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. Its principal markets include poultry, swine, cattle, dairy and aquaculture, with additional products for personal care, automotive, industrial chemical and chemical catalyst applications. This unaudited filing covers the three and nine months ended March 31, 2018, compared with the same periods in 2017; the balance sheet comparison is March 31, 2018 versus June 30, 2017.
Key financial metrics
| Metric | Three months ended March 31, 2018 | Year-over-year change | Nine months ended March 31, 2018 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $208.9 million | +10% | $608.2 million | +7% |
| Gross profit | $69.1 million | +14% | $199.4 million | +8% |
| Gross margin | 33.1% | Up from 31.9% | 32.8% | Up from 32.5% |
| Operating income | $26.5 million | -12% | $72.8 million | -2% |
| Net income | $19.8 million | -16% | $42.8 million | -13% |
| Diluted EPS | $0.49 | Down from $0.59 | $1.06 | Down from $1.23 |
| Adjusted EBITDA | $33.4 million | +12% | $96.0 million | +6% |
| Interest expense, net | $3.1 million | -22% | $9.2 million | -21% |
Segment sales for the quarter were $132.3 million in Animal Health, $62.9 million in Mineral Nutrition and $13.7 million in Performance Products. Nine-month segment sales were $394.0 million, $174.6 million and $39.6 million, respectively. Nine-month Adjusted EBITDA was $105.1 million for Animal Health, $14.7 million for Mineral Nutrition and $0.9 million for Performance Products, before corporate costs.
Cash flow, debt and liquidity
- Operating cash flow was $59.9 million for the nine months, down from $84.8 million in the prior-year period. The decrease primarily reflected $21.7 million of cash invested in inventories and unfavorable changes in operating assets and liabilities.
- Investing cash flow was negative $74.6 million, including $45.0 million invested in short-term investments, $15.0 million for a business acquisition and $13.0 million of capital expenditures.
- Financing cash flow was negative $11.1 million, including $12.0 million of dividends and $4.8 million of scheduled debt and other payments. Net Revolver borrowings were $0.5 million.
- Cash and cash equivalents were $30.6 million at March 31, 2018, and short-term investments were $45.0 million, for total cash and short-term investments of $75.6 million.
- Debt consisted of $65.5 million outstanding under the Revolver, $232.9 million of long-term debt and $11.0 million of current debt maturities. The Revolver had $180.0 million of remaining availability after $4.5 million of letters of credit.
- The credit facilities mature June 29, 2022. Management stated that the company was in compliance with its debt covenants at March 31, 2018.
- Working capital was $214.3 million, and the reported current-asset-to-current-liability ratio was 2.82:1. Management believes cash, operating cash flow and financing arrangements will support anticipated needs, while noting that adverse results or covenant violations could impair liquidity.
Material changes versus the prior comparable period
- Revenue growth was broad-based. Quarterly sales increased 9% in Animal Health, 10% in Mineral Nutrition and 17% in Performance Products. Nine-month sales increased 7%, 6% and 14%, respectively.
- Animal Health growth reflected international MFA sales, nutritional specialties, vaccines and a recent acquisition. Domestic medically important antimicrobial sales were approximately stable in the quarter but declined $5.9 million for the nine months.
- Gross margin improved, supported by volume growth, favorable seasonal demand and manufacturing efficiencies. Mineral Nutrition pricing reflected higher underlying commodity costs, while Performance Products faced higher copper-related raw material costs.
- SG&A increased 39% in the quarter and 14% for the nine months. Comparisons were affected by a $7.5 million insurance settlement gain recognized in the prior-year quarter and prior-year pension settlement and acquisition-related costs.
- Excluding specified unusual items, management said operating income would have increased approximately 18% in the quarter and 7% for the nine months.
- Net income declined despite improved gross profit and lower interest expense, primarily because of higher SG&A and substantially higher income tax expense.
Guidance, outlook, risks and unusual items
- No specific revenue or earnings guidance is provided in the filing. Management projects adequate liquidity throughout the year and intends to continue quarterly dividends of $0.10 per share, subject to board approval; a June 2018 dividend was declared after quarter-end.
- The December 2017 Tax Act resulted in provisional tax charges, including a $4.2 million mandatory repatriation toll charge and a $2.5 million deferred-tax-asset remeasurement provision. Management had not completed its analysis, and final effects could differ materially.
- The FDA’s proceedings concerning Mecadox remain ongoing. In March 2018, the FDA indefinitely stayed the withdrawal proceedings. U.S. Mecadox sales were approximately $12 million for the twelve months ended March 31, 2018; an adverse outcome could negatively affect results.
- Management identifies risks from restrictions or changing public perceptions regarding medically important antimicrobials, animal disease outbreaks, regulatory changes, competition, raw-material costs and availability, currency movements, customer consolidation, manufacturing disruptions and substantial indebtedness.
- Environmental liabilities are reserved at approximately $6.9 million. The company and subsidiaries face potential obligations related to contaminated sites, including the Omega Chemical Superfund Site; ultimate exposure cannot currently be predicted with certainty.
- The company entered into a $150 million interest-rate swap in July 2017, effectively fixing the floating-rate component on that debt at 1.8325% plus the applicable margin through the credit agreement’s maturity.
- Disclosure controls and procedures were not effective at March 31, 2018 because material weaknesses in internal control over financial reporting remained outstanding. Management is implementing remediation measures but cannot determine when remediation will be complete or assure its success.
- The company adopted inventory measurement guidance and early-adopted targeted derivative-accounting improvements without material effects. It expects to adopt the revenue standard using the modified retrospective method beginning July 1, 2018, and has not identified a material impact to date.
Most important facts for investors to verify
- Whether Animal Health growth, particularly international MFAs, nutritional specialties and vaccines, can offset continuing domestic pressure on medically important antimicrobials.
- The final tax effects of the Tax Act, including potential Global Intangible Low-Taxed Income exposure and adjustments to provisional amounts.
- The outcome and timing of the FDA’s Mecadox proceedings.
- Inventory normalization and the effect of working-capital investment on operating cash flow.
- Progress in remediating material weaknesses in internal controls.
- Compliance with debt covenants, interest-rate exposure and the company’s ability to maintain dividends while funding acquisitions and capital expenditures.
- Potential environmental and litigation liabilities beyond recorded reserves, particularly those associated with the Omega Chemical groundwater matter.