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 for poultry, swine, cattle, aquaculture, personal care, industrial chemical and chemical catalyst markets. This filing covers the three and nine months ended March 31, 2020, compared with the corresponding 2019 periods. The filing date was May 7, 2020. Although the request identifies “2019 Q3,” the filing is for fiscal third quarter 2020.
Financial performance and liquidity
| Metric | Three months ended March 31, 2020 | Three months ended March 31, 2019 | Nine months ended March 31, 2020 | Nine months ended March 31, 2019 |
|---|---|---|---|---|
| Net sales | $210.7 million | $205.7 million | $614.5 million | $624.1 million |
| Gross profit | $69.6 million | $64.9 million | $196.3 million | $199.3 million |
| Gross margin | 33.0% | 31.5% | 31.9% | 31.9% |
| Operating income | $21.3 million | $22.6 million | $51.1 million | $71.1 million |
| Net income | $13.5 million | $14.8 million | $27.9 million | $45.9 million |
| Diluted EPS | $0.33 | $0.37 | $0.69 | $1.13 |
| Adjusted EBITDA | $30.1 million | $30.0 million | $78.3 million | $91.7 million |
For the nine months, operating margin declined to 8.3% from 11.4%, and net margin declined to 4.5% from 7.4%. SG&A increased 13% to $145.2 million, reflecting product development and strategic investments, the Osprey acquisition, variable compensation, restructuring costs and higher corporate costs.
- Animal Health sales increased 8% in the quarter and 1% year to date. Nutritional specialties and vaccines grew, while MFAs and other products declined, particularly in China.
- Mineral Nutrition sales declined 7% in both the quarter and year-to-date period, primarily because of lower average selling prices.
- Performance Products sales declined 2% in both periods.
- Net cash provided by operating activities was $55.5 million for the nine months, versus $32.3 million in the prior year.
- Investing activities used $110.9 million, including $54.5 million for the Osprey acquisition and $24.0 million of capital expenditures.
- Financing activities provided $26.0 million, including $50.0 million of net Revolver borrowings, partly offset by $14.6 million of dividends and $9.5 million of debt payments.
At March 31, 2020, cash and cash equivalents were $26.7 million and short-term investments were $55.0 million. Total cash and short-term investments were $81.7 million. Working capital was $212.4 million, and the current-asset-to-current-liability ratio was 2.47:1.
Total debt consisted of $146.0 million outstanding under the Revolver, $221.9 million of Term A Loan principal before issuance costs and discounts, and $17.2 million of current debt maturities. The Revolver capacity was $250.0 million; after $2.7 million of letters of credit, $101.3 million remained available. The facilities mature June 29, 2022, and the company was in compliance with financial covenants at March 31, 2020.
Material changes versus the prior comparable period
- Quarterly sales rose 2%, but nine-month sales fell 2% because of lower Mineral Nutrition sales and reduced MFAs and other sales in China, where African Swine Fever and regulatory changes affected demand.
- Quarterly gross margin improved 150 basis points to 33.0%, primarily from favorable Animal Health volume and product mix.
- Nine-month net income fell 39%, operating income fell 28%, and Adjusted EBITDA fell 15%, primarily from higher SG&A, lower gross profit and unfavorable foreign-currency movements.
- Osprey Biotechnics was acquired in August 2019 for net cash consideration of $54.5 million. The acquisition added $25.3 million of goodwill and resulted in a recorded estimated contingent payment liability of $7.6 million; the additional payment has a minimum of $4.8 million and no stated maximum.
- Debt and Revolver borrowings increased from June 30, 2019, while cash and cash equivalents declined by $30.8 million during the nine months. Short-term investments increased by $31.0 million.
- The company adopted the new lease standard on July 1, 2019, recognizing $18.6 million of right-of-use assets and $19.4 million of lease liabilities.
- Accumulated other comprehensive loss increased to $121.9 million from $86.2 million, driven primarily by foreign-currency translation losses and derivative valuation changes.
Guidance, outlook, risks and unusual items
No specific numerical full-year revenue or earnings guidance is provided in the filing. Management stated that liquidity is expected to be adequate for at least the next twelve months, while cautioning that adverse operating results, covenant violations, COVID-19 effects or difficult financing markets could impair future liquidity.
COVID-19 caused limited financial disruption during the quarter, and production facilities continued operating despite supply-chain and logistics challenges. Management expected near-term demand declines and identified potential effects on sales, expenses, reserves, manufacturing, research and development, employee costs, raw-material prices, customer purchasing patterns and global food-animal markets.
- Restructuring charges of $0.4 million were recorded during the nine months; management expected approximately $0.5 million of additional employee-separation charges by June 30, 2020.
- Interest expense increased 15% year to date because of higher Revolver borrowings, partly offset by lower variable rates. The company entered into an additional $150.0 million interest-rate swap in March 2020.
- Environmental liabilities for identified investigation, remediation and closure costs were estimated at $4.9 million. The company is involved in an EPA-related groundwater matter and related litigation for which ultimate liability cannot presently be estimated with certainty.
- The company faces risks from COVID-19, animal and human disease outbreaks, restrictions on antibacterials, regulatory changes, competition, raw-material availability and pricing, foreign-currency volatility, customer consolidation, product liability, environmental matters and substantial indebtedness.
- Disclosure controls and procedures were not effective at March 31, 2020 because of previously reported material weaknesses in internal control over financial reporting. Remediation was ongoing, and management could not determine when it would be completed.
Most important facts for investors to verify
- Whether COVID-19 caused the anticipated demand, customer-operations and supply-chain disruptions after March 31, 2020.
- The sustainability of the quarterly gross-margin improvement despite weaker nine-month profitability and higher SG&A.
- Progress and final purchase accounting for Osprey, including the contingent consideration with no maximum payment.
- Revolver utilization, covenant headroom and refinancing requirements before the June 2022 maturity.
- Completion and effectiveness of remediation for the material weaknesses in internal control.
- Potential exposure from the Omega Chemical Site groundwater matter and other environmental claims.
- Future cash requirements for capital expenditures, dividends, restructuring, lease obligations and acquisition-related payments.