Phibro Animal Health Corporation — Form 10-Q Summary
Reporting period: The filing covers the three and nine months ended March 31, 2015, with comparisons to March 31, 2014. The supplied metadata labels the period “2014 Q3,” but the filing itself is for fiscal 2015 third quarter.
Business Context
Phibro develops, manufactures and markets animal-health products, mineral-nutrition products and performance products. Its principal segments are Animal Health, Mineral Nutrition and Performance Products. The financial statements are unaudited interim statements prepared under U.S. GAAP.
Financial Performance and Position
| Metric | Three months ended March 31, 2015 | Change vs. 2014 | Nine months ended March 31, 2015 | Change vs. 2014 |
|---|---|---|---|---|
| Net sales | $187.5 million | +8% | $563.6 million | +11% |
| Gross profit | $59.1 million | +12% | $175.5 million | +14% |
| Gross margin | 31.5% | +1.0 percentage point | 31.1% | +0.9 percentage point |
| Operating income | $21.8 million | +26% | $66.7 million | +31% |
| Net income | $19.4 million | +205% | $55.3 million | +281% |
| Diluted EPS | $0.49 | vs. $0.21 | $1.39 | vs. $0.48 |
| Adjusted EBITDA | $27.5 million | +23% | $83.0 million | +25% |
Segment trends: Nine-month Animal Health sales increased 11% to $353.4 million, Mineral Nutrition sales increased 17% to $171.5 million, and Performance Products sales declined 13% to $38.8 million. Animal Health and Mineral Nutrition drove the improvement in consolidated results.
Cash flow and liquidity: Nine-month operating cash flow was $46.8 million, compared with $16.6 million in the prior-year period. Investing cash outflow was $22.1 million, including $13.1 million of capital expenditures and $5.0 million paid in connection with the MJB transaction. Financing cash outflow was $14.4 million, including $11.7 million of dividends. Cash increased to $20.8 million from $11.8 million at June 30, 2014.
Working capital was $176.6 million, and the reported current-asset-to-current-liability ratio was 2.72:1. The company stated that cash on hand, operating cash flow and financing arrangements should be sufficient for anticipated needs, while noting that adverse operating results, covenant violations or economic disruptions could affect liquidity.
Debt: Total debt was approximately $287.2 million net of discount, consisting primarily of a Term B loan due April 15, 2021. The Term B loan carried a 4.00% interest rate at March 31, 2015. There were no Revolver borrowings; $14.4 million of letters of credit and other commitments left $85.6 million available. The company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected higher volumes in Animal Health and Mineral Nutrition, partially offset by weaker Performance Products sales.
- Gross margin improved to 31.5% for the quarter and 31.1% for the nine months, aided by volume growth, favorable production costs and currency effects.
- Interest expense declined substantially following the April-May 2014 refinancing and redemption of 9.25% Senior Notes.
- Foreign currency results changed from losses of $0.3 million in the prior-year quarter and $2.1 million in the prior-year nine months to gains of $4.6 million and $6.9 million, respectively. These gains primarily arose from intercompany balances and materially benefited reported income.
- The company recognized $2.0 million of licensing revenue in the quarter and $8.0 million for the nine months after contractual and regulatory milestones were achieved. Excluding this revenue, nine-month sales growth was 9% rather than 11%, and Adjusted EBITDA growth was 13% rather than 25%.
- The company entered into agreements with MJ Biologics relating to vaccine development, licensing and a planned acquisition. It paid $5.0 million upfront, made a $5.0 million loan, recorded $12.4 million of intangible assets and recognized $7.4 million of long-term consideration-related liabilities. The acquisition results were not material through March 31, 2015.
- Domestic and certain foreign deferred tax assets remained subject to full valuation allowances. A $1.2 million benefit from previously unrecognized tax benefits contributed to the nine-month tax provision.
Guidance, Outlook, Risks and Unusual Items
No formal quantitative earnings or revenue guidance is provided. Management expects available cash, operating cash flow, the Revolver and foreign credit lines to support liquidity throughout the year, but this expectation is subject to operating performance, covenant compliance and broader economic conditions. The company intends to continue quarterly dividends of $0.10 per share, subject to board approval and legal and debt-agreement restrictions.
- Material weaknesses in internal control over financial reporting remained unresolved. Management stated that disclosure controls and procedures were not effective as of March 31, 2015 and planned additional staffing and other remediation measures.
- Environmental investigations, remediation obligations and litigation involve the Santa Fe Springs, California facility and the Omega Chemical Superfund Site. Estimated environmental costs were $6.9 million at March 31, 2015, but ultimate liability remains uncertain and could be material.
- Key business risks include restrictions on antibacterials in food-producing animals, regulatory changes, product-liability and efficacy concerns, animal-disease outbreaks, competition, raw-material price and availability fluctuations, currency movements, dependence on Israeli and Brazilian operations, and substantial indebtedness.
- Brazilian real derivatives had a net fair value liability of approximately $3.0 million at March 31, 2015; $1.8 million of the accumulated unrealized derivative loss was expected to be recognized in earnings within twelve months.
- Adjusted EBITDA and Adjusted Net Income are non-GAAP measures and exclude or adjust for items including foreign-currency gains and losses, acquired-intangible amortization and acquisition-related costs. They should not be treated as substitutes for GAAP net income.
Investor Verification Checklist
- Verify the sustainability of growth excluding the $8.0 million of nine-month licensing revenue and the effect of foreign-currency gains.
- Assess Animal Health and Mineral Nutrition volume, pricing and margin trends, and the continued decline in Performance Products.
- Review debt maturities, interest-rate exposure, leverage covenant headroom and the availability of the Revolver.
- Monitor progress in remediating the material weaknesses in internal controls.
- Evaluate potential environmental liabilities and the ultimate obligations under the MJB transaction, including the closing payment and earn-out terms.
- Confirm the company’s ability to fund capital expenditures, dividends and debt service from operating cash flow.