Attached files
| file | filename |
|---|---|
| EX-32.2 - EXHIBIT 32.2 - Synutra International, Inc. | dp19778_ex3202.htm |
| EX-31.1 - EXHIBIT 31.1 - Synutra International, Inc. | dp19778_ex3101.htm |
| EX-31.2 - EXHIBIT 31.2 - Synutra International, Inc. | dp19778_ex3102.htm |
| EX-32.1 - EXHIBIT 32.1 - Synutra International, Inc. | dp19778_ex3201.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 September 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 001-33397
SYNUTRA INTERNATIONAL, INC.
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DELAWARE
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13-4306188
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(State or Other Jurisdiction of
Incorporation or Organization)
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I.R.S. Employer
Identification No.
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2275 Research Blvd., Suite 500
Rockville, Maryland 20850
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(Address of Principal Executive Offices, Zip Code)
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(301) 840-3888
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(Registrant’s Telephone Number, Including Area Code)
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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.
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Large accelerated filer o
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Accelerated filer x
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Non-accelerated filer o
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Smaller reporting company o
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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
As of November 4, 2010, there were 57,300,713 shares of the registrant’s common stock outstanding.
Page
PART I
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1
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13
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23
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23
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PART II
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24
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24
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24
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24
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24
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24
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24
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25
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PART I
FINANCIAL INFORMATION
SYNUTRA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
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September 30, 2010
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March 31, 2010
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|||||||
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(in thousands,
except share par value)
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||||||||
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ASSETS
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||||||||
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Current Assets:
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||||||||
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Cash and cash equivalents
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$
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52,327
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$
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48,693
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||||
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Restricted cash
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26,804
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33,384
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||||||
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Accounts receivable, net of allowance of $6,360 and $4,355, respectively
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40,088
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26,013
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||||||
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Inventories
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67,597
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52,134
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||||||
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Due from related parties
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9,864
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8,111
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||||||
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Income tax receivable
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3,760
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523
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||||||
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Receivable from assets disposal
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5,386
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5,879
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||||||
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Prepaid expenses and other current assets
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17,293
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8,209
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||||||
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Deferred tax assets
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34,049
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33,390
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||||||
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Total current assets
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257,168
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216,336
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||||||
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Property, plant and equipment, net
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109,163
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110,037
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||||||
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Land use rights, net
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6,036
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5,996
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||||||
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Intangible assets, net
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3,126
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3,394
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||||||
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Goodwill
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—
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1,437
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||||||
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Receivable from assets disposal
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—
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4,404
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||||||
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Other assets
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5,521
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3,575
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||||||
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Deferred tax assets
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4,208
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4,178
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TOTAL ASSETS
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$
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385,222
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$
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349,357
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||||
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LIABILITIES AND EQUITY
|
||||||||
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Current Liabilities:
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||||||||
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Short-term debt
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$
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77,120
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$
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98,069
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||||
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Long-term debt due within one year
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14,923
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61,194
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||||||
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Accounts payable
|
61,099
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49,947
|
||||||
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Due to related parties
|
2,443
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2,670
|
||||||
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Advances from customers
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9,130
|
9,375
|
||||||
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Other current liabilities
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26,833
|
22,674
|
||||||
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Total current liabilities
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191,548
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243,929
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||||||
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Long-term debt
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79,091
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41,018
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||||||
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Deferred revenue
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4,734
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4,688
|
||||||
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Capital lease obligations
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5,461
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5,372
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||||||
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Other long-term liabilities
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1,451
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1,419
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||||||
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Total liabilities
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282,285
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296,426
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||||||
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Equity:
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||||||||
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Synutra International, Inc. shareholders’ equity
|
||||||||
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Common stock, $.0001 par value: 250,000 authorized; 57,301 and 54,001 issued and outstanding at September 30, 2010 and March 31, 2010, respectively
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6
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5
|
||||||
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Additional paid-in capital
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135,440
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76,607
|
||||||
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Accumulated deficit
|
(59,339
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)
|
(48,289
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)
|
||||
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Accumulated other comprehensive income
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26,214
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24,015
|
||||||
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Total Synutra common shareholders’ equity
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102,321
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52,338
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||||||
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Noncontrolling interest
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616
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593
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||||||
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Total equity
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102,937
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52,931
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||||||
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TOTAL LIABILITIES AND EQUITY
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$
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385,222
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$
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349,357
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||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
SYNUTRA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
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Three Months Ended
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Six Months Ended
|
||||||||||||||
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September 30,
|
September 30,
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||||||||||||||
|
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2010
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2009
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2010
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2009
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||||||||||||
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(in thousands, except earnings per share)
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||||||||||||||||
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Net sales
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$
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41,202
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$
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65,330
|
$
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124,989
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$
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112,680
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||||||||
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Cost of sales
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32,306
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53,051
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69,732
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80,829
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||||||||||||
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Gross profit
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8,896
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12,279
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55,257
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31,851
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||||||||||||
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Selling and distribution expenses
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12,211
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10,334
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24,837
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20,811
|
||||||||||||
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Advertising and promotion expenses
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14,654
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7,507
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24,656
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22,652
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||||||||||||
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General and administrative expenses
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8,370
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4,909
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15,886
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9,550
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||||||||||||
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Impairment loss from assets disposal
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—
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5,921
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—
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5,921
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||||||||||||
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Other operating income, net
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238
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107
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311
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224
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||||||||||||
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Loss from operations
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(26,101
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)
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(16,285
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)
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(9,811
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)
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(26,859
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)
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||||||||
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Interest expense
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2,113
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2,788
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4,775
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5,166
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||||||||||||
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Interest income
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137
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370
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245
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888
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||||||||||||
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Other income (expense), net
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58
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(267
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)
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225
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(1,051
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)
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Loss before income tax benefit
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(28,019
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)
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(18,970
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)
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(14,116
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)
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(32,188
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)
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||||||||
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Income tax benefit
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(6,797
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)
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(4,912
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)
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(3,002
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)
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(8,135
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)
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||||||||
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Net loss
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(21,222
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)
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(14,058
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)
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(11,114
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)
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(24,053
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)
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||||||||
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Net loss attributable to the noncontrolling interest
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(66
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)
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(39
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)
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(64
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)
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(88
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)
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||||||||
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Net loss attributable to Synutra International, Inc. common shareholders
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$
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(21,156
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)
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$
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(14,019
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)
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$
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(11,050
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)
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$
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(23,965
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)
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Loss per share – basic and diluted
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$
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(0.37
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)
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$
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(0.26
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)
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$
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(0.20
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)
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$
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(0.44
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)
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||||
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Weighted average common shares outstanding – basic and diluted
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57,301
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54,001
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55,651
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54,001
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||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
SYNUTRA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)
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|
Three Months Ended
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Six Months Ended
|
||||||||||||||
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September 30,
|
September 30,
|
||||||||||||||
|
|
2010
|
2009
|
2010
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2009
|
||||||||||||
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(in thousands)
|
||||||||||||||||
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Net loss
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$
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(21,222
|
)
|
$
|
(14,058
|
)
|
$
|
(11,114
|
)
|
$
|
(24,053
|
)
|
||||
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Currency translation adjustments
|
1,627
|
44
|
2,206
|
114
|
||||||||||||
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Total comprehensive loss
|
(19,595
|
)
|
(14,014
|
)
|
(8,908
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)
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(23,939
|
)
|
||||||||
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Less: Comprehensive loss attributable to noncontrolling interest
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(61
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)
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(39
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)
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(57
|
)
|
(88
|
)
|
||||||||
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Comprehensive loss attributable to Synutra International, Inc. common shareholders
|
$
|
(19,534
|
)
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$
|
(13,975
|
)
|
$
|
(8,851
|
)
|
$
|
(23,851
|
)
|
||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
SYNUTRA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
|
Common Stock
|
||||||||||||||||||||||||||||
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Shares
|
Amount
|
Additional paid-in capital
|
Accumulated deficit
|
Accumulated other comprehensive income
|
Noncontrolling interest
|
Total equity
|
||||||||||||||||||||||
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(in thousands)
|
||||||||||||||||||||||||||||
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Balance, March 31, 2009
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54,001 | $ | 5 | $ | 76,607 | $ | (23,674 | ) | $ | 23,921 | $ | 537 | $ | 77,396 | ||||||||||||||
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Net loss
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— | — | — | (23,965 | ) | — | (88 | ) | (24,053 | ) | ||||||||||||||||||
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Currency translation adjustments
|
— | — | — | — | 114 | — | 114 | |||||||||||||||||||||
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Other
|
— | — | — | — | — | 152 | 152 | |||||||||||||||||||||
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Balance, September 30, 2009
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54,001 | $ | 5 | $ | 76,607 | $ | (47,639 | ) | $ | 24,035 | $ | 601 | $ | 53,609 | ||||||||||||||
|
Balance, March 31, 2010
|
54,001 | $ | 5 | $ | 76,607 | $ | (48,289 | ) | $ | 24,015 | $ | 593 | $ | 52,931 | ||||||||||||||
|
Net loss
|
— | — | — | (11,050 | ) | — | (64 | ) | (11,114 | ) | ||||||||||||||||||
|
Issuance of common stock
|
3,300 | 1 | 58,833 | — | — | — | 58,834 | |||||||||||||||||||||
|
Currency translation adjustments
|
— | — | — | — | 2,199 | 7 | 2,206 | |||||||||||||||||||||
|
Other
|
— | — | — | — | — | 80 | 80 | |||||||||||||||||||||
|
Balance, September 30, 2010
|
57,301 | $ | 6 | $ | 135,440 | $ | (59,339 | ) | $ | 26,214 | $ | 616 | $ | 102,937 | ||||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
SYNUTRA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
Six Months Ended September 30,
|
||||||||
|
2010
|
2009
|
|||||||
|
(in thousands)
|
||||||||
|
Operating activities:
|
||||||||
|
Net loss
|
$
|
(11,114
|
)
|
$
|
(24,053
|
)
|
||
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
||||||||
|
Amortization of debt issuance costs
|
175
|
160
|
||||||
|
Depreciation and amortization
|
5,051
|
4,963
|
||||||
|
Bad debt expense (reversal)
|
1,900
|
(548
|
)
|
|||||
|
Goodwill and intangible asset impairment
|
1,700
|
—
|
||||||
|
Loss (gain) on disposal of property, plant and equipment
|
(17
|
)
|
10
|
|||||
|
Impairment loss from assets disposal
|
9
|
5,921
|
||||||
|
Deferred income tax
|
12
|
(6
|
)
|
|||||
|
Other compensation expense
|
80
|
153
|
||||||
|
Changes in operating assets and liabilities:
|
||||||||
|
Accounts receivable
|
(15,274
|
)
|
(8,188
|
)
|
||||
|
Inventories
|
(14,270
|
)
|
(1,306
|
)
|
||||
|
Due from related parties
|
(2,306
|
)
|
531
|
|||||
|
Prepaid expenses and other current assets
|
(5,055
|
)
|
4,173
|
|||||
|
Accounts payable
|
9,752
|
(31,299
|
)
|
|||||
|
Due to related parties
|
745
|
(2,444
|
)
|
|||||
|
Advances from customers
|
(412
|
)
|
9,500
|
|||||
|
Income tax receivable
|
(3,174
|
)
|
(8,559
|
)
|
||||
|
Deferred revenue
|
(41
|
)
|
—
|
|||||
|
Product recall provision
|
—
|
(1,697
|
)
|
|||||
|
Current and non-current other liabilities
|
6,944
|
4,085
|
||||||
|
Net cash used in operating activities
|
$
|
(25,295
|
)
|
$
|
(48,604
|
)
|
||
|
Investing activities:
|
||||||||
|
Acquisition of property, plant and equipment
|
(1,473
|
)
|
(2,965
|
)
|
||||
|
Change in restricted cash
|
7,085
|
(31,630
|
)
|
|||||
|
Payment for business acquisitions
|
—
|
(1,468
|
)
|
|||||
|
Proceeds from assets disposal
|
3,361
|
5,642
|
||||||
|
Net cash provided by (used in) investing activities
|
$
|
8,973
|
$
|
(30,421
|
)
|
|||
|
Financing activities:
|
||||||||
|
Proceeds from short-term debt
|
70,440
|
251,868
|
||||||
|
Repayment of short-term debt
|
(92,767
|
)
|
(160,092
|
)
|
||||
|
Proceeds from long-term debt
|
57,385
|
7,331
|
||||||
|
Repayment of long-term debt
|
(67,339
|
)
|
—
|
|||||
|
Payment on capital lease obligations
|
(7,505
|
)
|
—
|
|||||
|
Proceeds from issuance of common stock
|
62,700
|
—
|
||||||
|
Issuance costs for common stock issuance
|
(3,866
|
)
|
—
|
|||||
|
Net cash provided by (used in) financing activities
|
$
|
19,048
|
$
|
99,107
|
||||
|
Effect of exchange rate changes on cash and cash equivalents
|
$
|
908
|
$
|
55
|
||||
|
Net change in cash and cash equivalents
|
3,634
|
20,137
|
||||||
|
Cash and cash equivalents, beginning of period
|
$
|
48,693
|
$
|
37,736
|
||||
|
Cash and cash equivalents, end of period
|
$
|
52,327
|
$
|
57,873
|
||||
|
Supplemental cash flow information:
|
||||||||
|
Interest paid
|
4,253
|
5,773
|
||||||
|
Income tax paid
|
168
|
732
|
||||||
|
Non-cash investing and financing activities:
|
||||||||
|
Purchase of property, plant and equipment by accounts payable
|
394
|
879
|
||||||
|
Assets disposal by other receivable
|
5,386
|
—
|
||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
SYNUTRA INTERNATIONAL, INC.
NOTES TO CONSENSED CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES
|
Directly or through its wholly owned subsidiary, Synutra International, Inc. (collectively with its subsidiaries, the “Company” or “Synutra”) owns all or majority of the equity interests of the entities in the People’s Republic of China (“China” or “PRC”) that are principally engaged in the production, marketing and distribution of dairy based nutritional products under the Company’s own brands in China. The Company is a leader in sales of infant formula products in China. The Company produces, markets and sells nutritional products under the “Shengyuan” or “Synutra” name, together with other complementary brands. The Company focuses on selling premium infant formula products, which are supplemented by more affordable infant formula products targeting the mass market as well as other nutritional products, such as adult powdered formula and prepared baby food, and certain nutritional ingredients and supplements.
|
2.
|
BASIS OF PRESENTATION
|
The Company is responsible for the unaudited condensed consolidated financial statements included in this document, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include all normal and recurring adjustments that management of the Company considers necessary for a fair presentation of its financial position and operating results. The Company prepared these statements following the requirements of the U.S. Securities and Exchange Commission (the “SEC”) for interim reporting. As permitted under those rules, the Company condensed or omitted certain footnotes or other financial information that are normally required by GAAP for annual financial statements. These statements should be read in combination with the consolidated financial statements in the Company’s Annual Report on Form 10-K and its subsequent amendments, if any, for the fiscal year ended March 31, 2010.
The unaudited condensed consolidated financial statements include the financial statements of Synutra International, Inc. and its subsidiaries, its consolidated variable interest entity, Beijing Shengyuan Huimin Technology Service Co., Ltd., and its subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.
Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim unaudited condensed consolidated financial statements may not be the same as those for the full year.
|
3.
|
ISSUANCE OF COMMON STOCK
|
On June 30, 2010, the Company completed an offering (“Offering”) of 3.3 million shares of common stock at a price to public of $19.00 per share. The net proceeds from the Offering, after deducting underwriting discounts, commissions and offering expenses, totaled approximately $58.8 million. The net proceeds of the Offering were used to (i) repay in full $35.0 million of the RBS Loan (as defined in Note 9) and (ii) for general corporate purposes.
|
4.
|
FAIR VALUE MEASUREMENTS
|
The carrying value of financial instruments including cash, receivables, accounts payable, short-term debt and due to and from related parties, approximates their fair value at September 30, 2010 due to the relatively short-term nature of these instruments. The carrying value of long-term debt approximates its fair value as their interest rates are at the same level of the current market yield for comparable loans.
The following table sets forth by level, within the fair value hierarchy, the Company’s assets and liabilities accounted for at fair value on a nonrecurring basis as of September 30, 2010 and March 31, 2010. The Company did not have any items recorded at fair value on a recurring basis subsequent to initial recognition as of September 30, 2010 and March 31, 2010.
|
Description
|
Amount
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
Significant Other Observable Inputs
(Level 2)
|
Significant Unobservable Inputs
(Level 3)
|
Total Loss
|
|||||||||||||||
|
September 30, 2010:
|
(In thousands)
|
|||||||||||||||||||
|
Goodwill
|
$
|
—
|
$
|
—
|
$
|
1,440
|
||||||||||||||
|
Intangible asset (know-how)
|
$
|
—
|
$
|
—
|
$
|
260
|
||||||||||||||
|
March 31, 2010:
|
||||||||||||||||||||
|
Assets held for sale
|
$
|
30,211
|
$
|
30,211
|
$
|
5,894
|
||||||||||||||
In accordance with the provisions of ASC No.350, Intangibles – Goodwill and Other, goodwill with a carrying amount of $1.4 million and a know-how, which represents the acquired recipe, with a carrying amount of $0.3 million were written down to their fair value of zero, resulting in a loss of $1.7 million, which was included in general and administrative expenses of baby food segment for the six months ended September 30, 2010.
In June 2010, baby food segment began to implement sales and marketing activities through the Company’s distribution channel, which was delayed by the tight cash flow caused by the product recall in relation to the melamine contamination incident. The Company encountered some unexpected challenge in the implementation of marketing strategies in the baby food segment. Due to the uncertainty in future operating results, the Company reduced its growth expectation in baby food segment for the future years. As a result of reduced expectations of future cash flows in baby food segment, the Company determined that the goodwill with a carrying amount of $1.4 million was not recoverable and consequently recorded a full impairment charge. The Company applied the income approach to estimate the fair value of the goodwill. Calculating the fair value of the goodwill requires the input of significant estimates and assumptions, some of which are unobservable. The significant estimates and assumptions include business assumptions, weighted average cost of capital, terminal growth rate, and effective tax rate. The Company has categorized this as a level 3 fair value measurement.
The fair value of the know-how was determined by management, as the Company has made significant modification to the original recipe, management estimated that the value of the original recipe has been reduced to zero. The Company has categorized this as a level 3 fair value measurement.
|
5.
|
INVENTORIES
|
The Company’s inventories at September 30, 2010 and March 31, 2010 are summarized as follows:
|
September 30, 2010
|
March 31, 2010
|
|||||||
|
(In thousands)
|
||||||||
|
Raw materials
|
$
|
48,712
|
$
|
35,667
|
||||
|
Work-in-progress
|
14,271
|
10,893
|
||||||
|
Finished goods
|
4,614
|
5,574
|
||||||
|
Total
|
$
|
67,597
|
$
|
52,134
|
||||
|
6.
|
PREPAID EXPENSES AND OTHER CURRENT ASSETS
|
|
September 30, 2010
|
March 31, 2010
|
|||||||
|
(In thousands)
|
||||||||
|
Prepaid expense
|
$
|
4,590
|
$
|
421
|
||||
|
Prepaid taxes
|
7,173
|
2,287
|
||||||
|
Subsidy receivable
|
1,492
|
1,465
|
||||||
|
Assets held for sale
|
1,979
|
408
|
||||||
|
Other
|
2,059
|
3,628
|
||||||
|
Total
|
$
|
17,293
|
$
|
8,209
|
||||
|
7.
|
DUE FROM (TO) RELATED PARTIES AND RELATED PARTY TRANSACTIONS
|
|
A.
|
Classification of related party balances by name
|
|
a.
|
Due from related parties
|
|
September 30, 2010
|
March 31, 2010
|
|||||||
|
(In thousands)
|
||||||||
|
Sheng Zhi Da Dairy Group Corporation
|
$
|
1,761
|
$
|
1,728
|
||||
|
Beijing Honnete Dairy Co., Ltd.
|
6,839
|
5,476
|
||||||
|
St. Angel (Beijing) Business Service Co. Ltd.
|
1,264
|
907
|
||||||
|
Total
|
$
|
9,864
|
$
|
8,111
|
||||
|
b.
|
Due to related parties
|
|
September 30, 2010
|
March 31, 2010
|
|||||||
|
(In thousands)
|
||||||||
|
Sheng Zhi Da Dairy Group Corporation
|
$
|
1,889
|
$
|
2,098
|
||||
|
Beijing Honnete Dairy Co., Ltd.
|
554
|
568
|
||||||
|
Beijing St. Angel Cultural Communication Co., Ltd.
|
—
|
4
|
||||||
|
Total
|
$
|
2,443
|
$
|
2,670
|
||||
The Company had certain related party borrowings which were recorded in short-term debt. See Note 9. Except for the related party borrowings, the amount due to and due from related parties were unsecured and interest free.
|
B.
|
Sales to related parties
|
For the three-month and six-month ended September 30, 2010 and 2009, the Company’s sales to the related parties included whey protein and industrial milk powder to Beijing Honnete Dairy Co., Ltd., industrial milk powder to Beijing Kelqin Dairy Co., Ltd. and powdered formula products to St. Angel (Beijing) Business Service Co., Ltd.
|
|
Three Months Ended
|
Six Months Ended
|
||||||||||||||
|
|
September 30,
|
September 30,
|
||||||||||||||
|
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
|
(In thousands)
|
||||||||||||||||
|
Beijing Honnete Dairy Co., Ltd.
|
$
|
262
|
$
|
2,039
|
$
|
434
|
$
|
4,278
|
||||||||
|
Beijing Kelqin Dairy Co., Ltd.
|
23
|
31
|
23
|
31
|
||||||||||||
|
St. Angel (Beijing) Business Service Co., Ltd.
|
290
|
—
|
440
|
—
|
||||||||||||
|
Total
|
$
|
575
|
$
|
2,070
|
$
|
897
|
$
|
4,309
|
||||||||
|
C.
|
Purchases from related parties
|
The Company did not purchase from related parties in the fiscal quarters ended September 30, 2010 and 2009.
|
8.
|
PROPERTY, PLANT AND EQUIPMENT, NET
|
|
September 30, 2010
|
March 31, 2010
|
|||||||
|
(In thousands)
|
||||||||
|
Property, plant and equipment, cost:
|
||||||||
|
Buildings
|
$
|
56,423
|
$
|
49,351
|
||||
|
Plant and machinery
|
75,551
|
63,547
|
||||||
|
Office equipment and furnishings
|
3,361
|
3,314
|
||||||
|
Motor vehicles
|
2,591
|
2,590
|
||||||
|
Others
|
428
|
392
|
||||||
|
Total cost
|
$
|
138,354
|
$
|
119,194
|
||||
|
Less: Accumulated depreciation:
|
||||||||
|
Buildings
|
7,611
|
6,353
|
||||||
|
Plant and machinery
|
20,639
|
17,065
|
||||||
|
Office equipment and furnishings
|
1,891
|
1,634
|
||||||
|
Motor vehicles
|
1,264
|
1,099
|
||||||
|
Others
|
348
|
329
|
||||||
|
Total accumulated depreciation
|
31,753
|
26,480
|
||||||
|
Construction in progress
|
2,562
|
17,323
|
||||||
|
Property, plant and equipment, net
|
$
|
109,163
|
$
|
110,037
|
||||
Construction in progress mainly represents manufacturing equipment and facilities, as well as milk collection station.
The Company recorded depreciation expense of $2.5 million and $2.3 million for the fiscal quarters ended September 30, 2010 and 2009, and $5.0 million and $4.9 million for the six months ended September 30, 2010 and 2009, respectively.
|
9.
|
DEBT
|
On October 11, 2007, ABN AMRO Bank N.V., Hong Kong branch (now known as The Royal Bank of Scotland N.V. (“RBS”)) as administrative agent, as collateral agent and as arranger, and certain lenders party thereto (the “Lenders”) provided a three year term loan (the “Original Loan Agreement”) to the Company in the aggregate amount of $35.0 million. On February 26, 2010, the Company entered into an amendment (the “Amendment”) to its Original Loan Agreement with RBS and Lenders (as amended, the “RBS Loan”). The interest rate was amended to LIBOR plus 4.5%. The Amendment required the Company to maintain consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) that is no lower than the Minimum Consolidated EBITDA specified in the Original Loan Agreement, as amended. Pursuant to the Amendment, the Company is required to prepay the loan within 30 days of an equity issuance. The principal of the loan and outstanding interest were repaid on July 16, 2010, following the Offering described in Note 3.
As of September 30, 2010 and March 31, 2010, the Company had short-term debt from PRC banks in the amount of $73.3 million and $94.2 million, respectively. The maturity dates of the short-term debt outstanding range from October 2010 to September 2011. The weighted average interest rate on short-term debt from PRC banks outstanding at September 30, 2010 and March 31, 2010 was both 4.7%. The short-term debt from PRC banks at September 30, 2010 and March 31, 2010 were secured by the pledge of certain fixed assets held by the Company of $21.4 million and $33.4 million, respectively; the pledge of the Company’s land use right of $0.8 million and $2.2 million, respectively; and the pledge of cash deposits of $7.0 million and $11.7 million, respectively.
As of September 30, 2010 and March 31, 2010, the Company had long-term debt, including current portion, from PRC banks in the amount of $94.0 million and $67.4 million, respectively. The maturity dates of the long-term debt at September 30, 2010 are from May 2011 to January 2013. The weighted average interest rate of outstanding long-term debt at September 30, 2010 and March 31, 2010 was both 5.4%. The indebtedness was secured by the pledge of certain fixed assets of $8.0 million and nil, respectively; and the pledge of land use right of $1.9 million and $0.9 million, respectively at September 30, 2010 and March 31, 2010.
Apart from borrowings from banks, the Company had short-term loans from related parties in the amount of $3.9 million as of September 30, 2010 and March 31, 2010. The maturity dates of these related party loans at September 30, 2010 range from November 2010 to January 2011, and are extendable on the same terms upon maturity. The interest rate at September 30, 2010 and March 31, 2010 was both 10.0%. The interest expense of related party loans for the fiscal quarter ended September 30, 2010 and 2009 was $97,000 and $126,000, respectively.
|
10.
|
OTHER CURRENT LIABILITIES
|
|
September 30, 2010
|
March 31, 2010
|
|||||||
|
(In thousands)
|
||||||||
|
Accrued rebate and slotting fee
|
$
|
2,184
|
$
|
1,256
|
||||
|
Payroll and bonus payables
|
5,391
|
4,102
|
||||||
|
Accrued selling and marketing expenses
|
1,251
|
1,098
|
||||||
|
Accrued advertising and promotion expenses
|
12,629
|
6,116
|
||||||
|
Accrued sales return
|
2,229
|
3,960
|
||||||
|
Others
|
3,149
|
6,142
|
||||||
|
Total
|
$
|
26,833
|
$
|
22,674
|
||||
|
11.
|
INCOME TAXES
|
The effective tax rate is based on expected income, statutory tax rates and incentives available in the various jurisdictions in which the Company operates. For interim financial reporting, the Company estimates the annual tax rate based on projected taxable income for the full year and records a quarterly income tax provision in accordance with the ASC No. 740-270, “Income tax – Interim reporting” (previously FIN 18, " Accounting for Income Taxes in Interim Period "). As the year progresses, the Company refines the estimates of the year’s taxable income as new information becomes available. This continual estimation process often results in a change to the expected effective tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected annual tax rate.
|
12.
|
LOSS PER SHARE
|
For purposes of calculating basic and diluted earnings per share, the Company used the following weighted average common shares outstanding:
|
|
Three Months Ended
|
Six Months Ended
|
||||||||||||||
|
|
September 30,
|
September 30,
|
||||||||||||||
|
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
|
(In thousands)
|
||||||||||||||||
|
Net loss attributable to common shareholders
|
$
|
(21,156
|
)
|
$
|
(14,019
|
)
|
$
|
(11,050
|
)
|
$
|
(23,965
|
)
|
||||
|
Basic weighted average common shares outstanding
|
57,301
|
54,001
|
55,651
|
54,001
|
||||||||||||
|
Dilutive potential common shares from warrants
|
—
|
—
|
—
|
—
|
||||||||||||
|
Diluted weighted average shares outstanding
|
57,301
|
54,001
|
55,651
|
54,001
|
||||||||||||
|
Loss per share-basic and diluted
|
$
|
(0.37
|
)
|
$
|
(0.26
|
)
|
$
|
(0.20
|
)
|
$
|
(0.44
|
)
|
||||
The warrants to purchase 400,000 shares of common stock granted to RBS in connection with the RBS Loan were excluded from the computation of diluted earnings per share for all periods presented as they would be anti-dilutive.
|
13.
|
SEGMENT REPORTING
|
The Company focuses on selling premium infant formula products, which are supplemented by more affordable infant formula products targeting the mass market as well as other nutritional products, such as adult powdered formula and prepared baby food, and certain nutritional ingredients and supplements. The activities of each segment are as follows:
Powdered Formula - Sales of powdered infant and adult formula products.
Baby Food - Sales of prepared baby food for babies and children.
Nutritional Ingredients and Supplements - Sales of nutritional ingredients and supplements such as chondroitin sulfate, and microencapsulated Docosahexanoic Acid (“DHA”) and Arachidonic Acid (“ARA”).
“All Other” includes non-core businesses such as sales of ingredients and milk powder to industrial customers.
The Company’s underlying accounting records are maintained on a legal entity basis for government and public reporting requirements. Segment disclosures are on a performance basis consistent with internal management reporting.
|
|
Three Months Ended
|
Six Months Ended
|
||||||||||||||
|
|
September 30,
|
September 30,
|
||||||||||||||
|
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
|
(In thousands)
|
||||||||||||||||
|
NET SALES TO EXTERNAL CUSTOMERS
|
||||||||||||||||
|
Powdered formula
|
$
|
37,285
|
$
|
42,031
|
$
|
116,529
|
$
|
84,501
|
||||||||
|
Baby food
|
115
|
268
|
197
|
611
|
||||||||||||
|
Nutritional ingredients and supplements
|
867
|
460
|
867
|
516
|
||||||||||||
|
All other
|
2,935
|
22,571
|
7,396
|
27,052
|
||||||||||||
|
Net sales
|
$
|
41,202
|
$
|
65,330
|
$
|
124,989
|
$
|
112,680
|
||||||||
|
INTERSEGMENT SALES
|
||||||||||||||||
|
Powdered formula
|
$
|
—
|
$
|
1
|
$
|
—
|
$
|
5
|
||||||||
|
Baby food
|
97
|
—
|
171
|
232
|
||||||||||||
|
Nutritional ingredients and supplements
|
1,707
|
—
|
5,441
|
1,522
|
||||||||||||
|
All other
|
419
|
1,046
|
891
|
1,054
|
||||||||||||
|
Intersegment sales
|
$
|
2,223
|
$
|
1,047
|
$
|
6,503
|
$
|
2,813
|
||||||||
|
GROSS PROFIT
|
||||||||||||||||
|
Powdered formula
|
$
|
10,645
|
$
|
21,269
|
$
|
55,699
|
$
|
41,470
|
||||||||
|
Baby food
|
(203
|
)
|
45
|
(212
|
)
|
177
|
||||||||||
|
Nutritional ingredients and supplements
|
(729
|
)
|
(230
|
)
|
(729
|
)
|
(879
|
)
|
||||||||
|
All other
|
(817
|
)
|
(8,805
|
)
|
499
|
(8,917
|
)
|
|||||||||
|
Gross profit
|
$
|
8,896
|
$
|
12,279
|
$
|
55,257
|
$
|
31,851
|
||||||||
|
Selling and distribution expenses
|
12,211
|
10,334
|
24,837
|
20,811
|
||||||||||||
|
Advertising and promotion expenses
|
14,654
|
7,507
|
24,656
|
22,652
|
||||||||||||
|
General and administrative expenses
|
8,370
|
4,909
|
15,886
|
9,550
|
||||||||||||
|
Impairment loss
|
5,921
|
5,921
|
||||||||||||||
|
Other operating income, net
|
238
|
107
|
311
|
224
|
||||||||||||
|
Loss from operations
|
(26,101
|
)
|
(16,285
|
)
|
(9,811
|
)
|
(26,859
|
)
|
||||||||
|
Interest expense
|
2,113
|
2,788
|
4,775
|
5,166
|
||||||||||||
|
Interest income
|
137
|
370
|
245
|
888
|
||||||||||||
|
Other income (expense), net
|
58
|
(267
|
)
|
225
|
(1,051
|
)
|
||||||||||
|
Loss before income tax benefit
|
$
|
(28,019
|
)
|
$
|
(18,970
|
)
|
$
|
(14,116
|
)
|
$
|
(32,188
|
)
|
||||
|
September 30, 2010
|
March 31, 2010
|
|||||||
|
(In thousands)
|
||||||||
|
TOTAL ASSETS
|
||||||||
|
Powdered formula
|
$
|
380,418
|
$
|
333,975
|
||||
|
Baby food
|
26,541
|
35,115
|
||||||
|
Nutritional ingredients and supplements
|
40,698
|
37,879
|
||||||
|
All other
|
139,950
|
115,787
|
||||||
|
Intersegment elimination
|
(202,385
|
)
|
(173,399
|
)
|
||||
|
Total
|
$
|
385,222
|
$
|
349,357
|
||||
|
14.
|
CONTINGENCIES
|
As of September 30, 2010, the end of the period covered by this report, the Company was subject to various legal proceedings and claims discussed below, as well as certain other legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business. Other than as discussed below, in the opinion of management, the Company does not have a potential liability related to any current legal proceedings and claims that would individually or in the aggregate have a material adverse effect on its financial condition or operating results. However, the results of legal proceedings cannot be predicted with certainty. The Company intends to contest each lawsuit vigorously but should the Company fail to prevail in any of these legal matters or should several of these legal matters be resolved against the Company in the same reporting period, the operating results of a particular reporting period could be materially and adversely affected.
On March 29, 2010, U.S. District Judge Deborah Chasanow for the District of Maryland ordered the dismissal of a complaint filed January 15, 2009 on behalf of 54 Chinese families alleged to be affected by melamine contamination, against Synutra International, Inc. and Synutra Inc. (Jiali Tang, et al vs. Synutra International, Inc., et al.), alleging negligent or intentional infliction of personal injury, negligent or intentional infliction of emotional distress, battery, breach of warranty, fraudulent or negligent misrepresentation, seeking compensation for punitive damages in the amount of US$500 million, together with any compensatory damages. In an opinion issued the same date of the order above, the court sided with the Company’s positions and granted the motion to dismiss on the grounds of forum non conveniens. The court also granted the motion to file under seal a response to a Notice of Recent Development filed by the Plaintiffs. In considering the motion to dismiss on the grounds of forum non conveniens, the court examined both the availability and adequacy of the alternative forum in China as well as how public and private interests favor the choice of forum. In addition, taking into account that an “alternative compensation plan is undisputedly available to Plaintiffs,” the court ruled that “a conditional dismissal will not be employed to protect the Plaintiffs’ rights to pursue a judicial remedy in the alternative forum.” On June 28, 2010, the plaintiffs filed an opening brief of appeal of the dismissal order. In response, the Company filed an opposing brief on July 28, 2010 with the court of appeals. The plaintiffs’ reply brief was filed on August 16, 2010. The appeal is fully briefed and awaiting decision by the Fourth Circuit. Management believes the possibility of a significant loss from this lawsuit is remote. Therefore, no accrual has been established for any potential loss in connection with this lawsuit.
|
15.
|
SUBSEQUENT EVENTS
|
There was no other material event to be reported.
Sections of this Quarterly Report on Form 10-Q (the “Form 10-Q”) including, in particular, the Company’s Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed, implied or forecasted in any such forward-looking statements.
Expressions of future goals and expectations or similar expressions including, without limitation, “may,” “should,” “could,” “expects,” “does not currently expect,” “plans,” “anticipates,” “intends,” “believes,” “estimates,” “predicts,” “potential,” “targets,” or “continue,” reflecting something other than historical fact are intended to identify forward-looking statements. The factors described in the Company’s Annual Report on Form 10-K under Part I. Item 1A. Risk Factors and below in Part II. Other Information – Item 1A. Risk Factors could cause the Company’s actual results to differ materially from those described in the forward-looking statements. Unless required by law, the Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. However, readers should carefully review the reports and documents the Company files from time to time with the SEC, particularly its Quarterly Reports on Form 10-Q, Annual Report on Form 10-K , Current Reports on Form 8-K and all amendments to those reports.
Available Information
The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are filed with the SEC. Such reports and other information filed by the Company with the SEC are available on the Company’s website at http://www.synutra.com when such reports are available on the SEC website. The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. The contents of these websites are not incorporated into this filing. Further, the Company’s references to the URLs for these websites are intended to be inactive textual references only.
Overview
We are a leading infant formula company in China. We principally produce, market and sell our products under the “Shengyuan” or “Synutra” name, together with other complementary brands in mainland China. We focus on selling premium infant formula products, which are supplemented by more affordable infant formulas targeting the mass market as well as other nutritional products and ingredients. We sell our products through an extensive nationwide sales and distribution network covering 30 provinces and provincial-level municipalities in China. As of September 30, 2010, this network comprised over 560 independent distributors and over 1,000 independent sub-distributors who sell our products in over 75,000 retail outlets.
We currently have three reportable segments which are:
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o
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Powdered formula segment: Powdered formula segment covers the sale of powdered infant and adult formula products. It includes the brands of Super, U-Smart, Mingshan and Helanruniu;
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o
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Baby food segment: Baby food segment covers the sale of prepared baby food for babies and children. It includes the brand of Huiliduo;
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Nutritional ingredients and supplements segment: Nutritional ingredients and supplements segment covers the production and sale of nutritional ingredients and supplements such as chondroitin sulfate, and microencapsulated Docosahexanoic Acid (“DHA”) and Arachidonic Acid (“ARA”).
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Our “Other” business includes non-core businesses such as sales of ingredients and milk powder to industrial customers.
Our net sales for the six months ended September 30, 2010 increased by 10.9% to $125.0 million from $112.7 million for the same period in the previous year. Our gross profit for the six months ended September 30, 2010 increased by 73.5% to $55.3 million from $31.9 million for the same period in the previous year. Our net loss attributable to Synutra International, Inc. common shareholders for the six months ended September 30, 2010 was $11.1 million, as compared to $24.0 million for the same period in the previous year.
In August 2010, there were several media reports alleging our infant formula products caused symptoms of hormone-triggered sexual prematurity in infants in the Hubei province of China (the media reports, together with the reactions thereto, the “prematurity event”). In response to such media reports, the Ministry of Health ("MOH") of China conducted tests on samples of our products and concluded that there was no link between our infant milk powder products and premature development in infants. However, our business was significantly and negatively impacted in the fiscal quarter ended September 30, 2010 as a result of these media reports. Our sales volume decreased significantly in August and September of 2010 from the prior fiscal quarter. According to data released by China’s Ministry of Commerce’s Commercial Information Center (“CIC”), our market share dropped significantly from 6.6% in July 2010 to 4.8% in August 2010. In reaction, we provided more discounts and promotional supports to our distributors, and we incurred higher advertising and other expenses in the fiscal quarter ended September 30, 2010. We also committed to expend $1.5 million to finance studies on causes of and treatments for premature development in infants, and to educate the public on the issue. As the result, we had a significant net loss for the fiscal quarter ended September 30, 2010.
While we have been significantly and adversely affected by the prematurity event, management is cautiously optimistic about our ongoing recovery. We believe that the positive conclusion of MOH’s tests and Phoenix TV's on-air apology laid a solid foundation for the recovery of our brand going forward. In addition, due to the destocking of our products by our distributors, the sales of our products from our distributors to consumers have outpaced our sales to our distributors in this fiscal quarter, however, we expect our sales to our distributors to increase in future quarters. Based on these factors, management believes that sales and profitability for the following several quarters could improve significantly.
Unless otherwise noted, all translations from Renminbi to U.S. dollars were made at the mid rate published by the People’s Bank of China, or the mid rate, as of September 30, 2010, which was RMB6.7011 to $1.00. We make no representation that the Renminbi amounts referred to in this Quarterly Report on Form 10-Q could have been or could be converted into U.S. dollars at any particular rate or at all. On November 1, 2010, the mid rate was RMB6.6908 to $1.00.
Critical Accounting Policies and Estimates
We follow certain significant accounting policies when preparing our consolidated financial statements. A summary of these policies is included in our Annual Report on Form 10-K for the year ended March 31, 2010 under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates”. The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities at the date of the financial statements. We evaluate these estimates and judgments on an ongoing basis and base our estimates on historical experience, current conditions and various other assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Our actual results may differ from these estimates.
We believe that the estimates, assumptions and judgments involved in the accounting policies described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our most recent Annual Report on Form 10-K have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies.
RESULTS OF OPERATIONS
Three months ended September 30, 2010 and 2009
Net Sales
Net sales for the fiscal quarter ended September 30, 2010 decreased by 36.9% to $41.2 million from $65.3 million for the same period in the previous year. This decrease in net sales was mainly due to the decrease in net sales of powdered formula segment, as the business was significantly and negatively affected by the prematurity event, and decrease in net sales of other business, as we disposed surplus milk powder in the fiscal quarter ended September 30, 2009.
Powdered formula segment
Net sales of our powdered formula segment, including infant powdered formula and other powdered formula products for children and adults under our Super, U-Smart, Mingshan and Helanruniu brand names accounted for 90.5% of our total sales for the fiscal quarter ended September 30, 2010. Net sales of our powdered formula segment for the fiscal quarter ended September 30, 2010 decreased by 11.3 % to $37.3 million from $42.0 million for the same period in the previous year, primarily as a result of the following factors:
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Sales volume of powdered formula products increased by 14.4% to 6,443 tons for the fiscal quarter ended September 30, 2010 from 5,630 tons for the same period in the previous year, due primarily to the increase in sales volume before the prematurity event, as we recovered from the earlier melamine contamination incident, partially offset by the decrease in sales volume after the prematurity event.
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The average selling price of our powdered formula products for the fiscal quarter ended September 30, 2010 decreased by 22.5% to $5,787 per ton from $7,466 per ton for the same period in the previous year. The significant decrease in average selling price is mainly due to the prematurity event, which required us to increase the amount of discount we provided to suppliers in order for them to conduct more promotional activities.
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Baby food segment
Net sales of baby food segment for the fiscal quarter ended September 30, 2010 was $115,000, as compared to $268,000 for the same period in the previous year. The products in this segment comprised mainly of prepared baby food, such as cooked meat and vegetables. Because of the prematurity event, we focused our efforts during the quarter on the recovery of the powdered formula segment, and did not develop the baby food segment as planned.
Nutritional ingredients and supplements segment
Net sales of nutritional ingredients and supplements segment was $867,000 and $460,000 for the fiscal quarter ended September 30, 2010 and 2009, respectively. The products in this segment comprised mainly of chondroitin sulfate sold to third parties. There were also inter-segment sales of $1.7 million of nutritional ingredients, such as microencapsulated DHA and ARA, which were used in the production of powdered infant formula products, as compared to zero for the same period in the previous year.
Other
Other sales for the fiscal quarter ended September 30, 2010 was $2.9 million, which included sales of raw milk and surplus milk powder to industrial customers. Other sales for the fiscal quarter ended September 30, 2009 was $22.6 million, which mainly included sales of surplus milk powder that was overstocked due to melamine contamination incident.
Cost of Sales
Cost of sales for the fiscal quarter ended September 30, 2010 decreased by 39.1% to $32.3 million from $53.1 million for the same period in the previous year. The decrease in the cost of sales is mainly led by the decrease of cost of sales in other business, partially offset by the increase of cost of sales in the powdered formula segment.
Powdered formula segment
Cost of sales for the powdered formula segment for the fiscal quarter ended September 30, 2010 increased by 28.3% to $26.6 million from $20.8 million for the same period in the previous year. The increase in the cost of sales is primarily due to the increased sales volume and estimated cost of free products (products used in promotional activities such as buy four get one free) of $2.0 million to distributors to compensate their cost of free products to end consumers.
Baby food segment
Cost of sales for the baby food segment for the fiscal quarter ended September 30, 2010 was $318,000, as compared to $223,000 for the same period in the previous year.
Nutritional ingredients and supplements segment
Cost of sales for the nutritional ingredients and supplements segment was $1.6 million and $690,000 for the fiscal quarter ended September 30, 2010 and 2009, respectively.
Other
Other cost of sales for the fiscal quarter ended September 30, 2010 was $3.8 million, which included cost of sales of raw milk and surplus milk powder to industrial customers. Other cost of sales for the fiscal quarter ended September 30, 2009 was $31.4 million, which mainly included cost of sales of surplus milk powder that was overstocked due to the melamine contamination incident.
Gross Profit and Gross Margin
As a result of the foregoing, gross profit for the fiscal quarter ended September 30, 2010 decreased by 27.6% to $8.9 million from $12.3 million for the same period in the previous year. Gross profit for our powdered formula products for the fiscal quarter ended September 30, 2010 decreased by 50.0% to $10.6 million from $21.3 million for the same period in the previous year.
Our overall gross margin increased to 21.6% for the fiscal quarter ended September 30, 2010 from 18.8% for the same period in the previous year. Our gross margin for powdered formula segment was 28.6% for the fiscal quarter ended September 30, 2010, as compared to 50.6% for the same period in the previous year. The decrease in gross margin was mainly due to the decreased net sales as we provided more discounts and conducted more promotional activities to distributors.
Selling and Distribution Expenses
Selling and distribution expenses for the fiscal quarter ended September 30, 2010 increased by 18.2% to $12.2 million from $10.3 million for the same period in the previous year. This increase was mainly due to the increase in compensation expenses. Total compensation expense for the fiscal quarter ended September 30, 2010 increased by 34.7% to $7.9 million from $5.9 million for the same period in the previous year due to an increase in base salary and performance-related bonus to the sales staff.
Advertising and Promotion Expenses
Advertising and promotion expenses for the fiscal quarter ended September 30, 2010 increased 95.2% to $14.7 million from $7.5 million for the same period in the previous year. Advertising expenses for the fiscal quarter ended September 30, 2010, which accounted for 56.1% of total advertising and promotion expenses, increased by 108.3% to $8.2 million from $3.9 million for the same period in the previous year. The increase in advertising expenses is mainly due to more advertisement on TV in reaction to the prematurity event. Promotion expenses for the fiscal quarter ended September 30, 2010, which accounted for 43.9% of total advertising and promotion expenses, increased 80.7% to $6.4 million from $3.6 million for the same period in the previous year. The incease in promotion expenses is mainly due to the estimated cost for bonus points to consumers of $3.8 million.
General and Administrative Expenses
General and administrative expenses for the fiscal quarter ended September 30, 2010 increased by 70.5% to $8.4 million from $4.9 million for the same period in the previous year. The increase was mainly due to $1.5 million of donation to prematurity-related research, and $1.6 million increase in bad debt expense.
Other Operating Income, Net
Other operating income for the fiscal quarter ended September 30, 2010 increased to $238,000 from $107,000 for the same period in the previous year. The income represented general purpose government subsidy from local governments.
Interest Expense
Interest expense for the fiscal quarter ended September 30, 2010 decreased to $2.1 million from $2.8 million for the same period in the previous year. The decrease was mainly due to the decrease in average loan balance.
Interest Income
Interest income for the fiscal quarter ended September 30, 2010 decreased to $137,000 from $370,000 for the same period in the previous year. The decrease was mainly due to the decrease in restricted cash, which had a higher interest rate than cash and cash equivalent.
Other Income (Expense), Net
Other income for the fiscal quarter ended September 30, 2010 was $58,000, which was mainly due to the Renminbi appreciating against the U.S. dollar. Other expense for the fiscal quarter ended September 30, 2009 was $267,000, which was mainly due to the Renminbi depreciating against the Euro. We purchase milk powder and whey protein from Europe and New Zealand and the transactions were denominated in the Euro and U.S. dollar.
Income Tax Benefit
As a result of the loss generated, we recorded an income tax benefit of $6.8 million for the fiscal quarter ended September 30, 2010, as compared to income tax benefit of $4.9 million for the same period in the previous year.
Net Loss Attributable to Synutra International, Inc. Common Shareholders
As a result of the foregoing, net loss attributable to Synutra International, Inc. for the fiscal quarter ended September 30, 2010 was $21.2 million, as compared to $14.0 million for the same period in the previous year.
Six months ended September 30, 2010 and 2009
Net Sales
Net sales for the six months ended September 30, 2010 increased by 10.9% to $125.0 million from $112.7 million for the same period in the previous year. This increase in net sales was mainly due to recovered net sales in powdered formula segment from the earlier melamine contamination incident before the business was significantly and negatively affected by the prematurity event in August 2010, and partially offset by the decrease in net sales of other business, as we disposed surplus milk powder in the six months ended September 30, 2009.
Powdered formula segment
Net sales of our powdered formula products, including infant powdered formula and other powdered formula products for children and adults under our Super, U-Smart, Mingshan and Helanruniu brand names accounted for 93.2% of our total sales for the six months ended September 30, 2010. Net sales of our powdered formula products for the six months ended September 30, 2010 increased by 37.9% to $116.5 million from $84.5 million for the same period in the previous year, primarily as a result of the following factors:
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Sales volume of powdered formula products increased by 39.3% to 14,807 tons for the six months ended September 30, 2010 from 10,626 tons for the same period in the previous year, due primarily to the increase in sales volume before the prematurity event, as we recovered from the earlier melamine contamination incident, partially offset by the decrease in sales volume after the prematurity event.
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The average selling price of our powdered formula products for the six months ended September 30, 2010 decreased by 1.0% to $7,870 per ton from $7,953 per ton for the same period in the previous year. The decrease in average selling price is mainly due to the prematurity event, which required us to increase the amount of discount we provided to suppliers to conduct more promotional activities, partially offset by the high average selling price for the fiscal quarter ended June 30, 2010, when we were recovering from the earlier melamine contamination incident.
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Baby food segment
Net sales of the baby food segment for the six months ended September 30, 2010 was $197,000, as compared to $611,000 for the same period in the previous year. The products in this segment comprised mainly of prepared baby food, such as cooked meat and vegetables. Because of the prematurity event, we focused our efforts during the quarter on the recovery of the powdered formula segment, and did not develop the baby food segment as planned.
Nutritional ingredients and supplements segment
Net sales of nutritional ingredients and supplements segment were $867,000 and $516,000 for the six months ended September 30, 2010 and 2009, respectively. The products in this segment comprised mainly of chondroitin sulfate sold to third parties. There were also inter-segment sales of $5.4 million of nutritional ingredients, such as microencapsulated DHA and ARA, which were used in the production of powdered infant formula products, as compared to $1.5 million for the same period in the previous year.
Other
Other sales for the six months ended September 30, 2010 was $7.4 million, which included sales of raw milk and surplus milk powder to industrial customers. Other sales was $27.1 million for the six months ended September 30, 2009, which mainly included sales of surplus milk powder that was overstocked due to melamine contamination incident.
Cost of Sales
Cost of sales for the six months ended September 30, 2010 decreased by 13.7% to $69.7 million from $80.8 million for the same period in the previous year. The decrease in the cost of sales is mainly led by the decrease of cost of sales of other business, partially offset by the increase of cost of sales of the powdered formula segment.
Powdered formula segment
Cost of sales for the powdered formula segment for the six months ended September 30, 2010 increased by 55.0% to $60.8 million from $43.0 million for the same period in the previous year. The increase in the cost of sales is due primarily to the recovery in sales volume before the prematurity event.
Baby food segment
Cost of sales of the baby food segment for the six months ended September 30, 2010 was $409,000, as compared to $434,000 for the same period in the previous year.
Nutritional ingredients and supplements segment
Cost of sales of the nutritional ingredients and supplements segment was $1.6 million and $1.4 million for the six months ended September 30, 2010 and 2009, respectively.
Other
Other cost of sales for the six months ended September 30, 2010 was $6.9 million, which included cost of sales of raw milk and surplus milk powder to industrial customers. Other cost of sales was $36.0 million for the six months ended September 30, 2009, which mainly included cost of sales of surplus milk powder that was overstocked due to melamine contamination incident.
Gross Profit and Gross Margin
As a result of the foregoing, gross profit for the six months ended September 30, 2010 increased by 73.5% to $55.3 million from $31.9 million for the same period in the previous year. Gross profit for our powdered formula products for the six months ended September 30, 2010 increased by 34.3% to $55.7 million from $41.5 million for the same period in the previous year.
Our overall gross margin increased to 44.2% for the six months ended September 30, 2010 from 28.3% for the same period in the previous year. Our gross margin for powdered formula segment was 47.8% for the six months ended September 30, 2010, as compared to 49.1% for the same period in the previous year. The decrease in gross margin of powdered formula segment was mainly due to the effect of the prematurity event.
Selling and Distribution Expenses
Selling and distribution expenses for the six months ended September 30, 2010 increased by 19.3% to $24.8 million from $20.8 million for the same period in the previous year. This increase was mainly due to the increase in compensation expenses. Total compensation expense for the six months ended September 30, 2010 increased by 36.5% to $16.2 million from $11.9 million for the same period in the previous year due to an increase in base salary and performance related bonus of the sales staff.
Advertising and Promotion Expenses
Advertising and promotion expenses for the six months ended September 30, 2010 increased 8.8% to $24.7 million from $22.7 million for the same period in the previous year. Advertising expenses for the six months ended September 30, 2010, which accounted for 56.4% of total advertising and promotion expenses, increased by 13.7% to $13.9 million from $12.2 million for the same period in the previous year. The increase in advertising expenses is mainly due to more advertisement on TV in reaction to the prematurity event. Promotion expenses for the six months ended September 30, 2010, which accounted for 43.6% of total advertising and promotion expenses, increased 3.1% to $10.7 million from $10.4 million for the same period in the previous year.
General and Administrative Expenses
General and administrative expenses for the six months ended September 30, 2010 increased by 66.4% to $15.9 million from $9.6 million for the same period in the previous year. The increase was mainly due to a $1.7 million impairment loss of goodwill and an intangible asset of the baby food segment, $1.5 million of donation to prematurity-related research, and $2.4 million increase in bad debt expense.
Impairment Loss from Assets Disposal
We recorded impairment loss of $5.9 million for the six months ended September 30, 2009, which represented the difference between the estimated fair value and carrying value of the assets to be sold by two of our subsidiaries. We do not intend to dispose any other major assets.
Other Operating Income, Net
Other operating income for the six months ended September 30, 2010 decreased to $311,000 from $224,000 for the same period in the previous year. The income represented general purpose government subsidy from local governments.
Interest Expense
Interest expense for the six months ended September 30, 2010 decreased to $4.8 million from $5.2 million for the same period in the previous year. The decrease was mainly due to the decrease in average loan balance.
Interest Income
Interest income for the six months ended September 30, 2010 decreased to $245,000 from $888,000 for the same period in the previous year. The decrease was mainly due to the decrease in restricted cash, which had a higher interest rate than cash and cash equivalent.
Other Income (Expense), Net
Other income for the six months ended September 30, 2010 was $225,000, which was mainly due to the Renminbi appreciating against the U.S. dollar. Other expense for the six months ended September 30, 2009 was $1.1 million, which was mainly due to the Renminbi depreciating against the Euro. We purchase milk powder and whey protein from Europe and New Zealand and the transactions were denominated in the Euro and U.S. dollar.
Income Tax Benefit
As a result of the loss generated, we recorded an income tax benefit of $3.0 million for the six months ended September 30, 2010, as compared to income tax benefit of $8.1 million for the same period in the previous year. Our effective tax rate decreased to 21.3% for the six months ended September 30, 2010 from 25.3% for the same period in the previous year, which was mainly due to increased valuation allowance for net operating loss carryforwards of certain subsidiaries.
Net Loss Attributable to Synutra International, Inc. Common Shareholders
As a result of the foregoing, net loss attributable to Synutra International, Inc. for the six months ended September 30, 2010 was $11.1 million, as compared to $24.0 million for the same period in the previous year.
Liquidity and Capital Resources
Our primary sources of liquidity are cash from operations and available borrowings. Cash flows from operating activities represent the inflow of cash from our customers and the outflow of cash for inventory purchases, manufacturing, operating expenses, interest and taxes. Cash flows used in investing activities primarily represent capital expenditures for equipment and buildings. Cash flows from financing activities primarily represent borrowings from banks, and for the six months ended September 30, 2010, it also includes the issuance of 3.3 million shares of common stock, with net proceeds of approximately $58.8 million.
On July 7, 2010, the Company entered into a supplementary agreement with Beijing Oriental Campus Property Management Co., Ltd., pursuant to which the Company is required to prepay the head office building rental expense of $17.6 million, representing rental expense from September 1, 2010 to August 31, 2018, before December 31, 2010. We paid $7.5 million of this expense during the fiscal quarter ended September 30, 2010. Due to the tight cash flow we experienced after the prematurity event, we negotiated with the counterparty and temporarily ceased payment for the remaining balance. Any further payment will be made on a negotiated basis.
The following table sets forth, for the periods indicated, certain information relating to our cash flows:
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Six Months Ended September 30,
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2010
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2009
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(in thousands)
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||||||||
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Net cash used in operating activities
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$
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(25,295
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)
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$
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(48,604
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)
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Net cash used in investing activities
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8,973
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(30,421
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)
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Net cash provided by financing activities
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19,048
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99,107
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Effect of foreign currency translation on cash and cash equivalents
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908
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55
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Net cash flow
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$
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3,634
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$
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20,137
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Cash Flows from Operating Activities
Net cash used in operating activities was $25.3 million and $48.6 million for the six months ended September 30, 2010 and 2009, respectively. Net cash used in operating activities for the six months ended September 30, 2010 included net loss of $11.1 million, non-cash items not affecting cash flows of $8.9 million, and a $23.1 million increase in working capital. The changes in working capital for the six months ended September 30, 2010 were primarily related to a $15.3 million increase in accounts receivable, which was mainly due to credit sales to certain key distributors, and a $14.3 million increase in inventory, which was mainly due to slower production process than purchasing process, partially offset by a $9.8 million increase in accounts payable, which was mainly due to the slowed payment process due to the prematurity event. In the six months ended September 30, 2010, we spent $88.3 million to purchase raw materials and other production materials, $20.9 million in staff compensation and social welfare, $14.8 million in other taxes, $33.7 million in selling and distribution, advertising and promotion, and general and administrative expenses, and received $136.9 million from our customers.
Cash Flows from Investing Activities
Net cash provided by investing activities was $9.0 million for the six months ended September 30, 2010, as compared to net cash used in investing activities of $30.4 million for the six months ended September 30, 2009. Cash invested in purchases of property and equipment was $1.5 million and $3.0 million for the six months ended September 30, 2010 and 2009, respectively. Cash inflow from restricted cash was $7.1 million for the six months ended September 30, 2010, as compared to cash outflow from restricted cash of $31.6 million for the six months ended September 30, 2009. Restricted cash represents cash deposited with banks as security against the issuance of letters of credit for the import of raw materials and as pledges for certain short-term borrowings.
Cash Flows from Financing Activities
Net cash provided by financing activities was $19.0 million and $99.1 million for the six months ended September 30, 2010 and 2009. Apart from the borrowings and repayments of loan to banks and related parties, we issued 3.3 million shares of common stock and the net proceeds were approximately $58.8 million. We used a portion of the net proceeds to repay the outstanding principal and interest amounts on the RBS Loan on July 16, 2010.
Outstanding Indebtedness
For information on our short-term and long-term borrowings, see “Item 1. Financial Statements—Note 9.”
Contractual Obligations
For information on our contractual obligations, please refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Tabular Disclosure of Contractual Obligations.”as presented in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010.
Capital Expenditures
Our capital expenditures for the six months ended September 30, 2010 was $1.5 million, as compared to $3.0 million for the same period in the previous year.
Off-Balance Sheet Arrangements
We do not have off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
There is no material change in the information reported under Item 7A, “Foreign Exchange Risk”, “Inflation”, “Interest Rate Risk”, “Concentration of Credit Risk” and “Commodities Risk” contained in our Form 10-K for the fiscal year ended March 31, 2010.
Conclusion Regarding Effectiveness of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this report.
Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2010, the Company’s disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (a) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (b) accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the fiscal quarter ended September 30, 2010, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
PART II
OTHER INFORMATION
Information pertaining to legal proceedings can be found in “Item 1. Financial Statements—Note 14,” to the condensed consolidated financial statements, and is incorporated by reference herein.
For information regarding the risks and uncertainties affecting our business, please refer to “Part I, Item 1A Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2010. There have been no material changes to these risks and uncertainties during the fiscal quarter ended September 30, 2010.
None.
None.
None.
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Exhibit
Number
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Description
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31.1
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Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended
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31.2
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Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended
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32.1
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)
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32.2
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)
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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.
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SYNUTRA INTERNATIONAL, INC.
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Date:
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November 4, 2010
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By:
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/s/ Liang Zhang
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Name:
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Liang Zhang
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Title:
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Chief Executive Officer and Chairman
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By:
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/s/ Donghao Yang
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Name:
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Donghao Yang
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Title:
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Chief Financial Officer
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25