Phibro Animal Health Corporation — Form 10-Q Summary
Reporting period: The filing covers the three and nine months ended March 31, 2017, compared with the corresponding 2016 periods. The supplied metadata identifies “2016 Q3,” but the filing is for fiscal 2017 third quarter. Results are unaudited.
Business context
Phibro develops, manufactures and markets animal health and mineral nutrition products for food animals, including poultry, swine, cattle, dairy and aquaculture. It also sells performance products for personal care, automotive, industrial chemical and chemical catalyst applications. Reportable segments are Animal Health, Mineral Nutrition and Performance Products.
Key financial metrics
| Metric | Three months ended March 31, 2017 | Change vs. 2016 | Nine months ended March 31, 2017 | Change vs. 2016 |
|---|---|---|---|---|
| Net sales | $189.9 million | Up 3% | $569.4 million | Up 1% |
| Gross profit | $60.6 million | Up 3% | $185.1 million | Up 3% |
| Gross margin | 31.9% | Down from 32.0% | 32.5% | Up from 31.9% |
| Operating income | $30.0 million | Up 42% | $74.4 million | Up 13% |
| Net income | $23.6 million | Up 27% | $49.2 million | Down 27% |
| Diluted EPS | $0.59 | Up from $0.46 | $1.23 | Down from $1.69 |
| Adjusted EBITDA | $29.7 million | Approximately flat | $90.8 million | Up 6% |
Quarterly net income benefited from a $7.5 million insurance settlement gain. Nine-month net income was reduced by the absence of the prior-year $21.3 million domestic tax valuation allowance release and by lower foreign-currency gains.
Segment performance
- Animal Health: Quarterly sales increased 2% to $121.0 million; nine-month sales increased 3% to $369.2 million. Nutritional specialties and vaccines grew strongly, while medicated feed additives and other products declined.
- Mineral Nutrition: Quarterly sales increased 8% to $57.2 million, driven by volume and higher selling prices. Nine-month sales declined 1% to $165.5 million because of lower prices.
- Performance Products: Quarterly sales decreased 3% to $11.7 million; nine-month sales decreased 3% to $34.8 million.
Cash flow, debt and liquidity
- Net cash provided by operating activities was $84.8 million for the nine months, compared with $10.6 million in the prior-year period.
- Capital expenditures were $15.4 million; net cash used in investing activities was $17.2 million. The prior year included a $46.5 million business acquisition.
- Net cash used in financing activities was $51.8 million, including $39.0 million of net Revolver repayments and $11.8 million of dividends.
- Cash and cash equivalents were $49.3 million at March 31, 2017, compared with $33.6 million at June 30, 2016. Working capital was $194.8 million, and the current-assets-to-current-liabilities ratio was 2.88:1.
- Debt included $282.0 million of Term B Loan principal, $30.0 million outstanding under the Revolver and $2.9 million of current maturities, before applicable debt issuance costs and discounts. The Term B Loan is due April 2021.
- The Revolver has $200.0 million of capacity. After $30.0 million of borrowings and $14.5 million of letters of credit, $155.5 million remained available. The company was in compliance with its debt covenants at March 31, 2017.
- Management stated that cash on hand and financing arrangements should support expected needs, while noting that adverse operating results, covenant breaches, economic conditions or financing disruptions could reduce liquidity.
Material changes and unusual items
- Quarterly SG&A decreased 19%, primarily because of the $7.5 million insurance settlement gain. Excluding that gain and prior-year acquisition costs, quarterly SG&A increased approximately 3%.
- Nine-month SG&A included $1.7 million of pension settlement costs and $1.3 million of acquisition-related transaction costs, including costs related to an unsuccessful acquisition.
- The effective tax rate was 10.6% for the quarter and 22.2% for the nine-month period. The nine-month 2017 tax provision included a $3.8 million benefit from releasing a foreign deferred-tax valuation allowance and a $1.4 million benefit related to employee stock option exercises.
- The prior-year nine-month tax benefit included a $21.3 million domestic valuation allowance release and a $3.7 million benefit from previously unrecognized tax benefits.
- The company revised prior-period expense classification to move product-related intangible amortization from SG&A to cost of goods sold. The revision reduced reported gross profit and SG&A by $1.2 million for the quarter and $3.1 million for the nine-month period, with no impact on net income or cash flow.
- The domestic pension plan was amended to eliminate future-service and compensation credits. The company recorded a $6.8 million pension curtailment gain in other comprehensive income and a $1.7 million pension settlement charge in earnings.
Outlook, risks and contingencies
- No quantitative revenue or earnings guidance is provided in the filing. Management expects liquidity to remain adequate under its operating plan and currently intends to pay quarterly dividends of $0.10 per share, subject to Board approval.
- U.S. sales of products classified as medically important antibacterials were approximately $27 million for the twelve months ended March 31, 2017, down $10 million from the twelve months ended June 30, 2016. Regulatory restrictions and changing consumer views could further reduce demand.
- The FDA was reviewing the continued approval of Mecadox. U.S. Mecadox sales were approximately $14 million for the twelve months ended March 31, 2017. The company had submitted safety data and was awaiting the FDA’s response; loss of approval could adversely affect results.
- Environmental liabilities include an estimated $7.2 million reserve for investigation, remediation and closure costs. The company is involved in EPA-related and private-party matters concerning contaminated groundwater near its Santa Fe Springs, California facility, but cannot reliably estimate potential ultimate liability.
- The company is exposed to foreign-currency, interest-rate and commodity-price risks and uses derivatives primarily for hedging. It also faces risks from animal disease outbreaks, product liability, raw-material availability and pricing, competition, manufacturing disruptions and substantial indebtedness.
- Disclosure controls were not effective as of March 31, 2017 because material weaknesses in internal control over financial reporting remained from the prior annual report. Remediation efforts were underway, but the company could not estimate when remediation would be complete or assure its success.
Investor verification points
- Assess recurring profitability and cash generation excluding the $7.5 million insurance settlement and discrete tax benefits.
- Monitor the decline in medicated feed additive sales, including medically important antibacterials, and the FDA’s action regarding Mecadox.
- Verify leverage, Revolver availability, covenant compliance and the April 2021 Term B Loan maturity.
- Review the status and potential magnitude of the Santa Fe Springs environmental matters and related reserve adequacy.
- Confirm progress in remediating the material weaknesses in internal control over financial reporting.
- Evaluate whether growth in nutritional specialties and vaccines can offset pressure on medicated feed additives and international markets.