Phibro Animal Health Corporation: Fiscal 2018 Second-Quarter Form 10-Q
Business context and reporting period
Phibro develops, manufactures and markets animal health, mineral nutrition and performance products globally. The unaudited filing covers the three and six months ended December 31, 2017, compared with the corresponding 2016 periods. The company’s fiscal year ends June 30.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2017 | Six months ended Dec. 31, 2017 |
|---|---|---|
| Net sales | $205.9 million | $399.3 million |
| Gross profit | $66.9 million; 32.5% margin | $130.3 million; 32.6% margin |
| Operating income | $23.9 million; 11.6% margin | $46.3 million; 11.6% margin |
| Net income | $7.0 million; 3.4% margin | $22.9 million; 5.7% margin |
| Diluted EPS | $0.17 | $0.57 |
| Adjusted EBITDA | $32.5 million | $62.6 million |
| Cash flow from operations | Not separately provided | $37.1 million |
- Six-month segment sales were $261.7 million for Animal Health, $111.7 million for Mineral Nutrition and $25.9 million for Performance Products.
- At December 31, 2017, cash and cash equivalents were $40.2 million and short-term investments were $27.0 million, for total cash and short-term investments of $67.2 million.
- Total debt was approximately $316.4 million, comprising $9.5 million of current maturities, $71.0 million outstanding under the revolving facility and $235.9 million of long-term debt.
- The $250.0 million revolving facility had $174.4 million available after $71.0 million of borrowings and $4.6 million of letters of credit. The facilities mature June 29, 2022, and the company reported compliance with its covenants.
- Working capital was $211.5 million and the current-assets-to-current-liabilities ratio was 2.80:1.
- Capital expenditures were $8.9 million, a business acquisition used $15.0 million, and dividends paid were $8.0 million during the six months.
Material changes versus the prior comparable period
- Three-month sales increased 7%, while six-month sales increased 5%. Growth occurred across all three segments.
- Animal Health growth reflected higher volumes, particularly in nutritional specialties and vaccines, international MFA growth and the contribution of a recent acquisition. Domestic sales of medically important antimicrobials declined.
- Gross profit increased 5% in both periods, but gross margins declined from 33.1% to 32.5% for the quarter and from 32.8% to 32.6% for the six months, partly because of acquisition-related cost of goods sold.
- Adjusted EBITDA increased 4% for the quarter and 3% year to date. Animal Health EBITDA growth was modest, Mineral Nutrition improved, and six-month Performance Products EBITDA declined 49%.
- Net income declined 48% for the quarter and 10% for the six months, primarily because of higher income tax expense related to the December 2017 U.S. Tax Act and other discrete tax items.
- Net cash from operations decreased $10.6 million year over year, while investing cash use increased by $40.8 million because of short-term investments and the acquisition. Ending cash declined $15.9 million from June 30, 2017, although total cash and short-term investments increased by $11.1 million.
Guidance, outlook, risks and unusual items
- The filing does not provide specific quantitative revenue or earnings guidance. Management stated that cash on hand, operating cash flow and financing arrangements are expected to support future needs, subject to operating performance and covenant compliance.
- The company recorded provisional Tax Act effects, including a $2.5 million deferred-tax remeasurement provision and a $4.2 million mandatory repatriation toll-charge provision. Management had not completed its analysis, including potential Global Intangible Low-Taxed Income effects, and final amounts may differ materially.
- The six-month effective tax rate was 42.9%; management estimated 28.3% excluding specified discrete tax items.
- Key business risks include regulatory restrictions on medically important antimicrobials, the FDA’s ongoing review of Mecadox, animal disease outbreaks, raw-material costs and availability, foreign currency exposure, competition, customer consolidation and substantial indebtedness.
- U.S. sales of medically important antimicrobials were approximately $16 million for the twelve months ended December 31, 2017, compared with $23 million for the twelve months ended June 30, 2017. U.S. Mecadox sales were approximately $13 million and $14 million, respectively.
- Phibro acquired an animal-health business for $15.0 million in September 2017. The acquisition was considered immaterial for pro forma disclosure but generated $1.7 million of acquisition-related cost of goods sold during the six months.
- An interest-rate swap on $150.0 million of notional debt was entered into in July 2017, effectively fixing the applicable floating-rate portion at 1.8325% plus the applicable credit spread.
- Environmental liabilities estimated for identified investigation, remediation and closure costs were $6.9 million at December 31, 2017. The company is also involved in ongoing EPA-related groundwater matters for which ultimate liability cannot currently be predicted.
- Disclosure controls and procedures were not effective 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.
Important facts for investors to verify
- Progress and final accounting effects of the Tax Act, including any GILTI-related adjustments.
- Whether domestic medically important antimicrobial sales remain stabilized and how regulatory developments affect demand.
- The FDA’s response regarding continued approval of Mecadox.
- Integration, profitability and contingent consideration related to the September 2017 acquisition.
- Cash conversion, inventory growth and the effect of seasonal working-capital requirements.
- Debt covenant headroom, refinancing requirements and the company’s ability to maintain quarterly dividends.
- Remediation of the disclosed internal-control material weaknesses.
- Potential changes in environmental liabilities and exposure from the Omega Chemical Site groundwater proceedings.