Phibro Animal Health Corporation: Fiscal 2021 First Quarter 10-Q
Reporting period: Three months ended September 30, 2020, compared with the three months ended September 30, 2019. Phibro develops, manufactures and markets animal health, mineral nutrition and performance products globally. The filing was signed November 4, 2020.
Financial performance and liquidity
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $195.2 million | $189.7 million | Up 3% |
| Gross profit | $64.1 million | $57.7 million | Up 11% |
| Gross margin | 32.8% | 30.4% | Up 240 basis points |
| Operating income | $15.7 million | $10.1 million | Up 55% |
| Net income | $12.3 million | $2.5 million | Up $9.8 million |
| Diluted EPS | $0.30 | $0.06 | Up $0.24 |
| Adjusted EBITDA | $24.3 million | $19.7 million | Up 24% |
| Net cash from operations | $1.7 million | $(3.6) million | Improved $5.3 million |
- Net income benefited from higher operating income, lower net interest expense and a $3.6 million foreign-currency gain, compared with a $3.2 million loss in the prior-year quarter.
- The effective tax rate was 25.5%, compared with 29.6%. The current-quarter rate included approximately $1.2 million of tax benefits; excluding those benefits, management stated the rate would have been 32.5%.
- Cash and cash equivalents were $31.0 million and short-term investments were $61.0 million at September 30, 2020, for combined liquidity of $92.0 million.
- Working capital was $231.7 million and the current-assets-to-current-liabilities ratio was 2.65:1.
- Capital expenditures were $7.4 million. The company invested $6.0 million in short-term investments and paid $4.9 million in dividends.
- Total reported debt comprised $20.3 million of current maturities, $185.0 million of revolver borrowings and $193.1 million of long-term debt, before considering cash and short-term investments.
- The $250.0 million revolver had $185.0 million drawn and $2.7 million of outstanding letters of credit, leaving $62.3 million available.
Material changes versus the prior comparable period
- Animal Health: Sales increased 5% to $128.4 million. MFAs and other products, nutritional specialties and vaccines all grew, primarily from stronger international demand and favorable order timing. Adjusted EBITDA increased 20% to $30.1 million.
- Mineral Nutrition: Sales declined 2% to $51.4 million as volume growth was offset by lower average selling prices tied to lower underlying raw-material costs. Adjusted EBITDA declined 12% to $3.0 million.
- Performance Products: Sales increased 1% to $15.4 million, while Adjusted EBITDA increased 131% to $2.0 million due primarily to favorable product mix and production costs.
- Gross profit benefited from sales growth, product mix and production costs, particularly in Animal Health and Performance Products. The prior-year period included $0.3 million of acquisition-related cost of goods sold.
- SG&A increased 2% to $48.4 million. The prior-year period included $0.4 million of restructuring costs and $0.5 million of acquisition-related transaction costs; excluding those items, SG&A increased approximately 4%.
- Operating cash flow improved to $1.7 million, but inventory consumed $9.5 million of cash and accrued expenses and other liabilities consumed $4.4 million.
- Net cash decreased $5.4 million during the quarter, compared with a $2.7 million decrease in the prior-year period.
Outlook, commentary, risks and unusual items
- Management stated that production facilities continued operating without interruption despite COVID-19-related supply-chain and logistical challenges. The company incurred higher safety and supply-chain costs, while maintaining headcount and compensation at constant levels.
- COVID-19 continues to create uncertainty regarding customer demand, manufacturing, supply chains, raw-material costs, reserves, employee costs and global economic conditions. Management expects available liquidity to support ongoing needs for at least the next twelve months, but provided no assurance that liquidity will remain adequate under adverse conditions.
- The FDA’s regulatory actions concerning carbadox are a significant product risk. The company disputes the FDA’s position and is seeking continuation of the prior hearing process. Carbadox sales were approximately $17 million for the twelve months ended September 30, 2020; an inability to defend the product could adversely affect results.
- The company was in compliance with its debt covenants at September 30, 2020. The credit facilities mature June 29, 2022 and require a maximum first-lien net leverage ratio of 4.00:1.00 and a minimum interest coverage ratio of 3.00:1.00.
- Environmental investigations, remediation obligations and litigation remain contingencies. Estimated environmental liabilities were approximately $5.1 million, while the ultimate exposure related to the Omega Chemical Site groundwater matter could not be estimated with reasonable certainty.
- The company reported material weaknesses in internal control over financial reporting. Disclosure controls and procedures were deemed ineffective as of September 30, 2020. Remediation efforts were ongoing, with no assurance regarding completion or success.
- The board declared a $0.12 per-share quarterly dividend payable December 16, 2020, subject to the company’s stated conditions and debt-agreement limitations.
- CFO Richard G. Johnson was scheduled to retire from the CFO position effective November 15, 2020 and continue as Finance Advisor through September 30, 2021 under a continuing employment letter.
Important facts for investors to verify
- Whether COVID-19-related demand, supply-chain costs, currency volatility and customer purchasing patterns materially affect subsequent quarters.
- The outcome and timing of the FDA’s carbadox regulatory process and the potential impact of losing approximately $17 million in annual carbadox sales.
- Revolver utilization, debt maturities, covenant compliance and available borrowing capacity as operating conditions change.
- Whether inventory growth and working-capital requirements continue to constrain operating cash flow.
- Progress in remediating the material weaknesses in internal control over financial reporting.
- Potential costs and liability allocation related to environmental investigations, the Omega Chemical Site groundwater matter and other litigation.
- The sustainability of the quarter’s reported earnings improvement, particularly the $3.6 million foreign-currency gain and tax benefits.