Phibro Animal Health Corporation — Fiscal 2015 First Quarter 10-Q
Reporting period: Three months ended September 30, 2014, compared with the three months ended September 30, 2013. The unaudited filing covers a global animal health, mineral nutrition, and performance products company. Results for an interim period are not necessarily indicative of the full year.
Financial performance and key metrics
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales | $187.5 million | $162.2 million | +16% |
| Gross profit | $60.3 million | $49.5 million | +22% |
| Gross margin | 32.2% | 30.5% | +170 basis points |
| Operating income | $25.1 million | $16.4 million | +53% |
| Operating margin | 13.4% | 10.1% | +330 basis points |
| Net income | $20.5 million | $5.8 million | +251% |
| Diluted earnings per share | $0.52 | $0.19 | Higher |
| Adjusted EBITDA | $30.5 million | $21.6 million | +41% |
| Adjusted EBITDA margin | 16.2% | 13.3% | +290 basis points |
Net sales benefited from a $6.0 million license-related revenue and gross profit contribution tied to a vaccine delivery technology agreement. Excluding this item, sales growth was approximately 12%, gross profit growth was approximately $4.8 million, and Adjusted EBITDA growth was approximately 13%.
- Animal Health: Sales increased 16% to $117.2 million; Adjusted EBITDA increased 35% to $32.5 million. Vaccine sales increased 87%, including the license-related revenue; nutritional specialty products increased 38%.
- Mineral Nutrition: Sales increased 20% to $55.4 million and Adjusted EBITDA increased 41% to $3.5 million, primarily from higher volumes and improved margins.
- Performance Products: Sales declined 1% to $14.8 million and Adjusted EBITDA declined 5% to $1.0 million.
SG&A increased 6% to $35.2 million, below the rate of sales growth. The company cited increased sales, marketing, development, salary, professional-fee, and public-company costs.
Cash flow, liquidity, and debt
- Net cash provided by operating activities was $17.4 million, compared with cash used of $0.2 million in the prior-year quarter.
- Capital expenditures were $4.0 million, resulting in cash used in investing activities of $4.0 million.
- Financing activities used $4.8 million, including $3.9 million of dividends and $0.7 million of scheduled Term B loan repayment.
- Cash and cash equivalents increased to $19.7 million from $11.8 million at June 30, 2014. Approximately $12.2 million was held by international subsidiaries.
- Working capital was $180.3 million, and the current-assets-to-current-liabilities ratio was 2.74:1.
- Total debt was approximately $288.7 million, consisting primarily of a Term B loan due April 15, 2021. The Term B loan carried a 4.00% interest rate at September 30, 2014.
- There were no revolving-credit borrowings. Letters of credit and other commitments totaled $17.1 million, leaving $82.9 million available under the $100 million revolving facility. The company also reported $15.0 million of availability under Israeli loan agreements.
- The company stated that cash on hand, operating cash flow, and financing availability should support anticipated needs, while cautioning that adverse results, covenant violations, economic conditions, or financing disruptions could reduce liquidity.
Material changes versus the prior comparable period
- Revenue growth was led by volume increases in Animal Health and Mineral Nutrition, with additional benefit from the $6.0 million license milestone.
- Gross and operating margins expanded due to volume, product mix, pricing, and lower relative SG&A growth. Higher product costs partially offset Animal Health gross-profit gains.
- Net interest expense declined by $5.2 million because the company refinanced in April 2014, retired prior credit facilities and loans, and redeemed 9.25% senior notes in May 2014.
- Foreign currency results shifted from a $0.6 million net loss to a $1.2 million net gain, primarily reflecting movements in the Brazilian, Turkish, and Belgian currencies against the U.S. dollar.
- The company paid its first reported quarterly dividend of $0.10 per share, or $3.9 million, and stated its intention to continue quarterly dividends subject to board approval and applicable debt restrictions.
- A warrant for 386,750 Class B shares was exercised cashlessly, resulting in the issuance of 163,675 Class B shares.
Outlook, risks, contingencies, and unusual items
- Management did not provide specific revenue or earnings guidance in the filing. It projected adequate liquidity throughout the year based on its operating plan and expected covenant compliance.
- Management identified risks from restrictions on antibacterials, regulatory changes, animal-disease outbreaks, product safety or efficacy concerns, competition, raw-material prices and availability, foreign exchange, economic conditions, customer consolidation, manufacturing disruptions, litigation, and substantial indebtedness.
- The company is involved in environmental matters related to groundwater contamination near its Santa Fe Springs, California facility. Estimated costs for identified environmental investigation, remediation, monitoring, and closure obligations were approximately $7.0 million at September 30, 2014. Potential additional liabilities related to the Omega Chemical Site could not be estimated with certainty.
- Management stated that other claims and lawsuits arising in the ordinary course, including product-liability matters, were not expected to have a material adverse effect, individually or in the aggregate.
- A $5.3 million payment to customers related to poultry damages from the use of a product in fiscal 2010 reduced operating cash flow during the quarter.
- The company recognized a $1.2 million tax benefit from previously unrecognized tax benefits. Its effective tax rate was 10.2%, partly because domestic taxes were substantially offset by the release of a valuation allowance against domestic net operating losses.
- Disclosure controls and procedures were determined to be ineffective because of material weaknesses in internal control over financial reporting identified in the Annual Report. Management was evaluating remediation measures, including additional staffing and resources.
- The company reported no material change in risk factors from its Annual Report. A previously disclosed Israeli mass-tort lawsuit concluded with no company liability after plaintiffs withdrew their appeal.
Important facts for investors to verify
- Whether the $6.0 million vaccine-technology license milestone is nonrecurring and how future license milestones may affect comparability.
- Whether Animal Health vaccine and nutritional-specialty volume growth is sustainable after excluding the license revenue.
- Progress in remediating the material weaknesses in internal controls.
- Compliance with the revolving-facility leverage covenant, whose maximum permitted ratio was 4.50:1.00 through June 30, 2015 and 4.25:1.00 thereafter.
- The sustainability of quarterly dividends given approximately $288.7 million of debt, covenant restrictions, and future capital requirements.
- Potential additional environmental costs and liabilities associated with the Omega Chemical Site and related litigation.
- The effect of regulatory restrictions on antibacterials and other animal-health products, as well as raw-material, foreign-exchange, and market risks.