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 globally. Its animal health products serve poultry, swine, cattle, dairy, aquaculture and ethanol markets; performance products serve personal care, automotive, industrial chemical and catalyst applications. The filing covers the three and nine months ended March 31, 2014, compared with the periods ended March 31, 2013. The supplied metadata labels the period “2013 Q3,” but the filing itself is for fiscal 2014 third quarter.
Financial performance and liquidity
| Metric | Three months ended March 31, 2014 | Year-over-year change | Nine months ended March 31, 2014 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $173.3 million | +7% | $508.2 million | +4% |
| Gross profit | $52.8 million | +15% | $153.5 million | +17% |
| Gross margin | 30.5% | Up from 28.1% | 30.2% | Up from 26.8% |
| Operating income | $17.3 million | +20% | $50.7 million | +21% |
| Operating margin | 10.0% | Up from 8.9% | 10.0% | Up from 8.6% |
| Net income | $6.4 million | +52% | $14.5 million | -23% |
| Adjusted EBITDA | $22.4 million | +16% | $66.4 million | +18% |
Basic and diluted earnings per share were $0.21 for the quarter and $0.48 for the nine-month period, compared with $0.14 and $0.62, respectively, in the prior-year periods. The nine-month decline in GAAP net income primarily reflects the prior-year $8.7 million tax benefit from a deferred tax valuation allowance reversal; adjusted net income increased 94% to $23.4 million.
- Segment trends: Nine-month Animal Health sales increased 12% to $316.9 million and segment Adjusted EBITDA increased 24% to $74.1 million. Mineral Nutrition sales declined 5% to $146.7 million and Adjusted EBITDA declined 12% to $8.1 million. Performance Products sales declined 11% to $44.6 million and Adjusted EBITDA declined 32% to $3.1 million.
- Cash flow: Nine-month operating cash flow was $16.6 million, versus cash used of $8.4 million in the prior year. Capital expenditures were $14.2 million; investing cash outflow was $14.1 million.
- Cash and working capital: Cash was $11.0 million at March 31, 2014, down from $27.4 million at June 30, 2013. Working capital increased to $166.4 million from $153.7 million.
- Debt and liquidity: Reported debt totaled approximately $374.5 million, including $300.0 million of 9.25% senior notes, $42.5 million outstanding under the domestic senior credit facility and other term loans. The credit facility had $40.4 million of remaining availability, in addition to $15.0 million available under Israeli loan agreements. The company was in compliance with its debt covenants at March 31, 2014.
- Shareholder distributions: The company paid a $25.0 million dividend during the nine months, compared with $3.0 million in the prior-year period.
Material changes versus the prior comparable period
- Growth was concentrated in Animal Health, supported by MFAs and other products, nutritional specialties and vaccines. Vaccines grew 54% for the nine-month period, while nutritional specialty products grew 22%.
- Management deemphasized low-margin, volatile lysine sales, contributing to the Mineral Nutrition decline. Lower commodity-related selling prices and competitive conditions also pressured that segment.
- Performance Products declined due to lower demand for copper-based catalyst products, lower volumes of a low-margin industrial chemical and pricing pressure.
- Gross margin expanded substantially because of Animal Health volume growth, favorable mix, pricing, lower unit costs and the benefit from the prior OmniGen Research acquisition.
- SG&A increased 15% for the nine-month period, reflecting increased sales, marketing, product development, public-company costs and amortization.
- The company revised prior-period comparative amounts for identified errors, which management concluded were not material individually or in aggregate. A current-year correction increased pre-tax income by $358 thousand.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal revenue or earnings guidance. Management stated that cash on hand, operating cash flow and available borrowing capacity were expected to provide sufficient flexibility for working capital, capital expenditures and debt service for at least the next 12 months.
On April 16, 2014, after the reporting date, the company completed an initial public offering of 8,333,333 Class A shares at $15.00 per share, generating approximately $114.2 million of net proceeds. It also entered into a $290.0 million Term B Loan and a $100.0 million revolving credit facility. The proceeds were used to retire the existing senior notes, term loans and domestic senior credit facility. The refinancing is expected to produce a $23.7 million loss on extinguishment of debt in the quarter and year ended June 30, 2014. The adjusted post-transaction debt was approximately $290.1 million, and management reported an adjusted leverage ratio of 3.4x.
- Income taxes included recognition of previously unrecognized tax benefits totaling $1.6 million in the quarter and $2.9 million for the nine months. The company continues to maintain a full valuation allowance against domestic deferred tax assets.
- The company changed its indefinite reinvestment assertion for $25.0 million of Israeli subsidiary earnings, remitted that amount to the parent as a dividend and recorded approximately $3.2 million of foreign withholding taxes. Certain Israeli tax examinations settled in April 2014 for approximately $2.9 million.
- Environmental reserves were approximately $7.3 million at March 31, 2014. Environmental investigations and remediation obligations remain subject to potentially material changes based on regulatory developments and new information.
- The company accrued $5.6 million for customer poultry-damage claims and recorded a $5.35 million insurance-recovery asset. The insurer denied coverage, and the company is pursuing recovery.
- Key business risks include restrictions on antibacterials in food-producing animals, product liability, animal disease outbreaks, regulatory changes, competition, raw-material price volatility, currency movements, dependence on Israeli and Brazilian operations, substantial indebtedness and debt covenants.
- Disclosure controls and procedures were assessed as ineffective at March 31, 2014 because of material weaknesses and a significant deficiency in internal control over financial reporting. Management was evaluating additional staffing and other remediation measures.
Most important facts for investors to verify
- Whether the post-quarter IPO and refinancing permanently reduce interest expense, near-term maturities and leverage despite the $23.7 million debt-extinguishment charge.
- The sustainability of Animal Health growth, particularly vaccines and nutritional specialty products, and whether Mineral Nutrition and Performance Products continue to decline.
- Conversion of Adjusted EBITDA and adjusted net income into recurring operating cash flow after interest, taxes, capital expenditures and working-capital needs.
- Resolution and ultimate insurance recovery associated with the $5.6 million poultry-product claims.
- Potential exposure from environmental remediation, the Omega Chemical Site proceedings and other regulatory or product-liability matters.
- Progress in remediating the disclosed material weaknesses and significant internal-control deficiency.
- The effect of tax examinations, valuation allowances, foreign withholding taxes and possible repatriation of foreign earnings on future tax rates and cash flows.