Phibro Animal Health Corporation — Form 10-Q Summary
Business context and reporting period
Phibro develops, manufactures and markets animal-health, mineral-nutrition and performance products. Its primary markets include poultry, swine, cattle, dairy and aquaculture, with additional products for personal care, automotive, industrial chemical and chemical catalyst applications.
This unaudited filing covers the three and six months ended December 31, 2015, compared with the corresponding 2014 periods. The filing was signed February 9, 2016. The fiscal-year-to-date period represents the company’s second quarter.
Financial performance and key metrics
| Metric | Three months ended Dec. 31, 2015 | Year-over-year change | Six months ended Dec. 31, 2015 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $191.8 million | Up 2% | $378.9 million | Up 1%; up 2% excluding prior-year milestone revenue |
| Gross profit | $62.4 million | Up 11% | $122.6 million | Up 5%; up 11% excluding prior-year milestone revenue |
| Gross margin | 32.5% | Up from 29.7% | 32.4% | Up from 30.9% |
| Operating income | $22.6 million | Up 14% | $44.5 million | Down 1% |
| Operating margin | 11.8% | Up from 10.5% | 11.7% | Down from 11.9% |
| Net income | $30.2 million | Up 112% | $48.9 million | Up 47% |
| Diluted earnings per share | $0.75 | Up from $0.36 | $1.22 | Up from $0.84 |
| Adjusted EBITDA | $28.4 million | Up 14% | $56.1 million | Up 1%; up 13% excluding prior-year milestone revenue |
The reported net income increase was substantially affected by an $18.8 million benefit from releasing the domestic deferred-tax-asset valuation allowance. Excluding that release, the company reported income-tax expense of approximately $4.7 million for the quarter and $9.4 million for the six-month period.
- Animal Health: Six-month sales increased 2% to $241.6 million, or 5% excluding the prior-year licensing milestone. Six-month adjusted EBITDA increased 5% to $63.8 million.
- Mineral Nutrition: Six-month sales declined 1% to $113.3 million as volume growth was offset by lower selling prices tied to lower raw-material costs. Adjusted EBITDA increased 2% to $7.3 million.
- Performance Products: Six-month sales declined 8% to $23.9 million, and adjusted EBITDA declined 93% to $0.1 million, reflecting lower copper-product prices and lower chemical-catalyst volumes.
Cash flow, balance sheet, debt and liquidity
- Six-month operating cash flow was $5.6 million, down from $25.8 million in the prior-year period. Working-capital investment included $12.8 million for inventories and $6.9 million for receivables.
- Capital expenditures were $17.7 million, compared with $7.7 million in the prior-year period, for existing assets, capacity expansion and productivity improvements.
- Cash declined to $25.4 million at December 31, 2015 from $29.2 million at June 30, 2015.
- Working capital was $173.1 million, compared with $176.0 million at June 30, 2015. The reported current-assets-to-current-liabilities ratio was 2.55:1.
- Total debt consisted primarily of $285.7 million of Term B loan principal, $20.0 million drawn on the revolving facility and $2.8 million of current debt maturities. Long-term debt, net of discount and current maturities, was $282.3 million.
- At December 31, 2015, the revolving facility had $20.0 million drawn, $14.1 million of outstanding letters of credit and $65.9 million of remaining availability. The company was in compliance with its debt covenants.
- In January 2016, the revolving commitment was increased from $100 million to $200 million. The company then funded the approximately $46.5 million MVP Laboratories acquisition with the Revolver.
- The company declared and paid a quarterly dividend of $0.10 per share and stated its intention to continue quarterly dividends, subject to board approval, financial condition and debt-agreement restrictions.
Material changes versus the prior comparable period
- Quarterly sales growth was modest, but gross profit and gross margin improved materially because of volume growth, improved operating efficiencies, favorable currency movements and product mix.
- Quarterly SG&A increased 10% to $39.8 million, driven by expanded sales-force and product-development costs, acquisition-related compensation and higher corporate expenses.
- Interest expense increased 13% for the quarter and 11% year to date, principally because of acquisition-related accrued interest associated with the MJB transaction.
- Quarterly foreign-currency results shifted from a $1.0 million gain in 2014 to a $2.6 million loss in 2015. Year-to-date results remained a $2.9 million gain, compared with a $2.2 million gain in 2014.
- The six-month 2014 results included $6.0 million of vaccine-licensing milestone revenue and income, which makes reported year-over-year growth less representative of underlying operating trends.
- Prior-year interim financial statements were revised for an income-tax accounting error involving long-term intercompany investments. The correction reduced 2014 net income by $1.2 million for the quarter and $2.7 million for six months, with no change to comprehensive income or operating cash flow.
Guidance, outlook, risks and unusual items
The filing does not provide formal revenue or earnings guidance. Management stated that cash on hand, the Revolver, foreign credit lines and projected operating cash flow are expected to provide adequate liquidity throughout the year, while cautioning that adverse operating results, covenant violations, economic disruption or difficulty obtaining financing could impair liquidity.
- Future tax expense is expected to increase because the domestic valuation allowance was released and domestic pre-tax income will generally be taxed going forward.
- The January 2016 acquisition of MVP Laboratories expands the vaccine business; purchase-price allocation was still under evaluation and pro forma information was not provided because management considered the results immaterial to the consolidated financial statements.
- Environmental exposures include an EPA investigation and related litigation concerning groundwater contamination near the Omega Chemical Superfund Site. Recorded estimated environmental costs were $6.5 million at December 31, 2015, but ultimate liability cannot currently be estimated with certainty.
- Outstanding derivatives included Brazilian-real call and put options with a combined notional amount of R$156.0 million. Accumulated other comprehensive loss included $4.5 million of derivative losses, of which approximately $1.2 million was expected to enter earnings within twelve months.
- Key business risks include restrictions on antibacterials in food animals, animal-disease outbreaks, regulatory and product-safety changes, raw-material price and availability volatility, foreign-currency exposure, competition, manufacturing disruptions, litigation, substantial indebtedness and debt-covenant restrictions.
- Disclosure controls were not effective as of December 31, 2015 because material weaknesses in internal control over financial reporting continued from the prior Form 10-K. Management was implementing additional policies, accounting resources and access controls but could not estimate when remediation would be complete or assure its success.
Most important facts for investors to verify
- Separate sustainable operating earnings from the $18.8 million tax valuation-allowance release and other acquisition-related adjustments.
- Assess cash conversion, particularly the decline in operating cash flow caused by inventory, receivable and other working-capital investment.
- Confirm post-acquisition leverage, Revolver borrowings, covenant compliance and liquidity after the $46.5 million MVP acquisition.
- Evaluate whether Animal Health growth can offset weakness in Performance Products and pricing pressure in Mineral Nutrition.
- Monitor the effect of the expected higher domestic effective tax burden in future periods.
- Track remediation of the material internal-control weaknesses and any additional financial-statement corrections.
- Review developments in the Omega Chemical groundwater matter and other environmental, product-liability and regulatory contingencies.