Phibro Animal Health Corporation — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2019. The request metadata references 2018 Q4, but the supplied filing is the fiscal 2019 Form 10-K and includes unaudited fourth-quarter data for the three months ended June 30, 2019.
Business context
Phibro is a global animal health, mineral nutrition and performance products company serving livestock producers, feed manufacturers, distributors and industrial customers in more than 75 countries. The company operates through Animal Health, Mineral Nutrition and Performance Products segments.
- Animal Health products include medicated feed additives, nutritional specialties and vaccines.
- Mineral Nutrition products primarily comprise trace-mineral formulations for livestock feed.
- Performance Products supplies specialty ingredients for personal care, industrial chemical and chemical catalyst markets.
Financial performance and key metrics
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $828.0 million | $820.0 million | Up 1% |
| Gross profit | $264.6 million | $266.9 million | Down 1% |
| Gross margin | 32.0% | 32.5% | Down 50 basis points |
| Operating income | $83.2 million | $98.9 million | Down 16% |
| Net income | $54.7 million | $64.9 million | Down 16% |
| Diluted EPS | $1.35 | $1.61 | Down $0.26 |
| Adjusted EBITDA | $118.0 million | $129.0 million | Down 8% |
| Cash flow from operations | $47.2 million | $70.0 million | Down $22.8 million |
| Capital expenditures | $29.9 million | $18.5 million | Up $11.3 million |
Net sales by segment were $532.0 million for Animal Health, $233.8 million for Mineral Nutrition and $62.2 million for Performance Products. Animal Health sales were essentially flat, Mineral Nutrition declined slightly, and Performance Products increased 17%.
Animal Health Adjusted EBITDA declined 4% to $136.0 million, Mineral Nutrition Adjusted EBITDA declined 15% to $15.7 million, and Performance Products Adjusted EBITDA increased 151% to $4.7 million. Total Adjusted EBITDA margin declined to 14.3% from 15.7%.
Liquidity, debt and balance sheet
- Cash and short-term investments totaled $81.6 million at June 30, 2019, including $57.6 million of cash and $24.0 million of short-term investments.
- Working capital was $242.9 million, and the current-assets-to-current-liabilities ratio was 2.71:1.
- Total debt was $326.2 million, comprising $231.3 million of Term A borrowings and $96.0 million outstanding under the revolving credit facility.
- The company had $150.99 million of remaining Revolver availability after $3.0 million of letters of credit.
- Debt facilities mature in June 2022 and contain maximum first-lien net leverage and minimum interest coverage covenants. The company reported compliance at June 30, 2019.
- Stockholders’ equity increased to $216.0 million from $185.0 million.
Material changes versus the prior comparable period
- Revenue growth was limited to 1%, while gross profit declined because of weaker Animal Health and Mineral Nutrition profitability.
- SG&A increased 8% to $181.4 million. FY2019 included $6.3 million of restructuring costs, $2.3 million of stock-based compensation, $0.2 million of acquisition-related transaction costs and a $1.5 million benefit from cancellation of a business arrangement.
- The restructuring charge included $3.5 million for termination of a contract manufacturing agreement and $2.8 million for employee separation costs. Management expected approximately $1.0 million of additional separation costs by December 31, 2019.
- Animal Health MFA and other sales increased 4% to $350.5 million, but nutritional specialty sales declined 8% and vaccine sales declined 5%.
- Animal Health international growth was partly offset by lower U.S. poultry and swine demand. Fourth-quarter Asia Pacific MFA demand was negatively affected by African Swine Fever in China.
- Operating cash flow declined primarily because accounts receivable, inventories and prepaid assets consumed cash. Accounts receivable increased to $159.0 million and inventory increased to $198.3 million; days sales outstanding rose to 70 from 58.
- Phibro adopted ASC 606 effective July 1, 2018. Management reported no material impact on reported sales or retained earnings.
Outlook, commentary, risks and unusual items
- Management stated that cash on hand, operating cash flow and financing arrangements were expected to support ongoing needs, but noted that adverse operating results or covenant violations could impair liquidity.
- FY2020 capital expenditures were expected to be approximately $45 million, primarily for Animal Health capacity expansion, manufacturing efficiency and environmental, health and safety compliance.
- In August 2019, after the reporting date, Phibro acquired Osprey Biotechnics for $55 million in cash, funded through the Revolver. The transaction also includes additional consideration of at least $4.84 million based on future EBITDA.
- Antibacterials and related products represented a material portion of sales; MFA and other sales were $350.5 million, or approximately 42% of consolidated sales. Regulatory restrictions, antimicrobial-resistance concerns and changing customer preferences remain significant risks.
- The FDA’s proceedings concerning Mecadox, a carbadox product, remained indefinitely stayed as of the filing date. The product could continue to be sold in the United States, but an adverse regulatory outcome could materially reduce sales.
- Environmental remediation accruals were $5.9 million. Phibro-Tech is a potentially responsible party in the Omega Chemical Superfund groundwater matter; the company stated that potential liability could not be estimated with reasonable certainty.
- The independent auditor issued an unqualified opinion on the financial statements but concluded that the company did not maintain effective internal control over financial reporting because of material weaknesses involving accounting resources, transaction controls and segregation of duties. Remediation was in progress, with no assurance as to completion or success.
- The company declared a $0.12 per share dividend payable September 25, 2019 and expected to continue quarterly dividends subject to board approval, liquidity and debt-covenant restrictions.
Important facts for investors to verify
- Whether restructuring actions and increased corporate costs improve operating income and Adjusted EBITDA in FY2020.
- Progress on remediation of the material weaknesses in internal control over financial reporting.
- The FDA’s eventual resolution of the Mecadox withdrawal proceedings and the revenue exposure to antibacterials and other regulated products.
- Liquidity and leverage after the $55 million Osprey acquisition, planned capital expenditures and scheduled debt amortization.
- Whether working-capital investment, particularly elevated receivables and inventory, converts back into operating cash flow.
- The impact of African Swine Fever, other animal disease outbreaks, antimicrobial restrictions, raw-material costs and foreign exchange on demand and margins.
- Potential environmental liabilities beyond the $5.9 million accrued amount, including the Omega Chemical matter.
- The acquisition accounting, integration costs and contingent consideration associated with Osprey, which occurred after the fiscal year-end.