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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] 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 0-27818
DOANE PET CARE COMPANY
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 43-1350515
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
210 WESTWOOD PLACE SOUTH, SUITE 400
BRENTWOOD, TN 37027
(Address of Principal Executive Office, Including Zip Code)
(615) 373-7774
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of November 10, 2000, registrant had outstanding 1,000 shares of
common stock.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2000 (unaudited)
and January 1, 2000....................................................................... 1
Unaudited Condensed Consolidated Statements of Income for the three
months and nine months ended September 30, 2000 and October 2, 1999....................... 2
Unaudited Condensed Consolidated Statement of Stockholder's Equity and
Comprehensive Income for the nine months ended September 30, 2000......................... 3
Unaudited Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2000 and October 2, 1999.................................. 4
Notes to Unaudited Condensed Consolidated Financial Statements............................ 5
Independent Auditors' Review Report....................................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................ 12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders....................................... 14
Item 6. Exhibits and Reports on Form 8-K.......................................................... 14
Signatures......................................................................................... 15
3
DOANE PET CARE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)
SEPTEMBER 30, JANUARY 1,
2000 2000
------------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 6,673 $ 7,194
Accounts receivable, net 109,351 69,156
Inventories, net 74,101 52,938
Deferred tax assets 16,094 14,720
Prepaid expenses and other current assets 5,944 3,799
------------- -------------
Total current assets 212,163 147,807
Property, plant and equipment, net 284,916 216,067
Goodwill and other intangibles, net 359,942 298,545
Other assets 41,670 30,877
------------- -------------
Total assets $ 898,691 $ 693,296
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 24,504 $ 17,131
Accounts payable 93,581 64,512
Accrued liabilities 56,299 33,332
------------- -------------
Total current liabilities 174,384 114,975
Long-term debt, excluding current maturities 541,152 410,791
Other long-term liabilities 7,635 8,169
Deferred tax liabilities 45,822 30,450
------------- -------------
Total liabilities 768,993 564,385
------------- -------------
Senior Preferred Stock, 3,000,000 shares authorized,
1,200,000 shares issued and outstanding 52,787 45,965
------------- -------------
Commitments and contingencies -- --
Stockholder's equity:
Common stock, $0.01 par value; 1,000 shares authorized,
issued and outstanding -- --
Additional paid-in-capital 107,119 106,708
Accumulated other comprehensive loss (4,368) (170)
Accumulated deficit (25,840) (23,592)
------------- -------------
Total stockholder's equity 76,911 82,946
------------- -------------
Total liabilities and stockholder's equity $ 898,691 $ 693,296
============= =============
See accompanying notes to the unaudited condensed consolidated financial
statements and accompanying auditors' review report.
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DOANE PET CARE COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- -------------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
------------- ------------- ------------- -------------
Net sales $ 225,723 $ 181,436 $ 640,878 $ 565,521
Cost of goods sold 173,328 141,465 487,566 426,607
------------- ------------- ------------- -------------
Gross profit 52,395 39,971 153,312 138,914
Operating expenses:
Promotion and distribution 18,863 14,264 52,776 45,064
Selling, general and administrative 13,014 10,400 35,489 29,605
Amortization of intangibles 3,379 2,619 9,228 7,752
Non-recurring expenses -- 304 9,028 2,419
------------- ------------- ------------- -------------
Income from operations 17,139 12,384 46,791 54,074
Interest expense, net 14,441 10,040 36,878 30,334
Other income, net (225) (168) (1,046) (535)
------------- ------------- ------------- -------------
Income before income taxes and cumulative
effect of a change in accounting principle 2,923 2,512 10,959 24,275
Income tax expense 1,331 1,200 6,385 10,058
------------- ------------- ------------- -------------
Income before cumulative effect of a change
in accounting principle 1,592 1,312 4,574 14,217
Cumulative effect at adoption on January 1, 1999
of a change in accounting for derivative
instruments, net of income tax benefit of $1,440 -- -- -- (2,263)
------------- ------------- ------------- -------------
Net income 1,592 1,312 4,574 11,954
Preferred stock dividends and accretion (2,345) (2,074) (6,822) (6,035)
------------- ------------- ------------- -------------
Net income (loss) allocated to common shares $ (753) $ (762) $ (2,248) $ 5,919
============= ============= ============= =============
Basic and diluted net income (loss) per common share:
Net income (loss) before cumulative effect
of accounting change (753) (762) (2,248) 8,182
Cumulative effect of accounting change -- -- -- (2,263)
------------- ------------- ------------- -------------
Net income (loss) per common share $ (753) $ (762) $ (2,248) $ 5,919
============= ============= ============= =============
Basic and diluted weighted-average common
shares outstanding 1,000 1,000 1,000 1,000
============= ============= ============= =============
See accompanying notes to the unaudited condensed consolidated financial
statements and accompanying auditors' review report.
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DOANE PET CARE COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF
STOCKHOLDER'S EQUITY AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------------------ PAID-IN COMPREHENSIVE ACCUMULATED
SHARES AMOUNT CAPITAL LOSS DEFICIT TOTAL
---------- ---------- ---------- ------------- ----------- ----------
Balances at January 1, 2000 1,000 $ -- $ 106,708 $ (170) $ (23,592) $ 82,946
Comprehensive income:
Net income -- -- -- -- 4,574 4,574
Unrealized loss on foreign
currency translation, net -- -- -- (4,088) -- (4,088)
Unrealized loss on cash flow
hedges, net of deferred tax
benefit of $101 -- -- -- (110) -- (110)
----------
Total comprehensive income 376
----------
Preferred stock dividends -- -- -- -- (6,014) (6,014)
Accretion of preferred stock -- -- -- -- (808) (808)
Capital contribution -- -- 411 -- -- 411
---------- ---------- ---------- ---------- ---------- ----------
Balances at September 30, 2000 1,000 $ -- $ 107,119 $ (4,368) $ (25,840) $ 76,911
========== ========== ========== ========== ========== ==========
See accompanying notes to the unaudited condensed consolidated financial
statements and accompanying auditors' review report.
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DOANE PET CARE COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
--------------------------------
SEPTEMBER 30, OCTOBER 2,
2000 1999
------------- -------------
Cash flows from operating activities:
Net income $ 4,574 $ 11,954
Items not requiring (providing) cash:
Depreciation 16,843 11,928
Amortization of intangibles 9,228 7,752
Deferred tax expense 5,979 9,928
Changes in fair value of derivative instruments (2,008) 3,692
Non-cash interest expense 1,724 1,427
Other non-cash charges, net 608 169
Equity in joint ventures (741) (696)
Cumulative effect of accounting change -- 2,263
Changes in current assets and liabilities 932 (18,025)
------------- -------------
Net cash provided by operating activities 37,139 30,392
------------- -------------
Cash flows from investing activities:
Capital expenditures, including interest capitalized (22,114) (20,558)
Acquisition related payments, net of cash acquired (143,893) (801)
Other, net (2,343) (1,351)
------------- -------------
Net cash used in investing activities (168,350) (22,710)
------------- -------------
Cash flows from financing activities:
Capital contribution 411 598
Net payments under revolving credit agreement (9,000) (11,200)
Principal payments on long-term debt (16,226) (10,600)
Proceeds on issuance of long-term debt 158,619 12,851
Payments for debt issuance costs (2,501) --
------------- -------------
Net cash provided by (used in) financing activities 131,303 (8,351)
Effect of exchange rate changes on cash and
cash equivalents (613) 19
------------- -------------
Decrease in cash and cash equivalents (521) (650)
Cash and cash equivalents, beginning of period 7,194 3,349
------------- -------------
Cash and cash equivalents, end of period $ 6,673 $ 2,699
============= =============
See accompanying notes to the unaudited condensed consolidated financial
statements and accompanying auditors' review report.
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DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Doane Pet Care Company and Subsidiaries (the "Company") do not include all
the information and footnotes required by generally accepted accounting
principles for complete financial statements. The year end condensed
consolidated balance sheet data was derived from audited financial statements.
In the opinion of management, all material adjustments, consisting of normal and
recurring adjustments, have been made which were considered necessary to present
fairly the financial position and the results of operations and cash flows at
the dates and for the periods presented. Certain reclassifications have been
made to previously reported consolidated financial statements to conform with
the fiscal 2000 presentation.
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes contained in the Company's 1999 annual report on Form 10-K for the fiscal
year ended January 1, 2000 (the "1999 10-K"), including related exhibits. The
accounting policies used in preparing these financial statements are the same as
those summarized in the 1999 10-K.
The Company's fiscal year ends on the Saturday nearest to the end of
December. Each month and quarter also end on a Saturday with the third quarters
of 1999 and 2000 ending on October 2, 1999 and September 30, 2000, respectively.
(2) CHANGE IN ACCOUNTING PRINCIPLE AND RESTATEMENT OF 1999 QUARTERLY
FINANCIAL DATA
Effective January 1, 1999, the Company adopted Statement on Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, ("SFAS 133") which establishes new accounting and reporting
guidelines for derivatives and hedging transactions. The Company disclosed in
its 1999 10-K a restatement of its financial results for the first three
quarters of 1999 relating to the adoption of SFAS 133. The adjustments are the
result of a change from the previous methodology for offsetting or reversing
commodity derivative instrument contract fair value gains and losses recognized
in cost of goods sold in future periods when actual cash settlement occurs or
contract dates have passed. This change was implemented based on a year end
review of the Company's policies and procedures relating to SFAS 133. The
restated balances and results from operations as of and for the third quarter
and nine months ended October 2, 1999, as disclosed in this quarterly report on
Form 10-Q, reflect the fair value gains and losses of the Company's commodity
derivative instruments in cost of goods sold immediately as required by SFAS
133. As a result, the Company recorded the cumulative effect of a change in
accounting principle related to commodity derivative instruments of $2.3
million at adoption on January 1, 1999. In addition, adjustments were made for
the third quarter and nine months ended October 2, 1999 to increase cost of
goods sold by $4.9 million and $3.7 million, respectively.
(3) ACQUISITIONS
Arovit Acquisition
On May 10, 2000, the Company acquired A/S Arovit Petfood ("Arovit"),
headquartered in Esbjerg, Denmark, for approximately DKK 1.2 billion ($144.4
million) and assumed indebtedness, net of cash, of approximately DKK 97.0
million.
Arovit manufactures and sells a full range of pet food products,
throughout Europe, for dogs and cats, including wet, dry and treats, primarily
through private label programs. This acquisition was accounted for as a purchase
with the purchase price and direct acquisition costs allocated based on the fair
value of assets acquired and liabilities assumed. In connection with the
purchase of Arovit, the Company recorded $70.8 million of goodwill and
trademarks which are being amortized over 40 years and $11.7 million of other
identifiable assets which are being amortized over 5 to 30 years. Additionally,
the
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DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Company is depreciating acquired property, plant and equipment of $69.2 million
over the remaining useful lives ranging from 5 to 30 years. The Company financed
this acquisition through an amendment to its existing credit facilities which
included Euro 82.0 million (approximately $73.0 million at May 10, 2000) of new
Euro Tranche A loans with the remainder being an incremental Tranche B loan. The
Euro denominated debt has been designated as a hedge of the foreign currency
(Euro) exposure inherent in Doane's net investment in Arovit. Changes in the
fair value of this Euro denominated debt due to fluctuations in the Euro to U.S.
dollar exchange rate have been recognized in accumulated other comprehensive
income.
Set forth below is certain unaudited pro forma consolidated financial
information of the Company for the year ended January 1, 2000 and the nine
months ended September 30, 2000 that has been adjusted to reflect the Company's
acquisition of Arovit as if such transaction occurred at January 1, 1999 (in
thousands, except per share amounts):
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, JANUARY 1,
2000 2000
------------- -------------
Net sales $ 691,297 $ 954,700
Net income 2,647 22,183
Basic and diluted net income (loss) per common share (4,175) 14,010
The pro forma financial data above is based on certain assumptions and
estimates, and therefore does not purport to be indicative of the results that
would actually have been obtained had the acquisition of Arovit been completed
as of such dates or indicative of future results of operations and financial
position.
Larkshall Acquisition
On October 14, 1999, the Company acquired all of the assets of the
Larkshall Extrusions ("Larkshall") division of Buxted Chicken Limited for $5.0
million in cash. Larkshall is a manufacturer of a complete range of dry pet
foods, with an emphasis on super premium pet foods, located in England. This
acquisition has been accounted for as a purchase with the purchase price and
direct acquisition costs allocated based on the fair value of assets acquired
and liabilities assumed.
DIPP Acquisition
On July 30, 1999, the Company acquired a 50% interest in Doane
International Pet Products LLC ("DIPP"), a privately held international pet food
distribution and brokerage company. The jointly owned business is the Company's
exclusive distributor of Doane manufactured products, as well as DIPP's existing
product lines, in the Asian and Latin American markets. The Company's investment
in DIPP is being accounted for under the equity method. The purchase price was
$0.8 million in cash and 40,000 shares in common stock of Doane Pet Care
Enterprises, Inc., the Company's parent, valued at $0.4 million.
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DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(4) INVENTORIES
A summary of inventories, net of valuation allowances, follows (in
thousands):
SEPTEMBER 30, JANUARY 1,
2000 2000
------------- -------------
(UNAUDITED)
Raw materials $ 18,045 $ 15,321
Packaging materials 26,394 20,199
Finished goods 29,662 17,418
------------- -------------
Total $ 74,101 $ 52,938
============= =============
(5) COMMITMENTS AND CONTINGENCIES
The Company is party, in the ordinary course of business, to claims and
litigation. In management's opinion, the resolution of such matters is not
expected to have a material impact on the future financial condition, results of
operations or cash flows of the Company.
(6) NON-RECURRING EXPENSES
Non-recurring expenses for the nine months ended September 30, 2000
include (1) a $4.6 million loss on a forward currency purchase contract which
was put in place to hedge our currency risk associated with the Arovit purchase;
(2) a $3.0 million charge for closure of certain inefficient manufacturing
facilities; and (3) a $1.4 million charge for the write-off of costs for a
potential acquisition that was not consummated.
At September 30, 2000, the Company had $1.9 million accrued for plant
closure costs, primarily related to lease termination costs and severance. The
Company expects to pay these costs within the next 12 months.
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INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors
Doane Pet Care Company
We have reviewed the condensed consolidated balance sheet of Doane Pet Care
Company and Subsidiaries as of September 30, 2000, the related condensed
consolidated statements of income for the three-month and nine-month periods
ended September 30, 2000 and October 2, 1999, the condensed consolidated
statement of stockholder's equity and comprehensive income for the nine-month
period ended September 30, 2000 and the condensed consolidated statements of
cash flows for the nine-month periods ended September 30, 2000 and October 2,
1999. These condensed consolidated financial statements are the responsibility
of the Company's management.
We have conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, 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 review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Doane Pet Care Company and
Subsidiaries as of January 1, 2000, and the related consolidated statements of
income, stockholder's equity and comprehensive income and cash flows for the
year then ended (not presented herein); and in our report dated February 25,
2000, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of January 1, 2000 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
As discussed in Note 2 to the condensed consolidated financial statements,
effective January 1, 1999, the Company adopted Statement on Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities."
/s/ KPMG LLP
Houston, Texas
October 27, 2000
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains certain forward-looking
statements which are based on management's current views and assumptions
regarding future events and financial performance. These statements are
qualified by reference to the sections "Forward-Looking Statements" and "Risk
Factors" in Item 1 of our 1999 annual report on Form 10-K, which lists important
factors that could cause actual results to differ materially from those
discussed in this report.
RESULTS OF OPERATIONS
Our financial results in the periods covered by this quarterly report
on Form 10-Q are significantly impacted by two acquisitions: (1) the acquisition
of Arovit in May 2000, and (2) the acquisition of Larkshall in October 1999.
Readers are encouraged to consider carefully the accompanying unaudited
condensed consolidated financial statements and related notes contained
elsewhere in this quarterly report on Form 10-Q and our consolidated financial
statements and related notes contained in our 1999 annual report on Form 10-K as
they read the discussion below (in thousands, except percentages):
Three months ended Nine months ended
--------------------------------------- ---------------------------------------
September 30, 2000 October 2, 1999 September 30, 2000 October 2, 1999
------------------ ------------------ ------------------ ------------------
Net sales $225,723 100.0% $181,436 100.0% $640,878 100.0% $565,521 100.0%
Cost of goods sold 173,328 76.8 141,465 78.0 487,566 76.1 426,607 75.4
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 52,395 23.2 39,971 22.0 153,312 23.9 138,914 24.6
Operating expenses:
Promotion and distribution 18,863 8.4 14,264 7.9 52,776 8.2 45,064 8.0
Selling, general and administrative 13,014 5.8 10,400 5.7 35,489 5.5 29,605 5.2
Amortization of intangibles 3,379 1.4 2,619 1.4 9,228 1.5 7,752 1.4
Non-recurring expenses -- -- 304 0.2 9,028 1.4 2,419 0.4
-------- -------- -------- -------- -------- -------- -------- --------
Income from operations 17,139 7.6 12,384 6.8 46,791 7.3 54,074 9.6
Interest expense, net 14,441 6.4 10,040 5.5 36,878 5.8 30,334 5.4
Other income, net (225) (0.1) (168) (0.1) (1,046) (0.2) (535) (0.1)
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes and
cumulative effect of a change in
accounting principle 2,923 1.3 2,512 1.4 10,959 1.7 24,275 4.3
Income tax expense 1,331 0.6 1,200 0.7 6,385 1.0 10,058 1.8
-------- -------- -------- -------- -------- -------- -------- --------
Income before cumulative effect of
a change in accounting principle 1,592 0.7 1,312 0.7 4,574 0.7 14,217 2.5
Cumulative effect at adoption on
January 1, 1999 of a change in accounting
for derivative instruments, net of income
tax benefit of $1,440 -- -- -- -- -- -- (2,263) (0.4)
-------- -------- -------- -------- -------- -------- -------- --------
Net income 1,592 0.7% 1,312 0.7% 4,574 0.7% 11,954 2.1%
======== ======== ======== ======== ======== ======== ======== ========
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED OCTOBER 2,
1999
Net sales. Our net sales in the third quarter of 2000 increased 24.4%
to $225.7 million from $181.4 million in the same 1999 period. This net sales
growth is primarily due to the acquisition of Arovit in May 2000, as well as the
acquisition of Larkshall in October 1999. Excluding the impact of these
acquisitions, we experienced an increase in net sales of approximately 3.6% over
the comparable 1999 period.
Gross profit. Our gross profit in the third quarter of 2000 increased
31.1% to $52.4 million from $40.0 million in the same 1999 period primarily due
to the acquisitions of Arovit and Larkshall. In addition, our gross margin has
become more volatile as a result of SFAS 133 fair value accounting for our
commodity derivative instruments. Such accounting has resulted in a $2.1
million reduction to our cost of goods sold in the third quarter of 2000
compared to a $4.9 million increase in the third quarter of 1999.
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12
These factors were partially offset by expenditures for product improvements to
meet competition, new business development expenses and an increase in the price
of natural gas.
Promotion and distribution. Our promotion and distribution expenses in
the third quarter of 2000 increased to $18.9 million from $14.3 million in the
same 1999 period primarily due to the acquisition of Arovit.
Selling, general and administrative. Our selling, general and
administrative expenses in the third quarter of 2000 increased to $13.0 million
from $10.4 million in the same 1999 period due to the acquisitions of Arovit and
Larkshall, partially offset by lower expenses associated with management of
corporate overhead.
Amortization of intangibles. Our amortization expense for intangibles
in the third quarter of 2000 increased to $3.4 million from $2.6 million in the
same 1999 period primarily due to the acquisition of Arovit.
Interest expense, net. Interest expense, net, for the third quarter of
2000 increased to $14.4 million from $10.0 million in the same 1999 period
primarily due to the financing obtained for the purchase of Arovit in May 2000
as well as an increase in interest rates.
Income tax expense. Income tax expense for the third quarter of 2000
increased due to higher pre-tax income compared to the same 1999 period.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED OCTOBER 2,
1999
Net sales. Our net sales for the nine months ended September 30, 2000
increased 13.3% to $640.9 million from $565.5 million in the same 1999 period.
This net sales growth is primarily due to the acquisition of Arovit in May 2000
as well as Larkshall in October 1999. Excluding the impact of these
acquisitions, we experienced an increase in net sales of approximately 2.3% over
the comparable 1999 period. Our net sales and tonnage volume growth in the first
nine months of 2000 was mitigated by two industry factors: (1) our customers
reduced purchases at the beginning of this year following a year-end build-up of
inventory due to year 2000 concerns and (2) competitive pressures including the
launch in the first quarter of 2000 of a major national brand into mass
merchandise, grocery and club retailers which was previously sold only through
select specialty channels.
Gross profit. Our gross profit for the nine months ended September 30,
2000 increased by 10.4% to $153.3 million from $138.9 million in the same 1999
period. Our gross margin was favorably impacted by the acquisitions of Arovit
and Larkshall. In addition, our gross margin has become more volatile as a
result of SFAS 133 fair value accounting for our commodity derivative
instruments. Such accounting has resulted in a $3.2 million reduction to our
cost of goods sold in the nine months ended September 30, 2000 compared to a
$3.7 million increase in the same 1999 period. The impact of these favorable
items on our gross margin was partially offset by expenditures for product
improvements to meet competition, new business development expenses and an
increase in the price of natural gas.
Promotion and distribution. Our promotion and distribution expenses for
the nine months ended September 30, 2000 increased to $52.8 million from $45.1
million in the same 1999 period primarily due to the acquisition of Arovit.
Selling, general and administrative. Our selling, general and
administrative expenses for the nine months ended September 30, 2000 increased
to $35.5 million from $29.6 million in the same 1999 period primarily due to the
acquisitions of Arovit and Larkshall, partially offset by lower expenses
associated with management of corporate overhead.
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Amortization of intangibles. Our amortization expense for intangibles
in the nine months ended September 30, 2000 increased to $9.2 million from $7.8
million in the same 1999 period primarily due to the acquisition of Arovit.
Non-recurring expenses. Non-recurring expenses for the nine months
ended September 30, 2000 include (1) a $4.6 million loss on a forward currency
purchase contract which was put in place to hedge our currency risk associated
with the Arovit purchase; (2) a $3.0 million charge for closure of certain
inefficient manufacturing facilities; and (3) a $1.4 million charge for the
write-off of costs for a potential acquisition that was not consummated.
Interest expense, net. Interest expense, net, for the nine months ended
September 30, 2000 increased to $36.9 million from $30.3 million in the same
1999 period primarily due to the financing obtained for the purchase of Arovit
in May 2000 as well as an increase in interest rates.
Income tax expense. Income tax expense for the nine months ended
September 30, 2000 decreased to $6.4 million from $10.1 million due to lower
pre-tax income compared to the same 1999 period. Our effective income tax rate
increased to 58.3% for the 2000 period from 41.4% in the 1999 period due to (1)
the add-back of permanent differences, primarily non-deductible amortization of
goodwill, reflecting a larger percentage of pre-tax income for the 2000 period;
and (2) the loss on a forward currency purchase contract discussed in
non-recurring expenses above that is not deductible for income tax purposes.
Cumulative effect of a change in accounting principle. The cumulative
effect of a change in accounting principle in the 1999 period relates to our
adoption on January 1, 1999 of SFAS 133, which applies to derivative commodity
purchase transactions. The loss recorded of $3.7 million in the 1999 period is
presented net of income tax benefit of $1.4 million.
LIQUIDITY AND CAPITAL RESOURCES
We have historically funded our operations, capital expenditures and
working capital requirements from cash flows from operations, bank borrowings
and industrial development revenue bonds. We had working capital of $37.8
million at September 30, 2000. As of September 30, 2000, we had unused borrowing
capacity of $96.2 million under our revolving credit agreement, which was net of
$2.8 million for outstanding letters of credit.
For the nine months ended September 30, 2000, cash generated from
operating activities totaled $37.1 million, up from $30.4 million in the same
1999 period. This improvement is due to favorable management of working capital
partially offset by lower earnings in the 2000 period compared to the 1999
period.
The net cash used in our investing activities of $168.4 million for the
nine months ended September 30, 2000 was higher than the comparable 1999 period
activity of $22.7 million primarily due to $144.4 million of acquisition
related payments, net of cash acquired, for the Arovit acquisition.
Net cash provided by our financing activities was approximately $131.3
million for the nine months ended September 30, 2000 primarily resulting from
the financing obtained for the purchase of Arovit.
The acquisition of Arovit in May 2000, was financed through borrowings
under an amendment to our senior credit agreement. The amended credit agreement
provides for $80.0 million of incremental Tranche B loans and Euro 82.0 million
(approximately $73.0 million at May 10, 2000) of new Euro Tranche A loans. The
final maturity of each is December 2005, and each amortizes over the five-year
term with balloon payments at maturity.
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We are continually reviewing our requirements to upgrade and / or add
new facilities to meet the market demands placed on us. In this process, the
Company may eliminate outdated and inefficient facilities, upgrade equipment and
warehouse facilities, or add new capacity either through the construction or
acquisition of operating companies. We intend to finance these upgrades or
acquisitions with borrowings under existing or expanded credit facilities, or
the issuance of additional equity or debt securities.
We are highly leveraged and have significant cash requirements for debt
service. Our ability to borrow is limited by our senior credit facility and the
limitations on the incurrence of indebtedness in the indenture governing our
senior subordinated notes.
EURO
Effective January 1, 1999, 11 of the 15 countries comprising the
European Union began a transition to a single monetary unit, the "Euro," which
is scheduled to be completed by July 1, 2002. We are currently considering
options to ensure our operations in Europe can operate effectively after
transitioning to the Euro. Our European operations may incur significant costs
in conversion of their systems to the Euro. We are unable to predict whether
these costs can be passed through to our European customers. These customers may
also begin conducting business using the Euro prior to the completion of the
conversion of our European systems. Delays in conversion could have a material
adverse effect on the results of our operations in Europe. In addition, the
introduction of the Euro may increase competition as manufacturers in other
European countries become able to compete more easily in our markets. We do not
believe the implementation of the Euro will have a material effect on our
operations or financial condition taken as a whole.
INFLATION AND CHANGES IN PRICES
Our financial results depend to a large extent on the costs of raw
materials and packaging and our ability to pass along increases in these costs
to our customers. Historically, market prices for commodity grains and food
stocks have fluctuated in response to a number of factors, including changes in
U.S. government farm support programs, changes in international agricultural and
trading policies and weather conditions during the growing and harvesting
seasons. Fluctuations in paper prices, which affect our costs for packaging
materials, have resulted from changes in supply and demand, general economic
conditions and other factors. In addition, we have exposure to changes in
pricing of natural gas, which affects our manufacturing costs. In the event of
any increases in raw materials, packaging and natural gas costs, we may be
required to increase sales prices for our products to avoid margin
deterioration. We cannot assure you of the timing or extent of our ability to
implement future price adjustments in the event of increased raw materials,
packaging and natural gas costs or of whether any price increases implemented by
us may affect the volumes of future shipments to our customers.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks. Market risk is the potential loss
arising from adverse changes in market prices and rates. Our market risks could
arise from changes in commodity prices, interest rates and foreign currency
exchange rates.
Commodity price risk. We manage price risk created by market
fluctuations by using derivative instruments for portions of our primary
commodity product purchases, which are corn and soybean meal, principally
through exchange traded futures and options contracts. The terms of these
contracts are generally less than one year. Settlement of positions are either
through financial settlement with the exchanges or through exchange for the
physical commodity, in which case, we deliver the contract against the
acquisition of the physical commodity. We do not enter into derivative or other
financial instruments for trading or speculative purposes.
Based upon an analysis utilizing the actual derivative contractual
volumes and assuming a 10% adverse movement in commodity prices, the potential
decrease in the fair value of the Company's
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commodity derivative instruments at September 30, 2000 would not have a material
adverse effect on our financial position, results of operations or cash flows.
All changes in the fair value of our derivative instruments for
commodities are included in cost of goods sold in the statements of income for
the third quarter and nine months ended September 30, 2000 and October 2, 1999
in the accompanying unaudited condensed consolidated financial statements
included herein.
Interest rate risk. We are subject to market risk exposure related to
changes in interest rates. Accordingly, our net income is affected by changes in
interest rates. Assuming our current level of borrowings, a 100 basis point
increase in interest rates under these borrowings would decrease our net income
for the third quarter and nine months ended September 30, 2000 by approximately
$0.5 million and $1.5 million, respectively. In addition, such a change would
result in a decrease of approximately $8.9 million in the fair value of our
fixed rate debt at September 30, 2000. In the event of an adverse change in
interest rates, we could take action to mitigate our exposure; however, due to
the uncertainty of the actions that would be taken and their possible effects,
this analysis assumes no such actions. Furthermore, this analysis does not
consider the effects of the change in the level of overall economic activity
that could exist in such an environment.
We periodically use interest rate hedges (swaps) to limit our exposure
to the interest rate risk associated with our floating rate debt, which was
$392.2 million at September 30, 2000. Amounts received (paid) under interest
rate swap agreements are recorded as reductions (additions) to interest expense.
These contracts are designated as cash flow hedges. The deferred gains
associated with these contracts were $0.7 million, net of deferred tax expense
of $0.5 million, at September 30, 2000 and have been recognized in accumulated
other comprehensive income in the accompanying unaudited condensed consolidated
financials statements included herein.
Foreign currency exchange risk. Our earnings and financial position are
affected by foreign exchange rate fluctuations. We currently have foreign
operations in Western Europe. The translation adjustments during the third
quarter and nine months ended September 30, 2000 were losses of $7.2 million and
$4.1 million, respectively, which were recognized in accumulated other
comprehensive income in the accompanying unaudited condensed consolidated
financial statements included herein.
Prior to the Arovit acquisition, our normal business operations have
not been exposed to significant foreign exchange risk. Arovit periodically
enters into foreign currency contracts to hedge specific currency exposures from
commercial transactions. At September 30, 2000, the Company had open positions
maturing within the next 12 months with a fair value of $39.5 million. The
deferred gains on these foreign currency contracts totaling $0.2 million, net of
deferred tax expense of $0.1 million, at September 30, 2000 have been recognized
in accumulated other comprehensive income in the accompanying unaudited
condensed consolidated financials statements included herein.
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PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Index
*27.1 Financial Data Schedule
* Filed herewith
(b) Reports on Form 8-K
None.
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SIGNATURES
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.
DOANE PET CARE COMPANY
Dated: November 10, 2000 By: /s/ PHILIP K. WOODLIEF
----------------------
Philip K. Woodlief
Vice President and
Chief Financial Officer
Dated: November 10, 2000 By: /s/ STEPHEN P. HAVALA
---------------------
Stephen P. Havala
Corporate Controller and
Principal Accounting Officer
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
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27.1 Financial Data Schedule