricing power and make it easier for such vendors to sell their products directly to animal health customers, both of which could decrease our net sales and profitability.
Our top ten vendors supplied products that accounted for approximately 68% and 74% of our revenues for the nine months ended June 30, 2010 and 2009, respectively, and 74% of our revenues for the fiscal year ended September 30, 2009. Pfizer supplied products that accounted for approximately 25% and 24% of our revenues during the nine months ended June 30,
2010 and 2009, respectively, and 24% of our revenues for our fiscal year ended September 30, 2009. Of the Pfizer supplied products, production animal products under a livestock agreement accounted for approximately 11% and 14% of our revenues during the nine months ended June 30, 2010 and 2009, respectively, and approximately 14% of our revenues for our fiscal year ended September 30, 2009. Fort Dodge supplied products that accounted for 11% of our revenues during the nine months ended June 30, 2009, and 11% of our revenues for our fiscal year ended September 30, 2009. Intervet-Schering, a subsidiary of Schering Plough, supplied products that accounted for approximately 10% and 11% of our revenues during the nine months ended June 30, 2010 and 2009, respectively, and 11% of our revenues for our fiscal year ended September 30, 2009. Boehringer Ingelheim supplied products that accounted for approximately 10% and 4% of our revenues during the nine months ended June 30, 2010 and 2009, respectively, and 4% of our revenues for our fiscal year ended September 30, 2009. Merial, a subsidiary of Sanofi-Aventis, supplies the majority of their products to us under an agency relationship. Commission revenue generated from Merial products accounted for approximately 50% and 55% of total commission revenues for each of the nine months ended June 30, 2010 and 2009, and 56% of total commission revenues for our fiscal year ended September 30, 2009.
Vendor Rebates
We typically renegotiate vendor contracts annually. These vendor contracts may include terms defining rebates, commissions and exclusivity requirements. Vendor rebates based on sales are classified in our accompanying consolidated statements of income as a reduction to cost of product sales at the time the sales performance measures are achieved. Purchase rebates are measured against inventory purchases from the vendors and are a reduction of inventory until the product is sold. When the inventory is sold, purchase rebates are recognized as a reduction to cost of product sales. Many of our vendors rebate programs are based on a calendar year.
Acquisitions
In February 2010, we acquired the outstanding share capital of Centaur. Based in Castle Cary, England, Centaur is a supplier of animal health products to veterinarians in the United Kingdom. Centaur sells products to both the companion animal market and production animal market.
In July 2008, we acquired substantially all of the assets of AAHA MARKETLink. Based near Denver, Colorado, AAHA MARKETLink was a distributor of animal health products to members of American Animal Hospital Association.
For more information on our business, see our Annual Report on Form 10-K filed with the SEC on November 20, 2009.
Results of Operations
The following table summarizes our results of operations for the three and nine months ended June 30, 2010 and 2009, in dollars and as a percentage of total revenues.
|
|
Three Months Ended June 30, |
|
Nine Months Ended June 30, |
|
||||||||||||||||
|
|
2010 |
|
% |
|
2009 |
|
% |
|
2010 |
|
% |
|
2009 |
|
% |
|
||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Product sales |
|
$ |
334,242 |
|
96.1 |
% |
$ |
231,743 |
|
93.6 |
% |
$ |
827,614 |
|
95.1 |
% |
$ |
647,979 |
|
93.4 |
% |
Product sales to related party |
|
9,113 |
|
2.6 |
% |
12,075 |
|
4.9 |
% |
30,687 |
|
3.5 |
% |
35,542 |
|
5.1 |
% |
||||
Commissions |
|
4,332 |
|
1.3 |
% |
3,645 |
|
1.5 |
% |
12,094 |
|
1.4 |
% |
10,273 |
|
1.5 |
% |
||||
Total revenues |
|
347,687 |
|
100.0 |
% |
247,463 |
|
100.0 |
% |
870,395 |
|
100.0 |
% |
693,794 |
|
100.0 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cost of product sales |
|
303,750 |
|
87.4 |
% |
212,980 |
|
86.1 |
% |
750,927 |
|
86.3 |
% |
594,022 |
|
85.6 |
% |
||||
Gross profit |
|
43,937 |
|
12.6 |
% |
34,483 |
|
13.9 |
% |
119,468 |
|
13.7 |
% |
99,772 |
|
14.4 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Selling, general and administrative expenses |
|
27,435 |
|
7.9 |
% |
22,748 |
|
9.2 |
% |
75,448 |
|
8.7 |
% |
67,379 |
|
9.7 |
% |
||||
Depreciation and amortization |
|
1,438 |
|
0.4 |
% |
844 |
|
0.3 |
% |
3,559 |
|
0.4 |
% |
2,546 |
|
0.4 |
% |
||||
Operating income |
|
15,064 |
|
4.3 |
% |
10,891 |
|
4.4 |
% |
40,461 |
|
4.6 |
% |
29,847 |
|
4.3 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
(171 |
) |
0.0 |
% |
(63 |
) |
0.0 |
% |
(389 |
) |
0.0 |
% |
(202 |
) |
0.0 |
% |
||||
Earnings of equity method investees |
|
45 |
|
0.0 |
% |
53 |
|
0.0 |
% |
155 |
|
0.0 |
% |
174 |
|
0.0 |
% |
||||
Other |
|
57 |
|
0.0 |
% |
130 |
|
0.1 |
% |
299 |
|
0.0 |
% |
406 |
|
0.0 |
% |
||||
Total other income (expense), net |
|
(69 |
) |
0.0 |
% |
120 |
|
0.1 |
% |
65 |
|
0.0 |
% |
378 |
|
0.0 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Income before taxes |
|
14,995 |
|
4.3 |
% |
11,011 |
|
4.5 |
% |
40,526 |
|
4.6 |
% |
30,225 |
|
4.3 |
% |
||||
Income tax expense |
|
(5,858 |
) |
-1.7 |
% |
(4,395 |
) |
-1.8 |
% |
(15,884 |
) |
-1.8 |
% |
(11,873 |
) |
-1.7 |
% |
||||
Net income |
|
$ |
9,137 |
|
2.6 |
% |
$ |
6,616 |
|
2.7 |
% |
$ |
24,642 |
|
2.8 |
% |
$ |
18,352 |
|
2.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
0.74 |
|
|
|
$ |
0.55 |
|
|
|
$ |
2.02 |
|
|
|
$ |
1.52 |
|
|
|
Diluted |
|
$ |
0.74 |
|
|
|
$ |
0.54 |
|
|
|
$ |
1.99 |
|
|
|
$ |
1.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average common shares outstanding (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
12,265 |
|
|
|
12,079 |
|
|
|
12,215 |
|
|
|
12,075 |
|
|
|
||||
Diluted |
|
12,408 |
|
|
|
12,303 |
|
|
|
12,380 |
|
|
|
12,298 |
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009
Total Revenues. Total revenues increased 40.5% to $347,687 for the three months ended June 30, 2010, from $247,463 for the three months ended June 30, 2009. Of the 40.5% revenue growth, 23.3% or $57,665 was related to the acquisition of Centaur. Excluding this acquisition, our revenues attributable to existing customers represented approximately 43% of the growth of total revenues during the quarter ended June 30, 2010. For the purpose of calculating growth rates of new and existing customer revenue, we have defined a new customer as a customer that did not purchase product from us in the corresponding fiscal quarter of the prior year, with the remaining customer base being considered existing customers. This increase in revenues during the three months ended June 30, 2010 is partially due to market share gains and the sale of flea, tick and heartworm products that we did not sell in the same period of the prior fiscal year due to our previously exclusive arrangement with Merial. Certain new flea, tick and heartworm products that we now distribute are sold under buy/sell arrangements while all flea, tick and heartworm products in the past were sold under an agency agreement. The product sales under a buy-sell arrangement results in greater revenue than product sales under an agency arrangement because we recognize product sales under a buy-sell arrangement as total sales net of estimated product returns and sales tax, whereas we only recognize commission revenue in product sales under an agency relationship. Product sales to related party decreased by 24.5% to $9,113 for the three months ended June 30, 2010, from $12,075 for the three months ended June 30, 2009. Commissions increased 18.8% to $4,332 for the three months ended June 30, 2010, from $3,645 for the three months ended June 30, 2009.
Gross Profit. Gross profit increased by 27.4% to $43,937 for the three months ended June 30, 2010, from $34,483 for the three months ended June 30, 2009. Gross profit was benefited by our revenue growth and the addition of Centaur. Gross profit as a percentage of total revenues was 12.6% and 13.9% for the three months ended June 30, 2010 and 2009, respectively. Gross profit as a percentage of total revenues decreased due to the addition of Centaur because Centaurs gross profit as a percentage of total revenues is generally lower than MWIs, which serves to reduce the overall gross margin of the consolidated Company when compared to our results for the same period in the prior year. Vendor rebates for the three months ended June 30, 2010 increased by approximately $540 compared to the three months ended June 30, 2009.
Selling, General and Administrative (SG&A). SG&A expenses increased 20.6% to $27,435 for the three months ended June 30, 2010, from $22,748 for the three months ended June 30, 2009. SG&A expenses increased primarily due to the acquisition of Centaur and our revenue growth. SG&A expenses as a percentage of total revenues decreased to 7.9% for the three months ended June 30, 2010 from 9.2% for the three months ended June 30, 2009. SG&A expenses as a percentage of total revenues decreased due, in part, to the addition of Centaur because Centaurs SG&A expenses as a percentage of total revenues are generally lower than MWIs, which serves to reduce the overall SG&A expenses as a percentage of total revenues when compared to our results for the same period in the prior year. Additionally, we had an improvement in our allowance for doubtful accounts as a result of payments made by certain customers.
Other Income (Expense). Other income (expense) decreased 157.5% to $69 in expense for the three months ended June 30, 2010, from $120 in income for the three months ended June 30, 2009 primarily due to an increase in interest expense which came as a result from borrowing on our revolving credit facility to finance the Centaur acquisition.
Income Tax Expense. Our effective tax rate for the three months ended June 30, 2010 and 2009 was 39.1% and 39.9%, respectively. The decrease in the effective tax rate is primarily due to the impact of the Centaur acquisition.
Nine Months Ended June 30, 2010 Compared to Nine Months Ended June 30, 2009
Total Revenues. Total revenues increased 25.5% to $870,395 for the nine months ended June 30, 2010, from $693,794 for the nine months ended June 30, 2009. Included in total revenues for the nine months ended June 30, 2010 were $91,271 related to the acquisition of Centaur. Excluding this acquisition, our revenues attributable to existing customers represented approximately 37% of the growth of total revenues during the nine months ended June 30, 2010. Additionally, revenues increased during the nine months ended June 30, 2010 primarily due to market share gains and the addition of flea, tick and heartworm products that we did not sell in the same period of the prior fiscal year as a result of not entering into an exclusive agreement on the Merial products. Product sales to related party decreased by 13.7% to $30,687 for the nine months ended June 30, 2010, from $35,542 for the nine months ended June 30, 2009. Commissions increased 17.7% to $12,094 for the nine months ended June 30, 2010, from $10,273 for the nine months ended June 30, 2009.
Gross Profit. Gross profit increased by 19.7% to $119,468 for the nine months ended June 30, 2010, from $99,772 for the nine months ended June 30, 2009. Gross profit as a percentage of total revenues was 13.7% and 14.4% for the nine months ended June 30, 2010 and 2009, respectively. Vendor rebates for the nine months ended June 30, 2010 increased by approximately $165 compared to the nine months ended June 30, 2009. This increase was primarily a result of the increase in revenues, partially offset by the elimination in our December quarter of the livestock rebate opportunity from one of our largest vendors.
Selling, General and Administrative (SG&A). SG&A expenses increased 12.0% to $75,448 for the nine months ended June 30, 2010, from $67,379 for the nine months ended June 30, 2009. SG&A expenses as a percentage of total revenues improved to 8.7% for the nine months ended June 30, 2010 compared to 9.7% for the nine months ended June 30, 2009. Included in the increase in SG&A expenses are direct acquisition-related expenses of $1,100 related to the acquisition of Centaur.
Other Income (Expense). Other income (expense) decreased 82.8% to $65 in income for the nine months ended June 30, 2010, from $378 in income for the nine months ended June 30, 2009. The decrease was primarily due to an increase in interest expense which came as a result from borrowing on our revolving credit facility for the Centaur acquisition.
Critical Accounting Policies
The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The accompanying condensed consolidated financial statements are prepared using the same critical accounting policies discussed in our Annual Report on Form 10-K filed with the SEC on November 20, 2009.
Liquidity and Capital Resources
Our principal sources of liquidity are cash flows generated from operations and borrowings on our credit facilities. We use capital primarily to fund day-to-day operations and to maintain sufficient inventory levels in order to promptly fulfill customer orders and to expand our operations and sales growth. We believe our capital resources, including our ability to borrow funds from our credit facilities, will be sufficient to meet our anticipated cash needs for at least the next twelve months. Bank of America, N.A. and Wells Fargo, N.A. are the lenders under our revolving credit facility. The revolving credit facility allows for borrowings in the aggregate of $100,000, matures March 1, 2013 and has a variable interest rate equal to the Daily LIBOR Floating Rate or the LIBOR 1-month fixed rate plus a margin ranging from 1.75% to 2.50%. The lenders also receive an unused line fee and letter of credit fee equal to 0.2% of the unused amount of the revolving credit facility. Our outstanding balance on the revolving credit facility at June 30, 2010 was $13,400, and the interest rate was 2.06% as of June 30, 2010.
The facility contains certain financial covenants as well as other non-financial restrictive covenants. As of June 30, 2010, we were in compliance with all covenants in the facility.
Our lenders may have suffered losses related to their lending and other financial relationships, especially because of the general weakening of the national economy and increased financial instability of many borrowers. As a result, the lenders may become insolvent or tighten their lending standards, which could make it more difficult for us to borrow under our revolving credit facility, extend the terms of our revolving credit facility or obtain alternative financing on favorable terms or at all. Our financial condition and results of operations could be adversely affected if we were unable to draw funds under our revolving credit facility because of a lender default or if we fail to obtain other cost-effective financing.
We generally extend some level of credit to our customers. If customers cash flow or operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain other sources of credit, they may not be able to pay or may delay payment to us, or in some cases may return products to us. Any inability of current and/or potential customers to pay us for our products and/or services due to their deteriorating financial condition or otherwise may adversely affect our results of operations and financial condition.
Operating Activities. For the nine months ended June 30, 2010, cash provided by operations was $10,600 and was primarily attributable to net income of $24,642 partially offset by an increase in accounts receivable of $12,072 due to the increase in revenues. The increase in inventories of $8,282 and accounts payable of $6,365 were both due to the increase in revenues.
For the nine months ended June 30, 2009, cash provided by operations was $2,847 and was primarily attributable to net income of $18,352, partially offset by an increase of receivables of $2,245 due to revenue growth partially offset by collection of receivables with extended payment terms that related to sales from prior periods, and a decrease in accounts payable of $16,282 due primarily to the timing of payment to vendors for strategic inventory purchases.
Investing Activities. For the nine months ended June 30, 2010, net cash used in investing activities was $41,470 and was primarily due to acquisition of Centaur of $39,511, net of cash acquired of $674, and capital expenditures of $1,862 related to distribution center infrastructure, including the relocation of the Holland, Michigan distribution center in September 2009 and technology investments.
For the nine months ended June 30, 2009, net cash used in investing activities was $1,527 and was primarily due to capital expenditures of $1,649 related to distribution center infrastructure, including the relocation of the Dallas distribution center in November 2008 and technology investments.
Financing Activities. For the nine months ended June 30, 2010, net cash provided by financing activities was $17,519, which was primarily due to net borrowings of $15,876 on our credit facilities. Our revolving credit facility was used to finance the Centaur acquisition. Additionally, our credit facilities are used to meet our working capital requirements and the amounts borrowed fluctuate based on timing of payables and collection of receivables. This was coupled with the tax benefit from stock option exercises of $1,829.
For the nine months ended June 30, 2009, net cash provided by financing activities was $331, which was primarily due to common stock issued under our employee stock purchase plan and the tax benefit of from stock option exercises.
Contractual Obligations and Guarantees
For information on our contractual obligations and guarantees, see our Annual Report on Form 10-K filed on November 20, 2009 with the SEC and our Quarterly Report on Form 10-Q filed on May 6, 2010 with the SEC.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risks primarily from changes in interest rates , in particular, the Daily LIBOR Floating Rate, and foreign currency translation risk. The Company does not engage in financial transactions for trading or speculative purposes. We do not hedge the translation of foreign currency profits into U.S. dollars.
The interest payable on our revolving credit facility is based on variable interest rates and is therefore affected by changes in market interest rates. The outstanding balance on the facility as of June 30, 2010 was $13,400. The interest rate on this facility at June 30, 2010 was 2.06%. A change of 10% from the interest rate as of June 30, 2010 (Daily LIBOR Floating Rate plus 1.75%), would have changed interest by $7 for the quarter ended June 30, 2010.
Item 4. Controls and Procedures
Management of the Company, including the Chief Executive Officer and the Chief Financial Officer of the Company, has evaluated the effectiveness of the Companys disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of June 30, 2010. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures, including the accumulation and communication of disclosures to the Companys Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure, are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified by the SECs rules and forms.
There were no changes in the Companys internal control over financial reporting that occurred during the Companys most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
Cautionary Statement for
Purposes of Safe Harbor Provisions of the Private Securities Litigation Reform
Act of 1995
This quarterly report on Form 10-Q contains
forward-looking statements within the meaning of the federal securities laws.
Statements that are not historical facts, including statements about our
beliefs and expectations, are forward-looking statements. Forward-looking
statements include statements preceded by, followed by or that include the
words may, could, would, should, believe, expect, anticipate, plan,
estimate, target, project, intend and similar expressions. These
statements include, among others, statements regarding our expected business
outlook, anticipated financial and operating results, our business strategy and
means to implement our strategy, our objectives, the amount and timing of
capital expenditures, the amount and timing of interest expense, the likelihood
of our success in expanding our business, financing plans, budgets, working
capital needs and sources of liquidity.
Forward-looking statements are only predictions and are not guarantees of our performance. These statements are based on our managements beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products, the expansion of product offerings geographically or through new applications, the timing and cost of planned capital expenditures, competitive conditions and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve known and unknown risks and uncertainties, which could cause actual results that differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:
· the impact of vendor consolidation on our business;
· changes in or availability of vendor contracts or rebate programs;
· vendor rebates based upon attaining certain growth goals;
· changes in the way vendors introduce/deliver products to market;
· exclusivity requirements with certain vendors that may prohibit us from distributing competing products manufactured by other vendors;
· risks associated with our international operations;
· transitional challenges associated with acquisitions, including the failure to achieve anticipated synergies;
· financial risks associated with acquisitions;
· the impact of general economic trends on our business;
· the recall of a significant product by one of our vendors;
· extended shortage or backorder of a significant product by one of our vendors;
· seasonality;
· the timing and effectiveness of marketing programs or price changes offered by our vendors;
· the timing of the introduction of new products and services by our vendors;
· the ability to borrow on our revolving credit facility, extend the terms of our revolving credit facility or obtain alternative financing on favorable terms or at all;
· risks from potential increases in variable interest rates;
· the impact of tightening credit standards and/or access to credit on behalf of our customers and suppliers;
· unforeseen litigation;
· a disruption caused by adverse weather or other natural conditions;
· inability to ship products to the customer as a result of technological or shipping disruptions; and
· competition.
Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the SEC, we are under no obligation to publicly update or revise any forward-looking statements, whether as a result of any new information, future events or otherwise. You should not place undue reliance on our forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results or performance.
Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, we have a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of MWI Veterinary Supply, Inc.
We are not currently a party to any material pending legal proceedings and are not aware of any claims that could have a material adverse effect on our financial position, results of operations or cash flows.
On April 19, 2010, we received a Civil Investigative Demand from the Federal Trade Commission seeking various documents concerning certain products that we distribute for Pfizer, Inc. The products are Rimadyl, Clavamox and Simplicef. The Civil Investigative Demand also seeks information on the generic forms of these products. The subpoena states that the investigation is to determine whether Pfizer or others have engaged in any unfair methods of competition. We have responded to the demand and intend to fully cooperate with this investigation. At this time, we have not been notified that we are a target of this investigation but we are unable to predict the timing and outcome of this matter.
There have been no material changes from the risk factors disclosed in the Risk Factors section of the Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2009, as modified by the risk factors disclosed in the Risk Factors section of the Companys Quarterly Report on Form 10-Q for the three months ended March 31, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The table below provides information concerning our repurchase of shares of our common stock during the three months ended June 30, 2010.
Issuer Purchases of Equity Securities
Period |
|
Total |
|
Average |
|
Total Number of |
|
Maximum Number |
|
|
April 1, 2010 to April 30, 2010 |
|
|
|
|
|
|
|
|
|
|
May 1, 2010 to May 31, 2010 |
|
|
|
|
|
|
|
|
|
|
June 1, 2010 to June 30, 2010 |
|
79 |
|
$ |
48.15 |
|
|
|
|
|
Total |
|
79 |
(1) |
$ |
48.15 |
|
|
|
|
|
(1) These shares were withheld upon the vesting of employee restricted stock grants in connection with payment of required withholding taxes.
Item 3. Defaults Upon Senior Securities
None.
None.
None.
10.1 |
|
2010 Pfizer Equine Products Marketing Agreement between MWI Veterinary Supply Co. and Pfizer, Inc. effective as of January 1, 2010 |
|
|
|
15 |
|
Letter re: Unaudited Interim Financial Information |
|
|
|
31.1 |
|
Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2 |
|
Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Certain portions of the exhibit have been omitted pursuant to a confidential treatment request submitted to and approved by the SEC.
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.
|
MWI Veterinary Supply, Inc. |
|
(Registrant) |
|
|
|
|
Date: July 29, 2010 |
/s/ Mary Patricia B. Thompson |
|
Mary Patricia B. Thompson |
|
Senior Vice President of
Finance and |