UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2012
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-51468
MWI VETERINARY SUPPLY, INC.
(Exact name of registrant as specified in its Charter)
Delaware | 02-0620757 | |
(State of Incorporation) | (I.R.S. Employer Identification Number) | |
3041 W. Pasadena Dr. | ||
Boise, ID | 83705 | |
(Address of principal executive offices) | (Zip Code) | |
(208) 955-8930 | ||
(Registrant’s telephone number, including area code) |
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 x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | o | |
Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of July 27, 2012 was 12,738,153.
MWI VETERINARY SUPPLY, INC.
INDEX
PART I. | |||
Item 1. | |||
Item 2. | |||
Item 3. | |||
Item 4. | |||
PART II. | |||
Item 1. | |||
Item 1A. | |||
Item 2. | |||
Item 3. | |||
Item 4. | |||
Item 5. | |||
Item 6. |
PART I. FINANCIAL INFORMATION | |||||||||||||
Item 1. Financial Statements | |||||||||||||
MWI VETERINARY SUPPLY, INC. | |||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF INCOME | |||||||||||||
Dollars and shares in thousands, except per share data | |||||||||||||
(unaudited) | |||||||||||||
Three months ended June 30, | Nine months ended June 30, | ||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||
Revenues: | |||||||||||||
Product sales | $ | 535,763 | $ | 393,706 | $ | 1,466,547 | $ | 1,089,830 | |||||
Product sales to related party | 14,351 | 10,560 | 44,494 | 38,401 | |||||||||
Commissions | 4,555 | 6,470 | 12,699 | 15,791 | |||||||||
Total revenues | 554,669 | 410,736 | 1,523,740 | 1,144,022 | |||||||||
Cost of product sales | 485,150 | 356,649 | 1,325,089 | 988,877 | |||||||||
Gross profit | 69,519 | 54,087 | 198,651 | 155,145 | |||||||||
Selling, general and administrative expenses | 43,959 | 33,663 | 125,799 | 97,160 | |||||||||
Depreciation and amortization | 2,273 | 1,723 | 6,739 | 4,879 | |||||||||
Operating income | 23,287 | 18,701 | 66,113 | 53,106 | |||||||||
Other income (expense): | |||||||||||||
Interest expense | (249) | (166) | (684) | (600) | |||||||||
Earnings of equity method investees | 75 | 51 | 231 | 187 | |||||||||
Other | 166 | 116 | 540 | 394 | |||||||||
Total other income (expense), net | (8) | 1 | 87 | (19) | |||||||||
Income before taxes | 23,279 | 18,702 | 66,200 | 53,087 | |||||||||
Income tax expense | (8,776) | (7,312) | (25,323) | (20,537) | |||||||||
Net income | $ | 14,503 | $ | 11,390 | $ | 40,877 | $ | 32,550 | |||||
Earnings per common share: | |||||||||||||
Basic | $ | 1.15 | $ | 0.91 | $ | 3.24 | $ | 2.61 | |||||
Diluted | $ | 1.15 | $ | 0.91 | $ | 3.23 | $ | 2.60 | |||||
Weighted average common shares outstanding: | |||||||||||||
Basic | 12,628 | 12,484 | 12,609 | 12,453 | |||||||||
Diluted | 12,662 | 12,526 | 12,638 | 12,507 | |||||||||
See Notes to Condensed Consolidated Financial Statements. |
MWI VETERINARY SUPPLY, INC. | |||||||
CONDENSED CONSOLIDATED BALANCE SHEETS | |||||||
Dollars and shares in thousands, except per share data | |||||||
(unaudited) | |||||||
June 30, | September 30, | ||||||
2012 | 2011 | ||||||
Assets | |||||||
Current Assets: | |||||||
Cash and cash equivalents | $ | 434 | $ | 606 | |||
Receivables, net | 270,393 | 215,861 | |||||
Inventories | 242,474 | 170,065 | |||||
Prepaid expenses and other current assets | 6,973 | 10,079 | |||||
Deferred income taxes | 2,445 | 1,672 | |||||
Total current assets | 522,719 | 398,283 | |||||
Property and equipment, net | 34,297 | 25,209 | |||||
Goodwill | 61,449 | 49,041 | |||||
Intangibles, net | 38,832 | 24,894 | |||||
Other assets, net | 7,529 | 6,792 | |||||
Total assets | $ | 664,826 | $ | 504,219 | |||
Liabilities And Stockholders’ Equity | |||||||
Current Liabilities: | |||||||
Credit facilities | $ | 56,234 | $ | 2,907 | |||
Accounts payable | 234,365 | 182,594 | |||||
Accrued expenses and other current liabilities | 20,181 | 16,385 | |||||
Current portion of capital lease obligations | 519 | 909 | |||||
Total current liabilities | 311,299 | 202,795 | |||||
Deferred income taxes | 6,839 | 5,989 | |||||
Long-term capital lease obligations | 147 | 354 | |||||
Other long-term liabilities | 3,075 | 2,271 | |||||
Commitments and contingencies (see Note 14) | |||||||
Stockholders’ Equity | |||||||
Common stock $0.01 par value, 40,000 authorized; 12,738 and | |||||||
12,618 shares issued and outstanding, respectively | 127 | 126 | |||||
Additional paid in capital | 143,611 | 133,759 | |||||
Retained earnings | 200,365 | 159,488 | |||||
Accumulated other comprehensive income | (637) | (563) | |||||
Total stockholders’ equity | 343,466 | 292,810 | |||||
Total liabilities and stockholders’ equity | $ | 664,826 | $ | 504,219 | |||
See Notes to Condensed Consolidated Financial Statements. |
MWI VETERINARY SUPPLY, INC. | |||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||||
Dollars in thousands (unaudited) | |||||||||
Nine months ended June 30, | |||||||||
2012 | 2011 | ||||||||
Cash Flows From Operating Activities: | |||||||||
Net income | $ | 40,877 | $ | 32,550 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||
Depreciation and amortization | 6,752 | 4,888 | |||||||
Amortization of debt issuance costs | 31 | 50 | |||||||
Stock-based compensation | 1,734 | 887 | |||||||
Deferred income taxes | 80 | 32 | |||||||
Earnings of equity method investees | (231) | (187) | |||||||
Loss on disposal of property and equipment | 30 | - | |||||||
Excess tax benefit of exercise of common stock options | (428) | (2,271) | |||||||
Other | (40) | (83) | |||||||
Changes in operating assets and liabilities (net of effects of business acquisitions): | |||||||||
Receivables | (32,186) | (16,269) | |||||||
Inventories | (44,668) | 4,273 | |||||||
Prepaid expenses and other current assets | 3,065 | 5,530 | |||||||
Accounts payable | 26,799 | (13,505) | |||||||
Accrued expenses and other current liabilities | 3,563 | 2,386 | |||||||
Net cash provided by operating activities | 5,378 | 18,281 | |||||||
Cash Flows From Investing Activities: | |||||||||
Business acquisitions, net of cash acquired | (53,718) | (7,000) | |||||||
Purchases of property and equipment | (4,766) | (10,280) | |||||||
Proceeds from sale of property and equipment | 96 | - | |||||||
Other investments | (618) | (4,283) | |||||||
Net cash used in investing activities | (59,006) | (21,563) | |||||||
Cash Flows From Financing Activities: | |||||||||
Borrowings on credit facilities | 393,716 | 232,630 | |||||||
Payments on credit facilities | (340,348) | (228,895) | |||||||
Proceeds from issuance of common stock | 405 | 297 | |||||||
Proceeds from exercise of stock options | 129 | 89 | |||||||
Excess tax benefit of exercise of common stock options | 428 | 2,271 | |||||||
Debt issuance costs | (111) | - | |||||||
Payment on long-term debt and capital lease obligations | (742) | (3,117) | |||||||
Net cash provided by financing activities | 53,477 | 3,275 | |||||||
Effect of Exchange Rate on Cash and Cash Equivalents | (21) | 85 | |||||||
(Decrease)/Increase in Cash and Cash Equivalents | (172) | 78 | |||||||
Cash and Cash Equivalents at Beginning of Period | 606 | 911 | |||||||
Cash and Cash Equivalents at End of Period | $ | 434 | $ | 989 | |||||
See Notes to Condensed Consolidated Financial Statements. |
MWI VETERINARY SUPPLY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Dollars and sterling pounds in thousands, except share and per share data
(unaudited)
NOTE 1 — GENERAL
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the results of operations, financial position and cash flows of MWI Veterinary Supply, Inc. and its wholly-owned subsidiaries (collectively referred to as “we,” “us,” and “our” throughout this Form 10-Q). All intercompany balances have been eliminated.
In the opinion of our management, the accompanying unaudited condensed consolidated financial statements include all adjustments necessary to present fairly, in all material respects, our results for the periods presented. These condensed consolidated financial statements have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our 2011 Annual Report on Form 10-K filed with the SEC on November 28, 2011. The results of operations for the three and nine months ended June 30, 2012 are not necessarily indicative of results to be expected for the entire fiscal year.
Our unaudited condensed consolidated balance sheet as of September 30, 2011 has been derived from the audited consolidated balance sheet as of that date.
Use of Estimates
The accompanying unaudited condensed consolidated financial statements have been prepared on the accrual basis of accounting using accounting principles generally accepted in the United States. In preparing financial information, we use certain estimates and assumptions that may affect the reported amounts and disclosures. Some of these estimates require difficult, subjective and complex judgments about matters that are inherently uncertain. As a result, actual results could differ materially from these estimates. Estimates are used when accounting for, among other items, sales returns, allowance for doubtful accounts, customer incentives, vendor rebates, inventories, goodwill and intangible assets, income taxes, impairment of long-lived assets, depreciation and amortization, employee benefits, unearned income and contingencies. The estimates of fair value of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet date and reported amounts of revenue and expenses for the periods are based on assumptions that we believe to be reasonable.
Revenue Recognition
We sell products we source from vendors to our customers through either a “buy/sell” transaction or an agency relationship with our vendors. In a “buy/sell” transaction, we purchase or take inventory of products from the vendor. When a customer places an order with us, we pick, pack, ship and invoice the customer for the order. We recognize revenue from “buy/sell” transactions as product sales when the product is delivered to the customer. We accept product returns from our customers. We estimate returns based on historical experience and recognize these estimated returns as a reduction of product sales. Product returns have historically not been significant to our financial statements. We record revenues net of sales tax. In an agency relationship, we generally do not purchase and take inventory of products from vendors. We receive an order from a customer, then transmit the order to the vendor, who picks, packs and ships the order to the customer. In some cases, the vendor invoices and collects payment from the customer, while in other cases we invoice and collect payment from the customer on behalf of the vendor. We receive a commission payment for soliciting the order from the customer and for providing other customer service activities. Commissions are recognized when the services upon which the commissions are based are complete. Gross billings from agency contracts were $90,873 and $101,376 for the three months ended June 30, 2012 and 2011, respectively, and generated commission revenue of $4,555 and $6,470, respectively. Gross billings from agency contracts were $246,866 and $282,637 for the nine months ended June 30, 2012 and 2011, respectively, and generated commission revenue of $12,699 and $15,791, respectively.
Customer incentives are accrued based on the terms of the contracts with each customer. These incentive programs provide that the customer receive an incentive based on their product purchases or attainment of performance goals. Incentives are estimated based on the specific terms in each agreement, historical experience and product growth rates. Incentives are recognized as a reduction to product sales.
Cost of Product Sales and Vendor Rebates
Cost of product sales consist of our inventory product cost, including shipping and delivery costs to and from our distribution centers. Vendor rebates are recorded based on the terms of the contracts or programs with each vendor. Many of our vendors’ rebate programs are based on a calendar year. We may receive quarterly, trimester, semi-annual or annual performance-based rebates from third-party vendors based upon attainment of certain sales and/or purchase goals. Sales rebates are classified in the accompanying condensed consolidated statements of income as a reduction to cost of product sales at the time the sales performance measures are achieved. Purchase rebates are measured against inventory purchases from the vendors when the purchase measures are achieved and are classified as a reduction of inventory until the product is sold. When the inventory is sold, purchase rebates are recognized as a reduction to cost of product sales.
Historically, actual results have not significantly deviated from those determined using the estimates described above. We expect that our estimates in the future will continue to be reasonable as our rebates are based on specific vendor program goals and are principally recorded upon achievement of sales or purchase performance measures. Vendors may change or eliminate rebate programs from year to year.
NOTE 2 — EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2011, the FASB issued guidance to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between generally accepted accounting principles in the United States and International Financial Reporting Standards. The guidance changes certain fair value measurement principles and enhances the disclosure requirements, particularly for Level 3 fair value measurements. The guidance is effective for our fiscal year beginning October 1, 2012. We do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.
In June 2011, the FASB issued guidance on the presentation of comprehensive income in an entity's financial statements. The guidance requires that comprehensive income be presented either in one continuous statement or in two separate but consecutive statements presenting the components of net income and its total, the components of other comprehensive income and its total, and total comprehensive income. The guidance also requires that reclassification adjustments from other comprehensive income to net income be presented in both the components of net income and the components of other comprehensive income. The guidance is effective for our fiscal year beginning October 1, 2012. We do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.
In September 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-08, Testing Goodwill for Impairment (“ASU 2011-08”) permitting the assessment of qualitative factors to determine whether events and circumstances lead to the conclusion that it is necessary to perform the traditional two-step impairment test. Under ASU 2011-08, entities testing goodwill for impairment now have the option to perform a qualitative assessment before having to calculate the fair value of a reporting unit. If an entity determines, on the basis of qualitative factors, that the fair value of the reporting unit is more-likely-than-not less than the carrying amount, the existing two-step quantitative impairment test is required. Otherwise, no further impairment testing is required. This update is effective for us on October 1, 2012. We do not believe that the adoption of this provision will have a material impact on our consolidated financial statements.
NOTE 3 — BUSINESS ACQUISITIONS
On March 21, 2011, MWI Veterinary Supply Co. (“MWI Co.”) purchased substantially all of the assets of Nelson Laboratories Limited Partnership (“Nelson”) for $7,000 in cash. Nelson was a distributor of animal health products to over 1,100 veterinary practices, primarily in the Midwestern United States. This acquisition allows us to better serve our customers in this region of the United States. An intangible asset representing customer relationships acquired in the acquisition has an estimated useful life of 10 years. The amount recorded in goodwill is expected to be deductible for tax purposes over 15 years.
On October 31, 2011, MWI Co. purchased substantially all of the assets of Micro Beef Technologies, Ltd. (“Micro”) for $60,878, including $53,400 in cash and 94,359 shares of common stock valued at $7,158, which is the fair value of the common stock as of the date of acquisition and a working capital adjustment of $320. The $53,400 paid in cash as consideration of Micro was funded with borrowings under our Credit Agreement (as defined in Note 7) as then in effect. Micro was a value-added distributor to the production animal market, including the distribution of micro feed ingredients, pharmaceuticals, vaccines, parasiticides, supplies and other animal health products. Micro also was a leading innovator of proprietary, computerized management systems for the production animal market. The intangible assets acquired in the acquisition include technology, customer relationships, trade name and covenant not to compete. The useful life of the amortizing intangible assets ranges from 5 years to 17 years. Trade name is a non-amortizing intangible asset. The amount recorded in goodwill is expected to be deductible for tax purposes over 15 years.
The fair values assigned to the tangible and intangible assets acquired and liabilities assumed are based on management's estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition, which may be adjusted during the allocation period as defined in Accounting Standards Codification (“ASC”) 280. These purchase price allocations are based on a combination of valuations and analyses.
2012 | 2011 | ||||||
Cash | $ | 2 | $ | - | |||
Receivables | 22,373 | 4,041 | |||||
Inventories | 27,759 | 3,594 | |||||
Other current assets | 105 | - | |||||
Property and equipment | 8,882 | 1,900 | |||||
Goodwill | 12,415 | 1,823 | |||||
Intangibles | 15,760 | 140 | |||||
Investments | 199 | - | |||||
Total assets acquired | 87,495 | 11,498 | |||||
Accounts payable | 25,026 | 4,498 | |||||
Accrued expenses and other liabilities | 1,591 | - | |||||
Total liabilities assumed | 26,617 | 4,498 | |||||
Net assets acquired | $ | 60,878 | $ | 7,000 | |||
The following table presents information for Micro that is included in our consolidated statements of income from the acquisition date of October 31, 2011 through the end of the quarter ended June 30, 2012:
Micro's operations included in MWI's results | ||||||||||
Three months ended June 30, 2012 | Nine months ended June 30, 2012 | |||||||||
Revenues | $ | 69,069 | $ | 178,236 | ||||||
Net Income | $ | 897 | $ | 3,210 | ||||||
The following table presents supplemental pro forma information as if the acquisition of Micro had occurred on October 1, 2011 for the nine months ended June 30, 2012 and on October 1, 2010 for the nine months ended June 30, 2011 (unaudited):
Unaudited Pro Forma Consolidated Results | |||||||||
Nine months ended June 30, | |||||||||
2012 | 2011 | ||||||||
Revenues | $ | 1,545,670 | $ | 1,311,640 | |||||
Net Income | $ | 40,971 | $ | 34,975 | |||||
The unaudited pro forma consolidated results are not necessarily indicative of what our consolidated results of operations would have been had we completed the acquisition on October 1, 2011 or 2010. Additionally, the unaudited pro forma consolidated results do not purport to project the future results of operations of the combined company.
NOTE 4 — RECEIVABLES
June 30, | September 30, | ||||||
2012 | 2011 | ||||||
Trade | $ | 254,517 | $ | 203,038 | |||
Vendor rebates and programs | 18,387 | 15,404 | |||||
272,904 | 218,442 | ||||||
Allowance for doubtful accounts | (2,511) | (2,581) | |||||
$ | 270,393 | $ | 215,861 | ||||
Product sales resulting from transactions with Banfield, The Pet Hospital (“Banfield”) were approximately 6% of total product sales during each of the three and nine months ended June 30, 2012 and 2011. Approximately 8% of our trade receivables resulted from transactions with Banfield as of June 30, 2012 and September 30, 2011.
NOTE 5 — PROPERTY AND EQUIPMENT
June 30, | September 30, | ||||||
2012 | 2011 | ||||||
Land | $ | 1,937 | $ | 1,723 | |||
Building and leasehold improvements | 14,107 | 13,427 | |||||
Machinery, furniture and equipment | 32,030 | 20,979 | |||||
Computer equipment | 7,875 | 5,864 | |||||
Construction in progress | 1,231 | 2,203 | |||||
57,180 | 44,196 | ||||||
Accumulated depreciation | (22,883) | (18,987) | |||||
$ | 34,297 | $ | 25,209 | ||||
Depreciation expense was $1,549 and $1,266 for the three months ended June 30, 2012 and 2011, respectively. Depreciation expense was $4,589 and $3,612 for the nine months ended June 30, 2012 and 2011, respectively.
NOTE 6 — GOODWILL AND INTANGIBLES
The changes in the carrying value of goodwill are as follows:
Goodwill as of September 30, 2011 | $ | 49,041 | ||||||
Acquisition activity | 12,415 | |||||||
Foreign currency adjustments | (7) | |||||||
Goodwill as of June 30, 2012 | $ | 61,449 | ||||||
Balances of intangibles are as follows:
June 30, | September 30, | |||||||||
Useful Lives | 2012 | 2011 | ||||||||
Amortizing: | ||||||||||
Customer relationships | 9-20 years | $ | 30,491 | $ | 24,981 | |||||
Covenants not to compete | 1-5 years | 897 | 808 | |||||||
Technology | 11 years | 5,830 | - | |||||||
Other | 2-7 years | 1,050 | 455 | |||||||
38,268 | 26,244 | |||||||||
Accumulated amortization | (7,064) | (5,109) | ||||||||
31,204 | 21,135 | |||||||||
Non-Amortizing: | ||||||||||
Trade names and patents | 7,628 | 3,759 | ||||||||
$ | 38,832 | $ | 24,894 | |||||||
Amortization expense was $728 and $459 for the three months ended June 30, 2012 and 2011, respectively. Amortization expense was $2,163 and $1,276 for the nine months ended June 30, 2012 and 2011, respectively. Estimated future annual amortization expense related to intangible assets as of June 30, 2012 is as follows:
Amount | ||||
Remainder of 2012 | $ | 702 | ||
2013 | 2,723 | |||
2014 | 2,537 | |||
2015 | 2,261 | |||
2016 | 2,163 | |||
Thereafter | 20,818 | |||
$ | 31,204 | |||
The above projection of amortization expense includes preliminary estimates of intangible assets and lives associated with the acquisition of Micro. These amounts may be adjusted during the allocation period as defined in ASC 805.
NOTE 7 — DEBT
The following table presents the outstanding debt and capital lease obligations as of June 30, 2012 and September 30, 2011:
June 30, | September 30, | |||||||
2012 | 2011 | |||||||
Revolving credit facility, 1.12% interest as of June 30, 2012 | $ | 47,100 | $ | - | ||||
Sterling revolving credit facility, 1.65% interest as of June 30, 2012 | 9,134 | 2,907 | ||||||
Capital lease obligations (1) | 666 | 1,263 | ||||||
Total debt and capital lease obligations | 56,900 | 4,170 | ||||||
Less: Long-term capital lease obligations | (147) | (354) | ||||||
Total debt included in current liabilities | $ | 56,753 | $ | 3,816 | ||||
(1) The capital lease obligations have varying maturity dates. | ||||||||
Revolving Credit Facility — On November 1, 2011, MWI Co. as borrower, entered into a Third Amendment to Credit Agreement (the “Third Amendment”) with MWI Veterinary Supply, Inc. and Memorial Pet Care, Inc., as guarantors, and Bank of America, N.A. and Wells Fargo Bank, N.A. as lenders (collectively, the “Lenders”), amending the Credit Agreement dated December 13, 2006, and as amended from time to time, by and among MWI Co., MWI Veterinary Supply, Inc., Memorial Pet Care, Inc. and the Lenders (the “Credit Agreement”). As discussed in Note 3 – Business Acquisitions, MWI Co.’s purchase of the assets of Micro was completed on October 31, 2011, using borrowing capacity that existed prior to the effectiveness of the Third Amendment. The Third Amendment increased the aggregate revolving commitment of the Lenders under the Credit Agreement from $100,000 to $150,000 and extended the maturity date of the Credit Agreement from March 1, 2013 to November 1, 2016. Under the Third Amendment, the margin on variable interest rate borrowings now ranges from 0.95% to 1.50%. The margin previously ranged from 1.50% to 2.25% under the Second Amendment. The Third Amendment also reduced the commitment fee from a range of 0.2% to 0.35% to a range of 0.15% to 0.25% depending on the funded debt to EBITDA ratio. The Credit Agreement contains financial covenants, including a fixed charge ratio and a funded debt to EBITDA ratio. We were in compliance with all of the covenants as of June 30, 2012 and September 30, 2011.
Sterling revolving credit facility— On November 5, 2010, Centaur Services Limited (“Centaur”), a wholly owned subsidiary of MWI Co. entered into a £12,500 unsecured revolving line of credit facility (the “sterling revolving credit facility”) with Wells Fargo Bank, N.A. London Branch (“Wells Fargo”). The sterling revolving credit facility is for a three year term with interest paid at the end of the applicable one month, three month or six month interest period. Interest is based on LIBOR for the applicable interest period plus an applicable margin of 1.05% to 1.90%. The facility contains financial covenants requiring Centaur to maintain a minimum tangible net worth of £3,000. As of June 30, 2012 and September 30, 2011, Centaur was in compliance with the covenant.
NOTE 8 — FAIR VALUE OF FINANCIAL INSTRUMENTS
Current fair value accounting guidance includes a hierarchy that is intended to increase consistency and comparability in fair value measurements and disclosures. This hierarchy prioritizes inputs to valuation techniques based on observable and unobservable data. The guidance categorizes these inputs used in measuring fair value into three levels which include the following:
· | Level 1 – observable inputs such as quoted prices in active markets; |
· | Level 2 – inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; and |
· | Level 3 – unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
As of June 30, 2012 and September 30, 2011, financial instruments include cash and cash equivalents, receivables and accounts payable, and the fair values approximate book values due to their short maturities.
In November 2011, we amended our revolving credit facility in the United States and in November 2010, we entered into our sterling revolving credit facility in the United Kingdom. Because these credit facilities include interest rates based on current market conditions, we believe that the estimated fair value of our debt was materially the same as our carrying value.
NOTE 9 — COMMON STOCK AND STOCK-BASED AWARDS
2002 Stock Plan |
We had a 2002 Stock Plan (the “2002 Plan”) to provide our directors, executives and other key employees with additional incentives by allowing them to acquire an ownership interest in us and, as a result, encouraging them to contribute to our success. All options that were granted under this plan have been exercised. Options were only eligible to be granted under the 2002 Plan until the 10th anniversary of the adoption of the 2002 Plan, which was June 18, 2012, therefore, no additional shares are available for issuance under the 2002 Plan.
2005 Stock Plan |
We have a 2005 Stock-Based Award and Incentive Compensation Plan (the “2005 Plan”), under which we may offer restricted and unrestricted shares of our common stock and grant options to purchase shares of our common stock to selected employees and non-employee directors. The purpose of the 2005 Plan is to promote our long-term financial success by attracting, retaining and rewarding eligible participants. As of June 30, 2012 and September 30, 2011, we had 917,961 and 932,438 shares, respectively, of our common stock available for issuance under the 2005 Plan. As of June 30, 2012, 23,843 options to purchase common stock were outstanding with a weighted average exercise price of $17.54 per share and expiring through September 2015.
The 2005 Plan permits us to grant stock options (both incentive stock options and non-qualified stock options), restricted and unrestricted stock and deferred stock. The compensation committee will determine the number and type of stock-based awards to each participant, the exercise price of each award, the duration of the award (not to exceed ten years), vesting provisions and all other terms and conditions of such award in individual award agreements. The 2005 Plan provides that upon termination of employment with us, unless determined otherwise by the compensation committee at the time options are granted, the exercise period for vested awards will generally be limited, provided that vested awards will be canceled immediately upon a termination for cause or voluntary termination. The 2005 Plan provides for the cancellation of all unvested awards upon termination of employment with us, unless determined otherwise by the compensation committee at the time awards are granted.
We did not grant common stock options during each of the nine months ended June 30, 2012 and 2011. During the nine months ended June 30, 2012 and 2011, we issued 5,750 and 5,550 shares of restricted stock under the 2005 Plan. We also granted 6,000 shares of unrestricted stock to non-employee directors during each of the nine months ended June 30, 2012 and 2011. During the three months ended June 30, 2012 and 2011, we recognized $989 and $235 of compensation expense related to stock grants, respectively. During the nine months ended June 30, 2012 and 2011, we recognized $1,857 and $1,139 of compensation expense related to stock grants, respectively.
We also have an employee stock purchase plan (“ESPP”) that allows substantially all employees to purchase shares of our common stock at 95% of the fair market value on the date of purchase. The purchase date is the last trading date of the purchase periods, which begin in March, June, September and December. Employees accumulate amounts through payroll deductions during the purchase period of between 1% and 10% but no more than $20 annually. An employee is allowed to purchase a maximum of 200 shares per purchase period. During the nine months ended June 30, 2012 and 2011, we issued 5,226 and 4,420 shares, respectively, of our common stock under the ESPP.
NOTE 10 — INCOME TAXES
Our effective tax rate for the three months ended June 30, 2012 and 2011 was 37.7% and 39.1%, respectively. The change in our effective tax rate is primarily due to a change in our estimates related to state taxes. Our effective tax rate for the nine months ended June 30, 2012 and 2011 was 38.3% and 38.7%, respectively.
As of June 30, 2012, we had $23 of unrecognized tax benefits, of which $15 would impact our effective rate if recognized. Our policy for classifying interest and penalties associated with unrecognized tax benefits is to include such items in income tax expense. The amount of interest and penalties recognized during the nine months ended June 30, 2012 and 2011 was not material.
With few exceptions, we are no longer subject to income tax examination for years before 2007 in the U.S. and significant state and local jurisdictions. We are no longer subject to income tax examination for years before 2009 in significant foreign jurisdictions.
NOTE 11 — COMPUTATION OF EARNINGS PER SHARE
Three months ended June 30, | |||||||||||||
2012 | 2011 | ||||||||||||
Basic | Diluted | Basic | Diluted | ||||||||||
Net income | $ | 14,503 | $ | 14,503 | $ | 11,390 | $ | 11,390 | |||||
Weighted average common shares outstanding | 12,628 | 12,628 | 12,484 | 12,484 | |||||||||
Effect of diluted securities | |||||||||||||
Stock options and restricted stock | 34 | 42 | |||||||||||
Weighted average diluted shares outstanding | 12,662 | 12,526 | |||||||||||
Earnings per share | $ | 1.15 | $ | 1.15 | $ | 0.91 | $ | 0.91 | |||||
Anti-dilutive shares excluded from calculation | - | - | |||||||||||
Nine months ended June 30, | |||||||||||||
2012 | 2011 | ||||||||||||
Basic | Diluted | Basic | Diluted | ||||||||||
Net income | $ | 40,877 | $ | 40,877 | $ | 32,550 | $ | 32,550 | |||||
Weighted average common shares outstanding | 12,609 | 12,609 | 12,453 | 12,453 | |||||||||
Effect of diluted securities | |||||||||||||
Stock options and restricted stock | 29 | 54 | |||||||||||
Weighted average diluted shares outstanding | 12,638 | 12,507 | |||||||||||
Earnings per share | $ | 3.24 | $ | 3.23 | $ | 2.61 | $ | 2.60 | |||||
Anti-dilutive shares excluded from calculation | - | - | |||||||||||
NOTE 12 — RELATED PARTIES
MWI Co. holds a 50.0% membership interest in Feeders’ Advantage LLC (“Feeders’ Advantage”). MWI Co. charged Feeders’ Advantage for certain operating and administrative services in the amounts of $237 and $193 for the three months ended June 30, 2012 and 2011, respectively. MWI Co. charged Feeders’ Advantage for certain operating and administrative services in the amounts of $733 and $645 for the nine months ended June 30, 2012 and 2011, respectively. Sales of products to Feeders’ Advantage were $14,351 and $10,560, which represented 3% of total product sales for each of the three months ended June 30, 2012 and 2011. Sales of products to Feeders’ Advantage were $44,494 and $38,401, which represented 3% of total product sales for each of the nine months ended June 30, 2012 and 2011.
MWI Co. allows Feeders’ Advantage to use its cash management system to finance its day-to-day operations. At any given time, the outstanding position used in the cash management system may be a receivable or payable depending on the cash activity. A receivable balance bears interest at the prime rate. The interest due on the outstanding receivable is calculated and charged to Feeders’ Advantage on the last day of each month. Conversely, to the extent MWI Co. has a payable balance due to Feeders’ Advantage, the payable balance accrues interest in favor of Feeders’ Advantage at the average federal funds rates in effect for that month. MWI Co. had a payable balance to Feeders’ Advantage of $767 as of June 30, 2012 and a receivable balance from Feeders’ Advantage of $756 as of September 30, 2011.
NOTE 13 — STATEMENTS OF CASH FLOWS – SUPPLEMENTAL AND NON-CASH DISCLOSURES
Nine months ended June 30, | |||||||
2012 | 2011 | ||||||
Supplemental Disclosures | |||||||
Cash paid for interest | $ | 589 | $ | 416 | |||
Cash paid for income taxes | 23,050 | 14,436 | |||||
Non-cash Activities | |||||||
Issuance of restricted common stock for asset acquisition | 7,158 | - | |||||
Capital lease asset additions and related obligations | 140 | - | |||||
Equipment acquisitions financed with accounts payable | 145 | 102 | |||||
NOTE 14 — COMMITMENTS AND CONTINGENCIES
Except as disclosed in our Form 10-Q for the three months ended December 31, 2011 and March 31, 2012, we are not currently a party to any material pending legal proceedings and are not aware of any claims that could have a material adverse effect on our financial position, results of operations or cash flows.
NOTE 15 — OTHER COMPREHENSIVE INCOME
The components of comprehensive income were as follows:
Three months ended June 30, | Nine months ended June 30, | ||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||
Net income | $ | 14,503 | $ | 11,390 | $ | 40,877 | $ | 32,550 | |||||
Other comprehensive income: | |||||||||||||
Foreign currency translation | (1,252) | (245) | (75) | 575 | |||||||||
Total comprehensive income | $ | 13,251 | $ | 11,145 | $ | 40,802 | $ | 33,125 | |||||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
To the Board of Directors and Stockholders of
MWI Veterinary Supply, Inc.
Boise, Idaho
We have reviewed the accompanying condensed consolidated balance sheet of MWI Veterinary Supply, Inc. and subsidiaries (the "Corporation") as of June 30, 2012, and the related condensed consolidated statements of income for the three-month and nine-month periods ended June 30, 2012 and 2011 and of cash flows for the nine-month periods ended June 30, 2012 and 2011. These interim financial statements are the responsibility of the Corporation’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of MWI Veterinary Supply, Inc. and subsidiaries as of September 30, 2011, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated November 28, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of September 30, 2011 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ DELOITTE & TOUCHE LLP
Boise, Idaho
July 30, 2012
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
All dollar amounts are presented in thousands, except for per share amounts.
Overview
We are a leading distributor of animal health products to veterinarians in the United States and the United Kingdom. We sell our products to veterinarians in both the companion and production animal markets. Our growth has primarily been from internal growth initiatives and, to a lesser extent, selective acquisitions. On October 31, 2011, we acquired substantially all of the assets of Micro Beef Technologies, Ltd. (“Micro”), which was a value-added distributor to the production animal market, including the distribution of micro feed ingredients, pharmaceuticals, vaccines, parasiticides, supplies, and other animal health products. Micro was also a leading innovator of proprietary, computerized management systems for the production animal market. On March 21, 2011, we acquired substantially all of the assets of Nelson Laboratories Limited Partnership (“Nelson”), which was a distributor of animal health products to veterinarians in the midwestern United States. Our financial results are presented as one reportable segment.
We estimate that historically approximately two-thirds of our total revenues have been generated from sales to the companion animal market and one-third from sales to the production animal market. While we expect that the majority of our business will continue to be generated from the companion animal market, we expect that the product mix will shift to an increasing amount of our revenues being generated from sales to the production animal market as a result of the Micro acquisition. The state of the overall economy in both the United States and United Kingdom and consumer spending have impacted both the companion animal and production animal markets, with tightening credit markets, volatile commodity prices in milk, grain, corn and feeder cattle, and changes in weather patterns (e.g. droughts or seasons of higher precipitation) also affecting demand in the production animal market. Both the companion animal and production animal markets have been integral to our financial results and we intend to continue supporting both markets.
Industry
We believe that the growth in the companion animal market in both the United States and United Kingdom has slowed as a result of a decrease in consumer spending but has shown signs of a recovery in 2012. Historically, growth in the companion animal market has been due to the increasing number of households with companion animals, increased expenditures on animal health and preventative care, an aging pet population, advancements in pharmaceuticals and diagnostic testing and extensive marketing programs sponsored by companion animal nutrition and pharmaceutical companies. While the average order size for companion animal health products is often smaller than production animal health products, companion animal health products typically have higher margins. We intend to continue to penetrate this market through internal growth initiatives and selective acquisitions. We believe that some of our customers in this market have experienced liquidity issues as a result of the tightening credit markets.
Product sales in the production animal market in both the United States and United Kingdom are impacted by volatility in commodity prices such as milk, corn, grain and feeder cattle, changes in weather patterns (e.g. droughts or seasons of higher precipitation that determine how long cattle will graze) and changes in the general economy. This creates cash-flow challenges for these farmers and in turn, could impact the time it takes for us to collect our outstanding accounts receivable from these customers as well as affect the overall collectability of these accounts. However, we still believe that it is important to our business to service this market and we intend to continue to support production animal veterinarians with a broad range of products and value-added services. Historically, sales in this market have been largely driven by spending on animal health products to improve productivity, weight gain and disease prevention, as well as a growing focus on food safety.
We generally extend some level of credit to our customers without requiring collateral, which exposes us to credit risk. If customers’ cash flow or operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain other sources of credit, they may not be able to pay or may delay payment to us, or in some cases may return products to us. We continually assess our customers’ ability to pay us and adjust our allowance for doubtful accounts, as necessary.
Our quarterly sales and operating results have varied significantly in the past, and will likely continue to do so in the future. Historically, our total revenues have typically been higher during the spring and fall months due to increased sales of production animal products. Product use cycles for production animal products are directly related to medical procedures performed by veterinarians on production animals during the spring and fall months. These buying patterns can also be affected by the marketing programs or price increase announcements of vendors and distributors, which can cause veterinarians to purchase production animal health products earlier than those products are needed. This kind of early purchasing may reduce our sales in the months these purchases would have otherwise been made.
Sales
We sell products that we source from our vendors to our customers through either a “buy/sell” transaction or an agency relationship with our vendors. In a “buy/sell” transaction, we purchase or take inventory of products from our vendors. When a customer places an order with us, we pick, pack, ship and invoice the customer for the order. We record sales from “buy/sell” transactions, which account for the vast majority of our business, as revenues from product sales in conformity with generally accepted accounting principles in the United States. In an agency relationship, we generally do not purchase and take inventory of products from our vendors. When we receive an order from our customer, we transmit the order to our vendor, who picks, packs and ships the order to our customer. In some cases, our vendor invoices and collects payment from our customer, while in other cases we invoice and collect payment from our customer on behalf of our vendor. We receive a commission payment for soliciting the order from our customer and for providing other customer service activities. The aggregate revenues we receive in agency transactions constitute the “commissions” line item on our consolidated statements of income and are recorded in conformity with accounting principles generally accepted in the United States. Our vendors determine the method we use to sell our products. Historically, vendors have occasionally switched between the “buy/sell” and agency models for particular products in response to market conditions related to that particular product. A switch between models can impact our revenues and our operating income. We cannot know in advance when a vendor will switch between the “buy/sell” and agency models or what impact, if any, such a change may have. A switch can occur even with vendors with whom we have written agreements, because most of our agreements with vendors have relatively short terms and are terminable with or without cause on short notice, normally 30 to 90 days. The impact of any individual change from a “buy/sell” to an agency model depends on the costs and expenses associated with a particular product, and can have either a positive or a negative effect on our profitability.
We typically renegotiate vendor contracts annually. These vendor contracts may include terms defining margins, rebates, commissions, exclusivity requirements and the manner in which we go to market. For example, vendors could require us to distribute their products on an exclusive basis, which could cause us to forego distributing competing products which may also be profitable. Conversely, competitors could obtain exclusive rights to market particular products, which we would be unable to market. If we lose the right to distribute products under such exclusive agreements, we may lose access to certain products and lose a competitive advantage. Exclusivity agreements could allow potential competitors to sell products that we cannot offer and erode our market share. In addition, vendors have the ability to expand the distributors that they use which could have a material adverse effect on our business.
On April 20, 2012, one of our vendors, IDEXX Laboratories, Inc., a manufacturer of veterinary diagnostic products (“IDEXX”), announced a change to its U.S. distributor strategy as a result of an ongoing investigation by the Federal Trade Commission of IDEXX’s “competitive products” policy. Currently, MWI is a national distributor for IDEXX, and has agreed to the terms of IDEXX’s competitive products policy which restricts MWI’s ability to distribute certain competing products. IDEXX has announced that going forward, it intends that one of its three national distributors will be converted from a “value added distributor” to a “generalist,” with the result being that the distributor chosen as the generalist will not be restricted by any exclusivity requirements, but will be entitled to receive lower margins on the distribution of any IDEXX products than will any value added distributors. MWI is currently in discussions with IDEXX on the matter and is currently reviewing the financial impact to MWI if it were to agree to convert from a value added distributor to a generalist. MWI’s current contract with IDEXX remains in effect and is scheduled to terminate on December 31, 2012, and a change to MWI’s relationship with IDEXX if any will only result after negotiations of a new contract with IDEXX.
Some of our current and future vendors may decide to compete with us in the future by pursuing or increasing their efforts in direct marketing and sales of their products. These vendors could sell their products at lower prices and maintain a higher gross margin on their product sales than we can. In this event, veterinarians or animal owners may elect to purchase animal health products directly from these vendors. As an example of this type of event, we were a sales agent for a pet food line for most of fiscal year 2011 that we will not represent in fiscal year 2012 because that manufacturer chose to sell their products direct and not through sales agents.
Many of our vendors’ rebate programs are based on a calendar year. Historically, the three months ended December 31 has been our most significant quarter for recognition of rebates. This trend has slowed some in recent years due to certain changes in vendor contracts but it still remains our largest quarter for vendor rebates. Vendor rebates based on sales are classified in our accompanying consolidated statements of income as a reduction to cost of product sales at the time the sales performance measures are achieved. Purchase rebates are measured against inventory purchases from the vendors and are a reduction of inventory until the product is sold. When the inventory is sold, purchase rebates are recognized as a reduction to cost of product sales.
Vendor Consolidation
In the United States, our top ten vendors supplied products that accounted for approximately 73% and 70% of our revenues for the nine months ended June 30, 2012 and 2011, respectively, and 71% of our revenues for the fiscal year ended September 30, 2011. Pfizer supplied products that accounted for approximately 22% and 24% of our revenues during the nine months ended June 30, 2012 and 2011, respectively, and 24% of our revenues for our fiscal year ended September 30, 2011. Of the Pfizer supplied products, production animal products under a livestock agreement accounted for approximately 13% and 12% of our revenues during the nine months ended June 30, 2012 and 2011, respectively, and approximately 13% of our revenues for our fiscal year ended September 30, 2011. Merck (formerly known as Intervet/Schering-Plough) supplied products that accounted for approximately 15% and 11% of our revenues during the nine months ended June 30, 2012 and 2011, respectively, and 11% of our revenues for our fiscal year ended September 30, 2011. No other vendor accounts for more than 10% of our revenues in the United States. Merial, a subsidiary of Sanofi-Aventis, supplies the majority of their products to us under an agency relationship. Commission revenue generated from Merial products accounted for approximately 52% and 48% of total commission revenues during the nine months ended June 30, 2012 and 2011, respectively, and 47% of total commission revenues for our fiscal year ended September 30, 2011.
For more information on our business, see our Annual Report on Form 10-K filed with the SEC on November 28, 2011.
Results of Operations
The following table summarizes our results of operations for the three and nine months ended June 30, 2012 and 2011, in dollars and as a percentage of total revenues.
Three months ended June 30, | Nine months ended June 30, | |||||||||||||||||||||||||
2012 | % | 2011 | % | 2012 | % | 2011 | % | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||
Product sales | $ | 535,763 | 96.6 | % | $ | 393,706 | 95.9 | % | $ | 1,466,547 | 96.2 | % | $ | 1,089,830 | 95.3 | % | ||||||||||
Product sales to related party | 14,351 | 2.6 | % | 10,560 | 2.5 | % | 44,494 | 2.9 | % | 38,401 | 3.3 | % | ||||||||||||||
Commissions | 4,555 | 0.8 | % | 6,470 | 1.6 | % | 12,699 | 0.9 | % | 15,791 | 1.4 | % | ||||||||||||||
Total revenues | 554,669 | 100.0 | % | 410,736 | 100.0 | % | 1,523,740 | 100.0 | % | 1,144,022 | 100.0 | % | ||||||||||||||
Cost of product sales | 485,150 | 87.5 | % | 356,649 | 86.8 | % | 1,325,089 | 87.0 | % | 988,877 | 86.4 | % | ||||||||||||||
Gross profit | 69,519 | 12.5 | % | 54,087 | 13.2 | % | 198,651 | 13.0 | % | 155,145 | 13.6 | % | ||||||||||||||
SG&A expenses | 43,959 | 7.9 | % | 33,663 | 8.2 | % | 125,799 | 8.3 | % | 97,160 | 8.5 | % | ||||||||||||||
Depreciation and amortization | 2,273 | 0.4 | % | 1,723 | 0.4 | % | 6,739 | 0.4 | % | 4,879 | 0.5 | % | ||||||||||||||
Operating income | 23,287 | 4.2 | % | 18,701 | 4.6 | % | 66,113 | 4.3 | % | 53,106 | 4.6 | % | ||||||||||||||
Other income (expense): | ||||||||||||||||||||||||||
Interest expense | (249) | - | % | (166) | - | % | (684) | - | % | (600) | - | % | ||||||||||||||
Earnings of equity method | ||||||||||||||||||||||||||
investees | 75 | - | % | 51 | - | % | 231 | - | % | 187 | - | % | ||||||||||||||
Other | 166 | - | % | 116 | - | % | 540 | - | % | 394 | - | % | ||||||||||||||
Total other income (expense) | (8) | - | % | 1 | - | % | 87 | - | % | (19) | - | % | ||||||||||||||
Income before taxes | 23,279 | 4.2 | % | 18,702 | 4.6 | % | 66,200 | 4.3 | % | 53,087 | 4.6 | % | ||||||||||||||
Income tax expense | (8,776) | (1.6) | % | (7,312) | (1.8) | % | (25,323) | (1.7) | % | (20,537) | (1.8) | % | ||||||||||||||
Net income | $ | 14,503 | 2.6 | % | $ | 11,390 | 2.8 | % | $ | 40,877 | 2.6 | % | $ | 32,550 | 2.8 | % | ||||||||||
Earnings per common share: | ||||||||||||||||||||||||||
Basic | $ | 1.15 | $ | 0.91 | $ | 3.24 | $ | 2.61 | ||||||||||||||||||
Diluted | $ | 1.15 | $ | 0.91 | $ | 3.23 | $ | 2.60 | ||||||||||||||||||
Weighted average common shares outstanding (in thousands): | ||||||||||||||||||||||||||
Basic | 12,628 | 12,484 | 12,609 | 12,453 | ||||||||||||||||||||||
Diluted | 12,662 | 12,526 | 12,638 | 12,507 |
Three months ended June 30, 2012 compared to Three months ended June 30, 2011
Total Revenues. Total revenues increased 35.0% to $554,669 for the three months ended June 30, 2012, from $410,736 for the three months ended June 30, 2011. Excluding the acquisition of the assets of Micro, organic revenue growth in the United States was 18.5% for the quarter ended June 30, 2012 compared to the same period in the prior fiscal year. Revenues from Micro, which was acquired on October 31, 2011, were $69,069 for the quarter ended June 30, 2012. Revenue growth in the United Kingdom was 16.7% for the quarter ended June 30, 2012, compared to the same period in the prior fiscal year, consisting of 20.2% organic growth partially offset by a decline of 3.5% related to foreign currency exchange. Excluding the revenues from Micro, revenues in the United States attributable to existing customers represented approximately 68% of the growth in revenues and revenues attributable to new customers represented approximately 32% of the growth in revenues during the three months ended June 30, 2012. For the purpose of calculating growth rates of new and existing customer revenue, we have defined a new customer as a customer that did not purchase product from us in the corresponding fiscal quarter of the prior year, with the remaining customer base being considered existing customers. Revenues from new customers for each fiscal quarter are summed to arrive at the estimated year-to-date revenue for new customers.
Product sales to related party increased by 35.9% to $14,351 for the three months ended June 30, 2012, from $10,560 for the three months ended June 30, 2011. This increase was primarily due to higher product use to treat cattle and higher priced products that were used by the feedlots during the quarter ended June 30, 2012 compared to the quarter ended June 30, 2011. Commissions decreased to $4,555 for the three months ended June 30, 2012, from $6,470 for the three months ended June 30, 2011. In the prior year quarter ended June 30, 2011, we earned an incentive from one of our vendors. This incentive was earned at a substantially lower level in the quarter ended June 30, 2012. Additionally, commissions decreased due to the loss of a pet food line that we represented for most of fiscal year 2011 that we are not representing in fiscal year 2012, and a shift in commissions revenues to buy-sell revenues for certain parasiticides.
Gross Profit. Gross profit increased by 28.5% to $69,519 for the three months ended June 30, 2012, from $54,087 for the three months ended June 30, 2011. The change in gross profit is primarily a result of increased total revenues as discussed above. Gross profit as a percentage of total revenues was 12.5% and 13.2% for the three months ended June 30, 2012 and 2011, respectively. The decrease in gross profit as a percentage of total revenues was primarily due to the decrease in commissions, as well as lower product margins partially offset by improved freight as a percentage of total revenues. Vendor rebates for the three months ended June 30, 2012 increased by approximately $286 compared to the three months ended June 30, 2011.
Selling, General and Administrative (“SG&A”). SG&A expenses increased 30.6% to $43,959 for the three months ended June 30, 2012, from $33,663 for the three months ended June 30, 2011. The increase in SG&A expenses was primarily due to the addition of Micro and compensation costs from increased headcount to support the revenue growth. SG&A expenses as a percentage of total revenues were 7.9% for the three months ended June 30, 2012, compared to 8.2% for the three months ended June 30, 2011.
Depreciation and Amortization. Depreciation and amortization increased 31.9% to $2,273 for the three months ended June 30, 2012, from $1,723 for the three months ended June 30, 2011. The increase was primarily related to the acquisition of Micro.
Income Tax Expense. Our effective tax rate for the three months ended June 30, 2012 and 2011 was 37.7% and 39.1%, respectively. The change in our effective tax rate is primarily due to a change in our estimates related to state taxes.
Nine months ended June 30, 2012 compared to Nine months ended June 30, 2011
Total Revenues. Total revenues increased 33.2% to $1,523,740 for the nine months ended June 30, 2012, from $1,144,022 for the nine months ended June 30, 2011. Excluding the acquisition of the assets of Micro, revenue growth in the United States was 18.5% for the nine months ended June 30, 2012 compared to the same period in the prior fiscal year. Revenues from Micro, which was acquired on October 31, 2011, were $178,236 for the nine months ended June 30, 2012. Revenue growth in the United Kingdom was 13.2% for the nine months ended June 30, 2012, compared to the same period in the prior fiscal year, consisting of 15.2% organic growth, partially offset by a decline of 2.0% related to foreign currency exchange. Excluding the revenues from Micro, revenues in the United States attributable to existing customers represented approximately 66% of the growth in revenues and revenues attributable to new customers represented approximately 34% of the growth in revenues during the nine months ended June 30, 2012.
Product sales to related party increased by 15.9% to $44,494 for the nine months ended June 30, 2012, from $38,401 for the nine months ended June 30, 2011. Commissions decreased to $12,699 for the nine months ended June 30, 2012, from $15,791 for the nine months ended June 30, 2011. Commissions decreased due to the loss of a pet food line that we represented for most of fiscal year 2011 that we will not represent in fiscal year 2012. Additionally, commissions decreased due to the incentive described above and a shift in commissions revenues to buy-sell revenues for certain parasiticides.
Gross Profit. Gross profit increased by 28.0% to $198,651 for the nine months ended June 30, 2012, from $155,145 for the nine months ended June 30, 2011. The change in gross profit is primarily a result of increased total revenues as discussed above. Gross profit as a percentage of total revenues was 13.0% and 13.6% for the nine months ended June 30, 2012 and 2011, respectively. The decrease in gross profit as a percentage of total revenues was due to a decrease in commissions and lower vendor rebates as a percentage of total revenues. Vendor rebates for the nine months ended June 30, 2012 increased by approximately $613 compared to the nine months ended June 30, 2011.
Selling, General and Administrative (“SG&A”). SG&A expenses increased 29.5% to $125,799 for the nine months ended June 30, 2012, from $97,160 for the nine months ended June 30, 2011. The increase in SG&A expenses was primarily due to the addition of Micro and compensation costs from increased headcount to support the revenue growth. SG&A expenses as a percentage of total revenues were 8.3% for the nine months ended June 30, 2012, compared to 8.5% for the nine months ended June 30, 2011.
Depreciation and Amortization. Depreciation and amortization increased 38.1% to $6,739 for the nine months ended June 30, 2012, from $4,879 for the nine months ended June 30, 2011. The increase was primarily related to the acquisition of Micro.
Critical Accounting Policies
The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The accompanying condensed consolidated financial statements are prepared using the same critical accounting policies discussed in our Annual Report on Form 10-K filed with the SEC on November 28, 2011.
Liquidity and Capital Resources
Our principal sources of liquidity are cash flows generated from operations and borrowings on our credit facilities. We use capital primarily to fund day-to-day operations and to maintain sufficient inventory levels in order to promptly fulfill customer orders and to expand our operations and sales growth. We believe our capital resources, including our ability to borrow funds from our credit facilities, will be sufficient to meet our anticipated cash needs for at least the next twelve months.
We generally extend some level of credit to our customers without requiring collateral, which exposes us to credit risk. If customers’ cash flow or operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain other sources of credit, they may not be able to pay or may delay payment to us, or in some cases may return products to us. Any inability of current and/or potential customers to pay us for our products and/or services due to their deteriorating financial condition or otherwise may adversely affect our results of operations and financial condition. Volatility in commodity prices, such as milk, corn, grain and feeder cattle, and deteriorating economic conditions can have a significant impact on the financial results of our customers. We continually assess our customers’ ability to pay us and adjust our allowance for doubtful accounts, as necessary.
On November 1, 2011, MWI Co. as borrower, entered into a Third Amendment to Credit Agreement (the “Third Amendment”) with MWI Veterinary Supply, Inc. and Memorial Pet Care, Inc., as guarantors, and Bank of America, N.A. and Wells Fargo Bank, N.A. as lenders (collectively, the “Lenders”), amending the Credit Agreement dated December 13, 2006, and as amended from time to time, by and among MWI Co., MWI Veterinary Supply, Inc., Memorial Pet Care, Inc. and the Lenders (the “Credit Agreement”). As discussed in Note 3 – Business Acquisitions, MWI Co.’s purchase of the assets of Micro was completed on October 31, 2011, using borrowing capacity that existed prior to the effectiveness of the Third Amendment. The Third Amendment increased the aggregate revolving commitment of the Lenders under the Credit Agreement from $100 million to $150 million and extended the maturity date of the Credit Agreement from March 1, 2013 to November 1, 2016. Under the Third Amendment, the margin on variable interest rate borrowings now ranges from 0.95% to 1.50%. The margin previously ranged from 1.50% to 2.25% under the Second Amendment. The Third Amendment also reduced the commitment fee from a range of 0.2% to 0.35% to a range of 0.15% to 0.25% depending on the funded debt to EBITDA ratio. The Credit Agreement contains financial covenants, including a fixed charge ratio and a funded debt to EBITDA ratio. We were in compliance with all of the covenants as of June 30, 2012 and September 30, 2011. Our outstanding balance on the revolving credit facility at June 30, 2012 and September 30, 2011 was $47,100 and $0, respectively, and the interest rate was 1.12% as of June 30, 2012.
On November 5, 2010, Centaur entered into a £12,500 unsecured revolving line of credit facility (the “sterling revolving credit facility”) with Wells Fargo Bank, N.A. London Branch (“Wells Fargo”). The sterling revolving credit facility is for a three year term with interest paid at the end of the applicable one month, three month or six month interest period. Interest is based on LIBOR for the applicable interest period plus an applicable margin of 1.05% to 1.90%. The facility contains financial covenants requiring Centaur to maintain a minimum tangible net worth of £3,000 which is to be calculated at end of each fiscal year. Our outstanding balance on the revolving credit facility at June 30, 2012 was £5,850, or $9,134 using the current exchange rate as of June 30, 2012 and at September 30, 2011 was £1,861, or $2,907 using the current exchange rate as of September 30, 2011. The interest rate was 1.65% as of June 30, 2012.
Operating Activities. For the nine months ended June 30, 2012, cash used in operations was $5,378 and was primarily attributable to net income of $40,877 offset by changes in working capital which was used to accommodate the growth in revenues and strategic inventory purchases.
For the nine months ended June 30, 2011, cash provided by operations was $18,281 and was primarily attributable to net income of $32,550 offset by changes in working capital. Accounts payable decreased $13,505 as strategic inventory purchases were made during the quarter ended September 30, 2010 to support our organic growth of that quarter, and payments for those purchases were made during the nine months ended June 30, 2011 but we have kept inventory levels higher to support our growth. Receivables increased $16,269 due to revenue growth.
Investing Activities. For the nine months ended June 30, 2012, net cash used in investing activities was $59,006. We paid $53,718 in cash for the acquisition of the assets of Micro. Additionally, we paid for capital expenditures of $4,766 primarily related to information technology and our new distribution center in Harrisburg, Pennsylvania.
For the nine months ended June 30, 2011, net cash used in investing activities was $21,563. We paid $7,000 in cash for the acquisition of Nelson. Additionally, we paid for capital expenditures of $10,280 which primarily related to an office building purchased in Boise, Idaho for our headquarters, equipment for our new distribution center in Visalia, California to accommodate the growth needs in that region and other distribution center technology. Additionally, we made an investment in Cubex LLC, a technology based inventory management business, of $4,000.
Financing Activities. For the nine months ended June 30, 2012, net cash provided by financing activities was $53,477, which was primarily due to net borrowings of $53,368 on our credit facilities. Our revolving credit facilities are used to fund strategic acquisitions, meet our working capital requirements and make capital purchases.
For the nine months ended June 30, 2011, net cash provided by financing activities was $3,275, which was primarily due to net borrowings of $3,735 on our credit facilities.
Contractual Obligations and Guarantees
For information on our contractual obligations and guarantees, see our Annual Report on Form 10-K filed on November 28, 2011 with the SEC.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks primarily from changes in interest rates, in particular, the Daily LIBOR Floating Rate, and foreign currency translation risk. We do not engage in financial transactions for trading or speculative purposes. We do not hedge the translation of foreign currency profits into U.S. dollars. We continually evaluate our foreign currency exchange rate risk and the different options available for managing such risk.
We are exposed to foreign currency risk due to our U.K. subsidiary, Centaur. A hypothetical 10% change in the value of the U.S. dollar in relation to the British Pound, which is the Company’s most significant foreign currency exposure, would have changed net sales for the three months ended June 30, 2012 by approximately $7,680. This amount is not indicative of the hypothetical net earnings impact due to the partially offsetting impact of the currency exchange movements on cost of sales and operating expenses.
The interest payable on the facility is based on variable interest rates and is affected by changes in market interest rates. The outstanding balance on the revolving credit facility in the United States as of June 30, 2012 was $47,100. A change of 10% from the interest rate as of June 30, 2012, which was approximately 1.12% (Daily LIBOR Floating Rate plus a margin of 0.95%), would have changed interest by $13 for the three months ended June 30, 2012.
Item 4. Controls and Procedures
Management of the Company, including the Chief Executive Officer and the Chief Financial Officer of the Company, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of June 30, 2012. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures, including the accumulation and communication of disclosures to the Company’s Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure, are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.
On October 31, 2011, we acquired substantially all of the assets of Micro. In connection with integrating Micro, we are evaluating our internal control over financial reporting and, where necessary, will implement changes as the integration proceeds. This process may result in additions or changes to our internal control over financial reporting. Except for the acquisition, there were no changes in our internal control over financial reporting during the quarter ended June 30, 2012 that materially affected, or are reasonably likely to materially affect, our internal controls.
PART II. OTHER INFORMATION
Cautionary Statement for Purposes of “Safe Harbor Provisions” of the Private Securities Litigation Reform Act of 1995
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “intend” and similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement our strategy, our objectives, the amount and timing of capital expenditures, the amount and timing of interest expense, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs and sources of liquidity.
Forward-looking statements are only predictions and are not guarantees of our performance. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products, the expansion of product offerings geographically or through new applications, the timing and cost of planned capital expenditures, competitive conditions and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve known and unknown risks and uncertainties, which could cause actual results that differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:
· | the impact of vendor consolidation on our business; |
· | changes in or availability of vendor contracts or rebate programs; |
· | exclusivity requirements with certain vendors that may prohibit us from distributing competing products manufactured by other vendors or margin reductions if we become a non-exclusive distributor; |
· | transitional challenges associated with acquisitions, including the failure to achieve anticipated synergies; |
· | vendor rebates based upon attaining certain growth goals; |
· | changes in the way vendors introduce/deliver products to market; |
· | seasonality; |
· | unforeseen litigation; |
· | risks associated with our international operations; |
· | financial risks associated with acquisitions; |
· | the impact of general economic trends on our business; |
· | the recall of a significant product by one of our vendors; |
· | extended shortage or backorder of a significant product by one of our vendors; |
· | the timing and effectiveness of marketing programs or price changes offered by our vendors; |
· | the timing of the introduction of new products and services by our vendors; |
· | our intellectual property rights may be inadequate to protect our business; |
· | the ability to borrow on our revolving credit facility, extend the terms of our revolving credit facility or obtain alternative financing on favorable terms or at all; |
· | risks from potential increases in variable interest rates; |
· | the impact of tightening credit standards and/or access to credit on behalf of our customers and suppliers; |
· | a disruption caused by adverse weather or other natural conditions or disasters; |
· | inability to ship products to the customer as a result of technological or shipping disruptions; and |
· | competition. |
Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the SEC, we are under no obligation to publicly update or revise any forward-looking statements, whether as a result of any new information, future events or otherwise. You should not place undue reliance on our forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results or performance.
Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, we have a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of MWI Veterinary Supply, Inc.
Item 1. Legal Proceedings
Except as disclosed in our Form 10-Q for the three months ended December 31, 2011 and March 31, 2012, we are not currently a party to any material pending legal proceedings and are not aware of any claims that could have a material adverse effect on our financial position, results of operations or cash flows.
Item 1A. Risk Factors
There have been no material changes from the risk factors disclosed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2011.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
The table below provides information concerning our repurchase of shares of our common stock during the three months ended June 30, 2012.
Issuer Purchases of Equity Securities | |||||||||
Total Number of | Maximum Number (or | ||||||||
Total | Shares Purchased | Approximate Dollar | |||||||
Number | Average | as Part of Publicly | Value) of Shares that May | ||||||
of Shares | Price Paid | Announced Plans | Yet Be Purchased Under | ||||||
Period | Purchased | per Share | or Programs | the Plans or Programs | |||||
April 1 to April 30, 2012 | 216 | (1) | $ | 93.13 | — | — | |||
May 1 to May 31, 2012 | — | — | — | — | |||||
June 1 to June 30, 2012 | 66 | (1) | 98.32 | — | — | ||||
Total | 282 | $ | 94.34 | — | — | ||||
(1) These shares were withheld upon the vesting of employee stock grants in connection with payment of required withholding taxes. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
15 | Letter re: Unaudited Interim Financial Information | |
31.1 | Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101 | Financials in XBRL format |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MWI Veterinary Supply, Inc. | |||
(Registrant) | |||
Date: July 30, 2012 | /s/ Mary Patricia B. Thompson | ||
Mary Patricia B. Thompson | |||
Senior Vice President of Finance and Administration, Chief Financial Officer |