Attached files
file | filename |
---|---|
EX-31.1 - EXHIBIT 31.1 - CEO - Animal Health International, Inc. | exhibit31_1.htm |
EX-32.1 - EXHIBIT 32.1 - Animal Health International, Inc. | exhibit32_1.htm |
EX-31.2 - EXHIBIT 31.2 - CFO - Animal Health International, Inc. | exhibit31_2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form 10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended December 31, 2009
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
File Number 1-33273
ANIMAL HEALTH INTERNATIONAL, INC.
(Exact
name of Registrant as specified in its charter)
Delaware
|
71-0982698
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
Number)
|
7
Village Circle, Suite 200
Westlake,
Texas
|
76262
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (817) 859-3000
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 ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
o
No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or 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 ¨
Accelerated Filer ¨
Non-Accelerated Filer ¨ Smaller
Reporting Company x
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes
¨
No x
FORM
10-Q
FOR
THE QUARTERLY PERIOD ENDED DECEMBER 31, 2009
Page
|
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EX-31.1:
CERTIFICATION
|
||||
EX-31.2:
CERTIFICATION
|
||||
EX-32.1:
CERTIFICATION
|
PART
1. FINANCIAL INFORMATION
Consolidated
Financial Statements
Consolidated
Balance Sheets
(In
thousands, excluding share information)
(Unaudited)
|
|
June 30,
2009
|
December
31, 2009
|
|||||
Assets
|
|
|||||||
Current
assets:
|
|
|||||||
Cash
and cash equivalents
|
|
$
|
2,749
|
$
|
2,085
|
|||
Accounts
receivable, net
|
|
74,441
|
82,596
|
|||||
Current
portion of notes receivable
|
|
126
|
204
|
|||||
Income
tax receivable
|
|
1,001
|
1,777
|
|||||
Merchandise
inventories, net
|
|
89,315
|
102,350
|
|||||
Deferred
income taxes
|
|
3,358
|
3,463
|
|||||
Prepaid
expenses
|
|
2,319
|
1,730
|
|||||
Total
current assets
|
|
173,309
|
194,205
|
|||||
Noncurrent
assets:
|
|
|||||||
Notes
receivable, net of current portion
|
|
280
|
171
|
|||||
Property,
plant, and equipment, net
|
|
16,043
|
15,556
|
|||||
Goodwill
|
|
60,334
|
62,245
|
|||||
Customer
relationships
|
|
28,022
|
26,319
|
|||||
Noncompete
agreements
|
|
3,436
|
2,898
|
|||||
Trademarks
and trade names
|
|
33,170
|
33,170
|
|||||
Debt
issue costs and other assets, net of accumulated amortization of
$2,017
and
$2,537, respectively
|
|
3,671
|
3,189
|
|||||
Total
assets
|
|
$
|
318,265
|
$
|
337,753
|
|||
|
||||||||
Liabilities
and Stockholders’ Equity
|
|
|||||||
Current
liabilities:
|
|
|||||||
Accounts
payable
|
|
$
|
83,567
|
$
|
86,768
|
|||
Accrued
liabilities
|
|
13,055
|
15,151
|
|||||
Current
portion of long-term debt
|
|
7,179
|
457
|
|||||
Total
current liabilities
|
|
103,801
|
102,376
|
|||||
Noncurrent
liabilities:
|
|
|||||||
Long-term
debt, net of current portion
|
|
119,913
|
137,150
|
|||||
Deferred
lease incentives
|
|
1,101
|
1,154
|
|||||
Deferred
income taxes
|
|
23,069
|
23,624
|
|||||
Total
liabilities
|
|
247,884
|
264,304
|
|||||
|
||||||||
Commitments
and contingencies (note 12)
|
|
|||||||
Stockholders’
equity:
|
|
|||||||
Preferred
stock, par value $0.01 per share. Authorized 10,000,000
shares,
issued
and outstanding 0 shares
|
|
—
|
—
|
|||||
Common
stock, par value $0.01 per share. Authorized 90,000,000
shares,
issued
and outstanding 24,329,670 shares
|
|
243
|
243
|
|||||
Additional
paid-in capital
|
|
132,912
|
133,157
|
|||||
Accumulated
deficit
|
|
(58,853
|
)
|
(58,382
|
)
|
|||
Accumulated
other comprehensive loss
|
|
(3,921
|
)
|
(1,569
|
)
|
|||
Total
stockholders’ equity
|
|
70,381
|
73,449
|
|||||
|
||||||||
Total
liabilities and stockholders’ equity
|
|
$
|
318,265
|
$
|
337,753
|
See
accompanying Notes to Unaudited Consolidated Financial Statements.
2
Consolidated
Statements of Operations
(In
thousands, except per share data)
(Unaudited)
|
Three
Months Ended
December 31,
|
Six
Months Ended
December 31,
|
||||||||||||||
|
2008
|
2009
|
2008
|
2009
|
||||||||||||
Net
sales
|
|
$
|
184,477
|
$
|
170,487
|
$
|
353,500
|
$
|
331,816
|
|||||||
Costs
and expenses:
|
|
|||||||||||||||
Direct
cost of products sold (excludes depreciation and
amortization)
|
|
152,209
|
141,071
|
290,932
|
276,454
|
|||||||||||
Salaries,
wages, commissions, and related benefits
|
|
11,818
|
12,722
|
26,149
|
25,561
|
|||||||||||
Selling,
general, and administrative
|
|
12,579
|
10,818
|
23,866
|
20,767
|
|||||||||||
Depreciation
and amortization
|
|
2,054
|
2,022
|
4,130
|
4,000
|
|||||||||||
Operating
income
|
|
5,817
|
3,854
|
8,423
|
5,034
|
|||||||||||
Other
income (expense):
|
|
|||||||||||||||
Other
income
|
|
189
|
166
|
418
|
300
|
|||||||||||
Interest
expense
|
|
(2,289
|
)
|
(2,068
|
)
|
(4,623
|
)
|
(4,579
|
)
|
|||||||
Income
before income taxes
|
|
3,717
|
1,952
|
4,218
|
755
|
|||||||||||
Income
tax expense
|
|
(1,448
|
)
|
(734
|
)
|
(1,665
|
)
|
(284
|
)
|
|||||||
Net
income
|
|
$
|
2,269
|
$
|
1,218
|
$
|
2,553
|
$
|
471
|
|||||||
Earnings
per common share:
|
|
|||||||||||||||
Basic
|
|
$
|
0.09
|
$
|
0.05
|
$
|
0.10
|
$
|
0.02
|
|||||||
Diluted
|
|
$
|
0.09
|
$
|
0.05
|
$
|
0.10
|
$
|
0.02
|
|||||||
Weighted
average shares outstanding:
|
|
|||||||||||||||
Basic
|
|
24,330
|
24,330
|
24,330
|
24,330
|
|||||||||||
Diluted
|
|
24,330
|
24,330
|
24,330
|
24,330
|
See
accompanying Notes to Unaudited Consolidated Financial
Statements.
3
ANIMAL
HEALTH INTERNATIONAL, INC.
(In
thousands)
(Unaudited)
|
Three months ended
December 31,
|
Six months ended
December 31,
|
||||||||||||||
|
2008
|
2009
|
2008
|
2009
|
||||||||||||
Net
income
|
|
$
|
2,269
|
$
|
1,218
|
$
|
2,553
|
$
|
471
|
|||||||
Other
comprehensive income (loss):
|
|
|||||||||||||||
Unrealized
gain (loss) on derivative instruments, net of tax
|
|
(1,392
|
)
|
993
|
(1,331
|
)
|
1,336
|
|||||||||
Foreign
currency translation adjustment
|
|
(1,006
|
)
|
325
|
(1,316
|
)
|
1,016
|
|||||||||
|
||||||||||||||||
Total
comprehensive income (loss)
|
|
$
|
(129
|
)
|
$
|
2,536
|
$
|
(94
|
)
|
$
|
2,823
|
|||||
|
See
accompanying Notes to Unaudited Consolidated Financial
Statements.
4
Consolidated
Statements of Cash Flows
(In
thousands)
(Unaudited)
|
Six
Months Ended
|
|||||||
|
December 31,
|
|||||||
|
2008
|
2009
|
||||||
Cash
flows from operating activities :
|
|
|||||||
Net
income
|
|
$
|
2,553
|
$
|
471
|
|||
Adjustments
to reconcile net income to net cash provided by (used for) operating
activities:
|
|
|||||||
Depreciation
and amortization
|
|
4,130
|
4,000
|
|||||
Amortization
of debt issue costs
|
|
338
|
520
|
|||||
Amortization
of loss on settlement of interest rate swap
agreements
|
—
|
620
|
||||||
Bad
debt expense
|
23
|
203
|
||||||
Stock
compensation expense
|
|
684
|
245
|
|||||
Gain
on sale of equipment
|
|
(101
|
)
|
(15
|
)
|
|||
Deferred
income taxes
|
|
(877
|
)
|
221
|
|
|||
Changes
in operating assets and liabilities (working capital):
|
|
|||||||
Accounts
receivable
|
|
(6,772
|
)
|
(8,792
|
)
|
|||
Merchandise
inventories
|
|
(2,001
|
)
|
(12,139
|
)
|
|||
Income
taxes receivable/payable
|
|
1,117
|
(152
|
) | ||||
Prepaid
expenses
|
|
495
|
604
|
|||||
Accounts
payable
|
|
2,374
|
7,470
|
|||||
Accrued
liabilities and other
|
|
(105
|
)
|
(633
|
) | |||
|
||||||||
Net
cash provided by (used for) operating activities
|
|
1,858
|
(7,377
|
)
|
||||
Cash
flows from investing activities:
|
|
|||||||
Purchase
of property, plant, and equipment
|
|
(1,751
|
)
|
(1,229
|
)
|
|||
Disposition
(purchase) of other assets
|
|
104
|
(221
|
)
|
||||
Purchase
price adjustments
|
|
(2,856
|
)
|
—
|
|
|||
Proceeds
from sale of equipment
|
|
284
|
103
|
|||||
Net
changes in notes receivable
|
|
301
|
76
|
|||||
|
||||||||
Net
cash used for investing activities
|
|
(3,918
|
)
|
(1,271
|
)
|
|||
Cash
flows from financing activities:
|
|
|||||||
Repayment
of long-term debt
|
|
(635
|
)
|
(2,874
|
)
|
|||
Settlement
of terminated interest rate swap agreements
|
—
|
(3,348
|
)
|
|||||
Net
borrowings under revolving credit facilities
|
|
3,076
|
17,308
|
|||||
Debt
issue costs
|
|
(39
|
)
|
(63
|
)
|
|||
Change
in overdraft balances
|
|
4,759
|
(2,915
|
)
|
||||
|
||||||||
Net
cash provided by financing activities
|
|
7,161
|
8,108
|
|||||
Effect
of exchange rate changes on cash and cash equivalents
|
|
(72
|
)
|
(124
|
)
|
|||
|
||||||||
Net
increase (decrease) in cash and cash equivalents
|
|
5,029
|
(664
|
)
|
||||
Cash
and cash equivalents, beginning of period
|
|
2,452
|
2,749
|
|||||
|
||||||||
Cash
and cash equivalents, end of period
|
|
$
|
7,481
|
$
|
2,085
|
See
accompanying Notes to Unaudited Consolidated Financial Statements.
5
Notes
to consolidated financial statements
(Dollars
in thousands, except share and per share data)
(Unaudited)
(1)
Organization
Animal
Health International, Inc. (AHII), was incorporated in Delaware in May 2005.
Through its wholly-owned subsidiaries, Walco International, Inc. and Kane
Veterinary Supplies, Ltd. (Kane, note 3, collectively, with AHII, the Company),
the Company’s primary business activity is the sale and distribution of animal
health products, supplies, services and technology through operating divisions
located throughout the United States, Canada and Taiwan.
(2)
Summary of significant accounting policies
(a)
Basis of consolidation
The
accompanying unaudited consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All intercompany
balances and transactions have been eliminated in consolidation.
In the
opinion of management, the accompanying unaudited consolidated financial
statements include all adjustments necessary to present fairly, in all material
respects, the results of the Company for the periods presented.
These consolidated financial statements have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and accompanying
notes for the year ended June 30, 2009 included in the Company’s Annual
Report on Form 10-K. The results of operations for the three and six months
ended December 31, 2009 are not necessarily indicative of results to be
expected for the entire fiscal year.
(b)
Rebates
Inventory
rebates are recognized when estimable and probable and include inventory
purchase rebates and sales-related rebates. Inventory purchase rebates received
are capitalized into inventory while sales-related rebates are recorded as a
reduction of direct cost of products sold.
(c)
Stock compensation
In January 2007, the Company reserved 2,500,000 shares of its common
stock for the issuance of awards under the 2007 Stock Option and Incentive
Plan. In November 2009, the Company amended and restated the 2007 Stock
Option and Incentive Plan, and reserved an additional 1,100,000 shares of its
common stock for the issuance of awards.
In
January 2007, the Company issued options to purchase an aggregate of 749,300
shares under terms established by the 2007 Stock Option and Incentive Plan. The
Company also issued options to purchase 9,500 shares in May 2007, an additional
750,000 shares in both November 2007 and November 2008, and 411,125 in December
2009. The
options vest over a four-year period, carry a ten-year term, and have an
exercise price of $11.00 per share for the initial 749,300 shares, $13.53 per
share for the 9,500 shares granted in May 2007, $11.47 per share for the 750,000
shares granted in November 2007, $2.37 per share for the 750,000 shares granted
in November 2008, and $2.65 per share for the 411,125 shares granted in December
2009. The options issued are incentive stock options, which are not
performance-based and vest with continued employment. Unexercised options may be
forfeited in the event of termination of employment. Options to purchase 341,087
shares were vested and had a weighted average exercise price of $6.81, and a
weighted average remaining contract term of 8.1 years, but no options were
exercised as of December 31, 2009. In December 2009, the
Company issued 838,875 restricted stock units to certain employees. These units
vest over a four-year period, have an indefinite life, and convert to shares of
common stock upon certain triggering events. The units carried a fair value of
$2.15 upon their issuance, and the expense related to these units during the
three months ended December 31, 2009 was $30.
6
During
May 2009, the Company’s senior management voluntarily surrendered 1,018,500
options for no consideration. The voluntary surrender was not accompanied by a
concurrent grant of a replacement award nor any other valuable consideration.
Accordingly, the unrecognized compensation expense related to these stock
options of $1,803 was recognized as compensation expense in the fourth quarter
of fiscal 2009. After accounting for the 838,875 restricted stock units granted
to employees, the 360,720 deferred stock units granted to non-employee
members of the Board of Directors, and the 1,381,112 stock options issued to
employees that have not been forfeited or surrendered, there
were 1,019,293 shares of common stock reserved for future issuance at December
31, 2009.
The
Company uses the Black-Scholes formula to estimate the value of stock options
granted to employees and expects to continue to use this option valuation model.
The Company includes a forfeiture estimate in the amount of compensation expense
being recognized. The forfeiture estimate is based on historical employee
turnover rates. The estimated fair value of the options is amortized to expense
on a straight-line basis over the four-year vesting period.
Total
compensation expense for these options and restricted stock units is $7,515
including the following amounts charged or to be charged to compensation expense
each year ended June 30 over each four-year vesting period: $224 in 2007, $1,342
in 2008, $3,208 in 2009, $673 in 2010, $801 in 2011, $612 in 2012, $473 in 2013,
and $182 in 2014. Compensation expense related to these options and
restricted stock units totaled $350 and $140 for the three months ended December
31, 2008 and 2009, respectively, and $684 and $245 for the six months ended
December 31, 2008 and 2009, respectively. The weighted average remaining
contract term for the options was 8.9 years at December 31, 2009.
Options
|
Weighted Average
Exercise
Prices
|
Weighted Average Fair
Value
at Grant Date
|
||||||||||
Balance
at July 1, 2009
|
1,014,175
|
$
|
5.03
|
1.81
|
||||||||
Granted
|
411,125
|
2.65
|
0.88
|
|||||||||
Exercised
|
—
|
—
|
—
|
|||||||||
Forfeited
|
(44,188
|
)
|
3.62
|
1.23
|
||||||||
Balance
at December 31, 2009
|
1,381,112
|
$
|
4.33
|
$
|
1.53
|
Intrinsic
value for stock options is defined as the difference between the current market
value and the exercise price. The aggregate intrinsic value for these stock
options was $20 at December 31, 2009.
(d)
Earnings per share
Earnings
per share reflects application of the two class method. All classes of common
stock participate pro rata in dividends. Therefore, the two class method of
calculating earnings per share has been applied. Basic earnings per share is
computed by dividing net income available to common shareholders by the
weighted average number of common shares outstanding for the reporting period.
Diluted earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. For the calculation of diluted earnings per share, the basic
weighted average number of shares is increased by the dilutive effect of stock
options determined using the treasury stock method. The components of basic and
diluted earnings per share are as follows (in thousands, except per share
amounts):
Three
Months Ended
December 31,
|
Six
Months Ended
December 31,
|
|||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||
Net
income available to common shareholders
|
$ | 2,269 | $ | 1,218 | $ | 2,553 | $ | 471 | ||||||||
Basic
weighted average shares outstanding
|
24,330 | 24,330 | 24,330 | 24,330 | ||||||||||||
Dilutive
effect of stock options
|
— | — | — | — | ||||||||||||
Diluted
weighted average shares outstanding
|
24,330 | 24,330 | 24,330 | 24,330 | ||||||||||||
Basic
earnings per share
|
$ | 0.09 | $ | 0.05 | $ | 0.10 | $ | 0.02 | ||||||||
Diluted
earnings per share
|
$ | 0.09 | $ | 0.05 | $ | 0.10 | $ | 0.02 |
7
(e)
Effect of recently issued accounting pronouncements
A recent
pronouncement by the Financial Accounting Standards Board (FASB) defines fair
value, establishes a framework for measuring fair value in accordance with
Generally Accepted Accounting Principles (GAAP), and expands disclosures about
fair value measurements. The provisions of this pronouncement were adopted on a
prospective basis for financial instruments in the first quarter of fiscal 2009
and had no impact upon the Company’s consolidated financial
statements. Those provisions relate to financial assets and
liabilities carried at fair value and fair value disclosures related to
financial assets and liabilities. Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The
provisions of the pronouncement for nonfinancial assets and nonfinancial
liabilities became effective for the Company in the first quarter of fiscal 2010
and had no impact upon the Company’s consolidated financial
statements.
A recent
FASB pronouncement establishes principles and requirements for how an acquirer
in a business combination recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, and any controlling
interest; recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and determines what information
to disclose to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. The pronouncement became
effective for the Company in the first quarter of fiscal 2010. The impact
that the pronouncement will have on future consolidated financial statements
will vary with each future acquisition.
In June
2009, the FASB released a Codification, which establishes the FASB Accounting
Standards Codification as the source of authoritative accounting principles
recognized by the FASB to be applied in the preparation of financial statements
in conformity with GAAP. This Codification explicitly recognizes rules and
interpretive releases of the SEC under federal securities laws as authoritative
GAAP for SEC registrants. The Codification became effective September 15, 2009,
and did not have an impact upon the Company’s consolidated financial
statements.
(3)
Acquisitions
The
Company acquired certain assets of Farm City Animal Supply, Inc. during the
second fiscal quarter of 2007. Cash of $105 was paid during the quarter
ended September 30, 2008, as an earn-out payment to certain selling stockholders
of Farm City Animal Supply, Inc. During the quarter ended December 31, 2008, the
Company received $74 in cash proceeds as a final settlement on the acquisition.
The earn-out payment and settlement proceeds comprise a net $31 in purchase
price adjustments that were accounted for as goodwill.
In
October 2007, AHII acquired all of the outstanding stock of Kane for $22,184 in
cash (plus $1,017 in direct acquisition costs). In addition, the Company is
obligated to make additional cash payments to certain selling stockholders if
certain performance targets are met through October 2010. Substantially all of
these contingent payments, if any, will be accounted for as goodwill when and if
earned. Kane is based in Edmonton, Canada, and is a leading distributor of
animal health products in both the production and companion animal markets.
During the quarter ended December 31, 2008, certain performance targets were
met, and the Company paid $2,825 to certain selling stockholders in the same
quarter. During the quarter ended December 31, 2009, certain performance targets
were met, and in January of 2010, the Company paid $1,911 to certain selling
stockholders. Both of these purchase price adjustments were accounted for as
goodwill in the quarter earned.
The
Company’s acquisitions serve to further the Company’s strategy to access
additional product lines, sales representatives, customer opportunities,
manufacturer relationships and sales territories.
8
(4)
Accounts receivable, net
|
June 30,
2009
|
December
31,
2009
|
||||||
Trade
accounts receivable
|
|
$
|
68,494
|
$
|
76,366
|
|||
Vendor
rebate receivables
|
|
8,239
|
9,380
|
|||||
Other
receivables
|
|
1,116
|
418
|
|||||
|
||||||||
|
77,849
|
86,164
|
||||||
Less
allowance for doubtful accounts
|
|
(3,408
|
)
|
(3,568
|
)
|
|||
|
||||||||
Accounts
receivable, net
|
|
$
|
74,441
|
$
|
82,596
|
At June
30, 2009, the Company recorded a bad debt provision of $2,708 as a result of a
dispute with a manufacturer regarding a rebate receivable. This receivable
remained in dispute at December 31, 2009.
(5)
Property, plant, and equipment, net
|
June 30,
2009
|
December
31,
2009
|
||||||
Land
|
|
$
|
3,461
|
$
|
3,461
|
|||
Buildings
and improvements
|
|
4,378
|
4,434
|
|||||
Leasehold
improvements
|
|
3,749
|
3,842
|
|||||
Construction
in progress
|
|
26
|
—
|
|||||
Equipment:
|
|
|||||||
Warehouse
|
|
2,359
|
2,460
|
|||||
Automotive
|
|
6,730
|
6,804
|
|||||
Office/software
|
|
5,392
|
5,947
|
|||||
|
||||||||
|
26,095
|
26,948
|
||||||
Less
accumulated depreciation
|
|
(10,052
|
)
|
(11,392
|
)
|
|||
|
||||||||
Property,
plant, and equipment, net
|
|
$
|
16,043
|
$
|
15,556
|
Depreciation
expense was $915 and $901 for the three months ended December 31, 2008 and
2009, respectively, and $1,766 and $1,759 for the six months ended December 31,
2008 and 2009, respectively.
9
(6)
Goodwill and other intangible assets
Estimated
Useful
Life
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
||||||||||
June 30, 2009
:
|
|||||||||||||
Goodwill
|
Indefinite
|
$
|
60,334
|
$
|
—
|
$
|
60,334
|
||||||
Customer
relationships
|
12
years
|
40,578
|
(12,556
|
)
|
28,022
|
||||||||
Noncompete
agreements
|
2-5
years
|
6,245
|
(2,809
|
)
|
3,436
|
||||||||
Trademarks
and trade names
|
Indefinite
|
33,170
|
—
|
33,170
|
|||||||||
$
|
140,327
|
$
|
(15,365
|
)
|
$
|
124,962
|
|||||||
December 31, 2009
:
|
|||||||||||||
Goodwill
|
Indefinite
|
$
|
62,245
|
$
|
—
|
$
|
62,245
|
||||||
Customer
relationships
|
12
years
|
40,578
|
(14,259
|
)
|
26,319
|
||||||||
Noncompete
agreements
|
2-5
years
|
6,245
|
(3,347
|
)
|
2,898
|
||||||||
Trademarks
and trade names
|
Indefinite
|
33,170
|
—
|
33,170
|
|||||||||
$
|
142,238
|
$
|
(17,606
|
)
|
$
|
124,632
|
Amortization
expense related to intangible assets totaled $1,139 and $1,121 for the three
months ended December 31, 2008 and 2009, respectively, and $2,364 and
$2,241 for the six months ended December 31, 2008 and 2009, respectively. Based
on the current estimated useful lives assigned to intangibles assets,
amortization expense for fiscal 2010, 2011, 2012, 2013, and 2014 is projected to
total $4,482, $4,482, $4,229, $3,867, and $3,406, respectively.
The
Company reviews its goodwill and other nonamortizing intangible assets for
impairment annually at the close of the fiscal year or more frequently if
indicators of impairment exist. A significant amount of judgment is involved in
determining if an indicator of impairment has occurred. Such indicators may
include, among others: a significant decline in the Company’s expected future
cash flows; a sustained, significant decline in the Company’s stock price and
market capitalization; a significant adverse change in legal factors or in the
business climate; unanticipated competition; and slower growth rates. Any
adverse change in these factors could have a significant impact on the
recoverability of the Company’s goodwill and other nonamortizing intangible
assets and could have a material impact on the Company’s consolidated financial
statements.
The
Company’s stock price and market capitalization have improved in the past six
months, and the Company has experienced minimal change in growth rates in the
past six months. As a result, the Company concluded that indicators had not
emerged to indicate that impairment testing needed to be performed as of
December 31, 2009. The Company will perform its annual impairment test at June
30, 2010.
(7)
Long-term debt
|
June 30,
2009
|
December
31,
2009
|
||||||
Credit
agreement—Revolving credit facility
|
|
$
|
79,245
|
$
|
96,553
|
|||
Credit
agreement—Term Note
|
|
43,650
|
41,045
|
|||||
Liability
for interest rate swap agreements
|
3,920
|
—
|
||||||
Other
|
|
277
|
9
|
|||||
|
||||||||
|
127,092
|
137,607
|
||||||
Less
current portion
|
|
(7,179
|
)
|
(457
|
)
|
|||
|
||||||||
|
$
|
119,913
|
$
|
137,150
|
10
In August 2007, the Company entered into a new $44,550 first lien term loan and with borrowings thereunder paid in full the $44,550 balance of our then existing $45,000 first lien term loan. The $44,550 first lien term loan matures on May 31, 2011 and bears interest at an annual rate equal to LIBOR plus 2.0%, which is paid quarterly. Borrowings are collateralized by a first priority interest in and lien on all of the Company’s assets.
In
October 2007, the revolving credit facility (the Revolver) was amended to a
$135,000 facility, which matures on June 30, 2010. The amended Revolver included
a $10,000 overcollateralization first drawn sub-limit that amortizes and expired
on March 31, 2009. The outstanding borrowings under the $10,000
overcollateralization first drawn sub-limit bore interest at the rate of 0.75%
above the rate as defined per the terms of the September 2006 Revolver
amendment. The outstanding borrowings under the Revolver’s base $135,000
facility bore interest at the rate defined per the terms of the September 2006
Revolver amendment.
In May
2009, the Revolver was amended to a $130,000 facility, with maturity on the
earlier of June 30, 2012, or 60 days prior to the final extended maturity date
of the Term Note, which currently matures on May 31, 2011. The outstanding
borrowings under the amended facility bear interest through July 20, 2009, at
LIBOR plus 3.50% for U.S. borrowings and CDOR Rate plus 1% for Canadian
borrowings, and thereafter at rates based upon the Company’s Leverage Ratio as
defined in the amended Revolver with LIBOR-based rates ranging from LIBOR and
CDOR Rate plus 3.00% to LIBOR and CDOR Rate plus 3.75%, and with Prime-based
rates ranging from U.S. Prime and Canadian Prime Rate plus 0.50% to U.S. Prime
and Canadian Prime Rate plus 1.25%. Debt issue costs of $1,098 resulting from
this extension were capitalized and are being amortized over the remaining term
of the Revolver utilizing the straight-line method, which approximates the
effective interest method. Borrowings remain collateralized by a first
priority interest in and lien on all of the Company’s assets. At December 31,
2009, the Company’s availability under the Revolver totaled
$29,069.
As of
December 31, 2009, the interest rates for the Revolver ranged from 3.80% to
4.25%, and the interest rate for the first lien term loan was
2.25%. Additionally, the Company is required to pay a commitment fee on the
daily unused amount of the Revolver at a per annum rate of 0.50%. The credit
agreements contain certain covenants that, among other things, restrict our
ability to incur additional indebtedness, make certain payments, sell assets,
enter into certain transactions with affiliates and create liens. Moreover,
certain of these agreements require us to maintain specified financial
ratios. The most restrictive covenant relates to the creation or assumption
of additional indebtedness. The Company was in compliance with all financial
covenants at December 31, 2009.
The
Company has utilized cash flow hedge accounting and used derivative financial
instruments to effectively convert a portion of its variable-rate debt to
fixed-rate debt. Based upon interest rates, in order to reduce cash interest
expense over the last three quarters of fiscal 2010, the Company elected to
terminate both of its interest rate swap agreements as of September 30,
2009.
The
Company entered into a $43,000 notional value swap transaction with a financial
institution effective April 18, 2007. The Company received a floating rate based
on LIBOR and paid a fixed rate of 4.95%. The swap agreement had an original
termination date of June 28, 2010. On September 30, 2009, the Company terminated
the swap agreement, and the fair value of this swap was a net liability of
$1,511 on that date. This liability was paid in October 2009.
The
Company entered into a $52,000 million notional value swap transaction with a
financial institution effective April 18, 2007. The Company received a floating
rate based on LIBOR and paid a fixed rate of 4.95%. The swap agreement had an
original termination date of May 7, 2010. On September 30, 2009, the Company
terminated the swap agreement, and the fair value of this swap was a net
liability of $1,837 on that date. This liability was paid in October
2009.
Swap
agreement fair values are recorded on the consolidated balance sheet as a
component of current portion of long-term debt. The fair values of the interest
rate swap agreements were estimated based on current settlement prices and
quoted market prices of comparable contracts. The Company calculated no
ineffectiveness on both interest rate swap agreements at their termination on
September 30, 2009. At December 31, 2009, an unrealized loss of $1,016, net of
taxes of $677, is recorded on the consolidated balance sheet as accumulated
other comprehensive income (loss). This unrealized loss will be amortized to
interest expense over the remaining terms of the original swap
agreements.
11
The net
receipts or payments from the interest rate swap agreements were recorded in
interest expense. During the three months ended December 31, 2008, changes
in the fair values of interest rate swap agreements totaled $(2,320). During the
six months ended December 31, 2008 and 2009, changes in the fair value of
interest rate swap agreements totaled $(2,218) and $572, respectively. The
Company reclassified $447 during the three months ended December 31, 2008, and
$968 and $1,047, respectively, during the six months ended December 31, 2008 and
2009, from accumulated other comprehensive income (loss) to interest
expense.
(8)
Financial instruments
The fair
value hierarchy prioritizes inputs to valuation techniques based on observable
and unobservable data and categorizes the inputs into three
levels: Level 1 – Unadjusted quoted prices in active markets for
identical assets or liabilities, Level 2 – Significant observable pricing inputs
other than quoted prices included within Level 1 that are either directly or
indirectly observable as of the reporting date (essentially, this represents
inputs that are derived principally from or corroborated by observable market
data), and Level 3 – Generally unobservable inputs, which are developed based on
the best information available and may include the Company’s own internal
data. Observable data should be used when available.
The
following table presents the Company’s financial assets and liabilities measured
as of December 31, 2009:
Fair
Value
|
||||||||||||||||
December
31,
2009
|
Level
1
|
Level
2
|
Level 3
|
|||||||||||||
Financial assets at
cost:
|
||||||||||||||||
Current
portion of notes receivable
|
$
|
204
|
||||||||||||||
Notes
receivable, net of current portion
|
171
|
|||||||||||||||
Total
|
$
|
375
|
||||||||||||||
Financial assets at fair
value:
|
||||||||||||||||
Cash
and cash equivalents
|
2,085
|
2,085
|
—
|
—
|
||||||||||||
Total
|
$
|
2,085
|
$
|
2,085
|
$
|
—
|
$
|
—
|
||||||||
Financial liabilities carried
at historical proceeds:
|
||||||||||||||||
Current
portion of long-term debt
|
$
|
457
|
||||||||||||||
Long-term
debt, net of current portion
|
137,150
|
|||||||||||||||
Total
|
$
|
137,607
|
12
(9)
Preferred stock
As of
December 31, 2009, the Company had one class of undesignated preferred
stock authorized with no shares issued or outstanding. The Board of Directors of
the Company may designate and issue preferred stock in one or more series. The
Board of Directors can fix the rights, preferences and privileges of the shares
of each series and any of its qualifications, limitations or
restrictions.
(10)
Related-party transactions
The
Company has property lease agreements with certain employees. The Company
incurred related rent expense of $76 and $92 for the three months ended
December 31, 2008 and 2009, respectively, and $160 and $185 for the six
months ended December 31, 2008 and 2009, respectively. During the three months
ended December 31, 2009, certain employees with whom the Company had such lease
agreements ceased employment with the Company. As such, there were no
remaining future obligations outstanding at December 31, 2009 with related
parties.
(11)
Income taxes
The
Company’s effective tax rate was 39.0% and 37.6% for the three months ended
December 31, 2008 and 2009, respectively, and 39.5% and 37.6% for the six
months ended December 31, 2008 and 2009, respectively. The decrease in the
effective tax rate in the three months and six months ended December 31,
2009, as compared to the same periods in the prior year was attributable to
lower income subject to U.S. Federal income tax, which carries a higher tax rate
than income subject to Canadian income taxes.
At
December 31, 2009, there were no material unrecognized tax benefits. In
addition, there were no accruals for the payment of interest and penalties
related to income tax liabilities at December 31, 2009. The Company
recognizes potential interest and penalties related to unrecognized tax benefits
in income tax expense. As of December 31, 2009, the Company has open tax years
for Federal purposes back to June 2005. For state purposes, the open years
typically date back to June 2006, although some states remain open back to June
2005.
(12)
Commitments and contingencies
The
Company is involved in various matters of litigation arising in the normal
course of business. Although the ultimate liability from existing or potential
claims cannot be ascertained, management does not anticipate that any related
outcomes would have a materially adverse effect on the Company’s financial
position, operating results or cash flows.
(13) Subsequent Events
The Company evaluated all events and transactions that occured from
December 31, 2009 through February 2, 2010. Effective
January 22, 2010, the Company entered into a Confidential Settlement Agreement
and Release, and a Confidential Patent Settlement Agreement and Release,
with a competitor and its affiliated parties, which agreements settled
all claims, disputes and related matters with prejudice. As a result
of such settlement and related legal costs, the Company recognized an
additional liability of $350,000 and charged the amount against selling,
general, and administrative costs in the three months ended December 31,
2009. The parties agreed that the other terms included in these agreements
are confidential. However, we do not believe that the other settlement
terms are material to the Company’s financial position, operating results or
cash flows.
13
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
(Dollars in thousands, except share and per share
data)
|
Forward
Looking Statements
This
Quarterly Report on Form 10-Q (Form 10-Q) contains “forward-looking
statements” within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. In particular, statements contained in the Form 10-Q, including
but not limited to, statements regarding the Company’s future results of
operations and financial position, business strategy and plan prospects,
projected revenue or costs and objectives of management for future operations,
are forward-looking statements. These statements relate to the Company’s future
plans, objectives, expectations and intentions and may be identified by words
such as “may,” “will,” “should,” “expects,” “plans,” “anticipate,” “intends,”
“target,” “projects,” “contemplates,” “believe,” “estimates,” “predicts,”
“potential,” and “continue,” or the negative of these terms or other similar
words. These statements are only predictions. We have based these forward
looking statements largely on our current expectations and projections about
future events and financial trends that we believe may affect our business,
results of operations and financial condition. The outcome of the events
described in these forward looking statements is subject to risks, uncertainties
and other factors described in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” elsewhere in this Quarterly
Report on Form 10-Q and in our Annual Report on Form 10-K for the year
ended June 30, 2009. Accordingly, you should not rely upon forward looking
statements as predictions of future events. We cannot assure you that the events
and circumstances reflected in the forward looking statements will be achieved
or occur, and actual results could differ materially from those projected in the
forward looking statements. The forward looking statements made in this
Quarterly Report on Form 10-Q relate only to events as of the date on which
the statements are made. We undertake no obligation to update any forward
looking statement to reflect events or circumstances after the date on which the
statement is made or to reflect the occurrence of unanticipated
events.
Overview
The
Company, through its operating subsidiaries, sells more than 40,000 products
sourced from over 1,500 manufacturers to over 71,000 customers, as well as
provides consultative services to customers in the highly fragmented animal
health products industry. Products the Company distributes include
pharmaceuticals, vaccines, parasiticides, diagnostics, capital equipment,
sanitizers, devices, supplies, and dairy lagoon treatment systems. The Company’s
principal customers are veterinarians, production animal operators and animal
health product retailers. The Company’s strategy is to become the leading
worldwide provider of animal health products and services in the production
animal and companion animal health products markets through (i) organic
growth, (ii) expansion of its sales of proprietary products,
(iii) improved operational efficiencies, and (iv) select
acquisitions.
14
Key
factors and trends that have affected and the Company believes will continue to
affect its operating results include:
·
|
Fluctuations
in commodity prices;
|
·
|
Overall
growth or contraction in the dairy
industry;
|
·
|
Consolidation
by the Company's customers in the dairy
industry;
|
·
|
Increased
focus on companion animal
customers;
|
·
|
Changes
in customer preferences; and
|
The
Company generates revenue from customers in three ways. Over 97% of the
Company’s revenue is generated through “buy/sell” transactions. The remainder
comes from consignment and agency transactions. In the “buy/sell” transactions,
the Company takes title to the inventory from its manufacturers. The Company
sells products to customers and invoices them. “Buy/sell” transactions are
advantageous to the Company over other sales methods because the Company takes
title to the inventory and is able to promote these products on behalf of
manufacturers and effectively manage the pricing and distribution of these
products. For consignment sales, the Company does not take title to the product,
but it does stock and ship product to and invoice the customer. For agency
sales, the Company transmits orders from its customers to its manufacturers. The
manufacturer ships the product directly to the Company’s customers and
compensates the Company with a commission payment for handling the order from
the customer and providing customer service. Manufacturers may occasionally
switch between the “buy/sell” and agency methods for particular products.
Currently and for the past three fiscal years, only one product with material
sales has been treated as a consignment sale.
For more
information on the Company’s business, see the Company’s Annual Report on Form
10-K.
Results
of Operations
The
following table summarizes the historical results of operations for the three
and six months ended December 31, 2008 and 2009, in dollars and as a
percentage of net sales. The Company’s gross profit may not be comparable to
other entities, since some entities include all of the costs related to their
distribution network in cost of goods sold and others, like us, report
non-direct costs instead in selling, general, and administrative expenses, and
salaries, wages, commissions, and related benefits.
15
Summary
consolidated results of operations table
|
Three Months Ended
December 31,
|
Six Months Ended
December 31,
|
||||||||||||||
(in
thousands, except number of representatives)
|
|
2008
|
2009
|
2008
|
2009
|
|||||||||||
Net
sales
|
|
$
|
184,477
|
$
|
170,487
|
$
|
353,500
|
$
|
331,816
|
|||||||
Direct
cost of products sold (excludes depreciation and
amortization)
|
|
152,209
|
141,071
|
290,932
|
276,454
|
|||||||||||
Gross
profit
|
|
32,268
|
29,416
|
62,568
|
55,362
|
|||||||||||
Selling,
general, and administrative expenses (includes salary, wages, commission,
and related benefits)
|
|
24,397
|
23,540
|
50,015
|
46,328
|
|||||||||||
Depreciation
and amortization
|
|
2,054
|
2,022
|
4,130
|
4,000
|
|||||||||||
Operating
income
|
|
5,817
|
3,854
|
8,423
|
5,034
|
|||||||||||
Other
income (expense):
|
|
|||||||||||||||
Interest
expense
|
|
(2,289
|
)
|
(2,068
|
)
|
(4,623
|
)
|
(4,579
|
)
|
|||||||
Other
income
|
|
189
|
166
|
418
|
300
|
|||||||||||
Income
before income taxes
|
|
3,717
|
1,952
|
4,218
|
755
|
|||||||||||
Income
tax expense
|
|
(1,448
|
)
|
(734
|
)
|
(1,665
|
)
|
(284
|
)
|
|||||||
Net
income
|
|
$
|
2,269
|
$
|
1,218
|
$
|
2,553
|
$
|
471
|
|||||||
Net
sales
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
|||||||
Direct
cost of products sold (excludes depreciation and
amortization)
|
|
82.5
|
%
|
82.7
|
%
|
82.3
|
%
|
83.3
|
%
|
|||||||
Gross
profit
|
|
17.5
|
%
|
17.3
|
%
|
17.7
|
%
|
16.7
|
%
|
|||||||
Selling,
general, and administrative expenses (includes salary, wages, commission,
and related benefits)
|
|
13.2
|
%
|
13.8
|
%
|
14.1
|
%
|
14.0
|
%
|
|||||||
Depreciation
and amortization
|
|
1.1
|
%
|
1.2
|
%
|
1.2
|
%
|
1.2
|
%
|
|||||||
Operating
income
|
|
3.2
|
%
|
2.3
|
%
|
2.4
|
%
|
1.5
|
%
|
|||||||
Other
income (expense)
|
|
|||||||||||||||
Interest
expense
|
|
(1.3
|
)%
|
(1.3
|
)%
|
(1.3
|
)%
|
(1.4
|
)%
|
|||||||
Other
income
|
|
0.1
|
%
|
0.1
|
%
|
0.1
|
%
|
0.1
|
%
|
|||||||
Income
before income taxes
|
|
2.0
|
%
|
1.1
|
%
|
1.2
|
%
|
0.2
|
%
|
|||||||
Income
tax expense
|
|
(0.8
|
)%
|
(0.4
|
)%
|
(0.5
|
)%
|
(0.1
|
)%
|
|||||||
Net
income
|
|
1.2
|
%
|
0.7
|
%
|
0.7
|
%
|
0.1
|
%
|
|||||||
Other
data:
|
|
|||||||||||||||
Field
sales representatives
|
|
227
|
216
|
227
|
216
|
Three
months ended December 31, 2009 compared to three months ended December 31,
2008
Net sales. Net sales
decreased $13,990, or 7.6%, to $170,487 for the three months ended
December 31, 2009, from $184,477 for the three months ended
December 31, 2008. The decrease in net sales was primarily attributable to
lower spending by production animal customers whose profits have been
constrained by fluctuating commodity prices and the general economic slowdown.
The number of field sales representatives decreased to 216 as of
December 31, 2009, from 227 as of December 31, 2008, primarily as a result
of consolidation of underperforming territories.
16
Gross profit. Gross
profit decreased $2,852, or 8.8%, to $29,416 for the three months ended
December 31, 2009, from $32,268 for the three months ended
December 31, 2008. Gross profit as a percentage of sales was 17.3% for the
three months ended December 31, 2009, compared to 17.5% for the three
months ended December 31, 2008. The decrease in gross profit resulted from
the decline in sales combined with lower gross profit margins driven by declines
in manufacturer rebates.
Selling, general, and administrative
expenses. Selling, general, and administrative expenses decreased to
$23,540 for the three months ended December 31, 2009, from $24,397 for the
three months ended December 31, 2008. The decrease was primarily the result
of a decrease in variable selling and distribution expenses driven by lower
sales volume combined with cost reduction efforts. The fixed nature of
certain expenses such as salaries, rent, and computer related costs, together
with the $350 accrual for settlement and related legal costs drove a slight
increase in selling, general and administrative expenses as a percent of sales
from 13.2% for the three months ended December 31, 2008, to 13.8% for the
three months ended December 31, 2009.
Depreciation and
amortization. Depreciation and amortization decreased slightly from
$2,054 for the three months ended December 31, 2008, to $2,022 for the
three months ended December 31, 2009. The decrease results primarily from
lower amortization of intangible assets driven by certain noncompete agreements
reaching the conclusion of their useful lives.
Other expenses. Other
expenses decreased $198, or 9.4%, to $1,902 for the three months ended
December 31, 2009, from $2,100 for the three months ended December 31,
2008. The decrease in other expenses was due to a decrease in interest expense
of $221 to $2,068 in the three months ended December 31, 2009, as compared
to $2,289 in the three months ended December 31, 2008. This decrease was
due to lower interest rates than in the prior year.
Income tax expenses. Income
tax expense decreased $714, or 49.3%, to $734 for the three months ended
December 31, 2009, from $1,448 for the three months ended December 31,
2008. The effective tax rate was 37.6% and 39.0% for the three months ended
December 31, 2009 and 2008, respectively. This decrease in the
effective tax rate was attributable to lower income subject to U.S. Federal
income tax, which carries a higher tax rate than income subject to Canadian
income taxes.
Six
months ended December 31, 2009 compared to six months ended
December 31, 2008
Net sales. Net sales
decreased $21,684, or 6.1%, to $331,816 for the six months ended
December 31, 2009, from $353,500 for the six months ended December 31,
2008. The decrease in net sales was primarily attributable to lower spending by
production animal customers whose profits have been constrained by fluctuating
commodity prices and the general economic slowdown. The number of
field sales representatives decreased to 216 as of December 31, 2009, from
227 as of December 31, 2008 , as a result of consolidation of underperforming
territories.
Gross profit. Gross profit
decreased $7,206, or 11.5%, to $55,362 for the six months ended
December 31, 2009, from $62,568 for the six months ended December 31,
2008. Gross profit as a percentage of sales was 16.7% for the six months ended
December 31, 2009, compared to 17.7% for the six months ended
December 31, 2008. The decrease in gross profit resulted from the decline
in sales combined with lower gross profit margins driven by declines in
manufacturer rebates.
Selling, general, and administrative
expenses. Selling, general, and administrative expenses decreased $3,687,
or 7.4%, to $46,328 for the six months ended December 31, 2009, from
$50,015 for the six months ended December 31, 2008. The decrease was
primarily the result of a decrease in variable selling and distribution expenses
driven by lower sales volume combined with cost reduction efforts, partially
offset by the $350 accrual for settlement and related legal costs. These factors
drove a slight decrease in selling, general and administrative expenses as a
percent of sales from 14.1% for the six months ended December 31, 2008, to
14.0% for the six months ended December 31, 2009.
Depreciation and
amortization. Depreciation and amortization decreased from $4,130 for the
six months ended December 31, 2008, to $4,000 for the six months ended
December 31, 2009. The decrease results from lower amortization of
intangible assets driven by certain noncompete agreements reaching the
conclusion of their useful lives.
Other expenses. Other
expenses increased $74, or 1.8%, to $4,279 for the six months ended
December 31, 2009, from $4,205 for the six months ended December 31,
2008. The increase in other expenses was primarily due to a decrease in other
income of $118 to $300 in the six months ended December 31, 2009, as
compared to $418 in the six months ended December 31, 2008. This decrease
in other income was primarily due to $86 of lower gains on the sale of equipment
than in the prior year.
17
Income tax
expenses. Income tax expense decreased $1,381, or 82.9%, to $284 for the
six months ended December 31, 2009, from $1,665 for the six months ended
December 31, 2008. The effective tax rate was 37.6% and 39.5% for the six
months ended December 31, 2009 and 2008, respectively. This decrease in the
effective tax rate was attributable to lower income subject to U.S. Federal
income tax, which carries a higher tax rate than income subject to Canadian
income taxes.
Liquidity
and Capital Resources
The
Company’s primary sources of liquidity are cash flows generated from operations
and borrowings under the Company’s revolving credit facility. Funds are expended
to provide working capital that enables the Company to maintain adequate
inventory levels to promptly fulfill customer needs and expand operations. The
Company expects its capital resources to be sufficient to meet anticipated cash
needs for at least the next twelve months, and it expects cash flows from
operations to be sufficient to reduce outstanding borrowings under the Company’s
revolving credit agreement.
Operating activities.
For the six months ended December 31, 2009, net cash used for operating
activities was $7,377, and was attributable to $471 in net income, $5,573
of non-cash costs, and a $221 change in deferred income taxes, all offset
by an increase in working capital of $13,642. The non-cash costs included $4,000
of depreciation and amortization, $520 of debt issue cost amortization, $620 of
amortization of loss on settlement of interest rate swap agreements, $203 of bad
debt expense, and $245 of stock compensation expenses. The change in working
capital included an increase in accounts receivable of $8,792 and an increase in
inventory of $12,139, both partially offset by an increase in accounts payable
of $7,470. The increase in accounts receivable resulted from strong sales
at the close of the quarter that converted to cash early in the third quarter.
The increase in inventory was due to inventory purchases near the close of the
quarter in advance of manufacturer price increases. This increase in
inventory drove the corresponding increase in accounts payable. While accounts
receivable and inventory levels as a percentage of sales were higher at December
31, 2009, the Company expects to manage these balances back to historical norms.
For the
six months ended December 31, 2008, net cash provided by operating activities
was $1,858, and was attributable to $2,553 in net income and $5,074 of non-cash
costs offset by an increase in working capital of $4,892 and a change in
deferred income taxes of $877. The non-cash costs included $4,130 of
depreciation and amortization, $338 of debt issue cost amortization, and $684 of
stock compensation expenses. The change in working capital included an increase
in accounts receivable of $6,772 and an increase in inventory of $2,001, both
partially offset by an increase in accounts payable of $2,374 and a decrease in
income tax receivables/payables of $1,117. The increase in accounts
receivable resulted from strong sales at the close of the quarter that converted
to cash early in the third quarter. The increase in inventory was due to
inventory purchases near the close of the quarter in
advance of manufacturer price increases. This increase in inventory
drove the
corresponding increase in accounts payable. The decrease in income
tax receivables/payables results from the timing of income tax
payments.
Investing
activities. For the six months ended December 31, 2009, net
cash used for investing activities was $1,271, and was primarily attributable to
$1,229 of purchases of property, plant, and equipment.
For the
six months ended December 31, 2008, net cash used for investing activities was
$3,918, and was primarily attributable to $2,825 in cash payments to certain
selling stockholders of Kane for Kane’s achievement of certain performance
targets and $1,751 of purchases of property, plant and equipment, partially
offset by $301 of changes in notes receivable and $284 of proceeds from the sale
of equipment.
Financing
activities. For the six months ended December 31, 2009, net
cash provided by financing activities was $8,108, and was primarily attributable
to net borrowings on the revolving credit facility totaling $17,308, partially
offset by an unfavorable change in overdraft balances of $2,915, principal
payments on other debt totaling $2,874, and the settlement of liabilities
related to terminated interest rate swap agreements totaling $3,348.
For the
six months ended December 31, 2008, net cash provided by financing activities
was $7,161, and was primarily attributable to a change in overdraft balances of
$4,759 and net borrowings from revolving credit facilities totaling $3,076,
partially offset by $635 of repayments of long-term debt.
Capital
resources. In August 2007, the Company entered into a new $44,550
first lien term loan and with borrowings thereunder paid in full the $44,550
balance of our then existing $45,000 first lien term loan. The $44,550 first
lien term loan matures on May 31, 2011 and bears interest at an annual rate
equal to LIBOR plus 2.0%, which is paid quarterly. Borrowings are collateralized
by a first priority interest in and lien on all of the Company’s assets.
18
In
October 2007, the revolving credit facility (the Revolver) was amended to a
$135,000 facility, which matures on June 30, 2010. The amended Revolver included
a $10,000 overcollateralization first drawn sub-limit that amortizes and expired
on March 31, 2009. The outstanding borrowings under the $10,000
overcollateralization first drawn sub-limit bore interest at the rate of 0.75%
above the rate as defined per the terms of the September 2006 Revolver
amendment. The outstanding borrowings under the Revolver’s base $135,000
facility bore interest at the rate defined per the terms of the September 2006
Revolver amendment.
In May
2009, the Revolver was amended to a $130,000 facility, with maturity on the
earlier of June 30, 2012, or 60 days prior to the final extended maturity date
of the Term Note, which currently matures on May 31, 2011. The outstanding
borrowings under the amended facility bear interest through July 20, 2009, at
LIBOR plus 3.50% for U.S. borrowings and CDOR Rate plus 1% for Canadian
borrowings, and thereafter at rates based upon the Company’s Leverage Ratio as
defined in the amended Revolver with LIBOR-based rates ranging from LIBOR and
CDOR Rate plus 3.00% to LIBOR and CDOR Rate plus 3.75%, and with Prime-based
rates ranging from U.S. Prime and Canadian Prime Rate plus 0.50% to U.S. Prime
and Canadian Prime Rate plus 1.25%. Debt issue costs of $1,098 resulting from
this extension were capitalized and are being amortized over the remaining term
of the Revolver utilizing the straight-line method, which approximates the
effective interest method. Borrowings remain collateralized by a first
priority interest in and lien on all of the Company’s assets. At December 31,
2009, the Company’s availability under the Revolver totaled
$29,069.
As of
December 31, 2009, the interest rates for the Revolver ranged from 3.80% to
4.25%, and the interest rate for the first lien term loan was
2.25%. Additionally, the Company is required to pay a commitment fee on the
daily unused amount of the Revolver at a per annum rate of 0.50%. The credit
agreements contain certain covenants that, among other things, restrict our
ability to incur additional indebtedness, make certain payments, sell assets,
enter into certain transactions with affiliates and create liens. Moreover,
certain of these agreements require us to maintain specified financial
ratios. The most restrictive covenant relates to the creation or assumption
of additional indebtedness. The Company was in compliance with all financial
covenants at December 31, 2009.
The
Company has utilized cash flow hedge accounting and used derivative financial
instruments to effectively convert a portion of its variable-rate debt to
fixed-rate debt. Based upon interest rates, in order to reduce cash interest
expense over the last three quarters of fiscal 2010, the Company elected to
terminate both of its interest rate swap agreements as of September 30,
2009.
The
Company entered into a $43,000 notional value swap transaction with a financial
institution effective April 18, 2007. The Company received a floating rate based
on LIBOR and paid a fixed rate of 4.95%. The swap agreement had an original
termination date of June 28, 2010. On September 30, 2009, the Company terminated
the swap agreement, and the fair value of this swap was a net liability of
$1,511 on that date. This liability was paid in October 2009.
The
Company entered into a $52,000 million notional value swap transaction with a
financial institution effective April 18, 2007. The Company received a floating
rate based on LIBOR and paid a fixed rate of 4.95%. The swap agreement had an
original termination date of May 7, 2010. On September 30, 2009, the Company
terminated the swap agreement, and the fair value of this swap was a net
liability of $1,837 on that date. This liability was paid in October
2009.
Swap
agreement fair values are recorded on the consolidated balance sheet as a
component of current portion of long-term debt. The fair values of the interest
rate swap agreements were estimated based on current settlement prices and
quoted market prices of comparable contracts. The Company calculated no
ineffectiveness on both interest rate swap agreements at their termination on
September 30, 2009. At December 31, 2009, an unrealized loss of $1,016, net of
taxes of $677, is recorded on the consolidated balance sheet as accumulated
other comprehensive income (loss). This unrealized loss will be amortized to
interest expense over the remaining terms of the original swap
agreements.
The net
receipts or payments from the interest rate swap agreements were recorded in
interest expense. During the three months ended December 31, 2008, changes
in the fair values of interest rate swap agreements totaled $(2,320). During the
six months ended December 31, 2008 and 2009, changes in the fair value of
interest rate swap agreements totaled $(2,218) and $572, respectively. The
Company reclassified $447 during the three months ended December 31, 2008, and
$968 and $1,047, respectively, during the six months ended December 31, 2008 and
2009, from accumulated other comprehensive income (loss) to interest
expense.
19
Contractual
Obligations
As of
December 31, 2009, there were no material changes in the Company’s contractual
obligations as disclosed in the Company’s Annual Report on Form
10-K.
Off-Balance
Sheet Arrangements
As of
December 31, 2009, the Company did not have any off-balance sheet arrangements
other than the operating lease commitments in the contractual obligations table
as disclosed in the Company’s Annual Report on Form 10-K.
Recent
Accounting Pronouncements
A recent
pronouncement by the FASB defines fair value, establishes a framework for
measuring fair value in accordance with GAAP, and expands disclosures about fair
value measurements. The provisions of this pronouncement were adopted on a
prospective basis for financial instruments in the first quarter of fiscal 2009
and had no impact upon the Company’s consolidated financial
statements. Those provisions relate to financial assets and
liabilities carried at fair value and fair value disclosures related to
financial assets and liabilities. Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The
provisions of the pronouncement for nonfinancial assets and nonfinancial
liabilities became effective for the Company in the first quarter of fiscal 2010
and had no impact upon the Company ’ s consolidated financial
statements.
A recent
FASB pronouncement establishes principles and requirements for how an acquirer
in a business combination recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, and any controlling
interest; recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and determines what information
to disclose to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. The pronouncement became
effective for the Company in the first quarter of fiscal 2010. The impact
that the pronouncement will have on future consolidated financial statements
will vary with each future acquisition.
In June
2009, the FASB released a Codification, which establishes the FASB Accounting
Standards Codification as the source of authoritative accounting principles
recognized by the FASB to be applied in the preparation of financial statements
in conformity with GAAP. This Codification explicitly recognizes rules and
interpretive releases of the SEC under federal securities laws as authoritative
GAAP for SEC registrants. The Codification became effective September 15, 2009,
and did not have an impact upon the Company’s consolidated financial
statements.
20
Exposure
to Interest Rates
The
Company is exposed to certain market risks arising from transactions that are
entered into in the normal course of business. As part of the Company’s
financial risk management program, it has used certain derivative financial
instruments to manage these risks. The Company does not engage in financial
transactions for speculative purposes and therefore holds no derivative
instruments for trading purposes. The Company’s exposure to market risk for
changes in interest rates relates to variable interest rates on borrowings under
the Company’s credit agreements. At December 31, 2009, $137.6 million of
the Company’s debt remained subject to market risk for changes in interest
rates. If the weighted average interest rate on the Company’s remaining variable
rate indebtedness rose 31 basis points (a 10.0% change from the calculated
weighted average interest rate as of December 31, 2009), assuming no change
in the Company’s outstanding balance under its revolving credit facility and
Term Note, the Company’s annualized income before taxes and cash flows from
operating activities would decline by approximately $0.4 million. If the
weighted average interest rate on the Company’s remaining variable rate
indebtedness decreased 31 basis points (a 10.0% change from the calculated
weighted average interest rate as of December 31, 2009), assuming no change
in the Company’s outstanding balance under its revolving credit facility and
Term Note, the Company’s annualized income before taxes and cash flows from
operating activities would increase by approximately $0.4 million.
Exposure
to Exchange Rates
AHII's subsidiaries
are located in Canada and Taiwan. Due to the relative low volume of payments
made by AHII through these subsidiaries, the Company does not believe that it
has significant exposure to foreign currency exchange risks. The Company
currently does not use derivative financial instruments to mitigate foreign
currency exchange risks. The Company continues to review this issue and may
consider hedging certain foreign exchange risks through the use of currency
futures or options in future years.
Our
management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures as of December 31, 2009. The term “disclosure controls and
procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (Exchange Act), means controls and other
procedures of a company that are designed to ensure that information required to
be disclosed by a company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company’s management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. Management recognizes that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on the evaluation of our disclosure
controls and procedures as of December 31, 2009, our chief executive
officer and chief financial officer concluded that, as of such date, the
Company’s disclosure controls and procedures were effective at the reasonable
assurance level.
No change
in our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended
December 31, 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
21
From time
to time, we are a party to legal proceedings and claims arising in the ordinary
course of business. We are not currently aware of any such proceedings or claims
that we believe will have, individually or in the aggregate, a material adverse
effect on our business, financial condition or results of
operations.
Not
Applicable.
Not
Applicable.
None.
The
Company held its 2009 Annual Meeting of Stockholders on November 17,
2009. On the record date, 24,329,670 shares of our common stock were
entitled to vote. At the meeting, 20,953,755 shares were represented
in person or by proxy.
The first
proposal was considered to approve an amendment and restatement of the 2007
Stock Option and Incentive Plan. The proposal passed with 15,449,525
votes for, and 22,300 votes withheld. The
second proposal was considered to elect three Class III members to the Board of
Directors as directors whose term will expire in 2012. The following individuals
were elected as Class III directors:
Name
|
Votes For
|
Votes Withheld
|
David
W. Biegler
|
18,188,477
|
2,765,278
|
Jerry
W.
Pinkerton
|
18,191,742
|
2,762,013
|
Brandon
White
|
18,411,902
|
2,541,853
|
None.
Item 6.
|
Exhibits
|
Number
|
|
Description
|
31.1
|
|
Rule
13a-14(a)/15d-14(a) Certification, executed by James C. Robison, Chairman,
President and Chief Executive Officer.
|
31.2
|
|
Rule
13a-14(a)/15d-14(a) Certification, executed by William F. Lacey, Senior
Vice President and Chief Financial Officer.
|
32.1*
|
|
Section
1350 Certifications, executed by James C. Robison, Chairman, President and
Chief Executive Officer, and William F. Lacey, Senior Vice President and
Chief Financial Officer.
|
*
|
This
certification shall not be deemed “filed” for purposes of Section 18
of the Securities Act of 1934, or otherwise subject to the liability of
that Section, nor shall it be deemed to be incorporated by reference into
any filing under the Securities Act of 1933 or the Securities Exchange Act
of 1934.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Animal
Health International, Inc.
(Registrant)
|
||
Date:
February 2, 2010
|
/s/
William F. Lacey
|
|
William
F. Lacey
|
||
Senior
Vice President and Chief Financial Officer
|
||
(Principal
Financial and Accounting Officer)
|