ITEM 1. FINANCIAL STATEMENTS
SYNUTRA INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars and shares in thousands, except
per share data)
(UNAUDITED)
|
|
December
31,
2016
|
|
|
March
31,
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
51,401
|
|
|
$
|
102,667
|
|
Restricted cash
|
|
|
32,362
|
|
|
|
77,787
|
|
Accounts receivable, net of allowance of $806 and $1,435, as of December 31, 2016 and March 31, 2016, respectively
|
|
|
28,315
|
|
|
|
29,911
|
|
Inventories
|
|
|
129,447
|
|
|
|
98,360
|
|
Due from related parties
|
|
|
1,080
|
|
|
|
2,486
|
|
Receivable from disposal of a subsidiary
|
|
|
997
|
|
|
|
1,161
|
|
Deferred tax assets
|
|
|
14,630
|
|
|
|
15,781
|
|
Prepayments and other current assets
|
|
|
48,041
|
|
|
|
30,675
|
|
Investment held at trust
|
|
|
0
|
|
|
|
3,169
|
|
Total current assets
|
|
|
306,273
|
|
|
|
361,997
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
302,938
|
|
|
|
294,185
|
|
Land use rights, net
|
|
|
7,811
|
|
|
|
8,541
|
|
Intangible assets, net
|
|
|
2,802
|
|
|
|
2,661
|
|
Restricted cash
|
|
|
172,236
|
|
|
|
128,397
|
|
Due from related parties
|
|
|
0
|
|
|
|
2,223
|
|
Deferred tax assets
|
|
|
4,102
|
|
|
|
3,481
|
|
Long-term loan receivable
|
|
|
7,208
|
|
|
|
9,286
|
|
Other non-current assets
|
|
|
12,564
|
|
|
|
6,326
|
|
TOTAL ASSETS
|
|
$
|
815,934
|
|
|
$
|
817,097
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
163,379
|
|
|
$
|
95,175
|
|
Long-term debt due within one year
|
|
|
76,209
|
|
|
|
95,504
|
|
Accounts payable
|
|
|
71,642
|
|
|
|
76,862
|
|
Income taxes payable
|
|
|
1,794
|
|
|
|
2,721
|
|
Due to related parties
|
|
|
205
|
|
|
|
132
|
|
Advances from customers
|
|
|
30,111
|
|
|
|
25,186
|
|
Other current liabilities
|
|
|
48,805
|
|
|
|
49,617
|
|
Total current liabilities
|
|
|
392,145
|
|
|
|
345,197
|
|
Long-term debt
|
|
|
271,872
|
|
|
|
315,512
|
|
Deferred government subsidies
|
|
|
6,699
|
|
|
|
7,196
|
|
Capital lease obligations
|
|
|
6,447
|
|
|
|
7,315
|
|
Other long-term liabilities
|
|
|
4,199
|
|
|
|
5,077
|
|
Total liabilities
|
|
|
681,362
|
|
|
|
680,297
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Common stockholders’ equity:
|
|
|
|
|
|
|
|
|
Common stock, $.0001 par value: 250,000 shares authorized; 57,301 shares issued and 56,691 shares outstanding as of both December 31, 2016, and March 31, 2016
|
|
|
6
|
|
|
|
6
|
|
Additional paid-in capital
|
|
|
134,693
|
|
|
|
134,693
|
|
Accumulated deficit
|
|
|
(7,065
|
)
|
|
|
(14,810
|
)
|
Accumulated other comprehensive income
|
|
|
2,427
|
|
|
|
13,352
|
|
Total common stockholders’ equity
|
|
|
130,061
|
|
|
|
133,241
|
|
Noncontrolling interest
|
|
|
4,511
|
|
|
|
3,559
|
|
Total equity
|
|
|
134,572
|
|
|
|
136,800
|
|
TOTAL LIABILITIES AND EQUITY
|
|
$
|
815,934
|
|
|
$
|
817,097
|
|
The accompanying notes are an integral part
of the consolidated financial statements.
SYNUTRA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except
per share data)
(UNAUDITED)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net sales
|
|
$
|
109,053
|
|
|
$
|
109,256
|
|
|
$
|
269,622
|
|
|
$
|
278,933
|
|
-including sales to related parties
|
|
|
4,406
|
|
|
|
3,593
|
|
|
|
11,495
|
|
|
|
8,946
|
|
Cost of sales
|
|
|
66,578
|
|
|
|
53,891
|
|
|
|
155,830
|
|
|
|
141,031
|
|
Gross profit
|
|
|
42,475
|
|
|
|
55,365
|
|
|
|
113,792
|
|
|
|
137,902
|
|
Selling and distribution expenses
|
|
|
15,898
|
|
|
|
14,001
|
|
|
|
40,591
|
|
|
|
40,569
|
|
Advertising and promotion expenses
|
|
|
12,156
|
|
|
|
12,835
|
|
|
|
29,223
|
|
|
|
30,921
|
|
General and administrative expenses
|
|
|
7,678
|
|
|
|
8,000
|
|
|
|
22,622
|
|
|
|
20,701
|
|
Loss on a supply contract
|
|
|
0
|
|
|
|
0
|
|
|
|
2,833
|
|
|
|
0
|
|
Government subsidies
|
|
|
146
|
|
|
|
105
|
|
|
|
403
|
|
|
|
307
|
|
Income from operations
|
|
|
6,889
|
|
|
|
20,634
|
|
|
|
18,926
|
|
|
|
46,018
|
|
Interest expense
|
|
|
3,580
|
|
|
|
4,117
|
|
|
|
10,471
|
|
|
|
12,495
|
|
Interest income
|
|
|
1,814
|
|
|
|
2,179
|
|
|
|
5,615
|
|
|
|
6,713
|
|
Foreign currency exchange gain (loss), net
|
|
|
2,477
|
|
|
|
(2,423
|
)
|
|
|
(1,851
|
)
|
|
|
(10,975
|
)
|
Other expense, net
|
|
|
104
|
|
|
|
179
|
|
|
|
291
|
|
|
|
599
|
|
Income before income tax expense
|
|
|
7,496
|
|
|
|
16,094
|
|
|
|
11,928
|
|
|
|
28,662
|
|
Income tax expense
|
|
|
2,359
|
|
|
|
3,823
|
|
|
|
4,142
|
|
|
|
7,754
|
|
Net income
|
|
|
5,137
|
|
|
|
12,271
|
|
|
|
7,786
|
|
|
|
20,908
|
|
Net income attributable to the noncontrolling interest
|
|
|
192
|
|
|
|
233
|
|
|
|
41
|
|
|
|
768
|
|
Net income attributable to common stockholders
|
|
$
|
4,945
|
|
|
$
|
12,038
|
|
|
$
|
7,745
|
|
|
$
|
20,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding – basic and diluted
|
|
|
56,691
|
|
|
|
57,026
|
|
|
|
56,691
|
|
|
|
57,163
|
|
Earnings per share – basic and diluted
|
|
$
|
0.09
|
|
|
$
|
0.21
|
|
|
$
|
0.14
|
|
|
$
|
0.35
|
|
The accompanying notes are an integral part
of the consolidated financial statements.
SYNUTRA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS)
(Dollars in thousands)
(UNAUDITED)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net income
|
|
$
|
5,137
|
|
|
$
|
12,271
|
|
|
$
|
7,786
|
|
|
$
|
20,908
|
|
Other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
(8,371
|
)
|
|
|
(3,773
|
)
|
|
|
(11,224
|
)
|
|
|
(2,422
|
)
|
Other comprehensive loss
|
|
|
(8,371
|
)
|
|
|
(3,773
|
)
|
|
|
(11,224
|
)
|
|
|
(2,422
|
)
|
Comprehensive (loss) income
|
|
|
(3,234
|
)
|
|
|
8,498
|
|
|
|
(3,438
|
)
|
|
|
18,486
|
|
Less: Comprehensive income (loss) attributable to noncontrolling interest
|
|
|
17
|
|
|
|
416
|
|
|
|
(258
|
)
|
|
|
942
|
|
Comprehensive (loss) income attributable to common stockholders
|
|
$
|
(3,251
|
)
|
|
$
|
8,082
|
|
|
$
|
(3,180
|
)
|
|
$
|
17,544
|
|
The accompanying notes are an integral part
of the consolidated financial statements.
SYNUTRA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(Dollars and shares in thousands)
(UNAUDITED)
|
|
Synutra
International Inc. Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Additional
paid-in
capital
|
|
|
Accumulated
deficit
|
|
|
Accumulated
other
comprehensive
income
|
|
|
Noncontrolling
interest
|
|
|
Total
Equity
|
|
Balance, March 31, 2015
|
|
|
57,301
|
|
|
$
|
6
|
|
|
$
|
135,440
|
|
|
$
|
(35,046
|
)
|
|
$
|
11,526
|
|
|
$
|
2,643
|
|
|
$
|
114,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
20,140
|
|
|
|
0
|
|
|
|
768
|
|
|
|
20,908
|
|
Other comprehensive income, net of tax of nil
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(2,596
|
)
|
|
|
174
|
|
|
|
(2,422
|
)
|
Repurchase of noncontrolling interest
|
|
|
0
|
|
|
|
0
|
|
|
|
1,820
|
|
|
|
0
|
|
|
|
186
|
|
|
|
(3,491
|
|
|
|
(1,485
|
)
|
Contribution from noncontrolling shareholders
|
|
|
0
|
|
|
|
0
|
|
|
|
430
|
|
|
|
0
|
|
|
|
(186
|
)
|
|
|
3,491
|
|
|
|
0
|
|
Shares repurchased
|
|
|
(464
|
)
|
|
|
0
|
|
|
|
(2,371
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(2,371
|
)
|
Balance, December 31, 2015
|
|
|
56,837
|
|
|
$
|
6
|
|
|
$
|
135,319
|
|
|
$
|
(14,906
|
)
|
|
$
|
8,930
|
|
|
$
|
3,585
|
|
|
$
|
132,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2016
|
|
|
56,691
|
|
|
$
|
6
|
|
|
$
|
134,693
|
|
|
$
|
(14,810
|
)
|
|
$
|
13,352
|
|
|
$
|
3,559
|
|
|
$
|
136,800
|
|
Net income
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
7,745
|
|
|
|
0
|
|
|
|
41
|
|
|
|
7,786
|
|
Other comprehensive income, net of tax of nil
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(10,925
|
)
|
|
|
(299
|
)
|
|
|
(11,224
|
)
|
Contribution from noncontrolling shareholders
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,210
|
|
|
|
1,210
|
|
Balance, December 31, 2016
|
|
|
56,691
|
|
|
$
|
6
|
|
|
$
|
134,693
|
|
|
$
|
(7,065
|
)
|
|
$
|
2,427
|
|
|
$
|
4,511
|
|
|
$
|
134,572
|
|
The accompanying notes are an integral part
of the consolidated financial statements.
SYNUTRA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(UNAUDITED)
|
|
Nine
Months Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,786
|
|
|
$
|
20,908
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
7,849
|
|
|
|
7,247
|
|
Bad debt expense (reversal)
|
|
|
(538
|
)
|
|
|
(1,367
|
)
|
Inventory write down
|
|
|
8,029
|
|
|
|
5,491
|
|
Deferred income tax
|
|
|
(849
|
)
|
|
|
(214
|
)
|
Loss on a supply contract
|
|
|
556
|
|
|
|
0
|
|
Other
|
|
|
2
|
|
|
|
61
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
884
|
|
|
|
(8,067
|
)
|
Inventories
|
|
|
(47,214
|
)
|
|
|
(10,069
|
)
|
Due from related parties
|
|
|
3,086
|
|
|
|
958
|
|
Prepaid land use right
|
|
|
0
|
|
|
|
(518
|
)
|
Prepayments and other current assets
|
|
|
(23,427
|
)
|
|
|
(17,232
|
)
|
Other non-current assets
|
|
|
(2,460
|
)
|
|
|
(7
|
)
|
Accounts payable
|
|
|
9,511
|
|
|
|
23,326
|
|
Due to related parties
|
|
|
73
|
|
|
|
117
|
|
Advances from customers
|
|
|
6,645
|
|
|
|
9,127
|
|
Income tax receivable/payable
|
|
|
(850
|
)
|
|
|
(3,894
|
)
|
Other current liabilities
|
|
|
2,896
|
|
|
|
6,028
|
|
Other noncurrent liabilities
|
|
|
(1,181
|
)
|
|
|
373
|
|
Net cash (used in) provided by operating activities
|
|
|
(29,202
|
)
|
|
|
32,268
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of property, plant and equipment
|
|
|
(44,922
|
)
|
|
|
(96,914
|
)
|
Repurchase of non-controlling interest
|
|
|
0
|
|
|
|
(1,486
|
)
|
Acquisition of intangible assets
|
|
|
(371
|
)
|
|
|
0
|
|
Change in restricted cash
|
|
|
(12,663
|
)
|
|
|
(12,127
|
)
|
Proceeds from assets disposal
|
|
|
40
|
|
|
|
16
|
|
Proceeds from disposal of subsidiaries
|
|
|
72
|
|
|
|
5,617
|
|
Changes in long-term loan receivable
|
|
|
0
|
|
|
|
(9,809
|
)
|
Proceed of investment held at trust
|
|
|
3,103
|
|
|
|
0
|
|
Net cash used in investing activities
|
|
|
(54,741
|
)
|
|
|
(114,703
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from short-term debt
|
|
|
160,806
|
|
|
|
110,441
|
|
Repayment of short-term debt
|
|
|
(88,068
|
)
|
|
|
(155,683
|
)
|
Proceeds from long-term debt
|
|
|
63,643
|
|
|
|
211,914
|
|
Repayment of long-term debt
|
|
|
(101,079
|
)
|
|
|
(98,972
|
)
|
Payment on capital lease obligations
|
|
|
(422
|
)
|
|
|
(519
|
)
|
Proceeds from noncontrolling interest
|
|
|
1,219
|
|
|
|
0
|
|
Payment on shares repurchased
|
|
|
0
|
|
|
|
(2,371
|
)
|
Net cash provided by financing activities
|
|
|
36,099
|
|
|
|
64,810
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(3,422
|
)
|
|
|
(2,340
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(51,266
|
)
|
|
|
(19,965
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
102,667
|
|
|
|
85,171
|
|
Cash and cash equivalents, end of period
|
|
$
|
51,401
|
|
|
$
|
65,206
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid, net of capitalized interest of $4.0 million and $3.2 million
|
|
$
|
10,000
|
|
|
$
|
10,677
|
|
Income tax paid
|
|
|
5,839
|
|
|
|
11,858
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment included in accounts payable
|
|
$
|
6,190
|
|
|
$
|
13,202
|
|
Consideration receivable on disposal of subsidiaries
|
|
|
0
|
|
|
|
4,891
|
|
The accompanying notes are an integral part
of the consolidated financial statements.
SYNUTRA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES
|
Synutra International, Inc.
and its subsidiaries (hereinafter collectively referred to as the “Company” or “Synutra”) are principally
engaged in production, distribution and sales of dairy-based nutritional products under the “Shengyuan” or “Synutra”
line of brands in the People’s Republic of China (“China” or “PRC”). The Company focuses on selling
powdered formula products for infants and adults, and also engages in other nutritional product offerings, such as certain nutritional
ingredients and supplements.
The Company is responsible
for the unaudited consolidated financial statements included in this document, which have been prepared in accordance with accounting
principles generally accepted in the United States of America (“US GAAP”) and include all normal and recurring adjustments
that management of the Company considers necessary for a fair presentation of its financial position and operating results. The
Company prepared these statements following the requirements of the U.S. Securities and Exchange Commission (the “SEC”)
for interim reporting. As permitted under those rules, the Company condensed or omitted certain footnotes or other financial information
that are normally required by US GAAP for annual financial statements. These statements should be read in combination with the
consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2016.
The unaudited consolidated
financial statements include the financial statements of Synutra International, Inc. and its subsidiaries, its consolidated variable
interest entity, Beijing Shengyuan Huimin Technology Service Co., Ltd. (the variable interest entity, or "VIE"), in which
the Company has a controlling financial interest. A controlling financial interest is typically determined when a company holds
a majority of the voting equity interest in an entity. US GAAP provides guidance on the identification and financial reporting
for entities over which control is achieved through means other than voting interests, which requires certain VIEs to be consolidated
by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated
financial support from other parties. Through the contractual arrangements between the Company and the VIE, the Company
controls the operating activities and holds all the beneficial interests of the VIE and has been determined to be the primary beneficiary
of the VIE. The Company has concluded that such contractual arrangements are legally enforceable. The operations associated with
the consolidated VIE are insignificant and hold de minimis assets and liabilities.
Net income or loss of a subsidiary
is attributed to the Company and to the noncontrolling interests on the basis of relative ownership interest. Noncontrolling interests
in subsidiaries are presented separately from the Company's equity therein.
All inter-company accounts
and transactions have been eliminated in consolidation.
The operating results for
interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.
The Company’s inventories
as of December 31, 2016 and March 31, 2016 are summarized as follows:
(In thousands)
|
|
December
31,
2016
|
|
|
March
31,
2016
|
|
Raw materials
|
|
$
|
56,975
|
|
|
$
|
41,073
|
|
Work-in-progress
|
|
|
10,137
|
|
|
|
20,609
|
|
Finished goods
|
|
|
62,335
|
|
|
|
36,678
|
|
Total
|
|
$
|
129,447
|
|
|
$
|
98,360
|
|
The Company recorded lower
of cost or market provisions for inventory of $2.6 million and $0.5 million for the three months ended December 31, 2016 and 2015,
respectively, and $8.0 million and $5.5 million for the nine months ended December 31, 2016 and 2015, respectively.
|
4.
|
RELATED PARTIES AND RELATED PARTY TRANSACTIONS
|
|
A.
|
Related party balances
|
|
a.
|
Due from related parties, including current and non-current
portion
|
(In thousands)
|
|
December
31,
2016
|
|
|
March
31,
2016
|
|
Sheng Zhi Da Dairy Group Corporation
|
|
$
|
1,049
|
|
|
$
|
3,349
|
|
St. Angel (Beijing) Business Service Co. Ltd.
|
|
|
0
|
|
|
|
1,334
|
|
Beijing St. Angel Cultural Communication Co., Ltd.
|
|
|
19
|
|
|
|
23
|
|
Beijing AoNaier Feed Stuff Co., Ltd.
|
|
|
12
|
|
|
|
3
|
|
Total
|
|
$
|
1,080
|
|
|
$
|
4,709
|
|
|
b.
|
Due to related parties
|
(In thousands)
|
|
December
31,
2016
|
|
|
March
31,
2016
|
|
Beijing St. Angel Cultural Communication Co., Ltd.
|
|
$
|
77
|
|
|
$
|
132
|
|
Beijing AoNaier Feed Stuff Co., Ltd.
|
|
|
13
|
|
|
|
0
|
|
St. Angel (Beijing ) Business Service Co. Ltd.
|
|
|
115
|
|
|
|
0
|
|
Total
|
|
$
|
205
|
|
|
$
|
132
|
|
The amount due to and due from
related parties were unsecured and interest free.
|
B.
|
Sales to and services for related parties
|
In the three and nine months
ended December 31, 2016, the Company’s sales to related parties mainly included feed grade milk powder sold to Beijing
AoNaier Feed Stuff Co., Ltd. (AoNaier for short) and powdered formula products sold to St. Angel (Beijing) Business Service
Co., Ltd. (St. Angel (Beijing) Business Service for short). Other immaterial transactions with related parties included
renting office spaces to Beijing Honnete Dairy Co., Ltd. (Honnete for short), AoNaier, St. Angel (Beijing) Business
Service and St. Angel Cultural Communication Co., Ltd. In the three and nine months ended December 31, 2015, the Company’s
sales to related parties mainly included feed grade milk powder and whey powder to AoNaier, and powdered formula products to St.
Angel (Beijing) Business Service.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Beijing Honnete Dairy Co., Ltd.
|
|
$
|
189
|
|
|
$
|
2
|
|
|
$
|
193
|
|
|
$
|
6
|
|
St. Angel (Beijing) Business Service Co., Ltd.
|
|
|
4,082
|
|
|
|
3,559
|
|
|
|
11,107
|
|
|
|
8,827
|
|
Qingdao Lvyin Waste Disposal Investment Management Co., Ltd.
|
|
|
(5
|
)
|
|
|
0
|
|
|
|
1
|
|
|
|
2
|
|
Beijing AoNaier Feed Stuff Co., Ltd.
|
|
|
135
|
|
|
|
26
|
|
|
|
179
|
|
|
|
93
|
|
Beijing St. Angel Cultural Communication Co., Ltd.
|
|
|
5
|
|
|
|
6
|
|
|
|
15
|
|
|
|
18
|
|
Total
|
|
$
|
4,406
|
|
|
$
|
3,593
|
|
|
$
|
11,495
|
|
|
$
|
8,946
|
|
|
C.
|
Purchases from related parties
|
In the three and nine months
ended December 31, 2016 and 2015, St. Angel Cultural Communication conducted certain marketing activities for the Company.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Beijing St. Angel Cultural Communication Co. Ltd.
|
|
$
|
110
|
|
|
$
|
118
|
|
|
$
|
338
|
|
|
$
|
347
|
|
|
5.
|
PROPERTY, PLANT AND EQUIPMENT, NET
|
(In thousands)
|
|
December
31,
2016
|
|
|
March
31,
2016
|
|
Property, plant and equipment, cost:
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,777
|
|
|
$
|
1,914
|
|
Capital lease of building
|
|
|
4,864
|
|
|
|
5,469
|
|
Buildings and renovations
|
|
|
161,568
|
|
|
|
79,984
|
|
Plant and machinery
|
|
|
169,499
|
|
|
|
64,584
|
|
Office equipment and furnishings
|
|
|
33,635
|
|
|
|
11,973
|
|
Motor vehicles
|
|
|
2,309
|
|
|
|
2,460
|
|
Others
|
|
|
8,866
|
|
|
|
1,143
|
|
Total cost
|
|
$
|
382,518
|
|
|
$
|
167,527
|
|
Less: Accumulated depreciation:
|
|
|
|
|
|
|
|
|
Capital lease of building
|
|
|
1,109
|
|
|
|
1,111
|
|
Buildings and renovations
|
|
|
21,997
|
|
|
|
20,780
|
|
Plant and machinery
|
|
|
46,610
|
|
|
|
45,879
|
|
Office equipment and furnishings
|
|
|
9,610
|
|
|
|
9,672
|
|
Motor vehicles
|
|
|
1,897
|
|
|
|
1,920
|
|
Others
|
|
|
891
|
|
|
|
857
|
|
Total accumulated depreciation
|
|
|
82,114
|
|
|
|
80,219
|
|
Construction in progress
|
|
|
2,534
|
|
|
|
206,877
|
|
Property, plant and equipment, net
|
|
$
|
302,938
|
|
|
$
|
294,185
|
|
Land represents a parcel of
land acquired for the Company’s French subsidiary.
Construction in progress
mainly represents construction and equipment purchased for the French subsidiary as of March 31, 2016. As of December 31, 2016,
the French plant had substantially completed the construction for the intended use.
The Company recorded depreciation
expense for owned assets and capital leased assets of $2.6million and $2.4 million for the three months ended December 31,
2016 and 2015, respectively, and $7.7 million and $7.2 million for the nine months ended December 31, 2016 and 2015, respectively.
|
6.
|
LONG-TERM LOAN RECEIVABLE
|
In May 2015, the Company
granted a four-year long-term loan of RMB 60.0 million (equivalent to $8.6 million) with interest rate of 7% to Qingdao Jisheng
Iron Printing and Tin Making Co.,LTD. (“Qingdao Jisheng”), a supplier for the iron sheet used for its formula products.
Qingdao Jisheng shall use the loan to expand its own upstream manufacturing capacity. RMB10.0 million, RMB20.0 million and RMB30.0
million shall be repaid by Qingdao Jisheng in May 2017, 2018 and 2019, respectively. The outstanding principal loan amount of $1.4
million and $7.2 million are separately recorded as prepayments and other current assets, and long-term loan receivable on the
consolidated balance sheet, which is close to its fair value. On the other hand, in fiscal 2016 the Company received RMB27.0 million
in cash equivalent from Qingdao Jisheng as a performance guaranty to be the exclusive iron sheet supplier to its Carhaix facility.
See Note 9 for details. The Company evaluated the credit risk associated with the loan and estimated the cash flow expected to
be collected over the life of the loan. A valuation allowance will be established if the loan is deemed unable to be collected.
No valuation allowance has been recorded as of December 31, 2016.
|
7.
|
INVESTMENT HELD AT TRUST
|
In October and November
2015, the Company launched two marketing initiatives whereby customers can purchase online cash coupons through the BaiduPay platform
(the “Platform”). The cash coupons can be redeemed by the customer within one year from the date of purchase for the
Company’s products posted on the Platform. The customers have the right to request the Company to redeem their unused coupons
at the end of the one-year period for the original purchase amount plus an annual rate of 8.0%. According to the agreement between
the Company and the Platform, the cash received from the customers from the purchases of cash coupons (the “Fund”)
is required to be deposited in a specific trust managed by a third party financial institution (the “Trust Company”)
to protect the customers’ interest and only the portion of the Fund related to the cash coupon redeemed for the Company’s
products can be utilized by the Company at its discretion. The Fund relating to the unused coupons is restricted for use by the
Company and can only be invested in principal protected investment products agreed by the Company and the Trust Company.
As agreed by both parties,
the Fund was invested to purchase a trust product consisting of fixed income debt securities with interest rate of 7% and maturity
term less than one year. The Company classified the investment as held-to-maturity securities and carried it at amortized cost.
As of December
31, 2016, the Company received RMB21.1 million (equivalent to $3.1 million) from the Trust Company and completed the BaiduPay
marketing activities and the related Trust asset generation and cash collection.
The Company’s debts
consisted of the following:
(In thousands)
|
|
December
31,
2016
|
|
|
March
31,
2016
|
|
Short-term debt
|
|
$
|
163,379
|
|
|
$
|
95,175
|
|
Long-term debt due within one year
|
|
|
76,209
|
|
|
|
95,504
|
|
Total debt, current
|
|
|
239,588
|
|
|
|
190,679
|
|
Long-term debt, non-current portion
|
|
|
271,872
|
|
|
|
315,512
|
|
Total
|
|
$
|
511,460
|
|
|
$
|
506,191
|
|
Long-term debt
The long-term debts, including
current portion, as of December 31, 2016 and March 31, 2016 are comprised of:
(In thousands)
|
|
December
31,
2016
|
|
|
March
31,
2016
|
|
Long-term debt borrowed in Mainland China
|
|
$
|
225,229
|
|
|
$
|
262,514
|
|
Long-term debt borrowed in Hong Kong
|
|
|
15,520
|
|
|
|
47,061
|
|
Long-term debt borrowed in France
|
|
|
107,332
|
|
|
|
101,441
|
|
Total
|
|
$
|
348,081
|
|
|
$
|
411,016
|
|
As of December 31, 2016, the
long-term debts borrowed in China was secured by restricted cash deposit of $57.7 million. These debts used floating interest rates,
which are calculated based on the benchmark lending interest rate published by the People’s Bank of China, or LIBOR . The
maturity dates range from June 2017 to June 2019.
As of December 31, 2016, long-term
debt borrowed in Hong Kong was secured by restricted cash deposits of $7.9 million. These debts used floating interest rates, which
are calculated based on LIBOR. The maturity date of the used facilities was March 2017.
As of December 31,
2016, long-term debts borrowed in France was secured by restricted cash deposits of $46.8million and all the long-lived assets
of the French Project (defined in Note 10). These debts have floating interest rates ranging from LIBOR+2% to LIBOR+4.3%. The
maturity dates of the borrowed debts range from February 2018 to September 2022.
As of December 31, 2016,
short-term debts were secured by restricted cash deposits of $67.9 million. The rest restricted cash, including short-term and
long-term, was $24.3 million, which was the deposit for letters of credit and bank acceptance bills, and deposit not yet due for
repaid loan.
The weighted average interest
rate as of December 31, 2016 and March 31, 2016 for the long-term debts was 3.6% and 3.7%, respectively.
As of December 31, 2016, borrowings
both in short-term and long-term, including current portion, denominated in RMB, USD and EUR were $184.6 million, $27.5 million
and $299.4 million, respectively.
Maturities on long-term debt,
including current and non-current portion are as follows:
(In thousands)
|
|
Twelve
Months
Ended
|
|
December 31, 2017
|
|
$
|
76,209
|
|
December 31, 2018
|
|
|
177,378
|
|
December 31, 2019
|
|
|
38,669
|
|
December 31, 2022
|
|
|
55,825
|
|
Total
|
|
$
|
348,081
|
|
The total amount of interest
cost incurred was $4.9 million and $5.4 million, and the amount thereof that has been capitalized was $1.3 million and $1.3 million,
for the three months ended December 31, 2016 and 2015, respectively. The total amount of interest cost incurred was $14.4 million
and $15.7 million, and the amount thereof that has been capitalized was $4.0 million and $3.2 million for the nine months ended
December 31, 2016 and 2015, respectively.
|
9.
|
OTHER CURRENT LIABILITIES
|
(In thousands)
|
|
December
31,
2016
|
|
|
March
31,
2016
|
|
Accrued discount, rebate and slotting fee
|
|
$
|
25,321
|
|
|
$
|
25,932
|
|
Payroll and bonus payables
|
|
|
8,425
|
|
|
|
12,111
|
|
Accrued selling expenses
|
|
|
4,243
|
|
|
|
2,975
|
|
Accrued advertising and promotion expenses
|
|
|
2,524
|
|
|
|
2,812
|
|
Others
|
|
|
8,292
|
|
|
|
5,787
|
|
Total
|
|
$
|
48,805
|
|
|
$
|
49,617
|
|
In May 2015, Qingdao Jisheng
agreed to pay RMB 27.0 million (equivalent to $3.9 million) to the Company as performance guaranty to secure the exclusive iron
sheet supplier status for the Company's French Project for ten years starting from its commercial operation. Under the agreement,
the Company is required to fulfill a contractual amount of minimum purchase volume at fair market value each year for a period
of ten years. If the Company fulfills the contractual minimum purchase volume, it can keep the entire performance guaranty amount.
If the Company failed to meet this minimum annual purchase volume, the Company is obligated to compensate Qingdao Jisheng at RMB
0.1 per tin for the shortfall. By March 31, 2016, the Company had received RMB27.0 million (equivalent to $3.9 million) from Qingdao
Jisheng. As the Company’s French Project had not begun purchasing iron sheet as of December 31, 2016, $0.4 million
and $3.5 million were recorded in "other current liabilities" and "other noncurrent liabilities" as of
December 31, 2016, respectively. The amount will be recognized based on actual order as a reduction to cost.
|
10.
|
LOSS ON A SUPPLY CONTRACT
|
In September 2012, the Company
entered into a 10-year milk supply agreement with Sodiaal Union (“Sodiaal”), a French agricultural cooperative company,
for its French Project. In accordance with the terms of this supply agreement, the Company is committed to purchasing a fixed volume
of raw milk from Sodiaal on a monthly basis. If there is a shortfall between the Company’s actual purchases and the contractual
amount, the Company would have to pay a cash compensation to Sodiaal, which is determined as the difference between the milk purchase
prices to be paid by Sodiaal to the milk farmers and the spot market price for the shortfall quantity. Under these agreements,
the Company undertakes to build a new drying facility in Carhaix, France (the “French Project”) for the manufacture
of powdered milk and fat-enriched, or high oil, demineralized whey. The Company is committed to purchasing, and Sodiaal and Euroserum
are committed to selling, 288 million liters of milk per year for ten years, an amount of whey equivalent to 24,000 tons of 70%
demineralized pre-concentrated dry whey extract per year for ten years, and 6,000 tons of 70% demineralized whey powder per year,
or an equivalent quantity of liquid whey, for ten years, at market based prices at the time of purchase, to satisfy the production
needs of the new drying facility. If the Company purchased less than the agreed amount, the Company would compensate Sodiaal or
Euroserum, as the case may be, for the loss suffered. The Company initially agreed to begin purchasing raw milk from Sodiaal in
January 2016; however, the purchase plan has been delayed as the milk tower did not commence trial operation until June 2016.
As required by the contract,
the Company paid Sodiaal and third-party processors to process the raw milk into powder or other dairy products to fulfill its
purchase obligations under the contract. Given that such payment was a result of its commitment to purchase rather than an expense
required to test run the facility itself, rather than including this loss in its total project investment, the Company recorded
a $8.8 million and $2.8 million loss related to this contract during the three months ended March 31, 2016 and June 30, 2016,
respectively. Since June 2016, the Company gradually increased the volume of raw milk the Company processed in-house, and since
August 2016 when its second tower commenced trial operation, the Company has been able to fulfill all of its purchase commitments. The
second tower is able to process liquid whey protein and liquid milk, and the Company has been using the second tower to process
liquid milk on an as-needed basis to avoid further losses under its milk purchase contract. The Company did not incur additional
contract loss in the three months ended December 31, 2016.
(In thousands)
|
|
December
31,
2016
|
|
|
March
31,
2016
|
|
Common stock, $.0001 par value: 250,000 shares authorized; 57,301 shares issued and 56,691 shares outstanding at both December 31, 2016 and March 31, 2016 (share number in thousands)
|
|
$
|
6
|
|
|
$
|
6
|
|
Additional paid-in capital
|
|
|
134,693
|
|
|
|
134,693
|
|
Accumulated deficit
|
|
|
(7,065
|
)
|
|
|
(14,810
|
)
|
Accumulated other comprehensive income
|
|
|
2,427
|
|
|
|
13,352
|
|
Total common stockholders’ equity
|
|
|
130,061
|
|
|
|
133,241
|
|
Noncontrolling interest
|
|
|
4,511
|
|
|
|
3,559
|
|
Total equity
|
|
$
|
134,572
|
|
|
$
|
136,800
|
|
On September 10, 2015, the
Company’s board of directors approved a share repurchase program authorizing the repurchase of up to an aggregate amount
of $20.0 million of the Company’s common stock from time to time through September 10, 2016. Under the program, shares may
be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under
the Exchange Act. Following the approval, the Company entered into a Rule 10b5-1 trading plan under the Exchange Act permitting
open market repurchases of the Company’s common stock based on certain triggers described in the trading plan. In fiscal
year 2016, the Company repurchased 610,313 shares of common stock in an open trading window or under the Rule 10b5-1 trading plan
at an aggregate cost of $3.0 million, which was paid for through cash on hand. The share repurchase program automatically terminated
due to the Company’s public announcement of receiving a non-binding proposal letter, dated January14, 2016, from Mr. Liang
Zhang, Chairman and CEO of the Company, and an affiliated entity of his, proposing a “going-private” transaction. For
details, please refer to the Company’s Form 8-K filed on January 15, 2016.
The effective tax rate is
based on expected income (loss), statutory tax rates and incentives available in the various jurisdictions in which the Company
operates. For interim financial reporting, the Company estimates the annual tax rate based on projected taxable income for the
full year and records a quarterly income tax provision (benefit) in accordance with the ASC No. 740-270, “Income tax –
Interim reporting”. As the year progresses, the Company refines the estimates of the year’s taxable income as new information
becomes available. This continual estimation process often results in a change to the expected effective tax rate for the year.
When this occurs, the Company adjusts the income tax provision (benefit) during the quarter in which the change in estimate occurs
so that the year-to-date provision reflects the expected annual tax rate.
The Company considers positive
and negative evidence to determine whether some portion or all of the deferred tax assets will more likely than not be realized.
This assessment considers, among other matters, the nature, frequency and severity of recent losses, forecasts of future profitability,
the duration of statutory carryforward periods, the Company's experience with tax attributes expiring unused and tax planning alternatives.
Valuation allowances have been established for deferred tax assets based on a more-likely-than-not threshold. The Company's ability
to realize deferred tax assets depends on its ability to generate sufficient taxable income within the carryforward periods provided
for in the tax law.
For purposes of calculating
basic and diluted earnings per share, the Company used the following weighted average common stocks outstanding:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
(In thousands except for per share data)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net income attributable to common stockholders
|
|
$
|
4,945
|
|
|
$
|
12,038
|
|
|
$
|
7,745
|
|
|
$
|
20,140
|
|
Weighted average common stock outstanding – basic and diluted
|
|
|
56,691
|
|
|
|
57,026
|
|
|
|
56,691
|
|
|
|
57,163
|
|
Earnings per share - basic and diluted
|
|
$
|
0.09
|
|
|
$
|
0.21
|
|
|
$
|
0.14
|
|
|
$
|
0.35
|
|
The Company’s chief
operating decision maker has been identified as the chief executive officer, who reviews consolidated results when making decisions
about allocating resources and assessing performance of the Company. In fiscal year 2014, the Company operated and reported its
performance in four segments. However, starting from fiscal year 2015, the Company has operated the Powdered Formula and Foods
segments as a single business segment based on a shared distribution network and similar marketing strategies. Therefore, there
are only three reportable segments for the three months ended December 31, 2016 and 2015. The three reportable segments are:
Nutritional food
-
Sales of powdered infant and adult formula products, prepared foods and ultra high temperature (“UHT”) liquid milk
products.
Nutritional supplement
-
Sales of nutritional supplement such as chondroitin sulfate to external customers, and microencapsulated Docosahexanoic Acid (“DHA”)
and Arachidonic Acid (“ARA”) to powdered formula segment.
Other business
-
Other business includes non-core businesses such as ancillary sales of excess or unusable ingredients and materials to industrial
customers, providing genetic diagnostic services for newborn babies, and sales of cosmetics to pregnant women.
Segment disclosures are on
a performance basis consistent with internal management reporting. The following tables summarized the Company’s revenue
and cost generated from different revenue streams.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
NET SALES TO EXTERNAL CUSTOMERS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Nutritional food
|
|
$
|
97,974
|
|
|
$
|
96,258
|
|
|
$
|
248,744
|
|
|
$
|
248,249
|
|
- Nutritional supplement
|
|
|
9,432
|
|
|
|
10,569
|
|
|
|
14,963
|
|
|
|
26,684
|
|
- Other business
|
|
|
1,647
|
|
|
|
2,429
|
|
|
|
5,915
|
|
|
|
4,000
|
|
Net sales
|
|
$
|
109,053
|
|
|
$
|
109,256
|
|
|
$
|
269,622
|
|
|
$
|
278,933
|
|
INTERSEGMENT SALES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Nutritional food
|
|
$
|
199
|
|
|
$
|
220
|
|
|
$
|
333
|
|
|
$
|
278
|
|
- Nutritional supplement
|
|
|
3,897
|
|
|
|
3,436
|
|
|
|
10,629
|
|
|
|
9,291
|
|
- Other business
|
|
|
704
|
|
|
|
354
|
|
|
|
1,403
|
|
|
|
491
|
|
Intersegment sales
|
|
$
|
4,800
|
|
|
$
|
4,010
|
|
|
$
|
12,365
|
|
|
$
|
10,060
|
|
GROSS PROFIT (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Nutritional food
|
|
$
|
40,369
|
|
|
$
|
54,860
|
|
|
$
|
112,950
|
|
|
$
|
136,252
|
|
- Nutritional supplement
|
|
|
1,607
|
|
|
|
923
|
|
|
|
2,001
|
|
|
|
2,011
|
|
- Other business
|
|
|
499
|
|
|
|
(418
|
)
|
|
|
(1,159
|
)
|
|
|
(361
|
)
|
Gross profit
|
|
$
|
42,475
|
|
|
$
|
55,365
|
|
|
$
|
113,792
|
|
|
$
|
137,902
|
|
(In
thousands)
|
|
December
31,
2016
|
|
|
March
31,
2016
|
|
TOTAL ASSETS
|
|
|
|
|
|
|
|
|
- Nutritional food
|
|
$
|
771,029
|
|
|
$
|
757,459
|
|
- Nutritional supplement
|
|
|
37,435
|
|
|
|
43,962
|
|
- Other business
|
|
|
6,238
|
|
|
|
20,555
|
|
- Unallocated assets
|
|
|
1,599
|
|
|
|
4,870
|
|
- Intersegment elimination
|
|
|
(367
|
)
|
|
|
(9,749
|
)
|
Total
|
|
$
|
815,934
|
|
|
$
|
817,097
|
|
ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements
Sections of this Quarterly
Report on Form 10-Q (the “Form 10-Q”) including, in particular, the Company’s Management’s Discussion and
Analysis of Financial Condition and Results of Operations contain forward-looking statements. These forward-looking statements
are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to
predict; therefore, actual results may differ materially from those expressed, implied or forecasted in any such forward-looking
statements.
Expressions of future goals
and expectations or similar expressions including, without limitation, “may,” “should,” “could,”
“expects,” “does not currently expect,” “plans,” “anticipates,” “intends,”
“believes,” “estimates,” “predicts,” “potential,” “targets,” or “continue,”
reflecting something other than historical fact are intended to identify forward-looking statements. The factors described
in the Company’s Annual Report on Form 10-K under Part I. Item 1A. Risk Factors and below in Part II. Other Information –
Item 1A. Risk Factors could cause the Company’s actual results to differ materially from those described in the forward-looking
statements. Unless required by law, the Company undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. However, readers should carefully review the reports and
documents the Company files from time to time with the Securities and Exchange Commission (the “SEC”), particularly
its Quarterly Reports on Form 10-Q, Annual Report on Form 10-K , Current Reports on Form 8-K and all amendments to those reports.
Use of Terms
Except where the context otherwise
requires and for purposes of the Form 10-Q only:
|
•
|
“we,” “us,” the “Company,” “our,” and “Synutra”
refer to Synutra International, Inc., and its consolidated subsidiaries;
|
|
•
|
“China” or “PRC” refers to the People’s Republic of China, excluding
Taiwan and the Special Administrative Regions of Hong Kong and Macau;
|
|
•
|
all references to “ton” or “tons” are to “tonne” or “metric
ton;”
|
|
•
|
all references to “Renminbi” or “RMB” are to the legal currency of China;
|
|
•
|
all references to “Euro,” “EUR,” or “€” are to the legal
currency of the European Union; and
|
|
•
|
all references to “U.S. dollars,” “USD,” “dollars,” or “$”
are to the legal currency of the United States.
|
Amounts may not always add
to the totals due to rounding.
Available Information
The Company’s Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections
13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are filed with the SEC. Such
reports and other information filed by the Company with the SEC are available on the Company’s website at http://www.synutra.com
when such reports are available on the SEC website. The public may read and copy any materials filed by the Company with the
SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information
on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that
contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC
at http://www.sec.gov. The contents of these websites are not incorporated into this filing. Further, the Company’s
references to the URLs for these websites are intended to be inactive textual references only.
Overview
We are a leading infant formula
company in China. We principally engage in the production, distribution and sale of dairy-based nutritional products under the
“Shengyuan” or “Synutra” line of brands in the PRC. We focus on selling powdered formula products for infants
and adults, and also engage in other nutritional product offerings, such as prepared foods and certain nutritional ingredients
and supplements. We sell most of our products through an extensive nationwide sales and distribution network covering all provinces
and provincial-level municipalities in China. As of December 31, 2016, this network comprised over 990 independent distributors
and over 270 independent sub-distributors who sell our products in approximately 27,680 retail outlets.
We currently have three reportable
segments:
|
●
|
Nutritional Food: includes the sale of powdered infant and adult formula products, with major brands
including Super, My Angel and Dutch Cow, UHT liquid milk product under the brand of Dutch Cow introduced in fiscal year 2016, and
prepared foods under the brand of Huiliduo;
|
|
●
|
Nutritional Supplement: includes the production and sale of nutritional supplements such as chondroitin
sulfate to third parties, and microencapsulated DHA and ARA to the nutritional food segment for use in powdered formula production;
and
|
|
●
|
Other Business: includes non-core businesses such as ancillary sales of excess or unusable ingredients
and materials to industrial customers, providing genetic diagnostic services for newborn babies, and sales of cosmetics to
pregnant women.
|
Executive Summary
After the successful implementation
of our Gold Mining Strategy, which improved our management of distributors and stores with regard to both inventories and expenses,
as more fully described in the Annual Report on Form 10-K for the fiscal year 2014, we continued to execute the same management
philosophy in fiscal years 2015 and 2016. We continued to focus on the productivity of our stores, promoters and sales staff,
and continued to build our brand through direct communication with consumers via our promoters, rather than through
mass market advertisements or promotional campaigns.
Based on this philosophy, we
launched the Kangaroo program in fiscal year 2015, to enable our in-store promoters to better serve our consumers through our membership
loyalty program. Promoters’ compensation was previously solely based on the commission they received on the sales in the
stores where they worked and only during the hours they worked. Under the Kangaroo program, we are able to reward bonuses to promoters
based on the loyalty points accumulated by their members, regardless of where and when sales occur, which encouraged promoters
to maintain an accurate and updated list of their members in our central database. Using our self- developed sales management mobile
application “Treasure in Hand,” our promoters can manage mobile communications with their members, including calls,
text messages and WeChat messages (the dominant mobile communication application in China) with one app, focusing on the particular
community-based WeChat group communications. The Treasure in Hand app is linked to our WeChat corporate account “Thumb Mama,”
or “Mu Zhi Ma Ma” in Chinese. If a promoter, or a part-time worker, can pass our standard entrance exam on infant nutrition
and health knowledge, they can be admitted into the Thumb Mama program and become a nutritional consultant and host a sub-group
under our corporate WeChat account, and then attract members into their respective sub-groups. In addition to maintaining member
service through the WeChat group communication, such account is also linked to our Thumb Mall e-commerce platform as described
below.
In the beginning of fiscal
year 2016, we launched our WeChat-based e-commerce platform “Thumb Mall,” or “Mu Zhi Shang Cheng” in Chinese.
We have placed our Super brand infant formula products, DutchCow brand adult formula and liquid milk products, and Precious Care
brand pregnancy cosmetic products on the Thumb Mall platform. We plan to expand its offerings to include more of our products.
If our member orders infant formula products from Thumb Mall, she can enjoy special discounts only available to Kangaroo program
members and her nutritional consultant will receive a commission. We intend to encourage the continuous shift from offline stores
to our own online platform, which will enable us to further reduce physical retail outlets and the associated overhead. The online
program also enables us to recruit part-time, online-only nutritional consultants who do not work in any store and only get paid
through commission from online sales, which greatly expands the size of our field sales team without increasing fixed overhead.
By the end of fiscal year 2016, sales through Thumb Mall had reached approximately 15% of total sales of Super brand products,
and we had attracted approximately 10,000 part-time nutritional consultants into our program.
During fiscal 2017,
we continued to develop the Kangaroo program, and saw the number of active members with recent purchases continue to rise, along
with the number of both full-time and part-time nutritional consultants. Our performance in fiscal 2017, however, was negatively
affected by the delayed opening of our French project. As described in more details elsewhere in this Form 10-Q and the Form 10-K
for fiscal 2016, the French project includes spray-drying capacity of 45,000 tons for whole milk powder and 45,000 tons for high
oil whey protein powder. It also includes 90,000 tons of dry-mixing and canning capacity for canned powdered formula products.
We had plans to produce a 100% made-in-France version of our core Super brand infant milk formula products, and introduced this
product to our distributors in China at the end of August 31, 2016. While the made-in-France products have received positive feedback
from our distributors and mom-and-baby store owner clients, the prolonged delay of the French project to generate reliable production
volume has disrupted their order schedule, as our distributors reduced the order volume on made-in-China Super brand and other
products in anticipation of the made-in-France products, which failed to be delivered on schedule. However, given the high level
of interest expressed by the distributors and stores to carry our made-in-France products, we expect the year-over-year sales
to improve once we resolve the delay of the French project to steadily meet the volume demand.
We
commenced trial operations of our French project in June 2016 and began formal operation of the whole milk tower in July
2016. However, as our whole milk powder is intended to be placed into our canned products with certain density requirements,
we spent longer time than expected adjusting the density and other physical or biological properties of the powders. While we
completed the physical adjustments of the tower equipment in September 2016, and held a grand opening ceremony on September
28, 2016 during which we showcased the full cycle production capacity of the two towers and the mixing and canning facility,
we identified certain glitches of the information controlling system of the facility that would force the facility to
automatically turn off with false alarms, as a result of which the facility was unable to generate stable supplies of powder
or infant formula products for the Chinese market by November 2016. In December 2016, there were a few working days
during which we were able to produce infant formula products at the designed hourly capacity, and the production output of
infant formula products from our French project totaled 760 tons in December 2016, and 1,205 tons in the three months ended
December 31, 2016. As we were gradually fixing the auto-turn-off problem, on December 31, 2016, we recognized the entire
project as finished and reclassified the asset from construction in progress to fixed assets. The total budget of the project
was €211.0 million as of December 31, 2016. Despite the interruption in production, with its demonstrated full cycle
operation capacity, the French project has received full production permits or certifications from competent authorities,
including the import accreditation for both dairy and infant milk formula products from the Certification and Accreditation
Administration of China.
Our performance in
the three months ended December 31, 2016 was also negatively affected by the regulatory uncertainty with regards to production
license from China Food and Drug Administration (“CFDA”). In June 2016, CFDA released the final version of guidance
for the production license for the general infant formula products, which stipulates that effective January 1, 2018, the number
of formulas/brands that each factory is allowed to manufacture is limited to three brands, but it has not released any detailed
implementation rules to date. There is considerable uncertainty as to the transition from the current over 2,000 brands in the
Chinese market to an estimated 500 brands with approximately 170 factories licensed or accredited to supply infant formula products
to the Chinese market. In addition to the adverse effect on the market demand for our My Angel products and certain private label
products, during the three months ended December 31, 2016, we experienced negative competitive pressure to our other major domestic
brands such as Super. In response to the new regulation, retail outlets have increased their order volumes from major domestic
brands, but in return they demanded higher discounts to compensate for the loss of higher spreads that they used to obtain from
smaller brands. During the three months ended December 31, 2016, the demand for higher discounts appeared to be consistent across
our distributors and outlets, which led us to believe that this will be a more permanent market condition. Nevertheless, we expect
our average sales price and profitability to partially recover once we are able to steadily import infant formula products from
our French project, as made-in-E.U. products in general enjoy higher prices in the Chinese market. While the infant formula production
capacity of our French project is fully stabilized, we expect that the majority of our infant formula product sales will be from
made-in-France products and that we may gain market share with the made-in-France products as the smaller brands continue to exit
from the market.
A third major factor
that negatively affected our performance during the three months ended December 31, 2016 was the losses we incurred to launch
the Dutch Cow UHT liquid milk products. While the Dutch Cow brand is a leading adult formula brand in China, it takes time for
consumers to accept liquid milk products under the same brand. Our sales team, which was trained in the high margin, high brand-loyalty,
targeted-marketing formula market, also needs to adapt to the low margin, highly competitive, mass-marketing liquid milk market.
As a result, we have experienced slower-than-expected inventory turnover and also have given away substantial amount of free samples
and incurred higher-than-expected expenses on promotional activities, resulting in a decrease in gross margin under this product
in the three months ended December 31, 2016. While we have seen a significant increase in sales volume in the last three months
for the Dutch Cow liquid milk products, in particular driven by e-commerce generated volumes from promotional events organized
by e-commerce platforms in November 2016, we still expect to face inventory pressure for this product
in the near team. We believe, however, in the long run, our investment to expand the awareness and client base for the Dutch Cow
products will build up significant equity in this brand.
On January 14, 2016,
our board of directors received a preliminary non-binding proposal letter from Mr. Liang Zhang, our chairman and chief executive
officer, and an affiliated entity of his, which together with Mr. Zhang comprised the buyer group at the time, to acquire all
of our outstanding common stock not already owned by the buyer group in a going-private transaction for $5.91 in cash per share.
On January 21, 2016, our board of directors formed a special committee, consisting solely of independent directors, to consider
the proposed going-private transaction and to negotiate with the buyer group, while considering other strategic options available
to us. On January 30, 2016, the special committee received a letter from the buyer group led by Mr. Zhang, stating, among other
things, that such buyer group would not proceed with the proposed going-private transactions unless approved by the special committee.
Our share repurchase program approved on September 10, 2015 had automatically terminated due to our public announcement of receiving
such non-binding proposal letter. On November 17, 2016, we entered into an agreement and plan of merger in connection with the
proposed going-private transaction. For details, please refer to the Company’s Form 8-K filed on November 17, 2016. There
can be no assurance that the merger agreement or the transactions contemplated thereunder or any alternative transactions will
be approved by our stockholders or consummated.
Three Months Results of Operations
Below is a summary of selected
comparative results of operations for the three months ended December 31, 2016 and 2015:
|
|
Three
Months
Ended December 31,
|
|
|
|
|
(In thousands,
except per share data)
|
|
2016
|
|
|
2015
|
|
|
%
Change
|
|
Net sales
|
|
$
|
109,053
|
|
|
$
|
109,256
|
|
|
|
-0.2
|
%
|
- Nutritional food segment
|
|
|
97,974
|
|
|
|
96,258
|
|
|
|
2
|
%
|
Cost of sales
|
|
|
66,578
|
|
|
|
53,891
|
|
|
|
24
|
%
|
- Nutritional food segment
|
|
|
57,605
|
|
|
|
41,398
|
|
|
|
39
|
%
|
Gross profit
|
|
|
42,475
|
|
|
|
55,365
|
|
|
|
-23
|
%
|
- Nutritional food segment
|
|
|
40,369
|
|
|
|
54,860
|
|
|
|
-26
|
%
|
Gross Margin
|
|
|
39
|
%
|
|
|
51
|
%
|
|
|
-23
|
%
|
- Nutritional food segment
|
|
|
41
|
%
|
|
|
57
|
%
|
|
|
-28
|
%
|
Income from operations
|
|
|
6,889
|
|
|
|
20,634
|
|
|
|
-67
|
%
|
Interest expense, net
|
|
|
1,766
|
|
|
|
1,938
|
|
|
|
-9
|
%
|
Foreign currency exchange gain (loss), net
|
|
|
2,477
|
|
|
|
(2,423
|
)
|
|
|
202
|
%
|
Income before income tax expense
|
|
|
7,496
|
|
|
|
16,094
|
|
|
|
-53
|
%
|
Income tax expense
|
|
|
2,359
|
|
|
|
3,823
|
|
|
|
-38
|
%
|
Net income
|
|
|
5,137
|
|
|
|
12,271
|
|
|
|
-58
|
%
|
Net income attributable to common stockholders
|
|
$
|
4,945
|
|
|
$
|
12,038
|
|
|
|
-59
|
%
|
Weighted average common stock outstanding – basic and diluted
|
|
|
56,691
|
|
|
|
57,026
|
|
|
|
-1
|
%
|
Earnings per share – basic and diluted
|
|
$
|
0.09
|
|
|
$
|
0.21
|
|
|
|
-67
|
%
|
Net Sales
Our net sales by reportable
segments are shown in the table below:
|
|
Three
Months
Ended December 31,
|
|
|
|
|
|
%
Change in
|
|
(In thousands,
except percentage data)
|
|
2016
|
|
|
2015
|
|
|
%
Change
|
|
|
Volume
|
|
|
Price
|
|
Nutritional food
|
|
$
|
97,974
|
|
|
$
|
96,258
|
|
|
|
2
|
%
|
|
|
9
|
%
|
|
|
-19
|
%
|
Nutritional supplement
|
|
|
9,432
|
|
|
|
10,569
|
|
|
|
-11
|
%
|
|
|
|
|
|
|
|
|
Other business
|
|
|
1,647
|
|
|
|
2,429
|
|
|
|
-32
|
%
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
109,053
|
|
|
$
|
109,256
|
|
|
|
-0.2
|
%
|
|
|
|
|
|
|
|
|
Net sales of our nutritional
food segment include powdered formula products for infants, children and adults, prepared food for infants and children, and liquid
milk. The minor increase in net sales of our nutritional food segment was mainly due to the combined effects of the following factors:
|
●
|
The
net sales of liquid milk increased to $12.7 million in the three months ended December 31, 2016 from nil in the three months
ended December 31, 2015.
|
|
●
|
The sales volume of powdered formula products for the three months ended December 31, 2016 was 8,358
tons, as compared to 7,647 tons for the same period in the previous year.
|
|
●
|
The
average selling price of powdered formula products for the three months ended December 31, 2016 was $10,204 per ton, compared
to $12,588 per ton for the same period in the previous year. Average selling price is calculated as net sales, after deducting
sales discounts and rebates, divided by sales volume. The decrease in average selling price was mainly due to higher discounts
to distributors and retail outlets and an unfavorable change in RMB to USD exchange rates.
|
The sales volume and average
selling price exclude the amount of free products provided to customers, which is recorded as cost of sales in the corresponding
period.
Our nutritional supplement
segment mainly consists of external sales of chondroitin sulfate materials to international pharmaceutical companies. The decrease
was primarily due to minor fluctuations in orders from major customers of this segment.
Other business mainly includes
ancillary sales of excess or unusable ingredients and materials to industrial customers, such as whole milk powder and whey powder.
Sales under this segment fluctuate from quarter to quarter.
Cost of Sales
Our cost of sales by reportable
segments is shown in the table below:
|
|
Three
Months
Ended December 31,
|
|
|
|
|
(In thousands,
except percentage data)
|
|
2016
|
|
|
2015
|
|
|
%
Change
|
|
Nutritional food
|
|
$
|
57,605
|
|
|
$
|
41,398
|
|
|
|
39
|
%
|
Nutritional supplement
|
|
|
7,825
|
|
|
|
9,646
|
|
|
|
-19
|
%
|
Other business
|
|
|
1,148
|
|
|
|
2,847
|
|
|
|
-60
|
%
|
Cost of sales
|
|
$
|
66,578
|
|
|
$
|
53,891
|
|
|
|
24
|
%
|
Cost of sales primarily
include raw materials, labor, and allocated overhead. The increase in the cost of sales of the nutritional food segment was
mainly due to the higher shipment volume and increased unit purchase cost of raw powder materials. Cost for the UHT products,
which was launched in January 2016, also contributed the increase of the cost of sales.
The decrease in the cost of
sales of the nutritional supplement segment was mainly due to the decreased sales volume of chondroitin sulfate.
Gross Profit and Gross Margin
|
|
Three
Months
Ended December 31,
|
|
|
|
|
(In thousands,
except percentage data)
|
|
2016
|
|
|
2015
|
|
|
%
Change
|
|
Nutritional food
|
|
$
|
40,369
|
|
|
$
|
54,860
|
|
|
|
-26
|
%
|
Nutritional supplement
|
|
|
1,607
|
|
|
|
923
|
|
|
|
74
|
%
|
Other business
|
|
|
499
|
|
|
|
(418
|
)
|
|
|
*
|
|
Gross profit
|
|
$
|
42,475
|
|
|
$
|
55,365
|
|
|
|
-23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nutritional food
|
|
|
41
|
%
|
|
|
57
|
%
|
|
|
|
|
Nutritional supplement
|
|
|
17
|
%
|
|
|
9
|
%
|
|
|
|
|
Other business
|
|
|
30
|
%
|
|
|
-17
|
%
|
|
|
|
|
Gross margin
|
|
|
39
|
%
|
|
|
51
|
%
|
|
|
|
|
* Not meaningful
The decrease in the
gross profit of nutritional food segment was mainly due to the decreased average selling price of powdered formula products. In
order to stimulate the sales volume, we offered higher discounts to distributors and retail outlets, which lowered the average
selling price of formula products. The decrease in the gross margin of nutritional food segment was mainly due to the decreased
average selling price of powdered formula products, the increased unit purchase cost of raw powder materials, and the increased
sales of Dutch Cow UHT liquid milk with lower margin, which was launched in January 2016. In addition, sales in this segment are
generally denominated in RMB while costs in this segment follow global pricing in USD, and therefore, the depreciation of RMB
to USD also had an adverse effect on the profitability of this segment.
The increase in the
gross profit and the gross margin of the nutritional supplement segment was mainly due to the renegotiation of average selling
price with major customers in 2016 and positive foreign exchange translation effect as the sales in this segment are generally
denominated in USD while costs are mainly incurred in RMB.
Expenses
|
|
Three
Months
Ended December 31,
|
|
|
|
|
(In thousands,
except percentage data)
|
|
2016
|
|
|
2015
|
|
|
%
Change
|
|
Selling and distribution expenses
|
|
$
|
15,898
|
|
|
$
|
14,001
|
|
|
|
14
|
%
|
Advertising and promotion expenses
|
|
|
12,156
|
|
|
|
12,835
|
|
|
|
-5
|
%
|
- Advertising expenses
|
|
|
3,043
|
|
|
|
3,238
|
|
|
|
-6
|
%
|
- Promotion expenses
|
|
|
9,113
|
|
|
|
9,597
|
|
|
|
-5
|
%
|
General and administrative expenses
|
|
|
7,678
|
|
|
|
8,000
|
|
|
|
-4
|
%
|
Government subsidies
|
|
|
146
|
|
|
|
105
|
|
|
|
39
|
%
|
Selling
and distribution expenses primarily include compensation expense for sales staff, freight charges and travel expenses. The increase
in selling and distribution expenses was mainly due to the additional expenses incurred as we invited our staff
and
certain distributors to visit our French facility.
Advertising expenses primarily
include media expenses paid to e-commerce providers. Promotion expenses primarily include promotional products provided to end
customers and service charges for our consumer loyalty program administered by a third party. Advertising and promotion expenses
decreased slightly in the three months ended December 31, 2016.
General and administrative
expenses primarily include salaries for staff and management, depreciation, office rental, office supplies and legal and
consulting fees. General and administrative expenses decreased slightly in the three months ended December 31, 2016.
Government subsidies represent
the receipt of general purpose subsidies from local governments.
Interest Expense and Interest Income
|
|
Three
Months
Ended December 31,
|
|
|
|
|
(In thousands,
except percentage data)
|
|
2016
|
|
|
2015
|
|
|
%
Change
|
|
Interest expense
|
|
$
|
3,580
|
|
|
$
|
4,117
|
|
|
|
-13
|
%
|
Interest income
|
|
|
1,814
|
|
|
|
2,179
|
|
|
|
-17
|
%
|
The decrease in interest expense
was mainly due to decreased average interest rate as we borrow more EUR-denominated loans for the French project which charged
lower interest rates, partially offset by increased loan balances. $1.3 million of interest expenses was capitalized for the French
project in the three months ended December 31, 2016. In addition, interest rates on our RMB-denominated loans have decreased since
mid-2015.
Interest income on restricted
cash balance, which is mostly RMB, also declined compared to that of the corresponding period of the previous year.
Foreign Currency Exchange Gain (Loss), Net
Our sales and
receivables are mostly denominated in RMB, while a substantial part of our raw material purchase and over half of our loans
are denominated in EUR. In light of the changes in foreign exchange rates, since fiscal year 2017, we have gradually replaced
our USD-denominated loans by EUR-denominated loans as we completed the construction of the French facility and began test
operation at such facility in fiscal year 2017. As of December 31, 2016, 59% of our total loan balance was denominated in EUR
and 5% in USD, compared to 31% of total loans in EUR and 23% in USD as of March 31, 2016. As such, we recorded a foreign
currency exchange gain of $2.5 million for the three months ended December 31, 2016 compared with a loss of $2.4 million for
the three months ended December 31, 2015, as RMB has begun to appreciate against EUR since March 2016 while it has
depreciated against USD significantly since August 2015.
Net Income Attributable to Common Stockholders
As a result of the foregoing,
net income attributable to common stockholders for the three months ended December 31, 2016 was $4.9 million, compared to $12.0
million for the same period in the previous year.
Nine Months Results of Operations
Below is a summary of selected
comparative results of operations for the nine months ended December 31, 2016 and 2015:
|
|
Nine
Months Ended
December 31,
|
|
|
|
|
(In thousands,
except per share data)
|
|
2016
|
|
|
2015
|
|
|
%
Change
|
|
Net sales
|
|
$
|
269,622
|
|
|
$
|
278,933
|
|
|
|
-3
|
%
|
- Nutritional food segment
|
|
|
248,744
|
|
|
|
248,249
|
|
|
|
0.2
|
%
|
Cost of sales
|
|
|
155,830
|
|
|
|
141,031
|
|
|
|
10
|
%
|
- Nutritional food segment
|
|
|
135,794
|
|
|
|
111,997
|
|
|
|
21
|
%
|
Gross profit
|
|
|
113,792
|
|
|
|
137,902
|
|
|
|
-17
|
%
|
- Nutritional food segment
|
|
|
112,950
|
|
|
|
136,252
|
|
|
|
-17
|
%
|
Gross Margin
|
|
|
42
|
%
|
|
|
49
|
%
|
|
|
-15
|
%
|
- Nutritional food segment
|
|
|
45
|
%
|
|
|
55
|
%
|
|
|
-17
|
%
|
Income from operations
|
|
|
18,926
|
|
|
|
46,018
|
|
|
|
-59
|
%
|
Interest expense, net
|
|
|
4,856
|
|
|
|
5,782
|
|
|
|
-16
|
%
|
Foreign currency exchange loss, net
|
|
|
(1,851
|
)
|
|
|
(10,975
|
)
|
|
|
83
|
%
|
Income before income tax expense
|
|
|
11,928
|
|
|
|
28,662
|
|
|
|
-61
|
%
|
Income tax expense
|
|
|
4,142
|
|
|
|
7,754
|
|
|
|
-47
|
%
|
Net income
|
|
|
7,786
|
|
|
|
20,908
|
|
|
|
-66
|
%
|
Net income attributable to common stockholders
|
|
$
|
7,745
|
|
|
$
|
20,140
|
|
|
|
-65
|
%
|
Weighted average common stock outstanding – basic and diluted
|
|
|
56,691
|
|
|
|
57,163
|
|
|
|
-0.8
|
%
|
Earnings per share – basic and diluted
|
|
$
|
0.14
|
|
|
$
|
0.35
|
|
|
|
-65
|
%
|
Net Sales
Our net sales by reportable
segments are shown in the table below:
|
|
Nine
Months Ended
December 31,
|
|
|
|
|
|
%
Change in
|
|
(In thousands,
except percentage data)
|
|
2016
|
|
|
2015
|
|
|
%
Change
|
|
|
Volume
|
|
|
Price
|
|
Nutritional food
|
|
$
|
248,744
|
|
|
$
|
248,249
|
|
|
|
0.2
|
%
|
|
|
3
|
%
|
|
|
-3
|
%
|
Nutritional supplement
|
|
|
14,963
|
|
|
|
26,684
|
|
|
|
-44
|
%
|
|
|
|
|
|
|
|
|
Other business
|
|
|
5,915
|
|
|
|
4,000
|
|
|
|
48
|
%
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
269,622
|
|
|
$
|
278,933
|
|
|
|
-3
|
%
|
|
|
|
|
|
|
|
|
Net sales of our nutritional
food segment include powdered formula products for infants, children and adults, prepared food for infants and children, and liquid
milk. The minor increase in net sales of our nutritional food segment was mainly due to the increase in the combined effects of
the following factors:
|
●
|
The
net sales of liquid milk increased to $19.0 million in the nine months ended December 31, 2016 from nil in the nine months
ended December 31, 2015.
|
|
●
|
The sales volume of powdered formula products for the nine months ended December 31, 2016 was 20,058
tons, as compared to 19,383 tons for the same period in the previous year.
|
|
●
|
The
average selling price of powdered formula products under nutritional food segment for the nine months ended December 31, 2016
was $
12,401 per ton, compared to $12,808
per ton for the same period in the previous year. Average selling price is calculated as net sales, after deducting sales
discounts and rebates, divided by sales volume. The decrease in average selling price was mainly due to higher discounts to
distributors and retail outlets and an unfavorable change in RMB to USD exchange rates.
|
The sales volume and average
selling price exclude the amount of free products provided to customers, which is recorded as cost of sales in the corresponding
period.
Our nutritional supplement
segment mainly consists of external sales of chondroitin sulfate materials to international pharmaceutical companies. The decrease
was primarily due to minor fluctuations in orders from major customers of this segment.
Other
business mainly includes ancillary sales of excess or unusable ingredients and materials to industrial customers, such as whole
milk powder and whey powder.
Sales under this
segment fluctuate from quarter to quarter.
Cost of Sales
Our cost of sales by reportable
segments is shown in the table below:
|
|
Nine
Months
Ended December 31,
|
|
|
|
|
(In thousands,
except percentage data)
|
|
2016
|
|
|
2015
|
|
|
%
Change
|
|
Nutritional food
|
|
$
|
135,794
|
|
|
$
|
111,997
|
|
|
|
21
|
%
|
Nutritional supplement
|
|
|
12,962
|
|
|
|
24,673
|
|
|
|
-47
|
%
|
Other business
|
|
|
7,074
|
|
|
|
4,361
|
|
|
|
62
|
%
|
Cost of sales
|
|
$
|
155,830
|
|
|
$
|
141,031
|
|
|
|
10
|
%
|
Cost of sales primarily
include raw materials, labor, and allocated overhead. The increase in the cost of sales of the nutritional food segment was
mainly due to the higher sales volume and increased unit purchase cost of raw powder and whey powder. Cost for the UHT products,
which was launched in January 2016, also contributed the increase of the cost of sales.
The decrease in the cost of
sales of the nutritional supplement segment was mainly due to the decreased sales volume of chondroitin sulfate.
Gross Profit and Gross Margin
|
|
Nine
Months Ended
December 31,
|
|
|
|
|
(In thousands,
except percentage data)
|
|
2016
|
|
|
2015
|
|
|
%
Change
|
|
Nutritional food
|
|
$
|
112,950
|
|
|
$
|
136,252
|
|
|
|
-17
|
%
|
Nutritional supplement
|
|
|
2,001
|
|
|
|
2,011
|
|
|
|
-0.5
|
%
|
Other business
|
|
|
(1,159
|
)
|
|
|
(361
|
)
|
|
|
*
|
|
Gross profit
|
|
$
|
113,792
|
|
|
$
|
137,902
|
|
|
|
-17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nutritional food
|
|
|
45
|
%
|
|
|
55
|
%
|
|
|
|
|
Nutritional supplement
|
|
|
13
|
%
|
|
|
8
|
%
|
|
|
|
|
Other business
|
|
|
-20
|
%
|
|
|
-9
|
%
|
|
|
|
|
Gross margin
|
|
|
42
|
%
|
|
|
49
|
%
|
|
|
|
|
* Not meaningful
The decrease in the
gross profit of nutritional food segment was due to the material decrease of gross margin average selling price of powdered formula
products. The decrease in the gross margin of nutritional food segment was mainly due to the decreased average selling price of
powdered formula products, the increased unit purchase cost of raw powder materials, and the increased sales of Dutch Cow UHT
liquid milk with lower margin, which was launched in January 2016. In addition, sales in this segment are generally denominated
in RMB while costs in this segment follow global pricing in USD, and therefore, the depreciation of RMB to USD also had an adverse
effect on the profitability of this segment.
The increase in the gross
margin of the nutritional supplement segment was mainly due to the renegotiation of average selling price with major customers
in 2016.
Expenses
|
|
Nine
Months
Ended December 31,
|
|
|
|
|
(In thousands,
except percentage data)
|
|
2016
|
|
|
2015
|
|
|
%
Change
|
|
Selling and distribution expenses
|
|
$
|
40,591
|
|
|
$
|
40,569
|
|
|
|
0.1
|
%
|
Advertising and promotion expenses
|
|
|
29,223
|
|
|
|
30,921
|
|
|
|
-5
|
%
|
- Advertising expenses
|
|
|
7,306
|
|
|
|
8,301
|
|
|
|
-12
|
%
|
- Promotion expenses
|
|
|
21,917
|
|
|
|
22,620
|
|
|
|
-3
|
%
|
General and administrative expenses
|
|
|
22,622
|
|
|
|
20,701
|
|
|
|
9
|
%
|
Loss on a supply contract
|
|
|
2,833
|
|
|
|
0
|
|
|
|
*
|
|
Government subsidies
|
|
|
403
|
|
|
|
307
|
|
|
|
31
|
%
|
* Not meaningful
Selling and distribution
expenses primarily include compensation expense for sales staff, freight charges and travel expenses. Our selling and distribution
expenses remained stable mainly due to the combined effects of the additional expense incurred as we invited our staff and certain
distributors to visit our French facility and a decrease in bonuses for sales staff.
Advertising
expenses primarily include media expenses paid to e-commerce providers. Promotion expenses primarily include promotional
products provided to end customers, and service charges for our consumer loyalty program administered by a third party.
A
dvertising
and promotion expenses decreased slightly in the nine months ended December 31, 2016, primarily due to a decrease in advertising
expenses as a result of the utilization of less expensive Internet channels for promotional activities and a change in our promotion
budget management.
General and administrative
expenses primarily include salaries for staff and management, depreciation, office rental, office supplies and legal and
consulting fees.
Loss on a supply contract
mainly represents compensation to Sodiaal under our milk supply agreement, as we could not take full delivery of raw milk during
the nine months ended December 31, 2016. For details, see “Item 1. Financial Statements — Note 10.”
Government subsidies represent
the receipt of general purpose subsidies from local governments.
Interest Expense and Interest Income
|
|
Nine
Months
Ended December 31,
|
|
|
|
|
(In thousands,
except percentage data)
|
|
2016
|
|
|
2015
|
|
|
%
Change
|
|
Interest expense
|
|
$
|
10,471
|
|
|
$
|
12,495
|
|
|
|
-16
|
%
|
Interest income
|
|
|
5,615
|
|
|
|
6,713
|
|
|
|
-16
|
%
|
The decrease in interest
expense was mainly due to decreased average interest rate as we borrow more EUR-denominated loans for the French project which
charged lower interest rates, partially offset by increased loan balances. $4.0 million of interest expenses was capitalized for
the French project in the nine months ended December 31, 2016. In addition, interest rates on our RMB-denominated loans
have decreased since mid-2015.
Interest income on restricted
cash balance, which is mostly RMB, also declined compared to that of the corresponding period of the previous year.
Foreign Currency Exchange Loss, Net
Our sales and
receivables are mostly denominated in RMB, while a substantial part of our raw material purchase and over half of our loans
are denominated in EUR. In light of the changes in foreign exchange rates, since fiscal year 2017, we have gradually replaced
our USD-denominated loans by EUR-denominated loans as we completed the construction of the French facility and began test
operation at such facility in fiscal year 2017. As of December 31, 2016, 59% of our total loan balance was denominated in EUR
and 5% in USD, compared to 31% of total loans in EUR and 23% in USD as of March 31, 2016. As such, we recorded a foreign
currency exchange loss of $1.9 million and $11.0 million for the nine months ended December 31, 2016 and 2015, respectively,
as RMB has begun to appreciate against EUR since March 2016 while it has depreciated against USD significantly since August
2015.
Net Income Attributable to Common Stockholders
As a result of the foregoing,
net income attributable to common stockholders for the nine months ended December 31, 2016 was $7.7 million, compared to $20.1
million for the same period in the previous year.
Liquidity and Capital Resources
Overview
Our primary sources of
liquidity are cash on hand, cash from operations and available borrowings. Cash flows from operating activities mainly represent
the inflow of cash from our customers and the outflow of cash for inventory purchases, manufacturing, operating expenses, interest
and taxes. Cash flows used in investing activities primarily represent capital expenditures for equipment and buildings, and restricted
cash used as security against letters of credit, bank acceptance bills and short-term and long-term borrowings. Cash flows from
financing activities primarily represent proceeds and repayments of borrowings. In addition, while there can be no assurance that
we will be able to refinance our short-term bank borrowings as they become due, historically, we have renewed or rolled over most
of our bank loans after the maturity date of the loans and we believe we will continue to be able to do so.
Cash and cash equivalents
totaled $51.4 million as of December 31, 2016, of which $49.3 million was held outside of the United States.
On September 17, 2012, the
Company entered into a partnership framework agreement, a milk supply agreement, a whey supply agreement, a whey powder supply
agreement, and a technical assistance agreement with Sodiaal Union, a French agricultural cooperative company (“Sodiaal”),
and/or Euroserum SAS (“Euroserum”), a French subsidiary of Sodiaal, as the case may be, relating to a long-term industrial
and commercial partnership between Sodiaal and the Company. Under these agreements, we undertake to build a new drying facility
in Carhaix, France, for the manufacture of powdered milk and fat-enriched, or high oil, demineralized whey. We are committed to
purchasing, and Sodiaal and Euroserum are committed to selling, 288 million liters of milk per year for ten years, an amount of
whey equivalent to 24,000 tons of 70% demineralized pre-concentrated dry whey extract per year for ten years, and 6,000 tons of
70% demineralized whey powder per year, or an equivalent quantity of liquid whey, for ten years, at market based prices at the
time of purchase, to satisfy the production needs of the new drying facility. If we purchase less than the agreed amount, we would
compensate Sodiaal or Euroserum, as the case may be, for the loss suffered. We initially agreed to begin purchasing raw milk from
Sodiaal in January 2016; however, the purchase plan has been delayed as the milk tower did not commence trial operation until June
2016. As required by the contract, we paid Sodiaal and third-party processors to process the raw milk into powder or other dairy
products to fulfill our purchase obligations under the contract. Given that such payment was a result of our commitment to purchase
rather than an expense required to test run the facility, rather than including this loss in our total project investment, we recorded
a $8.8 million and $2.8 million loss related to this contract during the three months ended March 31, 2016 and June 30, 2016, respectively.
Since June 2016, we have gradually increased the volume of raw milk we process in-house and by August 2016 when our second tower
commenced trial operation, we were able to fulfill all of our purchase commitments. For details, see “Item 1. Financial Statements
— Note 10.”
On September 18, 2015 and
March 24, 2016, we entered into two purchase contracts under which we agreed to purchase UHT liquid milk from two suppliers in
France, including one affiliate of Sodiaal, from calendar 2017 through calendar 2027. The minimum amount of liquid milk products
we agreed to purchase is 85,500 tons in calendar 2017, and between 195,500 tons and 207,000 tons in calendar 2018 through calendar
2027. We expect to finance the purchases under these contracts with operating cash flow and trade financing arrangements, and sell
the products in the Chinese market.
In March 2016, we entered
into a five-year lease contract under which we agreed to lease UHT liquid milk equipment from a supplier in France, beginning from
calendar 2017 to calendar 2018. The lease payment will be $3.7 million per year. We expect to finance the lease with operating
cash flow.
On September 10, 2015, our
board of directors approved a share repurchase program authorizing the repurchase of up to an aggregate amount of $20,000,000 of
our common stock from time to time through September 10, 2016. Under this repurchase program, shares may be repurchased in privately
negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act. Following
the approval, we entered into a Rule 10b5-1 trading plan under the Exchange Act permitting open market repurchases of our common
stock based on certain triggers described in the trading plan. During fiscal year 2016, we repurchased 610,313 shares of our common
stock under the Rule 10b5-1 trading plan at an aggregate cost of $3.0 million which was paid for through cash on hand. The share
repurchase program had automatically terminated due to our public announcement of receiving a non-binding proposal letter, dated
January14, 2016, from Mr. Liang Zhang, our chairman and chief executive officer, and an affiliated entity of his, proposing a “going-private”
transaction.
Cash Flows
The following table sets forth,
for the periods indicated, certain information relating to our cash flows:
|
|
Nine
Months Ended December 31,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
Cash flow provided by/(used in):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,786
|
|
|
$
|
20,908
|
|
Depreciation and amortization
|
|
|
7,849
|
|
|
|
7,247
|
|
Bad debt expense (reversal)
|
|
|
(538
|
)
|
|
|
(1,367
|
)
|
Inventory write down
|
|
|
8,029
|
|
|
|
5,491
|
|
Deferred income tax
|
|
|
(849
|
)
|
|
|
(214
|
)
|
Loss on a supply contract
|
|
|
556
|
|
|
|
0
|
|
Other
|
|
|
2
|
|
|
|
61
|
|
Changes in assets and liabilities
|
|
|
(52,037
|
)
|
|
|
142
|
|
Total operating activities
|
|
|
(29,202
|
)
|
|
|
32,268
|
|
Investing activities
|
|
|
(54,741
|
)
|
|
|
(114,703
|
)
|
Financing activities
|
|
|
36,099
|
|
|
|
64,810
|
|
Effect of foreign currency translation on cash and cash equivalents
|
|
|
(3,422
|
)
|
|
|
(2,340
|
)
|
Net change in cash and cash equivalents
|
|
$
|
(51,266
|
)
|
|
$
|
(19,965
|
)
|
Cash flow provided by operating
activities in the nine months ended December 31, 2016 was a result of the net income of $7.8 million, as adjusted for non-cash
expense and income items of $15.0 million, and an increase in working capital of $52.0 million. In the nine months ended December
31, 2016, we spent $263.6 million to purchase raw materials and other production materials, $34.3 million in staff compensation
and social welfare, $33.0 million in taxes, $66.0 million in operating expenses, $10.0 million in interest, $1.3 million
in land lease, received $376.3 million from our customers and $2.6 million from interest payments.
Cash flow used in investing
activities in the nine months ended December 31, 2016 mainly represents $44.9 million payment for the purchase of property, plant
and equipment, $12.7 million outflow for restricted cash deposited with banks as security against the issuance of letters of credit
for the import of raw materials and as pledges for certain short-term and long-term borrowings, $3.1 million outflow for purchase
of investment held at trust, and $0.4 million outflow for acquisition of intangible assets.
Cash flow provided
by financing activities in the nine months ended December 31, 2016 mainly represents net cash inflow of $72.7 million from short-term
loans and $1.2 million proceeds from noncontrolling interest related to Pingo (Beijing) Paper Co., Ltd., partially offset
by net cash outflow of $37.4 million from long-term loans and $0.4 million payment for assets under capital leases.
Outstanding Indebtedness
For information on our short-term
and long-term borrowings, see “Item 1. Financial Statements – Note 8.”
Capital Expenditures
Our capital expenditures were
$38.7 million and the corresponding cash outflow was $44.9 million for the nine months ended December 31, 2016, which mainly represented
expenditures for our drying facility project in France.
Off-Balance Sheet Arrangements
We do not have off-balance
sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is
material to investors.
Recent Accounting Pronouncements
In November 2016, FASB issued
Accounting Standards Update 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this Update require
that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally
described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted
cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total
amounts shown on the statement of cash flows. The amendments in this Update do not provide a definition of restricted cash or restricted
cash equivalents. The amendments in this Update are effective for public business entities for fiscal years beginning after December
15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period.
If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal
year that includes that interim period. The amendments in this Update should be applied using a retrospective transition method
to each period presented. We are evaluating the impact to our financial position and results of operations upon adoption.
In January 2017, FASB issued
Accounting Standards Update 2017-01 Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments
in this Update are intended to make the guidance on the definition of a business more consistent and cost-efficient. Specifically,
the ASU: (1) provides a “screen” that requires a determination that a set is not a business when substantially all
of the fair value of the gross assets acquired (or disposed of) is concentrated in a single asset or group of similar identifiable
assets; (2) specifies that if the screen’s threshold is not met, a set cannot be considered a business unless it includes
an input and a substantive process that together significantly contribute to the ability to create output; and (3) narrows the
definition of the term “output” to be consistent with the description of outputs in ASC 606. Public business entities
should apply the amendments in this Update to annual periods beginning after December 15, 2017, including interim periods within
those periods. The amendments in this Update should be applied prospectively on or after the effective date. No disclosures are
required at transition. We are evaluating the impact to our financial position and results of operations upon adoption.