Business Context and Reporting Period
Phibro Animal Health Corporation develops, manufactures and markets animal health, mineral nutrition and performance products. The unaudited Form 10-Q covers the three and six months ended December 31, 2018, representing fiscal second quarter and first-half results, compared with the corresponding 2017 periods.
- Segments: Animal Health, Mineral Nutrition and Performance Products.
- Revenue is geographically diversified; six-month sales increased in Latin America and Canada and Asia Pacific, while Europe, the Middle East and Africa declined modestly.
- The company adopted ASC 606 effective July 1, 2018 using the modified retrospective method; management reported no material impact on net sales or retained earnings.
Financial Performance and Key Metrics
| Metric | Three months ended Dec. 31, 2018 | Three months ended Dec. 31, 2017 | Six months ended Dec. 31, 2018 | Six months ended Dec. 31, 2017 |
|---|---|---|---|---|
| Net sales | $218.2 million | $205.9 million | $418.4 million | $399.3 million |
| Gross profit | $68.6 million | $66.9 million | $134.4 million | $130.3 million |
| Gross margin | 31.5% | 32.5% | 32.1% | 32.6% |
| Operating income | $25.7 million | $23.9 million | $48.6 million | $46.3 million |
| Operating margin | 11.8% | 11.6% | 11.6% | 11.6% |
| Net income | $14.7 million | $7.0 million | $31.1 million | $22.9 million |
| Diluted EPS | $0.36 | $0.17 | $0.77 | $0.57 |
| Adjusted EBITDA | $31.6 million | $32.5 million | $61.7 million | $62.6 million |
- Six-month net sales rose 5%, led by Animal Health growth of 3%, Mineral Nutrition growth of 5% and Performance Products growth of 18%.
- Animal Health sales benefited from MFAs and other products, particularly international volume growth, but nutritional specialties and vaccines declined.
- Six-month net income increased 35%, primarily because the prior-year period included significant Tax Act-related discrete tax charges.
- The six-month effective tax rate decreased to 27.4% from 42.9%. The 2018 rate included a $0.7 million benefit from revising the previously recorded mandatory repatriation tax charge and a $0.2 million employee stock-option benefit.
- Adjusted EBITDA declined 1% for the first six months. Animal Health and Performance Products improved, but Mineral Nutrition declined 29% and corporate expenses increased.
Cash Flow, Balance Sheet, Debt and Liquidity
- Six-month operating cash flow was $16.6 million, down from $37.1 million. Working-capital consumption included $16.3 million from higher inventories and $8.9 million from accounts receivable growth.
- Investing cash outflow was $20.9 million, including $12.1 million of capital expenditures and $9.8 million for business acquisitions.
- Financing cash inflow was $6.9 million, reflecting $18.0 million of net Revolver borrowings, $8.9 million of dividends, $6.3 million of scheduled debt and other payments, and a $3.8 million acquisition note.
- Cash and cash equivalents were $31.3 million at December 31, 2018; short-term investments were $49.0 million, for total cash and short-term investments of $80.3 million.
- Working capital was $237.5 million, and the reported current-asset-to-current-liability ratio was 2.93:1.
- Debt consisted of $88.0 million under the Revolver, $223.7 million of long-term debt and $12.6 million of current maturities, or approximately $324.3 million in total reported debt obligations. The Revolver had $157.8 million available after $4.2 million of letters of credit.
- The credit facilities mature June 29, 2022. Management reported compliance with applicable debt covenants at December 31, 2018.
- The company declared a quarterly dividend of $0.12 per share, a 20% increase from $0.10, and stated that future quarterly dividends were expected to remain $0.12 per share subject to Board approval.
Material Changes, Outlook and Risks
- Gross margin declined because of unfavorable Mineral Nutrition product mix and constrained pricing, increased vaccine manufacturing costs and other mix effects.
- Mineral Nutrition Adjusted EBITDA weakened despite higher revenue, reflecting competitive pricing and product mix pressure.
- Performance Products benefited from volume growth in copper-based and personal-care products.
- Second-quarter foreign-currency losses were $2.6 million, compared with a $0.3 million gain in the prior-year quarter, primarily due to Turkish and Brazilian currency movements.
- Management stated that cash on hand, operating cash flow and available financing should support expected needs, but cautioned that adverse operating conditions, covenant violations, economic disruption or reduced access to financing could impair liquidity.
- Key business risks include restrictions on antibacterials, animal disease outbreaks, weather and raw-material volatility, competition, customer consolidation, regulatory changes, product liability, foreign currency exposure, dependence on international operations and substantial indebtedness.
- Environmental liabilities were estimated at $6.6 million. The company is involved in EPA-related groundwater investigation and CERCLA/RCRA litigation concerning the Omega Chemical Site; ultimate liability cannot currently be estimated with certainty.
- Disclosure controls were not effective at December 31, 2018 because previously reported material weaknesses in internal control over financial reporting remained. Remediation was ongoing, and management could not determine when it would be complete.
- The filing reports no material changes to previously disclosed risk factors or contractual obligations.
Important Facts for Investors to Verify
- Whether inventory and receivables growth converts into operating cash flow in subsequent quarters.
- Whether Mineral Nutrition pricing, product mix and Adjusted EBITDA recover.
- Progress and effectiveness of remediation of the material weaknesses in internal controls.
- Compliance with leverage and interest-coverage covenants as Revolver borrowings remain elevated.
- The eventual financial exposure from the Omega Chemical Site environmental matter and related litigation.
- The sustainability of the $0.12 quarterly dividend given debt service, capital expenditures and acquisition spending.
- Future effects of currency movements, antibacterials regulation, animal disease trends and dairy and poultry demand.