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 serving poultry, swine, cattle, dairy, aquaculture, ethanol, personal care, automotive, industrial chemical and catalyst markets. This unaudited report covers the three and six months ended December 31, 2014, compared with the corresponding 2013 periods. Fiscal year-end is June 30.
Financial performance and key metrics
| Metric | Three months ended Dec. 31, 2014 | Three months ended Dec. 31, 2013 | Six months ended Dec. 31, 2014 | Six months ended Dec. 31, 2013 |
|---|---|---|---|---|
| Net sales | $188.7 million | $172.7 million | $376.1 million | $335.0 million |
| Gross profit | $56.1 million | $51.2 million | $116.4 million | $100.7 million |
| Gross margin | 29.7% | 29.6% | 30.9% | 30.1% |
| Operating income | $19.8 million | $17.0 million | $44.9 million | $33.4 million |
| Operating margin | 10.5% | 9.9% | 11.9% | 10.0% |
| Net income | $15.4 million | $2.3 million | $35.9 million | $8.1 million |
| Diluted EPS | $0.39 | $0.08 | $0.90 | $0.27 |
| Adjusted EBITDA | $25.0 million | $22.3 million | $55.5 million | $43.9 million |
Six-month operating cash flow was $25.8 million, compared with $16.4 million in the prior-year period. Capital expenditures were $7.7 million, and free cash flow before financing activities was approximately $18.8 million. Cash increased to $20.7 million from $11.8 million at June 30, 2014. Working capital was $187.5 million, and the current-assets-to-current-liabilities ratio was 2.90:1.
Total debt was approximately $287.9 million, consisting primarily of a $288.6 million Term B loan and capitalized leases, net of unamortized debt discount. The Term B loan was due April 15, 2021 and carried a 4.00% interest rate at December 31, 2014. There were no revolver borrowings; $82.8 million remained available after $17.2 million of letters of credit and other commitments. The company was in compliance with its debt covenants.
The company paid $7.8 million of dividends during the six months, or $0.20 per share. It stated an intention to pay regular quarterly dividends of $0.10 per share, subject to board approval, legal availability and debt-agreement restrictions.
Material changes versus the prior comparable period
- Three-month sales increased 9% and six-month sales increased 12%, driven by Animal Health and Mineral Nutrition. Performance Products declined 21% in the quarter and 11% year to date.
- Animal Health quarterly sales increased 10%, led by MFAs and other products and nutritional specialties. Vaccine sales declined 8% in the quarter because of international registration delays.
- Mineral Nutrition sales increased 16% in the quarter and 18% year to date, reflecting higher volumes, improved demand and higher selling prices associated with raw-material costs.
- Performance Products weakened because of lower copper-based product volumes, reduced industrial demand, lower personal-care volumes and lower selling prices.
- Six-month results included $6.0 million of licensing revenue and gross profit from achievement of contractual and regulatory milestones related to vaccine delivery technology. Excluding this item, six-month sales growth was 11% and Adjusted EBITDA growth was 13%.
- Interest expense declined 60% year over year following the April 2014 refinancing and the retirement or redemption of prior debt instruments.
- Foreign currency results shifted from losses of $1.2 million in the quarter and $1.8 million year to date in 2013 to gains of $1.0 million and $2.2 million, respectively, in 2014.
- The effective tax rate decreased to 10.9% for the quarter and 10.5% year to date, partly because domestic income was offset by net operating losses and because of a $1.2 million year-to-date benefit from previously unrecognized tax benefits.
Guidance, outlook, commentary, risks and unusual items
Management stated that cash on hand, operating cash flow, revolver availability and foreign credit lines were expected to support planned cash needs and that its operating plan projected adequate liquidity. No quantified revenue or earnings guidance was provided.
- Management expects regular quarterly dividends but noted that future payments depend on operating results, financial condition, capital requirements, subsidiary funding and debt-agreement limitations.
- In January 2015, the company entered into collaboration, distribution, technology-license and intellectual-property purchase agreements with MJ Biologics relating to animal vaccines. It paid $5.0 million upfront, made a separate $5.0 million loan to MJB’s shareholder, agreed to a minimum base payment of $200 thousand per month, and may owe a closing payment of at least $10.0 million, royalties and earn-out payments. The acquisition closing was anticipated on or before January 1, 2021, subject to conditions.
- Environmental liabilities were estimated at $7.0 million at December 31, 2014. Phibro-Tech is involved in EPA-related groundwater matters and related private litigation concerning the Omega Chemical Superfund Site; the ultimate liability cannot currently be estimated with certainty.
- Accrued expenses included no product-liability claims balance at December 31, 2014, compared with $5.3 million at June 30, 2014. The company paid $5.3 million to customers during the period for poultry damages related to use of a product in fiscal 2010.
- The company maintained a full valuation allowance against domestic and certain foreign deferred tax assets, but indicated that a significant portion could potentially be released in future periods if positive evidence continues.
- Disclosure controls and procedures were not effective at December 31, 2014 because of material weaknesses in internal control over financial reporting identified in the prior Annual Report. Management was evaluating corrective measures, potentially including additional staffing and resources.
- Principal risks include restrictions on antibacterials, regulatory changes, animal-disease outbreaks, product liability, competition, raw-material prices and availability, currency fluctuations, dependence on Israeli and Brazilian operations, substantial indebtedness, covenant compliance and environmental obligations.
Most important facts for an investor to verify
- Whether sales and margin growth, particularly in Animal Health and Mineral Nutrition, continues after the $6.0 million licensing milestone.
- The sustainability of operating cash flow after inventory investment, customer payments and dividend distributions.
- Term B loan amortization, interest-rate exposure, covenant headroom and the availability of the revolver.
- The economics, closing conditions, cash commitments, royalties and potential earn-outs associated with the MJ Biologics agreements.
- Progress in remediating material weaknesses in internal controls.
- Potential exposure from the Omega Chemical groundwater matters, environmental claims and other product-liability litigation.
- Whether the deferred-tax valuation allowance, low effective tax rate and previously recognized tax benefits affect future earnings comparability.