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. The filing covers the unaudited three months ended September 30, 2017, compared with the three months ended September 30, 2016. The company operates through Animal Health, Mineral Nutrition and Performance Products segments.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $193.4 million | $188.0 million | Up 3% |
| Gross profit | $63.4 million | $61.0 million | Up 4% |
| Gross margin | 32.8% | 32.4% | Up 40 bps |
| Operating income | $22.4 million | $21.8 million | Up 3% |
| Net income | $15.9 million | $12.2 million | Up 31% |
| Diluted EPS | $0.39 | $0.31 | Up $0.08 |
| Adjusted EBITDA | $30.1 million | $29.8 million | Up 1% |
| Operating cash flow | $4.8 million | $21.5 million | Down $16.7 million |
- Animal Health sales increased 3% to $128.8 million. Nutritional specialties rose 17% and vaccines rose 25%, while medicated feed additives and other products declined 5%.
- Mineral Nutrition sales increased 1% to $52.1 million; Performance Products sales increased 5% to $12.5 million.
- Net income benefited from a $2.7 million tax benefit related to employee stock-option exercises. Excluding this benefit, the effective tax rate would have been approximately 30.6%, compared with 30.7% in the prior year.
- Cash and cash equivalents were $62.1 million at September 30, 2017, compared with $56.1 million at June 30, 2017. Working capital was $219.2 million and the current-assets-to-current-liabilities ratio was 2.94:1.
- Cash used in investing activities was $16.8 million, including $11.6 million for a business acquisition and $5.0 million of capital expenditures.
- Total debt included $85.0 million outstanding under the revolving credit facility, $239.0 million of long-term debt and $7.9 million of current maturities. The company had $160.3 million of remaining Revolver availability after letters of credit.
- The company paid quarterly dividends of $0.10 per share, totaling $4.0 million, and stated that it intended to continue quarterly dividends at that rate subject to board approval.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by higher volumes in nutritional specialties and vaccines, international Animal Health growth and higher pricing in Mineral Nutrition and Performance Products.
- Domestic MFA sales declined $10.5 million, including a $4.2 million reduction in medically important antimicrobial sales and unfavorable customer-order timing.
- Gross margin improved modestly, although gross profit included $0.2 million of acquisition-related cost of goods sold and $0.5 million of higher depreciation expense.
- SG&A increased 5% to $41.0 million, primarily from Animal Health sales-force expansion and product-development costs. Excluding acquisition-related transaction costs, SG&A increased 7%.
- Interest expense declined 20% to $3.1 million, primarily because of lower rates under the new Credit Facilities completed in June 2017.
- Operating cash flow declined substantially because of seasonal increases in receivables and inventories and payments of accrued incentive compensation.
- The company acquired an animal health business in September 2017 for approximately $15.0 million, including approximately $3.5 million payable after quarter-end. Pro forma information was not provided because the acquisition was not material to the consolidated financial statements.
- Adjusted EBITDA growth was limited to 1%; Animal Health improved 3%, while Mineral Nutrition declined 7% and Performance Products declined 67% because of higher raw-material and product costs.
Guidance, Outlook, Risks and Unusual Items
- Management stated that cash on hand, operating cash flow, Revolver availability and foreign credit lines were expected to provide sufficient liquidity for future needs and that the operating plan projected adequate liquidity throughout the year. No specific revenue or earnings guidance was provided.
- The company was in compliance with its debt covenants at September 30, 2017. The Credit Facilities mature June 29, 2022. A $150.0 million interest-rate swap entered in July 2017 converts a portion of floating-rate debt to a fixed rate of 1.8325% plus the applicable margin.
- Key business risks include regulatory restrictions on medically important antimicrobials, consumer concerns regarding animal-product safety, potential FDA withdrawal of Mecadox approval, animal-disease outbreaks, commodity-price and raw-material volatility, foreign-currency exposure, competition and substantial indebtedness.
- U.S. sales of medically important antimicrobial products were approximately $18 million for the twelve months ended September 30, 2017. U.S. Mecadox sales were approximately $14 million for that period. The FDA’s review of Mecadox remained unresolved.
- The company estimated environmental investigation, remediation and closure costs of approximately $6.9 million at September 30, 2017. Potential liabilities related to the Omega Chemical Superfund groundwater plume could not be estimated with reasonable certainty and could become material.
- Management identified material weaknesses in internal control over financial reporting. Disclosure controls were therefore not effective as of September 30, 2017. Remediation was underway, but management could not determine when it would be completed or assure its success.
- The company early adopted ASU 2017-12 on derivatives and hedging; management stated that it had no material effect. Adoption of the new revenue-recognition standard is expected beginning July 1, 2018, using the modified retrospective method, with the impact still under evaluation.
Investor Verification Priorities
- Verify the status and potential financial impact of the FDA’s Mecadox review and broader antimicrobial regulations.
- Assess whether the operating-cash-flow decline is seasonal or reflects a sustained buildup in receivables and inventories.
- Review acquisition accounting, the remaining $3.5 million acquisition payment and integration performance.
- Monitor debt balances, interest-rate exposure, covenant compliance and Revolver availability.
- Track remediation of the material weaknesses in internal control over financial reporting.
- Evaluate potential environmental liabilities associated with the Omega Chemical Site and other contaminated sites.
- Reconcile Adjusted EBITDA with GAAP results and consider the effect of acquisition-related items, tax benefits and foreign-currency adjustments.