Phibro Animal Health Corporation: Q1 FY2016 10-Q Summary
Business context and reporting period
Phibro develops, manufactures and markets animal health, mineral nutrition and performance products globally. The filing covers the unaudited three months ended September 30, 2015, compared with the three months ended September 30, 2014. Amounts are in thousands except per-share data.
Financial performance and position
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $187.1 million | $187.5 million | Down $0.3 million |
| Gross profit | $60.2 million | $60.3 million | Down $0.2 million |
| Gross margin | 32.2% | 32.2% | Stable |
| Operating income | $21.9 million | $25.1 million | Down 13% |
| Net income | $18.8 million | $18.9 million | Down 1% |
| Diluted EPS | $0.47 | $0.48 | Down $0.01 |
| Adjusted EBITDA | $27.7 million | $30.5 million | Down 9% |
- SG&A increased 9% to $38.3 million, raising SG&A as a percentage of sales to 20.5% from 18.8%.
- Net income margin was 10.0%, compared with 10.1%; the effective tax rate increased to 20.2% from 17.0%.
- Operating cash flow was negative $2.4 million, compared with positive $17.4 million. Working-capital changes used $24.5 million, including $5.6 million from receivables, $5.5 million from inventories and $9.2 million from accounts payable and accrued expenses.
- Capital expenditures were $8.1 million, compared with $4.0 million, primarily for existing assets, capacity expansion and productivity improvements.
- Cash increased to $31.8 million at September 30, 2015 from $29.2 million at June 30, 2015, primarily because of net revolver borrowings of $17.5 million. International subsidiaries held $30.4 million of cash.
- Total debt included $20.5 million drawn on the revolving credit facility and $283.0 million of long-term debt, net of current maturities. The Term B loan is due April 15, 2021.
- The revolver had $65.5 million available after $14.0 million of outstanding letters of credit. Additional availability under Israeli loan agreements was $15.0 million. The company was in compliance with debt covenants.
- Working capital was $179.7 million and the current-assets-to-current-liabilities ratio was 2.70:1 at September 30, 2015.
- The company paid a quarterly dividend of $0.10 per share, totaling $3.9 million, and stated an intent to continue quarterly dividends subject to board approval and financing restrictions.
Material changes versus the prior comparable period
- Reported sales were essentially flat because Q1 FY2015 included approximately $6.0 million of vaccine-licensing milestone revenue. Excluding that milestone, Q1 FY2016 sales increased approximately 3%, or $5.7 million.
- Animal Health sales increased 8% excluding the milestone, led by higher international MFA volumes, dairy and poultry nutritional specialty products, and vaccine volumes including MJB products. Reported Animal Health sales increased 2%.
- Mineral Nutrition sales declined 2% because of lower selling prices tied to raw-material commodity prices, partly offset by higher volumes.
- Performance Products sales declined 15% because of lower copper-based and chemical-catalyst volumes and lower selling prices.
- Excluding the prior-year milestone, gross profit increased 11% and adjusted EBITDA increased 13%. Including the milestone, gross profit was slightly lower and adjusted EBITDA declined $2.8 million.
- Animal Health adjusted EBITDA declined 3% as reported but increased 19% excluding the milestone. Mineral Nutrition adjusted EBITDA declined 9%, while Performance Products adjusted EBITDA declined 92%.
- Foreign-currency gains increased to $5.5 million from $1.2 million, primarily from movements in the Brazilian real and Turkish currencies against the U.S. dollar. These gains primarily arose from intercompany balances and were treated as non-operational in adjusted measures.
- SG&A rose $3.1 million, including $0.4 million of acquisition-related accrued compensation associated with the MJB transactions and higher sales, development, salary and public-company costs.
- The company revised Q1 FY2015 results for an income-tax accounting error involving long-term intercompany investments. The correction reduced prior-year net income by $1.5 million and diluted EPS by $0.04, to the reported comparative amounts of $18.9 million and $0.48.
Guidance, outlook, risks and unusual items
- Management stated that cash on hand, revolver availability and foreign credit lines are expected to provide adequate liquidity throughout the year, but gave no quantitative earnings or revenue guidance.
- Management expects to comply with debt covenants based on its operating plan, while noting that adverse operating results, covenant violations, economic disruption or difficulty obtaining financing could reduce liquidity.
- Key risks include restrictions on antibacterials in food-producing animals, dependence on antibacterial products, animal-disease outbreaks, regulatory changes, product liability, competition, raw-material availability and prices, foreign-currency exposure, dependence on Israeli and Brazilian operations, substantial indebtedness and debt covenants.
- Environmental liabilities remain uncertain. Estimated costs for identified soil and groundwater issues and site closure costs were approximately $6.8 million at September 30, 2015. The company is involved in EPA-related and private litigation concerning the Omega Chemical Superfund groundwater plume and cannot reasonably predict its ultimate liability.
- Outstanding derivatives had a net fair value liability of $6.4 million, and $4.9 million of unrealized derivative losses were recorded in other comprehensive income during the quarter. The company anticipated recognizing $1.7 million of those losses in earnings within twelve months.
- Comprehensive loss was $3.8 million, compared with comprehensive income of $10.4 million, primarily because of a $21.7 million foreign-currency translation loss and derivative losses.
- The company’s disclosure controls and procedures were not effective at September 30, 2015 because of material weaknesses in internal control over financial reporting. Management was evaluating additional staffing and other remediation measures.
Important facts for investors to verify
- Whether operating cash flow improves as receivables, inventory, incentive compensation and retirement-plan funding normalize.
- Progress in expanding Animal Health sales and margins, particularly vaccines, nutritional specialties and MJB products.
- Recovery prospects for Mineral Nutrition and Performance Products after pricing and volume declines.
- Debt reduction, revolver utilization, covenant headroom and the effect of floating interest rates.
- The ultimate cost and timing of environmental investigations, remediation and related litigation.
- Remediation of the material weaknesses in internal control and the effect on future financial reporting.
- Whether the full valuation allowance on most domestic and certain foreign deferred tax assets is released if positive earnings trends continue.
- The sustainability of quarterly dividends given negative operating cash flow, capital expenditures and debt obligations.